| Page Range | 61509-62240 | |
| FR Document |
| Page and Subject | |
|---|---|
| 83 FR 61563 - 340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation | |
| 83 FR 61601 - Sunshine Act Meeting Notice | |
| 83 FR 61602 - Xanthan Gum From the People's Republic of China: Continuation of Antidumping Duty Order | |
| 83 FR 61610 - National Advisory Council on Indian Education; Meeting | |
| 83 FR 61593 - Magnuson-Stevens Act Provisions; Fisheries of the Northeastern United States; Fisheries of the Northeastern United States; Atlantic Herring Fishery; Adjustment to Atlantic Herring Specifications and Sub-Annual Catch Limits for 2019 | |
| 83 FR 61681 - Meeting of the Coordinating Council on Juvenile Justice and Delinquency Prevention | |
| 83 FR 61532 - Final Priorities, Requirements, Definitions, and Selection Criteria-Expanding Opportunity Through Quality Charter Schools Program; Grants to Charter Management Organizations for the Replication and Expansion of High-Quality Charter Schools | |
| 83 FR 61610 - Application for New Awards; Expanding Opportunity Through Quality Charter Schools Program (CSP)--Grants to Charter Management Organizations for the Replication and Expansion of High-Quality Charter Schools | |
| 83 FR 61670 - Notice of Availability of the Draft Environmental Impact Statement for the Proposed Caldwell Canyon Mine Project, Caribou County, Idaho | |
| 83 FR 61683 - Distribution of Cable Royalty Funds; Distribution of Satellite Royalty Funds | |
| 83 FR 61546 - Group Registration of Newsletters and Serials | |
| 83 FR 61639 - Medicare Program; Request for Nominations for Members for the Medicare Evidence Development & Coverage Advisory Committee | |
| 83 FR 61635 - Proposed Agency Information Collection Activities; Comment Request | |
| 83 FR 61637 - Proposed Agency Information Collection Activities; Comment Request | |
| 83 FR 61636 - Proposed Agency Information Collection Activities; Comment Request | |
| 83 FR 61632 - Registration Review; Draft Human Health and/or Ecological Risk Assessments for Several Pesticides; Notice of Availability | |
| 83 FR 61619 - Notice of Orders Issued Under Section 3 of the Natural Gas Act During October 2018 | |
| 83 FR 61629 - TSCA Science Advisory Committee on Chemicals (SACC); Notice of Public Meetings | |
| 83 FR 61574 - Standards of Performance for New Residential Wood Heaters, New Residential Hydronic Heaters and Forced-Air Furnaces | |
| 83 FR 61585 - Standards of Performance for New Residential Wood Heaters, New Residential Hydronic Heaters and Forced-Air Furnaces | |
| 83 FR 61631 - Information Collection Request Submitted To OMB for Review and Approval; Comment Request; NESHAP for Industrial, Commercial, and Institutional Boilers and Process Heaters (Renewal) | |
| 83 FR 61657 - Meeting of the Advisory Commission on Childhood Vaccines | |
| 83 FR 61567 - Medicare Program: Changes to Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs; Correction | |
| 83 FR 61682 - Agency Information Collection Activities; Submission for OMB Review; Comment Request; Form ETA-9142-B-CAA-2, Attestation for Employers Seeking To Employ H-2B Nonimmigrant Workers Under Section 205 of Division M of the Consolidated Appropriations Act, 2018 Public Law 115-141 | |
| 83 FR 61721 - Notice of OFAC Sanctions Actions | |
| 83 FR 61668 - Notice of Availability of the Draft Environmental Impact Statement for the Sevier Playa Potash Project, Utah | |
| 83 FR 61709 - Office of Commercial Space Transportation: Notice of Availability and Request for Comment on the Draft Environmental Assessment for Issuing SpaceX a Launch License for an In-Flight Dragon Abort Test, Kennedy Space Center, Brevard County, Florida | |
| 83 FR 61632 - Environmental Impact Statements; Notice of Availability | |
| 83 FR 62204 - Approval and Promulgation of Implementation Plans; Arkansas; Approval of Regional Haze State Implementation Plan Revision and Partial Withdrawal of Federal Implementation Plan | |
| 83 FR 61568 - Fisheries of the Northeastern United States; Northeast Multispecies Fishery; Georges Bank Cod Trip Limit Adjustment for the Common Pool Fishery | |
| 83 FR 61525 - Airworthiness Directives; Leonardo S.p.A. (Type Certificate Previously Held by Finmeccanica S.p.A. and AgustaWestland S.p.A.) Helicopters | |
| 83 FR 61707 - Meeting of the Regional Energy Resource Council | |
| 83 FR 61600 - Environmental Impact Statement; Cattle Fever Tick Control Barrier in South Texas: Record of Decision | |
| 83 FR 61607 - Procurement List; Additions and Deletions | |
| 83 FR 61608 - Procurement List; Proposed Deletions | |
| 83 FR 61726 - Agency Information Collection Activities; Submission for OMB Review; Comment Request; Multiple Bureau of the Fiscal Service Information Collection Requests | |
| 83 FR 61713 - Notice of Receipt of Petition for Decision That Nonconforming Model Year 2016 Chevrolet Equinox Multipurpose Passenger Vehicles Are Eligible for Importation | |
| 83 FR 61717 - Notice of Receipt of Petition for Decision That Nonconforming Model Year 2015 Ferrari 458 Speciale Aperta Passenger Cars Are Eligible for Importation | |
| 83 FR 61719 - Notice of Receipt of Petition for Decision That Nonconforming Model Year 2016 Mercedes-Benz GL500 Multipurpose Passenger Vehicles Are Eligible for Importation | |
| 83 FR 61711 - Notice of Receipt of Petition for Decision That Nonconforming Model Year 2005 Chevrolet Corvette Passenger Cars Are Eligible for Importation | |
| 83 FR 61718 - Notice of Receipt of Petition for Decision That Certain Nonconforming Model Year 2011 Mercedes-Benz GL550 Multipurpose Passenger Vehicles Originally Certified to the Canadian Motor Vehicle Safety Standards Are Eligible for Importation | |
| 83 FR 61714 - Notice of Receipt of Petition for Decision That Nonconforming Model Year 2015 Chevrolet Silverado Trucks Are Eligible for Importation | |
| 83 FR 61715 - Notice of Receipt of Petition for Decision That Nonconforming Model Year 2008 Jeep Grand Cherokee Multipurpose Passenger Vehicles Are Eligible for Importation | |
| 83 FR 61622 - Combined Notice of Filings | |
| 83 FR 61622 - Combined Notice of Filings #1 | |
| 83 FR 61710 - Notice of Receipt of Petition for Decision that Nonconforming Model Year 2015 Bentley Continental Passenger Cars Are Eligible for Importation | |
| 83 FR 61668 - Agency Information Collection Activities; Submission to the Office of Management and Budget for Review and Approval; Industrial Minerals Surveys | |
| 83 FR 61638 - Agency Information Collection Activities: Proposed Collection; Comment Request | |
| 83 FR 61531 - Drawbridge Operation Regulation; Atlantic Intracoastal Waterway, Albemarle and Chesapeake Canal, Chesapeake, VA | |
| 83 FR 61532 - Recurring Safety Zone; Steelers Fireworks, Pittsburgh, PA | |
| 83 FR 61603 - Magnuson-Stevens Act Provisions; General Provisions for Domestic Fisheries; Pacific Coast Groundfish Fishery; Application for an Exempted Fishing Permit | |
| 83 FR 61678 - Narciso A. Reyes, M.D.; Decision and Order | |
| 83 FR 61675 - Steve Fanto, M.D.; Decision and Order | |
| 83 FR 61684 - NASA International Space Station Advisory Committee; Meeting | |
| 83 FR 61569 - Magnuson-Stevens Act Provisions; Fisheries Off West Coast States; Pacific Coast Groundfish Fishery; 2018 Tribal Fishery Allocations for Pacific Whiting; Reapportionment Between Tribal and Non-tribal Sectors | |
| 83 FR 61671 - Notice of Availability of the Western Energy Company's Rosebud Mine Area F Final Environmental Impact Statement; S1D1S SS08011000 SX064A000 190S180110; S2D2S SS08011000 SX064A000 19XS501520 | |
| 83 FR 61609 - Withdrawal of the Notice of Intent To Prepare a Draft Environmental Impact Statement (DEIS) in Cooperation With the North Carolina Department of Transportation and South Carolina Department of Transportation for Extending SC 31 (Carolina Bays Parkway), in Horry County, South Carolina, To Connect to US 17, in Brunswick County, North Carolina | |
| 83 FR 61609 - Notice of Availability of the Record of Decision for the Final Missouri River Recovery Management Plan and Environmental Impact Statement | |
| 83 FR 61722 - Agency Information Collection Activities; Submission for OMB Review; Comment Request; Multiple IRS Information Collection Requests | |
| 83 FR 61527 - Airworthiness Directives; General Electric Company Turbofan Engines | |
| 83 FR 61599 - Submission for OMB Review; Comment Request | |
| 83 FR 61645 - Determination of Regulatory Review Period for Purposes of Patent Extension; PROVAYBLUE | |
| 83 FR 61648 - Blood Glucose Monitoring Test Systems for Prescription Point-of-Care Use; Draft Guidance for Industry and Food and Drug Administration Staff; Availability | |
| 83 FR 61643 - Determination of Regulatory Review Period for Purposes of Patent Extension; KEVZARA | |
| 83 FR 61646 - Agency Information Collection Activities; Proposed Collection; Comment Request; Oversight of Clinical Investigations: A Risk-Based Approach to Monitoring | |
| 83 FR 61653 - Agency Information Collection Activities; Proposed Collection; Comment Request; Food and Drug Administration Adverse Event Reports; Electronic Submissions | |
| 83 FR 61684 - Alan T. Waterman Award Committee; Notice of Meeting | |
| 83 FR 61650 - Bone, Reproductive and Urologic Drugs Advisory Committee; Notice of Meeting; Establishment of a Public Docket; Request for Comments | |
| 83 FR 61640 - Self-Monitoring Blood Glucose Test Systems for Over-the-Counter Use; Draft Guidance for Industry and Food and Drug Administration Staff; Availability | |
| 83 FR 61529 - Airworthiness Directives; CFM International S.A. Turbofan Engines | |
| 83 FR 61601 - Notice of Public Meeting of the Wyoming Advisory Committee | |
| 83 FR 61573 - Loan Guaranty: Revisions to VA-Guaranteed or Insured Cash-Out Home Loans | |
| 83 FR 61674 - Truck and Bus Tires From China | |
| 83 FR 61667 - Aquatic Nuisance Species Task Force Meeting | |
| 83 FR 61685 - Performance Review Boards for Senior Executive Service; Revision | |
| 83 FR 61658 - National Institute of Diabetes and Digestive and Kidney Diseases; Notice of Closed Meeting | |
| 83 FR 61659 - Prospective Grant of an Exclusive Patent License: Agonist/Antagonist Compositions and Methods of Use | |
| 83 FR 61658 - National Cancer Institute; Notice of Closed Meeting | |
| 83 FR 61658 - National Institute of Allergy and Infectious Diseases; Notice of Closed Meeting | |
| 83 FR 61601 - Notice of Public Meeting of the Michigan Advisory Committee | |
| 83 FR 61672 - Steel Wheels From China; Scheduling of the Final Phase of Countervailing Duty and Antidumping Duty Investigations | |
| 83 FR 61664 - Virginia; Amendment No. 3 to Notice of a Major Disaster Declaration | |
| 83 FR 61664 - Virginia; Amendment No. 2 to Notice of a Major Disaster Declaration | |
| 83 FR 61623 - Combined Notice of Filings #1 | |
| 83 FR 61621 - Chattanooga Gas Company; Notice of Application | |
| 83 FR 61620 - Arena Energy, LP, Castex Offshore, Inc., EnVen Energy Ventures, LLC, Fieldwood Energy LLC, Walter Oil & Gas Corporation, W&T Offshore, Inc. v. High Point Gas Transmission, LLC; Notice of Complaint | |
| 83 FR 61626 - Midship Pipeline Company, LLC; Notice of Intent To Prepare an Environmental Assessment for a Proposed Amendment of the Midcontinent Supply Header Interstate Pipeline Project and Request for Comments on Environmental Issues | |
| 83 FR 61659 - Changes in Flood Hazard Determinations | |
| 83 FR 61663 - Final Flood Hazard Determinations | |
| 83 FR 61699 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To the Modification of Certain Routing Fees | |
| 83 FR 61705 - Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Withdrawal of a Proposed Rule Change To Amend the Fee Schedule Regarding Connectivity Fees for Members and Non-Members | |
| 83 FR 61689 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to FINRA Rule 4570 (Custodian of Books and Records) | |
| 83 FR 61686 - Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Modification of Certain Routing Fees | |
| 83 FR 61692 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Certificate of Incorporation, Bylaws and Rule 3.3 | |
| 83 FR 61700 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Provisions for Excluding Days for Purposes of Pricing Tiers | |
| 83 FR 61705 - Self-Regulatory Organizations; NYSE American LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 903, Series of Options Open for Trading | |
| 83 FR 61687 - Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Withdrawal of a Proposed Rule Change To Amend the Fee Schedule Regarding Connectivity Fees for Members and Non-Members | |
| 83 FR 61687 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Rule 6.4-O, Series of Options Open for Trading | |
| 83 FR 61709 - Notice Rescinding Eight Notices of Intent To Prepare Environmental Impact Statements | |
| 83 FR 61657 - Meetings Announcement for the Physician-Focused Payment Model Technical Advisory Committee Required by the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA); Correction | |
| 83 FR 61651 - Joint Meeting of the Arthritis Advisory Committee and the Drug Safety and Risk Management Advisory Committee; Notice of Meeting; Establishment of a Public Docket; Request for Comments | |
| 83 FR 61642 - Endocrinologic and Metabolic Drugs Advisory Committee; Notice of Meeting; Establishment of a Public Docket; Request for Comments | |
| 83 FR 61605 - Fisheries of the Exclusive Economic Zone Off Alaska; Bering Sea and Aleutian Islands Management Area; Cost Recovery Programs | |
| 83 FR 61675 - Agency Information Collection Activities; Proposed eCollection eComments Requested; Forensic Firearm Training Request for Non-ATF Employees-ATF Form 7110.15 | |
| 83 FR 61685 - Proposal Review; Notice of Meetings | |
| 83 FR 61624 - KEI (Maine) Power Management (II) LLC; Notice of Intent To File License Application, Filing of Pre-Application Document, and Approving Use of the Traditional Licensing Process | |
| 83 FR 61625 - Notice of Amendment: Midship Pipeline Company, LLC | |
| 83 FR 61624 - Atlanta Gas Light Company; Notice of Application | |
| 83 FR 61664 - Draft Environmental Impact Statement and Draft Habitat Conservation Plan; Receipt of an Application for an Incidental Take Permit for Marbled Murrelets, Bald Eagles, and Golden Eagles; Skookumchuck Wind Energy Project, Lewis and Thurston Counties, Washington | |
| 83 FR 62152 - Modernizing Part D and Medicare Advantage To Lower Drug Prices and Reduce Out-of-Pocket Expenses | |
| 83 FR 61708 - Environmental Impact Statement for Allen Fossil Plant Ash Impoundment Closures | |
| 83 FR 61551 - Revisions to California State Implementation Plan; South Coast Air Quality Management District; Stationary Source Permits | |
| 83 FR 61552 - Safe Management of Recalled Airbags | |
| 83 FR 61628 - Information Collection Request Submitted to OMB for Review and Approval; Comment Request; NESHAP for Plating and Polishing Area Sources (Renewal) | |
| 83 FR 61634 - Information Collection Request Submitted to OMB for Review and Approval; Comment Request; NESHAP for Friction Materials Manufacturing (Renewal) | |
| 83 FR 61523 - Airworthiness Directives; Dassault Aviation Airplanes | |
| 83 FR 61707 - Notice of Availability of the Draft Environmental Assessment (Draft EA) for Palmetto Railways Camp Hall Rail Line | |
| 83 FR 61509 - Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire | |
| 83 FR 61571 - Post-Trade Name Give-Up on Swap Execution Facilities | |
| 83 FR 61946 - Swap Execution Facilities and Trade Execution Requirement | |
| 83 FR 61730 - Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts |
(1) An erroneous editorial note was included in the printed version of the
(2) In the printed version of the
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Board of Governors of the Federal Reserve System.
Final rule.
The Board of Governors of the Federal Reserve System (Board) is publishing final amendments to Regulation J. The amendments clarify and simplify certain provisions Regulation J, remove obsolete provisions, and align the rights and obligations of sending banks, paying banks, and Federal Reserve Banks (Reserve Banks) with the Board's recent amendments to Regulation CC to reflect the virtually all-electronic check collection and return environment. The final rule also amends Regulation J to clarify that terms used in financial messaging standards, such as ISO 20022, do not confer legal status or responsibilities.
Effective January 1, 2019.
Clinton N. Chen, Senior Attorney (202) 452-3952, Legal Division; or Ian C.B. Spear, Manager (202) 452-3959; Division of Reserve Bank Operations and Payment Systems; for users of Telecommunication Devices for the Deaf (TDD) only, contact 202-263-4869; Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
Subpart A of Regulation J governs the collection of checks and other items by the Reserve Banks. This subpart includes the warranties and indemnities that are given to the Reserve Banks by parties that send items to the Reserve Banks for collection and return, as well as the warranties and indemnities for which the Reserve Banks are responsible in connection with the items they handle. Subpart A also describes the methods by which the Reserve Banks may recover for losses associated with their collection of items. Subpart A authorizes the Reserve Banks to issue operating circulars governing the details of the collection of checks and other items and provides that such operating circulars have binding effect on all parties interested in an item handled by a Reserve Bank. The Reserve Banks' Operating Circular No. 3, “Collection of Cash Items and Returned Checks” (OC 3),
In March 2018, the Board published a notice of proposed rulemaking (“proposal”) intended to align subpart A of Regulation J with the Board's 2017 amendments to Regulation CC and cross reference certain provisions (83 FR 11431). The proposal also included amendments to subpart B of Regulation J to clarify that terms used in financial messaging standards, such as ISO 20022, do not confer legal status or responsibilities. The Board received 25 comments in response to its proposal during the comment period from a variety of commenters, including financial institutions, trade associations, clearinghouses, and private individuals. The Board has considered all comments received and has adopted amendments to Regulation J as described below.
Under subpart A of Regulation J, Reserve Banks handle “items,” which are defined to include “electronic items.” Regulation J currently defines an “electronic item” as an electronic image of, and information describing, an item that a Reserve Bank agrees to handle pursuant to an operating circular. Regulation J also sets forth certain warranties provided to the Reserve Banks by the sender of an electronic item and certain warranties provided by the Reserve Banks when sending or presenting an electronic item. Specifically, Regulation J provides that for electronic items, the sender and the Reserve Banks make warranties (1) as set forth in the Uniform Commercial Code (U.C.C.) and Regulation CC as if the electronic item were subject to their terms; and (2) similar to those made for substitute checks under the Check 21 Act (“Check-21-like warranties”). Regulation J also currently provides similar provisions related to checks that are returned as electronic items.
In 2017, the Board published a final rule amending Regulation CC to reflect the virtually all-electronic check collection and return environment (82 FR 27552). Among other things, the amendments created a regulatory framework for the collection and return of electronic items (
In its proposal, the Board proposed to remove the term “electronic item” from Regulation J and define “check” and “returned check” to include an electronic check and electronic returned check as defined in § 229.2 of Regulation CC. The proposal defined the term “item” to include an electronic check as defined in Regulation CC. The Board also proposed to eliminate duplicative provisions by removing the Check-21-like warranties currently provided under Regulation J by the sender and the Reserve Banks. Instead, the proposal provided that the sender of an item (including an electronic check) and the Reserve Banks would (as applicable and unless otherwise provided) make all the warranties and indemnities set forth in and subject to the terms of subparts C and D in
Commenters generally supported aligning Regulation J with Regulation CC's amendments regarding electronic checks. The Board received specific comments on cross referencing Regulation CC electronic check warranties and indemnities, which is discussed in detail in the relevant section-by-section analysis. The Board has revised proposed §§ 210.6(b)(3) and 210.12(e) to extend the warranties with respect to electronic checks and electronic returned checks provided by Reserve Banks to the same scope of recipients as in Regulation CC, as discussed in detail in the relevant section-by-section analyses.
In the 2017 amendments to Regulation CC, the Board included certain indemnities with respect to electronically-created items (ECIs), which are check-like items created in electronic form that never existed in paper form. ECIs can be difficult to distinguish from electronic images of paper checks. As a practical matter, a bank receiving an ECI often handles it as if it were derived from a paper check. However, because there was no original paper check corresponding to the ECI, the warranties, indemnities, and other provisions of Regulation CC would not apply to those items. As the Board explained in the 2017 Regulation CC amendments, the payee and the depositary bank are in the best position to know whether an item is electronically created and to prevent the item from entering the check-collection system. Therefore, to protect banks that receive ECIs during the check collection process, the Board's Regulation CC amendments provided indemnities that ultimately shift liability for losses to the depositary bank. These losses could arise because the ECI (1) is not derived from a paper check, (2) was unauthorized, or (3) was transferred or presented for payment more than once.
In its proposal, the Board explained that although Regulation J does not explicitly address ECIs, the definition of item in Regulation J does not encompass ECIs and therefore Regulation J does not allow for the handling of ECIs by the Reserve Banks. Specifically, Regulation J defines an item, in part, as “an instrument or a promise or order to pay money, whether negotiable or not” that meets several other requirements.
To provide greater clarity that Regulation J does not allow for the handling of ECIs by the Reserve Banks, the Board proposed to amend the definition of “item” in subpart A of Regulation J to state explicitly that the term does not include an ECI as defined in Regulation CC. Furthermore, because Regulation J is intended to provide rules for the collection and return of items by the Reserve Banks, the Board proposed to allow the Reserve Banks to require senders to provide warranties and indemnities that only “items” and any “noncash items” the Reserve Banks have agreed to handle will be provided to the Reserve Banks. The Board's proposal also permitted the Reserve Banks to provide a subsequent collecting bank and a paying bank the warranties and indemnities provided by the sender. The Board requested comment on possible implications that this clarification and change related to ECIs in Regulation J may have on financial institutions or the industry more broadly. The Board also requested comment on whether, and to what extent, the Board should consider amending Regulation J as part of a future rulemaking to permit the Reserve Banks to accept ECIs.
Three commenters, including a Federal Reserve Bank and a comment letter submitted by a group of trade associations (“group letter”), supported the Board's proposal on ECIs. The Reserve Bank commenter noted that it is aware that some advocates support allowing ECIs to be handled in the same manner as checks and has worked with these advocates to explore the possibility of making legal and operational changes to support ECIs. However, the Reserve Bank commenter stated that there is currently no consensus among industry participants to change laws or adopt standards necessary to support ECIs. In the absence of such laws and standards supporting ECIs, the Reserve Bank commenter believes that ECIs represent an unacceptable level of risk to financial institutions. Similarly, the group letter stated that ECIs lack legal status under existing laws and expose financial institutions to risks that cannot be effectively mitigated. The group letter stated that due to ECIs uncertain legal status, it is important to protect financial institutions that receive ECIs during the check collection process from damage or loss arising from the fact that ECIs are not derived from paper checks. Therefore, the group supported the Board's proposal to allow Reserve Banks to require senders to provide warranties and indemnities with respect to ECIs and did not support additional rulemaking to allow the handling of ECIs by the Reserve Banks.
Fourteen commenters, including a joint commenter letter submitted by businesses, financial institutions, and industry associations (“joint letter”), generally did not support the Board's proposed amendments on ECIs. The joint letter stated that the Board's proposal concerning ECIs is not in line with the Board's recent payment system improvement efforts.
The Board has considered the comments received and has adopted the amendments concerning ECIs as proposed in its final rule. The Board notes that numerous comments erroneously viewed the Board's proposed amendments as substantive modifications that created a new prohibition on ECIs. However, as discussed above, ECIs are not “items” under the Board's current Regulation J and therefore cannot be handled by the Reserve Banks. This exclusion of ECIs under current Regulation J is already reflected in current OC 3, which requires that an “electronic item” contain an image and data captured from a paper check. The Board's amendments to the definition of “item” are intended only to provide additional clarity regarding these existing exclusions and do not create any new prohibitions. The Board believes this existing exclusion shifts liability to parties better positioned to know whether a purported item is electronically created and that can either prevent the ECI from entering the check-collection system or assume the risk of sending it forward. Moreover, the Board's amendments would not prevent entities that desire to exchange ECIs from doing so by agreement using direct exchange relationships or other methods not involving the Reserve Banks.
The Board appreciates comments regarding the Federal Reserve's payment system improvement efforts and continues to support technological innovation in the payments system. However, as set forth in the Federal Reserve's
The Board does not believe it is appropriate to adopt guidance to clarify how banks can distinguish ECIs from electronic checks. As it stated in its proposal, the Board recognizes that a bank receiving an electronic image generally cannot distinguish an image that is derived from a paper check from an ECI. This inability to distinguish ECIs from electronic images of paper checks is the reason the Board adopted indemnities with respect to ECIs in Regulation CC. The parties in the best position to know whether a purported item is electronically created are also in the best position to assess and take on any associated risks that may arise from ECIs entering the check collection system and can also address such risk in agreements with their customers that deposit ECIs.
Regulation J currently provides that settlement with a Reserve Bank for cash items “shall be made by debit to an account on the Reserve Bank's books, cash, or other form of settlement” to which the Reserve Bank has agreed.
The Board proposed to revise certain settlement provisions of Regulation J to remove references to cash and other specified forms of settlement (
The Board received one comment supporting the proposal and no opposing comments. The Board has adopted these amendments as proposed in the final rule.
Financial messaging standards provide a common format that allows different financial institutions to communicate. The Board has separately requested comment on the Federal Reserve Banks' plan to migrate to the ISO 20022 financial messaging standard for the Fedwire Funds Service.
The Board received four comments supporting these proposed changes and no opposing comments. The Board has adopted these amendments as proposed.
Regulation J defines the term “check” as a draft as defined in the U.C.C. drawn on a bank and payable on demand. The Board proposed to revise the definition of “check” to mean a “check” and an “electronic check” as those terms are defined in Regulation CC. This amendment aligns the terminology in the two regulations.
Regulation J also includes the term “check as defined in 12 CFR 229.2(k)” (the Regulation CC definition of “check”). This term is used in Regulation J in those provisions that require specific references to the Regulation CC definition of “check.” (See §§ 210.2(m), 210.7(b)(2), and 210.12(a)(2).) The Board proposed to delete the definition of “check as defined in 12 CFR 229.2(k)” because it was no longer needed in light of the proposed revision of the Regulation J definition of “check” to cross-reference the Regulation CC definition. The Board also proposed to revise the three provisions where it is used by deleting the reference to “check as defined in 12 CFR 229.2(k).”
Six commenters, including the group letter, were generally supportive of the Board's proposed changes to align Regulation J with Regulation CC. The Board did not receive specific comments on proposed § 210.2(h) or any opposing comments. The Board has adopted these changes as proposed.
Regulation J uses the term “item” to refer to the instruments and electronic images that the Reserve Banks handle. Regulation J uses the term “electronic item” to refer to an electronic image of an item, and information describing that item, that a Reserve Bank agrees to handle as an item pursuant to an operating circular. To align the terminology of Regulation J with Regulation CC, the Board proposed to delete the definition of “electronic item” and revise the definition of “item” in § 210.2(i) to include a check, which, under the proposed amendment discussed above would include both a check and an electronic check as defined in Regulation CC. The Board also proposed to add a clarifying statement that the term “item” does not include an ECI as defined in § 229.2 of Regulation CC.
Six commenters, including the group letter, were generally supportive of alignment between Regulation J and Regulation CC. With respect to ECIs in particular, three commenters supported the Board's proposed amendments, while fourteen commenters generally opposed amendments that restricted the Reserve Banks' handling of ECIs. For reasons described in the overview section, the Board has adopted § 210.2(i) as proposed.
Current § 210.2(m) defines a “returned check” as “a cash item or a check as defined in 12 CFR 229.2(k) returned by a paying bank.” To align the definition of “returned check” with “check,” the Board proposed to delete the reference to “check as defined in 12 CFR 229.2(k)” and instead refer to the definition of “electronic returned check” in Regulation CC. The Board did not receive any comments on proposed § 210.2(m). The Board has adopted these changes as proposed.
A “sender” under § 210.2(n) is any of several listed entities that sends an item to a Reserve Bank for forward collection. The Board proposed to add “member bank, as defined in section 1 of the Federal Reserve Act” in § 210.2(n)(2) to include a bank or trust company that is a member of one of the Federal Reserve Banks to ensure inclusion of any member bank that does not fall under the existing definition. The Board proposed to redesignate current § 210.2(n)(2)-(6) to § 210.2(n)(3)-(7) to accommodate the insertion.
One commenter requested that the Board clarify whether its proposed changes to § 210.2(n) would expand the types of institutions that may directly participate as a sender in the Fedwire services subject to subpart B of Regulation J, such as nondepository trust companies. The commenter noted that revising the definition of sender to capture member nondepository trust companies would prompt concerns regarding payment system risk with respect to access to Federal Reserve financial services. The Board's proposed changes to the definition of “sender” does not affect the rights of any particular type of entity to obtain access to Federal Reserve services. (In any case, the definition of “sender” in § 210.2(n) applies only to the collection of checks and other items by the Reserve Banks and not to the Fedwire Funds Service.) As stated in the Board's proposal, proposed § 210.2(n) is intended to ensure inclusion of any member bank that does not fall under the existing list of entities that send items to a Reserve Bank for forward collection. Whether any particular member bank, including a nondepository trust company, obtains an account and access to Reserve Bank check services continues to be governed by existing laws, rules, and policies, including the Federal Reserve Act, the Board's Policy on Payment System Risk and the Reserve Banks' internal risk analysis. The Board intends no expansion of rights by this technical change. The Board has adopted the amendments as proposed.
Current § 210.2(q) defines “Fedwire” as having the same meaning set forth in § 210.26(e). The Board proposed to amend this definition to refer to both “Fedwire Funds Service and Fedwire” to conform to the proposed amendment to § 210.26(e). The Board did not receive any comments on proposed § 210.2(q) and has adopted the revisions as proposed.
Section 210.3(a) provides general provisions concerning the obligations of Reserve Banks and the role of operating circulars. As discussed in the overview section on ECIs, the Board proposed to add a sentence to § 210.3(a) to permit Reserve Banks to require a sender to provide warranties and indemnities that only items and any noncash items the Reserve Banks have agreed to handle will be sent to the Reserve Banks. Additionally, in order to allow the Reserve Banks to pass any such warranties and indemnities forward, the Board proposed to authorize the Reserve Banks to provide to a subsequent collecting bank and to the paying bank any warranties and indemnities provided by the sender pursuant to this paragraph.
The Board received one comment, the group letter, supporting the proposal. The Board did not receive any comments opposing these particular amendments, although as discussed in the overview section, fourteen commenters generally opposed amendments that restricted the Reserve Banks' handling of ECIs. For the reasons described in the overview section, the Board has adopted these revisions as proposed.
Section 210.4(a) sets forth the rule for determining the Reserve Bank to which an item should be sent. The Board proposed to clarify this paragraph to provide that a sender's Administrate Reserve Bank may direct a sender (other than a Reserve Bank) to send any item to a specified Reserve Bank, whether or
The Board did not receive any comments on proposed § 210.4 and has adopted the revisions as proposed.
Current § 210.5(a) lists the warranties, authorizations, and agreements made by a sender. The first two paragraphs (current § 210.5(a)(1) and (2)) apply to all items and require the sender to authorize the Reserve Banks to handle the item sent and warrant that the sender is entitled to enforce the item, that the item has not been altered, and that the item bears the indorsements applied by all prior parties. The Board did not propose to revise these paragraphs. Current § 210.5(a)(3) and (4) set out warranties for electronic items and electronic items that are not representations of substitute checks, respectively. These warranties are now specified in Regulation CC, and the Board proposed to revise Regulation J accordingly. Specifically, the Board proposed to amend § 210.5(a)(3) to require the sender to make all applicable warranties and indemnities set forth in Regulation CC and the U.C.C. The proposal retained the existing requirement that the sender make all warranties set forth in and subject to the terms of U.C.C. 4-207 for an electronic check as if it were an item subject to the U.C.C. The proposed changes were intended to streamline Regulation J, align § 210.5(a) with the Regulation CC provisions that set out warranties and indemnities for electronic checks, and ensure a seamless chain of warranties for the items handled by the Reserve Banks.
The Board also proposed to require a sender to make any warranties or indemnities regarding the sending of items that the Reserve Banks include in an operating circular issued in accordance with § 210.3(a) to ensure that only items and any noncash items the Reserve Banks have agreed to handle will be sent to the Reserve Banks (proposed § 210.5(a)(4)). Finally, the Board proposed to add a reference to “indemnities” to the introductory text of § 210.5(a) to reflect the coverage of sender indemnities in proposed § 210.5(a)(3) and (4).
One commenter, the group letter, requested that the Board add commentary concerning the cross referencing of Regulation CC's image quality warranty. Under Regulation CC, each bank that transfers an electronic check warrants that “the electronic image accurately represents all of the information on the front and back of the original check as of the time the original check was truncated and the electronic information includes an accurate record of all MICR line information required for a substitute check under § 229.2(aa) and the amount of the check.”
The Board acknowledges that the warranty in § 229.34(a)(1)(i) does not require that the electronic check capture those characteristics of the paper check that cannot survive the imaging process. The commentary to § 229.34(a)(1)(i) states that the electronic check warranties correspond to the warranties made by a bank that transfers, presents, or returns a substitute check.
Current § 210.5(a)(5) sets out the sender's liability to Reserve Banks. The Board proposed to amend this paragraph to align this paragraph to changes elsewhere in the proposed rule.
Current § 210.5(a)(5)(i)(C) states that the sender agrees to indemnify the Reserve Bank for any loss or expense resulting from “[a]ny warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, or the U.C.C.” The Board proposed to amend this provision to provide that the sender will also indemnify a Reserve Bank for any loss or expense sustained resulting from any warranties and indemnities regarding the sending of “items” required by the Reserve Bank in an operating circular issued pursuant to proposed § 210.3(a).
Current § 210.5(a)(5)(ii) specifies conditions and limitations to a sender's liability for warranties and indemnities that a Reserve Bank makes for a substitute check, a paper or electronic representation thereof, or any other electronic item. The Board proposed to delete the term “electronic item” in current § 210.5(a)(5)(ii) and replace it with “electronic check.”
Current § 210.5(a)(5)(ii)(A) provides that a sender of an original check is not liable for any amount that the Reserve Bank pays under subpart D of Regulation CC for a subsequently created substitute check or under § 210.6(b)(3) for an electronic item, absent the sender's agreement to the contrary. The Board proposed to delete the reference to current § 210.6(b)(3), which lists warranties and an indemnity for an electronic item that is not a representation of a substitute check, and replace it with a reference to § 229.34 of Regulation CC with respect to an electronic check, consistent with other proposed amendments to § 210.6(b) described below.
Current § 210.5(a)(5)(ii)(B) provides that nothing in Regulation J alters the liability structure that applies to substitute checks and paper or electronic representations of substitute checks under subpart D of Regulation CC. The Board proposed to add that this subpart also does not alter the liability of a sender of an electronic check under § 229.34 of Regulation CC, consistent with the other proposed revisions to Regulation J.
Current § 210.5(a)(5)(ii)(C) provides that a sender of an electronic item that is not a representation of a substitute check is not liable for any related warranties or indemnities that a Reserve Bank pays that are attributable to the Reserve Bank's own lack of good faith or failure to exercise ordinary care. The Board proposed to broaden this provision by applying the limitation on liability to all senders for any amount that the Reserve Bank pays that is attributable to the Reserve Bank's own lack of good faith or failure to exercise
The Board did not receive any comments on proposed § 210.5(a). As discussed in the overview section, the Board received numerous comments generally supporting aligning Regulation J with Regulation CC. The Board has adopted these revisions as proposed.
Section 210.5(c) sets out the procedures by which a Reserve Bank may recover against a sender if certain actions or proceedings related to the sender's actions are brought against (or defense is tendered to) a Reserve Bank. A portion of this paragraph was inadvertently dropped from the Code of Federal Regulations. The Board proposed to reinstate the dropped language, which provides that, upon entry of a final judgment or decree, a Reserve Bank may recover from the sender the amount of attorneys' fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, with interest. In addition, the Board proposed to correct cross-references to this provision in § 210.5(d).
The Board did not receive any comments on proposed § 210.5(c) & (d). The Board has adopted these revisions as proposed.
Current § 210.5(e) provides that when a sender sends an item to a Reserve Bank, the sender and any prior collecting bank grant to the sender's Administrative Reserve Bank a security interest in all of their respective assets in the possession of, or held for the account of, any Reserve Bank to secure their respective obligations due or to become due to the Administrative Reserve Bank under this subpart or subpart C of part 229 (Regulation CC). The Board proposed to amend this paragraph to refer to subpart D of Regulation CC in addition to subpart C, as senders may have obligations to Reserve Banks under that subpart as well.
The Board did not receive any comments on proposed § 210.5(e). The Board has adopted these revisions as proposed.
Section 210.6(a)(2) limits a Reserve Bank's liability with respect to an item to three instances: (1) The Reserve Bank's own lack of good faith or failure to exercise ordinary care, (2) as provided in this section of Regulation J, and (3) as provided in subparts C and D of Regulation CC. The Board proposed to expand this list to provide that a Reserve Bank may be liable under any warranties and indemnities provided in an operating circular issued in accordance with § 210.3(a) regarding the sending of items.
The Board received one comment, the group letter, supporting its proposal to allow the Reserve Banks to address warranties and indemnities for eligible items and non-cash items in the operating circular. The Board did not receive any opposing comments. The Board has adopted these revisions as proposed.
Section 210.6(b) sets forth the warranties and indemnities made by a Reserve Bank when it presents or sends an item. In alignment with the Board's proposed amendments to the sender's warranties in § 210.5(a), the Board proposed to replace current § 210.6(b)(2) and (3), which provide warranties and indemnities for electronic items and electronic items that are not representations of substitute checks, respectively. Those warranties are now covered by Regulation CC. The Board also proposed to make a conforming amendment to § 210.6(b)(1)(iii) to eliminate the unnecessary reference to “paper or electronic form.”
The Board proposed a new § 210.6(b)(2) to provide that a Reserve Bank would make any warranties or indemnities regarding the sending of items as set forth in an operating circular issued pursuant to proposed § 210.3(a). This language corresponds to the similar proposed provision for sender liability in § 210.5(a)(4).
The Board proposed a new § 210.6(b)(3) to provide that the Reserve Bank makes to a subsequent collecting bank and to the paying bank all the warranties and indemnities set forth in subparts C and D for Regulation CC. Proposed § 210.6(b)(3) would retain the existing application of U.C.C. 4-207 warranties to electronic items (now called electronic checks).
In § 210.6(b)(4), the Board proposed to retain the existing Reserve Bank indemnity for substitute checks created from electronic checks, which is in current § 210.6(b)(3)(ii). This provision provides an indemnity chain for substitute check indemnity claims under Regulation CC, enabling receiving banks (and, in turn, Reserve Banks) to pass the loss on such claims to the bank whose choice to handle an item electronically necessitated the later creation of a substitute check.
The Board received one comment, the group letter, on proposed § 210.6(b)(3). The group letter noted that the persons that receive the electronic check warranties from the Reserve Banks appeared to be more limited than the persons that receive the electronic check warranties under Regulation CC. Specifically, proposed § 210.6(b)(3) does not extend the electronic check warranties to the drawer of the check on the forward side, unlike the warranties in Regulation CC. The group letter noted, however, that proposed § 210.6(a)(2)(iv) provides that a Reserve Bank does not assume any liability with respect to an item or its proceeds “except as provided under subparts C and D of Regulation CC.” The group letter requested that the Board clearly require that the Reserve Banks provide the same scope and recipients of the new electronic check warranties in Regulation J as provided under Regulation CC.
The Board agrees with the group letter that Reserve Banks should provide the electronic check and electronic returned check warranties to the same scope of recipients in Regulation J as in Regulation CC, including to drawers and owners of checks. The Board believes that extending the warranties to the drawers and owners is consistent with the warranty flow set forth in section 5 of the Check 21 Act for substitute checks and will protect parties outside the banking system from any undesirable consequences resulting from check truncation. The Board has revised proposed § 210.6(b)(3) accordingly in the final rule. Otherwise, the Board has adopted § 210.6(b) as proposed, with minor revisions to correct typographical errors in § 210.6(b)(2) & (3).
The limitations on Reserve Bank liability are set forth in proposed (and current) § 210.6(a)(2). The Board proposed to delete paragraph (c) as it is redundant and to redesignate current paragraph (d) as paragraph (c). The Board did not receive any comments on proposed § 210.6(c). The Board has adopted these revisions as proposed.
Section 210.7(b) provides the places of presentment for a Reserve Bank or subsequent collecting bank. Current § 210.7(b)(2) states “In the case of a check as defined in 12 CFR 229.2(k), in accordance with 12 CFR 229.36.” In alignment with the Board's proposed deletion of the defined term “check as defined in 12 CFR 229.2(k),” the Board proposed to delete the use of that term in § 210.7(b)(2), as it is no longer needed, and make other minor edits.
The Board did not receive any comments on proposed § 210.7. The Board has adopted these revisions as proposed.
Current § 210.9(b)(5) requires that settlement for cash items with a Reserve Bank be made by debit to an account on the Reserve Bank's books, cash, or other form of settlement to which the Reserve Bank agrees. The Board proposed to amend this provision by removing the reference to cash as a means of settlement. The Board also proposed to make conforming amendments to § 210.9(c) and (d), as well as to remove the references to other rarely-used forms of settlement (cashier's checks, certified checks, or other bank drafts or obligations). The Board proposed to correct cross-references and to capitalize the term “Administrative Reserve Bank” wherever it appears to conform to the defined term in § 210.2(c).
As discussed in the overview section, the Board received one comment, the group letter, supporting the proposal. The Board did not receive any opposing comments. The Board has adopted the revisions as proposed.
Current § 210.9(e) states that a Reserve Bank may handle a bank draft or other form of payment it receives in payment of a cash item as a cash item and that a Reserve Bank may handle a bank draft or other form of payment it receives in payment of a noncash item as either a cash item or a noncash item. The Board proposed to delete this paragraph as it is now obsolete.
The Board did not receive any comments on proposed § 210.9(e) and has deleted this paragraph as proposed.
Current § 210.9(f) states that a Reserve Bank that acts in good faith and exercises ordinary care shall not be liable for the nonpayment of, or failure to realize upon, any bank draft or other form of payment that it accepts pursuant to § 210.9(b)-(d). The Board proposed to renumber this paragraph as § 210.9(e) and to replace the reference to “bank draft or other form of payment” with “any non-cash form of payment” to conform to the proposed changes to the other provisions of this section.
The Board did not receive any comments on proposed § 210.9(f). The Board has adopted these revisions as proposed.
Section 210.10(a) states that each Reserve Bank shall “include in its operating circulars” its time schedules for availability of cash items and returned checks and, correspondingly, when credits can be counted toward reserve balance requirements for purposes of Regulation D (12 CFR part 204). The Reserve Banks' practice is to publish the time schedules on the Federal Reserve website for financial services. Accordingly, the Board proposed to amend this paragraph to delete the requirement that time schedules be included in the operating circulars and, instead, require only that the time schedules be published.
The Board did not receive any comments on proposed § 210.10. The Board has adopted these revisions as proposed.
Section 210.11(b) states that a Reserve Bank may give credit for the proceeds of a noncash item subject to payment in actually and finally collected funds in accordance with a time schedule included in its operating circulars. To conform to amendments made in proposed § 210.10, the Board proposed to delete the reference to operating circulars and require only that the time schedule be published.
The Board did not receive any comments on proposed § 210.11(b). The Board has adopted these revisions as proposed.
Current § 210.11(c) prohibits a Reserve Bank from providing credit for a bank draft or other form of payment for a noncash item until it receives payment in actually and finally collected funds. The Board proposed to delete this paragraph, as actually and finally collected funds are already required by § 210.11(a).
The Board did not receive any comments on proposed § 210.11(c) and has adopted these revisions as proposed.
Section 210.12 sets out provisions governing the handling of returned checks. It is the counterpart to §§ 210.5 and 210.6, which govern the handling of items for forward collection.
Current § 210.12(a)(2) sets out the procedures by which a paying bank may return checks not handled by Reserve Banks and refers to “check as defined in § 229.2(k) of this chapter (Regulation CC).” In alignment with the Board's proposal to delete the defined term “check as defined in § 229.2(k)” in § 210.2(h), the Board proposed to delete the use of this term in this paragraph, as it is no longer needed, and to use the term “check” instead.
The Board did not receive any comments on proposed § 210.12(a) and has adopted these revisions as proposed.
Current § 210.12(c) provides the warranties, authorizations, and agreements related to returned checks made by paying banks and returning banks. The Board proposed amendments to this paragraph that are parallel to the proposed amendments for forward-collection items with respect to the liability of the sender (§ 210.5(a)(3)) and the Reserve Banks (§ 210.6(b)(2)). Specifically, the Board proposed to replace current § 210.12(c)(3) and (4), which provide warranties for all returned checks that are electronic items and warranties for returned checks that are electronic items that are not representations of substitute checks, respectively, with a provision that requires the paying bank or returning bank to make all the warranties and indemnities as set forth in Regulation CC, as applicable (proposed § 210.12(c)(3)).
Current § 210.12(c)(5) sets out the conditions under which a paying bank
The Board did not receive any comments on proposed § 210.12(c) and has adopted these revisions as proposed, with a minor revision to correct a typographical error in § 210.12(c)(1).
Current § 210.12(d) is titled “Preservation of other warranties and indemnities.” The Board proposed to change the title of this paragraph to “Returning bank's or paying bank's liability under other law” to mirror the heading for the corresponding paragraph for senders (§ 210.5(b)).
The Board did not receive any comments on proposed § 210.12(d). The Board has adopted these revisions as proposed.
Current § 210.12(e) sets forth a Reserve Bank's liability when it handles a returned check, including warranties and liabilities. The Board proposed to amend this paragraph to correspond to the amendments proposed in § 210.6(b) related to the warranties and liabilities that are made by Reserve Banks when presenting or sending an item.
The Board receive one comment, the group letter, on proposed § 210.12(e). Corresponding to the comment discussed in the section-by-section analysis for § 210.6(b)(3), the group letter stated that the proposed Regulation J does not extend the electronic check warranties for returns to the owner of the check, unlike the warranties in Regulation CC. The group letter requested that the Board require the Reserve Banks provide in Regulation J the same scope and recipients of the new electronic check warranties as provided under Regulation CC.
For the reasons described in the section-by-section analysis for § 210.6(b), the Board has revised proposed § 210.12(e)(ii) to extend the warranties for electronic returned checks provided by Reserve Banks to the same scope of recipients as provided in Regulation CC. The Board has also revised proposed § 210.12(e)(2)(i) to correct a typographical error.
Section 210.12(f) parallels § 210.5(c) and sets out the procedures by which a Reserve Bank may recover against a paying bank or returning bank if certain actions or proceedings related to the paying bank's or returning bank's actions are brought against (or defense is tendered to) a Reserve Bank. A portion of this paragraph was inadvertently dropped from the Code of Federal Regulations. The Board proposed to reinstate the dropped language, which provides that, upon entry of a final judgment or decree, a Reserve Bank may recover from the paying bank or returning bank the amount of attorneys' fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, with interest. In addition, the Board proposed to correct cross-references and make organizational changes in § 210.12(g).
The Board did not receive any comments on proposed § 210.12(f) & (g) and has adopted these revisions as proposed.
Section 210.25 sets out the authority, purpose, and scope for subpart B of Regulation J, which governs Fedwire funds transfers. The Board proposed to add a new § 210.25(e) to clarify that financial messaging standards (
The Board received four comments supporting these proposed changes and no opposing comments. The Board has adopted these amendments as proposed.
Section 210.2(e) defines the term “Fedwire” to mean the funds-transfer system owned and operated by the Federal Reserve Banks that is used primarily for the transmission and settlement of payment orders governed by subpart B. The Board proposed to amend this definition so that it applies to the official title of the service, “Fedwire Funds Service,” as well as the shorthand term “Fedwire.” The Board also proposed to change references to “Fedwire” to “Fedwire Funds Service” in §§ 210.9(b)(4)(i), 210.25(a) and (b)(3), and 210.29(b).
The Board did not receive any comments on proposed § 210.26 and has adopted these revisions as proposed.
Current § 210.32 sets out provisions that govern Federal Reserve Bank liability and payment of interest. Section 210.32(b) provides that compensation that is paid by Federal Reserve Banks in the form of interest shall be calculated in accordance with section 4A-506 of Article 4A. Under section 4A-506(a), the amount of interest may be determined by agreement between the sender and receiving bank or by funds-transfer system rule. If there is no such agreement, under section 4A-506(b), the amount of interest is based on the federal funds rate. The current commentary to § 210.32(b) states that “Interest would be calculated in accordance with the procedures specified in section 4A-506(b).” The Board proposed to delete this statement and rearrange the commentary to clarify that interest can be calculated in accordance with both section 4A-506(a) and (b).
The Board did not receive any comments on the proposed commentary to § 210.32. The Board has adopted these revisions as proposed.
The Board conducts a competitive impact analysis when it considers an operational or legal change, if that change would have a direct and material adverse effect on the ability of other service providers to compete with the Federal Reserve in providing similar services due to legal differences or due to the Federal Reserve's dominant market position deriving from such legal differences. All operational or legal changes having a substantial effect on payments-system participants will be
The Board does not believe that the amendments to Regulation J will have a direct and material adverse effect on the ability of other service providers to compete effectively with the Reserve Banks in providing similar services due to legal differences. The final rule would align the provisions in Regulation J governing Reserve Bank services to the generally applicable provisions in Regulation CC. The final rule would not affect the competitive position of private-sector presenting banks vis-à-vis the Reserve Banks.
The Riegle Community Development Regulatory Improvement Act of 1994 requires that agency regulations that impose additional reporting, disclosure, and other requirements on insured depository institutions take effect on the first calendar quarter following publication in final form, unless the agency determines for good cause that the regulation should become effective before such time. 12 U.S.C. 4802(b). Consistent with the Riegle Community Development Act, this final rule is effective on January 1, 2019.
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR part 1320, appendix A.1), the Board may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a valid Office of Management and Budget (OMB) control number. The Board reviewed the final rule under the authority delegated to the Board by the OMB and determined that it contains no collections of information under the PRA.
An initial regulatory flexibility analysis (IRFA) was included in the proposal in accordance with section 3(a) of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601
The final rule will apply to all depository institutions regardless of their size.
With respect to ECIs, provisions in the final rule would allow the Reserve Banks to require that senders provide certain warranties and indemnities. The Board recognizes these provisions may affect the creation and acceptance of ECIs by small entities. Neither Regulation J nor Regulation CC would prevent private-sector collecting banks from doing the same. In addition, the Board's final rule would not prevent small entities that desire to exchange ECIs from doing so by agreement using direct exchange relationships or other methods not involving the Reserve Banks. The Board believes the final rule will help to shift liability to parties better positioned to know whether an item is electronically created and that can either prevent the item from entering the check-collection system or assume the risk of sending it forward.
Furthermore, the Board does not expect the amendments that remove references to cash and other specified forms of settlement to burden small entities, as the use of cash as settlement is rare and typically only done in emergency situations. The Board's final rule will allow use of cash as settlement in emergency situations by continuing to permit other forms of settlement to which the Reserve Banks agree. The Board does not expect the rule to have a significant economic impact on a substantial number of small entities.
Banks, Banking, Federal Reserve System.
For the reasons set forth in the preamble, the Board amends 12 CFR part 210 as follows:
12 U.S.C. 248 (i), (j), and (o); 12 U.S.C. 342; 12 U.S.C. 360; 12 U.S.C. 464; 12 U.S.C. 4001-4010; 12 U.S.C. 5001-5018.
(h)
(i)
(i) An instrument or a promise or order to pay money, whether negotiable or not, that is—
(A) Payable in a Federal Reserve District
(B) Sent by a sender to a Reserve Bank for handling under this subpart; and
(C) Collectible in funds acceptable to the Reserve Bank of the District in which the instrument is payable; or
(ii) A check.
(2) Unless otherwise indicated,
(m)
(n)
(1) A
(2) A member bank, as defined in section 1 of the Federal Reserve Act (12 U.S.C. 221);
(3) A clearing institution, defined as—
(i) An institution that is not a depository institution but that maintains with a Reserve Bank the balance referred to in the first paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
(ii) A corporation that maintains an account with a Reserve Bank in conformity with § 211.4 of this chapter (Regulation K);
(4) Another Reserve Bank;
(5) An international organization for which a Reserve Bank is empowered to act as depositary or fiscal agent and maintains an account;
(6) A foreign correspondent, defined as any of the following entities for which a Reserve Bank maintains an account: A foreign bank or banker, a foreign state as defined in section 25(b) of the Federal Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency referred to in section 14(e) of that act (12 U.S.C. 358); or
(7) A branch or agency of a foreign bank maintaining reserves under section 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 3105).
(q)
(s) * * *
(1) The terms not defined herein have the meanings set forth in § 229.2 of this chapter applicable to subpart C or D of part 229 of this chapter (Regulation CC), as appropriate; and
(a)
(a)
(b) * * *
(1) * * *
(ii) The initial sender's Administrative Reserve Bank (which is deemed to have accepted deposit of the item from the initial sender);
(iii) The Reserve Bank that receives the item from the initial sender (if different from the initial sender's Administrative Reserve Bank); and
(3) The identity and order of the parties under paragraph (b)(1) of this section determine the relationships and the rights and liabilities of the parties under this subpart, part 229 of this chapter (Regulation CC), section 13(1) and section 16(13) of the Federal Reserve Act, and the Uniform Commercial Code. An initial sender's Administrative Reserve Bank that is deemed to accept an item for deposit or handle an item is also deemed to be a sender with respect to that item. The Reserve Banks that are deemed to handle an item are deemed to be agents or subagents of the owner of the item, as provided in § 210.6(a).
(a)
(1)
(2)
(i) The sender is a person entitled to enforce the item or authorized to obtain payment of the item on behalf of a person entitled to enforce the item;
(ii) The item has not been altered; and
(iii) The item bears all indorsements applied by parties that previously handled the item for forward collection or return.
(3)
(4)
(5)
(A) The sender's lack of authority to make the warranty in paragraph (a)(1) of this section;
(B) Any action taken by the Reserve Bank within the scope of its authority in handling the item; or
(C) Any warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, the U.C.C., or, regarding the sending of items, an operating circular issued in accordance with § 210.3(a).
(ii) A sender's liability for warranties and indemnities that the Reserve Bank makes for a substitute check, a paper or electronic representation thereof, or for an electronic check is subject to the following conditions and limitations—
(A) A sender of an original check shall not be liable under paragraph (a)(5)(i) of this section for any amount that the Reserve Bank pays under subpart D of part 229 of this chapter, or under § 229.34 of this chapter with respect to an electronic check, absent the sender's agreement to the contrary; and
(B) Nothing in this subpart alters the liability of a sender of a substitute check or paper or electronic representation of a substitute check under subpart D of part 229 of this chapter, or a sender of an electronic check under § 229.34 of this chapter.
(iii) A sender shall not be liable for any amount that the Reserve Bank pays under this subpart or part 229 of this chapter that is attributable to the Reserve Bank's own lack of good faith or failure to exercise ordinary care.
(c)
(i) The alleged failure of the sender to have the authority to make the warranty and agreement in paragraph (a)(1) of this section;
(ii) Any action by the Reserve Bank within the scope of its authority in handling the item; or
(iii) Any warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, or the U.C.C.
(2) Upon entry of a final judgment or decree in an action or proceeding described in paragraph (c)(1) of this section, a Reserve Bank may recover from the sender the amount of attorneys' fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, together with interest thereon.
(d)
(i) The Reserve Bank made seasonable written demand on the sender to assume defense of the action or proceeding; and
(ii) The sender has not made any other arrangement for payment that is acceptable to the Reserve Bank.
(2) The Reserve Bank is not responsible for defending the action or proceeding before using this method of recovery. A Reserve Bank that has been charged under this paragraph (d) may recover from its sender in the manner and under the circumstances set forth in this paragraph (d).
(3) A Reserve Bank's failure to avail itself of the remedy provided in this paragraph (d) does not prejudice its enforcement in any other manner of the indemnity agreement referred to in paragraph (a)(5) of this section.
(e)
The revisions and addition read as follows:
(a) * * *
(2) * * *
(iii) As provided in an operating circular issued in accordance with § 210.3(a) regarding the sending of items; and
(iv) As provided in subparts C and D of part 229 of this chapter (Regulation CC).
(b)
(1)
(i) The Reserve Bank is a person entitled to enforce the item (or is authorized to obtain payment of the item on behalf of a person that is either entitled to enforce the item or authorized to obtain payment on behalf of a person entitled to enforce the item);
(ii) The item has not been altered; and
(iii) The item bears all indorsements applied by parties that previously handled the item for forward collection or return.
(2)
(3)
(4)
(ii) The Reserve Bank shall not be liable under paragraph (b)(4)(i) of this section for any amount that the recipient bank pays under subpart D of part 229 of this chapter that is attributable to the lack of good faith or failure to exercise ordinary care of the recipient bank or a person that handled the item, in any form, after the recipient bank.
(c)
(2) A claim that arises under paragraph (b)(3) of this section shall be barred unless the action on the claim is commenced within one year after the claim accrues. Such a claim accrues as of the date on which the claimant first learns, or by which the claimant reasonably should have learned, of the facts and circumstances giving rise to the claim.
(3) This paragraph (c) does not alter the time limit for claims under § 229.38(g) of this chapter (which include claims for breach of warranty under § 229.34 of this chapter) or subpart D of part 229 of this chapter.
(a) * * *
(1) A Reserve Bank or a subsequent collecting bank may present an item for payment or send the item for presentment and payment; and
(b) * * *
(2) In accordance with § 229.36 of this chapter (Regulation CC);
(b) * * *
(2) * * *
(i) On the day a paying bank receives a cash item from a Reserve Bank, it shall settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank, or return the item, by the latest of—
(A) The next clock hour or clock half-hour that is at least one half-hour after the paying bank receives the item;
(B) 8:30 a.m. eastern time; or
(C) Such later time as provided in the Reserve Banks' operating circulars.
(3) * * *
(i) * * *
(A) On that day, settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank, or return the item, by the latest of the next clock hour or clock half-hour that is at least one half-hour after it ordinarily would have received the item, 8:30 a.m. eastern time, or such later time as provided in the Reserve Banks' operating circulars; or
(B) On the next day that is a banking day for both the paying bank and the Reserve Bank, settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by 8:30 a.m. eastern time on that day or such later time as provided in the Reserve Banks' operating circulars; and compensate the Reserve Bank for the value of the float associated with the item in accordance with procedures provided in the Reserve Bank's operating circular.
(4)
(i) Settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by the close of the Fedwire Funds Service on the Reserve Bank's next banking day, or return the item by midnight of the day it receives the item (if the paying bank fails to settle for or return a cash item in accordance with this paragraph (b)(4)(i), it shall become accountable for the amount of the item as of the close of its banking day on the day it receives the item); and
(ii) Settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by 8:30 a.m. eastern time on the Reserve Bank's next banking day or such later time as provided in the Reserve Bank's operating circular, or return the item by midnight of the day it receives the item. If the paying bank fails to settle for or return a cash item in accordance with this paragraph (b)(4)(ii), it shall be subject to any applicable overdraft charges. Settlement under this paragraph (b)(4)(ii) satisfies the settlement requirements of paragraph (b)(4)(i) of this section.
(5)
(6)
(c)
(d)
(e)
(a) Each Reserve Bank shall publish a time schedule indicating when the amount of any cash item or returned check received by it is counted toward the balance maintained to satisfy a reserve balance requirement for purposes of part 204 of this chapter (Regulation D) and becomes available for use by the sender or paying or
(b)
(a)
(2)
(c)
(1)
(2)
(3)
(4)
(A) The paying or returning bank's lack of authority to give the authorization in paragraph (c)(1) of this section;
(B) Any action taken by a Reserve Bank within the scope of its authority in handling the returned check; or
(C) Any warranty or indemnity made by the Reserve Bank under paragraph (e) of this section or part 229 of this chapter.
(ii) A paying bank's or returning bank's liability for warranties and indemnities that a Reserve Bank makes for a returned check that is a substitute check, a paper or electronic representation thereof, or an electronic returned check is subject to the following conditions and limitations—
(A) A paying bank or returning bank that sent an original returned check shall not be liable for any amount that a Reserve Bank pays under subpart D of part 229 of this chapter, or under § 229.34 of this chapter with respect to an electronic returned check, absent the paying bank's or returning bank's agreement to the contrary; and
(B) Nothing in this subpart alters the liability under subpart D of part 229 of this chapter of a paying bank or returning bank that sent a substitute check or a paper or electronic representation of a substitute check or under § 229.34 of this chapter of a paying bank or returning bank that sent an electronic returned check; and
(iii) A paying bank or returning bank shall not be liable for any amount that the Reserve Bank pays under this subpart or part 229 of this chapter that is attributable to the Reserve Bank's own lack of good faith or failure to exercise ordinary care.
(d)
(e)
(i)
(ii)
(2)
(ii) The Reserve Bank shall not be liable under paragraph (e)(2)(i) of this section for any amount that the recipient bank pays under subpart D of part 229 of this chapter that is attributable to the lack of good faith or failure to exercise ordinary care of the recipient bank or a person that handled the item, in any form, after the recipient bank.
(3)
(i) For the Reserve Bank's own lack of good faith or failure to exercise ordinary care;
(ii) As provided in this paragraph (e); and
(iii) As provided in subparts C and D of part 229 of this chapter (Regulation CC).
(f)
(i) The alleged failure of the paying bank or returning bank to have the authority to give the authorization in paragraph (c)(1) of this section;
(ii) Any action by the Reserve Bank within the scope of its authority in handling the returned check; or
(iii) Any warranty or indemnity made by the Reserve Bank under paragraph (e) of this section or part 229 of this chapter; and
(2) Upon entry of a final judgment or decree in an action or proceeding described in paragraph (f)(1) of this section, a Reserve Bank may recover from the paying bank or returning bank the amount of attorneys' fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, together with interest thereon.
(g)
(i) The Reserve Bank made seasonable written demand on the paying bank or returning bank to assume defense of the action or proceeding; and
(ii) The paying bank or returning bank has not made any other arrangement for payment that is acceptable to the Reserve Bank.
(2) The Reserve Bank is not responsible for defending the action or proceeding before using this method of recovery. A Reserve Bank that has been charged under this paragraph (g) may recover from the paying or returning bank in the manner and under the circumstances set forth in this paragraph (g).
(3) A Reserve Bank's failure to avail itself of the remedy provided in this paragraph (g) does not prejudice its enforcement in any other manner of the indemnity agreement referred to in paragraph (c)(4) of this section.
The revision and addition read as follows:
(b) * * *
(2) Except as otherwise provided in paragraphs (b)(3) and (4) of this section, including Article 4A as set forth in appendix B to this subpart, and operating circulars of the Reserve Banks issued in accordance with paragraph (c) of this section, this subpart governs the rights and obligations of:
(e)
(e)
The addition and revision read as follows:
(e)
(b)
(2) Section 210.32(b) requires Federal Reserve Banks to provide compensation through an explicit interest payment. Under section 4A-506(a), the amount of such interest may be determined by agreement between the sender and receiving bank or by funds-transfer system rule. If there is no such agreement, under section 4A-506(b), the amount of interest is based on the federal funds rate. Similarly, compensation in the form of explicit interest will be paid to government senders, receiving banks, or beneficiaries described in § 210.25(d) if they are entitled to interest under this subpart. A Federal Reserve Bank may also, in its discretion, pay explicit interest directly to a remote party to a Fedwire funds transfer that is entitled to interest, rather than providing compensation to its direct sender or receiving bank.
(3) If a bank that received an explicit interest payment is not the party entitled to interest compensation under article 4A, the bank must pass the benefit of the explicit interest payment made to it to the party that is entitled to compensation in the form of interest from a Federal Reserve Bank. The benefit may be passed on either in the form of a direct payment of interest or in the form of a compensating balance, if the party entitled to interest agrees to accept the other form of compensation, and the value of the compensating balance is at least equivalent to the value of the explicit interest that otherwise would have been provided.
By order of the Board of Governors of the Federal Reserve System, November 14, 2018.
Federal Aviation Administration (FAA), Department of Transportation (DOT).
Final rule.
We are adopting a new airworthiness directive (AD) for all Dassault Aviation Model Falcon 10 airplanes. This AD was prompted by a determination that new and more restrictive maintenance requirements and airworthiness limitations are necessary. This AD requires revising the existing maintenance or inspection program, as applicable, to incorporate new or more restrictive maintenance requirements and airworthiness limitations. We are issuing this AD to address the unsafe condition on these products.
This AD is effective January 4, 2019.
The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of January 4, 2019.
For service information identified in this final rule, contact Dassault Falcon Jet Corporation, Teterboro Airport, P.O. Box 2000, South Hackensack, NJ 07606; telephone 201-440-6700; internet
You may examine the AD docket on the internet at
Tom Rodriguez, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone and fax 206-231-3226.
We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to all Dassault Aviation Model Falcon 10 airplanes. The NPRM published in the
We are issuing this AD to address, among other things, fatigue cracking and damage in principal structural elements; such fatigue cracking and damage could result in reduced structural integrity of the airplane.
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive 2018-0078, dated April 9, 2018 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Dassault Aviation Model Falcon 10 airplanes. The MCAI states:
The airworthiness limitations and certification maintenance instructions for the Dassault Falcon 10 aeroplanes, which are
Failure to accomplish these instructions could result in an unsafe condition [fatigue cracking and damage in principal structural elements, which could result in reduced structural integrity of the airplane.]
Previously, EASA issued AD 2008-0221 to require accomplishment of the maintenance tasks, and implementation of the airworthiness limitations, as specified in the Dassault Falcon 10 AMM, Chapter 5-40, at Revision 8.
Since that [EASA] AD was issued, Dassault issued the [Airworthiness Limitations Section] ALS, which introduces new and more restrictive maintenance requirements and/or airworthiness limitations.
For the reason described above, this [EASA] AD takes over the requirements for Falcon 10 aeroplanes from EASA AD 2008-0221, and requires accomplishment of the actions specified in the ALS.
You may examine the MCAI in the AD docket on the internet at
We gave the public the opportunity to participate in developing this final rule. We received no comments on the NPRM or on the determination of the cost to the public.
We reviewed the relevant data and determined that air safety and the public interest require adopting this final rule as proposed, except for minor editorial changes. We have determined that these minor changes:
• Are consistent with the intent that was proposed in the NPRM for addressing the unsafe condition; and
• Do not add any additional burden upon the public than was already proposed in the NPRM.
Dassault has issued Section 5-40-00, Airworthiness Limitations, Revision 13, dated July 2017, of the Dassault Falcon 10 Maintenance Manual. This service information describes repetitive mandatory maintenance tasks. 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
We estimate that this AD affects 60 airplanes of U.S. registry. We estimate the following costs to comply with this AD:
We have determined that revising the existing maintenance or inspection program takes an average of 90 work-hours per operator, although we recognize that this number may vary from operator to operator. In the past, we have estimated that this action takes 1 work-hour per airplane. Since operators incorporate maintenance or inspection program changes for their affected fleet(s), we have determined that a per-operator estimate is more accurate than a per-airplane estimate. Therefore, we estimate the total cost per operator to be $7,650 (90 work-hours × $85 per work-hour).
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.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes and associated appliances to the Director of the System Oversight Division.
This AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),
(3) Will not affect intrastate aviation in Alaska, and
(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD is effective January 4, 2019.
None.
This AD applies to all Dassault Aviation Model Falcon 10 airplanes, certificated in any category.
Air Transport Association (ATA) of America Code 05, Time Limits/Maintenance Checks.
This AD was prompted by a determination that new and more restrictive maintenance requirements and airworthiness limitations are necessary. We are issuing this AD to address, among other things, fatigue cracking and damage in principal structural elements; such fatigue cracking and damage could result in reduced structural integrity of the airplane.
Comply with this AD within the compliance times specified, unless already done.
Within 90 days after the effective date of this AD, revise the existing maintenance or inspection program, as applicable, to incorporate Section 5-40-00, Airworthiness Limitations, Revision 13, dated July 2017, of the Dassault Falcon 10 Maintenance Manual (“Section 5-40-00”). The initial compliance time for accomplishing the actions is at the applicable time specified in Section 5-40-00; or within 90 days after the effective date of this AD; whichever occurs later.
After the maintenance or inspection program has been revised as required by paragraph (g) of this AD, no alternative actions (
The following provisions also apply to this AD:
(1)
(2)
(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA Airworthiness Directive 2018-0078, dated April 9, 2018, for related information. This MCAI may be found in the AD docket on the internet at
(2) For more information about this AD, contact Tom Rodriguez, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone and fax 206-231-3226.
(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
(2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise.
(i) Section 5-40-00, Airworthiness Limitations, Revision 13, dated July 2017, of the Dassault Falcon 10 Maintenance Manual.
(ii) [Reserved]
(3) For service information identified in this AD, contact Dassault Falcon Jet Corporation, Teterboro Airport, P.O. Box 2000, South Hackensack, NJ 07606; telephone 201-440-6700; internet
(4) You may view this service information at the FAA, Transport Standards Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206-231-3195.
(5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to:
Federal Aviation Administration (FAA), DOT.
Final rule.
We are adopting a new airworthiness directive (AD) for Leonardo S.p.A. (Leonardo) Model AW189 helicopters. This AD requires replacing the tail plane lower fitting with an improved tail plane lower fitting. This AD was prompted by reports of cracks on the tail plane fittings of Model AW189 helicopters. The actions of this AD are intended to correct an unsafe condition on these products.
This AD is effective January 4, 2019.
For service information identified in this final rule, contact Leonardo S.p.A. Helicopters, Matteo Ragazzi, Head of Airworthiness, Viale G.Agusta 520, 21017 C.Costa di Samarate (Va) Italy; telephone +39-0331-711756; fax +39-0331-229046; or at
You may examine the AD docket on the internet at
Kristi Bradley, Aerospace Engineer, Safety Management Section, Rotorcraft Standards Branch, FAA, 10101 Hillwood Pkwy., Fort Worth, TX 76177; telephone 817-222-5110; email
On May 23, 2018, at 83 FR 23827, the
The NPRM was prompted by AD No. 2016-0161, dated August 8, 2016 (EASA AD 2016-0161), issued by EASA, which is the Technical Agent for the Member States of the European Union, to correct an unsafe condition for Leonardo Model AW189 helicopters. EASA advises that some cracks have been reported in-service on the tail plane fitting of AW189 helicopters following an onset of abnormal play. According to EASA, this condition, if not detected and corrected, could jeopardize structural integrity of the helicopter. EASA further advises that Leonardo developed a tail plane lower fitting with an improved design (P/N 8G0000P00511). Accordingly, EASA AD 2016-0161 requires repetitive inspections of the tail plane lower fitting assembly until the improved tail plane lower fitting is installed.
When the NPRM was issued, the FAA was in the process of updating AgustaWestland's name changes to Finmeccanica S.p.A. and then to Leonardo Helicopters on its FAA type certificate; therefore the NPRM specified AgustaWestland as the type certificate holder. Because this name change is now effective, this AD applies to Leonardo helicopters.
We gave the public the opportunity to participate in developing this AD, but we received no comments on the NPRM.
These helicopters have been approved by the aviation authority of Italy and are approved for operation in the United States. Pursuant to our bilateral agreement with Italy, EASA, its technical representative, has notified us of the unsafe condition described in the EASA AD. We are issuing this AD because we evaluated all information provided by Italy and determined the unsafe condition exists and is likely to exist or develop on other helicopters of these same type designs and that air safety and the public interest require adopting the AD requirements as proposed except for the name change from AgustaWestland to Leonardo. We have also updated the estimated costs to reflect that this AD affects 4 helicopters of U.S. Registry rather than 2 helicopters. These changes are consistent with the intent of the proposals in the NPRM (83 FR 23827, May 23, 2018) and will not increase the economic burden on any operator nor increase the scope of this AD.
The EASA AD requires inspecting the tail plane lower fitting for play within 50 flight hours and thereafter at intervals not to exceed 25 flight hours. If a crack or other damage exists, the EASA AD requires the improved tail plane lower fitting be installed within 10 flight hours. If no crack exists, the EASA AD requires that the improved tail plane lower fitting be installed within 200 flight hours or 2 months, whichever occurs first. This AD does not require inspections and requires installing the improved tail plane lower fitting within 50 hours time-in-service.
We reviewed Leonardo Helicopters Bollettino Tecnico (BT) No. 189-038, Revision B, dated October 13, 2016, which specifies repetitively inspecting the tail plane assembly for a crack.
We also reviewed BT No. 189-070, Revision A, dated October 13, 2016, which provides instructions for replacing the tail plane lower fitting with the improved tail plane lower fitting retromodification P/N 8G0000P00511.
We estimate that this AD affects 4 helicopters of U.S. Registry and that labor costs average $85 a work-hour. Based on these estimates, we expect that replacing the tail plane lower fitting with an improved tail plane lower fitting requires 64 work-hours and parts cost $15,424 for a total cost of $20,864 per helicopter and $83,456 for the U.S. fleet.
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 helicopters identified in this rulemaking action.
This AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
(1) Is not a “significant regulatory action” under Executive Order 12866;
(2) Is not a “significant rule” under 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.
We prepared an economic evaluation of the estimated costs to comply with this AD and placed it in the AD docket.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD applies to Leonardo S.p.A. (Type Certificate previously held by Finmeccanica S.p.A. and AgustaWestland S.p.A.) Model AW189 helicopters, certificated in any category, with a tail plane lower fitting part number (P/N) 8G5350A07051 installed.
This AD defines the unsafe condition as a crack on a tail plane fitting, which could result in failure of the tail plane fitting and loss of helicopter control.
This AD becomes effective January 4, 2019.
You are responsible for performing each action required by this AD within the specified compliance time unless it has already been accomplished prior to that time.
Within 50 hours time-in-service, install tail plane retromodification kit P/N 8G0000P00511.
(1) The Manager, Safety Management Section, Rotorcraft Standards Branch, FAA, may approve AMOCs for this AD. Send your proposal to: Kristi Bradley, Aerospace Engineer, Safety Management Section, Rotorcraft Standards Branch, FAA, 10101 Hillwood Pkwy., Fort Worth, TX 76177; telephone 817-222-5110; email
(2) For operations conducted under a 14 CFR part 119 operating certificate or under 14 CFR part 91, subpart K, we suggest that you notify your principal inspector, or lacking a principal inspector, the manager of the local flight standards district office or certificate holding district office, before operating any aircraft complying with this AD through an AMOC.
(1) Leonardo Helicopters Bollettino Tecnico (BT) No. 189-038, Revision B, and BT No. 189-070, Revision A, both dated October 13, 2016, which are not incorporated by reference, contain additional information about the subject of this AD. For service information identified in this AD, contact Leonardo S.p.A. Helicopters, Matteo Ragazzi, Head of Airworthiness, Viale G.Agusta 520, 21017 C.Costa di Samarate (Va) Italy; telephone +39-0331-711756; fax +39-0331-229046; or at
(2) The subject of this AD is addressed in European Aviation Safety Agency (EASA) AD No. 2016-0161, dated August 8, 2016. You may view the EASA AD on the internet at
Joint Aircraft Service Component (JASC) Code: 5510, Horizontal Stabilizer Structure.
Federal Aviation Administration (FAA), DOT.
Final rule.
We are adopting a new airworthiness directive (AD) for certain General Electric Company (GE) GEnx-2B67, -2B67B, and -2B67/P turbofan engines. This AD was prompted by low-cycle fatigue (LCF) cracking of the fuel manifold leading to an engine fire. This AD requires removal from service of certain fuel manifolds at the next engine shop visit and their replacement with parts eligible for installation. We are issuing this AD to address the unsafe condition on these products.
This AD is effective January 4, 2019.
For service information identified in this final rule, contact General Electric Company, GE Aviation, Room 285, 1 Neumann Way, Cincinnati, OH 45215; phone: 513-552-3272; email:
You may examine the AD docket on the internet at
Herman Mak, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7147; fax: 781-238-7199; email:
We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to certain GE GEnx-2B67, -2B67B, and -2B67/P turbofan engines. The NPRM published in the
GE published GEnx-2B Service Bulletin (SB) 73-0038 R03, dated August 17, 2018, to provide operators with instructions for replacing the lower fuel manifold system when in the intermixed configuration. This SB eliminates the need to replace the top main and lower fuel manifolds in the shop.
We gave the public the opportunity to participate in developing this final rule. We have considered the comment received. The Boeing Company supported the NPRM.
We reviewed the relevant data, considered the comment received, and determined that air safety and the public interest require adopting this final rule as proposed.
We reviewed GE GEnx-2B SB 73-0038 R02, dated November 19, 2015, and GEnx-2B SB 73-0038 R03, dated August 17, 2018. GE GEnx-2B SB 73-0038 R02, dated November 19, 2015 describes procedures for removing and replacing the fuel manifold system with parts eligible for installation. GE GEnx-2B SB 73-0038 R03, dated August 17, 2018 describes procedures for replacing the fuel manifold system when in the intermixed configuration.
We estimate that this AD affects two engines installed on airplanes of U.S.
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.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to engines, propellers, and associated appliances to the Manager, Engine and Propeller Standards Branch, Policy and Innovation Division.
This AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under 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.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD is effective January 4, 2019.
None.
This AD applies to General Electric Company (GE) GEnx-2B67, -2B67B, and -2B67/P turbofan engines with top main fuel manifolds, part numbers (P/Ns) 2419M11G01, 2561M11G01, or 2546M11G01, or lower fuel manifolds, P/Ns 2419M12G01, 2561M12G01, or 2546M12G01, installed.
Joint Aircraft System Component (JASC) Code 7310, Engine Fuel Distribution.
This AD was prompted by low-cycle fatigue cracking of the fuel manifold leading to an engine fire. We are issuing this AD to prevent the failure of the fuel manifold. The unsafe condition, if not addressed, could result in failure of the fuel manifold, engine fire, and damage to the airplane.
Comply with this AD within the compliance times specified, unless already done.
At the next engine shop visit, remove the applicable fuel manifolds from service and replace with parts eligible for installation.
After the effective date of this AD, do not install top main fuel manifolds, P/Ns 2419M11G01, 2561M11G01, or 2546M11G01, or lower fuel manifolds, P/Ns 2419M12G01, 2561M12G01, or 2546M12G01.
For the purpose of this AD, an “engine shop visit” is the induction of an engine into the shop for maintenance involving the separation of pairs of major mating engine case flanges, except for the following situations, which do not constitute an engine shop visit:
(1) Separation of engine flanges solely for the purposes of transportation of the engine without subsequent maintenance.
(2) Separation of engine flanges solely for the purposes of replacing the fan or propulsor without subsequent maintenance.
(1) The Manager, ECO Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the manager of the certification office, send it to the attention of the person identified in paragraph (k) of this AD. You may email your request to:
(2) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office.
For more information about this AD, contact Herman Mak, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7147; fax: 781-238-7199; email:
None.
Federal Aviation Administration (FAA), DOT.
Final rule; request for comments.
We are adopting a new airworthiness directive (AD) for all CFM International S.A. (CFM) LEAP-1B21, LEAP-1B23, LEAP-1B25, LEAP-1B27, LEAP-1B28, LEAP-1B28B1, LEAP-1B28B2, LEAP-1B28B2C, LEAP-1B28B3, LEAP-1B28BBJ1, and LEAP-1B28BBJ2 turbofan engines with a certain high-pressure turbine (HPT) stator case (HPT cases) installed. This AD requires removal of affected HPT cases from service and their replacement with a part eligible for installation. This AD was prompted by the discovery of a quality escape at a manufacturing facility involving unapproved welds on HPT cases. We are issuing this AD to address the unsafe condition on these products.
This AD is effective December 17, 2018.
The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of December 17, 2018.
We must receive comments on this AD by January 14, 2019.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
For service information identified in this final rule, contact CFM International Inc., Aviation Operations Center, 1 Neumann Way, M/D Room 285, Cincinnati, OH 45125; phone: 877-432-3272; fax: 877-432-3329; email:
You may examine the AD docket on the internet at
Christopher McGuire, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7120; fax: 781-238-7199; email:
We learned from CFM of a quality escape at one of their suppliers, AECC Aero Science and Technology Co., Ltd., which was performing welds on newly-manufactured components to correct errors introduced in their manufacturing process. These welds were not reviewed or approved by either CFM or the FAA. CFM's review of manufacturing records determined that these parts include HPT cases installed on CFM LEAP-1B turbofan engines. These HPT cases are life limited. The unapproved repairs reduced the material capability of these cases which requires their removal prior to reaching their published Airworthiness Limitation Section life limit. This condition, if not addressed, could result in failure of the HPT case, engine fire, and damage to the airplane. We are issuing this AD to address the unsafe condition on these products.
We reviewed CFM Service Bulletin (SB) LEAP-1B-72-00-0193-01A-930A-D, Issue 003, dated November 5, 2018. The SB describes procedures for removing the affected HPT cases from the engine. 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
We are issuing 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 AD requires removal of the affected HPT cases from service and their replacement with a part eligible for installation.
An unsafe condition exists that requires the immediate adoption of this AD without providing an opportunity for public comments prior to adoption. The FAA has found that the risk to the flying public justifies waiving notice and comment prior to the adoption of this rule because the compliance time for the required action is shorter than the time necessary for the public to comment and for us to publish the final rule. Certain HPTs cases must be removed within 200 cycles after the effective date of this AD to ensure they do not fail. Therefore, we find good cause that notice and opportunity for prior public comment are impracticable. In addition, for the reason stated above, we find that good cause exists for making this amendment effective in less than 30 days.
This AD is a final rule that involves requirements affecting flight safety and was not preceded by notice and an opportunity for public comment. However, we invite you to send any written data, views, or arguments about this final rule. Send your comments to an address listed under the
We will post all comments we receive, without change, to
We estimate that this AD affects two engines installed on airplanes of U.S. registry.
We estimate the following costs to comply with this AD:
We estimate the following costs to do any necessary replacements that would be required based on the results of the inspection. We have no way of determining the number of aircraft that might need this replacement:
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.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to engines, propellers, and associated appliances to the Manager, Engine and Propeller Standards Branch, Policy and Innovation Division.
This AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that this AD:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under 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.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD is effective December 17, 2018.
None.
This AD applies to CFM International S.A. (CFM) LEAP-1B21, LEAP-1B23, LEAP-1B25, LEAP-1B27, LEAP-1B28, LEAP-1B28B1, LEAP-1B28B2, LEAP-1B28B2C, LEAP-1B28B3, LEAP-1B28BBJ1, and LEAP-1B28BBJ2 turbofan engines with a high-pressure turbine (HPT) stator case (HPT case), part number (P/N) 2541M81G01 installed, and with any HPT case serial number (S/N) listed in Table 1 or Table 2 of Planning Information, paragraph 3.A., of CFM Service Bulletin (SB) LEAP-1B-72-00-0193-01A-930A-D, Issue 003, dated November 5, 2018.
Joint Aircraft System Component (JASC) Code 7250, Turbine Section.
This AD was prompted by the discovery of a quality escape at a manufacturing facility involving unapproved welds on HPT cases. We are issuing this AD to prevent failure of the HPT case. The unsafe condition, if not addressed, could result in engine fire and damage to the airplane.
Comply with this AD within the compliance times specified, unless already done.
(1) After the effective date of this AD, remove the affected HPT case from service no later than the number of cycles in service specified in Table 1 or Table 2 of Planning Information, paragraph 3.A., of CFM SB LEAP-1B-72-00-0193-01A-930A-D, Issue 003, dated November 5, 2018.
(2) After removing the HPT case as required in paragraph (g)(1) of this AD, and before further flight, determine if the combustor diffuser nozzle (CDN) case, P/N 2548M30G01 to 2548M30G07, inclusive, and with any CDN case S/N listed in Table 1 or Table 2 of Planning Information, paragraph 3.A., of CFM SB LEAP-1B-72-00-0193-01A-930A-D, Issue 003, dated November 5, 2018, needs to be replaced as follows:
(i) Inspect the HPT case forward flange outer diameter using the Accomplishment Instructions, paragraphs 5.B.(1), 5.B.(2), and 5.B.(4) of CFM SB LEAP-1B-72-00-0193-01A-930A-D, Issue 003, dated November 5, 2018.
(ii) If, during the inspection required by paragraph (g)(2)(i) of this AD, you find an HPT case forward flange cracked across the full axial length of the outer diameter, remove the CDN case, P/N 2548M30G01 to 2548M30G07, inclusive, from service and, before further flight, replace with a part eligible for installation.
(1) The Manager, ECO Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the manager of the certification office, send it to the attention of the person identified in paragraph (i) of this AD. You may email your request to:
(2) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office.
For more information about this AD, contact Christopher McGuire, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7120; fax: 781-238-7199; email:
(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
(2) You must use this service information as applicable to do the actions required by this AD, unless the AD specifies otherwise.
(i) CFM Service Bulletin LEAP-1B-72-00-0193-01A-930A-D, Issue 003, dated November 5, 2018.
(ii) [Reserved]
(3) For CFM service information identified in this AD, contact CFM International Inc., Aviation Operations Center, 1 Neumann Way, M/D Room 285, Cincinnati, OH 45125; phone: 877-432-3272; fax: 877-432-3329; email:
(4) You may view this service information at FAA, Engine and Propeller Standards Branch, 1200 District Avenue, Burlington, MA 01803. For information on the availability of this material at the FAA, call 781-238-7759.
(5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to:
Coast Guard, DHS.
Notice of deviation from drawbridge regulation.
The Coast Guard has issued a temporary deviation from the operating schedule that governs the S168/Great Bridge bridge. This bridge carries SR168 (Battlefield Boulevard South) over the Atlantic Intracoastal Waterway (AICW), Albemarle and Chesapeake Canal, mile 12.0, at Chesapeake, VA. The deviation is necessary to facilitate the Annual Chesapeake Rotary Christmas Parade. This deviation allows the bridge to remain in the closed-to-navigation position.
The deviation is effective from 4 p.m. to 10 p.m., on Saturday, December 1, 2018.
The docket for this deviation, USCG-2018-1035 is available at
If you have questions on this temporary deviation, call or email Mr. Michael Thorogood, Bridge Administration Branch Fifth District, Coast Guard, telephone 757-398-6557, email
The City of Chesapeake owner and operator of the S168/Great Bridge bridge has requested a temporary deviation from the current operating regulations to ensure the safety of the increased volumes of spectators that will be participating in the Annual Chesapeake Rotary Christmas Parade on Saturday, December 1, 2018. The S168/Great Bridge Bridge carries SR 168/Battlefield Boulevard South over the Atlantic Intracoastal Waterway (AICW), Albemarle and Chesapeake Canal, mile 12.0, at Chesapeake, VA. This bridge is a double bascule drawbridge and has a vertical clearance of 8 feet above mean high water in the closed position. The bridge has an unlimited vertical clearance in the open position.
The current operating regulation is set out in 33 CFR 117.997(g). Under this temporary deviation, the bridge will be maintained in the closed-to-navigation position from 4 p.m. to 6 p.m. and from 8 p.m. to 10 p.m. on Saturday, December 1, 2018.
The AICW, Albemarle and Chesapeake Canal, is used by a variety of vessels including U.S. government vessels, small commercial vessels, recreational vessels and tug and barge traffic. The Coast Guard has carefully considered the nature and volume of vessel traffic on the waterway in publishing this temporary deviation.
Vessels able to pass through the bridge in the closed-to-navigation position may do so at any time. The bridge will be able to open for emergencies and there is no immediate alternative route for vessels unable to pass through the bridge in the closed position. The Coast Guard will also inform the users of the waterway through our Local and Broadcast Notices to Mariners of the change in operating schedule for the bridge so that vessel operators can arrange their transits to minimize any impact caused by the temporary deviation.
In accordance with 33 CFR 117.35(e), the drawbridge must return to its regular operating schedule immediately at the end of the effective period of this temporary deviation. This deviation from the operating regulations is authorized under 33 CFR 117.35.
Coast Guard, DHS.
Notice of enforcement of regulation.
The Coast Guard will enforce the safety zone for the Pittsburgh Steelers Fireworks to provide for the safety of persons, vessels, and the marine environment on the navigable waters of the Allegheny, Ohio, and Monongahela Rivers during this event. Our regulation for marine events within the Eighth Coast Guard District identifies the regulated area for this event in Pittsburgh, PA. During the enforcement periods, entry into this zone is prohibited unless authorized by the Captain of the Port Marine Safety Unit Pittsburgh or a designated representative.
The regulations in 33 CFR 165.801, Table 1, Line 57 will be enforced from 7 p.m. through 11 p.m. on December 2, 2018.
If you have questions about this notice of enforcement, call or email Petty Officer Jennifer Haggins, Marine Safety Unit Pittsburgh, U.S. Coast Guard; telephone 412-221-0807, email
The Coast Guard will enforce a safety zone for the Steelers fireworks listed in 33 CFR 165.801, Table 1, Line 57 from 7 p.m. through 11 p.m. on December 2, 2018. This action is being taken to provide for the safety of persons, vessels, and the marine environment on the navigable waters of the Allegheny, Ohio, and Monongahela Rivers during this event. Our regulation for marine events within the Eighth Coast Guard District, § 165.801, specifies the location of the safety zone for the Steelers fireworks, which covers a less than one-mile stretch of the Ohio, Allegheny, and Monongahela Rivers. Entry into the safety zone is prohibited unless authorized by the Captain of the Port Marine Safety Unit Pittsburgh (COTP) or a designated representative. Persons or vessels desiring to enter into or pass through the area must request permission from the COTP or a designated representative. They can be reached on VHF FM channel 16. If permission is granted, all persons and vessel shall comply with the instructions of the COTP or designated representative.
In addition to this notice of enforcement in the
Office of Innovation and Improvement, Department of Education.
Final priorities, requirements, definitions, and selection criteria.
The Acting Assistant Deputy Secretary for Innovation and Improvement announces priorities, requirements, definitions, and selection criteria for Grants to Charter Management Organizations for the Replication and Expansion of High-Quality Charter Schools (CMO grants or CMO grant program) under the Expanding Opportunity Through Quality Charter Schools Program (CSP), Catalog of Federal Domestic Assistance (CFDA) number 84.282M. We may use one or more of these priorities, requirements, definitions, and selection criteria for competitions in fiscal year (FY) 2019 and later years. We take this action to support the replication and expansion of high-quality charter schools by charter management organizations (CMOs) throughout the Nation, particularly those that serve
These priorities, requirements, definitions, and selection criteria are effective November 30, 2018.
Allison Holte, U.S. Department of Education, 400 Maryland Avenue SW, Room 4W243, Washington, DC 20202. Telephone: (202) 205-7726.
If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.
First, we seek to continue to use funds under this program to support high-quality applications from highly qualified applicants. To that end, we announce priorities, requirements, definitions, and selection criteria that encourage or require applicants to describe, for example: Past successes working with
Second, these final priorities, requirements, definitions, and selection criteria are designed to increase the likelihood that CMO grants support expanded high-quality educational opportunities for
We published a notice of proposed priorities, requirements, definitions, and selection criteria for this program in the
There are several significant differences between the NPP and this notice of final priorities, requirements, definitions, and selection criteria (NFP). First, we have revised the title and focus of Priority 2 (which was proposed as “School Improvement through Restart Efforts”) to clarify that applicants addressing the priority should be focused on reopening, and not restarting,
We group major issues according to subject. Generally, we do not address technical and other minor changes. In addition, we do not address comments that raised concerns not directly related to the proposed priorities, requirements, definitions, or selection criteria.
Further, while we understand that WCAG is designed to make web content accessible to a wide range of individuals with disabilities and that demonstrating compliance with WCAG is a widely accepted method for public schools, including virtual public charter schools, to meet the obligations discussed above, the Department does not require grantees to adopt a particular standard to ensure accessibility of web content or online platforms to meet their obligations under Section 504 or Title II of the ADA. Moreover, the WCAG standards are updated periodically.
With respect to requiring virtual charter schools to focus on the enrollment and retention of, and academic outcomes for,
Finally, while we recognize that virtual charter schools can present unique challenges with respect to the enforcement of CSP requirements, the ESEA does not preclude virtual charter schools from receiving CSP funds. For this reason, we decline to adopt the commenter's suggestion that we preclude applicants that propose to replicate or expand virtual charter schools from applying for funds under this program.
Further, a number of priorities, requirements, definitions, and selection criteria under this program focus on
With respect to the commenter's suggestion to raise per-seat funding caps, no revisions to these final priorities, requirements, definitions, or selection criteria are necessary for the Department to change per-seat funding caps for CMO grants in a given year. Under 34 CFR 75.101 and 75.104(b), the Secretary may establish maximum funding amounts for grants by publishing a notice in the
We also note that section 4303 of the ESEA authorizes the CSP Grants to State Entities (State Entities) program, under which the Department awards grants to State entities, and State entities, in turn, award subgrants to eligible applicants (
Finally, we agree that students learn best in safe, clean, and well-maintained environments. Section 4303(h)(3) of the ESEA authorizes the use of CSP funds to “[carry] out necessary renovations to ensure that a new school building complies with applicable statutes and regulations, and minor facilities repairs (excluding construction)” (20 U.S.C. 7221b(h)(3)).
We agree with the commenters that some aspects of
In addition, we share the commenters' concerns about ensuring that students with disabilities receive FAPE. However, this priority focuses specifically on diversity with respect to race and socioeconomic status. Race and socioeconomic status are commonly cited in research on diversity and its relationship with student academic achievement as two demographic factors that have a major impact.
We agree with the commenter that cultivating and maintaining a diverse student body can be difficult and is unlikely to happen overnight. We also agree that high-quality charter schools can be a powerful option for
Finally, we agree with the commenter that CMOs should consider the community context when replicating or expanding high-quality charter schools, particularly charter schools with an intentional focus on racial and socioeconomically diverse student bodies. However, we do not think it is appropriate or practical to require that CMOs demonstrate to the Department a net zero effect on surrounding schools. For these reasons, we decline to revise the priority.
We also agree that applicants should be required to demonstrate past success working with low-achieving public schools in order to meet the priority. Accordingly, we are revising the stem of the priority to require applicants to address each subpart of the priority, including the subpart focused on demonstrating past success working with at least one
Finally, we agree that a focus on middle schools and high schools may be appropriate in specific contexts, and have included a priority for applications that propose to replicate or expand high-quality charter schools that serve high school students. Under this priority, an applicant can propose to
Further, the Department's most recent update to the CSP nonregulatory guidance was issued in January 2014.
Likewise, we agree that obtaining data on students' postsecondary degree attainment and employment may be relevant and encourage applicants to submit such information, as appropriate. On the other hand, the Department must balance its interest in obtaining sufficient information to assist peer reviewers in evaluating the quality of applications with its interest in minimizing the burden on applicants. In order to meet the priority, an applicant must describe how it will prepare students for postsecondary education and provide support for its graduates who enroll in institutions of higher education (IHEs) and certain one-year training programs that prepare students for gainful employment in a recognized occupation. In addition, applicants must establish one or more project-specific
Further, while a career in the military can be very rewarding, the Department's mission is to promote student academic achievement and preparation for global competitiveness by fostering educational excellence and ensuring equal access. Therefore, we believe the primary goal of elementary and secondary education should be preparing students for success at the postsecondary education level. Nevertheless, charter schools have great flexibility to establish a unique mission and educational focus. Thus, an applicant may propose to replicate or expand charter schools with a wide range of educational programs, including a military (
We also agree with the commenters that ensuring that students with disabilities (as well as other
We also decline to revise the priority to require that CMOs operate or manage charter schools with 60 to 90 percent students who are
We agree with the commenter that an applicant receiving points for this priority should be required to maintain the same, or a substantially similar, poverty threshold throughout the life of the grant. As such, we are revising the priority to clarify that an applicant must demonstrate not only that its current portfolio of schools meets the specified poverty threshold, but also that it will maintain the same, or a substantially similar, poverty level in the charter schools that it replicates or expands, as well as its other schools, for the entire grant period. We recognize that the percentage of students who are
Finally, we agree that 34 CFR 75.225 provides a useful tool for encouraging applications from novice applicants. The Department will continue to follow the requirements in 34 CFR 75.225 to give priority to novice applicants in future CMO grant competitions, as we deem appropriate.
In addition, we recognize that replicating or expanding high-quality charter schools will impact the surrounding community and is likely to have a greater impact in a rural community. The Department's broad focus is on expanding high-quality educational options for all students, including students in rural communities. Ideally, increasing access to high-quality educational options in
In addition, while we believe that a requirement for applicants to demonstrate a commitment to meaningfully collaborate with Tribal communities would result in actual collaborations, we agree that the language in the priority could be clearer with respect to requiring applicants to meaningfully engage with Tribal communities. Therefore, we are revising the priority to clarify that applicants must do more than demonstrate a commitment to collaborate.
Likewise, we believe that charter school developers and charter schools in the communities where the charter school will be located are best suited to assemble a school board that understands the unique educational needs of the students to be served. We believe that requiring a specific percentage or number of board members from
Finally, while an applicant is not precluded from demonstrating past success working with Tribal communities, we decline to revise the priority to impose such a requirement. In order to receive CMO funds, all applicants must describe how they operate or manage the charter schools (including virtual charter schools) for which they have presented evidence of success (
In addition, Requirement (a) provides that applicants must demonstrate that they operate more than one charter school. Requirement (a) clearly states that, for purposes of the CMO grant program, multiple charter schools are considered to be separate schools if each school meets the definition of “charter school” in section 4310(2) of the ESEA and is treated as a separate school by its authorized public chartering agency and the State in which the charter school is located, including for purposes of accountability and reporting under Title I, Part A of the ESEA. For these reasons, we decline to revise the priority as suggested by the commenter.
We appreciate that some data may suggest that many charter schools have student bodies comprised of 75 percent or more
Under this priority, applicants must propose to replicate or expand high-quality charter schools that have an intentional focus on recruiting students from racially and socioeconomically diverse backgrounds and maintaining racially and socioeconomically diverse student bodies in those charter schools, consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws.
Under this priority, applicants must—
(i) Demonstrate past success working with one or more
(ii) Propose to use grant funds under this program to reopen one or more
(A) Replicating one or more high-quality charter schools based on a successful charter school model for which the applicant has provided evidence of success; and
(B) Targeting a demographically similar student population in the replicated charter schools as was served by the
Under this priority, applicants must propose to—
(i) Replicate or expand high-quality charter schools to serve high school students, including
(ii) Prepare students, including
(iii) Provide support for students, including
(iv) Propose one or more project-specific performance measures, including aligned leading indicators or other interim milestones, that will provide valid and reliable information about the applicant's progress in preparing students, including
(v) For purposes of this priority, postsecondary education institutions include institutions of higher education, as defined in section 8101(29) of the Elementary and Secondary Education Act of 1965, as amended by the Every
Under this priority, applicants must demonstrate one of the following—
(i) That at least 40 percent of the students across all of the charter schools the applicant operates or manages are
(ii) That at least 50 percent of the students across all of the charter schools the applicant operates or manages are
(iii) That at least 60 percent of the students across all of the charter schools the applicant operates or manages are
Under this priority, applicants must demonstrate one of the following—
(i) That they currently operate or manage two to five charter schools;
(ii) That they currently operate or manage six to 20 charter schools; or
(iii) That they currently operate or manage 21 or more charter schools.
Under this priority, applicants must propose to replicate or expand one or more high-quality charter schools in—
(i) A
(ii) A community that is not a
Under this priority, applicants must—
(i) Propose to replicate or expand one or more high-quality charter schools that—
(A) Utilize targeted outreach and recruitment in order to serve a
(B) Have a mission and focus that will address the unique educational needs of
(C) Have a governing board with a substantial percentage of members who are members of
(ii) Submit a letter of support from at least one
(iii) Meaningfully collaborate with the
When inviting applications for a competition using one or more priorities, we designate the type of each priority as absolute, competitive preference, or invitational through a notice in the
Applicants for funds under this program must meet one or more of the following requirements—
(a) Demonstrate that the applicant currently operates or manages more than one charter school. For purposes of this program, multiple charter schools are considered to be separate schools if each school—
(i) Meets each element of the definition of “charter school” under section 4310(2) of the ESEA; and
(ii) Is treated as a separate school by its authorized public chartering agency and the State in which the charter school is located, including for purposes of accountability and reporting under title I, part A of the ESEA.
(b) Provide information regarding any compliance issues, and how they were resolved, for any charter schools operated or managed by the applicant that have—
(i) Closed;
(ii) Had their charter(s) revoked due to problems with statutory or regulatory compliance, including compliance with sections 4310(2)(G) and (J) of the ESEA; or
(iii) Had their affiliation with the applicant revoked or terminated, including through voluntary disaffiliation.
(c) Provide a complete logic model (as defined in 34 CFR 77.1) for the grant project. The logic model must include the applicant's objectives for replicating or expanding one or more high-quality charter schools with funding under this program, including the number of high-quality charter schools the applicant proposes to replicate or expand.
(d) If the applicant currently operates, or is proposing to replicate or expand, a single-sex charter school or coeducational charter school that provides a single-sex class or extracurricular activity (collectively referred to as a “single-sex educational program”), demonstrate that the existing or proposed single-sex educational program is in compliance with title IX of the Education Amendments of 1972 (20 U.S.C. 1681,
(e) Describe how the applicant currently operates or manages the high-quality charter schools for which it has presented evidence of success and how the proposed replicated or expanded charter schools will be operated or managed, including the legal relationship between the applicant and its schools. If a legal entity other than the applicant has entered or will enter into a performance contract with an authorized public chartering agency to operate or manage one or more of the applicant's schools, the applicant must also describe its relationship with that entity.
(f) Describe how the applicant will solicit and consider input from parents and other members of the community on the implementation and operation of each replicated or expanded charter
(g) Describe the lottery and enrollment procedures that will be used for each replicated or expanded charter school if more students apply for admission than can be accommodated, including how any proposed weighted lottery complies with section 4303(c)(3)(A) of the ESEA.
(h) Describe how the applicant will ensure that all eligible children with disabilities receive a free appropriate public education in accordance with part B of the IDEA.
(i) Describe how the proposed project will assist
(j) Provide a budget narrative, aligned with the activities, target grant project outputs, and outcomes described in the logic model, that outlines how grant funds will be expended to carry out planned activities.
(k) Provide the applicant's most recent independently audited financial statements prepared in accordance with generally accepted accounting principles.
(l) Describe the applicant's policies and procedures to assist students enrolled in a charter school that closes or loses its charter to attend other high-quality schools.
(m) Provide—
(i) A request and justification for waivers of any Federal statutory or regulatory provisions that the applicant believes are necessary for the successful operation of the charter schools to be replicated or expanded; and
(ii) A description of any State or local rules, generally applicable to public schools, that will be waived, or otherwise not apply, to such schools.
(a) A school identified by the State for comprehensive support and improvement under section 1111(c)(4)(D)(i) of the ESEA; or
(b) A public school otherwise identified by the State or, in the case of a charter school, its authorized public chartering agency, as similarly academically poor-performing.
(1) Is legally established—
(i) By Tribal or inter-Tribal charter or in accordance with State or Tribal law; and
(ii) With appropriate constitution, by-laws, or articles of incorporation;
(2) Includes in its purposes the promotion of the education of Indians;
(3) Is controlled by a governing board, the majority of which is Indian;
(4) If located on an Indian reservation, operates with the sanction or by charter of the governing body of that reservation;
(5) Is neither an organization or subdivision of, nor under the direct control of, any institution of higher education; and
(6) Is not an agency of State or local government.
(i) Admits as regular students only persons having a certificate of graduation from a school providing secondary education, or the recognized equivalent of such a certificate, or persons who meet the requirements of section 484(d)of the HEA;
(ii) Is legally authorized within such State to provide a program of education beyond secondary education;
(iii) Provides an educational program for which the institution awards a bachelor's degree or provides not less than a 2-year program that is acceptable for full credit toward such a degree, or awards a degree that is acceptable for admission to a graduate or professional degree program, subject to review and approval by the Secretary;
(iv) Is a public or other nonprofit institution; and
(v) Is accredited by a nationally recognized accrediting agency or association, or if not so accredited, is an institution that has been granted preaccreditation status by such an agency or association that has been recognized by the Secretary for the granting of preaccreditation status, and the Secretary has determined that there is satisfactory assurance that the institution will meet the accreditation standards of such an agency or association within a reasonable time.
(a)
(i) The extent to which the academic achievement results (including annual student performance on statewide assessments, annual student attendance and retention rates, and, where applicable and available, student academic growth, high school graduation rates, college attendance rates, and college persistence rates) for
(ii) The extent to which one or more charter schools operated or managed by the applicant have closed; have had a charter revoked due to noncompliance with statutory or regulatory requirements; or have had their affiliation with the applicant revoked or terminated, including through voluntary disaffiliation.
(iii) The extent to which one or more charter schools operated or managed by the applicant have had any significant issues in the area of financial or operational management or student safety, or have otherwise experienced significant problems with statutory or regulatory compliance that could lead to revocation of the school's charter.
(b)
In determining the significance of the contribution the proposed project will make in expanding educational opportunities for
(i) The extent to which charter schools currently operated or managed by the applicant serve
(ii) The quality of the plan to ensure that the charter schools the applicant proposes to replicate or expand will recruit, enroll, and effectively serve
(c)
In determining the quality of the evaluation plan for the proposed project, the Secretary considers the extent to which the methods of evaluation include the use of objective performance measures that are clearly related to the intended outcomes of the proposed project, as described in the applicant's logic model (as defined in 34 CFR 77.1), and that will produce quantitative and qualitative data by the end of the grant period.
(d)
In determining the quality of the applicant's management plan, the Secretary considers the ability of the applicant to sustain the operation of the replicated or expanded charter schools after the grant has ended, as demonstrated by the multi-year financial and operating model required under section 4305(b)(3)(B)(iii) of the ESEA.
This document does not preclude us from proposing additional priorities, requirements, definitions, or selection criteria, subject to meeting applicable rulemaking requirements.
Under Executive Order 12866, it must be determined whether this regulatory action is “significant” and, therefore, subject to the requirements of the Executive order and subject to review by the Office of Management and Budget (OMB). Section 3(f) of Executive Order 12866 defines a “significant regulatory action” as an action likely to result in a rule that may—
(1) Have an annual effect on the economy of $100 million or more, or adversely affect a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or Tribal governments or communities in a material way (also referred to as an “economically significant” rule);
(2) Create serious inconsistency or otherwise interfere with an action taken or planned by another agency;
(3) Materially alter the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or
(4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles stated in the Executive order.
This final regulatory action is not a significant regulatory action subject to review by OMB under section 3(f) of Executive Order 12866.
Under Executive Order 13771, for each new rule that the Department proposes for notice and comment or otherwise promulgates that is a significant regulatory action under Executive Order 12866, and that imposes total costs greater than zero, it must identify two deregulatory actions. For Fiscal Year 2019, any new incremental costs associated with a new regulation must be fully offset by the elimination of existing costs through deregulatory actions. Because the proposed regulatory action is not significant, the requirements of Executive Order 13771 do not apply.
We have also reviewed this final regulatory action under Executive Order 13563, which supplements and explicitly reaffirms the principles, structures, and definitions governing regulatory review established in Executive Order 12866. To the extent permitted by law, Executive Order 13563 requires that an agency—
(1) Propose or adopt regulations only upon a reasoned determination that their benefits justify their costs (recognizing that some benefits and costs are difficult to quantify);
(2) Tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives and taking into account—among other things and to the extent practicable—the costs of cumulative regulations;
(3) In choosing among alternative regulatory approaches, select those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity);
(4) To the extent feasible, specify performance objectives, rather than the behavior or manner of compliance a regulated entity must adopt; and
(5) Identify and assess available alternatives to direct regulation, including economic incentives—such as user fees or marketable permits—to encourage the desired behavior, or provide information that enables the public to make choices.
Executive Order 13563 also requires an agency “to use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible.” The Office of Information and Regulatory Affairs of OMB has emphasized that these techniques may include “identifying changing future compliance costs that might result from technological innovation or anticipated behavioral changes.”
We are issuing these final priorities, requirements, definitions, and selection criteria only on a reasoned determination that their benefits justify their costs. In choosing among alternative regulatory approaches, we selected those approaches that maximize net benefits. Based on the analysis that follows, the Department believes that this regulatory action is consistent with the principles in Executive Order 13563.
We also have determined that this regulatory action does not unduly interfere with State, local, and Tribal
In accordance with these Executive orders, the Department has assessed the potential costs and benefits, both quantitative and qualitative, of this regulatory action. The potential costs are those resulting from statutory requirements and those we have determined as necessary for administering the Department's programs and activities.
The Department believes that this regulatory action does not impose significant costs on eligible entities, whose participation in this program is voluntary. While this action does impose some requirements on participating CMOs that are cost-bearing, the Department expects that applicants for this program will include in their proposed budgets a request for funds to support compliance with such cost-bearing requirements. Therefore, costs associated with meeting these requirements are, in the Department's estimation, minimal.
This regulatory action strengthens accountability for the use of Federal funds by helping to ensure that the Department selects for CSP grants the CMOs that are most capable of expanding the number of high-quality charter schools available to our Nation's students, consistent with a major purpose of the CSP as described in section 4301(3) of the ESEA. The Department believes that these benefits to the Federal government and to State educational agencies outweigh the costs associated with this action.
The Department believes that the priorities, requirements, definitions, and selection criteria are needed to administer the program effectively. As an alternative to the selection criteria announced in this document, the Department could choose from among the selection criteria authorized for CSP grants to CMOs in section 4305(b) of the ESEA (20 U.S.C. 7221c) and the general selection criteria in 34 CFR 75.210. We do not believe that these criteria provide a sufficient basis on which to evaluate the quality of applications. In particular, the criteria do not sufficiently enable the Department to assess an applicant's past performance with respect to the operation of high-quality charter schools or with respect to compliance issues that the applicant has encountered.
We note that several of the final priorities, requirements, definitions, and selection criteria are based on priorities, requirements, definitions, selection criteria, and other provisions in the authorizing statute for this program.
The final priorities, requirements, and selection criteria contain information collection requirements that are approved by OMB under OMB control number 1894-0006; the final priorities, requirements, and selection criteria do not affect the currently approved data collection.
This document provides early notification of our specific plans and actions for this program.
You may also access documents of the Department published in the
U.S. Copyright Office, Library of Congress.
Final rule.
The U.S. Copyright Office is amending its regulations governing the group registration options for newsletters and serials. With respect to group newsletters, the final rule amends the definition of “newsletter,” eliminating the requirement that each issue must be a work made for hire, and the provision stating that group newsletter claims must be received within three months after publication. Under the final rule, newsletter publishers now should register their issues with the online application and upload a digital copy of each issue through the electronic registration system instead of submitting them in a physical form. With respect to group serials, the final rule clarifies that serials governed by the rule generally must be published at intervals of a week or longer, and that the publication dates provided in the application need not match the dates appearing on the issues themselves. In addition, the rule phases out the paper application for group serials and the submission of physical copies. Beginning one year after the rule goes into effect, serial publishers will be required to use the online application for group serials and to upload a digital copy of each issue, rather than submitting them in a physical form. The final rule updates the regulations for both newsletters and serials by confirming that publishers do not need to provide the Library of Congress with complimentary subscriptions to or microfilm of each issue as a condition for registering their works with the Office, but newsletter and serial issues that are submitted for purposes of registration will no longer satisfy the mandatory deposit requirement. Publishers will be expected to separately provide the Library with two complimentary subscriptions if the newsletter or serial is published in the United States in a physical format (unless the publisher is informed that the publication is not needed for the Library's collections). If the newsletter or serial is published solely in electronic form, the publisher will remain exempt from mandatory deposit
Robert J. Kasunic, Associate Register of Copyrights and Director of Registration Policy and Practice, or Erik Bertin, Deputy Director of Registration Policy and Practice, by telephone at 202-707-8040, or by email at
On May 17, 2018, the Copyright Office (the “Office”) published two notices of proposed rulemaking (“NPRMs”) setting forth proposed amendments to the regulations governing the group registration options for newsletters and serials. 83 FR 22902 (May 17, 2018); 83 FR 22896 (May 17, 2018). The Office did not receive any comments in response to the NPRM on group newsletters. In response to the NPRM on group serials, the Office received comments from the Copyright Alliance and one individual.
The final rule revises current practices for the group registration option for newsletters. It clarifies and expands the category of works eligible for this option by amending the definition of what constitutes a “newsletter” and by making clear that newsletters need not be collective works. It also eliminates the work-made-for-hire requirement and the requirement that the issues must be submitted within three months after publication.
The final rule also phases out the paper application (known as Form G/DN) and generally requires applicants to register their newsletters using the designated online application. In addition, it requires applicants to upload their newsletters in a digital format through the electronic registration system. If an applicant submits Form G/DN after the effective date of the final rule, the Office will refuse to register the claim. Likewise, the Office will refuse registration if an applicant submits physical copies of a newsletter, such as printed copies or photocopies, or digital copies that have been saved onto a flash drive, disc, or other physical storage medium.
The final rule codifies, clarifies, and revises current practices for the group registration option for serials.
First, the final rule requires that each claim must include at least two issues, that each issue must be a work made for hire, and that the author and copyright claimant for each issue must be the same person or organization.
Second, the final rule eliminates the current requirement that each issue must have been created no more than one year prior to publication.
Third, the final rule requires that applicants may only register serials that are “generally . . . published at intervals of a week or longer” (
Fourth, the final rule requires that each issue must be an “all-new” collective work that has not been previously published, and each issue must be fixed and distributed as a discrete, self-contained collective work. The Copyright Alliance expressed concern that this requirement may prevent publishers from registering “enhanced, digital issues which may contain content hosted on and linked to another platform such as videos and blogs that allow the reader to manipulate or interact with the issue.”
Fifth, the final rule generally requires applicants to register their issues using the online application designated for group serial claims, and eliminates the paper application known as Form SE/Group.
Finally, the final rule amends the deposit requirements by requiring applicants to upload their issues in digital form through the electronic registration system, instead of submitting them in a physical form, absent exceptional cases. While the Copyright Alliance agreed that requiring publishers to upload a digital copy of each issue “will generally `increase the efficiency of the group registration
The Office has concluded that the other concerns raised by the Copyright Alliance about digital deposits were already adequately addressed by the proposed rule. The Office has accepted digital deposits from serial publishers since September 14, 2012, and is not aware of any technical issues that have prevented them from using the upload feature. The current registration system will accept any digital deposit, as long as it is submitted in an acceptable file format and does not exceed 500MB. And as noted in the proposed rule, the files may be compressed to comply with this limit, if necessary.
The Office first introduced its electronic registration system more than a decade ago, and as the Copyright Alliance acknowledged, the Office has not experienced any issues concerning the security of its digital deposits.
In addition to these technical measures, the Office's regulations restrict the parties who may obtain access to its digital registration deposits. Briefly stated, the Office will provide a copy of a registration deposit only if it receives (i) written authorization from the copyright claimant or the owner of the exclusive rights in the work, (ii) a written request from an attorney representing a plaintiff or defendant in litigation involving that work, or (iii) a court order directing the Office to produce a copy of that work for use in a legal proceeding.
Similarly, regulations restrict how parties may access digital registration deposits that have been transferred to the Library of Congress. Specifically, the Library currently provides access to the digital registration deposits that it receives through the group registration option for newspaper issues, subject to certain conditions specified in the regulations.
The final rule makes four changes that modify the regulations governing both newsletters and serials.
First, the rule memorializes the Office's longstanding position regarding the scope of a group registration. It confirms that a registration for a group of newsletter or serial issues covers each issue in the group. It also confirms that if each issue is a collective work, the registration will cover the articles, photographs, illustrations, or other contributions appearing within those issues if they are fully owned by the copyright claimant and if they were first published in those issues.
Second, the rule confirms that newsletter and serial publishers will no longer be required to provide the Library of Congress with complimentary subscriptions to or microfilm copies of their issues as a condition for seeking a group registration under section 408(c)(1) of the Copyright Act. The Copyright Alliance applauded the elimination of this requirement.
Third, the rule provides guidance on how newsletter and serial publishers may comply with the mandatory deposit requirement. If a newsletter or serial is published in the United States in a physical format, the publisher will be expected to provide the Library with two complimentary subscriptions to physical copies of that publication, unless the publisher is notified that the newsletter or serial is not needed for the Library's collections. The rule does not change for newsletters or serials published solely in electronic format; in that case, the publisher will not be expected to provide copies of that publication unless the Office issues a formal demand for that newsletter or serial under section 202.24 of the regulations.
Fourth, the final rule includes provisions to address the Copyright Alliance's concerns about the potential burdens of electronic filing and digital deposit on applicants transitioning from traditional print to digital media.
The Office plans to offer several resources for newsletter and serial publishers that should ease the transition to these new requirements, including an updated version of the
Copyright.
Copyright.
For the reasons set forth in the preamble, the Copyright Office amends 37 CFR parts 201 and 202 as follows:
17 U.S.C. 702.
(c) * * *
(6)
(c) * * *
17 U.S.C. 408(f), 702.
The additions and revision read as follows:
(d)
(1)
(ii) The group must include at least two issues.
(iii) Each issue in the group must be an all-new collective work that has not been previously published, each issue must be fixed and distributed as a discrete, self-contained collective work, and the claim in each issue must be limited to the collective work.
(iv) Each issue in the group must be a work made for hire, and the author and claimant for each issue must be the same person or organization.
(v) The serial generally must be published at intervals of a week or longer. All of the issues must be published within three months, under the same continuing title, within the same calendar year, and the applicant must specify the date of publication for each issue in the group.
(2)
(3)
(i) The issues may be submitted in digital form if the following requirements have been met. Each issue must be contained in a separate electronic file. The applicant must use the file-naming convention and submit digital files in accordance with instructions specified on the Copyright Office's website. The files must be submitted in Portable Document Format (PDF), they must be assembled in an orderly form, and they must be uploaded to the electronic registration system as individual electronic files (
(ii) Alternatively, the applicant may submit a physical copy of each issue, provided that the deposit is received on or before December 30, 2019. If the claim is submitted with an online application, the copies must be accompanied by the required shipping slip generated by the electronic registration system, the shipping slip must be attached to one of the copies, the copies and the shipping slip must be included in the same package, and the package must be sent to the address specified on the shipping slip.
(4)
(f)
(1)
(ii) The group must include at least two issues.
(iii) Each issue in the group must be an all-new issue or an all-new collective work that has not been previously published, and each issue must be fixed and distributed as a discrete, self-contained work.
(iv) The author and claimant for each issue must be the same person or organization.
(v) All the issues in the group must be published under the same continuing title, they must be published within the same calendar month and bear issue dates within that month, and the applicant must identify the earliest and latest date that the issues were published during that month.
(2)
(3)
(4)
(n)
(d) * * *
(2) * * *
(xi) In the case of serials (as defined in § 202.3(b)(1)(v), but excluding newspapers) published in the United States in a physical format, or in both a physical and an electronic format, the copyright owner or the owner of the exclusive right of publication must provide the Library of Congress with two complimentary subscriptions to the serial, unless the Copyright Acquisitions Division informs the owner that the serial is not needed for the Library's collections. Subscription copies must be physically mailed to the Copyright Office, at the address for mandatory deposit copies specified in § 201.1(c) of this chapter, promptly after the publication of each issue, and the subscription(s) must be maintained on an ongoing basis. The owner may cancel the subscription(s) if the serial is no longer published by the owner, if the serial is no longer published in the United States in a physical format, or if the Copyright Acquisitions Division informs the owner that the serial is no longer needed for the Library's collections. In addition, prior to commencing the subscriptions, the owner must send a letter to the Copyright Acquisitions Division at the address specified in § 201.1(b) of this chapter confirming that the owner will provide the requested number of subscriptions for the Library of Congress. The letter must include the name of the publisher, the title of the serial, the International Standard Serial Number (“ISSN”) that has been assigned to the serial (if any), and the issue date and the numerical or chronological designations that appear on the first issue that will be provided under the subscriptions.
a. * * * (For works first published only in a country other than the United States, the law requires the deposit of the work as first published.)
Approved by:
Environmental Protection Agency (EPA).
Final rule.
The Environmental Protection Agency (EPA) is finalizing action on a revision to the South Coast Air Quality Management District (SCAQMD or District) portion of the California State Implementation Plan (SIP). We are finalizing a conditional approval of one rule governing issuance of permits for stationary sources, including review and permitting of major sources and major modifications under part D of title I of the Clean Air Act (CAA). Specifically, the revision pertains to SCAQMD Rule 1325—
This rule will be effective on December 31, 2018.
The EPA has established a docket for this action under Docket No. EPA-R09-OAR-2018-0413. All documents in the docket are listed on the
Laura Yannayon, EPA Region 9, (415) 972-3534,
Throughout this document, the terms “we,” “us,” and “our” refer to EPA.
On August 8, 2018 (83 FR 39012), the EPA proposed to conditionally approve the following rule that was submitted for incorporation into the SCAQMD portion of the California SIP.
We proposed a conditional approval of this rule because we determined that, separate from the deficiencies listed in Section II.B of our proposed rulemaking action, the rule met the statutory requirements for SIP revisions as specified in section 110(l) of the CAA, as well as the substantive statutory and regulatory requirements for a nonattainment New Source Review (NSR) permit program as contained in CAA sections 110(a)(2)(C) and 173(a) through (c), and 40 CFR 51.165 that pertain to a PM
The EPA's proposed action provided a 30-day public comment period. During this period, we received two comments on the proposed rule. These comments raised issues that are outside the scope of our proposed approval of Rule 1325, including air pollution monitoring in China and India, climate change, and wind and solar power costs and regulations. None of those comments are germane to our evaluation of Rule 1325.
No comments were submitted that change our assessment that submitted Rule 1325 satisfies the applicable CAA requirements. Therefore, under CAA sections 110(k)(4) and 301(a), and for the reasons set forth in our August 8, 2018 proposed rule, we are finalizing the conditional approval of Rule 1325. This action incorporates Rule 1325 into the federally enforceable SIP and will be codified through revisions to 40 CFR 52.220 (Identification of plan) and 40 CFR 52.248 (Identification of plan—conditional approval).
If the State meets its commitment to submit the required changes, the revisions to Rule 1325 will remain a part of the SIP until EPA takes final action approving or disapproving the new SIP revisions. However, if the State fails to submit these revisions within the required timeframe, the conditional approval will automatically become a disapproval, and EPA will issue a finding of disapproval. EPA is not required to propose the finding of disapproval.
In addition, because we are finalizing our proposed action, we are removing the existing Rule 1325 from the SCAQMD portion of the California SIP.
In this rule, the EPA is finalizing regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, the EPA is finalizing the incorporation by reference of the SCAQMD rule listed in Table 1 of this preamble. The EPA has made, and will continue to make, these materials available electronically through
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, this action merely approves state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this action:
• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act; and
• Does not provide the EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).
The Congressional Review Act, 5 U.S.C. 801
Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, New Source Review, Particulate matter, Reporting and recordkeeping requirements.
Part 52, Chapter I, Title 40 of the Code of Federal Regulations is amended as follows:
42 U.S.C. 7401
(c) * * *
(458) * * *
(i) * * *
(A) * * *
(
(509) New and amended regulations for the following APCDs were submitted on May 8, 2017 by the Governor's designee.
(i)
(
(B) [Reserved]
(ii) [Reserved]
(f) The EPA is conditionally approving a California State Implementation Plan (SIP) revision submitted on May 8, 2017, updating Rule 1325—Federal PM
Environmental Protection Agency (EPA).
Interim final rule with request for comments.
The Environmental Protection Agency (EPA) is issuing this interim final rule in response to the urgent public health issue posed by recalled Takata airbag inflators still installed in vehicles. With this rule, EPA is facilitating a more expedited removal of defective Takata airbag inflators from vehicles by dealerships, salvage yards and other locations for safe and environmentally sound disposal by exempting the collection of airbag waste
This interim final rule is effective on November 30, 2018. Comments must be received on or before January 29, 2019. Under the Paperwork Reduction Act (PRA), comments on the information collection provisions must be received on or before January 29, 2019.
Submit your comments, identified by Docket ID No. EPA-HQ-OLEM-2018-0646, at
Office of Resource Conservation and Recovery, Materials Recovery and Waste Management Division, MC 5304P, Environmental Protection Agency, 1200 Pennsylvania Ave. NW, Washington, DC 20460, Tracy Atagi, at (703) 308-8672, (
This action applies to entities that manage airbag waste (
Section 553(b)(B) of the Administrative Procedure Act, 5 U.S.C. 553(b)(B), provides that, when an agency for good cause finds that notice and public procedures are impracticable, unnecessary or contrary to the public interest, the agency may issue a rule without providing notice and an opportunity for public comment. EPA has determined that there is good cause for issuing this interim final rule without prior proposal and opportunity for comment because such notice and opportunity for comment would be impracticable and contrary to the public interest. Specifically, prompt promulgation of this rule without delay is necessary to protect human health and the environment by facilitating the urgent removal of dangerously defective Takata airbag inflators from vehicles, and by preventing defective Takata airbag inflators from scrap vehicles from being reused, while maintaining protection of human health and the environment during airbag waste collection, storage and disposal.
In its November 3, 2015 Coordinated Remedy Order, the U.S. Department of Transportation (DOT) National Highway Traffic Safety Administration (NHTSA) found that it was imperative to accelerate the rate of the recalls because “[e]ach airbag inflator with the capacity to rupture, as the recalled Takata inflators do, presents an unreasonable risk of serious injury or death . . . Since the propensity for rupture increases with the age of the inflator, and increases even more when the vehicle has been exposed to consistent long-term HAH [high absolute humidity] conditions, the risk for injurious or lethal rupture increases with each passing day.”
Delaying promulgation of this rule through notice and comment procedures would be impracticable and contrary to the public interest because such a delay would further increase the risk of death or serious injury by slowing down the removal of defective Takata airbag inflators from vehicles and impeding the collection of defective airbag inflators from salvage yards and other locations (and increasing the potential for defective airbag inflators in scrap vehicles to be reused). This existing risk has now increased significantly since the date of the 2015 NHTSA report because of recent events that further heighten the urgency to accelerate the recall.
First, more time has passed since the date of the 2015 NHTSA study, and as noted in that study and reiterated in the 2017 study by the Independent Monitor, each passing day brings forth more danger. The danger is greater today than in 2015 because of the increased age of the inflators.
Second, with the recent amendment to DOT's Preservation Order on April 12, 2018, and with Takata's restructuring due to bankruptcy finalized on February 21, 2018, vehicle manufacturers no longer have to send recalled inflators to Takata warehouses
This rule is intended to assist the automobile dealers and other entities in their handling of the airbags, and ensure delivery of the airbags to facilities that can more expertly manage these airbags in order to accelerate the recall. Thus, it is essential that there be no delay in promulgating this rule.
Third, there have continued to be deaths as recently as 2018 as a result of Takata airbag explosions. On January 1, 2018, there was a death in Malaysia
Finally, with respect to the effective date, EPA finds that it has good cause to make the revisions immediately effective under section 553(d) of the Administrative Procedure Act (APA), 5 U.S.C. 553(d), and section 3010(b) of RCRA, 42 U.S.C. 6930(b). Section 553(d) provides in pertinent part that final rules shall not become effective until 30 days after publication in the
The purpose of section 553(d) of the APA is to “give affected parties a reasonable time to adjust their behavior before the final rule takes effect.”
Moreover, EPA has determined that for purposes of both the APA and RCRA effective date provisions, there is good cause for making this final rule effective immediately. In determining whether good cause exists to waive the 30-day effective date under the APA, an agency should “balance the necessity for immediate implementation against principles of fundamental fairness which require that all affected persons be afforded a reasonable amount of time to prepare for the effective date of its ruling.”
As a result, EPA is making this interim final rule effective upon publication.
These regulations are promulgated under the authority of sections 2002, 3001, 3002, 3003, 3004, 3006, 3010, and 3017 of the Solid Waste Disposal Act of 1965, as amended by the Resource Conservation and Recovery Act of 1976 (RCRA), as amended by the Hazardous and Solid Waste Amendments of 1984 (HSWA). This statute is commonly referred to as “RCRA.”
The revisions to 40 CFR 260.10, CFR 261.4 and CFR 262.14 become effective on November 30, 2018.
An airbag module is a fully assembled unit including both the airbag inflator and the fabric cushion. An airbag inflator is the small metal canister within the airbag module that generally houses explosive propellant and an initiator. The airbag module is deployed when the airbag inflator receives an electronic pulse from a vehicle's crash sensor. In properly functioning airbag modules that use a gas generating system, chemical propellant contained in an airbag inflator unit burns in a fast and controlled manner, quickly emitting an inert gas through vents in the canister out into the airbag module, which inflates the cushion. Airbag modules across the automobile safety industry utilize explosive propellants for rapid response to an automobile accident.
Most airbag inflators use oxidizers as part of the gas generating composition of
Airbag modules and airbag inflators that exhibit hazardous waste characteristics under 40 CFR part 261 subpart C may be exempt from hazardous waste regulations under certain scenarios, as summarized in an EPA memorandum signed on July 19, 2018.
In May 2015, the U.S. Department of Transportation (DOT) announced a national recall of airbag inflators manufactured by Takata due to a defect in their phase-stabilized ammonium nitrate (PSAN) propellant, which has resulted in fifteen deaths and at least 250 injuries in the U.S. as of August 2018.
On November 3, 2015, the National Highway Traffic Safety Administration (NHTSA) issued a Coordinated Remedy Order that set forth the requirements and obligations of certain motor vehicle manufacturers and the airbag manufacturer, Takata, in connection with the recall and remedy of certain types of Takata airbag inflators.
The PSAN propellant used in the recalled Takata airbag inflators degrades over time when moist propellant is exposed to long-term daily temperature cycling. Moisture from the air adsorbs to PSAN particles, changing the structure of the propellant and causing the inflator to over-pressurize during deployment.
A 2015 Safety Data Sheet (SDS) for Takata pyrotechnic automotive safety devices, including airbag modules and airbag inflators, describes the hazards of the devices, including an “[i]nitiation hazard of an uncontrolled activation of the safety device due to: Fire; heat; electrostatic discharge; inductions through electromagnetic radiation; or, excessive mechanical load” and a “[b]urn hazard when there is direct contact with pyrotechnic safety device during activations.”
Propagation and bonfire testing results submitted to EPA by Takata provides further information regarding the hazards posed by recalled Takata inflators.
While non-Takata airbag inflators do not present the same shrapnel-producing defect as recalled Takata airbag inflators, these airbag inflators can still present an explosive risk when processed or recycled, as demonstrated by recent incidents at two facilities. In February 2015, an explosion and fire occurred at one airbag manufacturing and recycling facility as two workers handled airbag inflators that had been processed in an incinerator prior to recycling the metal.
A Preservation Order issued by DOT and signed by Takata in February 2015 required all recalled airbag inflators be preserved intact, except for those utilized for testing purposes. Takata was required to take all reasonable and appropriate steps designed to prevent the partial or full destruction, alteration, deletion, shredding, incineration or loss of recalled or returned inflators, ruptured inflators and any other inflators under the recalls. The recalled Takata inflators were organized into categories of inflators that must be preserved. Ruptured inflators from field events were required to be preserved in a locked, secured, climate-controlled area, except for testing, inspection or analysis purposes. Recalled or returned inflators were also to be kept in a locked, secured and climate-controlled area.
In the June 23, 2017 memorandum, EPA clarified that the recalled Takata airbag inflators are not subject to RCRA Subtitle C regulatory requirements while they are being held under the 2015 DOT Preservation Order because EPA does not consider materials being stored pending judicial proceedings or investigations to be “discarded.” This interpretation is consistent with previous interpretations EPA has taken on similar materials, such as seized fireworks held as evidence and materials from aircraft accidents subject to investigation, where such items would otherwise be considered hazardous waste.
Takata's U.S. subsidiary, TK Holdings Inc., filed for Chapter 11 bankruptcy on June 25, 2017, and received U.S. court approval for its plan on February 21, 2018.
The April 12, 2018 Amendment to the February 25, 2015 Preservation Order and Testing Control Plan, issued by the U.S. DOT's NHTSA, requires Takata to preserve certain airbag inflators that are the subject of an ongoing defect investigation by NHTSA and the subject of private litigation.
The original 2015 Preservation Order required Takata to preserve indefinitely all affected airbag inflators, while the 2018 Amendment enables Takata to reduce the number of preserved airbag inflators by requesting the release of certain inflators from the Preservation Order allowing them to be disposed in compliance with all applicable regulations, including RCRA. The Amended Order also requires Takata to account for returned foreign and other ammonium-nitrate containing inflators. The Amendment applies to Takata airbag inflators removed from vehicles as a result of recalls affecting the 19 vehicle manufacturers.
The terms of the Amendment require Takata to track all airbag inflators in its possession by unique serial number and set aside at least 5% of inflators,
Although the affected vehicle manufacturers may choose to contract with Takata's post-bankruptcy reorganized entity to transport and store recalled airbag inflators, they are not required to do so by the Preservation Order or Amendment. If a vehicle manufacturer chooses to contract with the Takata entity, the Takata entity must preserve those airbag inflators under the terms of the Preservation Order, and therefore those airbag inflators are not solid wastes per EPA's June 23, 2017 memorandum as described above. However, a vehicle manufacturer may choose not to contract with the Takata entity for a variety of reasons, including increased cost, increased liability, and slower disposal, in which case those airbag inflators would not be covered by the Preservation Order or Amendment, and would be considered discarded when removed from the vehicle.
In its 2015 Coordinated Remedy Order pertaining to the Takata airbag recalls, DOT found that it was imperative to accelerate the rate of the recalls because “[e]ach airbag inflator with the capacity to rupture, as the recalled Takata inflators do, presents an unreasonable risk of serious injury or death. . .Since the propensity for rupture increases with the age of the inflator, and increases even more when the vehicle has been exposed to consistent long-term HAH [high absolute humidity] conditions, the risk for injurious or lethal rupture increases with each passing day.”
Since the original order was issued by DOT, the affected vehicle manufacturers have been working steadily to remove the recalled Takata airbag inflators from vehicles. As discussed earlier, because of DOT's Preservation Order, the recalled airbag inflators have not been regulated as hazardous waste and have instead been safely collected, transported as hazardous materials and stored under the Preservation Order.
With the amendment to DOT's Preservation Order and with Takata's restructuring due to bankruptcy, vehicle manufacturers may now dispose of recalled inflators that are not covered by the amended Preservation Order directly, rather than sending them to the Takata warehouses for long-term storage. This approach is preferable from a public health and environmental protection perspective both because it reduces the volume of inflators in long-term storage and because it is more efficient in freeing up resources spent on handling and storage that can be spent directly on the recalls themselves.
However, because this subset of recalled inflators is not subject to the DOT Preservation Order, they would be regulated as hazardous waste. As a result, many automobile dealers and other entities who continue to replace recalled airbag inflators at the current rate of repair would become subject to additional hazardous waste generator requirements in 40 CFR part 262, which would impose additional regulatory obligations on the dealers' and salvage vendors' management of the inflators.
Most automobile dealers and salvage vendors are currently in the category of “Very Small Quantity Generators” of hazardous waste. By managing hazardous airbag waste, the dealers and salvage vendors would likely generate sufficient amounts of hazardous waste (on a monthly basis) to become subject to increased regulations associated with higher generator categories for which dealers and salvage vendors typically have not had experience, familiarity, or expertise. Imposing these increased generator obligations on dealers and salvage vendors would result in a much less efficient, effective and environmentally protective approach to the urgent, time-critical recall effort. Through our conversations with DOT, the automobile manufacturers, automotive salvage vendors, and other affected stakeholders, EPA has learned that imposing full generator requirements on automobile dealers and salvage vendors who lack the expertise and experience in managing hazardous waste might result in the slowdown, rather than the necessary acceleration, of the recall effort, resulting in greater harm to human health and the environment.
A related but separate issue involves airbag modules and airbag inflators scavenged from scrapped automobiles. One vendor company has been involved in the collection of Takata airbag modules from the approximately 6,000 salvage yards in the United States. The company was approached by one automobile manufacturer after they discovered a number of injuries were caused by recalled Takata airbag inflators recovered from salvage yards and installed in other vehicles. The salvage vendor worked with the automobile manufacturer, DOT, and the independent monitor to put together a program to retrieve airbag modules containing recalled airbag inflators before the inflators can be removed and placed in another vehicle because at that point, they are virtually untraceable. The vendor collects the airbag and brings them to a central location where they undergo a validation step to determine whether they are definitively recalled airbag inflators. This validation includes using visual aids and scanning all VIN and serial numbers. The vendor also supplies specifically designed packaging and handles the
Due to the potential for the replacement of defective Takata airbag inflators to slow down with the application of full RCRA generator requirements, EPA has determined that modified RCRA requirements are appropriate for automobile dealers, salvage yards, and other entities that are removing the recalled airbag inflators and facilitating the recalls.
As discussed earlier, any potential delay to the recalls presents an immediate public health threat, increasing the chances of death or serious injury due to a defective airbag deploying in a vehicle. Moreover, the system for managing the recalled airbag modules and inflators under the DOT Preservation Order over the last three years has provided for protection of human health and the environment during collection and transport of the airbag modules and inflators. Under the recalls, each individual recalled inflator is tracked by vehicle identification number, and subject to DOT packaging and transportation regulations. Vehicle manufacturers work with their dealers to make sure that the recalled inflators are quickly moved offsite and not over-accumulated, and have a strong incentive from a liability perspective to continue to do so in the future.
The conditions for the exemption promulgated by this rule mirror how recalled airbag modules and airbag inflators have been managed under the DOT Preservation Order during the past three years, except that instead of going to long-term storage under the Preservation Order, the collected airbag waste will be sent for safe disposal at a RCRA facility designated to receive hazardous waste per 40 CFR 260.10. Thus, exempting the collection of airbag waste from RCRA requirements, provided certain conditions are met, will result in an increase in protection of public health by facilitating the recalls, allowing the current airbag waste collection system to continue to safely collect the recalled inflators, and sending them directly to appropriate disposal facilities rather than to long-term storage facilities under the Preservation Order.
As previously explained in other rulemakings, EPA has authority under RCRA to issue conditional exclusions from the hazardous waste regulations. EPA has previously interpreted RCRA section 3001(a) to authorize the issuance of “conditional exemptions” from the requirements of RCRA Subtitle C, where it determines that “a waste might pose a hazard only under limited management scenarios, and other regulatory programs already address such scenarios.” 62 FR at 6636 (February 12, 1997); 66 FR at 27222-27223 (May 16, 2001). The final rule takes a similar approach to those earlier rules.
Section 3001(a) requires that EPA decide whether a waste “should be subject to” the requirements of RCRA Subtitle C. Hence, RCRA section 3001 authorizes EPA to determine when subtitle C regulation is appropriate. EPA has consistently interpreted section 3001 of RCRA to give it broad flexibility in developing criteria for hazardous wastes to enter or exit the Subtitle C regulatory system.
RCRA section 1004(5) further supports EPA's interpretation. This interpretation has also been upheld upon judicial review. See,
EPA has most recently provided a full discussion of EPA's authority for conditional exclusion from RCRA Subtitle C requirements in the preamble in its final rule entitled Hazardous Waste Management System: Conditional Exclusion for Carbon Dioxide (CO2) Streams in Geologic Sequestration Activities, 79 FR 350, 353-354 (January 3, 2014). Consistent with that rule, and other rules involving conditional exemptions, EPA has determined in this rule, as discussed above, that exempting the collection of airbag waste from RCRA requirements, provided certain conditions are met, will result in an increase in protection of public health by facilitating the recalls and allowing the current airbag waste collection system to continue to safely collect the recalled inflators. It is important to note, however, that this conditional exemption only applies to the storage and transport of airbag waste during collection. The final disposition of the hazardous airbag waste continues to be regulated under applicable RCRA Subtitle C hazardous waste regulations.
EPA has received requests from stakeholders to unconditionally exempt airbag modules and inflators from RCRA hazardous waste regulations.
EPA solicits comment on the conditional exemption for airbag waste, including the applicability of the exemption and the specific requirements of this conditional exemption as explained in this preamble. EPA will consider these comments in determining whether any additional revisions to the regulation of airbag waste are necessary in the future.
The new airbag waste conditional exemption found at 40 CFR 261.4(j) applies to all airbag waste (
The vast majority of items affected by the conditional exemption will be Takata airbag waste. As of August 2018, an estimated 50 million defective airbag inflators were under recall in approximately 37 million U.S. vehicles, with the potential for more recalls to be issued in the future.
However, EPA has determined that the conditional exemption should also apply to the collection of non-Takata airbag waste for the purpose of disposal, provided that the conditions of the exemption are met. Managing all airbag waste under the same protective requirements will avoid confusion, increase efficiency and will help prevent non-Takata airbag waste from being diverted into the municipal waste stream. Because non-Takata airbag waste is expected to be a much smaller volume waste than the recalled Takata airbag waste, in many cases automobile dealers that generate hazardous waste would be below the Very Small Quantity Generator threshold of 100 kilograms/month, which under the federal RCRA requirements in 40 CFR 262.14 would allow the non-Takata airbag waste to be disposed of in the municipal wastestream. Including these materials under the airbag waste conditional exemption is more protective of human health and the environment because it would encourage their disposal at hazardous waste management facilities. To make it clear that VSQGs have the option of managing their airbag waste under the airbag waste conditional exemption and sending their airbag waste to an airbag waste collection facility or a designated facility subject to the requirements of 40 CFR part 261.4(j), EPA is including a conforming change to the VSQG regulations at 40 CFR 262.14(a)(xi). (Note that the airbag waste conditional exemption does not prevent the airbag modules or airbag inflators from being managed under other applicable exemptions as explained in the July 2018 memo referenced in section IV.A. in this preamble) In addition, EPA also requests comment on expanding the applicability of the airbag waste exemption to include other similar propellent-actuated devices and their components. It would be helpful if commenters include detailed information on these additional wastestreams, including descriptions of the wastestreams, volumes generated, risks posed and current management practices.
Based on information provided by automobile manufacturers, automobile dealers limit the quantity of recalled airbag modules and inflators stored onsite. According to one automobile manufacturer, guidance provided by Takata requires that dealers ship out the recalled airbag inflators that have been removed from vehicles every two weeks, or when the quantity reaches 200 inflators (
Limiting the quantity and accumulation times at airbag waste handlers for airbag waste prevents over-accumulation and limits the potential hazards posed by the inflators in case of a fire. Under the airbag waste exemption finalized in this action, airbag waste handlers are allowed to accumulate up to 250 airbag modules or airbag inflators for up to 180 days, whichever comes first. Limiting the quantity of airbag modules and airbag inflators accumulated onsite to 250 (
During accumulation under the airbag waste exemption, airbag waste must be packaged in a container designed to address the risk posed by the airbag waste. Such a container would help reduce the potential for the airbag waste to react in case of a fire, and also reduce the projectile hazard if the defective Takata airbag inflators were to deploy. In most cases, this container would be the same container that the replacement airbag part was shipped in to the airbag handler, or, in the case of salvage yards, the container provided by the salvage recovery vendor. However, any container that meets DOT requirements for transporting the airbag items would meet the terms of the conditional exemption. Each container must be labeled “Airbag Waste—Do Not Reuse.”
Airbag waste must be shipped directly to either (1) a designated facility as defined in 40 CFR 260.10, or (2) an airbag waste collection facility in the United States under the control of a vehicle manufacturer or their authorized representative, or under the control of an authorized party administering a remedy program in response to a recall under the National Highway Traffic Safety Administration. Airbag waste collection facilities may include part supply centers/parts distribution centers or any other facility authorized by vehicle manufacturers to collect their airbag waste and hold it for more than 10 days. (Airbag waste held at a transfer facility for less than 10 days is considered to be in transport and only subject to the DOT transportation regulations). Because the airbag waste is not subject to hazardous waste generator requirements under 40 CFR part 262 while at the airbag waste handler, the designated facility or the airbag waste collection facility that accepts the airbag waste from the airbag waste handler is considered the hazardous waste generator for the purposes of 40 CFR part 262 as the person whose act first causes a hazardous waste to become subject to the generator regulations.
As a condition for exemption from RCRA hazardous waste requirements, airbag waste handlers must maintain at the facility and make available upon inspection certain records that document off-site shipments of airbag waste for a period of three years to help verify the airbag waste went to an appropriate destination. Specifically, for each shipment of airbag waste, the handler must maintain documentation of the date of each shipment, the name of each transporter, the type and quantity of airbag waste (
While used airbag modules and used airbag inflators are not solid waste when reused for their intended purpose, in the case of airbag modules and airbag inflators that are subject to a recall under the National Highway Traffic Safety Administration, such reuse is not allowed under RCRA. Reuse of recalled Takata inflators is particularly dangerous due to the shrapnel producing defect that can cause death or serious injury when the airbag is deployed, even when the vehicle accident would otherwise be considered minor. As noted in a report by the Takata Independent Monitor, salvaged Takata inflators may pose an even greater risk than other defective Takata inflators due to possible exposure to high heat and humidity for an extended time in the scrap vehicles. In one case, a vehicle that was repaired with a salvaged Takata airbag inflator was involved in a minor accident. The resulting shrapnel from deployment of the defective resulted in serious injury to the driver. The family owning the car had no reasonable way of knowing that it contained a defective inflator.
Under section 3006 of RCRA, EPA may authorize a qualified state to administer and enforce a hazardous waste program within the state in lieu of the federal program, and to issue and enforce permits in the state. A state may receive authorization by following the approval process described in 40 CFR 271.21 (see 40 CFR part 271 for the overall standards and requirements for authorization). EPA continues to have independent authority to bring enforcement actions under RCRA sections 3007, 3008, 3013, and 7003. An authorized state also continues to have independent authority to bring enforcement actions under state law.
After a state receives initial authorization, new federal requirements and prohibitions promulgated under RCRA authority existing prior to the 1984 Hazardous and Solid Waste Amendments (HSWA) do not apply in that state until the state adopts and receives authorization for equivalent state requirements. In contrast, under RCRA section 3006(g) (42 U.S.C. 6926(g)), new federal requirements and prohibitions promulgated under HSWA provisions take effect in authorized states at the same time that they take effect in unauthorized states. As such, EPA carries out the HSWA requirements and prohibitions in authorized states, including the issuance of new permits implementing those requirements, until EPA authorizes the state to do so.
Authorized states are required to modify their programs only when EPA enacts federal requirements that are more stringent or broader in scope than existing federal requirements. Under RCRA section 3009, states may impose standards that are more stringent or broader in scope than those in the federal program (see also 40 CFR 271.1(i)). Therefore, authorized states are not required to adopt new federal regulations that are considered less stringent than previous federal regulations or that narrow the scope of the RCRA program. Previously authorized hazardous waste regulations would continue to apply in those states that do not adopt “deregulatory” rules.
The regulations finalized in this interim final rule are not promulgated under the authority of HSWA. Thus, the standards will be applicable on the effective date only in those states that do not have final authorization of their base RCRA programs. Moreover, authorized states are required to modify their programs only when EPA promulgates federal regulations that are more stringent or broader in scope than the authorized state regulations. For those changes that are less stringent, states are not required to modify their program. Pursuant to section 3009 of RCRA, states may impose more stringent regulations than the federal program. This rule eliminates specific hazardous waste requirements that would otherwise apply to airbag waste (airbag modules and airbag inflators) managed under the conditional exemption, and therefore, these changes are less stringent than the federal program and authorized states are not required to adopt them. However, if a state were, through implementation of state waiver authorities or other state laws, to allow compliance with the provisions of the conditional exemption in advance of adoption or authorization, EPA would not generally consider such implementation a concern for purposes of enforcement or state authorization. Of course, the state could not implement the requirements in a way that was less stringent than the federal requirements in this rule.
This action is a significant regulatory action that was submitted to the Office of Management and Budget (OMB) for review. This rule has been determined significant because it raises novel legal or policy issues arising out of a legal mandate, the President's priorities or the principles set forth in the Executive Order. Any changes made in response to OMB recommendations have been documented in the docket. The EPA prepared an economic analysis of the potential costs and benefits associated with this action. This analysis, “Economic Assessment of the Safe Management of Recalled Airbags Rule”,
This action is considered an Executive Order 13771 deregulatory action. Details on the estimated cost savings of this final rule can be found in EPA's analysis of the potential costs and benefits associated with this action.
The information collection activities in this rule have been granted emergency approval by the Office of Management and Budget (OMB) under the PRA. The Information Collection Request (ICR) that has been approved by OMB was assigned EPA ICR number 2589.02 and OMB Control Number 2050-0221. You can find a copy of the ICR in the docket for this rule, and it is briefly summarized here.
The collection of information is necessary in order to ensure that the hazardous waste airbag modules and airbag inflators exempted under this rule are safely disposed of and that defective airbag modules and airbag inflators are not reinserted into vehicles where they would pose an unreasonable risk of death or serious injury. Information collection activities include requiring affected entities maintain copies of shipping records and confirmations of receipt for three years.
In addition to the emergency ICR which will implement the requirements for up to six months, EPA is also developing an ICR based on comments received on this rulemaking. Towards this goal, pursuant to section 3506(c)(2)(A) of the PRA, EPA is soliciting comments and information to enable it to: (i) Evaluate whether the collection of information is necessary for the proper performance of the functions of the Agency, including whether the information will have practical utility; (ii) evaluate the accuracy of the Agency's estimate of the burden of the collection of information, including the validity of the methodology and assumptions used; (iii) enhance the quality, utility, and clarity of the information to be collected; and (iv) minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated electronic, mechanical, or other technological collection techniques or other forms of information technology,
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The OMB control numbers for the EPA's regulations in 40 CFR are listed in 40 CFR part 9. When OMB approves this ICR, the Agency will announce that approval in the
This action is not subject to the RFA. The RFA applies only to rules subject to notice and comment rulemaking requirements under the Administrative Procedure Act (APA), 5 U.S.C. 553, or any other statute. The APA exempts from notice and comment requirements rules for which an Agency finds “for good cause” that notice and an opportunity to comment are “impracticable, unnecessary, or contrary to the public interest.” The Agency is invoking this exemption to address exigent public health issues associated with the Takata airbag recalls.
This action does not contain an unfunded mandate of $100 million or more as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. The action imposes no enforceable duty on any state, local, or tribal governments or the private sector.
This action does not have federalism implications. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government.
This action does not have tribal implications as specified in Executive Order 13175. This action does not have substantial direct effects on one or more Indian tribes, on the relationship
Section 5-502 of Executive Order 13045 provides that in emergency situations, or where the Agency is required by law to act more quickly than normal review procedures allow, the Agency shall comply with the Executive Order to the extent practicable. This action is being issued under a good cause exemption of notice and comment rulemaking under the APA to address an emergency situation associated with defective airbag inflators and risks to public health. The rule will remove potential regulatory impediments associated with the Takata airbag recalls. The recalls address explosion risks associated with faulty airbag deployment which could cause (and have caused) serious harm to passengers in vehicles, including children.
This action is not a “significant energy action” because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy. This rulemaking simply removes potential regulatory impediments associated with the Takata airbag recalls; therefore, by itself, this rulemaking will not have any effect on the supply, distribution or use of energy.
This rulemaking does not involve technical standards.
The EPA believes that this action is not subject to Executive Order 12898 (59 FR 7629, February 16, 1994) because the rule increases protection of human health and the environment by removing potential regulatory impediments associated with the Takata airbag recalls while ensuring safe management and disposal of airbag waste. The recalls address explosion risks associated with faulty airbag deployment which could cause (and have caused) serious harm to passengers, including passengers from minority and low-income communities.
This action is subject to the CRA, and the EPA will submit a rule report to each House of the Congress and to the Comptroller General of the United States. The CRA allows the issuing agency to make a rule effective sooner than otherwise provided by the CRA if the agency makes a good cause finding that notice and comment rulemaking procedures are impracticable, unnecessary or contrary to the public interest (5 U.S.C. 808(2)). The EPA has made a good cause finding for this rule as discussed in Section I.B. of this preamble, including the basis for that finding.
Environmental protection, Administrative practice and procedure, Definitions, Hazardous waste.
Environmental protection, Hazardous waste, Recycling, Solid waste.
Environmental protection, Hazardous waste, Generator Standards.
For the reasons set out in the preamble, title 40, chapter I of the Code of Federal Regulations is amended as follows:
42 U.S.C. 6905, 6912(a), 6921-6927, 6930, 6935, 6937, 6938, 6939 and 6974.
42 U.S.C. 6905, 6912(a), 6921, 6922, 6924(y) and 6938.
(j)
(i) The airbag waste is accumulated in a quantity of no more than 250 airbag modules or airbag inflators, for no longer than 180 days;
(ii) The airbag waste is packaged in a container designed to address the risk posed by the airbag waste and labeled “Airbag Waste-Do Not Reuse”;
(iii) The airbag waste is sent directly to either:
(A) An airbag waste collection facility in the United States under the control of a vehicle manufacturer or their authorized representative, or under the control of an authorized party administering a remedy program in response to a recall under the National Highway Traffic Safety Administration, or
(B) A designated facility as defined in 40 CFR 260.10;
(iv) The transport of the airbag waste complies with all applicable U.S. Department of Transportation regulations in 49 CFR part 171 through 180 during transit;
(v) The airbag waste handler maintains at the handler facility for no less than three (3) years records of all off-site shipments of airbag waste and all confirmations of receipt from the receiving facility. For each shipment, these records must, at a minimum, contain the name of the transporter and date of the shipment; name and address of receiving facility; and the type and quantity of airbag waste (
(2) Once the airbag waste arrives at an airbag waste collection facility or designated facility, it becomes subject to all applicable hazardous waste regulations, and the facility receiving airbag waste is considered the hazardous waste generator for the purposes of the hazardous waste regulations and must comply with the requirements of 40 CFR part 262.
(3) Reuse in vehicles of defective airbag modules or defective airbag inflators subject to a recall under the National Highway Traffic Safety Administration is considered sham recycling and prohibited under 40 CFR 261.2(g).
42 U.S.C. 6906, 6912, 6922-6925, 6937, 6938 and 6939g.
(a) Provided that the very small quantity generator meets all the conditions for exemption listed in this section, hazardous waste generated by the very small quantity generator is not subject to the requirements of parts 124, 262 (except §§ 262.10 through 262.14) through 268, and 270 of this chapter, and the notification requirements of section 3010 of RCRA and the very small quantity generator may accumulate hazardous waste on site without complying with such requirements. The conditions for exemption are as follows:
(5) A very small quantity generator that accumulates hazardous waste in amounts less than or equal to the limits in paragraphs (a)(3) and (4) of this section must either treat or dispose of its hazardous waste in an on-site facility or ensure delivery to an off-site treatment, storage, or disposal facility, either of which, if located in the U.S., is:
(i) Permitted under part 270 of this chapter;
(ii) In interim status under parts 265 and 270 of this chapter;
(iii) Authorized to manage hazardous waste by a state with a hazardous waste management program approved under part 271 of this chapter;
(iv) Permitted, licensed, or registered by a state to manage municipal solid waste and, if managed in a municipal solid waste landfill is subject to part 258 of this chapter;
(v) Permitted, licensed, or registered by a state to manage non-municipal non-hazardous waste and, if managed in a non-municipal non-hazardous waste disposal unit, is subject to the requirements in §§ 257.5 through 257.30 of this chapter;
(vi) A facility which:
(A) Beneficially uses or reuses, or legitimately recycles or reclaims its waste; or
(B) Treats its waste prior to beneficial use or reuse, or legitimate recycling or reclamation;
(vii) For universal waste managed under part 273 of this chapter, a universal waste handler or destination facility subject to the requirements of part 273 of this chapter;
(viii) A large quantity generator under the control of the same person as the very small quantity generator, provided the following conditions are met:
(A) The very small quantity generator and the large quantity generator are under the control of the same person as defined in § 260.10 of this chapter. “Control,” for the purposes of this section, means the power to direct the policies of the generator, whether by the ownership of stock, voting rights, or otherwise, except that contractors who operate generator facilities on behalf of a different person as defined in § 260.10 of this chapter shall not be deemed to “control” such generators.
(B) The very small quantity generator marks its container(s) of hazardous waste with:
(
(
(ix)-(x) [Reserved]
(xi) For airbag waste, an airbag waste collection facility or a designated facility subject to the requirements of § 261.4(j) of this chapter.
Health Resources and Services Administration, HHS.
Final rule; effective date change.
The Health Resources and Services Administration (HRSA) administers section 340B of the Public Health Service Act (PHSA), which is referred to as the “340B Drug Pricing Program” or the “340B Program.” HHS published a final rule on January 5, 2017, that set forth the calculation of the 340B ceiling price and application of civil monetary penalties. On June 5, 2018, HHS published a final rule that delayed the effective date of the 340B ceiling price and civil monetary rule until July 1, 2019, to consider alternative and supplemental regulatory provisions and to allow for sufficient time for additional rulemaking. On November 2, 2018, HHS issued a proposed rule to solicit comments to change the effective date from July 1, 2019, to January 1, 2019, and to cease any further delay of the rule. HHS proposed this action because it determined that the January 5, 2017, final rule has been subject to extensive public comment, and had been delayed several times. HHS has considered the full range of comments on the substantive issues in the January 5, 2017, final rule. After consideration of the comments received on the effective date of the proposed rule, HHS is changing the effective date of the January 5, 2017, final rule, to January 1, 2019.
The effective date of the final rule published in the
CAPT Krista Pedley, Director, Office of Pharmacy Affairs, Healthcare Systems Bureau, HRSA, 5600 Fishers Lane, Mail Stop 08W05A, Rockville, MD 20857, or by telephone at 301-594-4353.
HHS published a notice of proposed rulemaking (NPRM) in June 2015 to implement civil monetary penalties (CMPs) for manufacturers who knowingly and intentionally charge a covered entity more than the ceiling price for a covered outpatient drug; to provide clarity regarding the requirement that manufacturers calculate the 340B ceiling price on a quarterly basis and how the ceiling price is to be calculated; and to establish the requirement that a manufacturer charge a $.01 (penny pricing policy) for drugs when the ceiling price calculation equals zero (80 FR 34583, June 17, 2015). The public comment period closed on August 17, 2015, and HRSA received 35 comments.
After review of the initial comments, HHS reopened the comment period (81 FR 22960, April 19, 2016) to invite additional comments on the following areas of the NPRM: 340B ceiling price calculations that result in a ceiling price that equals zero (penny pricing); the methodology that manufacturers use when estimating the ceiling price for a new covered outpatient drug; and the definition of the “knowing and intentional” standard to be applied when assessing a CMP for manufacturers that overcharge a covered entity. The comment period closed May 19, 2016, and HHS received 72 comments.
On January 5, 2017, HHS published a final rule in the
In previous rulemaking, delaying the effective date of the January 5, 2017, final rule, HHS stated that it “is developing new comprehensive policies to address the rising costs of prescription drugs. These policies will address drug pricing in government programs, such as Medicare Parts B & D, Medicaid, and the 340B Program. Due to the development of these comprehensive policies, we are delaying the effective date for the January 5, 2017, final rule to July 1, 2019.” (83 FR 25944)
However, as explained in the proposed rule, HHS has determined that the finalization of the 340B ceiling price and civil monetary penalty rule will not interfere with HHS's development of these comprehensive policies. Accordingly, HHS no longer believes a delay in the effective date is necessary and is changing the effective date of the rule from July 1, 2019, to January 1, 2019. The implementation date and the effective date will be the same.
In the NPRM, HHS solicited comments to change the effective date from July 1, 2019, to January 1, 2019, and cease any further delay of the rule. HHS received approximately 160 comments, which contained a number of issues from covered entities, manufacturers, and groups representing these stakeholders. In this final rule, HHS will only respond to comments related to whether HHS should change the effective date of the January 5, 2017, final rule to January 1, 2019. HHS did not consider and does not address comments that raised issues beyond the narrow scope of the NPRM, including comments related to broader policy matters. HHS has summarized the relevant comments received and provided its responses below.
In addition, commenters have not demonstrated that the finalization of the January 5, 2017, final rule would interfere with HHS's development of these comprehensive policies. As such, HHS does not believe that any further delay is necessary and is changing the effective date of the final rule from July 1, 2019, to January 1, 2019.
The effective date of the final rule has been delayed for nearly two years, which has provided affected entities more than enough time to prepare for its requirements.
HHS has examined the effects of this final rule as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 8, 2011), the Regulatory Flexibility Act (September 19, 1980, Pub. L. 96-354), the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132 on Federalism (August 4, 1999).
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 is supplemental to and reaffirms the principles, structures, and definitions governing regulatory review as established in Executive Order 12866, emphasizing the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.
Section 3(f) of Executive Order 12866 defines a “significant regulatory action” as an action that is likely to result in a rule: (1) Having an annual effect on the economy of $100 million or more in any 1 year, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities (also referred to as “economically significant”); (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order. A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year), and a “significant” regulatory action is subject to review by the Office of Management and Budget (OMB).
HHS does not believe that this final rule to change the effective date of the January 5, 2017, final rule from July 1, 2019, to January 1, 2019, will have an economic impact of $100 million or more in any 1 year, and is therefore not designated as an “economically significant” final rule under section 3(f)(1) of Executive Order 12866. The 340B Program as a whole creates significant savings for entities purchasing drugs through the program, with total purchases estimated to be $19 billion in CY 2017. This final rule to implement the January 5, 2017, final rule would codify current policies regarding calculation of the 340B ceiling price and manufacturer civil monetary penalties. HHS does not anticipate that the imposition of civil monetary penalties would result in significant economic impact.
When the 2017 Rule was finalized, it was described as not economically significant. Therefore, changing the effective date of the 2017 Rule is also not likely to have an economically significant impact.
Specifically, the RIA for the 2017 Rule stated that, “[. . .]manufacturers are required to ensure they do not overcharge covered entities, and a civil monetary penalty could result from overcharging if it met the standards in this final rule. HHS envisions using these penalties in rare situations. Since the Program's inception, issues related to overcharges have been resolved between a manufacturer and a covered entity and any issues have generally been due to technical errors in the calculation. For the penalties to be used as defined in the statute and in this [2017] rule, the manufacturer overcharge would have to be the result of a knowing and intentional act. Based on anecdotal information received from covered entities, HHS anticipates that this would occur very rarely if at all.” Since the civil penalties envisioned in the 2017 Rule were expected to be rare, changing the effective date of these civil penalties is unlikely to have an economically significant impact.
Executive Order 13771 (January 30, 2017) requires that the costs associated with significant new regulations “to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations.” This rule is not subject to the requirements of Executive Order 13771 because this rule results in no more than
The Regulatory Flexibility Act (5 U.S.C. 601
The final rule would affect drug manufacturers (North American Industry Classification System code 325412: Pharmaceutical Preparation Manufacturing). The small business size standard for drug manufacturers is 750 employees. Approximately 600 drug manufacturers participate in the Program. While it is possible to estimate the impact of the final rule on the industry as a whole, the data necessary to project changes for specific manufacturers or groups of manufacturers were not available, as HRSA does not collect the information necessary to assess the size of an individual manufacturer that participates in the 340B Program. For purposes of the RFA, HHS considers all health care providers to be small entities either by virtue of meeting the Small Business Administration (SBA) size standard for a small business, or for being a nonprofit organization that is not dominant in its market. The current SBA size standard for health care providers ranges from annual receipts of $7 million to $35.5 million. As of January 1, 2017, over 12,000 covered entities participate in the 340B Program, which represent safety-net healthcare providers across the country. HHS has determined, and the Secretary certifies that this final rule will not have a significant impact on the operations of a substantial number of small manufacturers; therefore, we are not preparing an analysis of impact for the purposes of this RFA. HHS estimates
Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires that agencies prepare a written statement, which includes an assessment of anticipated costs and benefits, before proposing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation) in any one year.” In 2018, that threshold is approximately $150 million. HHS does not expect this rule to exceed the threshold.
HHS has reviewed this final rule in accordance with Executive Order 13132 regarding federalism, and has determined that it does not have “federalism implications.” This rule would not “have substantial direct effects on the States, or on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” The proposal to rescind the June 5, 2018, final rule and make the January 5, 2017, final rule effective as of January 1, 2019, would not adversely affect the following family elements: Family safety, family stability, marital commitment; parental rights in the education, nurture, and supervision of their children; family functioning, disposable income or poverty; or the behavior and personal responsibility of youth, as determined under Section 654(c) of the Treasury and General Government Appropriations Act of 1999.
The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) requires that OMB approve all collections of information by a Federal agency from the public before they can be implemented. This final rule is projected to have no impact on current reporting and recordkeeping burden for manufacturers under the 340B Program. Changes finalized in this rule would result in no new reporting burdens.
Centers for Medicare & Medicaid Services (CMS), HHS.
Final rule; correction.
This document corrects an error that appeared in the final rule with comment period published in the
Marjorie Baldo, (410) 786-4617.
In FR Doc. 2018-24243 of November 21, 2018 (83 FR 58818), entitled “Medicare Program: Changes to Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs” (hereinafter referred to as the CY 2019 OPPS/ASC final rule with comment period), there was an error that is identified and corrected in the Correction of Errors section below.
On page 58818, we made an error in the
Under 5 U.S.C. 553(b) of the Administrative Procedure Act (APA), the agency is required to publish a notice of the proposed rule in the
We believe that this correcting document does not constitute a rulemaking that would be subject to these requirements. This correcting
In addition, even if this were a rulemaking to which the notice and comment procedures and delayed effective date requirements applied, we find that there is good cause to waive such requirements. Undertaking further notice and comment procedures to incorporate the correction in this document into the final rule or delaying the effective date would be contrary to the public interest because it is in the public's interest to have adequate time to comment on the payment classifications assigned to the interim APC assignments and/or status indicators of new or replacement Level II HCPCS codes included in the CY 2019 OPPS/ASC final rule with comment period.
Furthermore, such procedures would be unnecessary, as we are not altering our payment methodologies or policies, but rather, we are simply correcting the incorrect comment period end date. This correcting document is intended solely to ensure that the comment period end date included in the CY 2019 OPPS/ASC final rule with comment period is correct for those items on which the public can submit public comments. For these reasons, we believe we have good cause to waive the notice and comment and effective date requirements.
In FR Doc. 2018-24243 of November 21, 2018 (83 FR 58818), make the following corrections:
1. On page 58818, in the second column, in the
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Temporary rule; inseason adjustment.
This action adjusts the possession and trip limits of Georges Bank cod for Northeast multispecies common pool vessels for the remainder of the 2018 fishing year, in order to ensure that the common pool fishery is able to harvest, but not exceed, its annual quota for the stock. These changes are intended to provide the common pool fishery with additional fishing opportunities.
These possession and trip limit adjustment are effective November 29, 2018, through April 30, 2019.
Spencer Talmage, Fishery Management Specialist, 978-281-9232.
The regulations at § 648.86(o) authorize the Regional Administrator to adjust the possession and trip limits for common pool vessels in order to help avoid the overharvest or underharvest of the common pool quotas.
Based on information reported through October 13, 2018, the common pool fishery has caught 5,797 lb (2.6 mt) of Georges Bank (GB) cod, or approximately 11 percent of its 53,374 lb (24.2 mt) annual quota. At the current rate of fishing, the common pool fishery is not projected to fully harvest its annual quota for the stock by the end of the 2018 fishing year. A moderate increase in the possession and trip limits for the stock will provide additional opportunities with little risk of exceeding the common pool quota of the stock.
Effective November 29, 2018, the possession and trip limit of GB cod is increased, as summarized in Table 1. Common pool groundfish vessels that have declared their trip through the vessel monitoring system (VMS) or interactive voice response system, and crossed the VMS demarcation line prior to November 29, 2018, may land at the new possession and trip limits for that trip.
The projection supporting the increase of the common pool possession and trip limits for GB cod is based on the assumption that the common pool fleet fishes primarily within the Western U.S./Canada area, outside of any Special Access Programs (SAPs), as it has done for several years. As described in 50 CFR 648.85(b), SAPs are established to authorize specific fisheries to allow increased yield of certain target stocks without undermining the achievement of the goals of the Northeast Multispecies Fishery Management Plan. The Closed Area II Haddock SAP (CA2 SAP) has a limit of 1,000 lb (453.6 kg) per trip of GB cod, which is double the GB cod trip limit for common pool vessels not participating in the SAPs.
Under a worst-case scenario projection, the common pool fleet could take up to 12 trips within the CA2 SAP at 1,000 lb (453.6 kg) per trip. In this scenario, the common pool could potentially land the entire common pool Eastern GB cod sub-ACL of 11,500 lb (5.2 mt), and could substantially contribute to exceeding the entire common pool GB cod sub-ACL.
In order to avoid this worst case scenario that would contribute to the common pool exceeding its quotas, effective November 29, 2018, the trip limit of GB cod for common pool vessels participating in the CA2 SAP is set to 500 lb (226.8 kg) per trip. In addition, this change may help avoid confusion and facilitate enforcement by making the CA2 SAP GB cod trip limit consistent with other common pool limits for the stock.
Common pool groundfish vessels participating in the affected SAPs that have declared their trip through the vessel monitoring system (VMS) or interactive voice response system, and crossed the VMS demarcation line prior to November 29, 2018, are not subject new possession and trip limits for that trip.
Weekly quota monitoring reports for the common pool fishery can be found on our website at:
This action is required by 50 CFR part 648 and is exempt from review under Executive Order 12866.
The Assistant Administrator for Fisheries, NOAA, finds good cause pursuant to 5 U.S.C. 553(b)(B) and 5 U.S.C. 553(d)(3) to waive prior notice and the opportunity for public comment and the 30-day delayed effectiveness period because it would be impracticable and contrary to the public interest.
The catch data used as the basis for this action only recently became available. The available analysis indicates that the increased possession and trip limit adjustments for GB cod will help the fishery achieve the optimum yield (OY) for this stock. Any delay in this action would limit the benefits to common pool vessels that this action is intended to provide.
The decrease in the CA2 SAP trip limit reduces the low likelihood of overages should vessels participate in the CA2 SAP. An overage of the common pool quota for this stock would undermine conservation objectives and trigger the implementation of accountability measures that could reduce available catch in the next fishing year, which would have negative economic impacts on the common pool fishery.
The time necessary to provide for prior notice and comment, and a 30-day delay in effectiveness, would keep NMFS from implementing the necessary possession and trip limit changes in a timely manner, which could prevent the fishery from achieving the OY and cause negative economic impacts to the common pool fishery.
16 U.S.C. 1801
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Temporary rule; reapportionment of tribal Pacific whiting allocation.
This document announces the reapportionment of 40,000 metric tons of Pacific whiting from the tribal allocation to the non-tribal commercial fishery sectors via automatic action on September 24, 2018. This reapportionment is to allow full utilization of the Pacific whiting resource.
The reapportionment of Pacific whiting was applicable from 12 noon local time, September 24, 2018 through December 31, 2018. Comments will be accepted through December 17, 2018.
You may submit comments, identified by NOAA-NMFS-2017-0160 by any of the following methods:
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Miako Ushio (West Coast Region, NMFS), phone: 206-526-4644 or email:
This document is accessible online at the Office of the Federal Register's website at
Pacific whiting (
This document announces the reapportionment of 40,000 metric tons (mt) of Pacific whiting from the tribal allocation to the non-tribal commercial sectors on September 24, 2018. Regulations at 50 CFR 660.131(h) contain provisions that allow the Regional Administrator to reapportion Pacific whiting from the tribal allocation, specified at 50 CFR 660.50, that will not be harvested by the end of the fishing year to other sectors.
For 2018, the Pacific Coast treaty tribes were allocated 77,251 mt of Pacific whiting. The best available information on September 24, 2018, indicated that less than 5,000 mt of the 2018 allocation had been harvested, and at least 40,000 mt of the tribal allocation would not be harvested by December 31, 2018. To allow for increased utilization of the resource, on September 24, 2018, NMFS reapportioned 40,000 mt from the Tribal sector to the Shorebased IFQ Program, C/P Coop, and MS Coop in proportion to each sector's original allocation. Reapportioning this amount is expected to allow for greater attainment of the TAC while not limiting tribal harvest opportunities for the remainder of the year. NMFS provided notice of the reapportionment on September 24, 2018, via emails sent directly to fishing businesses and individuals, and postings on the NMFS West Coast Region website. Reapportionment was effective the same day as the notice.
The amounts of Pacific whiting available for 2018 before and after the reapportionment are described in the table below.
NOAA's Assistant Administrator for Fisheries (AA) finds that good cause exists for this notification to be issued without affording prior notice and opportunity for public comment pursuant to 5 U.S.C. 553(b)(B), because such notification would be impracticable and contrary to the public interest. As previously noted, NMFS provided actual notice of the reapportionment to fishery participants at the time of the action. Prior notice and opportunity for public comment on this reapportionment was impracticable because NMFS had insufficient time to provide prior notice between the time the information about the progress of the fishery needed to make this determination became available and the time at which fishery modifications had to be implemented in order to allow fishers access to the available fish during the remainder of the fishing season. For the same reasons, the AA also finds good cause to waive the 30-day delay in effectiveness for these actions, required under 5 U.S.C. 553(d)(3).
These actions are authorized by §§ 660.55 (i), 660.60(d) and 660.131(h) and are exempt from review under Executive Order 12866.
16 U.S.C. 1801
Commodity Futures Trading Commission.
Request for comment.
The Commodity Futures Trading Commission (Commission or CFTC) is requesting public comment regarding the practice of “post-trade name give-up” on swap execution facilities.
Comments must be received on or before January 29, 2019.
You may submit comments, identified by “Post-Trade Name Give-Up on Swap Execution Facilities” and RIN number 3038-AE79, by any of the following methods:
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All comments must be submitted in English or, if not, accompanied by an English translation. Comments will be posted as received to
The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from
Aleko Stamoulis, Special Counsel, (202) 418-5714,
Historically, swaps traded in over-the-counter (“OTC”) markets rather than on regulated exchanges. Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)
Many swaps are traded on SEFs through trading methods and protocols that are electronic, voice-based, or a hybrid of both; and that provide for anonymous trade execution, trade execution on a name-disclosed basis, or a combination thereof. This variety of trading methods and protocols has developed because of the broad and diverse range of products traded in the swaps market that trade mostly episodically rather than on a continuous basis. The decision by a market participant to use one execution method or another depends on considerations such as the type of swap, transaction size, complexity, the swap's liquidity at a given time, the number of potential liquidity providers, and the associated desire to minimize potential information leakage and front-running risks.
“Post-trade name give-up” is a long-standing market practice in many swaps markets and originated as a necessary practice in OTC markets for uncleared swaps. Post-trade name give-up refers to the practice of disclosing the identity of each swap counterparty to the other after a trade has been matched anonymously. In the case of uncleared swaps, post-trade name give-up enables a market participant to perform a credit-check on its counterparty prior to finalizing a trade. Due to the bilateral counterparty relationship that exists in an uncleared swap agreement, post-trade name give-up is also necessary in order to keep track of credit exposure and payment obligations with respect to individual counterparties.
For trades that are cleared, however, the rationale for post-trade name give-up is less clear cut. That is because a DCO enables each party to substitute the credit of the DCO for the credit of the parties, thereby eliminating individual credit risk and counterparty exposure. Swaps that are intended to be cleared are subject to pre-execution credit checks and straight-through processing requirements, effectively eliminating counterparty risk and, presumably, the need for market participants to know the identities of counterparties to anonymously matched trades.
Post-trade name give-up continues today in some swaps markets, including with respect to swaps that are anonymously executed and cleared.
As the swaps market increasingly becomes a cleared market, the Commission believes that it is reasonable to ask whether the post-trade name give-up practice continues to serve a valid industry purpose in facilitating swaps trading. A variety of views exist on both sides of this issue, depending on one's position in the market. Some industry participants have criticized the continued practice of post-trade name give-up in cleared swaps markets. During a meeting of the Commission's Market Risk Advisory Committee held in April 2015, several participants in a panel on SEFs identified post-trade name give-up as a concern with respect to SEF trading.
Other industry participants have claimed that post-trade name give-up is an important tool used to mitigate liquidity risk or the risk that traders will game the market.
Another reported concern is that buy-side clients may undercut prices from dealers, for example, by posting aggressive bids or offers on an interdealer order book and then soliciting dealers through a request-for-quote (“RFQ”) on a dealer-to-client platform, hoping to motivate dealers to provide more favorable quotes based on prices posted in the order book.
The Commission requests comment from the public relating to the practice of post-trade name give-up on SEF markets where trades are anonymously executed and intended to be cleared. The Commission encourages all comments, including relevant background information, actual market examples, best practice principles, expectations for possible impacts on market structure and market liquidity, and estimates of any asserted costs and expenses. The Commission also encourages substantiating data, statistics, and any other information that supports any such comments. In particular, the Commission requests comment on the following questions:
The following appendix will not appear in the Code of Federal Regulations.
On this matter, Chairman Giancarlo and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative.
Department of Veterans Affairs.
Advanced notice of rulemaking.
The Department of Veterans Affairs (VA) is issuing this document in compliance with the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). The Act requires VA to amend its regulation on VA-guaranteed or insured cash-out refinance loans and to publish the amended regulation within a shortened time frame. If VA determines that urgent or compelling circumstances make compliance with the advance public notice and comment requirements of the Administrative Procedure Act impracticable or contrary to public interest and publishes notice of that determination in the
November 30, 2018.
Loan Policy & Valuation, Loan Guaranty Service (26), Veterans Benefits Administration, Department of Veterans Affairs, 810 Vermont Avenue NW, Washington, DC 20420.
Greg Nelms, Assistant Director for Loan Policy & Valuation, Loan Guaranty Service (26), Veterans Benefits Administration, Department of Veterans Affairs, 810 Vermont Avenue NW, Washington, DC 20420, (202) 632-8862. (This is not a toll-free number.)
On May 24, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), Public Law 115-174, 132 Stat. 1296. Section 309 of the Act, codified at 38 U.S.C. 3709, provides new statutory criteria for determining when, in general, VA may guarantee a refinance loan. The Act also requires, among other things, VA to promulgate regulations, within 180 days after the date of the enactment of the Act, for cash-out refinance loans, specifically those where the principal of the new loan to be VA-guaranteed or insured is larger than the payoff amount of the loan being refinanced. Public Law 115-174, 132 Stat. 1296.
Section 309(a)(2) of the Act permits VA to waive the requirements of the Administrative Procedure Act (APA), 5 U.S.C. 551 through 559, if the Secretary determines that urgent or compelling circumstances make compliance with such requirements impracticable or contrary to public interest. Public Law 115-174, 132 Stat. 1348-1349.
VA believes there are several urgent and compelling circumstances that make advance notice and comment on this rule contrary to the public interest. First, VA is concerned about lenders who seem to continue to exploit legislative and regulatory gaps related to seasoning, recoupment, and net tangible benefit standards, despite anti-predatory lending actions that VA and Congress have already taken. VA's regulatory impact analysis for this rule indicates that perhaps more than 50 percent of cash-out refinances remain vulnerable to predatory terms and conditions until this rule goes into effect. VA believes that VA must immediately seal these gaps to fulfill its obligation to veterans, prudent lenders, and those who invest in securities that include VA-guaranteed loans.
VA is also gravely concerned about constraints in the availability of program liquidity if VA does not act quickly to address early pre-payment speeds for VA-guaranteed cash-out refinance loans. In large part, cashflows derived from investors in mortgage-backed securities (MBS) furnished by the Government National Mortgage Association (Ginnie Mae) provide liquidity for lenders that originate VA-guaranteed refinance loans. When pricing MBS, investors rely on pre-payment models to estimate the level of pre-payments and any resultant potential losses of revenue expected to occur in a set period, given possible changes in interest rates. These pre-payment models tend to drive, at least in significant part, the valuation of Ginnie Mae MBS. Ginnie Mae, buyers of VA-guaranteed loans, and other industry stakeholders have expressed serious concerns that early pre-payments of VA-guaranteed loans are devaluing these investments. See “Slowing Down VA Refi Churn Proving More Difficult Than Expected”, National Mortgage News (November 12, 2018),
In a hearing before the House Veterans' Affairs Committee's Subcommittee on Economic Opportunity, the Government National Mortgage Association (Ginnie Mae) issued warnings to Congress regarding the ripple effects that risky refinancing practices had on the valuing of VA-guaranteed loans, as well as Ginnie Mae pools at-large. See
Exacerbating the issue is the lending industry's varied interpretation of the Act, which has led to lender uncertainty in how to implement a responsible cash-out refinance program. VA believes this uncertainty has caused prudent lenders to employ a high degree of caution, (
At the same time, VA is concerned that certain lenders are exploiting cash-out refinancing as a loophole to the responsible refinancing Congress envisioned when enacting section 309 of the Act. VA recognizes there are certain advantages to a veteran who wants to obtain a cash-out refinance, and VA has no intention of unduly curtailing veterans' access to the equity they have earned in their homes. Nevertheless, some lenders are pressuring veterans to increase artificially their home loan amounts when refinancing, without regard to the long-term costs to the veteran and without adequately advising the veteran of the veteran's loss of home equity. In doing so, veterans are placed at a higher financial risk, and the lender avoids compliance with the more stringent requirements Congress mandated for less risky refinance loans. Essentially, the lender revives the period of subprime lending under a new name.
VA does not plan to dispense with the notice and comment requirements altogether. Section 309(a)(2)(A)(ii) and (iii) of the Act requires VA, 10 days before publication of the final rule, to submit a notice of the waiver to the House and Senate Committees on Veterans' Affairs and publish the notice in the
The Secretary of Veterans Affairs approved this document and authorized the undersigned to sign and submit the document to the Office of the Federal Register for publication electronically as an official document of the Department of Veterans Affairs. Robert L. Wilkie, Secretary, Department of Veterans Affairs, approved this document on November 19, 2018, for publication.
Environmental Protection Agency (EPA).
Proposed rule.
In this action, the EPA proposes to amend the 2015 New Source Performance Standards (NSPS) for new residential hydronic heaters and new forced-air furnaces by adding a two-year “sell-through” period for all affected new hydronic heaters and forced-air furnaces that are manufactured or imported before the May 2020 compliance date to be sold at retail through May 2022. This will allow retailers additional time, after the May 2020 effective date of the “Step 2” standards, for the sale of “Step 1” compliant hydronic heaters and forced-air furnaces remaining in inventory. The EPA is also taking comment on whether a sell-through period for all affected new residential wood heaters is appropriate following the May 2020 compliance date and, if so, how long a sell-through period is needed and why. In addition, this action is taking comment on whether the current minimum pellet fuel requirements should be retained and, if so, whether they should be revised.
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Because this hearing is being held at a U.S. government facility, individuals planning to attend the hearing should be prepared to show valid picture identification to the security staff in order to gain access to the meeting room. Please note that the REAL ID Act, passed by Congress in 2005, established new requirements for entering federal facilities. For purposes of the REAL ID Act, the EPA will accept government-issued IDs, including driver's licenses from the District of Columbia and all
For questions about this proposed action, contact Ms. Amanda Aldridge, Outreach and Information Division, Mail Code: C304-05, Office of Air Quality Planning and Standards, U.S. Environmental Protection Agency, Research Triangle Park, North Carolina 27711; telephone number: (919) 541-5268; fax number: (919) 541-0072; and email address:
The EPA may ask clarifying questions during the oral presentations but will not respond to the presentations at that time. Written statements and supporting information submitted during the comment period will be considered with the same weight as oral comments and supporting information presented at the public hearing. Commenters should notify Regina Chappell if there are special needs related to providing comments at the hearings. Verbatim transcripts of the hearings and written statements will be included in the docket for this rulemaking.
Please note that any updates made to any aspect of the hearing will be posted online at
The EPA will not provide audiovisual equipment for presentations. Any media presentations should be submitted to the public docket at
If you require the service of a translator or special accommodations such as audio description, please pre-register for the hearing and describe your needs by December 13, 2018. We may not be able to arrange accommodations without advanced notice.
The EPA may publish any comment received to its public docket. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. The EPA will generally not consider comments or comment contents located outside of the primary submission (
The
On March 16, 2015 (80 FR 13672), the Environmental Protection Agency (EPA) finalized the NSPS for new residential wood heaters, new residential hydronic heaters, and new forced-air furnaces. For this action, the term wood heaters refers to all appliances covered in 40 CFR part 60, subpart AAA, and the terms hydronic heaters and forced-air furnaces refer to appliances covered in 40 CFR part 60, subpart QQQQ. Also, for this action, the term wood heating devices refers to all units regulated by the 2015 NSPS (40 CFR part 60, subparts AAA and QQQQ).
In this action, the EPA proposes to amend 40 CFR part 60, subpart QQQQ of the 2015 NSPS by adding a two year “sell-through” period for retailers to sell new hydronic heaters and forced-air furnaces that are manufactured or imported before the May 2020 compliance date and are compliant with the “Step 1” standards. This will allow retailers additional time after the May 2020 effective date of the “Step 2” standard, to sell “Step 1” compliant hydronic heaters and forced-air furnaces remaining in inventory. The EPA is also taking comment on whether a sell-through period for retailers to sell new residential wood heaters (40 CFR part 60, subpart AAA) is appropriate following the May 2020 compliance date and, if so, how long a sell-through period is needed and why. In addition, this action is taking comment on whether the current minimum pellet fuel requirements should be retained or revised. In the 2015 Final Rule Preamble (at 80 FR at 13682/2), the EPA stated: “For pellet-fueled appliances, operation according to the owner's manual includes operation only with pellet fuels that are specified in the owner's manual.”
The Agency estimated the cost and benefits of the proposed rule by developing a memorandum (supplemental RIA)
Table 1 of this preamble lists categories and entities that are the subject of this proposal. Table 1 is not intended to be exhaustive, but rather provides a guide for readers regarding the entities likely to be affected by this proposed action. These standards, and any changes considered in this rulemaking, are directly applicable to sources as a federal program. Other federal, state, local and tribal government entities are not directly affected by this action.
In addition to being available in the docket, an electronic copy of this action is available on the internet. Following signature by the EPA Administrator, the EPA will post a copy of this proposed action at
Section 111 of the Clean Air Act (CAA) requires the EPA Administrator to list categories of stationary sources that, in his or her judgment, cause or contribute significantly to air pollution which may reasonably be anticipated to endanger public health or welfare. The EPA must then issue “standards of performance” for new sources in such source categories. The EPA has the authority to define the source categories, determine the pollutants for which standards should be developed, and identify within each source category the facilities for which standards of performance would be established.
CAA section 111(a)(1) defines “a standard of performance” as “a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirement) the Administrator determines has been adequately demonstrated.” This definition makes clear that the standard of performance must be based on controls that constitute “the best system of emission reduction (BSER).” The standard that the EPA develops, based on the BSER, is commonly a numerical emission limit, expressed as a performance level. As provided in CAA 111(b)(5), the EPA does not prescribe a specific technology that must be used to comply with a standard of performance. Rather, sources generally can select any measure or combination of measures that will achieve the emission level of the standard.
The Residential Wood Heaters source category is different from most NSPS source categories in that it is for mass-produced residential consumer products. Thus, important elements in determining BSER include the costs and environmental impacts on consumers of delaying production while wood heating devices with those systems are designed, tested, field evaluated and certified.
Section 111(b)(1)(B) of the CAA requires that the standards be effective upon promulgation of the NSPS. Given this statutory requirement, as discussed more fully in the
Residential wood heaters were originally listed under CAA section 111(b) in February 18, 1987 (see 52 FR 5065). The NSPS for wood heaters (40 CFR part 60, subpart AAA) was proposed on February 18, 1987 (see 52 FR 4994) and promulgated on February 26, 1988 (see 53 FR 5859) (1988 Wood Heater NSPS). The NSPS was amended in 1998 to address an issue related to certification testing (see 63 FR 64869).
On February 3, 2014, the EPA proposed revisions to the NSPS (See 79 FR 6330) and promulgated revisions on March 16, 2015 (See 80 FR 13672). The final 2015 NSPS updated the 1988 Wood Heater NSPS emission limits, eliminated exemptions over a broad suite of residential wood combustion devices, and updated test methods and the certification process. The 2015 NSPS also added a new subpart (40 CFR part 60, subpart QQQQ) that covers new wood burning residential hydronic heaters and new forced-air furnaces. It also directs owners of pellet or wood chip heaters to burn only the fuel
As a part of the 2015 rulemaking, the EPA identified the percentage of wood heaters estimated to be meeting the Step 2 standards prior to promulgation of the 2015 NSPS as 70 percent of pellet stoves and 26 percent of wood stoves. Similarly, 18 percent of hydronic heaters were meeting the Step 2 standards prior to promulgation of the 2015 NSPS, while the limited dataset for forced-air furnaces showed no models meeting the Step 2 standards prior to promulgation of the 2015 NSPS. As of March 20, 2018, there were a total of 78 models (44 pellet models and 34 crib/cord wood) that met the Step 2 standard for wood heaters (as required under 40 CFR 60.532(b) or 60.532(c)), nine models that met the Step 2 standard for hydronic heaters (as required under 40 CFR 60.5474(a)(2) or (b)(3)) and one model that met the Step 2 standard for forced-air furnaces (as required under 40 CFR 60.5474(a)(6)). The inventory of certified models as of March 2018 is provided in the document titled: “List of EPA certified Wood Heating Devices March 2018,” which is available in the docket and at the website
In promulgating the 2015 NSPS, the EPA took a “stepped compliance approach” in which certain “Step 1” standards became effective in May 2015 and more stringent “Step 2” standards would become effective five years later, in May 2020.
A major component of demonstrating compliance with either Step 1 or Step 2 is a certification test, using an EPA approved test method, for a given wood heating device. Among other requirements, the emissions from the certification test cannot exceed the emission limit for the standard for which it is certifying (either Step 1 or Step 2). It is worth noting that, because these certification test methods were developed outside of the 2015 NSPS, certification test methods have their own requirements independent of the 2015 NSPS, such as fuel requirements.
The 2015 NSPS included a sell-through provision which allowed seven and a half months for retailers to sell current wood heater and hydronic heater non-compliant inventory (Step 1 sell-through). No sell-through provision was provided for forced-air furnaces because small forced-air furnaces did not have to comply with a numerical emission standard until May 2016, and large forced-air furnaces did not have to comply with a numerical emission standard until May 2017 (see 80 FR 13682 and 13685). While manufacturers could no longer make units that were not certified for the Step 1 standard (after the May 2015 Step 1 effective date), the Step 1 sell-through allowed retailers several months to sell their existing inventory that was not Step 1 compliant. The 2015 NSPS provided no such sell-through provision for the more stringent Step 2 standards that are currently scheduled to become effective in May 2020. The Step 1 and Step 2 standards are discussed further below.
In promulgating the 2015 NSPS, the EPA took a stepped compliance approach to implementing the emission limits for the rule. The Step 1 standard was intended to codify emission limits that were already being met. For wood heaters, (40 CFR part 60, subpart AAA), the Step 1 limit was based on the Washington State standard that had been in effect since 1995 and had been met by most wood heater manufacturers. For hydronic heaters, the Step 1 emission limit was based on the 2010 Phase 2 Voluntary Hydronic Heater Program. Step 1 for forced-air furnaces was what the EPA concluded would be immediately achievable based on a limited dataset.
The Step 1 standard went into effect in May 2015, and Step 2 becomes effective in May 2020 (see discussion at 80 FR 13676-13677). For the Step 1 standards, the EPA provided a “sell-through” period of seven and a half months, until December 2015, to allow retailers additional time after the effective date of the rule to sell the non-compliant wood heaters and hydronic heaters remaining in inventory (see 80 FR 13685). Specifically, the 2015 NSPS allowed non-compliant wood heaters and hydronic heaters manufactured before May 15, 2015, to be imported and/or sold at retail through December 31, 2015 (see 40 CFR 60.532(a) and 60.5474(a)(1)).
Recently, the EPA has learned from manufacturers and retailers that a substantial number of retailers are already reducing or even ending their purchases of Step 1-certified wood heating devices from the manufacturers because they are concerned that they will not be able to sell these devices before the May 2020 Step 2 compliance date and will be left with unsaleable inventory.
Hearth, Patio & Barbecue Association (HPBA):
Frank Moore (President & Owner, Hardy Manufacturing):
Mark Freeman (Owner, Kuma Stoves):
Chris Neufeld (Vice President, Blaze King):
To address this situation, the EPA is proposing to amend the 2015 NSPS, 40 CFR part 60, subpart QQQQ requirements to create a two-year sell-through period for retailers after the Step 2 compliance date that is similar to the Step 1 sell-through period. The EPA is proposing an amendment that will allow Step 1-compliant hydronic heaters and forced-air furnaces manufactured or imported before May 15, 2020, to be sold at retail through May 15, 2022. The EPA is not proposing any changes to its BSER determination and is not proposing any changes to the 5-year compliance period for Step 2 or the associated May 2020 compliance date. As stated in the March 16, 2015, notice of final rulemaking, the EPA concluded that:
• A final hydronic heater Step 2 emission level of 0.10 lb/mmBtu within 5 years as BSER is a reasonable balance of environmental impacts and costs; and
• a final forced-air furnace Step 2 emission level of 0.15 lb/mmBtu within 5 years as BSER is a reasonable balance of environmental impacts and costs.
While the EPA is soliciting comment on the compliance date for the Step 2 emission limits in a separate
In this action, the EPA is seeking comment on this two-year sell-through period for retailers after the Step 2 compliance date, including the reasonableness of the Agency's determination that there is a need for a Step 2 sell-through period and, if providing a sell-through period is reasonable, what length of sell-through period is appropriate and why. The EPA is particularly interested in soliciting comments for the following topics regarding compliant hydronic heaters and forced-air furnaces and the sell-through period:
(1) The Agency solicits comment on whether retailers are currently declining to purchase Step 1-compliant hydronic heaters and forced-air furnaces and how widespread is this reduction in purchases. The EPA also solicits comment as to whether this will become a more significant issue as the May 2020 compliance date approaches and, if so, when is it likely that retailers will no longer be willing to buy Step 1-compliant hydronic heaters and forced-air furnaces at all. The EPA solicits comment on the cost or other impacts that retailers could have on manufacturers who are small businesses if they decline to purchase Step 1-compliant hydronic heaters and forced-air furnaces.
(2) The Agency is soliciting comment as to what is the typical period of time between (a) when a retailer purchases a hydronic heater or forced-air furnace, and (b) when the device is sold to a consumer. In particular, the Agency is soliciting comment on these periods of time for small businesses.
(3) The Agency is soliciting comment on the EPA's proposal that a sell-through period for retailers to sell Step 1-compliant hydronic heaters and forced-air furnaces is a reasonable way to address concerns about retailers' reluctance to purchase Step 1-compliant hydronic heaters and forced-air furnaces and/or manufacturers' inability to sell such heaters and furnaces before Step 2-certified models are available. In particular, the EPA is soliciting comment on the sell-through as a reasonable way to address concerns about retailers of devices and products from small businesses.
(4) The Agency is soliciting comments regarding, if a sell-through period for the May 2020 compliance date were to be promulgated, what period of time after May 2020 would be sufficient for retailers to sell their inventory of Step 1-compliant hydronic heaters and forced-air furnaces. The EPA is proposing a two-year period but is also taking comment on whether either a shorter or a longer sell-through period may be more reasonable and, if so, why a sell-through period other than two years is appropriate. For small businesses in particular, the Agency is soliciting comment on a two-year period and whether that amount of time is reasonable.
(5) The EPA is also soliciting comment on whether the Agency's proposal to provide the same two-year Step 2 sell-through period for both hydronic heaters and forced-air furnaces is reasonable, or whether a sell-through period of some different length may be more appropriate for each of these types of wood heating devices. The EPA is also soliciting comment on whether it may be more appropriate not to provide a sell-through period at all for either hydronic heaters or forced-air furnaces.
(6) The Agency is soliciting information on the number of Step 1 forced-air furnaces and hydronic heaters that are currently in production and the number that are being designed for Step 2 compliance that have not yet received their EPA certification for Step 2 compliance. The EPA requests information on the number of Step 2 pellet and cord/crib wood forced-air furnaces and hydronic heaters that are currently certified to meet Step 2. The EPA is soliciting comment on how far in advance of the current May 2020 Step 2 compliance date manufacturers will need to submit their EPA certification applications to not only meet the standards, but also to manufacture, market, and distribute their products without disruption to their business.
(7) The Agency seeks comment on whether and what type of small business relief may be appropriate in place of the extended sell-through period that would accomplish the same goal.
(8) The Agency seeks comment on the effects on the consumer as a result of a sell-through period.
Providing specific information and data to explain the basis of your comments on these topics discussed above (and on all matters that you address in your comments) will be helpful in the Agency's consideration of the issues presented by this proposed rule.
The EPA is also taking comment on whether the 2015 NSPS, 40 CFR part 60, subpart AAA, should also be revised to create a two-year sell-through period for retailers after the Step 2 compliance date for wood heaters similar to what is being proposed for 40 CFR part 60, subpart QQQQ appliances in section III of this preamble. The EPA is seeking comment on whether to allow Step 1-compliant 40 CFR part 60, subpart AAA wood heaters manufactured or imported before May 15, 2020, to be sold at retail through May 15, 2022. In this action, the EPA is seeking comment on a two-year sell-through period for retailers after the Step 2 compliance date, including comment on whether a Step 2 sell-through period for wood heaters is needed, and, if a sell-through period is added, what length of sell-through period is reasonable, and why.
The EPA is particularly interested in soliciting comments for the following topics regarding compliant wood heaters and the sell-through period:
(1) The Agency solicits comment on whether retailers are currently declining to purchase Step 1-compliant wood heaters and whether this reduction in purchases is widespread. In particular, the EPA solicits comment on whether there is a disproportionate change in purchases of crib/cord wood heaters (certification tests with either crib wood or cord wood) compared to pellet wood heaters due to the approaching May 2020 compliance date. The EPA also solicits comment as to whether this will become a more significant issue as the May 2020 compliance date approaches and, if so, when it is likely that retailers will no longer be willing to buy Step 1-compliant wood heaters. The EPA solicits comment on the cost or other impacts that retailers could have on manufacturers who are small businesses if they decline to purchase Step 1-compliant wood heaters.
(2) The Agency is soliciting comment as to what is the typical period of time between (a) when a retailer purchases a wood heater, and (b) when the device is sold to a consumer. In particular, the Agency is soliciting comment on these periods of time for small businesses.
(3) The Agency is soliciting comment as to whether a sell-through period for retailers to sell Step 1-compliant wood heaters is a reasonable way to address these concerns about retailers' reluctance to purchase Step 1-compliant wood heaters and/or manufacturers' inability to sell wood heaters before Step 2-certified models are available. In particular, the Agency is soliciting comment on the sell-through as a reasonable way to address concerns about retailers of devices and products from small businesses.
(4) The Agency is soliciting comments regarding if a sell-through period for the May 2020 compliance date were to be promulgated, what period of time after May 2020 would be sufficient for retailers to sell their inventory of Step 1-compliant wood heaters. The EPA is also taking comment on whether the sell-through period should be as short as one year or as long as three years (or more), and, if so, why such a sell-through period would be more appropriate than two years. For small businesses in particular, the Agency is soliciting comment on a two-year period and whether that amount of time is reasonable.
(5) The Agency is soliciting information on the number of Step 1 wood heater models that are currently in production and the number that are being designed for Step 2 compliance that have not yet received their EPA certification for Step 2 compliance. The EPA requests information on the number of Step 2 pellet and crib/cord wood heaters that are currently certified to meet Step 2. The EPA is soliciting comment on how far in advance of the current May 2020 Step 2 compliance date manufacturers will need to submit their EPA certification applications to not only meet the standards, but also to manufacture, market, and distribute their products without disruption to their business. The EPA solicits comment on any potential impact on consumers if the production of Step 2-compliant wood heaters is limited.
(6) The Agency seeks comment on whether and what type of small business relief may be appropriate in place of the extended sell-through period that would accomplish the same goal.
(7) The Agency seeks comment on the effects on the consumer as a result of a sell-through period.
Providing specific information and data to explain the basis of your comments on these topics discussed above (and on all matters that you address in your comments) will be helpful in the Agency's consideration of the issues presented by this proposed rule.
Certification tests for residential wood pellet heaters require pellet fuels be made of wood with certain minimum quality requirements to ensure consistent operation for every certification test. These requirements have the added benefit to manufacturers of minimizing emissions during certification testing.
The 2015 NSPS requires that pellets burned in a residential wood pellet heater meet the same minimum quality requirements to ensure consistent operations and comparable emissions. See Pellet Fuel Requirements stated in 40 CFR 60.532(e) and 60.5474(e). These requirements were intended to maintain a level of quality consistent with the requirements of a pellet heater certification test to ensure these pellets are similar to pellets used in certification testing. The EPA concluded at the time that this requirement provided some assurance that the wood pellet heater's performance in the home would be consistent with the laboratory certification test. A pellet manufacturer is not obligated to produce pellets that meet the pellet fuel requirements, but operators and manufacturers of residential pellet heaters in the United States are prohibited from using pellets that do not meet the pellet fuel requirements. However, the Agency has learned of issues regarding these requirements since publication of the 2015 rule. Therefore, the EPA is taking comment on whether the minimum quality pellet fuel requirements in the 2015 NSPS (40 CFR part 60, subparts AAA and QQQQ) should be retained and, if they are retained, whether they should be revised.
(1) The EPA is taking comment on whether 40 CFR part 60, subparts AAA and QQQQ should retain the minimum pellet fuel requirements, which are currently found at 40 CFR 60.532(e) and 60.5474(e). In support of the 2015 NSPS and in response to a remand of the record requested by the EPA, the EPA prepared a memorandum that set forth
(2) The EPA is taking comment on whether the minimum pellet fuel requirements in 40 CFR 60.532(e) and 60.5474(e) should be eliminated entirely.
(3) The EPA is taking comment on whether the pellet fuel requirements, if retained, should be revised. Such revisions could include adding new requirements or removing one or more of the current requirements or revising the requirements that are currently stated. For example, with respect to the maximum dimensions stated in 40 CFR 60.532(e)(2) and 60.5474(e)(2), the Agency is seeking comment on whether this criterion should be removed or replaced with larger or smaller dimensions. The EPA has reviewed the pellet requirements and solicits comment on whether the Agency should revise the current minimum pellet fuel requirements:
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6. Contains no demolition or construction waste.
7. Total of each trace metal: 100 mg/kg. Clarify if this should be reported “as received” or “dry basis”. The trace metals include mercury, cadmium, lead, arsenic, chromium, copper, nickel, and zinc.
8. None of the prohibited fuels in paragraph (f) of this section. The prohibited list does not prevent the use of unseasoned wood as an input material for manufacturing pellets.
The EPA is interested in receiving comments that both support the current requirements (and explain why they are necessary) and comments that advocate that the requirements be removed or revised.
The air impacts associated with the requirements of this proposed rule are the forgone emission reductions of PM
These proposed actions are anticipated to have negligible impacts on energy costs or usage. To the extent that Step 1-compliant hydronic heaters and forced-air furnaces continue to be sold for an additional two years, it is difficult to determine the precise energy impacts that might result from this proposed action. Wood-fueled appliances compete with other biomass forms for residential heating as well as more traditional energy sources such as oil, electricity, and natural gas. There is also a lack of sufficient data to determine the potential for affected consumers to choose other types of fuels and their associated appliances, nor the potential impacts to affected manufacturers.
The cost savings of the proposed action are the increase in revenues for manufacturers and retailers of hydronic heaters and forced-air furnaces affected by this rulemaking. The overall distribution of the avoided compliance costs as well as the distribution of forgone benefits is uncertain. The increase in revenues is calculated by estimating the reduction in unit costs from producing Step 1-compliant hydronic heaters and forced-air furnaces as compared to Step 2-compliant devices with estimates of sales taken from the 2015 NSPS RIA, using the estimates calculated for the final 2015 NSPS requirements as the baseline. The revenue estimate calculated is the average of the annual estimates calculated for the 2019-2022 timeframe and the primary scenario (Scenario 2). The estimate of additional average annual revenues to manufacturers is $0.01 billion (2016 dollars). Calculated as an EAV, the estimate is $0.01 billion (2016 dollars). More information on how these impacts are estimated can be found in the supplemental RIA of this proposed rule.
The economic impacts of this proposal are the cost savings that are shown in section VI.C of this preamble. Impacts on employment are qualitatively examined in the supplemental RIA.
The overall distribution of the avoided compliance costs as well as the distribution of forgone benefits is uncertain. Although this proposed action may result in the delay of the emission reductions from the 2015 NSPS by up to two years, this proposed action to establish a sell-through period does not change the standards upon implementation. The proposed revisions in this action would defer emission reductions into the future, thus delaying the health benefits estimated in the Residential Wood Heaters 2015 NSPS RIA. Due to analytical limitations, it was not possible to conduct air quality modeling for this proposed rule. Instead, the Agency used a “benefit-per-ton” approach to estimate the forgone benefits. In brief, the EPA calculated benefit per-ton (BPT) values for this sector by: (1) Characterizing the photochemical modeled PM
As compared to the 2015 NSPS RIA, for the years 2019 to 2022, this proposed rule, if finalized, would result in less
These forgone benefit estimates represent the annual average economic value of the health benefits that would have occurred in the years 2019, 2020, 2021 and 2022, were the proposed sell-through date not deferred from 2020 to 2022.
The Agency assumes that all fine particles, regardless of their chemical composition, are equally potent in causing premature mortality because the scientific evidence is not yet sufficient to allow differentiation of effects estimates by particle type. Even though the Agency assumes that all fine particles have equivalent health effects, the benefit-per-ton estimates vary between precursors depending on the location and magnitude of their impact on PM
For this analysis, policy-specific air quality data are not available. Thus, the Agency is unable to estimate the percentage of forgone premature mortality associated with this specific proposed rule's forgone emission reductions at each PM
Every benefit analysis examining the potential effects of a change in environmental protection requirements is limited, to some extent, by data gaps, model capabilities (such as geographic coverage) and uncertainties in the underlying scientific and economic studies used to configure the benefit and cost models. A detailed discussion of these uncertainties is provided in the supplemental RIA. Despite these uncertainties, the benefit analysis for this action provides a reasonable indication of the expected forgone health benefits of the proposed rulemaking under a set of reasonable estimations.
The monetized forgone benefits estimates provided above do not include forgone benefits from a variety of additional benefit categories. Although the Agency does not have sufficient information or modeling available to provide monetized estimates for these forgone benefits, the Agency includes a qualitative assessment of these unquantified forgone benefits in the supplemental RIA for this proposed rule. For more information on the benefits analysis, refer to the supplemental RIA for this proposed rule, which is available in the docket at Docket ID No. EPA-HQ-OAR-2018-0195.
Additional information about these statutes and Executive Orders can be found at
This action is an economically significant regulatory action that was submitted to the Office of Management and Budget (OMB) for review. Any changes made in response to OMB recommendations have been documented in the docket. The EPA prepared an analysis of the potential costs and benefits associated with this action. This analysis, Supplemental Regulatory Impact Analysis (RIA)—Estimated Cost Savings and Forgone Benefits Associated with the Proposed Rule, “Standards of Performance for New Residential Wood Heaters, New Residential Hydronic Heaters and Forced-Air Furnaces” is a memorandum that is available in the docket. It is also summarized in section I of this preamble.
Consistent with Executive Orders 12866 and 13563, “Improving Regulation and Regulatory Review,” the Agency has estimated the cost and benefits of the proposed rule. Given the nature of this rule, the Agency modified the discussion of net benefits (benefits−costs) to be more consistent with the relevant terminology of traditional net benefit analysis. The costs are presented here as the forgone benefits presented in section 5 of the supplemental RIA and section VI.E of this preamble. The Agency represents the benefits as the cost savings presented in section 2 of the supplemental RIA and section VI.C of this preamble, which the Agency estimates as the increase in revenues to manufacturers of affected wood heaters. The net benefits are the benefits (cost savings) minus the costs (forgone benefits). In this proposed rule, the estimated costs are greater than the benefits, leading to a negative net benefit (or net cost). The estimated annual average net benefit at a 3-percent discount rate is $0.09 billion to $0.22 billion, and $0.08 billion to $0.20 billion at a 7-percent discount rate in 2016 dollars, over the 2019 to 2022 timeframe. The net benefit estimate reflects an annual average of 257 tons of forgone PM
In addition, Table 4 reports the present values and equivalent annualized values of the net benefits discounted at 7 and 3 percent. EAV are the annualized present values, or the levelized flow of the present values (PV), over the three years affected by the proposal. The PV of the net benefits are negative $0.07 billion to negative $0.19 billion when using a 7 percent discount rate and negative $0.07 billion to negative $0.20 billion when using a 3 percent discount rate. The equivalent annualized values of the net benefits are negative $0.06 billion to negative $0.15 billion per year when using a 7 percent discount rate and negative $0.08 billion to negative $0.20 billion per year when using a 3 percent discount rate. The negative values indicate that EAV of the estimated benefits (cost savings) of the proposal are smaller than the EAV of estimated costs (forgone benefits). All these estimates are in 2016 dollars and are discounted to 2016.
For more information on the forgone benefits analysis, the cost analysis and the calculation of net benefits, please refer to the supplemental RIA prepared for this proposed rulemaking under Docket ID No. EPA-HQ-OAR-2018-0195.
This action is expected to be an Executive Order 13771 deregulatory action. Details on the estimated cost savings of this proposed rule can be found in the rule's economic analysis. See section VI of this preamble.
This action does not impose any new information collection burden under the PRA. OMB has previously approved the information collection activities contained in the existing regulations and assigned OMB Control number 2060-01 for 40 CFR part 60, subpart AAA and OMB Control number 2060-0693 for 40 CFR part 60, subpart QQQQ. This action is believed to result in no changes to the information collection requirements of the 2015 Standards of Performance for New Residential Wood Heaters, New Residential Hydronic Heaters and Forced-air Furnaces rule, so that the information collection estimate of project cost and hour burden from the 2015 final rule have not been revised.
I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA. In making this determination, the impact of concern is any significant adverse economic impact on small entities. An agency may certify that a rule will not have a significant economic impact on a substantial number of small entities if the rule relieves regulatory burden, has no net burden, or otherwise has a positive economic effect on the small entities subject to the rule. This proposed rule will not impose any new requirements on any entities because it does not impose any additional regulatory requirements relative to those specified in the 2015 NSPS. The Agency has, therefore, concluded that this action will have no net regulatory burden for all directly regulated small entities.
This action does not contain any unfunded mandate as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. The action imposes no enforceable duty on any state, local, or tribal governments or the private sector.
This action does not have federalism implications. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government.
This action does not have tribal implications as specified in Executive Order 13175. This rule will not impose any requirements on tribal governments. Thus, Executive Order 13175 does not apply to this action. Consistent with the EPA Policy on Consultation and Coordination with Indian Tribes, the EPA will provide outreach through the National Tribal Air Association and will offer consultation to tribal officials.
This proposed action is subject to Executive Order 13045 because it is an economically significant regulatory action as defined by Executive Order 12866. As noted in the preamble to the 2015 NSPS, the EPA does not believe that the environmental health risks or safety risks addressed by the NSPS presents a disproportionate risk to children based on distributional assessments of effects from residential wood smoke emissions (see 80 FR 13700). Although this proposed action may result in the delay of the emission reductions of some hydronic heater and forced air furnace appliances in the 2015 NSPS by up to two years, this will not alter the EPA's prior findings that on a nationwide basis, cancer risks due to residential wood smoke emissions among disadvantaged population groups generally are lower than the risks for the general population due to residential wood smoke emissions. (One of the demographic variables examined by the EPA was that of people 18 years and younger.) Furthermore, the proposed action does not affect the level of public health and environmental protection already being provided by existing NAAQS and other mechanisms in the CAA. This proposed action does not affect applicable local, state, or federal permitting or air quality management programs that will continue to address areas with degraded air quality and maintain the air quality in areas meeting current standards. Areas that need to reduce criteria air pollution to meet the NAAQS will still need to rely on control strategies to reduce emissions. To the extent that states use other mechanisms in order to comply with the NAAQS, this action will not have a disproportionate adverse effect on children's health.
This action is not a “significant energy action” because it is not likely to have a significant adverse effect on the supply, distribution or use of energy. This action allows affected wood
This rulemaking does not involve technical standards.
The EPA believes that this proposed action will not have disproportionately high and adverse human health or environmental effects on minority populations, low-income populations or indigenous peoples as specified in Executive Order 12898 (59 FR 7629, February 16, 1994). As noted in the preamble to the 2015 NSPS, the EPA believes that the human health or environmental risk addressed by the NSPS will not have potential disproportionately high and adverse human health or environmental effects on minority, low-income or indigenous populations from residential wood smoke emissions (see 80 FR 13701). Although this proposed action may result in the delay of the emission reductions of some hydronic heater and forced air furnace appliances in the 2015 NSPS by up to two years, this will not alter the EPA's prior findings that on a nationwide basis, cancer risks due to residential wood smoke emissions among disadvantaged population groups generally are lower than the risks for the general population due to residential wood smoke emissions.
Furthermore, the overall distribution of the avoided compliance costs as well as the distribution of forgone benefits is uncertain. Although this proposed action may result in the delay of the emission reductions of some hydronic heater and forced air furnace appliances in the 2015 NSPS by up to two years, this proposed action to establish a sell-through period does not change the standards upon implementation.
Environmental protection, Administrative practice and procedure.
For the reasons set out in the preamble, title 40, chapter I of the Code of Federal Regulations is proposed to be amended as follows:
42 U.S.C. 7401,
(a) * * *
(2) On or after May 15, 2020, manufacture or sell at retail a residential hydronic heater unless it has been certified to meet the 2020 particulate matter emission limit in paragraph (b)(2) or (b)(3) of this section except that a residential hydronic heater certified to meet the 2015 particulate matter emission limit in paragraph (b)(1) of this section manufactured or imported on or before May 15, 2020, may be sold at retail on or before May 15, 2022.
(6) On or after May 15, 2020, manufacture or sell at retail a small or large residential forced-air furnace unless it has been certified to meet the 2020 particulate matter emission limit in paragraph (b)(6) of this section except that a small or large residential forced-air furnace certified to meet the applicable 2015 particulate matter emission limit in paragraph (b)(4) or (b)(5) of this section, respectively, manufactured or imported on or before May 15, 2020 may be sold at retail on or before May 15, 2022.
Environmental Protection Agency (EPA).
Advance notice of proposed rulemaking.
In this action, the Environmental Protection Agency (EPA) is soliciting comment on several aspects of the 2015 Standards of Performance for New Residential Wood Heaters, New Residential Hydronic Heaters and Forced-Air Furnaces (2015 NSPS) in order to inform future rulemaking to improve these standards and related test methods. This action does not propose any changes to the 2015 NSPS, but does take comment on a number of aspects of the rule, including the compliance date for the Step 2 emission limits, Step 2 emission limits for forced-air furnaces, hydronic heaters and wood heaters, Step 2 emission limits based on weighted averages versus individual burn rates, transitioning to cord wood certification test methods, compliance audit testing, third-party review, electronic reporting tool, and warranty requirements.
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For questions about this action, contact Ms. Amanda Aldridge, Outreach and Information Division, Mail Code: C304-05, Office of Air Quality Planning and Standards, U.S. Environmental Protection Agency, Research Triangle Park, North Carolina 27711; telephone number: (919) 541-5268; fax number: (919) 541-0072; and email address:
The EPA may publish any comment received to its public docket. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. The EPA will generally not consider comments or comment contents located outside of the primary submission (
The
A. Does this action apply to me?
B. How do I obtain a copy of this document and other related information?
Table 1 of this preamble lists categories and entities that are the subject of this notice. Table 1 is not intended to be exhaustive, but rather provides a guide for readers regarding the entities likely to be affected by this proposed action. The issues described in this notice, and any changes considered in future rulemakings, would be directly applicable to sources as a federal program. Other federal, state, local and tribal government entities are not directly affected by this action.
In addition to being available in the docket, an electronic copy of this action is available on the internet.
Following publication in the
Section 111 of the CAA requires the EPA Administrator to list categories of stationary sources that, in his or her judgment, cause or contribute significantly to air pollution which may reasonably be anticipated to endanger public health or welfare. The EPA must then issue “standards of performance” for new sources in such source categories. The EPA has the authority to define the source categories, determine the pollutants for which standards should be developed, and identify within each source category the facilities for which standards of performance would be established.
Section 111(a)(1) of the CAA defines “a standard of performance” as “a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction (BSER) which (taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirement) the Administrator determines has been adequately demonstrated.” This definition makes clear that the standard of performance must be based on measures that constitute BSER, while taking into account multiple statutory factors. The standard that the EPA develops, based on the BSER, is commonly a numerical emission limit, expressed as a performance level. As provided in CAA 111(b)(5), the EPA does not prescribe a specific technology that must be used to comply with a standard of performance. Rather, sources generally can select any measure or combination of measures that will achieve the emission level of the standard. Where certain statutory criteria are met, the EPA may promulgate design, equipment, work practice or operational standards instead of a numerical standard of performance. See CAA 111(h)(1) and (2).
The Residential Wood Heaters source category is different from most NSPS source categories in that it applies to mass-produced residential consumer products. Thus, an important consideration in determining the emission limit that is achievable through the application of the BSER here is the cost to both manufacturers and consumers as well as any potential environmental impact of delaying production while wood heating devices with those systems are designed, tested, field evaluated and certified.
Section 111(b)(1)(B) of the CAA requires that the standards be effective upon promulgation of the NSPS. Given this statutory requirement, as discussed more fully in the
Residential wood heaters were originally listed under CAA section 111(b) in February 18, 1987 (see 52 FR 5065). The NSPS for wood heaters (40 CFR part 60, subpart AAA) was proposed on February 18, 1987 (see 52 FR 4994) and promulgated on February 26, 1988 (see 53 FR 5859) (1988 Wood Heater NSPS). The NSPS was amended in 1998 to address an issue related to certification testing (see 63 FR 64869).
On February 3, 2014, the EPA proposed revisions to the NSPS (see 79 FR 6330) and published notice of its final rule making revisions on March 16, 2015 (see 80 FR 13672). The final 2015 NSPS updated the 1988 Wood Heater NSPS emission limits, eliminated exemptions over a broad suite of residential wood combustion devices, and updated test methods and the certification process. The 2015 NSPS also added a new subpart (40 CFR part 60, subpart QQQQ) that covers new wood burning residential hydronic heaters and new forced-air furnaces.
For this action, the term “wood heaters” refers to all appliances covered in 40 CFR part 60, subpart AAA, and the terms “hydronic heaters” and “forced-air furnaces” refer to appliances covered in 40 CFR part 60, subpart QQQQ. Also, for this action, the term “wood heating devices” refers to all units, collectively, regulated by the 2015 NSPS (40 CFR part 60, subparts AAA and QQQQ).
In promulgating the 2015 NSPS, the EPA took a “stepped compliance approach” in which certain “Step 1”
The Step 1 standard reflected demonstrated wood heater technologies at the time. For wood heaters, the Step 1 limit was based on the Washington State standard that had been in effect since 1995 and had been met by most wood heater manufacturers. For hydronic heaters, the Step 1 emission limit was based on the 2010 Phase 2 Voluntary Hydronic Heater Program. The Step 1 standard for forced-air furnaces was what the EPA concluded would be immediately achievable based on a limited dataset (see 80 FR 13693).
For the Step 1 standards, the EPA provided a “sell-through” period of seven and a half months, until December 2015, to allow retailers additional time after the effective date of the rule to sell the non-compliant wood heaters and hydronic heaters remaining in inventory (see 80 FR 13685). Specifically, the 2015 NSPS allowed non-compliant wood heaters and hydronic heaters manufactured before May 15, 2015, to be imported and/or sold at retail through December 31, 2015 (see 40 CFR 60.532(a) and 60.5474(a)(1)).
A major component of demonstrating compliance with both the Step 1 and Step 2 standards is a certification test, using an EPA-specified test method, for a given wood heating device. Among other requirements, the emissions from the certification test cannot exceed the emission limit for the standard for which it is certifying (either Step 1 or Step 2). It is worth noting that, because these certification test methods were developed outside of the 2015 NSPS, they have their own requirements independent of the 2015 NSPS, such as fuel requirements.
Another important point is that the EPA-specified test methods may not reflect how a typical consumer uses the device. Some test methods require the use of crib wood,
The EPA has worked with a wide array of stakeholders, including but not limited to industry, states, and non-governmental organizations, in implementing the 2015 NSPS and received feedback from these stakeholders on how to improve the 2015 NSPS. Based on this feedback, the EPA is soliciting comments on the following 10 topics:
As discussed at 80 FR 13678, 13684 and 13690 in the 2015 NSPS, the EPA contemplated requiring “real world” cord wood test methods for the Step 2 standards in the final rule. However, the Agency determined that it was premature to require a cord wood based-Step 2 emission limit (except for forced-air furnaces for which CSA B415.1-10 already specified cord wood as the test fuel) because no cord wood test method for wood heaters was available at that time. Rather, the EPA based the Step 2 emission limit on crib wood test data but included a voluntary alternative cord wood compliance option and emission limit to encourage manufacturers to certify with cord wood as soon as possible to provide consumers with better information for actual in-home-use performance. Recently, the EPA approved the use of ASTM 3053-17, finalized in November 2017, through the EPA's Broadly Applicable Test Methods approval process. Broadly applicable test methods Alt-125 and Alt-127 (
As the 2015 NSPS did not include a new test method intended to provide “real world” data through cord wood compliance testing, the EPA has received many informal comments and taken part in several discussions concerning the differences between the existing compliance test methods and “real world” cord wood compliance testing. These discussions have led the EPA to review existing wood appliance test methods and conduct research into the data sets provided by those test methods. In doing so, the Agency recognizes a need to better understand what compliance test procedures are necessary in order to provide a cord wood emissions test data set that serves both the compliance test benchmark (pass/fail) and “real world” data collection to support other regulatory needs. Our review of existing test methods has focused on two distinct facets of the testing procedures: (1) Particulate collection and measurement during the testing; and (2) operation and fueling of an appliance during the testing. Each of these two pathways is currently represented in our compliance testing paradigms by a separate test methodology. For example, ASTM E2515-11 serves as the particulate collection and measurement test method for all existing NSPS compliance test requirements, but this test method is always used in conjunction with any one of several different operation and fueling protocols, such as the EPA Method 28R for crib wood fuel testing of a wood heater or the EPA Method 28WHH for crib wood fuel testing of a hydronic heater. There is inherent variability in each facet of the testing, and the overall variability of the testing result combines the variability inherent to each facet. The EPA recognizes that moving away from a crib wood fuel compliance testing paradigm to a cord wood fuel compliance paradigm involves the introduction of the additional variability inherent to cord wood fuel including the use of various species of cord wood fuel across different regions of the U.S. and in different countries where compliance testing may occur. In that light, a review of test method processes and procedures is appropriate with respect to handling this additional and unknown variability,
In addition to the lack of information surrounding the validation of these operating and fueling protocols, the Agency recognizes the need to understand the variability introduced to a compliance test protocol through the combustion of various fuel species. Beyond this, the Agency seeks comment on the need to develop a thorough understanding of appliance use and emissions from typical appliance operations such as startup, refueling (adding logs) and other common modes of operation more representative of actual in-home use than the “high burn, mid burn, and low burn” modes currently required by Method 28R and/or similar operating conditions required by the various operating and fueling protocols throughout 40 CFR part 60, subparts AAA and QQQQ. The Agency realizes that “real-world” data collection stems from an understanding of the actual in-home use of the appliance, and any compliance test paradigm relies on consistent application of appliance fueling and operation during performance tests and, while our existing compliance paradigms provide some testing consistency, the Agency would like information supporting their use or specific information as to more appropriate compliance operation and fueling protocol direction for this program.
The EPA seeks comment on whether existing operation and fueling protocols are suited to deliver an appropriate compliance test result and if existing operation and fueling protocols are suited to deliver “real world” emissions data where such data are a necessary output of this program. The EPA also seeks comment on the need to validate existing operation and fueling protocols and/or expend time and resources to develop new validated operation and fueling protocol methods in support of cord wood fuel compliance testing and providing such “real world” emissions data from those tests. Relatedly, the EPA also seeks comment with respect to developing new emission standards to correspond with new test methods, if new test method development is found to be necessary. Commenters should provide relevant information and data to support their comments.
While some manufacturers have begun manufacturing Step 2-compliant units, the EPA has learned of issues with compliance with these emission limits by the May 15, 2020, deadline. In the 2015 NSPS, the EPA concluded that the 5-year period leading up to the May 2020 Step 2 compliance date would provide manufacturers with sufficient lead time to develop, test and certify Step 2-compliant wood heating devices (see 80 FR 13676).
The Step 1 emission standards reflected demonstrated wood heater technologies at that time. Step 2 standards were deemed to be reasonable levels of emission control five years after promulgation. As a part of the 2015 rulemaking, the EPA identified the percentage of wood heaters estimated to be meeting the Step 2 standards prior to promulgation of the 2015 NSPS as 70 percent of pellet stoves and 26 percent of wood stoves. Similarly, 18 percent of hydronic heaters were meeting the Step 2 standards prior to promulgation of the 2015 NSPS, while the limited dataset for forced-air furnaces showed no models meeting the Step 2 standards prior to promulgation of the 2015 NSPS. As of March 20, 2018, there were a total of 78 (44 pellet and 34 crib/cord wood) models that when certified for the Step 1 and Step 2 standards reported emission levels that met the Step 2 standard for wood heaters (as required under 40 CFR 60.532(b) or 60.532(c)). In addition, there are nine models that met the Step 2 standard for hydronic heaters (as required under 40 CFR 60.5474(a)(2) or (b)(3)) and one model that met the Step 2 standard for forced-air furnaces (as required under 40 CFR 60.5474(a)(6)) based on the Step 2 certification process. The inventory of certified models as of March 2018 is provided in the document titled: “List of EPA certified Wood Heating Devices March 2018,” which is available in the docket and at the website
Recently, some manufacturers have indicated that they need more time to develop, test, and certify wood heating devices that meet the Step 2 standard and that the costs of Step 2 compliance are beyond what the industry can bear. As a result of this input, the EPA is soliciting comment on whether it is feasible/practicable for manufacturers to meet the Step 2 emission limits by May 15, 2020. Commenters should discuss whether the Step 2 compliance date is achievable or not and should provide relevant information and data to support their position. For example, commenters may wish to address the following questions:
1. Are there other factors that have changed or that the Agency did not consider when issuing the 2015 NSPS that have influenced whether some manufacturers are able to comply, and others are not? Why are some manufacturers able to comply with the Step 2 emission limits by May 2020 and others cannot comply by then?
2. For manufacturers expecting to achieve Step 2 emission limits by May 2020, what is the time and cost to bring
3. For manufacturers that do not expect to achieve the Step 2 emission limits by May 2020, what factors are preventing your model(s) from meeting the emission limits? Are there other factors that have changed or that the Agency did not consider when issuing the 2015 NSPS that have had an effect on meeting the May 2020 emission limits? Are there features of wood heating devices that make meeting Step 2 standards more challenging or more expensive? Does a lack of desirable consumer features lead to delays in replacing older dirty stoves or promote switching to other fuels?
The EPA is also soliciting comment on how much the compliance date should be extended, if at all. Commenters should provide relevant information and data to support any request for an extension of the compliance date. For example, commenters may wish to address the following questions:
1. What new factors resulted in the need for time beyond the five years of the 2015 NSPS? The Agency seeks comment and information explaining how cost affects meeting the Step 2 emission limits by May 2020, including why cost projections have changed since the 2015 NSPS, along with relevant data on the cost of research and development, certification testing, and bringing a model to market. Are there other cost considerations such as material costs, warranty costs, installation costs, or maintenance costs that were unexpected or different from what the Agency estimated in the 2015 NSPS? Have there been any other unforeseen impacts on costs for manufacturers due to changes in consumer preferences or attitudes towards the devices and products that would be needed to comply with Step 2? For example, would any of the new designs needed to meet the May 2020 standards impact the size of the unit, how much it would cost consumers to operate it, or change the maintenance frequency or cost?
2. If more time is needed to meet the Step 2 emission limits, the EPA seeks comment on the time and resources devoted to research and development of a Step 2 model since 2014. Commenters should include information regarding time spent on emissions testing, and the number of runs/tests passed versus the number failed. Both manufacturer-produced test data and certified laboratory test data are of interest to the EPA. The Agency is also interested in receiving information regarding emission reduction efforts and any other information outlining attempts to develop a Step 2-compliant model.
3. If more time is needed to meet the Step 2 emission limits, then how much additional time is needed? For example, the Agency solicits comments and detailed information regarding the timetable for conducting research and development, additional testing, developing saleable products, marketing, and any other relevant information and data that supports a request for a delayed compliance date.
The EPA also solicits comment on the environmental consequences and public health effects, if any, of delaying compliance.
At the time of the 2015 NSPS, the EPA expected most forced-air furnace manufacturers to transfer technology and knowledge from wood heaters and hydronic heaters to design Step 2-compliant forced-air furnaces by the 2020 compliance date; however, the EPA is only aware of one manufacturer that has received EPA certification as being Step 2 compliant, see website:
Also, since promulgating the 2015 NSPS, the EPA has received feedback from some manufacturers that complying with the Step 2 emission limit is cost prohibitive. Therefore, the EPA is soliciting comment on whether, regardless of technical feasibility concerns, it is economically feasible to comply with the Step 2 emission limit for forced-air furnaces. Commenters should explain the issues regarding costs and the feasibility/practicability for achieving the Step 2 emission limit and whether changing the Step 2 emission limit would alleviate these issues, along with data supporting the position. The EPA is also soliciting comment on the environmental and public health effects, if any, of modifying the Step 2 emission limit for forced-air furnaces.
As noted earlier, the EPA is also soliciting comment on the feasibility of the Step 2 compliance date of May 15, 2020. The EPA is soliciting comment on whether to extend the Step 2 compliance date for forced-air furnaces. Commenters should provide relevant information and data to support any request for a delayed compliance date. The EPA is also soliciting comment on the environmental and public health effects, if any, of potential extensions of the Step 2 compliance date for forced-air furnaces.
For the 2015 NSPS, the EPA set the Step 2 emission limits based on its determination of the BSER, which takes into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirements (See 80 FR 13687). Since promulgation, however, the EPA has received comments from industry representatives that the cost of compliance with Step 2 emission limits for hydronic heaters is exceeding the EPA's original estimation. The EPA
As of March 20, 2018, there are nine models that meet the Step 2 standard for hydronic heaters (as required under 40 CFR 60.5474(a)(2) and 60.5474(b)(2) or (b)(3)), and one model that meets the Step 2 standard for forced-air furnaces (as required under 40 CFR 60.5474(a)(6) and 60.5474(b)(6)) based on the Step 2 certification process. These models are listed in the document titled “List of EPA certified Wood Heating Devices March 2018,” which is in the docket at EPA-HQ-OAR-2018-0196. Also see link
The EPA is requesting comment regarding these models and models that have not met the Step 2 standard for hydronic heaters and what they demonstrate about achieving the standard at a reasonable cost. Specifically, for manufacturers expecting to be unable to design a hydronic heater to meet the Step 2 standard, the EPA is interested in whether the Step 2 standard applicable to your device is achievable at a reasonable cost by the May 2020 Step 2 compliance date. The Agency is also interested in receiving information regarding efforts undertaken to design hydronic heaters to meet the applicable Step 2 standard, including cost, and if one or more models are expected to be ready for certification by the May 2020 Step 2 compliance date, when you expect to submit your application(s) for certification to the EPA.
As noted earlier, the EPA is also soliciting comment on the feasibility of the Step 2 compliance date of May 15, 2020. The EPA is soliciting comment on whether to extend the Step 2 compliance date for hydronic heaters. Commenters should provide relevant information and data to support any request for a delayed compliance date. The EPA is also soliciting comment on the environmental and public health effects, if any, of potential extensions of the Step 2 compliance date for hydronic heaters.
For hydronic heaters, the 2015 NSPS retained the proposed Step 1 emission cap of 18 grams per hour (g/hr) for all burn rates. For forced-air furnaces, the 2015 NSPS does not require an emission cap for any burn rates for Step 1. The Step 2 requirements for hydronic heaters did not retain the g/hr cap. Instead, to balance industry's concern with the g/hr cap with concerns about very large emissions at individual burn rates, the Step 2 emission standards for hydronic heaters and forced-air furnaces require the devices to meet the emission limits for crib wood and cord wood, at each individual burn rate (see 80 CFR 13684 and 13690).
The emission limits for hydronic heaters reflect the data available for the 2015 NSPS rulemaking, when 18 percent of hydronic heaters in the EPA's Voluntary Hydronic Heater Program already met the Step 2 standard. For forced-air furnaces, the EPA determined that research and development would be needed in order to meet the Step 2 limits.
In the 2014 NSPS proposal, the EPA proposed a weighted average approach for compliance. But, because of the large emissions that could potentially result from individual burn rates, along with the proposed weighted average approach, the EPA also proposed a g/hr cap for the certification test. Comments received from industry representatives in 2014 suggested that the g/hr emission cap would be too difficult to meet. To accommodate these concerns, and after considering other public comments, the EPA finalized the emission standards without a g/hr cap but required the devices to meet the emission limit at each individual burn rate to prevent large emission discharges.
Based on concerns raised since promulgating the 2015 NSPS, the EPA is soliciting comment on determining compliance with weighted averages instead of individual burn rates. Commenters should describe the relevant issues pertaining to compliance with the Step 2 emission limit with individual burn rates versus a weighted average and also include data to support their position. Commenters should also discuss and support with data how a weighted average would impact emissions and compliance costs.
As of March 20, 2018, there were a total of 78 models that when certified for the Step 1 and Step 2 standards reported emission levels that meet the Step 2 standard for wood heaters (as required under 40 CFR 60.532(b) or 60.532(c)). These models are listed in the document titled “List of EPA certified Wood Heating Devices March 2018,” which is in the docket at EPA-HQ-OAR-2018-0196. Also see link
The EPA is requesting comment on all aspects of the costs associated with the Step 2 standards for wood heaters compared to the costs estimated by the EPA in the 2015 NSPS and whether Step 2 is achievable at a reasonable cost. The EPA requests comment on the potential cost difference for consumers to operate different types of wood heaters and, in particular, the cost of operating a pellet wood heater compared to the cost of operating a cord/crib wood heater.
If you are a manufacturer that has been unable to design a wood heater to
Additionally, the EPA has received informal comments from several parties regarding emissions testing variability and, along with those discussions, issues have been raised regarding the units or format of the Step 2 emission limit in 40 CFR 60, subpart AAA. One issue raised is that the existing emission limit in units of grams per hour (g/hr) increases variability in that the duration of the performance test directly impacts the g/hr result, thus incentivizing longer test periods. The EPA is soliciting comments on this form of the standard (g/hr) and whether it is appropriate for the purpose of defining the compliance limit and, if not, what form of a standard would be more appropriate and reasons supporting those positions. Other possible unit options for the emission limit could be g/kg or lb/mmBtu. Commenters are asked to provide relevant information and data (where available) to support their comments.
The EPA seeks comment with respect to the EPA compliance audit test provisions in the current rules (2015 NSPS), found at 40 CFR 60.533(n) (80 FR 13708) for wood heaters and at 40 CFR 60.5475(n) (80 FR 13721) for hydronic heaters and forced-air furnaces. Specifically, the Agency is seeking comment on whether revisions to the current compliance audit test provisions are necessary to ensure compliance. First, the Agency is seeking comment on 40 CFR 60.533 (n)(2)(i) and 40 CFR 60.5475(n)(2)(i) regarding if it is appropriate for the EPA to select a lab to perform the audit test from any approved test laboratory, and whether the EPA should also consider using a federal laboratory. Alternatively, the EPA seeks comment on whether audit tests should be performed by the same lab that did the certification test for a given wood heater appliance. If the audit test should be done by the certifying lab, the EPA seeks comment on how to handle situations where the original certifying lab is out of business or unable to accommodate the audit test. Commenters should include any relevant information and data that support their views and comments.
Second, as some variability is inherent in emissions testing, the Agency is seeking comment (and information) on whether and, if so, to what degree, the EPA should consider this variability when assessing the result of an audit test to determine if a wood burning appliance successfully passed the test, or not. Please provide relevant information and data to support your comments.
Third, the Agency is seeking comment on establishing (as well as how best to manage the regulatory cost of), through NSPS regulation, a program using ASTM E691-99 “Standard Practice for Conducting an Interlaboratory Study to Determine the Precision of a Test Method.” The intent of such a program would be to develop and establish wood heating device audit test acceptability criteria, and to provide data useful to the EPA in both refining wood heating device test methodology development and in aiding the regulatory data collection with respect to wood heater, forced-air furnace, and hydronic heater emissions and standards setting processes. The EPA is also requesting comment on the cost or any concerns with specifying a specific certification lab and any discussion of the use of a federal versus a private lab. For the 2015 NSPS, the EPA estimated a cost of $63,564 for each compliance audit conducted for each hydronic heater and forced-air furnace over the period of 2015 to 2017, an estimate documented in the Supporting Statement for the standard.
In the 2015 NSPS, the EPA included a new feature to improve the process by which manufacturers of wood heating devices apply for certification (see 80 FR 13684, and the ISO-accredited third-party review at 80 FR 13706 and 80 FR 13719). The ISO-accredited third-party review was included in the 2015 NSPS to streamline and speed up the review process.
The EPA is seeking comment on whether third-party review has streamlined the process for manufacturers to submit their certification applications and/or what issues and problems stakeholders have experienced with third-party review process. The EPA also solicits suggestions for improving the third-party review and reducing regulatory burden, including what specific rule changes would be appropriate, and why. Commenters should provide relevant information and data to support their comments and suggestions.
The current process allows the EPA-approved certifying lab to also act as the third-party reviewer for a given appliance. Some external stakeholders have raised concerns about allowing a lab to act as both the certifying test lab and third-party reviewer for a given certification test. The EPA solicits comments as to whether an EPA-approved lab should be allowed to act
The EPA seeks comment on establishing electronic reporting for submitting the non-confidential business information (CBI) certification application, including the compliance test data, rather than via hard copy, to relieve manufacturer burden and enhance efficiencies. One possibility is the EPA's Electronic Reporting Tool (ERT). The ERT is a Microsoft Access® application that generates electronic versions of source test reports. Information on the ERT can be found at
The 2015 NSPS requires owners or operators to operate wood heating devices consistent with the owner's manual (see 40 CFR 60.532(f)(13) and (g) and 60.5474(f)(13) and (g)). The 2015 NSPS also requires manufacturers to provide an owner's manual that clearly states that operation in a manner inconsistent with the manual, such as burning prohibited material or pellets that do not meet the minimum requirements of the 2015 Rule, would void the warranty (see 80 FR 13751, appendix I to Part 60). The cost of this requirement to provide an owner's manual is an average of $3,750 per hydronic heater or forced-air furnace model over the time period of 2015 to 2017, according to the Supporting Statement for the 2015 NSPS.
Under Executive Order 12866, entitled
Environmental protection, Administrative practice and procedure.
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Proposed rule; request for comments.
This action proposes an in-season adjustment to the Atlantic herring specifications and sub-annual catch limits for 2019. These adjustments are necessary to reduce 2018 herring catch limits that would otherwise remain in effect for 2019. This action is intended to prevent overfishing of the herring resource while minimizing negative social and economic impacts of reduced catch limits.
Public comments must be received by December 31, 2018.
You may submit comments on this document, identified by NOAA-NMFS-2018-0131, by either of the following methods:
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Copies of this action, including the Supplemental Environmental Assessment and the Regulatory Impact Review/Initial Regulatory Flexibility Analysis (SEA/RIR/IRFA) prepared in support of this action, are available from Thomas A. Nies, Executive Director, New England Fishery Management Council, 50 Water Street, Mill 2, Newburyport, MA 01950. The supporting documents are also accessible via the internet at:
Carrie Nordeen, Fishery Policy Analyst, 978-281-9272.
We implemented 2016-2018 Atlantic herring specifications on November 1, 2016 (81 FR 75731), as recommended by the New England Fishery Management Council. The specifications included an overfishing limit (OFL) of 111,000 mt for 2018. The acceptable biological catch (ABC) for 2018 was also set at 111,000 mt. The ABC was based on the Council's interim control rule, set equal to the OFL with at least a 50-percent probability of preventing overfishing, and consistent with the Council's Scientific and Statistical Committee's (SSC) advice. The annual catch limit (ACL) for 2018 was 104,800 mt.
In June 2018, a new Northeast Regional Stock Assessment Workshop (SAW) for herring, reviewed by the Stock Assessment Review Committee (SARC), was completed. The assessment concluded that although herring was not overfished and overfishing was not occurring in 2017, poor recruitment would likely result in a substantial decline in herring biomass. The stock assessment estimated that recruitment had been at historic lows during the most recent 5 years (2013-2017). The assessment projected that biomass could increase, after reaching a low in 2019, if recruitment returns to average levels, but that herring catch would need to be reduced, starting in 2018, to prevent overfishing and lower the risk of the stock becoming overfished. The final assessment summary report is available on the Northeast Fisheries Science Center (NEFSC) website (
The Atlantic Herring Fishery Management Plan (FMP) allows us to make in-season adjustments to the herring specifications and sub-ACLs, after consultation with the Council, consistent with the Herring FMP's objectives and other FMP provisions. In August 2018, at the request of the Council, we used an in-season adjustment to reduce the 2018 ACL from 104,800 mt to 49,900 mt to reduce the risk of overfishing (83 FR 42450, August 22, 2018). This ensured at least a 50-percent probability of preventing overfishing in 2018. However, assessment projections indicated that catch would need to be further reduced in 2019 to prevent overfishing and lower the risk of the stock becoming overfished.
By regulation, herring catch limits for 2018, as modified by the 2018 in-season adjustment, will remain in effect until replaced. At its September 2018 meeting, the Council adopted a new ABC control rule for the herring fishery developed in Amendment 8 to the Herring FMP and recommended we use an in-season adjustment to reduce 2018 herring catch limits for 2019 while it develops new specifications starting in 2020. The Council was scheduled to begin developing the 2019-2021 herring specifications at its September meeting and take final action on the new specifications at its December 2018 meeting. The Council planned for us to implement the new specifications during 2019, based on the new ABC control rule it adopted in Amendment 8. However, because of the time required for the Council to prepare the necessary documentation and for us to review and approve the control rule in Amendment 8 and implement final approved measures, the new specifications would not have been effective early enough to prevent catch from exceeding the lower catch limits required to prevent overfishing in 2019.
We are proposing to adjust the current herring specifications and sub-ACLs for 2019, consistent with the Herring FMP's objectives of preventing overfishing while maximizing social and economic benefits. We will strive to publish the final rule as close as possible to the start of the new fishing year in January 2019. The 2019 specifications and sub-ACLs proposed in this action, as well as the Council's recommendations for 2019, are shown in Table 1.
We consulted with the Council on potential 2019 specifications during the Council's September 2018 meeting. At that meeting, the Council recommended that we:
• Use the most recent assessment and projections to develop the 2019 specifications.
• Use the ABC control rule approved by the Council in Amendment 8.
• Maintain the sub-annual catch limits for herring management areas based on the proportions allocated in the 2016-2018 specifications package.
○ Area 1A: 28.9 percent.
○ Area 1B: 4.3 percent.
○ Area 2: 27.8 percent.
○ Area 3: 39 percent.
• Proportionally reduce the fixed gear set-aside allocation which is based on a small weir fishery west of Cutler, ME.
• Set the border transfer (which allows U.S. vessels to transfer herring to Canadian vessels to be processed as food) at 0 mt.
Based on the best available science, we are proposing to reduce the OFL for 2019 to 30,688 mt. The Herring FMP specifies that the OFL must be equal to catch resulting from applying the maximum fishing mortality threshold to a current or projected estimate of stock size. When the stock is not overfished and overfishing is not occurring, this is usually the fishing rate supporting maximum sustainable yield. Catch that exceeds this amount would result in overfishing. An OFL of 30,388 mt would ensure at least a 50-percent probability of preventing overfishing in 2019. This OFL is based on projections by the SAW/SARC, as updated by NOAA's NEFSC staff using 2018 catch, and was recommended by both the SSC and the Council.
The Herring FMP specifies that the ABC may be equal to or less than the OFL depending on scientific uncertainty concerning stock size estimates, variability around recruitment estimates, and consideration of ecosystem issues. For the 2019 ABC reduction, we are proposing to continue applying the interim control rule that was used to set ABC in recent specifications (2016-2018). Our proposed ABC would have a 50-percent probability of preventing overfishing in 2019 and would be set equal to the OFL. In contrast, the SSC and Council recommended reducing the ABC for 2019 based on the new control rule the Council adopted in Amendment 8 that accounts for herring's role in the ecosystem. Our proposed ABC is 30,688 mt and the SSC/Council recommended ABC is 21,266 mt.
Our proposed ABC prevents overfishing and accounts for scientific uncertainty in the short-term until we are able to consider the Council's recommendation for addressing scientific uncertainty in a long-term control rule in Amendment 8. The approach to continue using the interim control rule for 2019 is independent of and involves different considerations than our consideration of the Council's recommended control rule in Amendment 8. We expect the Council to submit Amendment 8 to us for review and approval in late 2018. Additionally, while the 2018 assessment showed that the probability of the stock becoming overfished has increased since the last stock assessment, our proposed ABC is intended to reduce the risk of the stock becoming overfished.
We are proposing to maintain the current management uncertainty buffer (6,200 mt), as recommended by the Council, so the resulting ACL would be 24,488 mt. This ACL is almost 10,000 mt higher than the ACL that would result from the Council-recommended ABC (15,065 mt). Allowing this additional harvest helps to achieve optimum yield (OY) by accounting for social, economic, and ecological factors, specifically the need to conserve herring biomass while mitigating severe economic hardship on the herring industry. Because the majority of herring catch is bait for the lobster fishery, we expect this additional harvest to help minimize the negative economic impacts associated with bait shortages and higher bait prices on the lobster fishery. The management uncertainty buffer, in conjunction with low fishery closure thresholds (95 percent of the ACL and 92 percent of a sub-ACL), has prevented herring catch from ever exceeding the ABC, which further minimizes the probability of overfishing.
We are proposing to maintain the sub-ACL allocations used in the recent specifications (2016-2018) for 2019. This means that 28.9 percent of the ACL would be allocated to Area 1A, 4.3 percent allocated to Area 1B, 27.8 percent allocated to Area 2, and 39 percent allocated to Area 3. These sub-ACL allocations were recommended by the Council for past specifications, as well as for 2019, because they do not substantially impact one stock component (inshore versus offshore) more than the other while maximizing opportunities for the fishery to achieve OY. Adjusting the sub-ACL allocations for the herring management area may have impacts beyond those we considered in this action. For that reason, we are seeking public comment on the proposed sub-ACL allocation versus other possible sub-ACL allocations that would be consistent with the Herring FMP's objectives.
Based on the Council's recommendations, we are also proposing to reduce border transfer to 0 mt and reduce the fixed gear set-aside to 64 mt for 2019. Border transfer is a processing quota and is the maximum amount of herring that can be transshipped to Canada via Canadian carrier vessels for human consumption. Border transfer has been under-utilized in recent years, and there has been no border transfer since 2015. Reducing the border transfer to 0 mt for 2019 would
The Herring FMP requires we adjust for catch overages and underages in a subsequent year. Total catch in 2017 did not reach or exceed any of the management area sub-ACLs, so typically we would carryover those underages, or a portion of the underages, to increase sub-ACLs in 2019. However, to help ensure catch does not exceed the ABC/OFL in 2019 and to help prevent overfishing, we are proposing to not increase any sub-ACLs in 2019 based on carryover from underages in 2017.
All other herring specifications for 2019, including the river herring and shad catch caps, would remain unchanged from 2018. While our proposed adjustments to the herring specifications in 2019 are generally consistent with the Council's recommendations, our proposed ABC and the resulting ACL and sub-ACLs are not as conservative as those recommended by the Council. However, the specifications proposed in this action are expected to prevent overfishing and reduce the risk of the stock becoming overfished. We expect that implementing an ABC lower than the 30,688 mt ABC proposed in this action would not increase the probability of preventing overfishing or the stock from becoming overfished enough to outweigh the increased financial hardship on the herring and lobster fisheries. If herring specifications are too low, they may preclude a viable fishery in 2019 and some businesses may not be sustainable and may fail. Our proposed specifications for 2019 are intended to balance preventing overfishing and maintaining a viable herring fishery to achieve OY, while we consider approval and implementation of a long-term ABC control rule in Amendment 8 to the Herring FMP.
We are soliciting public comment on the Herring Research Set-Aside (RSA) program awards for 2019-2021. The Herring RSA Program allocates up to 3 percent of each management area sub-ACL annually, as established by the Council in Amendment 1 to the Herring FMP (72 FR 11251, March 12, 2007). Exempted Fishing Permits (EFPs) exempting vessels from certain herring management regulations have been routinely approved since 2007 to support compensation fishing that funds herring-related research consistent with RSA priorities identified by the Council. By continuing to issue these EFPs we would facilitate compensation fishing in support of the projects funded under the 2019 Herring RSA Program. Herring RSA proposals for 2019 are currently under review with the NEFSC, with selections expected in late November or early December of this year. RSA compensation fishing may be allowed as early as January 2019.
Consistent with previous herring RSA compensation fishing EFPs, vessels would be authorized to harvest herring RSA after a herring management area sub-ACL had been caught and the directed herring fishery is limited to a 2,000 lb (907.2 kg) limit of herring per day/trip. It would also allow vessels to harvest RSA during times when the sub-ACLs were not seasonally available for harvest, specifically during January through May in Area 1A and January through April in Area 1B. RSA grant recipients would be required to meet all EFP application requirements prior to the issuance of the EFPs.
If approved, the EFP applicants may request minor modifications and extensions to the EFP throughout the year. EFP modifications and extensions may be issued without further notice if they are deemed essential to facilitate completion of the proposed research and have minimal impacts that do not change the scope of the initially approved EFP request. Any fishing activity conducted outside the scope of the exempted fishing activity would be prohibited.
The NMFS Assistant Administrator has determined that this proposed rule is consistent with the Herring FMP, national standards and other provisions of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act), and other applicable law.
This proposed rule is exempt from review under Executive Order (E.O.) 12866 because this action contains no implementing regulations.
NMFS prepared an Initial Regulatory Flexibility Analysis (IRFA) for this proposed rule, as required by section 603 of the Regulatory Flexibility Act (RFA), 5 U.S.C. 603. The IRFA describes the economic impact that this proposed rule would have on small entities, including small businesses, and also determines ways to minimize these impacts. The IRFA includes this section of the preamble to this rule and analyses contained in the SEA/RIR/IRFA for this action. A copy of the full analysis is available from the Council (see
This action proposes in-season adjustments to the herring specifications and sub-ACLs for 2019. A complete description of the reasons why this action is being considered, and the objectives of and legal basis for this action, are contained in the preamble to this proposed rule and are not repeated here.
The RFA recognizes three kinds of small entities: Small businesses, small organizations, and small governmental jurisdictions. For purposes of the RFA only, the small business criteria in the finfish fishing industry (NAICS 114111) is a firm that is independently owned and operated and not dominant in its field of operation, with gross annual receipts of $11 million or less. Small organizations and small governmental jurisdictions are not directly regulated by this action.
There are five permit categories in the herring fishery: (1) Limited access permit for all management areas (Category A); (2) limited access permit for access to Areas 2 and 3 only (Category B); (3) limited access incidental catch permit for 25 mt per trip (Category C); (4) an open access incidental catch permit for 3 mt per trip (Category D); and (5) an open access permit for limited access mackerel permit holders authorizing up to 9 mt per trip (Category E) in Areas 2 and 3.
In 2017 there were a total of 1,566 permitted herring vessels. Of those, 1,434 were exclusively Category D vessels. Of the remaining 132 permitted herring vessels, 22 belonged to large businesses. Every Category B permit was also authorized for Category C, and all but one Category E permitted vessel also carried a Category D authorization. We included Category E vessels that also have Category D authorization in the analysis. Table 2 presents the counts of permitted vessels by category along with their affiliated entity's small or large business status (the status of the company that holds the herring permit).
Table 3 refines the counts from Table 2 to include only those vessels that had revenue from herring at least once in the 3-year period of analysis. In 2017, there were 4 large businesses and 69 small that had revenue from herring.
Finally, Table 4 defines the small entities affected by this proposed action—small businesses with a Herring Category A, B, C, or E permit and revenue from herring during the 2015-2017 period of analysis. There were 37, 31, and 38 such vessels in 2015, 2016, and 2017 respectively.
To better understand the impact of this action on the affected small businesses, we compared the revenue from herring fishing to total revenue brought in by the entity (business) that holds the herring permit. The 17 to 18 small entities with Category A permits show the most dependence on the herring fishery, with 49.75 percent to 62.03 percent of their revenue coming from herring landings. The 4 small Category E permitted entities have the least dependence on the herring fishery with less than one percent of total entity revenue coming from the herring fishery.
This proposed rule does not introduce any new reporting, recordkeeping, or other compliance requirements.
This action does not duplicate, overlap, or conflict with any other Federal rules.
We are proposing to adjust the current herring specifications and sub-ACLs for 2019, consistent with the Herring FMP's objectives of preventing overfishing while maximizing social and economic benefits. Non-preferred alternatives would likely not accomplish these objectives for this action as well as the proposed action.
Alternative 1 would not achieve the stated objectives of the action because it has a less than 50-percent probability of preventing overfishing in 2019 and, thus, is inconsistent the Magnuson-Stevens Act. Additionally, Alternative 1 would negatively impact the herring stock by increasing the probability that it would become overfished. The primary difference between Alternative 2 (Council-recommended) and Alternative 3 (proposed action) are the proposed specifications for ABC and the resulting ACL for 2019. The ABC associated with the proposed action (30,688 mt) is higher than the ABC associated with Alternative 2 (21,266 mt). After applying the management uncertainty buffer (6,200 mt) to the ABC, the resulting ACL associated with the proposed action (24,488 mt) is almost 10,000 mt higher than the ACL associated with the Alternative 2 (15,065 mt).
We expect that implementing an ABC lower than 30,688 mt in 2019 would not increase the probability of preventing overfishing or the stock from becoming overfished enough to outweigh the increased financial hardship on the herring and lobster fisheries. If the ACL is too low, it may preclude a viable fishery in 2019 and some businesses may not be sustainable and may fail. The proposed ABC for 2019 is intended to balance preventing overfishing and maintaining a viable herring fishery to achieve OY, while we consider approval and implementation of a long-term ABC control rule in Amendment 8 the Herring FMP.
16 U.S.C. 1801
The Department of Agriculture has submitted the following information collection requirement(s) to OMB for review and clearance under the Paperwork Reduction Act of 1995, Public Law 104-13. Comments are requested regarding (1) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) the accuracy of the agency's estimate of burden including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology.
Comments regarding this information collection received by December 31, 2018 will be considered. Written comments should be addressed to: Desk Officer for Agriculture, Office of Information and Regulatory Affairs, Office of Management and Budget (OMB), New Executive Office Building, 725 17th Street NW, Washington, DC 20502. Commenters are encouraged to submit their comments to OMB via email to:
An agency may not conduct or sponsor a collection of information unless the collection of information displays a currently valid OMB control number and the agency informs potential persons who are to respond to the collection of information that such persons are not required to respond to the collection of information unless it displays a currently valid OMB control number.
The Department of Agriculture has submitted the following information collection requirement(s) to OMB for review and clearance under the Paperwork Reduction Act of 1995, Public Law 104-13. Comments are requested regarding (1) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) the accuracy of the agency's estimate of burden including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology.
Comments regarding this information collection received by December 31, 2018 will be considered. Written comments should be addressed to: Desk Officer for Agriculture, Office of Information and Regulatory Affairs, Office of Management and Budget (OMB), New Executive Office Building, 725—17th Street NW, Washington, DC 20502. Commenters are encouraged to submit their comments to OMB via email to:
An agency may not conduct or sponsor a collection of information unless the collection of information displays a currently valid OMB control number and the agency informs potential persons who are to respond to the collection of information that such persons are not required to respond to the collection of information unless it displays a currently valid OMB control number.
Animal and Plant Health Inspection Service, USDA.
Notice.
This notice advises the public of the Animal and Plant Health Inspection Service's record of decision for the final environmental impact statement titled “Cattle Fever Tick Eradication Program—Tick Control Barrier: Maverick, Starr, Webb, and Zapata Counties, Texas.”
An official of the Animal and Plant Health Inspection Service-Veterinary Services signed the record of decision on July 12, 2018.
You may read the final environmental impact statement and record of decision in our reading room. The reading room is located in room 1141 of the USDA South Building, 14th Street and Independence Avenue SW, Washington, DC. Normal reading room hours are 8 a.m. to 4:30 p.m., Monday through Friday, except holidays. To be sure someone is there to help you, please call (202) 799-7039 before coming. The record of decision, final environmental impact statement, and supporting information may also be viewed at
For questions related to the Cattle Fever Tick Eradication Program, contact Dr. Denise Bonilla, Entomologist, Cattle Fever Tick Eradication Program Manager, Surveillance, Preparedness and Response Services, VS, APHIS, Natural Resources Research Center, Building B, 2150 Centre Avenue, Fort Collins, CO 80526; (970) 494-7317. For questions related to the environmental impact statement, contact Ms. Michelle Gray, Environmental Protection Specialist, Environmental and Risk Analysis Services, PPD, APHIS, 4700 River Road Unit 149, Riverdale, MD 20737; (301) 851-3146.
On February 15, 2011, we published in the
On July 24, 2013, we published a notice of availability in the
The National Environmental Policy Act (NEPA) implementing regulations in 40 CFR 1506.10 require a minimum 30-day waiting period between the time a final EIS is published and the time an agency makes a decision on an action covered by the EIS. APHIS has reviewed the final EIS and comments received during the 30-day waiting period and has concluded that the final EIS fully analyzes the issues covered by the draft EIS and addresses the comments and suggestions submitted by commenters. This notice advises the public that the waiting period has elapsed, and APHIS has issued a record of decision (ROD) to implement the preferred alternative described in the final EIS.
The ROD has been prepared in accordance with: (1) NEPA, as amended (42 U.S.C. 4321
United States Commission on Civil Rights.
Notice of Commission business meeting.
Friday, December 7, 2018, at 10 a.m. EST.
Place: National Place Building, 1331 Pennsylvania Ave. NW, 11th Floor, Suite 1150, Washington, DC 20245 (entrance on F Street NW).
Brian Walch; phone (202) 376-8371; TTY: (202) 376-8116;
This business meeting is open to the public. Public call-in (listen-only) information: Toll-free: 1-800-682-9934, Conference ID 7671081. Stay abreast of updates at
U.S. Commission on Civil Rights.
Announcement of meeting.
Notice is hereby given, pursuant to the provisions of the rules and regulations of the U.S. Commission on Civil Rights (Commission) and the Federal Advisory Committee Act that the Michigan Advisory Committee (Committee) will hold a meeting on Friday, December 14, 2018, at 12:00 p.m. EST the purpose of the meeting is to continue discussing details for a 2019 briefing on voting rights.
The meeting will be held on Friday, December 14, 2018, at 12:00 p.m. EST.
Public Call Information: Dial: 877-260-1479; Conference ID: 3377560.
Ana Victoria Fortes, DFO, at
Members of the public can listen to the discussion. This meeting is available to the public through the above toll-free call-in number. Any interested member of the public may call this number and listen to the meeting. An open comment period will be provided to allow members of the public to make a statement as time allows. The conference call operator will ask callers to identify themselves, the organization they are affiliated with (if any), and an email address prior to placing callers into the conference room. Callers can expect to incur regular charges for calls they initiate over wireless lines, according to their wireless plan. The Commission will not refund any incurred charges. Callers will incur no charge for calls they initiate over land-line connections to the toll-free telephone number. Persons with hearing impairments may also follow the proceedings by first calling the Federal Relay Service at 1-800-877-8339 and providing the Service with the conference call number and conference ID number.
Members of the public are also entitled to submit written comments; the comments must be received in the regional office within 30 days following the meeting. Written comments may be mailed to the Regional Programs Unit Office, U.S. Commission on Civil Rights, 230 S. Dearborn St., Suite 2120, Chicago, IL 60604. They may also be faxed to the Commission at (312) 353-8324, or emailed to Carolyn Allen at
Records generated from this meeting may be inspected and reproduced at the Regional Programs Office, as they become available, both before and after the meeting. Records of the meeting will be available via
U.S. Commission on Civil Rights.
Announcement of meeting.
Notice is hereby given, pursuant to the provisions of the rules and regulations of the U.S. Commission on Civil Rights (Commission) and the Federal Advisory Committee Act (FACA) that the meeting of the Wyoming Advisory Committee (Committee) to the Commission will be held at 1:00 p.m. (Mountain Time) Wednesday, December 12, 2018. The purpose of this meeting is for the Committee to discuss project topics and receive information on USCCR project process.
The meeting will be held on Wednesday, December 12, 2018 at 1:00 p.m. MT.
Ana Victoria Fortes (DFO) at
This meeting is available to the public through the following toll-free call-in number: 877-260-1479, conference ID number: 2208701. Any interested member of the public may call this number and listen to the meeting. Callers can expect to incur charges for calls they initiate over wireless lines, and the Commission will not refund any incurred charges. Callers will incur no charge for calls they initiate over land-line connections to the toll-free telephone number. Persons with hearing impairments may also follow the proceedings by first calling the Federal Relay Service at 1-800-877-8339 and providing the Service with the conference call number and conference ID number.
Members of the public are entitled to make comments during the open period at the end of the meeting. Members of the public may also submit written comments; the comments must be received in the Regional Programs Unit within 30 days following the meeting. Written comments may be mailed to the Western Regional Office, U.S. Commission on Civil Rights, 300 North Los Angeles Street, Suite 2010, Los Angeles, CA 90012. They may be faxed to the Commission at (213) 894-0508, or emailed Ana Victoria Fortes at
Records and documents discussed during the meeting will be available for public viewing prior to and after the meetings at
Please click on the “Meeting Details” and “Documents” links. Records generated from these meetings may also be inspected and reproduced at the Regional Programs Unit, as they become available, both before and after the meetings. Persons interested in the work of this Committee are directed to the Commission's website,
Enforcement and Compliance, International Trade Administration, Department of Commerce.
As a result of the determinations by the Department of Commerce (Commerce) and the International Trade Commission (ITC) that revocation of the antidumping duty (AD) order on xanthan gum from the People's Republic of China (China) would likely lead to a continuation or recurrence of dumping and material injury to an industry in the United States, Commerce is publishing a notice of continuation of the AD duty order.
Applicable November 30, 2018.
Magd Zalok or Howard Smith, AD/CVD Operations, Office IV, Enforcement and Compliance, International Trade Administration, U.S. Department of Commerce, 1401 Constitution Avenue NW, Washington, DC 20230; telephone: (202) 482-4162 or (202) 482-5193, respectively.
On July 19, 2013, Commerce published in the
The merchandise covered by the scope of the
Merchandise covered by the scope of the
As a result of the determinations by Commerce and the ITC that revocation of the
This five-year sunset review and this notice are in accordance with section 751(c) and 751(d)(2) of the Act and published pursuant to section 777(i)(1) of the Act and 19 CFR 351.218(f)(4).
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice; request for comments.
NMFS announces the receipt of an exempted fishing permit application titled, “
Comments must be received no later than 5 p.m., local time on December 17, 2018.
You may submit comments on this document, identified by NOAA-NMFS-2018-0112, by any of the following methods:
•
•
Lynn Massey, West Coast Region, NMFS, at (562) 436-2462,
This action is authorized by the Pacific Coast Groundfish Fishery Management Plan (FMP) and implementing regulations at 50 CFR 600.745, which allow NMFS Regional Administrators to authorize exempted fishing permits (EFPs) to test fishing activities that would otherwise be prohibited.
In 2017, NMFS permitted 32 vessels to fish under the 2017 Trawl Gear EFP. The EFP exempted limited entry bottom and midwater trawl vessels from the minimum mesh size requirement, and exempted limited entry bottom trawl vessels from the requirement to use selective flatfish trawl gear shoreward of the Trawl Rockfish Conservation Area (RCA) north of 42° North latitude (N lat). The purpose of this EFP was to collect information on potential impacts to prohibited and protected species from modifying or eliminating certain gear and area regulations by allowing participants to configure their gear to re-establish a targeted rockfish fishery for widow, yellowtail, and chilipepper rockfish. From March 2017 to December 2017, a total of 11 limited entry groundfish bottom trawl vessels went on 63 EFP trips and landed 1,355 metric tons (mt) of groundfish, totaling $1,613,178 in revenue. Prohibited species bycatch included five Chinook salmon and no sturgeon.
To continue collecting information on the impacts of modifying or eliminating gear and area regulations, the Pacific Fishery Management Council (Council) recommended and NMFS issued, a 2018 Trawl Gear EFP that expanded on the 2017 Trawl Gear EFP. As with the 2017 EFP, the 2018 EFP was intended to collect data on if and how the removal of certain gear, time, and area restrictions for the Shorebased Individual Fishing Quota (IFQ) Program may impact the nature and extent of prohibited species bycatch. In addition to the exemptions provided by the 2017 Trawl Gear EFP (
• Fishing with midwater groundfish trawl gear north of 40°10′ N lat. in all areas (
• Fishing with midwater groundfish trawl gear south of 40°10′ N lat. within the boundaries of the Trawl RCA;
• Bringing a new haul onboard before a previous haul is stowed; and
• Carrying and fishing more than one type of groundfish trawl gear (midwater and bottom trawl gear) on the same trip.
At the June 2018 Council meeting, the 2017 and 2018 Trawl Gear EFP applicants submitted a modified EFP application titled, “
• The requirement to use selective flatfish trawl gear, and the prohibition on using small footrope trawl gear, other than selective flatfish trawl gear, shoreward of the Trawl RCA between 42° N lat. and 40°10′ N lat.;
• The prohibition on fishing with midwater groundfish trawl gear north of 40°10′ N lat. in all areas (
• The prohibition on fishing with midwater groundfish trawl gear south of 40°10′ N lat. within the boundaries of the Trawl RCA; and
• The prohibition on retaining certain prohibited species.
If NMFS approves this EFP, vessels fishing on an EFP trip with limited entry bottom trawl gear would be permitted to use any small footrope gear that meets the definition in regulations at § 660.11 shoreward of the Trawl RCA and between 42° N lat. and 40°10′ N lat. Vessels fishing on an EFP trip with limited entry midwater trawl gear would be permitted to fish within all areas north of 40°10′ N lat. and within the boundaries and seaward of the Trawl RCA south of 40°10′ N lat. Midwater trawling will still be prohibited shoreward of the Trawl RCA south of 40°10′ N lat. Participating vessels would not be constrained to the Pacific whiting primary season dates in existing groundfish regulations (see CFR 660.131). Participating vessels would be required to carry observers or use a NMFS-approved electronic monitoring system on 100 percent of trips, as is currently required in the IFQ program. Participating vessels would also be required to retain all salmon (excluding salmon already sampled by the West Coast Groundfish Observer (WCGOP) program) until offloading.
A goal of this EFP is to collect information on the effects of lifting the restrictions described above on bycatch, including bycatch of Endangered Species Act (ESA)-listed species. Previous analyses suggest that bycatch rates of ESA-listed salmon and green sturgeon could increase as a result of the increased and changes in gear configurations resulting from this EFP. However, because a targeted fishery for chilipepper, widow, and yellowtail rockfish has not existed in more than a decade, and because the current groundfish trawl fishery has changed considerably in recent years, available data may have limited utility for predicting current impacts to protected and prohibited species in fisheries conducted with the exemptions that would be allowed under the EFP. NMFS staff worked with the applicants to develop an EFP that would increase the ability of fishery participants to target pelagic rockfish species while also minimizing bycatch to the extent practicable and collecting information about bycatch. To address potential increased protected and prohibited species encounters, the EFP applicants proposed gear-based Chinook salmon bycatch limits for midwater trawl and bottom trawl EFP vessels in 2019 (based on the Council Groundfish Management Team's recommendations at the September 2018 meeting; Agenda Item I.8.a). Under this proposal, if Chinook salmon catch on EFP trips for either gear type reaches the applicable bycatch limit, NMFS would revoke the EFP for that gear type for the remainder of the year.
During discussion at the September 2018 meeting, the Council recommended simplifying the EFP terms by proposing that the Chinook bycatch limits be based only on the 42° N lat. management line, rather than by gear type north and south of the 42° N lat. line. This recommendation would reduce unnecessary complexity while still providing adequate safeguards for limiting salmon bycatch under the EFP. If this EFP is approved, NMFS would set a bycatch limit of 1,000 Chinook salmon north of 42° N lat. and 100 Chinook salmon south of 42° N lat. for vessels declared into the EFP, regardless of gear type. If either of these bycatch limits are reached, NMFS would revoke the EFP for both gear types in the respective management area (
The application includes a requirement to retain and land salmon bycatch on all EFP trips, consistent with current requirements for vessels participating in the shoreside Pacific whiting fishery. The intent of this provision is to provide a complete census of salmon bycatch for each EFP trip and maximize the amount of biological and genetic salmon samples. At the September 2018 meeting, the Council expressed a desire to provide state fish and wildlife agencies the opportunity to sample salmon bycatch. This sampling effort would be in addition to the salmon sampling already conducted by WCGOP. To address the request for additional sampling, the Council requested that NMFS work with NOAA's Office of Law Enforcement and state fish and wildlife agencies to establish proper chain-of-custody and sampling protocols in the event that salmon are landed. NMFS is supportive of making salmon bycatch available to state fish and wildlife agencies for additional sampling, however NMFS is confident that WCGOP's sampling approach is sufficient to collect the necessary scientific information for assessing salmon bycatch.
The EFP applicants have not proposed a specific list of participating vessels, but rather are proposing that NMFS publish a public notice to gauge interest from limited entry groundfish midwater and bottom trawl vessels. Depending on the amount of interest and where vessels may be fishing, NMFS may need to limit participation by time and area to mitigate potential impacts.
Information collected under the EFP would be used to support analysis for potential new gear regulations and modifications to existing gear regulations. Because many of the current gear regulations have been in place for more than ten years, it is difficult for NMFS, the Council, and industry to predict the impacts of removing these regulations. In the past ten years, the industry has changed significantly. Reduction in capacity, innovations in gear technologies, and changes in management have all contributed to these changes. This EFP would help demonstrate what potential impacts, if any, today's fleet may have if some of the current gear, area, and time regulations are modified from what is currently in regulation.
NMFS is proposing to approve the 2019 Trawl Gear EFP, covering all the exemptions stated above, following the conclusion of the public comment period and review of public comment. Pending approval, NMFS would issue the permits for the EFP to the vessel owner or designated representative as the “EFP holder.” NMFS intends to use an adaptive management approach in which NMFS may revise requirements and protocols to improve the program without issuing another
NMFS analyzed the potential effects of implementing the 2018 Trawl Gear EFP in an environmental assessment (EA), dated December 2017 (Available at:
After publication of this document in the
16 U.S.C. 1801
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice of standard prices and fee percentages.
NMFS publishes standard prices and fee percentages for cost recovery for the Amendment 80 Program, the American Fisheries Act (AFA) Program, the Aleutian Islands Pollock (AIP) Program, and the Western Alaska Community Development Quota (CDQ) groundfish and halibut Programs. The fee percentage for 2018 is 0.75 percent for the Amendment 80 Program, 0.24 percent for the AFA inshore cooperatives, 0.34 percent for the AFA mothership cooperative, 3.0 percent for the AIP program, and 0.66 percent for the CDQ groundfish and halibut Programs. This action is intended to provide the 2018 standard prices and fee percentages to calculate the required payment for cost recovery fees due by December 31, 2018.
The standard prices and fee percentages are valid on November 30, 2018.
Carl Greene, Fee Coordinator, 907-586-7105.
Section 304(d) of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act) authorizes and requires the collection of cost recovery fees for limited access privilege programs and the CDQ Program. Cost recovery fees recover the actual costs directly related to the management, data collection, and enforcement of the programs. Section 304(d) of the Magnuson-Stevens Act mandates that cost recovery fees not exceed three percent of the annual ex-vessel value of fish harvested by a program subject to a cost recovery fee, and that the fee be collected either at the time of landing, filing of a landing report, or sale of such fish during a fishing season or in the last quarter of the calendar year in which the fish is harvested.
NMFS manages the Amendment 80 Program, AFA Program, and AIP Program as limited access privilege programs. On January 5, 2016, NMFS published a final rule to implement cost recovery for these three limited access privilege programs and the CDQ groundfish and halibut programs (81 FR 150). The designated representative (for the purposes of cost recovery) for each program is responsible for submitting the fee payment to NMFS on or before the due date of December 31 of the year in which the landings were made. The total dollar amount of the fee due is determined by multiplying the NMFS published fee percentage by the ex-vessel value of all landings under the program made during the fishing year. NMFS publishes this notice of the fee percentages for the Amendment 80, AFA, AIP, and CDQ groundfish and halibut fisheries in the
The fee liability is based on the ex-vessel value of fish harvested in each program. For purposes of calculating cost recovery fees, NMFS calculates a standard ex-vessel price (standard price) for each species. A standard price is determined using information on landings purchased (volume) and ex-vessel value paid (value). For most groundfish species, NMFS annually summarizes volume and value information for landings of all fishery species subject to cost recovery in order to estimate a standard price for each species. The standard prices are described in U.S. dollars per pound for landings made during the year. The standard prices for all species in the Amendment 80, AFA, AIP, and CDQ groundfish and halibut programs are listed in Table 1. Each landing made under each program is multiplied by the appropriate standard price to arrive at an ex-vessel value for each landing. These values are summed together to arrive at the ex-vessel value of each program (fishery value).
NMFS calculates the fee percentage each year according to the factors and methods described in Federal regulations at 50 CFR 679.33(c)(2), 679.66(c)(2), 679.67(c)(2), and 679.95(c)(2). NMFS determines the fee percentage that applies to landings
NMFS will provide an annual report that summarizes direct program costs for each of the programs in early 2019. NMFS calculates the fishery value as described under the section “Standard Prices.”
The Amendment 80 Program allocates total allowable catches (TACs) of groundfish species, other than Bering Sea pollock, to identified trawl catcher/processors in the Bering Sea and Aleutian Islands (BSAI). The Amendment 80 Program allocates a portion of the BSAI TACs of six species: Atka mackerel, Pacific cod, flathead sole, rock sole, yellowfin sole, and Aleutian Islands Pacific ocean perch. Participants in the Amendment 80 sector have established cooperatives to harvest these allocations. Each Amendment 80 cooperative is responsible for payment of the cost recovery fee for fish landed under the Amendment 80 Program. Cost recovery requirements for the Amendment 80 Program are at 50 CFR 679.95.
For most Amendment 80 species, NMFS annually summarizes volume and value information for landings of all fishery species subject to cost recovery in order to estimate a standard price for each fishery species. Regulations specify that for rock sole, NMFS shall calculate a separate standard price for two periods—January 1 through March 31, and April 1 through October 31, which accounts for a substantial difference in estimated rock sole prices during the first quarter of the year relative to the remainder of the year. The volume and value information is obtained from the First Wholesale Volume and Value Report, and the Pacific Cod Ex-Vessel Volume and Value Report.
Using the fee percentage formula described above, the estimated percentage of direct program costs to fishery value for the 2018 calendar year is 0.75 percent for the Amendment 80 Program. For 2018, NMFS applied the fee percentage to each Amendment 80 species landing that was debited from an Amendment 80 cooperative quota allocation between January 1 and December 31 to calculate the Amendment 80 fee liability for each Amendment 80 cooperative. The 2018 fee payments must be submitted to NMFS on or before December 31, 2018. Payment must be made in accordance with the payment methods set forth in 50 CFR 679.95(a)(3)(iv).
The AFA allocates the Bering Sea directed pollock fishery TAC to three sectors—catcher/processor, mothership, and inshore. Each sector has established cooperatives to harvest the sector's exclusive allocation. In 2018, the cooperatives for the mothership sector and the inshore sector are responsible for paying the fee for Bering Sea pollock landed under the AFA. Cost recovery requirements for the AFA sectors are at 50 CFR 679.66.
NMFS calculates the standard price for pollock using the most recent annual value information reported to the Alaska Department of Fish & Game for the Commercial Operator's Annual Report and compiled in the Alaska Commercial Fisheries Entry Commission Gross Earnings data for Bering Sea pollock. Due to the time required to compile the data, there is a one-year delay between the gross earnings data year and the fishing year to which it is applied. For example, NMFS used 2017 gross earnings data to calculate the standard price for 2018 pollock landings.
Under the fee percentage formula described above, the estimated percentage of direct program costs to fishery value for the 2018 calendar year is 0.24 percent for the AFA inshore sector, and 0.34 percent for the AFA mothership sector. To calculate the 2018 fee liabilities, NMFS applied the respective fee percentages to the landings of Bering Sea pollock debited from each cooperative's fishery allocation that occurred between January 1 and December 31. The 2018 fee payments must be submitted to NMFS on or before December 31, 2018. Payment must be made in accordance with the payment methods set forth in 50 CFR 679.66(a)(4)(iv).
The AIP Program allocates the Aleutian Islands directed pollock fishery TAC to the Aleut Corporation, consistent with the Consolidated Appropriations Act of 2004 (Pub. L. 108-109), and its implementing regulations. Annually, prior to the start of the pollock season, the Aleut Corporation provides NMFS with the identity of its designated representative for harvesting the Aleutian Islands directed pollock fishery TAC. The same individual is responsible for the submission of all cost recovery fees for pollock landed under the AIP Program. Cost recovery requirements for the AIP Program are at 50 CFR 679.67.
NMFS calculates the standard price for pollock using the most recent annual value information reported to the Alaska Department of Fish & Game for the Commercial Operator's Annual Report and compiled in the Alaska Commercial Fisheries Entry Commission Gross Earnings data for Aleutian Islands pollock. Due to the time required to compile the data, there is a one-year delay between the gross earnings data year and the fishing year to which it is applied. For example, NMFS used 2017 gross earnings data to calculate the standard price for 2018 pollock landings.
For the 2018 fishing year, the Aleut Corporation selected participants to harvest or process the Aleutian Islands directed pollock fishery TAC. Some harvest occurred; however, the majority of that TAC was eventually reallocated to the Bering Sea directed pollock fishery TAC. Due to the small harvest, the estimated percentage of direct program costs to fishery value for the 2018 calendar year were disproportionately high and well above 3.0 percent. Pursuant to section 304(d)(2)(B) of the Magnuson-Stevens Act, the fee percentage amount must not exceed 3.0 percent. Therefore, the 2018 fee percentage is set at 3.0 percent. To calculate the 2018 fee liability, NMFS applied the respective fee percentage to the pollock landings attributed to the AIP Program that occurred between January 1 and December 31. The 2018 fee payments must be submitted to NMFS on or before December 31, 2018. Payment must be made in accordance with the payment methods set forth in 50 CFR 679.67(a)(3)(iv).
The CDQ Program was implemented in 1992 to provide access to BSAI
For most CDQ groundfish species, NMFS annually summarizes volume and value information for landings of all fishery species subject to cost recovery in order to estimate a standard price for each fishery species. The volume and value information is obtained from the First Wholesale Volume and Value Report and the Pacific Cod Ex-Vessel Volume and Value Report. For CDQ halibut and fixed-gear sablefish, NMFS calculates the standard prices using information from the Individual Fishing Quota (IFQ) Ex-Vessel Volume and Value Report, which collects information on both IFQ and CDQ volume and value.
Using the fee percentage formula described above, the estimated percentage of direct program costs to fishery value for the 2018 calendar year is 0.66 percent for the CDQ groundfish and halibut programs. For 2018, NMFS applied the calculated CDQ fee percentage to all CDQ groundfish and halibut landings made between January 1 and December 31 to calculate the CDQ fee liability for each CDQ group. The 2018 fee payments must be submitted to NMFS on or before December 31, 2018. Payment must be made in accordance with the payment methods set forth in 50 CFR 679.33(a)(3)(iv).
16 U.S.C. 1801
Committee for Purchase From People Who Are Blind or Severely Disabled.
Additions to and deletions from the Procurement List.
This action adds services to the Procurement List that will be provided by nonprofit agencies employing persons who are blind or have other severe disabilities, and deletes products and services from the Procurement List previously furnished by such agencies.
Committee for Purchase From People Who Are Blind or Severely Disabled, 1401 S. Clark Street, Suite 715, Arlington, Virginia 22202-4149.
Michael R. Jurkowski, Telephone: (703) 603-2117, Fax: (703) 603-0655, or email
On 4/20/2018 (83 FR 77) and 10/19/2018 (83 FR 203), the Committee for Purchase From People Who Are Blind or Severely Disabled published notices of proposed additions to the Procurement List.
After consideration of the material presented to it concerning capability of qualified nonprofit agencies to provide the services and impact of the additions on the current or most recent contractors, the Committee has determined that the services listed below are suitable for procurement by the Federal Government under 41 U.S.C. 8501-8506 and 41 CFR 51-2.4.
I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were:
1. The action will not result in any additional reporting, recordkeeping or other compliance requirements for small entities other than the small organizations that will provide the services to the Government.
2. The action will result in authorizing small entities to provide the services to the Government.
3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 8501-8506) in connection with the services proposed for addition to the Procurement List.
Accordingly, the following services are added to the Procurement List:
On 10/19/2018 (83 FR 203) and 10/26/2018 (83 FR 208), the Committee for Purchase From People Who Are Blind or Severely Disabled published notices of proposed deletions from the Procurement List.
After consideration of the relevant matter presented, the Committee has determined that the products and services listed below are no longer suitable for procurement by the Federal Government under 41 U.S.C. 8501-8506 and 41 CFR 51-2.4.
I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were:
1. The action will not result in additional reporting, recordkeeping or other compliance requirements for small entities.
2. The action may result in authorizing small entities to furnish the products and services to the Government.
3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 8501-8506) in connection with the products and services deleted from the Procurement List.
Accordingly, the following products and services are deleted from the Procurement List:
Committee for Purchase From People Who Are Blind or Severely Disabled.
Proposed Deletions from the Procurement List.
The Committee is proposing to delete a product and services from the Procurement List that was previously furnished by nonprofit agencies employing persons who are blind or have other severe disabilities.
Committee for Purchase From People Who Are Blind or Severely Disabled, 1401 S. Clark Street, Suite 715, Arlington, Virginia, 22202-4149.
For further information or to submit comments contact: Michael R. Jurkowski, Telephone: (703) 603-2117, Fax: (703) 603-0655, or email
This notice is published pursuant to 41 U.S.C. 8503 (a)(2) and 41 CFR 51-2.3. Its purpose is to provide interested persons an opportunity to submit comments on the proposed actions.
The following product and services are proposed for deletion from the Procurement List:
Department of the Army, U.S. Army Corps of Engineers, DoD.
Notice.
The U.S. Army Corps of Engineers, Wilmington District, Wilmington Regulatory Division and the U.S. Army Corps of Engineers, Charleston District, Charleston Regulatory Division (collectively COE) are issuing this notice to advise the public that a State (North Carolina Department of Transportation [NCDOT] and South Carolina Department of Transportation [SCDOT]) funded Draft Environmental Impact Statement (DEIS) will no longer be prepared by the COE, while acting as lead federal agency, for improvements to SC 31 starting near Little River, Horry County, South Carolina and running northeast to US 17, in an area between Calabash and Shallotte, Brunswick County, North Carolina. On July 6, 2017 the COE issued a Notice of Intent to prepare a DEIS for the “Carolina Bays Parkway Extension”, NCDOT Project 44604 and SCDOT Project P029554. Recent commitment of federal funds has altered various aspects of this project, including the designation of the lead federal agency. Due to these developments, the COE will no longer act in this capacity, but rather as a cooperating agency throughout the evaluation of the project. At the appropriate time, a separate notice will be issued within the
Questions about the COE's current role in this project can be directed to Mr. Brad Shaver, Regulatory Project Manager (Wilmington District), Wilmington Regulatory Field Office, 69 Darlington Avenue, Wilmington, NC 28403, by telephone: (910) 251-4611, or by email at
Department of the Army, U.S. Army Corps of Engineers, DoD.
Notice; availability of the Record of Decision.
The U.S. Army Corps of Engineers (USACE) announces the availability of the Record of Decision (ROD) for the Final Missouri River Recovery Management Plan and Environmental Impact Statement (MRRMP-FEIS) published in the
Tiffany Vanosdall, U.S. Army Corps of Engineers at (402) 995-2695 or by email at
The USACE has developed the MRRMP-FEIS in cooperation with the U.S. Fish and Wildlife Service (USFWS). This document is the USACE Record of Decision for the MRRMP-FEIS dated August, 2018. The MRRMP-FEIS is a programmatic assessment of major federal actions necessary to avoid a finding of jeopardy for the pallid sturgeon (
National Advisory Council on Indian Education (NACIE), U.S. Department of Education.
Announcement of a closed and open teleconference meeting.
This notice sets forth the announcement of an upcoming meeting to be conducted by the National Advisory Council on Indian Education (NACIE). Notice of the meeting is required by section 10(a)(2) of the Federal Advisory Committee Act.
The NACIE teleconference meeting will be held on December 17, 2018 from 3:00 p.m.-5:00 p.m. (EST). The closed portion of the meeting will take place first from 3:00 p.m. to 3:45 p.m. The open portion of the meeting will take place from 4:00 p.m. to 5:00 p.m.
Tina Hunter, Designated Federal Official, Office of Elementary and Secondary Education, U.S. Department of Education, 400 Maryland Avenue SW, Washington, DC 20202. Telephone: 202-205-8527. Fax: 202-205-0310. Email:
Section 7141 of the Elementary and Secondary Education Act of 1965 (ESEA) as amended by the Every Student Succeeds Act (ESSA), 20 U.S.C. 7471.
Office of Innovation and Improvement, Department of Education.
Notice.
The Department of Education (Department) is issuing a notice inviting applications for fiscal year (FY) 2019 for CSP—Grants to Charter Management Organizations for the Replication and Expansion of High-Quality Charter Schools, Catalog of Federal Domestic Assistance (CFDA) number 84.282M.
For the addresses for obtaining and submitting an application, please refer to our Common Instructions for Applicants to Department of Education Discretionary Grant Programs, published in the
Eddie Moat, U.S. Department of Education, 400 Maryland Avenue SW,
If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.
We have published elsewhere in this issue of the
First, applicants must choose to submit their applications under one of two absolute priorities—
This competition also includes five competitive preference priorities. First, we encourage applicants to propose projects that focus on replicating or expanding
Second, we encourage applicants to propose to reopen one or more
Third, we encourage applicants to propose to
Fourth, we encourage applications from eligible entities that would
Finally, we encourage
Each of these absolute priorities constitutes its own funding category. Applicants may propose projects that address both absolute priorities, but must clearly indicate under which absolute priority they are officially applying. The Secretary intends to award grants under each absolute priority for which applications of sufficient quality are submitted.
Under this priority, applicants must propose to
Under this priority, applicants must demonstrate that at least 40 percent of the students across all of the
Under this priority, applicants must propose to
Under this priority, applicants must—
(i) Demonstrate past success working with one or more
(ii) Propose to use grant funds under this program to reopen one or more
(A) Replicating one or more
(B) Targeting a demographically similar student population in the replicated
Under this priority, applicants must propose to—
(i)
(ii) Prepare students, including
(iii) Provide support for students, including
(iv) Propose one or more project-specific performance measures, including aligned leading indicators or other interim milestones, that will provide valid and reliable information about the applicant's progress in preparing students, including
(v) For purposes of this priority, postsecondary education institutions include institutions of higher education, as defined in section 8101(29) of the ESEA, and one-year training programs that meet the requirements of section 101(b)(1) of the Higher Education Act of 1965, as amended (HEA).
Under this priority, applicants must—
(i) Propose to
(A) Utilize targeted outreach and recruitment in order to serve a
(B) Have a mission and focus that will address the unique educational needs of
(C) Have a governing board with a substantial percentage of members who are members of
(ii) Submit a letter of support from at least one
(iii) Meaningfully collaborate with the
This priority is for applications submitted by
The following definitions are from sections 4310 and 8101 of the ESEA, 34 CFR 75.225 and 77.1, and the NFP.
(a) A school identified by the State for comprehensive support and improvement under section 1111(c)(4)(D)(i) of the ESEA; or
(b) A public school otherwise identified by the State or, in the case of a
(i) In accordance with a specific State statute authorizing the granting of charters to schools, is exempt from significant State or local rules that inhibit the flexible operation and management of public schools, but not from any rules relating to the other requirements of this paragraph;
(ii) Is created by a developer as a public school, or is adapted by a developer from an existing public school, and is operated under public supervision and direction;
(iii) Operates in pursuit of a specific set of educational objectives determined by the school's developer and agreed to by the authorized public chartering agency;
(iv) Provides a program of elementary or secondary education, or both;
(v) Is nonsectarian in its programs, admissions policies, employment practices, and all other operations, and is not affiliated with a sectarian school or religious institution;
(vi) Does not charge tuition;
(vii) Complies with the Age Discrimination Act of 1975, title VI of the Civil Rights Act of 1964, title IX of the Education Amendments of 1972, section 504 of the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990 (42 U.S.C. 12101
(viii) Is a school to which parents choose to send their children, and that—
(A) Admits students on the basis of a lottery, consistent with section 4303(c)(3)(A), if more students apply for admission than can be accommodated; or
(B) In the case of a school that has an affiliated charter school (such as a school that is part of the same network of schools), automatically enrolls students who are enrolled in the immediate prior grade level of the affiliated charter school and, for any additional student openings or student openings created through regular attrition in student enrollment in the affiliated charter school and the enrolling school, admits students on the basis of a lottery as described in clause (A);
(ix) Agrees to comply with the same Federal and State audit requirements as do other elementary schools and secondary schools in the State, unless such State audit requirements are waived by the State;
(x) Meets all applicable Federal, State, and local health and safety requirements;
(xi) Operates in accordance with State law;
(xii) Has a written performance contract with the authorized public chartering agency in the State that includes a description of how student performance will be measured in charter schools pursuant to State assessments that are required of other schools and pursuant to any other assessments mutually agreeable to the authorized public chartering agency and the charter school; and
(xiii) May serve students in early childhood education programs or postsecondary students. (Section 4310(2) of the ESEA)
(i) In general—
The term “child with a disability” means a child—
(A) With intellectual disabilities, hearing impairments (including deafness), speech or language impairments, visual impairments (including blindness), serious emotional disturbance (referred to in this chapter as “emotional disturbance”), orthopedic impairments, autism, traumatic brain injury, other health impairments, or specific learning disabilities; and
(B) Who, by reason thereof, needs special education and related services.
(ii) Child aged 3 through 9.
The term “child with a disability” for a child aged 3 through 9 (or any subset of that age range, including ages 3 through 5), may, at the discretion of the State and the local educational agency, include a child—
(A) Experiencing developmental delays, as defined by the State and as measured by appropriate diagnostic instruments and procedures, in 1 or more of the following areas: Physical development; cognitive development; communication development; social or emotional development; or adaptive development; and
(B) Who, by reason thereof, needs special education and related services. (Section 8101(4) of the ESEA)
(a) Shows evidence of strong academic results, which may include strong student academic growth, as determined by a State;
(b) Has no significant issues in the areas of student safety, financial and operational management, or statutory or regulatory compliance;
(c) Has demonstrated success in significantly increasing student academic achievement, including graduation rates where applicable, for all students served by the
(d) Has demonstrated success in increasing student academic achievement, including graduation rates where applicable, for each of the subgroups of students, as defined in section 1111(c)(2), except that such demonstration is not required in a case in which the number of students in a group is insufficient to yield statistically reliable information or the results would reveal personally identifiable information about an individual student. (Section 4310(8) of the ESEA)
(a) Is legally established—
(i) By Tribal or inter-Tribal charter or in accordance with State or Tribal law; and
(ii) With appropriate constitution, by-laws, or articles of incorporation;
(b) Includes in its purposes the promotion of the education of Indians;
(c) Is controlled by a governing board, the majority of which is Indian;
(d) If located on an Indian reservation, operates with the sanction or by charter of the governing body of that reservation;
(e) Is neither an organization or subdivision of, nor under the direct control of, any institution of higher education; and
(f) Is not an agency of State or local government. (NFP)
(i) Admits as regular students only persons having a certificate of graduation from a school providing secondary education, or the recognized equivalent of such a certificate, or persons who meet the requirements of section 484(d) of the HEA;
(ii) Is legally authorized within such State to provide a program of education beyond secondary education;
(iii) Provides an educational program for which the institution awards a bachelor's degree or provides not less than a 2-year program that is acceptable for full credit toward such a degree, or awards a degree that is acceptable for admission to a graduate or professional degree program, subject to review and approval by the Secretary;
(iv) Is a public or other nonprofit institution; and
(v) Is accredited by a nationally recognized accrediting agency or association, or if not so accredited, is an institution that has been granted preaccreditation status by such an agency or association that has been recognized by the Secretary for the granting of preaccreditation status, and the Secretary has determined that there is satisfactory assurance that the institution will meet the accreditation standards of such an agency or association within a reasonable time. (NFP)
(a) Any applicant for a grant from the Department that—
(i) Has never received a grant or subgrant under the program from which it seeks funding;
(ii) Has never been a member of a group application, submitted in accordance with 34 CFR 75.127-75.129, that received a grant under the program from which it seeks funding; and
(iii) Has not had an active discretionary grant from the Federal Government in the five years before the deadline date for applications for new awards under the program.
(b) In the case of a group application submitted in accordance with §§ 75.127-75.129, a group that includes only parties that meet the requirements of paragraph (a)(i) of this section. (34 CFR 75.225)
Applications for CSP CMO grant funds must address the following application requirements. These requirements are from the NFP and sections 4303
Applicants for funds under this program must—
(a) Describe the
(i) A description of how the applicant will ensure that
(ii) A description of how the applicant will ensure that each
(b) For each
(i) Student assessment results for all students and for each subgroup of students described in section 1111(c)(2);
(ii) Attendance and student retention rates for the most recently completed school year and, if applicable, the most recent available four-year adjusted cohort graduation rates and extended-year adjusted cohort graduation rates; and
(iii) Information on any significant compliance and management issues encountered within the last three school years by any school operated or managed by the eligible entity, including in the areas of student safety and finance. (Section 4305(b)(3)(A) of the ESEA)
(c) Describe the educational program that the applicant will implement in each
(i) Information on how the program will enable all students to meet the challenging State academic standards;
(ii) The grade levels or ages of students who will be served; and
(iii) The instructional practices that will be used. (Section 4305(b)(3)(B)(ii) of the ESEA)
(d) Demonstrate that the applicant currently operates or manages more than one
(i) Meets each element of the definition of “
(ii) Is treated as a separate school by its
(e) Provide information regarding any compliance issues, and how they were resolved, for any
(i) Closed;
(ii) Had their charter(s) revoked due to problems with statutory or regulatory compliance, including compliance with sections 4310(2)(G) and (J) of the ESEA; or
(iii) Had their affiliation with the applicant revoked or terminated, including through voluntary disaffiliation. (NFP)
(f) Provide a complete
(g) If the applicant currently operates, or is proposing to
(h) Describe how the applicant currently operates or manages the
(i) Describe how the applicant will solicit and consider input from parents and other members of the community on the implementation and operation of each
(j) Describe the lottery and enrollment procedures that will be used for each replicated or expanded
(k) Describe how the applicant will ensure that all eligible children with disabilities receive a free appropriate public education in accordance with Part B of the Individuals with Disabilities Education Act (IDEA). (NFP)
(l) Describe how the proposed project will assist
(m) Provide a budget narrative, aligned with the activities, target grant project outputs, and outcomes described in the
(n) Provide the applicant's most recent independently audited financial statements prepared in accordance with generally accepted accounting principles. (NFP)
(o) Describe the applicant's policies and procedures to assist students enrolled in a
(p) Provide—
(i) A request and justification for waivers of any Federal statutory or regulatory provisions that the applicant believes are necessary for the successful operation of the
(ii) A description of any State or local rules, generally applicable to public schools, that will be waived, or otherwise not apply, to such schools. (NFP)
Applications for CSP CMO grant funds must provide the following assurances. These assurances are from sections 4303 and 4305 of the ESEA. The source of each assurance is provided in parentheses following each assurance.
Applicants for funds under this program must provide assurances that—
(a) The grantee will support
(b) The grantee will ensure that each
(i) Information on the educational program;
(ii) Student support services;
(iii) Parent contract requirements (as applicable), including any financial obligations or fees;
(iv) Enrollment criteria (as applicable); and
(v) Annual performance and enrollment data for each of the subgroups of students, as defined in section 1111(c)(2) of the ESEA, except that such disaggregation of performance and enrollment data shall not be required in a case in which the number of students in a group is insufficient to yield statistically reliable information or the results would reveal personally identifiable information about an individual student. (Section 4303(f)(2)(G) of the ESEA)
(c) The eligible entity has sufficient procedures in effect to ensure timely closure of low-performing or financially mismanaged
The Department is not bound by any estimates in this notice. The estimated range and average size of awards are based on a single 12-month budget period. We may use available funds to support multiple 12-month budget periods for one or more grantees.
1.
2.
3.
4.
For this competition, the maximum limit of grant funds that may be awarded per new or expanded
Applicants must ensure that all costs included in the proposed budget are authorized under the CSP and are reasonable and necessary in light of the goals and objectives of the proposed project. Any costs determined by the Secretary to be unauthorized, or otherwise unreasonable or unnecessary, will be removed from the final approved budget.
(b)
Likewise, a
(c)
1.
2.
Because we plan to make successful applications available to the public, you may wish to request confidentiality of business information.
Consistent with Executive Order 12600, please designate in your application any information that you believe is exempt from disclosure under Exemption 4. In the appropriate Appendix section of your application, under “Other Attachments Form,” please list the page number or numbers on which we can find this information. For additional information please see 34 CFR 5.11(c).
3.
4.
(a) Preparing teachers, school leaders, and specialized instructional support personnel, including through paying costs associated with—
(i) Providing professional development; and
(ii) Hiring and compensating, during the applicant's planning period
(A) Teachers,
(B) School leaders, and
(C) Specialized instructional support personnel.
(b) Acquiring supplies, training, equipment (including technology), and educational materials (including developing and acquiring instructional materials).
(c) Carrying out necessary renovations to ensure that a new school building complies with applicable statutes and regulations, and minor facilities repairs (excluding construction).
(d) Providing one-time, startup costs associated with providing transportation to students to and from the
(e) Carrying out community engagement activities, which may include paying the cost of student and staff recruitment.
(f) Providing for other appropriate, non-sustained costs related to the replication or expansion of
Further, under section 4305(b)(1) of the ESEA, CMO grant funds must be used to open and prepare for the operation of one or more replicated
We reference additional regulations outlining funding restrictions in the
5.
• A “page” is 8.5″ x 11″, on one side only, with 1″ margins at the top, bottom, and both sides.
• Double space (no more than three lines per vertical inch) all text in the application narrative, including titles, headings, footnotes, quotations, references, and captions, as well as all text in charts, tables, figures, and graphs.
• Use a font that is either 12 point or larger or no smaller than 10 pitch (characters per inch).
• Use one of the following fonts: Times New Roman, Courier, Courier New, or Arial.
The recommended page limit does not apply to Part I, the cover sheet; Part II, the budget section, including the narrative budget justification; Part IV, the assurances and certifications; or the one-page abstract, the resumes, the bibliography, or the letters of support. However, the recommended page limit does apply to all of the application narrative.
1.
In evaluating an application, the Secretary considers the following criteria:
(a)
In determining the quality of the eligible applicant, the Secretary considers the following factors:
(i) The extent to which the academic achievement results (including annual student performance on statewide assessments and annual student attendance and retention rates and, where applicable and available, student academic growth, high school graduation rates, college attendance rates, and college persistence rates) for
(ii) The extent to which one or more
(iii) The extent to which one or more
(b) Significance of
In determining the significance of the contribution the proposed project will make in expanding educational opportunities for
(i) The extent to which
(ii) The quality of the plan to ensure that the
(c)
In determining the quality of the evaluation plan for the proposed project, the Secretary considers the extent to which the methods of evaluation include the use of objective performance measures that are clearly related to the intended outcomes of the proposed project, as described in the applicant's
(d)
In determining the quality of the applicant's management plan, the
(i) The ability of the applicant to sustain the operation of the replicated or expanded
(ii) The adequacy of the management plan to achieve the objectives of the proposed project on time and within budget, including clearly defined responsibilities, timelines, and milestones for accomplishing project tasks (5 points). (34 CFR 75.210(g)(2)(i))
(iii) The qualifications, including relevant training and experience, of key project personnel (5 points). (34 CFR 75.210(e)(3)(ii))
2.
In addition, in making a competitive grant award, the Secretary requires various assurances, including those applicable to Federal civil rights laws that prohibit discrimination in programs or activities receiving Federal financial assistance from the Department (34 CFR 100.4, 104.5, 106.4, 108.8, and 110.23).
3.
4.
Please note that, if the total value of your currently active grants, cooperative agreements, and procurement contracts from the Federal Government exceeds $10,000,000, the reporting requirements in 2 CFR part 200, Appendix XII, require you to report certain integrity information to FAPIIS semiannually. Please review the requirements in 2 CFR part 200, Appendix XII, if this grant plus all other Federal funds you receive exceed $10,000,000.
1.
If your application is not evaluated or not selected for funding, we notify you.
2.
We reference the regulations outlining the terms and conditions of an award in the
3.
4.
(b) At the end of your project period, you must submit a final performance report, including financial information, as directed by the Secretary. If you receive a multiyear award, you must submit an annual performance report that provides the most current performance and financial expenditure information as directed by the Secretary under 34 CFR 75.118. The Secretary may also require more frequent performance reports under 34 CFR 75.720(c). For specific requirements on reporting, please go to
(c) Under 34 CFR 75.250(b), the Secretary may provide a grantee with additional funding for data collection analysis and reporting. In this case the Secretary establishes a data collection period.
5.
(b)
(1)
(2)
(3)
(4)
All grantees must submit an annual performance report with information that is responsive to these
6.
In making a continuation award, the Secretary also considers whether the grantee is operating in compliance with the assurances in its approved application, including those applicable to Federal civil rights laws that prohibit discrimination in programs or activities receiving Federal financial assistance from the Department (34 CFR 100.4, 104.5, 106.4, 108.8, and 110.23).
7.
You may also access documents of the Department published in the
Office of Fossil Energy, Department of Energy.
Notice of orders.
The Office of Fossil Energy (FE) of the Department of Energy gives notice that during October 2018, it
They are also available for inspection and copying in the U.S. Department of Energy (FE-34), Division of Natural Gas Regulation, Office of Regulation, Analysis, and Engagement, Office of Fossil Energy, Docket Room 3E-033, Forrestal Building, 1000 Independence Avenue SW, Washington, DC 20585, (202) 586-9478. The Docket Room is open between the hours of 8:00 a.m. and 4:30 p.m., Monday through Friday, except Federal holidays.
Take notice that on November 21, 2018, 2018, pursuant to Rule 206 of the Federal Energy Regulatory Commission's (Commission) Rules of Practice and Procedure, 18 CFR 385.206 (2018), Arena Energy LP, Castex Offshore, Inc., EnVen Energy Ventures, LLC, Fieldwood Energy LLC, W&T Offshore, Inc., and Walter Oil & Gas Corporation (Complainants) filed a complaint against High Point Gas Transmission, LLC (Respondent), alleging that Respondent failed to adequately respond to a request for transportation service, is in violation of the Commission's open-access transportation policies, the Commission's policies with respect to an interstate pipeline acquiring off-system capacity, and Respondent's
The Complainants certify that a copy of the complaint was served on Respondent's corporate representatives designated on the Commission's Corporate Officials List.
Any person desiring to intervene or to protest this filing must file in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211, 385.214). Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceeding. Any person wishing to become a party must file a notice of intervention or motion to intervene, as appropriate. The Respondent's answer and all interventions, or protests must be filed on or before the comment date. The Respondent's answer, motions to intervene, and protests must be served on the Complainants.
The Commission encourages electronic submission of protests and interventions in lieu of paper using the “eFiling” link at
This filing is accessible on-line at
Comment Date: 5:00 p.m. Eastern Time on December 11, 2018.
Take notice that on November 9, 2018, Chattanooga Gas Company (CGC), 2207 Olan Mills Drive, Chattanooga, TN 37421, filed in Docket No. CP19-16-000, an application pursuant to section 7(f) of the Natural Gas Act (NGA) and the Commission's regulations requesting a service area determination allowing CGC to expand or enlarge its facilities, without further authorization from the Commission. CGC requests a service area determination with respect to its entire Tennessee local distribution company (LDC) service area as well as a few small geographic areas in Georgia into which CGC's mainline and service lines extend. CGC also requests: (i) A finding that CGC qualifies as an LDC for the purposes of section 311 of the Natural Gas Policy Act of 1978 (NGPA); (ii) a waiver of the Commission's accounting and reporting requirements and other regulatory requirements ordinarily applicable to natural gas companies under the NGA and the NGPA; and (iii) such further relief as the Commission may deem appropriate, all as more fully described in the application which is on file with the Commission and open to public inspection. The filing may also be viewed on the web at
Any questions regarding this application should be directed to Elizabeth Wade, Senior Counsel, AGL Resources Inc., Ten Peachtree Place NE, Atlanta, GA 30309, by telephone at (404) 584-3160 or by email at
Pursuant to section 157.9 of the Commission's rules, 18 CFR 157.9, within 90 days of this Notice the Commission staff will either: Complete its environmental assessment (EA) and place it into the Commission's public record (eLibrary) for this proceeding; or issue a Notice of Schedule for Environmental Review. If a Notice of Schedule for Environmental Review is issued, it will indicate, among other milestones, the anticipated date for the Commission staff's issuance of the EA for this proposal. The filing of the EA in the Commission's public record for this proceeding or the issuance of a Notice of Schedule for Environmental Review will serve to notify federal and state agencies of the timing for the completion of all necessary reviews, and the subsequent need to complete all federal authorizations within 90 days of the date of issuance of the Commission staff's EA.
There are two ways to become involved in the Commission's review of this project. First, any person wishing to obtain legal status by becoming a party to the proceedings for this project should, on or before the comment date stated below file with the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, a motion to intervene in accordance with the requirements of the Commission's Rules of Practice and Procedure (18 CFR 385.214 or 385.211) and the Regulations under the NGA (18 CFR 157.10). A person obtaining party status will be placed on the service list maintained by the Secretary of the Commission and will receive copies of all documents filed by the applicant and by all other parties. A party must submit 3 copies of filings made in the proceeding with the Commission and must provide a copy to the applicant and to every other party. Only parties to the proceeding can ask for court review of Commission orders in the proceeding.
However, a person does not have to intervene in order to have comments considered. The second way to participate is by filing with the Secretary of the Commission, as soon as possible, an original and two copies of comments in support of or in opposition to this project. The Commission will consider these comments in determining the appropriate action to be taken, but the filing of a comment alone will not serve to make the filer a party to the proceeding. The Commission's rules require that persons filing comments in opposition to the project provide copies of their protests only to the party or parties directly involved in the protest.
Persons who wish to comment only on the environmental review of this project should submit an original and two copies of their comments to the Secretary of the Commission. Environmental commentors will be placed on the Commission's environmental mailing list and will be notified of any meetings associated with the Commission's environmental review process. Environmental commentors will not be required to serve copies of filed documents on all other parties. However, the non-party commentors will not receive copies of all documents filed by other parties or issued by the Commission and will not have the right to seek court review of the Commission's final order.
As of the February 27, 2018 date of the Commission's order in Docket No. CP16-4-001, the Commission will apply its revised practice concerning out-of-time motions to intervene in any new Natural Gas Act section 3 or section 7 proceeding.
The Commission strongly encourages electronic filings of comments, protests, and interventions in lieu of paper using the “eFiling” link at
Comment Date: 5:00 p.m. Eastern time on December 14, 2018.
Take notice that the Commission has received the following Natural Gas Pipeline Rate and Refund Report filings:
284.123(g)
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified date(s). Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
Take notice that the Commission received the following electric corporate filings:
Take notice that the Commission received the following exempt wholesale generator filings:
Take notice that the Commission received the following electric rate filings:
Take notice that the Commission received the following qualifying facility filings:
Take notice that the Commission received the following PURPA 210(m)(3) filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
Take notice that the Commission received the following electric rate filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
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f.
g.
h. Potential
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j. KEI Power filed its request to use the Traditional Licensing Process on September 26, 2018. KEI Power provided public notice of its request on September 24, 2018. In a letter dated November 23, 2018, the Director of the Division of Hydropower Licensing approved KEI Power's request to use the Traditional Licensing Process.
k. With this notice, we are initiating informal consultation with the U.S. Fish and Wildlife Service and/or NOAA Fisheries under section 7 of the Endangered Species Act and the joint agency regulations thereunder at 50 CFR part 402; and NOAA Fisheries under section 305(b) of the Magnuson-Stevens Fishery Conservation and Management Act and implementing regulations at 50 CFR 600.920. We are also initiating consultation with the Maine State Historic Preservation Officer, as required by section 106 of the National Historic Preservation Act, and the implementing regulations of the Advisory Council on Historic Preservation at 36 CFR 800.2.
l. With this notice, we are designating KEI Power as the Commission's non-federal representative for carrying out informal consultation pursuant to section 7 of the Endangered Species Act and section 305(b) of the Magnuson-Stevens Fishery Conservation and Management Act; and consultation pursuant to section 106 of the National Historic Preservation Act.
m. KEI Power filed a Pre-Application Document (PAD; including a proposed process plan and schedule) with the Commission, pursuant to 18 CFR 5.6 of the Commission's regulations.
n. A copy of the PAD is available for review at the Commission in the Public Reference Room or may be viewed on the Commission's website (
o. The licensee states its unequivocal intent to submit an application for a subsequent license for Project No. 4202. Pursuant to 18 CFR 16.20, each application for a subsequent license and any competing license applications must be filed with the Commission at least 24 months prior to the expiration of the existing license. All applications for license for this project must be filed by September 30, 2021.
p. Register online at
Take notice that on November 9, 2018, Atlanta Gas Light Company (AGL), Ten Peachtree Place NE, Atlanta, GA 30309, filed in Docket No. CP19-15-000, an application pursuant to section 7(f) of the Natural Gas Act (NGA) and the Commission's regulations requesting a service area determination allowing AGL to expand or enlarge its facilities, without further authorization from the Commission. AGL requests a service area determination with respect to its entire Georgia local distribution company (LDC) service area as well as a few small geographic areas in Tennessee into which AGL's mainline and service lines extend. AGL also requests: (i) A finding that AGL qualifies as an LDC for the purposes of section 311 of the Natural Gas Policy Act of 1978 (NGPA); (ii) a waiver of the Commission's accounting and reporting requirements and other regulatory requirements ordinarily applicable to natural gas companies under the NGA and the NGPA; and (iii) such further relief as the Commission may deem appropriate, all as more fully described in the application which is on file with the Commission and open to public inspection. The filing may also be viewed on the web at
Any questions regarding this application should be directed to Elizabeth Wade, Senior Counsel, AGL Resources Inc., Ten Peachtree Place NE, Atlanta, GA 30309, by telephone at (404) 584-3160 or by email at
Pursuant to section 157.9 of the Commission's rules, 18 CFR 157.9, within 90 days of this Notice the Commission staff will either: Complete its environmental assessment (EA) and place it into the Commission's public record (eLibrary) for this proceeding; or issue a Notice of Schedule for Environmental Review. If a Notice of Schedule for Environmental Review is issued, it will indicate, among other milestones, the anticipated date for the Commission staff's issuance of the EA for this proposal. The filing of the EA in the Commission's public record for this proceeding or the issuance of a Notice of Schedule for Environmental Review will serve to notify federal and state agencies of the timing for the completion of all necessary reviews, and the subsequent need to complete all federal authorizations within 90 days of the date of issuance of the Commission staff's EA.
There are two ways to become involved in the Commission's review of this project. First, any person wishing to
However, a person does not have to intervene in order to have comments considered. The second way to participate is by filing with the Secretary of the Commission, as soon as possible, an original and two copies of comments in support of or in opposition to this project. The Commission will consider these comments in determining the appropriate action to be taken, but the filing of a comment alone will not serve to make the filer a party to the proceeding. The Commission's rules require that persons filing comments in opposition to the project provide copies of their protests only to the party or parties directly involved in the protest.
Persons who wish to comment only on the environmental review of this project should submit an original and two copies of their comments to the Secretary of the Commission. Environmental commentors will be placed on the Commission's environmental mailing list and will be notified of any meetings associated with the Commission's environmental review process. Environmental commentors will not be required to serve copies of filed documents on all other parties. However, the non-party commentors will not receive copies of all documents filed by other parties or issued by the Commission and will not have the right to seek court review of the Commission's final order.
As of the February 27, 2018 date of the Commission's order in Docket No. CP16-4-001, the Commission will apply its revised practice concerning out-of-time motions to intervene in any new Natural Gas Act section 3 or section 7 proceeding.
The Commission strongly encourages electronic filings of comments, protests, and interventions in lieu of paper using the “eFiling” link at
Take notice that on November 14, 2018, Midship Pipeline Company, LLC (Midship), 700 Milam Street, Suite 1900, Houston, Texas 77002, filed an application pursuant to section 7(c) of the Natural Gas Act and Parts 157 and 284 of the Commission's regulations requesting authorization to amend its Certificate of Public Convenience and Necessity issued on August 13, 2018, in Docket No. CP17-458-000
The filing is available for review at the Commission in the Public Reference Room or may be viewed on the Commission's website web at
Any questions regarding the proposed amendment should be directed to Karri Mahmoud, Director, Regulatory Project Development, 700 Milam Street, Suite 1900, Houston, Texas 77002, by telephone at (713) 375-5000, or by email at
Pursuant to section 157.9 of the Commission's rules, 18 CFR 157.9, within 90 days of this Notice, the Commission staff will either: Complete its environmental analysis (EA) and place it into the Commission's public record (eLibrary) for this proceeding, or issue a Notice of Schedule for Environmental Review. If a Notice of Schedule for Environmental Review is issued, it will indicate, among other milestones, the anticipated date for the Commission staff's issuance of the EA for this proposal. The filing of the EA in the Commission's public record for this proceeding or the issuance of a Notice of Schedule will serve to notify federal and state agencies of the timing for the completion of all necessary reviews, and the subsequent need to complete all federal authorizations within 90 days of the date of issuance of the Commission staff's EA.
There are two ways to become involved in the Commission's review of this project. First, any person wishing to obtain legal status by becoming a party to the proceedings for this project should, on or before the comment date stated below, file with the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, a motion to intervene in accordance with the requirements of the Commission's Rules of Practice and Procedure (18 CFR 385.214 or 385.211) and the Regulations under the NGA (18 CFR 157.10). A person obtaining party status will be placed on the service list maintained by the Secretary of the Commission and will receive copies of all documents filed by the applicant and by all other parties. A party must submit 3 copies of filings made with the Commission and must provide a copy to the applicant and to every other party in
However, a person does not have to intervene in order to have comments considered. The second way to participate is by filing with the Secretary of the Commission, as soon as possible, an original and two copies of comments in support of or in opposition to this project. The Commission will consider these comments in determining the appropriate action to be taken, but the filing of a comment alone will not serve to make the filer a party to the proceeding. The Commission's rules require that persons filing comments in opposition to the project provide copies of their protests only to the party or parties directly involved in the protest.
Persons who wish to comment only on the environmental review of this project should submit an original and two copies of their comments to the Secretary of the Commission. Environmental commenters will be placed on the Commission's environmental mailing list and will be notified of any meetings associated with the Commission's environmental review process. Environmental commenters will not be required to serve copies of filed documents on all other parties. However, the non-party commenters will not receive copies of all documents filed by other parties or issued by the Commission and will not have the right to seek court review of the Commission's final order.
As of the February 27, 2018 date of the Commission's order in Docket No. CP16-4-001, the Commission will apply its revised practice concerning out-of-time motions to intervene in any new Natural Gas Act section 3 or section 7 proceeding.
The Commission strongly encourages electronic filings of comments, protests, and interventions in lieu of paper using the “eFiling” link at
The staff of the Federal Energy Regulatory Commission (FERC or Commission) will prepare an environmental assessment (EA) that will discuss the environmental impacts of a proposed amendment (0.8-mile reroute) of Midship Pipeline Company, LLC's (Midship Pipeline) Midcontinent Supply Header Interstate Pipeline Project (MIDSHIP Project) in Bryan County, Oklahoma.
This notice announces the opening of the scoping process the Commission will use to gather input from the public and interested agencies about issues regarding the amendment/reroute. The National Environmental Policy Act (NEPA) requires the Commission to take into account the environmental impacts that could result from its action whenever it considers the issuance of a Certificate of Public Convenience and Necessity. NEPA also requires the Commission to discover concerns the public may have about proposals. This process is referred to as “scoping.” The main goal of the scoping process is to focus the analysis in the EA on the important environmental issues. By this notice, the Commission requests public comments on the scope of the issues to address in the EA. To ensure that your comments are timely and properly recorded, please submit your comments so that the Commission receives them in Washington, DC on or before 5:00 p.m. Eastern Time on December 24, 2018.
You can make a difference by submitting your specific comments or concerns about the reroute. Your comments should focus on the potential environmental effects, reasonable alternatives, and measures to avoid or lessen environmental impacts. Your input will help the Commission staff determine what issues they need to evaluate in the EA. Commission staff will consider all filed comments during the preparation of the EA.
If you sent comments on this project to the Commission before the opening of this docket on November 14, 2018, you will need to file those comments in Docket No. CP19-17-000 to ensure they are considered as part of this proceeding.
This notice is being sent to the Commission's current environmental mailing list for this amendment. State and local government representatives should notify their constituents of this proposed amendment and encourage them to comment on their areas of concern.
If you are a landowner receiving this notice, a pipeline company representative may contact you about the acquisition of an easement to construct, operate, and maintain the proposed facilities. The company would seek to negotiate a mutually acceptable easement agreement. You are not required to enter into an agreement. However, if the Commission approves the amendment, that approval conveys with it the right of eminent domain. Therefore, if you and the company do not reach an easement agreement, the pipeline company could initiate condemnation proceedings in court. In such instances, compensation would be determined by a judge in accordance with state law.
Midship Pipeline provided landowners with a fact sheet prepared by FERC entitled “An Interstate Natural Gas Facility On My Land? What Do I Need To Know?” This fact sheet addresses a number of typically asked questions, including the use of eminent domain and how to participate in the Commission's proceedings. It is also available for viewing on the FERC website (
The Commission offers a free service called eSubscription which makes it easy to stay informed of all issuances and submittals regarding the dockets/projects to which you subscribe. These instant email notifications are the fastest
For your convenience, there are three methods you can use to submit your comments to the Commission. The Commission encourages electronic filing of comments and has staff available to assist you at (866) 208-3676 or
(1) You can file your comments electronically using the
(2) You can file your comments electronically by using the
(3) You can file a paper copy of your comments by mailing them to the following address. Be sure to reference the project docket number (CP19-17-000) with your submission: Kimberly D. Bose, Secretary, Federal Energy Regulatory Commission, 888 First Street NE, Room 1A, Washington, DC 20426.
Midship Pipeline proposes a 0.8-mile reroute between mileposts 195.2 to 195.9 of the MIDSHIP Project in Bryan County, Oklahoma. This reroute would shift the pipeline about 400 feet west and south of the certificated pipeline route. The general location of the reroute is shown in appendix 1.
Construction of the proposed reroute would disturb about 12.5 acres of land. Following construction, Midship Pipeline would maintain about 5.3 acres for permanent operation of the project; the remaining acreage would be restored and revert to former uses. This represents an increase from the certificated route of about 1.2 acres during construction and 0.5 acre during operation.
The EA will discuss impacts that could occur as a result of the proposed amendment under these general headings:
• Geology and soils;
• water resources and wetlands;
• vegetation and wildlife;
• threatened and endangered species;
• cultural resources;
• land use;
• air quality and noise;
• public safety; and
• cumulative impacts.
Commission staff will also evaluate reasonable alternatives to the proposed amendment, and make recommendations on how to lessen or avoid impacts on the various resource areas as applicable.
The EA will present Commission staffs' independent analysis of the issues. The EA will be available in electronic format in the public record through eLibrary
With this notice, the Commission is asking agencies with jurisdiction by law and/or special expertise with respect to the environmental issues of this project to formally cooperate in the preparation of the EA.
In accordance with the Advisory Council on Historic Preservation's implementing regulations for section 106 of the National Historic Preservation Act, the Commission is using this notice to initiate consultation with the applicable State Historic Preservation Office (SHPO), and to solicit their views and those of other government agencies, interested Indian tribes, and the public on the project's potential effects on historic properties.
The environmental mailing list includes federal, state, and local government representatives and agencies; elected officials; environmental and public interest groups; Native American Tribes; other interested parties; and local libraries and newspapers. This list also includes all affected landowners (as defined in the Commission's regulations) who are potential right-of-way grantors, whose property may be used temporarily for project purposes, and anyone who submits comments on the project. Commission staff will update the environmental mailing list as the analysis proceeds to ensure that Commission notices related to this environmental review are sent to all individuals, organizations, and government entities interested in and/or potentially affected by the proposed amendment.
If the Commission issues the EA for an allotted public comment period, a
Additional information about the amendment/reroute is available from the Commission's Office of External Affairs, at (866) 208-FERC, or on the FERC website at
Environmental Protection Agency (EPA).
Notice.
The Environmental Protection Agency (EPA) has submitted an information collection request (ICR), NESHAP for Plating and Polishing Area Sources (EPA ICR Number 2294.05, OMB Control Number 2060-0623), to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act. This is a proposed extension of the ICR, which is currently approved through November 30, 2018. Public comments were previously requested, via the
Additional comments may be submitted on or before December 31, 2018.
Submit your comments, referencing Docket ID Number EPA-HQ-OECA-2014-0097 to: (1) EPA online using
EPA's policy is that all comments received will be included in the public docket without change, including any personal information provided, unless the comment includes profanity, threats, information claimed to be Confidential Business Information (CBI), or other information whose disclosure is restricted by statute.
Patrick Yellin, Monitoring, Assistance, and Media Programs Division, Office of Compliance, Mail Code 2227A, Environmental Protection Agency, 1200 Pennsylvania Ave. NW, Washington, DC 20460; telephone number: (202) 564-2970; fax number: (202) 564-0050; email address:
Supporting documents, which explain in detail the information that the EPA will be collecting, are available in the public docket for this ICR. The docket can be viewed online at
There is a decrease in the annualized capital or operation & maintenance costs since the previous renewal due to an adjustment. There are no ongoing monitoring requirements in the rule and no new sources are expected to incur capital/startup costs. Therefore, the capital/startup costs were reduced to zero since those costs have already been incurred when the existing sources became subject to the rule.
Environmental Protection Agency (EPA).
Notice.
This notice announces the peer review of the draft Risk Evaluation for Colour Index (C.I.) Pigment Violet 29 (PV29) and associated documents developed under EPA's existing chemical substance process under the Toxic Substances Control Act (TSCA). The peer review panel deliberations will be conducted during a 4-day, in-person, public meeting of the TSCA Science Advisory Committee on Chemicals (SACC). This in-person meeting will also include a general TSCA orientation for the TSCA SACC. A portion of the in-person meeting will be closed to the public for the committee's discussion of information claimed as confidential business information (CBI). Prior to the in-person meeting, there will be a public, 2-hour preparatory virtual meeting to consider the scope and clarity of the draft charge questions for this peer review. During these upcoming meetings, the public is invited to provide oral comments for the peer review on the draft risk evaluation for PV29 and related documents. Comments on the draft charge questions will be accepted prior to and during the 2-hour preparatory virtual meeting. The TSCA SACC peer review panel will consider these comments during their discussions.
For additional instructions, see Unit I.C. and Unit I.D. of the
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Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at
Dr. Todd Peterson, DFO, Office of Science Coordination and Policy (7201M), Environmental Protection Agency, 1200 Pennsylvania Ave. NW, Washington, DC 20460-0001; telephone number: (202) 564-6428; email address:
This action is directed to the public in general. This action may be of interest to persons who are interested in risk evaluations of chemical substances under the Toxic Substances Control Act (TSCA). Since other entities may also be interested in this risk evaluation, the Agency has not attempted to describe all the specific entities that may be affected by this action.
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You may participate in the in-person peer review meeting by following the instructions in this unit. To ensure proper receipt by EPA, it is imperative that you identify docket ID number EPA-HQ-OPPT-2018-0604 in the subject line on the first page of your request.
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Requests to make oral comments at the in-person meeting should identify the name of the individual making the presentation, the organization (if any) the individual will represent, and any requirements for audiovisual equipment. Oral comments before the TSCA SACC during the in-person meeting are limited to approximately 5 minutes unless prior arrangements have been made. In addition, each speaker should bring 30 copies of the comments and presentation for the DFO to distribute to the TSCA SACC at the meeting. The TSCA SACC will consider oral comments during their discussions.
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The Science Advisory Committee on Chemicals (SACC) was established by EPA in 2016 under the authority of the Frank R. Lautenberg Chemical Safety for the 21st Century Act, Public Law 114-182, 140 Stat. 448 (2016), and operates in accordance with the Federal Advisory Committee Act (FACA), 5 U.S.C. App. 2. The SACC supports activities under the Toxic Substances Control Act (TSCA), 15 U.S.C. 2601
The SACC is comprised of experts in: Toxicology; human health and environmental risk assessment; exposure assessment; and related sciences (
The focus of the TSCA SACC in-person meeting is to peer review the Agency's draft risk evaluation of C.I. Pigment Violet 29, which was developed under EPA's existing chemical substance process. C.I. Pigment Violet 29 is an organic pigment that has a low solubility, low volatility, is expected to be highly persistent, and has low bioaccumulation potential in fish and other animals. The pigment is utilized as an intermediate to create or adjust the color of other pigments, as well as in commercial paints, coatings, plastics, and rubber products.
Under TSCA, the purpose of the risk evaluation is to determine whether a chemical substance presents an unreasonable risk to health or the environment under the conditions of use, including an unreasonable risk to a relevant potentially exposed or susceptible subpopulation. EPA released the draft risk evaluation for C.I. Pigment Violet 29 for public review and comment on November 15, 2018 (83 FR 57473; FRL-9986-45), and is submitting the same materials to the TSCA SACC for peer review.
After the peer review process, EPA will consider reviewer comments and recommendations, and public comments, to finalize the risk evaluation.
Approximately one hour of the TSCA SACC's in-person meeting will be closed to the public for the TSCA SACC to consider and discuss material that has been claimed as CBI and provided to the Committee as background for the draft risk evaluation for PV29. In accordance with FACA section 10(d), and section (c)(4) of the Government in the Sunshine Act, 5 U.S.C. 552b, this approximately one-hour session of the TSCA SACC will be closed to the public to avoid the potential disclosure of CBI, which is protected from disclosure by statute. See the Administrator's determination for a closed meeting available in the docket identified by Docket ID No. EPA-HQ-OPPT-2018-0604 at
EPA's background paper, related supporting materials, and draft charge/questions to the TSCA SACC are available on the TSCA SACC website and in docket. In addition, the Agency will provide additional background documents (
TSCA SACC will prepare meeting minutes and final report summarizing its recommendations to the Agency no later than 90 days after the meeting. The meeting minutes and final report will be posted on the TSCA SACC website and in the docket.
15 U.S.C. 2625(o)
Environmental Protection Agency (EPA).
Notice.
The Environmental Protection Agency (EPA) has submitted an information collection request (ICR), NESHAP for Industrial, Commercial, and Institutional Boilers and Process Heaters (EPA ICR No. 2028.09, OMB Control No. 2060-0551), to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act. This is a proposed extension of the ICR, which is currently approved through November 30, 2018. Public comments were previously requested, via the
Additional comments may be submitted on or before December 31, 2018.
Submit your comments, referencing Docket ID Number EPA-HQ-OECA-2014-0078, to: (1) EPA online using
EPA's policy is that all comments received will be included in the public docket without change including any personal information provided, unless the comment includes profanity, threats, information claimed to be Confidential Business Information (CBI), or other information whose disclosure is restricted by statute.
Patrick Yellin, Monitoring, Assistance, and Media Programs Division, Office of Compliance, Mail Code 2227A, Environmental Protection Agency, 1200 Pennsylvania Ave. NW, Washington, DC 20460; telephone number: (202) 564-2970; fax number: (202) 564-0050; email address:
Supporting documents, which explain in detail the information that the EPA will be collecting, are available in the public docket for this ICR. The docket can be viewed either online at
There is an adjustment decrease in the number of responses as compared with the previous ICR. This decrease is a result of removing some of the one-time response requirements for existing sources that have already met the initial compliance requirements. There is an overall increase in the total capital/startup and annual operation and maintenance costs compared with the previous ICR. These changes assume all existing sources have met the initial requirements of the rule. In addition, there are a small number of new
Environmental Protection Agency (EPA).
Notice.
This notice announces the availability of EPA's draft human health and ecological risk assessments for the registration review of amitraz, bispyribac-sodium, bromoxynil, captan, chloropicrin, dazomet, diclosulam, florasulam, flucarbazone-sodium, fluroxypyr, formetanate, imazalil, imazamox, imazapic, imazaquin, imazethapyr, MCPA, metam sodium, metam potassium, methyl isothiocyanate (MITC), o-benzyl-p-chlorophenol, starlicide, tri-n butyl tetradecyl phosphonium chloride (TTPC), triphenyltin hydroxide (TPTH), and zinc salts. This notice also announces the availability of EPA's draft human health risk assessments for the registration review of
Comments must be received on or before January 29, 2019.
Submit your comments, to the docket identification (ID) number for the specific pesticide of interest provided in the Table in Unit IV, by one of the following methods:
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This action is directed to the public in general, and may be of interest to a wide range of stakeholders including environmental, human health, farm worker, and agricultural advocates; the chemical industry; pesticide users; and members of the public interested in the sale, distribution, or use of pesticides. Since others also may be interested, the Agency has not attempted to describe all the specific entities that may be affected by this action. If you have any questions regarding the applicability of this action to a particular entity, consult the Chemical Review Manager identified in the Table in Unit IV.
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Registration review is EPA's periodic review of pesticide registrations to ensure that each pesticide continues to satisfy the statutory standard for registration, that is, the pesticide can perform its intended function without unreasonable adverse effects on human health or the environment. As part of the registration review process, the Agency has completed comprehensive draft human health and/or ecological risk assessments for all pesticides listed in the Table in Unit IV. After reviewing comments received during the public comment period, EPA may issue a revised risk assessment, explain any changes to the draft risk assessment, and respond to comments and may request public input on risk mitigation before completing a proposed registration review decision for the pesticides listed in the Table in Unit IV. Through this program, EPA is ensuring that each pesticide's registration is based on current scientific and other knowledge, including its effects on human health and the environment.
EPA is conducting its registration review of the chemicals listed in the Table in Unit IV pursuant to section 3(g) of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and the Procedural Regulations for Registration Review at 40 CFR part 155, subpart C. Section 3(g) of FIFRA provides, among other things, that the registrations of pesticides are to be reviewed every 15 years. Under FIFRA, a pesticide product may be registered or remain registered only if it meets the statutory standard for registration given in FIFRA section 3(c)(5) (7 U.S.C. 136a(c)(5)). When used in accordance with widespread and commonly recognized practice, the pesticide product must perform its intended function without unreasonable adverse effects on the environment; that is, without any unreasonable risk to man or the environment, or a human dietary risk from residues that result from the use of a pesticide in or on food.
Pursuant to 40 CFR 155.58, this notice announces the availability of EPA's human health and/or ecological risk assessments for the pesticides shown in the following table, and opens a 60-day public comment period on the risk assessments.
Pursuant to 40 CFR 155.53(c), EPA is providing an opportunity, through this notice of availability, for interested parties to provide comments and input concerning the Agency's draft human health and/or ecological risk assessments for the pesticides listed in the Table in Unit IV. The Agency will consider all comments received during the public comment period and make changes, as appropriate, to a draft human health and/or ecological risk assessment. EPA may then issue a revised risk assessment, explain any changes to the draft risk assessment, and respond to comments.
• To ensure that EPA will consider data or information submitted, interested persons must submit the data or information during the comment period. The Agency may, at its discretion, consider data or information submitted at a later date.
• The data or information submitted must be presented in a legible and useable form. For example, an English translation must accompany any material that is not in English and a written transcript must accompany any information submitted as an audiographic or videographic record. Written material may be submitted in paper or electronic form.
• Submitters must clearly identify the source of any submitted data or information.
• Submitters may request the Agency to reconsider data or information that the Agency rejected in a previous review. However, submitters must explain why they believe the Agency should reconsider the data or information in the pesticide's registration review.
As provided in 40 CFR 155.58, the registration review docket for each pesticide case will remain publicly accessible through the duration of the registration review process; that is, until all actions required in the final decision on the registration review case have been completed.
7 U.S.C. 136
Environmental Protection Agency (EPA).
Notice.
The Environmental Protection Agency (EPA) has submitted an information collection request (ICR)—NESHAP for Friction Materials Manufacturing (EPA ICR Number 2025.07, OMB Control Number 2060-0481) to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act. This is a proposed extension of the ICR, which is currently approved through August 31, 2018. Public comments were requested previously, via the
Additional comments may be submitted on or before December 31, 2018.
Submit your comments, referencing Docket ID Number EPA-HQ-OECA-2014-0085, to: (1) EPA online using
EPA's policy is that all comments received will be included in the public docket without change, including any personal information provided, unless the comment includes profanity, threats, information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute.
Patrick Yellin, Monitoring, Assistance, and Media Programs Division, Office of Compliance, Mail Code 2227A, Environmental Protection Agency, 1200 Pennsylvania Ave. NW, Washington, DC 20460; telephone number: (202) 564-2970; fax number: (202) 564-0050; email address:
Supporting documents, which explain in detail the information that the EPA will be collecting, are available in the public docket for this ICR. The docket can be viewed online at
Board of Governors of the Federal Reserve System.
Notice, request for comment.
The Board of Governors of the Federal Reserve System (Board) invites comment on a proposal to extend for three years, with revision, the Application to Become a Savings and Loan Holding Company or to Acquire a Savings Association or Savings and Loan Holding Company (FR LL-10(e); OMB No. 7100-0336).
Comments must be submitted on or before January 29, 2019.
You may submit comments, identified by
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All public comments are available from the Board's website at
Additionally, commenters may send a copy of their comments to the OMB Desk Officer—Shagufta Ahmed—Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10235, 725 17th Street NW, Washington, DC 20503, or by fax to (202) 395-6974.
A copy of the PRA OMB submission, including the proposed reporting form and instructions, supporting statement, and other documentation will be placed into OMB's public docket files, if approved. These documents will also be made available on the Board's public website at
Federal Reserve Board Clearance Officer—Nuha Elmaghrabi—Office of the Chief Data Officer, Board of Governors of the Federal Reserve System, Washington, DC 20551, (202) 452-3829. Telecommunications Device for the Deaf (TDD) users may contact (202) 263-4869, Board of Governors of the Federal Reserve System, Washington, DC, 20551.
On June 15, 1984, the Office of Management and Budget (OMB) delegated to the Board authority under the Paperwork Reduction Act (PRA) to approve and assign OMB control numbers to collection of information requests and requirements conducted or sponsored by the Board. In exercising this delegated authority, the Board is directed to take every reasonable step to solicit comment. In determining whether to approve a collection of information, the Board will consider all comments received from the public and other agencies.
The Board invites public comment on the following information collection, which is being reviewed under authority delegated by the OMB under the PRA. Comments are invited on the following:
a. Whether the proposed collection of information is necessary for the proper performance of the Board's functions, including whether the information has practical utility;
b. The accuracy of the Board's estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used;
c. Ways to enhance the quality, utility, and clarity of the information to be collected;
d. Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information.
At the end of the comment period, the comments and recommendations received will be analyzed to determine the extent to which the Board should modify the proposal.
Board of Governors of the Federal Reserve System.
Notice, request for comment.
The Board of Governors of the Federal Reserve System (Board) invites comment on a proposal to extend for three years, without revision, the
Comments must be submitted on or before January 29, 2019.
You may submit comments, identified by
•
•
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Additionally, commenters may send a copy of their comments to the OMB Desk Officer—Shagufta Ahmed—Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10235, 725 17th Street NW, Washington, DC 20503 or by fax to (202) 395-6974.
A copy of the PRA OMB submission, including the proposed reporting form and instructions, supporting statement, and other documentation will be placed into OMB's public docket files, once approved. These documents will also be made available on the Board's public website at:
Federal Reserve Board Clearance Officer—Nuha Elmaghrabi—Office of the Chief Data Officer, Board of Governors of the Federal Reserve System, Washington, DC 20551 (202) 452-3829. Telecommunications Device for the Deaf (TDD) users may contact (202) 263-4869, Board of Governors of the Federal Reserve System, Washington, DC 20551.
On June 15, 1984, the Office of Management and Budget (OMB) delegated to the Board authority under the Paperwork Reduction Act (PRA) to approve of and assign OMB control numbers to collection of information requests and requirements conducted or sponsored by the Board. In exercising this delegated authority, the Board is directed to take every reasonable step to solicit comment. In determining whether to approve a collection of information, the Board will consider all comments received from the public and other agencies.
The Board invites public comment on the following information collection, which is being reviewed under authority delegated by the OMB under the PRA. Comments are invited on the following:
a. Whether the proposed collection of information is necessary for the proper performance of the Board's functions; including whether the information has practical utility;
b. The accuracy of the Board's estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used;
c. Ways to enhance the quality, utility, and clarity of the information to be collected;
d. Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information.
Board of Governors of the Federal Reserve System.
Notice, request for comment.
The Board of Governors of the Federal Reserve System (Board) invites comment on a proposal to extend for three years, without revision, the Recordkeeping Provisions Associated with the Guidance on Sound Incentive Compensation Policies (FR 4027; OMB No. 7100-0327).
Comments must be submitted on or before January 29, 2019.
You may submit comments, identified by
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•
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All public comments are available from the Board's website at
Additionally, commenters may send a copy of their comments to the OMB Desk Officer—Shagufta Ahmed—Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10235, 725 17th Street NW, Washington, DC 20503, or by fax to (202) 395-6974.
A copy of the PRA OMB submission, including the proposed reporting form and instructions, supporting statement, and other documentation will be placed into OMB's public docket files, if approved. These documents will also be made available on the Board's public website at
Federal Reserve Board Clearance Officer—Nuha Elmaghrabi—Office of the Chief Data Officer, Board of Governors of the Federal Reserve System, Washington, DC 20551, (202) 452-3829. Telecommunications Device for the Deaf (TDD) users may contact (202) 263-4869, Board of Governors of the Federal Reserve System, Washington, DC 20551.
On June 15, 1984, the Office of Management and Budget (OMB) delegated to the Board authority under the Paperwork Reduction Act (PRA) to approve and assign OMB control numbers to collection of information requests and requirements conducted or sponsored by the Board. In exercising this delegated authority, the Board is directed to take every reasonable step to solicit comment. In determining whether to approve a collection of information, the Board will consider all comments received from the public and other agencies.
The Board invites public comment on the following information collection, which is being reviewed under authority delegated by the OMB under the PRA. Comments are invited on the following:
a. Whether the proposed collection of information is necessary for the proper performance of the Board's functions, including whether the information has practical utility;
b. The accuracy of the Board's estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used;
c. Ways to enhance the quality, utility, and clarity of the information to be collected;
d. Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation, maintenance,
At the end of the comment period, the comments and recommendations received will be analyzed to determine the extent to which the Board should modify the proposal.
Pursuant to Principle 2 of the Guidance, a banking organization's risk-management processes and internal controls should reinforce and support the development and maintenance of balanced incentive compensation arrangements. Principle 2 states that banking organizations should create and maintain sufficient documentation to permit an audit of the organization's processes for establishing, modifying, and monitoring incentive compensation arrangements. Additionally, large banking organizations should maintain policies and procedures that (i) identify and describe the role(s) of the personnel, business units, and control units authorized to be involved in the design, implementation, and monitoring of incentive compensation arrangements; (ii) identify the source of significant risk-related inputs into these processes and establish appropriate controls governing the development and approval of these inputs to help ensure their integrity; and (iii) identify the individual(s) and control unit(s) whose approval is necessary for the establishment of new incentive compensation arrangements or modification of existing arrangements.
Pursuant to Principle 3 of the Guidance, banking organizations should have strong and effective corporate governance to help ensure sound compensation practices. The Guidance states that a banking organization's board of directors should approve and document any material exceptions or adjustments to the organization's incentive compensation arrangements established for senior executives.
Because the recordkeeping provisions are contained within guidance, which is nonbinding, they are voluntary. There are no reporting forms associated with this information collection.
Because the incentive compensation records would be maintained at each banking organization, the Freedom of Information Act (“FOIA”) would only be implicated if the Board obtained such records as part of the examination or supervision of a banking organization. In the event the records are obtained by the Board as part of an examination or supervision of a financial institution, this information is considered confidential pursuant to exemption 8 of the FOIA, which protects information contained in “examination, operating, or condition reports” obtained in the bank supervisory process (5 U.S.C. 552(b)(8)). In addition, the information may also be kept confidential under exemption 4 for the FOIA, which protects commercial or financial information obtained from a person that is privileged or confidential (5 U.S.C. 552(b)(4)).
Centers for Medicare & Medicaid Services, Department of Health and Human Services.
Notice.
The Centers for Medicare & Medicaid Services (CMS) is announcing an opportunity for the public to comment on CMS' intention to collect information from the public. Under the Paperwork Reduction Act of 1995 (the PRA), federal agencies are required to publish notice in the
Comments must be received by January 29, 2019.
When commenting, please reference the document identifier or OMB control number. To be assured consideration, comments and recommendations must be submitted in any one of the following ways:
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2.
To obtain copies of a supporting statement and any related forms for the proposed collection(s) summarized in this notice, you may make your request using one of following:
1. Access CMS' website address at website address at
2. Email your request, including your address, phone number, OMB number, and CMS document identifier, to
3. Call the Reports Clearance Office at (410) 786-1326.
William Parham at (410) 786-1326.
This notice sets out a summary of the use and burden associated with the following information collections. More detailed information can be found in each collection's supporting statement and associated materials (see
Under the PRA (44 U.S.C. 3501-3520), federal agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. The term “collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA requires federal agencies to publish a 60-day notice in the
Centers for Medicare & Medicaid Services, HHS.
Notice.
This notice announces the request for nominations for membership on the Medicare Evidence Development & Coverage Advisory Committee (MEDCAC). Among other duties, the MEDCAC provides advice and guidance to the Secretary of the Department of Health and Human Services (the Secretary) and the Administrator of the Centers for Medicare & Medicaid Services (CMS) concerning the adequacy of scientific evidence available to CMS in making coverage determinations under the Medicare program.
The MEDCACs fundamental purpose is to support the principles of an evidence-based determination process for Medicare's coverage policies. MEDCAC panels provide advice to CMS on the strength of the evidence available for specific medical treatments and technologies through a public, participatory, and accountable process.
Nominations must be received by Monday, January 7, 2019.
You may mail nominations for membership to the following address: Centers for Medicare & Medicaid Services, Center for Clinical Standards and Quality, Attention: Leah Cromwell or Maria Ellis, 7500 Security Boulevard, Mail Stop: S3-02-01, Baltimore, MD 21244 or send via email to
Maria Ellis, Executive Secretary for the MEDCAC, Centers for Medicare & Medicaid Services, Center for Clinical Standards and Quality, Coverage and Analysis Group, S3-02-01, 7500 Security Boulevard, Baltimore, MD 21244 or contact Ms. Ellis by phone (410-786-0309) or via email at
The Secretary signed the initial charter for the Medicare Coverage Advisory Committee (MCAC) on November 24, 1998. A notice in the
The MEDCAC is governed by provisions of the Federal Advisory Committee Act, Public Law 92-463, as amended (5 U.S.C. App. 2), which sets forth standards for the formulation and use of advisory committees, and is authorized by section 222 of the Public Health Service Act as amended (42 U.S.C. 217A).
We are requesting nominations for candidates to serve on the MEDCAC. Nominees are selected based upon their individual qualifications and not solely as representatives of professional associations or societies. We wish to ensure adequate representation of the interests of both women and men, members of all ethnic groups, and physically challenged individuals. Therefore, we encourage nominations of qualified candidates who can represent these interests.
The MEDCAC consists of a pool of 100 appointed members including: 90 at-large standing members (10 of whom are patient advocates), and 10 representatives of industry interests. Members generally are recognized authorities in clinical medicine including subspecialties, administrative medicine, public health, biological and physical sciences, epidemiology and biostatistics, clinical trial design, health care data management and analysis, patient advocacy, health care economics, medical ethics or other relevant professions.
The MEDCAC works from an agenda provided by the Designated Federal Official. The MEDCAC reviews and evaluates medical literature and technology assessments, and hears public testimony on the evidence available to address the impact of medical items and services on health outcomes of Medicare beneficiaries. The MEDCAC may also advise the Centers for Medicare & Medicaid Services (CMS) as part of Medicare's “coverage with evidence development” initiative.
As of June 2019, there will be 20 membership terms expiring. Of the 20 memberships expiring, 1 is an industry representative and the remaining 19 membership openings are for the at-large standing MEDCAC membership.
All nominations must be accompanied by curricula vitae. Nomination packages should be sent to Leah Cromwell or Maria Ellis at the address listed in the
We are looking particularly for experts in a number of fields. These include cancer screening, genetic testing, clinical epidemiology, psychopharmacology, screening and diagnostic testing analysis, and vascular surgery. We also need experts in biostatistics in clinical settings, dementia treatment, minority health, observational research design, stroke epidemiology, and women's health.
The nomination letter must include a statement that the nominee is willing to serve as a member of the MEDCAC and appears to have no conflict of interest that would preclude membership. We are requesting that all curricula vitae include the following:
In the nomination letter, we are requesting that nominees specify whether they are applying for a patient advocate position, for an at-large standing position, or as an industry representative. Potential candidates will be asked to provide detailed information concerning such matters as financial holdings, consultancies, and research grants or contracts in order to permit evaluation of possible sources of financial conflict of interest. Department policy prohibits multiple committee memberships. A federal advisory committee member may not serve on more than one committee within an agency at the same time.
Members are invited to serve for overlapping 2-year terms. A member may continue to serve after the expiration of the member's term until a successor is named. Any interested person may nominate one or more qualified persons. Self-nominations are also accepted. Individuals interested in the representative positions must include a letter of support from the organization or interest group they would represent.
This document does not impose information collection requirements, that is, reporting, recordkeeping or third-party disclosure requirements. Consequently, there is no need for review by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
Food and Drug Administration, HHS.
Notice of availability.
The Food and Drug Administration (FDA or Agency) is announcing the availability of the draft guidance for industry and FDA staff entitled “Self-Monitoring Blood Glucose Test Systems for Over-the-Counter Use.” This draft guidance document describes studies and information that FDA recommends be used when submitting premarket notifications (510(k)s) for self-monitoring blood glucose test
Submit either electronic or written comments on the draft guidance by February 28, 2019 to ensure that the Agency considers your comment on this draft guidance before it begins work on the final version of the guidance.
You may submit comments on any guidance at any time as follows:
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
You may submit comments on any guidance at any time (see 21 CFR 10.115(g)(5)).
An electronic copy of the draft guidance document is available for download from the internet. See the
Leslie Landree, Center for Devices and Radiological Health, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 66, Rm. 4623, Silver Spring, MD 20993-0002, 301-796-6147.
On October 11, 2016, FDA published a final guidance entitled “Self-Monitoring Blood Glucose Test Systems for Over-the-Counter Use.” This guidance document described studies and information that FDA recommends be used when submitting 510(k)s for SMBGs that are for OTC home use by lay users. FDA is now proposing to make modifications to the final guidance based on feedback received from stakeholders, which the Agency believes will better align with the evolving understanding and development of these types of devices. When finalized, this draft guidance will replace the final guidance of the same title issued on October 11, 2016.
This draft guidance is not meant to address BGMS that are intended for prescription point-of-care use in professional healthcare settings (
This draft guidance is being issued consistent with FDA's good guidance practices regulation (21 CFR 10.115). The draft guidance, when finalized, will represent the current thinking of FDA on “Self-Monitoring Blood Glucose Test Systems for Over-the-Counter Use.” It does not establish any rights for any person and is not binding on FDA or the public. You can use an alternative approach if it satisfies the requirements of the applicable statutes and regulations. This guidance is not subject to Executive Order 12866.
Persons interested in obtaining a copy of the draft guidance may do so by downloading an electronic copy from the internet. A search capability for all Center for Devices and Radiological
This draft guidance refers to previously approved collections of information. These collections of information are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The collections of information in the following FDA guidance and regulations have been approved by OMB as listed in the following table:
Food and Drug Administration, HHS.
Notice; establishment of a public docket; request for comments.
The Food and Drug Administration (FDA) announces a forthcoming public advisory committee meeting of the Endocrinologic and Metabolic Drugs Advisory Committee (the Committee). The general function of the Committee is to provide advice and recommendations to FDA on regulatory issues. The meeting will be open to the public. FDA is establishing a docket for public comment on this document.
The meeting will be held on January 17, 2019, from 8 a.m. to 5 p.m.
FDA White Oak Campus, 10903 New Hampshire Ave., Bldg. 31 Conference Center, the Great Room (Rm. 1503), Silver Spring, MD 20993-0002. Answers to commonly asked questions including information regarding special accommodations due to a disability, visitor parking, and transportation may be accessed at:
FDA is establishing a docket for public comment on this meeting. The docket number is FDA-2018-N-4282. The docket will close on January 16, 2019. Submit either electronic or written comments on this public meeting by January 16, 2019. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before January 16, 2019. The
Comments received on or before January 3, 2019, will be provided to the Committee. Comments received after that date will be taken into consideration by FDA.
You may submit comments as follows:
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your
LaToya Bonner, Center for Drug Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 31, Rm. 2417, Silver Spring, MD 20993-0002, 301-796-9001, Fax: 301-847-8533, email:
FDA intends to make background material available to the public no later than 2 business days before the meeting. If FDA is unable to post the background material on its website prior to the meeting, the background material will be made publicly available at the location of the advisory committee meeting, and the background material will be posted on FDA's website after the meeting. Background material is available at
Persons attending FDA's advisory committee meetings are advised that FDA is not responsible for providing access to electrical outlets.
For press inquiries, please contact the Office of Media Affairs at
FDA welcomes the attendance of the public at its advisory committee meetings and will make every effort to accommodate persons with disabilities. If you require accommodations due to a disability, please contact LaToya Bonner (see
FDA is committed to the orderly conduct of its advisory committee meetings. Please visit our website at
Notice of this meeting is given under the Federal Advisory Committee Act (5 U.S.C. app. 2).
Food and Drug Administration, HHS.
Notice.
The Food and Drug Administration (FDA or the Agency) has determined the regulatory review period for KEVZARA and is publishing this notice of that determination as required by law. FDA has made the determination because of the submission of applications to the Director of the U.S. Patent and Trademark Office (USPTO), Department of Commerce, for the extension of a patent which claims that human biological product.
Anyone with knowledge that any of the dates as published (see the
You may submit comments as follows. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before January 29, 2019. The
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Beverly Friedman, Office of Regulatory Policy, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 51, Rm. 6250, Silver Spring, MD 20993, 301-796-3600.
The Drug Price Competition and Patent Term Restoration Act of 1984 (Pub. L. 98-417) and the Generic Animal Drug and Patent Term Restoration Act (Pub. L. 100-670) generally provide that a patent may be extended for a period of up to 5 years so long as the patented item (human drug product, animal drug product, medical device, food additive, or color additive) was subject to regulatory review by FDA before the item was marketed. Under these acts, a product's regulatory review period forms the basis for determining the amount of extension an applicant may receive.
A regulatory review period consists of two periods of time: A testing phase and an approval phase. For human biological products, the testing phase begins when the exemption to permit the clinical investigations of the biological product becomes effective and runs until the approval phase begins. The approval phase starts with the initial submission of an application to market the human biological product and continues until FDA grants permission to market the biological product. Although only a portion of a regulatory review period may count toward the actual amount of extension that the Director of USPTO may award (for example, half the testing phase must be subtracted as well as any time that may have occurred before the patent was issued), FDA's determination of the length of a regulatory review period for a human biological product will include all of the testing phase and approval phase as specified in 35 U.S.C. 156(g)(1)(B).
FDA has approved for marketing the human biologic product KEVZARA (sarilumab). KEVZARA is indicated for treatment of adult patients with moderately to severely active rheumatoid arthritis who have had an inadequate response or intolerance to one or more disease-modifying antirheumatic drugs. Subsequent to this approval, the USPTO received patent term restoration applications for KEVZARA (U.S. Patent Nos. 7,582,298 and 8,568,721) from Regeneron Pharmaceuticals, Inc., and the USPTO requested FDA's assistance in determining the patents' eligibility for patent term restoration. In a letter dated February 6, 2018 (revised), FDA advised the USPTO that this human biological product had undergone a regulatory review period and that the approval of KEVZARA represented the first permitted commercial marketing or use of the product. Thereafter, the USPTO requested that FDA determine the product's regulatory review period.
FDA has determined that the applicable regulatory review period for KEVZARA is 3,478 days. Of this time, 2,907 days occurred during the testing phase of the regulatory review period, while 571 days occurred during the
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2.
3.
This determination of the regulatory review period establishes the maximum potential length of a patent extension. However, the USPTO applies several statutory limitations in its calculations of the actual period for patent extension. In its applications for patent extension, this applicant seeks 1,234 or 937 days of patent term extension.
Anyone with knowledge that any of the dates as published are incorrect may submit either electronic or written comments and, under 21 CFR 60.24, ask for a redetermination (see
Submit petitions electronically to
Food and Drug Administration, HHS.
Notice.
The Food and Drug Administration (FDA or the Agency) has determined the regulatory review period for PROVAYBLUE and is publishing this notice of that determination as required by law. FDA has made the determination because of the submission of an application to the Director of the U.S. Patent and Trademark Office (USPTO), Department of Commerce, for the extension of a patent which claims that human drug product.
Anyone with knowledge that any of the dates as published (see the
You may submit comments as follows. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before January 29, 2019. The
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in
Beverly Friedman, Office of Regulatory Policy, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 51, Rm. 6250, Silver Spring, MD 20993, 301-796-3600.
The Drug Price Competition and Patent Term Restoration Act of 1984 (Pub. L. 98-417) and the Generic Animal Drug and Patent Term Restoration Act (Pub. L. 100-670) generally provide that a patent may be extended for a period of up to 5 years so long as the patented item (human drug product, animal drug product, medical device, food additive, or color additive) was subject to regulatory review by FDA before the item was marketed. Under these acts, a product's regulatory review period forms the basis for determining the amount of extension an applicant may receive.
A regulatory review period consists of two periods of time: A testing phase and an approval phase. For human drug products, the testing phase begins when the exemption to permit the clinical investigations of the drug becomes effective and runs until the approval phase begins. The approval phase starts with the initial submission of an application to market the human drug product and continues until FDA grants permission to market the drug product. Although only a portion of a regulatory review period may count toward the actual amount of extension that the Director of USPTO may award (for example, half the testing phase must be subtracted as well as any time that may have occurred before the patent was issued), FDA's determination of the length of a regulatory review period for a human drug product will include all of the testing phase and approval phase as specified in 35 U.S.C. 156(g)(1)(B).
FDA has approved for marketing the human drug product, PROVAYBLUE (methylene blue) indicated for the treatment of pediatric and adult patients with acquired methemoglobinemia. Subsequent to this approval, the USPTO received a patent term restoration application for PROVAYBLUE (U.S. Patent No. 8,765,942) from Provepharm S.A.S. and the USPTO requested FDA's assistance in determining the patent's eligibility for patent term restoration. In a letter dated February 6, 2018, FDA advised the USPTO that this human drug product had undergone a regulatory review period and that the approval of PROVAYBLUE represented the first permitted commercial marketing or use of the product. Thereafter, the USPTO requested that FDA determine the product's regulatory review period.
FDA has determined that the applicable regulatory review period for PROVAYBLUE is 415 days. Of this time, 232 days occurred during the testing phase of the regulatory review period, while 183 days occurred during the approval phase. These periods of time were derived from the following dates:
1.
2.
3.
This determination of the regulatory review period establishes the maximum potential length of a patent extension. However, the USPTO applies several statutory limitations in its calculations of the actual period for patent extension. In its application for patent extension, this applicant seeks 298 days of patent term extension.
Anyone with knowledge that any of the dates as published are incorrect may submit either electronic or written comments and, under 21 CFR 60.24, ask for a redetermination (see
Submit petitions electronically to
Food and Drug Administration, HHS.
Notice.
The Food and Drug Administration (FDA or Agency) is announcing an opportunity for public
Submit either electronic or written comments on the collection of information by January 29, 2019.
You may submit comments as follows. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before January 29, 2019. The
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Domini Bean, Office of Operations, Food and Drug Administration, Three White Flint North, 10A-12M, 11601 Landsdown St., North Bethesda, MD 20852, 301-796-5733,
Under the PRA (44 U.S.C. 3501-3520), Federal Agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. “Collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes Agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA (44 U.S.C. 3506(c)(2)(A)) requires Federal Agencies to provide a 60-day notice in the
With respect to the following collection of information, FDA invites comments on these topics: (1) Whether the proposed collection of information is necessary for the proper performance of FDA's functions, including whether the information will have practical utility; (2) the accuracy of FDA's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques, when appropriate, and other forms of information technology.
This information collection supports reporting and recordkeeping found in Agency guidance. Under parts 312 and 812 (21 CFR parts 312 and 812), sponsors are required to provide
Accordingly, we developed the guidance document entitled, “Guidance for Industry—Oversight of Clinical Investigations: A Risk-Based Approach to Monitoring.” The guidance is intended to assist sponsors of clinical investigations in developing strategies for risk-based monitoring and plans for clinical investigations of human drug and biological products, medical devices, and combinations thereof. The guidance describes strategies for monitoring activities performed by sponsors or by contract research organizations (CROs) that focus on the conduct, oversight, and reporting of findings of an investigation by clinical investigators. The guidance also recommends strategies that reflect a risk-based approach to monitoring that focuses on critical study parameters and relies on a combination of monitoring activities to oversee a study effectively. Finally, the guidance specifically encourages greater reliance on centralized monitoring methods where appropriate.
Information collections for reports and records associated with clinical investigations under parts 312 and 812 are currently approved under OMB control numbers 0910-0014 and 0910-0078 respectively. These reporting and recordkeeping provisions cover general elements. The guidance discusses other elements sponsors and investigators should consider and include in developing a monitoring plan. As explained in the guidance, documentation of monitoring should include sufficient detail to allow verification that the monitoring plan was followed. The plan should provide adequate information to those involved with monitoring to effectively carry out their duties. All sponsor and CRO personnel who may be involved with monitoring (including those who review appropriate action, determine appropriate action, or both) regarding potential issues identified through monitoring should review the monitoring plan.
We estimate the burden of this collection of information as follows:
Based on a review of the information collection, we have made no adjustments to our burden estimate. We estimate 88 sponsors will develop 132 comprehensive monitoring plans in accordance with the guidance. We believe the associated burden for each plan is approximately 4 hours and includes the time necessary to develop, and amend as appropriate, the monitoring plan.
Food and Drug Administration, HHS.
Notice of availability.
The Food and Drug Administration (FDA or Agency) is announcing the availability of the draft guidance for industry and FDA staff entitled “Blood Glucose Monitoring Test Systems for Prescription Point-of-Care Use.” This draft guidance document describes studies and criteria that FDA recommends be used when submitting premarket notifications (510(k)s) for blood glucose monitoring systems (BGMSs) that are for prescription point-of-care use. This draft guidance is not final nor is it in effect at this time.
Submit either electronic or written comments on the draft guidance by February 28, 2019 to ensure that the Agency considers your comment on this draft guidance before it begins work on the final version of the guidance.
You may submit comments on any guidance at any time as follows:
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
You may submit comments on any guidance at any time (see 21 CFR 10.115(g)(5)).
An electronic copy of the draft guidance document is available for download from the internet. See the
Leslie Landree, Center for Devices and Radiological Health, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 66, Rm. 4623, Silver Spring, MD 20993-0002, 301-796-6147.
On October 11, 2016, FDA published a final guidance entitled, “Blood Glucose Monitoring Test Systems for Prescription Point-of-Care Use.” That guidance document described studies and information that FDA recommends be used when submitting 510(k)s for BGMSs that are for prescription point-of-care use. FDA is now proposing to make modifications to the guidance based on feedback received from stakeholders, which the Agency believes will better align with the evolving understanding and development of these types of devices. When finalized, this draft guidance will replace the final guidance of the same title issued on October 11, 2016.
This draft guidance is being issued consistent with FDA's good guidance practices regulation (21 CFR 10.115). The draft guidance, when finalized, will represent the current thinking of FDA on “Blood Glucose Monitoring Test Systems for Prescription Point-of-Care Use.” It does not establish any rights for any person and is not binding on FDA or the public. You can use an alternative approach if it satisfies the requirements of the applicable statutes and regulations. This guidance is not subject to Executive Order 12866.
Persons interested in obtaining a copy of the draft guidance may do so by downloading an electronic copy from the internet. A search capability for all Center for Devices and Radiological Health guidance documents is available at
This draft guidance refers to previously approved collections of information. These collections of information are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The collections of information in the following FDA guidances and regulations have been approved by OMB as listed in the following table:
Food and Drug Administration, HHS.
Notice; establishment of a public docket; request for comments.
The Food and Drug Administration (FDA) announces a forthcoming public advisory committee meeting of the Bone, Reproductive and Urologic Drugs Advisory Committee. The general function of the committee is to provide advice and recommendations to FDA on regulatory issues. The meeting will be open to the public. FDA is establishing a docket for public comment on this document.
The meeting will be held on January 16, 2019, from 8:15 a.m. to 5 p.m.
FDA White Oak Campus, 10903 New Hampshire Ave., Bldg. 31 Conference Center, the Great Room (Rm. 1503), Silver Spring, MD 20993-0002. Answers to commonly asked questions including information regarding special accommodations due to a disability, visitor parking, and transportation may be accessed at:
FDA is establishing a docket for public comment on this meeting. The docket number is FDA-2018-N-4116. The docket will close on January 14, 2019. Submit either electronic or written comments on this public meeting by January 14, 2019. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before January 14, 2019. The
Comments received on or before December 31, 2018, will be provided to the committee. Comments received after that date will be taken into consideration by FDA.
You may submit comments as follows:
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” FDA will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Kalyani Bhatt, Center for Drug Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 31, Rm. 2417, Silver Spring, MD 20993-0002, 301-796-9001, Fax: 301-847-8533, email:
FDA intends to make background material available to the public no later than 2 business days before the meeting. If FDA is unable to post the background material on its website prior to the meeting, the background material will be made publicly available at the location of the advisory committee meeting, and the background material will be posted on FDA's website after the meeting. Background material is available at
Persons attending FDA's advisory committee meetings are advised that FDA is not responsible for providing access to electrical outlets.
For press inquiries, please contact the Office of Media Affairs at
FDA welcomes the attendance of the public at its advisory committee meetings and will make every effort to accommodate persons with disabilities. If you require accommodations due to a disability, please contact Kalyani Bhatt (see
FDA is committed to the orderly conduct of its advisory committee meetings. Please visit our website at
Notice of this meeting is given under the Federal Advisory Committee Act (5 U.S.C. app. 2).
Food and Drug Administration, HHS.
Notice; establishment of a public docket; request for comments.
The Food and Drug Administration (FDA) announces a forthcoming public advisory committee meeting of the Arthritis Advisory Committee and the Drug Safety and Risk Management Advisory Committee. The general function of the committees is to provide advice and recommendations to FDA on regulatory issues. The meeting will be open to the public. FDA is establishing a docket for public comment on this document.
The meeting will be held on January 11, 2019, from 8 a.m. to 5 p.m.
College Park Marriott Hotel and Conference Center, General Vessey Ballroom, 3501 University Blvd. East, Hyattsville, MD 20783. The conference center's telephone number is 301-985-7300. Answers to commonly asked questions about FDA Advisory Committee meetings may be accessed at:
FDA is establishing a docket for public comment on this meeting. The docket number is FDA-2018-N-4227. The docket will close on January 10, 2019. Submit either electronic or written comments on this public meeting by January 10, 2019. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before January 10, 2019. The
Comments received on or before December 27, 2018, will be provided to the committees. Comments received after that date will be taken into consideration by FDA.
You may submit comments as follows:
Submit electronic comments in the following way:
• Federal eRulemaking Portal:
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
• Mail/Hand delivery/Courier (for written/paper submissions): Dockets Management Staff (HFA-305), Food and Drug Administration, 5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” FDA will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Yinghua S. Wang, Center for Drug Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 31, Rm. 2417, Silver Spring, MD 20993-0002, 301-796-9001, Fax: 301-847-8533, email:
FDA intends to make background material available to the public no later than 2 business days before the meeting. If FDA is unable to post the background material on its website prior to the meeting, the background material will be made publicly available at the location of the advisory committee meeting, and the background material will be posted on FDA's website after the meeting. Background material is available at
Persons attending FDA's advisory committee meetings are advised that FDA is not responsible for providing access to electrical outlets.
For press inquiries, please contact the Office of Media Affairs at
FDA welcomes the attendance of the public at its advisory committee meetings and will make every effort to accommodate persons with disabilities. If you require accommodations due to a disability, please contact Yinghua S. Wang (see
FDA is committed to the orderly conduct of its advisory committee meetings. Please visit our website at
Notice of this meeting is given under the Federal Advisory Committee Act (5 U.S.C. app. 2).
Food and Drug Administration, HHS.
Notice.
The Food and Drug Administration (FDA, Agency, or we) is announcing an opportunity for public comment on the proposed collection of certain information by the Agency. Under the Paperwork Reduction Act of 1995 (PRA), Federal Agencies are required to publish notice in the
Submit either electronic or written comments on the collection of information by January 29, 2019.
You may submit comments as follows. Please note that late, untimely filed comments will not be considered. Electronic comments must be submitted on or before January 29, 2019. The
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on
Domini Bean, Office of Operations, Food and Drug Administration, Three White Flint North, 10A-12M, 11601 Landsdown St., North Bethesda, MD 20852, 301-796-5733,
Under the PRA (44 U.S.C. 3501-3520), Federal Agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. “Collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes Agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party.
With respect to the following collection of information, FDA invites comments on these topics: (1) Whether the proposed collection of information is necessary for the proper performance of FDA's functions, including whether the information will have practical utility; (2) the accuracy of FDA's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques, when appropriate, and other forms of information technology.
The SRP and the ESG are the Agency's electronic systems for collecting, submitting, and processing adverse event reports, product problem reports, and other safety information for FDA-regulated products. To ensure the safety and identify any risks, harms, or other dangers to health for all FDA-regulated human and animal products, the Agency needs to be informed whenever an adverse event, product quality problem, or product use error occurs. This risk identification process is the first necessary step that allows the Agency to gather the information necessary to be able to evaluate the risk associated with the product and take whatever action is necessary to mitigate or eliminate the public's exposure to the risk.
Some adverse event reports are required to be submitted to FDA (mandatory reporting) and some adverse event reports are submitted voluntarily (voluntary reporting). Requirements regarding mandatory reporting of adverse events or product problems have been codified in 21 CFR parts 310, 314, 514, 600, 803, and 1271, specifically §§ 310.305, 314.80, 314.98, 314.540, 329.100, 514.80, 600.80, 803.30, 803.40, 803.50, 803.53, 803.56, and 1271.350(a) (21 CFR 310.305, 314.80, 314.98, 314.540, 329.100, 514.80, 600.80, 803.30, 803.40, 803.50, 803.53, 803.56, and 1271.350(a)). While adverse event reports submitted to FDA in paper format using Forms FDA 3500, 3500A, 1932, and 1932a are approved under OMB control numbers 0910-0284 and 0910-0291, this notice solicits comments on adverse event reports filed electronically via the SRP and the ESG, and currently approved under OMB control number 0910-0645.
FDA currently has OMB approval to receive several types of adverse event reports electronically via the SRP using rational questionnaires. In this notice, FDA seeks comments on the extension of OMB approval for these existing rational questionnaires and the proposed revision of the existing rational questionnaire for tobacco products.
The Food and Drug Administration Amendments Act of 2007 (Pub. L. 110-085) (FDAAA) amended the Federal Food, Drug, and Cosmetic Act (FD&C Act) by creating section 417 (21 U.S.C. 350f), Reportable Food Registry (RFR). Section 417 of the FD&C Act defines “reportable food” as an article of food (other than infant formula) for which there is a “reasonable probability that the use of, or exposure to, such article of food will cause serious adverse health consequences or death to humans or animals.” (See section 417(a)(2) of the FD&C Act.) The Secretary of Health and Human Services (the Secretary) has delegated to the FDA Commissioner the responsibility for administering the FD&C Act, including section 417. The purpose of the RFR is to enable the Agency to track patterns of adulteration in food to support its efforts to target limited inspection resources to protect the public health. We designed the RFR report rational questionnaire to enable FDA to quickly identify, track, and remove from commerce an article of food (other than infant formula and dietary supplements) for which there is a reasonable probability that the use of, or exposure to, such article of food will cause serious adverse health consequences or death to humans or animals. FDA's Center for Food Safety and Applied Nutrition (CFSAN) uses the information collected to help ensure that such products are quickly and efficiently removed from the market to prevent foodborne illnesses. The data elements for RFR reports remain unchanged in this request for extension of OMB approval.
Section 512(l) of the FD&C Act (21 U.S.C. 360b(l)) and § 514.80(b) of FDA's regulations require applicants of approved new animal drug applications (NADAs) and approved abbreviated new animal drug applications (ANADAs) to report adverse drug experiences and product/manufacturing defects to the Center for Veterinary Medicine (CVM). This continuous monitoring of approved NADAs and ANADAs affords the primary means by which FDA obtains information regarding potential problems with the safety and efficacy of marketed approved new animal drugs as well as potential product/manufacturing problems. Postapproval marketing surveillance is important because data previously submitted to FDA may no longer be adequate, as animal drug effects can change over time and less apparent effects may take years to manifest.
If an applicant must report adverse drug experiences and product/manufacturing defects and chooses to do so using the Agency's paper forms, the applicant is required to use Form FDA 1932, “Veterinary Adverse Drug Reaction, Lack of Effectiveness, Product Defect Report.” Periodic drug experience reports and special drug experience reports must be accompanied by a completed Form FDA 2301, “Transmittal of Periodic Reports and Promotional Material for New Animal Drugs” (see § 514.80(d)). Form FDA 1932a, “Veterinary Adverse Drug Reaction, Lack of Effectiveness or Product Defect Report” allows for voluntary reporting of adverse drug experiences or product/manufacturing defects by veterinarians and the general public. Collection of information using existing paper Forms FDA 2301, 1932, and 1932a is approved under OMB control number 0910-0284.
Alternatively, an applicant may choose to report adverse drug experiences and product/manufacturing defects electronically. The electronic submission data elements to report adverse drug experiences and product/manufacturing defects electronically remain unchanged in this request for extension of OMB approval.
Section 1002(b) of FDAAA directed the Secretary to establish an early warning and surveillance system to
As noted, this notice seeks comments on a revision to the existing rational questionnaire utilized by consumers and concerned citizens to report tobacco product adverse event or product problems.
FDA has broad legal authority under the FD&C Act to protect the public health, including protecting Americans from tobacco-related death and disease by regulating the manufacture, distribution, and marketing of tobacco products and by educating the public, especially young people, about tobacco products and the dangers their use poses to themselves and others. The Family Smoking Prevention and Tobacco Control Act (Pub. L. 111-31) amended the FD&C Act by creating a new section 909 (21 U.S.C. 387i, Records and Reports on Tobacco Products). Section 909(a) of the FD&C Act authorizes FDA to establish regulations with respect to mandatory adverse event reports associated with the use of a tobacco product. FDA collects voluntary adverse event reports associated with the use of tobacco products from interested parties such as healthcare providers, researchers, consumers, and other users of tobacco products. Information collected in voluntary adverse event reports contributes to the Center for Tobacco Product's (CTP's) ability to be informed of, and assess the real consequences of, tobacco product use.
The need for this collection of information derives from our responsibility to obtain current, timely, and policy-relevant information to carry out our statutory functions. FDA's Commissioner is authorized to undertake this collection as specified in section 1003(d)(2) of the FD&C Act (21 U.S.C. 393(d)(2)). FDA's CTP has been receiving adverse event and product problem reports through the Safety Reporting Portal since January 2014, when the SRP for tobacco products first became available to the public. CTP also receives adverse event and product problem reports via paper forms, as approved under OMB control number 0910-0291. We are revising the questionnaire with non-substantive changes. The changes are made to make the questions more understandable and specific. In some instances, alterations were made to the list of values to choose from by the end user to include values more pertinent to CTP's current and future data collection needs. In one instance, a question was added about the event location: “In what setting(s) did this problem occur?” In still other instances, questions were removed altogether to streamline the questionnaire and make it more user-friendly. All changes were made with the goal of providing FDA more pertinent information while minimizing the burden on the respondent. Finally, we note that respondents unable to submit reports using the electronic system will still be able to provide their information by paper form (by mail or Fax) or telephone.
CTP has two voluntary rational questionnaires on the SRP. The first is utilized by consumers and concerned citizens to report tobacco product adverse event or product problems. A second rational questionnaire is used by tobacco product investigators in clinical trials with investigational tobacco products. In addition to the information collected by the first rational questionnaire for tobacco products, the second rational questionnaire collects identifying information specific to the clinical trial or investigational product such as clinical protocol numbers or other identifying features to pinpoint under which test or protocol the adverse event occurred.
Both CTP voluntary rational questionnaires capture tobacco-specific adverse event and product problem information from reporting entities such as healthcare providers, researchers, consumers, and other users of tobacco products. To carry out its responsibilities, FDA needs to be informed when an adverse event, product problem, or error with use is suspected or identified. FDA uses tobacco-specific adverse event and product problem information to assess and evaluate the risk associated with the product and to take whatever action is necessary to reduce, mitigate, or eliminate the public's exposure to the risk through regulatory and public health interventions. The burden for CTP remains unchanged. We seek approval of the revised rational questionnaire in this request for extension of OMB approval.
The Dietary Supplement and Nonprescription Drug Consumer Protection Act (DSNDCPA) (Pub. L. 109-462, 120 Stat. 3469) amended the FD&C Act with respect to serious adverse event reporting and recordkeeping for dietary supplements and nonprescription drugs marketed without an approved application.
Section 761(b)(1) of the FD&C Act (21 U.S.C. 379aa-1(b)(1)) requires the manufacturer, packer, or distributor whose name (under section 403(e)(1) of the FD&C Act (21 U.S.C. 343(e)(1)) appears on the label of a dietary supplement marketed in the United States to submit to FDA all serious adverse event reports associated with the use of a dietary supplement, accompanied by a copy of the product label. The manufacturer, packer, or distributor of a dietary supplement is required by the DSNDCPA to use the MedWatch form (Form FDA 3500A) when submitting a serious adverse event report to FDA. In addition, under section 761(c)(2) of the FD&C Act, the submitter of the serious adverse event report (referred to in the statute as the “responsible person”) is required to submit to FDA a followup report of any related new medical information the responsible person receives within 1 year of the initial report.
As required by section 3(d)(3) of the DSNDCPA, FDA issued guidance to describe the minimum data elements for serious adverse event reports for dietary supplements. The guidance document entitled “Guidance for Industry: Questions and Answers Regarding
Reporting of serious adverse events for dietary supplements to FDA serves as an early warning sign of potential public health issues associated with such products. Without notification of all serious adverse events associated with dietary supplements, FDA would be unable to investigate and followup promptly, which in turn could cause delays in alerting the public when safety problems are found. In addition, the information received provides a reliable mechanism to track patterns of adulteration in food that supports efforts by FDA to target limited inspection resources to protect the public health. FDA uses the information collected to help ensure that such products are quickly and efficiently removed from the market to prevent foodborne illnesses.
Paper mandatory dietary supplement adverse event reports are submitted to FDA on the MedWatch form, Form FDA 3500A, and paper voluntary reports are submitted on Form FDA 3500. Forms FDA 3500 and 3500A are available as fillable PDF forms. Dietary supplement adverse event reports may be electronically submitted to the Agency via the SRP. This method of submission is voluntary. A manufacturer, packer, or distributor of a dietary supplement who is unable to or chooses not to submit reports using the electronic system will still be able to provide their information by paper MedWatch form, Form FDA 3500A (by mail or Fax). There is no change to the mandatory information previously required on the MedWatch form. CFSAN is making available the option to submit the same information via electronic means.
The reporting and recordkeeping requirements of the FD&C Act for dietary supplement adverse event reports and the recommendations of the guidance document were first approved in 2009 under OMB control number 0910-0635. OMB approved the extension of the 0910-0635 collection of information in March 2016. OMB approved the electronic submission of dietary supplement adverse event reports via the SRP under OMB control number 0910-0645 in June 2013. Burden hours are also reported under OMB control number 0910-0291, reflecting the submission of dietary supplement adverse event reports on the paper MedWatch form, Form FDA 3500A.
The electronic submission data elements to report adverse events associated with dietary supplement products remain unchanged in this request for extension of OMB approval.
We continue to work on proposed new rational questionnaire functionality that will be used for food, infant formula, and cosmetic adverse event reports over the SRP. Currently, voluntary adverse event reports for such products are submitted on Form FDA 3500, which is available as a fillable PDF form. However, we have not developed rational questionnaires by which these reports may be electronically submitted to us via the SRP. In addition, MedWatch forms, although recently updated with field labels and descriptions to better clarify for reporters the range of reportable products, do not specifically include questions relevant for the analysis of adverse events related to food, infant formula, and cosmetics. The proposed food, infant formula, and cosmetics rational questionnaire functionality will operate in a manner similar to the dietary supplement rational questionnaire and will include specific questions relevant for the analysis of adverse events related to food, infant formula, and cosmetics. The electronic submission data elements to report adverse events associated with food, infant formula, and cosmetics products remain unchanged in this request for extension of OMB approval.
We estimate the burden of this collection of information as follows:
The Agency's estimate of the number of respondents and the total annual responses in table 1 is based primarily on mandatory and voluntary adverse event reports electronically submitted to the Agency. The estimated total annual responses are based on initial reports. Followup reports, if any, are not counted as new reports. Based on its experience with adverse event reporting, FDA estimates that it will take a respondent 0.6 hour to submit a voluntary adverse event report via the SRP, 1 hour to submit a mandatory adverse event report via the SRP, and 0.6 hour to submit a mandatory adverse event report via the ESG (gateway-to-gateway transmission). Both mandatory and voluntary RFR reports must be submitted via the SRP. FDA estimates that it will take a respondent 0.6 hour to submit a RFR report, whether the submission is mandatory or voluntary.
The burden hours required to complete paper FDA reporting forms (Forms FDA 3500, 3500A, 1932, and 1932a) are reported under OMB control numbers 0910-0284 and 0910-0291. While FDA does not charge for the use of the ESG, the Agency requires respondents to obtain a public key infrastructure certificate to set up the account. This can be obtained in-house or outsourced by purchasing a public key certificate that is valid for 1 year to 3 years. The certificate typically costs from $20 to $30.
Our estimated burden for the information collection reflects an overall increase of 688,547 hours and a corresponding increase of 1,145,763 responses. We attribute this adjustment to an increase in the number of submissions we received over the last few years.
Health Resources and Services Administration (HRSA), Department of Health and Human Services (HHS).
Notice.
The Advisory Commission on Childhood Vaccines (ACCV) has scheduled a public meeting. Information about the ACCV and the agenda for this meeting can be found on the ACCV website at:
December 6, 2018, at 10:00 a.m. ET.
This meeting will be held by teleconference and Adobe Connect webinar. The public can join the meeting by:
1. (Audio Portion) Calling the conference phone number 800-988-0218 and providing the following information: Leader Name: Dr. Narayan Nair, Password: 9302948.
2. (Visual Portion) Connect to the ACCV Adobe Connect Meeting using the following URL:
Annie Herzog, Program Analyst, Division of Injury Compensation Programs (DICP), HRSA, 5600 Fishers Lane, 08N146B, Rockville, Maryland 20857; 301-443-6593; or
The ACCV was established by section 2119 of the Public Health Service (PHS) Act (42 U.S.C. 300aa-19), as enacted by Public Law (Pub. L.) 99-660, and as subsequently amended, and advises the Secretary of HHS (the Secretary) on issues related to implementation of the National Vaccine Injury Compensation Program (VICP). During the December 6, 2018, meeting, agenda items will include, but are not limited to, updates from the DICP, Department of Justice (DOJ), National Vaccine Program Office (NVPO), Immunization Safety Office (Centers for Disease Control and Prevention), National Institute of Allergy and Infectious Diseases (National Institutes of Health) and Center for Biologics, Evaluation and Research (Food and Drug Administration). Agenda items are subject to change as priorities dictate. Refer to the ACCV website listed above for any updated information concerning the meeting to include a draft agenda and additional meeting materials that will be posted before the meeting.
Members of the public will have the opportunity to provide comments. Public participants may submit written statements in advance of the scheduled meeting. Oral comments will be honored in the order they are requested and may be limited as time allows. Requests to submit a written statement or make oral comments to the ACCV should be sent to Annie Herzog using the contact information above by Wednesday, December 5, 2018.
Individuals who need special assistance or another reasonable accommodation should notify Annie Herzog at the address and phone number listed above at least 3 business days before the meeting.
Notice of public meetings; correction.
The Department of Health and Human Services published a document in the
Sarah Selenich, Designated Federal Official, at the Office of Health Policy, Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, 200 Independence Ave. SW, Washington, DC 20201, (202) 690-6870.
In the
In the
Meeting Registration:
The public may attend the meetings in-person or participate by phone via
The following information is submitted when registering:
Name:
Company/organization name:
Postal address:
Email address:
Persons wishing to attend a PTAC meeting must register by following the instructions in the “Meeting Registration” section of this notice. A confirmation email will be sent to registrants shortly after completing the registration process.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meeting.
The meeting will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The purpose of this meeting is to evaluate requests for preclinical development resources for potential new therapeutics for the treatment of cancer. The outcome of the evaluation will provide information to internal NCI committees that will decide whether NCI should support requests and make available contract resources for development of the potential therapeutic to improve the treatment of various forms of cancer. The research proposals and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the proposed research projects, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Toby Hecht, Ph.D., Executive Secretary, Development Experimental Therapeutics Program, National Cancer Institute, NIH, 9609 Medical Center Drive, Room 3W110, Rockville, MD 20850, (240) 276-5683,
This notice is being published less than 15 days prior to the meeting due to the timing limitations imposed by the review and funding cycle.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meeting.
The meeting will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The contract proposals and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the contract proposals, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
This notice is being published less than 15 days prior to the meeting due to the timing limitations imposed by the review and funding cycle.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended (5 U.S.C. App.), notice is hereby given of a meeting of the Vaccine Research Center Board of Scientific Counselors, NIAID.
The meeting will be closed to the public as indicated below in accordance with the provisions set forth in section 552b(c)(6), Title 5 U.S.C., as amended for the review, discussion, and evaluation of individual intramural programs and projects conducted by the National Institute Of Allergy And Infectious Diseases, including consideration of personnel qualifications and performance, and the competence of individual investigators, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Any interested person may file written comments with the committee by forwarding the statement to the Contact Person listed on this notice. The statement should include the name, address, telephone number and when applicable, the business or professional affiliation of the interested person.
National Institutes of Health, HHS.
Notice.
The National Cancer Institute, an institute of the National Institutes of Health, Department of Health and Human Services, is contemplating the grant of an Exclusive Patent License to practice the inventions embodied in the Patents and Patent Applications listed in the Supplementary Information section of this notice to Bull Run Capital, Inc. located in Vancouver, BC, Canada.
Only written comments and/or applications for a license which are received by the National Cancer Institute's Technology Transfer Center on or before December 17, 2018 will be considered.
Requests for copies of the patent application, inquiries, and comments relating to the contemplated an Exclusive Patent License should be directed to: Jaime M. Greene, Senior Licensing and Patenting Manager, NCI Technology Transfer Center, 9609 Medical Center Drive, RM 1E530 MSC 9702, Bethesda, MD 20892-9702 (for business mail), Rockville, MD 20850-9702; Telephone: (240) 276-5530; Facsimile: (240) 276-5504; Email:
U.S. Provisional Patent Application No. 61/340,063, filed March 12, 2018, now abandoned, titled “Agonist/Antagonist Compositions and Methods of Use”, HHS Ref. No.: E-048-2010-0-US-01;
PCT Patent Application Serial No. PCT/US2011/028132, filed March 11, 2011, now abandoned, HHS Reference Number E-048-2010-0-PCT-02 titled “Agonist/antagonist compositions and methods of use”;
U.S. Patent 9,277,748 (Application No. 13/634,447) filed March 11, 2011, issued March 8, 2016, titled “Agonist/antagonist compositions and methods of use”, HHS Ref. No.: E-048-2010-0-US-04;
Canada Patent Application Serial No. 2,792,878, filed March 11, 2011, HHS Reference Number E-048-2010-0-CA-03 titled “Agonist/antagonist compositions and methods of use”; and
U.S. Patent Application Serial No 15/010,830, filed January 29, 2016, HHS Reference Number E-048-2010-0-US-05, titled “Agonist/antagonist compositions and methods of use”.
The patent rights in these inventions have been assigned and/or exclusively licensed to the government of the United States of America.
The prospective exclusive license territory may be worldwide and the field of use may be limited to: “Use of the TRVP1 antagonists BCTC, AMG9810, JYL-827, Capsazepine or IodoRTX combined with a TRVP1 agonist in a composition for the temporary incapacitation of a subject.”
This technology discloses novel compositions comprising a transient receptor potential cation channel subfamily V member 1 (TRPV1) receptor agonist and an antagonist in certain ratios which allow for the onset of agonist action followed by alleviation by antagonist action, and methods of use in personal defense and law enforcement.
Non-lethal means of temporarily incapacitating a person are needed for law enforcement and for personal protection. A common approach currently is to use pepper spray. Although current pepper sprays are effective, and relatively safe, for most individuals, they can be life threatening for people who suffer from asthma and have hypersensitive airways.
In order to reduce the length of time the pepper spray can cause the adverse effects that could result from extended exposure, inventors at NCI have created a composition comprising both an incapacitating pepper spray TRPV1 receptor agonist compound and a slower-acting TRPV1 receptor antagonist compound that reverses the effects of the agonist. The agonist/antagonist composition is intended to be used as an aerosol or spray, that, when administered, causes a painful stimulation and incapacitates a person for only a short period of time. This technology may fill a public health need by improving safety over currently available pepper sprays.
This notice is made in accordance with 35 U.S.C. 209 and 37 CFR part 404. The prospective exclusive license will be royalty bearing, and the prospective exclusive license may be granted unless within fifteen (15) days from the date of this published notice, the National Cancer Institute receives written evidence and argument that establishes that the grant of the license would not be consistent with the requirements of 35 U.S.C. 209 and 37 CFR part 404.
In response to this Notice, the public may file comments or objections. Comments and objections, other than those in the form of a license application, will not be treated confidentially, and may be made publicly available.
License applications submitted in response to this Notice will be presumed to contain business confidential information and any release of information in these license applications will be made only as required and upon a request under the Freedom of Information Act, 5 U.S.C. 552.
Federal Emergency Management Agency, DHS.
Notice.
New or modified Base (1-percent annual chance) Flood Elevations (BFEs), base flood depths, Special Flood Hazard Area (SFHA) boundaries or zone designations, and/or regulatory floodways (hereinafter referred to as flood hazard determinations) as shown on the
Each LOMR was finalized as in the table below.
Each LOMR is available for inspection at both the respective Community Map Repository address listed in the table below and online through the FEMA Map Service Center at
Rick Sacbibit, Chief, Engineering Services Branch, Federal Insurance and Mitigation Administration, FEMA, 400 C Street SW, Washington, DC 20472, (202) 646-7659, or (email)
The Federal Emergency Management Agency (FEMA) makes the final flood hazard determinations as shown in the LOMRs for each community listed in the table below. Notice of these modified flood hazard determinations has been published in newspapers of local circulation and 90 days have elapsed since that publication. The Deputy Associate Administrator for Insurance and Mitigation has resolved any appeals resulting from this notification.
The modified flood hazard determinations are made pursuant to section 206 of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4105, and are in accordance with the National Flood Insurance Act of 1968, 42 U.S.C. 4001
For rating purposes, the currently effective community number is shown and must be used for all new policies and renewals.
The new or modified flood hazard information is the basis for the floodplain management measures that the community is required either to adopt or to show evidence of being already in effect in order to remain qualified for participation in the National Flood Insurance Program (NFIP).
This new or modified flood hazard information, together with the floodplain management criteria required by 44 CFR 60.3, are the minimum that are required. They should not be construed to mean that the community must change any existing ordinances that are more stringent in their floodplain management requirements. The community may at any time enact stricter requirements of its own or pursuant to policies established by other Federal, State, or regional entities.
This new or modified flood hazard determinations are used to meet the floodplain management requirements of the NFIP and are used to calculate the appropriate flood insurance premium rates for new buildings, and for the contents in those buildings. The changes in flood hazard determinations are in accordance with 44 CFR 65.4.
Interested lessees and owners of real property are encouraged to review the final flood hazard information available at the address cited below for each community or online through the FEMA Map Service Center at
Federal Emergency Management Agency, DHS.
Notice.
Flood hazard determinations, which may include additions or modifications of Base Flood Elevations (BFEs), base flood depths, Special Flood Hazard Area (SFHA) boundaries or zone designations, or regulatory floodways on the Flood Insurance Rate Maps (FIRMs) and where applicable, in the supporting Flood Insurance Study (FIS) reports have been made final for the communities listed in the table below.
The FIRM and FIS report are the basis of the floodplain management measures that a community is required either to adopt or to show evidence of having in effect in order to qualify or remain qualified for participation in the Federal Emergency Management Agency's (FEMA's) National Flood Insurance Program (NFIP). In addition, the FIRM and FIS report are used by insurance agents and others to calculate appropriate flood insurance premium rates for buildings and the contents of those buildings.
The date of February 15, 2019 has been established for the FIRM and, where applicable, the supporting FIS report showing the new or modified flood hazard information for each community.
The FIRM, and if applicable, the FIS report containing the final flood hazard information for each community is available for inspection at the respective Community Map Repository address listed in the tables below and will be available online through the FEMA Map Service Center at
Rick Sacbibit, Chief, Engineering Services Branch, Federal Insurance and Mitigation Administration, FEMA, 400 C Street SW, Washington, DC 20472, (202) 646-7659, or (email)
The Federal Emergency Management Agency (FEMA) makes the final determinations listed below for the new or modified flood hazard information for each community listed. Notification of these changes has been published in newspapers of local circulation and 90 days have elapsed since that publication. The Deputy Associate Administrator for Insurance and Mitigation has resolved any appeals resulting from this notification.
This final notice is issued in accordance with section 110 of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4104, and 44 CFR part 67. FEMA has developed criteria for floodplain management in floodprone areas in accordance with 44 CFR part 60.
Interested lessees and owners of real property are encouraged to review the new or revised FIRM and FIS report available at the address cited below for each community or online through the FEMA Map Service Center at
Federal Emergency Management Agency, DHS.
Notice.
This notice amends the notice of a major disaster declaration for the Commonwealth of Virginia (FEMA-4401-DR), dated October 15, 2018, and related determinations.
This amendment was issued November 15, 2018.
Dean Webster, Office of Response and Recovery, Federal Emergency Management Agency, 500 C Street SW, Washington, DC 20472, (202) 646-2833.
The notice of a major disaster declaration for the Commonwealth of Virginia is hereby amended to include the following areas among those areas determined to have been adversely affected by the event declared a major disaster by the President in his declaration of October 15, 2018.
The counties of Botetourt, Chesterfield, Franklin, Lunenburg, Mathews, Mecklenburg, Nottoway, Pulaski, and Roanoke and the independent cities of Bristol, Danville, and Martinsville for Public Assistance.
Federal Emergency Management Agency, DHS.
Notice.
This notice amends the notice of a major disaster declaration for the Commonwealth of Virginia (FEMA-4401-DR), dated October 15, 2018, and related determinations.
This amendment was issued November 14, 2018.
Dean Webster, Office of Response and Recovery, Federal Emergency Management Agency, 500 C Street SW, Washington, DC 20472, (202) 646-2833.
The notice of a major disaster declaration for the Commonwealth of Virginia is hereby amended to include the following areas among those areas determined to have been adversely affected by the event declared a major disaster by the President in his declaration of October 15, 2018.
The counties of Craig, Floyd, Grayson, and Isle of Wight and the independent city of Hampton for Public Assistance.
Fish and Wildlife Service, Interior.
Notice of availability; request for comments.
In accordance with the Endangered Species Act (ESA) and the National Environmental Policy Act, we, the U.S. Fish and Wildlife Service (Service), announce the availability of a draft habitat conservation plan (HCP) in support of an application from Skookumchuck Wind Energy Project, LLC, an affiliate of Renewable Energy Services (applicant), for an incidental take permit (ITP) for the marbled murrelet, listed as threatened under the ESA, and the bald eagle and golden eagle, both of which are protected under the Bald and Golden Eagle Protection Act. Incidental take is expected to result from the operation of 38 commercial wind turbines and associated infrastructure located near Centralia, Washington, in Lewis and Thurston Counties. Also available for review is the Service's draft environmental impact statement (DEIS), which was prepared in response to the application. We are seeking public comments on the draft HCP and DEIS.
We will accept hardcopy comments received or postmarked on or before January 14, 2019. Comments submitted online at
• Chehalis, WA: Wednesday, December 5, 2018, from 6 to 8 p.m.
• Lacey, WA: Monday, December 10, 2018, from 6 to 8 p.m.
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• 100 SW Veterans Way, Chehalis, WA 98532
• 4220 6th Avenue SE, Room 194, Lacey, WA 98503
We will post all comments on
Tim Romanski, by telephone at 360-753-5823, or by email at
The Service received an incidental take permit (ITP) application from the Skookumchuck Wind Energy Project, LLC (applicant) in accordance with the requirements of the Endangered Species Act, as amended (ESA; 16 U.S.C. 1531
The ITP, if issued, would authorize incidental take of the covered species that may occur as a result of the operation and maintenance of the 38 commercial wind turbines over the 30-year permit term. This includes, without limitation, ITP coverage for covered species colliding with both stationary and operating project structures during the permit term. In contrast, the applicant does not seek ITP coverage for the construction phase of the wind project, which would include, without limitation, constructing roads and turbine pads, and erecting wind turbines. Nor does the applicant seek ITP coverage for the facility-decommissioning phase of the project. The applicant anticipates undertaking phased construction over a 9- to 12-month period beginning in mid-2019.
The draft HCP describes how impacts to covered species would be minimized and mitigated. The draft HCP also describes the covered species' life history and ecology, as well as biological goals and objectives of the HCP, the estimated take and its potential impact on covered species' populations, adaptive management, monitoring, and mitigation measures.
The Service prepared a draft environmental impact statement (DEIS) in response to the ITP application in accordance with the requirements of the National Environmental Policy Act (NEPA; 42 U.S.C. 4321
Skookumchuck Wind Energy Project, LLC, intends to initiate construction of a wind turbine facility in 2019, and commence wind turbine operations as soon as possible. Detailed descriptions of the project are found in section 2.0 of the HCP. The majority of the wind project, including all of the 38 turbines, is located in Lewis County, Washington, with some supporting infrastructure located in Thurston County, Washington. The wind turbines are proposed to be constructed on a prominent ridgeline on the Weyerhaeuser Vail Tree Farm, approximately 18 miles east of Centralia, Washington.
The project consists of a maximum of 38 wind turbines, with an expected output of 137 megawatts (MW); a maximum wind turbine height of 492 feet (from ground to vertical blade tip); a maximum rotor diameter of 446 feet; approximately 36.5 miles of existing roads that will be upgraded; approximately 3.9 miles of new road that will be constructed; 17 miles of buried medium-voltage collection cable that will transport power to a substation along the ridgeline; and 15 miles of transmission line that will transport power to the Tono Substation.
The applicant has proposed a conservation program to avoid, minimize, and mitigate for impacts to covered species. Avoidance and minimization measures to benefit the marbled murrelet include project design and planning efforts, and operational practices including seasonal curtailment of turbine blades, installation of transmission and distribution line flight diverters, shielding of artificial light sources, measures to reduce murrelet collisions with vehicles on the project site, and measures to prevent the artificial increase of potential nest predators in the project area. Mitigation measures intended to benefit the marbled murrelet include acquisition and management of conservation lands to promote the preservation and enhancement of suitable nesting habitat for the species, and funding the removal of abandoned or derelict fishing nets in the Salish Sea.
Avoidance and minimization measures to benefit the bald eagle and the golden eagle include project design and planning efforts, a mammal carrion reporting program to reduce scavenging by eagles on the project site, efforts that minimize creating cover for prey animals such as rabbits to reduce eagle use near the wind project, and 2 years of IdentiFlight® technology testing intended to reduce eagle collisions with operating turbine blades. Mitigation measures intended to benefit bald eagles and golden eagles consist of retrofitting power poles to reduce probability of collision and electrocution.
We propose to issue a 30-year permit for incidental take of marbled murrelet, bald eagle, and golden eagle if the Skookumchuck Wind Energy Project HCP meets all section 10(a)(1)(B) permit issuance criteria and, with respect to bald eagles and golden eagles, all BGEPA permit issuance criteria identified in 50 CFR 22.26 . The permit would authorize take of each of the covered species incidental to the operation and maintenance of the wind energy project.
Section 9 of the ESA and its implementing regulations prohibit “take” of fish and wildlife species listed as endangered. The ESA implementing regulations extend, under certain circumstances, the prohibition of take to threatened species (50 CFR 17.31). Under section 3 of the ESA, the term “take” means to “harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or attempt to engage in any such conduct” (16 U.S.C. 1538). Under section 10(a) of the ESA, the Service may issue permits to authorize
1. The taking will be incidental;
2. The applicant will, to the maximum extent practicable, minimize and mitigate the impact of such taking;
3. The applicant will ensure that adequate funding for the plan will be provided;
4. The taking will not appreciably reduce the likelihood of the survival and recovery of the species in the wild; and
5. The applicant will carry out any other measures that the Service may require as being necessary or appropriate for the purposes of the HCP.
Though the applicant is requesting incidental take for bald and golden eagles under section 10(a)(1)(B) of the ESA, consistency with the requirements of BGEPA (16 U.S.C. 668-668d) is also necessary. The BGEPA prohibits take of eagles where “take” is defined as “pursue, shoot, shoot at, poison, wound, kill, capture, trap, collect, destroy, molest, or disturb” and where “disturb” is further defined as “to agitate or bother” a bald or golden eagle to a degree that causes, or is likely to cause, based on the best scientific information available: (1) Injury to an eagle; (2) a decrease in its productivity, by substantially interfering with normal breeding, feeding, or sheltering behavior; or (3) nest abandonment, by substantially interfering with normal breeding, feeding, or sheltering behavior (50 CFR 22.3).
Under 50 CFR 22.26, the Service has the authority to authorize take of bald and golden eagles (generally, disturbance, injury, or killing) that occurs incidental to an otherwise lawful activity. For the Service to issue such a permit, the following required determinations must be met (see 50 CFR 22.26(f)):
1. The taking will be compatible with the preservation of the bald or golden eagle (further defined by the Service to mean “consistent with the goals of maintaining stable or increasing breeding populations in all eagle management units and the persistence of local populations throughout the geographic range of each species”);
2. The taking will protect an interest in a particular locality;
3. The taking will be associated with, but not the purpose of, the activity;
4. The taking will be avoided and minimized by the applicant to the extent practicable;
5. The applicant will have applied all appropriate and practical compensatory mitigation measures, when required pursuant to 50 CFR 22.26(c);
6. Issuance of the permit will not preclude issuance of another permit necessary to protect an interest of higher priority as set forth in 50 CFR 22.26(e)(7); and
7. Issuance of the permit will not interfere with ongoing civil or criminal action concerning unpermitted past eagle take at the project.
The Service can provide eagle take authorization through an ITP for an HCP, which confers take authorization under the BGEPA without the need for a separate permit, as long as the permit issuance criteria under both ESA and BGEPA will be met by the conservation measures included in the applicant's HCP.
In compliance with NEPA (42 U.S.C. 4321
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The environmental consequences of each alternative were analyzed to determine if significant environmental impacts would occur.
The EPA is charged with reviewing all Federal agencies' EISs and commenting on the adequacy and acceptability of the environmental impacts of proposed actions in EISs. Therefore, EPA is publishing a notice in the
EPA serves as the repository (EIS database) for EISs prepared by Federal agencies. All EISs must be filed with EPA. You may search for EPA comments on EISs, along with EISs themselves, at
You may submit your comments and materials by one of the methods in
1. The identification and evaluation of archaeological and historic resources that the proposed project may affect;
2. The proposed adaptive management framework for marbled murrelets and for bald and golden eagles;
3. Potential impacts to the human environment that may occur during the construction or decommissioning phases of the project (
4. Biological information and relevant data concerning the covered species and other wildlife;
5. Information on bald eagle, golden eagle, and marbled murrelet collisions with both stationary and moving objects such as wind turbines in the terrestrial
6. Potential direct, indirect, and cumulative impacts that implementation of the proposed wind project and mitigation/minimization measures could have on the covered species; and other endangered or threatened species, and their associated ecological communities or habitats; and other aspects of the human environment;
7. Whether there are additional connected, similar, or reasonably foreseeable cumulative actions and their possible impacts on the human environment including, without limitation, marbled murrelet, bald eagle, and golden eagle, which were not identified in the DEIS;
8. Other possible reasonable alternatives to the proposed permit action that the Service should consider, including additional or alternative avoidance, minimization, and mitigation measures; and
9. Other information relevant to the proposed wind project and impacts to the human environment.
We will post on
Persons needing reasonable accommodations in order to attend and participate in the public meetings should contact the Service's Washington Fish and Wildlife Office, using one of the methods listed in
We provide this notice in accordance with the requirements of section 10 of the ESA (16 U.S.C. 1531
Fish and Wildlife Service, Interior.
Notice of meeting.
We, the U.S. Fish and Wildlife Service, announce a public meeting of the Aquatic Nuisance Species (ANS) Task Force, in accordance with the Federal Advisory Committee Act. The ANS Task Force's purpose is to develop and implement a program for U.S. waters to prevent introduction and dispersal of aquatic invasive species; to monitor, control, and study such species; and to disseminate related information.
The ANS Task Force will meet Wednesday and Thursday, December 12-13, 2018, from 8 a.m. to 5 p.m. each day. The meeting is open to the public; for security purposes, signup is required. For more information, contact the ANS Task Force Executive Secretary (see
Susan Pasko, ANS Task Force Executive Secretary, by telephone at (703) 358-2466, or by email at
We, the U.S. Fish and Wildlife Service (Service), announce a public meeting of the Aquatic Nuisance Species (ANS) Task Force, in accordance with the Federal Advisory Committee Act (5 U.S.C. Appendix 2). The ANS Task Force was established by the Nonindigenous Aquatic Nuisance Prevention and Control Act of 1990, as amended (NANPCA; 16 U.S.C. 4701
• Discuss the content of the draft ANS Task Force Strategic Plan for 2019-2024.
• Review and discuss the draft ANS Task Force Report to Congress for 2016-2017.
• Respond to recommendations from the ANS Task Force regional panels.
The final agenda and other related meeting information will be posted on the Task Force website at
If you comment, before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
5 U.S.C. Appendix 2.
U.S. Geological Survey (USGS), Interior.
Notice of information collection; request for comment.
In accordance with the Paperwork Reduction Act of 1995, the U.S. Geological Survey is proposing to renew an information collection.
Interested persons are invited to submit comments on or before December 31, 2018.
Send written comments on this information collection request (ICR) to the Office of Management and Budget's Desk Officer for the Department of the Interior by email at
To request additional information about this ICR, contact Elizabeth S. Sangine by email at
In accordance with the Paperwork Reduction Act of 1995, we provide the general public and other Federal agencies with an opportunity to comment on proposed, revised, and continuing collections of information. This helps us assess the impact of our information collection requirements and minimize the public's reporting burden. It also helps the public understand our information collection requirements and provide the requested data in the desired format.
A
We are again soliciting comments on the proposed ICR that is described below. We are especially interested in public comment addressing the following issues: (1) Is the collection necessary for the USGS to perform its duties, including whether the information is useful; (2) the accuracy of the agency's estimate of the burden of the proposed collection of information; (3) ways to enhance the quality, usefulness, and clarity of the information to be collected; and (4) how to minimize the burden of this collection on the respondents, including through the use of information technology.
Comments that you submit in response to this notice are a matter of public record. Before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
An agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number.
The authorities for this action are the Paperwork Reduction Act of 1995 (44 U.S.C. 3501,
Bureau of Land Management, Interior.
Notice of availability.
In accordance with the National Environmental Policy Act (NEPA) of 1969, as amended, the Federal Land Policy and Management Act of 1976, as amended, the Mineral Leasing Act of 1920, as amended, and Secretarial Order 3355, the Bureau of Land Management (BLM) is releasing the Draft Environmental Impact Statement (EIS) for Crystal Peak Minerals Inc.'s (CPM) Sevier Playa Potash Project (Project), and by this notice is announcing the opening of the comment period.
To ensure comments will be considered, the BLM must receive written comments on the Project Draft EIS within 45 days following the date the Environmental Protection Agency publishes its Notice of Availability in the
You may submit comments related to the Draft EIS for the Project by any of the following methods:
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Electronic versions of the Project Draft EIS, appendices, and supporting documents can be downloaded from ePlanning at
(1) The BLM Fillmore Field Office at the above address;
(2) The BLM West Desert District Office at 2370 South Decker Lake Blvd., West Valley City, UT;
(3) The Fillmore City Library at 75 West Center, Fillmore, UT; and
(4) The Delta City Library at 76 North 200 West, Delta, UT.
Clara Stevens, Project Manager, telephone (435) 743-3119; address 95 East 500 North, Fillmore, UT 84631; email
On March 12, 2014, the BLM published a Notice of Intent to Prepare an EIS in the
The Project would be located in central Millard County in southwestern Utah. The Sevier Playa is a large terminal playa that is normally dry on the surface and contains subsurface potassium-bearing saline brines. The playa is approximately 26 miles long and averages 8 miles wide.
CPM holds or through agreement controls the rights to develop and operate potassium mineral leases on 117,814 acres of Federal lands administered by the BLM and an additional 6,409 acres of state lands. CPM proposes to exercise their lease rights by constructing and operating the Project, which would produce at its peak approximately 372,000 tons per year of potassium sulfate (K
The Project is a potash mine proposed on 124,223 acres of Federal and State mineral leases. The proposal includes mining facilities located on-lease with off-lease supporting infrastructure. On-lease facilities include evaporation ponds; a brine extraction system (trenches, wells, and conveyance canals); a recharge system (trenches, canals, and Sevier River diversion); a waste product storage area (purge brine and tailings); access roads, and processing facilities. The off-lease ROW facilities, proposed on approximately 4,135 acres, include power and communication lines, a natural gas pipeline, a rail loadout facility and rail spur; water supply wells; communication towers; preconcentration ponds; segments of recharge canals and the playa perimeter road; and access roads. Three gravel pits would also be developed.
Potassium-bearing brines would be extracted from trenches and wells on the Sevier Playa, and routed through a series of ponds, using solar evaporation to concentrate the brine. The preconcentration ponds would concentrate the brine causing halite (NaCl, table salt) and other non-commercial salts to precipitate. These salts would be stored in the preconcentration ponds. The saturated brine would be transferred to the production ponds for further evaporation, causing potassium-rich salts to precipitate. The production ponds would be harvested year-round, with the potassium-rich salts moved directly to a facility for processing into SOP. The SOP would be trucked to the rail loadout facility for distribution. Purge brine containing primarily magnesium chloride (MgCl
The Draft EIS analyzes CPM's Mining Plan, prepared for development of Federal potassium mineral leases acquired in 2011 and potash mineral leases acquired on State lands. These leases were amalgamated under BLM casefile number UTU-88387. In addition, the Draft EIS analyzes CPM's request for rights-of-way (ROWs) to construct various ancillary facilities on public lands in the vicinity of the mineral leases, but outside the lease boundary. CPM prepared a Plan of Development (POD) for the ROWs that they have requested. The Draft EIS also analyzes CPM's request to purchase mineral materials for gravel to support construction and operation of the Project. Although the BLM may only make decisions pertaining to public lands managed by the BLM, the EIS analyzes the complete Project including portions located on state and private lands.
This Draft EIS evaluates, in detail, the no action alternative, the proposed action, and five action alternatives. Alternative 1 would route a cross-country segment of the off-lease 69-kV power and communication line to an alignment along existing roads, including SR 257 and SR-257 Cutoff Road. Alternative 2 would route a cross-country segment of the off-lease 69-kV power and communication line to a more southern orientation along existing roads, including Crystal Peak Road and Crystal Peak Spur Road. Alternative 3 would route a segment of the off-lease natural gas pipeline entirely on BLM land to avoid crossing private lands. Alternative 4 would route a cross-country segment of the off-lease natural gas pipeline to a similar alignment as Alternative 2 along existing roads, including Crystal Peak Road and Crystal Peak Spur Road. Alternative 5 is an alternative method of diverting flows from the Sevier River into the recharge system. This alternative would relocate the on-lease Sevier River diversion facilities, including diversion channel, recharge canal, diversion culvert and sump, and perimeter and access roads slightly to the west, within the boundary of the playa.
Based on public scoping and internal review, the principal issues analyzed in the Draft EIS include: (1) Impacts to water resources and water quality including adverse effects to surface water and groundwater basins, as well as impacts to existing water rights holders; (2) adverse effects to air quality in the form of fugitive dust produced during construction and operation of the mine facilities; (3) impacts to cultural resources and historic properties, including rock art and subsurface features; (4) impacts to migratory bird populations; and (5) the socioeconomic effects of water right acquisition for recharge water. Analysis also includes impacts to the following resources: Visual, wildlife, access, range management, recreation, and soils.
The BLM published a Notice of Intent for the Project on March 12, 2014. Scoping was extended through August 31, 2015, due to Project delays. A public scoping meeting was held in Delta, Utah, on August 5, 2015. The public
In 2015, pursuant to Executive Order 13175, the BLM initiated government-to-government consultation with interested tribes, including the Confederated Tribes of the Goshute Reservation, the Hopi Tribe, the Kaibab Band of Paiute Indians, the Kanosh Band of Paiute Indians, the Navajo Nation, the Paiute Indian Tribe of Utah, the Skull Valley Band of Goshute, and the Ute Indian Tribe. Beginning in 2015, the BLM coordinated with the Utah State Historic Preservation Office and seven other consulting parties that requested to participate in the Section 106 process, to develop a Programmatic Agreement to outline a process to be used to avoid, mitigate, or treat adverse effects to historic properties.
In August 2015, the BLM invited agencies to participate as Cooperating Agencies in the Project. The following agencies accepted the invitation: The U.S. Department of Defense (Utah Test and Training Range), the U.S. Environmental Protection Agency, the U.S. Fish and Wildlife Service, the State of Utah, and Millard and Beaver Counties. These agencies and governments reviewed the Draft EIS before it was available to the public and their comments have been incorporated into the document.
Before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
40 CFR 1506.6, 40 CFR 1506.10.
Bureau of Land Management, Interior.
Notice of availability.
In accordance with the National Environmental Policy Act of 1969, as amended, the Bureau of Land Management (BLM) has prepared a Draft Environmental Impact Statement (EIS) for the proposed Caldwell Canyon Mine Project, and by this notice is announcing the opening of the comment period.
To ensure the BLM considers all comments, the BLM must receive written comments on the Draft EIS for the proposed Caldwell Canyon Mine Project within 45 days following the date the Environmental Protection Agency publishes this Notice of Availability in the
You may submit comments related to the Caldwell Canyon Mine Project Draft EIS by any of the following methods:
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Please reference “Caldwell Canyon Mine Draft EIS” on all correspondence. The BLM has made CD-ROM and print copies of the Caldwell Canyon Mine Draft EIS available in the BLM Pocatello Field Office at the following address: 4350 Cliffs Drive, Pocatello, ID 83204. In addition, the BLM has made an electronic copy of the Draft EIS available online at the BLM Land Use Planning and NEPA Register website:
For further information contact Bill Volk, Planning and NEPA Specialist, phone (208) 236-7503; address, BLM Pocatello Field Office, 4350 Cliffs Drive, Pocatello, ID 83204; email,
The BLM, as the Federal lease administrator, is the lead agency. The Idaho Department of Environmental Quality, Idaho Department of Lands, the U.S. Army Corps of Engineers, and the Idaho Governor's Office of Energy and Mineral Resources are cooperating agencies.
P4 Production, LLC (P4), a subsidiary of Bayer AG, developed and submitted a Mine and Reclamation Plan (M&RP), the Proposed Action, for the Caldwell Canyon Mine. The Proposed Action consists of mining Federal Phosphate Leases IDI-02, IDI-014080, and IDI-13738 and State of Idaho Mineral Lease E07959. Portions of the mine's waste rock would be placed into the nearby inactive Dry Valley Mine on Federal Phosphate Lease IDI-014184. P4 will request modifications to enlarge the phosphate lease boundaries for the Caldwell Canyon leases, and obtain authorization for a haul road across BLM public land as outlined in the Draft EIS. The BLM has fully evaluated alternatives to the Proposed Action, including a No Action Alternative, in the Draft EIS and addressed issues identified during scoping and analysis.
The BLM will make decisions to either approve, approve with modifications, or deny the Caldwell Canyon Mine M&RP and modification of the Dry Valley Mine M&RP. In addition, the BLM will determine whether to modify the lease boundaries, and whether to issue a right-of-way or phosphate use permit for a haul road on BLM lands. These decisions will consider public and agency input received on the Draft and Final EISs.
The BLM published a Notice of Intent (NOI) to prepare this EIS in the
Before including your phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
42 U.S.C. 4321
Office of Surface Mining Reclamation and Enforcement, U.S. Department of the Interior.
Notice of availability.
In accordance with the National Environmental Policy Act (NEPA) of 1969, as amended, the Office of Surface Mining Reclamation and Enforcement (OSMRE) has prepared a Final Environmental Impact Statement (EIS) for the Western Energy Company's Rosebud Mine Area F (Project) in southeastern Montana. This notice is announcing its availability. The Montana Department of Environmental Quality (DEQ) is a co-lead on this EIS process.
The OSMRE will not issue a final decision on the Proposed Action and Alternatives for a minimum of 30 days from the date that the U.S. Environmental Protection Agency (USEPA) publishes this notice in the
The Final EIS is available for review at:
Rosebud County Library, 201 North 9th Avenue, Forsyth, MT 59327, Between the hours of 11:00 a.m. and 7:00 p.m. Monday through Thursday; 11:00 a.m. to 5:00 p.m. Friday; 10:00 a.m. to 1:00 p.m. Saturday (Closed Sunday).
Montana DEQ Headquarters (Lee Metcalf Building), 1520 East 6th Avenue, Helena, MT 59620, Between the hours of 8:00 a.m. and 5:00 p.m. Monday through Friday (Closed Saturday and Sunday).
BLM Miles City Field Office, 111 Garryowen Road, Miles City, MT 59301, Between the hours of 7:45 a.m. and 4:30 p.m. Monday through Friday (Closed Saturday and Sunday).
BLM State Office, Billings, MT, 5001 Southgate Drive, Billings, MT 59101, Between the hours of 8:00 a.m. and 4:00 p.m. Monday through Friday (Closed Saturday and Sunday).
Logan Sholar, OSMRE Project Coordinator; Telephone: 303-293-5036; Address: 1999 Broadway Street, Suite 3320, Denver, Colorado 80202-3050; email:
The purpose of the Project is to consider continued operations at the Rosebud Mine by permitting and developing a new surface mine permit area, known as permit Area F. Western Energy submitted a permit application package to DEQ for the proposed 6,746-acre permit Area F (also referred to as the project area) at the Rosebud Mine, which is an existing 25,455-acre surface coal mine annually producing 8.0 to 10.25 million tons of low-sulfur subbituminous coal. DEQ is the regulatory authority for permitting actions involving federal coal in Montana. 30 CFR 926.10. If DEQ approves the permit and a Federal mining plan for the Project is approved as proposed, at the current rate of production, the operational life of the Rosebud Mine would be extended by 8 years. Mining operations in the project area, which would commence after all permits and approvals have been secured and a reclamation and performance bond has been posted, would last 19 years. Western Energy estimates that 70.8 million tons of recoverable coal reserves exist in the project area and would be removed during the 19-year operations period. As with other permit areas of the Rosebud Mine, all coal would be combusted locally at the Colstrip and Rosebud Power Plants.
Western Energy is required to obtain a surface coal mine operating permit from DEQ (pursuant to the Montana Strip and Underground Mine Reclamation Act (MSUMRA), Section 82-4-221
The DEQ's purpose for the Project is to review and make a decision on Western Energy's surface mine operating permit application under MSUMRA and to review and make decisions on the following related permits: (1) An application for a new Montana Pollutant Discharge Elimination System (MPDES) permit, and (2) an application to modify Montana Air Quality Permit #1570*07 to include the project area. The Bureau of Land Management (BLM) is a cooperating agency on the Final EIS.
The Final EIS considers three alternatives and evaluates the direct, indirect, and cumulative effects of the Proposed Action and the other two alternatives on the environment.
OSMRE is complying with Section 106 of the National Historic Preservation Act (NHPA Section 106) (16 U.S.C. 470f), as provided in 36 CFR 800.2(d)(3), concurrently with the NEPA process, including public involvement requirements and consultation with the State Historic Preservation Officer and Historic Preservation Officers with Tribal nations. Native American Tribal consultations are ongoing and have been conducted in accordance with applicable laws, regulations, and U.S. Department of the Interior (DOI) policy. Federal, Tribal, State, and local agencies, along with other stakeholders that may be interested in or affected by the Federal agencies' decisions on the Project, are invited to submit comments on the Final EIS.
As part of its consideration of the proposed Project's impacts on threatened and endangered species, OSMRE conducted informal consultation as well as streamlined consultation per the final 4(d) rule for the northern long-eared bat with the U.S. Fish and Wildlife Service pursuant to Section 7 of the Endangered Species Act (ESA) (16 U.S.C. 1536), and its implementing regulations, as provided in 50 CFR 400. The Section 7 consultation considered direct and indirect impacts from the proposed Project, including mining and related operations in the project area and continued operation of the Colstrip and Rosebud Power Plants.
In addition to compliance with NEPA, NHPA Section 106, and ESA Section 7, all Federal actions will be in compliance with applicable requirements of the Surface Mining Control and Reclamation Act of 1977 (30 U.S.C. 1021-1328), the Clean Water Act (33 U.S.C. 1251-1387), the Clean Air Act (42 U.S.C. 7401-7671q), and Executive Orders relating to environmental justice, tribal consultation, and other applicable laws and regulations.
Coal has been mined at Colstrip, MT for more than 90 years. The Norther Pacific Railway established the city of Colstrip and its associated mine in the 1920s to access coal from the Fort Union Formation. Coal mining began in 1924, providing fuel for the railway's steam locomotive trains. During the initial 34 years of mining, 44 million tons of coal were mined. By 1958, diesel-powered locomotives replaced steam engines and mining ceased in the Colstrip area.
In 1959, the Montana Power Company purchased rights to the Rosebud Mine in the city of Colstrip with plans to build power generation facilities. The Rosebud Mine operation began production in 1968. In 2001, Westmoreland purchased the Rosebud Mine; its subsidiary, Western Energy, continues to operate the mine today. Although the Rosebud Mine has shipped coal by rail as recently as 2010, all coal currently produced by the mine is consumed locally at the Colstrip and Rosebud Power Plants.
Western Energy proposes to conduct surface coal mining and reclamation operations within the 6,746-acre proposed permit Area F of the Rosebud Mine. The project area would be adjacent to the western boundary of Area C, 12 miles west of Colstrip. Western Energy proposes to conduct surface coal mining operations on an approximately 2,159-acre portion of the project area, with a total disturbance footprint, including soil storage, scoria pits, and haul roads, of approximately 4,260 acres. The project area would, in conjunction with the mining of any reserves remaining within existing permit areas A, B, and C of the Rosebud Mine, supply low-sulfur coal to the Colstrip Power Plant (Units 3 and 4) at a rate of between 7.7 and 9.95 million tons annually. In addition, coal from the Rosebud Mine with higher sulfur content would be supplied to the Rosebud Power Plant at a rate of approximately 300,000 tons annually.
Approval of the proposed permit Area F is expected to require several other agency actions, including:
• Findings and recommendations by BLM with respect to Western Energy's Resource Recovery and Protection Plan and other requirements of Western Energy's lease.
• Approval by DEQ of Western Energy's Montana Air Quality Permit #1570-07 to allow expansion of the geographic extent of the mine to include the proposed permit Area F; and
• Approval by DEQ of a new MPDES permit.
Alternatives carried forward in the Final EIS include the No Action Alternative (Alternative 1), the Proposed Action Alternative (Alternative 2), and the Proposed Action Plus Additional Environmental Protection Measures Alternative (Alternative 3). Several other alternatives were considered but dismissed from further consideration.
In accordance with the CEQ's regulations for implementing NEPA and the DOI's NEPA regulations, OSMRE solicited public comments on the Draft EIS. OSMRE responses to comments are included in Appendix F of the FEIS. The agencies considered comments received from the public on the Draft EIS and incorporated them, as appropriate, into the FEIS. The changes between the Draft EIS and Final EIS are a result of responding to comments received during the public comment period and generally consist of revisions to the text to clarify the analysis of resource-specific potential impacts under each alternative. No new analyses were completed and no new or additional data were used to support the existing analyses.
In addition, the FEIS includes updates based on evolving regulatory guidance and completion of the NHPA Section 106 and ESA Section 7 consultation processes.
40 CFR 1506.6, 40 CFR 1506.1
United States International Trade Commission.
Notice.
The Commission hereby gives notice of the scheduling of the final phase of antidumping and countervailing duty investigation Nos. 701-TA-602 and 731-TA-1412 (Final) pursuant to the Tariff Act of 1930 (“the Act”) to determine whether an industry in the United States is materially injured or threatened with material injury, or the establishment of an industry in the United States is materially retarded, by reason of imports of steel wheels from China, provided for in subheadings 8708.70.45, 8708.70.60, and 8716.90.50 of the Harmonized Tariff Schedule of the United States, preliminarily determined by the Department of Commerce (“Commerce”) to be subsidized and sold at less-than-fair-value.
October 23, 2018.
Jordan Harriman (202-205-2610), Office of Investigations, U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436. Hearing-impaired persons can obtain information on this matter by contacting the Commission's TDD terminal on 202-205-1810. Persons with mobility impairments who will need special assistance in gaining access to the Commission should contact the Office of the Secretary at 202-205-2000. General information concerning the Commission may also be obtained by accessing its internet server (
For further information concerning the conduct of this phase of the investigations, hearing procedures, and rules of general application, consult the Commission's Rules of Practice and Procedure, part 201, subparts A and B (19 CFR part 201), and part 207, subparts A and C (19 CFR part 207).
Additional written submissions to the Commission, including requests pursuant to section 201.12 of the Commission's rules, shall not be accepted unless good cause is shown for accepting such submissions, or unless the submission is pursuant to a specific request by a Commissioner or Commission staff.
In accordance with sections 201.16(c) and 207.3 of the Commission's rules, each document filed by a party to the investigations must be served on all other parties to the investigations (as identified by either the public or BPI service list), and a certificate of service must be timely filed. The Secretary will not accept a document for filing without a certificate of service.
These investigations are being conducted under authority of title VII of the Tariff Act of 1930; this notice is published pursuant to section 207.21 of the Commission's rules.
By order of the Commission.
United States International Trade Commission.
Notice of remand proceedings.
The U.S. International Trade Commission (“Commission”) hereby gives notice of the procedures it intends to follow to comply with the court-ordered remand of its final determinations in the antidumping and countervailing duty investigations of truck and bus tires (“TBTs”) from China. For further information concerning the conduct of these remand proceedings and rules of general application, consult the Commission's Rules of Practice and Procedure, part 201, subparts A through E (19 CFR part 201), and part 207, subpart A (19 CFR part 207).
November 26, 2018.
Nate Comly (202-205-3174), Office of Investigations, U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436. Hearing-impaired persons can obtain information on this matter by contacting the Commission's TDD terminal on 202-205-1810. Persons with mobility impairments who will need special assistance in gaining access to the Commission should contact the Office of the Secretary at 202-205-2000. General information concerning the Commission may also be obtained by accessing its internet server (
The comments must be based solely on the information in the Commission's record. The Commission will reject submissions containing additional factual information or arguments pertaining to issues other than those on which the Court has remanded this matter. The deadline for filing comments is December 11, 2018. Comments must be limited to no more than ten (10) double-spaced and single-sided pages of textual material.
Parties are advised to consult the Commission's Rules of Practice and Procedure, part 201, subparts A through E (19 CFR part 201), and part 207, subpart A (19 CFR part 207) for provisions of general applicability concerning written submissions to the Commission. All written submissions must conform to the provisions of section 201.8 of the Commission's rules; any submissions that contain BPI must also conform with the requirements of sections 201.6, 207.3, and 207.7 of the Commission's rules. The Commission's
Additional written submissions to the Commission, including requests pursuant to section 201.12 of the Commission's rules, will not be accepted unless good cause is shown for accepting such submissions or unless the submission is pursuant to a specific request by a Commissioner or Commission staff.
In accordance with sections 201.16(c) and 207.3 of the Commission's rules, each document filed by a party to the investigation must be served on all other parties to the investigation (as identified by either the public or BPI service list), and a certificate of service must be timely filed. The Secretary will not accept a document for filing without a certificate of service.
By order of the Commission.
Bureau of Alcohol, Tobacco, Firearms and Explosives, Department of Justice.
30-Day notice.
The Department of Justice (DOJ), Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), will submit the following information collection request to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act of 1995.
The proposed information collection was previously published in the
If you have additional comments, particularly with respect to the estimated public burden or associated response time, have suggestions, need a copy of the proposed information collection instrument with instructions, or desire any other additional information, please contact: Sheila Hopkins, National Laboratory Center either by mail at 6000 Ammendale Road, Ammendale, MD 20705, by email at
Written comments and suggestions from the public and affected agencies concerning the proposed collection of information are encouraged. Your comments should address one or more of the following four points:
Overview of this information collection:
(1)
(2)
(3)
(4)
(5)
(6)
On April 4, 2018, the Assistant Administrator, Diversion Control Division, Drug Enforcement Administration (hereinafter, DEA or Government), issued an Order to Show Cause to Steve Fanto, M.D. (hereinafter, Respondent), of Scottsdale, Arizona. Order to Show Cause (hereinafter, OSC), at 1. The OSC proposes the revocation of Respondent's Certificate of Registration (hereinafter, COR) on the ground that he is without authority to handle controlled substances in Arizona, the State in which he is registered with the DEA.
This Agency has jurisdiction to decide this case based upon the OSC allegation that Respondent holds a DEA Certificate of Registration (No. BF3649312) at the registered address of 7320 Deer Valley Road, J100, Scottsdale, Arizona 85255.
The substantive ground for the proceeding, as alleged in the OSC, is that Respondent is “prohibited from practicing medicine in the state in which . . . [he is] registered with the DEA.”
The OSC notified Respondent of his right to request a hearing on the allegations or to submit a written statement if he chooses to waive his right to a hearing.
In his April 30, 2018, Request for Extension/Hearing, Respondent acknowledged receipt of the OSC “on or after April 4, 2018.”
Respondent argued in his Request for Extension/Hearing that he should be allowed an extension of time to request a hearing “pending the resolution of . . . [AMB] actions regarding his Arizona medical license.” Request for Extension/Hearing, at 1. The gravamen of his argument is that an extension should be allowed, because if Respondent is successful before the AMB, his medical license will be returned to him.
The Office of Administrative Law Judges put the matter on the docket and assigned it to the Chief Administrative Law Judge, John J. Mulrooney, II (hereinafter, CALJ). On May 4, 2018, the CALJ denied the request for an extension of time, stating that “[a]n extension of time that has the potential to exist in perpetuity, at least on the present record, will not serve the interests of justice.” Order Denying the Respondent's Request for Extension and Directing the Filing of Government Evidence of Lack of State Authority Allegation and Briefing Schedule dated May 4, 2018 (hereinafter, Order Denying Extension), at 2. In the Order Denying Extension, the CALJ ordered the DEA to file evidence in support of its allegation that Respondent lacks State authority to handle controlled substances.
On May 16, 2018, the Government filed a motion for summary disposition. The motion by the Government alleged, in pertinent part, that Respondent lacks authority to handle controlled substances in Arizona and, therefore, pursuant to 21 U.S.C. 823(f) and 824(a)(3), Respondent's DEA COR should be revoked. Government's Motion for Summary Disposition and Argument in Support of Finding that Respondent Lacks State Authorization to Handle Controlled Substances (hereinafter, Summary Disposition Motion), at 4.
By motion dated May 25, 2018, Respondent requested an extension of time until December 3, 2018 to respond to the Government's motion for summary disposition. The essence of Respondent's argument was that the AMB “is expected to have acted on and reinstated . . . [Respondent's] authority to practice medicine by such date. Motion for Extension of Time to File Response to Government's Motion for Summary Disposition and Argument in Support of Finding that Respondent Lacks State Authorization to Handle Controlled Substances and Response to Government's Motion for Summary Disposition, at 1 (hereinafter, Respondent's Motion). Respondent alleged that he entered into the Interim Consent Agreement with the AMB, wherein he agreed to be prohibited from engaging in the practice of medicine in the State of Arizona until he applies to the Board and receives permission to do so, “based on coercive assertions” by the AMB at a time when he was unrepresented by counsel.
On May 31, 2018, the CALJ issued an Order (hereinafter, R.D.) denying Respondent's request for an extension and granting the Government's motion for summary disposition.
Respondent is the holder of DEA Certificate of Registration No. BF3649312, pursuant to which he is authorized to dispense controlled substances in schedules II through V as a practitioner, at the registered address of 7320 Deer Valley Road, J100, Scottsdale, Arizona 85255. Summary Disposition Motion, Attachment 1, at 1.
The AMB and Respondent entered into an Interim Consent Agreement. Summary Disposition Motion, Attachment 2. The effective date of the Interim Consent Agreement is July 12, 2017.
On May 8, 2018, a DEA Diversion Investigator (hereinafter, DI) contacted an AMB Investigator who informed the DI that Respondent's medical license remains under practice restriction. Summary Disposition Motion, Attachment 4, at 2. The DI averred that “the result of DEA's investigation has shown that . . . [Respondent] remains currently prohibited from practicing medicine in the State of Arizona.”
There is no evidence in the record that the AMB lifted the Practice Restriction on Respondent's medical license. Further, according to the online records of the State of Arizona, of which I take official notice, I find that the Interim Consent Agreement is still in effect today.
Accordingly, based on all of the evidence in the record before me, I find that Respondent currently is without authority to practice medicine in Arizona, the State in which he is registered.
Pursuant to 21 U.S.C. 824(a)(3), the Attorney General is authorized to suspend or revoke a registration issued under section 823 of the Controlled Substances Act (hereinafter, CSA), “upon a finding that the registrant . . . has had his State license or registration suspended . . . [or] revoked . . . by competent State authority and is no longer authorized by State law to engage in the . . . dispensing of controlled substances.” With respect to a practitioner, the DEA has also long held that the possession of authority to dispense controlled substances under the laws of the State in which a practitioner engages in professional practice is a fundamental condition for obtaining and maintaining a practitioner's registration.
This rule derives from the text of two provisions of the CSA. First, Congress defined the term “practitioner” to mean “a physician . . . or other person licensed, registered, or otherwise permitted, by . . . the jurisdiction in which he practices . . . , to distribute, dispense, . . . [or] administer . . . a controlled substance in the course of professional practice.” 21 U.S.C. 802(21). Second, in setting the requirements for obtaining a practitioner's registration, Congress directed that “[t]he Attorney General shall register practitioners . . . if the applicant is authorized to dispense . . . controlled substances under the laws of the State in which he practices.” 21 U.S.C. 823(f). Because Congress has clearly mandated that a practitioner possess State authority in order to be deemed a practitioner under the CSA, the DEA has held repeatedly that revocation of a practitioner's registration is the appropriate sanction whenever he is no longer authorized to dispense controlled substances under the laws of the State in which he practices.
Section 32-1401(22) of the Arizona Revised Statutes, cited in the “Interim Consent Agreement for Practice Restriction,” in pertinent part, defines the “practice of medicine” as the diagnosis or treatment of any and all human diseases, injuries, ailments, infirmities, or deformities, whether they be physical or mental, “by any means, methods, devices or instrumentalities.” Ariz. Rev. Stat. Ann. § 32-1401(22) (Westlaw, current through the First Special and Second Regular Session of the Fifty-Third Legislature (2018)). “Medicine” means “allopathic medicine as practiced by the recipient of a degree of doctor of medicine.” Ariz. Rev. Stat. Ann. § 32-1401(19) (Westlaw, current through the First Special and Second Regular Session of the Fifty-Third Legislature (2018)). Under Arizona law, a “doctor of medicine” is a “natural person holding a license, registration or permit to practice medicine pursuant to this chapter.” Ariz. Rev. Stat. Ann. § 32-1401(10) (Westlaw, current through the First Special and Second Regular Session of the Fifty-Third Legislature (2018)).
As already discussed, the AMB and Respondent entered into an “Interim Consent Agreement for Practice Restriction.” “Restrict,” in the context of this Interim Consent Agreement, means “taking a disciplinary action that alters the physician's practice or professional activities if the board determines that there is evidence that the physician is or may be medically incompetent or guilty of unprofessional conduct.” Ariz. Rev. Stat. Ann. § 32-1401(23) (Westlaw, current through the First Special and Second Regular Session of the Fifty-Third Legislature (2018)).
The conclusory language in Respondent's Motion that he imprudently entered into the Interim Consent Agreement based upon coercive assertions by the AMB at a time when he was unrepresented by counsel was not accompanied by specific facts indicating what was said that Respondent considered coercive. The legitimacy of the claim is undermined by the notable fact that Respondent did not submit any documentation indicating an effort by Respondent to bring the validity of the Interim Consent Agreement before the AMB, which, initially, would be the proper forum in which to raise that issue. Regardless, as pointed out by the CALJ citing long-standing Agency precedent, the controlling question is not the merits of Respondent's claim before the AMB, but rather, whether Respondent is currently authorized to handle controlled substances in the State of registration. R.D., at 3. In that regard, I adopt the following portion of the R.D. and agree with the CALJ's denial of Respondent's request for an extension of time/stay of proceedings. R.D., at 4.
Even if the Agency's precedent were not fixed firmly against the granting of such a delay in principle, the Respondent here is unable to point to a reliably fixed date where state proceedings would reasonably be concluded. The Respondent's Motion includes a Declaration from the Respondent's counsel (Respondent's Board Counsel) in his Arizona Board proceedings. . . . [Respondent's Motion,] Attachment 1. In the Respondent's Board Counsel's declaration, the decisional timeframe is couched in the following tenuous terms:
As for when the [Arizona Board]
It is undisputed that Respondent is not currently authorized to practice medicine in Arizona due to the Interim Consent Agreement. Thus, according to Arizona law, Respondent does not have authority to handle controlled substances in Arizona, the State in which he is registered with the DEA. As already discussed, the practice restriction on Respondent's medical license is currently in effect. DEA has “long and consistently interpreted the CSA as mandating the possession of authority under state law to handle controlled substances as a fundamental condition for obtaining and maintaining a registration.”
Pursuant to 28 CFR 0.100(b) and the authority thus vested in me by 21 U.S.C. 824(a), I order that DEA Certificate of Registration No. BF3649312 issued to Steve Fanto, M.D., be, and it hereby is, revoked. Pursuant to 28 CFR 0.100(b) and the authority thus vested in me by 21 U.S.C. 823(f), I further order that any pending application of Steve Fanto, M.D., to renew or modify this registration, as well as any other pending application by him for registration in the State of Arizona, be, and it hereby is, denied. This order is effective December 31, 2018.
On April 19, 2018, the Assistant Administrator, Diversion Control Division, Drug Enforcement Administration (hereinafter, DEA or Government), issued an Order to Show Cause to Narciso A. Reyes, M.D. (hereinafter, Respondent), of Luquillo, Puerto Rico. Order to Show Cause (hereinafter, OSC), at 1. The Show Cause Order proposes the revocation of Respondent's DEA Certificate of Registration on the grounds that he materially falsified applications he submitted to DEA and that he has been excluded from participation in a program pursuant to 42 U.S.C. 1320a-7(a).
Regarding jurisdiction, the Show Cause Order alleges that Respondent holds DEA Certificate of Registration No. FR4900305 at the registered address of Calle Fernandez Garcia 306, Luquillo, Puerto Rico 00773, with a mailing address of P.O. Box 247, Luquillo, PR 00773. OSC, at 2. This registration, the OSC alleges, authorizes Respondent to dispense controlled substances in schedules II through V as a practitioner.
Regarding the substantive grounds for the proceeding, the Show Cause Order alleges that, on October 20, 2009, the U.S. Department of Health and Human Services, Office of Inspector General (hereinafter, HHS/OIG), mandatorily excluded Respondent from participating in all Federal health care programs due to his conviction in U.S. District Court for conspiracy to commit health care fraud.
The Show Cause Order further alleges that Respondent provided false answers to two “yes” or “no” liability questions when he applied for a DEA registration on October 16, 2014 and when he filed a renewal application on April 17, 2017. OSC, at 2-3. Specifically, the Show
The Show Cause Order notifies Respondent of his right to request a hearing on the allegations or to submit a written statement while waiving his right to a hearing, the procedures for electing each option, and the consequences for failing to elect either option.
Respondent timely requested a hearing on May 21, 2018.
The Office of Administrative Law Judges (hereinafter, OALJ) put the matter on the docket and assigned it to Administrative Law Judge Charles Wm. Dorman (hereinafter, ALJ). I adopt the following statement of procedural history from the ALJ's Order Granting the Government's Motion for Summary Disposition and Recommended Rulings, Findings of Fact, Conclusions of Law, and Decision dated June 22, 2018 (hereinafter, R.D.).
On May 31, 2018, the Government filed a Motion for Summary Disposition (“Government's Motion”). The Government's Motion argued that there is no issue of material fact in this case to warrant an adversarial hearing. The Government's Motion further requested that I summarily dispose of this matter without a hearing and recommend to the Acting Administrator that . . . [Respondent's] DEA registration be revoked. On the same day, I issued an Order affording . . . [Respondent] the opportunity to respond to the Government's Motion by June 14, 2018. I explained that if . . . [Respondent] disagreed with any of the Government's statements of undisputed material facts as outlined in its motion for summary disposition, he should provide copies of documentary evidence refuting the Government's statement(s). I further directed . . . [Respondent] to identify the material fact(s) which justify an evidentiary hearing in this case. . . . [Respondent] failed to respond to the Government's Motion by the deadline on June 14, 2018.
On June 15, 2018, the day after . . . [Respondent's] Response was due, chambers staff emailed . . . [Respondent's] counsel notifying him that the OALJ had not received a response from him and asking whether he intended to submit a late filing. . . . [Respondent's] counsel replied by email on June 17, 2018, with the following statement: “There are no allegations on behalf of . . . [Respondent]. The documents are self [e]xplanatory.”
Then, on June 21, 2018, the OALJ received a filing from . . . [Respondent's] counsel titled “Statement of Narciso A. Reyes, M.D.” The filing states that . . . [Respondent] “will not make any statement regarding this administrative action” and that “[t]he issue is hereby submitted for final ruling.”
The ALJ correctly concluded that Respondent's choice not to refute, challenge, or even address any of the Government's reliable and probative evidence and legal arguments “strongly indicates that he no longer wishes to proceed to hearing.”
By letter dated July 16, 2018, the ALJ certified and transmitted the record to me for final Agency action. In that letter, the ALJ advised that neither party filed exceptions and that the time period to do so had expired.
I issue this Decision and Order based on the entire record before me. 21 CFR 1301.43(e). I make the following findings of fact.
On November 3, 2008, Respondent pled guilty in Federal District Court to one count of conspiracy to commit health care fraud. Government's Motion, GE-2 (Plea Agreement,
Based on Respondent's conviction for conspiracy to commit health care fraud, the HHS/OIG notified Respondent of his mandatory exclusion from participation in any capacity in Medicare, Medicaid, and all Federal health care programs for the minimum statutory period of five years effective October 20, 2009. Government's Motion, GE-4 (HHS/OIG Exclusion Letter), at 1 (citing 42 U.S.C. 1320a-7(a)); Government's Motion, GE-5 (HHS/OIG Exclusions Search Results: Verify), at 1. The HHS/OIG Exclusion Letter advised Respondent that reinstatement of eligibility to participate in these programs is not automatic. Government's Motion, GE-4, at 2. Respondent is still excluded from participation in these programs. Government's Motion, GE-5, at 1.
On January 31, 2013, Respondent voluntarily surrendered for cause DEA registration No. BR3465944. Government's Motion, GE-8 (Respondent's DEA-104 Voluntary Surrender of Controlled Substances Privileges), at 1; Government's Motion, GE-9 (Certification of Registration History), at 1. Neither the DEA-104 nor any other evidence in the record explains the context of this voluntary surrender. DEA retired registration No. BR3465944 on February 4, 2013. Government's Motion, GE-9, at 1.
On October 16, 2014, Respondent submitted an application for a new DEA registration. Government's Motion, GE-10 (Respondent's DEA Form 224 submitted on October 16, 2014), at 1. The application Respondent completed includes “yes” or “no” liability questions that an applicant must answer to advance to the next page of the online DEA application. Government's Motion, GE-l (Certification of Registration Status), at 2; Government's Motion, GE-10, at 1.
The first liability question that Respondent answered on his online DEA application for a registration asks: “Has the applicant ever been convicted
The second liability question that Respondent answered on his online DEA application for a registration asks: “Has the applicant ever surrendered (for cause) or had a federal controlled substance registration revoked, suspended, restricted or denied, or is any such action pending?” Government's Motion, GE-l, at 2; Government's Motion, GE-10, at 1. Respondent answered “no” to this question. Government's Motion, GE-1, at 2; Government's Motion, GE-10, at 1. The DEA-104 Voluntary Surrender of Controlled Substances Privileges form that Respondent signed, however, makes it clear that Respondent knew or should have known that his “no” response to this question was false. Government's Motion, GE-8, at 1.
DEA approved Respondent's application and, on October 17, 2014, assigned DEA Certificate of Registration No. FR4900305 to him. Government's Motion, GE-1, at 1.
On April 17, 2017, Respondent submitted an online DEA renewal application for his DEA registration No. FR4900305. Government's Motion, GE-1, at 1; Government's Motion, GE-11 (Respondent's DEA Form 224A submitted on April 17, 2017), at 1. The online DEA renewal application Respondent submitted includes “yes” or “no” liability questions that an applicant must answer to advance to the next page of the online DEA renewal application. Government's Motion, GE-l, at 1; Government's Motion, GE-11, at 1.
The first liability question that Respondent answered on his online DEA renewal application asks: “Has the applicant ever been convicted of a crime in connection with controlled substance(s) under state or federal law, or been excluded or directed to be excluded from participation in a medicare or state health care program, or [is] any such action pending?” Government's Motion, GE-1, at 1; Government's Motion, GE-11, at 1. Respondent answered “no” to this question. Government's Motion, GE-1, at 1; Government's Motion, GE-11, at 1. Again, the HHS/OIG Exclusion letter makes it clear that Respondent knew or should have known that his “no” response to this question was false. Government's Motion, GE-4, at 1-2.
The second liability question that Respondent answered on his online DEA renewal application asks: “Has the applicant ever surrendered (for cause) or had a federal controlled substance registration revoked, suspended, restricted or denied, or is any such action pending?” Government's Motion, GE-l, at 1; Government's Motion, GE-11, at 1. Respondent answered “no” to this question. Government's Motion, GE-1, at 1; Government's Motion, GE-11, at 1. Again, the DEA-104 Voluntary Surrender of Controlled Substances Privileges form that Respondent signed makes it clear that Respondent knew or should have known that his “no” response to this question was false. Government's Motion, GE-8, at 1.
DEA approved Respondent's renewal application on April 19, 2017. Government's Motion, GE-1, at 1.
In sum, Respondent is currently registered as a practitioner in schedules II through V under DEA Certificate of Registration FR4900305 at Calle Fernandez Garcia 306, Luquillo, Puerto Rico 00773. Government's Motion, GE-1, at 1. Respondent's registration expires on April 30, 2020.
Pursuant to 21 U.S.C. 824(a)(1), the Attorney General may suspend or revoke a registration issued under section 823 of Title 21, “upon a finding that the registrant . . . has materially falsified any application filed pursuant to or required by this subchapter.” According to Agency precedent, the Government must show that a respondent “knew or should have known” that his response to a liability question was false.
According to the Supreme Court, Federal courts' “most common formulation” of the concept of “materiality” is that “a concealment or misrepresentation is material if it `has a natural tendency to influence, or was capable of influencing, the decision of' the decisionmaking body to which it was addressed.”
As already discussed, when Respondent submitted an online DEA application for a registration and an online DEA renewal application, he answered “no” to whether he had ever been excluded from participation in Medicare and to whether he had ever surrendered a registration for cause. As I already found above, Respondent's four answers were false and he “knew or should have known” that they were false.
I next determine the “materiality” of Respondent's four answers. 21 U.S.C. 824(a)(1). Concerning Respondent's false statements about his voluntary surrender of DEA registration No. BR3465944, the DEA-104 that Respondent executed does not indicate the underlying reason(s) for Respondent's “alleged failure to comply with the Federal requirements pertaining to controlled substances.” Government's Motion, GE-8, at 1. Further, as the ALJ noted, the DEA-104 reveals nothing about whether Respondent's “alleged failure” “had a natural tendency to affect” an Agency decision. R.D., at 13-14 (quoting
Concerning Respondent's false statements regarding his mandatory exclusion, the Agency has never before considered the materiality of a respondent's false answers about his mandatory exclusion as that question is posed in this case. I find the ALJ's analysis persuasive: “Considering that exclusion from a federal health care program under 42 U.S.C. 1320a-7(a) is an independent basis for revoking [a]
Pursuant to 21 U.S.C. 824(a)(5), the Attorney General may suspend or revoke a registration issued under section 823 of Title 21, “upon a finding that the registrant . . . has been excluded . . . from participation in a program pursuant to section 1320a-7(a) of Title 42.” Agency precedent makes clear that revocation under 21 U.S.C. 824(a)(5) may be appropriate regardless of whether or not the misconduct that led to the mandatory exclusion involved controlled substances.
Under 42 U.S.C. 1320a-7(a)(1), the HHS OIG is required to exclude from participation in any Federal health care program any individual who has been convicted of a criminal offense “related to the delivery of an item or service under . . . [42 U.S.C. 1395
Where, as here, the Government has met its
I agree with the ALJ's analysis and conclude that revocation is independently the appropriate sanction for each of the separate violations the facts support. In particular, I agree with the ALJ's analysis that, even though the underlying misconduct which led to Respondent's conviction and mandatory exclusion did not involve controlled substances, it did involve the unlawful use of Respondent's prescribing authority. R.D., at 17. As the ALJ stated, “This type of fraudulent behavior does not inspire confidence that . . . [Respondent] can be trusted with a prescription pad bearing a DEA registration number.”
Further, Respondent materially falsified two DEA applications. One such falsification, alone, is sufficient, without proof of any other misconduct, to revoke a registration.
Accordingly, based on the evidence in the record supporting two independent bases for revocation, I shall order that Respondent's DEA registration be revoked and that any pending application of Respondent to renew or to modify that registration be denied.
Pursuant to 28 CFR 0.100(b) and the authority thus vested in me by 21 U.S.C. 824(a), I order that DEA Certificate of Registration No. FR4900305 issued to Narciso A. Reyes, M.D., be, and it hereby is, revoked. Pursuant to 28 CFR 0.100(b) and the authority thus vested in me by 21 U.S.C. 823(f), I further order that any pending application of Narciso A. Reyes, M.D., to renew or to modify this registration, be, and it hereby is, denied. This Order is effective December 31, 2018.
Coordinating Council on Juvenile Justice and Delinquency Prevention, Office of Justice Programs, Department of Justice.
Notice of meeting.
The Coordinating Council on Juvenile Justice and Delinquency Prevention announces its next meeting.
Wednesday, December 19, 2018 at 10 a.m. EST.
The meeting will take place in the third floor main conference room at the U.S. Department of Justice, Office of Justice Programs, 810 7th St. NW, Washington, DC 20531.
Visit the website for the Coordinating Council at
The Coordinating Council on Juvenile Justice and Delinquency Prevention
Although designated agency representatives may attend in lieu of members, the Council's formal membership consists of the following secretaries and/or agency officials; Attorney General (Chair), Administrator of the Office of Juvenile Justice and Delinquency Prevention (Vice Chair), Secretary of Health and Human Services (HHS), Secretary of Labor (DOL), Secretary of Education (DOE), Secretary of Housing and Urban Development (HUD), Director of the Office of National Drug Control Policy, Chief Executive Officer of the Corporation for National and Community Service and the Assistant Secretary of Homeland Security for the U.S. Immigration and Customs Enforcement. Nine additional members are appointed by the Speaker of the U.S. House of Representatives, the U.S. Senate Majority Leader and the President of the United States. Further agencies that take part in Council activities include, the Departments of Agriculture, Defense, Interior and the Substance and Mental Health Services Administration of HHS.
Council meeting agendas are available on
For security purposes and because space is limited, members of the public who wish to attend must register in advance of the meeting online at
Interested parties may submit written comments and questions in advance to Jeff Slowikowski (DFO) for the Council, at the contact information above. If faxing, please follow up with Sarah Wisniewski, Senior Program Manager/Federal Contractor (contact information above) in order to assure receipt of submissions. All comments and questions should be submitted no later than 5:00 p.m. EST on Friday December 14, 2018. The Council will limit public statements if they are found to be duplicative. Written questions submitted by the public while in attendance will also be considered by the Council.
Notice of availability; request for comments.
The Department of Labor (DOL or Department) is submitting the Employment and Training Administration (ETA) sponsored Information Collection Request (ICR), titled, “Attestation for Employers Seeking to Employ H-2B Nonimmigrant Workers Under Section 205 of Division M of the Consolidated Appropriations Act, 2018 Public Law 115-141 (March 23, 2018),” to the Office of Management and Budget (OMB) for review and approval for continued use in accordance with the Paperwork Reduction Act (PRA) of 1995. Public comments on the ICR are invited.
The OMB will consider all written comments it receives on or before December 31, 2018.
A copy of this ICR with applicable supporting documentation, including a description of the likely respondents, proposed frequency of response, and estimated total burden, may be obtained free of charge from the
Submit comments about this request by mail to the Office of Information and Regulatory Affairs, Attn: OMB Desk Officer for DOL-ETA, Office of Management and Budget, Room 10235, 725 17th Street NW, Washington, DC 20503; by Fax: 202-395-6881 (this is not a toll-free number); or by email:
Michel Smyth by telephone at 202-693-4129/TTY 202-693-8064 (these are not toll-free numbers) or by sending an email to:
This ICR seeks approval under the PRA for revisions to the Attestation for Employers Seeking to Employ H-2B Nonimmigrant Workers Under Section 205 of Division M of the Consolidated Appropriations Act, 2018 Public Law 115-141 (March 23, 2018) information collection. On March 23, 2018, the President signed the Consolidated Appropriations Act, 2018. Division M, Section 205 of the Act authorized the Secretary of Homeland Security, in consultation with the Secretary of Labor, to increase the number of H-2B visas available to U.S. employers, notwithstanding the otherwise established statutory numerical limitation. This collection of information was required by the regulations that went into effect on May 31, 2018, implementing Section 205. The Secretary of Homeland Security increased the H-2B cap for Fiscal Year 2018 by up to 15,000 additional visas for American businesses that were likely to suffer irreparable harm (that is, permanent and severe financial loss) without the ability to employ before the end of FY 2018 the H-2B workers requested on their petition.
The exigency created by the Consolidated Appropriations Act to meet the high demand by American businesses for H-2B workers, and the short period of time remaining in the fiscal year for U.S. employers to avoid the economic harm this legislation was intended to prevent, required initial clearance of this information collection using expedited processes. As a result, initial clearance for this information collection was sought using Paperwork Reduction Act emergency procedures outlined in regulations at 5 CFR 1320.13, and the Department received a six-month approval. Subsequently, the Department has sought public comment to revise this information collection through the notice and comment process. Specifically, the Department proposes: to revise this collection to eliminate the now expired provisions for completing and submitting Form ETA-9142-B-CAA-2,
This information collection is subject to the PRA. A Federal agency generally cannot conduct or sponsor a collection of information, and the public is generally not required to respond to an information collection, unless it is approved by the OMB under the PRA and displays a currently valid OMB Control Number. In addition, notwithstanding any other provisions of law, no person shall generally be subject to penalty for failing to comply with a collection of information that does not display a valid Control Number.
• Interested parties are encouraged to send comments to the OMB, Office of Information and Regulatory Affairs, at the address shown in the
• Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
• Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
• Enhance the quality, utility, and clarity of the information to be collected; and
• Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
44 U.S.C. 3507(a)(1)(D).
Copyright Royalty Board, Library of Congress.
Final distribution determination.
The Copyright Royalty Judges (Judges) announce the final distribution of cable and satellite royalty funds for the years 2010, 2011, 2012, and 2013. The determination is a result of agreement among the participants that claim shares of the cable and satellite royalty funds to be allocated to the Program Suppliers Claimant category. The Judges issued their allocation determination relating to cable royalty funds for the relevant years to the participants on October 18, 2018. Allocation of satellite royalty funds is not yet determined.
The final distribution order is also published in eCRB at
Anita Blaine, CRB Program Specialist, by telephone at (202) 707-7658 or email at
The Copyright Royalty Judges (Judges) received a joint motion of MPAA-represented Program Suppliers (MPAA) and Multigroup Claimants (MGC) for entry of a consent order adopting the distribution shares proposed by the MPAA and ordering a final distribution in conformity with those agreed shares of cable and satellite television royalty funds to be allocated to the Program Suppliers category for the 2010-13 cable and satellite royalty years.
The Judges find that the parties' agreement as to the final percentage distribution has ended any remaining controversy with regard to the subject funds over which the Judges have jurisdiction and that neither party now has a significant interest related to this proceeding as to the 2010-13 cable and satellite royalty funds. Accordingly, good cause exists for entry of a final distribution determination relating to the subject funds.
Distribution of funds allocated to all other program categories, except the Devotional Programming category, was without controversy. Parties to the controversy relating to the Devotional category resolved that controversy by agreement and the Judges entered a final order with regard to the Devotional
The Judges therefore
The Judges
The Judges
Upon issuance of this final determination, the Register of Copyrights (“Register”) shall have 60 days to conduct a statutory review. The Librarian of Congress shall review and cause this final determination, and any correction thereto by the Register, to be published in the
National Aeronautics and Space Administration.
Notice of meeting.
In accordance with the Federal Advisory Committee Act, as amended, the National Aeronautics and Space Administration announces a meeting of the NASA International Space Station (ISS) Advisory Committee. The purpose of the meeting is to review all aspects related to the safety and operational readiness of the ISS, and to assess the possibilities for using the ISS for future space exploration.
Friday, December 21, 2018, 2-3 p.m., Eastern Time.
NASA Headquarters, Glennan Conference Room (1Q39), 300 E Street SW, Washington, DC 20546. Note: 1Q39 is located on the first floor of NASA Headquarters.
Mr. Patrick Finley, Designated Federal Officer, Office of International and Interagency Relations, (202) 358-5684, NASA Headquarters, Washington, DC 20546-0001.
This meeting will be open to the public up to the seating capacity of the room. This meeting is also accessible via teleconference. To participate telephonically, please contact Mr. Finley by telephone at (202) 358-5684 before 4:30 p.m., Eastern Time, on December 18, 2018. You will need to provide your name, affiliation, and phone number. Attendees will be requested to sign a register and to comply with NASA security requirements, including the presentation of a valid picture ID to Security before access to NASA Headquarters. Foreign nationals attending this meeting will be required to provide a copy of their passport and visa in addition to providing the following information no less than 10 working days prior to the meeting: Full name; gender; date/place of birth; citizenship; visa information (number, type, expiration date); passport information (number, country, expiration date); employer/affiliation information (name of institution, address, country, telephone); title/position of attendee; and home address to Mr. Finley via email at
In accordance with the Federal Advisory Committee Act (Pub. L. 92-463, as amended), the National Science Foundation (NSF) announces the following meeting:
Alan T. Waterman Award Committee (#1172).
January 16, 2019; 9 a.m. to 2 p.m.
National Science Foundation, 2415 Eisenhower Avenue, Suite W19000, Alexandria, Virginia 22314.
Closed.
Sherrie B. Green, Program Manager, OD/OIA, Suite W17126, National Science Foundation, 2415 Eisenhower Ave., Alexandria, VA 22314; Telephone: (703) 292-8040.
To provide advice and recommendations in the selection of the Alan T. Waterman Award recipient.
To review and evaluate nominations as part of the selection process for awards.
The nominations being reviewed include information of a personal nature where disclosure would constitute unwarranted invasions of personal privacy. These matters are exempt under 5 U.S.C. 552b(c), (6) of the Government in the Sunshine Act.
In accordance with the Federal Advisory Committee Act (Pub. L. 92-463, as amended), the National Science Foundation (NSF) announces its intent to hold proposal review meetings throughout the year. The purpose of these meetings is to provide advice and recommendations concerning proposals submitted to the NSF for financial support. The agenda for each of these meetings is to review and evaluate proposals as part of the selection process for awards. The review and evaluation may also include assessment of the progress of awarded proposals. These meetings will primarily take place at NSF's headquarters, 2415 Eisenhower Avenue, Alexandria, VA 22314.
These meetings will be closed to the public. The proposals being reviewed include information of a proprietary or confidential nature, including technical information; financial data, such as salaries; and personal information concerning individuals associated with the proposals. These matters are exempt under 5 U.S.C. 552b(c), (4) and (6) of the Government in the Sunshine Act. NSF will continue to review the agenda and merits of each meeting for overall compliance of the Federal Advisory Committee Act.
These closed proposal review meetings will not be announced on an individual basis in the
Nuclear Regulatory Commission.
Appointments; revision.
On October 19, 2018, the U.S. Nuclear Regulatory Commission (NRC) announced appointments to the NRC Performance Review Board (PRB) responsible for making recommendations on performance appraisal ratings and performance awards for NRC Senior Executives and Senior Level System employees and appointments to the NRC PRB Panel responsible for making recommendations to the appointing and awarding authorities for NRC PRB members. Since then, the NRC has made revisions to the list of PRB member appointees.
November 30, 2018.
Please refer to Docket ID NRC-2018-0219 when contacting the NRC about the availability of information regarding this document. You may obtain publicly-available information related to this document using any of the following methods:
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•
•
Miriam L. Cohen, Executive Resources Board, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001; telephone: 301-287-0747, email:
On October 19, 2018 (83 FR 53118), the NRC announced appointments to the NRC PRB membership. The following revision has been made to the list of NRC PRB members. Catherine A. Haney, Regional Administrator, Region II, will replace Frederick D. Brown, Director, Office of New Reactors. The revised list of NRC PRB members that are responsible for making recommendations to the appointing and awarding authorities on performance appraisal ratings and performance awards for Senior Executives and Senior Level System employees read as follows:
Margaret M. Doane, Executive Director for Operations;
Marian L. Zobler, General Counsel;
Daniel H. Dorman, Deputy Executive Director for Materials, Waste, Research, State, Tribal, Compliance, Administration, and Human Capital Programs, Office of the Executive Director for Operations;
Michael R. Johnson, Deputy Executive Director for Reactor and Preparedness Programs, Office of the Executive Director for Operations;
Marc L. Dapas, Director, Office of Nuclear Material Safety and Safeguards;
Catherine A. Haney, Regional Administrator, Region II;
Brian E. Holian, Director, Office of Nuclear Security and Incident Response;
Nader L. Mamish, Director, Office of International Programs;
Mary C. Muessle, Director, Office of Administration;
K. Steven West, Regional Administrator, Region III; and
Maureen E. Wylie, Chief Financial Officer.
The following individuals will serve as members of the NRC PRB Panel that was established to review appraisals and make recommendations to the appointing and awarding authorities for NRC PRB members:
Anne T. Boland, Director, Office of Enforcement;
Brooke P. Clark, Deputy General Counsel for Hearings and Administration; and
Andrea D. Veil, Executive Director, Advisory Committee on Reactor Safeguards.
All appointments are made pursuant to Section 4314 of Chapter 43 of Title 5 of the United States Code.
For the Nuclear Regulatory Commission.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),
Cboe BYX Exchange, Inc. (the “Exchange” or “BYX”) is filing with the Securities and Exchange Commission (“Commission”) a proposed rule change to modify certain Routing Fees.
The text of the proposed rule change is also available on the Exchange's website (
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The Exchange proposes to amend its fee schedule to amend pricing for orders routed to Cboe EDGA Exchange, Inc., (“EDGA”), which yield fee codes AA, BJ, and RA.
First, the Exchange notes that orders routed to EDGA using ALLB routing strategy (which yield fee code AA) and orders routed to EDGA using a Destination Specific, TRIM or TRIM2 routing strategy (which yield fee code BJ) are currently assessed $0.00030 per share. The Exchange proposes to eliminate this fee and instead provide a rebate of $0.00240 per share for these orders. Next, the Exchange notes that orders routed to EDGA that add liquidity (which yield fee code RA) are assessed $0.00030 per share. The Exchange proposes to increase the rate from $0.00030 per share to $0.00300 per share.
The Exchange also believes the proposed rule change is consistent with Section 6(b)(4) of the Act, which requires that Exchange rules provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities.
The Exchange believes the proposed changes are reasonable because they reflect a pass-through of the pricing changes by EDGA described above. The Exchange further believes the proposed fee change is non-discriminatory because it applies uniformly to all Members. The Exchange lastly notes that routing through the Exchange is voluntary and that it operates in a highly competitive market in which market participants can readily direct order flow to competing venues or providers of routing services if they deem fee levels to be excessive.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes the proposed routing fee changes will not impose an undue burden on competition because the Exchange will uniformly assess the affected routing fees on all Members. Additionally, Members may opt to disfavor the Exchange's pricing if they believe that alternatives offer them better value or if they view the proposed fee as excessive. The Exchange also notes the proposed changes to the EDGA-related routing fees are meant to pass through the fees and rebates associated with executing orders on that market, and is therefore not designed to have any significant impact on competition. Further, excessive fees for participation would serve to impair an exchange's ability to compete for order flow and members rather than burdening competition.
The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any written comments from members or other interested parties.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On September 18, 2018, MIAX PEARL, LLC (“MIAX PEARL” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Commission received one comment letter on the proposal.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1)
The Exchange proposes to amend Rule 6.4-O. The proposed rule change is available on the Exchange's website at
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
The purpose of this filing is to amend Rule 6.4-O, Series of Options Open for Trading, to permit the listing and trading of up to ten expiration months for long term options on the SPDR® S&P
Rule 6.4-O(d) provides that the Exchange may list, with respect to any class of stock or Exchange-Traded Fund Share options series, options having from twelve up to thirty-nine months from the time they are listed until expiration (“LEAPS”). Under the current Rule, the Exchange may list up to six LEAPS expiration months.
The SPY ETF options market today is characterized by its tremendous daily and annual liquidity. As a consequence the Exchange believes that the listing of additional SPY ETF LEAPS expiration months would be well received by investors. This proposal to expand the number of permitted SPY ETF LEAPS would not apply to LEAPS on any other class of stock or Exchange-Traded Fund Share options.
The proposed rule change is consistent with Section 6(b)
The Exchange believes that the addition today of four additional expiration months for SPY ETF LEAPS does not represent a proliferation of expiration months, but is instead a very modest expansion of LEAPS options in response to stated customer demand. Significantly, the proposal would feature new LEAPS expiration months in only a single class of options—the SPY ETF—that are very liquid and heavily traded, as discussed above. Additionally, the Exchange notes that ten expiration months are already permitted for stock index LEAPS options on the Exchange as well as on other markets.
The Exchange notes that this proposal is substantially the same as a recent rule amendment submitted by PHLX.
The Exchange respectfully requests that the Commission waive the 30-day operative delay so that the proposed rule change may become effective and operative upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Act
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The proposal merely provides investors additional investment and risk management opportunities by providing flexibility to the Exchange to list additional long term options expiration series, expanding the number of SPY ETF LEAPS offered on the Exchange from six expiration months to ten expiration months.
No written comments were solicited or received with respect to the proposed rule change.
Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed under Rule 19b-4(f)(6)
At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“SEA,” “Act” or “Exchange Act”)
FINRA is proposing to amend FINRA Rule 4570 (Custodian of Books and Records) to: (1) Provide a member that is filing a Form BDW (Uniform Request for Broker-Dealer Withdrawal) the option of designating another FINRA member as the custodian of its books and records on the form; (2) clarify the obligations of the designated custodian; and (3) require the designated custodian to consent to act in such a capacity.
The text of the proposed rule change is available on FINRA's website at
In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
SEA Rule 17a-4 (Records to be Preserved by Certain Exchange Members, Brokers and Dealers)
FINRA Rule 4570 currently requires a member to designate as the custodian of its required books and records on the
FINRA understands that some members have had difficulty in identifying and designating an associated person as the books and records custodian on their Form BDWs when they are in the process of winding down. These members have indicated that other members are willing to function as custodians for purposes of FINRA Rule 4570, but they cannot do so currently because of the limitations in the rule.
To provide greater flexibility to members, FINRA is proposing to amend Rule 4570 to provide a member that is filing a Form BDW the option of designating another FINRA member as the custodian of its books and records on the Form BDW. The proposed rule change would not require members to designate another FINRA member as the custodian of their books and records, but would give them the option to do so, at their discretion. Firms would continue to have the option of designating an associated person as the custodian of their books and records. Further, the proposed rule change would preserve FINRA's ability to obtain the books and records of a former member because FINRA would continue to have jurisdiction over, and the ability to obtain information from, the member that has agreed to act as custodian.
In addition to permitting another member to act as the designated custodian, FINRA is proposing to amend Rule 4570 to clarify the obligations of the designated custodian. Specifically, the proposed rule change would clarify that the custodian designated on the Form BDW, which would be either an associated person or another member, must preserve the books and records on behalf of the member that filed the Form BDW for the remainder of the applicable retention periods and make them available for inspection by FINRA upon request. For example, if a custodian receives a record from a firm that is going out of business that had an original retention period of six years, four years of which have already passed, the custodian must retain that record for the remaining two years and provide it to FINRA upon request.
Further, the proposed rule change would clarify that a custodian is required to preserve and produce a former member's books and records in the same manner in which they were received. This provision is intended to ensure that the custodian does not alter the records after taking possession of them. However, the proposed rule change would provide that a custodian would not be precluded from converting the books and records in its possession into another format acceptable under the Exchange Act (
In addition, the proposed rule change would provide that where a member is acting as custodian, such member would not be required to verify the completeness or accuracy of the books and records that it receives. This exception is limited to members that are acting as custodians because their function is more akin to that of a recordkeeping service. However, FINRA believes that an associated person who is acting as custodian of a member's books and records is in a position to verify the completeness and accuracy of the member's books and records based on his or her existing relationship with the member.
Finally, FINRA is proposing to amend Rule 4570 to require that where a FINRA member has agreed to act as custodian of the books and records of another member that has filed a Form BDW, the member acting as custodian must: (1) Treat such books and records as if they were its own books and records; and (2) arrange upon its dissolution for such books and records to continue to be retained for the remainder of the applicable retention periods under FINRA and Exchange Act rules in the same manner as its own books and records consistent with Rule 4570. FINRA believes that by clarifying the obligations of the custodian, the proposed rule change would facilitate compliance with the obligations under SEA Rule 17a-4(g) and Form BDW.
FINRA has become aware of situations where the person named as the custodian on the Form BDW was not aware that the member was designating the person as a custodian. To address this issue, the proposed rule change would require a member to obtain the affirmative, written or verbal, consent of the custodian of books and records identified on the firm's Form BDW. In addition, the proposed rule change would require a member that is withdrawing its registration to inform its custodian of the obligations under FINRA and Exchange Act rules, including FINRA Rule 4570, prior to obtaining the custodian's consent.
The proposed rule change would also require the designated custodian to represent to FINRA, in a method prescribed by FINRA, that the custodian: (1) Has consented to act in the capacity of a custodian; (2) understands the responsibilities of a custodian; and (3) agrees to provide the books and records of the member for which it is acting as custodian to FINRA upon request during the course of the required retention periods.
The proposed rule change would impact all members, including members that have elected to be treated as capital acquisition brokers (“CABs”) and are subject to the CAB Rules. CAB Rule 457 subjects all CABs to FINRA Rule 4570. Accordingly, the proposed rule change to FINRA Rule 4570 would also impact CABs.
If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a
FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,
FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
FINRA has undertaken an economic impact assessment, as set forth below, to further analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs, benefits, and distributional and competitive effects, relative to the current baseline, and the alternatives FINRA considered in assessing how best to meet its regulatory objective.
FINRA Rule 4570 is intended to ensure that a firm's books and records are properly retained and accessible for the remainder of the applicable retention periods after the firm withdraws its registration with FINRA. However, certain aspects of the rule as currently written limit a firm's ability to identify a willing custodian and reduce the likelihood that books and records are properly retained and accessible following a firm's termination of registration.
The economic baseline for the proposed rule change is the number of firms that withdraw from the industry and thus file a Form BDW, and would therefore have to identify a custodian. In the past five years, approximately 1,100 firms filed a Form BDW, terminating their registration with FINRA. The firms had a median age of 14 years, and a median firm size of five associated persons and $240,000 in total assets, at the time they filed their Form BDW. The number of firms filing a Form BDW annually has largely remained constant over the last five years.
The proposed rule change would primarily affect firms filing a Form BDW, customers of those firms, designated custodians, and investors generally.
Currently, firms that file a Form BDW may only designate an associated person as the custodian of their books and records. By allowing such firms to designate another member as their custodian, the proposed rule change may reduce search costs associated with identifying a willing custodian. Search costs can be significant for firms filing a Form BDW as there are many other obligations that must also be addressed as a firm prepares to leave the industry. These obligations can make it difficult for a firm to identify an associated person who is willing, and able, to carry out the custodial responsibilities as the firm is in the process of winding down.
FINRA believes that introducing-only firms with established relationships with clearing firms may be most likely to benefit from the additional flexibility provided in the proposed rule change.
FINRA also believes that if a firm that is filing a Form BDW chooses another member as its custodian, it would enhance the ability of FINRA to obtain the books and records of the firm. This is because FINRA's jurisdiction over former associated persons is more limited than its jurisdiction over current members.
FINRA has become aware of situations where a document request was made to a custodian only to find that the custodian had stopped paying for the document storage or otherwise no longer had access to the books and records of the former firm. This makes books and records unavailable for use by FINRA staff, may inhibit the ability of FINRA staff to conduct its work and could lead to the imposition of sanctions on the custodian. Further, without access to the books and records of a former firm, customers who bring a claim against the firm may be limited in their ability to obtain restitution. Finally, FINRA and other regulators may be more limited in their ability to pursue a disciplinary action against the former firm or an associated person of the firm, possibly increasing risk to investors generally. By clarifying custodians' obligations, the proposed rule change aims to improve custodians' understanding of the time and monetary commitment and the potential sanctions that could be imposed on them should they not comply with their obligations.
Further, FINRA has come across instances where the custodian was unaware that they were named as the custodian of a former firm's books and records and did not have access to them. By requiring the custodian's affirmative consent and representation to FINRA, the proposed rule change would eliminate such situations. Similar to the benefits associated with clarifying the obligations of custodians, the custodian's consent and representation to FINRA would also increase the likelihood that a former firm's books and records would be properly retained and accessible.
The costs associated with the proposed rule change would likely depend on whether the designated custodian is an associated person or another member. The proposed rule change would give a firm that is filing a Form BDW the additional option of designating another member, rather than
Firms that designate members as their custodians, subject to their consent, may incur costs associated with record-keeping services provided by such members. For instance, a member that agrees to act as custodian is likely to incur operational and technology costs associated with integrating the former member's books and records into its record-keeping systems. Moreover, the proposed rule change could result in a change in how custodianship of books and records by firms leaving the industry is paid for and managed. For instance, clearing firms might adapt their business models to integrate the costs of custodial services into clearing agreements at the outset of the clearing relationship. This would potentially lead to an industry-wide increase in the costs of clearing agreements, regardless of any custodial undertaking by the clearing firms. However, considering the small number of firms that file Form BDW per year, FINRA believes that this is a low probability outcome.
The clarification of a custodian's obligations does not add any new direct burdens, but it could make it harder for firms to identify a custodian willing to agree to the obligations. Likewise, the affirmative consent requirement and the requirement to provide a representation to FINRA may make it more difficult for firms to find a willing custodian. However, given the importance to FINRA and investors of proper custody of books and records, FINRA believes that these additional burdens are warranted.
FINRA considered whether to amend Rule 4570 to require a firm that is going out of business to be only able to designate another member as its custodian. While such a requirement would further enhance FINRA's ability to obtain the books and records of former firms, FINRA determined that a firm that is leaving the industry and that is experiencing financial or operational difficulties may find it difficult to find another member that is willing to act as custodian. Further, FINRA continues to evaluate the viability that FINRA make itself available as an alternative custodian for members' records after withdrawal.
Written comments were neither solicited nor received.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2018-039 and should be submitted on or before December 21, 2018.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1)
The Exchange proposes to amend its certificate of incorporation, bylaws and Rule 3.3(a)(1)(B) to (1) harmonize certain provisions thereunder with similar provisions in the governing documents of the Exchange's national securities exchange affiliates and parent companies; and (2) make clarifying and updating changes. The proposed rule change is available on the Exchange's website at
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
The Exchange proposes to amend the Certificate of Incorporation of the Exchange (“Exchange Certificate”), Amended and Restated Bylaws of the Exchange (“Exchange Bylaws”), and Rule 3.3(a)(1)(B) to (1) harmonize certain provisions thereunder with similar provisions in the governing documents of the Exchange's national securities exchange affiliates
The Exchange is owned by the Holding Member, which in turn is indirectly wholly owned by NYSE Holdings LLC (“NYSE Holdings”). NYSE Holdings is a wholly owned subsidiary of Intercontinental Holdings, Inc. (“ICE Holdings”), which is in turn wholly owned by the Intercontinental Exchange, Inc. (“ICE”).
The Exchange operates as a separate self-regulatory organization and has rules, membership rosters and listings distinct from the rules, membership rosters and listings of the other NYSE Group Exchanges. At the same time, however, the Exchange believes it is important for each of the NYSE Group Exchanges to have a consistent approach to corporate governance in certain matters, to simplify complexity and create greater consistency among the NYSE Group Exchanges.
Because the Exchange is a Delaware non-stock corporation, most of the proposed changes are based on the governing documents of CHX and NYSE National, which are Delaware corporations, as the most comparable NYSE Group Exchanges.
The changes described herein would become operative upon the Exchange Certificate becoming effective pursuant to its filing with the Secretary of State of the State of Delaware.
The proposed amendments described below are primarily based on the Second Amended and Restated Certificate of Incorporation of Chicago Stock Exchange, Inc. (“NYSE Chicago Certificate”); Second Amended and Restated By-Laws of NYSE Chicago, Inc. (“NYSE Chicago Bylaws”)
The Exchange proposes to amend the Exchange Certificate as follows.
The Exchange proposes to amend the title to reflect that the proposed Exchange Certificate is the “Amended and Restated Certificate of Incorporation of NYSE Arca, Inc.”
In a non-substantive change, the Exchange proposes to replace “NYSE ARCA, INC.” with “NYSE Arca, Inc.” in Article 1, to reflect that the legal name of the Exchange is not entirely in capital letters. Proposed Article 1 is substantially similar to Article 1 of the NYSE Chicago Certificate and Article
In a non-substantive change, the Exchange proposes to update the address of the registered office and name of the registered agent, as previously filed. The Exchange also proposes to delete the “Certificate of Change of Registered Agent and/or Registered Office.”
Article 9 permits the Exchange to enter into a compromise with its creditors in certain circumstances. The Exchange proposes to amend current Article 9 to be consistent with the relevant provision of the DGCL, including the use of “corporation” instead of “Exchange.”
In a non-substantive change, the Exchange proposes to correct a reference to “this Article 11” to reference Article 10.
Article 12 addresses indemnification. The Exchange proposes to delete Article 12 in its entirety, as the indemnification provision is set forth in Article VII, Section 7.01 of the Exchange Bylaws, making this provision redundant. Subsequent articles would be renumbered accordingly. NYSE Chicago made a similar change, deleting Article EIGHTH(a) of its Certificate.
Current Article 13 (proposed Article 12) states that the approval of a majority of the members of the Board and a majority of the existing Corporate Members shall be required to amend or repeal any provision of the Exchange Certificate, and that any change to the Exchange Certificate or Bylaws that is required to be approved by or filed with the Commission before it may become effective shall not become effective until the required Commission procedures have been satisfied.
The Exchange proposes to amend the provision to state that the Exchange reserves the right to amend the Exchange Certificate and to change or repeal any provision thereof, provided that any amendment must be approved by a majority of the members of the Board present at the relevant meeting and by a majority of the existing Corporate Members. In addition, the Exchange proposes to add a sentence providing that before any amendment to, alteration or repeal of any provision of the Exchange Certificate shall be effective, those changes shall be submitted to the Board and, if required, the proposed changes shall not become effective until filed with or filed with and approved by the Commission, as the case may be. The revised provision would read as follows (deletions bracketed; new text italicized):
The approval of either a majority of the Board of Directors or the affirmative vote of a majority of the existing Corporate Members, shall be required to adopt, amend or repeal any provision of the bylaws of the Exchange. The [approval of ]
The proposed new text would be substantially similar to Article ELEVENTH of the NYSE Chicago Certificate. In addition, the proposed final sentence is consistent with the final sentence of Article ELEVENTH of the NYSE National Certificate.
Article 14 sets forth the name and mailing address of each of the incorporators. In a non-substantive change, the Exchange proposes to delete current Article 14 in its entirety, as it is obsolete.
In an administrative change, the Exchange proposes to add a statement in proposed Article 13 setting forth the date and time that the Exchange Certificate shall be effective, as well as to add a signature block with the date of execution. The proposed change would be consistent with Article XIV and signature block of the NYSE Group Certificate.
The Exchange proposes to amend the Exchange Bylaws as follows.
Article I contains a provision stating that the Exchange shall have a registered office in Delaware as required by law, and elsewhere as determined by the Board. The Exchange proposes to (a) amend the title and number to the provision in Article I, and (b) add a sentence that states that the Exchange's Delaware registered agent shall be such person or entity determined by the Board. The proposed title and final sentence would be consistent with the final sentence of Article I, Section 1 of the NYSE Chicago Bylaws and of Article II, Section 2.1 of the NYSE National Bylaws.
The Exchange proposes to delete Sections 2.02, 2.04, and 2.05, which are marked “Reserved,” and renumber the remaining sections of Article II accordingly.
The Exchange proposes to maintain the substance of current Section 2.06, renumbering it as Article 2.03, but substantially conforming the provision to the governing documents of the other NYSE Group Exchanges.
In an administrative change, the Exchange proposes to add text stating that (a) such approval must be made by a majority of the directors then in office, as opposed to total number of seats on the Board; and (b) the Holding Member may also fill any vacancy, and those vacancies resulting from removal from office by a vote of the Holding Member for cause may be filled by a vote of the Holding Member at the same meeting at which such removal occurs. The first sentence of the amended paragraph would be as follows (additions italicized):
Whenever between meetings of the Exchange any vacancy exists on the Board of Directors by reason of death, resignation, removal or increase in the authorized number of directors or otherwise, it may be filled
The change would be consistent with clause (ii) of Article II, Section 5 of the NYSE Chicago Bylaws, which was amended at the time of its acquisition by ICE.
In an administrative change, the Exchange proposes to amend the provision to state that the meeting shall be at the place designated in the notice of the meeting, but that if no designation is made, the meeting will be at the principal office of the Exchange. The change would be consistent with the first sentence of NYSE National Bylaws Article III, Section 3.8 and NYSE Chicago Bylaws, Article II, Section 7.
The Exchange proposes to revise the quorum requirement to state that “Except as otherwise required by law, at all meetings of the Board, the presence of a majority of the number of directors then in office shall constitute a quorum for the transaction of business.” In addition, it proposes to replace the sentence regarding procedures if less than a quorum is present with the statement that, if a quorum is not present, “a majority of the directors present at the meeting may adjourn the meeting, without notice other than announcement at the meeting, until a quorum shall be present.”
Changing the quorum requirement to a majority of the directors then in office would be consistent with the quorum provisions of the other NYSE Group Exchanges.
The Exchange proposes to add a sentence stating that each director shall be entitled to one vote. The revised provision is substantially similar to the first and third sentences of NYSE Chicago Bylaws Article II, Section 10.
In an administrative change, the Exchange proposes to replace “Unless otherwise restricted by” with “Unless otherwise provided by law.” The proposed change would allow the provision to be consistent with both applicable law and the Exchange governing documents and rules, should applicable law set forth specific requirements that differ from such documents. The change would be consistent with NYSE Chicago Bylaws Article II, Section 13.
In an administrative change, the Exchange proposes to amend Section 5.01 to provide that the Board shall elect officers of the Exchange as it deems appropriate. The statement that two or more offices may be held by the same person would be revised to exclude the Chief Regulatory Officer and the Secretary from holding the office of CEO or President. The revised provision would be substantially similar to Article VI, Section 6.1 of the NYSE National
The Exchange proposes to add death and retirement as events that would cause an officer to no longer hold office. The proposed change would be consistent with Article V, Section 2(a) of the NYSE Chicago Bylaws.
The Exchange proposes to delete the second sentence of Section 5.04, as Section 5.02 already provides that the any officer of the Exchange, including the CEO, shall, unless otherwise ordered by the Board, have such powers and duties as generally pertain to their office as well as such powers and duties as from time to time may be conferred by the Board. The Exchange notes that Article VI of the NYSE National Bylaws similarly does not have a separate provision regarding the powers of its chief executive officer.
The Exchange proposes to delete Section 6.05 in its entirety. Section 6.05 of the Exchange Bylaws dates to the demutualization of the Exchange (then “Pacific Exchange, Inc.”), when its ownership structure was materially different.
Accordingly, the Exchange proposes to delete the text of Section 7.01 (Indemnification) in its entirety and replace it with proposed text that is substantially similar to the CHX, ICE and ICE Holdings provisions, with the exception of changes to be consistent with the Exchange Bylaws' terminology.
(a) The Exchange shall, to the fullest extent permitted by law, as those laws may be amended and supplemented from time to time, indemnify any director or officer made, or threatened to be made, a party to any action, suit or proceeding, whether criminal, civil, administrative or investigative, by reason of being a director or officer of the Exchange or a predecessor corporation or, at the Exchange's request, a director, officer, partner, member, employee or agent of another corporation or other entity; provided, however, that the Exchange shall indemnify any director or officer in connection with a proceeding initiated by such person only if such proceeding was authorized in advance by the Board of Directors of the Exchange. The indemnification provided for in this Section 7.01 shall: (i) Not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office; (ii) continue as to a person who has ceased to be a director or officer; and (iii) inure to the benefit of the heirs, executors and administrators of an indemnified person.
(b) Expenses incurred by any such person in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a director or officer of the Exchange (or was serving at the Exchange's request as a director, officer, partner, member, employee or agent of another corporation or other entity) shall be paid by the Exchange in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Exchange as authorized by law. Notwithstanding the foregoing, the Exchange shall not be required to advance such expenses to a person who is a party to an action, suit or proceeding brought by the Exchange and approved by a majority of the Board of Directors of the Exchange that alleges willful misappropriation of corporate assets by such person, disclosure of confidential information in violation of such person's fiduciary or contractual
(c) The foregoing provisions of this Section 7.01 shall be deemed to be a contract between the Exchange and each director or officer who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The rights provided to any person by this bylaw shall be enforceable against the Exchange by such person, who shall be presumed to have relied upon it in serving or continuing to serve as a director or officer or in such other capacity as provided above.
(d) The Board of Directors in its discretion shall have power on behalf of the Exchange to indemnify any person, other than a director or officer, made or threatened to be made a party to any action, suit or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person, or his or her testator or intestate, is or was an officer, employee or agent of the Exchange or, at the Exchange's request, is or was serving as a director, officer, partner, member, employee or agent of another corporation or other entity.
(e) To assure indemnification under this Section 7.01 of all directors, officers, employees and agents who are determined by the Exchange or otherwise to be or to have been “fiduciaries” of any employee benefit plan of the Exchange that may exist from time to time, Section 145 of the Delaware General Corporation Law shall, for the purposes of this Section 7.01, be interpreted as follows: An “other enterprise” shall be deemed to include such an employee benefit plan, including without limitation, any plan of the Exchange that is governed by the Act of Congress entitled “Employee Retirement Income Security Act of 1974,” as amended from time to time; the Exchange shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the Exchange also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed “fines.”
In a conforming change, the Exchange proposes to add a section number before the word “Amendment.”
Rule 3.3(a)(1)(B) establishes the composition of the Exchange Regulatory Oversight Committee (“ROC”), and is substantially the same as the related provisions in the governing documents of the other NYSE Group Exchanges.
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Exchange Act,
The Exchange believes that the proposed amendments to the Exchange Bylaws, Certificate and Rule 3.3(a) would enable the Exchange to be so organized as to have the capacity to be able to carry out the purposes of the Exchange Act and to comply, and to enforce compliance by its exchange members and persons associated with its exchange members, with the provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the Exchange, because such amendments would add or expand upon existing provisions to protect and maintain the independence and integrity of the Exchange and its regulatory function and reinforce the notion that the Exchange is not solely a commercial enterprise, but a national securities exchange subject to the obligations imposed by the Exchange Act. Such provisions include ensuring that regulatory assets, fees, fines, and penalties may only be used to fund legal, regulatory and surveillance operations; and providing that any amendments to the Exchange Certificate must be submitted to the Board and, as applicable, shall not be effective until filed with or filed with and approved by the Commission. The Exchange believes that such provisions are consistent with and will facilitate a governance structure that will provide the Commission with appropriate oversight tools to ensure that the Commission will have the ability to enforce the Exchange Act with respect to the Exchange. The Exchange also believes that such amendments would act to insulate the Exchange's regulatory functions from its market and other commercial interests so that the Exchange can carry out its regulatory obligations and that, in general, the Exchange is administered in a way that is equitable to all those who trade on its market or through its facilities. Therefore, the Exchange believes that the proposed rule change would prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in facilitating transactions in securities, remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, protect investors and the public interest.
The Exchange believes that the proposed amendments to harmonize certain provisions of the Exchange Bylaws, Certificate and Rule 3.3(a) with similar provisions of the governing documents of other NYSE Group Exchanges, ICE and ICE Holdings would contribute to the orderly operation of the Exchange and would enable the
The Exchange also believes that the greater consistency among the governing documents of the NYSE Group Exchanges, ICE and ICE Holdings would promote the maintenance of a fair and orderly market, the protection of investors and the protection of the public interest. Indeed, the proposed amendments would make the corporate requirements and administrative processes relating to the Board, Board committees, officers, and other corporate matters more similar to those of the NYSE Group Exchanges, in particular NYSE National and CHX, which have been established as fair and designed to protect investors and the public interest.
The Exchange believes that the deletion of Article VI, Section 6.05 of the Exchange Bylaws would be consistent with the orderly operation of the Exchange and would enable the Exchange to be so organized as to have the capacity to carry out the purposes of the Exchange Act and comply with the provisions of the Exchange Act by its members and persons associated with members. Section 6.05 does not relate to the operations of the Exchange's markets, but rather to potential transactions with affiliates of the Exchange. Section 6.05 dates to the demutualization of the Exchange, when its ownership structure was materially different.
The proposed amendments to clarify the meaning of certain provisions of the Exchange Bylaws, Certificate and Rule 3.3(a), to better comport certain provisions with the DGCL and to effect non-substantive changes would facilitate the Exchange's continued compliance with the Exchange Certificate and Bylaws and applicable law, which would further enable the Exchange to be so organized as to have the capacity to be able to carry out the purposes of the Exchange Act and to comply, and to enforce compliance by its exchange members and persons associated with its exchange members, with the provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the Exchange. Such amendments would also remove impediments to and perfects the mechanism of a free and open market by removing confusion that may result from corporate governance provisions that are either unclear or inconsistent with the governing law.
The Exchange also believes that the proposed amendments would remove impediments to and perfect the mechanism of a free and open market by ensuring that persons subject to the Exchange's jurisdiction, regulators, and the investing public can more easily navigate and understand the governing documents. The Exchange further believes that the proposed amendments would not be inconsistent with the public interest and the protection of investors because investors will not be harmed and in fact would benefit from increased transparency and clarity, thereby reducing potential confusion.
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The proposed rule change is not intended to address competitive issues but rather is concerned solely with the corporate governance and administration of the Exchange.
No written comments were solicited or received with respect to the proposed rule change.
The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B)
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),
Cboe BZX Exchange, Inc. (the “Exchange” or “BZX”) is filing with the Securities and Exchange Commission (“Commission”) a proposed rule change to modify certain Routing Fees.
The text of the proposed rule change is also available on the Exchange's website (
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The Exchange proposes to amend its fee schedule to amend pricing for orders routed to Cboe EDGA Exchange, Inc., (“EDGA”), which yield fee codes AA, BJ, and RA.
First, the Exchange notes that orders routed to EDGA using ALLB routing strategy (which yield fee code AA) and orders routed to EDGA using a TRIM or TRIM2 routing strategy (which yield fee code BJ) are currently assessed $0.00030 per share. The Exchange proposes to eliminate this fee and instead provide a rebate of $0.00240 per share for these orders. Next, the Exchange notes that orders routed to EDGA that add liquidity (which yield fee code RA) are assessed $0.00030 per share. The Exchange proposes to increase the rate from $0.00030 per share to $0.00300 per share.
The Exchange also believes the proposed rule change is consistent with Section 6(b)(4) of the Act, which requires that Exchange rules provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities.
The Exchange believes the proposed changes are reasonable because they reflect a pass-through of the pricing changes by EDGA described above. The Exchange further believes the proposed fee change is non-discriminatory because it applies uniformly to all Members. The Exchange lastly notes that routing through the Exchange is voluntary and that it operates in a highly competitive market in which market participants can readily direct order flow to competing venues or providers of routing services if they deem fee levels to be excessive.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes the proposed routing fee changes will not impose an undue burden on competition because the Exchange will uniformly assess the affected routing fees on all Members. Additionally, Members may opt to disfavor the Exchange's pricing if they believe that alternatives offer them better value or if they view the proposed fee as excessive. The Exchange also notes the proposed changes to the EDGA-related routing fees are meant to pass through the fees and rebates associated with executing orders on that market, and is therefore not designed to have any significant impact on competition. Further, excessive fees for participation would serve to impair an exchange's ability to compete for order flow and members rather than burdening competition.
The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any written comments from members or other interested parties.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Exchange proposes to amend the Exchange's provisions for excluding a day from its volume calculations for purposes of determining pricing tiers.
The text of the proposed rule change is available on the Exchange's website at
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The purpose of the proposed rule change is to amend the Exchange's
To avoid penalizing members when aberrant low volume days result from systems or other issues at the Exchange, or where the Exchange closes early for holiday observance, the Exchange currently has language in its Pricing Schedule allowing it to exclude certain days from its average daily volume (“ADV”) calculations or calculations that are based on a percentage of industry volume. Currently, Section 1(b) of the Exchange's Pricing Schedule provides that for Phlx options, any day that the market is not open for the entire trading day or the Exchange instructs members in writing to route their orders to other markets may be excluded from the ADV calculation or calculation based on a percentage of industry volume; provided that the Exchange will only remove the day for members that would have a lower ADV or percentage of industry volume with the day included. If a day is removed from a calculation based on a percentage of monthly industry volume, volume executed that day will be removed from both the numerator and the denominator of the calculation.
In a recent review of the rule, the Exchange determined that it would be beneficial to further expand upon and provide additional detail regarding how the Exchange applies this rule.
The Exchange first proposes to delete the lead-in “For Phlx Options” in Section 1(b) of Options 7, and retitle this section as “Removal of Days for Purposes of Pricing Tiers.” The fees for Phlx options and PSX equities are no longer included in the same pricing schedule, and the Exchange therefore believes that the current clarifying lead-in is no longer necessary.
(1)(A) Any day that the Exchange announces in advance that it will not be open for trading will be excluded from the options tier calculations set forth in its Pricing Schedule; and (B) any day with a scheduled early market close (“Scheduled Early Close”) may be excluded from the options tier calculations only pursuant to paragraph (3) below.
(2) The Exchange may exclude the following days (“Unanticipated Events”) from the options tier calculations only pursuant to paragraph (3) below, specifically any day that: (A) the market is not open for the entire trading day, (B) the Exchange instructs members in writing to route their orders to other markets, (C) the Exchange is inaccessible to members during the 30-minute period before the opening of trade due to an Exchange system disruption, or (D) the Exchange's system experiences a disruption that lasts for more than 60 minutes during regular trading hours.
(3) If a day is to be excluded as a result of paragraph (1)(B) or (2) above, the Exchange will exclude the day from any member's monthly options tier calculations as follows:
(A) the Exchange may exclude from the ADV calculation any Scheduled Early Close or Unanticipated Event;
(B) the Exchange may exclude from the calculation based on a percentage of industry volume any Scheduled Early Close or Unanticipated Event; and
(C) the Exchange may exclude from any other applicable options tier calculation provided for in its Schedule of Fees (together with (3)(A) and (3)(B), “Tier Calculations”) any Scheduled Early Close or Unanticipated Event; provided, in each case, that the Exchange will only remove the day for members that would have a lower Tier Calculation with the day included. If a day is removed from a calculation based on a percentage of monthly industry volume, volume executed that day will be removed from both the numerator and the denominator of the calculation.
The proposed rule change: (i) Expands upon the existing scenarios where the Exchange may remove a day to adopt two additional situations related to Exchange systems disruptions, (ii) categorizes the scenarios into days that are known in advance (
The Exchange proposes to adopt two additional scenarios as “Unanticipated Events” that the Exchange may determine to exclude from its Tier Calculations. First, the Exchange proposes to exclude days where the Exchange is inaccessible to members during the 30-minute period before the opening of trade (
Second, the Exchange proposes to exclude days where there is an Exchange system disruption that lasts for more than 60 minutes during regular trading hours (
The Exchange believes that the two scenarios proposed above are reasonable and equitable because the intent of the current rule has always been to avoid penalizing members that might otherwise qualify for certain tiered pricing but that because of aberrant low volume days resulting, for instance, from Exchange systems disruptions, did not participate on the Exchange to the extent they might have otherwise participated.
In addition, to avoid penalizing members that step up and trade on a day with artificially low volume, the Exchange currently only removes days for members that would have a lower ADV calculation or calculation based on a percentage of industry volume with the day included (
The Exchange also proposes that if a systems disruption-related day is removed from a calculation based on a percentage of monthly industry volume, volume executed that day will be removed from both the numerator and denominator of the calculation. Removing the day from both the numerator and denominator of the calculation will ensure that members benefit from this rule as removing the day from the numerator only (
In light of the foregoing proposal to adopt two additional situations that the Exchange may exclude from its pricing tier calculations, the Exchange seeks to restructure the existing rule by separating out the different scenarios between days that are known in paragraph (1) and days that are not in paragraph (2), and define the latter as Unanticipated Events.
For planned days, the Exchange proposes to further distinguish between days that the Exchange announces in advance that it will not be open for trading in paragraph (1)(A) (
The Exchange proposes to further amend the existing rule to specify how the days in paragraphs (1) and (2) will be excluded from its tier calculations. As discussed above, the Exchange currently removes the days set forth in paragraphs (1)(B), (2)(A), and (2)(B) from its calculations of ADV and industry volume percentages only for members that would have a lower ADV or percentage of industry volume with the day included. The Exchange is not changing how it currently excludes these days from these calculations. And as further discussed above, the Exchange is proposing to adopt the same principle-based approach for excluding the system disruption-related days in paragraphs (2)(C) and (2)(D). As such, proposed paragraph (3) will specify for the ADV calculation and calculation based on a percentage of industry volume that the Exchange may exclude any Scheduled Early Close or Unanticipated Event, subject, in each case, to the better of rule.
As it relates to days where the Exchange announces in advance that it will not be open for trading, the Exchange notes that it will exclude those days from all options tier calculations set forth in its Pricing Schedule. This is also the case today since no trading activity occurs on those days, and the Exchange is only clarifying its current practice within the proposed rule text in paragraph (1)(A).
The proposal also adds a “catch-all” provision in paragraph (3)(C) that would apply to other applicable options tier calculations that are set forth in its Pricing Schedule (“Tier Calculations”), but are not specified within paragraphs (3)(A) and (3)(B) (
The Exchange proposes to add further detail throughout the rule text to bring greater transparency as to how the Exchange will apply the better of rule when removing days from its tier calculations. The Exchange proposes to make clear that it will only remove days pursuant to the better of rule by specifying in paragraphs (1)(B) and (2) that such days may be excluded from the Tier Calculations only pursuant to paragraph (3). Paragraph (3) will then provide that if a day is to be excluded as a result of paragraph (1)(B) or (2), the Exchange will be required to exclude the day from any member's monthly options tier calculations as detailed within paragraph (3) (
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange believes that the proposed rule change is reasonable and equitable as it provides a framework for removing days from the Exchange's volume calculations that the Exchange believes is beneficial to members. The proposed rule change would permit the Exchange to remove a day from its Tier Calculations in more circumstances, and ensures that the Exchange will only do so in circumstances where beneficial for the member due to the member executing a lower ADV or percentage of industry volume during the excluded day. The Exchange believes it is reasonable and equitable to exclude a day from its tier calculations when the Exchange's system experiences a disruption during the 30-minute period prior to the opening of trade that renders the Exchange inaccessible to members as this preserves the Exchange's intent behind adopting volume-based pricing. Without this change, members that are precluded from submitting eligible interest during the 30-minute window before the opening of trade may be negatively impacted, even if the Exchange resolves the issue before the market opens and as a result, does not instruct members to route away. The proposed change to exclude such days will diminish the likelihood of a cost increase occurring because a member is not able to reach a volume tier calculation on that date that it would reach on other trading days during the month. Furthermore, while the Exchange may have resolved the systems disruption from its perspective prior to the opening of trade, a member may now have issues managing their orders with the Exchange as a result of the original disruption, causing a downstream ripple effect.
Similarly, excluding a day where the Exchange's system experiences a disruption that lasts for more than 60 minutes intra-day is reasonable and equitable because the proposal seeks to avoid penalizing members that might otherwise qualify for certain tiered pricing but that, because of an Exchange systems disruption, did not participate on the Exchange to the extent they might have otherwise participated. The Exchange believes that certain systems disruptions could preclude some members from submitting orders to the Exchange even if such issue is not actually a complete systems outage. Other options exchanges similarly exclude exchange systems disruptions from their pricing tiers.
In addition, the Exchange believes that it is reasonable and equitable to apply the better of rule to both systems disruption-related scenarios. Without these changes, members that step up and trade significant volume on excluded trading days may be negatively impacted, resulting in an effective cost increase for those members. The proposal would align the Exchange's approach to how it applies this rule today for days where the market is not open for the entire trading day or where the Exchange instructs members to route away. Furthermore, removing the proposed days from both the numerator and denominator of a calculation based on a percentage of industry volume is reasonable and equitable as this treatment ensures that the member actually benefits from having the day removed. Again, this would align the Exchange's current approach to how it removes days from such calculations.
In light of the Exchange's proposal to adopt the two additional scenarios related to systems disruptions, the Exchange is making related, restructuring changes to the existing language in Options 7, Section 1(b) to bring greater transparency to the application of its rule. Specifically, the Exchange is distinguishing between planned and unplanned days in paragraphs (1) and (2), defining the latter as Unanticipated Events, and stipulating how the Exchange will exclude such days pursuant to this rule. Categorizing days in this manner will clarify the application of its rule in light of the Exchange's proposal to expand the rule to adopt additional days that
Furthermore, the Exchange believes that the proposed changes to adopt a catch-all provision in paragraph (3)(C) to other Tier Calculations not already specified in the rule to allow the Exchange to apply the better of rule going forward to all pricing programs based on other volume calculations is reasonable and equitable for the same reasons as allowing the Exchange to apply the better of rule for calculations based on ADV and industry volume percentages. The Exchange notes that aberrant low volume days resulting from, for instance, an Unanticipated Event, impacts all volume-based calculations, and allowing the Exchange to exclude such days from any volume-based tier calculation if the member would have a lower tier calculation with the day excluded will further protect members from being inadvertently penalized.
Finally, the Exchange further believes that the proposed rule change is not unfairly discriminatory because it will apply equally to all members. While the Exchange currently has rules in place for removing a day from its pricing, the Exchange believes that the proposed changes will benefit all members by providing more circumstances to remove a day, and ensuring that days are removed only in situations where the member benefits.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule change is designed to protect members from the possibility of a cost increase by excluding days when overall member participation might be significantly lower than a typical trading day. The Exchange believes that the proposed modifications to its tier calculations are pro-competitive and will result in lower total costs to end users, a positive outcome of competitive markets. The Exchange operates in a highly competitive market in which market participants can readily direct their order flow to competing venues. In such an environment, the Exchange must continually review, and consider adjusting, its fees and rebates to remain competitive with other exchanges. For the reasons described above, the Exchange believes that the proposed fee changes reflect this competitive environment.
No written comments were either solicited or received.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On September 18, 2018, Miami International Securities Exchange LLC (“MIAX” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1)
The Exchange proposes to amend Rule 903. The proposed rule change is available on the Exchange's website at
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
The purpose of this filing is to amend Rule 903, Series of Options Open for Trading, to permit the listing and trading of up to ten expiration months for long term options on the SPDR® S&P 500® Exchange-Traded Fund (the “SPY ETF”).
Commentary .03(a) of Rule 903 (“Commentary .03”) provides that the Exchange may list, with respect to any class of stock or Exchange-Traded Fund Share options series, options having from twelve up to thirty-nine months from the time they are listed until expiration (“LEAPS”). Under the current Rule, the Exchange may list up to six LEAPS expiration months.
The SPY ETF options market today is characterized by its tremendous daily and annual liquidity. As a consequence, the Exchange believes that the listing of additional SPY ETF LEAPS expiration months would be well received by investors. This proposal to expand the number of permitted SPY ETF LEAPS would not apply to LEAPS on any other
The proposed rule change is consistent with Section 6(b)
The Exchange believes that the addition today of four additional expiration months for SPY ETF LEAPS does not represent a proliferation of expiration months, but is instead a very modest expansion of LEAPS options in response to stated customer demand. Significantly, the proposal would feature new LEAPS expiration months in only a single class of options—the SPY ETF—that are very liquid and heavily traded, as discussed above. Additionally, the Exchange notes by way of precedent that ten expiration months are already permitted for stock index LEAPS options on other markets.
The Exchange notes that this proposal is substantially the same as a recent rule amendment submitted by PHLX.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The proposal merely provides investors additional investment and risk management opportunities by providing flexibility to the Exchange to list additional long term options expiration series, expanding the number of SPY LEAPS offered on the Exchange from six expiration months to ten expiration months.
No written comments were solicited or received with respect to the proposed rule change.
Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed under Rule 19b-4(f)(6)
At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Surface Transportation Board (Board) Office of Environmental Analysis (OEA), U.S. Army Corps of Engineers (Corps), joint lead agencies; U.S. Coast Guard (Coast Guard), Federal Railroad Administration (FRA), cooperating agencies.
Notice of Availability of the Draft EA on November 30, 2018 and request for comments.
On August 3, 2017, Palmetto Railways (Applicant) filed an exemption petition with the Board pursuant to 49 U.S.C. 10502 to construct and operate approximately 28 miles of new rail line between the Cross Subdivision of CSX Transportation, Inc. (CSXT) rail network near the Santee Cooper Cross Generating Station and the Camp Hall Commerce Park in Berkeley County, South Carolina. Implementation of the proposed rail line would bring industrial rail service to the Volvo Cars facility, as well as areas being developed by Santee Cooper. FRA and the Coast Guard are cooperating agencies in the preparation of this Draft EA pursuant to CEQ NEPA implementing regulations (40 CFR 1501.6).
The purpose of this Notice of Availability (NOA) is to notify individuals and agencies interested in or affected by the proposed action of the availability of the Draft EA for review and comment on November 30, 2018. The Draft EA analyzes the potential environmental impacts of the proposed action and alternatives, including the no-action alternative. The Draft EA addresses environmental issues and concerns identified during the scoping process. It also contains OEA's preliminary recommendations for environmental mitigation measures, and Palmetto Railways' voluntary mitigation measures.
The Draft EA will be available on November 30, 2018 through the Board's website at
Please mail written comments on the Draft EA and the recommended environmental mitigation to: Ms. Diana Wood, Surface Transportation Board, Docket No. FD 36095, c/o ICF, 9300 Lee Highway, Fairfax, VA 22031. Electronic comments on this Draft EA may also be submitted electronically on the joint lead agencies' project website (
The EA will be available for public review and comment on November 30, 2018. Mailed comments must be postmarked by December 30, 2018. Electronic comments must be received by December 30, 2018.
Diana Wood, Surface Transportation Board, Docket No. FD 36095, c/o ICF, 9300 Lee Highway, Fairfax, VA 22031.
By the Board, Victoria Ruston, Director, Office of Environmental Analysis.
Tennessee Valley Authority (TVA).
Notice of meeting.
The TVA Regional Energy Resource Council (RERC) will hold a meeting on Tuesday, December 18, 2018, to discuss the metrics and evaluation criteria that TVA is establishing for the 2019 Integrated Resource Plan (IRP). The RERC was established to advise TVA on its energy resource activities and the priority to be placed among competing objectives and values. Notice of this meeting is given under the Federal Advisory Committee Act (FACA).
The public meeting will be held on Tuesday, December 18, 2018, from 9:00 a.m. to 4:00 p.m., EST.
The meeting will be held at the Hilton Downtown Knoxville, 501 Church Street, Knoxville, Tennessee 37902, and will be open to the public. Anyone needing special access or accommodations should let the contact below know at least a week in advance.
Liz Upchurch, 865-632-8305,
The meeting agenda includes the following:
The RERC will hear opinions and views of citizens by providing a public comment session starting at 10:00 a.m., EST, lasting up to one hour, on Tuesday, December 18, 2018. Persons wishing to speak are requested to register at the door between 9:00 a.m. and 10:00 a.m., EST, on Tuesday, December 18, 2018, and will be called
Tennessee Valley Authority.
Notice of intent.
The Tennessee Valley Authority (TVA) intends to prepare an Environmental Impact Statement (EIS) to address the potential environmental effects associated with the future management of coal combustion residual (CCR) material at the Allen Fossil Plant (ALF) located in Shelby County, Tennessee, southwest of the City of Memphis. The purpose of this EIS is to support the implementation of TVA's goal to eliminate all wet CCR storage at its coal plants by closing CCR surface impoundments across the TVA system, and to assist TVA in complying with the Environmental Protection Agency's (EPA) CCR Rule. In addition, the proposed actions would make the ALF closure area land available for future economic development projects in the greater Memphis area.
TVA will evaluate closure of the East Ash Pond Complex, the West Ash Pond, and the Metal Cleaning Pond. In addition to these closures, TVA will analyze potential location requirements and associated environmental impacts associated with construction and utilization of a proposed beneficial re-use facility to process CCR materials. TVA will also evaluate potential impacts associated with actions requiring use of permitted borrow sites and the disposal of CCR at existing offsite permitted landfills. TVA will develop and evaluate various alternatives to these actions, including the No Action Alternative. Public comments are invited concerning both the scope of the review and environmental issues that should be addressed.
Comments on the scope of the EIS must be received on or before January 4, 2019.
Written comments should be sent to Ashley Farless, NEPA Compliance Specialist, 1101 Market Street, BR4A-C, Chattanooga, TN 37402. Comments also may be submitted online at:
Other related questions should be sent to Ashley Farless, NEPA Compliance Specialist, Tennessee Valley Authority, at 423-751-2361 or
This notice is provided in accordance with the Council on Environmental Quality's regulations (40 CFR parts 1500 to 1508) and TVA's procedures for implementing the National Environmental Policy Act (NEPA) and Section 106 of the National Historic Preservation Act (NHPA) and its implementing regulations (36 CFR part 800).
TVA is a corporate agency and instrumentality of the United States created by and existing pursuant to the TVA Act of 1933 that provides electricity for business customers and local power distributors. TVA serves more than 9 million people in parts of seven southeastern states. TVA receives no taxpayer funding, deriving virtually all of its revenues from sales of electricity. In addition to operating and investing its revenues in its electric system, TVA provides flood control, navigation and land management for the Tennessee River system and assists local power companies and state and local governments with economic development and job creation.
Historically, TVA has managed its CCRs in wet impoundments or dry landfills. On March 31, 2018, ALF's three coal-fired units were retired. While in operation, ALF consumed approximately 7,200 tons of coal a day and produced approximately 5,160 million kilowatt-hours of electricity a year. CCR produced by the collective units included approximately 85,000 dry tons of slag and fly ash that was wet-sluiced to the East Ash Pond Complex every year.
It is estimated that approximately 250,000 cubic yards (yd
In July 2009, the TVA Board of Directors passed a resolution for staff to review TVA practices for storing CCRs at its generating facilities, including ALF, which resulted in a recommendation to convert the wet ash management system at ALF to a dry storage system. On April 17, 2015, the EPA published the final Disposal of CCRs from Electric Utilities rule, also known as the CCR Rule.
In June 2016, TVA issued a Final Programmatic Environmental Impact Statement (PEIS) that analyzed methods for closing CCR impoundments at TVA fossil plants and identified specific screening and evaluation factors to help frame its evaluation of closures at its other facilities. A Record of Decision was released in July 2016 that would allow future environmental reviews of qualifying CCR impoundment closures to tier from the PEIS. This EIS is intended to tier from the 2016 PEIS to evaluate the closure alternatives for the CCR Ash Impoundments at ALF.
In addition to a No Action Alternative, this EIS will address alternatives that meet the purpose and need for the project. TVA plans to consider the following: (1) No Action, (2) closure of the Metal Cleaning Pond and closure-by-removal of the East Ash Pond Complex, the West Ash Pond and the CCR surrounding the Metal Cleaning Pond to an offsite landfill location (note that the Metal Cleaning Pond would be removed by default while removing the CCR material surrounding it), (3) closure of the Metal Cleaning Pond and closure-by-removal of the East Ash Pond Complex, the West Ash Pond and the CCR surrounding the Metal Cleaning Pond to a beneficial re-use facility & offsite landfill location (see note above in #2), and (4) closure of the Metal Cleaning Pond and closure-in-place of all CCR in the East Ash Pond Complex, the West Ash Pond and CCR surrounding the Metal Cleaning Pond.
This EIS will identify the purpose and need of the project and will contain descriptions of the existing environmental and socioeconomic resources within the area that could be affected by the management of CCR at ALF. Evaluation of potential environmental impacts to these resources will include, but not be limited to, water quality, aquatic and terrestrial ecology, threatened and endangered species, wetlands, land use, historic and archaeological resources, as well as solid and hazardous waste,
TVA is interested in an open process and wants input from the community. The public is invited to submit comments on the scope of this EIS no later than the date identified in the “Dates” section of this notice. Federal, state and local agencies and Native American Tribes are also invited to provide comments.
After consideration of comments received during the scoping period, TVA will develop and distribute a scoping document that will summarize public and agency comments that were received and identify the schedule for completing the EIS process. Following analysis of the issues, TVA will prepare a draft EIS for public review and comment. In making its final decision, TVA will consider the analyses in this EIS and substantive comments that it receives. A final decision on proceeding with the management and final disposal of CCR and closure of the surface impoundments will depend on a number of factors. These include results of the EIS, requirements of the CCR Rule, relevant state law requirements, engineering and risk evaluations, and financial considerations.
TVA anticipates holding a community meeting near ALF after releasing the Draft EIS. Meeting details will be posted on TVA's website. TVA expects to release the Draft EIS in the Fall of 2019.
40 CFR 1501.7.
Federal Aviation Administration, DOT.
Notice of availability and request for comment.
In accordance with the National Environmental Policy Act of 1969, as amended (NEPA), Council on Environmental Quality NEPA implementing regulations, and FAA Order 1050.1F,
Comments must be received on or before December 31, 2018.
Comments should be mailed to Daniel Czelusniak, Environmental Protection Specialist, Federal Aviation Administration, 800 Independence Avenue SW, Suite 325, Washington, DC 20591. Comments may also be submitted by email to
Daniel Czelusniak, Environmental Protection Specialist, Federal Aviation Administration, 800 Independence Avenue SW, Suite 325, Washington, DC 20591; phone (202) 267-5924; email
The FAA is evaluating SpaceX's proposal to conduct a one-time in-flight Dragon abort test at Kennedy Space Center's Launch Complex 39A, which would require the FAA to issue a launch license. Issuing a launch license is considered a Federal action subject to environmental review under NEPA. Under the Proposed Action, the FAA would issue a license to SpaceX, which would authorize SpaceX to conduct the abort test using a Falcon 9 launch vehicle and a Dragon-2 (
Alternatives under consideration include the Proposed Action and the No Action Alternative. Under the No Action Alternative, the FAA would not issue a license to SpaceX to conduct the abort test, and therefore SpaceX would not conduct the abort test.
The Draft EA evaluates the potential environmental impacts from the Proposed Action and No Action Alternative on visual effects (including light emissions); coastal resources; air quality; climate; noise and noise-compatible land use; biological resources; water resources (surface waters); hazardous materials, solid waste, and pollution prevention; and historical, architectural, archeological, and cultural resources. Potential cumulative impacts are also addressed in the Draft EA.
The FAA has posted the Draft EA on the FAA Office of Commercial Space Transportation website:
The FAA encourages all interested parties to provide comments concerning the scope and content of the Draft EA. Before including your address, phone number, email address, or other personal identifying information in your comment, be advised that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask the FAA in your comment to withhold from public review your personal identifying information, the FAA cannot guarantee that we will be able to do so.
Federal Railroad Administration (FRA), U.S. Department of Transportation (DOT).
Notice.
The Federal Railroad Administration (FRA) is issuing this notice to advise the public that FRA is rescinding the Notices of Intent (NOI) for the following Environmental Impact Statements (EIS): The Pennsylvania Maglev Proposal; the Tupelo Railroad Relocation Planning and Environmental Study; the Tier 2 EIS for the Chicago to Joliet High-Speed Rail (HSR) Project; the Tier 2 EIS for the HSR Project between Granite City, IL to St. Louis, MO HSR Project; EIS for the ACEforward Program; EIS for the Milwaukee, WI to Minneapolis, MN Rail Corridor; 7) the Los Angeles to San Louis Obispo North
For additional information please contact Michael Johnsen, Supervisory Environmental Protection Specialist, at the Federal Railroad Administration, 1200 New Jersey Avenue SE, Washington, DC 20590; telephone: 202-493-0845; or email:
FRA has identified several projects that, for various reasons, are no longer advancing through FRA environmental review and has therefore determined it is appropriate to rescind the applicable NOI to prepare an EIS. The following NOIs are being rescinded:
• Pennsylvania Maglev Proposal: FRA published the NOI on July 19, 2001. The purpose of the EIS was to further explore the feasibility of a magnetic levitation train system linking Pittsburgh International Airport to Pittsburgh and its eastern suburbs in Allegheny and Westmoreland Counties. However, the project sponsor has since decided not to pursue a maglev project in this corridor.
• Relocation or Reconstruction of Rail Lines in Tupelo, MS: FRA published the NOI on June 29, 2006 to study the potential relocation or reconstruction of rail lines in the Tupelo, MS central business district. However, the project sponsor has not advanced the environmental review and has not identified current or foreseeable funding for the project.
• Chicago to Joliet High-Speed Rail (HSR) Project: FRA published the NOI on February 18, 2014 to study potential HSR service along the Rock Island District Railroad corridor between Chicago and Joliet, IL. The project sponsor has informed FRA that it does not intend to pursue the environmental review for the project at this time.
• HSR Project between Granite City, Illinois to St. Louis, Missouri: FRA published this NOI on February 18, 2014 to study the increase of rail capacity associated with the Mississippi River crossings in the Granite City to St. Louis Tier 2 EIS. However, the project sponsor has informed FRA that it does not intend to pursue the environmental review for the project at this time.
• ACEforward Program: FRA published the NOI on September 18, 2013. The purpose of the EIS was to study the expansion of existing rail service between Stockton and San Jose, CA and extension of new rail service to Modesto and Merced, CA. However, the project sponsor has determined that the orginial scope for the ACEforward EIS is no longer consistent with regional planning efforts for improved rail service throughout the corridor.
• Milwaukee, WI to Minneapolis, MN Rail Corridor: FRA published a revised NOI on May 24, 2013. The purpose of the EIS is to evaluate ways to improve passenger rail service from the Twin Cities, MN to Milwaukee, WI. The project sponsor has informed FRA that it does not wish to pursue the environmental review for the project at this time.
• LOSSAN Rail Corridor Project: FRA published the NOI for this project on January 1, 2011. The purpose of the EIS was to study ways to improve passenger rail service from Los Angeles through San Louis Obispo. The NOI is being rescinded as the service options on this corridor have been reevaluated in the updated California State Rail Plan.
• Chicago to Detroit/Pontiac Corridor Investment Program: FRA published the NOI on August 31, 2012. The purpose of the EIS was to study potential service options and corresponding infrastructure improvements between Chicago, IL, and Pontiac, MI. The project sponsor and FRA have agreed to rescind the NOI, however the associated alternatives analysis and service development plan may be used for further environmental reviews, where necessary.
Issued in Washington, DC.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a petition for a decision that certain model year (MY) 2015 Bentley Continental passenger cars (PCs) that were not originally manufactured to comply with all applicable Federal motor vehicle safety standards (FMVSS) are eligible for importation into the United States because they are substantially similar to vehicles that were originally manufactured for sale in the United States and were certified by their manufacturer as complying with the safety standards (the U.S.-certified version of the MY 2015 Bentley Continental PCs) and are capable of being readily altered to conform to the standards.
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket and notice number cited in the title of this notice and must be submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA, telephone (202) 366-0712.
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA, pursuant to 49 CFR part 592. As specified in 49 CFR 593.7,
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles, as originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2015 Bentley Continental PCs, as originally manufactured, conforms to: Standard Nos. 102
The petitioner also contends that the subject non-U.S.-certified passenger cars are capable of being readily altered to meet the following standards in the manners indicated:
Standard No. 101
Standard No. 108
Standard No. 111
Standard No. 114
Standard No. 208
Standard No. 401
The petitioner further states that labels will be affixed to conform the vehicle to the requirements of 49 CFR parts 565 and 567, VIN
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition. Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket number cited in the title of this notice and must be submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA, telephone (202) 366-0712.
Under 49 U.S.C. 30141(a)(1)(A), a motor vehicle that was not originally manufactured to conform to all applicable FMVSS (49 CFR 571) shall be refused admission into the United States unless NHTSA has decided that the motor vehicle is substantially similar to a motor vehicle originally manufactured for importation into and sale in the United States, certified under 49 U.S.C. 30115, and of the same model year as the model of the motor vehicle to be compared, and is capable of being readily altered to conform to all applicable FMVSS.
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA pursuant to 49 CFR part 592. As specified in 49 CFR 593.7,
Wallace Environmental Testing Laboratories (WETL), of Houston, Texas (Registered Importer R-90-005) has petitioned NHTSA to decide whether nonconforming MY 2005 Chevrolet Corvette PCs are eligible for importation into the United States. The vehicles that WETL believes are substantially similar are MY 2005 Chevrolet Corvette PCs, manufactured for sale in the United States and certified by their manufacturer as conforming to all applicable FMVSS.
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles as originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2005 Chevrolet Corvette PCs, as originally manufactured, conforms to: Standard Nos. 102
The petitioner also contends that the subject non-U.S.-certified passenger cars are capable of being readily altered to meet the following standards in the manners indicated:
Standard No. 101
Standard No. 208
The petitioner additionally states that a vehicle identification plate must be
All comments and supporting materials received before the close of business on the closing date indicated above will be filed in the docket and considered. Comments filed after the closing date will also be considered to the fullest extent possible and available for examination in the docket at the above addresses.
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition. Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a petition for a decision that certain model year (MY) 2016 Chevrolet Equinox multipurpose passenger vehicles (MPVs) that were not originally manufactured to comply with all applicable Federal motor vehicle safety standards (FMVSS), are eligible for importation into the United States because they are substantially similar to vehicles that were originally manufactured for sale in the United States and were certified by their manufacturer as complying with the safety standards (the U.S.-certified 2016 Chevrolet Equinox MPVs) and are capable of being readily altered to conform to the standards.
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket number cited in the title of this notice and be submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA (202-366-0712).
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA pursuant to 49 CFR part 592. As specified in 49 CFR 593.7, NHTSA publishes notice in the
The petitioner claims that it compared non-U.S.-certified MY 2016 Chevrolet Equinox MPVs to their U.S.-certified counterparts, and found the vehicles to be substantially similar with respect to compliance with most FMVSS.
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles, as originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2016 Chevrolet Equinox MPVs, as originally manufactured, conforms to: Standard
The petitioner also contends that the subject non-U.S.-certified MPVs are capable of being readily altered to meet the following standards, in the manner indicated:
Standard No. 101
Standard No. 108
Standard No.
Standard No. 208
The petitioner further states that labels will be affixed to conform the vehicle to the requirements of 49 CFR parts 565 and 567, VIN
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a petition for a decision that certain model year (MY) 2015 Chevrolet Silverado trucks that were not originally manufactured to comply with all applicable Federal motor vehicle safety standards (FMVSS), are eligible for importation into the United States because they are substantially similar to vehicles that were originally manufactured for sale in the United States and were certified by their manufacturer as complying with the safety standards (the U.S.-certified 2015 Chevrolet Silverado trucks) and are capable of being readily altered to conform to the standards.
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket number cited in the title of this notice and must be submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA (202-366-0712).
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA pursuant to 49 CFR part 592. As specified in 49 CFR 593.7, NHTSA publishes notice in the
The petitioner claims that it compared non-U.S.-certified MY 2015 Chevrolet Silverado trucks to their U.S.-certified counterparts, and found the vehicles to be substantially similar with respect to compliance with most FMVSS.
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles as originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2015 Chevrolet Silverado trucks, as originally manufactured, conforms to: Standard Nos. 102
The petitioner also contends that the subject non-U.S.-certified trucks are capable of being readily altered to meet the following standards, in the manner indicated:
Standard No. 101
Standard No. 208
The petitioner further states that labels will be affixed to conform the vehicle to the requirements of 49 CFR parts 565 and 567, VIN
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition. Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a petition for a decision that certain model year (MY) 2008 Jeep Grand Cherokee multipurpose passenger vehicles (MPVs) that were not originally manufactured to comply with all applicable Federal motor vehicle safety standards (FMVSS), are eligible for importation into the United States because they are substantially similar to vehicles that were originally manufactured for sale in the United States and that were certified by their manufacturer as complying with the safety standards (the U.S.-certified 2008 Jeep Grand Cherokee MPV) and are capable of being readily altered to conform to the standards.
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket number cited in the title of this notice and must be submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA (202-366-0712).
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA pursuant to 49 CFR part 592. As specified in 49 CFR 593.7, NHTSA publishes notices in the
The petitioner claims that it compared non-U.S.-certified MY 2008 Jeep Grand Cherokee MPVs to their U.S.-certified counterparts, and found the vehicles to be substantially similar with respect to compliance with most FMVSS.
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles as originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2008 Jeep Grand Cherokee MPVs, as originally manufactured, conforms to: Standard Nos. 102
The petitioner also contends that the subject non-U.S.-certified MPVs are capable of being readily altered to meet the following standards, in the manner indicated:
Standard No. 101
Standard No. 108
Standard No. 114
Standard No. 208
The petitioner further states that labels will be affixed to conform the vehicle to the requirements of 49 CFR parts 565 and 567, VIN
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition. Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a petition for a decision that certain model year (MY) 2015 Ferrari 458 Speciale Aperta Passenger Cars (PCs) that were not originally manufactured to comply with all applicable Federal motor vehicle safety standards (FMVSS) are eligible for importation into the United States because they are substantially similar to vehicles that were originally manufactured for sale in the United States and that were certified by their manufacturer as complying with the safety standards (the U.S.-certified version of the MY 2015 Ferrari 458 Speciale Aperta PCs) and are capable of being readily altered to conform to the standards.
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket and notice number cited in the title of this notice and submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA, telephone (202) 366-0712.
I.
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA, pursuant to 49 CFR part 592. As specified in 49 CFR 593.7,
II.
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles, as originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2015 Ferrari 458 Speciale Aperta PCs, as originally manufactured, conform to: Standard Nos. 102
The petitioner also contends that the subject non-U.S.-certified vehicles are capable of being readily altered to meet the following standards in the manner indicated:
Standard No. 101
Standard No. 108
Standard No. 110
Standard No. 111
Standard No. 208
The petitioner further states that labels will be affixed to bring the vehicle into conformity with the requirements of 49 CFR parts 565 and 567, VIN
III.
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition. Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a petition for a decision that certain model year (MY) 2011 Mercedes-Benz GL550 multipurpose passenger vehicles (MPVs) that were not originally manufactured to comply with all applicable Federal motor vehicle safety standards (FMVSS), but that are certified by their original manufacturer as complying with all applicable Canadian motor vehicle safety standards (CMVSS), are eligible for importation into the United States because they are substantially similar to vehicles that were originally manufactured for sale in the United States and that were certified by their manufacturer as complying with the safety standards (the U.S.-certified 2011 Mercedes-Benz GL550 MPVs and are capable of being readily altered to conform to the standards.
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket number cited in the title of this notice and submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA (202-366-0712).
Under 49 U.S.C. 30141(a)(1)(A), a motor vehicle that was not originally
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA pursuant to 49 CFR part 592. As specified in 49 CFR 593.7, NHTSA publishes notice in the
J.K. Technologies, LLC (JK), of Baltimore, Maryland (Registered Importer R-90-006) has petitioned NHTSA to decide whether nonconforming MY 2011 Mercedes-Benz GL550 CMVSS-certified MPVs are eligible for importation into the United States. The vehicles which JK believes are substantially similar are MY 2011 Mercedes-Benz GL550 MPVs sold in the United States and certified by their manufacturer as conforming to all applicable FMVSS.
The petitioner claims that it compared the CMVSS-certified MY 2011 Mercedes-Benz GL550 CMVSS certified MPVs to their U.S.-certified counterparts, and found the vehicles to be substantially similar with respect to compliance with most FMVSS.
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles as, originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2011 Mercedes-Benz GL550 CMVSS certified MPVs, as originally manufactured, conform to: Standard Nos. 102
The petitioner also contends that the subject non-U.S.-certified passenger cars are capable of being readily altered to meet the following standards, in the manner indicated:
Standard No. 101
Standard No. 138
The petitioner further states that labels will be affixed to conform the vehicle to the requirements of 49 CFR parts 565 and 567,
All comments and supporting materials received before the close of business on the closing date indicated above will be filed in the docket and considered. Comments filed after the closing date will also be considered to the fullest extent possible and available for examination in the docket at the above addresses.
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition. Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Receipt of petition.
This document announces receipt by the National Highway Traffic Safety Administration (NHTSA) of a petition for a decision that certain model year (MY) 2016 Mercedes-Benz GL500 multipurpose passenger vehicles (MPVs) that were not originally manufactured to comply with all applicable Federal motor vehicle safety standards (FMVSS), are eligible for importation into the United States because they are substantially similar to
The closing date for comments on the petition is December 31, 2018.
Interested persons are invited to submit written data, views, and arguments on this petition. Comments must refer to the docket number cited in the title of this notice and must be submitted by any of the following methods:
•
•
•
• Comments may also be faxed to (202) 493-2251.
Comments must be written in the English language, and be no greater than 15 pages in length, although there is no limit to the length of necessary attachments to the comments. If comments are submitted in hard copy form, please ensure that two copies are provided. If you wish to receive confirmation that comments you have submitted by mail were received, please enclose a stamped, self-addressed postcard with the comments. Note that all comments received will be posted without change to
All comments, background documentation, and supporting materials submitted to the docket may be viewed by anyone at the address and times given above. The documents may also be viewed on the internet at
DOT's complete Privacy Act Statement is available for review in a
Neil Thurgood, Office of Vehicle Safety Compliance, NHTSA (202-366-0712).
Petitions for eligibility decisions may be submitted by either manufacturers or importers who have registered with NHTSA pursuant to 49 CFR part 592. As specified in 49 CFR 593.7, NHTSA publishes notice in the
The petitioner claims that it compared non-U.S.-certified MY 2016 Mercedes-Benz GL500 MPVs to their U.S.-certified counterparts, and found the vehicles to be substantially similar with respect to compliance with most FMVSS.
The petitioner submitted information with its petition intended to demonstrate that the subject non-U.S.-certified vehicles, as originally manufactured, conform to many applicable FMVSS in the same manner as their U.S.-certified counterparts, or are capable of being readily altered to conform to those standards.
Specifically, the petitioner claims that the non-U.S.-certified MY 2016 Mercedes-Benz GL500 MPVs, as originally manufactured, conforms to: Standard Nos. 102
The petitioner also contends that the subject non-U.S.-certified MPVs are capable of being readily altered to meet the following standards, in the manner indicated:
Standard No. 101
Standard No. 108
Standard No. 111
Standard No. 114
Standard No. 208
The petitioner further states that labels will be affixed to conform the vehicle to the requirements of 49 CFR parts 565 and 567, VIN
Once the petition is granted or denied, notice of the decision will be published in the
This notice of receipt of the subject petition does not represent any agency decision or other exercise of judgment concerning the merits of the petition. Notice of final action on the petition will be published in the
49 U.S.C. 30141(a)(1)(A), (a)(1)(B), and (b)(1); 49 CFR 593.7; delegation of authority at 49 CFR 1.95 and 501.8.
Office of Foreign Assets Control, Treasury.
Notice.
The Department of the Treasury's Office of Foreign Assets Control (OFAC) is publishing the names of one or more persons that have been placed on OFAC's Specially Designated Nationals and Blocked Persons List based on OFAC's determination that one or more applicable legal criteria were satisfied. All property and interests in property subject to U.S. jurisdiction of these persons are blocked, and U.S. persons are generally prohibited from engaging in transactions with them.
See
The Specially Designated Nationals and Blocked Persons List and additional information concerning OFAC sanctions programs are available on OFAC's website (
On November 20, 2018, OFAC determined that the property and interests in property subject to U.S. jurisdiction of the following persons are blocked under the relevant sanctions authorities listed below.
1. ALCHWIKI, Mhd Amer (a.k.a. AL CHWIKI, Mohamad Amer Mohamad Akram; a.k.a. ALCHWIKI, Amer; a.k.a. ALCHWIKI, Amer Mhd; a.k.a. ALCHWIKI, Mohamad Amer; a.k.a. AL-SHUWAYKI, Muhammad 'Amir Muhammad Akram; a.k.a. AL-SHWEIKI, Mohamad Amer; a.k.a. AL-SHWEIKI, Muhammad Omar; a.k.a. ALSHWIKI, Mhd Amer (Cyrillic: АЛЬШВИКИ, Мхд Амер); a.k.a. CHWIKI, Mohammad Amer; a.k.a. SHUWAYKI, Mohamad Amer; a.k.a. SHWEIKI, Mohammad Amer), 71 Linton Road, Acton, London W3 9HL, United Kingdom; Syria; DOB 04 Sep 1972; POB Damascus, Syria; nationality Syria; citizen Syria; Additional Sanctions Information—Subject to Secondary Sanctions Pursuant to the Hizballah Financial Sanctions Regulations; alt. Additional Sanctions Information—Subject to Secondary Sanctions; Gender Male; Passport N012430661; alt. Passport N010794545; alt. Passport N007024509; alt. Passport N005668098 (individual) [SDGT] [SYRIA] [IRGC] [IFSR] (Linked To: GLOBAL VISION GROUP; Linked To: ISLAMIC REVOLUTIONARY GUARD CORPS (IRGC)-QODS FORCE; Linked To: HIZBALLAH).
Designated pursuant to section 1(b)(i) of Executive Order 13582 of August 17, 2011, “Blocking Property of the Government of Syria and Prohibiting Certain Transactions With Respect to Syria” (E.O. 13582) for materially assisting, sponsoring, or providing financial, material, or technological support for, or goods or services in support of, CENTRAL BANK OF SYRIA, an entity identified as meeting the definition of the Government of Syria, as set forth in section 8(d) of E.O. 13582 and section 542.305 of the Syrian Sanctions Regulations, 31 CFR part 542.
Also designated pursuant to section 1(b)(ii) of E.O. 13582 for having acted or purported to act for or on behalf of, directly or indirectly, GLOBAL VISION GROUP, an entity whose property and interests in property are blocked pursuant to E.O. 13582.
Also designated pursuant to section 1(d)(i) of Executive Order 13224 of September 23, 2001, “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism” (E.O. 13224) for assisting in, sponsoring, or providing financial, material, or technological support for, or financial or other services to or in support of, ISLAMIC REVOLUTIONARY GUARD CORPS (IRGC)-QODS FORCE, an entity whose property and interests in property are blocked pursuant to E.O. 13224.
Also designated pursuant to section 1(d)(i) of E.O. 13224 for assisting in, sponsoring, or providing financial, material, or technological support for, or financial or other services to or in support of, HIZBALLAH, an entity whose property and interests in property are blocked pursuant to E.O. 13224.
2. AL-BAZZAL, Muhammad Qasim (a.k.a. BAZZAL, Mohamad; a.k.a. “MU'IN”); DOB 26 Aug 1984; POB Ba'albakk, Lebanon; Additional Sanctions Information—Subject to Secondary Sanctions Pursuant to the Hizballah Financial Sanctions Regulations; Gender Male; Passport LR0510789; Identification Number 18349929 (Lebanon) (individual) [SDGT] (Linked To: HIZBALLAH).
Designated pursuant to section 1(c) of E.O. 13224 for acting for or on behalf of HIZBALLAH, an entity whose property and interests in property are blocked pursuant to E.O. 13224.
3. DOGAEV, Andrey (a.k.a. DOGAYEV, Andrey; a.k.a. DOGAYEV, Andrey Yuryevich (Cyrillic: ДОГАЕВ, Андрей Юрьевич)); DOB 19 Dec 1955; POB Russia; Gender Male; Passport 72 9279533 (Russia) issued 27 Aug 2014 expires 27 Aug 2024; First Deputy Director of Promsyrioimport (individual) [SYRIA] (Linked To: PROMSYRIOIMPORT).
Designated pursuant to section 1(b)(ii) of E.O. 13582 for having acted or purported to act for or on behalf of, directly or indirectly, PROMSYRIOIMPORT, an entity whose property and interests in property are blocked pursuant to E.O. 13582.
4. SAJJAD, Rasoul (a.k.a. SAJJAD, Rassoul; a.k.a. SAJJAD, Rasul), Iran; DOB 09 Aug 1970; POB Esfahan, Iran; Additional Sanctions Information—Subject to Secondary Sanctions; Gender Male; Passport G9333110 (Iran) issued 03 Mar 2014 expires 03 Mar 2019; (individual) [SDGT] [IRGC] [IFSR] (Linked To: ISLAMIC REVOLUTIONARY GUARD CORPS (IRGC)-QODS FORCE).
Designated pursuant to section 1(d)(i) of E.O. 13224 for assisting in, sponsoring, or providing financial, material, or technological support for, or financial or other services to or in support of, Iran's ISLAMIC REVOLUTIONARY GUARD CORPS-QODS FORCE, an entity whose property and interests in property are blocked pursuant to E.O. 13224.
5. YAGHOUBI MIAB, Hossein (a.k.a. YAGHOOBI MAYAB, Hossein; a.k.a. YAGHOOBI, Hossein; a.k.a. YAGHUBI MAYAB, Hosein; a.k.a. YAQUBI, Hosein), Iran; DOB 23 Jul 1961; POB Tehran, Iran; Additional Sanctions Information—Subject to Secondary Sanctions; Gender Male; Passport G9342868 (Iran) issued 16 Mar 2016
Designated pursuant to section 1(d)(i) of E.O. 13224 for assisting in, sponsoring, or providing financial, material, or technological support for, or financial or other services to or in support of, Iran's ISLAMIC REVOLUTIONARY GUARD CORPS-QODS FORCE, an entity whose property and interests in property are blocked pursuant to E.O. 13224.
1. GLOBAL VISION GROUP (a.k.a. LIMITED LIABILITY COMPANY GLOBAL CONCEPTS GROUP (Cyrillic: ОБЩЕСТВО С ОГРАНИЧЕННОЙ ОТВЕТСТВЕННОСТЬЮ ГЛОБАЛЬНЫЕ КОНЦЕПЦИИ ГРУПП); a.k.a. “LLC GKG” (Cyrillic: “ООО ГКГ”)), Office I Room 7, Building 3, House 22, Staromonetny Lane, Moscow 119180, Russia; Russia; Staromonetne STR 22/3, Moscow, Russia; Additional Sanctions Information—Subject to Secondary Sanctions Pursuant to the Hizballah Financial Sanctions Regulations; alt. Additional Sanctions Information—Subject to Secondary Sanctions [SDGT] [SYRIA] [IRGC] [IFSR] (Linked To: BANIAS REFINERY COMPANY; Linked To: ALCHWIKI, Mhd Amer).
Designated pursuant to section 1(b)(i) of E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, BANIAS REFINERY COMPANY, an entity identified as meeting the definition of the Government of Syria as set forth in section 8(d) of E.O. 13582 and section 542.305 of the Syrian Sanctions Regulations, 31 CFR part 542.
Also designated pursuant to section 1(b)(i) of E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, CENTRAL BANK OF SYRIA, an entity identified as meeting the definition of the Government of Syria as set forth in section 8(d) of E.O. 13582 and section 542.305 of the Syrian Sanctions Regulations, 31 CFR part 542.
Also designated pursuant to section 1(c) of E.O. 13224 for being owned or controlled by, Mhd Amer ALCHWIKI, an individual whose property and interests in property are blocked pursuant to E.O. 13224.
2. PROMSYRIOIMPORT (a.k.a. FEDERAL STATE UNITARY ENTERPRISE FOREIGN ECONOMIC ASSOCIATION PROMSYRIOIMPORT; a.k.a. PROMSYRIOIMPORT FOREIGN ECONOMIC ASSOCIATION S.O.C.; a.k.a. VO PROMSYRIEIMPORT (Cyrillic: ВО ПРОМСЫРЬЕИМПОРТ); a.k.a. VO PROMSYRIEIMPORT FGUP; a.k.a. VO PROMSYRIOIMPORT), d. 13 str. 4, bulvar Novinski, Moscow 121099, Russia; 13 Novinski Boulevard, Moscow 121834, Russia; Novinskiy Boulevard 13, Building 4, Moscow 123995, Russia; Novinsky bld. 13, build 4, Moscow 121099, Russia; Government Gazette Number 01860331; Registration Number 1027700499903 (Russia); Tax ID No. 7704140399 (Russia) [SYRIA] (Linked To: SYRIAN COMPANY FOR OIL TRANSPORT).
Designated pursuant to section 1(b)(i) of E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, SYRIAN COMPANY FOR OIL TRANSPORT, an entity identified as meeting the definition of the Government of Syria as set forth in section 8(d) of E.O. 13582 and section 542.305 of the Syrian Sanctions Regulations, 31 CFR part 542.
3. MB BANK (f.k.a. BANK MELLI IRAN ZAO; a.k.a. JOINT STOCK COMPANY 'MIR BUSINESS BANK'; a.k.a. JSC 'MB BANK'; a.k.a. MB BANK, AO; a.k.a. MIR BIZNES BANK; a.k.a. MIR BIZNES BANK, AO; a.k.a. MIR BUSINESS BANK (Cyrillic: МИР БИЗНЕС БАНК); a.k.a. MIR BUSINESS BANK ZAO), 9/1 ul Mashkova, Moscow 105062, Russia; Russia; 9/1 Mashkova St., Moscow 105062, Russia; 6a Lenin Square Bld. A, Astrakhan 414000, Russia; SWIFT/BIC MRBBRUMM; website
Designated pursuant to section 1(b)(i) of E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, GLOBAL VISION GROUP, an entity whose property and interests in property are blocked pursuant to E.O. 13582.
4. TADBIR KISH MEDICAL AND PHARMACEUTICAL COMPANY (a.k.a. TADBIR KISH MEDICAL AND PHARMACEUTICAL CO.; a.k.a. TADBIR TED VA DAROYE KISH), Iran; Unit A103, 1st Floor, Padena Complex, Iran Blvd., Kish, Iran; Unit A301, 1st Floor, Padena Complex, Iran Blvd., Kish, Iran; Unit 301, 3rd Floor, Sadaf Tower, Kish, Iran [SYRIA] (Linked To: GLOBAL VISION GROUP).
Designated pursuant to section 1(b)(i) of E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, GLOBAL VISION GROUP, an entity whose property and interests in property are blocked pursuant to E.O. 13582.
Departmental Offices, U.S. Department of the Treasury.
Notice.
The Department of the Treasury will submit the following information collection requests to the Office of Management and Budget (OMB) for review and clearance in accordance with the Paperwork Reduction Act of 1995, on or after the date of publication of this notice. The public is invited to submit comments on these requests.
Comments should be received on or before December 31, 2018 to be assured of consideration.
Send comments regarding the burden estimate, or any other aspect of the information collection, including suggestions for reducing the burden, to (1) Office of Information and Regulatory Affairs, Office of Management and Budget, Attention: Desk Officer for Treasury, New Executive Office Building, Room 10235, Washington, DC 20503, or email at
Copies of the submissions may be obtained from Jennifer Leonard by emailing
44 U.S.C. 3501
Departmental Offices, U.S. Department of the Treasury.
Notice.
The Department of the Treasury will submit the following information collection requests to the Office of Management and Budget (OMB) for review and clearance in accordance with the Paperwork Reduction Act of 1995, on or after the date of publication of this notice. The public is invited to submit comments on these requests.
Comments should be received on or before December 31, 2018 to be assured of consideration.
Send comments regarding the burden estimate, or any other aspect of the information collection, including suggestions for reducing the burden, to (1) Office of Information and Regulatory Affairs, Office of Management and Budget, Attention: Desk Officer for Treasury, New Executive Office Building, Room 10235, Washington, DC 20503, or email at
Copies of the submissions may be obtained from Jennifer Leonard by emailing
44 U.S.C. 3501
Securities and Exchange Commission.
Proposed rule.
The Securities and Exchange Commission is proposing rule and form amendments that are intended to help investors make informed investment decisions regarding variable annuity and variable life insurance contracts. The proposal would modernize disclosures by using a layered disclosure approach designed to provide investors with key information relating to the contract's terms, benefits, and risks in a concise and more reader-friendly presentation, with access to more detailed information available online and electronically or in paper format on request. The proposed new rule would permit a person to satisfy its prospectus delivery obligations under the Securities Act of 1933 for a variable annuity or variable life insurance contract by sending or giving a summary prospectus to investors and making the statutory prospectus available online. The proposed rule also would consider a person to have met its prospectus delivery obligations for any portfolio companies associated with a variable annuity or variable life insurance contract if the portfolio company prospectuses are posted online. In addition, we are proposing amendments to the registration forms for variable annuity and variable life insurance contracts to update and enhance the disclosures to investors in these contracts, and to implement the proposed summary prospectus framework. We are further proposing to require variable contracts to use the Inline eXtensible Business Reporting Language (“Inline XBRL”) format for the submission of certain required disclosures in the variable contract statutory prospectus. We are also proposing certain technical and conforming amendments to our rules and forms, including amendments to rules relating to variable life insurance contracts, as well as rescission of certain related rules and forms. Lastly, we are seeking comments regarding parallel amendments to rules governing mutual fund summary prospectuses and registration forms applicable to other types of registered investment companies.
Comments should be submitted on or before February 15, 2019.
Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at
Daniel K. Chang, James Maclean, Amy Miller, Senior Counsels; Amanda Hollander Wagner, Branch Chief; Michael C. Pawluk, Senior Special Counsel, Investment Company Regulation Office, at (202) 551-6792; Keith Carpenter or Michael Kosoff, Senior Special Counsels, Disclosure and Review Office, at (202) 551-6921, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.
The Securities and Exchange Commission (“Commission”) is proposing new rule 498A [proposed rule 17 CFR 230.498A] under the Securities Act. The Commission is also proposing amendments to the following rules:
Finally, the
To meet life insurance needs and other financial goals, investors may consider variable annuity and variable life insurance contracts (together, “variable contracts” or “contracts”) as a way of combining insurance guarantees with the potential for long-term investment appreciation.
Investors should understand the features, risks, and charges associated with any potential investment. Providing investors with key information is particularly important in the context of variable contracts, since their structure is typically more complex than other types of investment products. The operation and terminology associated with these products can be difficult for investors to understand. Moreover, variable contract prospectuses are often quite lengthy (frequently more than a hundred pages), particularly in the case of products that include optional benefits. It is also common for insurers to describe different versions of the contract in one prospectus, some of which may no longer be available to new investors, leaving investors to wade through a lengthy document to find disclosures relevant to the particular contract that they purchased or are considering purchasing.
In addition, variable contract investors generally allocate their purchase payments to a range of investment options. For most variable contracts, these investment options typically are mutual funds, which are separately registered and have their own prospectuses.
We are concerned that the volume, format, and content of disclosures in the variable contract context may make it difficult for some investors to find and understand key information that they need to make an informed investment decision. To improve the current disclosure framework and update the manner in which variable contract investors receive and review prospectuses and related information, we are proposing new rule 498A under the Securities Act that permits the use of a summary prospectus to satisfy statutory prospectus delivery obligations, along with other rule and form amendments intended to implement the summary prospectus framework. Investors would continue to have access to the contract statutory prospectus and other information about the contract online (and could receive paper or electronic copies upon request), which would continue to provide more-detailed information about the contract.
Specifically, the approach under the proposed new rule contemplates the use of two types of summary prospectuses: An “initial summary prospectus” to be provided to new investors, and an “updating summary prospectus” to be provided to existing investors. To help investors make an informed investment decision, each type of summary prospectus uses a layered disclosure approach designed to provide investors with key information relating to the contract's terms, benefits, and risks in a concise and more reader-friendly presentation, with website addresses or hyperlinks to more detailed information posted online and delivered electronically or in paper format on request. In proposing new rule 498A, we are considering approaches that could affect, and raise the possibility of future amendments to, certain parallel provisions of rule 498 and certain of our registration forms applicable to other types of registered investment companies.
Variable contracts are contracts between an investor and an insurance company that provide investors with exposure to the securities markets while also offering certain insurance protections, such as protection against market losses, protection against outliving their assets, or assurances that their beneficiaries will receive a certain amount upon death.
When an investor purchases a variable contract, he or she makes a purchase payment (in either a lump sum or a series of payments), and in return, the insurance company promises to pay a stream of periodic income payments, either immediately or at some future date. Variable annuities allow investors to receive periodic payments for either a definite period (
Similar to variable annuities, variable life insurance contracts offer a death benefit to the investor, as well as the ability to accumulate cash value.
Investors bear a number of ongoing fees, expenses, and other charges when investing in a variable contract, including mortality and expense risk charges,
Variable contracts commonly offer optional benefit features as riders to the contract with their own terms and conditions. Riders commonly provide enhanced death benefits, as well as “living benefits” that may be designed to provide protection against investment losses or longevity risk, or to cover financial losses that result from illness, incapacity, or injury. These optional riders have become increasingly popular with variable contract investors.
The prospectus delivery requirements for variable contracts arise from the legal structure of these products. The “separate account”
Separate accounts may be organized either as management companies
Form N-4 (variable annuity) and N-6 (variable life) registrants are sometimes referred to as “two-tier” investment company structures. The top tier, which is the separate account established by the insurer and registered with the Commission as a UIT, is itself divided into “subaccounts,” each of which invests in the shares of an underlying portfolio company (
Section 5(b)(2) of the Securities Act makes it unlawful to carry or cause to be carried a security for purposes of sale or for delivery after sale “unless accompanied or preceded” by a prospectus that meets the requirements of section 10(a) of the Act.
Variable contract issuers generally maintain current prospectuses for their products through the filing of annual post-effective amendments to their registration statement and, as necessary, supplementing or “stickering” the contract prospectus or statement of additional information (“SAI”).
Additionally, portfolio companies may supplement or “sticker” their prospectus or SAI.
We understand that an insurer or the financial intermediary distributing the variable contact will typically deliver the variable contract prospectus upon issuance of the contract, in order to comply with the requirements of section 5(b)(2).
The Commission has interpreted section 5(b)(2) of the Securities Act to require delivery of a portfolio company prospectus to an investor in a variable contract who has allocated his or her purchase payments to that portfolio company.
Although paper is the default format for delivery of contract prospectuses, portfolio company prospectuses, and certain other required disclosures, we understand that most insurers offer investors the option to elect electronic delivery of these documents. The Commission has provided guidance noting that electronic delivery may be used to satisfy prospectus delivery requirements if: (1) The investor has notice of the availability of the information; (2) the use of the medium is not so burdensome that intended recipients cannot effectively access the information being provided; and (3) the issuer has evidence of delivery.
Our proposal builds on our experience with both layered disclosure (under the mutual fund summary prospectus)
Through each of these sets of reforms, “omitting prospectuses” as permitted by section 10(b) of the Securities Act have become a central feature of various parts of our securities offering and disclosure regime.
Our proposal also draws on the Commission's investor testing efforts, outreach, and other empirical research concerning investors' preferences. This included information about summary content and layered disclosure approaches as well as methods of delivery for required disclosures and use of the internet for financial and other purposes generally.
In addition, in 2011, the Commission engaged a consultant to conduct investor testing regarding shareholder reports. The consultant's report concerning that testing (“Investor Testing of Mutual Fund Shareholder Reports”) is in the comment file for this rule (
Moreover, certain observations by the staff of the Commission's Office of Investor Education and Advocacy as part of its 2012 Financial Literacy Study show that investors generally favor a layered approach to disclosure and, wherever possible, the use of a summary containing key information about an investment product or service.
Based upon the foregoing, we believe that a summary prospectus framework for variable contracts would benefit investors. The mutual fund industry has widely adopted the use of summary prospectuses.
We are proposing a new disclosure framework that, among other things, would permit the use of summary prospectuses for variable contracts, with additional information available to investors online. To help investors make an informed investment decision, this proposal uses a layered disclosure approach designed to provide investors with key information relating to the contract's terms, benefits, and risks in a concise and more reader-friendly presentation, with access to more detailed information available online, or delivered in paper or electronic format on request. We anticipate that the proposed framework would improve investor understanding of variable contracts.
The proposed rule builds upon our experience creating a summary prospectus option for mutual funds in 2009, but with certain differences intended to reflect the nature of variable contracts.
Because variable contracts typically include a number of optional benefits and underlying investment options, a summary could not, by its nature, include all relevant aspects and details regarding each of these contract features. The variable contract summary prospectus is designed to be a succinct summary of the contract's key terms and benefits and most significant risks, making it easier to read and more understandable for investors. This summary prospectus would serve as the cornerstone of a layered disclosure framework that would alert investors to the availability of more detailed information in the statutory prospectus and in other locations, and would be tailored to the unique aspects of these products. As a result, investors would have ready access to key information in connection with an investment decision.
The main elements of the new disclosure framework include:
•
•
•
•
•
•
•
Table 1 summarizes the various requirements—under the current prospectus delivery regime, and under the proposed summary prospectus regime—for information to either be (1) delivered to all investors, (2) made available online, or (3) delivered to those investors who so request:
Under proposed rule
We believe that optionality not only would give market participants time to adjust to the new layered disclosure approach, but also give the Commission and its staff the opportunity to assess the benefits to investors and insurers. While approximately 95% of mutual funds currently use a summary prospectus,
Given the current widespread use of summary prospectuses by mutual funds, we believe investors and other market participants have generally become comfortable with the use of a summary prospectus. However, the proposed variable contract summary prospectus regime would differ from the mutual fund summary prospectus framework in several key ways (
We believe that the diversity of variable contracts (and the corresponding diversity regarding variable contracts' approach to prospectus disclosure) also supports permitting, but not requiring, insurers to use the variable contract summary prospectus regime. We have observed that some variable contracts are fairly basic, offering few (or no) optional benefits and few investment options. Because these contracts have fairly straightforward disclosure documents, the summary prospectus regime may be less compelling for these products, as compared to more complex variable products with numerous optional benefits and investment options (which tend to have longer and more complicated prospectuses). Registrants will likely assess the relative benefit of using a summary prospectus based on the types of products they offer and the length of their current prospectuses—as well as the benefit of more concise disclosure to investors—when evaluating whether to opt into the new layered disclosure regime.
We are proposing new rule 498A, which would provide a new option for a person to satisfy its prospectus delivery obligations for variable contracts under section 5(b)(2) of the Securities Act by: (1) Sending or giving to new investors key information contained in a variable contract statutory prospectus in the form of an initial summary prospectus; (2) sending or giving to existing investors each year a brief description of certain changes to the contract, and a subset of the information in the initial summary prospectus, in the form of an updating summary prospectus; and (3) providing the statutory prospectus and other materials online. In addition, the new rule would require a registrant (or the financial intermediary distributing the variable contact) to send the variable contract statutory prospectus and other materials to the investor in paper or electronic format upon request.
The proposed rule would require a person relying on the rule to send or give an initial summary prospectus in connection with sales of variable contracts to new investors.
One unique aspect of variable contract disclosure practices is the wide variety of information about the contract that we understand investors commonly receive throughout the lifecycle of the contract. During the sales process, potential investors typically receive informational materials provided by the insurer, such as marketing brochures, investment option guides, and other explanatory materials that focus on key features of the particular contract or variable contracts generally. They may also receive disclosures required under state law, such as a “Buyer's Guide” that generally describes how variable contracts work.
Once the application is approved, the investor receives the contract, which sets forth in detail the investor-specific contract terms and is accompanied by the contract statutory prospectus. In addition to receiving an updated contract statutory prospectus and the prospectuses of the portfolio companies at least annually,
The proposed rule requires that the initial summary prospectus may only describe a single contract that the registrant currently offers for sale.
Aggregating disclosures for multiple contracts, or currently-offered and no-longer-offered features and options of a single contract, can hinder investors from distinguishing between contract features and options that apply to them and those that do not. Therefore, the proposed rule limits the initial summary prospectus to describing only a single contract that the registrant offers under the statutory prospectus to which the initial summary prospectus relates. While the initial summary prospectus could only describe one contract, the proposed rule nonetheless would permit it to describe more than one class of a currently-offered contract.
Although the content requirements for the initial summary prospectus cross-reference items of Forms N-3, N-4, and N-6, we anticipate that the proposed rule's scope provisions may cause registrants to vary certain disclosures that appear in the statutory prospectus when the same disclosure topics appear in the initial summary prospectus. This may occur even if both disclosures respond to the same form item requirement.
We request comment generally on the proposed scope requirements for the initial summary prospectus, and specifically on the following issues:
• Should the initial summary prospectus be limited to describing a single contract that the registrant currently offers for sale? Would this reduce the initial summary prospectus' complexity and minimize confusion to investors? Would this requirement be burdensome in any way for registrants to interpret, administer, or manage operationally, and if so, how? Should the proposed rule instead frame this requirement of one summary prospectus-per-contract in another manner, for clarity or for any other reason?
• Should we allow an initial summary prospectus to describe multiple contracts if the registrant currently offers multiple contracts through the related registration statement? Would the answer change if the multiple contracts were offered on a single prospectus versus multiple separate prospectuses? Would this make the initial summary prospectus substantially longer or confusing to investors, and would it decrease the likelihood that investors would read an initial summary prospectus?
• Should we restrict the number of contract classes that may be included in an initial summary prospectus?
The following chart outlines the information that the proposed rule would require to appear in an initial summary prospectus. Along with specifying required introductory disclosures on the outside front cover page or the beginning of the initial
As discussed below in Section II.E, we are also proposing to require the use of Inline XBRL format for the submission of certain required disclosures in the variable contract statutory prospectus. The structured data format would allow investors, financial intermediaries, third-party analysts, and others to more efficiently analyze and compare these products.
• The depositor's name;
• the registrant's name;
• the name of the contract, and the class or classes if any, to which the initial summary prospectus relates;
• a statement identifying the initial summary prospectus as a “Summary Prospectus for New Investors”; and
• the approximate date of the first use of the initial summary prospectus.
This Summary Prospectus summarizes key features of the [name of Contract]. You should read this Summary Prospectus carefully, particularly the section titled Important Information You Should Consider About the [Contract].
Before you invest, you should review the prospectus for the [name of Contract], which contains more information about the [Contract], including its features, benefits, and risks. You can find the prospectus and other information about the [Contract] online at [__]. You can also obtain this information at no cost by calling [__] or by sending an email request to [__].
The website address would be required to be specific enough to lead investors to a direct link to the statutory prospectus and other required information, rather than to the home page or another part of the website. The website could host other relevant disclosure documents with prominent links to each required document.
The legend could indicate, if applicable, that the statutory prospectus and other information are available from a financial intermediary (such as a broker-dealer) through which the contract may be purchased or sold.
For purposes of this proposed requirement, documents available on the website address would be required to be publicly accessible and free of charge.
You may cancel your [Contract] within 10 days of receiving it without paying fees or penalties. In some states, this cancellation period may be longer. Upon cancellation, you will receive either a full refund of the amount you paid with your application or your total contract value. You should review the prospectus, or consult with your investment professional, for additional information about the specific cancellation terms that apply.
Additional general information about certain investment products, including [variable annuities/variable life insurance contracts], has been prepared by the Securities and Exchange Commission's staff and is available at
These proposed legends are designed to provide identifying information about the variable contract to which the initial
If any information is incorporated by reference into the initial summary prospectus, the proposed rule would require that the legend include certain disclosures related to that information.
We request comment generally on the proposed requirements for the cover page and table of contents of the initial summary prospectus, and specifically on the following issues:
• Should we include any additional information or eliminate any of the information that we have proposed to include in these parts of the initial summary prospectus? For example, for prospectuses filed on Form S-11, which is used for registration under the Securities Act of securities of certain real estate companies, the cover page must include a prominent cross-reference to the risk factors section of the prospectus, including the page number where it appears, as well as certain disclosures, if applicable, regarding limitations on transferability of the securities being registered and the absence of a market for securities of the same class as those being registered.
• Are the proposed legends sufficient to notify investors of the availability and significance of the contract statutory prospectus and other information about the variable contract and how to obtain this information? Should the legends include greater detail about the information that is available?
• Will the proposed legends adequately inform investors of the various means for obtaining additional information about a variable contract? Are the proposed requirements for the website address where additional information is available adequate to ensure that the website and the additional information will be easy to locate?
• Would the proposed legend on the cover page or beginning of the initial summary prospectus with information on the free look period help alert investors that they may cancel their contracts without fees or penalties within a limited time after the sale? Should this legend be more prominently displayed (
• As proposed, should registrants be permitted to modify the required legends, provided the modified legends provide comparable information?
• Should the legends include a reference to the
• Should the proposed requirement to include the contract's EDGAR contract identifier on the bottom of the back cover page or last page of the initial summary prospectus instead require that another identifier be provided? If so, what identifier should be listed, and why?
• Should registrants be permitted to include a table of contents in the initial summary prospectus? Instead, should a table of contents be required? Does rule 481(c) under the Securities Act provide appropriate requirements for a table of contents included in an initial summary prospectus?
Proposed rule 498A specifies the content and order thereof required in an initial summary prospectus.
Section 10(b) of the Securities Act authorizes the Commission to adopt rules deemed necessary or appropriate in the public interest or for the protection of investors that permit the use of an “omitting prospectus” for the purposes of section 5(b)(1) that omits or summarizes information contained in the statutory prospectus. Section 24(g) of the Investment Company Act authorizes the Commission to permit the use of a prospectus under section 10(b) of the Securities Act to include information the substance of which is not included in the statutory prospectus. 15 U.S.C. 77j(b); 15 U.S.C. 77e(b)(1); 15 U.S.C. 80a-24(g);
The initial summary prospectus would begin with a section including certain basic and introductory information about the contract and its benefits, under the heading “Overview of the [Variable Annuity/Life Insurance] Contract.”
Specifically, this section would be required to include a concise description of the following:
This discussion would require a brief overview of the investment options available under the contract (that is, portfolio companies and any general or fixed account option).
The registrant thus would not list the names of each portfolio company available under the contract, as this would be duplicative of information available in the appendix that would accompany the summary prospectus.
Unlike variable annuities, variable life insurance requires the investor to make continuous premium payments in order to avoid a lapse of the contract. We therefore believe the “Overview” section should prominently explain the role of premium payments in the contract, and highlight for investors a key risk that non-payment (or insufficient payment) of premiums could result in contract lapse.
We request comment generally on the “Overview” section that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the requirements of the proposed section clear and appropriate in light of the goals of the initial summary prospectus, and would the information disclosed to investors be helpful to investors in light of these goals? Is this the most useful information for the beginning of the initial summary prospectus? Would it provide investors with context to better understand the remainder of the initial summary prospectus? Why or why not? Would the information provided in the proposed section be unnecessarily duplicative with other information that would appear in the initial summary prospectus?
• Should we impose word or page limits on the proposed section? If so, what should the word or page limits be (
• Are there additional disclosure topics that should be required to be included in the proposed “Overview” section? Instead, should we provide flexibility to registrants in preparing this section as to topics, etc.?
The initial summary prospectus would next include a table (the “Key Information Table”) that would provide a brief description of key facts about the variable contract in a specific sequence and in a standardized presentation that is designed to be easy to read and navigate.
The Key Information Table includes a number of prescribed disclosures and is designed to complement the “Overview” section. We have proposed placing these two disclosure sections at the beginning of the initial summary prospectus because we believe they contain certain basic information that is critical for variable contract investors to read. We are also proposing that this information be provided in a standardized tabular presentation because we believe that, as compared to the narrative-type presentation of corresponding disclosures in the statutory prospectus, a summary tabular presentation would be easier to read and better convey the importance of the information to investors.
Experts in disclosure effectiveness for consumer-facing communications also have encouraged the use of a “strong design grid” (such as the tabular presentation we propose) to clarify concepts to consumers and to organize disclosure elements.
We propose requiring that a registrant provide the Key Information Table under the heading “Important Information You Should Consider About the [Contract].”
Variable contracts typically have multiple layers of fees, expenses, and charges that can be confusing to investors. While the Fee Table currently required in variable contract prospectuses provides comprehensive fee and expense information,
The proposed Key Information Table would require certain information intended to alert investors about the potential impact of surrender charges imposed on early withdrawals. The first line-item in the proposed table, “Surrender Charge (charges for early withdrawals),” would require a statement that if the investor withdraws money from the contract within [x] years following his or her last premium payment, he or she will be assessed a surrender charge. This statement would include the maximum surrender charge, and the maximum number of years that a surrender charge may be assessed since the last payment was made under the contract.
In addition, we are proposing to require an example of the maximum surrender charge an investor could pay (in dollars) under the contract assuming a $100,000 investment (
Form N-4 registrants would disclose, in a tabular presentation in the order specified, the minimum and maximum annual fees for: (1) Base contract expenses;
Because the table showing minimum and maximum annual fees is intended to inform investors about the types and ranges of fees associated with a variable contract, we are excluding certain assumptions from the calculations. For example, although we know that some registrants do not charge extra for certain optional benefits, we want to alert investors to the costs associated with optional benefits that are available for an additional charge. Accordingly, the disclosure should reflect the minimum cost associated with an optional benefit that has a fee.
This presentation would consolidate the more detailed information in the Fee Table, in an effort to minimize the need for investors to perform complex calculations to understand the fees they will pay.
We have also designed an example in Forms N-3 and N-4 to provide a high-level cost illustration that would give an investor a tool to understand the basic cost framework of the contract. To emphasize that an investor's choices have a significant impact on the costs associated with his or her investment, we propose to require a two-column tabular presentation in the order specified reflecting the lowest and highest current annual cost estimates for the variable contract.
The lowest and highest annual dollar costs in this table would be based on certain prescribed assumptions (
The prescribed assumptions largely mirror the Fee Table, with the exception of the sales load, which is not reflected because we are seeking to highlight the contract's ongoing expenses. Because registrants may charge different fees in different years (which may have the effect of making fees appear small under certain circumstances), we propose to base the cost estimate on the average cost of a contract over a 10-year period to level-set the calculation.
In Form N-6, we have proposed that registrants provide disclosure in the “Ongoing Fees and Expenses” section of the table that primarily uses a narrative presentation, rather than the approach taken in Forms N-3 and N-4, due to the fact that maximum expenses could potentially exceed 100% of contract value based on the underwriting of the variable life insurance contract and therefore potentially be misleading to investors. This section of the table would require: (1) A brief statement that investment in a variable life insurance contract is subject to certain ongoing fees and expenses that are set based on characteristics of the insured; and (2) the minimum and maximum annual fees for the investment options in a tabular presentation.
The proposed Key Information Table also would include a condensed discussion of contract risks. Current risk disclosures in variable contract statutory prospectuses typically span multiple pages. While this level of disclosure may be appropriate for a statutory prospectus, we believe that a more-concise overview presentation of contract risks is better suited for the Key Information Table in light of the goals of the summary prospectus. Like the summary of fee and expense information that would appear in the proposed Key Information Table, these risk summaries are intended to provide a concise overview, with additional information available for an investor who desires or requires additional details.
Specifically, the table would include four line-items under the heading “Risks,” each of which would include disclosure about a risk that we believe investors should be alerted to: (1) Risk of loss; (2) risks that could occur if an investor believes a variable annuity is a short-term investment; (3) risks associated with the contract's investment options; and (4) insurance company risks.
The first line-item is intended to convey the concept that although variable contracts have elements of insurance, unlike most traditional forms of insurance, these products are subject to the risk of investment loss.
The second line-item is intended to emphasize to investors that variable contracts are generally long-term investments and not appropriate for an investor who needs ready access to cash, particularly in view of the impact of surrender charges and/or tax penalties for early withdrawals.
Because most variable annuity contracts typically offer fifty or more portfolio companies to which investors can allocate their purchase payments, we are not requiring that the Key Information Table include risk information specific to each portfolio company, as to do so would undermine the goal of brevity for this disclosure item.
The fourth line-item is meant to alert investors that any obligations, guarantees, or benefits under the contract that may be subject to the claims-paying ability of the insurance company (as opposed to the separate account, which is insulated from the claims of the insurance company's creditors) will depend on the financial
A fifth line-item, which would only appear in the “Risks” section for variable life insurance contracts, is meant to focus on contract lapse, which is a key risk for variable life insurance investors (but not relevant to variable annuity contracts).
Because the registrant may provide additional details about these and other risks in the statutory prospectus, we are also proposing a new requirement in Forms N-3 and N-4 that, like the current parallel requirement in Form N-6, would require the registrant to summarize the principal risks of purchasing a contract in a consolidated risk section within the statutory prospectus.
The proposed Key Information Table also would require registrants to briefly disclose those features of a variable contract that commonly include restrictions or limitations, namely the investment options and optional benefits that the contract offers. We have designed this section of the table to include separate line-items for each of these topics under the heading “Restrictions.”
The “Investment Options” line-item would require registrants to disclose whether there are any restrictions that may limit the investment options that an investor may choose and/or limitations on the transfer of contract value among portfolio companies, and if applicable, that the insurer reserves the right to remove or substitute portfolio companies as investment options.
We are proposing to include these line-items in the Key Information Table to put investors on notice of restrictions and limitations associated with different options that are available under the contract. We are not proposing to require a description of the specific restrictions and limitations associated with each of the available investment options and optional benefits. Doing so would likely add significant length to the table. Instead, this information will be provided in other parts of the initial summary prospectus, as well as the statutory prospectus.
Because variable contracts are subject to a special tax regime, with both tax advantages and potential tax impacts in certain circumstances, we are proposing to require that the Key Information Table include tax-related disclosures. The “Tax Implications” line-item of the table, which would appear under the heading “Taxes,” would require a statement that investors should consult with a tax professional to determine the tax implications of an investment in, and payments received under, the variable contract.
The tax disclosure in the proposed Key Information Table is meant to alert investors to tax implications of their investment in a location and using a presentation we believe investors are most likely to see and understand. Similar to the other line-items in the proposed Key Information Table, additional detail about the tax implications of an investment in a variable contract would also be available in the statutory prospectus.
The proposed Key Information Table would also include, if applicable,
The “Exchanges” line-item would require the registrant to state, if applicable, that some investment professionals may have a financial incentive to offer a new contract in place of the one owned by the investor.
In addition to the proposed instructions specific to each line-item in the Key Information Table, the table would be subject to a set of general instructions. To streamline the disclosure and encourage registrants to use plain-English, investor-friendly principles when drafting the disclosures, the proposed general instructions would require registrants to disclose the required information in the tabular presentation reflected in the form, in the order specified. However, registrants would be permitted to exclude any disclosures that are not applicable or modify any of the statements that would be required to appear in the table so long as the modified statement contains comparable information.
The proposed general instructions would also require registrants to provide cross-references or links to the location in the statutory prospectus where the subject matter required by the line-item is described in greater detail.
We believe that providing cross-references and links would help investors who seek additional information quickly find more detailed information that may be important to them. We recognize that certain line-items in the Key Information Table may more readily lend themselves to the inclusion of a single cross-reference or link because the information may be found in one location in the statutory prospectus.
Finally, in keeping with our goal of providing a brief tabular presentation of key facts that can be easily digested by investors, the proposed instructions provide that all disclosures in the Key Information Table should be short and succinct, consistent with the limitations of a tabular presentation.
We request comment generally on the Key Information Table that we propose would appear in the initial summary prospectus, and specifically on the following issues. We request specific comment about the table as it would appear in the updating summary prospectus and the statutory prospectus later in this release.
• Should we require the proposed Key Information Table to be included in the initial summary prospectus? Would this table provide a succinct summary of the contract's key terms and benefits and most significant risks, in a presentation that would improve readability and increase readership?
• Would the topics of the line-items that we propose to include in the Key Information Table be appropriate or useful for investors making an initial purchase of a variable contract? If not, why not? Should we require the table to include additional or different topics? Should we limit the topics and related disclosures to those that are required, or should we permit registrants to include additional topics at their discretion? Could this open the door to lengthy disclosure that might undermine the goal of a succinct presentation?
• Is the proposed tabular presentation useful and likely to facilitate investor
• Should we require cross-references to the location (section or sub-section, or heading or sub-heading) in the statutory prospectus where the information provided in response to each line-item of the Key Information Table is discussed in greater detail? Instead of cross-referencing to the relevant location in the statutory prospectus, should we instead require the cross-reference to include a specific page number in the statutory prospectus where an investor could find the information? Would it confuse investors who receive the summary prospectus to see cross-references to the statutory prospectus? If so, should the table in the summary prospectus not include cross-references, or should we consider some other approach?
• If we require cross-references, should electronic versions of the summary prospectus be required to link directly to the relevant location in the statutory prospectus, as would be required by proposed rule 498A? If not, why not? Would requiring a cross-reference (or link) pose any particular technical, legal, or other challenges for registrants? If so, what would these challenges be, and how could we modify the proposed rule or provide guidance to mitigate these challenges? Instead of hyperlinks, are there other technological tools that would better help an investor find information that is cross-referenced in the Key Information Table, such as QR codes or similar technological tools?
• Is the level of detail of the disclosure that we propose in each line-item of the Key Information Table appropriate, and does it strike the right balance between providing enough information to alert an investor to the most salient facts (including fees, expenses, and risks) of the variable annuity contract, but not too much, or too detailed information? If not, how should we modify the table?
• Should we impose a word or page limit on the proposed Key Information Table (
• Would the disclosure that a registrant would provide in response to the proposed “Fees and Expenses” line-items convey the appropriate amount of information to investors and concisely alert investors to the most important fees and expenses associated with the variable annuity contract? Are there any additional charges that should be included in these line-items? For example, we understand that in some instances an investment professional may charge fees for providing additional services that are directly deducted from the value of the investor's contract and which may be treated as a withdrawal from the contract, reduce the contract's benefits, and be subject to surrender charges. How common are such arrangements, and what disclosures, if any, would be appropriate to be included in the Key Information Table or elsewhere, such as in the fee table?
• Would the “Surrender Charge” line-item, as proposed, convey sufficient information for investors to understand the dollar amount that they could pay as a surrender charge if they make withdrawals in the first several years of their contract, and if not, how should we modify this line-item?
• Would the Minimum and Maximum Annual Fee and Lowest and Highest Cost tables convey information in a way that investors are likely to easily understand? Would these tables assist investors in understanding the costs of their investment and helping them compare the costs of investing in the variable annuity with the costs of investing in another product? Are the assumptions underpinning those tables appropriate? If not, why not? Are there any revisions that we should consider? Is $100,000 an appropriate figure to use as the basis for the cost example in the proposed table? Should we require that registrants use a different figure instead? If so, why? Should we require additional information to accompany the tables? For example, should the legend accompanying the tables inform investors that it is possible that the total fees associated with the contract may exceed the accumulated gains from the investment options selected by the investor? Should the Lowest and Highest Cost table include additional information such the hypothetical value of the contract (
• Should we require registrants creating an electronic version of the initial summary prospectus to provide an interactive calculator for investors to determine how fees and expenses would affect their specific investments? If so, should the calculator include transaction charges?
• Should variable life insurance contracts also be required to show the lowest and highest possible combination of charges in the Form N-6 Key Information Table? Cost of insurance is often an important component of expenses for variable life insurance contracts (unlike variable annuities), and can vary significantly from one insured person to another depending on various demographic characteristics (
• Would the disclosure that a registrant would provide in response to the proposed “Risks” line-items adequately convey an overview of the risks of investing in a variable contract? Are there other risks that we should require a registrant to disclose in the proposed Key Information Table? Should we revise or remove any of the proposed “Risks” line-items? For example, is it appropriate to allow registrants to include the insurance company's financial strength rating(s) in the line-item regarding the claims-paying ability of the insurance company? Should we revise the instructions associated with these proposed line-items to require different disclosures? Should we require a line-item for “Other Principal Risks” to provide registrants an opportunity to disclose risks related to investing in the contract that they would not otherwise be required to disclose in the Key Information Table? Should we instead provide flexibility by permitting registrants to disclose other risks at their discretion? Why or why not?
• Would the disclosure that a registrant would provide in response to the proposed “Restrictions” line-items appropriately convey the appropriate amount of information about certain restrictions that various contract options may entail, in light of the goals of the proposed Key Information Table? Should a registrant be required to disclose information about restrictions in the Key Information Table other than those associated with the contract's investment options and optional benefits? If so, what? Instead, should we provide flexibility by permitting registrants to disclose other restrictions at their discretion?
• Is the disclosure that a registrant would be required to provide in response to the proposed “Tax Implications” line-item appropriate, in light of the goals of the proposed Key Information Table? Should a registrant be required to emphasize more prominently that withdrawals will be subject to ordinary income tax, and not the capital gains rates? Should the line-item require disclosure of the specific tax penalties and requirements that variable contract investors may incur (
• Are the disclosures that a registrant would be required to provide in response to the proposed “Investment Professional Compensation” line-items appropriate, in light of the goals of the proposed Key Information Table? Would these disclosures adequately apprise investors of the potential conflicts that arise when their investment professional is compensated for recommending an investment into a new or an exchange from an existing variable contract, and are these disclosures appropriately balanced? Should we revise these proposed disclosure requirements, and if so, how? Is it appropriate that these line-items appear under the heading “Conflicts of Interest”? Is there another way that the summary prospectus could highlight the implications for investors of exchanges?
• Do the instructions associated with each of the proposed line-items clearly explain what a registrant would be required to disclose? In keeping with the structured format of a tabular presentation, we sought to promote concise disclosure by largely directing registrants to state, rather than to explain, certain information in response to the required line-items. Should the
The initial summary prospectus would be required to briefly describe the standard death benefit that the contract provides, under the heading “Standard Death Benefit.”
Under the proposed registration form amendments, a registrant would include in the statutory prospectus these disclosures, as well as additional disclosures relating to when the death benefit is calculated and payable or the forms the benefit may take.
We request comment generally on the disclosure on the standard death benefit that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the proposed disclosure requirements in the initial summary prospectus under the “Standard Death Benefit” heading clear and appropriate in light of the goals of the initial summary prospectus?
• Would this disclosure be useful to investors in connection with an initial purchase of a variable contract? Should this proposed content requirement include any additional, or any different, disclosure about the standard death benefit? For example, would including one or more of the other disclosures required to be included in the statutory prospectus better assist investors in gaining a basic initial understanding of the standard death benefit?
Following the discussion of the standard death benefit, the initial summary prospectus would be required to summarize additional standard or optional benefits available to the investor under the variable contract. We understand that insurers commonly consider these types of benefits to be primary features of variable contracts.
Specifically, the summary table would include the name of each benefit, its purpose, whether the benefit is standard or optional, associated fees (as a stated percentage of contract value, benefit base, etc.), and a brief description of limitations or restrictions.
Under the proposed form amendments, a registrant would include in the statutory prospectus the summary table, as well as additional disclosures in narrative form relating to optional benefits, such as further additional description of each benefit, and descriptions of benefits' limitations, restrictions and risks, and one or more examples illustrating the operation of each benefit.
We are also proposing instructions to allow registrants that offer multiple benefits of the same type (
We request comment generally on the disclosure relating to other benefits available under the contract that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the proposed initial summary prospectus disclosure requirements
• Are the proposed disclosure items in that table useful and appropriate for consideration by investors in connection with the initial purchase of a variable contract, or should we revise, supplement, or replace those items? Should the proposed summary table include any additional, or any different, disclosure about the standard death benefit or any other benefit? For example, should it include one or more of the other disclosures required to be included in the statutory prospectus? Or should we require that registrants add links or cross-references to these other disclosures? For the associated fee of each optional benefit, should the summary table permit a range of fees?
• Would investors find the proposed tabular presentation useful? Alternatively, would a different tabular presentation, a narrative presentation, or no presentation requirement for disclosure about any optional death benefits, as well as any optional or standard living benefits, be preferable?
• Are the proposed instructions clear, or should we modify them in any way? For example, should we require specific standardized disclosures in situations where certain optional benefits are only available to certain investors (
The initial summary prospectus would be required to include a brief description of the procedures for purchasing the variable contract (and premiums, in the case of variable life insurance contracts), under the heading “Buying the Contract” for variable annuity contracts and “Premiums” for variable life insurance contracts.
Sub-accounts refer to the investment options, such as portfolio companies, available under the contract.
We believe this information should be included in the initial summary prospectus so investors have a clear understanding of how they can purchase the variable contract.
We request comment generally on the disclosure on contract purchases that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the proposed disclosure requirements in the initial summary prospectus under the headings “Buying the Contract” (for variable annuity contracts) and “Premiums” (for variable life insurance contracts) clear and appropriate in light of the goals of the initial summary prospectus?
• Would this disclosure be useful to investors in connection with an initial purchase of a variable contract? Should this requirement include any additional, or any different, disclosure about purchases of variable contracts? For example, should it include one or more of the other disclosures required to be included in the statutory prospectus (
The initial summary prospectus for a variable life insurance contract would be required to include certain information about the possibility of contract lapse, under the heading “How Your Contract Can Lapse.”
We request comment generally on the disclosure on contract lapse that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the proposed requirements in the initial summary prospectus under the heading “How Your Contract Can Lapse” clear and appropriate in light of the goals of the initial summary prospectus?
• Would this disclosure be useful to investors in connection with an initial purchase of a variable life insurance contract? Should this proposed content requirement include any additional, or any different, disclosure about the possibility of contract lapse?
The initial summary prospectus would be required to include certain information about contract surrenders or withdrawals, under the heading “Surrendering Your Contract or Making Withdrawals: Accessing the Money in Your Contract.”
This proposed requirement is similar to the requirement for mutual fund summary prospectuses to include disclosure on procedures for redeeming shares.
We request comment generally on the disclosure on surrenders and withdrawals that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the proposed requirements in the initial summary prospectus under the heading “Surrendering Your Contract or Making Withdrawals: Accessing the Money in Your Contract” clear and appropriate in light of the goals of the initial summary prospectus?
• Would this disclosure be useful to investors in connection with an initial purchase of a variable contract? Should this proposed content requirement include any additional, or any different, disclosure about making contract surrenders and withdrawals? For example, should it include one or more of the other disclosures required to be included in the statutory prospectus (
The proposed rule would require the initial summary prospectus to include the full Fee Table (including, for variable annuity contracts, the expense example), that would appear in the statutory prospectus, under the heading “Additional Information About Fees.”
The initial summary prospectus fee information would be the same as the Fee Table included in the contract statutory prospectus, modified as necessary to describe only a single contract that the registrant currently offers for sale.
We are proposing to include the Fee Table in both the statutory prospectus and the initial summary prospectus because investor understanding of variable contract fees is particularly important given these products' layered fee structure and typically higher costs relative to other investment products. The Fee Table is intended to complement and build upon the high-level summary of contract fees and expenses in the Key Information Table by providing additional detail for those investors who may wish to review more comprehensive fee and expense information.
We understand that some registrants currently prepare supplements to the contract prospectus that detail and modify certain fees and rates under the variable contract applicable to new investors (“rate sheets”). Current fees, withdrawal rates, and crediting rates associated with various contract benefits (for new sales) can change so frequently as to make filing of post-effective amendments to the registration statement with each change impractical. Instead, updated disclosure of current levels of these fees and rates is accomplished by filing a rate sheet as a supplement under rule 497 under the Securities Act. We do not believe that the proposed summary prospectus framework will affect the current practice of using rate sheets.
We request comment generally on the Fee Table that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the proposed requirements in the initial summary prospectus under the heading “Additional Information About Fees” clear and appropriate in light of the goals of the initial summary prospectus?
• Would this disclosure be useful to investors in connection with an initial purchase of a variable contract? Would including the full Fee Table be consistent with the goal of providing a succinct summary of the contract's key terms and benefits and most significant risks, in a presentation that would improve readability and increase readership? Are there any particular line-items of the Fee Table, for either variable annuities or variable life insurance that could be omitted? Would only including summary information of the type that we propose to appear in the Key Information Table, either with or without a cross-reference or link to the full Fee Table, be more useful or appropriate for investors? Alternatively, would including only the full Fee Table, and not also the summary fee information in the Key Information Table, be more useful or appropriate for investors?
• Would registrants who elect to use the initial summary prospectus continue to prepare rate sheets? Would there be any additional burdens preparing rate sheets in this context? Should the staff guidance be modified in any way to accommodate the summary prospectus framework?
Finally, an initial summary prospectus would be required to include an appendix, under the heading “Appendix: [Portfolio Companies/Investment Options] Available Under the [Contract],” that provides summary information in a tabular form about the portfolio companies or investment options offered under the contract.
The appendix would include separate columns for each portfolio company's type (
For purposes of this discussion, we use the term “portfolio company” throughout, even though the appendix for Form N-3 registrants would use the term “investment option.”
A legend would precede the table. The first paragraph of the legend would state: “The following is a list of [Investment Options/Portfolio Companies] currently available under the [Contract], which is subject to change as discussed in the [Statutory Prospectus for the Contract].”
“Before you invest, you should review the prospectuses for the [Portfolio Companies]. These prospectuses contain more information about the [Portfolio Companies] and their risks and may be amended from time to time. You can find the prospectuses and other information about the [Portfolio Companies] online at [__]. You can request this information at no cost by calling [__] or by sending an email request to [__].”
“More information about the [Investment Options] is available in [the Statutory Prospectus for the Contract], which can be requested at no cost by following the instructions on [the front cover page or beginning of the Summary Prospectus].”
The second paragraph of the legend for variable contracts registered on Forms N-4 and N-6 would read as follows:
The performance information below reflects fees and expenses of the [Portfolio Companies], but does not reflect the other fees and expenses that your contract may charge. Performance would be lower if these charges were included. Each [Portfolio Company's] past performance is not necessarily an indication of future performance.
In contrast, because insurance charges are already reflected in the performance of the investment options for contracts registered on Form N-3, the second paragraph of the legend for variable annuities registered on Form N-3 would state:
The performance information below reflects contract fees and expenses that are paid by each investor. Each [Investment Option's] past performance is not necessarily an indication of future performance.
Because the investment experience of a variable contract investor will largely depend on his or her selection of portfolio companies (or investment options in the case of a variable annuity registered on Form N-3), we believe it is important for investors to receive an overview of the portfolio companies and investment options available under the contract in a uniform tabular presentation that promotes comparison.
Investors in contracts registered on Forms N-4 and N-6 currently receive portfolio company prospectuses at or shortly after the point of sale, as well as each portfolio company's updated prospectus each year. As discussed below, we are proposing an optional delivery method, which would permit satisfaction of any portfolio company prospectus delivery obligations if the portfolio company summary and statutory prospectuses are posted at the website address specified on the variable contract summary prospectus.
Alternatively, for variable contracts registered on Form N-3, registrants could omit the required appendix and instead provide more detailed disclosures for the investment options offered under the contract that would be required by proposed Item 20 of Form N-3.
We request comment generally on the appendix that we propose would appear in the initial summary prospectus, and specifically on the following issues:
• Are the requirements of the proposed appendix, and the associated proposed instructions, clear and appropriate in light of the goals of the initial summary prospectus? Should we modify them in any way?
• Would the information included in the appendix and its proposed tabular presentation be useful to investors in connection with the initial purchase of a variable contract? Would other or additional information, or a different presentation, be more useful to investors?
• Are the particular disclosure items that we have proposed for inclusion in the appendix useful and appropriate for consideration by investors, or should we revise, supplement, or replace those items? Alternatively, or in addition, should we require any other disclosures contemplated by rule 482 (
• The proposed instructions would provide that if the availability of one or more portfolio companies varies by benefit offered under the contract, registrants must include as another appendix a separate table indicating which portfolio companies were available under each of those benefits. Should this information be provided in a separate table? Why or why not? Are there ways to present this information in a more streamlined and comprehensible manner for investors? If so, how?
• Under our proposal, an initial summary prospectus for a contract registered on Form N-3 could omit the appendix and instead include the more detailed disclosures about the investment options offered under the contract that would be required by proposed Item 20 of Form N-3. Alternatively, in order to increase comparability between initial summary prospectuses, should the appendix be required to be included in all initial summary prospectuses for contracts registered on Form N-3? Conversely, should the initial summary prospectus be required to contain the more detailed disclosures that would be required by proposed Item 20 of Form N-3?
In addition to the specific requests for comment above on the proposed scope and content requirements of the initial summary prospectus, we also request comment generally on the initial summary prospectus, and specifically on the following issues:
• Is an initial summary prospectus an appropriate vehicle to highlight the importance of key terms, benefits, and risks of a variable contract? What are the key considerations for an initial investment in the contract? Does the proposed initial summary prospectus capture key considerations that a typical contract investor would find salient? Should an initial summary prospectus include additional information an investor would need in order to make an informed investment decision, and if so, what would this information be? Would this defeat our goal of providing investors a succinct summary?
• Should we exclude any of the proposed initial summary prospectus disclosure? Should we require any additional information to appear in the initial summary prospectus, such as from the contract's statutory prospectus, SAI, or Part C (“Other Information”) of the registration statement?
• We are proposing to require an initial summary prospectus to contain the information required by the proposed rule, and only that information, in a specified order to facilitate comparability (similar to the mutual fund summary prospectus model). Should all items in the initial summary prospectus be presented in the same order, under the headings that the proposed rule specifies? Would this promote comparability across products, and is comparability as feasible for variable products as it is mutual funds? Why or why not? If the items are not listed in the same order, could investors or investment professionals still easily compare different variable contracts? Is the proposed order appropriate, or should we consider a different order? Should the rule require ordered navigation links for electronic versions of the summary prospectus?
• Should we, as proposed, limit the information to be included in the initial summary prospectus, or should we allow registrants to include other information that is not specifically called for? We recognize that variable contracts are complex investment products, and some may have product features that are not contemplated by the current disclosure items. Should we permit registrants to disclose information not specifically required by the proposed rule to provide sufficient flexibility for the disclosure of future product developments or otherwise enhance disclosures to investors? Would that undermine the goal of comparability, or contribute to investor confusion? Are there other ways we could provide this flexibility?
• Should we impose any page or word limits on the initial summary prospectus (
• Is the information that we propose to require in the body or appendix of the initial summary prospectus appropriate? Should we include any additional information or eliminate any of the information that we have proposed to include? Should any information in the body (
• Would investors be more likely to read an initial summary prospectus if we required the use of certain design elements—such as larger font sizes or greater use of white space, colors, or visuals—or provided additional guidance on such design elements? If so, what should this disclosure requirement be? Would any of the proposed content requirements particularly benefit from the use of such design elements?
• Should registrants creating electronic versions of the initial summary prospectus be required to include active hyperlinks for website addresses referenced in the electronic version, as would be required under our proposal? What concerns would be raised, if any, if those website addresses were third-party websites? Should registrants creating electronic versions of the initial summary prospectus be required to include active hyperlinks for any cross-references, as would be required under our proposal?
• Should registrants creating electronic versions of the initial summary prospectus be allowed to use alternatives to any tabular presentations, such as the table(s) included in Appendix: Portfolio Companies/Investment Options Available Under the Contract, provided the information is presented in an easy to read and comparable manner? If so, should there be additional conditions on the use of these alternatives? What should those conditions be?
• Should we offer registrants greater flexibility to design summary prospectuses that can be viewed on mobile devices, are interactive, have audio or video features, or otherwise make use of technology and research about effective disclosure methods? If so, how can we allow flexibility while ensuring that investors receive the information they need to make their investment decisions?
• To what extent is the information proposed to be required in the initial summary prospectus duplicative of information provided in other point-of-sale disclosure documents (including those required under other regulatory regimes)?
• Would the initial summary prospectus, as proposed, appropriately complement current disclosure practices by not unnecessarily duplicating disclosure topics investors receive through other channels, and
• Are there any aspects of the initial summary prospectus that should be made to conform to parallel provisions in the updating summary prospectus or potential changes to those proposed parallel provisions? Conversely, are there any potential changes to the proposed updating summary prospectus that should not be made to the proposed initial summary prospectus?
• Is the hypothetical initial summary prospectus in Appendix A useful and illustrative of the proposed requirements? Does it appropriately show the level of detail that firms might provide, and are any of the design elements that the hypothetical initial summary prospectus uses particularly effective (or if they could be made more effective, how so)?
Today, variable contract investors are typically sent a copy of the updated current contract statutory prospectus each year.
We are not proposing that registrants send an updated initial summary prospectus to investors each year, due in part to the cost to maintain and update separate initial summary prospectuses for currently-offered variable contracts and those no longer offered. Additionally, we believe that existing investors would benefit more from a brief summary of the changes to the contract reflected in the statutory prospectus than to the disclosures in the initial summary prospectus, which is designed for someone making an initial investment decision.
We have therefore designed the updating summary prospectus to provide a brief description of any important changes with respect to the contract that occurred within the prior year, which will allow investors to better focus their attention on new or updated information relating to the contract. Additionally, the updating summary prospectus would include certain of the information required in the initial summary prospectus that we consider most relevant to investors when making additional investment decisions or otherwise monitoring their contract.
Finally, a registrant may only use an updating summary prospectus if it uses an initial summary prospectus for each currently offered contract described under the contract statutory prospectus to which the updating summary prospectus relates.
The proposed rule would permit the updating summary prospectus to describe one or more contracts covered in the statutory prospectus to which the updating summary prospectus relates.
Given the limited subset of information provided in the updating summary prospectus, we believe permitting registrants to combine multiple contracts would not cause investor confusion in the same way that combining disclosure about multiple contracts in the initial summary prospectus might. Furthermore, we understand that there are generally not a significant number of changes that occur to an individual contract year-over-year, and many of those changes (such as changes to the available portfolio companies or the addition of new optional benefits) typically apply across multiple contracts described in the same prospectus. We therefore believe the section describing contract changes, even if changes to multiple contracts are included, would not be overly lengthy, and would not prevent investors from reading or understanding the applicable disclosures.
We request comment generally on the proposed scope requirements for the updating summary prospectus, and specifically on the following issues:
• Is it appropriate to permit the updating summary prospectus to include multiple contracts under the statutory prospectus to which the updating summary prospectus relates? Would this approach promote operational efficiency? What other benefits would this approach entail? What drawbacks would this approach entail? Would this approach discourage investors from reading the updating summary prospectus? Would it confuse investors, and if so, should the proposed rule incorporate any additional provisions (or should we issue guidance) to help mitigate potential confusion? Would it prevent investors from reading or understanding the disclosures, and if so, what additional rule provisions or guidance could help mitigate this? Would the proposed disclosure requirement make clear to an investor whether a particular disclosure about year-over-year changes applies to that investor's contract? Should we require that an updating summary prospectus that includes disclosure about multiple contracts be formatted or presented in a certain way to help promote clarity to investors regarding whether a particular disclosure in the document concerns an investor's particular contract? Are there any other additions to the updating summary prospectus that would help promote clarity to investors on this point?
• Alternatively, what would be the benefits of requiring registrants to create a separate updating summary prospectus for each contract, similar to the requirement for the initial summary prospectus? Would this alternate approach be operationally burdensome, and if so, why? Would it enhance investor understanding? Would it reduce investor confusion?
• Should we restrict the number of contract classes that may be described in an updating summary prospectus? Why or why not?
The following chart outlines the information that would be required in an updating summary prospectus under proposed rule 498A. Along with specifying required cover page
• The depositor's name;
• the registrant's name;
• the name of the contract(s), and the class or classes, if any, to which the updating summary prospectus relates;
• a statement identifying the document as an “Updating Summary Prospectus”; and
• the approximate date of the first use of the updating summary prospectus.
You should read this Summary Prospectus carefully, particularly the section titled Important Information You Should Consider About the [Contract].
An updated prospectus for the [name of Contract] is currently available online, which contains more information about the [Contract], including its features, benefits, and risks. You can find the prospectus and other information about the [Contract] online at [__]. You can also obtain this information at no cost by calling [__] or by sending an email request to [__].
Additional general information about certain investment products, including [variable annuities/variable life insurance contracts], has been prepared by the Securities and Exchange Commission's staff and is available at
Like the cover page or beginning of the initial summary prospectus, the cover page or beginning of the updating summary prospectus would be required to include identifying information about the variable contract, as well as a legend including certain general information that would be applicable to all variable contracts. The portions of the proposed legend that describe how to obtain further information about the contract, as well as the
We do not believe that the free look period legend that would appear on the cover page or beginning of the initial summary prospectus would be appropriate in the context of the updating summary prospectus, because the free look period is not applicable to additional investments after the initial purchase.
We request comment generally on the proposed requirements for the cover page of the updating summary prospectus, and specifically on the following issues:
• Is the information that we propose to require on the cover page or beginning of the updating summary prospectus appropriate? Should we include any additional information or eliminate any of the information that we have proposed to include in these parts of the updating summary prospectus?
• Is the proposed legend sufficient to notify investors of the availability and significance of the contract statutory prospectus and other information about the variable contract and how to obtain this information? For example, should the legend
• Does the proposed legend adequately inform investors of the various means for obtaining additional information about a variable contract? For example, are the proposed requirements for the website address where additional information is available adequate to ensure that the website and the additional information will be easy to locate?
• As proposed, should we permit registrants to modify the required legend, provided the modified legend includes comparable information?
• Should the requirement in proposed rule 498A to include the EDGAR contract identifier for each contract covered by the updating summary prospectus on the bottom of the back cover page or last page of the updating summary prospectus be revised to list another identifier? If so, what identifier should be listed, and why?
• Should registrants be permitted to include a table of contents in the updating summary prospectus? Instead, should a table of contents be required for any updating summary prospectus? Does rule 481(c) under the Securities Act provide appropriate requirements for a table of contents included in an updating summary prospectus?
Proposed rule 498A specifies the content and order thereof required in an updating summary prospectus.
The updating summary prospectus would be required to include a concise description of any change with respect to the contract made after the most recent updating summary prospectus or statutory prospectus was sent or given to investors that has affected the availability of portfolio companies (or investment options under a variable annuity registered on Form N-3) under the contract,
These contract changes would be described under the heading “Updated Information About Your [Contract].”
The information in this [Updating Summary Prospectus] is a summary of certain [Contract] features that have changed since the [Updating Summary Prospectus] dated [date]. This may not reflect all of the changes that have occurred since you entered into your Contract.
We designed this disclosure requirement in light of the fact that disclosures in a contract statutory prospectus do not change frequently, and we believe providing investors with notice and a brief description of any changes that do occur may be more informative than repeating all the disclosures year-over-year. We believe that notice of these changes is particularly helpful, given that currently investors must determine which, if any, disclosures relevant to their particular contract have changed each year they receive the contract statutory prospectus. After receiving notice and a brief description of certain changes, an investor who then wishes to obtain more information on specific changes can consult the contract statutory prospectus to review related disclosures in more detail. We believe that highlighting certain key changes with respect to the contract in the updating summary prospectus will provide important information to investors that they can use in considering whether to continue making additional purchase payments or reallocate contract value.
We would require the disclosure of changes with respect to these particular disclosure topics (Fee Table, the standard death benefit, other benefits available under the contract, and portfolio companies available under the contract) because these are the areas where we understand contract-related changes are most likely to occur, and that may be of most interest to investors. We believe that permitting—but not requiring—a concise description of any additional changes will provide flexibility to registrants to highlight for investors any additional changes. The requirement to disclose contract-related changes to investors is particularly relevant for variable contracts, since the length of statutory prospectus disclosure may hinder investors in identifying important year-over-year changes to contract features.
In providing a concise description of a contract-related change in the updating summary prospectus, registrants must provide enough detail to allow investors to understand the change and how it will affect them.
We request comment generally on the brief description of certain contract-related changes that we propose would appear in the updating summary prospectus, and specifically on the following issues:
• Would this proposed disclosure requirement be useful to investors? Would understanding the information that would appear in an updating summary prospectus in response to the proposed requirement be
• Is the scope of changes that a registrant may discuss in the updating summary prospectus appropriate? Are there other topics that should be described in the updating summary prospectus (
• Is it appropriate to allow registrants to discuss any other changes that have been made to the contract during the same time period in this section? Should registrants also be allowed to discuss matters that do not directly involve the contract (
• Is the proposed requirement that a registrant include a “concise description” of each change clear and appropriate? Would registrants understand what level of disclosure they should include? Would any additional clarification in the rule text or Commission guidance be helpful?
The updating summary prospectus also would be required to include the same Key Information Table that would appear in the initial summary prospectus.
Because investors may make additional investments in the variable contract, we propose to require this disclosure in the updating summary prospectus to remind them of the contract's fees and expenses, risks, restrictions, tax implications, and investment professional compensation. Furthermore, we believe that an investor who continues to make investments in the variable contract (or to reallocate contract value)—not just an initial investor in the contract—should receive the benefit of this disclosure in a presentation that is intended to improve readability and readership.
Besides the brief description of contract-related changes and portfolio company/investment option appendix discussed below, an updating summary prospectus would include only this Key Information Table as summary disclosure about the contract's key information, and would not also include the additional disclosure that the initial summary prospectus would include (for example, additional information about standard and optional contract benefits, or the contract Fee Table). We believe this is appropriate in the context of an updating summary prospectus for several reasons.
First, unless the investor invested prior to the registrant relying on rule 498A, the investor already will have received the initial summary prospectus (and have had access to the statutory prospectus), which includes this extra detail. Additionally, the updating summary prospectus draws on layered disclosure concepts, where the investor can access the more detailed statutory prospectus electronically (or in paper format on request) to complement the disclosure included in the updating summary prospectus.
An updating summary prospectus that describes multiple contracts could contain a separate Key Information Table for each of the contracts, or use a different presentation approach that consistently discloses the required information for each contract in the required order. For example, if the only Key Information Table disclosure that would vary by contract were the fee information, a prospectus that describes multiple contracts could include a single Key Information Table that discloses separate fee information in the “Fees and Expenses” line-items for each contract.
We request comment generally on including the Key Information Table in the updating summary prospectus, and specifically on the following issues:
• Should we require including the proposed Key Information Table in the updating summary prospectus? Would this table provide a succinct summary of the contract's key information for investors who make ongoing purchase payments, or who reallocate contract value? If not, why not?
• Is the location of the proposed Key Information Table within the updating summary prospectus appropriate? If not, where should it be located?
• Should the table include, as proposed, the same line-items as the Key Information Table that would appear in the initial summary prospectus? Instead should we require a modified version of the table in the updating summary prospectus, and if so, how should we modify the table? For example, is it appropriate or necessary for the table that appears in the updating summary prospectus to include a line-item on investment professional compensation? Is it important to require the disclosure that investors should only exchange their contract if they determine, after comparing the features, fees, and risks of both contracts, that it is preferable for them to purchase the new contract rather than continue to own the existing contract?
• Should the presentation of the proposed table in the updating summary prospectus differ from the proposed presentation for the initial updating prospectus? If so, why, and what would be a better alternate presentation?
• Should we mirror the approach taken with the initial summary prospectus where cross-references in the Key Information Table for electronic versions of the updating summary prospectus would link directly to the location in the statutory prospectus where the subject matter is discussed in greater detail? If so, why? What would be a better approach?
• Are there any particular instructions for the Key Information Table that we should modify for the updating summary prospectus?
Finally, the updating summary prospectus would be required to include an appendix, under the heading “Appendix: [Portfolio Companies/Investment Options] Available Under the [Contract],” that provides summary information about the portfolio companies offered under the contract.
Because the selection of portfolio companies or investment options will directly affect the performance, and
We request comment generally on the appendix that we propose to require in the updating summary prospectus, and specifically on the following issues:
• Are the requirements of the proposed appendix clear and appropriate in light of the goals of the updating summary prospectus?
• Would the information that would be included in this appendix be useful to an investor who is considering whether to continue making additional purchase payments, or reallocate contract value? Would other or additional information be more useful to investors? For example, should the appendix identify portfolio companies that have been added, or portfolio companies that have been removed or closed to additional investment, during the period covered by the update?
• Should we, as proposed, permit a Form N-3 registrant to omit the appendix and instead include the more detailed disclosures about the investment options offered under the contract that would be required by proposed Item 20 of Form N-3? Are the considerations regarding the inclusion of the appendix in a Form N-3 registrant's updating summary prospectus the same or different as in the context of the initial summary prospectus?
In addition to the specific requests for comment above on the proposed content requirements and scope of the updating summary prospectus, we also request comment generally on the updating summary prospectus, and specifically on the following issues:
• Should we consider any alternative approaches to the proposed framework of two distinct summary prospectuses (the initial summary prospectus and the updating summary prospectus)? For example, should all variable contract investors receive a summary prospectus with identical content? As another example, should the proposed rule provide that only initial contract purchasers would receive a summary prospectus, and afterwards, investors who make additional purchase payments, or who reallocate contract value, would receive no summary prospectus (or receive only a notice that the statutory prospectus is available online)?
• Should we permit the use of an updating summary prospectus if a registrant does not use an initial summary prospectus for each currently offered contract described under the contract statutory prospectus to which the updating summary prospectus relates?
• Does the information in the proposed updating summary prospectus capture the information that is most likely to change from year to year, and that is most important for investors when considering whether to make additional purchase payments, or reallocate contract value? Should any of the information that we propose to require in the updating summary prospectus not be required? Should we require disclosure of any additional information (such as additional information that we propose to include in the initial summary prospectus) in the updating summary prospectus?
• Should we consider changing the proposed order in which the disclosure items would appear in the updating summary prospectus?
• Should we impose any page or word limits on the updating summary prospectus (
• Is the information that we propose to require in the body and appendix of the updating summary prospectus appropriate? Should we include any additional content requirements or modify or eliminate any of the content requirements? Should any information in the body be moved to an appendix, or vice versa?
• Would investors be more likely to read an updating summary prospectus if we required the use of certain design elements—such as larger font sizes or greater use of white space, colors, or visuals—or provided additional guidance on such design elements? Would any of the proposed content requirements particularly benefit from the use of such design elements?
• Would the updating summary prospectus, as proposed, appropriately complement current disclosure practices by not unnecessarily duplicating disclosure topics investors receive through other channels, and highlighting key risks that investors may not learn about through other channels?
• Should registrants creating electronic versions of the updating summary prospectus be required to include active hyperlinks for website addresses referenced in the electronic version, as would be required under our proposal? What concerns would be raised, if any, if those website addresses were third-party websites? Should registrants creating electronic versions of the initial summary prospectus be required to include active hyperlinks for any cross-references, as would be required under our proposal?
• Should we offer registrants greater flexibility to design summary prospectuses that can be viewed on mobile devices, are interactive, have audio or video features, or otherwise make use of technology and research about effective disclosure methods? If so, how can we allow such flexibility while still ensuring that investors receive the information they need to make their investment decisions?
• Are there any aspects of the updating summary prospectus that should be made to conform to parallel provisions in the initial summary prospectus or potential changes to those proposed parallel provisions? Conversely, are there any potential changes to the proposed initial summary prospectus that should not be made to the proposed updating summary prospectus?
• Is the hypothetical updating summary prospectus in Appendix B useful and illustrative of the proposed requirements? Does it appropriately show the level of detail that firms might provide?
Section 5(b)(2) of the Securities Act makes it unlawful to carry or cause to be carried a security for purposes of sale or for delivery after sale “unless accompanied or preceded” by a statutory prospectus.
Because the requirements of section 5(b)(2) of the Securities Act are applicable to “any person,” its obligations are applicable to financial intermediaries through whom variable contracts are sold, as well as variable contract issuers.
First, a person relying on the proposed rule would be required to send or give a summary prospectus to an investor no later than the time of the “carrying or delivery” of the contract security.
Second, the summary prospectus could not be bound together with any other materials, except that we are permitting portfolio company summary and statutory prospectuses to be bound together with the contract summary
The proposed rule also would provide that a communication relating to an offering registered on Forms N-3, N-4, or N-6 that a person sends or gives after the effective date of a variable contract's registration statement (other than a prospectus that section 10 of the Securities Act permits or requires) would not be deemed a prospectus under section 2(a)(10) of the Securities Act if:
(1) It is proved that prior to or at the same time with such communication a summary prospectus was sent or given to the person to whom the communication was made;
(2) the summary prospectus meets the same binding requirements that we discuss in the immediately-preceding paragraph;
(3) the summary prospectus that was sent or given satisfies the requirements for the initial summary prospectus or the updating summary prospectus, as applicable; and
(4) the initial summary prospectus, updating summary prospectus, contract statutory prospectus, and contract SAI are publicly accessible, free of charge, on a website in the manner that the proposed rule specifies.
Section 2(a)(10) of the Securities Act provides that certain communications accompanied or preceded by a statutory prospectus are not deemed to be “prospectuses” for purposes of the Securities Act.
Because we believe that all investors should receive the benefit of the succinct, investor-friendly disclosure that is included in the variable contract summary prospectus, all of the disclosure items that would appear in the summary prospectus also would be required to appear in the statutory prospectus. In that respect, all variable contract investors, regardless of whether the product they choose has a summary prospectus, would have the benefit of improved disclosures in the statutory prospectus.
We request comment generally on the proposal to permit a new option for prospectus delivery for variable contracts, and specifically on the following issues (in addition, we are requesting comment on certain parallel provisions of rule 498):
• Should we permit a person to satisfy its prospectus delivery obligations under the Securities Act with respect to variable contracts in the manner provided in the proposed rule? Would this approach provide investors with material information about the variable contract while providing adequate protections?
• Are there other delivery approaches that would be more effective than the proposed approach? For example, should we permit a person to satisfy its prospectus delivery obligations by filing a statutory prospectus with the Commission and by posting it online without using a summary prospectus?
• Is the proposed approach appropriate given the current demographics of variable contract investors? For example, does the proposed approach adequately protect investors who have no internet access or limited internet access or who prefer not to receive information about their variable contract investments over the internet? As another example, given the high percentage of investors who use an investment professional when purchasing a variable contract (and who might learn about the contract through discussions with investment professionals), is there another approach that would be more effective? Should we make any other changes with respect to prospectus delivery obligations? Does the proposed approach appropriately balance the objectives of the proposed summary prospectus framework with protecting investors who have no or limited access to the internet?
• Should investors have the ability to opt out of the rule permanently and thereafter receive a paper copy of any statutory prospectus? How could this be implemented in practice? For example, how would a registrant that had no prior relationship with an investor be apprised of the investor's decision to opt out?
• The proposed rule would not permit the summary prospectus to be bound together with any materials other than prospectuses for the portfolio companies that are available under the contract. This approach is modeled on rule 498(c). Do registrants currently rely on rule 498(c) to bind the variable contract's statutory prospectus with the prospectuses or summary prospectuses for the underlying portfolio companies? Since reliance on the proposed rule would be optional, should we continue to permit binding to be consistent with rule 498(c)? Since we anticipate that most registrants will rely on the optional delivery method for portfolio company prospectuses as described in section II.B below, should the rule permit a variable contract summary prospectus to be bound with prospectuses and summary prospectuses of portfolio companies, or is such a provision unnecessary?
• Under proposed rule 498A, use of the summary prospectus would be voluntary. Should we make use of the summary prospectus regime mandatory for all variable contract registrants? If so, why? Would inconsistent use of the summary prospectus create confusion, or make comparison of variable contract products more difficult for investors? Would a mandatory approach adequately protect investors who have no or limited internet access or who prefer not to receive information about their investments over the internet? Should we first adopt the voluntary summary prospectus regime and consider whether the summary prospectus should be mandated in the future, and if so, what methods or approaches should we consider? What would be registrants' primary considerations in determining whether to adopt the proposed voluntary summary prospectus regime? Would registrants be more likely to adopt the regime if the portions of the statutory prospectus that are also summary prospectus disclosures were segregated and placed at the beginning of the statutory prospectus?
• If we were to adopt a summary prospectus framework for variable contracts,
• Should registrants that elect to rely on rule 498A be required to send current investors a notice explaining the new delivery approach before sending the first updating summary prospectus? Would investors benefit from receiving such a notice? If so, should investors receive a separate notice about the transition, or should different methods of notifying investors be permitted? For example, should registrants be permitted to add the notice as an insert or legend to other documents they are already sending investors?
The proposed rule would permit investors who receive a succinct, user-friendly initial or updating summary prospectus to access more detailed information about the variable contract, either by reviewing the information online, or by requesting the information to be sent in paper or electronically. These provisions parallel provisions in the rule governing the use of mutual fund summary prospectuses.
Under the proposal, a variable contract's current initial summary prospectus, updating summary prospectus, statutory prospectus, and SAI, and, in the case of a registrant on Form N-3, the registrant's most recent annual and semi-annual reports to shareholders under rule 30e-1 under the Investment Company Act (together, the “required online contract documents”), would be required to be available online. This approach operationalizes the layered disclosure framework that undergirds the proposed rule, with the summary prospectus provided in paper (or electronically) to investors, and additional information about the contract securities available online. The required online contract documents generally comprise the same set of documents that the mutual fund summary prospectus rules require to be posted online, and provide additional important detail about the contract that investors can access if they wish. The required online contract documents only reference the registrant's annual and semi-annual shareholder reports for Form N-3 registrants because Form N-4 and Form N-6 registrants do not have their own shareholder reports, but instead transmit the portfolio companies' annual and semi-annual shareholder reports to the investors in their trust accounts.
As with similar provisions in the mutual fund summary prospectus rule, these required online contract documents would be required to be publicly accessible, free of charge, at the website address that the cover page of the summary prospectus specifies, on or before the time that the person relying on the proposed rule provides the summary prospectus to investors.
• The time of the “carrying or delivery” of the contract security if a person is relying on the proposed rule to satisfy its section 5(b)(2) prospectus delivery obligations; or
• If a person is relying on the proposed rule to send communications that will not be deemed to be prospectuses, the time that the person sends or gives the communication to investors.
This requirement is designed to provide continuous access to the information from the time the summary prospectus is sent or given until at least 90 days after the date of delivery of a security or communication in reliance on the proposed rule. This is the timeframe for the availability of online information under the mutual fund summary prospectus rule, and we are proposing that it be the same in the proposed rule because of market participants' familiarity with this timeframe, and because there may be operational efficiencies for certain registrants in having the timeframe be the same under both summary prospectus frameworks. Moreover, we believe this proposed timeframe appropriately balances the costs of maintaining information online with investors' interests in having the flexibility to access this online information after receiving the summary prospectus (for example, if they would like to review a topic presented therein in more detail in the statutory prospectus that is available online, after they have had the opportunity to read and digest the summary prospectus).
The proposed rule would direct that the required online contract documents be presented in a manner that is human-readable and capable of being printed on paper in human-readable format.
In addition, the proposed rule would mandate that the online materials be presented in a format that is convenient for both reading online and printing on paper.
The proposed rule also includes requirements for linking within the electronic versions of the contract statutory prospectus and SAI that are available online, and also for linking between electronic versions of contract summary and statutory prospectuses that are available online.
In this release, the term “substantively identical” is meant to refer to sets of provisions that do not include the same words verbatim, but where the only differences between the provisions are those that do not affect the substance of the requirement at issue. For example, parallel provisions in rule 498 and 498A where only the internal cross-references differ.
The first linking requirement would allow the reader to move directly between a table of contents of the contract statutory prospectus or SAI and the related sections of that document, by a single mouse click or mobile-device tap.
Mutual funds commonly implement this feature using a left navigation or “bookmark” design style. While such design styles continue to be popular (and we anticipate that some insurers relying on proposed rule 498A might also employ this design style), the increased use of mobile devices and applications has led to the development of new and evolving design styles. Any navigation style should provide the functionality that is required by the rule.
The summary prospectus content requirements reference information that is required to appear in the contract statutory prospectus, which in turn must be written using plain English principles.
Accordingly, the proposed rule would require a summary prospectus to define any “special terms” elected by the registrant, using any presentation that clearly conveys their meaning to investors.
We believe the proposed requirement for special terms in the contract summary prospectus, like the current and proposed requirements for special terms in the contract statutory prospectus, is appropriate in the context of variable contracts, as variable contract disclosure documents tend to include industry-specific language in order to describe the sometimes complex features of these products.
In order to leverage technology to help investors understand the variable contract, the proposed rule includes provisions that are meant to enhance investors' understanding of special terms when they view the summary prospectus online. Specifically, the proposed rule would require that investors either be able to view the definition of each special term used in an online summary prospectus upon command,
The proposed rule also would require that persons accessing the website that appears on the summary prospectus cover page be able to permanently retain, free of charge, an electronic version of each of the required online contract documents. Like the online version of these documents, the retainable version of the documents must be in a format that is: (1) Human-readable and capable of being printed on paper in human-readable format; and (2) permits persons accessing the downloaded documents to move directly back and forth between each section heading in a table of contents of that document and the section of the document referenced in that section heading.
In addition, the proposed rule would mandate that the electronic versions of the documents that may be permanently retained must be in a format that is convenient for both reading online and printing on paper.
Compliance with the conditions in the proposed rule regarding the online availability of the required online contract documents (including the formatting and linking requirements for these documents, the requirements associated with the use of special terms in these documents, and the ability to retain these documents permanently) is generally required in order to rely on the proposed rule to meet prospectus delivery obligations under section 5(b)(2) of the Securities Act.
We recognize, however, that there may be times when, due to events beyond a person's control, the person may temporarily not be in compliance with the proposed rule's conditions regarding the availability of the required online contract documents.
This provision provides that the conditions regarding the availability of the required online contract documents will be deemed to be met, even if the required online contract documents are temporarily unavailable, provided that the person has reasonable procedures in place to ensure that those materials are available in the required manner. A person relying on the proposed rule to satisfy prospectus delivery obligations would be required to take prompt action to ensure that those materials become available in the manner required as soon as practicable following the earlier of the time when the person knows, or reasonably should have known, that the documents were not available in the manner required.
We request comment generally on the conditions in the proposed rule regarding the availability of the required online contract documents, and specifically on the following issues:
• Should we require the online posting of the required online contract documents in the manner that the proposed rule specifies? Should we require that the required online contract documents be available on the insurance company's website as opposed to a third-party website? Should the website include an archive of older versions of these documents (not just the current versions)? If so, what information should be in the archive, and how long should such materials be required to be archived online?
• Should we require, as proposed, that persons accessing this website be able to permanently retain, through downloading or otherwise, free of charge, an electronic version of such documents? Should we require that downloaded documents retain links that enable a user to move readily between related passages of multiple documents? Would these requirements pose any technological, financial, or other challenges for persons relying on the proposed rule?
• Does the proposed 90-day timeframe for the availability of online information appropriately balance the costs of maintaining information online with investors' interests in having the flexibility to access this online information after receiving the summary prospectus? Would there be operational efficiencies for certain registrants in having the timeframe be the same under the variable contract summary prospectus framework and the mutual fund summary prospectus framework? How long do registrants typically maintain information online that is required under the mutual fund summary prospectus rules? As a matter of practice, is information generally maintained for a full year from the date of the summary prospectus?
• Should we provide additional guidance regarding what might constitute a “human-readable” format for providing the required online contract documents, as well as a “convenient” format for both reading these documents online and printing them on paper?
• Although the proposed rule specifies that the materials posted online must be in
• Are the proposed linking requirements appropriate and useful? Will these requirements help investors to navigate effectively within and between these documents? If not, why not? Are there other ways we can improve the usability of these documents? What are some options for enabling the linking requirements? Are the proposed linking requirements sufficiently technology-neutral and flexible enough to accommodate future technological developments?
• Should persons accessing the summary prospectus be able to view the definition of special terms upon command? Is the term “special terms” sufficiently clear, and is the proposed requirement that the document permit a person to “view the definition of each special term . . . upon command” sufficiently clear? Are the examples in the proposed rule text of what it means to view a term upon command (
• Should we require both the initial summary prospectus and the updating summary prospectus to define special terms? Should the updating summary prospectus, for example, be exempt from this requirement given that such documents are likely to be relatively brief and may only include a few defined terms? Are there other considerations that would create operational complications to requiring the updating summary prospectus to define special terms, such as any burden associated with updating definitions from year to year?
• Should we require registrants to electronically format the summary prospectus to allow investors to move directly back and forth between each defined term and the corresponding entry in a “glossary” section, if any? Should we extend this requirement to the contract statutory prospectus, or other required online contract documents? Is this functionality appropriate and useful? Is there a reason we should permit this capability, but not require it? What are some technology options that would enable investors to move directly back and forth between each term and the glossary?
• How can we encourage insurers to make fuller use of innovative technology to enable more interactive, user-friendly summary prospectus disclosure, while still creating a short, easy-to-read document that includes the proposed content? Are there potential tools that we should encourage or require insurers to use in order to make their disclosures more interactive and understandable? Should the proposed rule incorporate any additional requirements for technological tools to promote further investor understanding? For example, should we require that the required online contract documents be accompanied with any other technological tools (
• Should we mandate that the required online contract documents be available in formats that are compatible with mobile devices such as smartphones and tablets, or that are optimized for use with these types of technology platforms? Is the language of the proposed rule broad enough to contemplate current and future technology platforms? Should we incorporate any special provisions in the proposed rule, or provide guidance, regarding design features that could promote investor understanding of information that investors view on smartphones and tablets—for example, placement and prominence of certain disclosure (
• Does the proposed rule appropriately provide a safe harbor to address the possibility of inadvertent technological problems? Should persons relying on the proposed rule who have technological issues that prevent them from complying with the online posting requirements of the rule for a period of time be required to disclose on the website that the information was not available for a time in the manner required and explain the reasons for the failure to comply? If not, why not?
• Are those aspects of the proposed rule that mirror the approaches taken in the rule governing the use of mutual fund summary prospectuses (
• How else could we modify the proposed summary prospectus regime to take greater advantage of modern technology to modernize current disclosure practices for variable contracts? For example, should insurers consider employing technology to require a retail investor to scroll through the entirety of the summary prospectus before entering the next stage in the sales process, accessing a different part of the insurer's website to obtain more information, or checking a box to submit the application to purchase a variable contract? Are there other ways that technology could be used to encourage investors to read the summary prospectus?
• Does the proposal sufficiently encourage electronic design and delivery? Are there other ways we can modify the requirements to make clear that paper-based delivery is not the only permissible or desired delivery format?
• Are there other requirements that we should consider for insurers that are offering variable contracts to retail investors? Should we require that certain disclosures be presented in a manner reasonably calculated to draw retail investor attention to it? Are there other ways to ensure that retail investors receive the information they need to clearly understand the features, costs and risks of the variable contract they are considering?
Under the proposed rule, an investor who receives a contract summary prospectus and who would also like to review the required online contract documents would be able to choose whether to review these documents online or to receive that information directly, in paper or electronic format as requested by the investor. Accordingly, the proposed rule would require a registrant (or financial intermediary distributing the contract) to send a paper or electronic copy of the required online contract documents to any person requesting such a copy.
Collectively, these requirements are intended to ensure that an investor has prompt access to the required information in a format that he or she prefers. The three-business-day time period for sending the required online contract documents mirrors the parallel provision of the mutual fund summary prospectus rule.
Under the proposed approach, investors who prefer paper copies of prospectuses but do not have ready access to the internet (or the ability to print out the statutory prospectus that is made available online) would not be able to elect in advance to receive paper copies of all future statutory prospectuses unless a registrant chose to give investors that option. Assuming no such accommodation, investors would need to follow the summary prospectus legend's instruction on how to request paper delivery each time a summary prospectus is available. Those that do not take the additional step of requesting paper delivery would not receive the statutory prospectus in their preferred format. While we recognize that this could provide a challenge for these investors, we nonetheless believe that the proposed approach appropriately balances the interests of the number of variable contract investors whom we believe would benefit from the convenience of online documents against the number of those whom we believe prefer paper.
In addition to the requirement to provide certain documents upon request in paper or electronically, the proposed rule also requires that a contract summary prospectus must be given greater prominence than any materials that accompany the summary prospectus.
The proposed rule would also require any website address or cross-reference that is included in an electronic version of the summary prospectus (
The failure to comply with each of these additional requirements would not be a condition of reliance on the rule, in order to provide greater certainty to market participants who seek to rely on the rule. For example, market participants could be concerned that the three-business-day requirement could be violated on account of weather issues or other forces outside of the control of a person seeking to rely on the rule. Similarly, market participants could be concerned if compliance with the greater prominence requirement were a condition to rely on the proposed rule, because whether one is in compliance with this requirement could entail a certain degree of subjectivity.
We request comment generally on the requirements we discuss in this section, and specifically on the following issues:
• Should persons relying on the proposed rule be required to send the required online contract documents to any person requesting such documents within three business days after receiving such a request? Would a different period be appropriate? Should compliance with this requirement be a condition to reliance on the proposed rule? If not, why not?
• Does the proposed rule effectively promote investors' ability to request paper copies of the required online contract documents? Are there any changes to the proposed rule that we should consider to make the process for requesting paper copies of such documents more convenient for investors? Should we require registrants to make available to investors a way to opt into the automatic annual delivery of future statutory prospectuses in a paper format without having to specifically request the documents each year? What would be the operational challenges of this approach to registrants? Should we allow registrants to give investors the option of automatic delivery of future statutory prospectuses in paper?
• Should the rule require that the summary prospectus be given greater prominence that any materials that accompany the summary prospectus? If not, why not? Does this requirement pose any challenges to registrants? How might a summary prospectus be given greater prominence than any materials that accompany the summary prospectus when being delivered or made available electronically?
• Should compliance with any or all of the proposed requirements discussed in this
• The proposed rule would require any website address or cross-reference that is included in an electronic version of the summary prospectus (
The proposed rule would permit a registrant to incorporate by reference into the summary prospectus information contained in the contract statutory prospectus and SAI, subject to certain conditions.
Information could be incorporated by reference into the summary prospectus only by reference to the specific document that contains the information, and not by reference to another document that incorporates the information by reference.
The proposed rule would permit incorporation by reference only if the registrant satisfies the rule's conditions that prescribe the means by which the required online contract documents must be made available to investors.
The conditions on the availability of information that is incorporated by reference into the contract summary prospectus, and on identifying the information that is incorporated by reference, are intended to facilitate access to this information. Parallel conditions exist in the rule governing mutual fund summary prospectuses. Based on our experience, we believe that investors have found this approach to be useful. Therefore, we are proposing similar conditions for incorporation by reference for variable contract summary prospectuses.
A registrant that fails to comply with any of the above conditions is not permitted to incorporate information by reference into its summary prospectus. A registrant that does comply with these conditions, however, including the conditions for providing the documents that include the incorporated information online, would not also be required to send or give the incorporated information to investors together with the summary prospectus.
Rule 159 under the Securities Act provides that any information “conveyed” to a purchaser after the time of sale will not be taken into account, for purposes of determining whether a prospectus or oral statement included an untrue statement of material fact at the time of sale for purposes of sections 12(a)(2) and 17(a)(2) of the Act.
Under section 12(a)(2) of the Securities Act, sellers have liability to purchasers for offers or sales by means of a prospectus or oral communication that includes an untrue statement of material fact or omits to state a material fact that makes the statements made, based on the circumstances under which they were made, not misleading. Section 17(a)(2) of the Securities Act is a general antifraud provision, which makes it unlawful for any person in the offer and sale of a security to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
We request comment generally on the proposal to permit incorporation by reference into the summary prospectus and specifically on the following issues:
• Should we permit the contract statutory prospectus, SAI, and shareholder reports to be incorporated by reference into the summary prospectus? Are there special considerations in the case of variable contracts that warrant different incorporation by reference provisions than those under rule 498? For example, is there any other information we should permit registrants to incorporate by reference into the proposed contract summary prospectuses? Should we permit a registrant to incorporate by reference any information that is required to be included in the summary prospectuses? If so, should this approach vary based on the type of summary prospectus (initial summary prospectus versus updating summary prospectus)?
• Should we require, as proposed, that materials incorporated by reference into the summary prospectuses be available online? Are there additional or different conditions we should impose on the ability to incorporate by reference into the summary prospectus?
• The proposed rule would provide that, for purposes of rule 159, information is conveyed to a person not later than the time the person receives a summary prospectus, if that information is incorporated by reference into the summary prospectus in accordance with the proposed rule's conditions. Is this proposed provision, which mirrors the approach taken in the rule governing mutual fund summary prospectuses, also appropriate for variable contracts? Are there differences between mutual funds and variable contracts that warrant an alternative approach? If so, what modifications should be considered? Should the proposed provision apply to both types of summary prospectus (initial and updating)? Are there any modifications that would be appropriate depending on the type of summary prospectus?
We are proposing to require that registrants file a preliminary form of any contract summary prospectus (initial or updating summary prospectus) that the registrant intends to use on or after the effective date of the registration statement as an exhibit to the registration statement (“preliminary summary prospectus”).
We believe that it is important that Commission staff have the opportunity to review a variable contract's summary prospectus for compliance with the proposed rule and the relevant form requirements prior to its first use. However, we note that this approach differs from the approach regarding mutual fund summary prospectuses. The Commission elected not to require the filing of a mutual fund summary prospectus prior to first use because the content of the summary prospectus would be essentially identical to the content of the summary section of the statutory prospectus, which is filed prior to its first use.
In contrast, the proposed rule does not require the variable contract statutory prospectus to contain a stand-alone summary section from which a summary prospectus is created. In addition, while some variable contract summary prospectus disclosures would be identical to those in the statutory prospectus,
The initial summary prospectus and updating summary prospectus would also present certain information in a different order than might appear in the contract statutory prospectus.
In addition to requiring registrants to file a preliminary summary prospectus with the Commission prior to use, we are also proposing amendments to rule 497 under the Securities Act that would require a registrant to file a definitive form of summary prospectus after it is first used.
Section 10(b) of the Securities Act provides that a prospectus permitted under that section must, unless Commission rules provide otherwise, be filed as part of the registration statement but would not be deemed a part of the registration statement for purposes of section 11 of the Securities Act.
Some commenters in connection with the mutual fund summary prospectus proposal expressed concerns that the mutual fund summary prospectus would not be subject to section 11 liability, suggesting that this would result in a diminution of funds' liability under that section.
For similar reasons, it is our view that while a variable contract summary prospectus under the proposed rule would not itself be deemed a part of the registration statement for purposes of section 11, the information in the summary prospectus will generally be subject to liability under section 11. While proposed rule 498A would not have a comparable provision to that in rule 498 requiring that the information in the summary prospectus must be the same as in the statutory prospectus, we believe that the substance of the information itself would be the same, even though the language in both documents relating to the information may not be identical. For example, the language of the initial summary prospectus could differ from the language used in the statutory prospectus because proposed rule 498A requires that the initial summary prospectus may only describe a single contract that the registrant currently offers for sale, whereas we understand that certain contract statutory prospectuses include disclosure about contract features and options that the registrant may no longer offer to new investors. Nevertheless, the substance of the information for any currently-offered features and options would be the same.
The updating summary prospectus could include information that does not appear in the related contract statutory prospectus if the updating summary prospectus discloses changes to the contract that the issuer has made after the most recent updating summary prospectus or statutory prospectus was sent or given to investors.
For example, if a particular fee has changed from x% to y%, while the disclosure of the current fee rate (y%) would appear in both the updating summary prospectus and the related statutory prospectus, the earlier fee rate (x%) and the fact that the fee was changed would likely not be disclosed in the statutory prospectus.
The summary prospectus would be subject to liability under section 12(a)(2) of the Securities Act
We request comment generally on the proposed filing requirements for the variable contract summary prospectus and specifically on the following issues:
• Should we require filing of the preliminary form of any contract summary prospectuses? If not, what alternatives should we consider to facilitate staff review of the summary prospectus disclosures, and would investors be adequately protected if staff did not have the opportunity to review a summary prospectus pre-use? Should we only require the initial summary prospectus (or updating summary prospectus) to be filed prior to first use?
• Should we require post-use filing of the summary prospectus? Should only the initial summary prospectus (or updating summary prospectus) be filed after use?
• If the updating summary prospectus includes a description of a contract change that is not similarly described in the related
• Should the summary prospectus be subject to the stop order and other administrative provisions of section 8 of the Securities Act? Why or why not?
• Should the contract summary prospectus be deemed a part of the registration statement for purposes of section 11 of the Securities Act? Why or why not?
Proposed rule 498A includes a section of definitions for certain terms used throughout the rule.
We request comment generally on the definitions used in the proposed rule and specifically on the following issues:
• Should we include any additional, or exclude any proposed, defined terms?
• Should we modify the definitions of any defined terms? For example, does the proposed definition of “class” adequately distinguish among classes of a variable contract?
The Commission has interpreted section 5(b)(2) of the Securities Act to require the delivery of a portfolio company prospectus to any variable contract investor that allocates his or her purchase payments to that portfolio company, including on any exchange of contract value from one portfolio company to another.
Because the identity of investors is known by the insurance company and not the underlying portfolio companies, delivery of prospectuses for underlying portfolio companies is typically effected by the insurance company rather than the portfolio company.
The proposed rule would provide an optional method for satisfying portfolio company prospectus delivery obligations by making portfolio company summary and statutory prospectuses available online, with certain key information about the portfolio companies provided in the contract's summary prospectus.
As proposed, this option would allow satisfaction of prospectus delivery obligations with respect to a portfolio company, if: (1) An initial summary prospectus is used for each currently offered contract described under the related registration statement;
As discussed above, we are concerned that the volume of disclosure materials variable contract investors currently receive may prevent them from reading the materials or fully understanding these products. While the proposed variable contract summary prospectus framework is intended to provide investors with key information relating to the contract's terms, benefits, and risks in a concise and more reader-friendly format, we are concerned that investors may not read or understand information if the variable contract summary prospectus is accompanied by hundreds of pages of underlying
In addition, each summary prospectus would also include a Key Information Table that would provide certain disclosures about portfolio company risks and investment restrictions.
The vast majority of investors purchase variable contracts from sales persons, as opposed to purchasing directly from insurance companies.
As a condition to relying on the new option, we would require the related variable contract to use an initial summary prospectus for each currently offered contract described under the related registration statement.
As a second condition, a portfolio company that is registered on Form N-1A must use a summary prospectus.
Finally, to rely on the new option, the portfolio company's current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports would be required to be posted online under similar conditions for the posting of variable contract materials:
• The materials are publicly accessible, free of charge, at the website address specified on the cover page or beginning of the summary prospectuses for the variable contract, for the time period specified in proposed rule 498A(h)(1);
• The materials are presented on the website in a format, or formats, that are human-readable and capable of being printed on paper in human-readable format,
• Persons accessing the materials must be able to permanently retain, free of charge, an electronic version of such materials in a format, or formats, that is human-readable and permits persons accessing the materials to move directly back and forth between each section heading in a table of contents and the corresponding section of the document;
• Requested materials must be sent in paper or electronically upon request within three business days after receiving a request;
• The safe harbor specified in paragraph (h)(4) of the proposed rule would be available if the required materials are temporarily unavailable at the specified website.
When a portfolio company supplements or otherwise amends its summary or statutory prospectus between annual updates, the amendment is typically filed with the Commission pursuant to rule 497 under the Securities Act.
As discussed above, the proposed new option for satisfying portfolio company prospectus delivery requirements would require that current portfolio company summary prospectuses and statutory prospectuses be posted online. If a portfolio company amends its prospectus between annual updates, the updated prospectus must be posted online.
The proposed rule would not, however, include any separate requirement to deliver portfolio company prospectus amendments to investors. We believe that requiring delivery of prospectus amendments to investors who had not been delivered the prospectus itself could cause investor confusion. Instead, the proposed legend to the summary prospectus appendix listing all the portfolio companies available under the contract would include a statement that investors should review the prospectuses before making an investment decision and that they may be amended from time to time.
We request comment generally on the proposal to permit a new option for satisfying portfolio company prospectus delivery requirements, and specifically on the following issues (in addition, we are requesting comment on certain parallel provisions of rule 498):
An insurance company may choose to stop offering a variable contract to new investors while continuing to accept additional payments from existing investors. Each additional purchase payment under a variable contract is considered a “sale” under section 5 of the Securities Act requiring delivery of a current prospectus, and variable contract issuers generally maintain current prospectuses for their products through the filing of annual post-effective amendments to the registration statements.
As the number of contracts outstanding declines over time, the proportion of fixed costs per contract and other burdens associated with maintaining a current registration statement and mailing prospectuses increase over a diminishing asset base. Unlike other types of registered investment companies that can liquidate
Beginning in 1977, the staff of the Division of Investment Management issued a series of no-action letters stating that the staff would not recommend enforcement action if issuers did not update the variable contract registration statement and deliver updated prospectuses to existing investors, so long as certain conditions were met, including sending alternative disclosures to investors (each, a “Staff Letter,” and collectively, the “Staff Letters”).
The staff declined to extend its no-action position to variable annuities funded by managed separate accounts.
The Staff Letters generally were limited to Securities Act registration statements for contracts that are no longer offered to new purchasers and that have fewer than 5,000 investors (or participants in the case of group contracts).
• There are no material changes made to the contract;
• Investors are provided the following disclosures:
○ The portfolio companies' current prospectuses (or summary prospectuses) and any updates thereto, annual and semi-annual reports, proxy materials, and any other periodic reports or other shareholder materials for the portfolio companies;
○ Confirmations of transactions in accordance with rule 10b-10 under the Exchange Act;
○ Within 120 days after the close of the fiscal year, updated audited financial statements of the registrant, and in the case of variable life insurance contracts, the depositor's updated audited financial statements;
○ At least once a year, a statement of the number of units and values in each investor's account.
• The registrant files periodic reports with the Commission pursuant to section 30 of the Investment Company Act (
• New contracts are not offered to the public, and the registrant does not contemplate such an offering in the future.
As of the end of calendar year 2017, we understand that more than half of variable contract Securities Act registration statements may provide the alternative disclosures that the Staff Letters describe:
Providing the alternative disclosures described in the Staff Letters may have the effect of potentially limiting issuers' liability under certain provisions of the federal securities laws requiring a registration statement or prospectus to contain whatever information may be necessary or appropriate to avoid material misstatements or omissions.
In proposing the new variable contract summary prospectus disclosure framework, we acknowledge the industry practice of providing alternative disclosures (which are
If the proposed summary prospectus framework is adopted, the Commission would take the position that if an issuer of an existing contract that provides alternative disclosures does not file post-effective amendments to update a variable contract registration statement and does not provide updated prospectuses to existing investors, this would not provide a basis for enforcement action so long as investors receive the alternative disclosures. The Commission would take this position in recognition of the industry's practice that has developed in light of the Staff Letters, the costs and burdens that issuers of contracts operating in accordance with the Staff Letters currently incur, and the costs and burdens that issuers would incur under the proposed summary prospectus framework. Therefore, under the Commission's position, the Commission would permit contracts operating in the manner that the Staff Letters describe as of the effective date of any final summary prospectus rules (hereinafter referred to as the “Alternative Disclosure Contracts”) to continue to operate in such manner.
We note, however, that if a material change is made with respect to an Alternative Disclosure Contract, the registration statement for that contract would be required to be updated, and the contract would no longer be permitted to operate as an Alternative Disclosure Contract.
As a general matter, we believe that all variable contract investors should receive the same information. In this regard, our position with respect to Alternative Disclosure Contracts would be limited to the current universe of Alternative Disclosure Contracts, which will diminish in number over time. Our position is also based on our belief that the proposed summary prospectus framework could give investors more pertinent information to monitor their contract investment than the alternative disclosures. For example, the updating summary prospectus would include a brief description of certain changes to the contract that occurred during the previous year, as well as certain key information about the contract. We believe that investors could find this document to be more useful and user-friendly than the separate account financial statements that investors receive under the alternative disclosures.
Additionally, under the proposed summary prospectus regime, investors would receive key summary information about the portfolio companies (with the portfolio company prospectuses available online) instead of receiving the portfolio company prospectuses as they do currently.
We solicit comment on the following issues regarding the Alternative Disclosure Contracts:
• Would adoption of a summary prospectus framework and related form amendments effectively relieve some of the current burdens and costs on variable contract issuers of updating registration statements, and delivering updated prospectuses, such that the Commission's position on Alternative Disclosure Contracts would not be necessary? If not, to what extent would the burdens and costs of maintaining an updated registration statement and compliance with the proposed summary prospectus regime (to the extent that a registrant chooses to rely on proposed rule 498A) exceed that of providing the disclosure related to the Alternative Disclosure Contracts?
• Does the proposed summary prospectus regime give investors more pertinent information to use to help them make informed investment decisions, compared to the information investors holding Alternative Disclosure Contracts would receive?
• Are fees and charges for variable contracts currently established based on an expectation that the insurer will be able to provide alternative disclosures at some point, such as if a product launch is unsuccessful or if the insurer stops selling new contracts so that the number of investors diminishes over time? Would the Commission's position on Alternative Disclosure Contracts have other effects relating to new variable contracts? For example, would it cause insurers to be less willing to introduce new products?
• Would the Commission's position on Alternative Disclosure Contracts result in any variable contract design changes? Would the length of registration statements or prospectuses increase or decrease? If so, why? What would be the effect, if any, on contract disclosure?
• Under the Commission's position on Alternative Disclosure Contracts, which contracts should be able to provide alternative disclosures? For example, should the Commission's position be limited to Alternative Disclosure (
• What percentage of insurers currently delivers the alternative disclosures for at least one contract? What percentage of the variable contract business (in terms of number of contact owners and aggregate contract value) provides alternative disclosures? What are the size ranges of registration statements for those contracts that deliver alternative disclosures (both in terms of number of investors and in terms of aggregate contract value)?
• What number of investors, or aggregate contract value, would make providing alternative disclosures more cost-effective than annually updating a registration statement under the current variable contract prospectus delivery regime?
• What are the cost savings, if any, associated with providing alternative disclosures? What are the sources of the cost savings?
• Which current items of variable annuity and variable life insurance registration
• How frequently do material changes to the variable contract occur that would require an issuer that is delivering alternative disclosures to update its registration statement? What specific types of contract changes are considered to be material? What types of contract changes are considered to be non-material, such that the issuer would not update its registration statement in response to this condition? How are investors notified of any non-material changes? Are there types of contract changes where it is difficult to determine whether an issuer should update its registration statement? If so, please identify those types of changes.
• Do insurers currently host on their websites the alternative disclosure documents that are delivered to investors? Why or why not?
• Do investors that receive alternative disclosures contact their insurance company looking for information at a greater frequency than investors who receive a prospectus annually? What information are these investors looking for?
• Some of the circumstances that the Staff Letters identify vary depending on the no-action letter.
We request comment generally on how investors and financial professionals view the alternative disclosures, and specifically on the following issues:
• Investors that have variable contracts with registrants that provide alternative disclosures would receive different disclosure documents, and hence different sets of information, than they would receive under the proposed summary prospectus regime. Which approach do you believe is most beneficial for investors and why?
• To the extent that there are no material changes to a variable contract, what information about the contract—if any—do investors need to receive on an ongoing basis to monitor their investments in the contract and understand how the contract operates? If there are no material changes, would it be useful to investors to receive disclosure repeating key information of the contract each year, and/or to receive summary information about the portfolio companies each year?
• Are investors able to effectively understand financial statements that are provided as alternative disclosures, and are they useful in helping investors monitor their investments?
• An updated contract statutory prospectus, which investors typically receive annually, describes the variable contract but does not include insurance company or separate account financial statements. Investors holding contracts whose issuers provide alternative disclosures, however, receive the separate account financial statements annually, and in some cases the insurance company's financials. Assuming there are no changes to the contract in a given year, do investors have a preference as to which information they would rather receive? Is there other information that investors would like to receive?
If the Commission takes the position described in the prior subsection with respect to Alternative Disclosure Contracts, it would permit continued operation of Alternative Disclosure Contracts (
We are also considering two alternative approaches for discontinued contracts. Each of these alternative approaches would involve modifying, and codifying by rule, the disclosure framework the Staff Letters identify. Each of these alternative approaches could be implemented in two different ways:
•
•
We request comment on the Commission position described above, as well as the proposed approaches described below. We also request comment on whether an alternative approach should be implemented using method one or method two.
• Investors would receive an annual notice that includes information that is comparable to that which would be provided in an updating summary prospectus. Specifically, this notice would include: (1) The Key Information Table that would appear in an updating summary prospectus; (2) a brief description of any material
• The financial statements provided to investors under the alternative disclosures in the Staff Letters would be filed with the Commission, posted to the insurance company's website, and delivered to an investor upon request;
• Registrants would be permitted to use the optional method to satisfy portfolio company prospectus delivery requirements as provided under proposed rule 498A; and
• Investors would continue to receive portfolio company shareholder reports and proxy materials.
Issuers would be able to rely on Approach 1 if the contract is no longer offered to new purchasers, there are under 5,000 investors, and there have been no material changes during the period since the most recent update. Approach 1 reflects our belief that the proposed summary prospectus framework could give investors more pertinent information to use to help them make informed investment decisions, compared to the information
• Permit the registrant to rely on a modified version of rule 498A that would:
○ Require that investors receive an annual notice that includes information that is comparable to that which would be provided in an updating summary prospectus, as described in Approach 1;
○ Require that the contract statutory prospectus and SAI be made available online and delivered to an investor upon request; and
○ Permit registrants to use the proposed rule's optional method to satisfy portfolio company prospectus delivery requirements;
• Require the filing of separate account (including accumulation unit values for variable annuities) and depositor financials with the Commission, permit issuers to incorporate these documents by reference into the registration statement (even if they are filed after the effective date of the registration statement),
• Require that investors receive portfolio company shareholder reports and proxy materials.
As with Approach 1, issuers would be able to rely on Approach 2 if the contract is no longer offered to new purchasers, there are under 5,000 investors, and there are no material changes to the contract. Also, like Approach 1, Approach 2 reflects our belief that the proposed summary prospectus framework could give investors more pertinent information to use to help them make informed investment decisions, compared to the alternative disclosures received by investors under the circumstances that the Staff Letters identify.
However, Approach 2 would be more similar to the proposed summary prospectus regime in certain respects, in terms of the requirements for the information that is (1) delivered to all investors (with the annual notice under Approach 2 substituting for the summary prospectus), (2) made available online, and (3) delivered to those investors who so request.
Approach 2 differs from Approach 1 chiefly in that Approach 2 would require a registrant to maintain a current registration statement and make the statutory prospectus and SAI available online. However, under Approach 2, the registrant would only update the registration statement when there are material changes to the offering, since updated financial statements would be permitted to be forward incorporated by reference into the registration statement.
Since Approach 2 would entail the maintenance of a current registration statement, the liability provisions available under the federal securities laws would apply to Approach 2 to the same extent as under the current variable contract prospectus delivery regime
The following Table 4 summarizes the frameworks under the Staff Letters, Approaches 1 and 2, and the proposed summary prospectus framework under proposed rule 498A for certain documents to either be: (1) Delivered to all investors; (2) made available online; or (3) delivered to those investors who so request.
We request comments on the framework for discontinued contracts:
Approaches 1 and 2 separately would require financial statements to be filed with the Commission, posted to the insurance company's website, and delivered to an investor upon request.
• Should the Commission codify either Approach 1 or Approach 2? Why or why not? If so, which approach should the Commission codify? Would either of Approach 1 or Approach 2 facilitate the disclosure of useful information to investors in a better way than the information they would receive under the proposed summary prospectus regime? What are the benefits and drawbacks for investors of permitting Approach 1 or Approach 2, instead of requiring issuers to update the registration statement consistent with the proposed summary prospectus regime?
• Would either of Approach 1 or Approach 2 provide more useful information to investors than the information investors holding Alternative Disclosure Contracts would receive? If so, how?
• What number of investors or aggregate contract value would make reliance on Approach 1 or Approach 2 more cost-effective than annually updating a registration statement, both under current disclosure requirements and under the proposed summary prospectus regime?
• What are the expected cost savings, if any, associated with reliance on Approach 1 or Approach 2 as compared to: (1) The current disclosure regime; (2) the disclosures provided with respect to Alternative Disclosure Contracts; and (3) the proposed summary prospectus regime? What are the anticipated sources of the cost savings? Are there challenges that issuers would face in preparing and providing the information to investors that each alternative would require, and if so, what would these challenges (and any associated costs) be? Are there changes to the alternatives that we should consider in order to address those challenges? If so, what changes, and how would those changes affect investors' ability to make informed decisions?
• Under Approach 1 and Approach 2, investors would annually receive a notice that is substantially similar to the proposed updating summary prospectus. Should this notice be modified in any way? If so, how?
• Under Approach 1 and Approach 2, should the conditions incorporate a more precise definition of material changes that would require a registration statement to be updated? If so, what should the definition of material changes be? For changes to a registration statement that are not a material change to the contract, should we include a condition that the changes be posted on the insurance company's website and filed with the Commission? If so, what would be the costs associated with this condition? If not, why not?
• Under Approach 1, should the most-recently-updated prospectus and registration statement be made available to investors either by request or online? If not, why not? If we did require these documents to be made available online or by request, what kind of legend should appear on the cover page of these documents to make it clear to investors that these documents have not been updated, and that the contract has undergone no material changes, since the date of the document? Is there other information we should also require to be made available online (such as current investment restrictions associated with optional benefits, or a current Fee Table that shows both maximum and current contract fees)?
• Under Approach 1, certain materials would be required to be made available online. Should the web posting requirements be the same as those that proposed rule 498A would prescribe? Are there modifications that should be considered with respect to contracts relying on Approach 1? If so, what are those modifications and why are they necessary?
• Should a condition of Approach 1 be that audited financial statements of the registrant (and in the case of variable life insurance contracts, the depositor's audited financial statements) be filed with the Commission? If not, why not? What would be the additional costs associated with this condition?
• The approach in Approach 2, where a registration statement can refer to financial information that may be filed in the future avoiding the need to annually file a post-effective amendment to a registration statement, is permitted by other SEC registration forms, such as Form S-3. However, Securities Act rules still require that an updated registration statement be filed with the Commission once every three years.
• Should Approach 2 be permitted for all registration statements even if the contract is still offered to new purchasers, has over 5,000 investors, or may have had material changes since the most recent prospectus update? What would be the benefits to registrants and investors of permitting forward incorporation by reference, as under Approach 2, for all variable contract registration statements? Or, would this result in changes to variable contract disclosure practices that would impede investors' ability to understand their variable contracts in any way?
• How do Approach 1 and Approach 2 compare to the requirement to update a registration statement, and to the circumstances that the Staff Letters identify, with respect to the liability provisions available to investors under the federal securities laws? Are there changes to Approach 1 and Approach 2 that should be considered to further protect investors?
• Approaches 1 and 2 contemplate that the codified relief would be available only to Form N-4 and Form N-6 registrants (as the conditions associated with portfolio company disclosure would be applicable only to Form N-4 and Form N-6 registrants, and not also Form N-3 registrants).
• Should the Commission's position on Alternative Disclosure Contracts or Approaches 1 or 2 be extended to annuity contracts registered with the Commission under the Securities Act only and filed on Forms S-1 and S-3? If yes, how should the conditions be modified to accommodate these contracts?
• If the Commission were to codify Approach 1 or Approach 2, should issuers that are operating in the manner described in the Staff Letters, as of the effective date of the adoption of final variable contract summary prospectus rules, be permitted to continue operating in this manner? Or should the Commission instead require all issuers—including those that are operating in the manner described in the Staff Letters as of the effective date of the adoption of final variable contract summary prospectus rules—to satisfy the conditions under Approach 1 or Approach 2? If commenters believe that the latter approach is appropriate, should Approach 1 or Approach 2 be available to only those contracts that are no longer offered to new purchasers, make no material changes, for contracts with fewer than a certain number of investors, or for some other group of contracts? Why?
We are proposing amendments to Forms N-3, N-4, and N-6 to update and enhance the disclosures to investors in variable contracts, and to implement the proposed summary prospectus framework. These proposed amendments include new disclosure requirements to reflect the evolution of variable contract features, including, in particular, the prevalence of optional benefits that insurers offer under these contracts. In addition, we are proposing amendments to provide greater consistency among the registration forms for variable contracts. Form N-6, which was adopted in 2002 and is the newest variable contract form, served as a model for many of the proposed revisions to Forms N-3 and N-4. Accordingly, we are proposing fewer changes to Form N-6 than the other forms.
Certain investors who are considering variable annuities may also be considering variable life insurance (and vice versa). We believe a consistent presentation could reduce investor confusion and promote investor understanding through common disclosure across types of variable products on elements that we consider useful in explaining variable contracts' features and risks. Also, we believe that more uniformity of disclosures across variable contract types may make it easier for investors to compare similar products. Similarly, we believe that increasing consistency of disclosure requirements among registration forms could increase efficiencies among sponsors of variable contracts that register on multiple of these registration form types, and other market participants.
We are proposing amendments to the General Instructions of Forms N-3, N-4, and N-6 regarding the preparation and filing of registration statements. The proposed General Instructions would, like the General Instructions in current Form N-6,
Proposed General Instruction C.3 would provide substantive requirements for the preparation of the registration statement, including instructions relating to the organization, presentation, and prospectuses permitted to be included in a registration statement. The instruction would parallel Instruction C.3 of current Form N-6 in substance, except as described below.
Proposed General Instruction C.3.(a) would require that the disclosures in response to Item 2, Item 3, and Item 4 of the registration forms appear in numerical order at the front of the prospectus, and not be preceded by anything other than a cover page (Item 1), a glossary, or a table of contents. We believe that these disclosures should appear at the beginning of the prospectus because they contain the most salient information about a variable contract's key features, costs, and risks.
Proposed General Instruction C.3.(b) would provide that, except in response to Items 2 and 3, a registrant would be
Proposed General Instruction C.3.(c) would encourage registrants to use, as appropriate, question-and-answer presentations, tables, side-by-side comparisons, captions, bullet points, numeric examples, illustrations or similar presentation methods.
Proposed General Instruction C.3.(d) includes in substance the requirements of Item 2 (Definitions) of current Forms N-3 and N-4. The changes conform this instruction to the language in the parallel current General Instruction of Form N-6, which we believe will improve readability and consistency across form types.
Proposed General Instruction C.3.(e) would provide new guidance in each of the forms addressing when a registrant may describe multiple contracts in a single prospectus, and include multiple prospectuses in a single registration statement. First, proposed General Instruction C.3.(e)(i) would provide that registrants may describe multiple contracts in a single prospectus when the contracts are “essentially identical.” Whether the contracts are essentially identical would depend on the facts and circumstances. The proposed instruction includes examples to provide guidance on this point.
While proposed paragraph (a) of General Instruction C.3 requires registrants to disclose the information required by Items 2, 3, and 4 in numerical order at the front of the prospectus and generally not to precede the items with other information, proposed General Instruction C.3.(e)(iii) would provide that, as a general matter, registrants providing disclosure in a single prospectus for more than one contract, or for contracts sold in both the group and individual markets, may depart from this requirement as necessary to present the required information clearly and effectively (although the order of information required by each item must remain the same). The proposed instruction would include examples to provide guidance on this point.
Proposed paragraph (h) of General Instruction C.3, which would require variable contracts to use the Inline XBRL format for the submission of certain required disclosures in the variable contract statutory prospectus,
Proposed paragraph (i) of General Instruction C.3 would require any website address or cross-reference that is included in an electronic version of the statutory prospectus (
We request comment generally on the proposed amendments to the General Instructions of Forms N-3, N-4, and N-6 and specifically on the following issues:
• Would the proposed instructions provide clear guidance to registrants when preparing or amending a registration statement? Should any of the proposed instructions be modified or not be included? For example, proposed paragraph (i) of General Instruction C.3 would require any website address or cross-reference that is included in an electronic version of the statutory prospectus to be an active hyperlink. Should we broaden that requirement to also apply to the SAI and Part C of the registration statement? Would broadening the requirement in this manner result in any synergies or redundancies with the requirements of proposed rule 498A(h)(2)(iii)?
• Are the proposed definitions listed as Part A of the General Instructions clear, or should they be modified? Are there additional definitions that we should include in proposed Part A of the General Instructions?
• Are the proposed instructions in Part B of the General Instructions relating to the filing and use of the registration forms clear, or should they be modified? For example, proposed General Instruction B.2.(b) to Forms N-3, N-4, and N-6 provides that for registration statements or amendments filed only under the Investment Company Act, registrants need not respond to certain items of the forms. Those registration statements generally relate to contracts offered to institutional investors who are seeking to provide coverage for their key personnel, and
• Would the proposed instructions in Part C of the General Instructions result in clearer and more concise disclosure to investors? Are there other instructions that we should include to encourage registrants to use plain English principles or otherwise promote clear and concise disclosure?
• Would other requirements improve the utility and accessibility of the statutory prospectus for retail investors? Are there any areas in the document where requiring the use of a specific check-the-box approach, bullet points, tables, charts, graphs or other graphics or text features would be helpful in presenting any of the information or making it more engaging to retail investors? Should we include requirements for font size, margins and paper size? Should we restrict certain types or sizes of font, color choices or the use of footnotes?
• Is the requirement of proposed General Instruction C.3.(a) that Items 2, 3, and 4 appear in numerical order at the front of the prospectus appropriate? Should we specify that any other items appear at the front of the prospectus? Should all of the portions of the statutory prospectus that are also summary prospectus disclosures be segregated and placed at the beginning of the statutory prospectus to aid in the effective presentation of information for investors in contracts whose issuers choose not to rely on proposed rule 498A?
• Are the instructions in proposed General Instruction C.3.(e) on when registrants may describe multiple contracts in a single prospectus, and include multiple prospectuses in a single registration statement, clear and appropriate? Is it clear when contracts are “essentially identical,” or would additional clarification (either in the form text, or provided as Commission guidance) be helpful? Are the examples that the proposed form instructions include useful and appropriate? Are they generally consistent with current industry practice? Should we modify or expand these examples in any way? Would some alternative standard for when a single prospectus may describe multiple contracts, or for when a single registration statement may include multiple prospectuses, be more appropriate than the proposed “essentially identical” standard?
• Should a registrant only be permitted to describe a single contract in a prospectus, and if so, what parameters should dictate what a single contract is? Likewise, should a registrant only be permitted to include one prospectus in a registration statement? What is industry practice in terms of describing multiple contracts in a single prospectus, and combining multiple prospectuses into a single registration statement? What are the benefits and costs of this practice, both to members of the industry as well as to investors?
• Should we, as proposed, permit registrants that are providing disclosure for more than one contract in a single prospectus, or for contracts sold in both the group and individual markets, to depart from the instruction to disclose the information required by Items 2, 3, and 4 in numerical order to present the required information clearly and effectively (provided the order of information required by each item remains the same)? Should this instruction be modified in any way?
• Should the instructions in proposed Part D of the General Instructions regarding the use of incorporation by reference be modified in any way?
Table 5 shows how our proposed amendments would amend the item requirements of Part A of the variable contract registration forms.
We propose
• First, we are proposing that the front cover page include the name of the contract and the class or classes, if any, to which the contract relates to help clarify the specific contract and class or classes covered by the prospectus;
• Second, as with the initial summary prospectus and updating summary prospectus, we are proposing that the front cover page include a statement directing an investor to the
• Third, as with the initial summary prospectus, we are proposing that the front cover page include a legend informing investors about the free look period.
To streamline the front cover page and because similar information would appear in tabular presentation in the prospectus, we are proposing to eliminate the current requirements in Forms N-3 and N-4 that the registrant include on the front cover page the type of separate account and names of the available portfolio companies, respectively.
Additionally, we are proposing that the prospectus back cover page include certain additional information concerning: (1) The availability of the SAI and how to request other information about the contract; (2) whether and from where information is incorporated by reference into the prospectus as permitted by proposed Part D of the Form's General Instructions; and (3) the EDGAR contract identifier for the contract.
We request comment generally on the proposed amendments to the prospectus cover page requirements, and specifically on the following issues:
• Are there additional disclosure topics that should be included in the cover pages of the statutory prospectus?
• As proposed, should a legend that is similar to the disclosure regarding the free look period on the cover page of the initial summary prospectus also appear on the cover page of the statutory prospectus? Why or why not? Should we modify the proposed legend regarding the free look period that would appear on the cover page of the statutory prospectus in any way?
• Should the registration forms require that the registrant include the names of the investment options/portfolio companies on the front cover page?
• Should we require the name of the contract and the class/classes?
We propose to add new Item 2 to the registration forms, which would require registrants to include certain basic and introductory information about the contract and its benefits.
We request comment generally on the proposal to include a new item requiring registrants to include in the prospectus an overview of the contract, and specifically on the following issues:
• Should we require the proposed overview discussion to be included in the statutory prospectus? Are the content requirements for this proposed item appropriate for inclusion in the statutory prospectus?
• Should the disclosure requirements for this item be modified in any way for the statutory prospectus?
We propose to add new Item 3 to the registration forms, which would require a statutory prospectus to include the Key Information Table providing a brief description of key facts about the variable contract.
We request comment generally on the proposal to include the Key Information Table in the prospectus, and specifically on the following issues:
• Should we require the proposed Key Information Table to be included in the statutory prospectus? Are the content requirements for this proposed item appropriate for inclusion in the statutory prospectus?
• Should the Key Information Table in the statutory prospectus differ in any respect from the table in the summary prospectuses? If so, in what respect? Should we eliminate certain line-items? Are there additional disclosure topics that we should require in the Key Information Table that appears in the statutory prospectus?
• Would the Key Information Table disclosure requirements confuse investors if a prospectus were to describe multiple contracts? For example, if a prospectus that describes multiple contracts were to include a single Key Information Table that discloses separate fee information in the “Fees and Expenses” line-items for each contract, would this confuse investors?
• Are there certain disclosure presentations that would be so lengthy, or overly-broad, that they may not be useful to investors? Would it be useful for us to provide additional instructions in the form, about different approaches that registrants could take in presenting any of the required information in the Key Information Table? For example, with respect to fee disclosure in the Key Information Table, should we provide guidance or additional instructions on whether it would be acceptable to present a range of minimum and maximum fees, and lowest and highest annual costs, that includes all of the contracts that the prospectus describes, or instead require registrants to provide separate fee and cost ranges for each contract that the prospectus describes? Alternatively or additionally, should we require disclosure in the Key Information Table reminding investors to review their individual contract for information about the specific fees they will pay in connection with their contract?
• As discussed above, we are proposing a requirement that the Key Information Table include cross-references to the location in the statutory prospectus where the relevant subject matter is described in greater detail.
We propose to amend Item 3 of the current registration forms (which we would re-designate as Item 4) to simplify and update current fee and expense disclosure obligations.
We are proposing to modify the current “Contractowner Transaction Expenses” table in Forms N-3 and N-4 (which we would re-title as “Annual Transaction Expenses” in each form) by removing the current “Surrender Fees” line-item in this table. We believe the current “Deferred Sales Load” line-item in the table would already capture these fees.
We are proposing several changes to the current “Annual Account Fee” and “Annual Expenses” line-items in Form N-3,
In addition, we are proposing to modify the captions for existing line-items, consolidate certain line-items, and add a new line-item for optional benefits in this table in each form.
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We are proposing to amend the disclosures that registrants would provide with respect to the “Total Annual Portfolio Company Operating Expenses” table in Form N-4. First, we are proposing to revise the legend that would precede the table to direct investors to the new appendix required by new Item 18 relating to the portfolio companies available under the contract. As a conforming change, we are proposing to eliminate current Instruction 20 (stating that a registrant may include additional tables showing annual operating expenses separately for each portfolio company immediately following the required table), as this information would duplicate the fee information that would appear in the new appendix.
We also propose to simplify other instructions to the table. We propose to revise current Instruction 17(a) (which we would re-designate as new Instruction 16) to instruct registrants to use the gross expense ratio presented in the fee table of a portfolio company's current prospectus when disclosing the minimum and maximum “Total Annual [Portfolio Company] Operating Expenses.” Current Instruction 17(a) contains instructions for calculating Total Annual Portfolio Company Operating Expenses, which results in a figure that is the same as the gross expense ratio presented in a portfolio company's prospectus fee table. Directing registrants to use the gross expense ratio reflected in a portfolio company's current prospectus would avoid the need to provide detailed instructions in the form regarding how to calculate this figure (as is the case with current Instruction 17(a)).
We also propose revising current Instruction 19 (and renumbering it as Instruction 17) to modify the way that registrants could reflect operating expenses that include expense reimbursement or fee waiver arrangements. Currently, the instruction specifies that such expenses could appear in a footnote to the table. The revised instruction would instead state that these could appear as an additional line-item to the table. We believe that including these disclosures as a separate line-item in the table would provide a clearer presentation for investors than a footnote to the table.
We are proposing to update the requirements for the Example that would appear in the Fee Table in Forms N-3 and N-4 in several respects. First, we propose to revise the legend accompanying the Example to reflect the revised Fee Table headings and to reference the inclusion of optional benefits in the Example's assumptions. We believe the Example should reflect the highest cost that an investor may pay under the contract, inclusive of any available optional benefits. We also propose to increase the value of the assumed investment from $10,000, as required under Item 3 of current Form N-4 (and $1,000, as required under Item 3 of current Form N-3), to $100,000. We believe that $100,000 more closely approximates the current average value of a variable annuity,
We are also proposing to revise the instructions for the Example to clarify that registrants must provide an example for each contract class, consistent with current practice.
In addition, we propose to remove the last sentence of Instruction 21(b) of current Form N-4, which states that in lieu of providing the required example based on maximum portfolio company expenses, a registrant may include separate expense examples based on the expenses of each portfolio company. In our experience, registrants rarely include separate expense examples based on the expense of each portfolio company (likely because to do so would add extensive length to the Example section of the prospectus). Eliminating this option would therefore not only reflect actual practice, but also would be consistent with our goal of streamlining prospectus disclosure.
We also propose to make certain technical corrections to Instructions 21(a) and (b) of current Form N-4, by eliminating references to amortization costs, which do not apply to variable annuity contracts that are structured as UITs.
Because Form N-3 registrants have a single-tier structure, investors do not receive separate prospectuses containing portfolio turnover information for investment options offered under the contract, as is the case for portfolio companies offered under contracts registered on Forms N-4 and N-6. We propose to require disclosure of portfolio turnover for each investment option in Form N-3, as well as a brief statement explaining that portfolio turnover has associated transaction costs, and that a higher portfolio turnover rate may indicate higher transaction cost and higher taxes, which affect the investment option's performance.
In addition to specific instructions associated with each of the tables and the Example(s) that would appear in response to the proposed Item 4 disclosure requirements, we also propose to update the General Instructions associated with this item.
Instruction 1(a) to the Fee Table in current Form N-6 instructs registrants to round all dollar figures to the nearest
We also propose to revise General Instruction 5 of Form N-4 to state that if a fee is calculated based on a benchmark (
As part of our effort to update the Fee Table, we propose to modify current General Instruction 1.(f) to Item 3 of Form N-3 and General Instruction 6 to Item 3 of Form N-4 to eliminate language that would be redundant in light of new proposed General Instruction C.3.(e) of both forms.
Finally, we propose to eliminate certain instructions in Item 3 of current Forms N-3, N-4, and N-6 relating to new variable contract registrants. Specifically, we propose to eliminate Instructions 4(d)(i), 4(f)(ii), 4(g)(vi) and Instruction (f) under “Example” in Form N-3, Instruction 22 of Form N-4, and Instruction 5 of Form N-6 as the staff has found these instructions to be unnecessary.
For example, Instruction 4(d)(i) to Item 3 of current Form N-3, Instruction 22(a) to Item 3 of current Form N-4, and Instruction 5(a) to current Item 3 of Form N-6 instruct a registrant to base the percentages in the Total Annual Portfolio Company Operating Expenses table on estimated amounts for the current fiscal year, but we understand that these operating expenses need not be estimated because they would not vary based on whether the registrant is new or already exists. Likewise, Instructions 4(f)(ii) and 4(g)(vi) to Item 3 of current Form N-3, Instruction 22(b) to Item 3 of current Form N-4, and Instruction 5(b) of Item 3 to current Form N-6 state that a new registrant may disclose any expense reimbursement or fee waiver arrangements that are expected to reduce the expenses that the table would show. Because Instruction 14(e) in proposed Item 4 of Form N-3, Instruction 17 in proposed Item 4 of Form N-4, and Instruction 4(b) in proposed Item 4 of Form N-6 would address this same issue, and we do not see a reason to distinguish between new and existing registrants for this purpose, these current Instructions are unnecessary.
Lastly, Instruction (f) under the “Example” in Item 3 of current Form N-3 and Instruction 22(c) to Item 3 of current Form N-4 state that new registrants must only complete the 1- and 3-year period portions of the Example and estimate any annual contract fees collected. However, because variable contract charges are contractual and do not vary based on whether the variable contract registrant is new or existing, we believe a new registrant's Example should include the full 1, 3, 5, and 10-year periods required of existing registrants. For these reasons, we propose to eliminate these current Instructions in their entirety.
We request comment generally on the amendments we propose to make to the Fee Table, and specifically on the following issues:
• Would the proposed changes to the Fee Table disclosures effectively and appropriately streamline and consolidate the Form and the required disclosures? Would the proposed changes better reflect registrants' current disclosure practices? Would the new captions convey, more clearly than the current captions, the types of expenses investors can expect to pay under the contract?
• Are the proposed disclosure requirements and related instructions associated with the “Annual Contract Expenses” table appropriate? For example, would the table appropriately disclose the annual fees and expenses associated with a variable contract? As another example, is “Base Contract Expenses” an appropriate way to describe the basic insurance-related contract features available under the contract, or would some other term be preferable? How else might we characterize the charges associated with the basic features available under the contract (excluding optional benefits and annual portfolio company operating expenses)?
• For Form N-3 registrants, should we revise or remove the instruction to the “Total Annual Expenses” line-item providing that if optional benefit expenses are calculated on a basis other than contract value, registrants should prominently indicate that those optional benefit expenses are not included in total annual expenses? Would investors be confused by viewing total annual expenses which did not include optional benefit expenses? In this case, or generally, should we not require disclosure of total annual expenses? Conversely, should we require disclosure of total annual expenses for all registrants on Forms N-4 and N-6, as well as on Form N-3?
• Would the proposed requirements appropriately convey to investors the types of optional benefits available under the contract and the charges associated with each? Should we require disclosure of optional benefits that are available at no additional charge in the list of optional benefits? If not, why not?
• Should we revise the legend that would precede the required “Total Annual Portfolio
• Should we modify the requirements for the Example that would appear in the Fee Table, as proposed? Would the revised legend accompanying the Example appropriately alert investors to the assumptions that form the basis for the Example? Are the proposed revised instructions for the Example, including eliminating the option to include separate expense examples based on the expenses of each portfolio company, appropriate? Would they result in a clearer and more salient illustration of the costs of investing in the contract? Would increasing the value of the assumed investment in the Example from $10,000 (or $1,000 in the case of Form N-3 registrants) to $100,000 more closely align with typical current levels of investment in variable contracts? Are there any other modifications to the Example that we should make? If so, what?
• Should we revise the General Instructions to the Fee Table item, as proposed? For example, would the proposed requirement to disclose a maximum guaranteed charge as a single number, if a fee is calculated based on a benchmark, reduce investor confusion and better assist investors in understanding the costs they will pay when investing in a variable annuity? Are the other proposed revisions to the General Instructions appropriate to eliminate redundant language, and to otherwise update the tables? Should we modify or remove any other General Instructions, and if so, how?
• Are there any current General Instructions that we also should amend or other General Instructions we should include?
• Are there any additional modifications we should require to make the fee and expense information easier for investors to understand?
We propose to add new Item 5 to Forms N-3 and N-4, which would require registrants to summarize the principal risks of purchasing a contract, including the risks of poor investment performance, that contracts are unsuitable as short-term savings vehicles, limitations on access to cash value through withdrawals, and the possibility of adverse tax consequences. The new disclosure item for Forms N-3 and N-4 generally mirrors Item 2(b) of current Form N-6 (which we propose to re-designate as Item 5), with the exception of the risk of contract lapse.
Although current Form N-6 requires risk disclosures to be presented in a summary section at the front of the statutory prospectus, we propose to require for each registration form that the risk section be provided after the Key Information Table and Fee Table. While the Key Information Table would include a condensed discussion of contract risks, proposed Item 5 would give registrants the flexibility to describe the principal risks of investing in the contract in more detail than what could reasonably appear in a table meant to summarize the contract's key risks and features. While we are not proposing to limit the length of the summary of principal risks in response to proposed Item 5, we believe that the utility of a summary would be undermined by the long, complex descriptions we sought to avoid when we adopted the summary principal risk section as part of Form N-6.
We request comment generally on the proposal to include a new item requiring disclosure of principal risks in the prospectus, and specifically on the following issues:
• Should we require the summary of principal risks of investing in a contract to be disclosed in a single location in the prospectus? Should we instead permit registrants the flexibility to disclose risks in conjunction with the specific contract feature to which they pertain, thus providing greater context for the risk(s)?
• Should the summary of principal risks disclosures be required to follow the Key Information Table and Fee Table, or should we require or permit the disclosures to be provided elsewhere in the prospectus?
• Does the proposed item appropriately describe the types of risks to be summarized, or should the list of risks be revised?
• Would cross-referencing the risk section in the Key Information Table provide useful layered disclosure for investors, or are there limitations in this approach? How might they be resolved?
• Should we impose a page limit, or other length limit, on responses to the proposed item? If so, what limit would be appropriate? Should we instead allow registrants the flexibility to determine how much disclosure is appropriate? Are there any organizing principles we might consider to encourage registrants to avoid overly-lengthy disclosure?
• Should we make any other changes regarding proposed prospectus disclosures describing risks associated with the contract?
• Should we require the Item 5 disclosures to also be included in the Initial Summary Prospectus and Updating Summary Prospectus?
We propose to amend Item 5 of current Forms N-3 and N-4, and Item 4 of current Form N-6, which we would re-designate as Item 6 in each of the registration forms. Reflecting the more up-to-date requirements of the parallel item of current Form N-6, we are proposing to amend Forms N-3 andN-4 to relocate certain information from the prospectus to the SAI: (1) With respect to the depositor, a description of the general nature of its business, its date and form of organization and the state or other jurisdiction under which it is organized, and information relating to persons controlling the depositor; and (2) with respect to the registrant, its date and form of organization and classification pursuant to section 4 of the Investment Company Act, and whether there are sub-accounts of the registrant.
We are also proposing to amend the information required by the current item in Forms N-4 and N-6 regarding portfolio companies (and for Form N-3, investment options).
Proposed Item 19 of Form N-3 similarly would require a comparable appendix of investment options, but only if the appendix were included in a summary prospectus.
We request comment generally on the amendments we propose to make to the required prospectus disclosures describing the registrant, depositor, and portfolio companies, and specifically on the following issues:
• Should we streamline the disclosures relating to the depositor and registrant as proposed? Would these proposed amendments reduce any information that would be important to investors? Should we maintain any existing disclosures or require additional disclosures as to the depositor and registrant?
• Should we relocate the requirement to disclose information relating to service providers to the SAI as proposed?
• Should we make any other changes to the form regarding required prospectus disclosures describing the registrant, depositor, and/or portfolio companies?
We propose to amend Item 7 of current Form N-3 and Item 6 of current Form N-4 (which we would re-title, and re-designate as Item 8 (in the case of Form N-3) and Item 7 (in the case of Form N-4) to reflect the more up-to-date requirements of the parallel item of current Form N-6.
Paragraph (a) would expand the disclosure requirements of the current item in Forms N-3 and N-4 to include certain additional disclosure requirements that currently appear in the parallel item of Form N-6. The proposed amended items would require a registrant to provide a brief description of charges deducted from “any other source” (in addition to charges specifically deducted from purchase payments, investor accounts or assets of the registrant, which is currently required). These additional charges could include, for example, contract loan charges and optional benefit charges. In addition, we are proposing to require that the registrant describe: (1) The frequency of deductions (
In addition, Instruction 1 to subparagraph (a) of the proposed amended item in Forms N-3 and N-4 would include a new requirement for the registrant to describe the factors affecting the computation of the amount of the sales load.
We are also proposing new Instruction 4 to subparagraph (a) of the amended item of Forms N-3 and N-4.
We also propose to revise the item related to charges in each form to clarify that the required disclosures should relate to “current” charges.
Finally, we are proposing to amend the item of Form N-6 relating to charges in two respects. First, we are proposing to relocate disclosures on commissions paid to dealers from the SAI
We request comment generally on the amendments we propose to make to the required prospectus disclosures regarding contract charges and specifically on the following issues:
• Will investors find the information resulting from the expanded disclosure requirements of the proposed amendments useful (
• Is the proposed new instruction in Forms N-3 and N-4 that would permit a registrant to disclose a range of charges for premium or other taxes (if these would vary according to jurisdiction) appropriate? Instead, should the prospectus specify each of these charges individually?
• Should we require prospectus disclosure of additional information regarding contract charges?
• In the context of Form N-6 registrants, are there reasons that disclosures on commissions paid to dealers should not be located in the prospectus (and instead should be located in the SAI)? Will the new requirement in Form N-6 to provide a description of the types of operating expenses for which the registrant is responsible better help investors to understand contract charges?
• Are there any instructions that we should not include? Are there any additional instructions we should include?
We propose to amend Item 8 of current Form N-3, Item 7 of current Form N-4, and Item 6 of current Form N-6 (which we would re-designate as Items 9, 8, and 8, respectively) to reflect the more up-to-date requirements of Form N-6 (in the case of the amendments to Forms N-3 and N-4) and also to harmonize this disclosure item with other proposed amendments to the forms. Except as described below, we do not intend these proposed amendments to significantly alter current disclosure obligations.
We propose to remove the current instruction to subparagraph (a) of Forms N-3 and N-4, which states that the registrant need not repeat rights that are described elsewhere in the prospectus, and replace it with a new instruction to subparagraph (a) in each of the forms
We also propose to revise current subparagraph (b) of Forms N-3 andN-4 regarding contract provisions and limitation in two ways.
We also propose to revise the disclosure requirement in each registration form to clarify that the existing requirement to describe any provisions and limitations on transfer of contract value between sub-accounts includes transfer programs, such as dollar cost averaging, portfolio rebalancing, asset allocation programs, and automatic transfer programs.
We are also proposing to newly require in each registration form a description of the obligations under the contract that the insurer's general account funds (
We are also proposing to modify the instruction to the current subparagraph in each form relating to contract or registrant changes to require disclosure of the substitution of one portfolio company for another pursuant to section 26(c) of the Investment Company Act.
We are also proposing to eliminate current subparagraph (d) in Forms N-3 and N-4, which requires a description of how investor inquiries may be made. This item would duplicate information that would be required to appear on the back cover page of the prospectus pursuant to proposed Item 1(b)(1).
Finally, with respect to Forms N-3 and N-4, we are proposing to relocate disclosures regarding limitations on classes of purchasers from the cover page of the prospectus
We request comment on the proposed form amendments relating to the general description of the contracts, and specifically on the following issues:
• Should we require the prospectus to include a description of the obligations under the contract that the insurer's general account funds? Should the proposed requirement be modified in any way?
• Should we require disclosure of the substitution of one portfolio company for another pursuant to section 26(c) of the Investment Company Act? If not, why not? How should such disclosure be provided to investors?
• Should we make any other changes to the form regarding required prospectus disclosures describing the contract?
We propose to amend Item 9 of current Form N-3 and Item 8 of current Form N-4 (which we would re-designate as Items 10 and 9, respectively) to include a new requirement that a registrant state, if applicable, that the investor will not be able to withdraw any contract value amounts after the annuity commencement date.
We request comment generally on the proposed form amendments relating to the annuity period, and specifically on the following issues:
• Should we require the prospectus to include a statement that the investor will not be able to withdraw any contract value amounts after the annuity commencement date? Should the proposed requirement be modified in any way?
• Should we make any other changes to the form regarding required prospectus disclosures relating to the annuity period (
We propose to amend Item 10 of current Form N-3, Item 9 of current Form N-4, and Item 8 of current Form N-6 (which we would re-designate as Items 11, 10, and 10, respectively) to clarify that the current disclosures required by the item would only apply to the standard death benefit under the contract.
To assist variable annuity investors in better understanding the operation of the standard death benefit, we are also proposing to amend Forms N-3 and N-4 to specifically require registrants to summarize the operation of the standard death benefit.
We request comment generally on the proposed form amendments relating to the standard death benefit, and specifically on the following issues:
• Should we require other disclosures regarding the operation of the standard death benefit? Should we make any other changes to the form regarding required prospectus disclosures relating to the standard death benefit?
• As proposed, optional death benefit disclosures would be provided with disclosures of other optional benefits available under the contract. Instead, should we permit or require optional death benefits disclosures to accompany standard death benefit disclosures?
We propose to add a new item to each registration form that would require a registrant to discuss any standard living benefits, as well as all optional benefits (
As discussed above, subparagraph (a) of the proposed new item would require a tabular summary overview of each benefit available under the contract (other than the standard death benefit).
Subparagraphs (b) and (c) of the proposed new item would require the statutory prospectus to include narrative disclosures that would provide more detailed information regarding each of the benefits presented in the tabular summary. As proposed, a registrant would be required to include a brief description of each benefit (other than the standard death benefit) offered under the contract,
Some benefits offered by a contract may have complicated terms that do not readily lend themselves to being fully described in a tabular summary. Therefore, the proposed narrative disclosures are intended to complement the tabular summary presentation by allowing registrants to discuss the benefits, as well as the limitations, risks, and restrictions associated with each, in more detail without being constrained by the limitations of a tabular presentation. The requirement to discuss the limitations, risks, and restrictions associated with each benefit would also help ensure that these aspects of contract benefits—along with the value they could provide to investors—are discussed in a standardized manner among contract prospectuses.
We also propose to include an instruction directing registrants in responding to proposed subparagraphs (b) and (c) to provide one or more examples illustrating the operation of each benefit in a clear, concise, and understandable manner.
We request comment generally on the proposed new form requirements relating to other benefits under the contract, and specifically on the following issues:
• Would the disclosures by the proposed new item enhance the ability of investors to understand any standard living benefit, as well as additional options available under the contract?
• Should we require additional disclosures or otherwise modify the proposed requirements? For example, while the proposed new item would encompass optional death benefits, as well as standard and optional living benefits, should our registration forms require separate and more tailored disclosures for any of these benefit categories?
• Should the required disclosures be presented in a different manner? Should the statutory prospectus include both a tabular summary overview as well as narrative disclosures? Should any of the disclosures specifically required in the narrative disclosure also be required in the tabular summary?
We propose to amend Item 11 of Form N-3 and Item 10 of current Form N-4 (which we would re-designate as Items 13 and 12, respectively) to re-structure the disclosure item and make other minor revisions that would not substantively change current disclosure requirements.
We request comment generally on the proposed form requirements relating to purchases under the contract, including whether we should require any other disclosures with respect to purchases, or otherwise modify existing requirements.
We propose to amend Item 12 of current Form N-3 and Item 11 of current Form N-4 (which we would re-title and re-designate as Items 14 and 13, respectively) to reflect the more up-to-date requirements of the parallel item of Form N-6 and standardize these disclosure requirements across variable product registration forms.
Specifically, subparagraph (a) of the proposed item would consolidate the current disclosure requirements regarding surrenders and delays in effecting requests for surrender and provide a high-level overview of how an investor can surrender (or partially surrender or make withdrawals from) a contract, including any limits on the ability to surrender, how the proceeds are calculated, and when they are payable.
We are proposing to eliminate Item 12(b) of current Form N-3 and Item 11(b) of current Form N-4 (requirement to disclose any restrictions on redemption that may apply if the registrant offers the contracts in connection with the “Texas Optional Retirement Program”) and Item 12(c) of current Form N-3 and Item 11(c) of current Form N-4 (requirement to briefly describe whether a request for redemption may not be honored for a period of time after an investor makes a purchase payment). We believe that these requirements are generally encompassed by the proposed requirements (discussed in the following paragraph) to disclose any limits on the ability to surrender, including any limits on the availability of partial surrenders and withdrawals.
Subparagraphs (b) through (d) would require additional information related to the operation of partial surrenders and withdrawals under the contract, including: (1) Whether and under what circumstances they are available; (2) how they will affect a contract's cash value, death benefit(s), and/or any living benefits; and (3) how partial surrenders and partial withdrawals will be allocated among the sub-accounts.
Subparagraph (e) would require registrants to describe any provision for involuntary redemptions and the reasons for such provision.
Subparagraph (f), like Item 12(e) of current Form N-3 and Item 11(e) of current Form N-4, would require the disclosure of any revocation rights. However, to provide additional information relating to an investor's revocation rights, the proposed item would also specifically require: (1) A description of how the amount refunded is determined; (2) the method for crediting earnings to purchase payments during the free look period; and (3) whether investment options are limited during the free look period.
We request comment generally on the proposed form requirements relating to surrenders and withdrawals, and specifically on the following issues:
• Do commenters agree with our proposed approach of generally modeling disclosures regarding surrenders and withdrawals on similar disclosures required by Form N-6? Are there specific disclosures in Form N-6 that would be inappropriate or less relevant for N-3 and N-4 registrants? For example, although current Form N-3 and Form N-4 use the terms “redemptions” and “partial redemptions,” proposed Form N-3 and proposed Form N-4 would use the terms “surrender” and “partial surrender.” We understand these terms are synonymous, although we have chosen the latter terms to reflect the same terminology used in Form N-6. Is there any reason why Form N-3 and Form N-4 should use different terminology other than what is included in Form N-6? Alternatively, are there specific disclosures that would be more appropriate or relevant for N-3 or N-4 registrants but are not currently required by Form N-6?
• Would the proposed amendments help investors to better understand the procedures and impact of surrenders and withdrawals, including issues relating to partial surrenders and withdrawals, sub-account allocation, involuntary redemption, and investors' revocation rights under the contract?
• Should we require any other disclosures with respect to surrenders and withdrawals, or otherwise modify existing requirements? For example, should the proposed
We are proposing to amend Form N-6 to consolidate required prospectus and SAI disclosures relating to contract loans
Specifically, a registrant would be required to briefly describe: (1) The availability of loans; (2) any limitations on that availability (
We understand that variable annuities, like variable life insurance contracts, often offer investors the opportunity to borrow money against the cash value of their contract, and that insurers and intermediaries frequently promote this contract feature in their sales of variable annuities. Therefore, we are also proposing to add new Item 15 to Form N-3 and new Item 14 to Form N-4, which would require similar prospectus disclosure about the availability and terms of loans under the contract.
We request comment generally on the proposed new form requirements relating to loans under the contract, and specifically on the following issues:
• Should we require the prospectus to include a discussion of contract loan provisions? Would this disclosure be more appropriate only in the context of variable life insurance products?
• Will the information disclosed to investors pursuant to the proposed new form item be helpful to investors in understanding contract loan provisions, including any attendant risks? Should we require disclosure of additional information related to loan provisions, or otherwise modify the proposed requirements?
We propose to amend Item 13 of current Form N-3 and Item 12 of current Form N-4 (which we would re-designate as Items 16 and 15, respectively) to reflect the more up-to-date presentation and disclosure requirements of the parallel provisions of Form N-6.
However, the amendments would specifically limit required disclosures to “material” tax consequences. While the instructions to subparagraph (a) of Item 13 of current Form N-3 and Item 12 of current Form N-4 provide that the “disclosure need not include detailed description of applicable law,” we are proposing to eliminate this instruction in light of the proposed language limiting disclosures to “material” consequences.
We do not expect any of the proposed amendments to this item to significantly alter current disclosure obligations. We request comment generally on these amendments.
We propose to amend Item 14 of current Form N-3 and Item 13 of current Form N-4 (which we would re-designate as Items 17 and 16, respectively) to reflect the more up-to-date presentation and disclosure requirements of the parallel provisions of Form N-6.
As currently required by Form N-6, the proposed amendments would newly require registrants to: (1) Provide a description of the factual basis alleged to underlie the proceeding, and the relief sought, and (2) in addition to describing proceedings that a governmental authority has instituted, include information about proceedings “known to be contemplated” by governmental authorities.
These amendments are not expected to significantly alter current disclosure obligations. We request comment generally on these amendments.
We propose to add new Item 18 of Form N-3 and new Item 17 to Form N-4, which would require a statement, under a separate caption, of where any required financial statements of the registrant and the depositor may be found if they are not included in the prospectus.
The form's proposed General Instructions would provide that registrants are free to include in the prospectus financial statements required to be in the SAI, and may also include in the SAI financial statements that may be placed in Part C.
We request comment generally on the proposal to include new Item 18 of Form N-3 and new Item 17 of Form N-4, and specifically on the following issues:
• To what extent do registrants currently make available the financial statements of the registrant and depositor in locations other than the prospectus and/or SAI, as our
• Would the proposed item in the prospectus regarding the availability of financial statements assist investors in locating those materials?
We propose to add a new disclosure item to each registration form (proposed Item 19 of Form N-3, and proposed Item 18 of Forms N-4 and N-6), which would require registrants to include as an appendix to the prospectus a table summarizing information about the portfolio companies available under the contract. This table would appear under the heading “Portfolio Companies Available Under the Contract” and would consolidate certain summary information about each portfolio company into a concise, easy-to-read tabular presentation, as discussed in more detail above.
The appendix would provide a tabular summary overview of portfolio companies available under the contract that is designed to improve the ability of investors to understand, evaluate, and compare those portfolio companies. If the availability of one or more portfolio companies varies by benefit offered under the contract, registrants would be required to include as another appendix a separate table indicating which portfolio companies were available under each of those benefits.
Because we understand that certain variable contracts registered on Form N-3 have very few investment options (and sometimes have only one investment option), we recognize that the proposed appendix could have limited utility for certain Form N-3 registrants and their investors. For this reason, for variable contracts registered on Form N-3, we propose that registrants could omit the appendix and instead provide the more detailed disclosures about the investment options offered under the contract that proposed Item 20 of Form N-3 would require.
The same legends that precede the appendix in the summary prospectus would generally also precede the appendix in the statutory prospectus.
Registrants on Form N-3 that use a summary prospectus that includes the disclosures required by proposed Item 19 of Form N-3 would be required to include in that appendix an introductory legend explaining how more information about the investment options may be obtained.
We request comment generally on the proposed appendix requirement, and specifically on the following issues:
• Should we require these disclosures to be included in the statutory prospectus? Are the content requirements for this proposed item appropriate for inclusion in the statutory prospectus?
• Our proposal would generally require registrants to include the same information in the proposed appendix regarding portfolio companies in the statutory prospectus and in the initial summary prospectus and updating summary prospectus.
• Will the proposed tabular presentation required for portfolio company-related disclosures in the prospectus be more user-friendly for investors than the current disclosure requirements? Is the specific information required to be disclosed about portfolio companies likely to be more relevant and useful to investors than the current disclosure requirements? If not, why not? Are there alternatives we should consider?
• Under our proposal, registrants on Form N-3 would have the option of omitting the proposed appendix and instead providing the more detailed disclosures about the investment options offered under the contract that proposed Item 20 of Form N-3 would require (and would be required to include the appendix in the statutory prospectus only if the appendix also appears in the summary prospectus). In order to increase comparability between registration statements, should we require this appendix for all registration statements on Form N-3?
We are also proposing additional amendments to Form N-3 that are generally intended to update and enhance disclosures related to investment options by requiring similar disclosures required for open-end management companies registered on Form N-1A.
We are proposing to revise Item 6 of current Form N-3 (which we would re-designate as Item 7) to increase consistency among forms used to register management investment companies.
Among other things, the proposed amendments would require disclosure of the compensation paid to each investment adviser of the registrant.
We are proposing a new item that would provide more detailed information about each of the investment options available under the contract.
New paragraphs (a) and (b) would restate existing disclosure requirements contained in paragraphs (c), (d), and (e) of current Item 5 regarding investment strategies and risks to reflect the updated presentation and disclosure requirements of the parallel provisions of Form N-1A. These paragraphs would re-focus these disclosure requirements to require more granular disclosure related to each investment option as opposed to broader disclosure regarding registrants.
Specifically, among other things, the proposed amendments would require disclosure of whether the investment option may take temporary defensive positions that are inconsistent with the investment option's principal investment strategies in attempting to respond to adverse market, economic, political, or other conditions. We believe that investors should be informed about investment positions that an investment option can take from time to time that are inconsistent with the investment option's central investment focus.
The proposed amendments also would require the registrant to disclose, for each investment option, whether it may engage in active and frequent trading of portfolio securities and, if so, the consequences of increased portfolio turnover to investors and the investment option's performance. Increased portfolio turnover can result in increased transaction costs that are ultimately borne by investors. Collectively, these proposed amendments are intended to clarify and enhance the disclosure requirements relating to investment options' strategies and risks, and to increase consistency and thereby promote comparability among forms used to register management investment companies.
New paragraph (c) would require registrants with annual returns for at least one calendar year to provide, for each investment option:
• A bar chart showing the investment option's annual total returns for each of the last 10 calendar years (or for the life of the investment option, if less than 10 years), as well as the investment option's highest and lowest return for a quarter during the period displayed in the chart;
• A table showing the investment option's average annual total returns (with and without taxes on distributions and redemptions) for 1-, 5-, and 10-year calendar periods ending on the date of the most recently completed calendar year (or for the life of the investment option, if shorter), as well as the returns of an appropriate broad-based securities market index for those same periods; and
• Certain explanatory statements, such as how the information in the chart and table illustrates the variability of the investment option's returns, the investment option's past performance is not necessarily an indication of how the investment option will perform in the future, and, if applicable, how updated performance information may be obtained.
The disclosures that new paragraph (c) would require are modeled after the risk/return bar chart and table that Form N-1A currently requires and are intended to supplement the disclosures currently required by Form N-3 regarding accumulation unit income and capital changes
We request comment generally on the proposed amendments to the Part A requirements of Form N-3, and specifically on the following issues:
• Should we, as proposed, adopt amendments to certain current items in Form N-3 Part A as described in this section? To the extent that we have proposed amending these items to generally mirror the presentation of parallel items in Form N-1A, is this appropriate in the context of variable annuities whose separate accounts are registered on Form N-3? Do commenters recommend any additional amendments to any of the current Form N-3 Part A items?
• Proposed Item 7 (“Management”) would revise current disclosure requirements to move certain disclosures from the prospectus to the SAI, while other disclosures would appear in the prospectus that currently only appear in the SAI. Are these proposed amendments appropriate, and are there other disclosures that currently appear in Part A of Form N-3 that would be better suited for disclosure in the SAI? On the other hand, are there other disclosures that currently appear in the SAI that would better suited for disclosure in the prospectus?
• In the case of registrants that offer more than one investment option under the contract, should the disclosures contemplated by proposed Item 20 (“Additional Information About Investment Options Available Under the Contract”), as proposed, be presented for each investment option? If not, how should those disclosures be presented? Should any of these proposed disclosures be modified in any way? Are there additional investment option-related disclosures that may be relevant to contract investors and that we should require to appear in the prospectus?
Table 6 shows how our proposal would amend the item requirements of Part B of our variable contract registration forms. Except as described below, our proposed amendments to Part B of Forms N-3 and N-4 would generally conform to the language of the related Part B disclosure items in current Form N-6.
We propose to amend certain items of Part B of Forms N-3 and N-4 to reflect the more up-to-date presentation of corresponding items in Form N-6, and to re-designate their numbering as shown in Table 6 above. To the extent that these amended items incorporate only minor wording changes,
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We are proposing to amend Item 25 of current Form N-3 and Item 20 of current Form N-4 (which we would re-designate as Items 29 and 23, respectively) to specifically require identification of all principal underwriters of the registrant (other than the depositor), their principal business addresses, and the source of any affiliation.
We also propose to add an instruction to this item in Forms N-3, N-4, and N-6 stating that information need not be provided about bona fide contracts with the registrant or its insurance company for outside legal or auditing services, or bona fide contracts for personal employment entered into with the registrant or its depositor in the ordinary course of business. This instruction is intended to focus disclosures on underwriting costs, as opposed to costs for legal or auditing services or other ancillary matters, and would parallel similar instructions in Part C of these same forms regarding disclosures for principal underwriters.
Also, because we propose to amend Item 5 of current Form N-6 to include the disclosures on commissions to dealers currently required by current Item 20 in the SAI, we also propose to remove this disclosure from current Item 20 (which we would re-designate as Item 24).
We are proposing to amend Item 26 of current Form N-3 and Item 21 of current Form N-4 (which we would re-designate as Items 30 and 24, respectively), to remove the instruction specifically permitting the registrant to furnish separate yield quotations for individual and group contracts.
We also propose to relocate the disclosures required by Item 4 of current Forms N-3 and N-4 from the prospectus to the SAI,
When the AUV tables were adopted in 1985, the approach did not anticipate the proliferation of variations in contract charges and optional benefits that has resulted in numerous possible combinations of contract charges.
To streamline the prospectus, we propose to relocate the AUV tables from the prospectus to the SAI, where they are more appropriately located with certain detailed information that traditionally appears in the SAI. To reduce burdens on registrants, we propose to decrease the time periods for which the required information must be presented from 10 years
Our variable contract registration forms currently include various dollar thresholds that date back to their initial adoption. In the SAI, for example, information need not be given about any service required to be disclosed pursuant to current Item 25 of Form N-3, current Item 20 of Form N-4, and current Item 20 of Form N-6, for which total payments of less than $5,000 were made during each of the last three fiscal years.
We are also proposing additional amendments to Form N-3 that are generally intended to update and enhance disclosures related to investment options by requiring similar disclosures required for open-end management companies registered on Form N-1A. The revisions generally reflect the updated presentation and disclosure requirements of the parallel item in Form N-1A and would harmonize the disclosure requirements across registration statements for different products.
We are proposing to make certain amendments to Item 19 of Form N-3, which we would re-designate as Item 23.
Paragraph (b) of proposed Item 23 would require the discussion of all policies regarding: (1) Issuing senior securities; (2) borrowing money, including the purpose for which the proceeds will be used; (3) underwriting securities of other issuers; (4) concentrating investments in a particular industry or group of industries; (5) purchasing or selling real estate or commodities; (6) making loans; and (7) any other policy that the registrant deems fundamental or that may not be changed without shareholder approval, including, if applicable, the registrant's investment objectives. In contrast, Item 19 of current Form N-3 generally requires the disclosure of: (1) Fundamental policies not described in the prospectus regarding those same topics, as well as short sales, purchases on margin, and writing of put and call options, and any other policy the registrant deems fundamental; and (2) any significant but non-fundamental investment policies not described in the prospectus and which can be changed without the approval of the majority of votes available to eligible voters. We believe that the proposed amendments better correspond with the requirements of section 8 of the Investment Company Act than the current Form N-3 item requirements, since they more specifically reflect the disclosure that section 8 mandates.
When the Commission proposed amendments to Form N-1A in 1997, it noted that, although they are not required to do so, some funds disclose in the prospectus their policies with respect to the practices identified under section 8.
Paragraph (c) of proposed Item 23 would newly require registrants to disclose the types of investments that a registrant may make while assuming a temporary defensive position. We believe that investors should be informed about investment positions that an investment option can take from time to time that are inconsistent with the investment option's central investment focus.
Paragraph (f) of proposed Item 23 would newly require certain disclosures regarding material events by registrants or investment options that hold themselves out as “money market funds” or “money market accounts” pursuant to rule 2a-7 under the Investment Company Act.
We are proposing to make certain amendments to Item 20 of Form N-3, which we would re-designate as Item 24, to restate existing disclosure requirements to reflect the updated presentation and disclosure requirements of the parallel item in Form N-1A.
The proposed amendments would: (1) Newly require disclosure of the responsibilities of the board of directors with respect to the registrant's management and any arrangements that result in breakpoints in, or elimination of, sales loads for directors and other affiliated persons of the registrant;
In addition to the amendments to Item 21 of Form N-3 (which we would re-designate as Item 25) that we discuss above, which would conform certain aspects of this item to the disclosure requirements of Form N-6,
We are proposing to amend the current requirement to disclose the total dollar amount that the registrant or the insurance company paid under the investment advisory contract for the last three fiscal years to also require disclosure of amounts paid to “to the adviser (aggregated with amounts paid to affiliated advisers, if any), and any advisers who are not affiliated persons of the adviser.”
We are proposing to make certain amendments to Item 22 of Form N-3, which we would re-designate as Item 26.
We are proposing to make certain amendments to Item 23 of Form N-3, which we would re-designate as Item 27.
Together with the cover page amendments described above,
We request comment generally on the proposed amendments to the SAI requirements contained in our variable contract registration forms, and specifically on the following issues:
• Should we amend as proposed the items in Part B discussed above? Should we amend any other items of Part B, or add new items to Part B covering other disclosure items?
• Should we adjust the thresholds described above in section II.D.3.e? If so, should we propose to adjust similar thresholds in our registration statement forms for other types of investment companies to comparable levels? Should they be adjusted to a different level? Please explain the basis for any suggested changes, including the reasons for whether they should be adjusted using different factors or other considerations.
• Are the AUV tables useful to investors, and has the usefulness of these tables evolved since Forms N-3 and N-4 were first adopted? Is it appropriate to move the AUV tables from the prospectus to the SAI, or would some other approach better serve investors? For example, should we instead codify the approach set forth in staff no-action relief described above?
• Should we, as proposed, amend Part B of Form N-3 to require comparable disclosures required by Form N-1A? Should we modify the proposed amendments in any way?
Table 7 shows how our proposed amendments would amend the item requirements of Part C of our variable contract registration forms. These amendments are largely intended to update the disclosure requirements and provide greater consistency among variable contract registration forms. We are also proposing to eliminate certain disclosure items in light of recent regulatory developments and our goal of reducing duplicative disclosure requirements.
We propose to amend certain items of Part C of proposed Form N-4 to reflect the more up-to-date presentation of corresponding items in Form N-6, and to re-designate their numbering as shown in Table 7 above. To the extent that these amended items incorporate only minor wording changes,
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For each form, we are proposing to amend the “Exhibits” disclosure item to require a registrant to file a preliminary form of any contract summary prospectus that the registrant intends to use on or after the effective date of the registration statement as an exhibit.
For Form N-3, we propose to add an instruction stating that information need not be provided about bona fide contracts with the registrant or its insurance company for outside legal or auditing services, or bona fide contracts for personal employment entered into with the registrant or its depositor in the ordinary course of business. Likewise, for Forms N-4 and N-6, we propose to add a similar instruction stating that information need not be given about the service of mailing proxies or periodic reports of the registrant. Collectively, these instructions are intended to focus disclosures on underwritings costs, as opposed to costs for legal or auditing services or other ancillary matters, and would parallel similar instructions in Part B of these same forms regarding disclosures for underwriters.
Also, for Form N-3, we propose to amend the instruction to subparagraph (c) of Item 35 of current Form N-3 to eliminate the portion of the first instruction requiring to include as “other compensation” any compensation received by an underwriter for keeping the registrant's securities in the hands of the public.
In addition to proposing certain updated disclosure thresholds in the SAI, we are similarly proposing to increase certain disclosure thresholds in Part C. For example, when providing information required regarding commissions and other compensation received, directly or indirectly, from the registrant during the registrant's last fiscal year by each principal underwriter, a registrant currently may exclude information about any service for which total payments of less than $5,000 were made during each of the registrant's last three fiscal years.
To reduce overlapping regulatory requirements, we propose to eliminate Item 32 of current Form N-3 and Item 27 of current Form N-4 (“Number of Contractowners”), as we will obtain the information that this item would require a registrant to disclose in a registrant's filings on Form N-CEN.
Compare Item 38(d) of current Form N-3 and Item 32(c) of current Form N-3 (requiring undertaking to deliver any SAI and any required financial statements promptly upon written or oral request)
We are proposing to amend the third column of the table required by Item 30 of current Form N-6 (“Principal Underwriters,” which we would re-designate as Item 33) to reflect compensation received from the registrant on all redemptions, rather than the more narrow requirement to disclose only compensation from events occasioning the deduction of a deferred sales load.
We request comment generally on the proposed amendments to the Part C requirements of our variable contract registration forms, and specifically on the following issues:
• Should we amend as proposed the items in Part C discussed above? Should we amend any other items of Part C, or add new items to Part C covering other disclosure items?
• We request comment regarding the exhibits that would be required to be filed as part of the registration statement. Should we modify the proposed list of required exhibits? Should we require any additional exhibits, or eliminate any currently required exhibits? Should we revise the description of the exhibits that this item would require? For example, with respect to reinsurance contracts, should we specifically request guarantees and credit support agreements from one insurance company to another (
• Should we require Form N-3 and Form N-4 registrants to include the fee representations specified by the new item that mirrors a parallel item in Form N-6? If we do not require this disclosure in Form N-3 and Form N-4, should we remove the parallel requirement in Form N-6?
• Should we adjust the thresholds described above in section II.D.4.d? If so, should we propose to adjust similar thresholds in our registration statement forms for other types of investment companies to comparable levels? Should they be adjusted to a different level? Please explain the basis for any suggested changes, including the reasons for whether they should be adjusted using different factors or other considerations.
The guidelines to current Forms N-3 and N-4 (the “Guidelines”) were prepared by the Division of Investment Management when the Commission adopted the forms in 1985.
Although certain Guidelines have been revised and new ones added in connection with the adoption of various rules, the Guidelines collectively have not been reviewed since 1985. Certain Division positions in the Guidelines have become outdated.
As with other registration forms that have more recently been amended to eliminate the guidelines for those forms, we are proposing to rescind the Guidelines to Forms N-3 and N-4.
We are proposing to require the use of the Inline XBRL format for the submission of certain required disclosures in the variable contract statutory prospectus. The proposed amendments are intended to harness technology to allow investors (directly and through their investment professionals), data aggregators, financial analysts, Commission staff, and other data users to efficiently analyze and compare the available information about variable contracts, as required by their particular needs and circumstances. This aspect of our proposal is in keeping with our ongoing efforts to implement reporting and disclosure reforms that take advantage of the benefits of advanced technology to modernize the investment company reporting regime and to, among other things, help investors and other market participants better assess different products.
Information structured using the Inline XBRL format is both human-readable and machine-readable for purposes of validation, aggregation, and analysis. Inline XBRL is a specification of the XBRL format that allows filers to embed XBRL data directly into an HTML document, eliminating any need to submit a copy of the tagged information in a machine-readable document separate from the human-readable document.
In 2009, the Commission adopted rules requiring operating companies, mutual funds, and ETFs to submit certain disclosures in the XBRL format.
Reflecting the development in XBRL specifications and for consistency with the format required for operating companies, mutual funds, and ETFs, we are proposing amendments to our rules and forms that would require variable contract registrants to submit certain information in the Inline XBRL format.
For filers, Inline XBRL can enhance the efficiency of review, yield savings in time and cost of preparing machine-readable data, and potentially enhance the quality of the data over other machine-readable standards because certain errors will be easier to identify and correct because the data is also human-readable. For investors and other data users, requiring information to be tagged in a structured format could facilitate analysis and comparison of variable contracts. In addition, making the data available in Inline XBRL should enhance the usability and ease of accessibility to the disclosures because users will not have to access two different documents (one machine-readable and one human-readable) for the same data, and users can leverage the enhanced search and filtering capabilities of the Commission's Inline XBRL Viewer. Moreover, given the complexity of variable contracts, we believe that tagging certain sections within the statutory prospectus in Inline XBRL format could provide greater transparency regarding the products' features and risks in the marketplace.
We would require registrants to tag the Key Information Table, which provides a concise summary of fees and expenses, risks, restrictions, taxes, and conflicts of interest. We are also proposing to include the Fee Table, which provides detailed information about the variable contract's costs. We believe that tagging could facilitate analysis of the costs associated with variable contracts, and allow investors and their investment professionals to compare the costs of a particular contract with the costs of other variable contracts or other investment products, such as mutual funds.
We are also proposing to require Principal Risks to be tagged so investors and their investment professionals can analyze a contract's risks alongside the contract's features and benefits. We would also require registrants to tag Other Benefits Available Under the Contract because these optional product features may be easier to analyze and compare if information pertaining to those features is available in a structured data format. Finally, we are proposing to require registrants to tag Investment Options Available Under the Contract, as this may allow investors and their investment professionals to more easily compare the mutual funds or other investment options that are offered by different variable contracts and assess whether a particular contract's investment options meet the investor's needs or goals.
• For post-effective amendments filed pursuant to paragraph (b)(1)(i), (ii), (v), or (vii) of rule 485, and in the case of registrants on Forms N-4 or N-6, paragraph (b)(1)(vi) of rule 485,
• for initial registration statements and post-effective amendments filed other than pursuant to paragraph (b)(1)(i), (ii), (v), or (vii) of rule 485, and in the case of registrants on Forms N-4 or N-6, paragraph (b)(1)(vi) of rule 485, Interactive Data Files must be filed
• for any form of prospectus filed pursuant to rule 497(c) or (e), Interactive Data Files must be submitted concurrently with the filing.
We believe this approach will facilitate the timely availability of important information in a structured format for investors, their investment professionals, and other data users yielding substantial benefits. For data aggregators responding to investor demand for the data, the availability of the required disclosures in the Inline XBRL format concurrent with filing or before the date of effectiveness would allow them to quickly process and share the data and related analysis with investors. Therefore, we are not proposing to provide variable contract registrants with a filing period to submit Interactive Data Files.
We request comment generally on the proposed amendments to require the use of Inline XBRL, and specifically on the following issues:
• Should we adopt rules that make the submission of structured data in the Inline XBRL format mandatory for variable contract registrants? Should the requirements for variable contracts generally mirror the recently adopted Inline XBRL requirements for mutual funds and ETFs as we have proposed, or do variable contracts present different issues and considerations from mutual funds and ETFs? To what extent, or how, should registration statements and other filings for contracts operating in the manner that the Staff Letters describe, as discussed in section II.C above, be required to submit information in Inline XBRL?
• Should any category of variable contract registrants be exempt from the proposed Inline XBRL requirements? If so, which ones, and explain why. If we were to exempt any such filers from the Inline XBRL requirements, should they be permitted to voluntarily file in the Inline XBRL format? What would be the effects on data quality and usability to investors and other data users associated with exempting such filers from the Inline XBRL requirements?
• Should we otherwise take a different approach for variable contracts, and if so, what would that be? For example, should we require instead that information be submitted in reports filed on Form N-CEN? Would submission on Form N-CEN ensure that current structured data for all variable contracts, including those operating in the manner that the Staff Letters describe, as discussed in section II.C above, would be available under a common submission framework for all variable contracts? Would such a filing framework provide a less burdensome means of submitting the same structured data to the Commission? What would be the effects on data quality and usability to investors and other data users of having the information available in Form N-CEN's XML format instead of the proposed Inline XBRL format?
• Should variable contract registrants be required to use Inline XBRL to tag the proposed sections of the contract (Key Information Table, Fee Table, Principal Risks of Investing in the Contract, Other Benefits Available Under the Contract, and/or Portfolio Companies [Investment Options] Available Under the Contract) for Forms N-3, N-4, and N-6? Should only one or both Items 19 (Investment Options Under the Contract) and 20 (Additional Information About Investment Options Available Under the Contract) of Form N-3 be required to be tagged? Should other or different information be required to be tagged in Inline XBRL?
• What costs or other burdens (
• How long is it likely to take for vendors and filers to develop solutions for tagging variable contract submissions in Inline XBRL?
• As outlined in Section II.G below, we are proposing a similar compliance date of 18 months after the effective date of any final rules for the summary prospectus framework for all variable contracts to submit to the Commission the required information in Inline XBRL. Is this period appropriate, or should the requirement to submit the required information in Inline XBRL be subject to a compliance date later than the compliance date for any final rules for the summary prospectus framework? Should we adopt a phase-in schedule for the implementation of Inline XBRL for variable contract registrants based on certain factors, such as registrant size (or otherwise)?
• In the case of post-effective amendment filings made pursuant to paragraphs (b)(1)(i), (ii), (v), and (vii) of rule 485 under the Securities Act, and in the case of registrants on Forms N-4 or N-6, paragraph (b)(1)(vi) of rule 485, should we, as proposed, permit registrants to file the Inline XBRL document concurrently with the related filing? Why or why not? For example, is there a risk that investors may be confused by information that is tagged in Inline XBRL and filed before effectiveness of the related filing? Should we also permit registrants to submit tagged data information concurrently with the related filing in the case of initial registration statements and post-effective amendments made pursuant to other paragraphs of rule 485? Why or why not? Should we instead require that Interactive Data Files only be submitted in a subsequent amendment to the initial registration statement or any post-effective amendment? Why or why not?
• We are not proposing to provide a filing period for registrants to submit the Interactive Data Files. Instead, registrants would be required to submit Interactive Data Files on or prior to the effectiveness of a related initial registration statement or post-effective amendment, or concurrently with the filing of a related form of prospectus pursuant to rule 497. Are there costs or other burdens that may be incurred by filers if there is no filing period? Should we instead provide a filing period, and if so, what is the appropriate time period (
• To what extent do investors and other market participants find information that is available a structured format useful for analytical purposes? Is information that is narrative, rather than numerical, useful as an analytical tool? Would investors and other market participants find variable contract information that is available in a structured format useful for analytical purposes? To what ends would they find that information useful?
• Are any other amendments necessary or appropriate to require the submission of the
• In what ways might the Commission enhance the access to Inline XBRL data submitted by filers?
• Should we require other types of information to be submitted in the Inline XBRL format? If so, what other types of information would be suitable for the Inline XBRL format and why? Are there other means of embedding structured data into the human-readable format of filings that we should consider?
• Are the proposed hardship exemptions appropriate for variable contract registrants? Do variable contract participants have unique challenges that would impede them from being able to comply with the proposed filing requirements? If so, what are they?
We are proposing conforming amendments to various cross-references in our rules to reflect proposed rule 498A, and the proposed amendments to Forms N-3, N-4, and N-6. These cross-references are reflected in our proposed amendments to: Rules 159A, 421, 431, 482, 485, 497, and 498 under the Securities Act; rules 11 and 405 of Regulation S-T; and rule 14a-16 under the Exchange Act. We request comment generally on whether the proposed conforming amendments are appropriate. Should they be modified in any way or are additional conforming amendments needed?
We are proposing to rescind Form N-1 under the Securities Act and the Investment Company Act. In 1984, the Commission prescribed Form N-1 as the registration form to be used by open-end management investment companies that are separate accounts of insurance companies for registering under the Investment Company Act and for registering their securities under the Securities Act.
We request general comment on rescinding Form N-1 and whether there is any continuing need for the form. In addition, we request specific comment on the following:
• Are there currently any insurance company separate accounts offering variable life insurance contracts that are organized as management investment companies? Do any insurers have a present intention of establishing such a separate account?
• Would any registrants, including any variable annuity or variable life insurance registrants, be affected by the rescission of Form N-1? If so, how?
• If Form N-1 is rescinded, should the Commission prescribe another registration form for use by open-end management investment companies that are separate accounts of insurance companies issuing variable life insurance contracts? If so, should a new form be used for this purpose, or should an existing form be used and what changes should be made to the suggested form to adapt it for this category of registrants? If a new form should be used, what should that form look like?
We are proposing certain technical amendments to rules relating to variable life insurance contracts. Rule 6e-2 under the Investment Company Act, which was adopted in 1976, covers variable life insurance contracts having scheduled premium payment plans.
In 2002, the Commission issued a release making technical amendments to the VLI Rules, among others, to correct statutory references in those rules following the enactment of then recent legislation affecting those statutes.
Some provisions of these rules, specifically the detailed regulation of sales loads and other fees and charges required by sections 26 and 27 of the Investment Company Act, no longer follow statutory requirements as a consequence of amendments to those sections enacted by the National Securities Market Improvement Act of 1996 (“NSMIA”).
As part of these technical amendments, we are proposing to rescind rules 26a-2, 27a-1, 27a-2, 27a-3, 27d-2, 27g-1, and 27h-1 under the
Among other things, these amendments would remove the detailed rate regulatory provisions in the VLI Rules and other rules and forms under the Investment Company Act. In addition, these technical amendments would remove the detailed definitions of sales charges in those rules, as these definitions are not necessary to implement the reasonableness in the aggregate standard instituted by NSMIA. These amendments would also remove the numerical load limit on front end sales loads on variable annuities that had been included in rule 11a-2 when it was adopted in 1983—before NSMIA had been enacted—to incorporate the load limit in section 27(a), and make appropriate cross-referencing revisions to related rules. Separate from sales charge related changes, these amendments would additionally remove certain minimum capital conditions for insurers to qualify for exemptions from section 14(a) of the Investment Company Act, since NSMIA amended section 26 to mandate that any insurer serving as a separate account depositor have that level of minimum capital.
The $1,000,000 requirement in section 26(f)(2)(B) is a condition required for sales of both variable life insurance contracts and variable annuity contracts. Accordingly, in addition to proposing this amendment to the VLI Rules, we are also proposing a conforming amendment to rule 14a-2 under the Investment Company Act, which has a similar minimum capital condition applicable to depositors of separate accounts offering variable annuities to qualify for a similar exemption from section 14(a).
We seek comment on our proposed technical amendments to the VLI Rules, and proposed technical amendments and rescission of other rules and forms under the Investment Company Act intended to reflect the effect of the NSMIA amendments. Specifically:
• Should we adopt the technical amendments to the VLI Rules and other rules as proposed? Are other amendments necessary to reflect the effect of the NSMIA amendments?
• We are proposing to rescind rules 26a-2, 27a-1, 27a-2, 27a-3, 27d-2, 27g-1, and 27h-1, and related Forms N-27I-1 and N-27I-2, because these rules and forms were rendered moot as a result of the NSMIA amendments. Should we rescind these rules and forms as proposed, or are these rules and forms still necessary despite the NSMIA amendments?
We also propose to rescind rules 27e-1 and 27f-1 under the Investment Company Act and related Forms N-27E-1 and N-27F-1. These rules and forms were promulgated to prescribe the form of notices required by sections 27(d) and (e) of the Investment Company Act relating to refund and withdrawal rights of periodic payment plan certificate holders, including those certificates not issued by insurance company separate accounts. We are proposing to rescind these rules and forms because since 2006, section 27(j) of the Investment Company Act has barred new certificate issuances,
We request comment generally on our proposal to rescind rules 27e-1 and 27f-1 and related Forms N-27E-1 and N-27F-1, and specifically on the following issues:
• Are any periodic payment plans currently outstanding? If so, how many?
• Would any outstanding periodic payment plans be affected if we rescind the rules and forms as proposed? If so, how would they be affected?
• In lieu of rescinding these rules and forms, should we modify them in any way?
Finally, we are considering whether it would be appropriate to update other provisions of the VLI Rules. Certain provisions of the VLI Rules, such as exemptions allowing insurers, under certain circumstances, to disregard voting instructions on matters submitted to policy holders in compliance with sections 13 and 15 of the Investment Company Act, may not be necessary.
• To what extent are issuers of variable life insurance contracts relying on the exemptions and other conditions of the VLI Rules? For example, do insurers rely on the exemptions to disregard voting instructions?
• To what extent, if any, should limits in the VLI Rules on the parties to whom portfolio company shares underlying UIT separate accounts may be sold, or the conditions under which they may be sold, be changed?
• To what extent, if any, should the minimum capital requirement imposed by NSMIA on separate accounts offering variable insurance contracts, and on insurers sponsoring those accounts, be changed?
• In light of NSMIA's replacement of specific limits on sales charges and administrative expenses with a reasonableness standard for all fees and charges in the aggregate, would it be appropriate to consider any limitations on deferred sales loads to address concerns that those loads might present a burden on redemption? For example, how should those concerns be reflected in rule 6c-8 under the Investment Company Act governing deferred sales loads on variable annuity contracts?
• The VLI Rules provide an exemption from the redeemability provisions of the Investment Company Act generally for “established administrative procedures of the life insurer” relating to, among others, issuance, transfer, and redemptions of variable life insurance contracts. What procedures have developed since the rules were adopted for which an exemption is appropriate?
• Should the VLI Rules be amended to eliminate exemptions for managed separate
• Should the VLI Rules be amended in any other manner to reflect current legal requirements and industry practice, and if so, how?
The Commission proposes to provide a transition period after the effective date of the amendments to give registrants sufficient time to update their prospectuses and to prepare new registration statements under the amendments. We would require all initial registration statements on Forms N-3, N-4, and N-6, and all post-effective amendments that are annual updates to effective registration statements on these forms, filed 18 months or more after the effective date, to comply with the proposed amendments. A registrant could rely on rule 498A to satisfy its obligations to deliver a variable contract's statutory prospectus beginning on the effective date of the rule provided that the registrant is also in compliance with the amendments to Forms N-3, N-4, or N-6 (as applicable). We would also require variable contract registrants to submit to the Commission certain specified disclosures in Inline XBRL within the same 18-month compliance period. Further, our position with respect to Alternative Disclosure Contracts and/or any final rules associated with discontinued contracts would come into effect as of the effective date of rule 498A.
We request comment on the proposed compliance date, including whether the compliance date for using Inline XBRL to file certain specified disclosures should be different (if so, why), and whether the Commission should adopt a transition period after the effective date of the amendments for its position with respect to Alternative Disclosure Contracts if a summary prospectus framework is adopted.
We are mindful of the costs imposed by, and the benefits obtained from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the Securities Act, and section 2(c) of the Investment Company Act state that when the Commission is engaging in rulemaking under such titles and is required to consider or determine whether the action is necessary or appropriate in (or, with respect to the Investment Company Act, consistent with) the public interest, the Commission shall consider whether the action will promote efficiency, competition, and capital formation, in addition to the protection of investors. Further, section 23(a)(2) of the Exchange Act requires the Commission to consider, among other matters, the impact such rules would have on competition and states that the Commission shall not adopt any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The following analysis considers, in detail, the potential economic effects that may result from the proposed rule, including the benefits and costs to investors and other market participants as well as the broader implications of the proposal for efficiency, competition, and capital formation.
The proposed rule allows insurers to satisfy prospectus delivery requirements for variable contracts by providing investors with a summary prospectus while making statutory prospectuses and other documents available online. The proposed approach contemplates the use of two types of summary prospectuses: An initial summary prospectus to be provided to new investors, and an updating summary prospectus to be provided to existing investors. To help investors make informed investment decisions, each type of summary prospectus uses a layered disclosure approach designed to provide investors with key information relating to the contract's terms, benefits, and risks in a concise and more reader-friendly format, with access to more detailed information available online and electronically or in paper format on request. The proposed rule would permit satisfaction of any portfolio company prospectus delivery obligations if, among other conditions, the portfolio company summary and statutory prospectuses are posted at the website address specified on the variable contract summary prospectus.
We are also proposing to amend the registration forms for variable contracts to update and enhance the disclosure regime for these investment products. Additionally, we are proposing to require registrants to use Inline XBRL when filing certain disclosures contained in the contract statutory prospectus with the Commission. Finally, if the proposed summary prospectus framework is adopted, the Commission would take the position that if an issuer of an existing contract does not file post-effective amendments to update a variable contract registration statement and does not provide updated prospectuses to existing investors, under certain circumstances, this would not provide a basis for enforcement action so long as investors receive certain alternative disclosures (the Commission's position on “Alternative Disclosure Contracts,” as discussed above
We note that, where possible, we have attempted to quantify the costs, benefits, and effects on efficiency, competition, and capital formation expected to result from the proposed rule. In some cases, however, we are unable to quantify the economic effects because we lack the information necessary to provide a reasonable and reliable estimate. For example, because summary prospectuses offer a less lengthy, less complex disclosure alternative compared to statutory prospectuses, we expect that readership of variable contract disclosure would increase. We do not have data on the extent to which the use of summary prospectuses enhances readership compared to a scenario in which variable contract investors were only to receive a statutory prospectus and not a summary prospectus.
We are concerned that the volume, format, and content of disclosures in the variable contract context may make it difficult for investors to find and understand key information that they may want to make an informed investment decision. Section III.B.1 below provides an overview of the variable products market, including discussion of total assets, sales, organizational structures, and investor demographics. Our view of this market is based on statistics that describe the variable annuity market because we have not identified a reliable data source of information on the variable life insurance market. We invite commenters to provide data to assist us in forming a more complete understanding of the variable life insurance portion of the overall variable products market. Section III.B.2 provides an overview of existing statutory and regulatory disclosure requirements for variable products.
In 2017 there were a total of 2,327 unique variable annuity products offered by a total of 33 companies.
Also in 2017, variable annuity sales totaled $91.8 billion.
A variable contract investor may allocate his or her contract purchase payments to a range of options offered through an insurance company's separate account. Separate accounts may be registered as management companies or UITs. As of the end of calendar year 2017, there were five separate accounts registered as management companies and 723 structured as UITs.
Eighty-six percent of individual annuity investors purchased their first annuity before age 65, including 47% who were between the ages of 50 and 64 years old.
Currently, the default method for delivering the variable contract prospectus and the underlying portfolio company prospectuses is by printing and mailing paper copies of the documents to investors. While the costs of providing paper copies of variable contract prospectuses are borne by the insurer, the allocation of the costs of printing and mailing the portfolio company prospectuses depends on the terms of the participation agreement between the insurance company and the portfolio company.
Because insurers are not required to report investors' delivery elections to the Commission, we lack verifiable data on the percentage of variable contract prospectuses that are currently delivered electronically. In a 2016 letter to the Commission, one commenter estimated based on a survey of insurers conducted in 2015 that, generally, less than 15% of contract owners have affirmatively consented to electronic delivery.
As discussed in section II.C above, Commission staff has issued a series of no-action letters, referred to in this release as the “Staff Letters,” stating that the staff would not recommend enforcement action if issuers did not update the variable contract registration statement and deliver updated prospectuses to existing investors, so long as certain conditions were met, including sending alternative disclosures to investors. We estimate that as of the end of calendar year 2017, approximately 14% of existing variable annuity contracts had issuers that were operating in the manner that the Staff Letters describe (hereinafter, we refer to contracts whose issuers are currently operating in the manner that the Staff Letters describe as “In-Force Alternative Disclosure Contracts”).
The proposed rule would create a choice for insurers. They may continue to meet their prospectus delivery obligations by providing the statutory prospectus, or they may satisfy these obligations by providing a summary prospectus and making statutory prospectuses and other required documents available online. Those insurers that expect to benefit by providing summary prospectuses will choose to rely on the proposed rule to meet their prospectus delivery obligations.
If insurers choose to meet their prospectus delivery obligations by delivering summary prospectuses to investors, with other documents available online, investors will then have a choice as well. Under the layered disclosure framework we are proposing, investors will receive information in the form of a summary prospectus, with more detailed information available online if the investor chooses to access it. Thus, investors can continue to review the statutory prospectuses by accessing them online, or they may request paper or electronic delivery of statutory prospectuses on an ad hoc basis. Alternatively, investors may choose only to consult the summary prospectuses. Further, if investors want to rely on some combination of summary and statutory prospectuses to receive information about the contract, that choice is available to them as well.
We expect a vast majority of insurers will choose to use summary prospectuses. Thus, we expect that the vast majority of investors will have the option to use both summary prospectuses and statutory prospectuses in their decision-making, in whatever proportion investors think is best for their preferences. We discuss below the benefits and costs to both investors and insurers of the new options presented by the proposed contract summary prospectus regime and associated new optional delivery method for portfolio company prospectuses.
Should insurers choose to use summary prospectuses, investors may benefit in a number of ways.
First, investors are likely to benefit from the simplification of disclosure associated with initial summary prospectuses. We understand that contract statutory prospectuses may include disclosure about contract features and options that the registrant may no longer offer to new investors. Aggregating disclosures for multiple contracts, or currently-offered and no-longer-offered features and options of a single contract, creates complexity that can hinder investors from distinguishing between contract features and options that apply to them and those that do not.
For example, a separate account could offer different contracts over time, but with the contracts having substantially similar names. Likewise, separate accounts could offer different contracts at a single point in time, but with the contracts also having substantially similar names. Thus, contract investors reviewing lengthy statutory prospectuses may find it difficult,
In contrast, the proposed initial summary prospectus would be limited to describing only the contract and features currently available under the statutory prospectus. We believe this narrower focus could facilitate investors' understanding of their variable contract's features and risks and make these features and risks more salient. In reviewing the more targeted information in the initial summary prospectus, investors will be able to more easily and more efficiently understand the product they are investing in, leading to more informed investment choices.
Moreover, the initial summary prospectus is designed to provide investors with key information relating to the contract's key terms, benefits, and risks. The overview would describe the parties to the contract (the issuer and investor), and provide readers with basic information relevant to the cash flows of the contract, such as premium payments and benefits. Further, the Key Information Table includes aspects of variable contracts that investors have most frequently stated that they failed to fully understand according to the complaints database maintained by the Commission's Office of Investor Education and Advocacy,
Later sections of the initial summary prospectus would provide investors more detailed information about the cash flows related to contract purchase. One section would provide information about cash flows to the insurer, such as initial and subsequent purchase and premium payments. Other sections discuss cash flows investors can expect to receive, such as death benefits and other benefits. The initial summary prospectus for variable life insurance contracts also includes a section on how a contract could lapse, and thereby reduce payouts to investors. Finally, a section on withdrawal and surrenders discusses how accessing the money in a variable contract early affects the payouts that an investor should expect to receive. This basic information about cash flows would help investors value a variable contract and determine whether the contract would help them meet their financial goals. Taken together, the concise content provided in the initial summary prospectus could facilitate investors' evaluation and comparison of contracts at the time of investment and re-evaluation of contracts during the free look period. This could reduce the risk of inappropriate investments in variable contracts or inefficient matching of investors to variable contracts.
In addition, given the time required to review a statutory prospectus, investors may benefit from summary prospectuses because they offer a shorter alternative to statutory prospectus disclosure. Indeed, there is evidence that suggests that consumers benefit from summary disclosures.
Further, investors allocate their attention selectively,
Moreover, potential variable contract investors that choose to read disclosures despite their length may face “information overload,” causing them to make inefficient decisions about the size of their variable contract positions, their selection of optional benefits, or the
We note that these benefits are potentially magnified given the demographic profile of variable contract investors. The average age of annuity investors is 70.
The presentation proposed for the initial summary prospectus may also reduce the investor effort required to compare variable products when an investor considers a new investment. Information provided in a concise, user-friendly presentation could allow investors to compare information across products and as a result, may lead investors to make decisions that better align with their investment goals.
Additionally, the proposed framework for variable contract summary and statutory prospectuses also includes design elements to facilitate investor use. In particular the proposed rule includes requirements for linking both within the electronic version of a contract statutory prospectus and between the electronic versions of the contract statutory prospectus and the contract summary prospectus. The linking requirement would permit investors who use the electronic versions of contract prospectuses to quickly navigate between related sections within the contract statutory prospectus and back and forth between related sections of the contract summary prospectus and the contract statutory prospectus.
Finally, the proposed rule would additionally require that contract documents required to be posted online remain available on the website for at least 90 days. This requirement mirrors the online availability requirement for the mutual fund summary prospectuses used by most portfolio companies. As a result, investors who prefer to access the disclosure documents online could be certain that the documents for both the contract and the portfolio companies would be available for the same period of time.
The proposed updating summary prospectus will have many of the same benefits for investors associated with the initial summary prospectus discussed above associated with presenting key information in an easier and less time-consuming manner for investors. Specifically, because many terms of the variable contract do not change from year-to-year, the contract statutory prospectus may contain large amounts of disclosure that is duplicative of disclosure that the investor has previously received. Those changes that do occur may be important to investors, but the disclosure about these changes could be difficult for the investor to identify given the volume of prospectus disclosure that investors currently receive, and the current lack of a requirement to identify new or changed information.
Under the proposed rule, the updating summary prospectus would include a concise description of important changes affecting the statutory prospectus disclosure relating to certain topics that occurred within the prior year—namely the Fee Table, the standard death benefit, other benefits available under the contract, and portfolio companies available under the contract. We believe that these are topics that are most likely to entail contract changes and, for the reasons previously noted, are the types of contract changes most likely to be important to investors because they affect how investors evaluate variable contracts and are relevant to investors when making additional investment decisions or otherwise monitoring their contract. The proposed updating summary prospectus, if used by insurers to satisfy their prospectus delivery obligations, would likely reduce the burden on investors and increase their understanding of their contract by highlighting certain changes to the contract made during the previous year, while foregoing the repetition of most information that had remained unchanged.
We further recognize that the changes highlighted in the updating summary prospectus are only those relative to the immediately preceding updating summary prospectus and statutory prospectus. Accordingly, if an investor wanted to understand the changes to his or her contract since he or she initially purchased the contract, the investor would need to review all of the updating summary prospectuses (or each updated statutory prospectus). However, we have designed the updating summary prospectus to allow investors to better focus their attention on new or updated information relating to the contract. As noted above, we believe that existing investors in a variable contract would benefit more from a brief summary of changes that have occurred in the contract than a document like the initial summary prospectus, which is designed for someone making an initial investment decision. Therefore, we believe that requiring the proposed updating summary prospectus to only provide information on the most recent changes strikes the appropriate balance between increasing investor's understanding of and access to information about changes in the updated statutory prospectus and imposing additional costs on insurers to create more tailored updating disclosures comparing the current state of the contract to the original contract for each contract holder.
The updating summary prospectus also would include the Key Information Table. The inclusion of this key information could benefit investors by reminding them of the most important features of the contract, including the contract's fees and expenses, risks, restrictions, tax implications, and investment professional compensation. Finally, the updating summary prospectus would include an appendix that provides summary information about the portfolio companies that the registrant offers under the contract. The inclusion of this portfolio company information could benefit investors by reminding them of one of the most important decisions they face during the lifecycle of a contract—that is, whether and where to reallocate funds among the portfolio companies or investment options available to them.
While we believe that, should insurers opt to use summary prospectuses, the majority of investors would benefit from their disclosures, certain investors may incur costs. For example, although research indicates that investors generally prefer to receive summary disclosures
Moreover, those investors who prefer paper copies of statutory prospectuses and do not have ready access to the internet (and the ability to print out the statutory prospectus that is made available online
As described in section III.C.1.b below, we anticipate that the new optional delivery method for portfolio company prospectuses will result in cost savings from reduced printing and mailing expenses. To the extent that a portfolio company bears the printing and mailing expenses associated with portfolio company prospectuses, we expect that the reductions would benefit the portfolio company, as well as variable contract investors who have allocated contract value to the portfolio company (except perhaps in certain circumstances such as where the portfolio company is operating under an expense limitation arrangement). To the extent that the insurance company bears these costs, we expect that the reductions would benefit the insurance company, which may pass on such cost savings to existing variable contract investors and to new variable contract investors in the pricing of variable contracts offered in the future.
We note that we expect the benefit in terms of lower pricing of variable contracts would be small. We estimate the cost saving, per prospectus mailed, for the underlying portfolio company prospectuses to be $0.18.
While we believe that the proposed framework may benefit investors through reduced costs, certain investors may incur additional costs. While the portfolio company prospectuses will be available online and in paper or
Also, as discussed with respect to variable contract prospectuses above, internet access is not universal among variable contract investors, and investors who would prefer paper copies of prospectuses would be required to request paper delivery of those prospectuses on an ad hoc basis which could, in turn, delay investor review of those prospectuses.
The total cost of providing disclosure in any particular framework is the sum of costs associated with producing the disclosure materials, including labor and legal fees, and the costs associated with delivery of the disclosure materials, including printing and mailing costs and costs of making the disclosures available on a website. Insurers will benefit from the options provided by the proposed rule, to the extent that providing layered disclosure through a summary contract prospectus regime (including costs of producing and delivering initial summary and updating summary prospectuses and of making statutory prospectuses, portfolio company prospectuses, and other documents available online) is less expensive than providing statutory prospectuses to new investors and updated statutory prospectuses to existing investors annually, along with portfolio company prospectuses and other related documents.
As discussed later in this section, because we expect a primary driver of the benefit for insurers providing summary prospectuses to be cost savings associated with no longer printing and mailing lengthy statutory prospectuses for investors that currently receive these documents in paper, the magnitude of the benefit depends in part on the extent to which investors currently elect electronic delivery of materials associated with their variable contract. The higher the percentage of investors currently electing electronic delivery rather than paper, the smaller the benefit derived from foregoing the printing and mailing costs. Accordingly, to estimate the potential cost reduction associated with the proposed rule, as noted above, we assume that 15% of the contract investors currently elect electronic delivery of the statutory prospectus both at sale, and annually thereafter.
To estimate the overall impact of the proposed rules on insurers' cost of prospectus delivery, we begin by estimating the number of variable contract statutory prospectuses delivered in paper format. This requires a number of assumptions:
• We estimate that insurers will ultimately use summary prospectuses for 95% of contracts
• Issuers of In-Force Alternative Disclosure Contracts provide alternative disclosures in lieu of statutory prospectuses.
• We assume 15% of investors elect electronic delivery of prospectuses.
Next, we estimate the number of statutory prospectuses that would no longer be provided to investors in paper in connection with new contract purchases. In 2017, there were 18.7 million contracts in force.
We next estimate the cost difference, per prospectus, of sending summary prospectuses (initial summary prospectuses, as well as updating prospectuses) rather than statutory prospectuses.
As noted earlier in this section, another key component of costs that insurer will consider when determining whether to provide summary prospectuses under the proposed rules is the cost of producing the initial and updating summary prospectuses. Insurers choosing to provide summary prospectuses would bear a one-time cost of preparing both the initial summary prospectus and the updating summary prospectus, as well as costs associated with preparing updated versions of both documents in the future on at least an annual basis.
Insurers that choose to provide summary prospectuses are required to make statutory prospectuses and other materials available online.
Insurers are also required to include inter- and intra-document linking and special terms definitions. One linking requirement would allow the reader to move back and forth between a table of contents of the contract statutory prospectus or SAI, and the related sections of each document. Although prospectuses and SAIs are not required to have individual headings corresponding to the items in the registration forms, we assume that the sections of a prospectus or SAI would correspond with the item requirements of the forms. We estimate that Form N-3 filers would require 33 back-and-forth internal links, Form N-4 filers would require 27, and Form N-6 would require 28. The other linking requirement would allow the reader to move back and forth between each section of the summary prospectus and any related section of the contract statutory prospectus and SAI that provides additional detail. This back-and-forth movement could occur either directly from the summary prospectus to the relevant section of the statutory prospectus or SAI, or indirectly by linking from the summary prospectus to a table of contents in the statutory prospectus or SAI. For our analysis, we assume direct links as those will tend to be more costly when compared with indirect linking through a table of contents.
An initial summary prospectus for a Form N-3 registrant or a Form N-4 registrant includes eight sections and an initial summary prospectus for a Form N-6 registrant includes nine sections. However, the Key Information Table has instructions stating that, wherever feasible, a registrant should provide cross-references or links to the location in the statutory prospectus where the subject matter is described in greater detail. There are 11 sections of the Key Information Table. Therefore, we estimate that there would be 18 back-and-forth links between Form N-3 and Form N-4 registrant initial summary prospectuses and statutory prospectuses, and 19 back-and-forth links between Form N-6 registrant initial summary prospectuses and statutory prospectuses.
An updating summary prospectus for a Form N-3, Form N-4, or Form N-6 registrant includes three sections, one of which, the Key Information Table, includes 11 sections. One section is the “Updated Information About Your Contract” section. The number of links in this section would depend on the number of updates discussed. For example, assuming discussion of four updates, we estimate the number of back-and-forth links between a Form N-3, Form N-4, or Form N-6 registrant's updating summary prospectus and statutory prospectus to be 16.
The proposed rule would also require that investors either be able to view the definition of each special term used in an online summary prospectus upon command (
Finally, funds may incur costs in connection with the requirement to provide a statutory prospectus and other documents upon request of an investor. We estimate that the annual cost associated with printing and mailing these documents would be $500 per registrant.
Form N-4 and Form N-6 registrants that use summary prospectuses may also benefit from the option to provide prospectuses for all underlying portfolio companies online.
Moreover, as with the reduction in printing and mailing costs associated with the delivery of the contract statutory prospectus, the magnitude of these cost savings is dependent on the extent to which investors currently elect to receive electronic versions of the portfolio company prospectuses rather than receive them in paper. The higher the percentage of investors who currently receive paper copies of portfolio company prospectuses, the greater the reduction in printing and mailing costs arising from the new delivery option. We estimate that 85% of investors currently receive paper copies of these documents.
We estimate that printing and mailing expenses for summary prospectuses for underlying portfolio companies to be $0.53 per set of prospectuses.
Although we do not have data on the use of summary prospectuses for the underlying portfolio companies offered in variable contracts, we understand that delivery of summary prospectuses is typical. To the extent that there are portfolio companies for which no summary prospectus has been created, there would be costs associated with the summary prospectus requirement. Those costs would include the cost of creating the document, making sure that the summary prospectus is structured appropriately, and costs associated with filing the summary prospectus after it is first used under rule 497. We believe that these costs would be small, however. For example, the content of a mutual fund summary prospectus is just Items 2 through 8 of Form N-1A, with the cover page as specified by rule 498.
Funds may incur costs in connection with the requirement to provide summary prospectuses for underlying portfolio investments upon request of an investor. We estimate that the annual cost associated with printing and mailing these prospectuses would be $500 per registrant.
Thus, we estimate a reduction of costs related to delivery of portfolio company summary prospectuses of $6,573,000.
As discussed above, if the proposed summary prospectus framework is adopted, the Commission would take the position that Alternative Disclosure Contracts (contracts operating in the manner described in the Staff Letters as of the effective date of any final summary prospectus rules) are permitted to continue to operate in such a manner.
The Commission's position on Alternative Disclosure Contracts recognizes that the proposed rule and form amendments are expected to significantly reduce certain burdens and costs associated with the current contract and portfolio company prospectus framework.
Furthermore, we acknowledge that there are certain other costs and burdens that are currently reduced for issuers of In-Force Alternative Disclosure Contracts, but would not be similarly reduced under the proposed rule and form amendments. For example, a registrant that relies on proposed rule 498A would still bear burdens of maintaining and updating the contract registration statement,
We estimate that approximately 2.68 million existing variable annuity contracts were issued pursuant to registration statements for In-Force Alternative Disclosure Contracts.
With respect to insurers with variable contracts outstanding and those issuing new contracts, the Commission's position on Alternative Disclosure Contracts likely will result in some costs. Existing contracts whose issuers are
At the same time, we believe that the Commission's position with respect to Alternative Disclosure Contracts will provide investors more pertinent information to monitor their contract,
The proposed amendments to Forms N-3, N-4, and N-6 are intended to reflect the evolution of variable contract features including, in particular, the prevalence of optional benefits that insurers offer under these contracts, and to provide greater consistency among the forms.
For example, under the proposed amendments, the statutory prospectus would include the same Key Information Table, tabular presentation of optional benefits, and tabular appendix of information about underlying portfolio companies that appears in the summary prospectus. This means that all variable contract investors, not just investors in contracts that use the summary prospectus, would have access to information as presented in summary prospectuses. Further, the proposed amendments would require additional information about standard and optional benefits that a contract may offer. There is no current form requirement regarding optional benefits. The proposed amendments would also increase consistency of disclosure presentation requirements among variable contracts that register on different form types. This increased consistency could help investors compare variable contracts across products that register across different form types.
Certain investors who are considering variable annuities may also be considering variable life insurance (and vice versa). We believe a consistent presentation and common disclosure of elements that we consider useful in explaining variable contracts' features and risks could reduce investor confusion and promote investor understanding across types of variable products. Also, we believe that more uniformity of disclosures across variable contract types may make it easier for investors to compare similar products.
We are proposing amendments to the General Instructions of Forms N-3, N-4, and N-6 regarding the preparation and filing of registration statements. First, these amendments would prescribe the ordering and location of the Overview of the Variable Annuity Contract, the Key Information Table, and the Fee Table. In particular, the proposed amendments would place this information at the beginning of the prospectus, and could benefit investors to the extent that this placement makes information about a variable contract's key features, costs, and risks more readily available. We do not anticipate that these proposed changes would impose substantial costs on investors. We acknowledge that investors familiar with the current ordering of information on Forms N-3, N-4, and N-6 could bear one-time costs associated with adjusting to the proposed presentation of information on these forms.
Second, we are proposing amendments to the General Instructions that would provide new guidance in each of the forms that addresses when a single prospectus may be used to describe multiple contracts and when multiple prospectuses may be included in a single registration statement. To the extent that ensuring that prospectuses and registration statements cover contracts with similar features, costs, and risks facilitates investors' understanding of contract characteristics, these proposed amendments may benefit investors. Similarly, to the extent that the proposed guidance results in presentation of information that investors are unaccustomed to, investors may bear costs associated with adjusting to a new presentation of variable contract information. While we do not have information available to quantify these benefits, we believe that these proposed amendments are consistent with current industry practice and we therefore do not expect these benefits to be substantial.
For Form N-3 and Form N-4 registrants, we propose to relocate the AUV tables from the prospectus to the SAI, and shorten the time period covered by the AUV tables. Further, we propose to include an instruction permitting registrants to omit AUV tables altogether if they provide each investor with an annual account statement that discloses, with respect to each class of accumulation units the investor holds, the actual performance of each subaccount during the prior fiscal year. Accumulation unit values and the number of accumulation units outstanding permit investors to derive summary information about the performance of the variable contracts covered by a statutory prospectus. While shortening the time period covered by the AUV tables could impose costs on investors by reducing the amount of historical AUV information available on a statutory prospectus, we do not believe these costs will be substantial. This is because we believe the proliferation in combinations of contract changes has generated a proliferation in separate classes of accumulation units disclosed on statutory prospectuses, rendering the current AUV tables less useful for investors.
The proposed form amendments would increase consistency of disclosure presentation requirements among variable contracts that register on different form types. We anticipate that this increased consistency among Forms N-3, N-4, and N-6 could have the benefit of reducing costs among sponsors that register variable contracts on multiple of these registration form types. For example, we anticipate that this would make the production of registration statements simpler, in that form instructions and content requirements would in many cases be the same (except in cases where structural differences or product differences that the different form types indicate would lead to requirements that would differ across the form types).
For Form N-3 and Form N-4 registrants, we propose to relocate the AUV tables from the prospectus to the SAI, where they are more appropriately located with certain detailed information that traditionally appears in the SAI. We also propose to decrease the time periods for which the required information must be presented from 10 years to 5 years. Further, we propose to include an instruction permitting registrants to omit AUV tables altogether if they provide each investor with an annual account statement that discloses, with respect to each class of accumulation units the investor holds, the actual performance of each subaccount during the prior fiscal year. The proposed amendments should reduce the costs related to preparing registration statement disclosure of information relating to the contract's accumulation unit values for Form N-3 and Form N-4 registrants. We estimate the implementation costs for each of the three registrant types, while netting the reduced burden for Form N-3 and Form N-4 registrants, below.
In addition to these implementation costs, these proposed changes to forms could impose costs related to proposed changes presentation of information. In particular, the proposed amendments may impose costs on insurers to the extent that they limit insurers' flexibility in choosing the placement of information within the statutory prospectuses. While we do not have data necessary to quantify these costs, we do not expect them to be substantial.
The proposed amendments would require certain information from variable contract statutory prospectuses to be filed with the Commission in Inline XBRL. Inline XBRL is a specification of XBRL that is both human-readable and machine-readable for purposes of validation, aggregation, and analysis. The proposed Inline XBRL requirement is expected to benefit investors, filers, the Commission, and other data users, including third-party analysts, investment professionals, academic researchers, and other regulators. The availability of information from statutory prospectuses in Inline XBRL could enable variable contract investors, generally through information intermediaries such as third-party data aggregators (or by reviewing the disclosures directly), to capture and analyze disclosure information more quickly and at a lower cost, as well as to search and analyze the information dynamically, facilitate comparison of information across filers and reporting periods, and lead to better-informed investment decisions and potential gains in the efficiency of capital formation and allocation. These improvements could occur as a result of a reduction in the information barriers faced by investors and in the costs of collecting and analyzing disclosures. These benefits are expected to be greatest in instances of forms filed by a large number of registrants and for information from variable contract disclosures that is not aggregated by third-party sources today and therefore requires greater effort to extract and analyze on the part of investors. To the extent that some of the variable contract investors and third-party information providers also review disclosures of mutual funds and ETFs, those investors and information providers will have familiarity with using Inline XBRL to view and analyze disclosures from having reviewed prospectus risk/return summaries filed in Inline XBRL under the recently adopted Inline XBRL requirements for mutual funds and ETFs.
Variable contract registrants would incur costs to tag and review the required information in Inline XBRL. Some filers may perform the tagging in-house while others may retain outside service providers. We expect the outside service providers to pass along their costs to filers. Various XBRL preparation solutions have been developed and used by operating companies and open-end fund filers, and some evidence suggests that, for operating companies, XBRL tagging costs have decreased over time.
Similar to the risk/return summary requirements for mutual funds and ETFs, the proposed amendments would require variable contract registrants to submit to the Commission in Inline XBRL certain information from registration statements, post-effective amendments, and prospectuses with certain information that varies from the registration statement (rule 497 forms of
Nevertheless, we recognize that some registrants affected by the proposed requirement likely would incur initial costs to acquire the necessary expertise and/or software as well as ongoing costs of tagging required information in Inline XBRL, and that any fixed costs of complying with the Inline XBRL requirement may have a relatively greater impact on smaller filers. On an ongoing basis, registrants are expected to expend time to review the tagged information in Inline XBRL using their in-house staff. Some registrants may also incur an initial cost to license filing preparation software with Inline XBRL capabilities from a software vendor, and some may also incur an ongoing licensing cost. Other registrants may incur an initial cost to modify their existing filing preparation software to accommodate Inline XBRL preparation. Some registrants would incur the costs of filing agent services to rely on a filing agent to prepare their Inline XBRL filings. Initial costs involving investments in expertise and modifications to disclosure preparation solutions, or switching to a different software vendor or outside service provider may result in a higher compliance cost during the first year of using Inline XBRL than in subsequent years. While the costs of compliance with the Inline XBRL requirement are likely to vary across registrants, on average we estimate that direct compliance costs for a variable contract registrant on Forms N-3, N-4, and N-6, respectively, will be approximately $21,960, $15,012, and $15,012 per year, respectively, in the first three years under the proposed amendments.
For purposes of the PRA, during the first three years under the proposed Inline XBRL amendments to Form N-4, the average annual internal cost burden is estimated to be $14,112 and the average annual external cost burden per registrant is estimated to be $900. $14,112 + $900 = $15,012.
For purposes of the PRA, during the first three years under the proposed Inline XBRL amendments to Form N-6, the average annual internal cost burden is estimated to be $14,112 and the average annual external cost burden per registrant is estimated to be $900. $14,112 + $900 = $15,012.
The compliance dates under the proposed amendments are expected to give registrants additional time to obtain the necessary expertise and software, and mitigate the impact of transition on all filers, including smaller filers. However, we also expect that filers may realize benefits from the Inline XBRL requirement to the extent that making disclosures available in a structured format reduces some of the information barriers that make it costly for variable contract registrants to find appropriate sources of new investors, as discussed in section III.D below.
By making it easier to perform automated comparisons of disclosures across variable contracts, the proposed amendments also might affect sales agents. As we noted in section II.B.2 above, sales agents play a significant role in the distribution of variable contract products. For non-captive sales agents that independently compare variable contract products for recommendation to investors and prepare their own sales materials, we believe that those sales agents could benefit from the easier access and enhanced usability of information about variable contracts in a structured format, which may enable them to select variable contract offerings that are better tailored to investors' demands. Because having the required data in a structured format facilitates the analysis, aggregation, and comparison of information about variable contracts, the proposed amendments might increase competition for investor capital among sales agents offering variable contract products of individual insurers or a narrow range of variable contract products.
This section describes the effects we expect the proposed rule to have on efficiency, competition, and capital formation.
For their part, insurers only supply variable contracts to the extent they expect the benefits derived from providing the contracts to be greater than cost of supplying the contract.
These costs borne by both insurers and individuals are examples of market “frictions.” Market frictions have the effect of reducing the benefits from contracting between market participants.
Similarly, the proposed amendments to registration forms would make key information more salient for investors and would make the presentation of this information more consistent across variable contract types. Additional consistency across forms may also reduce compliance burdens for insurers that are required to file using multiple form types, as would reducing the amount of historical AUV information required to be disclosed. The resulting decrease in market frictions should lead to greater efficiency by reducing barriers that insurers may face in supplying variable contracts to investors, and reducing barriers investors may face in evaluating variable contracts sold to them by insurers, particularly during the free look period.
These increases in efficiency could manifest as a higher likelihood that investors' make investment decisions that are informationally efficient. First, it may increase the likelihood that investors choose a level of participation in variable contracts that is consistent with their overall financial needs and objectives—a level that may be higher or lower than current levels. The proposal may help promote investment in variable contracts by investors who would benefit from them. Second, an increase in the informational efficiency of investor decisions could make it more likely that investors that invest in variable contracts choose the contracts that best meet their needs and reject those that do not. Third, improved access to information resulting from more concise disclosure could facilitate more efficient investor allocation of assets across portfolio companies within variable contracts. Finally, access to clearer information about the contract terms may reduce the chances that an investor surrenders a variable contract when the costs of surrender do not justify the benefits of surrender.
Furthermore, we considered the potential impact of our position on Alternative Disclosure Contracts on efficiency. We recognize that our position likely will cause insurers issuing new contracts and issuers with variable contracts outstanding to incur additional costs due to the proposed disclosure obligations that they may not have anticipated. To the extent that these unexpected costs drive insurers to take actions to encourage investors to exchange old contracts for new contracts or to buy out existing contracts, the Commission's position may result in inefficiencies. In particular, insurer resources that are used to encourage exchanges or to buy out contract holders are resources that insurers may have put to other productive uses. However, we believe that this reduction in efficiency may be offset by the expected increase in informational efficiency associated with the enhanced disclosures that would be afforded to contract holders in lieu of the alternative disclosures described in the Staff Letters.
The proposed rule could also affect competition by requiring that information about the variable contract be presented in a concise, user-friendly way in the summary prospectus, which could allow investors to compare information across products. Requiring variable contract registrants to file certain key information in Inline XBRL could further facilitate comparisons of information across registrants by making it easier for investors (directly or through third-party data aggregators) to extract and aggregate information through automated means for analysis and comparison, which could increase competition among variable contract registrants for investor capital, particularly in combination with the proposed free look period. For example, the proposed rule requires insurers to distill certain key product information into tables. The presentation of this information in a table facilitates comparison across different products. Greater comparison across different variable products could lead to greater competition. Furthermore, by reducing the costs associated with aggregating data across variable contracts, the proposed Inline XBRL requirement could reduce barriers to entry for third-party data aggregators and induce competition among firms that supply information about variable contracts to investors, including other third-party aggregators and sales agents.
The effect on competition between insurers could be limited, however, to the extent variable contract investors continue to rely on an agent to help them select and customize their variable insurance products and do not have access to broad comparisons of variable contracts enabled by the proposed Inline XBRL requirements at the time of sale or during the free look period.
We recognize that any fixed costs of compliance with the proposed requirements, including Inline XBRL requirements, could have a relatively greater impact on small filers. However, the overall magnitude of such costs, discussed in greater detail in Section IV below, and thus the magnitude of the
Finally, we also considered the potential impact of our position on Alternative Disclosure Contracts on competition between insurers. Above, we discussed the possibility that, because contracts whose issuers are not operating in the manner described in the Staff Letters as of the effective date of final summary prospectus rules could not provide alternative disclosures after such date, the Commission's position could cause these insurers to experience future costs of disclosure obligations that they may not have anticipated. The Commission's position thus may place at a competitive advantage those insurers with a greater proportion of contracts that operate in the manner described in the Staff Letters as of the effective date of final summary prospectus rules.
The proposed Inline XBRL requirements could increase the efficiency of capital formation to the extent that making disclosures available in a structured format reduces some of the information barriers that make it costly for variable contract registrants to find appropriate sources of new investors. Smaller registrants in particular may benefit more from enhanced exposure to investors. If reporting the disclosures in a structured format increases the availability, or reduces the cost of collecting and analyzing, key information about variable contracts, smaller variable contract registrants may benefit from improved coverage by third-party information providers and data aggregators.
To the extent that the proposed rule reduces costs for some variable contract registrants, we would expect reduced costs to increase the portion of investor money that is retained as the investor's contract value, rather than used to cover expenses, resulting, over time, in a net positive effect on the level of capital invested through variable contracts. Furthermore, to the extent that reductions in expenses have a positive effect on the performance of variable contracts and attract new investors or additional capital from existing investors, the proposed rule may result in greater capital formation. We expect this effect to be small. The opposite would be expected to hold for those variable contract registrants that experience cost increases under the proposed rule.
Proposed new rule 498A would permit the use of two distinct types of contract summary prospectuses: (1) An initial summary prospectus covering variable contracts currently offered to new investors; and (2) an updating summary prospectus for existing investors. Alternatively, the Commission could mandate the use of summary prospectuses. Summary prospectuses may provide substantial net benefits to investors because they are shorter, simpler, and designed to make salient the most important variable contract terms. A mandatory regime would ensure that those benefits are available to all investors, not just those who have invested in variable contracts offered by insurers that would elect to deliver summary prospectuses.
We believe that insurers will only choose to rely on the optional summary prospectus regime should benefits outweigh the costs. While we believe that reliance on the proposed summary prospectus regime would yield cost savings for insurers, we acknowledge that these cost savings will vary across insurers and there may be insurers that do not expect benefits in excess of the expected costs of relying on summary prospectuses. Imposing a mandatory summary prospectus regime would entail imposing net costs on these insurers.
Based on our analysis of cost savings above, our expectation is that most insurers will choose to rely on summary prospectuses. Based on these factors, we believe making the use of summary prospectuses voluntary for insurers strikes the appropriate balance between offering insurers flexibility in choosing delivery methods on one hand, and making variable contract disclosures more digestible by the majority of investors, on the other.
The proposed rule would require the variable contract statutory prospectus, as well as the contract's SAI, to be publicly accessible, free of charge, at a website address specified on the cover of the summary prospectus. As we discuss above, investors who wish to use statutory prospectuses as well as summary prospectuses will bear an additional burden of accessing statutory prospectuses online. Alternatively, the proposed rule could require insurers to provide both summary and statutory prospectuses together in paper or, if the investor has elected to receive the document electronically, in electronic form. This alternative would offer the benefit, for those investors choosing to receive the documents in paper, that any investor wishing to use both summary and statutory prospectuses in his or her decision making would not be required to bear the additional burden of accessing statutory prospectuses online.
While providing both summary and statutory prospectuses together would eliminate the necessity of those investors who wish to use both summary and statutory prospectuses having to bear the burden of accessing statutory prospectuses online, we have decided not to propose this alternative for two reasons. First, rather than reducing printing and mailing costs, this alternative would create additional printing and mailing costs. We believe that the increased printing and mailing costs would cause few insurers to choose to provide both summary and statutory prospectuses. Thus,
Second, the proposed summary prospectuses would provide investors with key information relating to the
The proposed variable contract summary prospectus regime would require that the initial summary prospectus only describe a single contract that the registrant currently offers for sale, but would permit an updating summary prospectus to describe more than one contract covered in the statutory prospectus to which the updating summary prospectus relates. As an alternative, we could have proposed that the updating summary prospectus describe only a single contract.
Relative to the baseline, this alternative would be no different from the proposal in terms of the economic impacts related to the proposed initial summary prospectus, but would differ in economic effects related to the updating summary prospectus. An updating summary prospectus that describes solely the contract held by an investor could be easier for that investor to consume than an updating summary prospectus that describes more than one contract, and therefore could be more beneficial to investors than the proposed approach. The magnitude of this increase in benefits depends on the extent to which information about multiple contracts confuses investors or causes investors not to read the information, which, in turn, likely depends on the number of changes to contracts and the number of different contracts that would be presented in the updating summary prospectus. We acknowledge that this alternative would permit investors to easily focus on key information on a single contract. However, we preliminarily expect this increase in benefits to be limited because, based on our current understanding of variable contracts, there are a limited number of changes to contracts in any given year, and many of those changes (such as changes to the available portfolio companies or the addition of new optional benefits) typically apply to similar contracts in the same prospectus. Accordingly, although the section of the updating prospectus that describes changes to the contracts would cover multiple contracts, the number changes concerning any individual contract is expected to be relatively brief, thus minimizing the amount of inapplicable information the investor would read.
Under this alternative, insurers would be required to produce and deliver to investors a separate updating summary prospectus for each contract. An insurer could limit the costs associated with printing and mailing by only delivering those updating summary prospectuses to an investor that holds the contracts they describe. However, such a process would likely entail systems upgrades and changes to back-office operations needed to tailor mailings on an investor-by-investor basis.
We considered two closely-related alternative approaches to the proposed summary prospectus regime in which only initial contract purchasers would receive a summary prospectus, and afterwards, investors who make additional purchase payments or who reallocate contract value would either (1) receive no updating summary prospectus or (2) receive only a notice that the statutory prospectus is available online. Such an alternative would likely yield larger cost savings for insurers because insurers would not be required to produce, print, and mail updating summary prospectuses and would instead incur only costs associated with providing the initial summary prospectus when an investor first purchases the contract or reallocates contract value.
However, under either of these alternatives, investors would not benefit from the ongoing layered disclosure provided by the updating summary prospectus. As discussed above, the Commission believes that the updating summary prospectus's brief description of any important changes to the contract that occurred within the prior year allow investors to better focus their attention on new or updated information relating to the contract. Relatedly, the updating summary prospectus would include certain information required in the initial summary prospectus that we consider most relevant to investors when making additional investment decisions or otherwise monitoring their contracts, and investors would not have access to this concise presentation of key information under either alternative. For these reasons, we have not proposed this alternative.
The proposed amendments would require variable contract registrants to file certain information from statutory prospectuses with the Commission in Inline XBRL.
As an alternative, we could allow but not require variable contract registrants to file the information in Inline XBRL. Compared to the proposed amendments, a fully voluntary Inline XBRL program would lower costs for those filers, particularly filers that do not already file information in Inline XBRL. However, a voluntary program would reduce the usability of the required data. If the information were not submitted by the registrant in a structured, machine-readable format, investors and other data users who wish to instantly analyze, aggregate, and compare the data would be required to incur the costs of paying a third-party provider to manually rekey the data, review the data for data quality problems during the duplication process, and disseminate the data to the users. Alternatively, investors or data users unwilling to pay a third-party provider would incur the time to do that process themselves. In either scenario, the data would not be usable in as timely a manner if it were made machine-readable. In addition, under a voluntary program, data that is not submitted in Inline XBRL would not be validated, thus decreasing the overall data quality of the data submitted. Poor data quality reduces any data user's ability to meaningfully analyze, aggregate, and compare data.
Under the proposed amendments, filing the information in Inline XBRL would be required for Key Information Table, Fee Table, Principal Risks of Investing in the Contract, Other Benefits Available Under the Contract, and/or Portfolio Companies [Investment Options] Available Under the Contract. The information proposed to be filed in Inline XBRL largely parallels the information that is required of mutual funds and ETFs, and we believe is likely to be of greatest utility for investors and
The proposed amendments provide filers with an 18-month transition period after the effective date of the amendments to give registrants sufficient time to update their prospectuses and to prepare new registration statements that comply with the amendments, including with the Inline XBRL tagging requirement. As an alternative, we could provide filers with a shorter or longer transition period. Compared to the proposed amendments, a longer transition period would cause filers to defer Inline XBRL compliance costs and may ease the transition for filers, particularly smaller filers and filers that encounter challenges in acquiring expertise and software solutions needed to prepare Inline XBRL filings. However, a longer transition period also could defer the benefits of making the information available in a structured format to investors in variable contracts, compared to the proposed amendments. Conversely, compared to the proposed amendments, a shorter transition period would cause filers to incur Inline XBRL compliance costs earlier and may make the transition more difficult for smaller filers and filers that lack expertise and software solutions needed to prepare Inline XBRL filings. It also would allow investors to realize the benefits of access to key information in a structured format earlier than under the proposed amendments. Based on the state of the Inline XBRL standard today, and to allow filers the flexibility of additional time to comply, we are providing all filers with a transition period.
As another alternative, we could require the disclosures to be filed in another structured format, such as the XBRL or XML format. Compared to the proposed Inline XBRL requirement, the use of the XBRL format entails complete duplication of the data, which can adversely affect the quality and usability of the structured data as well as the efficiency and cost of preparation and review of the structured data. Compared to the proposed requirement to use Inline XBRL, the alternative to requiring the use of XML could result in lower costs for filers. However, compared to the proposed amendments, XML would provide less flexibility in tagging complex information as well as less extensive data quality validation capabilities. In addition, neither the XBRL nor XML options are human-readable. As a result, investors and other data users would not have the benefits of having a document that is both machine-readable and human-readable, or the benefits of the Inline Viewer when accessing the filing, such as enhanced search features, filtering capabilities, and built-in definitional references. Investors and other data users would need to access two different documents to view and analyze the same data. Filers would also have diminished data quality benefits. Because Inline XBRL embeds structured data directly into an HTML document, filers would not need to review a separate structured data document to identify and correct data quality errors. Moreover, by using an Inline XBRL viewer, filers can more easily identify discrepancies in their data before filing.
The Commission is proposing amendments to Forms N-3, N-4, and N-6. Collectively, these amendments are meant to update and enhance the disclosures to investors in variable annuity contracts, and to implement the proposed summary prospectus regime. An alternative would be for the Commission to propose a subset of the proposed amendments to the registration forms. Fewer amendments to the registration forms could be less costly for registrants, because registrants would be required to make fewer changes to their disclosure. However, the proposed form amendments also simplify certain current disclosure requirements, and so the net economic effects of proposing only a subset of the proposed amendments would depend on the particular subset of proposed amendments. As described in Section II.D. above, we believe that the form amendments that we propose promote investor understanding of variable contracts by presenting information in a clear manner and by reflecting industry developments. Proposing only a subset of these amendments could result in less investor understanding relative to the understanding resulting from the proposed amendments. For this reason, we have not proposed this alternative. However, we request comment above about each of the proposed amendments, and will assess, based on the comments we receive, if any of the proposed amendments would not further the goals of this rulemaking proposal.
Additionally, the Commission is proposing a new General Instruction in each of Forms N-3, N-4, and N-6 that is meant to encourage the use of disclosure effectiveness principles in variable contract disclosure. Specifically, proposed General Instruction C.3.(c) in each form would encourage registrants to use, as appropriate, question-and-answer presentations, tables, side-by-side comparisons, captions, bullet points, numeric examples, illustrations or similar presentation methods.
Also, the Commission is proposing a requirement that the Key Information Table include cross-references to the location in the statutory prospectus where the relevant subject matter is described in greater detail (and the requirement for cross-references in electronic versions of the summary prospectus and/or statutory prospectus to link directly to the location in the statutory prospectus where the topic is discussed in more detail). As an alternative to this proposed instruction, we could propose to require that, where a topic is summarized in the prospectus and is discussed in more detail elsewhere in the prospectus, the summarized topic must include a cross-reference (and a hyperlink in electronic document versions) to the location
Instead of permitting contracts whose issuers are currently operating in the manner that the Staff Letters describe to continue to operate in such manner, the Commission could require issuers of all contracts to prepare updated registration statements and comply with either the current standard prospectus delivery requirements or the optional summary prospectus regime. In this scenario, investors in In-Force Alternative Disclosure Contracts would benefit from the increased disclosure, either from receiving the statutory prospectus or the optional initial and updating summary prospectuses, while continuing to have access (either upon request or online, under the summary prospectus regime) to the financial statements they were receiving as part of the Staff Letters' alternative disclosures. Moreover, as explained in detail above, the optional summary prospectus regime, if relied on, could provide significant additional benefits for investors in terms of facilitating the review and understanding of available disclosures.
With respect to the impact on insurers, under this alternative, issuers of In-Force Alternative Disclosure Contracts would incur significant costs to update their registration statements, most of which have not been updated for many years.
In addition, issuers of In-Force Alternative Disclosure Contracts would no longer incur costs to deliver financial statements, which we estimated at $0.27 per contract. However, they would incur printing and mailing costs to deliver the contract statutory prospectus, which we estimated at $0.53 per contract. Still, the proposed optional summary prospectus framework would likely mitigate those increases by only requiring delivery of a shorter summary prospectus, as described above. We estimated the cost of delivering the summary prospectus to be $0.35 per contract. Moreover, the proposed summary prospectus regime also permits electronic delivery of underlying portfolio company prospectuses, which, if relied on, may further mitigate costs that an insurer would incur if it were not able to operate in the manner that the Staff Letters describe. We estimated the cost of delivery of the portfolio company summary prospects to be $0.53 per contract.
On balance, given the burdens associated with preparing an updated registration statement and compliance with either standard prospectus delivery requirements or the proposed optional summary prospectus regime, we believe contracts whose issuers currently are operating in the manner that the Staff Letters describe should be permitted to continue doing so.
As discussed above, the Commission is taking the position that, should it adopt the proposed summary prospectus framework, Alternative Disclosure Contracts (contracts operating in the manner described in the Staff Letters as of the effective date of any final summary prospectus rules) would be permitted to continue to operate in such a manner after the final rules' effective date. Under the proposed approach, all other current and future contracts would be subject to the proposed optional summary prospectus regime.
If the Commission were to adopt either of these alternatives, the Commission could take the position, as it does in the Proposed Framework, that Alternative Disclosure Contracts would be permitted to continuing operating in the manner described in the Staff Letters. Alternatively, the Commission could determine that the adopted alternative applies to
Besides the economic effects described below with respect to existing contracts, to the extent the alternatives create benefits or costs that are different from the benefits and costs of operating in the manner described in the Staff Letters (which would effectively be the same costs and benefits for Alternative Disclosure Contracts under the Proposed Framework), they could affect the creation of new variable contracts in the future. For example, if contract fees
As an alternative to applying the Proposed Framework to discontinued contracts, the Commission could adopt final rules providing that a registrant would not have to comply with certain requirements to update the variable contract registration statement and deliver updated contract prospectuses to existing investors, so long as the registrant complies with certain conditions (“Approach 1,” as discussed in more detail in section II.C above). The Commission could determine that these alternative requirements apply to
Codification of Approach 1 would be similar to the proposed summary prospectus regime in certain respects, in terms of the information that is either (1) delivered to all investors, (2) made available online, or (3) delivered to those investors who so request.
As discussed in section II.C, the Staff Letters identified a set of circumstances in which the staff would not recommend enforcement action once the registration statement is no longer updated, including that financial statements, as well as portfolio company prospectuses and shareholder reports, are delivered to all investors. If the Commission were to codify Approach 1 and In-Force Alternative Disclosure Contracts were required to comply with the conditions of Approach 1 (rather than choosing to follow the conditions set forth in the Staff Letters, as in the Proposed Framework), codification of Approach 1 may yield reduced printing and mailing costs compared to the baseline because:
• Unlike the circumstances described in the Staff Letters, under Approach 1, insurers would make financial statements available online and would only deliver them to investors (in paper or electronically) upon request. We estimate that issuers of In-Force Alternative Disclosure Contracts currently incur $0.27 per contract to print and mail financial statements.
• Under Approach 1, insurers could avail themselves of the proposed option to satisfy portfolio company prospectus delivery requirements by making prospectuses and shareholder reports available online and only delivering them to investors on request. This option, however, is not currently available for issuers of In-Force Alternative Disclosure Contracts. We estimate that issuers of In-Force Alternative Disclosure Contracts currently incur $0.53 per contract to deliver portfolio company prospectuses.
In addition, if the Commission were to codify Approach 1, a registrant relying on the conditions of Approach 1 would not be required to create and maintain a current registration statement and make the statutory prospectus and SAI available online. This is consistent with the circumstances described in the Staff Letters, and thus would not represent a change for In-Force Alternative Disclosure Contracts or contracts that may become discontinued in the future. However, the Proposed Framework requires that all insurers offering variable contracts (other than In-Force Alternative Disclosure Contracts affected by the Commission's position) must create and maintain a current registration statement and make the statutory prospectus and SAI available online (as well to deliver initial summary prospectuses and updating summary prospectuses). Accordingly, for insurers sponsoring contracts that could be discontinued in the future, these provisions of Approach 1 would produce lower costs for insurers than the Proposed Framework.
However, under Approach 1, insurers are required to deliver an annual notice to investors, which would include information that is comparable to information that would be included in an updating summary prospectus. An equivalent condition is not included in the circumstances that the Staff Letters describe. So, if In-Force Alternative Disclosure Contracts are required to comply with the conditions of Approach 1 (rather than adhering to the conditions set forth in the Staff Letters, as in the Proposed Framework), this would impose new costs on insurers sponsoring In-Force Alternative Disclosure Contracts. Likewise, issuers of contracts that may become discontinued in the future who may have expected that they could operate in the future in the manner described in the Staff Letters may experience unexpected costs compared to the baseline. Because of the similarities between information in this notice and in the updating summary prospectus, however we believe the costs under Approach 1 for issuers of contracts that may become discontinued in the future of producing, printing, and mailing these notices would be approximately equal to the costs associated with producing, printing, and mailing updating summary prospectuses, or about $0.35 per prospectus.
Investors may also incur costs and benefits under Approach 1 compared to both the baseline and the Proposed Framework. Specifically, as noted, investors would receive an annual notice providing disclosure of any material changes, as well as the same key information and portfolio company tables provided in an updating summary prospectus. If In-Force Alternative Disclosure Contracts are required to comply with the conditions of Approach 1 (rather than adhering to the conditions set forth in the Staff Letters, as in the Proposed Framework), this notice would benefit investors in those
Additionally, because the annual notice would be similar in content to the updating summary prospectus, Approach 1 would result in investors in contracts that previously relied on the summary prospectus regime receiving consistent disclosures for the full life of their contract. This represents a benefit to investors relative to the circumstances that the Staff Letters describe, under which investors receive a prospectus annually until the issuer begins to provide the alternative disclosures (and, similarly, investors in contracts that are not In-Force Alternative Disclosure Contracts receive a different set of disclosures than investors in In-Force Alternative Disclosure Contracts). This benefit to investors would similarly be present under the proposed summary prospectus regime, because an insurer choosing to use a summary prospectus would presumably do so for the full life of the contract.
Approach 1 also permits insurers to use the new optional portfolio company prospectus delivery method. To the extent that In-Force Alternative Disclosure Contracts are required to comply with the conditions of Approach 1 and insurers choose this option, the need to go to a website to access portfolio company prospectuses (or request electronic or paper copies) would create a burden for all investors relative to the baseline (including investors in In-Force Alternative Disclosure Contracts, and investors in contracts that could be discontinued in the future) who prefer to use these prospectuses when making allocation decisions. However, the impact of this burden may be mitigated by the inclusion of the portfolio company information table in the annual notice. The summary prospectus regime provides for the same optional approach to portfolio company prospectus delivery, and therefore the impact on investors in contracts that do not operate under the conditions of Approach 1 would be the same under the Proposed Framework.
Similarly, under Approach 1, insurers would not deliver financial statements to investors as they currently do if they are the issuers of In-Force Alternative Disclosure Contracts, but rather would make the statements available online (and deliver electronic or paper copies where requested by an investor). To the extent that In-Force Alternative Disclosure Contracts are required to comply with the conditions of Approach 1, investors in In-Force Alternative Disclosure Contracts who currently choose to rely on those financial statements would therefore face a burden in accessing them that they do not currently face under the baseline. Similarly, investors in contracts that may be discontinued in the future (and that would no longer be permitted to operate in the manner that the Staff Letters describe) may incur a future, unexpected burden to access those statements, though they would face this same burden under the proposed summary prospectus regime. Finally, because insurers under Approach 1 would not maintain an updated registration statement, this alternative may limit the potential liability of insurers to investors under certain liability provisions otherwise available under federal securities laws.
As a second alternative approach to applying the Proposed Framework to discontinued contract, the Commission could adopt final rules with a different set of conditions for relief from the requirements to update the variable contract registration statement and deliver updated contract prospectuses to existing investors (“Approach 2,” as discussed in more detail in section II.C above). As with Approach 1, the Commission could determine that these alternative requirements apply to
Approach 2 would be identical to Approach 1 in terms of how financial statements and portfolio company prospectuses are delivered or made available to investors. In addition, Approach 2 and Approach 1 both would involve delivery of an annual notice to investors that includes information that is comparable to information that would be included in an updating summary prospectus. Approach 2 differs from Approach 1 chiefly in that, under Approach 2, a registrant would need to create and maintain a current registration statement and make the statutory prospectus and SAI available online. Under Approach 2, the registrant would only update the registration statement when there are material changes to the offering, since updated financial statements would be permitted to be forward incorporated by reference into the registration statement. We note, however, that updating the registration statement to reflect a material change to the offering
Accordingly, issuers of contracts that may become discontinued in the future may incur certain unexpected future costs associated with this requirement; likewise, should Approach 2 apply to In-Force Alternative Disclosure Contracts, issuers of those contracts would incur these new costs compared to the baseline. In addition, because issuers of In-Force Alternative Disclosure Contracts do not maintain a current registration statement or make the statutory prospectus and SAI available online, should Approach 2 apply to In-Force Alternative Disclosure Contracts, insurers may incur initial costs to update the registration statement, which may not have been updated in years, and those costs may be significant.
The remaining conditions under Approach 2 are identical to those under Approach 1, and would produce equivalent economic effects, so that the aggregate impact is an increase in costs incurred by registrants under the proposed summary prospectus framework (assuming the effects of the Commission's position on Alternative Disclosure Contracts).
Under Approach 2, investors would receive an annual notice identical to the notice they receive under Approach 1. As described above, investors would benefit from this ongoing disclosure, compared to the alternative disclosures that they receive under the circumstances that the Staff Letters identify, as well as from the consistency with the disclosures provided in an updating summary prospectus. Like the proposed summary prospectus regime, Approach 2 would further benefit investors, relative to both the
Throughout this release, we have discussed the anticipated benefits and costs of the proposed rule and its potential effect on efficiency, competition, and capital formation. While we do not have comprehensive information on all aspects of variable contract industry reporting, we are using the data currently available in considering the effects of the proposed rule. We request comment on all aspects of this initial economic analysis, including on whether the analysis has (1) identified all benefits and costs, including all effects on efficiency, competition, and capital formation; (2) given due consideration to each benefit and cost, including each effect on efficiency, competition, and capital formation; and (3) identified and considered reasonable alternatives to the proposed new rule. We request and encourage any interested person to submit comments regarding the proposed rule, our analysis of the potential effects of the rules and other matters that may have an effect on the proposed rules. We request that commenters identify sources of data and information with respect to variable contracts in general, but also with respect to variable life products in particular, as well as provide data and information to assist us in analyzing the economic consequences of the proposed rules. We are also interested in comments on the qualitative benefits and costs we have identified and any benefits and costs we may have overlooked. We urge commenters to be as specific as possible.
Comments on the following questions are of particular interest.
• We have characterized a goal of variable contract investors as seeking to address the risk that they may outlive their retirement assets. Have we correctly characterized that goal of variable contract investors? What other products or investments, purchased either with or without the aid of investment professionals, are available to investors to achieve that goal?
• Under the proposed rule, to what extent would insurers choose to meet their disclosure obligation by providing investors with summary prospectuses while making statutory and other documents available on a website? The benefits of the proposed rule for insurers are linked to the extent they would be replacing printing and mailing paper statutory prospectuses with summary prospectuses. To what extent do investors currently elect to receive prospectuses via electronic delivery rather in paper? To what extent do investors who elect to receive prospectuses via electronic delivery also request paper copies of prospectuses?
• Should we, as we have proposed, allow insurers to provide summary prospectuses by delivering them, in paper, at no charge? Would investors prefer that these materials be provided in this manner? Would the summary prospectus be more useful if provided in another manner? Would investors be more aware or less aware of the availability of the information in summary prospectuses and other documents if provided only electronically on a website at no charge?
• Would any positive or negative effect of the proposed rule on investors be disproportionately greater for certain investors than for others? If so, which investors would be disproportionately affected, to what extent, and how would such effects manifest? What, if any, additional measures could help mitigate any such disproportionate effects? Please provide supportive data to the extent available.
• Should we require the website on which the statutory prospectus and other documents are made accessible to incorporate safeguards to protect the anonymity of its visitors? For example, should we require similar conditions to those provided in rule 14a-16 under the Exchange Act relating to internet availability of proxy materials? Why or why not? If so, what specific requirements should we consider?
• To what extent would the proposed rule reduce burdens such as printing and mailing costs borne by insurers? Would these burden reductions ultimately accrue to investors in the form of lower total expenses? Please provide supportive data to the extent available.
• To what extent might reduced burdens (
• To what extent would the proposed rule affect the ability of investors to understand the investment risks of variable contracts and to efficiently allocate capital? Would investors be more likely to allocate additional capital to variable products? What would be the effect on insurer competition for investor capital?
• To what extent do investors use statutory prospectus information to compare alternative variable product investments? To what extent should we expect that to change if insurers provide summary prospectuses rather than statutory prospectuses?
• Our estimates rely on several assumptions, such as 95% of insurers will choose to use a summary prospectus, all insurers who use a summary prospectus will choose to use the new optional delivery method for portfolio company prospectuses, and 15% of investors currently elect to receive electronic delivery of disclosure documents. Do commenters agree with these and other assumptions included in our analysis of the economic consequences of the proposed rule? Why or why not? Please provide supportive data to the extent possible.
• We estimate above that a maximum of approximately 2.68 million variable annuity contracts are In-Force Alternative Disclosure Contracts. Do commenters believe this estimate is reasonable? Why or why not? Please provide supportive data to the extent possible.
• This proposed rule would allow insurers and investors to take advantage of a summary disclosure regime designed to increase investor understanding of variable contract products through greater readability of and access to disclosures. Do commenters believe there are effective means by which we could measure the effectiveness of this rule if adopted? Why or why not? Please provide specific suggested methodologies.
Certain provisions of the proposed amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
We are also submitting a new collection of information for proposed rule 498A under the Securities Act to be used by separate accounts offering variable annuity or variable life insurance contracts that choose to send or give a summary prospectus (either an initial summary prospectus or an updating summary prospectus) to investors. The title for this new collection of information would be “Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts.” The Commission also intends to use a Feedback Flier to obtain information from investors about a sample variable annuity summary prospectus under the proposal.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.
The proposed amendments to Forms N-3, N-4, and N-6, if adopted, would update and enhance the required disclosures provided to variable contract investors. For example, the proposed amendments would summarize certain key information about the contract at the beginning of the prospectus, as well as update the presentation of fee information and require additional information about standard and optional benefits that a contract may offer. They also would standardize presentation requirements to make the information more accessible to retail investors, while retaining key elements of the disclosure that is available today.
In addition, we are proposing to amend Forms N-3, N-4, and N-6, along with certain rules that effectuate the Commission's requirements regarding the use of Inline XBRL format for the submission of certain required disclosures,
Proposed rule 498A, if adopted, would permit a person to satisfy its prospectus delivery obligations under the Securities Act for a variable contract by providing a summary prospectus to investors and making the statutory prospectus available online. The proposed rule also would consider a person to have met its prospectus delivery obligations for any portfolio companies associated with a variable contract if these prospectuses are posted online. Registrants would also be required to send these documents to the investor upon request.
Finally, proposed amendments to rule 497, if adopted, would provide the requirements for filing summary prospectuses with the Commission and for submitting information to the Commission in Inline XBRL format. These amendments would not constitute a separate collection of information under rule 497. The burden required by these amendments is part of the collection of information under proposed rule 498A, and—for filings of Interactive Data Files—would be part of the re-titled “Registered Investment Company Interactive Data” collection of information.
Form N-3 is the form used by separate accounts offering variable annuity contracts that are organized as management investment companies to register under the Investment Company Act and/or to register and offer their securities under the Securities Act. Form N-3, including the proposed amendments, contains collection of information requirements. Compliance with the disclosure requirements of Form N-3 is mandatory. Responses to the disclosure requirements are not confidential. We currently estimate for Form N-3 a total hour burden of 2500 hours, and a total annual external cost burden of $164,144.
We are proposing amendments to Form N-3 to update and enhance the disclosures to investors in variable annuity contracts, and to implement the proposed summary prospectus regime.
Form N-3 generally imposes two types of reporting burdens on investment companies: (1) The burden of preparing and filing the initial registration statement; and (2) the burden of preparing and filing post-effective amendments to a previously-effective registration statement. Based on a review of Form N-3 filings made with the Commission, our staff estimates that there will be no initial filings and that eight post-effective amendments would be made on Form N-3 per year.
Based on a review of filings with the Commission, we are increasing our estimate of the current number of investment options per filing from two to three investment options. There are currently five registration statements filed with the Commission on Form N-3 that cover 14 investment options. For purposes of this Paperwork Reduction Act analysis, we assume each registration statement would cover an average of three investment options. 14 investment options/5 registration statements = 2.8 investment options per registration statement.
The proposed amendments would include certain disclosure changes and new disclosures, but also would simplify certain current disclosure requirements in Form N-3. Based on this, we estimate that, on a net basis, the proposed amendments to Form N-3 would increase the burden of preparing an initial registration statement on Form N-3 by 5 hours per investment option per filing. Amortizing this burden over a three-year period results in an estimated average annual burden of 1.7 hours per year, at an estimated internal time cost equivalent of $571.
The internal time cost equivalent of $571 is calculated by multiplying the hour burden (1.7 hours) by the estimated hourly wage of $336. The estimated wage figure is based on published rates for Compliance Attorneys ($352) and Senior Programmers ($319). These hourly figures are from SIFMA's Management & Professional Earnings in the Securities Industry 2013, modified to account for an 1,800-hour work year; multiplied by 5.35 to account for bonuses, firm size, employee benefits and overheard; and adjusted to account for the effects of inflation. The estimated wage rate was further based on the estimate that Compliance Attorneys and Senior Programmers would divide time equally, resulting in a weighted wage rate of $336 (($352 + $319)/2 = 335.5).
We further estimate a one-time burden of an additional 20 hours per registration statement to update disclosures that are not related to the contract's investment options the first time the registration statement is amended by post-effective amendment following adoption of the proposed amendments. Subsequently, we estimate an ongoing burden of an additional 5 hours per registration statement per year to prepare and file a post-effective amendment to update these disclosures. Amortizing these burdens over a three-year period results in an estimated average annual burden of an additional 10 hours per registration statement to prepare and file the post-effective amendment, at an estimated internal time cost equivalent of $3,360.
In addition, we estimate a further burden of 6 hours per contract investment option to update registration statement disclosures that are related to the contract's investment options, the first time the registration statement is amended by post-effective amendment following adoption of the proposed amendments. Subsequently, we estimate an ongoing burden of an additional 1.5 hours per investment option per year to prepare and file a post-effective amendment to update these disclosures. Amortizing these burdens over a three-year period results in an estimated average annual burden of an additional 3 hours per investment option to prepare and file a post-effective amendment, at an estimated internal time cost equivalent of $3,360.
In the aggregate, we estimate that the proposed amendments to Form N-3 would cause registrants to incur an additional annual burden of 152 hours, at an internal time cost equivalent of $51,072.
Registrants would also bear external costs to prepare and update registration statements and post-effective amendments on Form N-3, such as costs for the services of independent auditors, outside counsel, or consultants.
In our most recently approved Paperwork Reduction Act submission for Form N-3, Commission staff estimated the cost burden for preparing and filing a post-effective amendment to a previously-effective registration statement is $10,259 per investment option, with a total annual approved external cost burden of $164,144.
We estimate that the cost burden for preparing and filing a post-effective amendment to a previously-effective registration statement would be $10,259 per registration statement to update disclosures that are not related to the contract's investment options, and an additional $3,420 per investment option to update disclosures that are related to the contract's investment options.
Form N-4 is the form used by separate accounts offering variable annuity contracts that are organized as unit investment trusts to register under the Investment Company Act and/or to register and offer their securities under the Securities Act. Form N-4, including the proposed amendments, contains collection of information requirements. Compliance with the disclosure requirements of Form N-4 is mandatory. Responses to the disclosure requirements are not confidential. We currently estimate for Form N-4 a total hour burden of 343,117 hours, and a total annual external cost burden of $36,308,889.
We are proposing amendments to Form N-4 to update and enhance the disclosures to investors in variable annuity contracts, and to implement the proposed summary prospectus regime.
Form N-4 generally imposes two types of reporting burdens on investment companies: (1) The burden of preparing and filing the initial registration statement; and (2) the burden of preparing and filing post-effective amendments to a previously-effective registration statement. Based on a review of Form N-4 filings made with the Commission, our staff estimates 35 initial filings on Form N-4 and 1,326 post-effective amendments would be made on Form N-4 per year.
There were 1,315, 1,415, and 1,247 post-effective amendments filed during 2015, 2016, and 2017, respectively. Averaging those post-effective amendments over three years results in an average of approximately 1,326 post-effective amendments per year. This estimate is based on the following calculation: (1,315 + 1,415 + 1,247)/3 years = 1,325.67 per year.
The proposed amendments would include certain disclosure changes and new disclosures, but also would simplify certain current disclosure requirements in Form N-4. Based on this, we estimate that, on a net basis, the proposed amendments to Form N-4 would increase the burden of preparing an initial registration statement on Form N-4 by 5 hours per initial registration statement. Amortizing this burden over a three-year period results in an estimated average annual burden of 1.7 hours per year, at an estimated internal time cost equivalent of $571.
We estimate a one-time burden of an additional 20 hours per registration statement the first time the registration statement is amended by post-effective amendment following adoption of the proposed amendments. Subsequently, we estimate an ongoing burden of an additional 5 hours per registration statement to prepare and file a post-effective amendment. Amortizing these burdens over a three-year period results in an estimated average annual burden of an additional 10 hours per registration statement to prepare and file a post-effective amendment, at an estimated internal time cost equivalent of $3,360.
In the aggregate, we estimate that the proposed amendments to Form N-4 would cause registrants to incur an additional annual burden of 13,320 hours, at an internal time cost equivalent of $4,475,345.
The estimate of $4,475,345 is based upon the following calculation. For initial registration statements: $571 × 35 initial filings on Form N-4 = $19,985. For post-effective amendments: $3,360 × 1,326 post-effective amendments = $4,455,360. $19,985 + $4,455,360 = $4,475,345.
Registrants would also bear external costs to prepare and update registration statements and post-effective amendments on Form N-4, such as the services of independent auditors and outside counsel.
In our most recently approved Paperwork Reduction Act submission for Form N-4, Commission staff estimated the annual cost burden for preparing and filing an initial Form N-4 filing is $23,013 per filing,
We do not estimate any change to the external costs per filing associated with the proposed amendments to Form N-4. In the aggregate, we estimate registrants on Form N-4 would incur annual external costs of $29,729,493.
Form N-6 is the form used by separate accounts organized as unit investment trusts that offer variable life insurance contracts to register under the Investment Company Act and/or to register and offer their securities under the Securities Act. Form N-6, including the proposed amendments, contains collection of information requirements. Compliance with the disclosure requirements of Form N-6 is mandatory. Responses to the disclosure requirements are not confidential. We currently estimate for Form N-6 a total hour burden of 85,269 hours, and a total annual external cost burden of $5,316,892.
We are proposing amendments to Form N-6 to update and enhance the disclosures to investors in variable life insurance contracts, and to implement the proposed summary prospectus regime.
Form N-6 generally imposes two types of reporting burdens on investment companies: (1) The burden of preparing and filing the initial registration statement; and (2) the burden of preparing and filing post-effective amendments to a previously-effective registration statement. Based on a review of Form N-6 filings made with the Commission, our staff estimates 8 initial filings on Form N-6 and 380 post-effective amendments would be made on Form N-6 per year.
There were 373, 420, and 346 post-effective amendments filed during 2015, 2016, and 2017, respectively. Averaging those post-effective amendments over three years results in an average of approximately 380 post-effective amendments per year. This estimate is based on the following calculation: (373 + 420 + 346)/3 years = 379.67 per year.
The proposed amendments would include certain disclosure changes and new disclosures, but also would simplify certain current disclosure requirements in Form N-6. Based on this, we estimate that, on a net basis, the proposed amendments to Form N-6 would increase the burden of preparing an initial registration statement on Form N-6 by 4 hours per registrant.
We estimate a one-time burden of an additional 15 hours per registration statement the first time the registration statement is amended by post-effective amendment following adoption of the proposed amendments.
In the aggregate, we estimate that the proposed amendments to Form N-6 would cause registrants to incur an additional annual burden of 3,048 hours, at an internal time cost equivalent of $1,024,128.
The estimate of $1,024,128 is based upon the following calculation. For initial registration statements: $336 × 8 initial filings on Form N-6 = $2,688. For post-effective amendments: $2,688 × 380 post-effective amendments = $1,021,440. $2,688 + $1,021,440 = $1,024,128.
Registrants would also bear external costs to prepare and update registration statements and post-effective amendments on Form N-6, such as the services of independent auditors and outside counsel.
In our most recently approved Paperwork Reduction Act submission for Form N-6, Commission staff estimated the annual cost burden for preparing and filing an initial Form N-6 filing is $24,169 per portfolio, with one portfolio per filing,
We do not estimate any change to the external costs per filing associated with the proposed amendments to Form N-6. In the aggregate, we estimate registrants on Form N-6 would incur annual external costs of $3,532,792. This decrease reflects a decrease in the estimated numbers of filings on Form N-6.
We are proposing amendments to the General Instructions of Forms N-3, N-4, and N-6, rules 485 and 497 under the Securities Act, and rules under Regulation S-T,
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The title of the collection of information affected by these amendments is “Mutual Fund Interactive Data,” which we would propose to re-title as “Registered Investment Company Interactive Data.” Compliance with these disclosure requirements would be mandatory, and responses would not be confidential. We currently estimate a total annual hour burden of 178,803 hours for this collection of information, and a total annual external cost burden of $10,000,647.
The proposed amendments would generally impose two types of reporting burdens on investment companies: (1) The burden of submitting certain information in Inline XBRL to the Commission in registration statements or post-effective amendments filed on Form N-3, Form N-4, and Form N-6; and (2) the burden of submitting certain information in Inline XBRL to the Commission in forms of prospectuses filed pursuant to rule 497(c) or 497(e) under the Securities Act that include information that varies from the registration statement. We separately discuss the additional internal hours and external cost burdens that would apply as a result of the proposed amendments.
As a threshold matter, we estimate that registrants on Forms N-3, N-4, and N-6 would require approximately 18 burden hours of in-house personnel time to tag and submit the required disclosure information in Inline XBRL format for each post-effective amendment
We estimate a weighted burden average of approximately 3 responses per year per registrant to file initial and post-effective registration statements and rule 497 filings, based on weighting the burden for each rule 497 filing as one quarter of the burden of a post-effective amendment filing, averaging the burden for each form equally, and estimating (based on a survey by Commission staff of filings made pursuant to rule 497) that 75% of rule 497 filings by registrants on each form would contain data that would be required to be submitting in Inline XBRL format.
For Form N-4, we estimate a burden of 4.7 responses per year. This estimate is based on the following: ((35 initial registration statements + 1,326 post-effective amendments) + (3,555 rule 497 filings × 0.75 of which will contain data that will need to be tagged × 0.25 weighted burden))/435 Form N-4 registrants = approximately 4.7 responses per year per registrant.
For Form N-6, we estimate a burden of 2.3 responses per year. This estimate is based on the following calculation: ((8 initial registration statements + 380 post-effective amendments) + (836 rule 497 filings × 0.75 of which will contain data that will need to be tagged × 0.25 weighted burden))/238 Form N-6 registrants = approximately 2.3 responses per year per registrant.
Overall, we estimate approximately 3 responses per year. This estimate is based upon the following calculation: (2.2 responses per N-3 registrant + 4.7 responses per N-4 registrant + 2.3 responses per N-6 registrant)/3 = 3.1 responses per year.
Currently, there are five Form N-3 registrants.
On a per registrant basis, the internal cost equivalent associated with Inline XBRL for Form N-3 registrants is estimated to be $20,160/year ($100,800/5 registrants = $20,160/year).
Currently, there are 435 Form N-4 registrants.
On a per-registrant basis, the internal cost equivalent associated with Inline XBRL is estimated to be $14,112/year ($6,138,720/435 registrants = $14,112/year).
Currently, there are 238 Form N-6 registrants.
On a per-registrant basis, the internal cost equivalent associated with Inline XBRL is estimated to be $14,112/year ($3,358,656/238 registrants = $14,112/year).
Compliance with the proposed Inline XBRL requirements would entail certain external costs, such as for software and/or the services of consultants and filing agents. For Form N-4 and Form N-6 registrants, we estimate an external cost burden of $900 per registrant for the cost of goods and services purchased to comply with the proposed Inline XBRL requirements, which is based on the estimated average external cost burden associated with the Inline XBRL preparation expenses for mutual funds and ETFs.
Based on the estimate of five Form N-3 registrants,
Proposed rule 498A would contain collection of information requirements. The likely respondents to this information collection are variable annuity and variable life insurance separate accounts registered or registering with the Commission.
The summary prospectus is voluntary, so the percentage of variable annuity and variable life insurance separate accounts that will choose to utilize it is uncertain. Given this uncertainty, we have assumed that 95% of all separate accounts would choose to use a summary prospectus under proposed rule 498A.
For registrants that choose to rely upon proposed rule 498A, we estimate a one-time collective burden of 40 hours per registration statement to prepare and file both a new initial summary prospectus and a new updating summary prospectus for offerings on Forms N-4 or N-6.
For offerings on Form N-3, we estimate a one-time collective burden of 40 hours per registration statement to prepare and file both a new initial summary prospectus and a new updating summary prospectus, plus a further burden of 12 hours per contract investment option. Subsequently, we estimate an ongoing collective burden of 10 hours per registration statement that would be incurred each following year to prepare and file updates of summary prospectuses, plus a further burden of 3 hours per investment option. We estimate that each registration statement filed on Form N-3 would include three investment options.
Because the PRA estimates represent the average burden over a three-year period, we estimate the average annual hour burden per registration statement to prepare initial and updating summary prospectuses would be 20 hours for filings on Form N-4 or N-6.
We estimate the aggregate annual hour burden to prepare initial and updating summary prospectuses for offerings on Forms N-3, N-4, and N-6 would be 14,610 hours, at an internal cost equivalent of $4,908,960.
The internal time cost equivalent of $4,908,960 is calculated by multiplying the hour burden (14,610 hours) by the estimated hourly wage of $336.
Registrants may also bear external costs to prepare and update the initial and updating summary prospectuses, such as the services of independent auditors and outside counsel. However, any external costs associated with filing the summary prospectuses as exhibits to the registration statements would already be reflected in the external costs associated with those registration statements.
For registrants that choose to rely upon proposed rule 498A, we estimate a one-time collective external cost burden of $10,000 per registration statement to prepare both a new initial summary prospectus and a new updating summary prospectus for offerings on Forms N-4 or N-6. In addition, we estimate an ongoing collective burden of $2,500 per registration statement during each subsequent year for the registrant to prepare updates of the initial summary prospectus and updating summary prospectus for offerings on Forms N-4 or N-6. For offerings on Form N-3, we estimate a one-time collective burden of $10,000 per registration statement to prepare and file both a new initial summary prospectus and a new updating summary prospectus, plus a further burden of $3,000 per contract investment option. Subsequently, we estimate an ongoing collective burden of $2,500 per registration statement during each following year to prepare and file updates of summary prospectuses, plus a further burden of $750 per investment option. We estimate that each registration statement filed on Form N-3 would include three investment options.
Because the PRA estimates represent the average burden over a three-year period, we estimate the average annual hour burden per registration statement to prepare and update initial and updating summary prospectuses would be $5,000 for filings on Form N-4 or N-
We estimate the aggregate annual external cost burden to prepare and update initial and updating summary prospectuses for offerings on Forms N-3, N-4, and N-6 would be $3,469,875.
Registrants that choose to rely upon proposed rule 498A would be required to make certain documents relating to the contract available online, including a variable contract's initial summary prospectus, updating summary prospectus, statutory prospectus, and SAI for contracts registered on Forms N-3, N-4, or N-6, and the contract's most recent annual and semi-annual reports to shareholders under rule 30e-1 in the case of a variable annuity contract registered under Form N-3.
We estimate the average burden to comply with the proposed website posting requirements would be 2 hours per set of documents associated with a single registration statement, both in the first year and annually thereafter.
In total, we estimate the annual burden to comply with the proposed website posting requirements of the rule for documents relating to variable contracts would be 1,379 hours, at an internal cost equivalent of $329,581.
The internal time cost equivalent of $329,581 is calculated by multiplying the hour burden (1,379 hours) by the estimated hourly wage based on published rates for webmasters ($239). This hourly figure is from SIFMA's Management & Professional Earnings in the Securities Industry 2013, modified to account for an 1,800-hour work year; multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead; and adjusted to account for the effects of inflation.
Furthermore, we also estimate that registrants may incur external costs in connection with the requirement to provide these documents upon request of a shareholder. We estimate that the average annual costs associated with printing and mailing these documents upon request would be collectively $500 for all documents associated with a single registrant.
Investors could also request to receive these documents electronically. We estimate that there would be negligible external costs associated with emailing electronic copies of these documents.
Registrants on Forms N-4 and N-6 that choose to rely on the new delivery option for portfolio company prospectuses would also be required to post online the portfolio company's summary prospectus, statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports.
We estimate the average burden to comply with the proposed website posting requirements would be 2 hours per set of documents associated with a single registration statement, both in the first year and annually thereafter. In total, we estimate the annual burden to comply with the proposed website posting requirements of the rule for documents relating to portfolio companies would be 1,370 hours, at an internal cost equivalent of $327,430.
The internal time cost equivalent of $327,430 is calculated by multiplying the hour burden (1,370 hours) by the estimated hourly wage based on published rates for Webmasters ($239).
Furthermore, we also estimate that registrants may incur external costs in connection with the requirement to provide these documents upon investor request. We estimate that the average annual costs associated with printing and mailing these documents upon request would be collectively $500 for all documents associated with a single registrant.
Accordingly, we estimate the total annual hour burden for registrants under proposed rule 498A to prepare, file and update both the initial summary prospectus and updating summary prospectuses, and post the required variable contract and portfolio company documents to a website would be 17,359 hours, at an internal time cost equivalent of $5,565,971.
This internal time cost equivalent estimate is based upon the following calculation: $4,908,960 to prepare, file, and update initial and updating summary prospectuses for offerings on Forms N-3,
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comments to: (1) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) evaluate the accuracy of our estimate of the burden of the proposed collections of information; (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.
In addition to these general requests for comment, we also request comment specifically on the following issues:
• Our analysis relies upon certain assumptions, such as all registrants on Forms N-3, N-4, and N-6 already have websites, and 95% of these registrants would choose to use a summary prospectus under proposed rule 498A. Do commenters agree with these assumptions?
• We also assume that 100% of registrants that rely on 498A to deliver contract summary prospectuses also would rely on the rule for the new delivery option for portfolio company prospectuses. Do commenters agree with these assumptions?
Persons wishing to submit comments on the collection of information requirements of the proposed rules and amendments should direct them to the OMB, Attention Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to, Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-23-18. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-23-18, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this release. Consequently, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days after publication of this release.
Section 3(a) of the Regulatory Flexibility Act of 1980 (“RFA”)
We are proposing new rule 498A under the Securities Act pursuant to authority set forth in Sections 5, 6, 7, 10, 19, and 28 of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, 77s, and 77z-3] and Sections 8, 24(a), 24(g), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), 80a-24(g), 80a-29, and 80a-37]. Proposed rule 498A would provide a new option that would permit a person to satisfy its variable annuity and variable life insurance contract prospectus delivery obligations under the Securities Act by providing a summary prospectus to investors.
A person would have the option of satisfying its prospectus delivery obligations for variable contracts under section 5(b)(2) of the Securities Act by: (1) Sending or giving to new investors the key information contained in a variable contract statutory prospectus in the form of an initial summary prospectus; (2) sending or giving to existing investors each year a brief description of certain changes to the contract, and a subset of the information in the initial summary prospectus, in the form of an updating summary prospectus; and (3) providing the statutory prospectus and other materials online. The proposed rule would require a registrant (or the financial intermediary distributing the variable contact) to send the variable contract statutory prospectus and other materials to the investor in paper or by email upon request. Additionally, the proposed rule would permit satisfaction of any portfolio company prospectus delivery obligations by posting the portfolio company summary and statutory prospectuses online at the website address specified on the variable contract summary prospectus.
The obligation to post these documents online would fall upon the party that has the prospectus delivery obligation for the portfolio company prospectus. For purposes of this Regulatory Flexibility Act analysis, we assume that delivery of portfolio company prospectuses would be done by registrants, rather than portfolio companies or financial intermediaries such as broker-dealers.
Investors would also be able to request and receive those documents in paper or electronically at no cost. No variable contract separate accounts would be required to send or give a summary prospectus.
We are also proposing amendments to Forms N-3, N-4, and N-6 pursuant to authority set forth in Sections 5, 6, 7, 10, and 19(a) of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and Sections 8, 24(a), 24(g), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), 80a-24(g), 80a-29, and 80a-37]. The proposed amendments to Forms N-3, N-4, and N-6 are intended to update and enhance the disclosures to investors in variable annuity and variable life insurance contracts, and to implement the proposed summary prospectus framework.
Specifically, the proposed amendments would add new disclosures requiring, among other things, an overview of the contract, key information, consolidated risk disclosures, a list of the available portfolio companies with expense and performance information, and information about standard and optional benefits that a contract may offer. The proposed amendments also would standardize presentation requirements across registration statement forms to make the information more accessible to retail investors. We are also proposing to require variable contracts to use the
Generally, an investment company is a small entity if, together with other investment companies in the same group of related investment companies, it has net assets of $50 million or less as of the end of its most recent fiscal year.
For this reason, we believe the new proposed rule 498A and the proposed amendments to Forms N-3, N-4, and N-6, would not, if adopted, have a significant economic impact on a substantial number of small entities.
We encourage written comments regarding this certification. We solicit comment as to whether new rule 498A and the proposed amendments to Forms N-3, N-4, and N-6 could have an effect on small entities that has not been considered. We ask that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of such impact.
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,”
• An annual effect on the economy of $100 million or more;
• A major increase in costs or prices for consumers or individual industries; or
• Significant adverse effects on competition, investment or innovation.
We request comment on whether our proposal would be a “major rule” for purposes of SBREFA. We solicit comment and empirical data on:
• The potential effect on the U.S. economy on an annual basis;
• Any potential increase in costs or prices for consumers or individual industries; and
• Any potential effect on competition, investment, or innovation.
Commenters are requested to provide empirical data and other factual support for their views to the extent possible.
The Commission is proposing the rules and forms contained in this document under the authority set forth in the Securities Act, particularly, sections 10, 19, and 28 thereof [15 U.S.C.
Investment companies, Reporting and recordkeeping requirements, Securities.
Administrative practice and procedure, Reporting and recordkeeping requirements, Securities.
Reporting and recordkeeping requirements, Securities.
For reasons set forth in the preamble, title 17, chapter II of the Code of Federal Regulations is proposed to be amended as follows:
15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78
(a) * * *
(2) Any free writing prospectus as defined in § 230.405 (Rule 405) relating to the offering prepared by or on behalf of the issuer or used or referred to by the issuer and, in the case of an issuer that is an open-end management company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1
(e) A summary prospectus prepared and filed (except a summary prospectus filed by an open-end management investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1
(a) A summary prospectus prepared and filed (except a summary prospectus filed by an open-end management investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1
(a)
The fact that an advertisement complies with this section does not relieve the investment company, underwriter, or dealer of any obligations with respect to the advertisement under the antifraud provisions of the federal securities laws. For guidance about factors to be weighed in determining whether statements, representations, illustrations, and descriptions contained in investment company advertisements are misleading, see § 230.156. In addition, an advertisement that complies with this section is subject to the legibility requirements of § 230.420.
(c) * * *
(3) A registrant's ability to file a post-effective amendment, other than an amendment filed solely for purposes of submitting an Interactive Data File, under paragraph (b) of this section is automatically suspended if a registrant fails to submit any Interactive Data File as required by General Instruction C.3.(g) of §§ 239.15A and 274.11A of this chapter (Form N-1A), General Instruction C.3.(h) of §§ 239.17a and 274.11b of this chapter (Form N-3), General Instruction C.3.(h) of §§ 239.17b and 274.11c of this chapter (Form N-4), or General Instruction C.3.(h) of §§ 239.17c and 274.11d of this chapter (Form N-6). A suspension under this paragraph (c)(3) shall become effective at such time as the registrant fails to submit an Interactive Data File as required by General Instruction C.3.(g) of Form N-1A, or General Instruction C.3.(h) of Form N-3, General Instruction C.3.(h) of Form N-4, or General Instruction C.3.(h) of Form N-6. Any such suspension, so long as it is in effect, shall apply to any post-effective amendment that is filed after the suspension becomes effective, but shall not apply to any post-effective amendment that was filed before the suspension became effective. Any suspension shall apply only to the ability to file a post-effective amendment pursuant to paragraph (b) of this section and shall not otherwise affect any post-effective amendment. Any suspension under this paragraph (c)(3) shall terminate as soon as a registrant has submitted the Interactive Data File as required by General Instruction C.3.(g) of Form N-1A, General Instruction C.3.(h) of Form N-3, General Instruction C.3.(h) of Form N-4, or General Instruction C.3.(h) of Form N-6.
(c) For investment companies filing on §§ 239.15A and 274.11A of this chapter (Form N-1A), §§ 239.14 and 274.11a-1 of this chapter (Form N-2), §§ 239.17a and 274.11b of this chapter (Form N-3), §§ 239.17b and 274.11c of this chapter (Form N-4), or §§ 239.17c and 274.11d of this chapter (Form N-6), within five days after the effective date of a registration statement or the commencement of a public offering after the effective date of a registration statement, whichever occurs later, 10 copies of each form of prospectus and form of Statement of Additional Information used after the effective date in connection with such offering shall be filed with the Commission in the exact form in which it was used. Investment companies filing on Forms N-1A, N-3, N-4, or N-6 must, if applicable pursuant to General Instruction C.3.(g) of Form N-1A, General Instruction C.3.(h) of Form N-3, General Instruction C.3.(h) of Form N-4, or General Instruction C.3.(h) of Form N-6, submit an Interactive Data File (as defined in § 232.11 of this chapter).
(e) For investment companies filing on §§ 239.15A and 274.11A of this chapter (Form N-1A), §§ 239.14 and 274.11a-1 of this chapter (Form N-2), §§ 239.17a and 274.11b of this chapter (Form N-3), §§ 239.17b and 274.11c of this chapter (Form N-4), or §§ 239.17c and 274.11d of this chapter (Form N-6), after the effective date of a registration statement, no prospectus that purports to comply with Section 10 of the Act (15 U.S.C. 77j) or Statement of Additional Information that varies from any form of prospectus or form of Statement of Additional Information filed pursuant to paragraph (c) of this section shall be used until five copies thereof have been filed with, or mailed for filing to the Commission. Investment companies filing on Forms N-1A, N-3, N-4, or N-6 must, if applicable pursuant to General Instruction C.3.(g) of Form N-1A, General Instruction C.3.(h) of Form N-3, General Instruction C.3.(h) of Form N-4, or General Instruction C.3.(h) of Form N-6, submit an Interactive Data File (as defined in § 232.11 of this chapter).
(k) Summary Prospectus filing requirements. This paragraph (k), and not the other provisions of § 230.497, shall govern the filing of summary prospectuses under § 230.498 and § 230.498A. Each definitive form of a summary prospectus under § 230.498 and § 230.498A shall be filed with the Commission no later than the date that it is first used.
(c) * * *
(2) The Summary Prospectus is not bound together with any materials, except that a Summary Prospectus for a Fund that is available as an investment option in a variable annuity or variable life insurance contract may be bound together with the Statutory Prospectus for the contract (or a summary prospectus for the contract provided under § 230.498A) and Summary Prospectuses and Statutory Prospectuses
(i) All of the Funds to which the Summary Prospectuses and Statutory Prospectuses that are bound together relate are available to the person to whom such documents are sent or given; and
(ii) A table of contents identifying each Summary Prospectus, Statutory Prospectus, and summary prospectus under § 230.498A that is bound together, and the page number on which it is found, is included at the beginning or immediately following a cover page of the bound materials;
(a)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(b)
(1)
(2)
(i) The Depositor's name.
(ii) The Registrant's name.
(iii) The name of the Contract, and the Class or Classes if any, to which the Initial Summary Prospectus relates.
(iv) A statement identifying the document as a “Summary Prospectus for New Investors.”
(v) The approximate date of the first use of the Initial Summary Prospectus.
(vi) The following legend:
This Summary Prospectus summarizes key features of the [name of Contract]. You should read this Summary Prospectus carefully, particularly the section titled Important Information You Should Consider About the [Contract].
Before you invest, you should review the prospectus for the [name of Contract], which contains more information about the [Contract], including its features, benefits, and risks. You can find the prospectus and other information about the [Contract] online at [__]. You can also obtain this information at no cost by calling [__] or by sending an email request to [__].
You may cancel your [Contract] within 10 days of receiving it without paying fees or penalties. In some states, this cancellation period may be longer. Upon cancellation, you will receive either a full refund of the amount you paid with your application or your total contract value. You should review the prospectus, or consult with your investment professional, for additional information about the specific cancellation terms that apply.
Additional information about certain investment products, including [variable annuities/variable life insurance contracts], has been prepared by the Securities and Exchange Commission's staff and is available at
(A) A registrant may modify the legend so long as the modified legend contains comparable information.
(B) The legend must provide an internet address, other than the address of the Commission's electronic filing system; toll-free telephone number; and email address that investors can use to obtain the Statutory Prospectus and other information, request other information about the Contract, and to make investor inquiries. The internet website address must be specific enough to lead investors directly to the Statutory Prospectus and other materials that are required to be accessible under paragraph (h)(1) of this section, rather than to the home page or other section of the website on which the materials are posted. The website could be a central site with prominent links to each document. The legend may indicate, if applicable, that the Statutory Prospectus and other information are available from a financial intermediary (such as a broker-dealer) through which the Contract may be purchased or sold.
(C) If a Registrant incorporates any information by reference into the Summary Prospectus, the legend must
(vii) The following legend that indicates that the Securities and Exchange Commission has not approved or disapproved of the Contract or passed upon the accuracy or adequacy of the disclosure in the summary prospectus and that any contrary representation is a criminal offense. The legend may be in one of the following or other clear and concise language:
(3)
(4)
(5)
(i) Under the heading “Overview of the [Variable Annuity/Life Insurance Contract],” the information required by Item 2 of Form N-3, Item 2 of Form N-4, or Item 2 of Form N-6.
(ii) Under the heading “Important Information You Should Consider About the [Contract],” the information required by Item 3 of Form N-3, Item 3 of Form N-4, or Item 3 of Form N-6.
(iii) Under the heading “Standard Death Benefit,” the information required by Item 11(a) of Form N-3, Item 10(a) of Form N-4, or Item 10(a) of Form N-6.
(iv) Under the heading “Other Benefits Available Under the [Contract],” the information required by Item 12(a) of Form N-3, Item 11(a) of Form N-4, or Item 11(a) of Form N-6.
(v) Under the heading “Buying the [Contract],” the information required by Item 13(a) of Form N-3, Item 12(a) of Form N-4, or Items 9(a) through 9(e) of Form N-6.
(vi) Under the heading “How Your [Contract] Can Lapse,” the information required by Item 14 of Form N-6.
(vii) Under the heading “Surrendering Your [Contract] or Making Withdrawals: Accessing the Money in Your [Contract],” the information required by Item 14(a) of Form N-3, Item 13(a) of Form N-4, or Item 12(a) of Form N-6.
(viii) Under the heading “Additional Information About Fees,” the information required by Item 4 of Form N-3, Item 4 of Form N-4, or Item 4 of Form N-6.
(ix) Under the heading “Appendix: [Portfolio Companies] Available Under the [Contract],” include as an appendix the information required by Item 19 of Form N-3, Item 18 of Form N-4, or Item 18 of Form N-6. If the appendix includes the information required by Item 19 of Form N-3, the appendix shall also include the following introductory legend: “The following is a list of [Investment Options] currently available under the [Contract], which is subject to change as discussed in [the Statutory Prospectus for the Contract]. More information about the [Investment Options] is available in [the Statutory Prospectus for the Contract], which can be requested at no cost by following the instructions on [the front cover page or beginning of the Summary Prospectus].” This introductory legend also may indicate, if applicable, that the prospectus and other information are available from a financial intermediary (such as an insurance sales agent or broker-dealer) through which the Contract may be purchased or sold. Alternatively, an Initial Summary Prospectus for a Contract registered on Form N-3 may include the information required by Item 20 of Form N-3 under the heading “Additional Information About Investment Options Available Under the Contract.”
(c)
(1)
(2)
(3)
(i) The Depositor's name.
(ii) The Registrant's name.
(iii) The name of the Contract(s) and the Class or Classes, if any, to which the Updating Summary Prospectus relates.
(iv) A statement identifying the document as an “Updating Summary Prospectus.”
(v) The approximate date of the first use of the Updating Summary Prospectus.
(vi) The following legend, which must meet the requirements of paragraphs (b)(2)(vi)(A) through (C) of this section:
You should read this Summary Prospectus carefully, particularly the section titled Important Information You Should Consider About the [Contract].
An updated prospectus for the [Contract] is currently available online, which contains more information about the [Contract], including its features, benefits, and risks. You can find the prospectus and other information about the [Contract] online at [__]. You can also obtain this information at no cost by calling [__] or by sending an email request to [__].
Additional information about certain investment products, including [variable annuities/variable life insurance contracts], has been prepared by the Securities and Exchange Commission's staff and is available at
(vii) The legend required by paragraph (b)(2)(vii) of this section.
(4)
(5)
(6)
An Updating Summary Prospectus must contain the information required by this paragraph (c)(6) with respect to the applicable registration form, in the order provided below.
(i) If any changes have been made with respect to the Contract after the Registrant has sent or given its most recent Updating Summary Prospectus or Statutory Prospectus with respect to the availability of Investment Options (for Registrants on Form N-3) or Portfolio Companies (for Registrants on Forms N-4 and N-6) under the Contract, or the disclosure that the Registrant included in response to Item 4 (Fee Table), Item 11 (Standard Death Benefit), or Item 12 (Other Benefits Available Under the Contract) of Form N-3 ; Item 4 (Fee Table), Item 10 (Standard Death Benefit), or Item 11 (Other Benefits Available Under the Contract) of Form N-4; and Item 4 (Fee Table), Item 10 (Standard Death Benefit), or Item 11 (Other Benefits Available Under the Contract) of Form N-6, include the following as applicable, under the heading “Updated Information About Your [Contract]”:
(A) The following legend: “The information in this [Updating Summary Prospectus] is a summary of certain [Contract] features that have changed since the [Updating Summary Prospectus] dated [date]. This may not reflect all of the changes that have occurred since you entered into your Contract.”
(B) As applicable, provide a concise description of each change specified in paragraph (c)(6)(i) of this section. Provide enough detail to allow investors to understand the change and how it will affect investors.
(ii) In addition to the changes specified in paragraph (c)(6)(i) of this section, a Registrant may provide a concise description of any other change with respect to the Contract within the time period that paragraph (c)(6)(i) of this section specifies, under the same heading that paragraph (c)(6)(i) of this section specifies. Any additional information included pursuant to this paragraph should not, by its nature, quantity, or manner of presentation, obscure or impede understanding of the information that paragraph (c)(6)(i) of this section requires.
(iii) Under the heading “Important Information You Should Consider About the [Contract],” provide the information required by Item 3 of Form N-3, Item 3 of Form N-4, or Item 3 of Form N-6.
(iv) Under the heading “Appendix: [Portfolio Companies/Investment Options] Available Under the [Contract],” include as an appendix the information required by Item 19 of Form N-3, Item 18 of Form N-4, or Item 18 of Form N-6. If the appendix includes the information required by Item 19 of Form N-3, the appendix shall also include the following introductory legend: “The following is a list of [Investment Options] currently available under the [Contract], which is subject to change as discussed in [the Statutory Prospectus for the Contract]. More information about the [Investment Options] is available in [the Statutory Prospectus for the Contract], which can be requested at no cost by following the instructions on [the front cover page or beginning of the Summary Prospectus].” This introductory legend also may indicate, if applicable, that the prospectus and other information are available from a financial intermediary (such as an insurance sales agent or broker-dealer) through which the Contract may be purchased or sold. Alternatively, an Updating Summary Prospectus for a Contract registered on Form N-3 may include, under the heading “Additional Information About Investment Options Available Under the Contract,” the information required by Item 20 of Form N-3.
(d)
(2) A Registrant may incorporate by reference into a Summary Prospectus any or all of the information contained in the Registrant's Statutory Prospectus and Statement of Additional Information, and any information from the Registrant's reports under § 270.30e-1 (Rule 30e-1) that the Registrant has incorporated by reference into the Registrant's Statutory Prospectus, provided that:
(i) The conditions of paragraphs (b)(2)(vi)(B), (c)(3)(vi), and (h) of this section are met;
(ii) A Registrant may not incorporate by reference into a Summary Prospectus information that paragraphs (b) and (c) of this section require to be included in an Initial Summary Prospectus or Updating Summary Prospectus, respectively; and
(iii) Information that is permitted to be incorporated by reference into the Summary Prospectus may be incorporated by reference into the Summary Prospectus only by reference to the specific document that contains the information, not by reference to another document that incorporates such information by reference.
(3) For purposes of § 230.159 of this chapter, information is conveyed to a person not later than the time that a Summary Prospectus is received by the person if the information is incorporated by reference into the Summary Prospectus in accordance with paragraph (d)(2) of this section.
(e)
(f)
(1) A Summary Prospectus is sent or given no later than the time of the carrying or delivery of the Contract security (an Initial Summary Prospectus in the case of a purchase of a new Contract, or an Updating Summary Prospectus in the case of additional purchase payments in an existing Contract);
(2) The Summary Prospectus is not bound together with any materials except Portfolio Company Prospectuses for Portfolio Companies available as investment options under the Contract, provided that:
(i) All of the Portfolio Companies are available as investment options to the person to whom such documents are sent or given; and
(ii) A table of contents identifying each Portfolio Company Prospectus that is bound together, and the page number on which each document is found, is included at the beginning or immediately following a cover page of the bound materials.
(3) The Summary Prospectus that is sent or given satisfies the requirements of paragraph (b) or paragraph (c) of this section, as applicable, at the time of the carrying or delivery of the Contract security; and
(4) The conditions set forth in paragraph (h) of this section are satisfied.
(g)
(1) It is proved that prior to or at the same time with such communication a Summary Prospectus was sent or given to the person to whom the communication was made;
(2) The Summary Prospectus is not bound together with any materials, except as permitted by paragraph (f)(2) of this section;
(3) The Summary Prospectus that was sent or given satisfies the requirements of paragraph (b) or paragraph (c) of this section, as applicable, at the time of such communication; and
(4) The conditions set forth in paragraph (h) of this section are satisfied.
(h)
(1) The current Initial Summary Prospectus, Updating Summary Prospectus, Statutory Prospectus, Statement of Additional Information, and in the case of a Registrant on Form N-3, the Registrant's most recent annual and semi-annual reports to shareholders under § 270.30e-1, are publicly accessible, free of charge, at the website address specified on the cover page or beginning of the Summary Prospectuses, on or before the time that the Summary Prospectuses are sent or given and current versions of those documents remain on the website through the date that is at least 90 days after:
(i) In the case of reliance on paragraph (f) of this section, the date that the Contract security is carried or delivered; or
(ii) In the case of reliance on paragraph (g) of this section, the date that the communication is sent or given.
(2) The materials that are accessible in accordance with paragraph (h)(1) of this section must be presented on the website in a format, or formats, that:
(i) Are human-readable and capable of being printed on paper in human-readable format;
(ii) Permit persons accessing the Statutory Prospectus or Statement of Additional Information for the Contract to move directly back and forth between each section heading in a table of contents of such document and the section of the document referenced in that section heading; provided that, in the case of the Statutory Prospectus, the table of contents is either required by § 230.481(c) of this chapter or contains the same section headings as the table of contents required by § 230.481(c) of this chapter; and
(iii) Permit persons accessing a Summary Prospectus to move directly back and forth between:
(A) Each section of the Summary Prospectus and any section of the Statutory Prospectus and Contract Statement of Additional Information that provides additional detail concerning that section of the Summary Prospectus; or
(B) Links located at both the beginning and end of the Summary Prospectus, or that remain continuously visible to persons accessing the Summary Prospectus, and tables of contents of both the Statutory Prospectus and the Contract Statement of Additional Information that meet the requirements of paragraph (h)(2)(ii) of this section.
(iv) Permit persons accessing the Summary Prospectus to view the definition of each special term used in the Summary Prospectus (as required by paragraph (e) of this section) upon command (
(3) Persons accessing the materials specified in paragraph (h)(1) of this section must be able to permanently retain, free of charge, an electronic version of such materials in a format, or formats, that meet each of the requirements of paragraphs (h)(2)(i) and (ii) of this section.
(4) The conditions set forth in paragraphs (h)(1), (h)(2), and (h)(3) of this section shall be deemed to be met, notwithstanding the fact that the materials specified in paragraph (h)(1) of this section are not available for a time in the manner required by paragraphs (h)(1), (h)(2), and (h)(3) of this section, provided that:
(i) The Registrant has reasonable procedures in place to ensure that the specified materials are available in the manner required by paragraphs (h)(1), (h)(2), and (h)(3) of this section; and
(ii) The Registrant takes prompt action to ensure that the specified documents become available in the manner required by paragraphs (h)(1), (h)(2), and (h)(3) of this section, as soon as practicable following the earlier of the time at which it knows or reasonably should have known that the documents are not available in the manner required by paragraphs (h)(1), (h)(2), and (h)(3) of this section.
(i)
(2)
(3)
(i) The materials that are accessible in accordance with paragraph (h)(1) of this section must be presented on the website in a format, or formats, that are convenient for both reading online and printing on paper; and
(ii) Persons accessing the materials that are accessible in accordance with
(4)
(5)
(j)
(i) An Initial Summary Prospectus is used for each currently offered Contract described under the related registration statement;
(ii) A summary prospectus is used for the Portfolio Company (if the Portfolio Company is registered on Form N-1A); and
(iii) The current summary prospectus, Statutory Prospectus, Statement of Additional Information, and most recent annual and semi-annual reports to shareholders under § 270.30e-1 of this chapter for the Portfolio Company are publicly accessible, free of charge, at the website address specified on the cover page or beginning of the Contract Summary Prospectuses, and are accessible under the conditions set forth in paragraphs (h)(1), (h)(2)(i) and (ii), (h)(3), and (h)(4) of this section, and paragraphs (i)(1) and (i)(3) of this section, with respect to the availability of documents relating to the Contract.
(2)
15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 77sss(a), 78c(b), 78
This section applies to electronic filers that submit Interactive Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K), paragraph (101) of Part II—Information Not Required to be Delivered to Offerees or Purchasers of § 239.40 of this chapter) (Form F-10), paragraph 101 of the Instructions as to Exhibits of § 249.220f of this chapter (Form F-20), paragraph B.(15) of the General Instructions to § 249.240f of this chapter (Form 40-F), paragraph C.(6) of the General Instructions to § 249.306 of this chapter (Form 6-K), General Instruction C.3.(g) of §§ 239.15A and 274.11A of this chapter (Form N-1A), General Instruction C.3.(h) of §§ 239.17a and 274.11b of this chapter (Form N-3), General Instruction C.3.(h) of §§ 239.17b and 274.11c of this chapter (Form N-4), and General Instruction C.3.(h) of §§ 239.17c and 274.11d of this chapter (Form N-6) specify when electronic filers are required or permitted to submit an Interactive Data File (as defined in § 232.11), as further described in the note to this section. This section imposes content, format and submission requirements for an Interactive Data File, but does not change the substantive content requirements for the financial and other disclosures in the Related Official Filing (as defined in § 232.11).
(a) * * *
(2) Be submitted only by an electronic filer either required or permitted to submit an Interactive Data File as specified by § 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K), paragraph (101) of Part II—Information Not Required to be Delivered to Offerees or Purchasers of § 239.40 of this chapter (Form F-10), paragraph 101 of the Instructions as to Exhibits of § 249.220f of this chapter (Form 20-F), paragraph B.(15) of the General Instructions to § 249.240f of this chapter (Form 40-F), paragraph C.(6) of the General Instructions to § 249.306 of this chapter (Form 6-K), General Instruction C.3.(g) of §§ 239.15A and 274.11A of this chapter (Form N-1A), General Instruction C.3.(h) of §§ 239.17a and 274.11b of this chapter (Form N-3), General Instruction C.3.(h) of §§ 239.17b and 274.11c of this chapter (Form N-4), or General Instruction C.3.(h) of §§ 239.17c and 274.11d of this chapter (Form N-6), as applicable;
(3) * * *
(i) If the electronic filer is neither an open-end management investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a
(ii) If the electronic filer is either an open-end management investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a
(4) Be submitted in accordance with the EDGAR Filer Manual and, as applicable, either § 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K), paragraph (101) of Part II—Information Not Required to be Delivered to Offerees or Purchasers of § 239.40 of this chapter (Form F-10), paragraph 101 of the Instructions as to Exhibits of § 249.220f of this chapter (Form 20-F), paragraph B.(15) of the General Instructions to § 249.240f of this chapter (Form 40-F), paragraph C.(6) of the General Instructions to § 249.306 of this chapter (Form 6-K), General Instruction C.3.(g) of §§ 239.15A and 274.11A of this chapter (Form N-1A), General Instruction C.3.(h) of §§ 239.17a and 274.11b of this chapter (Form N-3), General Instruction C.3.(h) of §§ 239.17b and 274.11c of this chapter (Form N-4), or General Instruction C.3.(h) of §§ 239.17c and 274.11d of this chapter (Form N-6).
(b)(1) If the electronic filer is neither an open-end management investment company registered under the Investment Company Act of 1940 nor a separate account (as defined in Section 2(a)(14) of the Securities Act) registered under the Investment Company Act of 1940 (15 U.S.C. 80a
(2) If the electronic filer is an open-end management investment company registered under the Investment Company Act of 1940) or a separate account (as defined in Section 2(a)(14) of the Securities Act) registered under the Investment Company Act of 1940 (15 U.S.C. 80a
(f) * * * (1) * * *
(i) In the manner specified in paragraph (f)(2) of this section rather than as specified by paragraph (a)(3)(i) of this section: Any electronic filer that is neither an open-end management investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a
Section 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to § 239.11 of this chapter (Form S-1), § 239.13 of this chapter (Form S-3), § 239.25 of this chapter (Form S-4), § 239.18 of this chapter (Form S-11), § 239.31 of this chapter (Form F-1), § 239.33 of this chapter (Form F-3), § 239.34 of this chapter (Form F-4), § 249.310 of this chapter (Form 10-K), § 249.308a of this chapter (Form 10-Q), and § 249.308 of this chapter (Form 8-K). Paragraph (101) of Part II—Information not Required to be Delivered to Offerees or Purchasers of § 239.40 of this chapter (Form F-10) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to Form F-10. Paragraph 101 of the Instructions as to Exhibits of § 249.220f of this chapter (Form 20-F) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to Form 20-F. Paragraph B.(15) of the General Instructions to § 249.240f of this chapter (Form 40-F) and Paragraph C.(6) of the General Instructions to § 249.306 of this chapter (Form 6-K) specify the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to § 249.240f of this chapter (Form 40-F) and § 249.306 of this chapter (Form 6-K). Section 229.601(b)(101) (Item 601(b)(101) of Regulation S-K), paragraph (101) of Part II—Information not Required to be Delivered to Offerees or Purchasers of Form F-10, paragraph 101 of the Instructions as to Exhibits of Form 20-F, paragraph B.(15) of the General Instructions to Form 40-F, and paragraph C.(6) of the General Instructions to Form 6-K all prohibit submission of an Interactive Data File by an issuer that prepares its financial statements in accordance with 17 CFR 210.6-01 through 210.6-10 (Article 6 of Regulation S-X). For an issuer that is an open-end management investment company or separate account registered under the Investment Company Act of 1940 (15 U.S.C. 80a
15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78
(f) * * *
(2) * * *
(iii) In the case of an investment company registered under the Investment Company Act of 1940, the company's prospectus, a summary prospectus that satisfies the requirements of § 230.498(b), § 230.498A(b), or § 230.498A(c) of this chapter, a Notice under § 270.30e-3 of this chapter, or a report that is required to be transmitted to stockholders by section 30(e) of the Investment Company Act (15 U.S.C. 80a-29(e)) and the rules thereunder; and
15 U.S.C. 80a-1
Section 270.6e-3 is also issued under 15 U.S.C. 80a-5(e).
(e) Definition of separate account and conditions for availability of exemption under §§ 270.6c-6, 270.6c-7, 270.6c-8, 270.11a-2, 270.14a-2, 270.15a-3, 270.16a-1, 270.22c-1, 270.22d-3, 270.22e-1, 270.26a-1, 270.27i-1, and 270.32a-2 of this chapter.
(2) As conditions to the availability of exemptive Rules 6c-6, 6c-7, 6c-8, 11a-2, 14a-2, 15a-3, 16a-1, 22c-1, 22d-3, 22e-1, 26a-1, 27i-1, and 32a-2, the separate account shall be legally segregated, the assets of the separate account shall, at the time during the year that adjustments in the reserves are made, have a value at least equal to the reserves and other contract liabilities with respect to such account, and at all other times, shall have a value approximately equal to or in excess of such reserves and liabilities; and that portion of such assets having a value equal to, or approximately equal to, such reserves and contract liabilities shall not be chargeable with liabilities arising out of any other business which the insurance company may conduct.
A registered separate account, and any depositor of or underwriter for such account, shall be exempt from the provisions of sections 22(e), 27(i)(2)(A), and 27(d) of the Act (15 U.S.C. 80a-22(e), 80a-27(i)(2)(A), and 80a-27(d), respectively) with respect to any variable annuity contract participating in such account to the extent necessary to permit compliance with the Texas Optional Retirement Program (“Program”), Provided, That the separate, account, depositor, or underwriter for such account:
(b) A registered separate account, and any depositor of or principal underwriter for such account, shall be exempt from the provisions of Sections 22(c) and 27(i)(2)(A) of the Act (15 U.S.C. 80a-22(c) and 80a-27(i)(2)(A), respectively) and § 270.22c-1 (Rule 22c-1) to the extent necessary to permit them to impose a deferred sales load on any variable annuity contract participating in such account; provided that the terms of any offer to exchange another contract for the contract are in compliance with the requirements of paragraph (d) or (e) of § 270.11a-2 (Rule 11a-2).
(c) A registered separate account, and any depositor of or principal underwriter for such account, shall be exempt from Sections 22(c) and 27(i)(2)(A) of the Act (15 U.S.C. 80a-22(c) and 80a-27(i)(2)(A), respectively) and § 270.22c-1 (Rule 22c-1) to the extent necessary to permit them to deduct from the value of any variable annuity contract participating in such account, upon total redemption of the contract prior to the last day of the year, the full annual fee for administrative services that otherwise would have been deducted on that date.
(a) A separate account, and the investment adviser, principal underwriter and depositor of such separate account, shall, except for the exemptions provided in paragraph (b) of this section, be subject to all provisions of the Act and rules and regulations promulgated thereunder as though such separate account were a registered investment company issuing periodic payment plan certificates if:
(1) Such separate account is established and maintained by a life insurance company pursuant to the insurance laws or code of:
(i) Any state or territory of the United States or the District of Columbia; or
(ii) Canada or any province thereof, if it complies to the extent necessary with § 270.7d-1 (Rule 7d-1) under the Act;
(2) The assets of the separate account are derived solely from the sale of variable life insurance contracts as defined in paragraph (c) of this section, and advances made by the life insurance company which established and maintains the separate account (“life insurer”) in connection with the operation of such separate account;
(3) The separate account is not used for variable annuity contracts or for funds corresponding to dividend accumulations or other contract liabilities not involving life contingencies;
(4) The income, gains and losses, whether or not realized, from assets allocated to such separate account, are, in accordance with the applicable variable life insurance contract, credited to or charged against such account without regard to other income, gains or losses of the life insurer;
(5) The separate account is legally segregated, and that portion of its assets having a value equal to, or approximately equal to, the reserves and other contract liabilities with respect to such separate account are not chargeable with liabilities arising out of any other business that the life insurer may conduct;
(6) The assets of the separate account have, at each time during the year that adjustments in the reserves are made, a value at least equal to the reserves and other contract liabilities with respect to such separate account, and at all other times, except pursuant to an order of the Commission, have a value approximately equal to or in excess of such reserves and liabilities; and
(7) The investment adviser of the separate account is registered under the Investment Advisers Act of 1940.
(b) If a separate account meets the requirements of paragraph (a) of this section, then such separate account and the other persons described in paragraph (a) of this section shall be exempt from the provisions of the Act as follows:
(1) Section 7 (15 U.S.C. 80a-7);
(2) Section 8 (15 U.S.C. 80a-8) to the extent that:
(i) For purposes of paragraph (a) of Section 8, the separate account shall file with the Commission a notification on § 274.301 (Form N-6EI-1) which identifies such separate account; and
(ii) For purposes of paragraph (b) of Section 8, the separate account shall file with the Commission a form to be designated by the Commission within 90 days after filing the notification on Form N-6EI-1; provided, however, that if the fiscal year of the separate account ends within this 90 day period the form may be filed within ninety days after the end of such fiscal year.
(3) Section 9 (15 U.S.C. 80a-9) to the extent that:
(i) The eligibility restrictions of Section 9(a) shall not be applicable to those persons who are officers, directors and employees of the life insurer or its affiliates who do not participate directly in the management or administration of the separate account or in the sale of variable life insurance contracts funded by such separate account; and
(ii) A life insurer shall be ineligible pursuant to paragraph (3) of Section 9(a) to serve as investment adviser, depositor of or principal underwriter for a variable life insurance separate account only if an affiliated person of such life insurer, ineligible by reason of paragraph (1) or (2) of Section 9(a), participates directly in the management or administration of the separate account or in the sale of variable life insurance contracts funded by such separate account.
(4) Section 13(a) (15 U.S.C. 80a-13(a)) to the extent that:
(i) An insurance regulatory authority may require pursuant to insurance law or regulation that the separate account make (or refrain from making) certain investments which would result in changes in the subclassification or investment policies of the separate account;
(ii) Changes in the investment policy of the separate account initiated by contractholders or the board of directors of the separate account may be disapproved by the life insurer, provided that such disapproval is reasonable and is based upon a determination by the life insurer in good faith that:
(A) Such change would be contrary to state law; or
(B) Such change would be inconsistent with the investment objectives of the separate account or would result in the purchase of securities for the separate account which vary from the general quality and nature of investments and investment techniques utilized by other separate accounts of the life insurer or of an affiliated life insurance company, which separate accounts have investment objectives similar to the separate account;
(iii) Any action taken in accordance with paragraph (b)(4) (i) or (ii) of this section and the reasons therefor shall be disclosed in the proxy statement for the next meeting of variable life insurance contractholders of the separate account.
(5) Section 14(a) (15 U.S.C. 80a-14(a));
(6)(i) Section 15(a) (15 U.S.C. 80a-15(a)) to the extent this Section requires that the initial written contract pursuant to which the investment adviser serves or acts shall have been approved by the vote of a majority of the outstanding voting securities of the registered company; provided that:
(A) Such investment adviser is selected and a written contract is entered into before the effective date of the registration statement under the Securities Act of 1933, as amended, for variable life insurance contracts which are funded by the separate account, and that the terms of the contract are fully disclosed in such registration statement, and
(B) A written contract is submitted to a vote of variable life insurance contractholders at their first meeting after the effective date of the registration statement under the Securities Act of 1933, as amended, on condition that such meeting shall take place within one year after such effective date, unless the time for the holding of such meeting shall be extended by the Commission upon written request for good cause shown;
(ii) Sections 15 (a), (b) and (c) (15 U.S.C. 80a-15(a), (b), and (c)) to the extent that:
(A) An insurance regulatory authority may disapprove pursuant to insurance law or regulation any contract between the separate account and an investment adviser or principal underwriter;
(B) Changes in the principal underwriter for the separate account initiated by contractholders or the board of directors of the separate account may be disapproved by the life insurer; provided that such disapproval is reasonable;
(C) Changes in the investment adviser of the separate account initiated by contractholders or the board of directors of the separate account may be disapproved by the life insurer; provided that such disapproval is reasonable and is based upon a determination by the life insurer in good faith that:
(
(
(D) Any action taken in accordance with paragraph (b)(6)(ii)(A), (B), or (C) of this section and the reasons therefor shall be disclosed in the proxy statement for the next meeting of variable life insurance contractholders of the separate account.
(7) Section 16(a) (15 U.S.C. 80a-16(a)) to the extent that:
(i) Persons serving as directors of the separate account prior to the first meeting of such account's variable life insurance contractholders are exempt from the requirement of Section 16(a) that such persons be elected by the holders of outstanding voting securities of such account at an annual or special meeting called for that purpose; provided that:
(A) Such persons have been appointed directors of such account by the life insurer before the effective date of the registration statement under the Securities Act of 1933, as amended, for variable life insurance contracts which are funded by the separate account and are identified in such registration statement (or are replacements appointed by the life insurer for any such persons who have become unable to serve as directors), and
(B) An election of directors for such account shall be held at the first meeting of variable life insurance contractholders after the effective date of the registration statement under the Securities Act of 1933, as amended, relating to contracts funded by such account, which meeting shall take place within one year after such effective date, unless the time for holding such meeting shall be extended by the Commission upon written request for good cause shown;
(ii) A member of the board of directors of such separate account may be disapproved or removed by the appropriate insurance regulatory authority if such person is ineligible to serve as a director of the separate account pursuant to insurance law or regulation of the jurisdiction in which the life insurer is domiciled.
(8) Section 17(f) (15 U.S.C. 80a-17(f)) to the extent that the securities and similar investments of the separate account may be maintained in the custody of the life insurer or an insurance company which is an affiliated person of such life insurer; provided that:
(i) The securities and similar investments allocated to such separate account are clearly identified as to ownership by such account, and such securities and similar investments are maintained in the vault of an insurance company which meets the qualifications set forth in paragraph (b)(8)(ii) of this section, and whose procedures and activities with respect to such safekeeping function are supervised by the insurance regulatory authorities of
(ii) The insurance company maintaining such investments must file with an insurance regulatory authority of a State or territory of the United States or the District of Columbia an annual statement of its financial condition in the form prescribed by the National Association of Insurance Commissioners, must be subject to supervision and inspection by such authority and must be examined periodically as to its financial condition and other affairs by such authority, must hold the securities and similar investments of the separate account in its vault, which vault must be equivalent to that of a bank which is a member of the Federal Reserve System, and must have a combined capital and surplus, if a stock company, or an unassigned surplus, if a mutual company, of not less than $1,000,000 as set forth in its most recent annual statement filed with such authority;
(iii) Access to such securities and similar investments shall be limited to employees of or agents authorized by the Commission, representatives of insurance regulatory authorities, independent public accountants for the separate account, accountants for the life insurer and to no more than 20 persons authorized pursuant to a resolution of the board of directors of the separate account, which persons shall be directors of the separate account, officers and responsible employees of the life insurer or officers and responsible employees of the affiliated insurance company in whose vault such investments are maintained (if applicable), and access to such securities and similar investments shall be had only by two or more such persons jointly, at least one of whom shall be a director of the separate account or officer of the life insurer;
(iv) The requirement in paragraph (b)(8)(i) of this section that the securities and similar investments of the separate account be maintained in the vault of a qualified insurance company shall not apply to securities deposited with insurance regulatory authorities or deposited in a system for the central handling of securities established by a national securities exchange or national securities association registered with the Commission under the Securities Exchange Act of 1934, as amended, or such person as may be permitted by the Commission, or to securities on loan which are collateralized to the extent of their full market value, or to securities hypothecated, pledged, or placed in escrow for the account of such separate account in connection with a loan or other transaction authorized by specific resolution of the board of directors of the separate account, or to securities in transit in connection with the sale, exchange, redemption, maturity or conversion, the exercise of warrants or rights, assents to changes in terms of the securities, or to other transactions necessary or appropriate in the ordinary course of business relating to the management of securities;
(v) Each person when depositing such securities or similar investments in or withdrawing them from the depository or when ordering their withdrawal and delivery from the custody of the life insurer or affiliated insurance company, shall sign a notation in respect of such deposit, withdrawal or order which shall show:
(A) The date and time of the deposit, withdrawal or order;
(B) The title and amount of the securities or other investments deposited, withdrawn or ordered to be withdrawn, and an identification thereof by certificate numbers or otherwise;
(C) The manner of acquisition of the securities or similar investments deposited or the purpose for which they have been withdrawn, or ordered to be withdrawn; and
(D) If withdrawn and delivered to another person the name of such person. Such notation shall be transmitted promptly to an officer or director of the separate account or the life insurer designated by the board of directors of the separate account who shall not be a person designated for the purpose of paragraph (b)(8)(iii) of this section. Such notation shall be on serially numbered forms and shall be preserved for at least one year;
(vi) Such securities and similar investments shall be verified by complete examination by an independent public accountant retained by the separate account at least three times during each fiscal year, at least two of which shall be chosen by such accountant without prior notice to such separate account. A certificate of such accountant stating that he has made an examination of such securities and investments and describing the nature and extent of the examination shall be transmitted to the Commission by the accountant promptly after each examination;
(vii) Securities and similar investments of a separate account maintained with a bank or other company whose functions and physical facilities are supervised by Federal or state authorities pursuant to any arrangement whereby the directors, officers, employees or agents of the separate account or the life insurer are authorized or permitted to withdraw such investments upon their mere receipt are deemed to be in the custody of the life insurer and shall be exempt from the requirements of Section 17(f) so long as the arrangement complies with all provisions of paragraph (b)(8) of this section, except that such securities will be maintained in the vault of a bank or other company rather than the vault of an insurance company.
(9) Section 18(i) (15 U.S.C. 80a-18(i)) to the extent that:
(i) For the purposes of any section of the Act which provides for the vote of securityholders on matters relating to the investment company:
(A) Variable life insurance contractholders shall have one vote for each $100 of cash value funded by the separate account, with fractional votes allocated for amounts less than $100;
(B) The life insurer shall have one vote for each $100 of assets of the separate account not otherwise attributable to contractholders pursuant to paragraph (b)(9)(i)(A) of this section, with fractional votes allocated for amounts less than $100; provided that after the commencement of sales of variable life insurance contracts funded by the separate account, the life insurer shall cast its votes for and against each matter which may be voted upon by contractholders in the same proportion as the votes cast by contractholders; and
(C) The number of votes to be allocated shall be determined as of a record date not more than 90 days prior to any meeting at which such vote is held; provided that if a quorum is not present at the meeting, the meeting may be adjourned for up to 60 days without fixing a new record date;
(ii) The requirement of this section that every share of stock issued by a registered management investment company (except a common-law trust of the character described in Section 16(c)) shall be a voting stock and have equal voting rights with every other outstanding voting stock shall not be deemed to be violated by actions specifically permitted by any provision of this section.
(10) Section 19 (15 U.S.C. 80a-19) to the extent that the provisions of this section shall not be applicable to any dividend or similar distribution paid or payable pursuant to provisions of participating variable life insurance contracts.
(11) Sections 22(d), 22(e), and 27(i)(2)(A) (15 U.S.C. 80a-22(d), 80a-22(e), and 80a-27(i)(2)(A), respectively) and § 270.22c-1 (Rule 22c-1) promulgated under Section 22(c) to the extent:
(i) That the amount payable on death and the cash surrender value of each variable life insurance contract shall be determined on each day during which the New York Stock Exchange is open for trading, not less frequently than once daily as of the time of the close of trading on such exchange; provided that the amount payable on death need not be determined more than once each contract month if such determination does not reduce the participation of the contract in the investment experience of the separate account; provided further, however, that if the net valuation premium for such contract is transferred at least annually, then the amount payable on death need be determined only when such net premium is transferred;
(ii) Necessary for compliance with this section or with insurance laws and regulations and established administrative procedures of the life insurer with respect to issuance, transfer and redemption procedures for variable life insurance contracts funded by the separate account including, but not limited to, premium rate structure and premium processing, insurance underwriting standards, and the particular benefit afforded by the contract; provided, however, that any procedure or action shall be reasonable, fair and not discriminatory to the interests of the affected contractholder and to all other holders of contracts of the same class or series funded by the separate account; and, further provided that any such action shall be disclosed in the form required to be filed by the separate account with the Commission pursuant to paragraph (b)(2)(ii) of this section.
(12) Section 27(i)(2)(A) (15 U.S.C. 80a-27(i)(A)), to the extent that such sections require that the variable life insurance contract be redeemable or provide for a refund in cash; provided that such contract provides for election by the contractholder of a cash surrender value or certain non-forfeiture and settlement options which are required or permitted by the insurance law or regulation of the jurisdiction in which the contract is offered; and further provided that unless required by the insurance law or regulation of the jurisdiction in which the contract is offered or unless elected by the contractholder, such contract shall not provide for the automatic imposition of any option, including, but not limited to, an automatic premium loan, which would involve the accrual or payment of an interest or similar charge;
(13) Section 32(a)(2) (15 U.S.C. 80a-31(a)(2)); provided that:
(i) The independent public accountant is selected before the effective date of the registration statement under the Securities Act of 1933, as amended, for variable life insurance contracts which are funded by the separate account, and the identity of such accountant is disclosed in such registration statement, and
(ii) The selection of such accountant is submitted for ratification or rejection to variable life insurance contractholders at their first meeting after the effective date of the registration statement under the Securities Act of 1933, as amended, on condition that such meeting shall take place within one year after such effective date, unless the time for the holding of such meeting shall be extended by the Commission upon written request for good cause shown.
(14) If the separate account is organized as a unit investment trust, all the assets of which consist of the shares of one or more registered management investment companies which offer their shares exclusively to variable life insurance separate accounts of the life insurer or of any affiliated life insurance company:
(i) The eligibility restrictions of Section 9(a) (15 U.S.C. 80a-9(a)) shall not be applicable to those persons who are officers, directors and employees of the life insurer or its affiliates who do not participate directly in the management or administration of any registered management investment company described above;
(ii) The life insurer shall be ineligible pursuant to paragraph (3) of Section 9(a) to serve as investment adviser of or principal underwriter for any registered management investment company described in paragraph (b)(14) of this section only if an affiliated person of such life insurer, ineligible by reason of paragraph (1) or (2) of Section 9(a), participates in the management or administration of such company;
(iii) The life insurer may vote shares of the registered management investment companies held by the separate account without regard to instructions from contractholders of the separate account if such instructions would require such shares to be voted:
(A) To cause such companies to make (or refrain from making) certain investments which would result in changes in the sub-classification or investment objectives of such companies or to approve or disapprove any contract between such companies and an investment adviser when required to do so by an insurance regulatory authority subject to the provisions of paragraphs (b)(4)(i) and (6)(ii)(A) of this section; or
(B) In favor of changes in investment objectives, investment adviser of or principal underwriter for such companies subject to the provisions of paragraphs (b)(4)(ii) and (6)(ii)(B) and (C) of this section;
(iv) Any action taken in accordance with paragraph (b)(14)(iii)(A) or (B) of this section and the reasons therefor shall be disclosed in the next report to contractholders made pursuant to section 30(e) (15 U.S.C. 80a-29(e)) and § 270.30e-2 (Rule 30e-2);
(v) Any registered management investment company established by the insurer and described in paragraph (b)(14) of this section shall be exempt from Section 14(a); and
(vi) Any registered management investment company established by the insurer and described in paragraph (b)(14) of this section shall be exempt from Sections 15(a), 16(a), and 32(a)(2) (15 U.S.C. 80a-15(a), 80-16(a), and 80-31(a)(2), respectively), to the extent prescribed by paragraphs (b)(6)(i), (b)(7)(i), and (b)(13) of this section, provided that such company complies with the conditions set forth in those paragraphs as if it were a separate account.
(c) When used in this rule,
(i) A death benefit and cash surrender value which vary to reflect the investment experience of the separate account;
(ii) An initial stated dollar amount of death benefit, and payment of a death benefit guaranteed by the life insurer to be at least equal to such stated amount; and
(iii) Assumption of the mortality and expense risks thereunder by the life insurer for which a charge against the assets of the separate account may be assessed. Such charge shall be disclosed in the prospectus and shall not be less than fifty per centum of the maximum charge for risk assumption as disclosed in the prospectus and as provided for in the contract.
(a) A separate account, and its investment adviser, principal underwriter and depositor, shall, except as provided in paragraph (b) of this section, comply with all provisions of the Investment Company Act of 1940 (15 U.S.C. 80a-1
(1) It is a separate account within the meaning of Section 2(a)(37) of the Act (15 U.S.C. 80a-2(a)(37)) and is established and maintained by a life insurance company pursuant to the insurance laws or code of:
(i) Any state or territory of the United States or the District of Columbia; or
(ii) Canada or any province thereof, if it complies with § 270.7d-1 (Rule 7d-1) under the Act (the “life insurer”);
(2) The assets of the separate account are derived solely from:
(i) The sale of flexible premium variable life insurance contracts (“flexible contracts”) as defined in paragraph (c)(1) of this section;
(ii) The sale of scheduled premium variable life insurance contracts (“scheduled contracts”) as defined in paragraph (c) of § 270.6e-2 (Rule 6e-2) under the Act;
(iii) Funds corresponding to dividend accumulations with respect to such contracts; and
(iv) Advances made by the life insurer in connection with the operation of such separate account;
(3) The separate account is not used for variable annuity contracts or other contract liabilities not involving life contingencies;
(4) The separate account is legally segregated, and that part of its assets with a value approximately equal to the reserves and other contract liabilities for such separate account are not chargeable with liabilities arising from any other business of the life insurer;
(5) The value of the assets of the separate account, each time adjustments in the reserves are made, is at least equal to the reserves and other contract liabilities of the separate account, and at all other times approximately equals or exceeds the reserves and liabilities; and
(6) The investment adviser of the separate account is registered under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1
(b) A separate account that meets the requirements of paragraph (a) of this section, and its investment adviser, principal underwriter and depositor shall be exempt with respect to flexible contracts funded by the separate account from the following provisions of the Act:
(1) Subject to section 26(f) of the Act, in connection with any sales charge deducted under the flexible contract, the separate account and other persons shall be exempt from Sections 12(b), 22(c), and 27(i)(2)(A) (15 U.S.C. 80a-12(b), 80-22(c), and 80a-27(i)(2)(A), respectively) of the Act, and § 270.12b-1 (Rule 12b-1) and § 270.22c-1 (Rule 22c-1) under the Act;
(2) Section 7 (15 U.S.C. 80a-7);
(3) Section 8 (15 U.S.C. 80a-8), to the extent that:
(i) For purposes of paragraph (a) of Section 8, the separate account filed with the Commission a notification on § 274.301 (Form N-6EI-1) which identifies the separate account; and
(ii) For purposes of paragraph (b) of Section 8, the separate account shall file with the Commission the form designated by the Commission within ninety days after filing the notification on Form N-6EI-1; provided, however, that if the fiscal year of the separate account end within this ninety day period, the form may be filed within ninety days after the end of such fiscal year.
(4) Section 9 (15 U.S.C. 80a-9), to the extent that:
(i) The eligibility restrictions of Section 9(a) shall not apply to persons who are officers, directors or employees of the life insurer or its affiliates and who do not participate directly in the management or administration of the separate account or in the sale of flexible contracts; and
(ii) A life insurer shall be ineligible under paragraph (3) of Section 9(a) to serve as investment adviser, depositor of or principal underwriter for the separate account only if an affiliated person of such life insurer, ineligible by reason of paragraphs (1) or (2) of Section 9(a), participates directly in the management or administration of the separate account or in the sale of flexible contracts.
(5) Section 13(a) (15 U.S.C. 80a-13(a)), to the extent that:
(i) An insurance regulatory authority may require pursuant to insurance law or regulation that the separate account make (or refrain from making) certain investments which would result in changes in the subclassification or investment policies of the separate account;
(ii) Changes in the investment policy of the separate account initiated by its contractholders or board of directors may be disapproved by the life insurer, if the disapproval is reasonable and is based on a good faith determination by the life insurer that:
(A) The change would violate state law; or
(B) The change would not be consistent with the investment objectives of the separate account or would result in the purchase of securities for the separate account which vary from the general quality and nature of investments and investment techniques used by other separate accounts of the life insurer or of an affiliated life insurance company with similar investment objectives;
(iii) Any action described in paragraph (b)(5)(i) or (ii) of this section and the reasons for it shall be disclosed in the next communication to contractholders, but in no case, later than twelve months from the date of such action.
(6) Section 14(a) (15 U.S.C. 80a-14(a));
(7)(i) Section 15(a) (15 U.S.C. 80a-15(a)), to the extent it requires that the initial written contract with the investment adviser shall have been approved by the vote of a majority of the outstanding voting securities of the registered investment company; provided that:
(A) The investment adviser is selected and a written contract is entered into before the effective date of the 1933 Act registration statement for flexible contracts, and that the terms of the contract are fully disclosed in the registration statement, and
(B) A written contract is submitted to a vote of contractholders at their first meeting and within one year after the effective date of the 1933 Act registration statement, unless the Commission upon written request and for good cause shown extends the time for the holding of such meeting;
(ii) Sections 15 (a), (b), and (c), to the extent that:
(A) An insurance regulatory authority may disapprove pursuant to insurance law or regulation any contract between the separate account and an investment adviser or principal underwriter;
(B) Changes in the principal underwriter for the separate account initiated by contractholders or the board of directors of the separate account may be disapproved by the life insurer; provided that such disapproval is reasonable;
(C) Changes in the investment adviser of the separate account initiated by contractholders or the board of directors of the separate account may be disapproved by the life insurer; provided that such disapproval is reasonable and is based on a good faith determination by the life insurer that:
(
(
(D) Any action described in paragraph (b)(7)(ii) (A), (B), or (C) of this section and the reasons for it shall be disclosed in the next communication to contractholders, but in no case, later than twelve months from the date of such action.
(8) Section 16(a) (15 U.S.C. 80a-16(a)), to the extent that:
(i) Directors of the separate account serving before the first meeting of the account's contractholders are exempt from the requirement of Section 16(a) that they be elected by the holders of outstanding voting securities of the account at an annual or special meeting called for that purpose; provided that:
(A) Such persons were appointed directors of the account by the life insurer before the effective date of the 1933 Act registration statement for flexible contracts and are identified in the registration statement (or are replacements appointed by the life insurer for any such persons who have become unable to serve as directors); and
(B) An election of directors for the account is held at the first meeting of contractholders and within one year after the effective date of the 1933 Act registration statement for flexible contracts, unless the time for holding the meeting is extended by the Commission upon written request and for good cause shown;
(ii) A member of the board of directors of the separate account may be disapproved or removed by an insurance regulatory authority if the person is not eligible to be a director of the separate account under the law of the life insurer's domicile.
(9) Section 17(f) (15 U.S.C. 80a-17(f)), to the extent that the securities and similar investments of a separate account organized as a management investment company may be maintained in the custody of the life insurer or of an affiliated life insurance company; provided that:
(i) The securities and similar investments allocated to the separate account are clearly identified as owned by the account, and the securities and similar investments are kept in the vault of an insurance company which meets the qualifications in paragraph (b)(9)(ii) of this section, and whose safekeeping function is supervised by the insurance regulatory authorities of the jurisdiction in which the securities and similar investments will be held;
(ii) The insurance company maintaining such investments must file with an insurance regulatory authority of a state or territory of the United States or the District of Columbia an annual statement of its financial condition in the form prescribed by the National Association of Insurance Commissioners, must be subject to supervision and inspection by such authority and must be examined periodically as to its financial condition and other affairs by such authority, must hold the securities and similar investments of the separate account in its vault, which vault must be equivalent to that of a bank which is a member of the Federal Reserve System, and must have a combined capital and surplus, if a stock company, or an unassigned surplus, if a mutual company, of not less than $1,000,000 as set forth in its most recent annual statement filed with such authority;
(iii) Access to such securities and similar investments shall be limited to employees of the Commission, representatives of insurance regulatory authorities, independent public accountants retained by the separate account (or on its behalf by the life insurer), accountants for the life insurer, and to no more than 20 persons authorized by a resolution of the board of directors of the separate account, which persons shall be directors of the separate account, officers and responsible employees of the life insurer or officers and responsible employees of the affiliated life insurance company in whose vault the investments are kept (if applicable), and access to such securities and similar investments shall be had only by two or more such persons jointly, at least one of whom shall be a director of the separate account or officer of the life insurer;
(iv) The requirement in paragraph (b)(9)(i) of this section that the securities and similar investments of the separate account be maintained in the vault of a qualified insurance company shall not apply to securities deposited with insurance regulatory authorities or deposited in accordance with any rule under Section 17(f), or to securities on loan which are collateralized to the extent of their full market value, or to securities hypothecated, pledged, or placed in escrow for the account of such separate account in connection with a loan or other transaction authorized by specific resolution of the board of directors of the separate account, or to securities in transit in connection with the sale, exchange, redemption, maturity or conversion, the exercise of warrants or rights, assents to changes in terms of the securities, or to other transactions necessary or appropriate in the ordinary course of business relating to the management of securities;
(v) Each person when depositing such securities or similar investments in or withdrawing them from the depository or when ordering their withdrawal and delivery from the custody of the life insurer or affiliated life insurance company, shall sign a notation showing:
(A) The date and time of the deposit, withdrawal or order;
(B) The title and amount of the securities or other investments deposited, withdrawn or ordered to be withdrawn, and an identification thereof by certificate numbers or otherwise;
(C) The manner of acquisition of the securities or similar investments deposited or the purpose for which they have been withdrawn, or ordered to be withdrawn; and
(D) If withdrawn and delivered to another person, the name of such person. The notation shall be sent promptly to an officer or director of the separate account or the life insurer designated by the board of directors of the separate account who is not himself permitted to have access to the securities or investments under paragraph (b)(9)(iii) of this section. The notation shall be on serially numbered forms and shall be kept for at least one year;
(vi) The securities and similar investments shall be verified by complete examination by an independent public accountant retained by the separate account (or on its behalf by the life insurer) at least three times each fiscal year, at least two of which shall be chosen by the accountant without prior notice to the separate account. A certificate of the accountant stating that he has made an examination of such securities and investments and describing the nature and extent of the examination shall be sent to the Commission by the accountant promptly after each examination;
(vii) Securities and similar investments of a separate account maintained with a bank or other company whose functions and physical facilities are supervised by federal or
(10) Section 18(i) (15 U.S.C. 80a-18(i)), to the extent that:
(i) For the purposes of any section of the Act which provides for the vote of securityholders on matters relating to the investment company:
(A) Flexible contractholders shall have one vote for each $100 of cash value funded by the separate account, with fractional votes allocated for amounts less than $100;
(B) The life insurer shall have one vote for each $100 of assets of the separate account not otherwise attributable to contractholders under paragraph (b)(10)(i)(A) of this section, with fractional votes allocated for amounts less than $100; provided that after the commencement of sales of flexible contracts, the life insurer shall cast its votes for and against each matter which may be voted upon by contractholders in the same proportion as the votes cast by contractholders; and
(C) The number of votes to be allocated shall be determined as of a record date not more than 90 days before any meeting at which such vote is held; provided that if a quorum is not present at the meeting, the meeting may be adjourned for up to 60 days without fixing a new record date;
(ii) The requirement of Section 18(i) that every share of stock issued by a registered management investment company (except a common-law trust of the character described in Section 16(c) (15 U.S.C. 80a-16(c))) shall be a voting stock and have equal voting rights with every other outstanding voting stock shall not be deemed to be violated by actions specifically permitted by any provisions of this section.
(11) Section 19 (15 U.S.C. 80a-19), to the extent that the provisions of this Section shall not apply to any dividend or similar distribution paid or payable under provisions of participating flexible contracts.
(12) Sections 22(c), 22(d), 22(e) and 27(i)(2)(A) (15 U.S.C. 80a-22(c)), 80a-22(d), 80a-22(e), and 80a-27(i)(2)(A), respectively) and § 270.22c-1 (Rule 22c-1) to the extent:
(i) The cash value of each flexible contract shall be computed in accordance with Rule 22c-1(b); provided, however, that where actual computation is not necessary for the operation of a particular contract, then the cash value of that contract must only be capable of computation; and provided further that to the extent the calculation of the cash value reflects deductions for the cost of insurance and other insurance benefits or administrative expenses and fees or sales charges, such deductions need only be made at such times as specified in the contract or as necessary for compliance with insurance laws and regulations; and
(ii) The death benefit, unless required by insurance laws and regulations, shall be computed on any day that the investment experience of the separate account would affect the death benefit under the terms of the contract provided that such terms are reasonable, fair, and nondiscriminatory;
(iii) Necessary to comply with this Rule or with insurance laws and regulations and established administrative procedures of the life insurer for issuance, increases in or additions of insurance benefits, transfer and redemption of flexible contracts, including, but not limited to, premium rate structure and premium processing, insurance underwriting standards, and the particular benefit afforded by the contract; provided, however, that any procedure or action shall be reasonable, fair and not discriminatory to the interests of the affected contractholders and to all other holders of contracts of the same class or series funded by the separate account; and provided further that any such action shall be disclosed in the form filed by the separate account with the Commission under paragraph (b)(3)(ii) of this section.
(13) Sections 27(i)(2)(A) and 22(c) (15 U.S.C. 80a-27(i)(2)(A) and 80a-22(c)) and § 270.22c-1 (Rule 22c-1), to the extent that:
(i) Such sections require that the flexible contract be redeemable or provide for a refund in cash; provided that the contract provides for election by the contractholder of a cash surrender value or certain non-forfeiture and settlement options which are required or permitted by the insurance law or regulation of the jurisdiction in which the contract is offered; and provided further that unless required by the insurance law or regulation of the jurisdiction in which the contract is offered or unless elected by the contractholder, the contract shall not provide for the automatic imposition of any option, including, but not limited to, an automatic premium loan, which would involve the accrual or payment of an interest or similar charge.
(ii) Notwithstanding the provisions of paragraph (b)(13)(A) of this section, if the amounts available under the contract to pay the charges due under the contract on any contract processing day are less than such charges due, the contract may provide that the cash surrender value shall be applied to purchase a non-forfeiture option specified by the life insurer in such contract; provided that the contract also provides that Contract processing days occur not less frequently than monthly.
(iii) Subject to Section 26(f) (15 U.S.C. 80a-26(f)), sales charges and administrative expenses or fees may be deducted upon redemption.
(14) Section 32(a)(2) (15 U.S.C. 80a-31(a)(2)); provided that:
(i) The independent public accountant is selected before the effective date of the 1933 Act registration statement for flexible contracts, and the identity of the accountant is disclosed in the registration statement; and
(ii) The selection of the accountant is submitted for ratification or rejection to flexible contractholders at their first meeting and within one year after the effective date of the 1933 Act registration statement for flexible contracts, unless the time for holding the meeting is extended by order of the Commission.
(15) If the separate account is organized as a unit investment trust, all the assets of which consist of the shares of one or more registered management investment companies which offer their shares exclusively to separate accounts of the life insurer, or of any affiliated life insurance company, offering either scheduled contracts or flexible contracts, or both; or which also offer their shares to variable annuity separate accounts of the life insurer or of an affiliated life insurance company, or which offer their shares to any such life insurance company in consideration solely for advances made by the life insurer in connection with the operation of the separate account; provided that the board of directors of each investment company, constituted with a majority of disinterested directors, will monitor such company for the existence of any material irreconcilable conflict between the interests of variable annuity contractholders and scheduled or flexible contractholders investing in such company; the life insurer agrees that it will be responsible for reporting any potential or existing conflicts to the directors; and if a conflict arises, the life insurer will, at its own cost, remedy
(i) The eligibility restrictions of Section 9(a) shall not apply to those persons who are officers, directors or employees of the life insurer or its affiliates who do not participate directly in the management or administration of any registered management investment company described in paragraph (b)(15) of this section;
(ii) The life insurer shall be ineligible under paragraph (3) of Section 9(a) to serve as investment adviser of or principal underwriter for any registered management investment company described in paragraph (b)(15) of this section only if an affiliated person of such life insurer, ineligible by reason of paragraphs (1) or (2) of Section 9(a), participates in the management or administration of such company;
(iii) For purposes of any section of the Act which provides for the vote of securityholders on matters relating to the separate account or the underlying registered investment company, the voting provisions of paragraph (b)(10)(i) and (ii) of this section apply; provided that:
(A) The life insurer may vote shares of the registered management investment companies held by the separate account without regard to instructions from contractholders of the separate account if such instructions would require such shares to be voted:
(
(
(B) Any action taken in accordance with paragraph (b)(15)(iii)(A)(1) or (2) of this section and the reasons therefor shall be disclosed in the next report contractholders made under Section 30(e) (15 U.S.C. 80a-29(e)) and § 270.30e-2 (Rule 30e-2);
(iv) Any registered management investment company established by the life insurer and described in paragraph (b)(15) of this section shall be exempt from Section 14(a); and
(v) Any registered management investment company established by the life insurer and described in paragraph (b)(14) of this section shall be exempt from Sections 15(a), 16(a), and 32(a)(2) (15 U.S.C. 80a-15(a), 80-16(a), and 80-31(a)(2), respectively), to the extent prescribed by paragraphs (b)(7)(i), (b)(8)(i), and (b)(14) of this section; provided that the company complies with the conditions set forth in those paragraphs as if it were a separate account.
(c) When used in this Rule:
(1)
(i) Premium payments which are not fixed by the life insurer as to both timing and amount; provided, however, that the life insurer may fix the timing and minimum amount of premium payments for the first two contract periods following issuance of the contract or of an increase in or addition of insurance benefits, and may prescribe a reasonable minimum amount for any additional premium payment;
(ii) A death benefit the amount or duration of which may vary to reflect the investment experience of the separate account;
(iii) A cash value which varies to reflect the investment experience of the separate account; and
(iv) There is a reasonable expectation that subsequent premium payments will be made.
(2)
(3)
(4)
(5)
(c) If the offering account imposes a front-end sales load on the acquired security, then such sales load shall be a percentage that is no greater than the excess of the rate of the front-end sales load otherwise applicable to that security over the rate of any front-end sales load previously paid on the exchanged security.
(a) A registered separate account, and any principal underwriter for such account, shall be exempt from section 14(a) of the Act (15 U.S.C. 80a-14(a)) with respect to a public offering of variable annuity contracts participating in such account.
(b) Any registered management investment company which has as a promoter an insurance company and which offers its securities to separate accounts of such insurance company
(c) Any registered management investment company exempt from section 14(a) of the Act pursuant to paragraph (b) of this section shall be exempt from sections 15(a), 16(a), and 32(a)(2) of the Act (15 U.S.C. 80a-15(a), 80a-16(a), and 80a-31(a)(2)), to the extent prescribed in rules 15a-3, 16a-1, and 32a-2 under the Act (17 CFR 270.15a-3, 270.16a-1, and 270.32a-2), provided that such investment company complies with the conditions set forth in those rules as if it were a separate account.
For purposes of Section 26(a)(2)(C) of the Act, payment of a fee to the depositor of or a principal underwriter for a registered unit investment trust, or to any affiliated person or agent of such depositor or underwriter (collectively, “depositor”), for bookkeeping or other administrative services provided to the trust shall be allowed the custodian or trustee (“trustee”) as an expense, provided that such fee is an amount not greater than the expenses, without profit:
(a) Actually paid by such depositor directly attributable to the services provided and
(b) Increased by the services provided directly by such depositor, as determined in accordance with generally accepted accounting principles consistently applied.
A registered separate account, and any depositor of or underwriter for such account, shall, during the annuity payment period of variable annuity contracts participating in such account, be exempt from the requirement of paragraph (1) of Section 27(i)(2)(A) of the Act that a periodic payment plan certificate be a redeemable security.
15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78
The text of Form N-3 will not appear in the Code of Federal Regulations.
References to sections and rules in this Form N-3 are to the Investment Company Act of 1940 [15 U.S.C. 80a-1
“Class” means a class of a Variable Annuity Contract that varies principally with respect to distribution-related fees and expenses.
“Contractowner Account” means any account of a contractowner, participant, annuitant, or beneficiary to which (net) purchase payments under a variable annuity contract are added and from which administrative or transaction charges may be subtracted.
“Insurance Company” means the person primarily responsible for the organization of the Registrant and the person, other than the trustee or the custodian, who has continuing functions or responsibilities with respect to the administration of the affairs of the Registrant. If there is more than one Insurance Company, the information called for in this Form about the Insurance Company shall be provided for each Insurance Company.
“Investment Option” means any portfolio of investments in which the Registrant invests and which may be selected as an option by the contractowner.
“Money Market Account” means an Investment Option that hold itself out to
“Money Market Fund” means a registered open-end management investment company, or series thereof, that is regulated as a money market fund pursuant to rule 2a-7 [17 CFR 270.2a-7].
“Multiple Class Fund” means an Investment Option that has more than one Class.
“Registrant” means the separate account (as defined in Section 2(a)(37) of the 1940 Act [15 U.S.C. 80a-2(a)(37)] that offers the Variable Annuity Contracts.
“SAI” means the Statement of Additional Information required by Part B of this Form.
“Securities Act” means the Securities Act of 1933 [15 U.S.C. 77a
“Securities Exchange Act” means the Securities Exchange Act of 1934 [15 U.S.C. 78a
“Statutory Prospectus” means a prospectus that satisfies the requirements of section 10(a) of the Securities Act [15 U.S.C. 77j(a)].
“Summary Prospectus” has the meaning provided by paragraph (a)(12) of rule 498A under the Securities Act [17 CFR 230.498A(a)(12)].
“Variable Annuity Contract” or “Contract” means any accumulation contract or annuity contract, any portion thereof, or any unit of interest or participation therein pursuant to which the value of the contract, either during an accumulation period or after annuitization, or both, varies according to the investment experience of the separate account in which the contract participates. Unless the context otherwise requires, “Variable Annuity Contract” or “Contract” refers to the Variable Annuity Contracts being offered pursuant to the registration statement prepared on this Form.
Form N-3 is used by all separate accounts organized as management investment companies and offering Variable Annuity Contracts to file:
(a) An initial registration statement under the Investment Company Act and any amendments to the registration statement;
(b) An initial registration statement required under the Securities Act and any amendments to the registration statement, including amendments required by section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)]; or
(c) Any combination of the filings in paragraph (a) or (b).
(a) For registration statements or amendments filed under both the Investment Company Act and the Securities Act or only under the Securities Act, include the facing sheet of the Form, Parts A, B, and C, and the required signatures.
(b) For registration statements or amendments filed only under the Investment Company Act, include the facing sheet of the Form, responses to all Items of Parts A (except Items 1, 4, 5, 10, 11, and 18), B, and C (except Items 34(e), (m), (n), and (o)), and the required signatures.
No registration fees are required with the filing of Form N-3 to register as an investment company under the Investment Company Act or to register securities under the Securities Act. If Form N-3 is filed to register securities under the Securities Act and securities are sold to the public, registration fees must be paid on an ongoing basis after the end of the Registrant's fiscal year.
(a) For registration statements and amendments filed under both the Investment Company Act and the Securities Act or under only the Securities Act, the general rules regarding the filing of registration statements in Regulation C [17 CFR 230.400-230.498A] apply to the filing of registration statements on Form N-3. Specific requirements concerning investment companies appear in rules 480-485 and 495-498A of Regulation C.
(b) For registration statements and amendments filed only under the Investment Company Act, the general provisions in rules 8b-1-8b-32 [17 CFR 270.8b-l to 8b-32] apply to the filing of registration statements on Form N-3.
(c) The plain English requirements of rule 421 under the Securities Act [17 CFR 230.421] apply to prospectus disclosure in Part A of Form N-3.
(d) Regulation S-T [17 CFR 232.10-232.903] applies to all filings on the Commission's Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).
(a) The requirements of Form N-3 are intended to promote effective communication between the Registrant and prospective investors. A Registrant's prospectus should clearly disclose the fundamental features and risks of the Variable Annuity Contracts, using concise, straightforward, and easy to understand language. A Registrant should use document design techniques that promote effective communication.
(b) The prospectus disclosure requirements in Form N-3 are intended to elicit information for an average or typical investor who may not be sophisticated in legal or financial matters. The prospectus should help investors to evaluate the risks of an investment and to decide whether to invest in a Variable Annuity Contract by providing a balanced disclosure of positive and negative factors. Disclosure in the prospectus should be designed to assist an investor in comparing and contrasting a Variable Annuity Contract with other Contracts.
(c) Responses to the Items in Form N-3 should be as simple and direct as reasonably possible and should include only as much information as is necessary to enable an average or typical investor to understand the particular characteristics of the Variable Annuity Contracts. The prospectus should avoid including lengthy legal and technical discussions and simply restating legal or regulatory requirements to which Contracts generally are subject. Brevity is especially important in describing the practices or aspects of the Registrant's operations that do not differ materially from those of other separate accounts. Avoid excessive detail, technical or legal terminology, and complex language. Also avoid lengthy sentences and paragraphs that may make the prospectus difficult for many investors to understand and detract from its usefulness.
(d) The requirements for prospectuses included in Form N-3 will be administered by the Commission in a way that will allow variances in disclosure or presentation if appropriate for the circumstances involved while remaining consistent with the objectives of Form N-3.
(a)
(b)
(c)
(a)
(b)
(c)
(d)
(e)
(i) A single prospectus may describe multiple Contracts that are essentially identical. Whether the prospectus describes Contracts that are “essentially identical” will depend on the facts and circumstances. For example, a Contract that does not offer optional benefits would not be essentially identical to one that does. Similarly, group and individual Contracts would not be essentially identical. However, Contracts that vary only due to state regulatory requirements would be essentially identical.
(ii) Similarly, multiple prospectuses may be combined in a single registration statement on Form N-3 when the prospectuses describe Contracts that are essentially identical. For example, a Registrant could determine it is appropriate to include multiple prospectuses in a registration statement in the following situations: (i) The prospectuses describe the same Contract that is sold through different distribution channels; (ii) the prospectuses describe Contracts that differ only with respect to underlying Investment Options offered; or (iii) the prospectuses describe both the original and an “enhanced” version of the same Contract (where the “enhanced” version modifies the features or options that the Registrant offers under that Contract).
(iii) Paragraph (a) of General Instruction C.3 requires Registrants to disclose the information required by Items 2, 3, and 4 in numerical order at the front of the prospectus and generally not to precede the Items with other information. As a general matter, Registrants providing disclosure in a single prospectus for more than one Variable Annuity Contract, or for Contracts sold in both the group and individual markets, may depart from the requirement of paragraph (a) as necessary to present the required information clearly and effectively (although the order of information required by each Item must remain the same). For example, the prospectus may present all of the Item 2 information for several Variable Annuity Contracts, followed by all of the Item 3 information for the Contracts, and followed by all of the Item 4 information for the Contracts. Alternatively, the prospectus may present Items 2, 3, and 4 for each of several Contracts sequentially. Other presentations also would be acceptable if they are consistent with the Form's intent to disclose the information required by Items 2, 3, and 4 in a standard order at the beginning of the prospectus.
(f)
(g)
(h)
(i) An Interactive Data File (§ 232.11 of this chapter) is required to be submitted to the Commission in the manner provided by Rule 405 of Regulation S-T (§ 232.405 of this chapter) for any registration statement or post-effective amendment thereto on Form N-3 that includes or amends information provided in response to Items 3, 4, 5, 12, 19, or 20.
(A) Except as required by paragraph (h)(i)(B), the Interactive Data File must
(B) In the case of a post-effective amendment to a registration statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), or (vii) of rule 485 under the Securities Act [17 CFR 230.485(b)], the Interactive Data File must be submitted either with the filing, or as an amendment to the registration statement to which the Interactive Data Filing relates that is submitted on or before the date the post-effective amendment that contains the related information becomes effective.
(ii) An Interactive Data File is required to be submitted to the Commission in the manner provided by rule 405 of Regulation S-T for any form of prospectus filed pursuant to paragraphs (c) or (e) of rule 497 under the Securities Act [17 CFR 230.497(c) or (e)] that includes information provided in response to Items 3, 4, 5, 12, 19 or 20 that varies from the registration statement. The Interactive Data File must be submitted with the filing made pursuant to rule 497.
(iii) The Interactive Data File must be submitted in accordance with the specifications in the EDGAR Filer Manual, and in such a manner that will permit the information for each Contract, and, for any information that does not relate to all of the Classes in a filing, each Class of the Contract to be separately identified.
(i)
(a) A Registrant may not incorporate by reference into a prospectus information that Part A of this Form requires to be included in a prospectus, except as specifically permitted by Part A, of the Form.
(b) A Registrant may incorporate by reference any or all of the SAI into the prospectus (but not to provide any information required by Part A to be included in the prospectus) without delivering the SAI with the prospectus.
(c) A Registrant may incorporate by reference into the SAI or its response to Part C information that Parts B and C require to be included in the Registrant's registration statement.
All incorporation by reference must comply with the requirements of this Form and the following rules on incorporation by reference: Rule 10(d) of Regulation S-K under the Securities Act [17 CFR 229.10(d)] (general rules on incorporation by reference, which, among other things, prohibit, unless specifically required by this Form, incorporating by reference a document that includes incorporation by reference to another document, and limits incorporation to documents filed within the last 5 years, with certain exceptions); rule 411 under the Securities Act [17 CFR 230.411] (general rules on incorporation by reference in a prospectus); rule 303 of Regulation S-T [17 CFR 232.303] (specific requirements for electronically filed documents); and rules 0-4, 8b-23, and 8b-32 [17 CFR 270.0-4, 270.8b-23, and 270.8b-32] (additional rules on incorporation by reference for investment companies).
(a)
(1) The Registrant's name.
(2) The Insurance Company's name.
(3) The types of Variable Annuity Contracts offered by the prospectus (
(4) The Investment Options available under the contract.
(5) The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(6) The date of the prospectus.
(7) The statement required by rule 481(b)(1) under the Securities Act.
(8) The statement that additional information about certain investment products, including variable annuities, has been prepared by the Securities and Exchange Commission's staff and is available at
(9) In the case of a Registrant holding itself out as a Money Market Fund or an Investment Option holding itself out as a Money Market Account, a prominent statement that an investment in the Registrant or the Investment Option is neither insured nor guaranteed by the U.S. Government.
(10) The legend: “If you are a new investor in the [Contract], you may cancel your [Contract] within 10 days of receiving it without paying fees or penalties. In some states, this cancellation period may be longer. Upon cancellation, you will receive either a full refund of the amount you paid with your application or your total contract value. You should review this prospectus, or consult with your investment professional, for additional information about the specific cancellation terms that apply.”
(b)
(1) A statement that the SAI includes additional information about the Registrant. Explain that the SAI is available, without charge, upon request, and explain how contractowners may make inquiries about their Contracts. Provide a toll-free (or collect) telephone number for investors to call: To request the SAI; to request other information about the Contracts; and to make contractowner inquiries.
1. A Registrant may indicate, if applicable, that the SAI and other information are available on its internet site and/or by email request.
2. A Registrant may indicate, if applicable, that the SAI and other information are available from an insurance agent or financial intermediary (such as a broker-dealer or bank) through which the Contracts may be purchased or sold.
3. When a Registrant (or an insurance agent or financial intermediary through which Contracts may be purchased or sold) receives a request for the SAI, the Registrant (or insurance agent or financial intermediary) must send the SAI within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.
(2) A statement whether and from where information is incorporated by reference into the prospectus as permitted by General Instruction D. Unless the information is delivered with the prospectus, explain that the Registrant will provide the information without charge, upon request (referring to the telephone number provided in response to paragraph (b)(1)).
(3) A statement that reports and other information about the Registrant are available on the Commission's internet site at
(4) The EDGAR contract identifier for the Contract on the bottom of the back cover page in type size smaller than that generally used in the prospectus (
Provide a concise description of the Contract, including the following information:
(a)
(b)
(1) This discussion should include a brief overview of the Investment Options available under the Contract, as well as any general (fixed) account options.
1. Prominently disclose that additional information about each Investment Option is provided elsewhere in the prospectus (see Items 19 and 20), and provide cross-references as appropriate.
2. A detailed explanation of the separate account and Investment Options is not necessary and should be avoided.
(2) State, if applicable, that if a contractowner annuitizes, he or she will receive a stream of income payments, however (i) he or she will be unable to make withdrawals and (ii) death benefits and living benefits will terminate.
(c)
Include the following information:
An investment in the Contract is subject to fees, risks, and other important considerations, some of which are briefly summarized in the following table. You should review the prospectus for additional information about these topics.
1. General.
(a) A Registrant should disclose the required information in the tabular presentation(s) reflected herein, in the order specified. A Registrant may exclude any disclosures that are not applicable, or modify any of the statements required to be included, so long as the modified statement contains comparable information.
(b) A Registrant should provide cross-references to the location in the Statutory Prospectus where the subject matter is described in greater detail. Cross-references in electronic versions of the Summary Prospectus and/or Statutory Prospectus should link directly to the location in the Statutory Prospectus where the subject matter is discussed in greater detail. The cross-reference should be adjacent to the relevant disclosure, either within the table row, or presented in an additional table column.
(c) All disclosures provided in response to this Item 3 should be short and succinct, consistent with the limitations of a tabular presentation.
2.
(a)
(b)
(c)
Include the following information, in the order specified:
(i)
(A) The legend: “The table below describes the fees and expenses that you may pay
(B) Provide Minimum and Maximum Annual Fees in substantially the following tabular format, in the order specified.
(C) Explain, in a parenthetical or footnote to the table or each caption, the basis for each percentage (
(D) Annual contract expenses should be calculated in accordance with the instructions for Total Annual Contract Expenses in Item 4.
(E) The Minimum Annual Fee means the lowest available current fee for each annual fee category (
(ii)
(A) The legend: “Because your contract is customizable, the choices you make affect how much you will pay. To help you understand the cost of owning your contract, the following table shows the lowest and highest cost you could pay
(B) Provide Lowest and Highest Annual Costs in substantially the following tabular format, in the order specified.
(C) Calculate the Lowest and Highest Annual Cost estimates in the following manner:
a. Calculate the dollar amount of fees that would be assessed based on the assumptions described in the table above for each of the first 10 Contract years.
b. Total each year's fees (discounted to the present value using a 5% annual discount rate) and divide by 10 to calculate the estimated dollar amounts that are required to be set forth in the table above.
c. Sales loads, other than ongoing sales charges, may be excluded from the Lowest and Highest Annual Cost estimates.
d. Amounts of any premium bonus may be excluded from the Lowest and Highest Annual Cost estimates.
e. Unless otherwise stated, the least and most expensive combination of annual contract expenses and optional benefits available for an additional charge should be based on the disclosures provided in the Example in Item 4. If a different combination of annual contract expenses and optional benefits available for an additional charge would result in different Minimum or Maximum fees in different years, use the least expensive or most expensive combination of annual contract expenses and optional benefits each year.
3.
(a)
(b)
(c)
(d)
4.
(a)
(b)
5.
6.
(a)
(b)
Include the following information:
The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. Please refer to your contract specifications page for information about the specific fees you will pay each year based on the options you have elected.
The first table describes the fees and expenses that you will pay
The next table describes the fees and expenses that you will pay
This Example is intended to help you compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include transaction expenses, annual contract expenses, and [Investment Option] operating expenses.
The Example assumes that you invest $100,000 in the contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year and assumes the most expensive combination of [Investment Option] operating expenses and optional benefits available for an additional charge. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
The Investment Option pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Registrant shares are held in a taxable account. These costs, which are not reflected in annual contract expenses or in the example, affect the Investment Option's performance. During the most recent fiscal year, the Investment Option's portfolio turnover rate was __% of the average value of its portfolio.
1. Include the narrative explanations in the order indicated. A Registrant may modify a narrative explanation if the explanation contains comparable information to that shown.
2. Assume that the annuity contract is owned during the accumulation period for purposes of the table (including the Example). If an annuitant would pay different fees or be subject to different expenses, disclose this in a brief narrative and provide a cross-reference to those portions of the prospectus describing these fees.
3. A Registrant may omit captions if the Registrant does not charge the fees or expenses covered by the captions. A Registrant may modify or add captions if the captions shown do not provide an accurate description of the Registrant's fees and expenses.
4. Round all dollar figures to the nearest dollar and all percentages to the nearest hundredth of one percent.
5. In the Annual Transaction Expenses and Annual Contract Expenses tables, the Registrant must disclose the maximum guaranteed charge, unless a specific instruction directs otherwise. If a fee is calculated based on a benchmark (
6. Provide a separate fee table (or separate column within the table) for each Contract form offered by the prospectus that has different fees.
7. If the Registrant offers more than one Investment Option, provide a separate response for each Investment Option. In addition, in a Contract with more than one Class, provide a separate response for each Class.
8. Administrative expenses include any contract, account, or similar fee imposed on all Contractowner Accounts on any recurring basis.
9. “Sales Load Imposed on Purchases” includes the maximum sales load imposed upon purchase payments and may include a tabular presentation, within the larger table, of the range of such sales loads.
10. “Deferred Sales Load” includes the maximum contingent deferred sales load (or surrender charge), expressed as
11. “Exchange Fee” includes the maximum fee charged for any exchange or transfer of Contract value from the Registrant to another investment company or from one Investment Option of the Registrant to another Investment Option or the insurance company's general account. The Registrant may include a tabular presentation of the range of exchange fees unless such a presentation would be so lengthy as to encumber the larger table, in which case the Registrant should only provide a cross-reference to the narrative portion of the prospectus discussing the exchange fee.
12. If the Registrant (or any other party pursuant to an agreement with the Registrant) charges any other transaction fee, add another caption describing it and list the (maximum) amount or basis on which the fee is deducted.
13. Base Contract expenses includes mortality and expense risk fees, and account fees and expenses. Account fees and expenses include all fees and expenses (except sales loads, mortality and expense risk fees, and optional benefits) that are deducted from separate account assets or charged to all Contractowner Accounts.
14. Other Annual Expenses.
(a) “Management Fees” include investment advisory fees (including any component thereof based on the performance of the Registrant), any other management fees payable to the investment adviser or its affiliates and administrative fees payable to the investment adviser or its affiliates not included as “Other Expenses.”
(b)(i) “Other Expenses” includes all expenses (except fees and expenses reported in other items in the table) that are deducted from separate account assets and are reflected as expenses in the Registrant's statement of operations (including increases resulting from complying with paragraph 2(g) of Rule 6-07 [17 CFR 210.6-07] of Regulation S-X).
(ii) “Other Expenses” do not include extraordinary expenses. “Extraordinary expenses” refers to expenses that are distinguished by their unusual nature and by the infrequency of occurrence. Unusual nature means the expense has a high degree of abnormality and is clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the fund, taking into account the environment in which the fund operates. Infrequency of occurrence means the expense is not reasonably expected to recur in the foreseeable future, taking into consideration the environment in which the fund operates. The environment of a fund includes such factors as the characteristics of the industry or industries in which it operates, the geographical location of its operations, and the nature and extent of governmental regulation. If extraordinary expenses were incurred that materially affected the Registrant's “Other Expenses,” the Registrant should disclose in the narrative following the table what the “Other Expenses” would have been had extraordinary expenses been included.
(iii) The Registrant may subdivide this caption into no more than three subcategories of the Registrant's choosing, but must also include a total of all “Other Expenses.”
(c) The percentages expressing annual expenses should be based on amounts incurred during the most recent fiscal year. However, if the Registrant has changed its fiscal year, and as a result the most recent fiscal year is less than three months, the Registrant should use the fiscal year prior to the most recent fiscal year as the basis for determining annual expenses.
(d) If there have been any changes in the annual expenses that would materially affect the information disclosed in the table:
(i) Restate the expense information using the current fees that would have been applicable had they been in effect during the previous fiscal year; and
(ii) In the narrative following the table, disclose that the expense information in the table has been restated to reflect current fees.
(e) If there were expense reimbursement or fee waiver arrangements that reduced any operating expenses and will continue to reduce them in the current fiscal year: (a) Revise the appropriate caption by adding “After Expense Reimbursements” or some similar phrase; (b) state the amount of the actual expenses incurred, (
(f)(i) If the Registrant invests in shares of one or more Acquired Funds, add a subcaption to the “Annual Expenses” portion of the table directly above the subcaption titled “Total Annual Expenses.” Title the additional subcaption: “Acquired Fund Fees and Expenses.” Disclose in the subcaption fees and expenses incurred indirectly by the Registrant as a result of investment in shares of one or more Acquired Funds. For purposes of this Item, an “Acquired Fund” means any company in which the Registrant invests that (i) is an investment company or (ii) would be an investment company under section 3(a) of the 1940 Act (15 U.S.C. 80a3(a)) but for the exceptions to that definition provided for in sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and 80a-3(c)(7)). If a Registrant uses another term in response to other requirements of this Form to refer to Acquired Funds, it may include that term in parentheses following the subcaption title. In the event the fees and expenses incurred indirectly by the Registrant as a result of investment in shares of one or more Acquired Funds do not exceed 0.01 percent (one basis point) of average net assets of the Registrant, the Registrant may include these fees and expenses under the subcaption “Other Expenses” in lieu of this disclosure requirement.
(ii) Determine the “Acquired Fund Fees and Expenses” according to the following formula:
(iii) Calculate the average net assets of the Registrant for the most recent fiscal year based on the value of the net assets determined no less frequently than the end of each month.
(iv) The total annual operating expense ratio used for purposes of this calculation (F1) is the annualized ratio of operating expenses to average net assets for the Acquired Fund's most recent fiscal period as disclosed in the Acquired Fund's most recent shareholder report. If the ratio of expenses to average net assets is not included in the most recent shareholder report or the Acquired Fund is a newly formed fund that has not provided a shareholder report, then the ratio of expenses to average net assets of the Acquired Fund is the ratio of total annual operating expenses to average annual net assets of the Acquired Fund for its most recent fiscal period as disclosed in the most recent communication from the Acquired Fund to the Registrant. For purposes of this instruction, Acquired Fund expenses include increases resulting from brokerage service and expense offset arrangements and reductions resulting from fee waivers or reimbursements by the Acquired Funds' investment advisers or sponsors.
(v) To determine the average invested balance (AI1), the numerator is the sum of the amount initially invested in an Acquired Fund during the most recent fiscal year (if the investment was held at the end of the previous fiscal year, use the amount invested as of the end of the previous fiscal year) and the amounts invested in the Acquired Fund no less frequently than monthly during the period the investment is held by the Registrant (if the investment was held through the end of the fiscal year, use each month-end through and including the fiscal year-end). Divide the numerator by the number of measurement points included in the calculation of the numerator (
15. Optional Benefits expenses include any optional features (
16. If optional benefit expenses are calculated on a basis other than account value, Registrants should prominently indicate that those optional benefit expenses are not included in total annual expenses (which are calculated as a percentage of account value).
17. For purposes of the Example(s) in the table, provide the following for each contract class of each Investment Option:
(a) Assume that the percentage amounts listed under “Base Contract [Expenses]” remain the same in each year of the 1-, 3-, 5-, and 10-year periods, except that an appropriate adjust to reflect reduced annual expenses from completion of organization expense amortization may be made;
(b) The most expensive combination of contract features must be shown first. Additional expense presentations are permitted, but not required;
(c) Assume the maximum sales load that may be deducted from purchase payments is deducted;
(d) For any breakpoint in any fee, assume that the amount of the Registrant's (and the Investment Option's) assets remains constant as of the level at the end of the most recently completed fiscal year;
(e) Assume no exchanges or other transactions;
(f) Reflect any [annual] contract expenses by dividing the total amount of [annual] contract expenses collected during the year that are attributable to the contract offered by the prospectus by the total average net assets that are attributable to the contract offered by the prospectus. Add the resulting percentage to Base Contract expenses and assume that it remains the same in each year of the 1-, 3-, 5-, and 10-year periods;
(g) Reflect any contingent deferred sales load by assuming a complete surrender on the last day of the year;
(h) Provide the information required in the third section of the Example only if a sales load or other fee is charged upon a complete surrender; and
(i) Include in the Example the information provided by the caption “If you annuitize at the end of the applicable time period” only if the Registrant charges fees upon annuitization that are different from those charged upon surrender.
Summarize the principal risks of purchasing a Contract, including the risks of poor investment performance, that Contracts are unsuitable as short-term savings vehicles, limitations on access to cash value through withdrawals, and the possibility of adverse tax consequences.
Concisely discuss the organization and operation or proposed operation of the Registrant. Include the information specified below.
(a)
(b)
(1) Income, gains, and losses credited to, or charged against, the Registrant reflect the Registrant's own investment experience and not the investment experience of the Insurance Company's other assets;
(2) the assets of the Registrant may not be used to pay any liabilities of the Insurance Company other than those arising from the Contracts; and
(3) the Insurance Company is obligated to pay all amounts promised to contractowners under the Contracts.
(c)
(d)
(e)
(a)
(1) Describe the compensation of each investment adviser of the Registrant as follows:
(i) If the Registrant has operated for a full fiscal year, state the aggregate fee paid to the adviser for the most recent fiscal year as a percentage of average net assets. If the Registrant has not operated for a full fiscal year, state what the adviser's fee is as a percentage of average net assets, including any breakpoints.
(ii) If the adviser's fee is not based on a percentage of average net assets (
(2) Include a statement, adjacent to the disclosure required by paragraph (a)(1) of this Item, that a discussion regarding the basis for the board of directors approving any investment advisory contract of the Registrant is available in the Registrant's annual or semi-annual report to contractowners, as applicable, and providing the period covered by the relevant annual or semi-annual report.
1. If the Registrant changed advisers during the fiscal year, describe the compensation and the dates of service for each adviser.
2. Explain any changes in the basis of computing the adviser's compensation during the fiscal year.
3. If a Registrant has more than one investment adviser, disclose the aggregate fee paid to all of the advisers, rather than the fees paid to each adviser, in response to this Item.
(b)
(a)
1. Describe the sales loads applicable to the Contract and how sales loads are charged and calculated, including the factors affecting the computation of the amount of the sales load. If the Contract has a front-end sales load, describe the sales load as a percentage of the applicable measure of purchase payments and as a percentage of the net amount invested for each breakpoint. For Contracts with a deferred sales load, describe the sales load as a percentage of the applicable measure of purchase payments (or other basis) that the deferred sales load may represent. Percentages should be shown in a table. Identify any events on which a deferred sales load is deducted (
2. Unless set forth in response to Instruction 1, list any special purchase plans or methods established pursuant to a rule or an exemptive order that reflect scheduled variations in, or elimination of, the sales load (
3. If proceeds from explicit sales loads will not cover the expected costs of distributing the contracts, identify from what source the shortfall, if any, will be paid. If any shortfall is to be made from assets from the Insurance Company's general account, disclose, if applicable, that any amounts paid by the Insurance Company may consist, among other things, of proceeds derived from Base Contract expenses deducted from the account.
4. If the Contract's charge for premium or other taxes varies according to jurisdiction, identification of the range of current premium or other taxes is sufficient.
(b)
(c)
(d)
(a)
(b)
(1) Minimum contract value, and the consequences of falling below that amount;
(2) allocation of purchase payments among Investment Options of the Registrant;
(3) transfer of Contract values between Investment Options of the Registrant, including transfer programs (
(4) conversion or exchange of Contracts for another contract, including a fixed or variable annuity or life insurance contract; and
(5) buyout offers of variable annuity contracts, including interests or participations therein.
(c)
(d)
(1) Why a change may be made (
(2) who, if anyone, must approve any change (
(3) who, if anyone, must be notified of any change.
(e)
(f)
(1) Describe the risks, if any, that frequent transfers of Contract value among Investment Options of the Registrant may present for other contractowners and other persons (
(2) State whether or not the Registrant or Insurance Company has policies and procedures with respect to frequent transfers of Contract value among Investment Options of the Registrant.
(3) If neither the Registrant nor Insurance Company has any such policies and procedures, provide a statement of the specific basis for the view of the board that it is appropriate for the Registrant not to have such policies and procedures.
(4) If the Registrant or Insurance Company has adopted any such policies and procedures, describe those policies and procedures, including:
(i) Whether or not the Registrant or Insurance Company discourages frequent transfers of Contract value among Investment Options of the Registrant;
(ii) whether or not the Registrant or Insurance Company accommodates frequent transfers of Contract value among Investment Options of the Registrant; and
(iii) any policies and procedures of the Registrant or Insurance Company for deterring frequent transfers of Contract value among Investment Options of the Registrant, including any restrictions imposed by the Registrant or Insurance Company to prevent or minimize frequent transfers. Describe each of these policies, procedures, and restrictions with specificity. Indicate whether each of these restrictions applies uniformly in all cases or whether the restriction will not be imposed under certain circumstances, including whether each of these restrictions applies to trades that occur through omnibus accounts at intermediaries, such as investment advisers, broker-dealers, transfer agents, and third party administrators. Describe with specificity the circumstances under which any restriction will not be imposed. Include a description of the following restrictions, if applicable:
(A) Any restrictions on the volume or number of transfers that may be made within a given time period;
(B) any transfer fee;
(C) any costs or administrative or other fees or charges that are imposed on persons deemed to be engaged in frequent transfers of Contract value among Investment Options of the Registrant, together with a description of the circumstances under which such costs, fees, or charges will be imposed;
(D) any minimum holding period that is imposed before a transfer may be made from an Investment Option into another Investment Option of the Registrant;
(E) any restrictions imposed on transfer requests submitted by overnight delivery, electronically, or via facsimile or telephone; and
(F) any right of the Registrant or Insurance Company to reject, limit, delay, or impose other conditions on transfers or to terminate or otherwise limit Contracts based on a history of frequent transfers among Investment Options, including the circumstances under which such right will be exercised.
(5) If applicable, include a statement, adjacent to the disclosure required by paragraphs (f)(1) through (f)(4) of this Item, that the Statement of Additional Information includes a description of all arrangements with any person to permit frequent transfers of contract value among Investment Options of the Registrant.
Briefly describe the annuity options available. The discussion should include:
(a) Material factors that determine the level of annuity benefits;
(b) The annuity commencement date (give the earliest and latest possible dates);
(c) Frequency and duration of annuity payments, and the effect of these on the level of payment;
(d) The effect of assumed investment return;
(e) Any minimum amount necessary for an annuity option and the consequences of an insufficient amount; and
(f) Rights, if any, to change annuity options or to effect a transfer of investment base after the annuity commencement date.
1. Describe the choices, if any, available to a prospective annuitant, and
2. Detailed disclosure on the method of calculating annuity payments should be placed in the Statement of Additional Information in response to Item 31.
(g) If applicable, state that the contractowner will not be able to withdraw any contract value amounts after the annuity commencement date.
Briefly describe the standard death benefit provided under the Contract during the accumulation and the annuity periods.
Include:
(a) The operation of the standard death benefit, including the amount of the death benefit and how the death benefit amount may vary, the circumstances under which the value of the benefit may increase or be reduced (including the impact of withdrawals), and how the benefit may be terminated.
(b) When the death benefit is calculated and payable and the effect of choosing a specific method of payment on calculation of the death benefit.
(c) The forms the benefit may take, including the effect of not choosing a payment option and the period, if any, during which payments must begin under any annuity option.
(a) Include the following information:
In addition to the standard death benefit associated with your contract, other [standard and/or optional] benefits may also be available to you. The purposes, fees, and restrictions/limitations of these additional benefits are briefly summarized in the following table[s].
1.
(a) The table required by this Item 12(a) is meant to provide a tabular summary overview of the benefits described in Item 12(b) (
(b) If the Contract offers multiple benefits of the same type (
(c) The Registrant should include appropriate titles, headings, or other information to promote clarity and facilitate understanding of the table(s) presented in response to this Item 12(a). For example, if certain optional benefits are only available to certain contractowners (
2.
3.
4.
5.
6.
(b) Briefly describe any other benefits (other than standard death benefit,
(1) Whether the benefit is standard or elected;
(2) The operation of the benefit, including the amount of the benefit and how the benefit amount may vary, the circumstances under which the value of the benefit may increase or be reduced (including the impact of withdrawals), and how the benefit may be terminated;
(3) Fees and costs, if any, associated with the benefit; and
(4) How the benefit amount is calculated and payable and the effect of choosing a specific method of payment on calculation of the benefit.
(c) Briefly describe any limitations, restrictions and risks associated with any benefit (other than the standard death benefit) offered under the contract (
(a) Briefly describe the procedures for purchasing a Contract. Include a concise explanation of:
(1) The minimum initial and subsequent purchase payments required and any limitations on the amount of purchase payments that will be accepted (if there are separate limits for each Investment Option, state these limits); and
(2) a statement of when initial and subsequent purchase payments are credited.
(b) Describe the manner in which purchase payments are credited, including: (A) An explanation that purchase payments are credited on the basis of accumulation unit value; (B) how accumulation unit value is determined; and (C) how the number of accumulation units credited to a contract is determined.
(c) Explain that investment performance of the Investment Options, expenses, and deduction of certain charges affect accumulation unit value and/or the number of accumulation units.
(d) Identify the method used to value the Registrant's assets (
(e) Describe when calculations of accumulation unit value are made and that purchase payments are credited to a contract on the basis of accumulation unit value next determined after receipt of a purchase payment.
(f) Identify each principal underwriter (other than the Insurance Company) of the variable annuity contracts and state its principal business address. If the principal underwriter is affiliated with the Registrant, the Insurance Company, or any affiliated person of the Registrant or the Insurance Company, identify how they are affiliated (
(a)
(b)
(c)
(d)
(e)
(f)
Briefly describe the loan provisions of the Contract, including any of the following that are applicable.
(a)
(b)
(c)
(d)
(e)
(f)
(a)
(b)
1. Identify the types of persons who may use the plans (
2. Do not describe the Internal Revenue Code requirements for qualifications of plans or the non-annuity tax consequences of qualification (
(c)
Describe any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Registrant, or the Registrant's investment adviser, principal underwriter, or Insurance Company is a party. Include the name of the court where the case is pending, the date instituted, the principal parties involved, a description of the factual basis alleged to underlie the proceeding, and the relief sought. Include similar information as to any proceedings instituted, or known to be contemplated, by a governmental authority.
If all of the required financial statements of the Registrant and the Insurance Company (
Include as an Appendix under the heading “Appendix: [Investment Options] Available Under [the Contract]” the following information, in the format specified below:
The following is a list of [Investment Options] currently available under [the Contract], which is subject to change as discussed in [the Statutory Prospectus for the Contract]. More information about the [Investment Options] is available in [the Statutory Prospectus for the Contract], which can be requested at no cost by following the instructions on [the front cover page or beginning of the Summary Prospectus].
The performance information below reflects contract fees and expenses that are paid by each investor. Each [Investment Option's] past performance is not necessarily an indication of future performance.
1.
(a) A Statutory Prospectus may omit the appendix described in this Item if the appendix is not included in a Summary Prospectus. The second sentence of the first paragraph of the legend preceding the table is only required in the case of a Summary Prospectus.
(b) Only include those Investment Options that are currently offered under the Contract.
(c) If the availability of one or more Investment Options varies by benefit offered under the Contract, include as another Appendix a separate table that indicates which Investment Options are available under each of the benefits offered under the Contract. This Appendix could incorporate a table that is structured pursuant to the following example, or could use any other presentation that might promote clarity and facilitate understanding:
2.
3.
4.
5.
(a)
(1)
(2)
(i) Describe the Investment Option's principal investment strategies, including the particular type or types of securities in which the Investment Option principally invests or will invest.
1. A strategy includes any policy, practice, or technique used by the Investment Option to achieve its investment objectives.
2. Whether a particular strategy, including a strategy to invest in a particular type of security, is a principal investment strategy depends on the strategy's anticipated importance in achieving the Registrant's investment objectives, and how the strategy affects the Investment Option's potential risks and returns. In determining what is a principal investment strategy, consider, among other things, the amount of the Investment Option's assets expected to be committed to the strategy, the amount of the Investment Option's assets expected to be placed at risk by the strategy, and the likelihood of the Investment Option losing some or all of those assets from implementing the strategy.
3. A negative strategy (
4. Disclose any policy to concentrate in securities of issuers in a particular industry or group of industries (
5. Disclose any other policy specified in Item 23(b)(1) that is a principal investment strategy of the Investment Option.
6. Disclose, if applicable, that the Investment Option may, from time to time, take temporary defensive positions that are inconsistent with the Investment Option's principal investment strategies in attempting to respond to adverse market, economic, political, or other conditions. Also disclose the effect of taking such a temporary defensive position (
7. Disclose whether the Investment Option (if not a Money Market Account) may engage in active and frequent trading of portfolio securities to achieve its principal investment strategies. If so, explain the tax consequences to contractowners of increased portfolio turnover, and how the tax consequences of, or trading costs associated with, an Investment Option's portfolio turnover may affect the Investment Option's performance.
(ii) Explain in general terms how the Investment Option decides which securities to buy and sell (
(b)
(c)
(1) Include the bar chart and table required by paragraphs (c)(2) and (3) of this Item. Provide a brief explanation of how the information illustrates the variability of the Investment Option's returns (
(2) If the Investment Option has annual returns for at least one calendar year, provide a bar chart showing the Investment Option's annual total returns for each of the last 10 calendar years (or for the life of the Investment Option if less than 10 years), but only for periods subsequent to the effective date of the Registrant's registration statement. Present the corresponding numerical return adjacent to each bar. If the Registrant's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Investment Option's highest and lowest return for a quarter during the 10 years or other period of the bar chart.
(3) If the Investment Option has annual returns for at least one calendar year, provide a table showing the Investment Option's average annual total return. All returns should be shown for 1-, 5-, and 10- calendar year periods ending on the date of the most recently completed calendar year (or for the life of the Investment Option, if shorter), but only for periods subsequent to the effective date of the Registrant's registration statement. The table also should show the returns of an appropriate broad-based securities market index for the same periods. An Investment Option that has been in existence for more than 10 years also may include returns for the life of the Investment Option. A Money Market Account may provide the Investment Option's 7-day yield ending on the date of the most recent calendar year or disclose a toll-free (or collect) telephone number that investors can use to obtain the Investment Option's current 7-day yield. For each Investment Option, provide the information in the following table with the specified captions:
Performance reflects contract fees and expenses that are paid by each investor. This performance does not reflect optional benefit expenses.
1.
(a) Provide annual total returns beginning with the earliest calendar year.
(i) Assume an initial investment made at the net asset value calculated on the last business day before the first day of each period shown.
(ii) Do not reflect sales loads or account fees in the initial investment, but, if sales loads or account fees are imposed, note that they are not reflected in total return.
(iii) Reflect any sales load assessed upon reinvestment of dividends or distributions.
(iv) Assume a redemption at the price calculated on the last business day of each period shown.
(v) For a period less than a full calendar year, state the total return for the period and disclose that total return is not annualized in a note to the chart.
(vi) If a Registrant's shares are sold subject to a sales load or account fees, state that sales loads or account fees are not reflected in the bar chart and that, if these amounts were reflected, returns would be less than those shown.
(b) For an Investment Option that provides annual total returns for only one calendar year or for an Investment Option that does not include the bar chart because it does not have annual returns for a full calendar year, modify, as appropriate, the narrative explanation required by paragraph (c)(1) of this Item (
2.
(a) For purposes of this table, an “appropriate broad-based securities market index” is one that is administered by an organization that is not an affiliated person of the Registrant, its investment adviser, or principal underwriter, unless the index is widely recognized and used. Adjust the index to reflect the reinvestment of dividends on securities in the index, but do not reflect the expenses of the Registrant.
(b) Calculate a Money Market Account's 7-day yield under Item 30(a) and the Investment Option's average annual total return under Item 30(b)(1).
(c) An Investment Option's is encouraged to compare its performance not only to the required broad-based index, but also to other more narrowly based indexes that reflect the market sectors in which the Investment Option invests. An Investment Option also may compare its performance to an additional broad-based index, or to a non-securities index (
(d) If the Investment Option selects an index that is different from the index used in a table for the immediately preceding period, explain the reason(s) for the selection of a different index and provide information for both the newly selected and the former index.
(e) An Investment Option (other than a Money Market Account) may include the Investment Option's yield calculated under Item 30(b)(2). Any Investment Option may include its tax-equivalent yield calculated under Item 30. If a Investment Option's yield is included, provide a toll-free (or collect) telephone number that investors can use to obtain current yield information.
3.
(a) When a Multiple Class Fund presents information for more than one Class together in response to this Item, provide annual total returns in the bar chart for only one of those Classes. The Multiple Class Fund can select which Class to include (
(i) Selects the Class with 10 or more years of annual returns if other Classes have fewer than 10 years of annual returns;
(ii) Selects the Class with the longest period of annual returns when the Classes all have fewer than 10 years of returns; and
(iii) If the Multiple Class Fund provides annual total returns in the bar chart for a Class that is different from the Class selected for the most immediately preceding period, explain in a footnote to the bar chart the reasons for the selection of a different Class.
(b) When a Multiple Class Fund offers a new Class in a prospectus and separately presents information for the new Class in response to this Item, include the bar chart with annual total returns for any other existing Class for the first year that the Class is offered. Explain in a footnote that the returns are for a Class that is not presented that would have substantially similar annual returns because the shares are invested in the same portfolio of securities and the annual returns would differ only to the extent that the Classes do not have the same expenses. Include return information for the other Class reflected in the bar chart in the performance table.
(c) When a Multiple Class Fund presents information for more than one Class together in response to this Item:
(i) Provide the average annual total returns required this Item for each of the Classes.
(ii) All returns shown should be identified by Class.
(d) If a Multiple Class Fund offers a Class in the prospectus that converts into another Class after a stated period, compute average annual total returns in the table by using the returns of the other Class for the period after conversion.
4.
(a) Neither the current adviser nor any affiliate is or has been in “control” of the previous adviser under section 2(a)(9) of the Investment Company Act [15 U.S.C. 80a-2(a)(9)];
(b) The current adviser employs no officer(s) of the previous adviser or employees of the previous adviser who were responsible for providing investment advisory or portfolio management services to the Registrant; and
(c) The graph is accompanied by a statement explaining that previous periods during which the Investment Option was advised by another investment adviser are not shown.
(a)
(1) The Registrant's name,
(2) The Insurance Company's name.
(3) The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(4) A statement or statements:
(i) That the SAI is not a prospectus;
(ii) How the prospectus may be obtained; and
(iii) Whether and from where information is incorporated by reference into the SAI; as permitted by General Instruction D.
(5) The date of the SAI and the prospectus to which the SAI relates.
(b)
(a)
(b)
(c)
(d)
(e)
(a)
(b)
(1) Describe the Registrant's policy with respect to each of the following:
(i) Issuing senior securities;
(ii) Borrowing money, including the purpose for which the proceeds will be used;
(iii) Underwriting securities of other issuers;
(iv) Concentrating investments in a particular industry or group of industries;
(v) Purchasing or selling real estate or commodities;
(vi) Making loans; and
(vii) Any other policy that the Registrant deems fundamental or that may not be changed without shareholder approval, including, if applicable, Registrant's investment objectives.
(2) State whether shareholder approval is necessary to change any policy specified in paragraph (b)(1) of this Item. If so, describe the vote required to obtain this approval.
(c)
(d)
(e)
(1) Describe the Registrant's policies and procedures with respect to the disclosure of the Registrant's portfolio securities to any person, including:
(i) How the policies and procedures apply to disclosure to different categories of persons, including individual investors, institutional investors, intermediaries that distribute the Registrant's shares, third-party service providers, rating and ranking organizations, and affiliated persons of the Registrant;
(ii) Any conditions or restrictions placed on the use of information about portfolio securities that is disclosed, including any requirement that the information be kept confidential or prohibitions on trading based on the information, and any procedures to monitor the use of this information;
(iii) The frequency with which information about portfolio securities is disclosed, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed;
(iv) Any policies and procedures with respect to the receipt of compensation or other consideration by the Registrant, its investment adviser, or any other party in connection with the disclosure of information about portfolio securities;
(v) The individuals or categories of individuals who may authorize disclosure of the Registrant's portfolio securities (
(vi) The procedures that the Registrant uses to ensure that disclosure of information about portfolio securities is in the best interests of Registrant contractowners, including procedures to address conflicts between the interests of Registrant contractowners, on the one hand, and those of the Registrant's investment adviser; principal underwriter; or any affiliated person of the Registrant, its investment adviser, or its principal underwriter, on the other; and
(vii) The manner in which the board of directors exercises oversight of disclosure of the Registrant's portfolio securities.
(2) Describe any ongoing arrangements to make available information about the Registrant's portfolio securities to any person, including the identity of the persons
1. The consideration required to be disclosed by paragraph (e)(2) of this Item includes any agreement to maintain assets in the Registrant or in other investment companies or accounts managed by the investment adviser or by any affiliated person of the investment adviser.
2. The Registrant is not required to describe an ongoing arrangement to make available information about the Registrant's portfolio securities pursuant to this Item, if, not later than the time that the Registrant makes the portfolio securities information available to any person pursuant to the arrangement, the Registrant discloses the information in a publicly available filing with the Commission that is required to include the information.
3. The Registrant is not required to describe an ongoing arrangement to make available information about the Registrant's portfolio securities pursuant to this Item if:
(a) The Registrant makes the portfolio securities information available to any person pursuant to the arrangement no earlier than the day next following the day on which the Registrant makes the information available on its website in the manner specified in its prospectus pursuant to paragraph (b) of this Instruction 3; and
(b) the Registrant has disclosed in its current prospectus that the portfolio securities information will be available on its website, including (1) the nature of the information that will be available, including both the date as of which the information will be current (
(f)
(1)
(i) During the last 10 years, any occasion on which the Registrant has invested less than ten percent of its total assets in weekly liquid assets (as provided in § 270.2a-7(c)(2)(ii)), and with respect to each such occasion, whether the Registrant's board of directors determined to impose a liquidity fee pursuant to § 270.2a-7(c)(2)(ii) and/or temporarily suspend the Registrant's redemptions pursuant to § 270.2a-7(c)(2)(i).
(ii) During the last 10 years, any occasion on which the Registrant has invested less than thirty percent, but more than ten percent, of its total assets in weekly liquid assets (as provided in § 270.2a-7(c)(2)(i)) and the Registrant's board of directors has determined to impose a liquidity fee pursuant to § 270.2a-7(c)(2)(i) and/or temporarily suspend the Registrant's redemptions pursuant to § 270.2a-7(c)(2)(i).
1. With respect to each such occasion, disclose: The dates and length of time for which the Registrant invested less than ten percent (or thirty percent, as applicable) of its total assets in weekly liquid assets; the dates and length of time for which the Registrant's board of directors determined to impose a liquidity fee pursuant to § 270.2a-7(c)(2)(i) or § 270.2a-7(c)(2)(ii), and/or temporarily suspend the Registrant's redemptions pursuant to § 270.2a-7(c)(2)(i); and the size of any liquidity fee imposed pursuant to § 270.2a-7(c)(2)(i) or § 270.2a-7(c)(2)(ii).
2. The disclosure required by paragraph (e)(1) of this Item should incorporate, as appropriate, any information that the Registrant is required to report to the Commission on Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N-CR [17 CFR 274.222].
3. The disclosure required by paragraph (e)(1) of this Item should conclude with the following statement: “The Registrant was required to disclose additional information about this event [or “these events,” as appropriate] on Form N-CR and to file this form with the Securities and Exchange Commission. Any Form N-CR filing submitted by the Registrant is available on the EDGAR Database on the Securities and Exchange Commission's internet site at
(2)
1. The term “financial support” includes any capital contribution, purchase of a security from the Registrant in reliance on § 270.17a-9, purchase of any defaulted or devalued security at par, execution of letter of credit or letter of indemnity, capital support agreement (whether or not the Registrant ultimately received support), performance guarantee, or any other similar action reasonably intended to increase or stabilize the value or liquidity of the Registrant's portfolio; excluding, however, any routine waiver of fees or reimbursement of Registrant expenses, routine inter-fund lending, routine inter-fund purchases of Registrant shares, or any action that would qualify as financial support as defined above, that the board of directors has otherwise determined not to be reasonably intended to increase or stabilize the value or liquidity of the Registrant's portfolio.
2. If during the last 10 years, the Registrant has participated in one or more mergers with another investment company (a “merging investment company”), provide the information required by paragraph (f)(2) of this Item with respect to any merging investment company as well as with respect to the Registrant; for purposes of this Instruction, the term “merger” means a merger, consolidation, or purchase or sale of substantially all of the assets between the Registrant and a merging investment company. If the person or entity that previously provided financial support to a merging investment company is not currently an affiliated person, promoter, or principal
3. The disclosure required by paragraph (f)(2) of this Item should incorporate, as appropriate, any information that the Registrant is required to report to the Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR [17 CFR 274.222].
4. The disclosure required by paragraph (f)(2) of this Item should conclude with the following statement: “The Registrant was required to disclose additional information about this event [or “these events,” as appropriate] on Form N-CR and to file this form with the Securities and Exchange Commission. Any Form N-CR filing submitted by the Registrant is available on the EDGAR Database on the Securities and Exchange Commission's internet site at
1. For purposes of this Item, the terms below have the following meanings:
(a) The term “family of investment companies” means any two or more registered investment companies that:
(i) Share the same investment adviser or principal underwriter; and
(ii) Hold themselves out to investors as related companies for purposes of investment and investor services.
(b) The term “fund complex” means two or more registered investment companies that:
(i) Hold themselves out to investors as related companies for purposes of investment and investor services; or
(ii) Have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies.
(c) The term “immediate family member” means a person's spouse; child residing in the person's household (including step and adoptive children); and any dependent of the person, as defined in section 152 of the Internal Revenue Code (26 U.S.C. 152).
(d) The term “officer” means the president, vice-president, secretary, treasurer, controller, or any other officer who performs policy-making functions.
2. When providing information about directors, furnish information for directors who are interested persons of the Registrant separately from the information for directors who are not interested persons of the Registrant. For example, when furnishing information in a table, you should provide separate tables (or separate sections of a single table) for directors who are interested persons and for directors who are not interested persons. When furnishing information in narrative form, indicate by heading or otherwise the directors who are interested persons and the directors who are not interested persons.
(a)
(1) Provide the information required by the following table for each member of the board of managers (“director”) and officer of the Registrant, and, if the Registrant has an advisory board, member of the board. Explain in a footnote to the table any family relationship between the persons listed.
1. For purposes of this paragraph, the term “family relationship” means any relationship by blood, marriage, or adoption, not more remote than first cousin.
2. For each director who is an interested person of the Registrant, describe, in a footnote or otherwise, the relationship, events, or transactions by reason of which the director is an interested person.
3. State the principal business of any company listed under column (4) unless the principal business is implicit in its name.
4. Indicate in column (6) directorships not included in column (5) that are held by a director in any company with a class of securities registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l) or subject to the requirements of section 15(d) of the Exchange Act (15 U.S.C. 78o(d)) or any company registered as an investment company under the 1940 Act (15 U.S.C. 80a-2(a)(19)), and name the companies in which the directorships are held. Where the other directorships include directorships overseeing two or more portfolios in the same fund complex, identify the fund complex and provide the number of portfolios overseen as a director in the fund complex rather than listing each portfolio separately.
(2) For each individual listed in column (1) of the table required by paragraph (a)(1) of this Item, except for any director who is not an interested person of the Registrant, describe any positions, including as an officer, employee, director, or general partner, held with affiliated persons or principal underwriters of the Registrant.
(3) Describe briefly any arrangement or understanding between any director or officer and any other person(s) (naming the person(s)) pursuant to which he was selected as a director or officer.
(b)
(1) Briefly describe the leadership structure of the Registrant's board, including the responsibilities of the board of directors with respect to the Registrant's management and whether the chairman of the board is an interested person of the Registrant. If the chairman of the board is an interested person of the Registrant, disclose whether the Registrant has a lead independent director and what specific role the lead independent director plays in the leadership of the Registrant. This disclosure should indicate why the Registrant has determined that its leadership structure is appropriate given the specific characteristics or circumstances of the Registrant. In addition, disclose the extent of the board's role in the risk oversight of the Registrant, such as how the board administers its oversight function and
(2) Identify the standing committees of the Registrant's board of directors, and provide the following information about each committee:
(i) A concise statement of the functions of the committee;
(ii) The members of the committee;
(iii) The number of committee meetings held during the last fiscal year; and
(iv) If the committee is a nominating or similar committee, state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting recommendations.
(3)(i) Unless disclosed in the table required by paragraph (a)(1) of this Item, describe any positions, including as an officer, employee, director, or general partner, held by any director who is not an interested person of the Registrant, or immediate family member of the director, during the two most recently completed calendar years with:
(A) The Registrant;
(B) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same Insurance Company, investment adviser or principal underwriter as the Registrant or having an Insurance Company, investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant;
(C) The Insurance Company or an investment adviser, principal underwriter, or affiliated person of the Registrant; or
(D) Any person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant.
(ii) Unless disclosed in the table required by paragraph (a)(1) of this Item or in response to paragraph (b)(3)(i) of this Item, indicate any directorships held during the past five years by each director in any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act (15 U.S.C. 78l) or subject to the requirements of section 15(d) of the Securities Exchange Act (15 U.S.C. 78o (d)) or any company registered as an investment company under the Investment Company Act, and name the companies in which the directorships were held.
(3) For each director, state the dollar range of equity securities beneficially owned by the director as required by the following table:
(i) In the Registrant; and
(ii) On an aggregate basis, in any registered investment companies overseen by the director within the same family of investment companies as the Registrant.
1. Information should be provided as of the end of the most recently completed calendar year. Specify the valuation date by footnote or otherwise.
2. Determine “beneficial ownership” in accordance with rule 16a-1(a)(2) under the Exchange Act (17 CFR 240.16a-1(a)(2)).
3. If the SAI covers more than one Investment Option, disclose in column (2) the dollar range of equity securities beneficially owned by a director in each Investment Option overseen by the director.
4. In disclosing the dollar range of equity securities beneficially owned by a director in columns (2) and (3), use the following ranges: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000, or over $100,000.
(4) For each director who is not an interested person of the Registrant, and his immediate family members, furnish the information required by the following table as to each class of securities owned beneficially or of record in.
(i) The Insurance Company or an investment adviser or principal underwriter of the Registrant; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant:
1. Information should be provided as of the end of the most recently completed calendar year. Specify the valuation date by footnote or otherwise.
2. An individual is a “beneficial owner” of a security if he is a “beneficial owner” under either rule 13d-3 or rule 16a-1(a)(2) under the Exchange Act (17 CFR 240.13d-3 or 240.16a-1(a)(2)).
3. Identify the company in which the director or immediate family member of the director owns securities in column (3). When the company is a person directly or indirectly controlling, controlled by, or under common control
4. Provide the information required by columns (5) and (6) on an aggregate basis for each director and his immediate family members.
(5) Unless disclosed in response to paragraph (b)(5) of this Item, describe any direct or indirect interest, the value of which exceeds $120,000, of each director who is not an interested person of the Registrant, or immediate family member of the director, during the two most recently completed calendar years, in:
(i) The Insurance Company or an investment adviser or principal underwriter of the Registrant; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant.
1. A director or immediate family member has an interest in a company if he is a party to a contract, arrangement, or understanding with respect to any securities of, or interest in, the company
2. The interest of the director and the interests of his immediate family members should be aggregated in determining whether the value exceeds $120,000.
(6) Describe briefly any material interest, direct or indirect, of any director who is not an interested person of the Registrant, or immediate family member of the director, in any transaction, or series of similar transactions, during the two most recently completed calendar years, in which the amount involved exceeds $120,000 and to which any of the following persons was a party:
(i) The Registrant;
(ii) An officer of the Registrant;
(iii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same Insurance Company, investment adviser or principal underwriter as the Registrant or having an Insurance Company, investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control with an Insurance Company, investment adviser or principal underwriter of the Registrant;
(iv) An officer of an investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same Insurance Company, investment adviser or principal underwriter as the Registrant or having an Insurance Company, investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant;
(v) The Insurance Company or an investment adviser or principal underwriter of the Registrant;
(vi) An officer of the Insurance Company or an investment adviser or principal underwriter of the Registrant;
(vii) A person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant; or
(viii) An officer of a person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant.
1. Include the name of each director or immediate family member whose interest in any transaction or series of similar transactions is described and the nature of the circumstances by reason of which the interest is required to be described.
2. State the nature of the interest, the approximate dollar amount involved in the transaction, and, where practicable, the approximate dollar amount of the interest.
3. In computing the amount involved in the transaction or series of similar transactions, include all periodic payments in the case of any lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director or immediate family member of the director without regard to the amount of profit or loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets, state the cost of the assets to the purchaser and, if acquired by the seller within two years prior to the transaction, the cost to the seller. Describe the method used in determining the purchase or sale price and the name of the person making the determination.
6. Disclose indirect, as well as direct, material interests in transactions. A person who has a position or relationship with, or interest in, a company that engages in a transaction with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item may have an indirect interest in the transaction by reason of the position, relationship, or interest. The interest in the transaction, however, will not be deemed “material” within the meaning of paragraph (b)(7) of this Item where the interest of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that is a party to the transaction with one of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item, and the transaction is not material to the company.
7. The materiality of any interest is to be determined on the basis of the significance of the information to investors in light of all the circumstances of the particular case. The importance of the interest to the person having the interest, the relationship of the parties to the transaction with each other, and the amount involved in the transaction are among the factors to be considered in determining the significance of the information to investors.
8. No information need be given as to any transaction where the interest of the director or immediate family member arises solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item and the director or immediate family member receives no extra or special benefit not shared on a pro rata basis by all holders of the Class of securities.
9. Transactions include loans, lines of credit, and other indebtedness. For indebtedness, indicate the largest aggregate amount of indebtedness outstanding at any time during the period, the nature of the indebtedness and the transaction in which it was incurred, the amount outstanding as of the end of the most recently completed calendar year, and the rate of interest paid or charged.
10. No information need be given as to any routine, retail transaction. For example, the Registrant need not disclose that a director has a credit card, bank or brokerage account, residential mortgage, or insurance policy with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item unless the director is accorded special treatment.
(7) Describe briefly any direct or indirect relationship, in which the
(i) Payments for property or services to or from any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
(ii) Provision of legal services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
(iii) Provision of investment banking services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item, other than as a participating underwriter in a syndicate; and
(iv) Any consulting or other relationship that is substantially similar in nature and scope to the relationships listed in paragraphs (b)(8)(i) through (b)(8)(iii) of this Item.
1. Include the name of each director or immediate family member whose relationship is described and the nature of the circumstances by reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business conducted between the director or immediate family member and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item as a result of the relationship during the two most recently completed calendar years.
3. In computing the amount involved in a relationship, include all periodic payments in the case of any agreement providing for periodic payments.
4. Disclose indirect, as well as direct, relationships. A person who has a position or relationship with, or interest in, a company that has a relationship with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item may have an indirect relationship by reason of the position, relationship, or interest.
5. In determining whether the amount involved in a relationship exceeds $120,000, amounts involved in a relationship of the director should be aggregated with those of his immediate family members.
6. In the case of an indirect interest, identify the company with which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item has a relationship; the name of the director or immediate family member affiliated with the company and the nature of the affiliation; and the amount of business conducted between the company and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item during the two most recently completed calendar years.
7. In calculating payments for property and services for purposes of paragraph (b)(8)(i) of this Item, the following may be excluded:
(a) Payments where the transaction involves the rendering of services as a common contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or
(b) Payments that arise solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item and no extra or special benefit not shared on a pro rata basis by all holders of the class of securities is received.
8. No information need be given as to any routine, retail relationship. For example, the Registrant need not disclose that a director has a credit card, bank or brokerage account, residential mortgage, or insurance policy with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item unless the director is accorded special treatment.
(8) If an officer of the Insurance Company or an investment adviser or principal underwriter of the Registrant, or an officer of a person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser or principal underwriter of the Registrant, served during the two most recently completed calendar years, on the board of directors of a company where a director of the Registrant who is not an interested person of the Registrant, or immediate family member of the director, was during the two most recently completed calendar years, an officer, identify:
(i) The company;
(ii) The individual who serves or has served as a director of the company and the period of service as director;
(iii) The Insurance Company, investment adviser or principal underwriter or person controlling, controlled by, or under common control with the Insurance Company, investment adviser or principal underwriter where the individual named in paragraph (b)(9)(ii) of this Item holds or held office and the office held; and
(iv) The director of the Registrant or immediate family member who is or was an officer of the company; the office held; and the period of holding the office.
(9) For each director, briefly discuss the specific experience, qualifications, attributes, or skills that led to the conclusion that the person should serve as a director for the Registrant at the time that the disclosure is made, in light of the Registrant's business and structure. If material, this disclosure should cover more than the past five years, including information about the person's particular areas of expertise or other relevant qualifications.
(c)
(1) Provide the information required by the following table:
1. For column (1), indicate, as necessary, the capacity in which the remuneration is received. For Compensated Persons who are directors of the Registrant, compensation is amounts received for service as a director.
2. If the Registrant has not completed its first full year since its organization, furnish the information for the current fiscal year, estimating future payments that would be made pursuant to an existing agreement or understanding. Disclose in a footnote to the Compensation Table the period for which the information is furnished.
3. Include in column (2) amounts deferred at the election of the Compensated Person, whether pursuant to a plan established under Section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)] or otherwise for the fiscal year in which earned. Disclose in a footnote to the Compensation Table the total amount of deferred compensation (including interest) payable to or accrued for any Compensated Person.
4. Include in columns (3) and (4) all pension or retirement benefits proposed to be paid under any existing plan in the event of retirement at normal retirement date, directly or indirectly, by the Registrant, any of its subsidiaries, or other companies in the Fund Complex. Omit column (4) where retirement benefits are not determinable.
5. For any defined benefit or actuarial plan under which benefits are determined primarily by final compensation (or average final compensation) and years of service, provide the information required in column (4) in a separate table showing estimated annual benefits payable upon retirement (including amounts attributable to any defined benefit supplementary or excess pension award plans) in specified compensation and years of service classifications. Also provide the estimated credited years of service for each Compensated Person.
6. Include in column (5) only aggregate compensation paid to a director for service on the board and all other boards of investment companies in a Fund Complex specifying the number of such other investment companies.
7. No information is required to be provided concerning the officers of the sponsoring insurance company who are not directly or indirectly engaged in activities related to the separate account.
(2) Describe briefly the material provisions of any pension, retirement, or other plan or any arrangement, other than fee arrangements disclosed in paragraph (c)(1), under which the Compensated Persons are or may be compensated for services provided, including amounts paid, if any, to the compensated Person under these arrangements during the most recently completed fiscal year. Specifically include the criteria used to determine amounts payable under the plan, the length of service or vesting period required by the plan, the retirement age or other event that gives rise to payment under the plan, and whether the payment of benefits is secured or funded by the Registrant.
(d)
(e)
(f)
1. A Registrant may satisfy the requirement to provide a description of the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities by including a copy of the policies and procedures themselves.
2. If a Registrant discloses that the Registrant's proxy voting record is available by calling a toll-free (or collect) telephone number, and the Registrant (or financial intermediary through which shares of the Registrant may be purchased or sold) receives a request for this information, the Registrant (or financial intermediary) must send the information disclosed in the Registrant's most recently filed report on Form N-PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.
3. If a Registrant discloses that the Registrant's proxy voting record is available on or through its website, the Registrant must make available free of charge the information disclosed in the Registrant's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Registrant's most recently filed report on Form N-PX must remain available on or through the Registrant's website for as long as the Registrant remains subject to the requirements of rule 30b1-4 (17 CFR 270.30b1-4) and discloses that the Registrant's proxy voting record is available on or through its website.
(a)
(1) The name of any person who controls the adviser, the basis of the person's control, and the general nature of the person's business. Also disclose, if material, the business history of any organization that controls the adviser.
(2) The name of any affiliated person of the Registrant or the Insurance Company who also is an affiliated person of the adviser, and a list of all capacities in which the person is
(3) The method of calculating the advisory fee payable by the Registrant including:
(i) The total dollar amounts that the Registrant or the Insurance Company paid to the adviser (aggregated with amounts paid to affiliated advisers, if any), and any advisers who are not affiliated persons of the adviser, under the investment advisory contract for the last three fiscal years;
(ii) If applicable, any credits that reduced the advisory fee for any of the last three fiscal years; and
(iii) Any expense limitation provision.
1. If the advisory fee payable by the Registrant or the Insurance Company varies depending on the Registrant's investment performance in relation to a standard, describe the standard along with a fee schedule in tabular form. The Registrant may include examples showing the fees that the adviser would earn at various levels of performance as long as the examples include calculations showing the maximum and minimum fee percentages that could be earned under the contract.
2. State each type of credit or offset separately.
3. When a Registrant is subject to more than one expense limitation provision, describe only the most restrictive provision.
4. For a Registrant with more than one Investment Option, or a Multiple Class Fund, describe the methods of allocation and payment of advisory fees for each Investment Option or Class.
(b)
(1) Describe all services performed for or on behalf of the Registrant supplied or paid for wholly or in substantial part by each investment adviser.
(2) Describe all fees, expenses, and costs of the Registrant that are to be paid by persons other than an investment adviser, the Insurance Company, or the Registrant, and identify those persons.
(c)
1. The term “management-related service contract” includes any contract with the Registrant to keep, prepare, or file accounts, books, records, or other documents required under federal or state law, or to provide any similar services with respect to the daily administration of the Registrant, but does not include the following:
(a) Any contract with the Registrant to provide investment advice;
(b) Any agreement with the Registrant to act as custodian or agent to administer purchases and redemptions under the Contracts; and
(c) Any contract with the Registrant for outside legal or auditing services, or contract for personal employment entered into with the Registrant in the ordinary course of business.
2. No information need be given in response to this paragraph with respect to the service of mailing proxies or periodic reports to the Registrant's contractowners.
3. In summarizing the substantive provisions of any management-related service contract, include the following:
(a) The name of the person providing the service;
(b) The direct or indirect relationships, if any, of the person with the Registrant, an investment adviser of the Registrant, its Insurance Company, or the Registrant's principal underwriter; and
(c) The nature of the services provided, and the basis of the compensation paid for the services for the Registrant's last three fiscal years.
(d)
(1) The person's name;
(2) a description of the nature of the arrangement, and the advice or information given; and
(3) any remuneration (including, for example, participation, directly or indirectly, in commissions or other compensation paid in connection with transactions in Registrant's portfolio securities) paid for such advice or information, and a statement of how and by whom such remuneration was paid for the last three fiscal years.
1. Persons who advised the investment adviser or the Registrant solely through uniform publications distributed to subscribers;
2. Persons who provided the investment adviser or the Registrant with only statistical and other factual information, advice about economic factors and trends, or advice as to occasional transactions in specific securities, but without generally advising about the purchase or sale of securities by the Registrant;
3. A company that is excluded from the definition of “investment adviser” of an investment company under section 2(a)(20)(iii) [15 U.S.C. 80a-2(a)(20)(iii)];
4. Any person the character and amount of whose compensation for these services must be approved by a court; or
5. Other persons as the Commission has by rule or order determined not to be an “investment adviser” of an investment company.
(e)
(f)
(1) A list of the principal types of activities for which payments are or will be made, including the dollar amount and the manner in which amounts paid by the Registrant under the plan during the last fiscal year were spent on:
(i) Advertising;
(ii) Printing and mailing of prospectuses to other than current contractowners;
(iii) Compensation to underwriters;
(iv) Compensation to broker-dealers;
(v) Compensation to sales personnel;
(vi) Interest, carrying, or other financing charges; and
(vii) Other (specify).
(2) The relationship between amounts paid to the distributor and the expenses that it incurs (
(3) The amount of any unreimbursed expenses incurred under the plan in a previous year and carried over to future years, in dollars and as a percentage of the Registrant's net assets on the last day of the previous year.
(4) Whether the Registrant participates in any joint distribution activities with another investment company. If so, disclose, if applicable, that fees paid under the Registrant's rule 12b-1 plan may be used to finance the distribution of the shares of another investment company, and state the method of allocating distribution costs (
(5) Whether any of the following persons had a direct or indirect financial interest in the operation of the plan or related agreements:
(i) Any interested person of the Registrant; or
(ii) Any director of the Registrant who is not an interested person of the Registrant.
(6) The anticipated benefits to the Registrant that may result from the plan.
(g)
(1) Unless disclosed in response to paragraph (c) or another Item of this form, identify and state the principal business address of any person who provides significant administrative or business affairs management services for the Registrant (
(2) State the name and principal business address of the Registrant's custodian and independent public accountant and describe generally the services performed by each.
(3) If the Registrant's assets are held by a person other than the Insurance Company, a commercial bank, trust company, or depository registered with the Commission as custodian, state the nature of the business of each such person.
(4) If an affiliated person of the Registrant, or an affiliated person of such an affiliated person, acts as administrative or servicing agent for the Registrant, describe the services the person performs and the basis for remuneration. State, for the past three years, the total dollars paid for the services, and by whom.
(5) If the Insurance Company is the principal underwriter of the Contract, so state.
(h)
(1) Provide the following dollar amounts of income and fees/compensation related to the securities lending activities of each Investment Option during its most recent fiscal year:
(i) Gross income from securities lending activities, including income from cash collateral reinvestment;
(ii) All fees and/or compensation for each of the following securities lending activities and related services: Any share of revenue generated by the securities lending program paid to the securities lending agent(s) (“revenue split”); fees paid for cash collateral management services (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split; administrative fees that are not included in the revenue split; fees for indemnification that are not included in the revenue split; rebates paid to borrowers; and any other fees relating to the securities lending program that are not included in the revenue split, including a description of those other fees;
(iii) The aggregate fees/compensation disclosed pursuant to paragraph (ii); and
(iv) Net income from securities lending activities (
(2) Describe the services provided in relation to the Investment Option by the securities lending agent in the Investment Option's most recent fiscal year.
(a)
(1) The Portfolio Manager's name;
(2) The number of other accounts managed within each of the following categories and the total assets in the accounts managed within each category:
(i) Registered investment companies;
(ii) Other pooled investment vehicles; and
(iii) Other accounts.
(3) For each of the categories in paragraph (a)(2) of this Item, the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account; and
(4) A description of any material conflicts of interest that may arise in connection with the Portfolio Manager's management of the Registrant's investments, on the one hand, and the investments of the other accounts included in response to paragraph (a)(2) of this Item, on the other. This description would include, for example, material conflicts between the investment strategy of the Registrant and the investment strategy of other accounts managed by the Portfolio Manager and material conflicts in allocation of investment opportunities between the Registrant and other accounts managed by the Portfolio Manager.
1. Provide the information required by this paragraph as of the end of the Registrant's most recently completed fiscal year, except that, in the case of an initial registration statement or an update to the Registrant's registration statement that discloses a new Portfolio Manager, information with respect to any newly identified Portfolio Manager must be provided as of the most recent practicable date. Disclose the date as of which the information is provided.
2. If a committee, team, or other group of persons that includes the Portfolio Manager is jointly and primarily responsible for the day-to-day management of the portfolio of an account, include the account in responding to paragraph (a) of this Item.
(b)
1. Provide the information required by this paragraph as of the end of the Registrant's most recently completed fiscal year, except that, in the case of an initial registration statement or an update to the Registrant's registration statement that discloses a new Portfolio Manager, information with respect to any newly identified Portfolio Manager must be provided as of the most recent practicable date. Disclose the date as of which the information is provided.
2. Compensation includes, without limitation, salary, bonus, deferred compensation, and pension and retirement plans and arrangements, whether the compensation is cash or non-cash. Group life, health, hospitalization, medical reimbursement, relocation, and pension and retirement plans and arrangements may be omitted, provided that they do not discriminate in scope, terms, or operation in favor of the Portfolio Manager or a group of employees that includes the Portfolio Manager and are available generally to all salaried employees. The value of compensation is not required to be disclosed under this Item.
3. Include a description of the structure of, and the method used to determine, any compensation received by the Portfolio Manager from the Registrant, the Registrant's investment adviser, or any other source with respect to management of the Registrant and any other accounts included in the response to paragraph (a)(2) of this Item. This description must clearly disclose any differences between the method used to determine the Portfolio Manager's compensation with respect to the Registrant and other accounts,
(c)
1. Provide the information required by this paragraph as of the end of the Registrant's most recently completed fiscal year, except that, in the case of an initial registration statement or an update to the Registrant's registration statement that discloses a new Portfolio Manager, information with respect to any newly identified Portfolio Manager must be provided as of the most recent practicable date. Specify the valuation date.
2. Determine “beneficial ownership” in accordance with rule 16a-1(a)(2) under the Exchange Act (17 CFR 240.16a-1(a)(2)).
(a)
(b)
(1) Identify, disclose the relationship, and state the aggregate dollar amount of brokerage commissions paid by the Registrant during its three most recent fiscal years to any broker:
(i) That is an affiliated person of the Registrant or an affiliated person of that person; or
(ii) An affiliated person of which is an affiliated person of the Registrant, its Insurance Company, its investment adviser, or principal underwriter.
(2) For each broker identified in response to paragraph (b)(1), state:
(i) The percentage of the Registrant's aggregate brokerage commissions paid to the broker during the most recent fiscal year; and
(ii) The percentage of the Registrant's aggregate dollar amount of transactions involving the payment of commissions effected through the broker during the most recent fiscal year.
(3) State the reasons for any material difference in the percentage of brokerage commissions paid to, and the percentage of transactions effected through, a broker disclosed in response to paragraph (b)(1).
(c)
1. If the Registrant will consider the receipt of products or services other than brokerage or research services in selecting brokers, specify those products and services.
2. If the Registrant will consider the receipt of research services in selecting brokers, identify the nature of those research services.
3. State whether persons acting on the Registrant's behalf are authorized to pay a broker a higher brokerage commission than another broker might have charged for the same transaction in recognition of the value of (a) brokerage or (b) research services provided by the broker.
4. If applicable, explain that research services provided by brokers through which the Registrant effects securities transactions may be used by the Registrant's investment adviser in servicing all of its accounts and that not all of these services may be used by the adviser in connection with the Registrant. If other policies or practices are applicable to the Registrant with respect to the allocation of research services provided by brokers, explain those policies and practices.
(d)
(e)
(a) Describe the manner in which Registrant's securities are offered to the public. Include a description of any special purchase plans and any exchange privileges not described in the prospectus.
(b) Describe the method that will be used to determine the sales load on the variable annuity contracts offered by the Registrant.
(c) Describe the method used to value the Registrants' assets if not described in the prospectus.
1. Describe the valuation procedure used to determine accumulation unit value.
2. If Registrant uses either penny-rounding pricing or amortized cost valuation, pursuant to either an order of exemption from the Commission or Rule 2a-7 under the 1940 Act [17 CFR 270.2a-7], describe the nature, extent and effect of any conditions under the exemption.
(d) Describe the way in which purchase payments are credited to the contract to the extent not described in the prospectus.
(e) If the Registrant has received an order of exemption from Section 18(f) of the 1940 Act [15 U.S.C. 80a-18(f)] from the Commission or has filed a notice of election pursuant to Rule 18f-1 under the Act [17 CFR 270.18f-1] which has not been withdrawn, fully describe the nature, extent, and effect of the exemptive relief in the Statement of Additional Information if the information is not in the prospectus.
(f)
1. The consideration required to be disclosed by paragraph (f) of this Item includes any agreement to maintain assets in the Registrant or in other investment companies or accounts managed or sponsored by the Insurance Company, its investment adviser, or any affiliated person of the Insurance Company or of any such investment adviser.
2. If the Registrant has an arrangement to permit frequent transfers of Contract value among Investment Options of the Registrant by a group of individuals, such as the participants in a defined contribution plan that meets the requirements for qualification under Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the Registrant may identify the group rather than identifying each individual group member.
(a)
(b)
(1) Whether the offering is continuous; and
(2) the aggregate dollar amount of underwriting commissions paid to, and the amount retained by, the principal underwriter for each of the Registrant's last three fiscal years.
(c)
(1) Payments made through deduction from premiums paid at the time of sale of the Contracts; or
(2) Payments made from cash values upon full or partial surrender of the Contracts or from an increase or decrease in the face amount of the Contracts.
1. Information need not be given about the service of mailing proxies or periodic reports of the Registrant.
2. Exclude information about bona fide contracts with the Registrant or its Insurance Company for outside legal or auditing services, or bona fide contracts for personal employment entered into with the Registrant or its Insurance Company in the ordinary course of business.
3. Information need not be given about any service for which total payments of less than $15,000 were made during each of the Registrant's last three fiscal years.
4. Information need not be given about payments made under any contract to act as administrative or servicing agent.
5. If the payments were made under an arrangement or policy applicable to dealers generally, describe only the arrangement or policy.
(a)
(1)
(2)
1. When calculating the yield or effective yield quotations, the calculation of net change in account value must include all deductions that are charged to all Contractowner Accounts in proportion to the length of the base period. For any account fees
2. Deductions from purchase payments and sales loads assessed at the time of redemption or annuitization should not be reflected in the computation of yield and effective yield. However, the amount or specific rate of such deductions must be disclosed.
3. Exclude realized gains and losses from the sale of securities and unrealized appreciation and depreciation from the calculation of yield and effective yield. Exclude income other than investment income.
(b)
(1)
1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 payment.
2. Include all recurring fees that are charged to all Contractowner Accounts. For any account fees that vary with the size of the account, assume an account size equal to the Investment Option's mean (or median) account size. If recurring fees charged to Contractowner Accounts are paid other than by redemption of accumulation units, they should be appropriately reflected.
3. Determine the ending redeemable value by assuming a complete redemption at the end of the 1, 5, or 10 year periods and the deduction of all nonrecurring charges deducted at the end of each period.
4. If the Registrant's registration statement has been in effect less than one, five, or ten years, the time period during which the registration statement has been in effect should be substituted for the period stated.
5. Carry the total return quotation to the nearest hundredth of one percent.
6. Total return information in the prospectus need only be current to the end of the Investment Option's most recent fiscal year.
(2)
1. To calculate interest earned (for the purpose of “a” above) on debt obligations:
(a) Compute the yield to maturity of each obligation held by the Investment Option based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day of each month, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest).
(b) Divide the yield to maturity by 360 and multiply the quotient by the market value of the obligation (including actual accrued interest) (as referred to in Instruction 1(a) above) to determine the interest income on the obligation for each day of the subsequent month that the obligation is in the portfolio. Assume that each month has thirty days.
(c) Total the interest earned on all debt obligation and all dividends accrued on all equity securities during the thirty-day or one month period.
(d) For purpose of Instruction 1(a), the maturity of an obligation with a call provision(s) is the next call date on which the obligation reasonably may be expected to be called or, if none, the maturity date.
2. With respect to the treatment of discount and premium on mortgage or other receivables-backed obligations which are expected to be subject to monthly payments of principal and interest (“paydowns”):
(a) Account for gain or loss attributable to actual monthly paydowns as an increase or decrease to interest income during the period.
(b) The Investment Option may elect (i) to amortize the discount and premium on the remaining security, based on the cost of the security, to the weighted average maturity date, if such information is available, or to the remaining term of the security, if the weighted average maturity date is not available, or (ii) not to amortize discount or premium on the remaining security.
3. Solely for the purpose of computing yield, recognize dividend income by accruing 1/360 of the stated dividend rate of the security each day that the security is in the portfolio.
4. Do not use equalization accounting in the calculation of yield.
5. Include expenses accrued pursuant to a plan adopted under rule 12b-1 under the 1940 Act [17 CFR 270.12b-1] among the expenses accrued for the period. Reimbursement accrued pursuant to a plan may reduce the accrued expenses, but only to the extent the reimbursement does not exceed expenses accrued for the period.
6. Include among the expenses accrued for the period all recurring fees that are charged to all Contractowner Accounts. For any account fees that vary with the size of the account, assume an account size equal to the Investment Option's mean (or median) account size.
7. If a broker-dealer or an affiliate (as defined in paragraph (b) of Rule 1-02 [17 CFR 210.1-02(b) of Regulation S-X) of the broker-dealer has, in connection with directing the Investment Option's brokerage transactions to the broker-dealer, provided, agreed to provide, paid for, or agreed to pay for, in whole or in part, services provided to the Investment Option (other than brokerage and research services as these terms are defined in Section 28(e) of the Securities Exchange Act of 1934 [15 U.S.C. 78bb(e)]), add to expenses accrued for the period an estimate of additional amounts that would have been accrued for the period if the Investment Option had paid for the services directly in an arms-length transaction.
8. Disclose the amount or specific rate of any nonrecurring account or sales charges.
(3)
Describe the method for determining the amount of annuity payments if not described in the prospectus. In addition, describe how any change in the amount of a payment after the first payment is determined.
(a)
1. An audited balance sheet or statement of assets and liabilities as of the end of the most recent fiscal year;
2. An audited statement of operations of the most recent fiscal year conforming to the requirements of Rule 6-07 of Regulation S-X [17 CFR 210.6-07];
3. An audited statement of cash flows for the most recent fiscal year if necessary to comply with generally accepted accounting principles; and
4. Audited statements of changes in net assets conforming to the requirements of Rule 6-09 of Regulation S-X [17 CFR 210.6-09] for the two most recent fiscal years.
(b)
1. Include, in a separate section, the financial statements and schedules of the Insurance Company required by Regulation S-X. If the Insurance Company would not have to prepare financial statements in accordance with generally accepted accounting principles except for use in this registration statement or other registration statements filed on Forms N-3, N-4, or N-6, its financial statements may be prepared in accordance with statutory requirements. The Insurance Company's financial statements must be prepared in accordance with generally accepted accounting principles if the Insurance Company prepares financial information in accordance with generally accepted accounting principles for use by the Insurance Company's parent, as defined in Rule 1-02(p) of Regulation S-X [17 CFR 210.1-02(p)], in any report under sections 13(a) and 15(d) of the Securities Exchange Act [15 U.S.C. 78m(a) and 78
2. All statements and schedules of the Insurance Company required by Regulation S-X, except for the consolidated balance sheets described in Rule 3-01 of Regulation S-X [17 CFR 210.3-01], and any notes to these statements or schedules, may be omitted from Part B and instead included in Part C of the registration statement. If any of this information is omitted from Part B and included in Part C, the consolidated balance sheets included in Part B should be accompanied by a statement that additional financial information about the Insurance Company is available, without charge, upon request. When a request for the additional financial information is received, the Registrant should send the information within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.
3. Notwithstanding Rule 3-12 of Regulation S-X [17 CFR 210.3-12], the financial statements of the Insurance Company need not be more current than as of the end of the most recent fiscal year of the Insurance Company. In addition, when the anticipated effective date of a registration statement falls within 90 days subsequent to the end of the fiscal year of the Insurance Company, the registration statement need not including financial statements of the Insurance Company more current than as of the end of the third fiscal quarter of the most recently completed fiscal year of the Insurance Company unless the audited financial statements for such fiscal year are available. The exceptions to Rule 3-12 of Regulation S-X contained in this Instruction 3 do not apply when:
(a) The Insurance Company's financial statements have never been included in an effective registration statement under the Securities Act of 1933 of a separate account that offers variable annuity contracts or variable life insurance contracts; or
(b) The balance sheet of the Insurance Company at the end of either of the two most recent fiscal years included in response to this Item shows a combined capital and surplus, if a stock company, or an unassigned surplus, if a mutual company, of less than $2,500,000; or
(c) The balance sheet of the Insurance Company at the end of a fiscal quarter within 135 days of the expected date of effectiveness under the Securities Act (or a fiscal quarter within 90 days of filing if the registration statement is filed solely under the Investment Company Act) would show a combined capital surplus, if a stock company, or an unassigned surplus, if a mutual company, of less than $2,500,000. If two fiscal quarters end within the 135 day period, the Insurance Company may choose either for purposes of this test.
Any interim financial statements required by this Item need not be comparative with financial statements for the same interim period of an earlier year.
Furnish the following information for each class of accumulation units of the Registrant.
1. For purpose of this Item, “class of accumulation units” means any variation that affects accumulation units, including variations related to contract class, optional benefits, and sub-accounts.
2. The above information must be provided for each class of accumulation units of the Registrant derived from contracts offered by means of this prospectus and each class derived from contracts no longer offered for sale, but for which registrant may continue to accept payments. Information need not be provided for any class of accumulation units of the Registrant derived from contracts that are currently offered for sale by means of a different prospectus. Also, information need not be provided for any class of accumulation units that is no longer offered for sale but for which Registrant may continue to accept payments, if the information is provided in a different, but current prospectus of the Registrant.
3. The information shall be presented in comparative columns for each of the last five fiscal years of the Registrant (or for life of the Registrant and its immediate predecessors, if less) but only from the later of the effective date of Registrant's first 1933 Act Registration Statement. In addition, the information shall be presented for the period between the end of the latest fiscal year and the date of the latest balance sheet or statement of assets and liabilities furnished.
4. Accumulation unit amounts shall be given at least to the nearest cent. If the computation of the offering price is extended to tenths of a cent or more, then the amounts on the table should be given in tenths of a cent.
5. Accumulation unit values should only be given for Investment Options that fund obligations of the Registrant under variable annuity contracts offered by means of this prospectus.
6. The portfolio turnover rate to be shown at caption 4 shall be calculated as follows:
(a) The rate of portfolio turnover shall be calculated by dividing (A) the lesser of purchases or sales of portfolio securities for the particular fiscal year by (B) the monthly average of the value of the portfolio securities owned by the Registrant during the particular fiscal year. Such monthly average shall be calculated by totaling the values of the portfolio securities as of the beginning and end of the first month of the particular fiscal year and as of the end of each of the succeeding eleven months, and dividing the sum by 13.
(b) For the purposes of this Item, exclude from both the numerator and the denominator all securities, including options whose maturities or expiration dates at the time of acquisition were one year or less. All long-term securities, including United States Government securities, should be included. Purchases shall include any cash paid upon the conversion of one portfolio security into another. Purchases shall also include the cost of rights or warrants purchased. Sales shall include the net proceeds of the sale of rights or warrants. Sales shall also include the net proceeds of portfolio securities which have been called, or for which payment has been made through redemption or maturity.
(c) If during the fiscal year the Registrant acquired the assets of another separate account in exchange for its own accumulation units, it shall exclude from purchases the value of securities so acquired, and from sales all sales of such securities made following a purchase-of-assets transaction to realign the Registrant's portfolio. In such event, the Registrant shall also make appropriate adjustment in the denominator of the portfolio turnover computation. The Registrant must disclose such exclusions and adjustments in its answer to this Item.
(d) Short sales which the Registrant intends to maintain for more than one year and put and call options where the expiration date is more than one year from date of acquisition are included in purchases and sales for purposes of this Item. The proceeds from a short sale should be included in the value of the portfolio securities which the Registrant sold during the reporting period and the cost of covering a short sale should be included in the value of the portfolio securities which the Registrant purchased during the period. The premiums paid to purchase options should be included in the value of the portfolio securities which the Registrant purchased during the reporting period and the premiums received from the sale of options should be included in the value of the portfolio securities which the Registrant sold during the period.
(e) A Registrant that holds itself out as a Money Market Fund is not required to provide a portfolio turnover rate in response to this Item.
7. Registrants may, but are not required to, omit the AUV tables, if the registrant provides an annual account statement to each individual contract owner that discloses, with respect to each class of accumulation units held by the contractowner, the actual performance of each Investment Option reflecting all contract charges incurred by the contract owner. For accounts held less than one year, the annual account statement must disclose the actual performance of each sub-account for the length of time the investor has owned the sub-account.
Subject to General Instruction D regarding incorporation by reference and rule 483 under the Securities Act [17 CFR 230.483], file the exhibits listed below as part of the registration statement. Letter or number the exhibits in the sequence indicated and file copies rather than originals, unless otherwise required by rule 483. Reflect any exhibit incorporated by reference in the list below and identify the previously filed document containing the incorporated material.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
Provide the following information about each director or officer of the Insurance Company:
Provide a list or diagram of all persons directly or indirectly controlled by or under common control with the Insurance Company or the Registrant. For any person controlled by another person, disclose the percentage of voting securities owned by the immediately controlling person or other basis of that person's control. For each company, also provide the state or other sovereign power under the laws of which the company is organized.
1. Include the Registrant and the Insurance Company in the list or diagram and show the relationship of each company to the Registrant and Insurance Company and to the other companies named, using cross-references if a company is controlled through direct ownership of its securities by two or more persons.
2. Indicate with appropriate symbols subsidiaries that file separate financial statements, subsidiaries included in consolidated financial statements; or unconsolidated subsidiaries included in group financial statements. Indicate for other subsidiaries why financial statements are not filed.
State the general effect of any contract, arrangements, or statute under which any underwriter or affiliated person of the Registrant is insured or indemnified against any liability incurred in his or her official capacity, other than insurance provided by any underwriter or affiliated person for his or her own protection.
Describe any other business, profession, vocation, or employment of a substantial nature in which each investment adviser of the Registrant, and each director, officer, or partner of any such investment adviser, is or has been, at any time during the past two fiscal years, engaged for his or her own account or as director, officer, employee, partner, or trustee.
1. State the name and principal business address of any company of which any person specified above is a director, officer, employee, partner, or trustee, and the nature of such connection.
2. If the investment adviser is the Insurance Company or an affiliate thereof that is also an insurance company, Registrants need only provide the above information for officers or directors who are engaged directly or indirectly in activities relating to the assets of the Registrant, and for executive officers including the Insurance Company's or its affiliate's president, secretary, treasurer, and vice presidents who have authority to act as president in his or her absence.
3. The names of investment advisory clients need not be given.
(a)
(b)
(c)
1. Disclose the type of services rendered in consideration for the compensation listed in column (5).
2. Exclude information about bona fide contracts with the Registrant or its Insurance Company for outside legal or auditing services, or bona fide contracts for personal employment entered into with the Registrant or its Insurance Company in the ordinary course of business.
3. Information need not be given about the service of mailing proxies or periodic reports of the Registrant.
4. Exclude information about any service for which total payments of less than $15,000 were made during each of the last three fiscal years.
5. Exclude information about payments made under any agreement whereby another person contracts with the Registrant or its Insurance Company to perform as custodian or administrative or servicing agent.
State the name and address of each person maintaining physical possession of each account, book, or other document, required to be maintained by Section 31(a) [15 U.S.C. 80a-30(a)] and the rules under that section.
Provide a summary of the substantive provisions of any management-related service contract not discussed in Part A or Part B, disclosing the parties to the contract and the total amount paid and by whom for the Registrant's last three fiscal years.
1. The instructions to Item 25(c) shall also apply to this Item.
2. Exclude information about any service provided for payments totaling less than $15,000 during each of the Registrant's last three fiscal years.
Provide a representation of the Insurance Company that the fees and charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Insurance Company.
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant (certifies that it meets all of the requirements for effectiveness of this registration statement under rule 485(b) under the Securities Act and) has duly caused this registration statement to be signed on its behalf by the undersigned, duly authorized, in the City of ____ and State of __, on this __ day of ____, __.
If the registration statement is being filed only under the Securities Act or under both the Securities Act and the Investment Company Act, it should be signed by both the Registrant and the Insurance Company. If the registration statement is being filed only under the Investment Company Act, it should be signed only by the Registrant.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
The text of Form N-4 will not appear in the Code of Federal Regulations.
References to sections and rules in this Form N-4 are to the Investment Company Act of 1940 [15 U.S.C. 80a-1
“Class” means a class of a Variable Annuity Contract that varies principally with respect to distribution-related fees and expenses.
“Contractowner Account” means any account of a contractowner, participant, annuitant, or beneficiary to which (net) purchase payments under a variable annuity contract are added and from which administrative or transaction charges may be subtracted.
“Depositor” means the person primarily responsible for the organization of the Registrant and the person, other than the trustee or custodian, who has continuing functions or responsibilities with respect to the administration of the affairs of the Registrant. “Depositor” includes the sponsoring insurance company that establishes and maintains the Registrant. If there is more than one Depositor, the information called for in this Form about the Depositor shall be provided for each Depositor.
“Portfolio Company” means any company in which the Registrant invests and which may be selected as an option by the contractowner.
“Registrant” means the separate account (as defined in Section 2(a)(37) of the 1940 Act [15 U.S.C. 80a-2(a)(37)]) that offers the Variable Annuity Contracts.
“SAI” means the Statement of Additional Information required by Part B of this Form.
“Securities Act” means the Securities Act of 1933 [15 U.S.C. 77a
“Securities Exchange Act” means the Securities Exchange Act of 1934 [15 U.S.C. 78a
“Statutory Prospectus” means a prospectus that satisfies the requirements of section 10(a) of the Securities Act [15 U.S.C. 77j(a)].
“Summary Prospectus” has the meaning provided by paragraph (a)(12) of rule 498A under the Securities Act [17 CFR 230.498A(a)(12)].
“Variable Annuity Contract” or “Contract” means any accumulation contract or annuity contract, any portion thereof, or any unit of interest or participation therein pursuant to which the value of the contract, either during an accumulation period or after annuitization, or both, varies according
Form N-4 is used by all separate accounts organized as unit investment trusts and offering Variable Annuity Contracts to file:
(a) An initial registration statement under the Investment Company Act and any amendments to the registration statement;
(b) An initial registration statement required under the Securities Act and any amendments to the registration statement, including amendments required by section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)]; or
(c) Any combination of the filings in paragraph (a) or (b).
(a) For registration statements or amendments filed under both the Investment Company Act and the Securities Act or only under the Securities Act, include the facing sheet of the Form, Parts A, B, and C, and the required signatures.
(b) For registration statements or amendments filed only under the Investment Company Act, include the facing sheet of the Form, responses to all Items of Parts A (except Items 1, 4, 5, 9, 10, and 17), B, and C (except Items 28(c), (k), (l), and (m)), and the required signatures.
No registration fees are required with the filing of Form N-4 to register as an investment company under the Investment Company Act or to register securities under the Securities Act. If Form N-4 is filed to register securities under the Securities Act and securities are sold to the public, registration fees must be paid on an ongoing basis after the end of the Registrant's fiscal year.
(a) For registration statements and amendments filed under both the Investment Company Act and the Securities Act or under only the Securities Act, the general rules regarding the filing of registration statements in Regulation C [17 CFR 230.400-230.498A] apply to the filing of registration statements on Form N-4. Specific requirements concerning investment companies appear in rules 480-485 and 495-498A of Regulation C.
(b) For registration statements and amendments filed only under the Investment Company Act, the general provisions in rules 8b-1—8b-32 [17 CFR 270.8b-l to 8b-32] apply to the filing of registration statements on Form N-4.
(c) The plain English requirements of rule 421 under the Securities Act [17 CFR 230.421] apply to prospectus disclosure in Part A of Form N-4.
(d) Regulation S-T [17 CFR 232.10-232.903] applies to all filings on the Commission's Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).
(a) The requirements of Form N-4 are intended to promote effective communication between the Registrant and prospective investors. A Registrant's prospectus should clearly disclose the fundamental features and risks of the Variable Annuity Contracts, using concise, straightforward, and easy to understand language. A Registrant should use document design techniques that promote effective communication.
(b) The prospectus disclosure requirements in Form N-4 are intended to elicit information for an average or typical investor who may not be sophisticated in legal or financial matters. The prospectus should help investors to evaluate the risks of an investment and to decide whether to invest in a Variable Annuity Contract by providing a balanced disclosure of positive and negative factors. Disclosure in the prospectus should be designed to assist an investor in comparing and contrasting a Variable Annuity Contract with other Contracts.
(c) Responses to the Items in Form N-4 should be as simple and direct as reasonably possible and should include only as much information as is necessary to enable an average or typical investor to understand the particular characteristics of the Variable Annuity Contracts. The prospectus should avoid including lengthy legal and technical discussions and simply restating legal or regulatory requirements to which Contracts generally are subject. Brevity is especially important in describing the practices or aspects of the Registrant's operations that do not differ materially from those of other separate accounts. Avoid excessive detail, technical or legal terminology, and complex language. Also avoid lengthy sentences and paragraphs that may make the prospectus difficult for many investors to understand and detract from its usefulness.
(d) The requirements for prospectuses included in Form N-4 will be administered by the Commission in a way that will allow variances in disclosure or presentation if appropriate for the circumstances involved while remaining consistent with the objectives of Form N-4.
(a)
(b)
(c)
(a)
(b)
(c)
(d)
(e)
(i) A single prospectus may describe multiple Contracts that are essentially identical. Whether the prospectus describes Contracts that are “essentially identical” will depend on the facts and circumstances. For example, a Contract that does not offer optional benefits would not be essentially identical to one that does. Similarly, group and individual Contracts would not be essentially identical. However, Contracts that vary only due to state regulatory requirements would be essentially identical.
(ii) Similarly, multiple prospectuses may be combined in a single registration statement on Form N-4 when the prospectuses describe Contracts that are essentially identical. For example, a Registrant could determine it is appropriate to include multiple prospectuses in a registration statement in the following situations: (i) The prospectuses describe the same Contract that is sold through different distribution channels; (ii) the prospectuses describe Contracts that differ only with respect to underlying funds offered; or (iii) the prospectuses describe both the original and an “enhanced” version of the same Contract (where the “enhanced” version modifies the features or options that the Registrant offers under that Contract).
(iii) Paragraph (a) of General Instruction C.3 requires Registrants to disclose the information required by Items 2, 3, and 4 in numerical order at the front of the prospectus and generally not to precede the Items with other information. As a general matter, Registrants providing disclosure in a single prospectus for more than one Variable Annuity Contract, or for Contracts sold in both the group and individual markets, may depart from the requirement of paragraph (a) as necessary to present the required information clearly and effectively (although the order of information required by each Item must remain the same). For example, the prospectus may present all of the Item 2 information for several Variable Annuity Contracts, followed by all of the Item 3 information for the Contracts, and followed by all of the Item 4 information for the Contracts. Alternatively, the prospectus may present Items 2, 3, and 4 for each of several Contracts sequentially. Other presentations also would be acceptable if they are consistent with the Form's intent to disclose the information required by Items 2, 3, and 4 in a standard order at the beginning of the prospectus.
(f)
(g)
(h)
(i) An Interactive Data File (§ 232.11 of this chapter) is required to be submitted to the Commission in the manner provided by Rule 405 of Regulation S-T (§ 232.405 of this chapter) for any registration statement or post-effective amendment thereto on Form N-4 that includes or amends information provided in response to Items 3, 4, 5, 11, or 18.
(A) Except as required by paragraph (h)(i)(B), the Interactive Data File must be submitted as an amendment to the registration statement to which the Interactive Data File relates. The amendment must be submitted on or before the date the registration statement or post-effective amendment that contains the related information becomes effective.
(B) In the case of a post-effective amendment to a registration statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485 under the Securities Act [17 CFR 230.485(b)], the Interactive Data File must be submitted either with the filing, or as an amendment to the registration statement to which the Interactive Data Filing relates that is submitted on or before the date the post-effective amendment that contains the related information becomes effective.
(ii) An Interactive Data File is required to be submitted to the Commission in the manner provided by rule 405 of Regulation S-T for any form of prospectus filed pursuant to paragraphs (c) or (e) of rule 497 under the Securities Act [17 CFR 230.497(c) or (e)] that includes information provided in response to Items 3, 4, 5, 11, or 18 that varies from the registration statement. The Interactive Data File must be submitted with the filing made pursuant to rule 497.
(iii) The Interactive Data File must be submitted in accordance with the specifications in the EDGAR Filer Manual, and in such a manner that will permit the information for each Contract, and, for any information that does not relate to all of the Classes in a filing, each Class of the Contract to be separately identified.
(i)
(a) A Registrant may not incorporate by reference into a prospectus information that Part A of this Form requires to be included in a prospectus, except as specifically permitted by Part A of the Form.
(b) A Registrant may incorporate by reference any or all of the SAI into the prospectus (but not to provide any information required by Part A to be included in the prospectus) without delivering the SAI with the prospectus.
(c) A Registrant may incorporate by reference into the SAI or its response to Part C information that Parts B and C require to be included in the Registrant's registration statement.
All incorporation by reference must comply with the requirements of this Form and the following rules on incorporation by reference: Rule 10(d) of Regulation S-K under the Securities Act [17 CFR 229.10(d)] (general rules on incorporation by reference, which, among other things, prohibit, unless specifically required by this Form, incorporating by reference a document that includes incorporation by reference to another document, and limits incorporation to documents filed within the last 5 years, with certain exceptions); rule 411 under the Securities Act [17 CFR 230.411] (general rules on incorporation by reference in a prospectus); rule 303 of Regulation S-T [17 CFR 232.303] (specific requirements for electronically filed documents); and rules 0-4, 8b-23, and 8b-32 [17 CFR 270.0-4, 270.8b-23, and 270.8b-32] (additional rules on incorporation by reference for investment companies).
(a)
(1) The Registrant's name.
(2) The Depositor's name.
(3) The types of Variable Annuity Contracts offered by the prospectus (
(4) The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(5) The date of the prospectus.
(6) The statement required by rule 481(b)(1) under the Securities Act.
(7) The statement that additional information about certain investment products, including variable annuities, has been prepared by the Securities and Exchange Commission's staff and is available at Investor.gov.
(8) The legend: “If you are a new investor in the [Contract], you may cancel your [Contract] within 10 days of receiving it without paying fees or penalties. In some states, this cancellation period may be longer. Upon cancellation, you will receive either a full refund of the amount you paid with your application or your total contract value. You should review this prospectus, or consult with your investment professional, for additional information about the specific cancellation terms that apply.”
(b)
(1) A statement that the SAI includes additional information about the Registrant. Explain that the SAI is available, without charge, upon request, and explain how contractowners may make inquiries about their Contracts. Provide a toll-free (or collect) telephone number for investors to call: To request the SAI; to request other information about the Contracts; and to make contractowner inquiries.
1. A Registrant may indicate, if applicable, that the SAI and other information are available on its internet site and/or by email request.
2. A Registrant may indicate, if applicable, that the SAI and other information are available from an insurance agent or financial intermediary (such as a broker-dealer or bank) through which the Contracts may be purchased or sold.
3. When a Registrant (or an insurance agent or financial intermediary through which Contracts may be purchased or sold) receives a request for the SAI, the Registrant (or insurance agent or financial intermediary) must send the SAI within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.
(2) A statement whether and from where information is incorporated by reference into the prospectus as permitted by General Instruction D. Unless the information is delivered with the prospectus, explain that the Registrant will provide the information without charge, upon request (referring to the telephone number provided in response to paragraph (b)(i)).
(3) A statement that reports and other information about the Registrant are available on the Commission's internet site at
(4) The EDGAR contract identifier for the Contract on the bottom of the back cover page in type size smaller than that generally used in the prospectus (
Provide a concise description of the Contract including the following information:
(a)
(b)
(1) This discussion should include of brief overview of the investment options available under the Contract (
1. Prominently disclose that additional information about each Portfolio Company is provided in an appendix to the prospectus, and provide a cross-reference to the relevant appendix.
2. A detailed explanation of the separate account, sub-accounts, and Portfolio Companies is not necessary and should be avoided.
(2) State, if applicable, that if a contractowner annuitizes, he or she will receive a stream of income payments, however (i) he or she will be unable to
(c)
Include the following information:
An investment in the Contract is subject to fees, risks, and other important considerations, some of which are briefly summarized in the following table. You should review the prospectus for additional information about these topics.
1.
(a) A Registrant should disclose the required information in the tabular presentation(s) reflected herein, in the order specified. A Registrant may exclude any disclosures that are not applicable, or modify any of the statements required to be included, so long as the modified statement contains comparable information.
(b) A Registrant should provide cross-references to the location in the Statutory Prospectus where the subject matter is described in greater detail. Cross-references in electronic versions of the Summary Prospectus and/or Statutory Prospectus should link directly to the location in the Statutory Prospectus where the subject matter is discussed in greater detail. The cross-reference should be adjacent to the relevant disclosure, either within the table row, or presented in an additional table column.
(c) All disclosures provided in response to this Item 3 should be short and succinct, consistent with the limitations of a tabular presentation.
2.
(a)
(b)
(c)
Include the following information, in the order specified:
(i)
(A) The legend: “The table below describes the fees and expenses that you may pay
(B) Provide Minimum and Maximum Annual Fees in substantially the following tabular format, in the order specified.
(C) Explain, in a parenthetical or footnote to the table or each caption, the basis for each percentage (
(D) If a Registrant offers multiple Portfolio Companies, it should disclose the minimum and maximum “Total Annual [Portfolio Company] Operating Expenses” calculated in accordance with Item 3 of Form N-1A (before expense reimbursements or fee waiver arrangements).
(E) The Minimum Annual Fee means the lowest available current fee for each annual fee category (
(ii)
(A) The legend: “Because your contract is customizable, the choices you make affect how much you will pay. To help you understand the cost of owning your contract, the following table shows the lowest and highest cost you could pay
(B) Provide Lowest and Highest Annual Costs in substantially the following tabular format, in the order specified.
(C) Calculate the Lowest and Highest Annual Cost estimates in the following manner:
a. Calculate the dollar amount of fees that would be assessed based on the assumptions described in the table above for each of the first 10 Contract years.
b. Total each year's fees (discounted to the present value using a 5% annual discount rate) and divide by 10 to calculate the estimated dollar amounts that are required to be set forth in the table above.
c. Sales loads, other than ongoing sales charges, may be excluded from the Lowest and Highest Annual Cost estimates.
d. Amounts of any premium bonus may be excluded from the Lowest and Highest Annual Cost estimates.
e. Unless otherwise stated, the least and most expensive combination of contract classes, Portfolio Company fees and expenses, and optional benefits available for an additional charge should be based on the disclosures provided in the Example in Item 4. If a different combination of contract classes, Total Annual Portfolio Company Operating Expenses, and/or optional benefits available for an additional charge would result in different Minimum or Maximum fees in different years, use the least expensive or most expensive combination of contract classes, Total Annual Portfolio Company Operating Expenses, and optional benefits each year.
3.
(a)
(b)
(c)
(d)
4.
(a)
(b)
5.
6.
(a)
(b)
Include the following information:
The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. Please refer to your contract specifications page for information about the specific fees you will pay each year based on the options you have elected.
The first table describes the fees and expenses that you will pay
The next table describes the fees and expenses that you will pay
If you choose to purchase an optional benefit, you will pay additional charges, as shown below.
The next item shows the minimum and maximum total operating expenses charged by the [Portfolio Companies] that you may pay periodically during the time that you own the contract. A complete list of [Portfolio Companies] available under the Contract, including their annual expenses, may be found at the back of this document.
This Example is intended to help you compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include transaction expenses, annual contract expenses, and [Portfolio Company] operating expenses.
The Example assumes that you invest $100,000 in the contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year and assumes the most expensive combination of [Portfolio Company] operating expenses and optional benefits available for an additional charge. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1. Include the narrative explanations in the order indicated. A Registrant may modify a narrative explanation if the explanation contains comparable information to that shown.
2. Assume that the annuity contract is owned during the accumulation period for purposes of the table (including the Example). If an annuitant would pay different fees or be subject to different expenses, disclose this in a brief narrative and provide a cross-reference to those portions of the prospectus describing these fees.
3. A Registrant may omit captions if the Registrant does not charge the fees or expenses covered by the captions. A Registrant may modify or add captions if the captions shown do not provide an accurate description of the Registrant's fees and expenses.
4. Round all dollar figures to the nearest dollar and all percentages to the nearest hundredth of one percent.
5. In the Annual Transaction Expenses and Annual Contract Expenses tables, the Registrant must disclose the maximum guaranteed charge, unless a specific instruction directs otherwise. If a fee is calculated based on a benchmark (
6. Provide a separate fee table (or separate column within the table) for each Contract form offered by the prospectus that has different fees.
7. In a Contract with more than one class, provide a separate response for each class.
8. Administrative expenses include any contract, account, or similar fee imposed on all Contractowner Accounts on any recurring basis.
9. “Sales Load Imposed on Purchases” includes the maximum sales
10. “Deferred Sales Load” includes the maximum contingent deferred sales load (or surrender charge), expressed as a percentage of the original purchase price or amount surrendered, and may include a tabular presentation, within the larger table, of the range of contingent deferred sales loads over time.
11. “Exchange Fee” includes the maximum fee charged for any exchange or transfer of contract value from the Registrant to another investment company or from one sub-account of the Registrant to another sub-account or the insurance company's general account. The Registrant may include a tabular presentation of the range of exchange fees unless such a presentation would be so lengthy as to encumber the larger table, in which case the Registrant should only provide a cross-reference to the narrative portion of the prospectus discussing the exchange fee.
12. If the Registrant (or any other party pursuant to an agreement with the Registrant) charges any other transaction fee, add another caption describing it and list the (maximum) amount or basis on which the fee is deducted.
13. Base Contract expenses includes mortality and expense risk fees, and account fees and expenses. Account fees and expenses include all fees and expenses (except sales loads, mortality and expense risk fees, and optional benefits expenses) that are deducted from separate account assets or charged to all Contractowner Accounts.
14. If the Registrant (or any other party pursuant to an agreement with the Registrant) imposes any other recurring charge (other than Total Annual [Portfolio Company] Operating Expenses), add another caption describing it and list the (maximum) amount or basis on which the charge is deducted.
15. Optional Benefits expenses include any optional features (
16. If a Registrant offers multiple Portfolio Companies, it should disclose the minimum and maximum “Total Annual [Portfolio Company] Operating Expenses” for any Portfolio Company calculated in accordance with Item 3 of Form N-1A (before expense reimbursements or fee waiver arrangements).
17. A Registrant may also reflect minimum and maximum Total [Portfolio Company] Operating Expenses that include expense reimbursement or fee waiver arrangements in an additional line-item to the range of Portfolio Company operating expenses. If the Registrant provides this disclosure, also disclose the period for which the expense reimbursement or fee waiver arrangement is expected to continue, and, if applicable, that it can be terminated at any time at the option of a Portfolio Company.
18. For purposes of the Example(s) in the table, provide the following for each contract class:
(a) Assume that the percentage amounts listed under “Base Contract [Expenses]” remain the same in each year of the 1-, 3-, 5, and 10-year periods;
(b) The most expensive combination of contract features must be shown first. Additional expense presentations are permitted, but not required;
(c) Assume the maximum sales load that may be deducted from purchase payments is deducted;
(d) For any breakpoint in any fee, assume that the amount of the Registrant's (and the Portfolio Company's) assets remains constant as of the level at the end of the most recently completed fiscal year;
(e) Assume no exchanges or other transactions;
(f) Reflect any [annual] contract expenses by dividing the total amount of [annual] contract expenses collected during the year that are attributable to the contract offered by the prospectus by the total average net assets that are attributable to the contract offered by the prospectus. Add the resulting percentage to Base Contract expenses and assume that it remains the same in each year of the 1-, 3-, 5-, and 10-year periods;
(g) Reflect any contingent deferred sales load by assuming a complete surrender on the last day of the year;
(h) Provide the information required in the third section of the Example only if a sales load or other fee is charged upon a complete surrender; and
(i) Include in the Example the information provided by the caption “If you annuitize at the end of the applicable time period” only if the Registrant charges fees upon annuitization that are different from those charged upon surrender.
Summarize the principal risks of purchasing a Contract, including the risks of poor investment performance, that Contracts are unsuitable as short-term savings vehicles, limitations on access to cash value through withdrawals, and the possibility of adverse tax consequences.
Concisely discuss the organization and operation or proposed operation of the Registrant. Include the information specified below.
(a)
(b)
(1) Income, gains, and losses credited to, or charged against, the Registrant reflect the Registrant's own investment experience and not the investment experience of the Depositor's other assets;
(2) the assets of the Registrant may not be used to pay any liabilities of the Depositor other than those arising from the Contracts; and
(3) the Depositor is obligated to pay all amounts promised to contractowners under the Contracts.
(c)
(d)
(a)
1. Describe the sales loads applicable to the Contract and how sales loads are charged and calculated, including the factors affecting the computation of the amount of the sales load. If the Contract has a front-end sales load, describe the sales load as a percentage of the applicable measure of purchase payments and as a percentage of the net amount invested for each breakpoint. For Contracts with a deferred sales load, describe the sales load as a percentage of the applicable measure of purchase payments (or other basis) that the deferred sales load may represent. Percentages should be shown in a table. Identify any events on which a deferred sales load is deducted (
2. Unless set forth in response to Instruction 1, list any special purchase plans or methods established pursuant to a rule or an exemptive order that reflect scheduled variations in, or elimination of, the sales load (
3. If proceeds from sales loads will not cover the expected costs of distributing the contracts, identify from what source the shortfall, if any, will be paid. If any shortfall is to be made from assets from the depositor's general account, disclose, if applicable, that any amounts paid by the depositor may consist, among other things, of proceeds derived from Base Contract Expenses deducted from the account.
4. If the Contract's charge for premium or other taxes varies according to jurisdiction, identification of the range of current premium or other taxes is sufficient.
(b)
(c)
(d)
(a)
(b)
(1) Minimum contract value, and the consequences of falling below that amount;
(2) allocation of purchase payments among sub-accounts of the Registrant;
(3) transfer of contract value between sub-accounts of the Registrant, including transfer programs (
(4) conversion or exchange of Contracts for another contract, including a fixed or variable annuity or life insurance contract; and
(5) buyout offers of variable annuity contracts, including interests or participations therein.
(c)
(d)
(1) Why a change may be made (
(2) who, if anyone, must approve any change (
(3) who, if anyone, must be notified of any change.
(e)
(f)
(1) Describe the risks, if any, that frequent transfers of contract value among sub-accounts of the Registrant may present for other contractowners and other persons (
(2) State whether or not the Registrant or Depositor has adopted policies and procedures with respect to frequent transfers of contract value among sub-accounts of the Registrant.
(3) If neither the Registrant nor the Depositor has adopted any such policies and procedures, provide a statement of the specific basis for the view of the Depositor that it is appropriate for the Registrant and Depositor not to have such policies and procedures.
(4) If the Registrant or Depositor has any such policies and procedures, describe those policies and procedures, including:
(i) Whether or not the Registrant or Depositor discourages frequent transfers of contract value among sub-accounts of the Registrant;
(ii) whether or not the Registrant or Depositor accommodates frequent transfers of contract value among sub-accounts of the Registrant; and
(iii) any policies and procedures of the Registrant or Depositor for deterring frequent transfers of contract value among sub-accounts of the Registrant, including any restrictions imposed by the Registrant or Depositor to prevent or minimize frequent transfers. Describe each of these policies, procedures, and restrictions with specificity. Indicate whether each of these restrictions applies uniformly in all cases or whether the restriction will not be imposed under certain circumstances, including whether each of these restrictions applies to trades that occur through omnibus accounts at intermediaries, such as investment advisers, broker-dealers, transfer agents, and third party administrators. Describe with specificity the circumstances under which any restriction will not be imposed. Include a description of the following restrictions, if applicable:
(A) Any restrictions on the volume or number of transfers that may be made within a given time period;
(B) any transfer fee;
(C) any costs or administrative or other fees or charges that are imposed on persons deemed to be engaged in frequent transfers of contract value among sub-accounts of the Registrant, together with a description of the circumstances under which such costs, fees, or charges will be imposed;
(D) any minimum holding period that is imposed before a transfer may be made from a sub-account into another sub-account of the Registrant;
(E) any restrictions imposed on transfer requests submitted by overnight delivery, electronically, or via facsimile or telephone; and
(F) any right of the Registrant or Depositor to reject, limit, delay, or impose other conditions on transfers or to terminate or otherwise limit Contracts based on a history of frequent transfers among sub-accounts, including the circumstances under which such right will be exercised.
(5) If applicable, include a statement, adjacent to the disclosure required by paragraphs (f)(i) through (f)(iv) of this Item, that the Statement of Additional Information includes a description of all arrangements with any person to permit frequent transfers of contract value among sub-accounts of the Registrant.
Briefly describe the annuity options available. The discussion should include:
(a) Material factors that determine the level of annuity benefits;
(b) The annuity commencement date (give the earliest and latest possible dates);
(c) Frequency and duration of annuity payments, and the effect of these on the level of payment;
(d) The effect of assumed investment return;
(e) Any minimum amount necessary for an annuity option and the consequences of an insufficient amount; and
(f) Rights, if any, to change annuity options or to effect a transfer of investment base after the annuity commencement date.
1. Describe the choices, if any, available to a prospective annuitant, and the effect of not specifying a choice. Where an annuitant is given a choice in assumed investment return, explain the effect of choosing a higher, as opposed to a lower, assumed investment return.
2. Detailed disclosure on the method of calculating annuity payments should be placed in the SAI in response to Item 25.
(g) If applicable, state that the contractowner will not be able to withdraw any contract value amounts after the annuity commencement date.
Briefly describe the standard death benefit provided under the Contract during the accumulation and the annuity periods. Include:
(a) The operation of the standard death benefit, including the amount of the death benefit and how the death benefit amount may vary, the circumstances under which the value of the benefit may increase or be reduced (including the impact of withdrawals), and how the benefit may be terminated.
(b) When the death benefit is calculated and payable and the effect of choosing a specific method of payment on calculation of the death benefit.
(c) The forms the benefit may take, including the effect of not choosing a payment option and the period, if any, during which payments must begin under any annuity option.
(a) Include the following information:
In addition to the standard death benefit associated with your contract, other [standard and/or optional] benefits may also be available to you. The purposes, fees, and restrictions/limitations of these additional benefits are briefly summarized in the following table[s].
1.
(a) The table required by this Item 11(a) is meant to provide a tabular summary overview of the benefits described in Item 11(b) (
(b) If the Contract offers multiple benefits of the same type (
(c) The Registrant should include appropriate titles, headings, or any other information to promote clarity and facilitate understanding of the table(s) presented in response to this Item 11(a). For example, if certain optional benefits are only available to certain contractowners (
2.
3.
4.
5.
6.
(b) Briefly describe any other benefits (other than standard death benefit,
(1) Whether the benefit is standard or elected;
(2) The operation of the benefit, including the amount of the benefit and how the benefit amount may vary, the circumstances under which the value of the benefit may increase or be reduced (including the impact of withdrawals), and how the benefit may be terminated;
(3) Fees and costs, if any, associated with the benefit; and
(4) How the benefit amount is calculated and payable and the effect of choosing a specific method of payment on calculation of the benefit.
(c) Briefly describe any limitations, restrictions and risks associated with any benefit (other than the standard death benefit) offered under the contract (
(a) Briefly describe the procedures for purchasing a Contract. Include a concise explanation of:
(1) The minimum initial and subsequent purchase payments required and any limitations on the amount of purchase payments that will be accepted (if there are separate limits for each sub-account, state these limits); and
(2) a statement of when initial and subsequent purchase payments are credited.
(b) Describe the manner in which purchase payments are credited, including: (A) An explanation that purchase payments are credited on the basis of accumulation unit value; (B) how accumulation unit value is determined; and (C) how the number of accumulation units credited to a contract is determined.
(c) Explain that investment performance of the Portfolio Companies, expenses, and deduction of certain charges affect accumulation unit value and/or the number of accumulation units.
(d) Describe when calculations of accumulation unit value are made and that purchase payments are credited to a contract on the basis of accumulation unit value next determined after receipt of a purchase payment.
(e) Identify each principal underwriter (other than the depositor) of the variable annuity contracts and state its principal business address. If the principal underwriter is affiliated with the Registrant, the depositor, or any affiliated person of the Registrant or the depositor, identify how they are affiliated (
(a)
(b)
(c)
(d)
(e)
(f)
Briefly describe the loan provisions of the Contract, including any of the following that are applicable.
(a)
(b)
(c)
(d)
(e)
(f)
(a)
(b)
1. Identify the types of persons who may use the plans (
2. Do not describe the Internal Revenue Code requirements for qualifications of plans or the non-annuity tax consequences of qualification (
(c)
Describe any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Registrant, the Registrant's principal underwriter or the Depositor is a party. Include the name of the court where the case is pending, the date instituted, the principal parties involved, a description of the factual basis alleged to underlie the proceeding, and the relief sought. Include similar information as to any proceedings instituted, or known to be contemplated, by a governmental authority.
If all of the required financial statements of the Registrant and the Depositor (see Item 26 and General Instruction C.3(b)) are not in the prospectus, state, under a separate caption, where the financial statements may be found. Briefly explain how investors may obtain any financial statements not in the Statement of Additional Information.
Include as an Appendix under the heading “Appendix: [Portfolio Companies] Available Under [the Contract]” the following information, in the format specified below:
The following is a list of [Portfolio Companies] currently available under [the Contract], which is subject to change as discussed in [the Statutory Prospectus for the Contract]. Before you invest, you should review the prospectuses for the [Portfolio Companies]. These prospectuses contain more information about the [Portfolio Companies] and their risks and may be amended from time to time. You can find the prospectuses and other information about the [Portfolio Companies] online at [__]. You can also request this information at no cost by calling [__] or by sending an email request to [__].
The performance information below reflects fees and expenses of the [Portfolio Companies], but does not reflect the other fees and expenses that your contract may charge. Performance would be lower if these charges were included. Each [Portfolio Company's] past performance is not necessarily an indication of future performance.
1.
(a) Only include those Portfolio Companies that are currently offered under the Contract.
(b) The introductory legend to the table must provide a website address, other than the address of the Commission's electronic filing system; toll free telephone number; and email address that investors can use to obtain the prospectuses of the Portfolio Companies and to request other information about the Portfolio Companies. The website address must be specific enough to lead investors directly to the prospectuses of the Portfolio Companies, rather than to the home page or other section of the website on which the materials are posted. The website could be a central site with prominent links to each document. The legend may indicate, if applicable, that the prospectuses and other information are available from a financial intermediary (such as an insurance sales agent or broker-dealer) through which the Contract may be purchased or sold. Registrants not relying upon rule 498A(j) under the Securities Act [17 CFR 230.498A(j)] with respect to the Portfolio Companies that are offered under the Contract may, but are not required to, provide the next-to-last sentence of the first paragraph of the introductory legend to the table regarding online availability of the prospectuses.
(c) If the availability of one or more Portfolio Companies varies by benefit offered under the Contract, include as another Appendix a separate table that indicates which Portfolio Companies are available under each of the benefits offered under the Contract. This Appendix could incorporate a table that is structured pursuant to the following
2.
3.
4.
5.
(a)
(1) The Registrant's name.
(2) The Depositor's name.
(3) The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(4) A statement or statements:
(i) That the SAI is not a prospectus;
(ii) How the prospectus may be obtained; and
(iii) Whether and from where information is incorporated by reference into the SAI, as permitted by General Instruction D.
(5) The date of the SAI and the prospectus to which the SAI relates.
(b)
(a)
(b)
(c)
(d)
(e)
(a)
(b)
1. The term “management-related service contract” includes any contract with the Registrant to keep, prepare, or file accounts, books, records, or other documents required under federal or state law, or to provide any similar services with respect to the daily administration of the Registrant, but does not include the following:
(a) Any agreement with the Registrant to act as custodian or agent to administer purchases and redemptions under the Contracts, and
(b) Any contract with the Registrant for outside legal or auditing services, or contract for personal employment entered into with the Registrant in the ordinary course of business.
2. In summarizing the substantive provisions of any management-related service contract, include the following:
(a) The name of the person providing the service;
(b) The direct or indirect relationships, if any, of the person with the Registrant, its Depositor, or its principal underwriter; and
(c) The nature of the services provided; and the basis of the compensation paid for the services for the Registrant's last three fiscal years.
(c)
(1) Unless disclosed in response to paragraph (b) or another item of this form, identify and state the principal business address of any person who provides significant administrative or business affairs management services for the Registrant (
(2) State the name and principal business address of the Registrant's custodian and independent public accountant and describe generally the services performed by each.
(3) If the Registrant's assets are held by a person other than the Depositor, a commercial bank, trust company, or depository registered with the Commission as custodian, state the nature of the business of each such person.
(4) If an affiliated person of the Registrant or the Depositor, or an affiliated person of such an affiliated person, acts as administrative or servicing agent for the Registrant, describe the services the person performs and the basis for remuneration. State, for the past three years, the total dollars paid for the services, and by whom.
(5) If the Depositor is the principal underwriter of the Contracts, so state.
(a) Describe the manner in which Registrant's securities are offered to the public. Include a description of any special purchase plans and any exchange privileges not described in the prospectus.
(b) Describe the method that will be used to determine the sales load on the variable annuity contracts offered by the Registrant.
(c)
1. The consideration required to be disclosed by Item 22(c) includes any agreement to maintain assets in the Registrant or in other investment companies or accounts managed or sponsored by the Depositor, any investment adviser of a Portfolio Company, or any affiliated person of the Depositor or of any such investment adviser.
2. If the Registrant has an arrangement to permit frequent transfers of contract value among sub-accounts of the Registrant by a group of individuals, such as the participants in a defined contribution plan that meets the requirements for qualification under Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the Registrant may identify the group rather than identifying each individual group member.
(a)
(b)
(1) Whether the offering is continuous; and
(2) the aggregate dollar amount of underwriting commissions paid to, and the amount retained by, the principal underwriter for each of the Registrant's last three fiscal years.
(c)
(1) Payments made through deduction from premiums paid at the time of sale of the Contracts; or
(2) Payments made from cash values upon full or partial surrender of the Contracts or from an increase or decrease in the face amount of the Contracts.
1. Information need not be given about the service of mailing proxies or periodic reports of the Registrant.
2. Exclude information about bona fide contracts with the Registrant or its Depositor for outside legal or auditing services, or bona fide contracts for
3. Information need not be given about any service for which total payments of less than $15,000 were made during each of the Registrant's last three fiscal years.
4. Information need not be given about payments made under any contract to act as administrative or servicing agent.
5. If the payments were made under an arrangement or policy applicable to dealers generally, describe only the arrangement or policy.
(a)
(1)
(2)
1. When calculating the yield or effective yield quotations, the calculation of net change in account value must include all deductions that are charged to all Contractowner Accounts in proportion to the length of the base period. For any account fees that vary with the size of the account, assume an account size equal to the sub-account's mean (or median) account size.
2. Deductions from purchase payments and sales loads assessed at the time of redemption or annuitization should not be reflected in the computation of yield and effective yield. However, the amount or specific rate of such deductions must be disclosed.
3. Exclude realized gains and losses from the sale of securities and unrealized appreciation and depreciation from the calculation of yield and effective yield. Exclude income other than investment income.
(b)
(1)
1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 payment.
2. Include all recurring fees that are charged to all Contractowner Accounts. For any account fees that vary with the size of the account, assume an account size equal to the sub-account's mean (or median) account size. If recurring fees charged to Contractowner Accounts are paid other than by redemption of accumulation units, they should be appropriately reflected.
3. Determine the ending redeemable value by assuming a complete redemption at the end of the 1, 5, or 10 year periods and the deduction of all nonrecurring charges deducted at the end of each period.
4. If the Registrant's registration statement has been in effect less than one, five, or ten years, the time period during which the registration statement has been in effect should be substituted for the period stated.
5. Carry the total return quotation to the nearest hundredth of one percent.
6. Total return information in the prospectus need only be current to the end of the Registrant's most recent fiscal year.
(2)
1. Include among the expenses accrued for the period all recurring fees that are charged to all Contractowner Accounts. For any account fees that vary with the size of the account, assume an account size equal to the sub-account's mean (or median) account size.
2. If a broker-dealer or an affiliate (as defined in paragraph (b) of Rule 1-02 [17 CFR 210.1-02(b) of Regulation S-X) of the broker-dealer has, in connection with directing the Portfolio Company's brokerage transactions to the broker-dealer, provided, agreed to provide, paid for, or agreed to pay for, in whole or in part, services provided to the Portfolio Company (other than brokerage and research services as these terms are defined in Section 28(e) of the Securities Exchange Act of 1934 [15 U.S.C. 78bb(e)]), add to expenses accrued for the period an estimate of
3. Net investment income must be calculated by the Portfolio Company as prescribed by Item 26(b)(4) of Form N-1A.
4. Disclose the amount or specific rate of any nonrecurring account or sales charges.
(3)
Describe the method for determining the amount of annuity payments if not described in the prospectus. In addition, describe how any change in the amount of a payment after the first payment is determined.
(a)
(i) An audited balance sheet or statement of assets and liabilities as of the end of the most recent fiscal year;
(ii) An audited statement of operations of the most recent fiscal year conforming to the requirements of Rule 6-07 of Regulation S-X [17 CFR 210.6-07];
(iii) An audited statement of cash flows for the most recent fiscal year if necessary to comply with generally accepted accounting principles; and
(iv) Audited statements of changes in net assets conforming to the requirements of Rule 6-09 of Regulation S-X [17 CFR 210.6-09] for the two most recent fiscal years.
(b)
1. Include, in a separate section, the financial statements and schedules of the Depositor required by Regulation S-X. If the Depositor would not have to prepare financial statements in accordance with generally accepted accounting principles except for use in this registration statement or other registration statements filed on Forms N-3, N-4, or N-6, its financial statements may be prepared in accordance with statutory requirements. The Depositor's financial statements must be prepared in accordance with generally accepted accounting principles if the Depositor prepares financial information in accordance with generally accepted accounting principles for use by the Depositor's parent, as defined in Rule 1-02(p) of Regulation S-X [17 CFR 210.1-02(p)], in any report under sections 13(a) and 15(d) of the Securities Exchange Act [15 U.S.C. 78m(a) and 78
2. All statements and schedules of the Depositor required by Regulation S-X, except for the consolidated balance sheets described in Rule 3-01 of Regulation S-X [17 CFR 210.3-01], and any notes to these statements or schedules, may be omitted from Part B and instead included in Part C of the registration statement. If any of this information is omitted from Part B and included in Part C, the consolidated balance sheets included in Part B should be accompanied by a statement that additional financial information about the Depositor is available, without charge, upon request. When a request for the additional financial information is received, the Registrant should send the information within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.
3. Notwithstanding Rule 3-12 of Regulation S-X [17 CFR 210.3-12], the financial statements of the Depositor need not be more current than as of the end of the most recent fiscal year of the Depositor. In addition, when the anticipated effective date of a registration statement falls within 90 days subsequent to the end of the fiscal year of the Depositor, the registration statement need not include financial statements of the Depositor more current than as of the end of the third fiscal quarter of the most recently completed fiscal year of the Depositor unless the audited financial statements for such fiscal year are available. The exceptions to Rule 3-12 of Regulation S-X contained in this Instruction 3 do not apply when:
(a) The Depositor's financial statements have never been included in an effective registration statement under the Securities Act of 1933 of a separate account that offers variable annuity contracts or variable life insurance contracts; or
(b) The balance sheet of the Depositor at the end of either of the two most recent fiscal years included in response to this Item shows a combined capital and surplus, if a stock company, or an unassigned surplus, if a mutual company, of less than $2,500,000; or
(c) The balance sheet of the Depositor at the end of a fiscal quarter within 135 days of the expected date of effectiveness under the Securities Act (or a fiscal quarter within 90 days of filing if the registration statement is filed solely under the Investment Company Act) would show a combined capital surplus, if a stock company, or an unassigned surplus, if a mutual company, of less than $2,500,000. If two fiscal quarters end within the 135 day period, the Depositor may choose either for purposes of this test.
Any interim financial statements required by this Item need not be comparative with financial statements for the same interim period of an earlier year.
Furnish the following information for each class of accumulation units of the Registrant.
1. For purpose of this Item, “class of accumulation units” means any variation that affects accumulation units, including variations related to contract class, optional benefits, and sub-accounts.
2. The above information must be provided for each class of accumulation units of the Registrant derived from contracts offered by means of any prospectus (and each class derived from contracts no longer offered for sale) to which the SAI relates, but for which registrant may continue to accept payments. Information need not be provided for any class of accumulation units of the Registrant derived from contracts that are currently offered for sale by means of a different prospectus. Also, information need not be provided for any class of accumulation units that is no longer offered for sale but for which Registrant may continue to accept payments, if the information is provided in a different, but current prospectus of the Registrant.
3. The information shall be presented in comparative columns for each of the last five fiscal years of the Registrant (or for life of the Registrant and its immediate predecessors, if less) but
4. Accumulation unit amounts shall be given at least to the nearest cent. If the computation of the offering price is extended to tenths of a cent or more, then the amounts on the table should be given in tenths of a cent.
5. Accumulation unit values should only be given for sub-accounts that fund obligations of the Registrant under variable annuity contracts offered by means of this prospectus.
6. Registrants may, but are not required to, omit the AUV tables, if the registrant provides an annual account statement to each individual contractowner that discloses, with respect to each class of accumulation units held by the contractowner, the actual performance of each subaccount reflecting all contract charges incurred by the contractowner. For accounts held less than one year, the annual account statement must disclose the actual performance of each sub-account for the length of time the investor has owned the sub-account.
Subject to General Instruction D regarding incorporation by reference and rule 483 under the Securities Act [17 CFR 230.483], file the exhibits listed below as part of the registration statement. Letter or number the exhibits in the sequence indicated and file copies rather than originals, unless otherwise required by rule 483. Reflect any exhibit incorporated by reference in the list below and identify the previously filed document containing the incorporated material.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
Provide a list or diagram of all persons directly or indirectly controlled by or under common control with the Depositor or the Registrant. For any person controlled by another person, disclose the percentage of voting securities owned by the immediately controlling person or other basis of that person's control. For each company, also provide the state or other sovereign power under the laws of which the company is organized.
1. Include the Registrant and the Depositor in the list or diagram and show the relationship of each company to the Registrant and Depositor and to the other companies named, using cross-references if a company is controlled through direct ownership of its securities by two or more persons.
2. Indicate with appropriate symbols subsidiaries that file separate financial statements, subsidiaries included in consolidated financial statements; or unconsolidated subsidiaries included in group financial statements. Indicate for other subsidiaries why financial statements are not filed.
State the general effect of any contract, arrangements, or statute under which any underwriter or affiliated person of the Registrant is insured or indemnified against any liability incurred in his or her official capacity, other than insurance provided by any underwriter or affiliated person for his or her own protection.
(a)
(b)
(c)
1. Disclose the type of services rendered in consideration for the compensation listed in column (5).
2. Information need not be given about the service of mailing proxies or periodic reports of the Registrant.
3. Exclude information about bona fide contracts with the Registrant or its Depositor for outside legal or auditing services, or bona fide contracts for personal employment entered into with the Registrant or its Depositor in the ordinary course of business.
4. Exclude information about any service for which total payments of less than $15,000 were made during each of the last three fiscal years.
5. Exclude information about payments made under any agreement whereby another person contracts with the Registrant or its Depositor to perform as custodian or administrative or servicing agent.
State the name and address of each person maintaining physical possession of each account, book, or other document, required to be maintained by Section 31(a) [15 U.S.C. 80a-30(a)] and the rules under that section.
Provide a summary of the substantive provisions of any management-related service contract not discussed in Part A or Part B, disclosing the parties to the contract and the total amount paid and by whom for the Registrant's last three fiscal years.
1. The instructions to Item 21(b) of this Form shall also apply to this Item.
2. Exclude information about any service provided for payments totaling less than $15,000 during each of the Registrant's last three fiscal years.
Provide a representation of the Depositor that the fees and charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Depositor.
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant (certifies that it meets all of the requirements for effectiveness of this registration statement under rule 485(b) under the Securities Act and) has duly caused this registration statement to be signed on its behalf by the undersigned, duly authorized, in the City of____, and State of__, on this__ day of____.
If the registration statement is being filed only under the Securities Act or under both the Securities Act and the Investment Company Act, it should be signed by both the Registrant and the Depositor. If the registration statement is being filed only under the Investment Company Act, it should be signed only by the Registrant.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
The text of Form N-6 will not appear in the Code of Federal Regulations.
References to sections and rules in this Form N-6 are to the Investment Company Act of 1940 [15 U.S.C. 80a-1
“Class” means a version of a Variable Life Insurance Contract that varies principally with respect to distribution-related fees and expenses.
“Depositor” means the person primarily responsible for the organization of the Registrant and the person, other than the trustee or custodian, who has continuing functions or responsibilities for the administration of the affairs of the Registrant. “Depositor” includes the sponsoring insurance company that establishes and maintains the Registrant. If there is more than one Depositor, the information called for in this Form about the Depositor must be provided for each Depositor.
“Portfolio Company” means any company in which the Registrant invests and which may be selected as an option by the contractowner.
“Registrant” means the separate account (as defined in section 2(a)(37) of the Investment Company Act [15 U.S.C. 80a-2(a)(37)]) that offers the Variable Life Insurance Contracts.
“SAI” means the Statement of Additional Information required by Part B of this Form.
“Securities Act” means the Securities Act of 1933 [15 U.S.C. 77a
“Securities Exchange Act” means the Securities Exchange Act of 1934 [15 U.S.C. 78a
“Statutory Prospectus” means a prospectus that satisfies the requirements of section 10(a) of the Securities Act [15 U.S.C. 77j(a)].
“Summary Prospectus” has the meaning provided by paragraph (a)(12) of rule 498A under the Securities Act [17 CFR 230.498A(a)(12)].
“Variable Life Insurance Contract” or “Contract” means a life insurance contract that provides for death benefits and cash values that may vary with the investment experience of any separate
Form N-6 is used by all separate accounts organized as unit investment trusts and offering Variable Life Insurance Contracts to file:
(a) An initial registration statement under the Investment Company Act and any amendments to the registration statement;
(b) An initial registration statement required under the Securities Act and any amendments to the registration statement, including amendments required by section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)]; or
(c) Any combination of the filings in paragraph (a) or (b).
(a) For registration statements or amendments filed under both the Investment Company Act and the Securities Act or only under the Securities Act, include the facing sheet of the Form, Parts A, B, and C, and the required signatures.
(b) For registration statements or amendments filed only under the Investment Company Act, include the facing sheet of the Form, responses to all Items of Parts A (except Items 1, 4, 5, 10, and 17), B, and C (except Items 29(c), (k), (l), (n), and (o)), and the required signatures.
No registration fees are required with the filing of Form N-6 to register as an investment company under the Investment Company Act or to register securities under the Securities Act. If Form N-6 is filed to register securities under the Securities Act and securities are sold to the public, registration fees must be paid on an ongoing basis after the end of the Registrant's fiscal year.
(a) For registration statements and amendments filed under both the Investment Company Act and the Securities Act or under only the Securities Act, the general rules regarding the filing of registration statements in Regulation C under the Securities Act [17 CFR 230.400-230.498A] apply to the filing of registration statements on Form N-6. Specific requirements concerning investment companies appear in rules 480-485 and 495-498A of Regulation C.
(b) For registration statements and amendments filed only under the Investment Company Act, the general provisions in rules 8b-1—8b-32 [17 CFR 270.8b-1 to 270.8b-32] apply to the filing of registration statements on Form N-6.
(c) The plain English requirements of rule 421 under the Securities Act [17 CFR 230.421] apply to prospectus disclosure in Part A of Form N-6.
(d) Regulation S-T [17 CFR 232.10-232.903] applies to all filings on the Commission's Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).
(a) The requirements of Form N-6 are intended to promote effective communication between the Registrant and prospective investors. A Registrant's prospectus should clearly disclose the fundamental features and risks of the Variable Life Insurance Contracts, using concise, straightforward, and easy to understand language. A Registrant should use document design techniques that promote effective communication.
(b) The prospectus disclosure requirements in Form N-6 are intended to elicit information for an average or typical investor who may not be sophisticated in legal or financial matters. The prospectus should help investors to evaluate the risks of an investment and to decide whether to invest in a Variable Life Insurance Contract by providing a balanced disclosure of positive and negative factors. Disclosure in the prospectus should be designed to assist an investor in comparing and contrasting a Variable Life Insurance Contract with other Contracts.
(c) Responses to the Items in Form N-6 should be as simple and direct as reasonably possible and should include only as much information as is necessary to enable an average or typical investor to understand the particular characteristics of the Variable Life Insurance Contracts. The prospectus should avoid including lengthy legal and technical discussions and simply restating legal or regulatory requirements to which Contracts generally are subject. Brevity is especially important in describing the practices or aspects of the Registrant's operations that do not differ materially from those of other separate accounts. Avoid excessive detail, technical or legal terminology, and complex language. Also avoid lengthy sentences and paragraphs that may make the prospectus difficult for many investors to understand and detract from its usefulness.
(d) The requirements for prospectuses included in Form N-6 will be administered by the Commission in a way that will allow variances in disclosure or presentation if appropriate for the circumstances involved while remaining consistent with the objectives of Form N-6.
(a)
(b)
(c)
(a)
(b)
(c)
(d)
(e)
(i) A single prospectus may describe multiple Contracts that are essentially identical. Whether the prospectus describes Contracts that are “essentially identical” will depend on the facts and circumstances. For example, a Contract that does not offer optional benefits would not be essentially identical to one that does. Similarly, group and individual Contracts would not be essentially identical. However, Contracts that vary only due to state regulatory requirements would be essentially identical.
(ii) Similarly, multiple prospectuses may be combined in a single registration statement on Form N-6 when the prospectuses describe Contracts that are essentially identical. For example, a Registrant could determine it is appropriate to include multiple prospectuses in a registration statement in the following situations: (i) The prospectuses describe the same Contract that is sold through different distribution channels; (ii) the prospectuses describe Contracts that differ only with respect to underlying funds offered; or (iii) the prospectuses describe both the original and an “enhanced” version of the same Contract (where the “enhanced” version modifies the features or options that the Registrant offers under that Contract).
(iii) Paragraph (a) of General Instruction C.3 requires Registrants to disclose the information required by Items 2, 3, and 4 in numerical order at the front of the prospectus and generally not to precede the Items with other information. As a general matter, Registrants providing disclosure in a single prospectus for more than one Variable Life Contract, or for Contracts sold in both the group and individual markets, may depart from the requirement of paragraph (a) as necessary to present the required information clearly and effectively (although the order of information required by each Item must remain the same). For example, the prospectus may present all of the Item 2 information for several Variable Life Contracts, followed by all of the Item 3 information for the Contracts, and followed by all of the Item 4 information for the Contracts. Alternatively, the prospectus may present Items 2, 3, and 4 for each of several Contracts sequentially. Other presentations also would be acceptable if they are consistent with the Form's intent to disclose the information required by Items 2, 3, and 4 in a standard order at the beginning of the prospectus.
(f)
(g)
(h)
(i) An Interactive Data File (§ 232.11 of this chapter) is required to be submitted to the Commission in the manner provided by Rule 405 of Regulation S-T (§ 232.405 of this chapter) for any registration statement or post-effective amendment thereto on Form N-6 that includes or amends information provided in response to Items 3, 4, 5, 11, or 18.
(A) Except as required by paragraph (h)(i)(B), the Interactive Data File must be submitted as an amendment to the registration statement to which the Interactive Data File relates. The amendment must be submitted on or before the date the registration statement or post-effective amendment that contains the related information becomes effective.
(B) In the case of a post-effective amendment to a registration statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), (vi), or (vii) of rule 485 under the Securities Act [17 CFR 230.485(b)], the Interactive Data File must be submitted either with the filing, or as an amendment to the registration statement to which the Interactive Data Filing relates that is submitted on or before the date the post-effective amendment that contains the related information becomes effective.
(ii) An Interactive Data File is required to be submitted to the Commission in the manner provided by rule 405 of Regulation S-T for any form of prospectus filed pursuant to paragraphs (c) or (e) of rule 497 under the Securities Act [17 CFR 230.497(c) or (e)] that includes information provided in response to Items 3, 4, 5, 11, or 18 that varies from the registration statement. The Interactive Data File must be submitted with the filing made pursuant to rule 497.
(iii) The Interactive Data File must be submitted in accordance with the specifications in the EDGAR Filer Manual, and in such a manner that will permit the information for each Contract, and, for any information that does not relate to all of the Classes in a filing, each Class of the Contract to be separately identified.
(i)
(a) A Registrant may not incorporate by reference into a prospectus information that Part A of this Form requires to be included in a prospectus, except as specifically permitted by Part A of the Form.
(b) A Registrant may incorporate by reference any or all of the SAI into the prospectus (but not to provide any information required by Part A to be included in the prospectus) without delivering the SAI with the prospectus.
(c) A Registrant may incorporate by reference into the SAI or its response to Part C information that Parts B and C require to be included in the Registrant's registration statement.
All incorporation by reference must comply with the requirements of this Form and the following rules on incorporation by reference: Rule 10(d) of Regulation S-K under the Securities Act [17 CFR 229.10(d)] (general rules on incorporation by reference, which, among other things, prohibit, unless specifically required by this Form, incorporating by reference a document that includes incorporation by reference to another document, and limits incorporation to documents filed within the last 5 years, with certain exceptions); rule 411 under the Securities Act [17 CFR 230.411] (general rules on incorporation by reference in a prospectus); rule 303 of Regulation S-T [17 CFR 232.303] (specific requirements for electronically filed documents); and rules 0-4, 8b-23, and 8b-32 [17 CFR 270.0-4, 270.8b-23, and 270.8b-32] (additional rules on incorporation by reference for investment companies).
(a)
(1) The Registrant's name.
(2) The Depositor's name.
(3) The types of Variable Life Insurance Contracts offered by the prospectus (
(4) The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(5) The date of the prospectus.
(6) The statement required by rule 481(b)(1) under the Securities Act.
(7) The statement that additional information about certain investment products, including variable life insurance, has been prepared by the Securities and Exchange Commission's staff and is available at
(8) The legend: “If you are a new investor in the [Contract], you may cancel your [Contract] within 10 days of receiving it without paying fees or penalties. In some states, this cancellation period may be longer. Upon cancellation, you will receive either a full refund of the amount you paid with your application or your total contract value. You should review this prospectus, or consult with your investment professional, for additional information about the specific cancellation terms that apply.”
(b)
(1) A statement that the SAI includes additional information about the Registrant. Explain that the SAI is available, without charge, upon request, and explain how contractowners may make inquiries about their Contracts. Provide a toll-free (or collect) telephone number for investors to call: To request the SAI; to request other information about the Contracts; and to make contractowner inquiries.
1. A Registrant may indicate, if applicable, that the SAI and other information are available on its internet site and/or by email request.
2. A Registrant may indicate, if applicable, that the SAI and other information are available from an insurance agent or financial intermediary (such as a broker-dealer or bank) through which the Contracts may be purchased or sold.
3. When a Registrant (or an insurance agent or financial intermediary through which Contracts may be purchased or sold) receives a request for the SAI, the Registrant (or insurance agent or financial intermediary) must send the SAI within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.
(2) A statement whether and from where information is incorporated by reference into the prospectus as permitted by General Instruction D. Unless the information is delivered with the prospectus, explain that the Registrant will provide the information without charge, upon request (referring to the telephone number provided in response to paragraph (b)(i)).
(3) A statement that reports and other information about the Registrant are available on the Commission's internet site at
(4) The EDGAR contract identifier for the Contract on the bottom of the back cover page in type size smaller than that generally used in the prospectus (
Provide a concise description of the Contract, including the following information:
(a)
(b)
(1) State whether premiums may vary in timing and amount (
(2) State whether restrictions may be imposed on premium payments (
(3) Describe how premiums may be allocated. This discussion should include a brief overview of the investment options available under the Contract, as well as any general (fixed) account options.
1. Prominently disclose that additional information about each Portfolio Company is provided in an appendix to the prospectus, and provide a cross-reference to the relevant appendix.
2. A detailed explanation of the separate account, sub-accounts, and Portfolio Companies is not necessary and should be avoided.
(4) State that payment of insufficient premiums may result in a lapse of the Contract.
(c)
Include the following information:
An investment in the Contract is subject to fees, risks, and other important considerations, some of which are briefly summarized in the following table. You should review the prospectus for additional information about these topics.
1.
(a) A Registrant should disclose the required information in the tabular presentation(s) reflected herein, in the order specified. A Registrant may exclude any disclosures that are not applicable, or modify any of the statements required to be included, so long as the modified statement contains comparable information.
(b) A Registrant should provide cross-references to the location in the Statutory Prospectus where the subject matter is described in greater detail. Cross-references in electronic versions of the Summary Prospectus and/or Statutory Prospectus should link directly to the location in the Statutory Prospectus where the subject matter is discussed in greater detail. The cross-reference should be adjacent to the relevant disclosure, either within the table row, or presented in an additional table column.
(c) All disclosures provided in response to this Item 3 should be short and succinct, consistent with the limitations of a tabular presentation.
2.
(a)
(b)
(c)
(i) Briefly state that in addition to surrender charges and transaction charges, an investment in the Contract is subject to certain ongoing fees and expenses, including fees and expenses covering the cost of insurance under the Contract and the cost of optional benefits available under the Contract, and that such fees and expenses are set based on characteristics of the insured (
(ii) Briefly state that contractowners will also bear expenses associated with the Portfolio Companies under the Contract, as shown in the following table:
(A) Explain, in a parenthetical or footnote to the table or the caption, the basis for the percentage (
(B) If a Registrant offers multiple Portfolio Companies, it should disclose the minimum and maximum “Total Annual [Portfolio Company] Operating Expenses” calculated in accordance with Item 3 of Form N-1A (before expense reimbursements or fee waiver arrangements).
(C) The Minimum Annual Fee means the lowest available current fee for each annual fee category (
3.
(a)
(b)
(c)
(d)
(e)
4.
(a)
(b)
5.
6.
(a)
(b)
Include the following information:
The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the Contract. Please refer to your contract specifications page for information about the specific fees you will pay each year based on the options you have elected.
The first table describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract, or transfer cash value between investment options.
The next table describes the fees and expenses that you will pay periodically during the time that you own the Policy, not including [Portfolio Company] fees and expenses.
The next item shows the minimum and maximum total operating expenses charged by the [Portfolio Companies] that you may pay periodically during the time that you own the contract. A complete list of [Portfolio Companies] available under the Contract, including their annual expenses, may be found at the back of this document.
1.
(a) Round all percentages to the nearest hundredth of one percent.
(b) Include the narrative explanations in the order indicated. A Registrant may modify a narrative explanation if the explanation contains comparable information to that shown.
(c) A Registrant may omit captions if the Registrant does not charge the fees or expenses covered by the captions. A Registrant may modify or add captions if the captions shown do not provide an accurate description of the Registrant's fees and expenses.
(d) If a Registrant uses one prospectus to offer a Contract in both the group and individual variable life markets, the Registrant may include narrative disclosure in a footnote or following the tables identifying markets where certain fees are either inapplicable or waived or lower fees are charged. In the alternative, a Registrant may present the information for group and individual contracts in another format consistent with General Instruction C.3.(c).
(e) The “When Charge is Deducted” column must be used to show when a charge is deducted,
(f) Under the “Amount Deducted” column, the Registrant must disclose the maximum guaranteed charge unless a specific instruction directs otherwise. The Registrant should include the basis on which the charge is imposed (
(g) Provide a separate fee table (or separate column within the table) for each Contract form offered by the prospectus that has different fees.
(h) In a Contract with more than one class, provide a separate response for each class.
2.
(a) “Other Surrender Fees” include any fees charged for surrender or partial surrender, other than sales charges imposed upon surrender or partial surrender.
(b) “Transfer Fees” include any fees charged for any transfer or exchange of cash value from the Registrant to another investment company, from one sub-account of the Registrant to another sub-account or the Depositor's general account, or from the Depositor's general account to the Registrant.
(c) If the Registrant (or any other party pursuant to an agreement with the Registrant) charges any other transaction fee, add another caption describing it and complete the other columns of the table for that fee.
3.
(a) The Registrant may substitute the term used in the prospectus to refer to the Portfolio Companies for the bracketed portion of the caption provided.
(b) For “Cost of Insurance” and any other charges that depend on contractowner characteristics, such as age or rating classification, the Registrant should disclose the minimum and maximum charges that may be imposed for a Contract, and the charges that may be paid by a representative contractowner, using appropriate sub-captions. In a footnote to the table, disclose (i) that the cost of insurance or other charge varies based on individual characteristics; (ii) that the cost of insurance charge or other charge shown in the table may not be representative of the charge that a particular contractowner will pay; and (iii) how the contractowner may obtain more information about the particular cost of insurance or other charges that would apply to him or her.
(i) In disclosing cost of insurance or other charges that depend on contractowner characteristics for a representative contractowner, the Registrant should assume characteristics (
(ii) The Registrant may supplement this disclosure of the minimum charges, maximum charges, and charges for a representative contractowner with additional disclosure immediately following the fee table. For example, the additional disclosure may include an explanation of the factors that affect the cost of insurance or other charge or tables showing the cost of insurance or other charge for a spectrum of representative contractowners.
(c) “[Annual] Maintenance Fee” includes any Contract, account, or similar fee imposed on any recurring basis. Any non-recurring Contract, account, or similar fee should be included in the “Transaction Fees” table.
(d) “Mortality and Expense Risk Fees” may be listed separately on two lines in the table.
(e) A Registrant may consolidate any charges that are assessed on a similar basis (
(f) Optional Benefits expenses include any optional features (
(g) If the Registrant (or any other party pursuant to an agreement with the Registrant) imposes any other recurring charge other than annual Portfolio Company Operating Expenses, add
4.
(a) If a Registrant offers multiple Portfolio Companies, it should disclose the minimum and maximum “Total Annual [Portfolio Company] Operating Expenses” for any Portfolio Company calculated in accordance with Item 3 of Form N-1A (before expense reimbursements or fee waiver arrangements).
(b) A Registrant may also reflect minimum and maximum Total [Portfolio Company] Operating Expenses that include expense reimbursement or fee waiver arrangements in an additional line-item to the range of portfolio company operating expenses. If the Registrant provides this disclosure, also disclose the period for which the expense reimbursement or fee waiver arrangement is expected to continue, and, if applicable, that it can be terminated at any time at the option of a portfolio company.
Summarize the principal risks of purchasing a Contract, including the risks of poor investment performance, that Contracts are unsuitable as short-term savings vehicles, the risks of Contract lapse, limitations on access to cash value through withdrawals, and the possibility of adverse tax consequences.
Concisely discuss the organization and operation or proposed operation of the Registrant. Include the information specified below.
(a)
(b)
(1) Income, gains, and losses credited to, or charged against, the Registrant reflect the Registrant's own investment experience and not the investment experience of the Depositor's other assets;
(2) the assets of the Registrant may not be used to pay any liabilities of the Depositor other than those arising from the Contracts; and
(3) the Depositor is obligated to pay all amounts promised to contractowners under the Contracts.
(c)
(d)
(a)
1. Describe the sales loads applicable to the Contract and how sales loads are charged and calculated, including the factors affecting the computation of the amount of the sales load. If the Contract has a front-end sales load, describe the sales load as a percentage of the applicable measure of premium payments (
2. Identify the factors that determine the applicable cost of insurance rate. Specify whether the mortality charges guaranteed in the contracts differ from the current charges. Identify the factors that affect the amount at risk, including investment performance, payment of premiums, and charges. Disclose how the cost of insurance charge is calculated based on the cost of insurance rate, amount at risk, and any other applicable factors. If the Depositor intends to use simplified underwriting or other underwriting methods that would cause healthy individuals to pay higher cost of insurance rates than they would pay under a substantially similar policy that is offered by the Depositor using different underwriting methods, state that the cost of insurance rates are higher for healthy individuals when this method of underwriting is used than under the substantially similar policy.
3. If the Contract's charge for premium or other taxes varies according to jurisdiction, identification of the range of current premium or other taxes is sufficient.
4. Identify charges that may be different in amount or method of computation when imposed in connection with, or subsequent to, increases in face amount of a Contract and briefly describe the differences.
(b)
(c)
(d)
(e)
(a)
(b)
(1) Allocation of premiums among sub-accounts of the Registrant;
(2) transfer of contract value between sub-accounts of the Registrant, including transfer programs (
(3) conversion or exchange of Contracts for another contract, including a fixed or variable annuity or life insurance contract.
(c)
(d)
(1) Why a change may be made (
(2) who, if anyone, must approve any change (
(3) who, if anyone, must be notified of any change.
(e)
(f)
(1) Describe the risks, if any, that frequent transfers of contract value among sub-accounts of the Registrant may present for other contractowners and other persons (
(2) State whether or not the Registrant or Depositor has adopted policies and procedures with respect to frequent transfers of contract value among sub-accounts of the Registrant.
(3) If neither the Registrant nor the Depositor has adopted any such policies and procedures, provide a statement of the specific basis for the view of the Depositor that it is appropriate for the Registrant and Depositor not to have such policies and procedures.
(4) If the Registrant or Depositor has any such policies and procedures, describe those policies and procedures, including:
(i) Whether or not the Registrant or Depositor discourages frequent transfers of contract value among sub-accounts of the Registrant;
(ii) whether or not the Registrant or Depositor accommodates frequent transfers of contract value among sub-accounts of the Registrant; and
(iii) any policies and procedures of the Registrant or Depositor for deterring frequent transfers of contract value among sub-accounts of the Registrant, including any restrictions imposed by the Registrant or Depositor to prevent or minimize frequent transfers. Describe each of these policies, procedures, and restrictions with specificity. Indicate whether each of these restrictions applies uniformly in all cases or whether the restriction will not be imposed under certain circumstances, including whether each of these restrictions applies to trades that occur through omnibus accounts at intermediaries, such as investment advisers, broker-dealers, transfer agents, and third party administrators. Describe with specificity the circumstances under which any restriction will not be imposed. Include a description of the following restrictions, if applicable:
(A) any restrictions on the volume or number of transfers that may be made within a given time period;
(B) any transfer fee;
(C) any costs or administrative or other fees or charges that are imposed on persons deemed to be engaged in frequent transfers of contract value among sub-accounts of the Registrant, together with a description of the circumstances under which such costs, fees, or charges will be imposed;
(D) any minimum holding period that is imposed before a transfer may be made from a sub-account into another sub-account of the Registrant;
(E) any restrictions imposed on transfer requests submitted by overnight delivery, electronically, or via facsimile or telephone; and
(F) any right of the Registrant or Depositor to reject, limit, delay, or impose other conditions on transfers or to terminate or otherwise limit Contracts based on a history of frequent transfers among sub-accounts, including the circumstances under which such right will be exercised.
(5) If applicable, include a statement, adjacent to the disclosure required by paragraphs (f)(1) through (f)(4) of this Item, that the Statement of Additional Information includes a description of all arrangements with any person to permit frequent transfers of contract value among sub-accounts of the Registrant.
(a)
(1) The minimum initial and subsequent premiums required and any limitations on the amount and the frequency of premiums that will be accepted. If there are separate limits for each sub-account, state these limits;
(2) whether required premiums, if any, are payable for the life of the Contract or some other term;
(3) whether payment of certain levels of premiums will guarantee that the Contract will not lapse regardless of the Contract's cash value;
(4) if applicable, under what circumstances premiums may be required in order to avoid lapse and how the amount of the additional premiums will be determined;
(5) if applicable, under what circumstances nonpayment of a required premium will not cause the Contract to lapse;
(6) if applicable, under what circumstances premiums in addition to the required premiums will be permitted; and
(7) if applicable, whether the level of the Contract's required premiums may change and, if so, how the amount of the change will be determined.
(b)
(c)
(d)
(e)
(f)
(1) An explanation of when the required premiums and additional premiums are credited to the Contract's cash value in the sub-accounts, and the basis (
(2) an explanation, to the extent applicable, that premiums are credited to the Contract's cash value on the basis of the sub- account valuation next determined after receipt of a premium;
(3) an explanation of when valuations of the assets of the sub-accounts are made; and
(4) a statement identifying in a general manner any national holidays when sub-account assets will not be valued and specifying any additional local or regional holidays when sub-account assets will not be valued.
(a)
(i) When insurance coverage is effective;
(ii) when the death benefit is calculated and payable;
(iii) how the death benefit is calculated;
(iv) who has the right to choose the form of benefit and the procedure for choosing the form of benefit, including when the choice is made and whether the choice is revocable;
(v) the forms the benefit may take and the form of benefit that will be provided if a particular form has not been elected; and
(vi) whether there is a minimum death benefit guarantee associated with the Contract.
Also describe if and how a contractowner may increase or decrease the face amount, including the minimum and the maximum amounts, any requirement of additional evidence of insurability, and whether charges, including sales load, are affected.
(b)
(a) Include the following information:
In addition to the standard death benefit associated with your contract, other [standard and/or optional] benefits may also be available to you. The purposes, fees, and restrictions/limitations of these additional benefits are briefly summarized in the following table[s].
1.
(a) The table required by this Item 11(a) is meant to provide a tabular summary overview of the benefits described in Item 11(b) (
(b) If the Contract offers multiple benefits of the same type (
(c) The Registrant should include appropriate titles, headings, or any other information to promote clarity and facilitate understanding of the table(s) presented in response to this Item 11(a). For example, if certain optional benefits are only available to certain contractowners (
2.
3.
4.
5.
6.
(b) Briefly describe any other benefits (other than standard death benefit,
(1) Whether the benefit is standard or elected;
(2) The operation of the benefit, including the amount of the benefit and how the benefit amount may vary, the circumstances under which the value of
(3) Fees and costs, if any, associated with the benefit; and
(4) How the benefit amount is calculated and payable and the effect of choosing a specific method of payment on calculation of the benefit.
(c) Briefly describe any limitations, restrictions and risks associated with any benefit (other than the standard death benefit) offered under the contract (
(a)
(b)
(c)
(d)
(e)
Briefly describe the loan provisions of the Contract, including any of the following that are applicable.
(a)
(b)
(c)
(d)
(e)
(f)
(a)
(b)
(c)
(d)
(a)
(b)
Describe any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Registrant, the Registrant's principal underwriter, or the Depositor is a party. Include the name of the court in which the proceedings are pending, the date instituted, the principal parties involved, a description of the factual basis alleged to underlie the proceeding, and the relief sought. Include similar information as to any legal proceedings instituted, or known to be contemplated, by a governmental authority.
If all of the required financial statements of the Registrant and the Depositor (
Include as an Appendix under the heading “Appendix: [Portfolio Companies] Available Under [the Contract]” the following information, in the format specified below:
The following is a list of [Portfolio Companies] currently available under [the Contract], which is subject to change as discussed in [the Statutory Prospectus for the Contract]. Before you invest, you should review the prospectuses for the [Portfolio Companies]. These prospectuses contain more information about the [Portfolio Companies] and their risks and may be amended from time to time. You can find the prospectuses and other information about the [Portfolio Companies] online at [__]. You can also request this information at no cost by calling [__] or by sending an email request to [__].
The performance information below reflects fees and expenses of the [Portfolio Companies], but does not reflect the other fees and expenses that your contract may charge. Performance would be lower if these charges were included. Each [Portfolio Company's] past performance is not necessarily an indication of future performance.
1.
(a) Only include those Portfolio Companies that are currently offered under the Contract.
(b) The introductory legend to the table must provide a website address, other than the address of the Commission's electronic filing system; toll free telephone number; and email address that investors can use to obtain the prospectuses of the Portfolio Companies and to request other information about the Portfolio Companies. The website address must be specific enough to lead investors directly to the prospectuses of the Portfolio Companies, rather than to the home page or other section of the website on which the materials are posted. The website could be a central site with prominent links to each document. The legend may indicate, if applicable, that the prospectuses and other information are available from a financial intermediary (such as an insurance sales agent or broker-dealer) through which the Contract may be purchased or sold. Registrants not relying upon rule 498A(j) under the Securities Act [17 CFR 230.498A(j)] with respect to the Portfolio Companies that are offered under the Contract may, but are not required to, provide the next-to-last sentence of the first paragraph of the introductory legend to the table regarding online availability of the prospectuses.
(c) If the availability of one or more Portfolio Companies varies by benefit offered under the Contract, include as another Appendix a separate table that indicates which Portfolio Companies are available under each of the benefits offered under the Contract. This Appendix could incorporate a table that is structured pursuant to the following example, or could use any other presentation that might promote clarity and facilitate understanding:
2.
3.
4.
5.
(a)
(1) The Registrant's name.
(2) The Depositor's name.
(3) The name of the Contract and the Class or Classes, if any, to which the Contract relates.
(4) A statement or statements:
(i) That the SAI is not a prospectus;
(ii) How the prospectus may be obtained; and
(iii) Whether and from where information is incorporated by reference into the SAI, as permitted by General Instruction D.
(5) The date of the SAI and of the prospectus to which the SAI relates.
(b)
(a)
(b)
(c)
(d)
(e)
(a)
(b)
1. The term “management-related service contract” includes any contract with the Registrant to keep, prepare, or file accounts, books, records, or other documents required under federal or state law, or to provide any similar services with respect to the daily administration of the Registrant, but does not include the following:
(a) Any agreement with the Registrant to act as custodian or agent to administer purchases and redemptions under the Contracts; and
(b) Any contract with the Registrant for outside legal or auditing services, or contract for personal employment entered into with the Registrant in the ordinary course of business.
2. In summarizing the substantive provisions of any management-related service contract, include the following:
(a) The name of the person providing the service;
(b) The direct or indirect relationships, if any, of the person with the Registrant, its Depositor, or its principal underwriter; and
(c) The nature of the services provided, and the basis of the compensation paid for the services for the Registrant's last three fiscal years.
(c)
(1) Unless disclosed in response to paragraph (b) or another item of this form, identify and state the principal business address of any person who provides significant administrative or business affairs management services for the Registrant (
(2) State the name and principal business address of the Registrant's custodian and independent public accountant and describe generally the services performed by each.
(3) If the Registrant's assets are held by a person other than the Depositor, a commercial bank, trust company, or depository registered with the Commission as custodian, state the nature of the business of that person.
(4) If an affiliated person of the Registrant or the Depositor, or an affiliated person of the affiliated person, acts as administrative or servicing agent for the Registrant, describe the services the person performs and the basis for remuneration. State, for the past three years, the total dollars paid for the services, and by whom.
(5) If the Depositor is the principal underwriter of the Contracts, so state.
(a)
(b)
(a)
(b)
(c)
(d) Describe any arrangements with any person to permit frequent transfers of contract value among sub-accounts of the Registrant, including the identity of the persons permitted to engage in frequent transfers pursuant to such arrangements, and any compensation or other consideration received by the Registrant, the Depositor, or any other party pursuant to such arrangements.
1. The consideration required to be disclosed by Item 23(d) includes any agreement to maintain assets in the Registrant or in other investment companies or accounts managed or sponsored by the Depositor, any investment adviser of a Portfolio Company, or any affiliated person of the Depositor or of any such investment adviser.
2. If the Registrant has an arrangement to permit frequent transfers of contract value among sub-accounts of the Registrant by a group of individuals, such as the participants in a defined contribution plan that meets the requirements for qualification under Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the Registrant may identify the group rather than identifying each individual group member.
(a)
(b)
(1) Whether the offering is continuous; and
(2) the aggregate dollar amount of underwriting commissions paid to, and the amount retained by, the principal underwriter for each of the Registrant's last three fiscal years.
(c)
(1) Payments made through deduction from premiums paid at the time of sale of the Contracts; or
(2) Payments made from cash values upon full or partial surrender of the Contracts or from an increase or decrease in the face amount of the Contracts.
1. Information need not be given about the service of mailing proxies or periodic reports of the Registrant.
2. Exclude information about bona fide contracts with the Registrant or its Depositor for outside legal or auditing services, or bona fide contracts for personal employment entered into with the Registrant or its Depositor in the ordinary course of business.
3. Information need not be given about any service for which total payments of less than $5,000 were made during each of the Registrant's last three fiscal years.
4. Information need not be given about payments made under any contract to act as administrative or servicing agent.
5. If the payments were made under an arrangement or policy applicable to dealers generally, describe only the arrangement or policy.
(a)
(b)
(c)
(d)
To the extent that the prospectus does not do so, describe the lapse and reinstatement provisions of the Contract. Include a discussion of any time limits that apply, how the charge to reinstate is determined, and any other conditions that apply to reinstatement. Describe the features of any lapse options not described in the prospectus, including any factors that will determine the amount or duration of the insurance coverage, and the limitations and conditions on availability of each lapse option. Identify which contract transactions (
(a)
(i) An audited balance sheet or statement of assets and liabilities as of the end of the most recent fiscal year;
(ii) An audited statement of operations for the most recent fiscal year conforming to the requirements of Rule 6-07 of Regulation S-X [17 CFR 210.6-07];
(iii) An audited statement of cash flows for the most recent fiscal year if necessary to comply with generally accepted accounting principles; and
(iv) Audited statements of changes in net assets conforming to the requirements of Rule 6-09 of Regulation S-X [17 CFR 210.6-09] for the two most recent fiscal years.
(b)
1. Include, in a separate section, the financial statements and schedules of the Depositor required by Regulation S-X. If the Depositor would not have to prepare financial statements in accordance with generally accepted accounting principles except for use in this registration statement or other registration statements filed on Forms N-3, N-4, or N-6, its financial statements may be prepared in accordance with statutory requirements. The Depositor's financial statements must be prepared in accordance with generally accepted accounting principles if the Depositor prepares financial information in accordance with generally accepted accounting principles for use by the Depositor's parent, as defined in Rule 1-02(p) of Regulation S-X [17 CFR 210.1-02(p)], in any report under sections 13(a) and 15(d) of the Securities Exchange Act [15 U.S.C. 78m(a) and 78
2. All statements and schedules of the Depositor required by Regulation S-X, except for the consolidated balance sheets described in Rule 3-01 of Regulation S-X [17 CFR 210.3-01], and any notes to these statements or schedules, may be omitted from Part B and instead included in Part C of the registration statement. If any of this information is omitted from Part B and included in Part C, the consolidated balance sheets included in Part B should be accompanied by a statement that additional financial information about the Depositor is available, without charge, upon request. When a request for the additional financial information is received, the Registrant should send the information within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.
3. Notwithstanding Rule 3-12 of Regulation S-X [17 CFR 210.3-12], the financial statements of the Depositor need not be more current than as of the end of the most recent fiscal year of the Depositor. In addition, when the anticipated effective date of a registration statement falls within 90 days subsequent to the end of the fiscal year of the Depositor, the registration statement need not include financial statements of the Depositor more current than as of the end of the third fiscal quarter of the most recently completed fiscal year of the Depositor unless the audited financial statements for such fiscal year are available. The exceptions to Rule 3-12 of Regulation S-X contained in this Instruction 3 do not apply when:
(a) The Depositor's financial statements have never been included in an effective registration statement under the Securities Act of a separate account that offers variable annuity contracts or variable life insurance contracts; or
(b) The balance sheet of the Depositor at the end of either of the two most recent fiscal years included in response to this Item shows a combined capital and surplus, if a stock company, or an unassigned surplus, if a mutual company, of less than $2,500,000; or
(c) The balance sheet of the Depositor at the end of a fiscal quarter within 135 days of the expected date of effectiveness under the Securities Act (or a fiscal quarter within 90 days of filing if the registration statement is filed solely under the Investment Company Act) would show a combined capital and surplus, if a stock company, or an unassigned surplus, if a mutual company, of less than $2,500,000. If two fiscal quarters end within the 135 day period, the Depositor may choose either for purposes of this test.
Any interim financial statements required by this Item need not be comparative with financial statements for the same interim period of an earlier year.
The Registrant may, but is not required to, include a table of hypothetical illustrations of death benefits, cash surrender values, and cash values in either the prospectus or the SAI. The following standards should be used to prepare any table of hypothetical illustrations that is included in the prospectus or the SAI:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Subject to General Instruction D regarding incorporation by reference and rule 483 under the Securities Act [17 CFR 230.483], file the exhibits listed below as part of the registration statement. Letter or number the exhibits in the sequence indicated and file copies rather than originals, unless otherwise required by rule 483. Reflect any exhibit incorporated by reference in the list below and identify the previously filed document containing the incorporated material.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(1) The illustrations of cash surrender values, cash values, death benefits, and/or any other values illustrated are consistent with the provisions of the Contract and the Depositor's administrative procedures;
(2) the rate structure of the Contract has not been designed, and the assumptions for the illustrations (including sex, age, rating classification, and premium amount and payment schedule) have not been selected, so as to make the relationship between premiums and benefits, as shown in the illustrations, appear to be materially more favorable than for any other prospective purchaser with different assumptions; and
(3) the illustrations are based on a commonly used rating classification and premium amounts and ages appropriate for the markets in which the Contract is sold.
(m)
(n)
(o)
(p)
(q)
(r)
Provide the following information about each director or officer of the Depositor:
Provide a list or diagram of all persons directly or indirectly controlled by or under common control with the Depositor or the Registrant. For any person controlled by another person, disclose the percentage of voting securities owned by the immediately controlling person or other basis of that person's control. For each company, also provide the state or other sovereign power under the laws of which the company is organized.
1. Include the Registrant and the Depositor in the list or diagram and show the relationship of each company to the Registrant and Depositor and to the other companies named, using cross-references if a company is controlled through direct ownership of its securities by two or more persons.
2. Indicate with appropriate symbols subsidiaries that file separate financial statements, subsidiaries included in consolidated financial statements, or unconsolidated subsidiaries included in group financial statements. Indicate for other subsidiaries why financial statements are not filed.
State the general effect of any contract, arrangements, or statute under which any underwriter or affiliated person of the Registrant is insured or indemnified against any liability incurred in his or her official capacity, other than insurance provided by any underwriter or affiliated person for his or her own protection.
(a)
(b)
(c)
1. Disclose the type of services rendered in consideration for the compensation listed under column (5).
2. Information need not be given about the service of mailing proxies or periodic reports of the Registrant.
3. Exclude information about bona fide contracts with the Registrant or its Depositor for outside legal or auditing services, or bona fide contracts for personal employment entered into with the Registrant or its Depositor in the ordinary course of business.
4. Exclude information about any service for which total payments of less than $15,000 were made during each of the Registrant's last three fiscal years.
5. Exclude information about payments made under any agreement whereby another person contracts with the Registrant or its Depositor to perform as custodian or administrative or servicing agent.
State the name and address of each person maintaining physical possession of each account, book, or other document required to be maintained by section 31(a) [15 U.S.C. 80a-30(a)] and the rules under that section.
Provide a summary of the substantive provisions of any management-related service contract not discussed in Part A or B, disclosing the parties to the contract and the total amount paid and by whom for the Registrant's last three fiscal years.
1. The instructions to Item 21 also apply to this Item.
2. Exclude information about any service provided for payments totaling less than $15,000 during each of the Registrant's last three fiscal years.
Provide a representation of the Depositor that the fees and charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Depositor.
By the Commission.
The Appendices will not appear in the Code of Federal Regulations.
This Summary Prospectus summarizes key features of the XYZ Variable Annuity Contract. You should read this Summary Prospectus carefully, particularly the section titled Important Information You Should Consider About the Contract.
Before you invest, you should review the prospectus for the XYZ Variable Annuity Contract, which contains more information about the contract, including its features, benefits, and risks. You can find the prospectus and other information about the contract online at
This Summary Prospectus incorporates by reference the XYZ Variable Annuity Contract's prospectus and Statement of Additional Information (SAI), both dated May 1, 2018, as amended or supplemented. The SAI may be obtained, free of charge, in the same manner as the prospectus.
In some states, this cancellation period may be longer. Upon cancellation, you will receive either a full refund of the amount you paid with your application or your total contract value. You should review the prospectus, or consult with your investment professional, for additional information about the specific cancellation terms that apply.
Additional information about certain investment products, including variable annuities, has been prepared by the Securities and Exchange Commission's staff and is available at Investor.gov.
A. The XYZ Variable Annuity Contract is designed to provide long-term accumulation of assets through investments in a variety of investment options during the accumulation phase. It can supplement your retirement income by providing a stream of income payments during the payout phase. It also offers death benefits to protect your designated beneficiaries. This contract may be appropriate if you have a long investment time horizon. It is not intended for people who may need to make early or frequent withdrawals or intend to engage in frequent trading in the portfolio companies.
A. Your contract has two phases: (1) An accumulation (savings) phase; and (2) a payout (income) phase.
To help you accumulate assets, you can invest your premium payments in:
• Portfolio companies (mutual funds), each of which has its own investment strategies, investment advisers, expense ratios, and returns; and
• a fixed account option, which offers a guaranteed interest rate during a selected period.
A list of portfolio companies in which you can invest is provided in the back of this Summary Prospectus.
You can elect to annuitize your contract and turn your contract value into a stream of income payments (sometimes called annuity payments) from XYZ, at which time the accumulation phase of the contract ends. These payments may continue for a fixed period of years, for your entire life, or for the longer of a fixed period or your life. The payments may also be fixed or variable. Variable payments will vary based on the performance of the investment options you select.
Please note that if you annuitize, your investments will be converted to income payments and you may no longer be able to choose to withdraw money at will from your contract. All benefits (including guaranteed minimum death benefits and living benefits) terminate upon annuitization.
An investment in the contract is subject to fees, risks, and other important considerations, some of which are briefly summarized in the following table. You should review the prospectus for additional information about these topics.
A. In addition to the standard death benefit associated with your contract, other optional benefits may also be available to you. The purposes, fees, and restrictions/limitations of these additional benefits are briefly summarized in the following tables.
These optional death benefits are available during the accumulation phase:
A. Complete our application and submit it, along with your initial premium payment, to our Administrative Office, at [Purchase Payment Processing, XYZ Insurance Company, 100 F Street NE, Washington, DC 20549]. Once we approve your application, we will send you your contract and a statement confirming your investments.
A. Your premium payments will be invested in the investment options that you choose.
After your initial premium payment, you are not required to make any additional premium payments under your contract.
A. Initial contract purchase: Your financial professional must determine that the contract is suitable for you and transmit your application to XYZ. If your application and purchase payment are complete when received by XYZ, or once it becomes complete, we will issue your contract within 2 business days. If some information is missing from your application, we may delay issuing your contract and crediting your account while we obtain the missing information. However, we will not hold your initial purchase payment for more than 5 business days without your permission.
Subsequent premium payment: If we receive a payment before the close of the NYSE (typically 4:00 p.m. EST), we will credit your purchase payment that day. If we receive your subsequent purchase payment after the close of the NYSE, your payment will be applied on the next business day.
A. You can access the money in your contract by making a withdrawal, which will reduce the value of your contract (including the amount of the death benefit). You may withdraw all or a portion of the cash value of your contract (minus applicable charges and other adjustments, discussed below).
Certain withdrawals may reduce the value of any optional living benefits you elected. Some optional living benefits provide withdrawal options.
A. Yes. These limitations are as follows:
A. You can request to withdraw all or a portion of the cash value of your contract (that is your contract value less any surrender charges and any prorated contract fees) on any business day through your financial intermediary, through our website, or by calling us or mailing a request to [Withdrawal Processing, XYZ Insurance Company, 100 F Street NE, Washington, DC 20549]. Generally, for withdrawal or surrender requests received before the close of the New York Stock Exchange (typically 4:00 p.m. EST), we will process your request that day. If we receive your request after the close of the New York Stock Exchange, your request payment will be processed the next
A. You will receive payments under the annuity payment option you select. However, you generally may not take any other withdrawals.
The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. Please refer to your contract specifications page for information about the specific fees you will pay each year based on the options you have elected.
The first table describes the fees and expenses that you will pay at the time that you buy the contract, surrender the contract, or transfer cash value between investment options. State premium taxes may also be deducted.
The next table describes the fees and expenses that you will pay each year during the time that you own the contract (not including portfolio company fees and expenses).
If you choose to purchase an optional benefit, you will pay additional charges, as shown below.
The next item shows the minimum and maximum total operating expenses charged by the portfolio companies that you may pay periodically during the time that you own the contract. A complete list of portfolio companies available under the contract, including their annual expenses, may be found at the back of this Summary Prospectus.
This example is intended to help you compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include transaction expenses, annual contract expenses, and Portfolio Company operating expenses.
The example assumes that you invest $100,000 in the contract for the time periods indicated. The example also assumes that your investment has a 5% return each year and assumes the most expensive combination of portfolio company operating expenses and optional benefits available for an additional charge. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
If you surrender your contract at the end of the applicable time period:
If you annuitize at the end of the applicable time period or if you do not surrender your contract:
The following is a list of portfolio companies currently available under the contract, which is subject to change, as discussed in the prospectus for the contract. Before you invest, you should review the prospectuses for the portfolio companies. These prospectuses contain more information about the portfolio companies and their risks and may be amended from time to time. You can find the prospectuses and other information about the portfolio companies online at
The performance information below reflects fees and expenses of the portfolio companies, but does not reflect the other fees and expenses that your contract may charge. Performance would be lower if these charges were included. Each portfolio company's past performance is not necessarily an indication of future performance.
The table below identifies the portfolio companies available for use with the
The table below identifies which portfolio companies are available for use with the
You should read this Summary Prospectus carefully, particularly the section titled Important Information You Should Consider About the Contract.
An updated prospectus for the XYZ Variable Annuity Contract is currently available online, which contains more information about the contract, including its features, benefits, and risks. You can find the prospectus and other information about the contract online at
This Summary Prospectus incorporates by reference the XYZ Variable Annuity Contract's prospectus and Statement of Additional Information (SAI), both dated May 1, 2018, as amended or supplemented. The SAI may be obtained, free of charge, in the same manner as the prospectus.
Additional information about certain investment products, including variable annuities, has been prepared by the Securities and Exchange Commission's staff and is available at
A. Yes. Please see below for a summary of changes that have been made to the contract. As described below, these changes may or may not affect you, depending on when you purchased your contract.
The information in this updating summary prospectus is a summary of certain contract features that have changed since the Updating Summary Prospectus dated May 1, 2017. This may not reflect all of the changes that have occurred since you entered into your Contract.
An investment in the contract is subject to fees, risks, and other important considerations, some of which are briefly summarized in the following table. You should review the prospectus for additional information about these topics.
The following is a list of portfolio companies currently available under the contract, which is subject to change, as discussed in the prospectus for the contract. Before you invest, you should review the prospectuses for the portfolio companies. These prospectuses contain more information about the portfolio companies and their risks and may be amended from time to time. You can find the prospectuses and other information about the portfolio companies online at
The performance information below reflects fees and expenses of the portfolio companies, but does not reflect the other fees and expenses that your contract may charge. Performance would be lower if these charges were included. Each portfolio company's past performance is not necessarily an indication of future performance.
The table below identifies the portfolio companies available for use with the
The table below identifies which portfolio companies are available for use with the
We require insurance companies to give you—in one long document called a
We would like to know what you think about the summary prospectus. Please take a few minutes to review this sample summary prospectus, which is available at
1. Have you ever considered purchasing a variable annuity? [ ] Yes [ ] No [ ] Don't know
2. The sample summary prospectus is divided into eight sections. Please indicate which two sections you found to be the
3. The sample summary prospectus includes a section named “Overview of the Variable Annuity Contract.” Does that section provide clear information? [ ] Yes [ ] No
If no, what other information would make this clearer?
4. The section named “Important Information You Should Consider About the Contract” includes a table. Do you think the table is clear? [ ] Yes [ ] No
If no, what other information would make this clearer? Would you prefer to see the information in a different format (other than a table)?
5. The sample summary prospectus describes what you would pay for the variable annuity, including upfront fees and future fees. Was this description clear? [ ] Yes [ ] No
If no, what other information would make this clearer?
6. Variable annuities may offer optional insurance benefits that you can purchase for extra fees. The sample summary prospectus describes these optional benefits.
A. Does the sample summary prospectus describe these optional benefits clearly? [ ] Yes [ ] No
If no, what other information would make this clearer?
B. Does the sample summary prospectus describe the extra fees associated with these optional benefits clearly? [ ] Yes [ ] No
If no, how could we make this clearer?
7. When you purchase a variable annuity, you decide how to invest your money by selecting one or more available mutual funds. The sample summary prospectus includes a table of mutual funds that are available as investment options. Does this table provide the information that you would want to consider when choosing mutual funds? [ ] Yes [ ] No
If no, what other information would be helpful to include?
8. After reading the sample summary prospectus, how likely would you be to request the full prospectus for more information on the following topics?
9. Is the length of the document: [ ] Too short [ ] Too long [ ] About right
If the length is not appropriate, why not?
10. How would you prefer to receive/read a document like the sample summary prospectus?
11. Do you have any additional suggestions for improving the summary prospectus? Is there anything else you would like to tell us about your experience with variable annuities?
If you are interested in background information on the proposed variable annuity summary prospectus, or want to provide feedback on additional questions, visit
You can send us feedback in the following ways (include the file number S7-23-18 in your response):
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
We will post your feedback on our website. Your submission will be posted without change; we do not redact or edit personal identifying information from submissions. You should only make submissions that you wish to make available publicly. Please provide your comments by February 15, 2019.
Commodity Futures Trading Commission.
Proposed rule.
The Commodity Futures Trading Commission (“Commission” or “CFTC”) is proposing amendments to regulations relating to the trade execution requirement under the Commodity Exchange Act (“CEA” or “Act”) and amendments to existing regulations relating to swap execution facilities (“SEFs”) and designated contract markets (“DCMs”). Among other amendments, the proposed rules apply the SEF registration requirement to certain swaps broking entities and aggregators of single-dealer platforms; broaden the scope of the trade execution requirement to include all swaps subject to the clearing requirement under the Act that a SEF or a DCM lists for trading; allow SEFs to offer flexible execution methods for all swaps that they list for trading; amend straight-through processing requirements; and amend the block trade definition. The proposed rules, which also include non-substantive amendments and various conforming changes to other Commission regulations, reflect the Commission's enhanced knowledge and experience with swaps trading characteristics and would further the Dodd-Frank Act's statutory goals for SEFs,
Comments must be received on or before February 13, 2019.
You may submit comments, identified by “Swap Execution Facilities and Trade Execution Requirement” and RIN 3038-AE25, by any of the following methods:
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Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, be accompanied by an English translation. Comments will be posted as received to
The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all submissions from
Nhan Nguyen, Special Counsel, (202) 418-5932,
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)
Pursuant to its discretionary rulemaking authority in CEA sections 5h(f)(1) and 8a(5), the Commission identified the relevant areas in which the statutory SEF framework would benefit from additional rules or regulations.
These rules reflect a more limited and prescriptive regulatory approach to implementing the statutory provisions and promoting the statutory goals of section 5h of the Act,
The Commission noted that the prescribed trading methods, such as the Order Book, are consistent with the SEF definition in CEA section 1a(50) of the Act as they allow multiple market participants to post bids or offers and accept bids and offers that are transparent to multiple market participants.
In adopting a regulatory framework that would effectuate the statutory SEF provisions and goals, the Commission relied in part upon its experience with the futures market, including DCM oversight and DCM core principles implementation.
The Commission's existing regulatory approach has transitioned some degree of swaps trading and market participants to SEFs, but has also created several challenges for swaps trading on SEFs, as described below.
The voluntary, SEF-driven MAT determination process has resulted in a limited set of products that are required to be executed on SEFs. Since 2014, SEFs have submitted a limited number of swaps, relative to the scope of swaps subject to the clearing requirement, as “available to trade” to the Commission.
Over the course of the part 37 implementation process, the Commission has gained greater familiarity with the swaps markets, in particular the nature of the products and how market participants trade and execute those products. Based on what it has learned, the Commission believes that the existing regulatory framework has contributed to the limited amount of swaps that are subject to the trade execution requirement, and therefore, the limited scope of swaps trading that occurs on SEFs.
Swaps consist of many highly variable terms and conditions beyond price and size that can be negotiated and tailored to suit a market participant's specific and unique needs. While some swaps are relatively standardized, others are customized and consist of innumerable permutations, making them generally less standardized and more bespoke than futures contracts. Given the ability to customize swaps to address specific and often large risks that cannot be offset through more standardized instruments, the swaps market is generally comprised of a relatively concentrated number of sophisticated market participants in contrast to the futures market. In this regard, the Commission notes that CEA section 2(e) limits swaps trading on SEFs to “eligible contract participants” (“ECPs”), as defined by CEA section 1a(18).
Historically, these particular characteristics have contributed to the use of a variety of execution methods—electronic, voice-based, or a hybrid of both (“voice-assisted”)—by market participants. Utilizing one execution method or another depends on considerations such as the type of swap, transaction size, complexity, the swap's liquidity at a given time, the number of potential liquidity providers, and the associated desire to minimize potential information leakage and front-running risks. For swaps with standard tenors that are relatively liquid, market participants may utilize a method of trading and execution, such as an electronic order book platform, that disseminates trading interests to all other market participants on the platform. Trading and execution in less standardized products, however, generally occur on systems or platforms that are more discreet in disseminating trading interests, such as auction platforms. The Commission's existing approach to required execution methods, as described above, creates a tension with swaps market characteristics that necessitate flexible execution methods. This tension has otherwise hindered the expansion of the trade execution requirement.
The Commission has learned that its approach to other part 37 rules may have imposed certain burdens on SEFs, including operating complexities and costs that have impeded development, innovation, and growth in the swaps market. SEFs have indicated that they are unable to comply with some of these requirements because they are impractical or unachievable due to technology limitations or incompatible with existing market practices. For example, as discussed further below, SEFs have informed the Commission that the confirmation requirement for uncleared swaps under § 37.6(b) and the electronic analysis capability requirements with respect to audit trail data for voice orders under § 37.205 have been operationally difficult and impractical to implement.
As a result of these burdens, the Commission believes that a significant amount of swaps liquidity formation activity occurs away from registered SEFs in a manner similar to the pre-Dodd-Frank Act swaps trading environment. These examples include (i) entities that aggregate single-dealer platforms to allow market participants to obtain indicative or firm pricing and execute swaps with multiple single-dealer liquidity providers away from SEFs; and (ii) swaps broking entities, including interdealer brokers
When necessary or appropriate to mitigate these burdens in the course of implementing part 37, Commission staff has issued various guidance and time-limited no-action relief to SEFs and market participants. The no-action relief has afforded additional time for compliance with certain part 37 regulations and related procedures or has provided an opportunity to
Given the challenges described above and the Commission's enhanced knowledge and experience from implementing part 37, the Commission is proposing to strengthen its swaps trading regulatory framework, while still effectuating the statutory SEF provisions and better promoting the statutory SEF goals. The Commission's proposed approach also more appropriately accounts for swaps market characteristics and should reduce certain complexities and costs that have contributed to a significant amount of swaps liquidity formation occurring away from SEFs; limited the scope of swaps that are subject to the trade execution requirement; and impeded SEF development, innovation, and growth. In this regard, the Commission proposes a simple but comprehensive approach that provides SEFs with flexibility, where appropriate, to calibrate their trading and compliance functions based on their respective trading operations and markets. The Commission believes that this proposed approach will attract greater liquidity formation on SEFs.
First, the Commission aims to effectuate the SEF registration requirement to ensure that multiple-to-multiple
Second, the Commission aims to facilitate increased trading and liquidity on SEFs by proposing a revised interpretation of the trade execution requirement that is consistent with CEA section 2(h)(8). The Commission's proposed interpretation would apply the trade execution requirement to all swaps that are both subject to the clearing requirement under section 2(h)(1) of the Act and listed for trading on a SEF. As a result of this approach, the Commission would also withdraw the existing voluntary MAT process.
The proposed expansion of the trade execution requirement is expected to capture a greater number of swaps with different liquidity profiles, thereby reinforcing the need to establish a more flexible regulatory approach to swaps trading and execution that would help foster customer choice, promote competition between and innovation by SEFs, and better account for fundamental swaps market characteristics. Accordingly, the Commission also proposes to allow a SEF to offer any method of execution for all swaps trading and execution, rather than only an Order Book or RFQ System.
Rather than dictating certain execution methods for Required Transactions, the Commission's proposed flexible approach would enable SEFs to provide, and ultimately allow market participants to choose, execution methods that are appropriate for the liquidity and other characteristics of particular swaps. The Commission's approach should also promote pre-trade price transparency in the swaps market by allowing execution methods that maximize participation and concentrate liquidity during times of episodic liquidity. The Commission believes that providing flexibility in execution methods will allow the swaps market to continue to naturally evolve and allow SEFs to innovate and provide more efficient, transparent, and cost-effective means of trading and execution. The Commission also proposes to eliminate the minimum trading functionality requirement, which should reduce the costs incurred by SEFs to operate and maintain order books that have not attracted significant volumes. In lieu of specific execution method requirements, the Commission is proposing general disclosure-based trading and execution rules that would apply to any execution method offered by a SEF.
In conjunction with allowing SEFs to offer more flexible execution methods, the Commission is proposing new rules for certain SEF personnel—“SEF trading specialists”—that constitute part of a SEF's trading system or platform. The proposed rules require SEFs to adopt minimum proficiency testing and ethics training requirements to ensure that their trading specialists possess and maintain an adequate level of technical knowledge and understand their ethical responsibilities in customer trading or execution and fostering liquidity formation. The proposed rules would also require SEFs to adopt trading conduct standards and a duty of supervision. With the ability to offer more flexible execution methods for all swaps, in particular those that involve discretion by trading specialists in handling trading or execution, the Commission believes that these proposed requirements are necessary to enhance professionalism in the swaps market and to promote market integrity and fairness. Further, the proposed requirements would mandate requisite levels of knowledge and competence that are commensurate to other similar requirements established for personnel in major trading markets, such as futures and equities.
The Commission is also proposing a series of amendments to additional part 37 regulations that implement the SEF core principles. These proposed amendments would allow a SEF to better tailor its compliance and regulatory oversight programs to its trading operations and markets. The Commission believes that these proposed revisions are critical to the ability of SEFs to offer the diverse types of execution methods that would be available to them under this proposal. Further, the proposed rules would streamline and refine some of the existing prescriptive requirements applicable to SEFs to better reflect technological capabilities and existing market practices in the swaps market. The proposed rules would also seek to reduce unnecessary compliance costs while still maintaining robust
With respect to existing staff guidance and staff no-action relief, the Commission would adopt or codify such guidance or relief where appropriate. Providing a simple, but more comprehensive regulatory approach would help mitigate barriers for market participants to trade and execute further on SEFs, which would in turn better promote the statutory SEF goals.
Finally, the proposed rules include non-substantive amendments and various conforming changes to relevant provisions in the Commission's regulations.
The Commission believes that the proposed revisions to the part 37 framework are consistent with the statutory SEF provisions and should serve to advance swaps trading on SEFs. The proposed rules are designed to more appropriately account for swaps market characteristics, especially with respect to the use of a wider array of different execution methods to trade and execute a broad scope of swaps with varying liquidity characteristics. Accordingly, the proposed rules are expected to better promote the development, innovation, and growth of the swaps market, with the intent of attracting liquidity formation onto SEFs.
As a general overview of the major changes described in this notice, the Commission is proposing:
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In developing these rules, the Commission has consulted with the Securities and Exchange Commission, pursuant to section 712(a)(1) of the Dodd-Frank Act.
The Commission is proposing non-substantive amendments to part 9 of the Commission's regulations that conform to proposed amendments to § 37.206—Disciplinary procedures and sanctions. Accordingly, the Commission discusses those proposed amendments to part 9 in Section VII.F. of this notice in conjunction with its discussion of the proposed amendments to § 37.206.
The Commission is proposing new rules under part 36 of the Commission's regulations to implement a proposed revised interpretation of the trade execution requirement in CEA section 2(h)(8), which would broaden the scope of the requirement to include additional swaps. The Commission discusses the proposed implementing rules in Section IV.I.4.a. of this notice in conjunction with its discussion of (i) the proposed adoption of flexible means of execution and elimination of the minimum trading functionality under § 37.3(a)(2); (ii) the prescribed execution methods under § 37.9; and (iii) the MAT process (and corresponding trade execution compliance schedule) under § 37.10, § 37.12, and §§ 38.11-12.
Section 37.1 currently clarifies that part 37 applies to every SEF that is registered or is applying to become registered as a SEF with the Commission. Section 37.1 also clarifies that part 37's applicability does not affect the eligibility of a registered SEF or a SEF applicant to operate as either a DCM under part 38 of the Commission regulations or a swap data repository (“SDR”) under part 49 of the Commission's regulations.
The Commission proposes a non-substantive amendment to § 37.1. The Commission has not identified any provisions in part 37 that would preclude a registered SEF from being eligible to operate as a DCM or an SDR; accordingly, the clarifying language may create unnecessary ambiguity. Therefore, the Commission proposes a non-substantive amendment to eliminate the existing language to avoid any potential confusion.
Section 37.2 states that a SEF must comply with part 37 and all other applicable Commission regulations, including any related definitions and cross-referenced sections. Section 37.2 also identifies certain specific pre-Dodd-Frank Act provisions whose applicability to SEFs may otherwise not be apparent—in particular, § 1.60 and part 9 of the Commission's regulations.
The Commission proposes a new provision under § 37.2(b) to define “market participant,” as the term is currently used in part 37, to clarify a SEF's jurisdiction over the various participants that may be involved in trading or executing swaps on its facility. In the preamble to the SEF Core Principles Final Rule, the Commission specified that a “market participant” includes any “person that directly or indirectly effects transactions on the SEF. [The definition] includes persons with trading privileges on the SEF and persons whose trades are intermediated.”
In practice, SEFs have created various participation categories, including “direct access,” “direct market access,” and “sponsored access” to describe how persons connect to their trading systems or platforms. For example, the Commission understands that “direct access” generally refers to participants who have been granted trading privileges by a SEF and utilize their own proprietary means,
Notwithstanding these categories, SEFs have generally relied on the existing description of “market participant” in the SEF Core Principles Final Rule preamble to establish jurisdiction over all of these participants that access the SEF and trade swaps on a direct or indirect basis. Given this established reliance and the continued use of this term under the proposed rules, the Commission seeks to codify the definition of “market participant” in part 37. The Commission proposes to define “market participant” as any person who accesses a SEF (i) through direct access provided by a SEF; (ii) through access or functionality provided by a third-party; or (iii) through directing an intermediary that accesses a SEF on behalf of such person to trade on its behalf. As a threshold matter, the Commission notes that since these persons are currently considered “market participants,” they are already subject to a SEF's jurisdiction. The Commission believes that persons accessing a SEF through the various means described above interact with other market participants on the SEF and have the ability to engage in abusive trading practices. Therefore, they should continue to be subject to a SEF's jurisdiction, including disciplinary procedures and recordkeeping obligations.
The Commission notes in particular that this proposed definition of “market participant” would apply to the recordkeeping requirements under § 37.404(b). Section 37.404(b) requires a SEF to adopt rules that require its market participants to keep records of their trading, including records of their activity in any index or instrument used as a reference price, the underlying
The proposed “market participant” definition would not capture clients of asset managers who, as market participants of a SEF, trade on a SEF on their clients' behalf.
Given that these clients give broad trading discretion to their asset managers, the Commission believes that requiring an asset manager who accesses and conducts actual trading on a SEF to submit to the SEF's jurisdiction is sufficient. This approach ensures that SEFs have the ability to take disciplinary action against the individual or entity—the asset manager—that could actually engage in potentially abusive trading practices on the SEF. The Commission notes that this logic would apply in other circumstances where a client gives broad trading discretion to another person to trade and execute swap transactions on the client's behalf. Therefore, these situations would not fall within the third prong of the “market participant” definition as described above because the client is not “directing” the intermediary to trade on its behalf.
With respect to recordkeeping, the Commission understands that asset managers typically maintain records of swap transactions on SEFs to which their clients are named counterparties. Although asset managers would likely not have complete records of their clients' trading activity in the index or instruments used as a reference price, the underlying commodity, and related derivatives markets under § 37.404(b), the Commission does not believe that SEFs would need these client records for regulatory purposes to the extent that the client is not directing the asset manager to trade on its behalf, but rather allowing the asset manager to exercise discretion in trading swaps. Therefore, the potential risks of manipulation, price distortion, and disruptions of the delivery or cash settlement process, which a SEF is required to prevent through trade monitoring under Core Principle 4, may be less attributable to such clients. To the extent that such risks may exist, however, the Commission believes it is sufficient for SEFs to have access to records that relate to the asset manager, who is conducting the actual swaps trading activity.
The Commission requests comment on all aspects of proposed § 37.2(b). The Commission is particularly interested in the impact of the scope of the proposed “market participant” definition on various constituencies and, therefore, requests comment on the following questions:
CEA section 5h(a)(1) establishes the SEF registration requirement and specifies that no person may operate a facility for the trading or processing of swaps unless the facility is registered as a SEF or as a DCM.
As discussed further below, the Commission is proposing to apply the SEF registration requirement to several types of entities. The Commission does not intend for the discussion in this notice to exhaustively address which entities must register as a SEF. Rather, a determination of whether an entity must register as a SEF pursuant to CEA section 5h(a)(1) would depend on an evaluation of the operations of the entity, in particular whether it meets the SEF definition under CEA section 1a(50).
As noted above, the Commission has stated that the SEF registration requirement in CEA section 5h(a)(1)
The Commission proposes to codify this existing approach to the SEF registration requirement by amending § 37.3(a)(1) to state that a person operating a facility that meets the statutory SEF definition must register as a SEF without regard to whether the swaps that it lists for trading are subject to the trade execution requirement. This proposed amendment is intended to clarify that the trade execution requirement is not a determinant of whether an entity must register as a SEF by codifying the requirement that an entity must register as a SEF if it permits trading or execution of any swap, including swaps that are not subject to the trade execution requirement, in a manner consistent with the statutory SEF definition,
The Commission requests comment on all aspects of the proposed amendment to § 37.3(a).
In the preamble to the SEF Core Principles Final Rule, the Commission evaluated the application of the statutory SEF registration requirement to various swaps market entities, including “aggregation services or portals” (“SEF Aggregator Portals”) and “one-to-many systems or platforms” (“Single-Dealer Platforms”).
As the Commission has gained greater knowledge and experience with the swaps market, however, it has become aware of a different type of a trading system or platform that implicates the SEF registration requirement—trading systems or platforms that aggregate Single-Dealer Platforms (“Single-Dealer Aggregator Platforms”). Specifically, a Single-Dealer Aggregator Platform typically operates a trading system or platform that aggregates multiple Single-Dealer Platforms and, thus, enables multiple dealer participants to provide executable bids and offers, often via two-way quotes, to multiple non-dealer participants on the system or platform. Those non-dealer participants are thus able to view, execute, or trade swaps posted to the Single-Dealer Aggregator Platform's system or platform from multiple dealer participants. These types of systems or platforms, however, have not registered their operations as SEFs.
The Commission believes that the type of trading system or platform provided by Single-Dealer Aggregator Platforms should be subject to the SEF registration requirement because it meets the SEF definition in CEA section 1a(50) by allowing multiple participants to trade swaps by accepting bids and offers made by multiple participants in the facility or system.
While a Single-Dealer Aggregator Platform has elements that resemble a Single-Dealer Platform, which is a type of entity that does not trigger the SEF registration requirement,
The Commission also believes that Single-Dealer Aggregator Platforms are distinguishable from SEF Aggregator Portals. SEF Aggregator Portals are services or portals that enable market participants to access multiple SEFs, each of which provides a trading system or platform that facilitates the trading or execution of swaps between multiple participants. In the preamble to the SEF Core Principles Final Rule, the Commission stated that a SEF Aggregator Portal does not meet the statutory SEF definition because it merely provides a portal through which its users may access multiple SEFs, rather than providing a venue for the trading or execution of swaps.
The Commission requests comment on all aspects of the proposed application of the SEF registration requirement to Single-Dealer Aggregator Platforms. The Commission may consider alternatives to the proposed application of the registration requirement to Single-Dealer Aggregator Platforms and requests comment on the following questions:
In the preamble to SEF Core Principles Final Rule, the Commission specified whether the SEF registration requirement would apply to several specific types of entities,
The Commission understands that the proposed interpretation may require certain non-domestic operations—in particular, foreign swaps broking entities, such as foreign interdealer broker operations—to seek SEF registration or an exemption from SEF registration pursuant to CEA section 5h(g), provided that they fall within the Commission's jurisdiction.
Since adopting part 37, the Commission has developed a deeper understanding of the swaps market and has observed how swaps broking entities, including interdealer brokers, have structured themselves in relation to the current SEF regulatory framework. Interdealer broker trading systems or platforms facilitate swaps trading between multiple customers by negotiating or arranging swaps through voice-based or voice-assisted systems that combine voice functionalities with electronic systems such as order books. Swap dealers currently use these trading systems or platforms for several purposes, including obtaining market color or maintaining pre-trade anonymity in the course of trading. Specifically, an interdealer broker typically “works” customer orders by issuing RFQs-to-all among other customers and negotiating or arranging any resultant bids or offers. Once the interdealer broker arranges a reciprocating bid and reciprocating offer, it sets a price for a specific swap transaction for a particular product, which in many cases enables a subsequent “trade work-up” session.
The Commission notes that interdealer brokers have adopted varying approaches to structuring themselves in relation to the SEF regulatory framework. Some interdealer brokers have registered components of their trading systems or platforms as SEFs. Other interdealer brokers have operated very similar trading systems or platforms outside of the structure of a SEF, often through registered IB entities, and have interacted with a SEF solely as participants of the SEF.
This bifurcated approach has existed despite the close similarities among interdealer broker trading systems or platforms, whether they are registered or not as SEFs—they offer trading systems or platforms that facilitate the trading of swaps between multiple participants. This approach, however, has been justified by the execution of the swap on a SEF; as noted, the interdealer brokers that conduct activity on non-SEF platforms ultimately route the pre-arranged transactions to a SEF where they are executed. This approach seems premised on the view that because the execution occurs on a registered SEF, the facilitating interdealer broker does not need to register as a SEF, notwithstanding its role in negotiating or arranging the transaction(s).
To facilitate trading in Required Transactions outside the SEF, these interdealer broker trading systems or platforms typically operate outside of SEFs pursuant to the time delay requirement for Required Transactions under § 37.9(b).
For swaps that are not subject to the trade execution requirement,
Based on the statutory SEF registration requirement and SEF definition, the associated SEF goals, the Commission's experience and knowledge from implementing part 37, and its evaluation of trading practices that have developed under the current SEF regulatory framework with respect to swaps broking entities that include interdealer brokers, the Commission proposes that a trading system or platform operated by such an entity must register as a SEF pursuant to CEA section 5h(a)(1) and § 37.3(a).
In addition to the statutory basis for this application, the Commission's proposed approach would advance the Dodd-Frank goals of promoting swaps trading on SEFs and pre-trade price transparency.
The Commission also believes that requiring these types of swaps broking entities to register as SEFs would help to consistently apply the SEF regulatory framework over a segment of swaps trading activity that is very similar to registered SEF activity. Interdealer brokers currently operate trading systems or platforms outside of the SEF regulatory framework, yet act as participants on SEFs, resulting in multiple-to-multiple trading that is opaque not only to the SEF where the negotiated or arranged trade is eventually routed to for execution, but also to the Commission and the general marketplace. Although many interdealer brokers are registered as IBs pursuant to CEA section 4f and are subject to the Commission's rules and regulations,
Requiring interdealer brokers to either register as SEFs or carry out their multiple-to-multiple trading activities within a SEF would also enhance market integrity and monitoring because such activities would become subject to the SEF core principles and regulations, as well as direct regulatory oversight of a SEF in its capacity as a self-regulatory organization (“SRO”).
Accordingly, the Commission proposes that swaps broking entities, including interdealer brokers, that offer a trading system or platform in which more than one market participant has the ability to
The Commission proposes to delay the application of the SEF registration requirement with respect to swaps broking entities, including interdealer brokers, for a period of six months, subject to certain conditions and starting from the compliance date of any final rule adopted from this proposed rulemaking. Swaps broking entities, including interdealer brokers, that meet the conditions set forth below would be able to continue to maintain their current practice of facilitating the negotiating or arranging of swaps transactions between multiple participants and routing those swaps transactions to SEFs for execution.
As applied to swaps broking entities, including interdealer brokers—most of whom are registered with the Commission as IBs—the Commission proposes that the six-month delay from the SEF registration requirement would be subject to the following conditions:
(i) All swap transactions that are traded on a swaps broking entity, including an interdealer broker, must be routed for execution to a SEF; and
(ii) The swaps broking entity, including an interdealer broker, must provide electronically the following information with respect to itself to the Secretary of the Commission at
Upon a DMO determination that a swaps broking entity's notice is complete, the Commission proposes to post these notices on the Commission's website under the “Industry Filings” page. This proposed approach would effectively maintain the status quo for these swaps broking entities for the proposed six-month delay period.
The Commission notes that the proposed six-month delay for swaps broking entities, including interdealer brokers, does not affect any other requirements under the CEA or the Commission's regulations. In particular, this delayed compliance date would not affect the application of CEA section 2(e) and its requirement that only ECPs be permitted to trade swaps on SEFs.
As part of this proposed transition period, swaps broking entities, including interdealer brokers, would be able to route their transactions to a SEF for execution. Furthermore, during this period, counterparties subject to the trade execution requirement would be able to satisfy that requirement by trading via a swaps broking entity, including an interdealer broker, that routes the transactions to a SEF for execution.
The Commission requests comment on all aspects of the proposed application of the SEF registration requirement to swaps broking entities. The Commission may consider alternatives to the proposed application of the requirement and requests comment on the following questions:
As discussed above, the Commission has observed that swaps broking
Consistent with the proposal regarding the SEF registration requirement above, such foreign multilateral swaps trading facilities, including foreign swaps broking entities, would be required to register as a SEF or seek an exemption from SEF registration if their activity falls within the jurisdictional reach of the Commission pursuant to CEA section 2(i). Pursuant to CEA section 2(i), activities outside of the U.S. are not subject to the swap provisions of the CEA, including any rules prescribed or regulations promulgated thereof, unless those activities either have a “direct and significant connection” with activities in, or effect on, commerce of the United States; or contravene any rule or regulation established to prevent evasion of a Dodd-Frank Act-enacted provision of the CEA.
Such facilities that do not wish to register as a SEF and prefer to comply with the regulatory requirements of their home country may seek an exemption from SEF registration pursuant to CEA section 5h(g) either directly or via the auspices of their home country regulator. Pursuant to CEA section 5h(g), the Commission may exempt facilities from SEF registration if the facility is subject to comparable, comprehensive supervision and regulation on a consolidated basis by the appropriate governmental authorities in the home country of the facility.
Given that the Commission intends to address the cross-border jurisdictional reach of the Commission's SEF registration requirement in the future, the Commission proposes to delay the compliance date of the registration
The proposed delay period would not apply to foreign swaps broking entities that do not currently facilitate trading,
Eligible Foreign Swaps Broking Entities that meet the conditions set forth below would be able to continue to maintain the current practice of facilitating the negotiation or arrangement of swaps transactions between multiple participants and routing those swaps transactions to SEFs or Exempt SEFs for execution.
During this period, the Commission anticipates that it will address what constitutes a “direct and significant connection with activities in, or effect on, commerce of the United States” for foreign multilateral swaps trading facilities, including foreign swaps broking entities, under CEA section 2(i).
The Commission notes that counterparties that are required to comply with the trade execution requirement may only satisfy the requirement by executing a swap on a SEF, a DCM, or an Exempt SEF.
During this time, the Commission could formalize a regulatory framework for providing exemptions from the SEF registration requirement for foreign multilateral swaps trading facilities, including foreign swaps broking entities, that meet that CEA section 2(i) standard. The proposed two-year delay not only could provide the Commission with sufficient time to formalize this framework, which would require standards and processes for evaluating exemption requests, but also give Eligible Foreign Swaps Broking Entities more time to determine their best course of action,
With respect to exemptions, the Commission anticipates that most foreign swaps broking entities and other foreign multilateral swaps trading facilities would seek to comply with the rules and regulations of their home countries, and thus, seek an exemption from SEF registration. The Commission further anticipates that the issuance of such exemptions may take some time based upon the large number of jurisdictions in which these operations are currently located.
The Commission further believes that this proposal should create strong incentives for foreign jurisdictions to establish or bolster their own robust regulatory regimes for swaps trading. Such measures would also be consistent with the commitment made among the G-20 countries in 2009 “to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage.”
As applied to Eligible Foreign Swaps Broking Entities—most of whom are registered with the Commission as IBs—the Commission proposes that the two-year delay from the SEF registration requirement be subject to the following conditions:
(i) All swap transactions involving U.S. persons that are traded on an Eligible Foreign Swaps Broking Entity must be routed for execution to a SEF or an Exempt SEF;
(ii) The Eligible Foreign Swaps Broking Entities must provide the following information electronically to the Secretary of the Commission at
Upon a DMO determination that an Eligible Foreign Swaps Broking Entity's notice is complete, the Commission would post these notices on the Commission's website under the “Industry Filings” page. This proposed approach would effectively maintain the status quo for these Eligible Foreign Swaps Broking Entities during the two-year compliance date delay period. The Commission notes that the proposed two-year delay for Eligible Foreign Swaps Broking Entities does not affect any other requirements under the CEA or the Commission's regulations. In particular, this delayed compliance date would not affect the application of CEA section 2(e) and its limitation of SEF and Exempt SEF trading to ECPs.
As part of this proposed transition period, Eligible Foreign Swaps Broking Entities would be able to route their transactions to either a SEF or an Exempt SEF for execution. Furthermore, during this two-year delay, counterparties subject to the trade execution requirement would be able to satisfy that requirement by trading via an Eligible Foreign Swaps Broking Entity that routes the transactions to either a SEF or an Exempt SEF for execution.
In light of these considerations, the Commission notes that the issue of whether an Eligible Foreign Swaps Broking Entity routes a transaction to a SEF or an Exempt SEF during the proposed two-year time delay period would have practical implications for the counterparties involved in the transaction with respect to complying with Commission reporting and clearing requirements. For swap transactions that are routed to a SEF for execution, the SEF would be responsible for compliance with (i) the real-time reporting requirements under part 43 of the Commission's regulations and (ii) the regulatory reporting requirements under part 45 of the Commission's regulations.
Further, for swap transactions routed to a SEF that are intended to be cleared or subject to the clearing requirement, the SEF would be responsible for routing the swap transaction to a Commission-registered derivatives clearing organization (“DCO”) or a clearing organization that has been exempted from DCO registration by the Commission pursuant to CEA section 5b(h),
(i) When a swap transaction executed by a U.S. person on such an Exempt SEF is a “customer” position subject to CEA section 4d, the transaction, if intended to be cleared, must be cleared through a Commission-registered FCM at a Commission-registered DCO;
(ii) When a swap transaction executed by a U.S. person on such an Exempt SEF is a “proprietary” position under Commission regulation 1.3(y), the transaction, if intended to be cleared, must be cleared either through a Commission-registered DCO or an Exempt DCO; and
(iii) When a swap transaction is subject to the Commission's clearing requirement, the transaction must be cleared either through a Commission-registered DCO or an Exempt DCO, provided that consistent with (i) above, the transaction must be cleared through a Commission-registered FCM at a Commission-registered DCO and cannot be cleared through an Exempt DCO if the transaction is a “customer” position subject to CEA section 4d.
The Commission requests comment on all aspects of its proposed approach to SEF registration for Eligible Foreign Swaps Broking Entities, in particular the proposed two-year delay in the compliance date of any final rule. The Commission may consider alternatives to the proposed two-year delay and requests comment on the following questions:
In developing the regulatory framework for SEFs, the Commission adopted a “minimum trading functionality” requirement under § 37.3(a)(2) that requires a SEF to maintain and offer an Order Book for all
The Commission has observed that market participants have rarely used Order Books to trade swaps on SEFs despite their availability for all swaps listed by SEFs. Depending on the product involved, for example, order book trading typically ranges between “less than [one percent] to less than [three percent] of total CDS transactions” on SEFs, while order book trading constitutes between “less than [one percent] to approximately [twenty percent] of total IRS transactions. . . .”
Therefore, based in part on its experience, the Commission proposes to eliminate the minimum trading functionality requirement and the regulatory Order Book definition. The Commission believes that eliminating the minimum trading functionality would help reduce operating costs for SEFs, as they would no longer be required to operate and maintain order book systems that are poorly suited for trading in less liquid swaps, and therefore, do not attract significant trading activity. Instead of employing resources to build and support a seldom-utilized trading system or platform, the proposed elimination provides a SEF with the flexibility to determine how to allocate its resources, particularly as it relates to developing methods of execution that are better suited to trading the products that it lists. As discussed below, other execution methods may be better suited to maximizing participation and concentrating liquidity formation on SEFs in episodically liquid swaps markets.
The Commission adopted the minimum trading functionality requirement based in part on the goal of promoting pre-trade price transparency,
To implement the SEF regulatory framework, the Commission established a temporary SEF registration regime to help minimize disruptions to incumbent platforms that had been operating prior to the adoption of part 37 and to allow new entities to compete with those incumbent platforms.
Based on the expiration of the temporary registration regime, the Commission proposes to eliminate the provisions under existing § 37.3(c) and adopt various conforming changes to other provisions in proposed § 37.3(b) and proposed § 37.3(h), as discussed below.
To request registration as a SEF, § 37.3(b)(1)(i) requires an applicant to electronically file a complete Form SEF, as set forth in Appendix A to part 37, with the Commission.
Based on its experience with the SEF registration process, the Commission believes that some of the information requested under Form SEF has proven to be unnecessary to determine an applicant's compliance with the Act and applicable Commission regulations. The Commission also recognizes that some of the exhibit requirements are unclear in the amount of information required to be provided, thereby causing inconsistency across applications in the information received to evaluate compliance. The proposed changes to the part 37 framework, as discussed further herein, would also necessitate certain Form SEF revisions. Therefore, the Commission is proposing several amendments to Form SEF that would consolidate or eliminate several of the existing exhibits and also request some additional information. Further, the Commission is proposing several amendments to the Form SEF instructions. The Commission intends for these proposed changes to establish a clearer and more streamlined application process that would still provide the Commission with sufficient and appropriate information to determine compliance with the Act and Commission regulations.
The Commission proposes several amendments to the “Business Organization” exhibits—existing Exhibits A through H—of Form SEF.
First, the Commission proposes to consolidate certain existing exhibits, in particular (i) existing Exhibit G, which requires an applicant to submit various governance documents, into existing Exhibit C, which requires information regarding the applicant's board of directors;
The Commission also proposes to narrow the scope of information required by existing Exhibit D, which requires a description of the applicant's organizational structure that includes a list and description of affiliates and relevant divisions, subdivisions, or other separate entities related to the applicant. As proposed, Exhibit D would require an applicant to describe the nature of the business of any affiliated entities which engage in financial services or market activities, including but not limited to, the trading, clearing, or reporting of swaps. The Commission believes that this amendment would more appropriately focus the required information on entities related to the applicant's swaps-trading business and minimize the submission of information that is not related. Further, the Commission proposes non-substantive amendments to the existing exhibit.
The Commission proposes several amendments to the “Financial Information” exhibits—existing Exhibits I through K—of Form SEF.
The Commission proposes to adopt several changes to existing Exhibit I.
The Commission proposes to amend the requirements of paragraphs (a) through (c) to conform to the proposed amendments to the SEF financial resources requirements under Core Principle 13. In particular, the proposed required documentation would demonstrate an applicant's ability to maintain resources that exceed one year of operating costs and the existence of resources to meet the liquidity requirement.
The Commission also proposes to adopt several changes to Exhibit K.
In addition to the amendments to new Exhibit G (existing Exhibit I) and new Exhibit H (existing Exhibit K), the Commission proposes to eliminate existing Exhibit J, which requires an applicant to disclose the financial resources information for any SEF, DCM, or other swap trading platform affiliates. Based on its experience with Exhibit J, the Commission recognizes that this information related to an applicant's affiliates is not particularly useful in demonstrating an applicant's compliance with Core Principle 13 or the conflicts of interest requirements under Core Principle 12.
The Commission proposes several amendments to the “Compliance” exhibits—existing Exhibits L through U—of Form SEF.
First, the Commission proposes to eliminate several exhibits including (i) existing Exhibit P, which requires the applicant to provide information on disciplinary and enforcement protocols, tools, and procedures that is generally duplicative to the details contained in an applicant's rulebook and compliance manual;
Second, the Commission proposes to streamline the requirements of existing Exhibit L.
Third, the Commission proposes to simplify the requirements of existing Exhibit M.
Fourth, the Commission proposes to eliminate the requirements under existing Exhibit N. The exhibit currently requires an applicant to provide executed or executable copies of any agreements or contracts that facilitate the applicant's compliance with the SEF core principles, including third-party regulatory service provider or member or user agreements. To streamline Form SEF, the Commission would require instead that applicants submit these documents pursuant to other relevant exhibits, as described below.
Fifth, the Commission proposes a new Exhibit L, which would continue to require an applicant to submit user agreements. As proposed, the new exhibit would specify that the required agreements would include, but not be limited to, on-boarding documentation, regulatory data use consent agreements, intermediary documentation, and arrangements for alternative dispute resolution.
Sixth, the Commission proposes a new Exhibit M to establish requirements related to an applicant's swaps reporting capabilities. The new Exhibit M would require the applicant to submit (i) a list of the SDRs to which the applicant will report swaps data, including the respective asset classes;
Seventh, the Commission proposes a new Exhibit N to incorporate the requirements in existing Exhibit T related to an applicant's ability to submit swaps to a DCO for clearing. New Exhibit N would require the applicant to submit (i) a list of DCOs and exempt DCOs to which the applicant will submit swaps for clearing, including the respective asset classes; (ii) a representation that the clearing members of those DCOs and exempt DCOs will guarantee all trades submitted by the swap execution facility for clearing; (iii) an executed copy of the clearing agreement and any related documentation for each of those DCOs or exempt DCOs; and (iv) a representation from each of those DCOs or exempt DCOs stating that the applicant has satisfactorily completed all requirements, including all necessary testing, that enable its acceptance of swap transactions submitted by the applicant for clearing. These requirements reflect some of the documents that the Commission has required applicants to submit under existing Exhibit N and would enable the Commission to determine an applicant's ability to comply with proposed § 37.702(b)(1) under Core Principle 7, which requires a SEF to coordinate with each DCO to facilitate “prompt, efficient, and accurate” processing and routing of transactions to the DCO for clearing.
Eighth, the Commission proposes a new Exhibit O to require an applicant to submit all other agreements or contracts that enable the applicant to comply with the applicable SEF core principles and are not already required to be submitted
Ninth, the Commission proposes to adopt several changes to existing Exhibit Q.
Finally, the Commission proposes to consolidate existing Exhibit S, which currently requires a discussion of how the applicant will maintain trading data, into new Exhibit K (re-designated from existing Exhibit O). Exhibit K would require an applicant to submit a copy of its compliance manual and documents that describe how the applicant will conduct trade practice, market, and financial surveillance.
The Commission proposes to re-designate existing Exhibit V, which requires the applicant to provide information pertaining to its program of risk analysis and oversight via the Technology Questionnaire, as a new Exhibit Q and to adopt non-substantive amendments to the exhibit's existing language.
In addition to the proposed amendments to the existing exhibits, the Commission is proposing several changes to the Form SEF instructions. Form SEF currently requires applicants to include a Table of Contents that lists each exhibit submitted as part of the application. In lieu of a separate list provided via existing Exhibit U, the Commission proposes to require that applicants designate, in the Table of Contents, the exhibits that are subject to a request for confidential treatment. The Commission also proposes to require that any such confidential treatment be reflected by some type of identifying number and code on the appropriate exhibit(s), similar to the approach followed for DCO applications and Form DCO.
The Commission also proposes two minor amendments related to the Form SEF cover sheet. First, to enable the Commission to evaluate a SEF's compliance with ongoing filing requirements more readily, the Commission proposes to require an applicant to specify its fiscal year-end date.
The Commission proposes to eliminate the requirement that an applicant request a “unique, extensible, alphanumeric code” from the Commission under § 37.3(b)(1)(iii) and to require instead that the applicant obtain a legal entity identifier (“LEI”). The Commission adopted part 37 prior to the establishment of the technical specification and governance mechanism for a global entity identifier. Since that adoption, a 20-digit alphanumeric LEI has been developed and adopted by many regulatory authorities in other jurisdictions, as well as the Commission, for use in identifying counterparties and other entities pursuant to various regulatory reporting requirements, including part 45 of the Commission's regulations.
The Commission requests comments on all aspects of the proposed amendments to § 37.3(b)(1) and Appendix A to part 37.
The Commission is not proposing any amendments to § 37.3(b)(2).
Section 37.3(b)(3) specifies that an applicant amending a pending application or requesting an amendment to a registration order must file an amended application with the Secretary of the Commission in the manner specified by the Commission. The Form SEF instructions correspond to this requirement and currently specify that requests for amending a registration order and any associated exhibits must be submitted via Form SEF. Section 37.3(b)(3) otherwise specifies that a SEF must file any amendment to its application subsequent to registration as a submission under part 40 of the Commission's regulations, or as specified by the Commission.
The Commission proposes to clarify and amend the requirements regarding post-registration amendments to both Form SEF exhibits and registration orders. First, the Commission proposes to amend § 37.3(b)(3) and Form SEF to eliminate the required use of Form SEF to request an amended order of registration from the Commission.
Second, the Commission proposes to eliminate the existing language that specifies the use of part 40 to file application amendments subsequent to registration. The Commission emphasizes that not all of the information from the Form SEF exhibits need to be updated pursuant to part 40 subsequent to registration; certain part 37 provisions already require SEFs to update their information on an ongoing basis. For example, under § 37.1306, a SEF is required to file updated financial reports, including fiscal year-end reports, which precludes the need to amend and file new Exhibit G (existing Exhibit I) through part 40. The Commission clarifies that part 40 only applies to information from application exhibits that constitute a “rule,” as defined under § 40.1(i).
The Commission requests comments on all aspects of the proposed amendments to § 37.3(b)(3).
The Commission is not proposing any amendments to § 37.3(b)(4).
Based on the elimination of the temporary registration regime under existing § 37.3(c), the Commission proposes to amend the existing provision to eliminate related language and specify that the Commission reviews a SEF registration application pursuant to a 180-day timeframe and the procedures specified in CEA section 6(a).
The Commission is not proposing any amendments to § 37.3(b)(6).
Consistent with existing Commission practice and the proposal to eliminate the use of Form SEF to request an amended registration order, the Commission proposes a new § 37.3(c)—“Amendment to an order of registration”—to establish a separate process for such requests.
The Commission requests comments on all aspects of proposed § 37.3(c).
The Commission is not proposing any amendments to § 37.3(d).
Section 37.3(e) establishes requirements that a SEF must follow when seeking to transfer its registration from its current legal entity to a new legal entity as a result of a corporate change.
The Commission proposes several non-substantive amendments to streamline the existing requirements under § 37.3(e) for filing a transfer request. First, the Commission proposes to simplify the timeline for filing a request by requiring that a SEF file the request “as soon as practicable,” rather than no later than three months prior to the anticipated corporate change or as soon as it knows of such a change, if less than three months prior to the change.
Second, with respect to the required information in a transfer request, the Commission also proposes to specifically reference other types of governing documents that would be adopted by transferees, such as a limited liability agreement or an operating agreement.
Third, the Commission proposes to simplify a transferee's compliance-related representations under § 37.3(e)(3)(vi). The Commission proposes to consolidate and eliminate unnecessary language;
Fourth, the Commission proposes to amend § 37.3(e) to better reflect the practical realities of the transfer process. Rather than require a transferee to represent that it will retain and assume all the assets and liabilities of the transferor without limitation, the Commission proposes to instead require that the transferee state in the request when it would not do so.
The Commission is not proposing any amendments to § 37.3(f).
The Commission is not proposing any amendments to § 37.3(g).
Given the deletion of the phrase relating to temporary registration in the existing paragraph, the Commission proposes a conforming non-substantive amendment.
Section 37.4 currently sets forth rules related to the listing of swap products and the submission of rules on a pre- and post-registration basis. Section 37.4(a) specifies that a SEF applicant may submit the terms and conditions of swaps that it intends to list for trading as part of its registration application.
The Commission proposes to eliminate § 37.4(a) and to adopt conforming amendments to § 37.4(b) to establish that the Commission's process of reviewing the terms and conditions of a swap product that the applicant intends to list for trading upon registration is separate from the review process of a SEF's application for registration.
To conform to the proposed approach for reviewing swap product terms and conditions from SEF applicants described above, the Commission also proposes to amend § 37.4(d) to delete the reference to any “swap terms and conditions” submitted by a dormant SEF that is applying for reinstatement of registration.
The Commission requests comments on all aspects of the proposed amendments to § 37.4.
The Commission is not proposing any amendments to § 37.5(a).
The Commission is proposing certain non-substantive amendments to § 37.5(b).
Section 37.5(c) sets forth notification requirements related to transfers of equity interest in a SEF. Section 37.5(c)(1) requires a SEF to notify the Commission if the SEF enters into a transaction involving the transfer of fifty percent or more of the equity interest in the SEF.
The Commission has previously stated that in situations where such an equity transfer occurs, the Commission has an interest in reviewing and considering the implications of the changes in ownership.
The Commission proposes to amend § 37.5(c)(1) to require a SEF to file a notice with the Commission in the event of any transaction that results in the transfer of direct or indirect ownership of fifty percent or more of the equity interest in the SEF. The Commission notes that indirect ownership may transpire, for example, through a transaction involving a direct or indirect parent company of the SEF. Section 37.5(c), however, only requires a SEF to file a notice where the SEF is a party to a transaction involving a transfer of direct ownership of fifty percent or more of the equity interest in the SEF, but not where the SEF is not a party to the transaction, or where the transaction results in a transfer of indirect ownership of the SEF. The Commission believes that such transfers implicate the same regulatory policies underlying the existing rule and therefore proposes
The Commission further proposes to streamline § 37.5(c) by deleting § 37.5(c)(3)—the Commission notes that part 40 already applies to SEFs with respect to rule filings, and therefore, a separate provision is not necessary to apply part 40 to SEFs.
The Commission requests comments on all aspects of the proposed amendments to § 37.5(c).
The Commission is not proposing any amendments to § 37.5(d).
Section 37.6(a) is intended to provide market participants with legal certainty with respect to swap transactions on a SEF and generally clarifies that a swap transaction entered into on or pursuant to the rules of a SEF cannot be void, voidable, subject to recession, otherwise invalidated, or rendered unenforceable due to a violation by the SEF of the Act or applicable Commission regulations or any proceeding that alters or supplements a rule, term or condition that governs such swap or swap transaction.
The Commission proposes non-substantive amendments to § 37.6(a).
Section 37.6(b) requires a SEF to provide each counterparty to a transaction with a written “confirmation” that contains all of the terms of a swap transaction at the time of the swap's execution for both cleared and uncleared swap transactions, including (i) “economic terms” that are specific to a transaction,
For uncleared swap transactions, the Commission is aware that many relationship terms that may govern certain aspects of an uncleared swap transaction are often negotiated and executed between potential counterparties prior to execution.
This requirement, however, has created impractical burdens for SEFs. Based upon feedback from SEFs, the Commission understands that SEFs have encountered many issues in trying to comply with the requirement for uncleared swaps, including high financial, administrative, and logistical burdens to collect and maintain bilateral transaction agreements from many individual counterparties. SEFs have stated that they are unable to develop a cost-effective method to request, accept, and maintain a library of every previous agreement between counterparties.
Commission staff has acknowledged these technological and operational challenges and has accordingly granted time-limited no-action relief.
Based on its experience with the part 37 implementation, the Commission acknowledges that cleared and uncleared swaps raise different issues with respect to confirmation requirements and the current SEF requirements create difficulties for the latter type of swap transaction. Therefore, the Commission is proposing a revised approach to § 37.6(b) as described below.
The Commission proposes §§ 37.6(b)(1)(i)-(ii) to establish separate swap transaction documentation requirements for cleared and uncleared swaps. Proposed § 37.6(b)(1)(i)(A) would apply the existing confirmation requirement—that a SEF must issue a written confirmation that includes all of the terms of the transaction—to cleared swap transactions. The Commission further proposes to define “confirmation document” under § 37.6(b)(1)(i)(B) as a legally binding written documentation that memorializes the agreement to all terms of a swap transaction and legally supersedes any previous agreement that relates to the swap transaction between the counterparties.
With respect to uncleared swap transactions the Commission proposes a revised approach under § 37.6(b)(1)(ii) that would require a SEF to provide the counterparties to an uncleared swap transaction with a “trade evidence record” that memorializes the terms of the swap transaction agreed upon between the counterparties on the SEF. In contrast to a cleared swap confirmation, the trade evidence record would not be required to include all of the terms of the swap transaction, including relationship terms contained in underlying documentation between the counterparties. As defined under proposed § 37.6(b)(1)(ii)(B), a trade evidence record means a legally binding written documentation that memorializes the terms of a swap transaction agreed upon by the counterparties and legally supersedes any conflicting term in any previous agreement that relates to the swap transaction between the counterparties. The Commission anticipates that these terms would include, at a minimum, the “economic terms” that are agreed upon between the counterparties to a specific SEF transaction,
The Commission believes that the proposed rule would provide SEFs with a simplified approach to comply with the legal documentation requirement, but also continue to promote the policy objective of § 37.6(b) by providing SEF participants with legal certainty with respect to both cleared and uncleared swap transactions. Further, the proposed approach accommodates existing counterparty trading practices for uncleared swaps, particularly the use of separate, previously-negotiated underlying agreements to establish relationship terms that generally govern the trading relationship, as opposed to a specific transaction, between two counterparties. To the extent that such terms either are agreed upon between the counterparties in underlying documentation established away from the SEF and continue to govern the transaction post-execution or are not required to establish legal certainty for a specific transaction, a SEF would not be required to incorporate those terms into a trade evidence record. The proposed approach should address the challenges that have prevented SEFs from fully complying with § 37.6(b) by reducing the administrative burdens for SEFs, who would not be required to obtain, incorporate, or reference those previous agreements, and for counterparties, who would not be required to submit all of their relevant documentation with other potential counterparties to the SEF.
The Commission requests comments on all aspects of proposed § 37.6(b)(1). In particular, the Commission is particularly interested in the prescribed contents and legal import of a trade evidence record and requests comment on the following questions:
Section 37.6(b) requires that the confirmation take place at the same time as execution, except for a limited exception for certain information for bunched orders.
The Commission recognizes that a strict implementation of the existing requirement is not practical from a temporal standpoint, given that a SEF's issuance of a written confirmation document or trade evidence record would only occur upon execution by counterparties.
As noted, § 37.6(b) requires a SEF to provide the written confirmation of a transaction executed on or pursuant to the SEF's rules to “each counterparty to [the] transaction.” The Commission proposes to add § 37.6(b)(2)(iii) to provide that a SEF may issue a confirmation document or trade evidence record to the intermediary trading on behalf of a counterparty, provided that the SEF establish and enforce rules to require any intermediary to transmit any such document or record to the counterparty as soon as technologically practicable. Based on industry practice, the Commission notes that to the extent that intermediaries, acting on behalf of swap participants, facilitate swap execution on a SEF, the SEF transmits the written confirmation to the intermediary and then requires the intermediary to forward the confirmation to its customer. The Commission understands that participants using intermediaries to trade on a SEF may not establish the appropriate connectivity necessary to receive written confirmations directly from the SEF. Requiring the intermediary to transmit the document or record as soon as technologically practicable would further accommodate current market practices, as discussed above.
The Commission requests comments on all aspects of proposed § 37.6(b)(2). In particular, the Commission requests comment on the following questions:
The Commission proposes to move and amend § 37.7, which prohibits a SEF from using proprietary or personal information that it collects or receives to fulfill regulatory obligations for business or marketing purposes, as a new § 37.504 under the Core Principle 5 (Ability to Obtain Information) regulations. The Commission discusses the proposed amendments to the existing requirements further below.
Section 37.8(a) requires an entity that operates as both a DCM and a SEF to separately register with the Commission in accordance with the procedures set forth under part 38 and part 37 of the Commission's regulations, respectively. Section 37.8(a) further requires that a dually-registered entity comply with the respective DCM and SEF core principles and regulations on an ongoing basis.
The Commission notes that the language is superfluous to the similar requirements that already exist under § 38.2 and § 37.2 for DCMs and SEFs, respectively, and therefore proposes to delete this latter requirement. The Commission notes, however, that this is not a substantive change and DCMs and SEFs must otherwise comply with the Act and applicable regulations.
The CEA, as amended by the Dodd-Frank Act, requires the Commission to develop and implement a regulatory framework for trading swaps on registered SEFs and establishes a corresponding trade execution requirement that requires certain swaps to be executed on DCMs, SEFs, or Exempt SEFs.
The Commission adopted this framework in part to achieve the SEF statutory goals in CEA section 5h(e) of promoting trading on SEFs and promoting pre-trade transparency in the swaps market. The Commission acknowledges that the existing framework has transitioned some swaps trading and market participants to SEFs. Since 2013, however, the Commission has gained considerable knowledge and experience with swaps trading dynamics through implementing part 37, particularly with respect to the required use of certain execution methods. Based on that knowledge and experience, the Commission believes that certain aspects of the current SEF regulatory framework should be enhanced to further promote the statutory SEF goals and better maximize the role of SEFs as vibrant and liquid marketplaces for swaps trading.
Accordingly, the Commission is proposing two revisions to the current framework. First, the Commission proposes to adopt a revised interpretation of CEA section 2(h)(8) to set the applicability of the trade execution requirement,
The trade execution requirement mandates counterparties to execute swap transactions subject to the clearing requirement on a SEF or DCM, unless no SEF or DCM “makes the swap available to trade.”
Section 37.9 defines swaps that are subject to the trade execution requirement,
In establishing the Order Book and RFQ System requirements, the Commission sought in part to transition swaps trading onto SEFs and achieve the statutory SEF goal of promoting pre-trade price transparency in the swaps market. In addition to establishing the Order Book as a minimum trading functionality for all swaps listed for trading by a SEF, the Commission intended for the Order Book requirement to promote such transparency for swaps subject to the trade execution requirement. The Commission did acknowledge, however, that an Order Book lacks the appropriate
To address this lack of suitability even within the scope of Required Transactions, the Commission prescribed the RFQ System as an alternative execution method for these transactions.
While the Commission acknowledges that the existing approach has transitioned some swaps trading to SEFs, this transition has stagnated and will not likely increase further without changes to the existing regulatory framework. This stagnation, as discussed further below, is reflected by the limited set of swaps that have become subject to the trade execution requirement, and therefore subject to mandatory trading on SEFs, through the Commission's MAT process. The lack of additional swaps becoming subject to the requirement over the last several years has been attributable to market participants' concerns over the Commission's Order Book and RFQ System requirements for Required Transactions under § 37.9; this concern, in turn, has dissuaded SEFs from submitting additional MAT determinations.
Since the Commission's adoption of the MAT determination process, a small number of swaps that are subject to the clearing requirement have become subject to the trade execution requirement. In the fall of 2013, four SEFs and one DCM submitted a limited number of swaps to the Commission as “available to trade” via the Commission's § 40.6 self-certification process.
Beyond this limited initial set of self-certified MAT determinations, however,
To establish which swaps would be sufficiently liquid to be traded via an Order Book or RFQ System, the Commission relied upon the expertise and experience of SEFs and DCMs in the MAT determination process.
The Commission acknowledges that the Order Book and RFQ System requirements are too prescriptive and limiting to be applied over a broader segment of the swaps market. Specifically, these methods do not account for the swaps products that are highly customized and episodically liquid by nature. The Commission previously acknowledged that market participants take into account factors such as swap product complexity, trade size, and liquidity in deciding how to trade swaps, including the number of market participants to whom a request for quote will be sent.
The required methods of execution has also limited SEFs from developing more efficient, transparent, and cost-effective methods of trading, as well as impeded their ability to compete with one another using innovative and different methods of execution.
The Commission notes that this scenario could occur with respect to forward rate agreements (“FRAs”), many of which are economically similar to IRS that are currently subject to the trade execution requirement. In spite of this economic similarity, FRAs in several different types of currency denominations and tenor ranges that are currently subject to the clearing requirement, but have not been submitted to the Commission as “available to trade.”
Further, the Commission believes that the current approach to required methods of execution may have imposed barriers to entry for entities that seek to offer swaps trading. As noted above, limiting the execution methods that a SEF can provide limits their ability to offer new and innovative trading solutions. As a result, new entrant SEFs have been unable to differentiate themselves from incumbent SEFs on the basis of innovation and development, given that both incumbent platforms and newly-registered entities are otherwise limited to offering an Order Book and an RFQ System. Accordingly, SEFs have been forced to compete with one another on a more ancillary basis, rather than on fundamental operating aspects that provide value to market participants, in particular the available trading system and platform.
The Commission's current approach to required methods of execution has also compelled SEFs to make unintended adjustments and alterations to their execution methods, including auction platforms
To further promote the SEF statutory goals, the Commission proposes a SEF regulatory framework that would facilitate a more robust application of the trade execution requirement and allow more flexibility in the execution methods that may be offered and used for trading swaps that are subject to the requirement. The Commission believes that this approach would better establish SEFs as vibrant and liquid marketplaces for swaps trading that foster price discovery and liquidity formation. The Commission believes that its proposed approach is consistent with the statutory SEF provisions and would also further the statutory SEF goals, while helping to alleviate the challenges of the existing approach described above.
The Commission proposes to adopt a new interpretation of the trade execution requirement that would greatly expand the scope of swaps that are subject to the requirement. Considering the market characteristics and episodic liquidity profiles of these additional swaps, the Commission's proposed approach would provide needed flexibility to SEFs and market participants to support more trading through SEF trading systems or platforms. In conjunction with an expansion of the trade execution requirement, the Commission also proposes to eliminate the prescriptive execution methods for swaps subject to the requirement. Rather than impose execution method requirements that are limited to an Order Book or RFQ System, the Commission's proposed approach would allow SEFs to develop and offer—and therefore enable—market participants to choose execution methods that are appropriate to their trading. Providing market participants with greater choice in execution methods allows them to utilize trading systems or platforms that are not constrained by prescriptive regulatory requirements and suit their trading circumstances and the market conditions for those swaps at a given time. This flexibility is necessary to facilitate trading in the broad scope of swaps that would become subject to the trade execution requirement. This flexibility should also allow the swaps market and SEFs to continue to naturally evolve and innovate to more efficient, transparent, and cost effective means of trading, even for swaps currently subject to the trade execution requirement. The Commission believes that this flexibility, in concert with the concentration of trading activity in episodically liquid swaps on SEFs, should help foster price discovery and allow market participants to pursue more appropriate, counterparty and swap-specific levels of pre-trade price transparency through additional methods of execution.
The Commission has interpreted the trade execution requirement in CEA Section 2(h)(8)—in particular, the phrase “makes the swap available to trade”—in a manner that has limited the scope of swaps that must be traded on a SEF.
Given the current regulatory framework's limited ability in promoting swaps trading on SEFs, which limits the statutory SEF goals, the Commission is proposing to adopt a revised interpretation of CEA section 2(h)(8). The Commission believes that the phrase “makes the swap available to trade” should be interpreted to mean that once the clearing requirement applies to a swap, then the trade execution requirement applies to that swap upon any single SEF or DCM listing the swap for trading.
The Commission notes that Congress had the ability to delineate a comprehensive statutory process for determining when a swap should be subject to the trade execution requirement, but did not do so when amending the CEA via the Dodd-Frank Act.
As support for its view that the proposed interpretation of CEA section 2(h)(8) would promote the trading of swaps on SEFs, the Commission notes that more than 85 percent of IRS and index CDS trading volume is currently subject to the clearing requirement;
Accordingly, the Commission's proposed approach would have a profound impact on the amount of swaps trading that occurs on SEFs. As noted above, Commission staff found that a small and declining percentage of the reported IRS
Given the Commission's proposed approach to the trade execution requirement, as described above, the Commission proposes to eliminate (i) the MAT process for SEFs under § 37.10; (ii) the associated trade execution compliance schedule under § 37.12; (iii) the MAT process for DCMs under § 38.12; and (iv) the associated trade execution compliance schedule under § 38.11.
The Commission further proposes to codify under § 36.1(a) the statutory language of the trade execution requirement in CEA section 2(h)(8), which requires counterparties to execute a swap that is subject to the clearing requirement on a DCM, a SEF, or an exempt SEF unless no such entity “makes the swap available to trade” or the swap is subject to a clearing exception in CEA section 2(h)(7).
As discussed further below, the Commission is also proposing (i) exemptions of various transactions from the trade execution requirement under § 36.1 pursuant to its exemptive authority in CEA section 4(c); (ii) a compliance schedule for market participants with respect to the expanded application of the trade execution requirement to additional swaps; (iii) a public registry with information as to which swaps are subject to the trade execution requirement and the SEFs or DCMs that list them for trading; and (iv) a standardized form to assist the Commission in populating the public registry with relevant information regarding the trade execution requirement.
The Commission requests comment on all aspects of its proposed approach to the trade execution requirement, including § 36.1(a) as well as any alternative approaches to implementation of the trade execution requirement.
To better foster trading on SEFs—particularly with respect to the many episodically liquid swaps that will become subject to the trade execution requirement—the Commission proposes to eliminate the existing execution method requirements under § 37.9. These requirements include the (i) definition of and associated requirements for Required Transactions under § 37.9(a), including the RFQ System definition under § 37.9(a)(3);
The Commission's proposed elimination of § 37.9(a) also includes the elimination of subparagraph (a)(2)(ii), which currently specifies that with respect to offering an Order Book or RFQ System for Required Transactions, a SEF may utilize “any means of interstate commerce” for purposes of execution and communication, including, but not limited to, the mail, internet, email and telephone.
As noted above, implementing the proposed interpretation of the trade execution requirement would increase the number of swaps that are required to trade on a SEF. Many of these swaps, which are all currently subject to the clearing requirement would have terms and conditions,
The existing execution methods for Required Transactions under the current framework, however, has precluded the full use of such discretion and forces participants to trade certain swaps in accordance with an Order Book or an RFQ System. As noted above, the Commission believes that these limited execution methods would not be suitable for the broad swath of the swaps market that would become newly subject to the trade execution requirement. Instead, prescribing those execution methods for this expanded group of swaps would likely impose greater trading risks on market participants, including execution and liquidity risks that negate any benefits associated with the centralized exchange trading of such swaps.
The existing framework was designed to promote the SEF statutory goals, in particular to promote pre-trade price transparency, but based on its implementation experience, the Commission believes that a SEF regulatory framework that requires a greater number of swaps to be traded through flexible execution methods on a SEF will better promote both SEF statutory goals. The Commission believes that requiring more swaps to be traded on SEFs would help foster vibrant and liquid SEF markets as liquidity formation and price discovery is centralized on these markets. With more swaps trading activity occurring in a concentrated SEF environment, the Commission anticipates that a greater number of observable transactions—for example, IRS of varying tenors along a single price curve—would allow for a richer price curve that provides participants with more accurate pricing for economically similar swaps along other points of the curve.
For example, auction platforms and work-up sessions—both of which SEFs currently offer under the existing framework—help to maximize participation and trading on the SEF at specific points of time and serve as effective tools for price discovery for market participants in periods of episodic liquidity. By allowing SEFs the flexibility to develop and tailor these types of functionalities to facilitate trading across a wide range of market liquidity conditions, a SEF can effectively promote appropriate counterparty and swap-specific levels of pre-trade price transparency
By eliminating the existing approach to required methods of execution, the Commission's proposed regulatory framework is also expected to foster customer choice in a manner that would benefit the swaps markets. The Commission believes that its proposed approach appropriately allows market participants, each of whom is a sophisticated entity trading in a professional market, to determine the execution method that best suits the swap being traded and their trading needs and strategies.
The proposed approach would allow SEFs to offer varied and innovative execution methods that are best suited to the products they list, as well as the
The Commission requests comment on all aspects of its proposed approach to execution methods as well as any alternative approaches.
The Commission is not proposing any amendments to § 37.100, which codifies the language of Core Principle 1.
Core Principle 2 requires a SEF to establish and enforce rules that govern its facility, including trading procedures to be followed when entering and executing orders, among other requirements.
To support the proposed approach of allowing more flexible execution methods on SEFs, which is intended to foster more liquidity formation through trading activity on SEF trading systems and platforms, the Commission is proposing to amend certain rules and adopt new rules under Core Principle 2, as described below. These proposed rules would, among other things, help foster open and transparent markets as well as promote market efficiency and integrity. In particular, the Commission proposes to establish general rules that would apply to any execution method that a SEF offers on its facility. The Commission also proposes to limit the ability of market participants to conduct pre-execution communications and submit resulting pre-negotiated or pre-arranged trades to a SEF for execution; and eliminate exceptions to the pre-arranged trading prohibition under § 37.203(a), including the time delay requirement under § 37.9(b).
Additionally, the Commission proposes to amend certain existing rules and adopt new rules under Core Principle 2, as described below, that correspond to the Commission's application of the SEF registration requirement to swap broking entities, including interdealer brokers. Among other goals, these proposed rules would enhance professionalism requirements for certain SEF personnel—“SEF trading specialists”—that operate as part of a SEF's trading system or platform,
Section 37.201 implements the Core Principle 2 requirement that a SEF establish and enforce rules that govern its facility. Section 37.201(a) specifies that these requirements include trading procedures to be followed when entering and executing orders traded or posted on the SEF.
Proposed § 37.201(a) would require a SEF to establish rules that govern the operation of the SEF, including rules that specify (i) the protocols and procedures for trading and execution; (ii) the permissible uses of “discretion” in facilitating trading and execution; and (iii) the sources and methodology for generating any market pricing information.
Pursuant to a SEF regulatory framework that would allow SEFs to offer flexible execution methods, the Commission believes that such rules would benefit market participants by providing a baseline level of transparency in SEF trading. As the Commission previously noted, one of the central goals of the Dodd-Frank Act is to bring transparency to the opaque OTC swaps market.
Based on the definition of “rule” under § 40.1(a), which encompasses any SEF “trading protocol,” the proposed rule clarifies those features of a SEF's execution methods that constitute SEF “rules” and must be submitted to the Commission pursuant to part 40 and disclosed to SEF market participants.
Proposed § 37.201(a)(1) would require a SEF to establish rules governing the protocols and procedures for trading and execution, including entering, amending, cancelling, or executing orders for each execution method offered by the SEF. The Commission believes that requiring SEFs to provide this level of detail and transparency for each of their execution methods is particularly important given the Commission's proposal to permit SEFs to offer flexible execution methods for all of their listed swaps.
The Commission believes that proposed § 37.201(a)(1) clarifies a SEF's existing obligations and is consistent with current market practice, in particular the general level of disclosure and information that many SEFs already provide in their rulebooks. This proposed rule is also better aligned with other proposed Core Principle 2 regulations that relate to SEF trading protocols and procedures, such as proposed § 37.203(e), which would require SEFs to promulgate rules and procedures to resolve error trades, including trade amendments or cancellations, as discussed below.
To comply with this rule, for example, a SEF that offers an RFQ protocol could specify various operational aspects of that protocol in its rulebook. Those aspects could include, among other things, how a requestor could initiate an RFQ; whether the RFQ requestor's identity is disclosed or anonymous; whether an RFQ request could be made visible to the entire market; whether a responder could offer either indicative or firm bids or offers; the length of time that an RFQ response with a firm bid or firm offer would have to remain executable by the RFQ requestor; or whether RFQ responses are disclosed to the whole market or just the requestor. By specifically requiring a SEF to disclose information regarding how each offered execution method operates, a market participant would have the ability to (i) make an informed decision about whether to trade and execute on that SEF; (ii) determine the type of trading system or platform that best suits its needs; and (iii) conform its trading and execution practices to the SEF's protocols and procedures.
Proposed § 37.201(a)(2) would require a SEF, where applicable, to establish rules specifying the manner or circumstances in which the SEF may exercise “discretion” in facilitating trading and execution for each of its execution methods. Many SEFs, in particular those that resemble or are based upon operations of swaps broking entities, including interdealer brokers, feature execution methods that involve the use of discretion.
Given the established role of swaps broking entities, including interdealer brokers, in fostering market liquidity through identifying and arranging multiple trading interests—both liquid and illiquid—amidst changing market conditions, the Commission recognizes that the use of discretion is an important element in fostering an efficient market. Therefore, the Commission's proposed regulatory framework would further accommodate the use of discretion by SEFs. As described above, SEFs would be allowed to offer flexible execution methods, thereby allowing methods that involve the exercise of discretion by SEF trading specialists.
The Commission believes that the proposed broadening of both the SEF registration requirement and the trade execution requirement would increase the level of discretion that SEFs (and their trading specialists) exercise in connection with swaps trading. To address this situation, proposed § 37.201(a)(2) would require SEFs to disclose the manner or circumstances in which they may exercise discretion. The Commission believes that such a disclosure requirement is important to
Pursuant to proposed § 37.201(a)(2), the Commission intends to require each SEF to generally disclose the possible areas in which it may use discretion for each execution method, rather than establish exact, pre-determined trading protocols and procedures. In identifying those general areas, a SEF's rules should disclose sufficient information that a reasonable market participant would consider important in deciding whether to onboard onto the SEF and, once participating on the SEF, in understanding how discretion may affect trading. The proposed rule, however, does not necessarily require a SEF to disclose any proprietary or confidential information in its public rulebook.
Proposed § 37.201(a)(3) would require each SEF to adopt rules that disclose the general sources and methodology for generating any market pricing information that the SEF provides to market participants to facilitate trading and execution. The term “sources” would include any general inputs that the SEF may consider when forming a price, such as swaps pricing data,
The Commission recognizes that some SEFs provide participants either an indicative or executable “market price” to encourage price discovery and liquidity or otherwise inform trading interest. The use of market prices is particularly prevalent in connection with certain execution methods, such as auctions and similar matching sessions.
Where pricing generated by a SEF in lieu of pricing based on market participant bids and offers help to foster liquidity and price discovery, the Commission believes that requiring SEFs to inform market participants as to their price formation sources and methodology would foster open and transparent markets and promote market integrity and efficiency. Requiring a SEF to disclose the sources of information used to generate a price and the methodology for calculating that price, for example, would allow market participants to be aware of prevailing liquidity and market conditions, thereby helping them to form views as to whether that price is an appropriate indicator of a particular market. Accordingly, market participants would be able to make informed trading decisions, such as whether to participate in an available trading session, and if so, the level of participation,
Similar to proposed § 37.201(a)(2), the Commission emphasizes that proposed § 37.201(a)(3) would establish a general
The Commission requests comment on all aspects of proposed § 37.201(a). In particular, the Commission requests comment on the following question:
Part 37 has permitted market participants to communicate with one another away from a SEF in connection with the eventual execution of swap transactions via the SEF's trading systems or platforms.
The Commission notes that “pre-arranged trading” is prohibited as an abusive trading practice under § 37.203(a). This prohibition generally applies to market participants who communicate with one another to pre-negotiate the terms of a trade away from a SEF's trading system or platform, but then execute the trade on such system or platform in a manner that appears competitive and subject to market risk. The Commission has intended for this prohibition to maintain the integrity of price competition and market risk that is incident to trading in the market.
For Required Transactions executed via an Order Book, a SEF may permit market participants to communicate with one another and pre-arrange or pre-negotiate a swap transaction away from its trading system or platform, subject to a time delay requirement and facility rules on pre-execution communications. Section 37.9(b)(1) currently permits a broker or dealer to engage in pre-execution communications to pre-arrange or pre-negotiate a swap, as long as one side of the resulting transaction is entered into the Order Book for a 15-second delay before the second side is entered for execution against the first side (the “time delay requirement”). The Commission defined “pre-execution communications” as communications between market participants to discern interest in the execution of a transaction prior to the exposure of the market participants' orders (
The Commission implemented § 37.9(b) to ensure a minimum level of pre-trade price transparency for orders based on pre-execution communications that occur away from the SEF, and to incentivize price competition between market participants for orders entered into an Order Book.
In addition to the time delay requirement, § 37.203(a) also specifies that a SEF may choose to permit pre-arranged trading in other instances. First, a SEF may permit a swap that it lists to be executed as a block trade away from a SEF pursuant to part 43. This exception allows such large-sized transactions to be privately negotiated to avoid potentially significant and adverse price impacts that would occur if traded on trading systems or platforms with pre-trade price transparency.
In the preamble to the SEF Core Principles Final Rule, the Commission did not discuss the issue of pre-execution communications regarding swaps that are not subject to the trade execution requirement,
The Commission proposes several amendments under the proposed framework that would broadly apply to pre-execution communications that occur away from a SEF. For swaps subject to the trade execution requirement, proposed § 37.201(b) would require a SEF to prohibit its participants from engaging in pre-execution communications away from its facility, including negotiating or arranging the terms and conditions of a swap prior to its execution on the SEF,
In eliminating the prescriptive execution methods and allowing more flexible execution for swaps subject to the trade execution requirement, the Commission believes that pre-execution communications, including the negotiation or arrangement of those swaps, would be able to occur entirely within a SEF's trading system or platform. Such negotiation or arrangement, regardless of the method through which they may occur,
Accordingly, the Commission believes that these proposed changes are an important element of the proposed SEF regulatory framework and are intended
The Commission also notes that its proposed approach to pre-execution communications, as applied to SEFs in the dealer-to-dealer market, is consistent with the application of the SEF registration requirement to swaps broking entities,
The Commission proposes an exception to the proposed prohibition on pre-execution communications under § 37.201(b) for swaps that are not subject to the trade execution requirement. The Commission's proposed exception recognizes that market participants do not have to execute such swaps on SEFs. The Commission also acknowledges that two counterparties may initially discuss or negotiate a potential swap transaction on a bilateral basis away from a SEF with the intent to execute the transaction away from the SEF, but subsequently determine to submit the resulting arranged transaction to be executed on a SEF. The Commission believes that applying the proposed § 37.201(b) prohibition to swaps not subject to the trade execution requirement would not be practical, given that counterparties do not have to execute these swaps on a SEF. The Commission emphasizes, however, that this proposed exception does not affect the SEF registration requirement under proposed § 37.3(a), which would specify that a person operating a facility that meets the statutory SEF definition must register as a SEF without regard to whether the swaps that it lists for trading are subject to the trade execution requirement.
The Commission also proposes an exception under § 37.201(b)(1) to the proposed prohibition on pre-execution communications for swaps subject to the trade execution requirement that are components of “package transactions” that also include components that are not subject to the trade execution requirement.
The Commission recognizes that some package transactions contain both a swap that is subject to the trade execution requirement and other swap or non-swap components that are not subject to the requirement. Components not subject to the requirement include, for example, swaps not subject to the clearing requirement,
The Commission believes that imposing a prohibition on swaps subject to the trade execution requirement that are part of a package transaction that includes components not subject to the requirement would inhibit the ability of counterparties to negotiate or arrange the latter components away from the SEF.
The Commission requests comment on all aspects of proposed § 37.201(b). In particular, the Commission seeks insights regarding market participants' use of pre-execution communications and requests comment on the following questions:
The Commission notes that a number of registered SEFs—in particular, those that operate in the dealer-to-dealer market—offer voice-based or voice-assisted execution platforms that utilize natural persons to facilitate trading in varying degrees. These persons, commonly referred to as “trading specialists” or “execution specialists,” perform core functions that facilitate swaps trading and execution in a multiple-to-multiple participant environment, including disseminating trading interests to the market,
Many individuals currently carry out the same functions away from a SEF as part of a swaps broking entity, such as an interdealer broker, prior to execution of the transaction on the SEF.
The Commission recognizes, however, that the current regulatory requirements for swaps broking entities do not necessarily fully address the unique functions of trading specialists on a SEF, which are broader in scope than the traditional IB functions of solicitation or acceptance of orders. SEF trading specialists serve an intermediary-type role for each market participant that accesses their SEF by facilitating fair, orderly, and efficient trading and overall market integrity. From a regulatory perspective, the Commission believes that SEF trading specialists—whether operating as part of a fully voice-based system or as a voice-assisted system with electronic-based features—are an integral part of their respective SEF's trading system or platform.
A voice-based or voice-assisted SEF trading system or platform is unique among SEF execution methods. Unlike a trading system or platform that executes orders and facilitates trading through generally automated means, trading specialists that comprise part of the voice-based or voice-assisted systems usually exercise a level of discretion and judgment in facilitating interaction between bids and offers from multiple market participants. That discretion and judgment is informed by their knowledge and understanding of market conditions, which are based upon information obtained from observing historical activity and gauging potential or actual trading interest from communications with participants.
By allowing SEFs to offer flexible methods of execution and broadening the trade execution requirement to swaps with more episodic liquidity, the Commission believes that the proposed rulemaking would lead to greater volumes of trading on voice-based trading systems or platforms that utilize discretion and judgment. The use of these methods should increase and enhance the utility of SEFs in a manner consistent with the SEF statutory intent and goals, but the Commission also believes that the expected increased role of discretion in SEF trading operations should be accompanied with a regulatory approach that aims to enhance professionalism among trading specialists and enhance market integrity. The Commission believes in particular that such a regulatory approach should address in particular the integral role that trading specialists play in exercising that discretion in a SEF's multiple-to-multiple trading environment.
Therefore, the Commission proposes to adopt a definition under § 37.201(c) that would categorize certain persons employed by a SEF as a “SEF trading specialist” and require a SEF to ensure that any such person (i) is not subject to a statutory disqualification under CEA sections 8a(2) or 8a(3); (ii) has met certain proficiency requirements; and (iii) undergoes ethics training on a periodic basis. The proposed regulations would further require a SEF to establish and enforce a code of conduct for its SEF trading specialists, as well as diligently supervise their activities. These proposed rules are intended to enhance professionalism in the swaps market and promote market integrity.
The Commission proposes to define a “SEF trading specialist” under § 37.201(c)(1) as any natural person who, acting as an employee (or in a similar capacity) of a SEF, facilitates the trading or execution of swap transactions (other than in a ministerial or clerical capacity), or who is responsible for direct supervision of such persons. This proposed definition would include both persons directly employed by the SEF and persons who are not directly employed, such as independent contractors and persons who are serving as SEF personnel pursuant to an arrangement with an affiliated broker employer,
In light of the activities of SEF trading specialists and the regulatory considerations discussed above, the Commission proposes § 37.201(c)(2)(i) to prohibit a SEF from permitting any person who is subject to a statutory disqualification under CEA sections 8a(2) or 8a(3) to serve as a SEF trading specialist if the SEF knows, or in the exercise of reasonable care should know, of the person's statutory disqualification.
The Commission, however, also proposes two exceptions to the proposed prohibition. Under proposed § 37.201(c)(2)(ii)(A), the prohibition would not apply where a person is listed as a principal
The Commission proposes to require a SEF to maintain proficiency standards for SEF trading specialists. Proposed § 37.201(c)(3)(i) would require a SEF to establish and enforce standards and procedures to ensure that its SEF trading specialists have the proficiency and knowledge necessary to fulfill their responsibilities to the SEF and to comply with the Act, applicable Commission regulations, and the SEF's rules. Further, the Commission proposes under proposed § 37.201(c)(3)(ii) to mandate that a SEF require any person employed as a SEF trading specialist to have taken and passed a swaps proficiency examination as administered by an RFA.
Given the level of discretion and judgement that SEF trading specialists exercise in facilitating swaps trading and execution, as well as the size and complexity of the transactions often executed on a SEF, the Commission believes that it is essential that a SEF ensure that its SEF trading specialists possess appropriate skills and knowledge. Accordingly, the Commission believes that demonstrating such skills and knowledge would be best achieved through a swaps proficiency examination regime. The Commission notes that persons who intermediate transactions in the futures markets and securities markets are already subject to proficiency requirements that include examinations.
The Commission proposes § 37.201(c)(4) to require a SEF to establish and enforce policies and procedures to ensure that its SEF trading specialists receive ethics training on a periodic basis. Given each trading specialist's obligation to promote a fair and orderly market in facilitating trading and execution while also using discretion in handling orders on behalf of individual market participants, a SEF must maintain a training program to ensure that its trading specialists are aware of and understand the relevant professional and ethical standards established by the SEF.
The Commission also proposes new guidance to Core Principle 2 in Appendix B that would provide the general objectives for an ethics training program and examples of topics that should be addressed.
The Commission proposes to require a SEF to establish and enforce a code of conduct for its SEF trading specialists. Like the proposed ethics training requirement under § 37.201(c)(4), the proposed code of conduct requirement aims to ensure that SEFs foster and maintain a high level of professionalism, integrity, and ethical conduct among their trading specialists when dealing with market participants and facilitating trading and execution. A SEF's code of conduct may provide that, among other things, a SEF trading specialist should (i) act in an honest and ethical manner and observe high standards of professionalism; (ii) handle orders with fairness and transparency; and (iii) not engage in fraudulent, manipulative, or disruptive conduct. The Commission includes these items for SEF consideration, but a SEF may include different or additional standards as well. These proposed standards of conduct are intended to be general and principles-based, given the many unique aspects of a SEF trading specialist's role in facilitating trading and execution as part of the SEF's particular trading system or platform.
To help promote compliance with a SEF's professionalism requirements, including ethics requirements and standards of conduct, the Commission also proposes § 37.201(c)(6) to require a SEF to diligently supervise the activities of its trading specialists in facilitating trading and execution on the SEF. While a SEF is generally responsible for the actions of its agents pursuant to CEA section 2(a)(1)(B) and § 1.2,
The Commission is proposing § 37.201(c)(7) to refer SEFs to the new guidance to Core Principle 2 in Appendix B as discussed above.
The Commission requests comment on all aspects of proposed § 37.201(c). In particular, the Commission requests comment on the following questions:
In addition to requiring a SEF to establish and enforce rules that govern its facility, Core Principle 2 requires a SEF to adopt trading, trade processing, and participation rules that provide participants with impartial access to the market and deter abuses; and establish and enforce compliance with any limitation on access.
The Commission is proposing several new rules and rule amendments under Core Principle 2, including clarifications of existing rules where appropriate, to implement its proposed swaps regulatory framework. These proposed amendments would streamline the SEF rules and allow SEFs to account for technological developments, existing market practices, and costs in their trading and market operations. Further, the amendments would codify no-action relief that has been provided under several existing Commission staff no-action letters. Among these changes, the Commission is proposing a modification to the impartial access requirements under § 37.202 and several corresponding amendments, which would provide a SEF with the ability to devise its participation criteria based on its own trading operations and market focus. Further, the Commission is proposing several amendments to §§ 37.203-206 that would allow a SEF to better tailor its own compliance and regulatory oversight rules to its trading operations and markets, while still maintaining a robust compliance program.
The Commission implemented the statutory impartial access requirement by adopting § 37.202. Existing § 37.202(a)(1) requires a SEF to provide any ECP and any independent software vendor (“ISV”) with impartial access to its market(s) and market services, including indicative quote screens or any similar pricing data displays, provided that the facility has, among other things, criteria governing such access that are “impartial, transparent, and applied in a fair and non-discriminatory manner.”
Core Principle 2, however, also allows a SEF to establish and enforce compliance with any rule of the SEF, including any limitation on access to the SEF.
Existing § 37.202(a)(3) requires a SEF to have a comparable fee structure for ECPs and ISVs receiving comparable access to, or services from, the SEF.
Finally, existing § 37.202(a)(2) requires SEFs to have procedures for ECPs to provide written or electronic confirmation of their ECP status with the SEF prior to obtaining access.
The Commission has applied the impartial access requirements to various areas of a SEF's operations that concern participant access to the market. These features include (i) eligibility or onboarding criteria; (ii) a participant's ability to access the SEF's functionalities,
First, the existing approach has created uncertainty for SEFs seeking to establish and apply access criteria in a consistent manner. The Commission recognizes that SEF Core Principle 2 requires a SEF to provide impartial access, but also allows a SEF to establish limitations on access. Accordingly, the Commission has allowed SEFs to establish different access criteria for different markets, but has also required each “similarly situated” group of ECPs and ISVs to be treated in the same manner.
Second, the manner in which the Commission has implemented the existing approach has often favored the promotion of an “all-to-all” trading environment and has, thus, limited the ability of SEFs to adapt their operations to the characteristics and dynamics of the swaps market.
Based on its experience with implementing part 37, the Commission proposes to modify its approach to applying the impartial access requirement. In doing so, the Commission proposes to streamline and consolidate the existing language and relevant preamble discussion from the SEF Core Principles Final Rule, including the Commission's view of “impartial” and the concept of “similarly situated,” to establish a revised impartial access requirement. Under proposed § 37.202(a)(1), a SEF would be required to establish rules that set forth impartial access criteria for accessing its markets, market services, and execution methods, including any indicative quote screens or any similar pricing data displays. Such impartial access criteria must be transparent, fair and non-discriminatory and applied to all or similarly situated market participants.
In proposing this approach, the Commission believes that criteria that are “fair and non-discriminatory” would inherently be “fair, unbiased, and unprejudiced,” which the Commission previously defined as “impartial.” The Commission also believes that the proposed rule clarifies that this criteria must be applied to market participants in a fair and non-discriminatory manner, as currently required under the existing requirements of § 37.202(a)(1). Finally, proposed § 37.202(a)(1) would continue to allow each SEF to determine which market participants are “similarly situated” in its market and configure appropriate access criteria, provided that such criteria are transparent, fair, and non-discriminatory to participants. Applying access criteria in a “fair and non-discriminatory” manner means that a SEF should permit or deny access to a market participant on a non-arbitrary basis, based on objective, pre-established requirements or limitations. The Commission emphasizes, however, that this streamlined approach does not mean that a SEF must create an “all-to-all” trading environment.
The Commission acknowledges that it has often applied the impartial access requirement to promote an “all-to-all” trading environment, which is neither required under Core Principle 2 nor is consistent with swaps market structure. Under the proposed approach, the Commission would not seek to apply the requirement to mandate that all participants have access to all SEFs, which may have circumscribed a SEF's ability under Core Principle 2 to set access limitations. Rather, to allow SEFs to serve different types of market participants or have different access criteria for different execution methods, the Commission would allow SEFs to apply access limitations, as long as they
This approach would also align with swaps market characteristics—in particular, the episodic nature of swaps liquidity—that have led to the overall swaps market being made up of both dealer-to-client and dealer-to-dealer markets, as described below. The Commission believes that the structure of the swaps market is a natural outgrowth of certain fundamental features of swaps trading. The Commission further believes that all-to-all markets are inimical to these fundamental swaps trading features; therefore, imposing all-to-all, market-derived requirements on swaps markets ultimately detracts from achieving the statutory SEF goals of promoting swaps trading on SEFs and pre-trade price transparency in the swaps market. Accordingly, the Commission believes that each SEF should be able to use access criteria to develop its business in a manner that is both consistent with the characteristics of swaps markets and accommodating of the types of participants that comprise the SEF's intended market.
The Commission still believes that any access criteria intended to prevent or reduce competition among similarly situated market participants would be unfair and discriminatory and, therefore, inconsistent with proposed § 37.202(a)(1). If a market participant is willing or able to meet the objective, pre-established, and transparent criteria for eligibility to onboard to a SEF or gain additional access to a SEF's trading mechanisms, then the SEF should not preclude that market participant from onboarding to the SEF or using its functionalities. Accordingly, such a market participant should not be subject to access criteria that are unfair and discriminatory and are intended to prevent or dis-incentivize that market participant's participation on the SEF.
The Commission emphasizes that under proposed § 37.202(a)(1), any access criteria—whether it concerns eligibility or onboarding criteria, prerequisites for using certain trading functionalities, or fee schedules—constitutes a “rule,” as that term is defined under § 40.1(i), that would be subject to rule approval or self-certification procedures under part 40.
The Commission also proposes to eliminate the reference to “ISVs,” which the Commission notes is not required under Core Principle 2. Given that a SEF should be able to set its access criteria to develop its business based on its desired market and participant needs, the Commission also believes that a SEF should be able to determine an ISV's level of access to the SEF. The Commission previously applied the impartial access requirement to ISVs on the basis that such types of vendors would provide various benefits to the swaps market and market participants, such as enhanced transparency and trading efficiency through the consolidation of trading data from multiple venues, analytics, and best displayed prices.
Based on the areas in which the Commission has applied the existing impartial access requirement to various aspects of a SEF's operation during the part 37 implementation, the Commission discusses below how the proposed impartial access approach would apply to these areas to provide further clarity, including (i) eligibility and onboarding; (ii) execution methods; and (iii) SEF use of discretion.
The Commission has applied the impartial access requirement to assess a SEF's eligibility and onboarding criteria. In the preamble to the SEF Core Principles Final Rule, the Commission prospectively identified whether or not certain hypothetical arrangements would comply with the rulemaking's approach to impartial access. Certain criteria were deemed non-compliant, such as platforms whose participants were limited to wholesale liquidity providers;
The Commission has realized from experience that certain criteria developed by SEFs reflect fundamental swap market segments. In particular, the swaps market consists of both a dealer-to-client market segment and a dealer-to-dealer market segment that are related, but also differ in important respects. In the dealer-to-client segment, corporate end-users and other buy-side participants access and utilize the swaps market to manage risk positions
The dealer-to-dealer market may provide benefits to the swaps markets, in particular to non-dealer clients, by allowing dealers who provide liquidity to offload risk from clients. Without this market, liquidity in the dealer-to-client market may suffer because the inherent risks of holding swaps inventory could arguably dis-incentivize participation by dealers in the dealer-to-client market or otherwise require dealers to charge their customers higher prices for taking on this risk. Absent the supply of liquidity providers, non-dealers who are liquidity takers would have difficulty executing swaps at competitive pricing. SEFs that serve the wholesale, dealer-to-dealer market have stated that using eligibility or participation criteria to maintain a dealer-to-dealer market is beneficial, given that it allows participants who share similar profiles and trading interests to interact with each another, thereby helping to promote liquid markets with tight pricing.
For the reasons stated above, the Commission believes that SEF eligibility and onboarding criteria that would serve to maintain this market structure would be appropriate and consistent with existing market dynamics and may provide the benefits discussed above. Accordingly, a SEF could premise these criteria in different ways, such as limiting access upon the type of the market participant or the swap product itself. For example, a SEF would be able to calibrate access to serve market participants within a particular market segment, such as dealers trading in a wholesale swaps market, who may be categorized as “similarly situated.”
In addition to assessing SEF onboarding and eligibility, the Commission has also applied the current impartial access standard to evaluate various SEF-established prerequisites for trading on certain platforms or interacting with certain participants. Some of those prerequisites reflect the nature of the swap involved,
SEFs have also argued that requiring market participants to meet trading prerequisites or participation criteria to access certain platforms or trade certain products can be beneficial to promoting effective trading markets on SEFs. In implementing part 37, the Commission has acknowledged that such criteria may be beneficial toward maintaining and promoting orderly trading for uncleared swaps on SEFs—for example, where participants must have certain trading enablements in place prior to trading uncleared swaps with other participants on the platform.
The Commission's current approach to impartial access, however, has led to confusion as to whether these types of criteria are inappropriate because they do not ensure equal participation by all market participants; or as to whether they are appropriate because they reflect a SEF's ability to impose limitations on access and are consistent with the view that SEFs should have the discretion to determine the most suitable way to promote trading on their platforms. Specifically, the Commission recognizes that requiring impartial access for “similarly situated” groups of market participants has currently been interpreted to require that a SEF allow all participants in that group to be able to interact with one another in the same manner and degree.
The Commission clarifies that a SEF must have impartial access criteria,
The Commission has also previously determined whether a SEF complies with the impartial access requirement based on how the SEF's trading systems or platforms handle participant orders. For example, a SEF's voice-based or voice-assisted execution methods involve the exercise of “discretion” by a SEF trading specialist in managing the interaction of multiple bids and offers from multiple participants. As described above, SEF trading specialists solicit orders on behalf of the SEF and seek to arrange transactions by matching those orders with reciprocal trading interests.
The Commission also recognizes that its current approach to impartial access may be in tension with its proposal to allow more flexible execution methods on SEFs, particularly those that involve discretion and are prevalent in the dealer-to-dealer market. While some SEF execution methods facilitate trading and execution on a non-discretionary basis,
The Commission also believes that the trading discretion exercised by SEF trading specialists may affect the manner in which market participants are treated on a facility, but would not necessarily be inconsistent with the Commission's proposed approach to impartial access. The Commission believes that to the extent that the exercise of discretion furthers a SEF's ability to facilitate trading and execution on its system or platform—including identifying trading interest in a discrete manner or managing bids and offers to maintain accurate market pricing—it should be viewed as being consistent with impartial access. The Commission also notes that proposed § 37.201(a)(2) would support the use of discretion in a manner consistent with impartial access; as discussed above, the proposed rule would provide transparency into the use of discretion by requiring each SEF to disclose the general manner and circumstances behind its use within each execution method.
Based on its experience in reviewing fee structures for SEFs, the Commission proposes to eliminate the requirement under § 37.202(a)(3) that a SEF must establish “comparable fee structures” for ECPs and ISVs receiving “comparable access” to the SEF or services from the SEF. In practice, this requirement has not fully accounted for the market practices described above. Instead, the Commission proposes § 37.202(a)(2) to require a SEF to establish and apply fee structures and fee practices in a fair and non-discriminatory manner to its market participants.
Currently, SEFs have established different fee levels for different categories of market participants or different types of trading activity, whether imposed directly through a trading fee schedule or indirectly through the use of trading incentive or discount programs.
Based on this practical difficulty, the Commission is proposing to allow SEFs and market participants the flexibility to determine fees based on legitimate business negotiations. In this proposal, the Commission does not intend to limit the scope of business-related factors that a SEF may continue to consider in establishing participation fee arrangements. Proposed § 37.202(a)(2) is intended to provide market participants and SEFs with the flexibility to negotiate fee arrangements on an individualized basis based on legitimate business justifications. The Commission emphasizes, however, that consistent with the impartial access requirement under proposed § 37.202(a)(1), a SEF should not use fees to discriminate against certain market participants.
The Commission proposes to require a SEF to maintain documentation of any decision to deny, suspend, permanently bar, or otherwise limit a market participant's access to the SEF.
The Commission also proposes non-substantive amendments to the existing provision, including amending the existing reference to “eligible contract participant” to “market participant” to provide greater clarity.
The Commission proposes under § 37.202(c) to maintain the existing requirement that a SEF must require its market participants to provide a written confirmation (electronic or otherwise) of their ECP status prior to obtaining access to the SEF. The Commission also proposes to make minor non-substantive revisions to the current language.
The Commission proposes under § 37.202(d) to maintain the existing requirement that a SEF must require that a market participant consent to its jurisdiction prior to granting any market participant access to its facilities. The Commission also proposes to make minor non-substantive revisions to the current language.
The Commission requests comment on all aspects of proposed § 37.202. In particular, the Commission requests comment on the following questions:
Section 37.203 implements certain aspects of Core Principle 2, which requires a SEF to (i) establish and enforce trading, trade processing, and participation rules to deter abuses; and (ii) have the capacity to detect, investigate, and enforce those rules, including the ability to capture information to identify rule violations.
During the part 37 implementation process, the Commission has acquired greater experience with the swaps markets, in particular related to SEF compliance and regulatory oversight requirements. The Commission acknowledges that the existing swaps regulatory framework was developed based in part on the futures regulatory framework. As a result, the current part 37 regulations do not sufficiently account for differences between futures and swaps markets, in particular the differences in the complexity and size of transactions, the number and sophistication of market participants,
Accordingly, the Commission believes that instead of prescribing a limited approach to compliance and regulatory oversight requirements, a SEF should be enabled to tailor its compliance and oversight program to fit its respective operations and market.
Section 37.203(a) requires a SEF to generally prohibit abusive trading practices on its markets by members and market participants, but also enumerates specific practices that a SEF must specifically prohibit, including front-running, wash trading, pre-arranged trading (except for block trades or other types of transactions certified or approved by the Commission under part 40), fraudulent trading, money passes, and any other trading practice that the SEF deems to be abusive.
The Commission proposes a non-substantive amendment to § 37.203(a) to eliminate the term “members.” The Commission notes that its proposed definition of “market participant” under § 37.2(b) would capture the universe of persons and entities that could engage in abusive trading practices, including a SEF's members.
As discussed above in conjunction with the proposed prohibition on pre-execution communications under § 37.201(b), the Commission is also proposing to eliminate exceptions to the pre-arranged trading prohibition under § 37.203(a).
The Commission requests comment on all aspects of proposed § 37.203(a). In particular, the Commission requests comment on the following questions:
Section 37.203(b) currently requires a SEF to have arrangements and resources for effective enforcement of its rules, which includes the authority to collect information and examine books and records of SEF members and persons under investigation. A SEF must also facilitate direct supervision of the market and analysis of data collected to determine whether a rule violation has occurred.
The Commission proposes several amendments to the existing requirements. First, the Commission proposes to eliminate the requirement that a SEF's arrangements and resources must facilitate the direct supervision of the market and the analysis of data collected to determine whether a rule violation has occurred. The Commission views the language of this requirement as superfluous because other regulations already set forth these requirements in greater specificity, such as § 37.203(d), which requires a SEF to maintain an automated trade surveillance system that is capable of detecting and reconstructing potential trade practice violations.
Second, the Commission proposes to eliminate the requirements that SEFs have the authority to collect documents on a routine and non-routine basis and examine books and records kept by members and persons under investigation. Instead, the Commission proposes to require that each SEF have the authority to collect information required to be kept by persons subject to the SEF's recordkeeping rules.
The Commission requests comment on all aspects of proposed § 37.203(b).
Section 37.203(c) currently requires a SEF to establish and maintain sufficient compliance staff and resources to conduct a number of enumerated tasks, such as audit trail reviews, trade practice surveillance, market surveillance, and real-time monitoring. The rule further requires that such staff must be sufficient to address unusual market or trading events and to conduct investigations in a timely manner.
The Commission proposes to eliminate the enumerated tasks and replace them with the phrase “self-regulatory obligations under the Act and Commission regulations.” The proposed amendment is intended to apply the requirement to all of the SEF's applicable self-regulatory functions and clarify that the existing requirement is not limited to the enumerated tasks. Similarly, the Commission also proposes to eliminate the language that requires staffing to be sufficient to address unusual market or trading events and to complete investigations in a timely manner, given that these enumerated requirements are an inherent part of a SEF's existing self-regulation obligations. As the Commission noted in the SEF Core Principles Final Rule, a SEF may also take into account the staff and resources of any third-party entities it uses under § 37.204 to provide regulatory services when evaluating the sufficiency of its compliance staff.
The Commission requests comment on all aspects of proposed § 37.203(c).
Section 37.203(d) requires a SEF to maintain an automated trade surveillance system capable of detecting potential trade practice violations.
The Commission proposes to eliminate the specific automated trade surveillance system capabilities enumerated under § 37.203(d), except for the ability of a SEF to reconstruct the sequence of market activity. Specifically, the Commission proposes to retain this concept by amending the remaining rule language to require that a SEF's automated trade surveillance system be capable of detecting potential trade practice violations and reconstructing the sequence of market activity and trading. The Commission believes that an automated trade surveillance system must be able to reconstruct both the sequence of market activity and trading in order to detect such violations.
The Commission recognizes based on its experience with implementing the existing requirement that a SEF's automated trade surveillance system cannot perform all of the enumerated capabilities under the existing rule, such as computing trade gains, losses, and swap equivalent positions. The Commission also acknowledges that it has not clarified the enumerated capabilities, which has led to some confusion.
The Commission also proposes to amend § 37.203(d) to clarify that all trades executed by voice or by entry into a SEF's electronic trading system or platform, as well as orders that are “entered into an electronic trading system or platform,” must be loaded and processed into the automated trade surveillance system. This proposed amendment reflects the Commission's recognition that no cost-effective and efficient means currently exists that would provide a SEF with the capability to load and process orders that are not initially entered into an electronic trading system or platform,
Finally, the Commission proposes to clarify that the term “trading day”—on which such data must be loaded into the automated trade surveillance system—means the day “on which such trade was executed or such order was entered.”
The Commission requests comment on all aspects of proposed § 37.203(d).
Section 37.203(e) currently requires a SEF to conduct real-time market monitoring of all trading activity on its system(s) or platform(s) to identify disorderly trading and any market or system anomalies.
In 2013, the Division of Clearing and Risk (“DCR”) and DMO (together, the “Divisions”) issued guidance (the “2013 Staff STP Guidance”) to address “straight-through processing” requirements that, among other things, expressed the view that SEFs should have rules stating that trades that are rejected from clearing are “void
SEFs and market participants raised concerns that considering such transactions to be void
For those SEFs that apply the concept of void
Based on this no-action relief, SEFs have allowed market participants to pre-arrange corrective trades for execution and submission to a DCO for clearing through means not prescribed under § 37.9 for Required Transactions. Such trades include a new trade with the corrected terms, where an error trade has been rejected from clearing. Such trades also include a new trade to offset an error trade accepted for clearing and a second subsequent trade with the corrected terms, as originally intended between the counterparties. This relief has enabled counterparties to address error trades, but has required SEFs to adopt mechanisms to identify these corrective trades and additional related rules and procedures for their respective market participants.
In light of the challenges described above, the Commission proposes clarifications and amendments to address the role of void
SEFs have adopted rules and protocols to address other general aspects of correcting an error trade. These factors, among the many specified across all SEFs, include a definition of “error trade”; the circumstances to which the SEF's error trade rules would apply; the process for a market participant to report an alleged error trade; the process through which a SEF may review and determine that an error trade has occurred; notification procedures; and the possible courses of action that a SEF may take (or allow its market participants to take) to correct the error trade. The Commission believes that the adoption of such error trade policies by SEFs reflects their understanding that such policies are a beneficial practice that promotes a fair and orderly trading market for their market participants.
Notwithstanding the existence of error trade rules and protocols across different SEFs, market participants have stated that those rules and protocols, and the manner in which they are applied, have been inconsistent in some respects. Participants have cited a number of such examples, including inconsistent approaches to notifying SEFs of alleged error trades; the varying factors that SEFs consider in evaluating alleged error trades; and the level of notification provided to other market participants regarding alleged errors. Therefore, some market participants—particularly those that are participants of multiple SEFs—have recommended that the Commission adopt some general error trade policy requirements to promote a more consistent approach. Based on the feedback received and its own observations during the part 37 implementation, the Commission proposes to refine its approach to SEF error trade policies in a manner that would benefit market participants.
The Commission proposes to eliminate the real-time market monitoring requirement, which is duplicative of Core Principle 4, and adopt a refined approach to SEF error trade policies under proposed § 37.203(e) that would allow a SEF to implement its own protocols and processes to correct error trades with respect to swaps (i) rejected by a DCO due to an operational or clerical error or (ii) accepted for clearing by a DCO that contains an operational or clerical error.
Consistent with proposed § 37.702(b)(1),
In addition to allowing a SEF to configure an approach to correcting non-credit related error trade swaps submitted to a DCO for clearing, however, the Commission emphasizes that proposed § 37.203(e) would generally require a SEF to establish baseline procedural requirements for an error trade policy for all swaps executed on its facility. The proposed approach would permit a SEF to develop and adopt a more efficient approach based on the nature of the transaction and error, as well as the SEF's own operational and technological capabilities.
The proposed approach, in conjunction with the proposed adoption of more flexible methods of execution, would also render the current no-action relief unnecessary for those SEFs that choose to deem error trades as void
In conjunction with the proposed flexibility to correcting error trades, § 37.203 would also set forth general requirements that are intended to create a baseline consistency among SEF error trade policies. Proposed § 37.203(e)(1) defines an “error trade” as any swap transaction executed on a SEF that contains an error in any term, including price, size, or direction.
Further, proposed § 37.203(e)(3) would establish a minimum set of notification requirements for a SEF. A SEF would be required to notify all of its market participants, as soon as practicable, of (i) any swap transaction that is under review pursuant to the SEF's error trade rules and procedures; (ii) a determination that the trade under review is or is not an error trade; and (iii) the resolution of any error trade, including any trade term adjustment or cancellation. The Commission proposes an “as soon as practicable” standard based on competing considerations, such as the need to maintain orderly trading versus the need for timely transparency. Under this proposed approach, a SEF may determine that making error trade information available at a particular point in time is not practicable, given the countervailing concerns of potential market disruptions caused by the announcement of a potentially erroneous trade that has been disseminated to the SEF's participants.
Proposed § 37.203(e)(4) would allow a SEF to establish non-reviewable ranges.
The Commission recognizes that identifying and resolving error trades in a timely manner is important to promote market integrity and efficiency and ensure that trade data, which market participants rely upon to inform their swaps trading decisions, accurately reflects prevailing market pricing at any given time. The Commission believes that proposed § 37.203(e) would accomplish these goals for market participants and the market as a whole.
The Commission requests comments on all aspects of proposed § 37.203(e). The Commission may consider alternatives to its proposed error trade policy requirements and requests comment on the following questions:
Existing § 37.203(f) currently sets forth requirements for SEFs with respect to conducting investigations of their market participants for potential rule violations.
The Commission proposes to amend existing § 37.203(f) to simplify and streamline the procedures for SEFs to conduct investigations and prepare investigation reports. First, the Commission proposes to amend § 37.203(f)(1) to state that each SEF must establish and maintain procedures requiring compliance staff to conduct investigations,
Second, the Commission proposes to amend § 37.203(f)(2) to eliminate the twelve-month requirement for completing investigations and instead provide SEFs with the ability to complete investigations in a timely manner taking into account the facts and circumstances of the investigation. Based on its experience, the Commission recognizes that each investigation raises unique issues, facts, and circumstances that affect the time that it takes to complete the investigation. A SEF may complete some investigations in less than twelve months and complete some investigations in more than twelve months. The Commission also recognizes that the list of mitigating factors in the existing rule is not comprehensive, and other factors may affect the time of an investigation. Rather than prescribe a singular requirement, the Commission believes that it is more appropriate to establish general parameters for completing investigations. In conjunction with this amendment, the Commission also proposes guidance to Core Principle 2 in Appendix B to provide SEFs with reasonable discretion to determine that time frame.
Third, the Commission proposes to streamline the requirements that apply to all SEF investigation reports, regardless of whether a reasonable basis exists for finding a violation, by consolidating the provisions under existing § 37.203(f)(4) into a new proposed § 37.203(f)(3). Accordingly, proposed § 37.203(f)(3) would require a SEF's compliance staff to prepare a written investigation report to document the conclusion of each investigation. The proposed rule would maintain the existing requirement that each investigation report contain the following information: (i) The reason the investigation was initiated; (ii) a summary of the complaint, if any; (iii) the relevant facts; (iv) the compliance staff's analysis and conclusions; and (v) a recommendation as to whether disciplinary action should be pursued. To provide further clarity regarding the actions that a SEF may take once the investigation report is completed, the Commission proposes adding guidance to Core Principle 2 in Appendix B to provide that compliance staff should submit all investigation reports to the CCO or other compliance department staff responsible for reviewing such reports and determining next steps in the process; and the CCO or other responsible staff should have reasonable discretion to decide whether to take any action, such as presenting the investigation report to a disciplinary panel for disciplinary action.
As part of the Commission's proposal to consolidate multiple existing warning letter requirements into a single provision under proposed § 37.206(c)(2), the Commission also proposes to eliminate the warning letter requirement under existing § 37.203(f)(5).
The Commission requests comment on all aspects of proposed § 37.203(f) and the associated guidance to Core Principle 2 in Appendix B.
The Commission is not proposing any amendments to § 37.203(g).
Section 37.204, among other things, permits a SEF to contract with an RFA, another registered entity, or the Financial Industry Regulatory Authority (“FINRA”) for the provision of regulatory services, subject to the requirement that the SEF supervises its regulatory service provider and retains exclusive authority over substantive decisions. As described below, the Commission proposes a series of amendments that would provide a SEF with further options in choosing and utilizing a regulatory service provider to assist with fulfilling its regulatory obligations, while still maintaining regulatory protections that relate to the use of an external services provider.
Section 37.204(a) permits a SEF to contract with an RFA, another registered entity, or FINRA to assist the SEF in complying with the Act and Commission regulations, as approved by the Commission.
Based upon its experience with implementing part 37, the Commission is proposing to expand the scope of entities that may provide regulatory services under § 37.204(a) to include any non-registered entity approved by the Commission.
Section 37.204(a), however, would also continue to be subject to important protections to ensure that a regulatory service provider provides effective regulatory services. To ensure each SEF's compliance with §§ 37.203(c)-(d), among other provisions, the Commission would continue to evaluate the sufficiency of a provider's compliance staff and resources and the capabilities of its automated trade surveillance system, and other capabilities.
The Commission requests comment on all aspects of proposed § 37.204(a).
Existing §§ 37.204(b)-(c) generally set forth a SEF's oversight responsibilities with respect to a regulatory service provider. Existing § 37.204(b) requires a SEF to retain sufficient compliance staff to supervise the quality and effectiveness of the services performed by a regulatory service provider; hold regular meetings with the regulatory service provider to discuss ongoing investigations, trading patterns, market participants, and any other matters of regulatory concern; and conduct and document periodic reviews of the adequacy and effectiveness of services provided on its behalf.
The Commission proposes to combine and streamline the requirements of existing §§ 37.204(b)-(c) into a new proposed § 37.204(b). The Commission further proposes to maintain a SEF's duty to supervise its regulatory service provider, but to eliminate the requirement that the SEF hold regular meetings and conduct periodic reviews of the provider. Instead, the Commission proposes that a SEF be able to determine the necessary processes for supervising their regulatory service providers. Consistent with this proposed change, the Commission also proposes to provide each SEF with the option to allow its regulatory service provider to make substantive decisions, provided that, at a minimum, the SEF is involved in such decisions. Therefore, a SEF would have the discretion to determine how they are involved in such decisions. The proposed rule would keep the existing examples of substantive decisions, including the adjustment or cancellation of trades, the issuance of disciplinary charges, and denials of access to the SEF for disciplinary reasons. Finally, the Commission proposes to eliminate the requirement that a SEF document where its actions differ from the regulatory service provider's recommendations, deferring instead to the SEF and its regulatory service provider to mutually agree on the method that they will use to document substantive decisions.
Based on its experience implementing the SEF regulatory framework, the Commission believes that some of the specific requirements currently prescribed under existing §§ 37.204(b)-(c) are unnecessary and overly prescriptive because SEFs, consistent with their position as self-regulatory organizations, remain ultimately responsible for the performance of any regulatory services received, for compliance with their obligations under the Act and Commission regulations, and for the regulatory service providers' performance on their behalf. Given a SEF's ultimate responsibility, the Commission believes that the SEF should be allowed to determine how best to supervise its regulatory service provider based on the services it receives and the nature of the SEF's operations and markets. The Commission also notes that this proposed approach is consistent with a SEF's discretion under Core Principle 1.
The Commission requests comment on all aspects of proposed § 37.204(b).
The Commission proposes a new § 37.204(c) to delegate to DMO the authority to approve any regulatory service provider chosen by a SEF. This does not, however, prohibit the Commission from exercising authority to approve any third party regulatory service provider. The Commission anticipates that expanding the scope of entities that may provide regulatory services under proposed § 37.204(a) may lead to a greater number of approval requests for such entities. Therefore, the Commission proposes to delegate this authority to ensure that such a review is conducted in an efficient manner. Such approval would require, at a minimum, that each regulatory service provider demonstrate that it has the capabilities and resources necessary to provide timely and effective regulatory services on behalf of the SEF, including adequate staff and automated surveillance systems, as required under proposed § 37.204(a).
The Commission requests comment on all aspects of proposed § 37.204(c).
Section 37.205 sets forth a SEF's audit trail requirements and generally requires a SEF to establish procedures to
Based on the Commission's experience with implementing part 37, including the SEF registration process, the Commission has observed that technology limitations have impacted SEFs' ability to comply with all of the audit trail requirements, particularly for orders submitted by voice and certain electronic communications that include instant messages and emails. Based on these observations, as well as the proposed ability for a SEF to offer flexible execution methods, the Commission proposes amendments to the audit trail requirements that seek to strike the appropriate balance between offering SEFs the ability to adopt such requirements that are best suited to their respective trading systems or platforms, while also ensuring that such programs enable SEFs to fulfill their self-regulatory obligations. The Commission believes that the proposed changes are consistent with Core Principle 2, which generally requires a SEF to capture information that may be used in establishing whether rule violations have occurred.
Section 37.205(a) requires a SEF to capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses.
The Commission proposes several amendments to streamline the existing requirements, account for different execution methods and swaps market practices, and eliminate redundancies with other part 37 requirements. Notwithstanding the proposed changes described above, the Commission emphasizes that the type of execution method offered by a SEF does not alter the obligation to capture all audit trail data necessary to detect, investigate, and enforce its rules pursuant to Core Principle 2.
First, the Commission proposes to clarify the existing language to specify that a SEF must capture and retain all audit trail data necessary to
Second, the Commission proposes to move the requirement that audit trail data shall be sufficient to reconstruct all indications of interest, requests for quotes, orders, and trades to the guidance to Core Principle 2 in Appendix B.
Third, the Commission proposes to eliminate the requirement that a SEF capture post-execution allocation information in its audit trail data. During the SEF registration process, numerous SEFs indicated that post-execution allocations normally occur between the clearing firm or the customer and the DCO, or at the middleware provider.
The Commission requests comment on all aspects of proposed § 37.205(a). In particular, the Commission requests comment on the following questions:
Section 37.205(b) requires, among other things, that SEFs retain all original source documents; maintain a transaction history database; conduct electronic analysis; and safely store all audit trail data.
The Commission proposes to eliminate certain elements of the original source documents requirement under § 37.205(b)(1) that specify the nature and content of the original source documents,
The Commission further proposes to amend § 37.205(b)(2) to revise the scope of audit trail data that must be captured in a SEF's electronic transaction history database. Specifically, the Commission proposes to eliminate the requirement that the database include all indications of interest, requests for quotes, orders, and trades entered into a SEF's trading system or platform. Instead, the SEFs would be required to include (i) trades executed by voice or by entry into a SEF's electronic trading system or platform; and (ii) orders that are entered into its electronic trading system or platform. Similar to proposed § 37.203(d), this proposed amendment recognizes that a SEF may not have a cost-effective and efficient method for inputting orders submitted by voice or certain other electronic communications, such as instant messaging and email, into an electronic transaction history database, given that they are not in the same format as orders and trades that are entered into a SEF's electronic trading system or platform.
The Commission additionally proposes to eliminate the remaining requirements of § 37.205(b)(2) that detail the information that must be included in transaction history database, given that these requirements are already captured in other audit trail requirements or do not comport with existing swaps market practices.
These proposed amendments are consistent with feedback received regarding the audit trail requirements during the SEF registration process. Some SEFs that offer voice-based trading systems or platforms stated that they do not have the requisite technology to conduct an electronic analysis of audit trail data that is not entered into a SEF's electronic trading system or platform, such as oral communications, electronic instant messages, and emails. The Commission understands that during that time, such technology, if available, would have been costly for SEFs to adopt and would not have been fully capable of digitizing oral communications in a sufficiently accurate manner to conduct effective surveillance.
While the Commission is aware that promising technologies are developing in this area, it does not believe that a viable, cost-effective automated technology solution currently exists. Currently, SEFs that offer any form of voice-based trading system or platform are required, as a condition to their registration, to establish voice audit trail surveillance programs to ensure that they can reconstruct a sample of voice trades and review such trades for possible trading violations. The proposed amendments to §§ 37.205(b)(2)-(3) would relieve a SEF from establishing or maintaining such a program, but the proposed audit trail reconstruction requirement under § 37.205(c), as discussed below, would apply instead. Nonetheless, a SEF must continue to conduct electronic analysis, using an automated trade surveillance system that meets the requirements of proposed § 37.203(d).
The Commission further proposes to eliminate the safe storage requirement under § 37.205(b)(4), given that it is generally duplicative of the requirements under Core Principle 14 and related regulations.
The Commission requests comment on all aspects of proposed §§ 37.205(b)(1)-(3).
Section 37.205(c) generally requires a SEF to enforce its audit trail and recordkeeping requirements.
The Commission proposes to eliminate the existing audit trail enforcement requirements under § 37.205(c) and adopt an audit trail reconstruction requirement instead.
The Commission believes that ensuring a SEF's audit trail is accurate and sufficient to conduct effective surveillance—the primary goals of audit trail enforcement—would be better served through an audit trail reconstruction program that focuses on verifying the accuracy of audit trail data and a SEF's ability to comprehensively and accurately reconstruct all trading on its facility in a timely manner. As discussed above, the Commission is aware that SEFs that offer any form of a voice-based trading system or platform do not currently have cost-effective solutions for consolidating certain types of data, such as oral communications, electronic instant messages, and emails, inputting them into an electronic transaction history database, and loading and processing them into an automated system to reconstruct trading. Given that the ability to reconstruct all trading is an essential component to conducting effective surveillance and is currently not being conducted in a routine, automated manner for certain key data, the Commission proposes to require that a SEF establish a program to verify its ability to comprehensively and accurately reconstruct all trading on its facility in a timely manner. The Commission also proposes to adopt guidance to Core Principle 2 in Appendix B specifying that an effective audit trail reconstruction program should annually review an adequate sample of executed and unexecuted orders and trades from each execution method offered to verify compliance with § 37.205(c).
Since SEFs that offer only electronic trading systems or platforms can use their automated trade surveillance systems to reconstruct trading, the reconstructions under proposed § 37.205(c) would serve to verify the accuracy of their audit trail data. A SEF that offers any form of voice-based trading could comply with proposed § 37.205(c) by conducting manual reconstructions, including orders entered by oral communications, instant messages, and email, and trades executed by voice that are captured by the SEF's electronic transaction history database. In addition to verifying the accuracy of the audit trail data for SEFs that offer electronic trading systems or platforms, these reconstructions would help ensure that in the absence of such an automated solution, a SEF that offers voice-based trading is able to reconstruct trading as necessary, including when they are investigating problematic trading activity.
The Commission requests comment on all aspects of proposed § 37.205(c) and the associated guidance to Core Principle 2 in Appendix B. In particular, the Commission requests comment on the following questions:
Section 37.206 generally requires a SEF to establish rules that deter abuses and have the capacity to enforce those rules though prompt and effective disciplinary action. The disciplinary rules that implement this requirement require a SEF to maintain sufficient enforcement staff, establish disciplinary panels, follow certain disciplinary
Since the adoption of § 37.206, the Commission has considered whether alternative cost-effective methods exist for complying with Core Principle 2's requirement to establish and enforce trading, trade processing, and participation rules that deter abuses, and have the capacity to investigate and enforce such abuses.
Section 37.206(a) requires a SEF to establish and maintain sufficient enforcement staff and resources to effectively and promptly prosecute possible rule violations within the disciplinary jurisdiction of the SEF.
The Commission proposes to change the word “prosecute” to “enforce” to more accurately describe the requirements under § 37.206(a), given that every rule violation may not lead to a prosecution.
The Commission also proposes to amend the guidance to Core Principle 2 in Appendix B that addresses a SEF's enforcement staff.
The Commission requests comment on all aspects of proposed § 37.206(a) and the associated guidance to Core Principle 2 in Appendix B.
Section 37.206(b) currently requires SEFs to establish one or more disciplinary panels that meet the composition requirements of part 40 and do not include a SEF's compliance staff or any person involved in adjudicating any other stage of the same proceeding.
The Commission proposes to amend § 37.206(b) to permit a SEF to administer its disciplinary program through not only one or more disciplinary panels, as currently allowed, but also through its compliance staff. As discussed above, this amendment provides SEFs with the ability to adopt a cost-effective disciplinary structure that best suits their markets and market participants, while still effectuating the requirements and protections of Core Principle 2 through compliance staff, disciplinary panels, or some combination of both.
The Commission also proposes other amendments to § 37.206(b), including non-substantive revisions, to streamline certain existing composition requirements for disciplinary panels.
Consistent with the Commission's intention to streamline requirements while still effectuating the Core Principle 2 requirements, the Commission proposes to eliminate the guidance to Core Principle 2 in Appendix B that specifies protocols for the SEF to handle charges and settlement offers.
The Commission requests comment on all aspects of proposed § 37.206(b) and the associated guidance to Core Principle 2 in Appendix B.
Section 37.206(c) requires a SEF to adopt rules that provide certain minimum procedural safeguards for any hearing. In general, the rule requires a fair hearing, promptly convened after reasonable notice to the respondent; and a copy of the hearing to be made and be a part of the record of the proceeding if the respondent requested the hearing.
The Commission proposes to eliminate § 37.206(c). First, the detailed hearing procedures under existing § 37.206(c) are not necessary, as SEFs that choose to establish a disciplinary panel have reasonable discretion to do so pursuant to Core Principle 1.
The Commission requests comment on all aspects of the proposed elimination of § 37.206(c) and the associated guidance to Core Principle 2 in Appendix B.
Section 37.206(d) requires a disciplinary panel to render a written decision promptly following a hearing.
The Commission proposes to eliminate the prescriptive requirements under § 37.206(d). This proposed elimination is consistent with other proposed amendments to § 37.206 that would allow a SEF to exercise discretion in establishing its disciplinary procedures pursuant to Core Principle 2. The Commission, however, also proposes to add guidance to Core Principle 2 in Appendix B to specify that a SEF's rules should require the disciplinary panel to promptly issue a written decision following a hearing or the acceptance of a settlement offer.
The Commission requests comment on all aspects of the proposed elimination of § 37.206(d) and the associated guidance to Core Principle 2 in Appendix B.
Existing § 37.206(e) requires that all disciplinary sanctions imposed by a SEF must be commensurate with the violations committed and must be clearly sufficient to deter recidivism or similar violations by other market participants.
The Commission proposes to consolidate the requirements that apply to disciplinary sanctions and warning letters, under existing § 37.206(e) and existing § 37.206(f),
The Commission also proposes several amendments to related guidance to Core Principle 2 in Appendix B that are consistent with the proposed changes and are intended to allow a SEF to determine how to issue warning letters and sanctions. First, the Commission proposes to adopt guidance to Core Principle 2 in Appendix B to state that SEFs should have reasonable discretion in determining when to issue warning letters and apply sanctions.
The Commission requests comment on all aspects of proposed § 37.206(c)(1) and the associated guidance to Core Principle 2 in Appendix B. In particular, the Commission requests comment on the following question:
Existing § 37.206(f) states that where a rule violation is found to have occurred, no more than one warning letter may be issued per rolling twelve-month period for the same violation.
As part of a new proposed § 37.206(c)(2) noted above, the Commission proposes to amend this provision to establish a more practical approach to the use of warning letters. Under the proposed approach, a SEF would be allowed to issue more than one warning letter over a rolling twelve-month period for violations that involve minor recordkeeping or reporting infractions. Given the
The Commission also proposes to eliminate guidance to Core Principle 2 in Appendix B that currently specifies that a SEF may adopt summary fines for violations of rules related to the failure to timely submit accurate records required for clearing or verifying each day's transactions.
The Commission requests comment on all aspects of proposed § 37.206(c)(2) and the associated guidance to Core Principle 2 in Appendix B. In particular, the Commission requests comment on the following question:
The Commission is not proposing any amendments to § 37.206(g).
Part 9 of the Commission's regulations details the process and procedures for the Commission's review of exchange disciplinary, access denial, or other adverse actions.
The Commission is proposing several non-substantive amendments to part 9 that correspond to certain proposed amendments to the Core Principle 2 regulations under part 37.
Specifically, the Commission proposes to eliminate those references under § 9.11(b)(2), which govern the content requirements for SEF
Under § 9.1(b)(2), § 9.2(k), and § 9.12(a)(3), the Commission also proposes to eliminate references to paragraph (a)(13) of the guidance to Core Principle 2 in Appendix B, which addresses the issuance of summary fines for failing to submit certain records in a timely manner. To replace those references, the Commission proposes to add new regulatory language that accounts for summary fines being permitted under the rules of the SEF for recordkeeping or reporting violations.
Under § 9.2(k) and § 9.12(a)(2), the Commission further proposes to eliminate references to paragraph (a)(10)(vi) of the guidance to Core Principle 2 in Appendix B, which addresses the use of sanctions for persons who impede the progress of disciplinary hearings. To replace those references, the Commission proposes new regulatory language that accounts for SEFs imposing disciplinary action on a person for impeding the progress of a hearing under the rules of the SEF.
Core Principle 3 specifies that a SEF shall permit trading only in swaps that are not readily susceptible to manipulation.
Section 37.301 further implements Core Principle 3 by requiring a SEF, at the time that it submits a new swap contract to the Commission, to demonstrate that the swap is not readily susceptible to manipulation by providing the information required in Appendix C to part 38.
Appendix C to part 38 for DCMs, as applied by § 37.301 to SEFs, provides guidance regarding the relevant considerations for evaluating if a new or existing swap contract is readily susceptible to manipulation.
The Commission proposes to eliminate the existing cross-reference to Appendix C to part 38 under § 37.301 and establish a separate Appendix C to part 37 to provide specific guidance to SEFs for complying with the requirements of Core Principle 3.
Specifically, proposed Appendix C to part 37 specifies (1) measures that a SEF should take to determine that a cash-settled swap contract is reflective of the underlying cash market, is not readily subject to manipulation or distortion, and is based on a cash price series that is reliable, acceptable, publicly available, and timely; (2) terms and conditions that should be specified for cash-settled swap contracts; (3) terms and conditions that should be specified for physically-settled swap contracts; (4) methodologies that should be utilized in estimating deliverable supplies; (5) terms and conditions that should be specified for options on swap contracts; and (6) guidance for options on physicals contracts.
The Commission believes that the proposed amendments would streamline the guidance to Core Principle 3 in a single appendix that is dedicated to part 37. A separate appendix for SEFs and swaps trading from the guidance provided in Appendix C to part 38, which primarily applies to DCMs and futures trading, reflects good regulatory practice that provides greater clarity and certainty. The proposed Appendix C to part 37 would serve as a streamlined source of guidance for new and existing SEFs when developing new swap products to list for trading and when monitoring their existing swap products.
The Commission believes that the proposed Appendix C to part 37 also clarifies a SEF's obligations pursuant to Core Principle 3 because the guidance specifically addresses swap contracts and reflects the diverse and non-standardized nature of the swaps market, including swaps traded on SEFs. In particular, the guidance provides SEFs with additional flexibility for certain terms and conditions for non-standardized swap contracts.
The Commission requests comments on all aspects of the proposed guidance to Core Principle 3 in Appendix C to part 37. In particular, the Commission requests comment on the following questions:
Core Principle 4 requires a SEF to establish and enforce rules or terms and conditions that define, or specifications that detail, the trading procedures to be used in entering and executing orders traded on or through the facilities of the SEF and procedures for trade processing of swaps on or through the facilities of the SEF.
The Commission received feedback from SEFs during the part 37 implementation that certain Core Principle 4 requirements are unnecessarily broad and create impracticable monitoring burdens upon SEFs, especially those requiring a SEF to monitor activity beyond its own markets. Based on its experience, the Commission has assessed this feedback and proposes amendments that would establish more practical monitoring requirements. These amendments, which in many cases would narrow a SEF's monitoring obligations to trading activity on its own facility, allow a SEF greater discretion to devise its own monitoring systems and protocols to suit the products that it offers for trading in a manner compliant with Core Principle 4. The Commission also proposes several amendments to the regulations under Core Principle 4 to conform to the proposed Appendix C to part 37, which sets forth guidance for SEFs to mitigate a swap contract's susceptibility to manipulation when developing new products and monitoring existing products.
Section 37.401 currently implements Core Principle 4 by setting forth requirements for SEFs to monitor market activity for the purpose of detecting manipulation, price distortions, and disruptions.
In the preamble to the SEF Core Principles Final Rule, the Commission clarified that § 37.401(a) requires a SEF to monitor its market participants' trading activity and reference data beyond its own market on an ongoing basis in certain instances.
The Commission proposes to amend § 37.401 to establish more practical trade monitoring requirements that are based on information about trading activity that is actually accessible to SEFs and, therefore, are more consistent with current practice in swaps and other derivatives markets. First, the Commission proposes to clarify under proposed § 37.401(a) that a SEF must conduct real-time market monitoring of “trading activity” on its own facility to identify (i) disorderly trading; (ii) any market or system anomalies; and (iii) instances or threats of manipulation, price distortion, and disruption.
In proposing these changes, the Commission recognizes that Core Principle 4 does not explicitly mandate the existing requirements under §§ 37.401(a)-(b) and has also learned that requiring a SEF to monitor trading activity beyond its own market on an “ongoing basis” has imposed impractical burdens, particularly given that many swaps trade both on multiple SEFs and on an OTC basis. For a swap subject to the trade execution requirement, a SEF is currently required to continually monitor trading for the same or similar swap listed on multiple SEFs. For a listed swap not subject to the requirement, the SEF must additionally monitor trading for the same swap or similar swap traded bilaterally away from a SEF.
Given the practical challenges discussed above in complying with the existing Core Principle 4 monitoring requirements, the Commission believes that a SEF should monitor beyond its own market as necessary to detect and prevent manipulation, price distortion, and, where possible, disruptions of the physical-delivery or cash-settlement processes. Further, such monitoring should be conducted when necessary to detect manipulative activity that would result in the failure of the market price to reflect the normal forces of supply and demand. In such cases, the SEF should be able to determine the instances in which it needs to collect and evaluate data related to that activity. As proposed, the scope of this data corresponds to the existing requirements of § 37.404, which require a SEF to have the ability to obtain this trading information.
The Commission also proposes to amend § 37.401(c) to establish more practical monitoring requirements with respect to a SEF's obligation to monitor general market data. The Commission proposes to clarify that a SEF has the discretion to determine when to monitor and evaluate such data beyond its own market,
Finally, the Commission proposes to consolidate the trade reconstruction requirements under existing § 37.401(d) and existing § 37.406 into a new proposed § 37.401(d), which would require a SEF to have the ability to comprehensively and accurately reconstruct all trading activity on its facility for the purpose of detecting instances or threats of manipulation, price distortion, and disruptions.
The Commission also proposes certain non-substantive changes to eliminate demonstration-based requirements under existing §§ 37.401(c)-(d). As noted above, the Commission proposes to set forth an affirmative monitoring requirement, rather than a demonstration requirement. The Commission notes that demonstration of compliance could otherwise be required upon Commission request under § 37.5(b), which requires a SEF to provide a written demonstration that it is in compliance with its obligations under the Act.
The Commission further proposes to eliminate duplicative language and adopt various conforming changes to the guidance to Core Principle 4 in Appendix B.
The Commission requests comment on all aspects of proposed § 37.401 and the associated guidance to Core Principle 4 in Appendix B. In particular, the Commission requests comment on the following question:
For swaps settled by physical delivery, § 37.402 requires that a SEF monitor each swap's terms and conditions as they relate to the underlying commodity market and monitor the “availability of supply” of the underlying commodity, as specified by the swap's delivery requirements.
The Commission proposes to clarify a SEF's monitoring obligations with respect to physical-delivery swaps under § 37.402 to be consistent with the guidance in proposed Appendix C to part 37 and ensure that the SEF can comply with Core Principles 3 and 4.
The Commission notes that Core Principles 3 and 4 place affirmative obligations on SEFs to permit trading only in swaps that are not readily susceptible to manipulation and prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process, respectively. As such, proposed § 37.402 places affirmative obligations on a SEF to make a good-faith effort to resolve conditions that are interfering with convergence or that threaten the adequacy of supplies or the delivery process. The Commission recognizes, however, that a SEF may not always be able to resolve these conditions; therefore, proposed § 37.402 allows the SEF to notify the Commission of such conditions.
The Commission further proposes corresponding amendments to the associated guidance to Core Principle 4
The Commission also proposes a non-substantive change to eliminate the demonstration-based requirement under § 37.402. As noted above, the Commission proposes to set forth an affirmative monitoring requirement for SEFs, rather than a demonstration requirement. The Commission notes that demonstration of compliance could otherwise be required upon Commission request under § 37.5(b), which requires a SEF to provide a written demonstration that it is in compliance with its obligations under the Act.
The Commission requests comment on all aspects of proposed § 37.402 and the associated guidance to Core Principle 4 in Appendix B.
For cash-settled swaps, § 37.403(a) requires that a SEF monitor the pricing of the reference price used to determine cash flows or settlement of a swap.
Based on its experience, the Commission acknowledges that the requirement imposed by § 37.403(a) to monitor the methodologies behind third-party indexes or instruments is not realistic due to the proprietary nature of these indexes and instruments. The Commission has observed that many SEFs offer swaps for which pricing is based on benchmark prices or benchmark indices owned or administered by third parties, such as the Intercontinental Exchange, Inc. (“ICE”),
Based on these considerations, the Commission proposes to eliminate the requirement under § 37.403(a) that SEFs monitor the “pricing” of the reference price used to determine cash flows or settlement.
The Commission believes that these proposed amendments would provide greater clarity and establish more practical requirements for SEFs to monitor the reference prices, including the index or instrument used to calculate them, in a manner that is consistent with Core Principle 4. Further, the Commission believes that these proposed amendments are consistent with the proposed guidance in Appendix C to part 37 regarding the design of cash-settled swap contracts. Among other things, that guidance specifies that the SEF should ensure that the reference price used for its contract is not readily susceptible to manipulation by assessing its reliability as an indicator of cash market values in the underlying commercial market.
The Commission also proposes a non-substantive change to eliminate the demonstration-based requirements under § 37.403. As noted above, the Commission proposes to set forth an affirmative monitoring requirement, rather than a demonstration requirement. The Commission notes that demonstration of compliance could otherwise be required upon Commission request under § 37.5(b), which requires a SEF to provide a written demonstration that it is in compliance with its obligations under the Act.
Given the changes to § 37.403 proposed above, the Commission proposes to delete the existing associated guidance in Core Principle 4 in Appendix B.
The Commission requests comment on all aspects of proposed § 37.403 and the elimination of the associated guidance to Core Principle 4 in Appendix B.
Section 37.404(a) provides that a SEF must demonstrate that it has access to sufficient information to assess whether trading in swaps listed on its market, in the index or instrument used as a reference price, or in the underlying commodity for its listed swaps is being used to affect prices on its market.
The Commission proposes several amendments to the associated guidance to Core Principle 4 in Appendix B. In particular, the Commission proposes to eliminate a SEF's ability to limit the application of proposed § 37.404(a) and proposed § 37.404(b) to only those market participants who conduct “substantial trading” on its facility. The Commission notes that it has not provided SEFs with any additional guidance,
The Commission also proposes a non-substantive change to eliminate the demonstration-based requirement under § 37.404(a).
The Commission requests comment on all aspects of proposed § 37.404 and the associated guidance to Core Principle 4 in Appendix B.
Section 37.405 requires that a SEF establish and maintain risk control mechanisms to prevent and reduce the potential risk of market disruptions, including, but not limited to, market restrictions that pause or halt trading in market conditions prescribed by the SEF.
The Commission proposes two amendments to § 37.405 to align the existing requirement with the proposed amendments to other Core Principle 4 regulations. First, the Commission proposes to clarify that a SEF is required to have risk control mechanisms to prevent and reduce market disruptions, as well as price distortions on their facility. This proposed change is consistent with Core Principle 4, which requires a SEF to monitor trading to prevent price distortions and disruptions to the delivery or cash settlement process.
The Commission also proposes several amendments to the associated guidance to Core Principle 4 in Appendix B. First, the Commission proposes to eliminate the reference to intraday position limit risk controls, which generally do not apply to a SEF because the Commission has yet to establish position limit rules for swaps. Second, the Commission proposes to clarify that a SEF's risk controls should be adapted to the swap contracts that it lists for trading; this amendment does not reflect a substantive change, but rather would be consistent with the proposed guidance in Appendix C to part 37, which provides that a SEF may adapt certain risk controls for swap contracts based on whether they are standardized or non-standardized.
The Commission requests comment on all aspects of proposed § 37.405 and the associated guidance to Core Principle 4 in Appendix B.
Section 37.406 requires that a SEF have the ability to comprehensively and accurately reconstruct all trading on its facility, and that audit-trail data and reconstructions be made available to the Commission in a form, manner, and time that is acceptable to the Commission.
Given the proposed consolidation with § 37.401(d), as described above, the Commission proposes to eliminate § 37.406.
The Commission requests comment on all aspects of the proposed elimination of § 37.406.
The Commission is not proposing any amendments to §§ 37.407-408.
Core Principle 5 requires a SEF to establish and enforce rules that allow the facility to obtain any “necessary information” to perform any of the functions described in CEA section 5h; provide the information to the Commission upon request; and have the capacity to carry out international information-sharing agreements as the Commission may require.
Section 37.501 specifies that a SEF's rules must allow it to obtain sufficient information to fulfill its functions and obligations under part 37, including the capacity to carry out such international information-sharing agreements as the Commission may require.
Existing § 37.502 requires a SEF to adopt rules that allow it to collect information on a routine basis, allow for the collection of non-routine data from its market participants, and allow for its examination of books and records kept by its market participants.
The Commission proposes to eliminate existing § 37.502.
The Commission requests comment on all aspects of the proposed elimination of existing § 37.502.
Existing § 37.504 requires a SEF to share information with other regulatory organizations, data repositories, and third-party data reporting services as required by the Commission or as otherwise necessary and appropriate to fulfill its self-regulatory and reporting
The Commission proposes to establish a more straightforward and streamlined information-sharing requirement by eliminating the specifically enumerated list of entities with which a SEF must share information and adopting conforming amendments. Instead, a SEF would be required to generally share information, as required by the Commission, or as appropriate to fulfill its self-regulatory and reporting responsibilities. Rather than limiting the types of entities that a SEF may share information with, however, a SEF would have the flexibility to share information with third parties that it may utilize to carry out those responsibilities, including affiliated entities. This broader and more adaptive approach to information-sharing practices would better accommodate, for example, a SEF's ability to use different types of regulatory service providers pursuant to the proposed amendments under § 37.204. The Commission emphasizes, however, that SEFs would not be required to share information with competitor entities. In relevant situations where information or data may need to be shared across different markets to help identify manipulation, price distortions or other disruptions, for example, the Commission anticipates that it will continue working in conjunction with SEFs to help establish such information-sharing arrangements.
The Commission also proposes a non-substantive revision by moving certain provisions from the existing guidance to Core Principle 4 to the guidance to Core Principle 5 in Appendix B.
The Commission requests comment on all aspects of proposed § 37.503 and the associated guidance to Core Principle 5 in Appendix B.
Section 37.7—“Prohibited use of data collected for regulatory purposes”—prohibits a SEF from using, for business or marketing purposes, any proprietary data or personal information it collects or receives, from or on behalf of any person, for the purpose of fulfilling its regulatory obligations, unless the person clearly consents to the SEF's use of such data or information in such manner.
The Commission proposes to create a more cohesive rule with respect to information-sharing practices under Core Principle 5 by moving existing § 37.7 to a new proposed § 37.504 and amending the current language of the requirement. Consistent with the existing prohibition, the Commission proposes that a SEF that shares such proprietary data or personal information with a third party shall ensure that that third party does not use the data or information for business or marketing purposes, unless the person from whom such data or information was obtained clearly consents to its use for business or marketing purposes (including consent to use by those third parties with whom the SEF may share such information). This proposed amendment corresponds to the Commission's other proposed amendments that would expand the scope of entities with whom a SEF may share information, including § 37.503, which would provide a SEF with greater flexibility in selecting a third-party provider to fulfill its self-regulatory and reporting responsibilities; and § 37.204, which would allow the SEF to utilize a broader scope of third-party entities, including non-registered affiliates to provide regulatory services, subject to Commission approval.
In the course of using such a provider, a SEF may need to share proprietary data or personal information with that third party. To the extent that § 37.504 would continue to limit SEFs from using this type of information for non-regulatory purposes, the Commission believes that the objective of protecting customer privacy and preventing the use of data for commercial purposes should also equally apply to third parties that obtain access to such data or information from a SEF for regulatory purposes. The Commission believes that the proposed amendments achieve this objective.
The Commission requests comments on all aspects of proposed § 37.504.
Core Principle 6 requires a SEF that is a trading facility to adopt, as is necessary and appropriate, position limits or position accountability levels for each swap contract to reduce the potential threat of market manipulation or congestion.
Section 37.601 further implements Core Principle 6 and specifies that until such time that compliance is required under part 151 of the Commission's regulations, a SEF may refer to the associated guidance and/or acceptable practices set forth in Appendix B to part 37.
The Commission proposes to eliminate the language of § 37.601 and the existing corresponding guidance to Core Principle 6, based on its intent to address this issue in a separate rulemaking. Until that time, the Commission clarifies that SEFs have reasonable discretion to determine how to comply with Core Principle 6 pursuant to Core Principle 1.
The Commission requests comment on all aspects of the proposed elimination of § 37.601 and the associated guidance to Core Principle 6 in Appendix B.
Core Principle 7 requires a SEF to establish and enforce rules and procedures for ensuring the financial integrity of swaps entered on or through the facilities of the SEF, including the clearance and settlement of the swaps pursuant to CEA section 2(h)(1).
As described further below, the Commission is proposing several amendments to the implementing regulations and § 39.12(b)(7), including amendments to certain “straight-through processing” obligations that apply to SEFs, DCMs, and DCOs.
Section 37.701 requires that transactions executed on or through a SEF that are subject to the clearing requirement, or are voluntarily cleared by the counterparties, must be cleared through a registered DCO or an exempt DCO.
The Commission proposes to amend § 37.701 to require a SEF to establish a direct and independent clearing agreement with each registered DCO or exempt DCO to which the SEF submits swap transactions for clearing.
A SEF's use of a third-party service provider to route swap transactions to a DCO for clearing may generally be appropriate, but the Commission believes that the indirect routing of transactions for clearing must occur pursuant to a direct and independent clearing services agreement between the SEF and each DCO utilized by the SEF. The Commission believes that maintaining a direct agreement between a SEF and DCO, notwithstanding the use of a third-party provider, is consistent with § 37.702(b), which requires each SEF to coordinate with a DCO to develop rules and procedures to facilitate prompt and efficient processing of transactions in accordance with the DCO's obligations under § 39.12(b)(7)(i)(A).
The Commission also proposes a non-substantive amendment to § 37.701 to eliminate “or through” from the language of the existing requirement. The Commission notes that this proposed amendment is a conforming change to other part 37 regulations and does not affect the scope of transactions that are required to be cleared pursuant to the clearing requirement in CEA section 2(h)(1)(A).
The Commission requests comment on all aspects of proposed § 37.701.
Section 37.702(a) requires a SEF to establish minimum financial standards for its members, which include at a minimum a requirement that each member qualifies as an ECP pursuant to CEA section 1a(18).
Existing § 37.702(b) and § 39.12(b)(7) require SEFs and registered DCOs, respectively, to coordinate with one another to facilitate the clearing of swap transactions executed on or through the SEF.
Sections 39.12(b)(7)(ii)-(iii) each further require a registered DCO to establish standards to accept or reject transactions for clearing as quickly as would be technologically practicable as if fully automated systems were used (the “AQATP” standard).
The Divisions subsequently issued the 2013 Staff STP Guidance to further clarify the application of “straight-through processing” obligations for swaps that apply to SEFs, DCMs, and DCOs under § 37.702(b), § 38.601(b),
Based on data received by DCR, the 2013 Staff STP Guidance expressed the view that compliance with the AQATP standard under § 39.12(b)(7)(ii) means that a registered DCO must accept or reject such trades for clearing within ten seconds after submission to the DCO.
The 2013 Staff STP Guidance also expressed the view that the AQATP standard applies to swap transactions that are routed to a DCO through a SEF's or DCM's use of a post-execution, third-party manual affirmation hub (“affirmation hub”).
The 2015 Supplementary Staff Letter expressed the view that the AQATP standard for transactions routed to an affirmation hub would be satisfied if the transactions were routed to and received by the relevant DCO no more than ten minutes after execution.
The Commission notes that the Divisions provided views regarding several aspects of straight-through processing in the 2013 Staff STP Guidance and the 2015 Supplementary Staff Letter. The Commission also understands that certain aspects of the guidance and staff letter may be unclear when read in conjunction with existing regulations. Therefore, the Commission seeks to provide clarity under the proposed regulatory framework with respect to the straight-through processing requirements for SEFs and DCOs through the proposed clarifications and amendments described below.
The Commission proposes several amendments to streamline and align the straight-through processing requirements between SEFs and DCOs.
The Commission also notes that some uncertainty exists about the interaction between the “prompt, efficient, and accurate” standard
In particular, the Commission proposes that the “prompt, efficient, and accurate” standard also applies to the processing and routing of swaps from a SEF to a DCO via affirmation hubs.
Based on the Divisions' experience with the ten-minute time frame, the Commission believes that a qualitative interpretation of “prompt, efficient, and accurate” is more appropriate than imposing a specific time standard upon SEFs for processing and routing transactions to the DCO. The Commission has observed that many SEFs, particularly those that offer voice-based or voice-assisted trading systems or platforms, have not been able to meet the time frame when using manual affirmation hubs. Further, the Commission believes that maintaining a specific time standard would be inconsistent with the proposed expansion of the trade execution requirement and the availability of flexible execution methods under the proposed framework. In particular, the expansion of the trade execution requirement will lead to the trading of a broader array of swaps on SEFs, many of which are likely more complex in nature and require more time for affirmation to occur. The inability to comply with a specific time frame could hinder the anticipated growth of trading in additional products on SEFs and impede the ability to utilize flexible means of execution. Further, a specific time frame may also limit the use—and therefore the benefits—of affirmation hubs. Therefore, the Commission believes that a rigid time frame for processing and routing trades from a SEF to a DCO is inappropriate under the proposed regulatory framework.
The “prompt, efficient, and accurate” standard may result in varying lengths of time for transactions to be processed and routed to a DCO, including some longer instances,
Where affirmation hubs are not utilized, the Commission believes that the “prompt, efficient, and accurate” standard would also result in a trade being processed and routed from a SEF to a DCO in a much shorter time frame. As noted above, that exact time frame would depend on swap market practices and technology, as well as market conditions at the time of execution. The Commission expects that the industry will continue to reduce time frames for transaction processing and routing to a DCO. The Commission emphasizes that it will continue to monitor time frames and industry developments with respect to transaction processing to ensure that SEFs and DCOs facilitate prompt, efficient, and accurate transaction processing and routing.
In addition to specifying that the “prompt, efficient, and accurate” standard applies to SEFs with respect to processing and routing transactions, the Commission proposes to clarify that the AQATP standard applies to a DCO's acceptance or rejection of a transaction for clearing upon submission to the DCO,
In conjunction with clarifying that the AQATP standard applies to registered DCOs, the Commission proposes to streamline and consolidate §§ 39.12(b)(7)(ii)-(iii) to establish one AQATP standard for registered DCOs under a new proposed § 39.12(b)(7)(ii) for all agreements, contracts, and transactions, regardless of whether they (i) are executed competitively or non-competitively; (ii) are executed on or pursuant to the rules of a SEF or DCM; or (iii) are swaps, futures contracts, or options on futures contracts.
The AQATP standard reflects the Commission's belief that acceptance or rejection for clearing in close to real time is crucial both for effective risk management and for the efficient operation of trading venues.
With respect to the pre-execution credit screening of orders for compliance with risk-based limits, the 2013 Staff STP Guidance expressed the view that (i) a clearing FCM must be identified in advance for each counterparty on an order-by-order basis for trades intended for clearing; and (ii) a SEF must facilitate pre-execution screening by each clearing FCM in accordance with § 1.73 on an order-by-order basis.
With respect to pre-execution screening by each clearing FCM, the 2013 Staff STP Guidance viewed §§ 1.73(a)(2)(i)-(ii) as requiring a clearing FCM to conduct pre-execution screening of orders for execution on a SEF or DCM for compliance with risk-based limits.
With respect to the requirement that a clearing FCM must be identified in advance for trades intended for clearing, the 2013 Staff STP Guidance noted that the Commission has already required parties to have a clearing arrangement in place with a clearing FCM in advance of execution and that in cases where more than one DCO offered clearing services, the parties would also need to specify in advance where the trade should be sent for clearing.
In conjunction with the Commission's proposal to clarify and amend straight-through processing requirements, the Commission proposes to adopt these two obligations—that each market participant identify a clearing member in advance and that a SEF facilitate pre-execution credit screening—under §§ 37.702(b)(2)-(3), respectively. The Commission believes that the proposed requirements are consistent with the proposed approach to straight-through processing as described above. In
The Commission requests comment on all aspects of proposed § 37.702 and §§ 39.12(b)(7)(i)-(ii). In particular, the Commission requests comment on the following questions:
The Commission proposes to amend the introductory language under proposed § 37.702(b) to specify that its requirements apply only to those transactions routed through a SEF to a registered DCO for clearing rather than, as currently required, to any transaction cleared by a DCO. While not meant to reflect a substantive change, the Commission believes that this amendment would clarify that the requirements of § 37.702(b) do not apply to a SEF that does not facilitate the clearing of applicable listed swaps that are not subject to the clearing requirement. The requirements would apply, however, if the SEF offers to facilitate the clearing of such swaps.
Section 37.703(a) requires a SEF to monitor its members to ensure that they continue to qualify as an ECP pursuant to CEA section 1a(18).
Core Principle 8 requires a SEF to adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, as is necessary and appropriate, including the authority to liquidate or transfer open positions in any swap or to suspend or curtail trading in a swap.
Section 37.801 further implements Core Principle 8 by referring SEFs to associated guidance and/or acceptable practices set forth in Appendix B to comply with § 37.800.
The Commission proposes to amend the guidance to Core Principle 8 by eliminating references to certain emergency actions that the Commission understands a SEF, as a matter of general market practice, would not be able to adopt, including imposing special margin requirements and transferring customer contracts and the margin. Since SEFs do not own the contracts, they do not have the ability to impose margin or transfer contracts. Additionally, the Commission proposes
The Commission requests comment on all aspects of the proposed associated guidance to Core Principle 8 in Appendix B.
The Commission is not proposing any amendments to the regulations under Core Principle 9.
Core Principle 10 requires a SEF, among other things, to maintain records of all activities related to the business of the facility, including a complete audit trail, in a form and manner acceptable to the Commission for a period of five years.
The Commission is not proposing any amendments to the regulations under Core Principle 11.
The Commission has not adopted any regulations under Core Principle 12 and is not proposing any regulations at this time.
Core Principle 13 requires a SEF to have adequate financial, operational, and managerial resources to discharge each of its responsibilities.
The Commission implemented these regulations to ensure a SEF's financial strength so that it could discharge its responsibilities, ensure market continuity, and withstand unpredictable market events.
Based on its experience with overseeing the financial resources requirements, the Commission proposes several amendments to the Core Principle 13 regulations that would achieve a better balance between ensuring SEF financial stability, promoting SEF growth and innovation, and reducing unnecessary costs. The Commission's proposed amendments, which include the addition of acceptable practices to Core Principle 13 in Appendix B, are based in part on existing Commission staff guidance, feedback received from SEFs, and Commission experience gained from ongoing oversight. As discussed in detail further below, the Commission's proposed changes consist of (i) clarification of the scope of operating costs that a SEF must cover with adequate financial resources; (ii) acceptable practices, based on existing Commission staff guidance, that address the discretion that a SEF has when calculating projected operating costs pursuant to proposed § 37.1304; (iii) amendments to the existing six-month liquidity requirement for financial resources held by a SEF; and (iv) streamlined requirements with respect to financial reports filed with the Commission. The proposed changes also would include non-substantive amendments to clarify certain existing requirements, including the renumbering of several provisions to present the requirements in a more cohesive manner.
Existing § 37.1301(a) requires a SEF to maintain financial resources that are sufficient to enable it
Certain SEFs have stated that existing § 37.1301(a), when read in conjunction with § existing 37.1301(c), can be construed to state that operational costs incurred for functions that are not germane to discharging SEF core principle responsibilities must be included in a financial resources calculation. According to those SEFs, requiring those costs to be included would require a SEF to allocate additional resources to comply with the requirement, which would hinder its ability to allocate that capital to operational growth and innovation, thereby creating unnecessary burdens.
The Commission proposes to consolidate the requirement under existing § 37.1301(c) into a new proposed § 37.1301(a) and adopt several amendments. First, the Commission proposes to amend the types of operating costs that must be included in a SEF's financial resources determination. As proposed, a SEF would be required to maintain adequate financial resources to cover the
The Commission believes that the proposed regulation represents a better and more balanced regulatory approach to implementing the Core Principle 13 requirements. Some SEF operational costs may not be necessary for discharging core principle and regulatory responsibilities, and therefore, should not be included when calculating a SEF's financial resources. Rather than require a SEF to allocate capital to account for such operating costs, the proposed amendment permits SEFs to allocate their capital to other areas, thereby furthering the goal of promoting SEF growth and innovation.
The Commission also proposes several non-substantive changes to align proposed § 37.1301(a) more closely to Core Principle 13 requirements. To reflect the ongoing nature of the Core Principle 13 requirements, the Commission proposes to specify that a SEF must maintain adequate financial resources on an “ongoing basis.” For consistency purposes with Core Principle 13, the Commission also proposes to replace the word “sufficient” with “adequate” and adopt additional language to specify that a SEF's financial resources will be considered “adequate” if their value “exceeds,” rather than is “at least equal to,” one year's worth of operating costs,
Further, as noted above, the Commission proposes to adopt additional language to clarify that a SEF's financial resources must be adequate to comply with the SEF core principles and any “applicable Commission regulations.” This amendment is intended to clarify that a SEF's resource adequacy obligation under proposed § 37.1301(a) also applies to any resources needed for complying with any additional regulatory requirements that the Commission has promulgated.
The Commission requests comment on all aspects of proposed § 37.1301(a). In particular, the Commission requests comment on the following question:
Section 37.1301(b) requires a SEF that also operates as a DCO to also comply with the financial resource requirements for DCOs under § 39.11.
The Commission requests comment on all aspects of proposed § 37.1301(b).
Given the proposed consolidation with § 37.1301(a), as described above, the Commission proposes to eliminate § 37.1301(c).
Section 37.1302 sets forth the types of financial resources available to SEFs to satisfy the general financial resources requirement.
Existing § 37.1305—“Liquidity of financial resources”—currently requires a SEF to maintain unencumbered, liquid financial assets,
The Commission proposes to amend the minimum amount of liquid financial resources that a SEF must include from six months of operating costs to the greater of (i) three months of a SEF's projected operating costs or (ii) the projected costs for a SEF to wind down its business, as determined by the SEF.
Since the adoption of part 37, many SEFs have continued to maintain that a six-month minimum requirement is not necessary and that some of their liquid assets would be better applied toward growth initiatives.
The Commission also proposes a non-substantive amendment to clarify that if a SEF has a deficiency in satisfying this requirement, then it may overcome that deficiency by obtaining a committed line of credit or similar facility in an amount at least equal to that deficiency.
The Commission requests comment on all aspects of proposed § 37.1303. In particular, the Commission requests responses to the questions below.
Existing § 37.1303—“Computation of projected operating costs to meet financial resource requirement”—currently requires a SEF to make a reasonable calculation of its projected operating costs for each fiscal quarter over a twelve-month period to determine the amount of financial resources needed to comply with the financial resource requirement.
The Commission proposes to amend the existing requirement to specify that a SEF must also make a reasonable calculation of projected wind-down costs, but would have reasonable discretion in adopting the methodology for calculating such costs. This proposed addition is consistent with the reasonable discretion already provided for calculating projected operating costs and corresponds to § 37.1303, which incorporates the calculation of a SEF's wind-down costs into the liquidity determination. The Commission also proposes two non-substantive amendments that would add a reference to § 37.1303, given that a SEF must calculate projected operating costs to determine how to comply with the liquidity requirement; and eliminate the twelve-month requirement, given that proposed § 37.1301(a) already establishes that the financial resource requirement applies on a one-year, rolling basis.
To help SEFs comply with Core Principle 13, which requires a SEF to calculate its operating costs as part of a financial resources determination, the Commission is proposing acceptable practices to Core Principle 13 in Appendix B associated with § 37.1304. The proposed acceptable practices expound upon the reasonable discretion that SEFs have for computing projected operating costs in determining their financial resource requirements. Among other things, these acceptable practices would further explain which operating costs are not necessary to comply with the SEF core principles and the Commission's regulations. The Commission notes that these acceptable practices generally incorporate existing guidance provided by Commission staff.
The proposed acceptable practices state that calculations of projected operating costs,
This approach would still require SEFs to maintain sufficient financial resources to ensure their financial viability, but also provide greater flexibility to SEFs to compute operating costs, consistent with the reasonable discretion provided under proposed § 37.1304. Although neither the CEA nor the Commission's regulations require a SEF to have more than one execution method, this flexibility could encourage SEFs to innovate and experiment in offering a variety of trading systems or platforms compared to the current requirements. Accordingly, this flexibility would mitigate possible disincentives for a SEF to limit the number and types of execution methods that it might otherwise develop and offer, were it required to account for the associated operating costs for all offered execution methods in a calculation. In excluding any of these expenses, however, a SEF would need to document and justify those exclusions pursuant to proposed requirements under § 37.1306, discussed further below.
The proposed acceptable practices would also specify that a SEF may exclude certain expenses in making a “reasonable” calculation of projected operating costs. These expenses include, in part, marketing and development costs; variable commissions paid to SEF trading specialists, the payment of which is contingent on whether the SEF collects associated revenue from transactions on its systems or platforms;
In addition to allowing a SEF to exclude certain projected operating costs, the proposed acceptable practices further specify that a SEF may pro-rate, but not exclude, certain expenses in calculating projected operating costs. The Commission recognizes that some costs may be only partly attributable to a SEF's ability to comply with the SEF core principles and the Commission's regulations; therefore, only those attributed costs would need to be included in a SEF's projected operating costs. Accordingly, a SEF may pro-rate expenses that are shared with affiliates,
The Commission requests comment on all aspects of proposed § 37.1304 and the associated acceptable practices to Core Principle 13 in Appendix B. In particular, the Commission requests comment on the following question:
Section 37.1304—“Valuation of financial resources”—currently requires a SEF, at least once each fiscal quarter, to compute the current market value of each financial resource used to meet its financial resources requirement under § 37.1301.
The Commission proposes a non-substantive amendment to add an applicable reference to § 37.1303. The Commission notes that in addition to calculating the current market value of each financial resource used to satisfy its financial resource requirement, compliance with the liquidity requirement would require a SEF to utilize the current market value of the applicable financial resources.
Section 37.1306 establishes a SEF's financial reporting requirements to the Commission. Section 37.1306(a)(1) currently requires that at the end of each fiscal quarter or upon Commission request, a SEF must report to the Commission (i) the amount of financial resources necessary to meet the financial resources requirement of § 37.1301; and (ii) the value of each financial resource available to meet those requirements as calculated under § 37.1304.
The Commission proposes several amendments to § 37.1306(a)(2). First, the Commission proposes to require a SEF to prepare its financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). For a SEF that is not domiciled in the U.S. and is not otherwise required to prepare its financial statements in accordance with GAAP, the Commission would allow that SEF to prepare its statements in accordance with either the International Financial Reporting Standards issued by the International Accounting Standards Board, or a comparable international standard as the Commission may accept in its discretion. The Commission notes that the quality and transparency of SEF financial reports submitted under the existing requirement have varied and believes that the GAAP-based requirement would promote consistency and better ensure a minimum reporting standard across financial submissions.
The Commission also proposes to require a SEF to provide its own financial statements, rather than allow a SEF the option of submitting the statements of its parent company. The Commission notes that it may lack jurisdiction over a SEF's parent company or its affiliates; in such instances, the Commission could not consider the parent company's financial resources in determining whether the SEF itself possesses adequate financial resources. Therefore, the Commission believes that a separate SEF financial statement would more clearly demonstrate evidence of the SEF's compliance with Core Principle 13.
In addition to the proposed amendments to § 37.1306(a)(2), the Commission proposes non-substantive revisions to § 37.1306(a)(1) to add appropriate references to § 37.1303 to § 37.1305, as discussed above. In addition to specifying the amount of financial resources necessary to comply with § 37.1301, a SEF's quarterly report must include the amount of financial resources necessary to comply with the liquidity requirement. Further, the amounts specified in the report must be based on the current market value of each financial resource and computed as reasonable calculations of the SEF's projected operating costs and wind-down costs.
The Commission requests comment on all aspects of proposed § 37.1306(a). In particular, the Commission requests comment on the questions below:
Section 37.1306(b) currently requires a SEF to make its financial resource calculations on the last business day of its fiscal quarter.
Section 37.1306(c) sets forth documentation requirements for a SEF's financial reporting obligations. Section 37.1306(c)(1) requires a SEF to provide the Commission with sufficient documentation explaining the methodology used to calculate its financial resource requirements under § 37.1301.
Based on the proposed amendments to the Core Principle 13 regulations described above, the Commission proposes conforming amendments to § 37.1306(c) to require a SEF to specify the methodology used to compute its financial resource and liquidity requirements. The documentation to be provided must be sufficient for the Commission to determine that the SEF has made reasonable calculations of projected operating costs and wind-down costs under § 37.1304. As
The proposed requirement does not necessarily create new obligations, but rather clarifies a SEF's existing obligations based upon existing guidance provided by Commission staff.
The Commission further believes that proposed §§ 37.1306(c)(2)(i)-(iv) would address the current lack of adequate documentation or insufficient identification of excluded or pro-rated expenses by some SEFs in submitting their projected operating costs based on Commission staff guidance. Absent the guidance, the Commission notes that the existing rule has created burdens for Commission staff when determining whether a SEF complies with Core Principle 13. In its experience thus far, the Commission recognizes that Commission staff has devoted additional effort to obtain the appropriate documentation from SEFs. Therefore, the Commission believes that adding greater specificity to the existing requirement would mitigate the time and resources required to determine a SEF's compliance with the financial resource requirements.
The Commission requests comment on all aspects of proposed § 37.1306(c).
Section 37.1306(d) requires a SEF to file its financial report no later than forty calendar days after the end of each of the SEF's first three fiscal quarters and no later than sixty calendar days after the end of the SEF's fourth fiscal quarter, or at such later time as the Commission may permit.
The Commission proposes to extend the due date for each SEF's fourth fiscal quarter report from sixty to ninety days following the end of the quarter. This new proposed due date conforms with the due date for the SEF annual compliance report under proposed § 37.1501(e)(2).
The Commission requests comment on all aspects of proposed § 37.1306(d).
The Commission proposes to add a new requirement under § 37.1306(e) for each SEF to provide notice to the Commission of its non-compliance with the financial resource requirements no later than forty-eight hours after the SEF knows or reasonably should have known of its non-compliance.
The Commission requests comment on all aspects of proposed § 37.1306(e).
Section 37.1307(a) currently delegates authority to the Director of DMO, or other staff as the Director may designate, to perform certain functions that are reserved to the Commission under the Core Principle 13 regulations, including reviewing the methodology used to compute projected operating costs.
The Commission proposes to amend § 37.1307(a)(2) to clarify that the Commission may additionally delegate the authority to review and make changes to the methodology used by a SEF to determine the market value of its financial resources under § 37.1305 and the methodology that SEFs use to determine their wind-down costs under § 37.1304. Further, the Commission would delegate the ability to request the additional documentation related to the calculation methodologies used under § 37.1306(c) and the notification of non-compliance under § 37.1306(e). The proposed amendments also include several additional non-substantive amendments based on the proposed amendments to Core Principle 13 regulations, as described above.
The Commission requests comment on all aspects of proposed § 37.1307.
Core Principle 14 requires that SEFs (i) establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, through the development of
The Commission is not proposing any amendments to existing §§ 37.1401(a)-(b), (e)-(f), (g)-(i), or (k)-(m), other than non-substantive changes to paragraph references that are based on the changes described below.
Section 37.1401(c) requires each SEF to maintain a business continuity-disaster recovery plan and resources, emergency procedures, and backup facilities sufficient to enable timely recovery, resumption of its operations, and resumption of its ongoing fulfillment of its responsibilities and obligations as a SEF following any disruption of its operations.
As noted above, the Commission proposes to move the existing requirement under § 37.205(b)(4)—“Safe storage capability”—that a SEF must protect audit trail data from unauthorized alteration, accidental erasure, or other loss to a more appropriate provision under proposed § 37.1401(c).
Existing Exhibit V to Form SEF in Appendix A requires an applicant for SEF registration to file an Operational Capability Technology Questionnaire (“Questionnaire”) in order to demonstrate compliance with Core Principle 14 and § 37.1401.
The Commission proposes a new provision under § 37.1401(g) to require each SEF to annually prepare and submit an up-to-date Questionnaire to Commission staff not later than 90 calendar days after the SEF's fiscal year-end.
The updated version of the Questionnaire requests documents and information in the following nine areas to assist the Commission in assessing a SEF's compliance with the Act and Commission regulations: (i) Organizational structure, system descriptions, facility locations, and geographic distribution of staff and equipment, including organizational charts and diagrams; (ii) enterprise risk management program and governance, including information regarding the Board of Directors, audits, and third-party providers; (iii) information security, including storage of records, access controls, and cybersecurity threat intelligence capabilities; (iv) business continuity and disaster recovery plan and resources, including testing and recovery time objectives; (v) capacity planning and testing; (vi) system operations, including configuration management and event management; (vii) systems development methodology, including quality assurance; (viii) physical security and environmental controls; and (ix) testing, including vulnerability, penetration, and controls testing. While the majority of the updated Questionnaire is unchanged from the current version, the Commission is making certain amendments, including the addition of enterprise technology risk assessments, board of director and committee information, third-party service provider information, and cybersecurity threat intelligence capabilities to keep up-to-date with the rapidly changing field of system safeguards and cybersecurity.
The proposed annual update is designed to reduce overall compliance-related burdens and enhance internal operational efficiency for SEFs. First, the Commission would use the Questionnaire as the basis for Systems Safeguards Examination (“SSE”) document requests. The Commission believes that maintaining an updated Questionnaire would limit SSE document requests and the effort required to respond to these requests—a SEF would be able to provide updated information and documents for sections of the Questionnaire that have changed since the last annual filing.
The Commission requests comment on all aspects of proposed § 37.1401(g).
Section 37.1401(j) specifies that for registered entities deemed by the Commission to be “critical financial markets,” § 40.9 sets forth requirements for maintaining and dispersing disaster recovery resources in a manner sufficient to meet a same-day recovery time objective in the event of a wide-scale disruption. The Commission proposes to eliminate this provision, given that the Commission has not defined “critical financial markets” and such requirements do not exist under § 40.9.
Core Principle 15 requires each SEF to designate a CCO and sets forth its corresponding duties.
Core Principle 15 requires a CCO to report directly to the SEF's “board [of directors]” or the SEF's “senior officer”
The Commission proposes to define a “senior officer” under § 37.1501(a) as the chief executive officer or other equivalent officer of the SEF. Across the various organizational structures that SEFs have established, the Commission has observed that a senior officer often may be the appropriate individual to whom a CCO would report regarding SEF activities. Therefore, this proposed definition would clarify the permissible reporting lines for the CCO and would provide specificity to the Commission's proposed amendments to the Core Principle 15 regulations, as described below. Among other things, the proposed requirements would enable the senior officer to have greater oversight responsibilities over the CCO consistent with Core Principle 15.
The Commission requests comment on all aspects of proposed § 37.1501(a). In particular, the Commission requests comment on the questions below.
Sections 37.1501(b)-(c) set forth certain baseline requirements for the SEF CCO position. Section 37.1501(b)—“Designation and qualifications of chief compliance officer”— requires a SEF to designate an individual to serve as the CCO; requires the CCO to have the authority and resources to help fulfill the SEF's statutory and regulatory duties, including supervisory authority over compliance staff; and establishes minimum qualifications for the designated CCO.
The Commission proposes to amend, clarify, and eliminate various existing requirements under §§ 37.1501(b)-(c) and consolidate the remaining provisions into § 37.1501(b), as described below. The Commission proposes to eliminate duplicative rules to Core Principle 15, including requirements that a SEF designate a
Consistent with Core Principle 15, which requires the CCO to report to the SEF's board or senior officer, the Commission also proposes amendments to the consolidated requirement under § 37.1501(b) to allow the SEF's senior officer to have the same oversight responsibilities over the CCO as the board. First, the Commission proposes to allow a CCO to consult with the board of directors or senior officer of the SEF as the CCO develops the SEF's policies and procedures.
The Commission further proposes to eliminate the limitations on authority to remove a CCO, which currently restricts that removal authority to a majority of the board, or in the absence of a board, a senior officer.
Based on the proposed consolidation of existing §§ 37.1501(b)-(c), the Commission also proposes several non-substantive amendments to the remaining provisions under proposed § 37.1501(b), including the renumbering of certain existing provisions.
The Commission proposes a new acceptable practice to Core Principle 15 in Appendix B associated with § 37.1501(b)(2)(i), which requires a CCO to have the background and skills appropriate to the position.
The proposed acceptable practice also states that a SEF should be especially vigilant regarding potential conflicts of interest when appointing a CCO. The Commission notes that the preamble to the SEF Core Principles Final Rule stated “a conflict of interest may compromise a CCO's ability to effectively fulfill his or her responsibilities as a CCO . . . .”
The Commission requests comment on all aspects of proposed § 37.1501(b) and the associated acceptable practices to Core Principle 15 in Appendix B.
Section 37.1501(d)—“Duties of chief compliance officer”—currently requires a CCO, at a minimum, to (i) oversee and review the SEF's compliance with the Act and Commission regulations;
The Commission proposes to adopt several substantive and non-substantive amendments to clarify and streamline these duties. The Commission proposes to consolidate certain existing provisions and specify that the CCO may identify noncompliance matters through “any means,” in addition to the currently prescribed means; and clarify that the procedures followed to address noncompliance issues must be “reasonably designed” by the CCO to handle, respond, remediate, retest, and resolve noncompliance issues identified by the CCO.
The Commission also proposes to amend a CCO's duty to resolve conflicts of interest.
The Commission believes that these proposed amendments do not weaken a CCO's statutory duty to address conflicts of interest, but rather reflect the CCO's practical ability to detect and resolve conflicts. Moreover, the proposed amendments reflect the Commission's belief that a CCO should have discretion to determine the conflicts that are material to his or her SEF's ability to comply with the Act and the Commission's regulations. The Commission believes that these proposed changes are consistent with Core Principle 15.
The Commission requests comment on all aspects of proposed § 37.1501(c).
Existing § 37.1501(e)—“Preparation of annual compliance report”—currently requires the CCO to annually prepare and sign an ACR that, at a minimum (i) describes the SEF's written policies and procedures, including the code of ethics and conflicts of interest policies;
During part 37 implementation, the Commission has gained experience and received feedback with respect to the ACR requirements. The Commission notes that some of the required ACR content has provided the Commission with minimal meaningful insight into a SEF's compliance program. For example, some of the content is duplicative of information obtained by the Commission from other reporting channels, such as the system-related information that a SEF must file pursuant to Core Principle 14
Based upon its experience in reviewing ACRs, the Commission is proposing certain amendments that would eliminate duplicative or unnecessary information requirements and streamline existing requirements. These amendments would reduce unnecessary regulatory burdens and compliance costs associated with certain aspects of ACRs. The Commission is also proposing certain amendments to enhance the usefulness of ACRs by enabling the Commission to assess the effectiveness of a SEF's compliance and self-regulatory programs. The proposed revisions represent a simplified approach that continues to effectuate Core Principle 15.
The Commission proposes to refine the scope of some of the required ACR content that it believes is otherwise duplicative, unnecessary, or burdensome. Under the proposed approach, a SEF would no longer need to include in its ACR either a review of all the Commission regulations applicable to a SEF or an identification of the written policies and procedures designed to ensure compliance with the Act and Commission regulations.
To facilitate the Commission's ability to assess a SEF's written policies and procedures regarding compliance matters, the Commission also proposes to require a SEF to discuss only material noncompliance matters and explain the corresponding actions taken to resolve such matters.
Consistent with these proposed amendments, the Commission also proposes to limit a SEF CCO's certification of an ACR's accuracy and completeness to “all material respects” of the report.
The Commission requests comment on all aspects of proposed § 37.1501(d). In particular, the Commission requests comment to the questions below.
Existing § 37.1501(f)(1) currently requires a CCO to provide an ACR to the board or, in the absence of a board, the senior officer for review.
The Commission proposes several amendments to simplify the ACR submission procedures. First, the Commission proposes to provide SEFs with an additional thirty days to file the ACR with the Commission, but no later than ninety calendar days after a SEF's fiscal year end.
In addition to the proposed amendments described above related to submitting the ACR, the Commission proposes certain non-substantive amendments to the remaining provisions under proposed § 37.1501(e).
The Commission requests comment on all aspects of proposed § 37.1501(e).
Existing Section 37.1501(g)(1) currently requires a SEF to maintain a copy of written policies and procedures adopted in furtherance of compliance with the Act and the Commissions regulations;
The Commission proposes streamline the recordkeeping requirements that pertain to the CCO's duties and the preparation and submission of the ACR. Accordingly, the Commission proposes a revised general requirement under proposed § 37.1501(f) that would require the SEF to keep all records demonstrating compliance with the duties of the CCO and the preparation and submission of the ACR consistent with the recordkeeping requirements under §§ 37.1000-1001.
Section 37.1501(h)—“Delegation of authority”—currently delegates the authority to grant or deny a SEF's request for an extension of time to file its ACR to the Director of DMO.
The Commission is proposing regulations under part 36 to address the broadened scope of swaps that will become subject to the trade execution requirement based on the proposed interpretation of “makes the swap available to trade” in CEA section 2(h)(8). In addition to an implementing regulation, the Commission proposes several exemptions from the requirement for certain types of swap transactions, as discussed below. Further, the Commission proposes to require that SEFs and DCMs file a standardized form with the Commission that details the swaps that they respectively list for trading that are subject to the requirement. The Commission also proposes a new provision to compel the Commission to establish a centralized registry on its website that reflects (i) the SEFs and DCMs that list swaps subject to the requirement; and (ii) the particular swaps listed on each of those entities. To transition trading of additional swaps onto SEFs or DCMs pursuant to the requirement, the Commission additionally proposes a revised compliance schedule.
The Commission proposes § 36.1(a) to codify the statutory language of the trade execution requirement, which requires counterparties to execute a swap that is subject to the clearing requirement on a DCM, a SEF or an exempt SEF unless no such entity “makes the swap available to trade” or the swap is subject to a clearing exception in CEA section 2(h)(7).
The Commission also proposes to exempt certain types of swap transactions from the trade execution requirement pursuant to its exemptive authority in CEA section 4(c). For the purposes of promoting responsible economic or financial innovation and fair competition, CEA section 4(c)(1) provides the Commission with the authority to exempt any agreement, contract, or transaction from any CEA provision, subject to specified factors.
As discussed below, the Commission specifically proposes exemptions from the trade execution requirement for the following transactions that would otherwise be subject to that requirement: (i) Swap transactions involving swaps that are listed for trading only by an Exempt SEF; (ii) swap transactions for which the clearing exceptions in CEA section 2(h)(7) or the clearing exceptions or exemptions under part 50 apply; (iii) swap transactions that are executed as a component of a package transaction that includes a component that is a new issuance bond; and (iv) swap transactions between “eligible affiliate counterparties” (“inter-affiliate counterparties”) that elect to clear such transactions, notwithstanding their ability to elect the relevant clearing exemption under § 50.52.
The Commission proposes § 36.1(b) to establish an exemption from the trade execution requirement that may be elected by counterparties to a swap that is subject to the trade execution requirement, but is listed for trading only by Exempt SEFs.
As noted above, CEA section 2(h)(8)(A) provides that counterparties to transactions involving a swap subject to the clearing requirement must execute the transaction on a DCM designated under CEA section 5, a SEF registered under CEA section 5h or a SEF that is exempt from registration under CEA 5h(g).
While the Commission interprets CEA section 2(h)(8) to mean that the listing of a swap by an Exempt SEF would trigger the trade execution requirement, the Commission believes that it would be appropriate to exempt such listings from the requirement, given that the Commission does not oversee the listing of swaps by Exempt SEFs. To list new contracts SEFs submit their products for Commission review pursuant to the part 40 filing requirements.
The Commission believes that exempting swaps subject to the clearing requirement that are listed exclusively by Exempt SEFs should have little practical impact on the number of products that become subject to the trade execution requirement. Given the internationally competitive nature of the swaps industry, the Commission believes that SEFs and DCMs will likely list many of the same swaps listed by Exempt SEFs. The Commission also emphasizes that once the trade execution requirement is triggered for a particular swap by a SEF or DCM that lists the swap, the requirement may be satisfied by executing the swap on not only a SEF or DCM, but also on an Exempt SEF as well.
For the reasons stated above, the Commission believes that exempting a swap subject to the clearing requirement that is listed for trading only on an Exempt SEF from triggering the trade execution requirement would be consistent with the objectives of CEA section 4(c).
Given that the number of swaps that are subject to the clearing requirement and only listed by Exempt SEFs is likely small, the Commission believes that the proposed exemption is appropriate and would be consistent with the public interest and purposes of the CEA. The Commission believes that the proposed regulation would not have a material adverse effect on the ability of the Commission or any SEF or DCM to discharge its regulatory or self-regulatory duties under the Act. The Commission notes that under the proposed exemption, swap agreements, contracts, and transactions would still be entered into solely between ECPs,
The Commission requests comment on all aspects of proposed § 36.1(b), including whether the proposed exemptive relief is consistent with the public interest and the other requirements of CEA section 4(c). In particular, the Commission requests comment on the following question:
The Commission proposes § 36.1(c) to establish an exemption to the trade execution requirement for swap transactions for which an exception or exemption has been elected pursuant to part 50. The proposed exemption would apply to any transaction for which (i) a clearing exception under § 50.50 or a clearing exemption under § 50.51 or § 50.52 has been elected; or (ii) a future exemption that has been adopted by the Commission under part 50 would apply. The Commission has determined that exempting these types of transactions from the trade execution requirement would be consistent with the objectives of CEA section 4(c).
The Act and the Commission's regulations specify that certain transactions that are not subject to the clearing requirement are not subject to the trade execution requirement. CEA section 2(h)(8) clearly establishes that transactions that are not subject to the clearing requirement pursuant to a clearing exception in CEA section 2(h)(7) are not subject to the trade execution requirement.
In contrast to swaps that are eligible for the end-user exception, however, swaps that are not subject to the clearing requirement based on other statutory authority are currently not expressly exempted from the trade execution requirement. Pursuant to its exemptive authority in CEA section 4(c), the Commission has provided additional exemptions from the clearing requirement for swaps between certain types of entities, as well as for certain types of swap transactions. Section 50.51 allows certain cooperatives—those that otherwise consist entirely of entities that would qualify for the end-user exception—to elect a clearing exemption for swaps executed with a member of an exempt cooperative.
The Commission believes that applying the trade execution requirement to swaps that are eligible for a clearing exception or clearing exemption potentially mitigates the benefits that are associated with that exception or exemption. For example, a counterparty that determines not to clear a swap pursuant to a clearing exemption, but otherwise remains subject to the trade execution requirement, would be limited in where it may trade or execute that swap and may incur additional costs related to SEF onboarding. Therefore, in order to fully preserve the benefits of a clearing exception or clearing exemption, the Commission believes swaps that are excepted or exempted from the clearing requirement should not be subject to the trade execution requirement.
For the reasons stated above, the Commission believes that exempting a swap transaction, for which a clearing exception or clearing exemption have been elected pursuant to part 50, from the trade execution requirement would be consistent with the objectives of CEA section 4(c).
Given that the scope of this proposed exemption is limited and applies to transactions that are already excepted or exempted from the clearing requirement, the Commission believes that the proposed regulation would not have a material adverse effect on the ability of the Commission or any SEF or DCM to discharge its regulatory or self-regulatory responsibilities under the CEA and the Commission's regulations. The Commission believes that under the proposed exemption, swap transactions would still be entered into solely between ECPs, who the Commission believes, for purposes of this proposal, to be appropriate persons.
The Commission requests comment on all aspects of proposed § 36.1(c), including whether the proposed exemptive relief is consistent with the public interest and the other requirements of CEA section 4(c). In particular, the Commission requests comment on the following question:
The Commission proposes § 36.1(d) to establish an exemption to the trade execution requirement for swap transactions that are components of a “New Issuance Bond” package transaction. The Commission believes that exempting these types of transactions from the trade execution requirement would be consistent with the objectives of CEA section 4(c). This proposed approach is consistent with the time-limited no-action relief provided by Commission staff for this category of package transactions.
New Issuance Bond package transactions include at least one individual swap component that is subject to the trade execution requirement and at least one individual component that is a bond
Given the role of the issuer in the package transaction—both as issuer of the bond and a counterparty to the swap—and the process under which the swap is negotiated,
Therefore, consistent with current no-action relief provided by Commission staff, the Commission proposes to exempt swap components of a New Bond Issuance package transaction from the trade execution requirement. The proposed exemption would establish that a “package transaction” consists of two or more component transactions executed between two or more counterparties, where (i) execution of each component transaction is contingent upon the execution of all other components transactions; and (ii) the component transactions are priced or quoted together as one economic transaction with simultaneous or near simultaneous execution of all components. The Commission recognizes the inherent challenges in trading or executing these swap components on a SEF or DCM and, therefore, recognizes the benefits of continuing to allow market participants to maintain established market practices with respect to this type of package transaction.
The Commission believes that exempting swap components of New Issuance Bond package transactions from the trade execution requirement would be consistent with the objectives of CEA section 4(c).
The Commission recognizes the importance of new bond issuances in helping market participants to raise capital and fund origination loans for businesses and homeowners. Accordingly, the Commission recognizes that allowing the swap components of New Bond Issuance package transaction to be executed away from a SEF or DCM—consistent with current market practice—is integral to facilitating the bond issuance. Further, the Commission recognizes that the proposed exemption is limited in nature,
The Commission believes, therefore, that the proposed exemption from the trade execution requirement for swap components of New Issuance Bond package transactions is appropriate and would be consistent with the public interest and purposes of the CEA. The Commission further believes that the proposed regulation would not have a material adverse effect on the ability of the Commission or any SEF or DCM to discharge its regulatory or self-regulatory duties under the CEA. The Commission notes that under the proposed exemption, swap transactions would still be entered into solely between ECPs, who the Commission believes, for purposes of this proposal, to be appropriate persons.
The Commission requests comment on all aspects of the proposed exemption of swap components of New Issuance Bond package transactions from the trade execution requirement under proposed § 36.1(d), including whether the proposed exemptive relief is consistent with the public interest and the other requirements of CEA section 4(c). The Commission specifically requests comment on the following questions:
The Commission proposes § 36.1(e) to establish an exemption from the trade execution requirement that may be elected by inter-affiliate counterparties to a swap that is submitted for clearing. Counterparties would be eligible to elect the exemption by meeting the conditions set forth under § 50.52(a) for “eligible affiliate counterparty” status.
Based on time-limited no-action relief granted by Commission staff, inter-affiliate counterparties that do not elect the § 50.52 clearing exemption are executing swaps away from a SEF or DCM that are otherwise subject to the trade execution requirement.
The Commission believes that exempting a swap executed between inter-affiliate counterparties that is submitted for clearing from the trade execution requirement would be consistent with the objectives of CEA section 4(c).
As noted above, these transactions are not intended to be arm's-length, market-facing, or competitively executed under any circumstance, irrespective of the type of swap involved. Therefore, the nature of these transactions mitigates the potential benefits of their execution on a SEF or a DCM. The Commission believes this proposed exemption would ensure that inter-affiliate counterparties would be able to efficiently utilize the risk management approach that best suits their individual needs, such as clearing inter-affiliate swaps, without being unduly influenced by whether that choice would require them to execute swaps on a SEF. Notably, the Commission's proposed rules would allow SEFs to provide more flexible means of execution and, thus, could address some of the issues currently cited with respect to executing inter-affiliate transactions on a SEF. Nevertheless, the Commission believes that the policy justifications described above support an exemption for such inter-affiliate swap transactions from the trade execution requirement.
The Commission believes, therefore, that the proposed exemption from the trade execution requirement for inter-affiliate counterparties is appropriate, and it would be consistent with the public interest and purposes of the CEA. Given the limited applicability of this proposed exemption to transactions only executed between inter-affiliates, the Commission believes that the proposed regulation would not have a material adverse effect on the ability of the Commission or any SEF or DCM to discharge its regulatory or self-regulatory duties under the CEA. Finally, the Commission notes that under the proposed exemption, swap transactions would still be entered into solely between ECPs, who the Commission believes, for purposes of this proposal, to be appropriate persons.
The Commission requests comment on all aspects of proposed § 36.1(e), including whether the proposed exemptive relief is consistent with the public interest and the other requirements of CEA section 4(c). In particular, the Commission requests comment on the following questions:
The Commission currently provides information on its website regarding the swaps that are subject to the trade execution requirement. In addition to providing a chart that identifies those swaps,
To help the Commission publish and maintain such a registry, the Commission also proposes a requirement under § 36.2(b) and Appendix A to part 36 that SEFs and DCMs submit a standardized Form TER. Form TER would detail the swaps that they list that are subject to or subsequently become subject to the clearing requirement. The Commission further proposes to require that a SEF or DCM submit a Form TER concurrently with any § 40.2 or § 40.3 product filing that consists of a swap that is subject to the clearing requirement. In addition, the Commission proposes that SEFs and DCMs file a Form TER, for any swaps they currently list that are subject to the clearing requirement, ten business days prior to the effective date of any final rule adopted from this notice. To effectuate this proposed change initially, the Commission is proposing that the effective date for proposed § 36.2 occur twenty days prior to effective date for the rest of this proposed rule. The Commission believes that this earlier effective period would provide SEFs and DCMs sufficient time to file their initial Form TERs and give Commission staff sufficient time to review and process these initial Form TERs. Finally, for swaps that are listed by a SEF or DCM that subsequently become subject to the clearing requirement, the Commission proposes to require that SEFs and DCMs file Form TER ten business days prior to the effective date of that requirement for such swaps. By requiring SEFs and DCMs to file Form TER prior to the effective date of such requirements, Commission staff would have sufficient time to review, compile Form TERs, and publish its trade execution requirement registry on its website.
Form TER in Appendix A to part 36 would require a SEFs or DCM to provide the specific relevant economic terms of the swaps that it lists for trading. Each SEF or DCM that lists a swap that is subject to or becomes subject to the clearing requirement would be required to file an initial Form TER that details all such listed swaps. Any subsequent changes to a SEF's or DCM's listing of such swaps, such as additional listed swaps that later become subject to the clearing requirement, would require the SEF or DCM to amend its Form TER to reflect that scope. For IRS listed for trading, Form TER would require a SEF or DCM to specify (i) product class/specification; (ii) currency; (iii) floating rate index; (iv) stated termination date; (v) optionality; (vi) dual currencies; and (vii) conditional notional amounts. For CDS listed for trading, Form TER would require a SEF or DCM to specify (i) product class/specification; (ii) reference entities; (iii) region; (iv) indices; (v) tenor; (vi) applicable series; and (vii) tranche. The Commission notes that the scope of required information corresponds to the scope of information provided under § 50.4 for IRS and CDS that are subject to the clearing requirement.
The Commission believes that Form TER would provide the information needed to efficiently produce a trade execution requirement registry under § 36.2. Given the potentially large number of filings and swaps that would comprise the trade execution requirement registry, the Commission believes that uniform submissions through a standardized Form TER will foster efficient processing of the submissions and uniform presentation of relevant information in the registry.
The Commission also proposes to require under § 36.2(c) that DCMs and SEFs publicly post their respective Form TER filings on their respective websites, and promptly amend any inaccurate Form TERs.
The Commission requests comment on all aspects of proposed § 36.2 and proposed Form TER in Appendix A to part 36. In particular, the Commission requests comment on the following questions:
The Commission observes that with the proposed elimination of the existing MAT determination process and the expanded scope of swaps that would be subject to the trade execution requirement under proposed § 36.1, counterparties may require additional time to prepare and update their business practices and technological and operational capabilities to trade and execute these swaps on a SEF or DCM. For example, market participants would have to directly on-board to a SEF or DCM, or otherwise avail themselves of other means of access, to continue trading those swaps that become newly subject to the trade execution requirement. Therefore, the Commission proposes to eliminate the existing trade execution requirement compliance schedule
In formulating the proposed compliance schedule, the Commission considered the expanded scope of swaps that would become subject to the trade execution requirement. The Commission also referred to the compliance schedule previously established for the initial implementation of the clearing requirement, with a focus on the defined categories of market participants and respective levels of swap trading activity.
The proposed schedule would establish different compliance dates for different categories of counterparties, as described below. As specified under proposed § 36.3(d), however, nothing in this proposed compliance schedule should be construed to prohibit counterparties from voluntarily complying with the trade execution requirement sooner than prescribed in the proposed compliance schedule. Finally, the Commission notes that pursuant to proposed § 36.3(b), the compliance schedule would not apply to swaps that are already subject to the trade execution requirement before the effective date of any final rule. Accordingly, market participants must continue to comply with the existing trade execution requirement for those swaps.
Under § 36.3(c)(1), a Category 1 entity, which would include swap dealers, major swap participants, security-based swap dealers, or major security-based swap participants, would have ninety days to comply with the expanded trade execution requirement when it executes a swap transaction with another Category 1 entity or a non-Category 1 entity that voluntarily seeks to execute the swap on a SEF, a DCM, or an Exempt SEF. The Commission believes that a ninety-day time frame would be a reasonable period for these entities because they possess experience in the swaps market and resources to comply with the requirement sooner than other counterparties. Further, the Commission believes that Category 1 entities are generally the most active participants in the swaps market, often serving as market makers and liquidity providers to other participants. As the initial category of participants that are required to comply with the expanded trade execution requirement, the Commission believes that Category 1 entities are best equipped to work internally and with the trading venues,
The Commission also believes that ninety days is a reasonable period of time for SEFs and DCMs to prepare to facilitate trading in additional swaps that would become subject to the expanded trade execution requirement. In particular, the Commission notes that some SEFs already list many of the types of swaps that would become subject to the expanded requirement.
The Commission proposes § 36.3(c)(2) to provide Category 2 entities with 180 days to comply with the expanded trade execution requirement when they execute swap transactions with a Category 1 entity, another Category 2 entity, or other counterparties that voluntarily seek to execute the swap on a SEF, a DCM, or an Exempt SEF. Category 2 entities would include commodity pools; private funds as defined in section 202(a) of the Investment Advisers Act of 1940; or persons predominantly engaged in activities related to the business of banking, or in activities that are financial in nature as defined in section 4(k) of the Bank Holding Company Act of 1956.
The Commission believes that a significant amount of swaps trading would migrate to SEFs or DCMs upon the compliance date for Category 2 entities because they consist of many active liquidity takers. Nevertheless, the Commission believes that an additional ninety days to comply with the expanded trade execution requirement would be reasonable for Category 2 entities, given that they may not have the same level of swaps trading expertise or resources as Category 1 entities. The Commission believes that it is essential for these entities to have sufficient time to transition their trading to venue-based environments.
The Commission proposes § 36.3(c)(3) to provide all entities that are not either Category 1 entities or Category 2 entities with 270 days to comply with the expanded trade execution requirement. The Commission believes that entities that do not qualify as either a Category 1 entity or Category 2 entity should be provided the greatest amount of time to comply with the expanded trade execution requirement because they likely have less sophistication in swaps trading. Of all of the participants in the swaps market, the Commission believes that the participants in this category are least likely to have on-boarded to or have experience trading swaps through SEFs or DCMs. Further, the Commission understands that onboarding onto such venues can be an intensive and time-consuming process. Therefore, the Commission believes that this additional time will help ensure that these participants have sufficient time to onboard or establish means of access and are prepared to trade on a SEF or DCM.
Under proposed § 36.3(e), the Commission would devise an appropriate compliance schedule when additional swaps listed by a SEF or DCM are subject to the trade execution requirement in the future
The Commission requests comment on all aspects of the proposed compliance schedule in proposed § 36.3. The Commission specifically requests comment on the following questions:
Section 43.2 defines a swap “block trade” as a publicly reportable swap transaction that (i) involves a swap that is listed on a SEF or DCM; (ii) occurs away from the SEF's or DCM's trading system or platform and is executed pursuant to the SEF's or DCM's rules
Similar to futures block trades, the Commission requires that swap block trades “occur away” from a SEF's or a DCM's trading system or platform, but pursuant to the SEF's or a DCM's rules and procedures.
Given that block trades must occur away from a SEF's or a DCM's trading system or platform, the enumerated prohibition on pre-arranged trading as an abusive trading practice under § 37.203(a) allows block trades as an exception.
During the part 37 implementation process, SEFs and market participants informed the Commission that for swap transactions that are intended to be cleared, requiring that such swaps to “occur away” from a SEF's trading system or platform creates an issue with carrying out pre-execution credit screening.
DMO acknowledged this operational challenge and accordingly has granted ongoing no-action relief from the requirement that swap block trades “occur away” from a SEF.
The Commission proposes to revise certain elements of the “block trade” definition under § 43.2. First, the Commission proposes to eliminate the “occurs away” requirement for swap block trades. Second, the Commission proposes to require that to the extent counterparties seek to execute any swap that has a notional or principal amount at or above the appropriate minimum block trade size applicable to such swap on a SEF, they must do so on a SEF's trading system or platform. For swaps listed by a SEF for trading that participants intend to execute on the SEF and submit for clearing, the Commission believes that the proposed revised definition would (i) allow FCMs to conduct pre-execution credit screenings in accordance with § 1.73; and (ii) allow SEFs to facilitate those screenings in accordance with the Commission's proposed requirement under § 37.702(b).
The Commission notes that this revised block trade definition is consistent with the provisions of the Dodd-Frank Act. CEA section 2(a)(13), as amended by the Dodd-Frank Act, directs the Commission to prescribe criteria for determining what constitutes a block trade for the purpose of establishing appropriate post-trade reporting time delays. The provision, however, does not set forth any pre-trade requirements, such as a requirement that the transaction be executed away from a SEF. Second, requiring block trades to be executed on a SEF for those swaps listed by the SEF, rather than allowing them to be executed away from the SEF, would also facilitate the statutory SEF goal of promoting swaps trading on SEFs.
The revised definition also corresponds with other proposed changes to the SEF regulatory framework. For example, the Commission believes that allowing SEFs to use flexible means of execution for swap transactions negates the need to allow swap block trade execution to occur away from SEFs. Similarly, the Commission's proposed approach to pre-execution communications should facilitate swap block trade execution on SEFs; proposed § 37.201(b) would generally prohibit participants from conducting such communications away from the SEF, except for communications regarding a listed swap that is not subject to the trade execution requirement, among other exceptions.
To conform to the amended block trade definition, the Commission also proposes to eliminate the block trade exception to the pre-arranged trading prohibition under § 37.203(a). Given that block trades would no longer occur away from a SEF, but would be executed on a SEF via flexible means of execution, the Commission expects that market participants will have sufficient ability to continue to execute such transactions through a SEF's trading system or platform.
The Commission requests comments on all aspects of proposed § 43.2. The Commission specifically requests comment on the following questions:
The Regulatory Flexibility Act
Therefore, the Chairman, on behalf of the Commission, pursuant to 5 U.S.C. 605(b), hereby certifies that the proposed rules will not have a significant economic impact on a substantial number of small entities.
The Paperwork Reduction Act of 1995, 44 U.S.C. 3501
The PRA applies to all information, regardless of form or format, whenever the government is obtaining, causing to be obtained, or soliciting information, and includes required disclosure to third parties or the public, of facts or opinions, when the information collection calls for answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, ten or more persons.
The Commission's proposed amendments would result in a collection of information within the meaning of the PRA, as discussed below. Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number from the Office of Management and Budget (“OMB”). The proposed rulemaking would amend parts 9, 36, 37, 38, 39, and 43 of the Commission's regulations to include new information collections, eliminate certain existing information collections, and modify existing information collections.
OMB control number 3038-0074 currently covers, among other things, all information collections arising in part 37 (other than the information collections related to existing § 37.10) and part 9.
The collections of information under these proposed amendments are necessary to implement certain provisions of the CEA, as amended by the Dodd-Frank Act. Among other provisions in the CEA, CEA section 8a(5) provides the Commission with authority to promulgate rules as reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA.
If the proposed amendments are adopted, responses to the proposed collections of information generally would be mandatory, although certain collections of information could vary based upon a SEF's discretion or level of business. For example, a SEF has the discretion to establish the scope of its trading operations,
The Commission will protect proprietary information according to the Freedom of Information Act and 17 CFR part 145, “Commission Records and Information.” In addition, section 8(a)(1) of the CEA strictly prohibits the Commission, unless specifically authorized by the CEA, from making public “data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.” The Commission is also required to protect certain information contained in a government system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
As discussed in the preamble to the final rules for part 37 (“SEF Core Principles Final Rule”), the methodology the Commission used to formulate the proposed estimates reflect an average across all SEFs (and in respect to proposed part 36, all SEFs and DCMs).
The following is a brief description of the information collections for SEFs, and as applicable DCMs and other market participants, under the proposed amendments to parts 36, 37 and 38.
The Commission notes that some of the proposed amendments are covered by other OMB control numbers. For example, some amendments would require SEFs to promulgate new rules that are required to be submitted to the Commission pursuant to part 40 of the Commission's regulations.
The Commission expects that as a result of the proposed application of the SEF registration requirement under § 37.3(a), additional swaps broking entities will register as SEFs. For PRA purposes, the Commission previously had revised the current number of registered SEFs from 23
The Commission notes that based on data from the National Futures Association (“NFA”), more than 300 interdealer brokers that are registered
The Commission initially estimates that up to 60 swaps broking entities, including interdealer brokers, and one Single-Dealer Aggregator Platform would register as SEFs as a result of the proposed application of the SEF registration requirement under § 37.3(a).
In connection with the Commission's proposed clarification of the registration requirement, the Commission would propose to delay the application of the registration requirement with respect to (i) swaps broking entities, including interdealer brokers for a six-month period; and (ii) foreign swaps broking entities, including foreign interdealer brokers that facilitate swaps trading for U.S. persons for two-year period, provided that in each case the subject entity submits a request to the Commission with certain information.
Proposed § 37.3(b) would streamline Form SEF by consolidating, amending, and eliminating several of the existing exhibits.
Proposed § 37.3(c) would eliminate the requirement that a SEF amend Form SEF when requesting an amended order of registration from the Commission. Instead, a registered SEF would file a request with the Commission for an amended order pursuant to proposed § 37.3(c), but would no longer be required to file updated exhibits to Form SEF, although a SEF would be required to provide the Commission with any additional information and documentation as the Commission deems necessary.
Proposed § 37.5(c) would amend the existing notification requirements related to transfers of equity interest in a SEF. Proposed § 37.5(c)(1) would require a SEF to file a notice with the Commission regarding any transaction that results in the transfer of direct or indirect ownership of fifty percent or more of the equity interest of a SEF as opposed to only direct ownership transfers as currently required.
Proposed §§ 37.6(b)(1)(i)-(ii) would amend the existing swap documentation requirements by establishing separate transaction documentation requirements for cleared and uncleared swaps, respectively. Under existing § 37.6(b), a SEF is required to provide each counterparty to a transaction with a written “confirmation” that contains all of the terms of a swap transaction at the time of the swap's execution for both cleared and uncleared swap transactions, including (i) “economic terms” specific to the transaction and (ii) non-transaction specific “relationship terms” governing the relationship between the two counterparties.
Proposed § 37.6(b)(1)(i), which would continue to apply the existing confirmation requirement to cleared swap transactions, would not alter the information collection burdens with respect to cleared swaps. For uncleared swaps, however, proposed § 37.6(b)(1)(ii) would require a SEF to provide a “trade evidence record” that memorializes the terms that are agreed upon by the counterparties on the SEF. In contrast to the requirement for cleared swaps, proposed § 37.6(b)(1)(ii) would not require the trade evidence record to include all the terms of the swap transaction, including relationship terms contained in underlying documentation between the counterparties, nor would the SEF need to obtain or maintain the underlying agreements prior to the execution of the swap transaction.
As a result, the Commission believes that the proposed amendments would reduce a SEF's annual recurring information collection burden for uncleared swap transactions. Accordingly, the Commission estimates that proposed § 37.6(b)(1)(ii) would reduce annual recurring information collection burdens by about 375 hours per SEF.
Proposed § 37.203(d) would eliminate the prescriptive automated trade surveillance system capabilities requirements enumerated in existing § 37.203(d), except for the ability of a SEF to reconstruct sequence of market activity, and would instead require that a SEF's automated trade surveillance system be capable of detecting and “reconstructing” potential trade practice violations.
As a result, the proposed rule would provide each SEF with the flexibility to determine what capabilities its automated trade surveillance system must have, based on the nature of the SEF's trading systems or platforms, to satisfy its core principle compliance responsibilities. Although it is possible that SEFs use their discretion to decrease the information collections and related burden hours, SEFs would still be obligated to comply with the same underlying core principle obligations with which they must currently comply. As a result, the Commission estimates and assumes that SEFs would continue to fulfill their information collection burdens in a manner similar to the status quo. Accordingly, the Commission assumes that proposed § 37.203(d) would not impose new information collection burdens or substantively or materially affect SEFs' total burden hours.
Proposed § 37.203(e) would require SEFs to establish an error trade policy that, among other things, would notify all market participants of (i) any swap transaction that is under review; (ii) any determination by the SEF that the swap transaction under review either has been determined to be or not to be an error trade; and (iii) the resolution of any error trade, including any trade term adjustment or trade cancellation. To the extent that SEFs currently are not explicitly required to provide market participants with notice of any of these events, proposed § 37.203(e) would impose a new information collection burden on SEFs.
Proposed § 37.205(a) would make several changes to SEFs' audit trail compliance obligations. First, the proposed amendment would replace the requirement that SEFs must “detect, investigate, and prevent” customer and market abuse with a requirement instead that SEFs must be able to “reconstruct all trading on its facility, detect and investigate customer and market abuses, and take appropriate disciplinary action.” Second, the Commission proposes to move the requirement that audit trail data shall be sufficient to reconstruct all indications of interest, requests for quotes, orders and trades, to the guidance to Core Principle 2 in Appendix B.
To the extent that the Commission is providing SEFs with greater discretion in fulfilling their information collection obligations with respect to audit trail requirements under § 37.205, the Commission estimates and assumes that SEFs would continue to fulfill their information collection burdens in a manner similar to the status quo. Accordingly, the Commission assumes that proposed § 37.205(a) would not substantively or materially affect a SEF's total information collection burden hours.
Proposed § 37.205(b) would narrow the scope of audit trail data that must be captured in a transaction history database under existing § 37.205(b)(2) by eliminating the requirement that SEFs include in their electronic transaction history database “all indications of interest, requests for quotes, and order and trades entered into” a SEF's trading system or platform. Instead, the SEFs would be required to include only “trades” executed via voice or via entry into a SEF's electronic trading system but must include all “orders” that are entered into an electronic trading system. The Commission additionally proposes to eliminate the remaining requirements of § 37.205(b)(2) detailing the information that must be included in transaction history database. Consistent with the changes to § 37.205(b)(2), the Commission further proposes to amend § 37.205(b)(3) to clarify that a SEF's electronic analysis capability must enable the SEF to reconstruct transactions, rather than “indications of interest, requests for quotes, orders, and trades.”
To the extent that the Commission is providing SEFs with greater discretion in fulfilling their information collection obligations with respect to audit trail requirements under § 37.205, the Commission estimates and assumes that SEFs would continue to fulfill their information collection burdens in a manner similar to the status quo. Accordingly, the Commission assumes that proposed § 37.205(b) would not substantively or materially affect a SEF's total information collection burden hours.
Proposed § 37.205(c) would eliminate the existing requirements for a SEF to establish an annual audit trail review and a related enforcement program and instead require the SEF to “establish a program to verify its ability to comprehensively and accurately reconstruct all trading on its facility. . . .” The Commission believes that this change will provide SEFs with discretion regarding what records they must maintain in order to comply with their information collection requirements,
To the extent that the Commission is providing SEFs greater discretion in fulfilling their information collection obligations with respect to audit trail requirements under § 37.205, the Commission estimates and assumes that SEFs would continue to fulfill their information collection burdens in a manner similar to the status quo. Accordingly, the Commission will assume that proposed § 37.205(c) would not substantively or materially affect a SEF's total information collection burden hours.
The Commission proposes to eliminate the existing requirements under (i) § 37.206(c), which currently specify certain minimum requirements for a SEF disciplinary hearing, including providing a transcript of the hearing to a respondent under certain conditions; and (ii) § 37.206(d), which requires that a disciplinary panel render a written decision promptly following a hearing, along with a detailed list of information that the SEF must include in the decision. Proposed § 37.206(b) would generally require a SEF to establish a disciplinary program to enforce its rules and provide the SEF with the discretion to administer that program through compliance staff instead of mandatory disciplinary panels. The Commission also proposes to add guidance to Core Principle 2 in Appendix B to specify that a SEF's rules governing the adjudication of a matter by the SEF's disciplinary panel should be fair, equitable, and publicly available and that a SEF's rules should require the disciplinary panel to promptly issue a written decision following a hearing or the acceptance of a settlement offer.
To the extent that the Commission is providing SEFs greater discretion in fulfilling their information collection requirements with respect to carrying out disciplinary hearing and issuing hearing decisions, the Commission estimates and assumes that SEFs would continue to fulfill their information collection burdens in a manner similar to the status quo. Accordingly, the Commission will assume that proposed §§ 37.206(b)-(d) would not substantively or materially affect a SEF's total information collection burden hours.
Proposed § 37.401(b) would require that a SEF collect and evaluate data on its market participants' trading activity outside of the SEF “as necessary” rather than “on an ongoing basis” as currently required.
Proposed § 37.1301(b) would permit SEFs that also operate as DCOs to file a single financial report under § 39.11 that covers both the SEF and DCO. Because this proposed approach would streamline and simplify the SEF financial reporting requirement process under § 37.1306, the Commission estimates that the proposed change would decrease annual recurring information collection burden by 5 burden hours. The Commission also estimates that 1 SEF will take advantage of this approach per year.
Proposed § 37.1306 would make several changes that would affect SEFs' information collection burden hours. First, proposed § 37.1306(a) would require SEFs' quarterly financial statement to be prepare in accordance with GAAP.
Second, proposed § 37.1306(c), among other things, would require a SEF to determine all of the costs that a SEF would incur to wind down its operations and the amount of time for the projected wind-down period, as well as explain the basis for its determinations. The Commission estimates that proposed § 37.1306(c) will impose an initial, non-recurring information collection of 20 burden hours associated with the SEF's obligation to provide a description of the costs and timing of a projected wind-down scenario, along with the basis for its determination. Additionally, the Commission estimates that this information collection burden would impose 5 annual recurring information collection burden hours after the initial year to update this information.
Proposed § 37.1401(g) would require a SEF to annually submit an up-to-date questionnaire that would be located in Appendix A to part 37 (“Questionnaire”) based on the existing Operational Capability Technology Questionnaire located in Exhibit V to Form SEF in Appendix A.
The Commission believes that the aggregate burden hours imposed on SEFs are mitigated for several reasons. First, an annually-updated Questionnaire would limit the work required of SEFs in responding to a System Safeguards Examination document requests to providing updated information and documents for sections of Exhibit Q that have changed since the last annual filing. Second, SEFs currently must provide similar information under existing §§ 37.1401(f)-(g).
Proposed § 37.1501(d)
Second, proposed § 37.1501(d)(3) would maintain the current requirement that an ACR describe the “financial, managerial, and operational resources” set aside for compliance with the Act and Commission regulations, but would eliminate the requirement that a SEF specifically discuss its compliance staffing and structure; a catalogue of investigations and disciplinary actions taken over the last year; and a review of disciplinary committee and panel performance. The Commission estimates that proposed § 37.1501(d)(3) would reduce annual recurring information collection burden hours by approximately 5 burden hours per SEF.
Third, to facilitate the Commission's ability to assess a SEF's written policies and procedures regarding compliance matters, proposed § 37.1501(d)(4) would require a SEF to discuss only material noncompliance matters and explain the corresponding actions taken to resolve such matters.
Fourth, proposed § 37.1501(d)(5) would limit a SEF CCO's certification of an ACR's accuracy and completeness to “all material respects” of the report. The Commission understands that CCOs have been hesitant to certify that an entire ACR is accurate and complete under the penalty of the law, without regard to whether a potential inaccuracy or omission would be a material error or not. Accordingly, since the Commission believes that the proposed change would entail fewer burdens for a CCO to collect the necessary information to enable the CCO to certify the ACR, the Commission estimates that this change would reduce annual recurring information collection burden hours per SEF/CCO by 10 burden hours.
Proposed part 36 would address the swap trade execution requirement and would eliminate the MAT determination process under existing § 37.10 and § 38.12, as well as the associated compliance schedules set forth under § 37.11 and § 38.11. Proposed § 36.2 would require SEFs and DCMs to each respectively file a standardized form (“Form TER”) to the Commission that details the swaps that they list for trading that are subject to the trade execution requirement, as well as include such information on their respective websites. The Commission estimates that filing these forms and providing the related information on their website will create a new information collection with an initial, non-recurring burden of approximately 5 burden hours per SEF to complete and submit Form TER. Additionally, the Commission estimates that this
The Commission invites the public to comment on any aspect of the paperwork burdens discussed herein, particularly for those provisions for which the Commission proposes to eliminate specific requirements and instead provide SEFs with discretion in complying with their information collection obligations. Copies of the supporting statements for the collections of information from the Commission to OMB are available by visiting
Those desiring to submit comments on the proposed information collection requirements should submit them directly to the Office of Information and Regulatory Affairs, OMB, by fax at (202) 395-6566, or by email at
Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders.
The Commission recognizes that the proposed rules may impose costs, but currently lacks the requisite data and information to reasonably estimate them. This lack of data and information is attributable in part to the discretion that a SEF would have under the proposed rules to achieve compliance by adopting different measures. Accordingly, the Commission cannot predict the approach that each SEF would adopt to achieve such compliance. Additionally, the initial and recurring compliance costs for any particular SEF or market participant would depend on the size, existing infrastructure, level of swap activity, and practices and cost structure of the relevant entity. Costs or benefits may be impacted, for example, if certain entities seek to avoid the regulations attendant to SEFs by reducing their swap activities. In situations where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of the applicable proposed rules in qualitative terms.
The Commission notes that this consideration is based on its understanding that the swaps market functions internationally with (i) transactions that involve U.S. firms occurring across different international jurisdictions; (ii) some entities organized outside the U.S. that are prospective Commission registrants; and (iii) some entities typically operating both within and outside the U.S. who follow substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the cost-benefit discussion below refers to the effects of the proposed rules on all subject swaps
The Commission generally requests comment on all aspects of its cost-benefit considerations, including the identification and assessment of any costs and benefits not discussed therein; the potential costs and benefits of the alternatives that the Commission discussed in this release; data and any other information to assist or otherwise inform the Commission's ability to quantify or qualitatively describe the costs and benefits of the proposed rules; and substantiating data, statistics, and any other information to support positions posited by commenters with respect to the Commission's discussion. Commenters may also suggest other alternatives to the proposed approach where the commenters believe that they would be appropriate under the CEA and would provide a more appropriate cost-benefit profile.
The primary focus of the proposed rules is to amend requirements set forth for swap execution facilities under part 37 of the Commission's regulations;
The Commission proposes to apply the SEF registration requirements in CEA section 5h(a)(1) and § 37.3(a)(1) to both (i) swaps broking entities, including interdealer brokers, that facilitate multiple-to-multiple swaps trading away from SEFs; and (ii) Single-Dealer Aggregator Platforms that aggregate single-dealer pages. Accordingly, these entities would be required to either register as a SEF or become a part of an existing SEF. Other alternatives, however, include adjusting their activity to avoid the SEF registration requirement; or in the case of foreign swaps broking entities, which includes foreign interdealer brokers that currently facilitate trading,
The Commission is also proposing to delay the compliance date of any final rule that applies the SEF registration requirement. For foreign swaps broking entities, the Commission proposes to delay the compliance date for a period of two years. This proposed delay would provide more time for the Commission to further develop its cross-border regulatory regime, including clarifying the cross-border jurisdictional reach of the SEF registration requirement under CEA section 2(i). For U.S. swaps broking entities, including interdealer brokers, the Commission proposes to delay the compliance date for a period of six months in order to provide such entities time to obtain SEF registration.
The Commission proposes several clarifying and streamlining amendments to Form SEF. Some of the proposed amendments would amend or eliminate several of the information requirements set forth in the existing exhibits. For example, the Commission is proposing to consolidate certain exhibits regarding governance (existing Exhibits C and G) and personnel (existing Exhibits E and F), as well as eliminate an exhibit regarding the financial resources of any affiliates (existing Exhibit J). The Commission is also proposing to clarify certain information requirements not explicitly enumerated in the existing requirements, but which have been incorporated in practice as part of the existing SEF application review process. For example, SEF applicants would need to provide additional information in Form SEF about, among other things, the asset classes the SEF applicant intends to list and submit for clearing (new Exhibit N). The Commission is also proposing to eliminate the requirement to use Form SEF to request an amended order of registration; under the proposed rules, a registered SEF would be able to file a request with the Commission for an amended order of registration.
Finally, the Commission proposes to revise § 37.4 to exclude product submissions from the SEF registration process. Section 37.4 currently permits a SEF applicant to submit the terms and conditions of swaps that it intends to list for trading as part of its application for registration. Section 37.4 also requires the Commission to consider such swaps for approval at the time that the Commission issues a SEF's registration order or, for a dormant SEF, reinstatement of registration. As proposed, a SEF applicant would have to obtain registration prior to submitting product terms and conditions or related amendments under § 40.2 or § 40.3, which govern the submission of new product terms and conditions or related amendments by registered entities.
The Commission believes that ensuring that all entities operating trading systems or platforms that facilitate swaps
Further, increased swaps trading on a SEF also should benefit market participants, including, among other things, protections to mitigate abusive trading or other market disruptions via a facility's audit trail, trade surveillance, market monitoring, recordkeeping, and anti-fraud and market manipulation rules. Additionally, the use of SEF mechanisms would help to enhance post-trade efficiencies and facilitate compliance with related Commission requirements, including pre-trade credit screening and the submission of transactions for clearing and reporting. Among other things, the Commission believes that access to such services could benefit certain market participants more than others, in particular those who have not previously established access to such services.
The proposed amendments to Form SEF may benefit potential SEF applicants, including those swaps broking entities and Single-Dealer Aggregator Platforms that the Commission anticipates would elect to register as SEFs, by making a more efficient and potentially less burdensome SEF registration process. The Commission anticipates that certain changes to Form SEF would reduce duplicative information requirements, while also continuing to ensure that it receives sufficient information to determine whether the applicant is in compliance with the core principles and Commission regulations. The additional proposed information requirements include information that Commission staff has been requesting in practice as part of the SEF registration process after applicants submit Form SEF. Thus, requiring this information on Form SEF should increase the efficiency of the SEF registration process by reducing the number of follow-up questions and requests. The Commission also anticipates that these proposed requirements will reduce the amount of time that the Commission needs to review a completed application.
The Commission also proposes conforming amendments to Form SEF that are consistent with the proposed regulations. The proposed amendments prompting the revision or elimination of certain existing information requirements relate to, among other things, proposed amendments to existing execution method and financial resource requirements, as discussed below. The proposal to eliminate the temporary registration provisions that have expired should have no direct impact on costs or benefits. Additionally, the Commission proposes to exclude product submissions from the SEF application process. The Commission believes that separating these two processes would likely promote efficiency for both Commission staff and SEF applicants. Otherwise, the review of a SEF applicant's registration application could be unnecessarily delayed or stayed because Commission staff may require additional consideration or analysis of the novelty or complexity of the proposed product.
Any swaps broking entity or Single-Dealer Aggregator Platform that elects to register as a SEF would incur the costs of registering, owning, and operating a SEF. The Commission previously discussed the costs of registering and operating a SEF in the SEF Core Principles Final Rule;
These entities are likely to incur initial setup costs to upgrade or create their existing systems or platforms to comply with the SEF core principles and Commission regulations applicable to SEFs, including the SEF registration requirement. The Commission recognizes that the additional ongoing marginal and fixed costs of maintaining a SEF could be significant for some of these entities. For example, some of these entities would have to educate their employees on SEF compliance practices; hire additional employees such as a CCO; and develop additional functions such as audit trail, trade surveillance, recordkeeping, and market monitoring.
To avoid or mitigate some of these costs, some swaps broking entities may become a part of a SEF with whom they are affiliated, thereby leveraging existing resources; nevertheless, they would likely still incur one-time costs and some ongoing costs. The Commission also notes that many swaps broking entities are currently registered with the Commission as introducing brokers (“IBs”); as such, they already follow certain similar regulatory requirements, including those related to oversight and recordkeeping. Therefore, the SEF registration costs to these entities would likely be lower since they already adhere to similar regulatory obligations. A Single-Dealer Aggregator Platform also would need to register as or join a SEF, thereby likely incurring similar costs.
The Commission estimates that there are approximately 40-60 swaps broking entities, including interdealer brokers, that would need to either register as a SEF or join a SEF as a result of the Commission's proposed application of the SEF registration requirement.
Smaller swaps broking entities or smaller Single-Dealer Aggregator Platforms may be more likely than larger entities or platforms to abstain from SEF activities to avoid the SEF registration requirement. Smaller entities or platforms are less likely to have existing technology and procedures or available resources to comply with new SEF requirements; therefore, their initial costs of compliance with those requirements may be larger or have a proportionally greater effect on smaller entities. Market participants may also bear some costs if some entities abstain from SEF activities. For example, market participants who have utilized these entities to trade swaps would no longer be able to do so for swaps that must be traded on a SEF or swaps that they would otherwise want to execute on a SEF. Therefore, these participants would incur costs that could include search and transition costs to identify and onboard to new SEFs. In transitioning to a new platform, those market participants may incur less favorable financial terms or have access to reduced services.
The Commission estimates that approximately 10-20 of the swaps broking entities that would potentially need to either register as a SEF or join a SEF are located outside of the U.S. or otherwise have operations outside of the U.S. (“Eligible Foreign Swaps Broking Entities”). To mitigate these registration costs, the Commission is proposing a two-year delay to the compliance date for Eligible Foreign Swaps Broking Entities. The proposed delay is likely sufficient for these entities either to register as SEFs in an orderly manner or to become subject to comparable and comprehensive supervision from their home regulators, and thus become eligible for an exemption to the SEF registration requirement pursuant to CEA section 5h(g). This proposed delay would also allow these entities more time to avoid operational disruptions, which should mitigate costs for these entities and limit disturbances in the swaps markets, while the Commission addresses the application of CEA section 2(i).
The delayed compliance date for Eligible Foreign Swaps Broking Entities would also delay the prospective benefits discussed above for those swaps trading on these foreign entities. However, the Commission does not anticipate that this delay would draw trading volume away from domestic SEFs. The Commission understands that market participants generally use Eligible Foreign Swaps Broking Entities to trade swaps outside of standard business hours in the U.S. and/or to access liquidity in other non-U.S. markets. The proposed six-month implementation window for U.S. swaps broking entities would also delay the benefits discussed above, but the amount of time needed for an entity to obtain SEF registration renders the compliance with the registration requirement by the compliance date of any final rule impractical.
Additionally, some customers of swaps broking entities and Single-Dealer Aggregator Platforms may incur the costs of “onboarding” with a SEF, to the extent that these market participants are not currently customers of a SEF. The Commission's proposal to expand the trade execution requirement to include all swaps subject to the clearing requirement that are listed on a SEF would prevent market participants from trading these swaps off-SEF in most instances. Accordingly, those market participants who wish to continue to trade these swaps would have to onboard to a SEF. The Commission estimates that up to 807 market participants in the interest rate swaps (“IRS”) market trade cleared swaps exclusively off-SEF and thus may need to onboard to a SEF.
To the extent that a market participant's swaps are already executed on a SEF after being arranged by a swaps broking entity, however, the Commission does not anticipate that the market participant would incur significant additional internal costs by using the SEF for the entire trading process. Some SEFs may charge higher fees for these trades due to the additional oversight the Commission contemplates that the SEF would provide.
The Commission proposes to reduce some information requirements as part of the proposed Form SEF, but would require additional information in other areas. As a result, the Commission believes that some proposed changes to Form SEF would reduce costs while others would increase costs. However, the Commission believes that the cost of preparing Form SEF, as proposed to be amended, is likely to be comparable to the cost of preparing the existing Form SEF. Since the additional information required by Form SEF generally consists of information that the Commission has been requesting as part of the registration process, SEF applicants already likely incur the costs associated with providing that information. Additionally, the Commission proposes to remove the product submission process from the SEF application process. SEF applicants may incur additional administrative costs associated with completing the product submission apart from a SEF
The Commission believes that the proposed application of the statutory SEF registration requirement to certain entities not currently registered as SEFs should protect market participants and the public by helping to ensure that entities that meet the SEF definition provide the protections associated with SEF core principles and the Commission's regulations. As noted above, these protections include audit trail, trade surveillance, market monitoring, recordkeeping, and anti-fraud and market manipulation rules. The proposed amendments to the SEF registration process should maintain the protection of market participants and the public by continuing to help ensure that SEF applicants provide the Commission with the information it needs to determine whether the SEF applicant will be able to comply with the SEF core principles and Commission regulations.
The Commission believes that the proposed application of the statutory SEF registration requirement to certain entities not currently registered should enhance the competitiveness and financial integrity of markets since these registered SEFs would be subject to relevant SEF core principles, including, among others, Core Principles 2, 4, and 15. The Commission also believes that the proposal would subject entities providing similar services to comparable regulations, thus increasing the competitiveness of SEFs. The greater use of SEF functions, such as pre-trade credit screening, submission to DCOs for clearing, and reporting to SDRs should also enhance efficiencies in the swaps market. Proposed Form SEF should continue to provide a means for SEF applicants to demonstrate compliance with core principles related to financial integrity, including Core Principle 13 regarding SEF financial resources.
The Commission believes that the application of the statutory SEF registration requirement to certain entities not registered as SEFs may further price discovery in swaps, given that more swap transactions would be traded on SEFs and more market participants would be participating on SEFs. This increased trading may enhance the liquidity of the swaps market on SEFs. The Commission believes that, generally, market participants would have access to better price discovery in more liquid markets.
The Commission believes that the proposed application of the statutory SEF registration requirement to certain entities not currently registered as SEFs may further sound risk management practices by helping to ensure that swaps trading occurs subject to the rules of the SEF and receive the protections associated with the SEF core principles and Commission regulations.
The Commission believes that the proposal that entities that meet the SEF definition must register as SEFs should further the public interest consideration of promoting trading of swaps on SEFs as stated in CEA section 5h(e).
The Commission requests comment on all aspects of the consideration of the costs and benefits of the provisions related to SEF registration. The Commission estimates that there would be 40 to 60 newly-registered SEFs. For those newly-registered SEFs, and with the understanding that costs will vary depending on the entity, what would be the average cost for a newly-registered SEF to comply with the Commission's proposed new SEF regime? If possible, please provide itemized costs per requirement. What would be the on-going costs to comply with that regime?
The Commission believes that many swaps broking entities, including interdealer brokers, are currently affiliates of a registered SEF. As a result, the cost of integrating a swaps broking entity's non-registered SEF into its current SEF registration regime will be significantly less than those of newly-registered SEFs,
Based on its increased understanding of swaps trading dynamics and the increased scope of swaps that would become subject to the trade execution requirement, the Commission proposes to eliminate the prescribed execution methods under § 37.9 for swaps subject to the trade execution requirement. In addition, the Commission proposes to eliminate the minimum trading functionality and Order Book provisions under §§ 37.3(a)(2)-(3). As a result, for any swap that it lists, a SEF would be able to offer any execution method that is consistent with the SEF definition in CEA section 1a(50) and the general rules related to trading and execution consistent with the SEF core principles and proposed part 37 rules. In particular, a SEF would be allowed to offer flexible methods of execution for any swap that it lists for trading, regardless of whether or not the swap is subject to the trade execution requirement.
In order to effect Core Principle 2, the existing rules under § 37.201 would be replaced with new general, disclosure-based trading and execution rules that would apply to any execution method offered by a SEF. Proposed § 37.201(a) would require a SEF to specify (i) the protocols and procedures for trading and execution; (ii) the extent to which the SEF may use its “discretion” in facilitating trading and execution; and (iii) the sources and methodology for generating any market pricing information.
The Commission proposes to eliminate the “Made Available to Trade” (“MAT”) process and proposes to interpret the trade execution requirement in CEA section 2(h)(8) to require swaps to be executed on a SEF or DCM if a swap is both subject to the
The Commission further proposes to use its authority pursuant to CEA section 4(c)
To facilitate compliance with the proposed interpretation of the trade execution requirement, the Commission proposes a compliance schedule, based on participant type, for the additional swaps that would become subject to the trade execution requirement. Under the proposal, entities would fall into categories based on their swaps trading experience and resources: Category 1 entities would have a 90-day compliance timeframe; Category 2 entities would have 180 days, and all other relevant entities would have 270 days to allow them to onboard onto a SEF, a DCM, or an Exempt SEF and to comply with the trade execution requirement. The Commission also is proposing to establish a centralized registry on its website to identify those SEFs and DCMs that list swaps subject to the trade execution requirement and the particular swaps listed on each entity. To establish the registry, the Commission is proposing to require SEFs and DCMs to file a standardized Form TER, concurrently with any § 40.2 or § 40.3 product filing, that would detail the swaps that they list for trading that are subject to the clearing requirement. In turn, Form TER would provide a streamlined process to allow the Commission to provide market participants with a public registry of the SEFs and DCMs that list particular swaps for trading. Finally, the Commission is also proposing that DCMs and SEFs be required to publicly post their Form TER on their respective websites.
For swaps subject to the trade execution requirement, proposed § 37.201(b) would require a SEF to prohibit its market participants from engaging in pre-execution communications away from its facility, including negotiating or arranging the terms and conditions of a swap prior to its execution on the SEF via the SEF's methods of execution. In conjunction with prohibiting pre-execution communications and pre-arranged trading under § 37.203, the Commission is eliminating the fifteen-second time delay requirement under § 37.9(b). Under proposed § 37.203, SEFs must prohibit pre-arranged trading for trading systems or platforms such as Order Books, where pre-arranged trading would be considered to be an abusive trading practice. This prohibition, however, would be subject to certain proposed exceptions. First, swap transactions that are not subject to the trade execution requirement would be excluded from the proposed prohibition. Second, package transactions that also include components that are not subject to the trade execution requirement would also be excluded from that proposed prohibition.
The Commission also proposes to revise the definition of “block trade” in existing § 43.2 to eliminate the “occurs away” requirement for swap block trades on SEFs. Pursuant to the revised definition, counterparties that seek to execute swaps at or above the block trade size on a SEF must do so on a SEF's trading system or platform, rather than away from the SEF pursuant to its rules as currently required. For swaps subject to the trade execution requirement, counterparties would not be able to conduct pre-execution communications to negotiate or arrange a block trade away from the SEF.
Proposed § 37.202 would modify the impartial access requirements to allow a SEF to devise its participation criteria based on its own trading operations and market. Specifically, a SEF would be required to establish rules that set forth impartial access criteria for accessing its markets, market services, and execution methods; such impartial access criteria must be transparent, fair, and non-discriminatory and applied to all similarly situated market participants. Based on this approach, the Commission would not require a SEF to maintain impartial access in a manner that promotes an “all-to-all” trading environment. Rather, a SEF would be allowed to serve different types of market participants or have different access criteria for different execution methods in order to facilitate trading for a desired market.
In addition to amending the impartial access requirement, the Commission also proposes several other related amendments. Under proposed § 37.202(a)(1), a SEF would no longer be required to provide impartial access to ISVs. Further, under proposed § 37.202(a)(2), a SEF would be allowed to establish fee structures in a fair and non-discriminatory manner. This revision would eliminate the existing requirement under § 37.202(a)(3), which requires a SEF to set “comparable fees” for “comparable access.”
The Commission believes that eliminating the minimum trading functionality requirement would provide several benefits. Based on its experience, the Commission has observed that market participants have generally not used Order Books for swaps trading on SEFs despite their availability for all SEF-listed swaps.
The Commission also believes that eliminating the required methods of execution for swaps subject to the trade execution requirement and instead allowing flexible means of execution on SEFs together with expanding the scope of swaps subject to the trade execution requirement, may further the statutory goal of promoting the trading of swaps on SEFs more effectively than the current SEF framework. As a result of their bespoke or customized structure, the Commission recognizes that swaps that currently are not MAT, but that would become subject to the trade execution requirement under the Commission's proposal, may be less liquid than current MAT swaps, and therefore, may be less suited for execution via an Order Book or a request-for-quote system that sends a quote to no less than three unaffiliated market participants and operates in conjunction with an Order Book (“RFQ System”).
Under the proposed approach, market participants would be allowed to utilize execution methods that best suit their trading needs and the swap being traded.
SEFs would have broader latitude to innovate and develop new and different methods of execution tailored to their markets. Accordingly, the proposed flexibility would enable SEFs to provide their market participants with additional choices for executing swaps subject to the trade execution requirement beyond the Order Book or RFQ System. Such methods could be more efficient for a broader range of swaps and various market liquidity conditions, which may allow SEFs to effectively promote appropriate counterparty and swap-specific levels of pre-trade price transparency.
This approach may also increase SEF competition as SEFs seek to differentiate from one another based on execution methods that they offer. The Commission believes that such increased competition may lead to reduced costs and increased transparency for market participants. The Commission further believes that flexible means of execution may provide opportunities for new entrants in the SEF market. New entrants would be able to utilize unique or novel execution methods that are not currently offered by incumbent SEFs. The Commission believes that new entrants would help increase competition in the market, which may lead to reduced transaction costs.
The Commission anticipates that SEFs with active Order Books would continue to offer them, such that customers who wish to transact on Order Books would continue to be able to do so. The Commission also notes that swap transactions on SEFs will continue to be subject to the part 43 real-time reporting requirements, so market participants would continue to benefit from the post-trade transparency associated with access to information about the most recent transaction price.
While the Commission is proposing to allow SEFs to utilize flexible methods of execution, the Commission is concurrently proposing under § 37.201(a) to require that SEFs implement various trading and execution-related rules, which would require SEFs to disclose in their rulebook the protocols and procedures of the execution methods they offer, including any discretion the SEF may have in facilitating trading and execution,
The Commission believes that expanding the scope of swaps that must be traded and executed on SEFs or DCMs would directly promote more SEF trading, which is one of the Dodd-Frank Act's statutory goals. As noted above, data analyzed by Commission staff indicates that the percentage of IRS trading volume that is subject to the trade execution requirement declined from approximately 10 to 12 percent of total reported IRS volume in 2015 to approximately 7 to 9 percent of total reported IRS volume in 2017 and the first half of 2018.
A recent ISDA analysis also shows that more than 85 percent of IRS trading volume is subject to the clearing requirement.
The Commission believes that the expanded trade execution requirement would ensure that more swaps trading occurs on SEFs. In turn, increased swaps trading on SEFs would help foster and concentrate liquidity and price discovery on SEFs. This may help increase market efficiency and competition between market participants, which would further decrease transaction costs. Further, the Commission believes that a broad trade execution requirement, in conjunction with the proposed prohibition on pre-execution communications, would ensure that swaps trading occurs on SEFs, which may further amplify the preceding benefits.
Bringing more swaps trading on to SEFs, including the entire liquidity formation process, would allow these swap trades to directly benefit from SEF oversight (including audit trail, trade surveillance, market monitoring, recordkeeping, and anti-fraud and market manipulation rules) and services that enhance market integrity (including pre-trade credit checks, straight through processing, and reporting to SDRs). Additionally, the Commission expects liquidity pools on SEFs to improve for various products that would become subject to the expanded trade execution requirement as a result of an increase in the number of market participants. This may further improve liquidity, and an increase in the number of products traded on SEFs, which would allow market participants to have direct access to more price observations for these products compared to the current SEF framework. With an increase in the amount of transactions on SEFs, the Commission also believes, that since SEFs would have more market data, they may be better equipped to fulfill their Core Principle 4 duties, as discussed further below. As such, the Commission believes that with direct access to more trades, a SEF may be better situated to prevent manipulation, price distortion, or disruptions to the functioning of an orderly market, which is likely to benefit all market participants.
In conjunction with the Commission's proposed interpretation of the trade execution requirement, the Commission is proposing to exempt certain transactions from this requirement. The proposed exemptions in CEA section 4(c) cover (i) swap transactions involving swaps that are listed for trading only by an Exempt SEF; (ii) swap transactions that are subject to and meet the requirements of the clearing exception in CEA section 2(h)(7) or the clearing exceptions or exemptions under part 50 of the Commission's regulations; (iii) swap transactions that are executed as a component of a package transaction that includes a component that is a new issuance bond;
The Commission is proposing to exempt swaps that are listed only by an Exempt SEF from triggering the trade execution requirement. Since it may be burdensome for a U.S. person to identify and onboard with an Exempt SEF that is the only platform listing a swap that is subject to the expanded trade execution requirement, the Commission believes that exempting these swaps from the trade execution requirement until they are listed by a registered SEF or a DCM would reduce such burdens.
The Commission is also proposing to exempt from the expanded trade execution requirement those transactions that are excepted or exempted from the clearing
Furthermore, the Commission is proposing to exempt “package transactions” that involve swap and new issuance bond components. In light of the involvement of the bond issuer and the underwriter in arranging and executing a package transaction in conjunction with a new issuance bond and the unique negotiation and fit-for-purpose nature of these package transactions, the Commission understands that it remains difficult or impossible to trade these package transactions on a SEF. Market participants currently may rely on Commission staff's temporary no-action relief to trade MAT swaps that involve new issuance bonds away from a SEF.
Finally, the Commission proposes to exempt from the trade execution requirement any swap transaction between inter-affiliate counterparties that elect to clear such transactions, notwithstanding their ability to elect the clearing exemption under § 50.52. Under the current rules, inter-affiliate transactions are only exempt from the trade execution requirement if the inter-affiliate counterparties elect not to clear the transaction. However, despite these transactions not being intended to be price-forming or arm's length and therefore not suitable for trading on SEFs, inter-affiliate counterparties that elect to clear their inter-affiliate transactions are subject to the trade execution requirement. This proposal instead would treat cleared and uncleared inter-affiliate swap transactions the same with respect to the trade execution requirement. The Commission believes that this approach would be beneficial because inter-affiliate swap transactions do not change the ultimate ownership and control of swap positions (or result in netting) and permitting them to be executed internally (provided that they qualify for the clearing exemption under existing § 50.52) may reduce costs relative to requiring that they be executed on SEF. Finally, the Commission believes that this exemption may help ensure that inter-affiliate counterparties are not discouraged from clearing their inter-affiliate swap transactions in order to avoid having to trade them on SEFs subject to the trade execution requirement, which may have systemic risk benefits.
The proposed trade execution requirement compliance schedule is intended to recognize that different categories of counterparties have different abilities and resources for achieving compliance with the trade execution requirement. As such, a phased compliance schedule should benefit counterparties by providing them with more time to adapt to the expanded trade execution requirement.
Proposed Form TER, which would provide for a uniform submission by SEFs and DCMs of information on swaps subject to the clearing requirement that are listed by such SEFs and DCMs, is intended to provide the Commission with the information needed to create a trade execution registry. This registry, in combination with the proposal requiring that DCMs and SEFs publicly post their Form TER on their websites, should benefit market participants and the public by facilitating determinations of whether a swap is subject to the trade execution requirement.
The Commission proposes to prohibit pre-execution communications for transactions subject to the trade execution requirement. The Commission believes that this prohibition would ensure that for swaps subject to the trade execution requirement, the trading of such swaps actually occurs within the confines of the SEF, which the Commission believes, in conjunction with the proposed interpretation of the trade execution requirement, would help foster and concentrate liquidity and price discovery which may help increase market efficiency and decrease transaction costs, as discussed above. Further, the Commission believes that with trading occurring within the SEF, market participants would receive the protections associated with SEF trading, as discussed above. With an expanded scope of swaps subject to the trade execution requirement, the Commission is concerned that allowing a disproportionate amount of SEF transactions to be pre-arranged or pre-negotiated away from the facility under the pretense of trading flexibility would undercut the impact of the expansion of the requirement. Without a limitation on pre-execution communications that occur away from the SEF, the SEF's role in facilitating swaps trading would be diminished, undermining the statutory goals of promoting greater swaps trading on SEFs and pre-trade price transparency.
The Commission does not intend to impose this prohibition on swap transactions not subject to the trade execution requirement and certain package transactions. These exceptions would allow those participants who wish to voluntarily execute such trades on a SEF to do so without having to alter their current trading practices. These exceptions are intended to recognize the practical realities of executing these types of swaps, which are often highly customized, on SEFs.
The Commission also proposes to amend the block trade definition to require that counterparties that seek to execute swaps that are above the block trade size on a SEF must do so on a SEF's trading system or platform and not away from the SEF pursuant to its rules. Requiring market participants to execute swap block trades on a SEF should help SEFs facilitate the pre-execution screening by futures commission merchants (“FCM”) of transactions against risk-based limits in an efficient manner through SEF-based mechanisms. Further, the proposed amendments regarding block trades on SEFs would promote the statutory goal in CEA section 5h(e) of promoting swaps trading on SEFs. The Commission notes that many market participants currently rely on no-action relief under which some block trades currently trade on-SEFs, and that this benefit has largely already been realized for these swaps.
Proposed § 37.202 would allow SEFs greater discretion to establish certain
The proposed clarification to the impartial access requirement should allow SEFs to adapt to existing trading practices in the swaps market, which feature different types of access-related practices. For example, the Commission recognizes that some entities in the dealer-to-dealer market,
The Commission notes that the benefits from this proposed change may already be realized to some degree as
The Commission proposes to eliminate the minimum trading functionality requirement that SEFs offer an Order Book for all swap transactions. The Commission notes that some market participants may not perceive a significant cost from the lack of availability of an Order Book because the Order Books on many SEFs exhibit little or no trading activity and contain few or no bids and offers, despite SEFs maintaining them over the past few years. This suggests that market participants are not currently using the available Order Books and may therefore not perceive a cost if the Order Books are eliminated.
As noted above, the Commission anticipates that competitive pressures may drive SEFs to offer flexible execution methods, which may impose additional costs on SEFs. The Commission believes that these additional costs may be mitigated, as SEFs would have the option, under the proposal, of continuing their existing execution practices.
The Commission recognizes that the overall amount of pre-trade price transparency in swap transactions currently subject to the trade execution requirement may decline if the Order Book and RFQ-to-3 requirement under existing § 37.9 are eliminated. This potential reduction in pre-trade price transparency could reduce the liquidity of certain swaps trading on SEFs and increase the overall trading costs. The Commission believes that this increased cost may be most severe for smaller customers that trade infrequently, and therefore may not be aware of current swaps pricing without pre-trade price transparency.
The purpose of the § 37.9 requirement that transactions in swaps subject to the trade execution requirement be executed using an Order Book or an RFQ System is to ensure that all activity in these swaps benefit from a baseline amount of pre-trade price transparency,
According to a Commission staff research paper
The Commission notes that the cost of a potential decline in pre-trade price transparency may be offset by the possible benefits from greater liquidity by permitting SEFs to offer other execution methods in episodically liquid markets. Additional execution methods like auction systems, to the extent SEFs decide to offer them, and other potential execution methods may be offered in response to the proposal and could be used to facilitate pre-trade price transparency at lower costs, particularly if SEFs also offer indicative quotes or indicative market clearing prices to participants.
Proposed § 37.201(a), which would require SEFs to disclose in their rulebook the protocols and procedures of execution methods they offer, including any discretion in facilitating trading and execution would impose administrative costs on SEFs. The Commission believes that those costs are similar to those imposed by existing § 37.201(a), which establishes similar disclosure requirements, but would be more tailored to existing SEF execution methods.
The proposed elimination of § 37.10 and § 38.12 and the proposed interpretation of the trade execution requirement as codified under § 36.1(a) would likely require some market participants to onboard to a SEF or DCM, if they have not already done so, in order to continue trading swaps. The costs for a market participant to onboard, along with the time various market participants would have to join a SEF or DCM under the compliance schedule, and trade on a SEF, discussed above, are also relevant.
To the extent more swaps are traded on SEFs or DCMs as a result of the proposed interpretation of the trade execution requirement as set out under § 36.1(a), SEFs and DCMs may incur additional costs, as part of their normal course of business, to update their systems to accommodate the increased number of products listed. Because this would be an expansion built on top of existing systems, the Commission does not expect the costs associated with this expansion to be substantial. Additionally, the Commission believes that the proposed exemptions for certain swaps from the trade execution requirement would not impose new costs on market participants or on SEFs.
The Commission expects there to be some cost to SEFs and DCMs related to the proposed Form TER requirement, where they would have to submit the specific relevant economic terms of the swaps they list for trading to the Commission (and posted on the website) in a timely manner. These costs are discussed in relation to the Commission's analysis above of information collection burdens under the PRA that are affected by the proposed rules.
Under the proposal, pre-execution communications for swaps subject to the trade execution requirement would have to occur within the confines of a SEF and could not occur outside of the SEF's facilities. In practice, this would mean that pre-execution communications between dealers and their customers could not occur through non-SEF telephones, email systems, instant messaging systems, or other means of communication outside of the SEF. SEFs would incur costs if they choose to set up telephone conference lines, proprietary instant messaging or email systems, or any other system within the SEF to facilitate pre-execution communications within the confines of the SEF.
SEFs could potentially use existing technology to facilitate pre-execution communications on SEF, thus mitigating some potential costs. The proposal could also impose costs on dealers and their customers since they commonly communicate via telephone or other systems today and may have to change their communication or trading practices to comply with the proposed rule. The costs for market participants would be mitigated to the extent that SEFs elect to incur the costs of providing telephone or other systems for their market participants to use for pre-execution communications, but costs may then increase correspondingly for SEFs.
The proposed amendment to the block trade definition to require that counterparties that seek to execute swaps that are above the block trade size on a SEF must do so on a SEF's trading system or platform would cause these transactions to incur the costs of trading on a SEF as discussed above. To the extent market participants react to these costs by reducing their use of block trades, they may be disadvantaged, incur additional costs, or hinder the effectiveness of their risk management program.
The proposed changes to the impartial access requirement, which would not require an “all-to-all” market as envisioned by the current rules, may inhibit the ability of certain market participants to access certain trading markets and liquidity pools. Under the proposed changes, SEFs may be able to offer markets that feature levels of liquidity and competitive pricing that only a limited category of participants could access. For example, SEFs that desire to serve the dealer-to-dealer segment of the market may have access criteria that certain participants cannot meet, thus preventing those participants from onboarding and from providing bids and offers, which could be disadvantageous to those participants and otherwise reduce access to favorable prices and impede price competition. Although the proposed changes to impartial access would require a SEF to allow those who seek and are able to meet set criteria to participate on its trading system or platform, this approach may still permit SEFs to impose barriers to access.
Additionally, allowing different trading markets to operate and accommodate a limited set of market participants for similar or the same swaps may impose costs through
The Commission notes, however, that the current SEF market structure and participation have generally continued to develop along these traditional market segments, absent the proposed access criteria. Therefore, the Commission anticipates that costs to market participants may not change much from the current situation.
The Commission anticipates that the proposed interpretation of the trade execution requirement, which may result in an expanded scope of swaps being required to trade on SEFs, coupled with the proposed ban on pre-execution communications for swaps subject to the trade execution requirement away from the facility, would help improve the protection of market participants and the public by allowing SEFs to more effectively surveil their markets and prevent manipulation and disruption to the functioning of an orderly swaps market. The proposed rules are expected to facilitate more transactions on SEFs, ensure that such transactions are executed entirely on SEFs, and facilitate more market participants trading on SEFs, effectively allowing SEFs to have direct access to more data and have direct visibility to a larger portion of the market.
The Commission anticipates that the proposed exemptions for certain swaps from the trade execution requirement should not materially affect the protection of market participants and the public. The proposed exemptions are intended to allow a limited number of swap transactions otherwise subject to the trade execution requirement to occur off-SEF where there is good reason to do so. These include transactions that involve end-users who are eligible for the end-user exception to both the clearing requirement and the trade execution requirement, transactions that are currently exempt under Part 50 from the clearing requirement, and transactions that cannot readily be executed on a registered SEF, even in light of the proposed rules allowing flexibility of execution methods.
The Commission believes that the proposed flexible execution methods should promote protection of market participants and the public by facilitating the trading of swaps on SEFs, including those swaps newly subject to the trade execution requirement. The Commission also believes that the proposed amendment to the block trade definition should help protect market participants and the public by moving block trades to SEFs with the associated protections described above. The proposal to prohibit pre-execution communications for transactions subject to the trade execution requirement away from the facility should help to ensure that the entire process of trading and executing a transaction would occur on SEF. Swaps traded on SEFs receive the protections associated with the SEF core principles and Commission regulations, including, among other things, monitoring of trading and prohibitions against manipulation and other abusive trading practices. The Commission believes that proposed § 37.201(a), which would require SEFs to disclose in their rulebook the protocols and procedures of execution methods they offer, including any discretion in facilitating trading and execution, should help protect market participants and the public by ensuring that they are informed about how these various execution methods operate.
The elimination of the mandatory Order Book and RFQ System execution methods for Required Transactions may reduce the benefits associated with pre-trade price transparency. In the absence of pre-trade price transparency, a counterparty may not obtain swaps at current market prices. However, the Commission believes that the approach taken in the proposed rule should promote pre-trade price transparency in the swaps market by allowing execution methods that maximize participation and concentrate liquidity during times of episodic liquidity.
The Commission anticipates that the proposed interpretation of the trade execution requirement, which may result in an expanded scope of swaps being required to trade on SEFs, should improve the efficiency and competitiveness of the swaps markets. Although SEFs and market participants may incur costs in trading an expanded scope of swaps on SEFs, the Commission expects that markets would become more efficient as a whole, since an increase in the number of market participants trading on SEFs should allow liquidity demanders to more efficiently locate liquidity providers and trade with them. These efficiency gains may be attenuated, however, if the costs of SEF trading are higher than expected or if market participants respond to the expanded trading requirement by reducing their use of swaps that are required to be traded on SEF.
The Commission believes competitiveness can also improve through more market participants trading on SEFs that offer a variety of trading mechanisms, some of which can be designed to improve competitiveness and liquidity formation in the market. To the extent these market participants did not have access to such trading mechanisms, they should benefit from increased competition and liquidity formation. Improvements in competiveness would be attenuated, however, if the increase in trading on SEFs is less than anticipated.
The Commission anticipates that the proposed exemptions from the trade execution requirement, as discussed above, may maintain the current efficiency of those trades and thus maintain the financial integrity of the counterparties. The Commission believes that the proposed exemptions are narrowly tailored and thus, should not materially affect the competitiveness of the swap markets.
The Commission believes that the proposed rules allowing flexible execution methods should enhance the efficiency and financial integrity of markets by providing an opportunity for SEFs to offer more execution methods that may be more efficient and cost-effective for their customers than those currently offered. The proposal to prohibit pre-execution communications for transactions subject to the trade execution requirement away from the facility should enhance the financial integrity of markets by helping to ensure that such communications receive the protections to financial integrity associated with SEF core principles, including Core Principle 7. Under the proposal, market participants should continue to have access to pre-trade price transparency, which should continue to promote competitive bid-ask spreads,
Additionally, the Commission's proposal to create and publish the trade execution requirement registry on its website should benefit market participants and increase efficiency by reducing uncertainty about whether a swap is required to be traded on a certain platform. Similarly, the Commission's proposal that a SEF publicly post its Form TER on its website also reinforces the efficiency benefit for market participants, albeit at the expense incurred by DCMs and SEFs related to Form TER filings, as discussed above.
The Commission believes that the proposed changes to impartial access may enhance the efficiency, competitiveness, and financial integrity of markets by allowing SEFs to develop trading platforms and fee structures that better reflect the underlying features of the products traded on the SEF and customer needs. This can facilitate competition between liquidity providers, leading to better pricing for all traders that participate in the relevant segment of the market. The proposed revision to the impartial access rule might impair competition by preventing some traders from providing or accessing liquidity on some SEFs or having access to the most up-to-date pricing information. Impaired access to liquidity or pricing information may result in some market participants transacting in swaps at uncompetitive terms.
The Commission believes that in general market participants should have access to better price discovery in more liquid markets under the proposed rule, because it should result in a higher number of products being traded on SEFs by an increased number of market participants. With increased transactions on SEFs, through an increase in number of products as well as in market participants, SEFs would offer more price points on the same or comparable products and potentially more bids and offers. This increased trading on SEFs may also offset any impairment to price discovery resulting from a loss in pre-trade price transparency from the elimination of the mandate to offer specified trading methods. The Commission expects all of these improvements to culminate in better and faster price discovery for market participants, although improvements in price discovery may be attenuated if the increase in trading on SEFs is less than anticipated.
While, as a general matter, the Commission believes that price discovery in swaps subject to the trade execution requirement should occur on SEFs, the Commission nevertheless believes that the proposed exemptions from the trade execution requirement should not materially impact price discovery in the U.S. swaps markets. Many of the transactions eligible for the exemptions, such as inter-affiliate trades, are not price-forming or involve end-users, while other eligible transactions in swaps that are only listed by Exempt SEFs cannot readily be traded on a registered SEF.
The Commission believes that the proposal to prohibit pre-execution communications for transactions subject to the trade execution requirement away from the facility should further price discovery on SEFs by helping to ensure that all negotiations related to price discovery occur on SEFs. The proposed amendment to the block trade definition would also tend to encourage more price discovery on SEFs. The proposed flexible execution methods would provide SEFs an opportunity to develop innovative execution methods that could enhance the price discovery process.
To the extent that the revised impartial access rules lead to a less competitive market, the market also may suffer from reduced price discovery.
The Commission believes the proposed expansion of the trade execution requirement may further sound risk management practices by requiring that a larger set of swap transactions are negotiated, arranged, and executed in a manner that is subject to the rules of a SEF and that those trades receive the protections associated with SEF core principles and Commission regulations.
The Commission anticipates that the proposed exemptions from the trade execution requirement should not significantly impair the furtherance of sound risk management practices because firms using the exemptions should continue to be able to move swap positions between affiliates and take advantage of the statutory end-user exception from the clearing requirement. Exempting certain transactions that cannot readily be executed on a SEF, such as package transactions involving new issuance bonds and transactions in swaps that are only listed by Exempt SEFs, should allow entities using these swaps to continue their sound risk management practices.
The Commission believes that the proposed rules enabling flexible execution methods and requiring that pre-execution communications for transactions subject to the trade execution requirement occur on-SEF may further sound risk management practices by requiring that these trades are negotiated, arranged, and executed on a SEF and that these trades receive the protections associated with SEF core principles and Commission regulations. Similarly, the Commission believes that the proposed rules enabling flexible execution methods should promote trading on SEFs and increase the number of transactions receiving these protections, thereby facilitating greater choice by market participants in execution methods that better suit their risk management needs, including allowing market participants to reduce potential information leakage and front-running risks. These improvements may be attenuated if the increase in trading on SEFs is less than anticipated. The proposed amendment to the block trade definition may further sound risk management practices by requiring block trades to occur on SEFs, while still allowing reporting delays pursuant to Part 43, which may give liquidity providers time to hedge such block trades before they are reported.
The Commission believes the proposed interpretation of the trade execution requirement and the proposed flexibility in execution methods would further the public interest consideration of promoting trading on SEFs as stated in CEA section 5h(e), while also continuing to provide market participants with access to the pre-trade price transparency offered by certain SEF execution methods. While the Commission is proposing to eliminate the minimum trading functionality requirement that SEFs offer an Order Book or other prescribed trading methods for all swap transactions, the Commission anticipates that market participants would still be able to realize pre-trade price transparency by sending RFQs to multiple market participants or using other multiple-to-multiple execution methods offered by SEFs that seek to encourage transparency and concentrate liquidity formation.
The Commission believes that the proposal to prohibit pre-execution
The Commission requests comment on all aspects of the consideration of the costs and benefits of the provisions related to market structure and trade execution.
The Commission is proposing to adopt regulations under § 37.201(c) that would categorize certain persons employed by a SEF as a “SEF trading specialist.” The Commission proposes to define a SEF trading specialist as any natural person who, acting as an employee (or in a similar capacity) of a SEF, facilitates the trading or execution of swaps transactions (other than in a ministerial or clerical capacity), or who is responsible for direct supervision of such persons. The Commission proposes to require a SEF to ensure that its SEF trading specialists are not subject to a statutory disqualification under sections 8a(2) or 8a(3) of the Act, have met certain proficiency requirements, and undergo ethics training on a periodic basis. Proposed § 37.201(c) also would require a SEF to establish standards of conduct for its SEF trading specialists, and to diligently supervise their activities.
Proposed § 37.201(c)(2) would prohibit a SEF from permitting a person who is subject to a statutory disqualification under section 8a(2) or 8a(3) of the Act to serve as a SEF trading specialist if the SEF knows, or in the exercise of reasonable care should know, of the statutory disqualification. There are certain exceptions for persons who have retained registration in other categories despite the disqualification.
Proposed § 37.201(c)(3) would require a SEF to establish and enforce standards and procedures, including taking and passing an examination
Proposed § 37.201(c)(4) would require a SEF to establish and enforce policies and procedures to ensure that its SEF trading specialists receive ethics training on a periodic basis.
Proposed § 37.201(c)(5) would require a SEF to establish and enforce policies and procedures that require its SEF trading specialists, in dealing with market participants and fulfilling their responsibilities to the SEF, to satisfy standards of conduct as established by the SEF.
Finally, proposed § 37.201(c)(6) would require a SEF to diligently supervise the activities of its SEF trading specialists in facilitating trading on the SEF.
Proposed § 37.2(b) would define “market participant.” Part 37 specifies that a SEF's jurisdiction applies to various market participants who may be involved in trading or executing swaps on its facility; to date, SEFs have been relying on preamble language describing a “market participant” provided in the SEF Core Principles Final Rule to determine the scope of jurisdiction. By clarifying and codifying the market participant definition in the part 37, the Commission would maintain the existing recordkeeping responsibilities of traders that meet the proposed definition, as well as the jurisdiction SEFs have with respect to those traders. For example, under § 37.404(b), a SEF is required to adopt rules that require its market participants to keep records of their trading, including records of their activity in any index or instrument used as a reference price, the underlying commodity, and related derivatives markets. In addition, a SEF is required to have means to obtain that information.
The key change to the proposed definition of market participant from the existing approach under part 37 is the exclusion of clients of asset managers or other similar situations. As noted above, “market participants” are subject to certain recordkeeping requirements, and under this definition, such clients would not be subject to these recordkeeping requirements.
The Commission proposes a number of changes to the existing rules regarding SEF audit trail and surveillance programs. First, the Commission proposes amending the audit trail requirements by moving certain § 37.205(a) requirements to guidance to Core Principle 2 in Appendix B. This guidance would state that audit trail data should be sufficient to reconstruct all indications of interest, requests for quotes, orders, and trades. The Commission also proposes to remove the requirement to capture post-trade allocation information. Second, the Commission proposes to eliminate the prescriptive requirements that specify the nature and content of the original source documents under § 37.205(b)(1). Third, the Commission would replace § 37.205(c)'s audit trail enforcement requirement with an audit trail reconstruction requirement, which would be focused on verifying a SEF's ability to reconstruct audit trail data rather than enforcing audit trail requirements on market participants. Fourth, the Commission proposes amending § 37.203(d), § 37.205(b)(2), and § 37.205(b)(3) to relieve a SEF's obligation to conduct automated surveillance on orders that are not entered into an electronic trading system or platform,
The Commission proposes several amendments to the rules that address a SEF's compliance program. First, the
Third, the Commission proposes several amendments to the rules that address a SEF's disciplinary program. Proposed § 37.206(b) requires that a SEF administer its disciplinary program through one or more disciplinary panels, as currently allowed, or through its compliance staff. The Commission also proposes to simplify a SEF's disciplinary procedures by eliminating the following requirements: (1) Existing § 37.206(c), which sets forth minimum requirements for a hearing, and (2) existing § 37.206(d)'s requirement that a disciplinary panel render a written decision promptly following a hearing, along with detailed items required to be included in the decision, and replacing it with guidance for proposed § 37.206(b) to specify that a SEF's rules should require the disciplinary panel to promptly issue a written decision following a hearing or the acceptance of a settlement offer. Consistent with the changes to § 37.206(b), the Commission proposes to eliminate paragraphs (a)(11)-(12) from the guidance to Core Principle 2 in Appendix B addressing § 37.206(b), which provides specific guidelines for a SEF's ability to provide rights of appeal to respondents and issue a final decision.
Additionally, proposed § 37.206(c) would establish certain requirements for warning letters that already apply to sanctions, and would allow more than one warning letter within a rolling 12-month period for entities, as well as for individuals for rule violations related to minor recordkeeping or reporting infractions. As a streamlining and conforming change, the Commission also proposes to eliminate the existing warning letter requirement from § 37.203(f)(5), and combine this requirement into proposed § 37.206(c).
The Commission proposes several amendments to the rules that address a SEF's use of regulatory service providers. Proposed § 37.204(a) expands the scope of entities that may provide regulatory services to include any non-registered entity approved by the Commission. The Commission also proposes to combine and amend existing §§ 37.204(b)-(c), resulting in several changes to the supervision requirements of a regulatory services provider (“RSP”). First, proposed § 37.204(b) eliminates the requirement that the SEF hold regular meetings and conduct periodic reviews of the provider and instead allows SEFs to determine the necessary processes for supervising their RSP. Second, under proposed § 37.204(b) a SEF may allow its RSP to make substantive decisions, provided that, at a minimum, the SEF is involved in such decisions. Third, the Commission proposes to eliminate the requirement under § 37.204(c) that a SEF document where its actions differ from the RSP's recommendations, deferring instead to the SEF and its RSP to mutually agree on the method it will use to document substantive decisions.
Proposed § 37.203(e) would require that SEFs establish and maintain rules and procedures that facilitate the resolution of error trades in a fair, transparent, consistent, and timely manner as opposed to the requirement in existing § 37.203(e) that SEFs have the authority to adjust trade prices or cancel trades in certain situations. The definition of “error trade” under § 37.203(e) would include any swap transaction executed on a SEF that contains an error in any term of the swap transaction, including price, size, or direction. However, this definition would not include a swap that is rejected from clearing for credit reasons, and a SEF's error policy would not apply.
The Commission proposes several amendments to the chief compliance officer (“CCO”) regulations. First, the Commission proposes to allow the senior officer
Second, the Commission proposes to consolidate and amend existing §§ 37.1501(d)(5)-(6)
Third, the Commission is proposing certain amendments to the annual compliance report (“ACR”) regulations in existing § 37.1501(e),
Fourth, the Commission proposes several amendments to simplify the ACR submission procedures. The Commission proposes to amend existing § 37.1501(f)(2)
In addition to these substantive changes, the Commission proposes a number of conforming, clarifying, and streamlining changes that would not impose new costs or result in new benefits and are not discussed in the cost and benefit sections below. The Commission proposes to eliminate the CCO's obligations to the regulatory oversight committee (“ROC”), including existing § 37.1501(c)(1)(iii), which requires a quarterly meeting with the ROC, and existing § 37.1501(c)(1)(iv), which requires the CCO to provide self-regulatory program information to the ROC. The proposal would not impact SEFs as there is no requirement that a SEF have a ROC.
Additionally, the Commission proposes to consolidate existing §§ 37.1501(b)-(c) into proposed § 37.1501(b). The Commission proposes to eliminate existing § 37.1501(b)(1), which requires a SEF to designate a CCO, and existing § 37.1501(c)(2), which requires the CCO to report directly to the board of directors or the senior officer of the SEF, as these requirements are already contained under § 37.1500.
The Commission proposes to eliminate the requirement under existing § 37.1501(f)(1) that a SEF must document the submission of the ACR to the SEF's board of directors or senior officer in board minutes or some other similar written record. This requirement is already covered in the general recordkeeping requirements in proposed § 37.1501(f), which is existing § 37.1501(g).
The Commission proposes a non-substantive amendment to § 37.1501(a)(2) to define a “senior officer” as “the chief executive officer or other equivalent officer of the swap execution facility.”
Finally, the Commission proposes a new acceptable practice to Core Principle 15 in Appendix B that would provide a non-exclusive list of factors that a SEF may consider when evaluating an individual's qualifications to be a CCO.
The Commission is proposing to amend the existing notification requirements related to transfers of equity interest in a SEF. Proposed § 37.5(c)(1) would require a SEF to file a notice with the Commission regarding any transaction that results in the transfer of direct or indirect ownership of fifty percent or more of the equity interest of a SEF as opposed to only direct ownership transfers as currently required. Transfer of ownership in an “indirect” manner may occur through a transaction that involves the transfer of ownership of a SEF's direct parent or an indirect parent, and therefore, implicates effective change in ownership of the SEF's equity interest.
The Commission is proposing several amendments to the existing confirmation requirement under
Second, the Commission proposes § 37.6(b)(2)(i) to require a SEF to provide counterparties with a confirmation document or trade evidence record “as soon as technologically practicable” after the execution of the transaction on the SEF.
Third, the Commission proposes § 37.6(b)(2)(iii) to allow a SEF to issue a confirmation document or trade evidence record to the intermediary trading on behalf of a counterparty, provided that the SEF establish and enforce rules to require transmission of the document or record to the counterparty as soon as technologically practicable.
The Commission proposes to amend § 37.504 to generally allow a SEF to share information with third-parties as necessary to fulfill its self-regulatory and reporting responsibilities by eliminating the specifically enumerated list of entities with whom a SEF must share information.
The Commission proposes to move the requirement in existing § 37.205(b)(4) that a SEF must protect audit trail data from unauthorized alteration and accidental erasure or other loss to proposed § 37.1401(c). The Commission proposes a new § 37.1401(g) to require SEFs to annually prepare and submit an up-to-date Exhibit Q (existing Exhibit V)
The Commission expects that SEF trading specialists would exercise a level of discretion and judgment in facilitating trading that is informed by their knowledge and understanding of the market and the products traded on it, and their communications with market participants. The role of SEF trading specialists and their use of discretion will likely increase under the Commission's proposed approach to allow SEFs to offer flexible execution methods and to expand the trade execution requirement. The dual and integral role that SEF trading specialists play in exercising that discretion—interacting with market participants, while facilitating fair, orderly, and efficient trading and overall market integrity—calls for a regulatory approach that aims to maintain market integrity and provide appropriate protections for market participants.
The Commission believes that establishing a new category of SEF personnel, “SEF trading specialists,” and requiring SEFs to subject SEF trading specialists to fitness requirements, proficiency testing, standards of conduct for SEF trading, and ethics training, and to diligently supervise them, would enhance proficiency and professionalism among SEF trading specialists, and would promote market integrity and confidence of market participants. The Commission also believes that these requirements would increase protection of market participants and the public by promoting fair dealing. Furthermore, diligent supervision of SEF trading specialists would increase compliance with legal and regulatory requirements and SEF rules.
Proposed § 37.201(c)(2)(i) would enhance protections for market participants by seeking to ensure that SEFs do not employ persons subject to a statutory disqualification as a SEF trading specialist, subject to the proposed exception as discussed below. Sections 8a(2) or 8a(3) of the Act set forth numerous bases upon which the Commission may refuse to register a person, including, without limitation, felony convictions, commodities or securities law violations, and bars or other adverse actions taken by financial regulators. The Commission believes that by restricting SEFs from permitting such persons from intermediating and facilitating SEF trading (except in a clerical or ministerial capacity), market participants and the public would be better protected from abusive and fraudulent trading practices. Moreover, given the role SEF trading specialists play in facilitating orderly and fair trading, the Commission believes that proposed § 37.201(c)(2)(i) would enhance market integrity and fairness, and the confidence of SEF market participants.
Proposed § 37.201(c)(2)(ii)(A) would allow SEFs to employ as a SEF trading specialist a person the National Futures Association (“NFA”) has permitted to be listed as a principal or to register with the Commission based on the NFA's determination that the incident giving rise to the person's statutory disqualification is insufficiently serious, recent, or otherwise relevant to evaluating the person's fitness. Similarly, proposed § 37.201(c)(2)(ii)(B) would allow a SEF to employ as a SEF trading specialist a person subject to a statutory disqualification who provides a written notice from an RFA stating that if the person were to apply for registration as an associated person, the RFA would not deny the application on the basis of the statutory disqualification.
Proposed § 37.201(c)(2)(ii) would benefit SEFs and their prospective SEF trading specialists by allowing SEFs to employ a person as a SEF trading specialist where the incident giving rise to the person's statutory disqualification is insufficiently serious, recent, or otherwise relevant to evaluating the person's fitness for registration with the Commission. The Commission believes that, where an RFA provides a notice that such circumstances are present, the benefits of the prohibition under § 37.201(c)(2)(i)—in particular the protection of market participants and the public and enhancing market integrity—are not implicated, and thus a SEF should be permitted to employ such persons as a SEF trading specialist.
Given the level of discretion SEF trading specialists exercise, the Commission believes that proposed § 37.201(c)(3)(i) would benefit market participants and the public by helping to ensure that SEF trading specialists have the requisite proficiency and knowledge to fulfill their responsibilities and to comply with the Act, Commission regulations, and SEF rules. The proficiency examination requirement under § 37.201(c)(3)(ii) would further ensure that all SEF trading specialists maintain a baseline level of proficiency. This would increase protection of market participants and better ensure that trading on SEFs is conducted in a fair, orderly, and efficient manner. The
Proposed §§ 37.201(c)(4)-(6) would respectively require a SEF to ensure that SEF trading specialists receive ethics training on a periodic basis, subject SEF trading specialists to standards of conduct in dealing with market participants and fulfilling their responsibilities, and diligently supervise the activities of its SEF trading specialists.
Overall, these proposed rules would promote public and market participants' confidence in the trading of swaps on SEFs and may bring additional volumes of trading and liquidity to SEFs.
The primary benefit of the rule change is an anticipated reduction in recordkeeping costs for clients of asset managers and SEFs.
Many of the proposed changes to the audit trail and surveillance requirements described above are expected to result in savings in terms of compliance staff and resources for most SEFs. For example, SEFs that offer voice trading are currently required to conduct regular voice audit trail surveillance in lieu of the electronic analysis capability requirements of § 37.205(b)(3). These SEFs dedicate compliance staff and resources to establishing and conducting the voice audit trail surveillance programs, including contracting with the NFA for the performance of the reviews. However, under the proposed changes to § 37.203(d), § 37.205(b)(2), and § 37.205(b)(3), these SEFs would no longer be required to conduct regular automated surveillance on indications of interest, requests for quotes, and orders that are not entered into a SEF's electronic trading system or platform. Therefore, new SEFs would not incur the cost to implement this requirement and all SEFs would not incur the ongoing cost to maintain a regular voice audit trail surveillance program.
Additionally, eliminating § 37.205(c)'s requirement to enforce audit trail requirements through annual reviews should result in cost savings to all SEFs, as they would no longer need resources, either internal compliance staff or the NFA, to perform audit trail reviews.
However, the Commission proposes to replace these requirements with a requirement to perform audit trail reconstructions, which is expected to reduce some of the cost savings as described above.
SEF compliance programs should benefit from the proposed changes related to conducting investigations. For example, changes proposed to § 37.203(f) seek to simplify the procedures for SEFs to conduct investigations and prepare investigation reports. Specifically, eliminating the 12-month requirement for completing investigations under § 37.203(f)(2), and replacing it instead with a general statement that permits SEFs to complete investigations “in a timely manner taking into account the facts and circumstances of the investigation” would provide SEFs with greater discretion to manage their workload, and allow them to prioritize their other compliance responsibilities as needed. SEFs also may benefit from the additional clarity and flexibility provided in language related to investigation reports in the guidance to Core Principle 2 in Appendix B. The language states that compliance staff should submit all investigation reports to the CCO or other compliance department staff responsible for reviewing such reports and determining next steps in the process, and that the CCO or other responsible staff should have reasonable discretion to decide whether to take any action, such as presenting the investigation report to a disciplinary panel for disciplinary action.
SEFs may realize additional cost savings under the proposed changes to the disciplinary rules under § 37.206. Proposed § 37.206(b) would allow a SEF to administer its disciplinary program through not only one or more disciplinary panels as currently allowed, but also through its compliance staff. This proposed rule would provide SEFs with more flexibility to adopt a cost effective disciplinary structure that better suits their markets and market participants, while still effectuating the requirements and protections of Core Principle 2. The Commission anticipates that SEFs that choose to administer their disciplinary programs through their compliance staff would incur the greatest cost savings. These SEFs would not incur the cost associated with establishing or maintaining disciplinary panels.
Additionally, to the extent that a SEF chooses to administer its disciplinary programs through compliance staff, the SEF may no longer incur certain costs associated with conducting hearings or appeals, such as preparing materials and presentations for hearings before the disciplinary panel, or the time spent by SEF employees preparing written disciplinary decisions. A SEF also may benefit from increased efficiencies that they can leverage from compliance staff's knowledge about the SEF and its trading practices to adjudicate matters more quickly than under the traditional disciplinary structure.
A SEF may realize cost savings from the proposed changes under § 37.204. Expanding the scope of entities that may provide regulatory services under proposed § 37.204(a) to include any non-registered entity approved by the Commission may result in an increase in competition among RSPs, and reduce the overall cost of securing an RSP. Under the proposed changes to § 37.204(b), a SEF and its RSP may also mutually agree on the method it will use to document substantive decisions, rather than documenting every instance where the SEF's actions differ from the RSP's recommendations, which may reduce the administrative costs associated with documentation created and maintained by a SEF and its RSP. Providing SEFs with the option under proposed § 37.204(b) to allow their RSPs to make substantive decisions, should better enable an RSP to promptly intervene and take action, as it deems necessary. Finally, eliminating the requirement under § 37.204(c) that a SEF document where its actions differ from the RSP's recommendations, deferring instead to the SEF and its RSP to mutually agree on the method it will use to document substantive decisions, may encourage better communication among SEFs and its RSP.
The Commission believes that the proposed changes to the error trade rule would reduce the costs and risks associated with error trades and promote swaps market integrity and efficiency. When counterparties execute a trade that is an error trade, the counterparties bear the costs and risks from being bound to terms to which they did not intend to assent. The proposed rule that requires error trades be resolved in a fair, transparent, and consistent manner would increase confidence that error trades would be corrected and that published swap data is an accurate indication of market supply and demand.
The proposed requirement that error trades be resolved in a timely manner would reduce the costs associated with error trades, including associated hedging costs. A counterparty may hedge an executed trade: (i) Before it learns that the trade may be erroneous, (ii) after it learns the trade may be erroneous, but before the SEF has determined whether the trade is an error trade, (iii) after an error has been identified but before it has been resolved, or (iv) after the SEF has resolved the error. The potential cost of each case likely depends on how quickly the SEF resolves the error because the longer a SEF takes to do so, then the greater the chance the market price of the trade and related hedge trade will move. For example, if a trader on a SEF enters into a hedge trade and the SEF determines that the initial trade is different from what the trader believed, then the trader may have to execute a new trade that hedges the correct trade and unwind the initial hedge trade. Doing so will be costly if the market has moved and the price of entering into the new hedge and unwinding the old hedge has increased. Similarly, a trader that waits to execute a hedge trade until after the SEF has resolved the error will likely face higher costs the longer the SEF takes to resolve the error. The proposed timeliness requirement should result in faster error resolution and lower the risk of costly market moves.
The proposed requirement that SEFs notify market participants that a swap transaction is under review pursuant to error trade rules and procedures, the determination that the trade under review is or is not an error trade, and the resolution of any error trade review should make markets more efficient. An error trade misinforms market participants when its price is different than the price would be if the trade had been executed non-erroneously. The notification requirement should allow market participants to make better informed decisions regarding supply and demand.
As discussed in the preamble, the Commission believes that some of the regulations implementing Core Principle 15 may be unnecessarily burdensome and inefficient. The proposed regulations are intended to address these issues.
The proposal to give the senior officer the same authority as the board of directors to oversee the CCO would provide SEFs with greater opportunity to structure the management and oversight of the CCO based on the SEF's particular corporate structure, size, and complexity. This could increase efficiency and reduce costs. Additionally, the quality of oversight of the CCO could improve if the senior officer is better positioned than the board of directors to provide day-to-day oversight of the CCO.
The proposal to permit the CCO to use any means to identify noncompliance issues is less prescriptive and should also increase efficiencies. The proposed amendment to § 37.1501(d) to refine the scope of the required information in a SEF's ACR should make the ACR process more efficient and reduce costs. For example, the proposed removal of § 37.1501(e)(2)(i) and certain specific content set forth under § 37.1501(e)(4) should reduce the amount of time that a CCO and his or her staff must spend preparing the ACR. Proposed § 37.1501(d)(4), which would require that SEFs focus on describing material non-compliance matters, rather than describing all compliance matters, should streamline the ACR requirement and provide more useful information to the Commission. Additionally, the proposed clarification under § 37.1501(e)(3) that the CCO must submit an amended ACR to the SEF's board of directors or, in the absence of a board of directors, the senior officer of the SEF, should reduce the need for extensive follow-up discussions.
Finally, the proposal to allow SEFs more time to submit their ACRs should reduce the time and resource burden on the CCO and compliance department. This additional time should allow SEFs to fully complete their ACRs and meet their other end-of-year reporting obligations, such as the fourth quarter financial report. However, the Commission understands that those SEFs that already may rely on Commission staff no-action relief for an extra 30 days to complete the ACR may have availed themselves of the benefits associated with the extended reporting deadline.
The Commission notes that an indirect transfer of a SEF's equity interest raises similar concerns as a direct transfer, notification of which is currently required under the existing requirement. Therefore, the Commission believes that proposed § 37.5(c)(1) would benefit market participants because the Commission would have the ability to more broadly identify and assess situations where an indirect equity interest transfer of a SEF could potentially impact its operational ability to comply with the SEF core principles and the Commission's regulations.
The Commission believes that the proposed “trade evidence record” approach in proposed § 37.6(b) should benefit both SEFs and market participants by decreasing the administrative costs to execute an uncleared swap on a SEF. Not only would a SEF not be required to expend time and resources to gather and maintain all of the underlying relationship documentation between all possible counterparties on its facility, but market participants would also not be required to expend time and resources in gathering and submitting this information to the SEF, including any amendments or updates to that documentation. Consistent with the bilateral nature of the underlying relationship documentation and current market practice outside of SEFs, counterparties to the transaction would be better able to devise their own confirmation documents by supplementing the information provided in the trade evidence record with additional terms that they have previously negotiated. Therefore, SEFs and counterparties should benefit from a documentation requirement that better reflects the nature of uncleared swap transactions. Moreover, the Commission believes this trade evidence record may encourage more uncleared swaps trading on SEFs where these trades can benefit from SEF oversight, and ultimately would increase the financial integrity of the swaps market. The Commission notes that to the extent that SEFs and market participants have relied on the existing no-action relief provided by Commission staff to avoid these costs by incorporating those terms by reference in a confirmation
SEFs should also benefit from the proposed requirement that they transmit the confirmation document or the trade evidence record “as soon as technologically” practicable after execution of the transaction rather than at the same time as execution. In particular, this approach should provide an opportunity for a SEF to develop protocols for transmitting this documentation in a manner that is adaptive to the type of execution method that is utilized to execute a transaction. Given the flexible methods of execution that the Commission proposes to allow for all swaps, this practical approach to transmitting documentation should not impede the development of trading systems or platforms. For example, a SEF that offers non-automated execution methods would not be required to ensure that post-trade processing protocols simultaneously transmit the confirmation or trade evidence record at the time of execution.
Further, SEFs and market participants should benefit from allowing an intermediary to receive a confirmation document or trade evidence record on behalf of the counterparties to the transaction. This approach should be more consistent with current market practice, such that intermediaries maintain the connectivity in trading on the SEF. Given that intermediaries are connected with and participating on the SEFs, but are acting on behalf of the counterparties, a SEF is able to transmit the documentation related to a swap transaction to the intermediary, who would then transmit that information to the ultimate counterparties.
The Commission believes that the proposed amendment to information-sharing requirements would benefit SEFs by providing a better opportunity to utilize third-party entities to fulfill their self-regulatory and reporting responsibilities at a lower cost. The proposed rule should increase the number of RSPs and likely increase the competition between these providers, which should both lower costs and improve the level of services offered. The Commission anticipates that this benefit would be greater for smaller SEFs that otherwise would have difficulty operating economically due to the high fixed costs of some services.
The Commission has identified several potential benefits from the proposed changes to the system safeguards requirements. First, the proposed annual Technology Questionnaire filing requirement (in proposed Exhibit Q) should help the Commission maintain a current profile of the SEF's automated systems and be consistent with the provisions of existing § 37.1401(g)(4),
Second, the Commission believes an annually-updated Technology Questionnaire could expedite Systems Safeguards Examinations (“SSE”). For example, it could reduce a SEF's overall compliance-related burdens for SSEs by (i) reducing a SEF's effort to respond to SSE document requests by instead allowing a SEF to provide updated information and documents for sections of Exhibit Q that have changed since the last annual filing; and (ii) allowing SEFs to respond to an SSE document request by referencing Exhibit Q information and documents to the extent that they are still current, rather than resubmitting such information and documents. The Commission also notes that an annual update to Exhibit Q, which would be required concurrently with submission of the CCO annual compliance report, could provide information and documents potentially useful in preparing that annual report.
The Commission expects that SEFs and/or SEF trading specialists would incur additional costs to satisfy the fitness requirement in proposed § 37.201(c)(2). The Commission expects that SEFs would vet prospective SEF trading specialists to ensure that they are not subject to a statutory disqualification. Such vetting may include the completion by a prospective SEF trading specialist of a questionnaire regarding employment and criminal history. Additionally, SEFs may conduct criminal background checks through third-party service providers to ensure that SEF trading specialists are not subject to a statutory disqualification.
The costs of ensuring compliance with proposed § 37.201(c)(2)(i) may be mitigated where a SEF trading specialist is separately registered with the Commission in some other capacity (
The expected costs associated with the proficiency requirement in proposed § 37.201(c)(3)(i) would include the cost to a SEF of determining if a SEF trading specialist is sufficiently proficient (which can be accomplished by passing the examination, once it is available) and, if necessary, providing training to ensure that a SEF trading specialist possesses the requisite proficiency. In some cases, the cost of determining proficiency may be minimal; for example where the SEF trading specialist has an employment history that reflects the requisite knowledge and experience.
The expected costs associated with the proficiency examination requirement in proposed § 37.201(c)(3)(ii) would include a fee imposed by the RFA. This fee would likely be designed to, at a minimum, offset the costs of developing and administering the examination. Additional costs may include study, training, or other examination preparation, borne by a SEF trading specialist or by a SEF on behalf of the SEF trading specialist. As discussed above, once an examination for swaps proficiency is made available, compliance by a SEF with the examination requirement in proposed § 37.201(c)(3)(ii) would constitute compliance with the general proficiency requirement in proposed § 37.201(c)(3)(i). Thus, the cost associated with complying with proposed § 37.201(c)(3)(i) would be mitigated once an RFA-administered examination is made available.
As discussed in the proposed amendments to the guidance to Core
While the Commission believes that the requirements in proposed §§ 37.201(c)(5)-(6) would impose additional costs on SEFs, the Commission anticipates that the costs would vary from SEF to SEF. A SEF may utilize its existing compliance staff or may opt to add compliance staff in order to enforce its standards of conduct for SEF trading specialists and to meet the SEF's obligation to diligently supervise SEF trading specialists. Additional costs associated with these proposed requirements may include the costs of developing standards of conduct and policies and procedures designed to ensure that SEF trading specialists are diligently supervised.
By effectively moving clients of asset managers out of the category of market participant, the proposal potentially reduces SEFs' ability to monitor the positions of these clients, although SEFs would still be able to monitor the trading of the asset managers.
Without conducting automated surveillance on orders entered by voice or certain other electronic communications, such as instant messaging and email, SEFs may have a reduced ability to identify potential misconduct involving voice orders. However, the Commission recognizes that since SEFs currently do not have a cost-effective solution for performing such automated surveillance, the proposed rules do not provide lesser protections to market participants and the public. Regarding the requirement to capture post-trade allocation information, the Commission understands that SEFs currently cannot capture this information. As a result of capturing less audit trail data under the proposal, there may be possible costs in the form of reduced protections to market participants and the public. However, the Commission does not believe that the proposed rule is likely to meaningfully reduce protections to market participants and the public as compared to the current rules.
The Commission proposes to replace the audit trail enforcement requirement with the requirement to perform audit trail reconstructions.
The Commission is mindful that the proposed elimination of the 12-month requirement for completing investigations under § 37.203(f)(2) could lead to delays in completing disciplinary actions. However, the Commission notes that SEFs remain responsible for completing investigations in a “timely manner taking into account the facts and circumstances of the investigation.” In addition, while many SEFs are likely to benefit from the proposed changes described above related to the disciplinary process, there may be accompanying costs. For example, a SEF's compliance staff may incur additional costs taking on the added responsibilities previously performed by a disciplinary panel.
The proposed changes to § 37.206 also permit SEFs to establish a disciplinary process that may provide respondents fewer procedural protections than are required under the current rules. However, the Commission notes that the guidance to Core Principle 2 in Appendix B states that a SEF's rules relating to disciplinary panel procedures should be fair, equitable, and publicly available. Competition and customer demand should ensure that SEFs maintain suitable disciplinary programs with sufficient protections.
New RSPs may incur start-up costs associated with developing an automated trade surveillance system and establishing and maintaining sufficient compliance staff. However, the Commission would expect these costs to decrease once the RSP has established its program and as it gains experience providing regulatory services. RSPs may realize further reductions in these costs as they gain economies of scale by offering their services to multiple SEFs.
Eliminating the requirement that a SEF hold regular meetings and conduct periodic reviews of its RSP may lead to varying degrees of communication between a SEF and its RSP, but the Commission believes that most SEFs would seek to maintain regular communication with their RSPs, given that SEFs remain ultimately responsible for the performance of any regulatory services received, for compliance with their obligations under the Act and Commission regulations, and for the RSPs' performance on their behalf.
The Commission anticipates that SEFs would incur costs to establish and
Proposed § 37.203(e)(2) would require that some SEFs incur the costs associated with establishing and maintaining rules and procedures that facilitate resolution of purported errors in a fair, transparent, consistent, and timely manner. Existing § 37.203(e) requires only that a SEF have the authority to resolve errors when necessary to mitigate certain market disrupting events. SEFs that do not currently have error trade policies, or whose policies are not compliant with proposed § 37.203(e)(2), would incur one-time costs to develop a compliant policy and ongoing costs to implement such policy.
To comply with the proposed § 37.203(e)(3) requirement that SEFs notify market participants of (i) any swap transaction that is under review pursuant to the SEF's error trade rules and procedures; (ii) a determination that the trade under review is or is not an error trade; and (iii) the resolution of any error trade, including any trade term adjustment or cancellation, some SEFs would have to incur costs to establish a means of communicating such information to market participants. The Commission believes that many SEFs would send notifications electronically to their market participants. All SEFs have the ability to communicate electronically with market participants. However, some SEFs may not be able to send electronic notifications “as soon as practicable” and could have to obtain and implement software to do so. SEFs would also incur costs each time a notification is sent. The Commission believes that the ongoing cost would be minimal if the notification was sent electronically using a partially automated software system. However, some SEFs may send notifications to their market participants by other means.
The Commission does not believe the proposed error trade policy is likely to increase the risk that counterparties act carelessly and make more errors. As noted above, market participants may incur significant costs when they enter into error trades if they need to unwind hedge trades and execute new hedge trades. The Commission believes that these costs encourage market participants to implement best practices to avoid errors. The Commission also does not believe that the error trade policy is likely to increase the risk that counterparties attempt to use error trades to manipulate the market by entering into off-market transactions and then cancelling the trades after the market has moved. Since § 37.203(e) already requires that SEFs correct error trades, the proposed rule should not improve a market manipulation scheme's chances of success.
The proposed change to § 37.1501(b) to authorize the senior officer to oversee the CCO, could impair the independence of the CCO, and as a result the CCO's oversight of the SEF. However, the Commission believes that this risk is mitigated by the Commission's review of annual ACRs and examination programs.
The proposed amendments would eliminate requirements that the CCO identify noncompliance matters using only certain specified detection methods, design procedures that detect and resolve all possible noncompliance issues, and eliminate all potential conflicts of interest. These requirements would be replaced by more flexible standards, which could potentially allow for some impairment of a CCO's oversight of the SEF in some circumstances. However, the Commission believes that the resulting costs (in the form of potential adverse consequences) would not be material because the proposed changes would now focus on material aspects of the compliance program,
The proposed change to § 37.1501(e) to reduce the information required in an ACR could make it more difficult for the Commission to assess a SEF's compliance and self-regulatory programs. However, the Commission does not anticipate that these changes would materially impact the Commission's assessment as it already receives or has access to such information from other sources. For example, the Commission approves a SEF's compliance staffing and structure as part of the SEF's registration or rule submission, and annual updates provide minimal additional information, at best. In addition, SEFs report finalized disciplinary actions to the NFA,
Finally, the proposal to give SEFs more time to submit their ACRs could delay the Commission in recognizing and addressing a SEF compliance issue. However, the Commission anticipates that such risk is mitigated to the extent that SEFs provide ACRs on the timeline set forth in the proposed rules. The Commission's experience with these SEFs has not indicated that this delayed reporting has adversely impacted its ability to recognize and address compliance issues in a timely manner.
The proposed additional requirement to notify the Commission of an indirect change in ownership would increase costs to a SEF, who would be required to provide notice in these instances. As part of that notification, a SEF may incur costs that are similar to those incurred when providing a notice of a direct change, including providing details of the proposed transaction and how the transaction would not adversely impact its ability to comply with the SEF core principles and the Commission's regulation, responding to any requests for supporting documentation from the Commission, and updating any ongoing changes to the transaction.
With respect to uncleared swaps, the proposed “trade evidence record” approach in proposed § 37.6(b) could reduce the financial integrity of transactions on SEFs compared to the current rule. There could be a greater risk of misunderstanding between the counterparties if they do not provide all the terms of a transaction at the time of execution. Even when parties reference agreements, confusion could arise from
The Commission also notes that to the extent that a SEF elects to not issue a confirmation document that includes or incorporates all of the terms of an uncleared swap transaction (including the trade evidence record), the counterparties to the swap may be subject to other Commission regulations that impose those burdens, and therefore, increased costs. For example, where one of the counterparties to an uncleared swap transaction is a swap dealer or major swap participant, § 23.501 requires that the swap dealer or major swap participant issue a confirmation for the transaction as soon as technologically practicable.
The Commission recognizes that permitting SEFs to share information with any third party to fulfill its self-regulatory obligations under proposed § 37.504 may increase the risk that the SEF's market participant information is misappropriated. These third party entities are not necessarily registered with the Commission and may lack the document security and compliance knowledge, to adequately protect market participant information. However, the Commission notes that a SEF would remain responsible for maintaining the security of this information, and would oversee their service providers to ensure compliance, to the extent feasible. Furthermore, the Commission intends to continue to review SEFs' operations to ensure ongoing compliance (including the compliance of third-party service providers).
SEFs are currently required to file a Technology Questionnaire under existing Exhibit V to Form SEF for registration as a SEF. SEFs are likely to incur additional costs associated with annually updating this Questionnaire in proposed Exhibit Q under proposed § 37.1401(g). The Commission believes, however, that this cost may be minimal, as the Technology Questionnaire pertains to the SEF's operations and is information that a SEF should know for purposes of its compliance with Core Principle 14 and the Commission regulations. Further, the Commission believes that maintaining an annually updated Exhibit Q would limit SSE document requests and the effort required to respond to these requests and ad-hoc Commission system safeguards-related requests under proposed § 37.1401(h).
The Commission believes that the proposed amendments to the existing SEF requirements related to compliance and self-regulatory responsibilities are likely to increase professionalism in the swaps market, further promote an orderly trading environment and market integrity, and better enable the Commission to protect market participants and the public.
First, several of the requirements should help the Commission to determine whether a SEF's operations are compliant with the Act and the Commission's regulations. For example, requiring a SEF to additionally provide notice of any transaction resulting in the transfer of indirect ownership of fifty percent or more of the SEF's equity interest under § 37.5(c)(1) would broaden the Commission's ability to review changes in ownership that may affect the SEF's operations. Accordingly, the Commission should be better able to assess whether such changes would adversely impact the SEF's operations or its ability to comply with the core principles or Commission's regulations, which are intended in part to protect market participants.
The Commission's proposed amendments to the ACR requirements under proposed § 37.1501(d) should also better enable the Commission to assess the effectiveness of a SEF's compliance or self-regulatory programs. The proposed amendments, among other things, would remove some of the existing content requirements that are duplicative and unnecessary, but require the ACR to include a description and self-assessment of the SEF's written policies. Removing information requirements,
The proposed requirement that a SEF annually update its response to the Questionnaire should facilitate the Commission's oversight of a SEF's systems safeguard program, and in turn, benefit the swaps markets by promoting more robust automated systems and enhanced cybersecurity. This should decrease the likelihood of disruptions and market-wide closures, systems compliance issues, and systems intrusions. The receipt of an annually-updated response to Exhibit Q should further the protection of market participants and the public by helping to ensure that automated systems are available, reliable and secure; adequate in scalable capacity; and effectively overseen.
Second, the proposed requirements under § 37.201(c) should protect market participants and the public by mandating that SEF trading specialists meet fitness and proficiency standards, undergo periodic ethics training, and be subject to standards of conduct and diligent supervision by SEFs. The Commission expects that the proposed requirements should reduce abusive and fraudulent conduct and increase the professionalism of, and fair dealing by, SEF trading specialists who facilitate trading between SEF market participants. Furthermore, the proposed requirements should promote compliance with legal and regulatory obligations and SEF rules that are aimed at protecting market participants. These improvements may be attenuated if the costs of meeting the new standards reduce the number of SEF trading specialists.
Third, in addition to promoting the Commission's ability to assess a SEF's compliance with the Act and Commission regulations, some of the requirements should protect market participants and the public by improving a SEF's ability to detect potential rule violations. For example, the proposed amendments to § 37.203(f)(2) and § 37.206(b) would permit a SEF to determine the timeframe within which to complete an investigation and how to administer its
The proposed changes to the existing audit trail requirements may reduce the scope of information that would be captured in a SEF's audit trail, but the Commission believes that these changes are not likely to materially affect the protection of market participants and the public. For example, the Commission proposes to eliminate the requirement that a SEF capture post-execution allocation information. The Commission notes that this information has generally not been captured because SEFs have operated under no-action relief, which was provided by Commission staff due to the general inability of SEFs to access this information. Thus, elimination of the requirement should not have a material effect.
The Commission believes that certain proposed amendments to current requirements reflect existing market realities, which preclude SEFs from complying with some of these requirements. In particular, the proposal would (i) move the requirement that audit trail data be sufficient to reconstruct indications of interest, requests for quotes, orders and trades, to the guidance to Core Principle 2 in Appendix B; and (ii) eliminate the requirement under existing § 37.205(b)(2) that a SEF's electronic history database include all indications of interest, requests for quotes, orders, and trades entered into a SEF's trading system or platform. Further, the proposed regulations would no longer require a SEF that offers a voice-based trading system or platform to maintain regular voice audit trail surveillance programs to reconstruct and review voice trades for possible trading violations. Notwithstanding the regulatory requirements in this area, the Commission emphasizes that SEF Core Principle 2 and its requirements remain and a SEF must still capture all audit trail data related to each of its offered execution methods that is necessary to reconstruct all trading on its facility, detect and investigate customer and market abuses, and take disciplinary action.
Fourth, the proposed requirements should protect market participants by promoting the integrity of the transactions executed on the SEF. For example, proposed § 37.203(e)—which would require a SEF to adopt policies to address and resolve error trades on its facility—should help to ensure that SEFs promptly address error trades to facilitate fair and equitable treatment between market participants on the SEF. To the extent that market participants better understand how a SEF addresses error trades and its approach for resolving such errors, these market participants should have more confidence in transacting on the SEF. Furthermore, the proposal should lead to SEFs adopting more consistent approaches to addressing trading errors, which should better protect market participants from basing their trading on erroneous information provided in market data feeds. Additionally, the proposal should lead to market participants receiving more effective notice of potential and resolved errors, which should minimize the market harm from price misinformation, which can lead to price distortion and inefficiency in the market, and indirectly impact the public. The extent of these improvements may depend on the quality of error trade policies adopted by SEFs and the effectiveness of their implementation.
Fifth, the proposed requirements should continue to promote the legal certainty of transactions executed on the SEF. Proposed § 37.6(b)(1)(ii), which would require a SEF to provide the counterparties to an uncleared swap transaction with a “trade evidence record” that memorializes the terms of the swap transaction agreed upon between the counterparties on the SEF, specifies that such documentation must be legally binding and memorialize the terms of the transaction. The Commission notes that this approach differs from the existing no-action relief provided by Commission staff, under which SEFs have incorporated terms by reference in a confirmation for an uncleared swap that have been previously established via privately-negotiated underlying agreements. While the proposed requirement would limit the scope of terms and conditions that must be included in SEF-issued documentation for uncleared swaps, the Commission believes that this approach is not likely to diminish the protection of market participants. The trade evidence record would continue to serve as evidence of a legally-binding swap transaction between the counterparties, who would still have the ability to supplement the record with additional terms that they had already previously agreed upon.
The protection of market participants and the public may be adversely affected to the extent that risks noted in the discussion of the costs of the proposed amendments occur. For example, increased flexibility in the implementation of compliance programs may lead to a reduction of their effectiveness in some circumstances.
The Commission believes that the proposed amendments to the SEF requirements listed above should further promote efficiency, competitiveness, and financial integrity of the swaps markets.
Requiring a SEF to adopt error trade policies under proposed § 37.203(e) should also promote efficiency and financial integrity on a SEF's markets. Although many SEFs currently maintain error trade policies as noted, the proposed rule should help to establish a more consistent and transparent approach to addressing and resolving error trades that should benefit market participants, including those that may rely on trading data derived from the SEF's trading activity. Accordingly, requiring SEFs to provide notification of potential errors and a pending review should mitigate the potential for subsequent trading based on an erroneous transaction that could create market distortions interfering with efficient and competitive markets. The requirement should encourage efficiency by minimizing the risk that the SEF's pricing information does not reflect existing market conditions, thereby increasing market participants' confidence to participate on the SEF's facility. The extent of these improvements may depend on the
The proposed amendments under Core Principle 2 would generally allow a SEF greater discretion to tailor its compliance program to identify and address rule violations among its markets and market participants. The Commission believes that proposed § 37.203(f) and § 37.206 may improve a SEF's operational efficiency, and thereby the efficiency and integrity of its markets, by allowing a SEF to determine how to complete an investigation and take disciplinary action to address misconduct more efficiently. Further, proposed § 37.204(b), which would allow a SEF's RSP more leeway to make substantive decisions related to a SEF's compliance program, should also improve the efficiency and integrity of a SEF's operations by allowing the RSP to take action with less delay once it identifies misconduct among market participants. These efficiency gains may be reduced by inappropriate decisions made by RSPs. Additionally, the Commission believes that the audit trail reconstruction requirement under proposed § 37.205(c) should improve a SEF's ability to detect potential rule violations, and may thereby enhance the overall integrity of its markets.
The requirements in proposed §§ 37.201(c)(2)-(3) should enhance efficiency, competitiveness, and financial integrity of swap markets by helping to ensure that SEF trading specialists, who are responsible for facilitating orderly, efficient, and fair trading on SEFs, have better fitness and proficiency to do so. The requirements pertaining to ethics training and SEF standards of conduct in proposed §§ 37.201(c)(4)-(5) should better ensure that SEF trading specialists are more aware of applicable regulatory obligations and SEF rules aimed at maintaining efficiency, competiveness, and market integrity. These gains may not be as extensive if the costs of meeting these standards reduce the number of SEF trading specialists. The proposed supervision requirement under § 37.201(c)(6) should increase compliance by SEF trading specialists with its obligations.
The Commission believes that related amendments proposed under Core Principle 15 should also promote efficiency and integrity of a SEF's market by allowing a more streamlined compliance approach that does not require the board of directors to assume primary oversight responsibility for the CCO. This proposed approach should in many circumstances permit the CCO to more efficiently make changes to the regulatory program in response to potential trading violations, which should aid in protecting the financial integrity of the market. Furthermore, the proposal's focus of the CCO's duties on reasonably designed procedures to address noncompliance issues and material conflicts of interest should improve the CCO's efficiency by specifying that this is the appropriate standard. This increased efficiency should permit CCOs to better allocate resources to focus on detecting and deterring material rule violations, which otherwise may harm the market's efficiency, competitiveness, and integrity.
The Commission believes that the proposed amendments related to compliance and self-regulatory responsibilities should protect the price discovery functions provided by a SEF's trading system or platform. For example, the proposed amendments under Core Principle 2, which the Commission believes would allow a SEF to develop the most efficient approach to identify and address rule violations based on its markets and market participants, should help to facilitate orderly trading and promote integrity in the market. Price discovery may be impaired, however, if SEFs are less successful in addressing rule violations or have difficulty in maintaining orderly trading under the framework of the proposed rules. By promoting market integrity and orderly trading—particularly through identifying and resolving abusive trading practices in an efficient manner—the Commission believes that a SEF's trading system or platform should be able to serve as a more robust mechanism for price discovery.
To the extent that SEF trading specialists facilitate the trading of swaps transactions, they may be active participants in the price discovery process. The proposed fitness, proficiency, and ethics rules would help ensure that SEF trading specialists perform these tasks ethically and competently, which should contribute to the smooth functioning of the price discovery process.
The Commission believes that requiring SEFs to adopt and maintain a formal error trade policy under proposed § 37.203(e) should similarly promote the SEF's ability to facilitate price discovery. The error trade policy should protect the price discovery process on the SEF's facility, and promote confidence in the prices market participants use to hedge risk. This may depend on the quality of the policy and the effectiveness of its implementation. If a SEF does not promptly address an error trade, market participants may mistakenly rely on inaccurate pricing information.
The Commission believes that the proposed amendments related to compliance and self-regulatory responsibilities should promote sound risk management practices. The gains in this regard may depend on the quality and effective implementation of the policies and practices that SEFs would adopt under the proposed amendments.
The Commission notes that proposed § 37.203(e) is intended to encourage SEFs to implement and maintain error trade policies that reduce operational risks for market participants, and are therefore sound risk management policies. This proposed rule should reduce the harm to a market participant when it enters into an error trade, and reduce harm to the market generally by decreasing the risk of reliance on pricing information from an error trade.
The Commission has not identified any effects of the proposed rules identified above on other public interest considerations.
The Commission requests comment on all aspects of the consideration of the costs and benefits of the provisions related to Compliance and SRO Responsibilities.
The Commission proposes to revise the guidance relating to how a SEF should demonstrate that a new swap contract is not readily susceptible to manipulation under § 37.301. The Commission proposes to adopt rules that would create an Appendix C to part 37 (and update the cross reference under § 37.301) and make conforming changes to the guidance found in Appendix B. The proposed revision to the guidance to Core Principle 3 in Appendix B would eliminate the explanatory guidance, which the Commission is proposing to address in the proposed guidance to Appendix C to part 37 and replace the existing Appendix B guidance's cross reference to sections of Appendix C to part 38 with a general reference to Appendix C to part 37. The guidance in Appendix C to part 38 partly focuses on futures
The proposed changes to the regulations implementing Core Principle 4 are intended to establish more practical trade monitoring requirements. First, the Commission proposes to amend existing § 37.401(c)
In addition to these substantive changes, the Commission proposes a number of clarifying and streamlining changes that would not result in any new costs or benefits and are not discussed below. The Commission proposes to partially incorporate existing § 37.203(e), which requires that a SEF conduct real-time market monitoring, into § 37.401(a),
The Commission believes that SEFs should benefit from the swap focused discussion in proposed Appendix C to part 37. Similar to Appendix C to part 38, the guidance outlined in proposed Appendix C to part 37 would set forth information that should be provided to the Commission for new products and rule amendments under § 37.301, based on best practices developed over the past three decades by the Commission and other regulators. This guidance should provide greater efficiency for SEFs so that they do not have to try to apply to swaps products the futures-related provisions in Appendix C to part 38. The guidance would also likely reduce the time and costs that SEFs would incur in providing the appropriate information and should mitigate the need for extensive follow-up discussions with the Commission. In addition, it should reduce the amount of time it takes Commission staff to analyze whether a new product or rule amendment is in compliance with the CEA.
Furthermore, the proposed Appendix C to part 37 should not diminish the current benefits from the implementing regulations for Core Principle 3. The proposed Appendix C to part 37 should continue to aid SEFs to list contracts that are not readily susceptible to manipulation and should contribute to integrity and stability of the marketplace by giving traders more confidence that the prices associated with swaps reflect the true supply of and demand for the underlying commodities or financial instruments.
The Commission acknowledges that trading abuses may take place across trading platforms and markets. However, the Commission understands that the requirement that a SEF monitor the trading activity of its market participants, whether or not the activity occurs on the SEF's own platform, has in practice been highly costly and burdensome, and in some instances these costs and burdens effectively preclude compliance. Moreover, requiring every SEF to monitor trading on every other regulated trading facility is redundant and therefore provides little incremental benefit.
The Commission believes that the proposed regulations should substantially reduce these very high monitoring costs for SEFs with relatively little impact on the benefits of the regulation, as discussed above. Under the proposed regulations, a SEF would not have to monitor trading activity in real-time beyond its facility or the pricing of reference prices for cash-settled swaps, and would not have to collect and evaluate its market participants trading activity on an ongoing basis—only as needed to detect and prevent abusive trading practices. Accordingly, this should save SEF resources.
Proposed § 37.401(a) and, for cash-settled swaps, the removal of existing § 37.403(a),
Furthermore, SEFs generally would no longer have to implement or maintain these protocols to import third party data. Consistent with these changes, proposed § 37.405 would require a SEF to maintain risk control mechanisms to prevent and reduce the potential risk of price distortions and market disruptions on its facility. A SEF would no longer have to incur costs to monitor other trading facilities and OTC trading for purposes of its risk controls. As noted above, since these other trading facilities also have risk control mechanisms, the benefits of requiring SEFs to monitor other trading facilities may be incremental.
Additionally, under proposed § 37.401(b), a SEF would only be required to collect and evaluate data on its market participant's activity that occurs away from the SEF to the extent that doing so is necessary to detect and prevent abusive trading practices. The cost for SEFs to collect market data should decrease because SEFs would no longer collect information on an ongoing basis. To the extent that SEFs were requesting that market participants provide trading data, market participants should also incur fewer costs. Furthermore, SEFs would no longer have to obtain trading data from third parties since all market participants would be required to provide trading data upon request under § 37.404(b), including those market participants that a SEF currently may not require to provide trading activity information to the SEF.
Consistent with these changes, proposed § 37.405 would require a SEF to maintain risk control mechanisms to prevent and reduce the potential risk of price distortions and market disruptions only on its facility. A SEF would no longer have to monitor or coordinate its risk controls with other SEFs and activity on the OTC market.
Notwithstanding these potential savings due to proposed §§ 37.401(a)-(b), § 37.405, and removal of existing § 37.403(a), the Commission understands that most SEFs have (in light of the infeasibility of compliance as discussed above) interpreted the existing regulations to be less demanding than as described in the preamble to the part 37 SEF final rule, and, in practice, have implemented monitoring programs and risk controls that primarily focus on their respective facility. These SEFs may not realize a meaningful reduction in costs because they already have implemented many of these more limited monitoring programs and risk controls.
Compliance with the guidance in proposed Appendix C to part 37 should not impose any additional costs on SEFs or the market generally. SEFs submitting products for the Commission's certification under § 37.301 could incur some costs applying the guidance if the proposed Appendix C to part 37 prompted a SEF to increase the information that it provided when submitting a new swap product. However, the requested information set forth in proposed Appendix C to part 37 is intended to reflect the Commission's prior expectations. For example, the proposed Appendix C to part 37 includes a specific section for options on swap contracts that Appendix C to part 38 does not address. This newly created section is intended to be consistent with previous Commission expectations regarding contract design and transparency of option contract terms. The Commission currently requires that a SEF's product submission specify in an objective manner the following material option-specific terms of a swap (in addition to appropriately designing and sufficiently specifying the underlying swap's terms): (i) Exercise method; (ii) exercise procedure; (iii) strike price provisions; (iv) automatic exercise provisions; (v) contract size; (vi) option expiration and last trading day; and (vii) option type and trading convention. SEFs have provided these option-specific terms in their submissions for options on swap contracts. The Commission does not expect SEFs to incur any additional costs because of the guidance.
The proposed changes to the implementing regulations under Core Principle 4 could increase the chance that a SEF does not promptly identify abusive trading practices that occur away from its facility, but this risk is mitigated because every transaction occurring on a regulated platform such as a SEF or DCM would still be subject to monitoring. The narrowing of a SEF's monitoring obligations under § 37.401(a) may potentially cause the SEF to not identify an abusive trading practice occurring on another exchange or OTC market, possibly in coordination with trading on the SEF's facility.
As a mitigating factor, the Commission believes that a SEF should benefit from its monitoring staff focusing more on trading activity on its facilities and the SEF's obligation to collect and evaluate its market participants' trading activity off of the SEF. This refocusing of the monitoring staff's attention should better enable a SEF to more quickly identify and address abusive trading practices on its facility.
The removal of SEFs' monitoring obligations under § 37.403(a) may potentially cause a SEF to not identify an abusive trading practice occurring on a cash-settled swap's underlier, possibly in coordination with trading of the cash-settled swap on the SEF's facility. In practice, the Commission believes that the additional risk of a SEF failing to promptly identify abusive trading due to this proposed regulation is minimal because SEFs typically cannot access third parties' price-forming information, and SEFs would be challenged to analyze this third party information for abusive activities. Consequently, the Commission does not anticipate that removing this requirement will materially impact SEFs current monitoring practices or effectiveness.
The reduction in trading information that SEFs have to analyze under proposed § 37.401(b) could limit a SEF's ability to identify an abusive trading practice occurring on another SEF or a DCM or OTC, possibly in coordination with trading on the SEF's facility. However, the Commission believes that under the proposed regulation, SEFs would still have the means to collect market participants' trading information and, in unusual situations when a SEF would benefit from additional information to identify abusive trading practices, the SEF would be able to request this information. Moreover, the
The proposed changes to the risk control mechanisms under § 37.405 could increase the chance that abusive trading practices go unchecked. A SEF would no longer have to monitor or coordinate its risk controls with other SEFs and OTC trading, and a market participant may be able to attempt to engage in an abusive trading practice across exchanges and OTC due to this lack of coordination. The Commission believes that this risk is largely mitigated because every SEF and DCM would be required to have these mechanisms on their own facilities, and therefore the incremental detriment from removing this requirement should be minimal. The Commission believes that potential costs resulting from removing the requirement that SEFs monitor or have risk controls related to the OTC market are unlikely to be significant, since such monitoring and risk controls are not practicable. The OTC market is not required by the CEA or the Commission's regulations to have risk controls and it is not clear that risk controls in the OTC market are feasible. The Commission notes that in light of the Commission's proposed interpretation of the trade execution requirement, more swaps are likely to be traded on-SEF and thus subject to monitoring and risk controls. Moreover, SEFs would continue to have the ability to investigate and address abusive trading practices that are implemented across multiple trading facilities, and to request information on a market participant's trading activity.
The proposed guidance in Appendix C to part 37 and the monitoring requirements in proposed §§ 37.401-403 should not materially diminish a SEF's ability to protect market participants and the public. The proposed guidance in Appendix C to part 37 and the proposed amendments to §§ 37.402-403 are intended to provide additional clarity for SEFs to help ensure that a contract is not readily susceptible to manipulation, and to help ensure that SEFs are able to adequately collect information on market activity, including special considerations for physical-delivery contracts and cash-settled contracts. Proposed §§ 37.402-403 would require SEFs to take specific actions to address threats of manipulation, price distortion, or market disruption, and proposed § 37.405 would continue to require risk controls to prevent and reduce the potential risk of price distortions and market disruptions on the SEF.
The Commission does not believe that narrowing a SEF's monitoring obligation under proposed § 37.401(a) to trading activity on its facility, requiring a SEF to collect market participants' off facility trading information only when necessary to detect abusive trading activity per proposed § 37.401(b), eliminating the SEF's monitoring of the price formation information for underlying indexes currently set forth under § 37.403(a), or altering the risk control mechanisms under § 37.405 would meaningfully increase the risk that abusive trading practices go undetected. While there is a risk that abusive trading can lead to market disruptions and create distorted prices or systemic risks that could harm the economy and the public, the SEF's requirement to monitor its facility per § 37.401(a) and to collect additional trading information from market participants as necessary per § 37.401(b) should mitigate this risk. As a group, these rules should continue to protect market participants by helping to prevent price manipulation and trading abuses, as the proposed rules are designed to protect the public by creating an environment that fosters prices that reflect actual market conditions.
The proposed guidance in Appendix C to part 37 is intended to provide more tailored guidance, based on best practices for swaps, regarding what a SEF should consider when developing a swap or amending the terms and conditions of an existing swap. This tailored guidance should help the contracts listed by SEFs, as a whole, to be more reflective of the underlying cash market, thus providing for more efficient hedging of commercial risk.
Furthermore, proposed §§ 37.401-403 should require SEFs to continue to detect and promptly address violations and market anomalies, and ensure that prohibited activities do not distort the swap market's prices. Therefore, the proposed modifications to SEF monitoring requirements should not materially diminish market confidence or reduce the market's ability to operate efficiently. Additionally, proposed § 37.405 should continue to deter rule violations by establishing conditions under which trading is paused or halted.
The Commission does not believe that the proposed rules would materially diminish a SEF's ability to implement an effective monitoring system of its facility to detect rule violations. Manipulation or other market disruptions interfere with the price discovery process by artificially distorting prices and preventing those prices from properly reflecting the fundamental forces of supply and demand. Although there is some risk, as discussed above, that modifications to the SEF's monitoring obligations may cause a SEF to not identify price manipulation, the Commission believes this risk is not material. These rules would continue to require that SEFs detect, and where possible prevent, such market mispricing, and detect disconnects between swaps and their related market prices,
By following the best practices outlined in the proposed guidance in Appendix C to part 37 and the requirements of proposed §§ 37.402-403, a SEF should be able to minimize the susceptibility of a swap to manipulation or price distortion at the time it is developing the contract's terms and conditions. Performing this work early on should enable a SEF to minimize risks to its clearinghouse and to market participants. Sound risk management practices rely upon execution of hedge strategies at market prices that are free of manipulation or other disruptions. These rules are designed to facilitate hedging at prices free of distortions that may be preventable by adequate controls.
Furthermore, proposed §§ 37.401-403 should continue to aid SEFs in deterring, detecting, and addressing operational risks posed by abusive trading practices or trading activities. These proposed rules are designed to limit the potential losses and costs to SEFs and market participants and promote sound risk management practices.
The Commission has not identified any effects that these rules will have on
The Commission requests comment on all aspects of the consideration of the costs and benefits of the provisions related to the Design and Monitoring of Swaps.
In order to promote financial integrity of transactions, the Commission is proposing changes with respect to certain straight-through processing obligations under Core Principle 7 for SEFs and its implementing regulations and under § 39.12(b)(7) for derivatives clearing organizations (“DCO”). The Commission will discuss these changes together in this section since these provisions interact to form the basis of the Commission's straight-through processing obligations for SEFs and DCOs.
Proposed § 37.701 would require a SEF to have an independent clearing agreement with each registered DCO or exempt DCO to which the SEF routes swaps for clearing, including in those instances where a SEF, pursuant to a service agreement with a third-party service provider, routes swaps through the SEF's third-party service provider to a DCO that maintains its own agreement with the third-party service provider, but not with the SEF.
Proposed § 37.702(b)(1) would require SEFs to coordinate with registered DCOs to develop rules and procedures that facilitate the “prompt, efficient, and accurate” processing and routing of swap transactions in accordance with § 39.12(b)(7)(i)(A).
Proposed §§ 37.702(b)(2)-(3), respectively, would mandate that SEFs (i) require their market participants to identify a clearing member in advance for each counterparty on an order-by-order basis and (ii) facilitate pre-execution screening by each clearing FCM in accordance with the requirements of § 1.73 on an order-by-order basis. The Commission notes that this is consistent with the Divisions' view in the 2013 Staff STP Guidance that such requirements are corollary to a SEF's obligation to facilitate “prompt and efficient” transaction processing.
The Commission proposes to streamline the applicable straight-through processing provisions for registered DCOs by consolidating the existing requirements under §§ 39.12(b)(7)(ii)-(iii) into proposed § 39.12(b)(7)(ii) and would delete existing § 39.12(b)(7)(iii). Specifically, proposed § 39.12(b)(7)(ii) would establish a single AQATP standard that applies to all “
In contrast, existing §§ 39.12(b)(7)(ii)-(iii) establish different standards that apply based on a transaction's characteristics. Existing § 39.12(b)(7)(ii) applies to (i) any contract, including futures, options on futures, and swaps, that is (ii) executed competitively, (iii) on or subject to the rules of a SEF or DCM, and (iv) the AQATP period applies after the trade's
The Commission would also make several non-substantive amendments. First, to conform the changes throughout the part 37 proposal, all references under §§ 37.702-703 to
Second, existing § 37.702(b)(2) requires SEFs to develop rules and procedures to facilitate the “prompt and efficient transaction processing” of swap transactions to the applicable DCO. To conform this requirement to existing § 39.12(b)(7)(i)(A), which requires each registered DCO to coordinate with a SEF or DCM to facilitate the “prompt, efficient, and accurate” processing of swaps for clearing, the Commission proposes to add the term “accurate” to the existing “prompt and efficient” standard for SEFs under § 37.702(b)(2).
Third, proposed § 37.702 would clarify that a SEF's obligations under § 37.702 apply only to registered DCOs, as opposed to exempt DCOs.
Fourth, proposed § 37.702(b) would specify that its requirements apply only to those transactions routed through a SEF to a registered DCO for clearing. The Commission believes that this change is helpful to clarify that § 37.702(b)'s requirements do not apply to those SEFs that do not facilitate the clearing of swaps executed on the SEF.
Fifth, proposed § 39.12(b)(7) would apply to all “agreements, contracts, and transactions,” rather than “transactions” as currently provided, in order to conform with the statutory definition of “DCO” in section 1a(15) of the Act and general scope of product eligibility under § 39.12(b)(1) and would make conforming changes in proposed §§ 39.12(b)(7)(i)-(ii).
Proposed § 37.701 is intended to interact with the other proposed changes in Core Principle 7 and § 39.12(b)(7) to strengthen the straight-through processing and routing of swaps from SEFs to DCOs, and increase market integrity. The Commission believes proposed § 37.701(b)'s requirement that a SEF have a direct clearing agreement with each DCO to which the SEF submits swaps for clearing would improve a SEF's ability to establish rules and procedures that better coordinate with a DCO's clearance and settlement processes to foster greater financial integrity of swaps sent to the DCO for clearing. Such an agreement also would instill more confidence in the ability of swap clearing through the SEF, as under the proposal the SEF should have the appropriate processes to facilitate swaps clearing. Further, the terms established in a direct clearing agreement between the SEF and DCO should help the SEF and DCO resolve any problems that arise at the DCO that could diminish the SEF's ability to submit transactions for clearing.
The Commission believes that adopting proposed §§ 37.702(b)(2)-(3) would strengthen the straight-through processing and routing of swaps from SEFs to DCOs, and increase financial integrity of transactions by ensuring a consistent and timely clearing process. Specifically, proposed §§ 37.702(b)(2)-(3) should benefit transaction processing, routing, and clearing by codifying the straight-through processing requirement that SEFs must ensure that trades are efficiently routed to DCOs, reducing the time between execution and clearing. However, to the extent counterparties already comply with proposed §§ 37.702(b)(2)-(3) as a result of standard industry practices or as a result of adopting the Divisions' view discussed in the 2013 Staff STP Guidance, these benefits may already have been realized.
The Commission believes that its proposed qualitative interpretation of the “prompt, efficient, and accurate” standard in proposed § 37.702(b)(1), rather than a static bright-line standard such as the ten-minute standard discussed by the Divisions in the 2015 Supplementary Staff Letter, would benefit the marketplace by establishing a standard that is conducive to the broader array of swaps that would be subject to the expanded trade execution requirement, as well as the additional executed methods that would be permitted under the Commission's proposal.
The Commission's proposed qualitative interpretation of the “prompt, efficient, and accurate” standard should also help ensure that SEFs have time to use third-party affirmation hubs for all swap trades instead of merely those trades that can be routed through the affirmation hub for submission to the DCO within the prescribed time limit. The Commission believes that permitting the use of affirmation hubs benefits the marketplace in certain situations by providing an opportunity for counterparties to identify and correct potential error trades prior to routing these trades to a DCO for clearing, thereby reducing the number of error trades.
The Commission believes that streamlining and creating a single AQATP standard would benefit DCOs, SEFs, and clearing FCMs. The current bifurcation of the AQATP standard requires a DCO to ascertain the characteristics of a trade to determine whether the DCO's obligation to accept or reject a trade subject to AQATP begins after (1) the trade's execution for a trade that is executed competitively on a SEF or DCM (and therefore subject to § 39.12(b)(7)(ii)), or (2) the trade's submission to the DCO for a trade that was either executed non-competitively or on or subject to the rules of a SEF or DCM or executed bilaterally (and therefore subject to § 39.12(b)(7)(iii)). The Commission's proposal to streamline the AQATP standard should simplify the AQATP standard for DCOs, which in turn may lead to even more efficient trade processing, routing, and clearing since these extra steps are being removed from the straight-through processing requirements.
Proposed § 37.701 would require those SEFs that do not currently have a direct clearing agreement with a DCO to
With respect to the Commission's proposed qualitative interpretation of the “prompt, efficient, and accurate” standard in proposed § 37.702(b)(1), the Commission believes that the proposed qualitative standard for swaps routed via third-party affirmation hubs could reduce the financial integrity of the trades facilitated by the SEF as compared to the alternative of establishing a bright-line static deadline, such as the ten-minute timeframe discussed by the Divisions in the 2015 Supplementary Staff Letter. As a result, a SEF could argue that it complies with the Commission's qualitative interpretation of the “prompt, efficient, and accurate” standard even though the swap could have been processed and routed more quickly if the Commission would have established a bright-line standard,
However, the Commission believes this potential cost would be mitigated if, as the Commission expects will occur, market and technological developments enable processing and routing through third-party affirmation hubs to occur at increasingly shorter time intervals. The Commission also believes that there is an inherent incentive to confirm all trades in a timely manner, as a counterparty to the trade that has entered a trade in its front office system and is trading on that information needs to ensure that trade is accurate, otherwise, it may be managing its portfolio with inaccurate information. Further, the Commission has set forth its expectation that under its proposed qualitative standard, transactions that can be reasonably affirmed on a fully automatic basis after execution should be affirmed in that manner.
Proposed § 37.702(b)(2) would require each market participant to identify a clearing FCM in advance of each trade for each counterparty. The Commission notes that market participants must already identify a clearing FCM, and so does not believe that the proposed requirement will impose a material cost since it would specify only that a market participant must identify its clearing FCM before the trade rather than after. Similarly, proposed § 37.702(b)(3) would require SEFs to provide pre-execution credit screening, which could impose a cost on some SEFs to establish a means of communicating with an FCM. While proposed §§ 37.702(b)(2)-(3) could impose costs by requiring SEFs to update their systems to facilitate these requirements, the Commission believes that SEFs generally already have established these functionalities as established market practices. Moreover, existing § 1.73 requires a clearing FCM to implement pre-execution risk controls. Consequently, the Commission believes that most SEFs already comply with proposed § 37.702(b)(3) since clearing FCMs otherwise would unlikely be able to comply with their § 1.73 obligations. Accordingly, costs imposed by proposed §§ 37.702(b)(2)-(3) likely have already been realized.
The Commission believes that the proposed consolidation of the AQATP standard would not impose any new cost on DCOs since the Commission is merely clarifying an AQATP standard in existing § 39.12(b)(7)(ii) to more accurately reflect when a DCO's AQATP obligation begins. The proposed ten-second AQATP standard could impose new costs by requiring DCOs to establish the ability to accept or reject trades for clearing within ten seconds. However, the Commission does not believe that the proposed interpretation of the AQATP standard would impose any material costs because it conforms to the industry standard and 99 percent of all trades are accepted or rejected from clearing within ten seconds or less.
The Commission's proposal on the financial integrity of transactions and straight-through processing obligations should benefit market participants and the public by helping to ensure greater transparency and consistency of straight-through processing, which the Commission expects would result in market participants and the public having a better understanding of the relevant market structure. In turn, this could enable market participants and the public to make more informed choices and more readily identify and understand possible risks. The proposal would adopt and codify certain straight-through processing standards—rather than relying on industry practice or staff guidance—related to the processing and routing of swaps by SEFs,
The AQATP standard reflects the Commission's belief that acceptance or rejection for clearing in close to real time is crucial for the efficient operation of trading venues, and the Commission's proposal is intended to reinforce SEFs' and DCOs' mutual obligation to work with one another to ensure the prompt, efficient, and accurate processing and routing of swaps from SEFs to DCOs. In turn, this should promote market efficiency and the financial integrity of transactions by requiring these market participants to work together to process, route, and ultimately clear swap transactions as appropriate.
In recognizing that some trading venues may not be fully automated or may offer execution methods that either are not fully automated or that have a relatively higher error rate, such as voice execution, the Commission's proposal would explicitly permit the use of third-party affirmation hubs pursuant to proposed § 37.702(b) to assist counterparties in identifying and fixing any errors before routing to a DCO. Identifying errors before trades are cleared should enhance the financial integrity of markets by helping to ensure that cleared transactions reflect counterparties' expectations and thereby avoid costs associated with fixing any cleared error trades. However, the absence of a prescribed timeframe to confirm transactions may result in delayed resolution of trade errors.
Clarifying that a DCO must accept or reject a trade after submission to the DCO,
Proposed § 37.702(b) and the Commission's related interpretation should promote efficiency by incorporating the use of third-party affirmation platforms, which provide an opportunity to identify error trades prior to clearing, pursuant to the “prompt, efficient, and accurate” standards. Similarly, proposed § 37.702(b) should promote financial integrity by reducing instances in which a DCO inadvertently clears an error trade, which may also possibly be reported to an SDR that would publish such trades to the public pursuant to the real-time reporting requirements under part 43 of the Commission's regulations. However, the Commission also recognizes that to the extent that market participants have adopted these practices, such as pre-execution screening by FCMs, these benefits may already have been realized.
The Commission does not believe the proposed changes will have a significant effect on price discovery. To the extent that the Commission's proposal is conducive to permitting new execution methods (
The AQATP standard reflects the Commission's belief that acceptance or rejection for clearing in close to real time is crucial for effective risk management. The Commission believes that prudent risk management dictates that once a trade has been submitted to a clearing FCM or a DCO, the clearing FCM or DCO must accept or reject it as quickly as possible. The Commission's proposal would promote sound risk management practices by ensuring that all intended-to-be-cleared swaps are subject to straight-through processing on a SEF and that all trades submitted to a DCO are subject to a consistent AQATP standard.
The Commission has not identified any other public interest considerations relevant to the proposal on financial integrity and straight-through processing obligations.
The Commission requests comment on all aspects of the consideration of the costs and benefits of the proposal related to the financial integrity of transactions and straight-through processing obligations.
The proposal would generally adopt Commission staff “Financial Resources Guidance,”
Proposed § 37.1301(a) would require a SEF to maintain financial resources in an amount adequate to cover only those projected operating costs necessary to enable the SEF to comply with its core principle obligations under section 5h of the Act and any applicable Commission regulation for a one-year period, calculated on an ongoing basis. In contrast, existing § 37.1301(a) requires a SEF to maintain sufficient financial resources to cover all of its operations for a one-year period, calculated on an ongoing basis, regardless of whether such operating costs are necessary for the SEF to comply with its core principle or other applicable Commission regulations. The Commission would consolidate § 37.1301(c) with § 37.1301(a) and accordingly delete § 37.1301(c). Proposed § 37.1301(b) would permit a SEF to file a consolidated financial report if the SEF also operates as a DCO.
Pursuant to existing § 37.1303, a SEF currently has reasonable discretion to determine its financial obligations under § 37.1301.
Further, based on the Financial Resources Guidance, the proposed Acceptable Practices would clarify that in order to determine its obligations under proposed § 37.1301(a), a SEF may pro-rate, but not exclude, certain expenses in calculating projected operating costs.
Proposed § 37.1303 would require a SEF to maintain liquid assets in an amount equal to the greater of (i) three-months' projected operating costs necessary to enable the SEF to comply with its core principle and applicable Commission regulations and (ii) the SEF's projected wind-down costs. In contrast, a SEF currently must maintain sufficient liquid assets to cover six-months' projected operating costs.
Since SEFs currently are not required to provide GAAP-compliant financial submissions, proposed § 37.1306(a) would require a SEF's quarterly financial submissions to conform to GAAP, or in the case of a non-U.S. domiciled SEF that is not otherwise required to prepare GAAP-compliant statements, to prepare its statements in accordance with either the International Financial Reporting Standards issued by the International Accounting Standards Board, or a comparable international standard that the Commission may accept in its discretion. Proposed § 37.1306(c) would provide that a SEF's quarterly financial statements must explicitly (i) identify all the SEF's expenses without any exclusions, (ii) identify all expenses and corresponding amounts that the SEF excluded or pro-rated when it determined its projected operating costs, (iii) explain why the SEF excluded or pro-rated any expenses, and (iv) identify and explain all costs necessary to wind down the SEF's operations. Section 37.1306(c)(1) currently requires SEFs to provide “[s]ufficient documentation” explaining how the SEF determined its financial resources obligations, and the Commission believes that the items specified in proposed § 37.1306(c) constitute such sufficient documentation and are already being provided by compliant SEFs. Proposed § 37.1306(d) would extend the deadline for a SEF's fourth quarter financial statement from sixty to ninety days after the end of such fiscal quarter to conform to the extended deadline for a SEF's annual compliance report. Proposed § 37.1306(e) would require a SEF to provide notice no later than forty-eight hours after it knows or reasonably should know it no longer meets its financial resources obligations.
Proposed § 37.1301(a) is expected to reduce the total financial assets that most SEFs must maintain since a SEF would be required to maintain sufficient resources to cover only its operations necessary to comply with its core principle obligations and applicable Commission regulations rather than all of its operating costs as currently provided in existing § 37.1301(a). With respect to proposed § 37.1301(a), the proposed Acceptable Practices would provide further guidance regarding the scope of a SEF's reasonable discretion when determining the SEF's financial requirements under § 37.1301(a) to exclude certain expenses from its projected operating cost calculations, thereby reducing the amount of total financial assets that a SEF must maintain under proposed § 37.1301(a). To the extent that the proposed Acceptable Practices generally adopt the staff's existing Financial Resources Guidance, SEFs may also already have realized the benefits associated with reduced financial resources
Proposed § 37.1301(b) could result in a marginal cost reduction since an entity would no longer be required to submit a separate financial submission for its affiliated SEF and DCO. However, the Commission believes that this would be a
Proposed § 37.1303's liquidity requirement would significantly reduce the amount of liquid financial assets that must be maintained by most SEFs. Currently, a SEF must maintain liquid financial assets equal to six-months' projected operating costs, while proposed § 37.1303 would require most SEFs to hold three-months' projected operating costs. As a result, proposed § 37.1303 generally would reduce the liquidity requirement for most SEFs by 50 percent.
The Commission believes that the proposal provides a SEF with greater flexibility in terms of establishing its financial resources. This, in turn, may lead to greater efficiencies in terms of financing and capital allocation and investment. However, the Commission acknowledges, as discussed below, this flexibility may increase the level of financial risk at the SEF.
Proposed §§ 37.1306(a) and (c) would benefit transparency and augment the Commission's oversight by requiring SEFs to provide standardized, GAAP-compliant financial submissions that explicitly identify any cost a SEF has excluded or pro-rated in determining its projected operating costs. In its experience conducting ongoing SEF oversight, Commission staff has devoted additional effort to obtain appropriate clarity and sufficient documentation from SEFs. Therefore, the Commission believes that clarifying the minimum documentation that a SEF must provide would mitigate the time and resources required both by staff in conducting its oversight and by SEFs in responding to staff's requests for additional information. Proposed § 37.1306(e) would benefit market integrity by ensuring that the Commission is aware of any non-compliance forty-eight hours after the SEF knows or reasonably should know that it fails to satisfy its financial resources obligations rather than when the SEF submits its quarterly financial statement under § 37.1306(a), increasing the Commission's ability to promptly respond.
Proposed § 37.1301(a) would reduce the amount of financial resources that a SEF must maintain to an amount that would enable the SEF to comply with its core principle obligations and applicable Commission regulations for a one-year period, calculated on an ongoing basis, rather than in an amount necessary to cover all of the SEF's operations as required under existing § 37.1301(a). The proposed Acceptable Practices further would clarify the costs that a SEF may exclude when determining its obligations under proposed § 37.1301(a). As a result, proposed § 37.1301(a) as contemplated in the proposed Acceptable Practices likely would induce SEFs to reduce the current level of total financial resources that they maintain under § 37.1301. In turn, this could decrease market participants' confidence and could harm a SEF's stability during adverse market conditions because the SEF may not have adequate financial resources to cover its costs. However, the Commission believes that the potential harm to a SEF's financial stability and to the market is minimal since proposed § 37.1301(a) addresses only the amount of a SEF's total financial assets, which includes illiquid assets, rather than focusing only on a SEF's liquid assets. The Commission notes that illiquid assets are less important compared to the amount of liquid financial assets that a SEF must maintain under proposed § 37.1303 since it is more difficult for a SEF to timely liquidate its illiquid assets to cover its operating costs, especially during periods of market instability. Accordingly, the Commission believes a SEF's liquid financial assets, which the Commission addresses in proposed § 37.1303 below, is more important for sustaining a SEF's financial health and continuing operations.
Proposed § 37.1303 could require some SEFs to maintain additional liquid financial assets, compared to the current liquidity requirement, where a SEF's wind-down costs exceed six-months' operating costs. However, as explained above under the discussion of benefits, the Commission believes that most SEFs would not have wind-down costs that exceed six-months' operating costs. Accordingly, proposed § 37.1303 should not increase the liquidity requirement for most SEFs.
Proposed § 37.1304 would require a SEF to incur an additional marginal cost to calculate its wind-down costs, in addition to its projected operating costs as currently required, in order to determine its financial resources
Proposed § 37.1306 would impose greater costs on a SEF. Specifically, proposed § 37.1306(a) would require a SEF to submit GAAP-compliant quarterly reports. Because GAAP-compliant financial statements generally require additional effort compared to non-GAAP compliance financial statements, the Commission estimates that the proposed change would increase annual costs for each SEF to create GAAP-compliance financial report. However, the Commission does not believe that proposed § 37.1306(c) would increase costs. Under existing § 37.1306(c), a SEF must provide sufficient documentation explaining the methodology it used to compute its financial resources requirements; accordingly, proposed § 37.1306(c) is merely clarifying the type of information that is already required.
The Commission previously noted that the financial resources requirements protect market participants and the public by establishing uniform standards and a system of Commission oversight that ensures that trading occurs on a financially stable facility, which in turn, mitigates the risk of market disruptions, financial losses, and system problems that could arise from a SEF's failure to maintain adequate financial resources.
Moreover, a SEF would be required to provide notice under proposed § 37.1306(e) no later than forty-eight hours after it knows or reasonably should have known that it no longer satisfies its financial resources obligations, ensuring that the Commission can take prompt action to protect market participants and the public. In contrast, the Commission currently is notified of non-compliance in a SEF's quarterly financial statements. Lastly, a SEF would be required to submit GAAP-compliant quarterly financial submissions under proposed § 37.1306(c) that explicitly identify the costs a SEF has excluded or pro-rated in determining its projected operating costs. As a result, the Commission would more easily be able to compare SEFs' financial health and take pro-active steps to protect market participants and the public if the Commission identifies a SEF with weak financial health or the development of negative financial trends among SEFs that could endanger the market participants or the public.
Proposed § 37.1301(a) and § 37.1303, as further clarified through the proposed Acceptable Practices, together should benefit market efficiency by reducing capital costs since SEFs would no longer be required to maintain an excessive amount of financial resources. Accordingly, a SEF should be able to more efficiently allocate its financial resources, which in turn should encourage market growth and innovation. For example, as noted above, in the case of proposed § 37.1303, the Commission expects that most SEFs would need to hold approximately 50 percent less liquid financial assets as reserve capital to cover operating costs. The current financial resources requirements dis-incentivize a SEF by imposing higher capital requirements if the SEF wishes to offer new or experimental technology, execution methods, or related products and services—especially if such business lines, products, or services are not expected to be immediately profitable or would have low margins.
The existing regulations may discourage a SEF from offering more capital intensive activities, such as execution methods that involve human brokers compared to fully electronic trading that are less capital intensive. Accordingly, the Commission believes that the proposed capital resources requirements would be more neutral with respect to a SEF's chosen technology and business model, and therefore should encourage a greater variety of execution methods and related services and products in the market place.
Reducing capital costs would promote the entry of new entrants into the market by reducing start-up costs and initial capital requirements, thereby further encouraging competition and innovation. The increase in competition and innovation could depend on the extent to which potential new entrants respond to this encouragement.
Proposed § 37.1306(e) should improve the financial integrity of markets by requiring a SEF to notify the Commission within 48 hours after it knows or reasonably should have known that it no longer satisfies its financial resources obligations, ensuring that the Commission can take prompt action to protect market integrity. Lastly, proposed § 37.1306(c) would improve SEF financial submissions by requiring GAAP-compliant statements as well as clarifying that a SEF must explicitly identify any costs that it has exclude or pro-rated in determining its projected operating costs. These changes should improve the Commission's ability to conduct its oversight responsibilities to protect market integrity.
The Commission has not identified any effects of the proposed rules identified above on price discovery.
By establishing specific standards with respect to how SEFs should assess and monitor the adequacy of their financial resources, the financial resources rules should promote sound risk management practices by SEFs. As noted above, proposed § 37.1303 would require a SEF to identify its wind-down costs and associated timing and ensure that it has sufficient liquid assets to maintain an orderly wind down. Similarly, proposed § 37.1306(c) would require a SEF to explain the basis of its determination for its estimate of its
The Commission has not identified any effects that these rules will have on other public interest considerations other than those enumerated above.
The Commission requests comment on all aspects of the consideration of the costs and benefits of the provisions related to SEF financial resources.
CEA section 15(b) requires the Commission to “take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of this Act, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of this Act.”
The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission requests comment on whether the proposal implicates any other specific public interest to be protected by the antitrust laws.
The Commission has considered the proposal to determine whether it is anticompetitive and does not anticipate that the proposal, viewed in its entirety, will have material anticompetitive effects or result in anticompetitive behavior. As described in detail in the preamble above, the proposal is expected to generally provide greater flexibility and competition in connection with swap trading on SEFs largely as a result of the proposed approach that would permit SEFs to offer a variety of innovative execution methods rather than being limited to specific, mandated execution methods. The Commission believes that such innovation is expected to promote greater competition between SEFs in order to attract additional trading and market participation.
The Commission also believes that achieving the SEF statutory goals of promoting trading on SEFs and pre-trade price transparency requires both (i) increasing the number of swaps that are subject to the trade execution requirement; and (ii) concurrently providing flexibility of execution methods. The Commission believes that requiring market participants to conduct a larger portion of their swaps trading on SEFs would, among other things, foster additional competition among a more concentrated number of market participants resulting in increased market efficiency and decreased transaction costs.
The Commission also notes that the proposal would enhance the available third party regulatory service providers that a SEF could hire to perform a variety of regulatory functions required of SEFs under the Act and Commission regulations. Specifically, as noted in the preamble, the Commission has proposed to expand the scope of entities that may provide regulatory services under § 37.204(a) to include any non-registered entity approved by the Commission. This proposed change is expected to potentially increase competition among existing and potential regulatory service providers and, thereby, reduce operating costs for SEFs, and mitigate barriers to entry for new SEFs.
Although the Commission does not anticipate that the proposal, viewed in its entirety, will have material anticompetitive effects or result in anticompetitive behavior, the Commission encourages comments on any aspect of the proposal that may be inconsistent with the antitrust laws or anticompetitive in nature. For example, the impartial access requirements proposed under § 37.202(a) would not require an all-to-all market as envisioned by the current SEF rules, and therefore may inhibit the ability of certain market participants to access certain trading markets and liquidity pools. The Commission notes, however, that the current SEF market structure and participation patterns already have generally developed along these traditional lines, absent the proposed access criteria. The Commission underscores that its proposed changes to the impartial access requirements would require a SEF to allow access to prospective participants who are able to meet the SEF's participation criteria. As discussed in this proposal, although the Commission believes that this approach should prevent potential anticompetitive harms, it may still provide potential barriers to access.
Further, the Commission has preliminarily determined that the proposal serves the regulatory goals set forth in CEA section 5h(e) to promote trading on SEFs and pre-trade transparency in the swaps market. In addition, the Commission also preliminary believes that the proposal serves the general regulatory purpose in CEA section 3(b) to “promote responsible innovation and fair competition among boards of trade, other markets and market participants.”
Although the Commission has not identified any less anticompetitive means to effectuate the purposes of CEA sections 5h(e) and 3(b) in connection with the SEF regulatory framework, nonetheless, the Commission requests comment on whether there are other less anticompetitive means of achieving the relevant purposes of the Act. The Commission notes that it is not required to follow the least anticompetitive course of action.
Administrative practice and procedure, Commodity exchanges, Commodity futures, Reporting and recordkeeping requirements.
Designated contract markets, Registered entities, Swap execution facilities, Swaps, Trade execution requirement.
Commodity futures, Registered entities, Registration application, Reporting and recordkeeping requirements, Swap execution facilities, Swaps.
Commodity futures, Designated contract markets, Registered entities, Reporting and recordkeeping
Consumer protection, Derivatives clearing organizations, Reporting and recordkeeping requirements, Risk management, Straight-through processing, Swaps.
Block trades, Consumer protection, Reporting and recordkeeping requirements, Swaps.
For the reasons stated in the preamble, the Commodity Futures Trading Commission proposes to amend 17 CFR chapter I as follows:
7 U.S.C. 1a, 2, 6b-1, 6c, 7, 7a-2, 7b-3, 8, 9, 9a, 12, 12a, 12c, 13b, 16a, 18, 19, and 21.
The revisions read as follows:
(b) * * *
(2) Except as provided in §§ 9.11(a), (b)(3)(i) through (v), (c), 9.12(a), and 9.13 (concerning the notice, effective date and publication of a disciplinary or access denial action), any summary action permitted under the rules of the swap execution facility imposing a minor penalty for the violation of rules relating to recordkeeping or reporting, or permitted under Core Principle 13, paragraph (a)(6) in appendix B to part 38 of this chapter imposing a minor penalty for the violation of exchange rules relating to decorum or attire, or relating to the timely submission of accurate records required for clearing or verifying each day's transactions or other similar activities; and
(3) Any exchange action arising from a claim, grievance, or dispute involving cash market transactions which are not a part of, or directly connected with, any transaction for the purchase, sale, delivery or exercise of a commodity for future delivery, a commodity option, or a swap.
(c) The Commission will, upon its own motion or upon motion filed pursuant to § 9.21(b), promptly notify the appellant and the exchange that it will not accept the notice of appeal or petition for stay of matters specified in paragraph (b) of this section. The determination to decline to accept a notice of appeal will be without prejudice to the appellant's right to seek alternate forms of relief that may be available in any other forum.
(k)
(b) * * *
(2) The written notice of a disciplinary action or access denial action provided to the person against whom the action was taken by a swap execution facility must be a copy of a written decision which includes the items listed in paragraphs (b)(3)(i) through (vi) of this section.
(a) * * *
(1) As permitted by Core Principle 2, paragraph (a)(8) in appendix B to part 37 of this chapter (emergency disciplinary actions) or Core Principle 13, paragraph (a)(7) in appendix B to part 38 of this chapter (emergency disciplinary actions), the exchange reasonably believes, and so states in its written decision, that immediate action is necessary to protect the best interests of the marketplace;
(2) As permitted by the rules of the swap execution facility or Core Principle 13, paragraph (a)(4) in appendix B to part 38 of this chapter (hearings), the exchange determines, and so states in its written decision, that the actions of a person who is within the exchange's jurisdiction has impeded the progress of a disciplinary hearing;
(3) As permitted by the rules of the swap execution facility for recordkeeping or reporting violations or Core Principle 13, paragraph (a)(6) in appendix B to part 38 of this chapter (summary fines for violations of rules regarding timely submission of records, decorum, or other similar activities), the exchange determines that a person has violated exchange rules relating to decorum or attire, or timely submission of accurate records required for clearing or verifying each day's transactions or other similar activities; or
(a) * * *
(2) Within ten days after a notice of summary action has been delivered in accordance with § 9.12(b) to a person who is the subject of a summary action permitted by Core Principle 2, paragraph (a)(8) in appendix B to part 37 of this chapter (emergency disciplinary actions) or Core Principle 13, paragraph (a)(7) in appendix B to part 38 of this chapter (emergency disciplinary actions), that person may petition the Commission to stay the effectiveness of the summary action pending completion of the exchange proceeding.
7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, 2a2, and 21, as amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
(a) Except as provided in this section, counterparties shall execute a transaction involving a swap subject to the clearing requirement of section 2(h)(1) of the Act on a designated contract market, a swap execution facility, or a swap execution facility that is exempt from registration under section 5h(g) of the Act, that lists the swap for trading.
(b) Paragraph (a) of this section does not apply to a swap transaction that is listed only by a swap execution facility that is exempt from registration under section 5h(g) of the Act.
(c) Paragraph (a) of this section does not apply to a swap transaction for which the clearing exception under section 2(h)(7) of the Act or the exceptions or exemptions under part 50 of this chapter have been elected, and the associated requirements met.
(d) Paragraph (a) of this section does not apply to a swap transaction that is executed as a component of a package transaction that includes a component transaction that is the issuance of a bond in a primary market.
(1) For purposes of this paragraph (d), a
(i) Execution of each component transaction is contingent upon the execution of all other components transactions; and
(ii) The component transactions are priced or quoted together as one economic transaction with simultaneous or near simultaneous execution of all components.
(2) [Reserved]
(e) Paragraph (a) of this section does not apply to a swap transaction that is executed between counterparties that have eligible affiliate counterparty status pursuant to § 50.52(a) of this chapter even if the eligible affiliate counterparties clear the swap transaction.
(a)
(b)
(1) For any swap, or any group, category, type or class of swaps subject to the clearing requirement of section 2(h)(1) of the Act, to be listed for trading, a designated contract market or a swap execution facility shall submit a complete Form TER or amend its Form TER concurrently with the submission of a product listing pursuant to § 40.2 or § 40.3 of this chapter;
(2) For any swap, or any group, category, type or class of swaps currently listed for trading and subject to the clearing requirement of section 2(h)(1) of the Act, a designated contract market or a swap execution facility shall submit a complete Form TER ten business days prior to the effective date of this rule in the
(3) For any swap, or any group, category, type or class of swaps that a designated contract market or a swap execution facility lists for trading that subsequent to listing is determined to become subject to the clearing requirement of section 2(h)(1) of the Act, the designated contract market or the swap execution facility shall submit a complete Form TER or amend its Form TER ten business days prior to the effective date of the same swap, or same group, category, type or class of swaps becoming subject to the clearing requirement.
(c)
(a)
(b) For swaps subject to the requirements of section 2(h)(8) of the Act prior to the effective date of this rule, counterparties must continue to comply with the requirements of section 2(h)(8) of the Act.
(c)
(1)
(2)
(3)
(d) Nothing in this rule shall be construed to prohibit any person from voluntarily complying with the requirements of section 2(h)(8) of the Act as set forth in § 36.1 sooner than required under the implementation schedule provided under paragraph (c) of this section.
(e)
7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
The provisions of this part shall apply to every swap execution facility that is registered or is applying to become registered as a swap execution facility under section 5h of the Commodity Exchange Act (“the Act”).
(a)
(b)
(1) Through direct access provided by a swap execution facility;
(2) Through access or functionality provided by a third-party; or
(3) Through directing an intermediary that accesses a swap execution facility on behalf of such person to trade on its behalf.
(a)
(b)
(i) File electronically a complete Form SEF as set forth in appendix A to this part, or any successor forms, and all information and documentation described in such forms with the Secretary of the Commission in the form and manner specified by the Commission;
(ii) Provide to the Commission, upon the Commission's request, any additional information and documentation necessary to review an application; and
(iii) Obtain a legal entity identifier code for the purpose of identifying the swap execution facility pursuant to part 45 of this chapter.
(2)
(ii) Section 40.8 of this chapter sets forth those sections of the application that will be made publicly available, notwithstanding a request for confidential treatment pursuant to § 145.9 of this chapter.
(3)
(4)
(5)
(6)
(ii) The Commission may issue an order denying registration upon a Commission determination, in its own discretion, that the applicant has not demonstrated compliance with the Act and the Commission's regulations applicable to swap execution facilities.
(c)
(2) A swap execution facility shall provide to the Commission, upon the Commission's request, any additional information and documentation necessary to review a request to amend an order of registration.
(3) The Commission shall issue an amended order of registration upon a Commission determination, in its own discretion, that the swap execution facility would maintain compliance with the Act and the Commission's regulations upon amendment to the order. If deemed appropriate, the Commission may issue an amended order of registration subject to conditions.
(4) The Commission may decline to issue an amended order based upon a Commission determination, in its own discretion, that the SEF would not continue to maintain compliance with the Act and the Commission's regulations upon amendment to the order.
(d)
(e)
(2)
(3)
(i) The underlying documentation that governs the corporate change;
(ii) A description of the corporate change, including the reason for the change and its impact on the swap execution facility, including its governance and operations, and its impact on the rights and obligations of market participants;
(iii) A discussion of the transferee's ability to comply with the Act, including the core principles applicable to swap execution facilities, and the Commission's regulations thereunder;
(iv) The governing documents adopted by the transferee, including a copy of any constitution, articles or certificate of incorporation, organization, formation, or association with all amendments thereto, partnership or limited liability agreements, and any existing bylaws, operating agreement, or rules or instruments corresponding thereto;
(v) The transferee's rules marked to show changes from the current rules of the swap execution facility;
(vi) A representation by the transferee that it:
(A) Will be the surviving entity and successor-in-interest to the transferor swap execution facility and will retain and assume the assets and liabilities of the transferor, except if otherwise indicated in the request;
(B) Will assume responsibility for complying with all applicable provisions of the Act and the Commission's regulations promulgated thereunder, including all self-regulatory responsibilities except if otherwise indicated in the request; and
(C) Will notify market participants of all changes to the transferor's rulebook prior to the transfer, including those changes that may affect the rights and obligations of market participants, and will further notify market participants of the concurrent transfer of the registration to the transferee upon Commission approval and issuance of an order permitting this transfer.
(4)
(f)
(g)
(h)
(a) Any rule, except for swap product terms and conditions, submitted as part of a swap execution facility's application for registration shall be considered for approval by the Commission at the time the Commission issues the swap execution facility's order of registration.
(b) Any rule, except for swap product terms and conditions, submitted as part of an application to reinstate the registration of a dormant swap execution facility, as defined in § 40.1 of this chapter, shall be considered for approval by the Commission at the time the Commission approves the dormant swap execution facility's reinstatement of registration.
(a)
(b)
(c)
(2)
(3)
(d)
(a)
(1) A violation by the swap execution facility of the provisions of section 5h of the Act or this part;
(2) Any Commission proceeding to alter or supplement a rule, term, or condition under section 8a(7) of the Act or to declare an emergency under section 8a(9) of the Act; or
(3) Any other proceeding the effect of which is to:
(i) Alter or supplement a specific term or condition or trading rule or procedure; or
(ii) Require a swap execution facility to adopt a specific term or condition, trading rule or procedure, or to take or refrain from taking a specific action.
(b)
(B)
(ii)
(B)
(2)
(ii) Specific customer identifiers for accounts included in bunched orders involving swap transactions need not be included in a confirmation document or a trade evidence record provided by a swap execution facility if the applicable requirements of § 1.35(b)(5) of this chapter are met.
(iii) The swap execution facility may issue the confirmation document or trade evidence record to the person acting as an intermediary on behalf of the counterparty to the swap transaction. The swap execution facility shall establish and enforce rules that require such intermediary to send the confirmation document or trade evidence record to the respective counterparty as soon as technologically practicable upon receipt of the confirmation document or trade evidence record from the swap execution facility.
(a) An entity that intends to operate both a designated contract market and a swap execution facility shall separately
(b) A board of trade, as defined in section 1a(6) of the Act, that operates both a designated contract market and a swap execution facility and that uses the same electronic trade execution system for executing and trading swaps on the designated contract market and on the swap execution facility shall clearly identify to market participants for each swap whether the execution or trading of such swaps is taking place on the designated contract market or on the swap execution facility.
(a)
(1) The core principles described in section 5h of the Act; and
(2) Any requirement that the Commission may impose by rule or regulation pursuant to section 8a(5) of the Act.
(b)
A swap execution facility shall:
(a) Establish and enforce compliance with any rule of the swap execution facility, including the terms and conditions of the swaps traded or processed on or through the swap execution facility and any limitation on access to the swap execution facility;
(b) Establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, including means to provide market participants with impartial access to the market and to capture information that may be used in establishing whether rule violations have occurred;
(c) Establish rules governing the operation of the facility, including rules specifying trading procedures to be used in entering and executing orders traded or posted on the facility, including block trades; and
(d) Provide by its rules that when a swap dealer or major swap participant enters into or facilitates a swap that is subject to the mandatory clearing requirement of section 2(h) of the Act, the swap dealer or major swap participant shall be responsible for compliance with the mandatory trading requirement under section 2(h)(8) of the Act.
(a)
(1) The protocols and procedures for trading and execution, including entering, amending, cancelling, or executing orders for each execution method;
(2) The manner or circumstances in which the swap execution facility may exercise discretion in facilitating trading and execution for each execution method; and
(3) The sources and methodology for generating any market pricing information provided to facilitate trading and execution for each execution method.
(b)
(1) Counterparties to a swap that is subject to the trade execution requirement of section 2(h)(8) of the Act as set forth in § 36.1 of this chapter may engage in communications away from the swap execution facility if the swap is executed as a component of a package transaction that includes a component transaction that is not subject to section 2(h)(8) of the Act as set forth in § 36.1 of this chapter. For purposes of this paragraph (b)(1), a package transaction consists of two or more component transactions executed between two or more counterparties where:
(i) Execution of each component transaction is contingent upon the execution of all other components transactions; and
(ii) The component transactions are each priced or quoted together as part of one economic transaction with simultaneous or near simultaneous execution of all components.
(2) [Reserved]
(c)
(2)
(ii) The prohibition set forth in paragraph (c)(2)(i) of this section shall not apply to:
(A) Any person listed as a principal or registered with the Commission as an associated person of a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator, commodity trading advisor, or leverage transaction merchant, or any person registered as a floor broker or floor trader, notwithstanding that such person is subject to a disqualification from registration under sections 8a(2) or 8a(3) of the Act; or
(B) Any person otherwise subject to a disqualification from registration under sections 8a(2) or 8a(3) of the Act for whom a registered futures association provides a notice stating that, if the person applied for registration with the Commission as an associated person, the registered futures association would not deny the application on the basis of the statutory disqualification.
(3)
(A) Fulfill their responsibilities to the swap execution facility as SEF trading specialists; and
(B) Comply with applicable provisions of the Act, the Commission's regulations, and the rules of the swap execution facility.
(ii)
(A) Such person has taken and passed any examination for swaps proficiency developed and administered by a registered futures association; and
(B) There is no continuous two-year period subsequent to such person passing a swaps proficiency examination during which the person has not served as a SEF trading specialist.
(iii) Compliance with the qualification testing requirements under paragraph (c)(3)(ii) of this section shall constitute compliance with the proficiency requirements under paragraph (c)(3)(i) of this section.
(4)
(5)
(6)
(7)
(a)
(2) A swap execution facility shall establish fee structures and fee practices that are fair and non-discriminatory to market participants.
(b)
(c)
(d)
(a)
(b)
(c)
(d)
(e)
(2) A swap execution facility shall establish and maintain rules and procedures that facilitate the resolution of error trades in a fair, transparent, consistent, and timely manner. Such rules and procedures shall:
(i) Provide the swap execution facility with the authority to adjust trade terms or cancel trades; and
(ii) Specify the rules and procedures for market participants to notify the swap execution facility of an error trade, including any time limits for notification.
(3) A swap execution facility shall, as soon as practicable, provide notice to all market participants of:
(i) Any swap transaction that is under review by the swap execution facility pursuant to error trade rules and procedures;
(ii) Any determination by the swap execution facility that a swap transaction under review is or is not an error trade; and
(iii) The resolution of any error trade, including any trade term adjustment or trade cancellation.
(4) The requirements of paragraph (e) of this section shall not preclude the swap execution facility from establishing non-reviewable ranges.
(f)
(2)
(3)
(g)
(a)
(b)
(1) The adjustment or cancellation of trades;
(2) Whether or not to issue disciplinary charges; and
(3) Denials of access to the swap execution facility for disciplinary reasons. Such decisions shall be documented as agreed upon by the swap execution facility and its regulatory service provider.
(c)
(a)
(b)
(2)
(3)
(c)
(a)
(b)
(c)
(2) A swap execution facility's compliance staff or disciplinary panel may not issue more than one warning letter to the same individual found to have committed the same rule violation within a rolling twelve-month period, except for rule violations related to minor recordkeeping or reporting infractions.
(d)
The swap execution facility shall permit trading only in swaps that are not readily susceptible to manipulation.
To demonstrate to the Commission compliance with the requirements of § 37.300, a swap execution facility shall, at the time it submits a new swap contract in advance to the Commission pursuant to part 40 of this chapter, provide the applicable information as set forth in appendix C to this part, Demonstration of Compliance that a Swap Contract is Not Readily Susceptible to Manipulation.
The swap execution facility shall:
(a) Establish and enforce rules or terms and conditions defining, or specifications detailing:
(1) Trading procedures to be used in entering and executing orders traded on or through the facilities of the swap execution facility; and
(2) Procedures for trade processing of swaps on or through the facilities of the swap execution facility; and
(b) Monitor trading in swaps to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process through surveillance, compliance, and disciplinary practices and procedures, including methods for conducting real-time monitoring of trading and comprehensive and accurate trade reconstructions.
A swap execution facility shall:
(a) Conduct real-time market monitoring of all trading activity on the swap execution facility to identify disorderly trading, any market or system anomalies, and instances or threats of manipulation, price distortion, and disruption;
(b) Collect and evaluate data on its market participants' trading activity away from its facility, including trading in the index or instrument used as a reference price, the underlying commodity for its listed swaps, or in related derivatives markets, as necessary to detect and prevent manipulation, price distortion, and, where possible, disruptions of the physical-delivery or cash-settlement processes;
(c) Monitor and evaluate general market data as necessary to detect and prevent manipulative activity that would result in the failure of the market price to reflect the normal forces of supply and demand; and
(d) Have the ability to comprehensively and accurately reconstruct all trading activity on its facility for the purpose of detecting instances or threats of manipulation, price distortion, and disruptions.
For a physical-delivery swap listed on the swap execution facility, the swap execution facility shall:
(a) Monitor the swap's terms and conditions as it relates to the underlying commodity market by reviewing the convergence between the swap's price and the price of the underlying commodity and make a good-faith effort to resolve conditions that are interfering with convergence or notify the Commission of such conditions; and
(b) Monitor the availability of the supply of the commodity specified by the delivery requirements of the swap and make a good-faith effort to resolve conditions that threaten the adequacy of supplies or the delivery process or notify the Commission of such conditions.
(a) For cash-settled swaps listed on the swap execution facility where the reference price is formulated and computed by the swap execution facility, the swap execution facility shall monitor the continued appropriateness of its methodology for deriving that price and take appropriate action, including amending the methodology, where there is a threat of manipulation, price distortion, or market disruption.
(b) For cash-settled swaps listed on the swap execution facility where the reference price relies on a third-party index or instrument, the swap execution facility shall monitor the continued appropriateness of the index or instrument and take appropriate action, including selecting an alternate index or instrument for deriving the reference price, where there is a threat of manipulation, price distortion, or market disruption.
(a) A swap execution facility shall maintain access to sufficient information to assess whether trading in swaps that it lists, in the index or instrument used as a reference price, or in the underlying commodity for its listed swaps is being used to affect prices on its market.
(b) A swap execution facility shall have rules that require its market participants to keep records of their trading, including records of their activity in the index or instrument used as a reference price, the underlying commodity, and related derivatives markets, and make such records available, upon request, to the swap execution facility or, if applicable, to its regulatory service provider, and the Commission.
The swap execution facility shall establish and maintain risk control mechanisms to prevent and reduce the potential risk of price distortions and market disruptions on its facility, including, but not limited to, market restrictions that pause or halt trading under market conditions prescribed by the swap execution facility.
A swap execution facility shall comply with the regulations in this subpart through a dedicated regulatory department or by contracting with a regulatory service provider pursuant to § 37.204.
A swap execution facility may refer to the guidance and/or acceptable practices in appendix B of this part to demonstrate to the Commission compliance with the requirements of § 37.400.
The swap execution facility shall:
(a) Establish and enforce rules that will allow the facility to obtain any necessary information to perform any of the functions described in section 5h of the Act;
(b) Provide the information to the Commission on request; and
(c) Have the capacity to carry out such international information-sharing agreements as the Commission may require.
A swap execution facility shall establish and enforce rules that will allow the swap execution facility to have the ability and authority to obtain sufficient information to allow it to fully perform its operational, risk management, governance, and
A swap execution facility shall provide information in its possession to the Commission upon request, in a form and manner that the Commission approves.
A swap execution facility shall share information as required by the Commission or as appropriate to fulfill its self-regulatory and reporting responsibilities. Appropriate information-sharing agreements can be established or the Commission can act in conjunction with the swap execution facility to carry out such information sharing.
A swap execution facility shall not use for business or marketing purposes, nor permit such use of, any proprietary data or personal information it collects or receives, from or on behalf of any person, for the purpose of fulfilling its regulatory obligations;
(a)
(b)
(1) Set its position limitation at a level no higher than the Commission limitation; and
(2) Monitor positions established on or through the swap execution facility for compliance with the limit set by the Commission and the limit, if any, set by the swap execution facility.
The swap execution facility shall establish and enforce rules and procedures for ensuring the financial integrity of swaps entered on or through the facilities of the swap execution facility, including the clearance and settlement of the swaps pursuant to section 2(h)(1) of the Act.
(a) Transactions executed on the swap execution facility that are required to be cleared under section 2(h)(1)(A) of the Act or are voluntarily cleared by the counterparties shall be cleared through a Commission-registered derivatives clearing organization, or a derivatives clearing organization that the Commission has determined is exempt from registration.
(b) A swap execution facility shall have an independent clearing agreement with each Commission-registered derivatives clearing organization, or derivatives clearing organization that the Commission has determined is exempt from registration, to which the swap execution facility submits a swap for clearing.
A swap execution facility shall provide for the financial integrity of its transactions:
(a) By establishing minimum financial standards for its market participants, which shall, at a minimum, require that each market participant qualifies as an eligible contract participant as defined in section 1a(18) of the Act;
(b) For transactions routed through a swap execution facility to a registered derivatives clearing organization for clearing:
(1) By coordinating with each registered derivatives clearing organization to which the swap execution facility submits transactions for clearing, in the development of rules and procedures to facilitate prompt, efficient, and accurate processing and routing of transactions to registered derivatives clearing organizations in accordance with the requirements of § 39.12(b)(7)(i)(A) of this chapter;
(2) By requiring that each market participant identify a clearing member in advance for each counterparty on an order-by-order basis; and
(3) By facilitating pre-execution screening by each clearing futures commission merchant in accordance with the requirements of § 1.73 of this chapter on an order-by-order basis.
A swap execution facility shall monitor its market participants to ensure that they continue to qualify as eligible contract participants as defined in section 1a(18) of the Act.
The swap execution facility shall adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, as is necessary and appropriate, including the authority to liquidate or transfer open positions in any swap or to suspend or curtail trading in a swap.
A swap execution facility may refer to the guidance and/or acceptable practices in appendix B of this part to demonstrate to the Commission compliance with the requirements of § 37.800.
(a)
(b)
With respect to swaps traded on or through a swap execution facility, each swap execution facility shall:
(a) Report specified swap data as provided under parts 43 and 45 of this chapter; and
(b) Meet the requirements of part 16 of this chapter.
(a)
(1) Maintain records of all activities relating to the business of the facility, including a complete audit trail, in a form and manner acceptable to the Commission for a period of five years;
(2) Report to the Commission, in a form and manner acceptable to the Commission, such information as the Commission determines to be necessary or appropriate for the Commission to perform the duties of the Commission under the Act; and
(3) Keep any such records relating to swaps defined in section 1a(47)(A)(v) of the Act open to inspection and examination by the Securities and Exchange Commission.
(b)
A swap execution facility shall maintain records of all activities relating to the business of the facility, in a form and manner acceptable to the Commission, for a period of at least five years. A swap execution facility shall maintain such records, including a complete audit trail for all swaps executed on the swap execution facility, investigatory files, and disciplinary files, in accordance with the requirements of § 1.31 and part 45 of this chapter.
Unless necessary or appropriate to achieve the purposes of the Act, the swap execution facility shall not:
(a) Adopt any rules or take any actions that result in any unreasonable restraint of trade; or
(b) Impose any material anticompetitive burden on trading or clearing.
A swap execution facility may refer to the guidance and/or acceptable practices in appendix B of this part to demonstrate to the Commission compliance with the requirements of § 37.1100.
The swap execution facility shall:
(a) Establish and enforce rules to minimize conflicts of interest in its decision-making process; and
(b) Establish a process for resolving the conflicts of interest.
(a)
(b)
(a) A swap execution facility shall maintain financial resources on an ongoing basis that are adequate to enable it to comply with the core principles set forth in section 5h of the Act and any applicable Commission regulations. Financial resources shall be considered adequate if their value exceeds the total amount that would enable the swap execution facility to cover its projected operating costs necessary for the swap execution facility to comply with section 5h of the Act and applicable Commission regulations for a one-year period, as calculated on a rolling basis pursuant to § 37.1304.
(b) An entity that operates as both a swap execution facility and a derivatives clearing organization shall also comply with the financial resource requirements of § 39.11 of this chapter. In lieu of filing separate reports under § 37.1306(a) and § 39.11(f) of this chapter, such an entity may file a single report in accordance with § 39.11 of this chapter.
Financial resources available to satisfy the requirements of § 37.1301 may include:
(a) The swap execution facility's own capital, meaning its assets minus its liabilities calculated in accordance with generally accepted accounting principles in the United States; and
(b) Any other financial resource deemed acceptable by the Commission.
The financial resources allocated by the swap execution facility to meet the ongoing requirements of § 37.1301 shall include unencumbered, liquid financial assets (
A swap execution facility shall each fiscal quarter, make a reasonable calculation of its projected operating costs and wind-down costs in order to determine its applicable obligations under § 37.1301 and § 37.1303. The swap execution facility shall have reasonable discretion in determining the methodologies used to compute such amounts. The Commission may review the methodologies and require changes as appropriate.
No less than each fiscal quarter, a swap execution facility shall compute the current market value of each financial resource used to meet its obligations under § 37.1301 and § 37.1303. Reductions in value to reflect market and credit risk (“haircuts”) shall be applied as appropriate.
(a) Each fiscal quarter, or at any time upon Commission request, a swap execution facility shall provide a report to the Commission that includes:
(1) The amount of financial resources necessary to meet the requirements of § 37.1301 and § 37.1303, computed in accordance with the requirements of § 37.1304, and the market value of each available financial resource, computed in accordance with the requirements of § 37.1305; and
(2) Financial statements, including the balance sheet, income statement, and statement of cash flows of the swap execution facility.
(i) The financial statements shall be prepared in accordance with generally accepted accounting principles in the United States, prepared in English, and denominated in U.S. dollars.
(ii) The financial statements of a swap execution facility that is not domiciled in the United States, and is not otherwise required to prepare financial statements in accordance with generally
(b) The calculations required by paragraph (a) of this section shall be made as of the last business day of the swap execution facility's applicable fiscal quarter.
(c) With each report required under paragraph (a) of this section, the swap execution facility shall also provide the Commission with sufficient documentation explaining the methodology used to compute its financial requirements under § 37.1301 and § 37.1303. Such documentation shall:
(1) Allow the Commission to reliably determine, without additional requests for information, that the swap execution facility has made reasonable calculations pursuant to § 37.1304; and
(2) Include, at a minimum:
(i) A total list of all expenses, without any exclusion;
(ii) All expenses and the corresponding amounts, if any, that the swap execution facility excluded or pro-rated when determining its operating costs, calculated on a rolling basis, required under § 37.1301 and § 37.1303, and the basis for any determination to exclude or pro-rate any such expenses;
(iii) Documentation demonstrating the existence of any committed line of credit or similar facility relied upon for the purpose of meeting the requirements of § 37.1303 (
(iv) All costs that a swap execution facility would incur to wind down the swap execution facility's operations, the projected amount of time for any such wind-down period, and the basis of its determination for the estimation of its costs and timing.
(d) The reports and supporting documentation required by this section shall be filed not later than 40 calendar days after the end of the swap execution facility's first three fiscal quarters, and not later than 90 calendar days after the end of the swap execution facility's fourth fiscal quarter, or at such later time as the Commission may permit, in its discretion, upon request by the swap execution facility.
(e) A swap execution facility shall provide notice to the Commission no later than 48 hours after it knows or reasonably should have known that it no longer meets its obligations under § 37.1301 or § 37.1303.
(a) The Commission hereby delegates, until it orders otherwise, to the Director of the Division of Market Oversight or such other employee or employees as the Director may designate from time to time, authority to:
(1) Determine whether a particular financial resource under § 37.1302 may be used to satisfy the requirements of § 37.1301;
(2) Review and make changes to the methodology used to compute projected operating costs and wind-down costs under § 37.1304 and the valuation of financial resources under § 37.1305;
(3) Request reports, in addition to those required in § 37.1306, or additional documentation or information under § 37.1306(a), (c), and (e); and
(4) Grant an extension of time to file fiscal quarter reports under § 37.1306(d).
(b) The Director may submit to the Commission for its consideration any matter that has been delegated in this section. Nothing in this section prohibits the Commission, at its election, from exercising the authority delegated in this section.
The swap execution facility shall:
(a) Establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, through the development of appropriate controls and procedures, and automated systems, that:
(1) Are reliable and secure; and
(2) Have adequate scalable capacity;
(b) Establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allow for:
(1) The timely recovery and resumption of operations; and
(2) The fulfillment of the responsibilities and obligations of the swap execution facility; and
(c) Periodically conduct tests to verify that the backup resources of the swap execution facility are sufficient to ensure continued:
(1) Order processing and trade matching;
(2) Price reporting;
(3) Market surveillance; and
(4) Maintenance of a comprehensive and accurate audit trail.
(a) A swap execution facility's program of risk analysis and oversight with respect to its operations and automated systems shall address each of the following categories of risk analysis and oversight:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(b) In addressing the categories of risk analysis and oversight required under paragraph (a) of this section, a swap execution facility shall follow generally accepted standards and best practices with respect to the development, operation, reliability, security, and capacity of automated systems.
(c) A swap execution facility shall maintain a business continuity-disaster recovery plan and business continuity-disaster recovery resources, emergency procedures, and backup facilities sufficient to enable timely recovery and resumption of its operations and resumption of its ongoing fulfillment of its responsibilities and obligations as a swap execution facility following any disruption of its operations. Such responsibilities and obligations include, without limitation: Order processing and trade matching; transmission of matched orders to a derivatives clearing organization for clearing, where appropriate; price reporting; market surveillance; and maintenance of a comprehensive audit trail protected from alteration, accidental erasure, or other loss. A swap execution facility's business continuity-disaster recovery plan and resources generally should enable resumption of trading and clearing of swaps executed on the swap execution facility during the next business day following the disruption. A swap execution facility shall update its business continuity-disaster recovery plan and emergency procedures at a frequency determined by an appropriate risk analysis, but at a minimum no less frequently than annually.
(d) A swap execution facility satisfies the requirement to be able to resume its operations and resume its ongoing fulfillment of its responsibilities and obligations during the next business day following any disruption of its operations by maintaining either:
(1) Infrastructure and personnel resources of its own that are sufficient to ensure timely recovery and resumption of its operations and resumption of its ongoing fulfillment of its responsibilities and obligations as a swap execution facility following any disruption of its operations; or
(2) Contractual arrangements with other swap execution facilities or disaster recovery service providers, as appropriate, that are sufficient to ensure continued trading and clearing of swaps executed on the swap execution facility, and ongoing fulfillment of all of the swap execution facility's responsibilities and obligations with respect to such swaps, in the event that a disruption renders the swap execution facility temporarily or permanently unable to satisfy this requirement on its own behalf.
(e) A swap execution facility shall notify Commission staff promptly of all:
(1) Electronic trading halts and material system malfunctions;
(2) Cyber security incidents or targeted threats that actually or potentially jeopardize automated system operation, reliability, security, or capacity; and
(3) Activations of the swap execution facility's business continuity-disaster recovery plan.
(f) A swap execution facility shall provide Commission staff timely advance notice of all material:
(1) Planned changes to automated systems that may impact the reliability, security, or adequate scalable capacity of such systems; and
(2) Planned changes to the swap execution facility's program of risk analysis and oversight.
(g) A swap execution facility shall annually prepare and submit to the Commission an up-to-date Exhibit Q to Form SEF—Program of Risk Analysis and Oversight Technology Questionnaire—in appendix A to this part. The annual filing shall be submitted electronically to the Commission not later than 90 calendar days after the end of the swap execution facility's fiscal year. The swap execution facility shall file Exhibit Q with the annual financial report and the annual compliance report pursuant to § 37.1306(d) and § 37.1501(e)(2), respectively.
(h) As part of a swap execution facility's obligation to produce books and records in accordance with § 1.31 of this chapter, Core Principle 10 (Recordkeeping and Reporting), and § 37.1000 and § 37.1001, a swap execution facility shall provide to the Commission the following system safeguards-related books and records, promptly upon the request of any Commission representative:
(1) Current copies of its business continuity-disaster recovery plans and other emergency procedures;
(2) All assessments of its operational risks or system safeguards-related controls;
(3) All reports concerning system safeguards testing and assessment required by this chapter, whether performed by independent contractors or by employees of the swap execution facility; and
(4) All other books and records requested by Commission staff in connection with Commission oversight of system safeguards pursuant to the Act or Commission regulations, or in connection with Commission maintenance of a current profile of the swap execution facility's automated systems.
(5) Nothing in this paragraph (h) shall be interpreted as reducing or limiting in any way a swap execution facility's obligation to comply with § 1.31 of this chapter, Core Principle 10 (Recordkeeping and Reporting), or § 37.1000 or § 37.1001.
(i) A swap execution facility shall conduct regular, periodic, objective testing and review of its automated systems to ensure that they are reliable, secure, and have adequate scalable capacity. It shall also conduct regular, periodic testing and review of its business continuity-disaster recovery capabilities. Such testing and review shall include, without limitation, all of the types of testing set forth in this paragraph (i).
(1)
(2)
(i) A swap execution facility shall conduct such vulnerability testing at a frequency determined by an appropriate risk analysis.
(ii) Such vulnerability testing shall include automated vulnerability scanning, which shall follow generally accepted best practices.
(iii) A swap execution facility shall conduct vulnerability testing by engaging independent contractors or by using employees of the swap execution facility who are not responsible for development or operation of the systems or capabilities being tested.
(3)
(i) A swap execution facility shall conduct such external penetration testing at a frequency determined by an appropriate risk analysis.
(ii) A swap execution facility shall conduct external penetration testing by engaging independent contractors or by using employees of the swap execution facility who are not responsible for development or operation of the systems or capabilities being tested.
(4)
(i) A swap execution facility shall conduct such internal penetration testing at a frequency determined by an appropriate risk analysis.
(ii) A swap execution facility shall conduct internal penetration testing by engaging independent contractors or by using employees of the swap execution facility who are not responsible for development or operation of the systems or capabilities being tested.
(5)
(i) A swap execution facility shall conduct controls testing, which includes testing of each control included in its program of risk analysis and oversight, at a frequency determined by an appropriate risk analysis. Such testing may be conducted on a rolling basis.
(ii) A swap execution facility shall conduct controls testing by engaging independent contractors or by using employees of the swap execution facility who are not responsible for development or operation of the systems or capabilities being tested.
(6)
(i) A swap execution facility shall conduct such security incident response plan testing at a frequency determined by an appropriate risk analysis.
(ii) A swap execution facility's security incident response plan shall include, without limitation, the swap execution facility's definition and classification of security incidents, its policies and procedures for reporting security incidents and for internal and external communication and information sharing regarding security incidents, and the hand-off and escalation points in its security incident response process.
(iii) A swap execution facility may coordinate its security incident response plan testing with other testing required by this section or with testing of its other business continuity-disaster recovery and crisis management plans.
(iv) A swap execution facility may conduct security incident response plan testing by engaging independent contractors or by using employees of the swap execution facility.
(7)
(i) A swap execution facility shall conduct enterprise technology risk assessment at a frequency determined by an appropriate risk analysis. A swap execution facility that has conducted an enterprise technology risk assessment that complies with this section may
(ii) A swap execution facility may conduct enterprise technology risk assessments by using independent contractors or employees of the swap execution facility who are not responsible for development or operation of the systems or capabilities being assessed.
(j) To the extent practicable, a swap execution facility shall:
(1) Coordinate its business continuity-disaster recovery plan with those of the market participants it depends upon to provide liquidity, in a manner adequate to enable effective resumption of activity in its markets following a disruption causing activation of the swap execution facility's business continuity-disaster recovery plan;
(2) Initiate and coordinate periodic, synchronized testing of its business continuity-disaster recovery plan with those of the market participants it depends upon to provide liquidity; and
(3) Ensure that its business continuity-disaster recovery plan takes into account the business continuity-disaster recovery plans of its telecommunications, power, water, and other essential service providers.
(k)
(1) Interfere with the swap execution facility's operations or with fulfillment of its statutory and regulatory responsibilities;
(2) Impair or degrade the reliability, security, or adequate scalable capacity of the swap execution facility's automated systems;
(3) Add to, delete, modify, exfiltrate, or compromise the integrity of any data related to the swap execution facility's regulated activities; or
(4) Undertake any other unauthorized action affecting the swap execution facility's regulated activities or the hardware or software used in connection with those activities.
(l)
(m)
(a)
(b)
(1) Report directly to the board or to the senior officer of the facility;
(2) Review compliance with the core principles in this subsection;
(3) In consultation with the board of the facility, a body performing a function similar to that of a board, or the senior officer of the facility, resolve any conflicts of interest that may arise;
(4) Be responsible for establishing and administering the policies and procedures required to be established pursuant to this section;
(5) Ensure compliance with the Act and the rules and regulations issued under the Act, including rules prescribed by the Commission pursuant to section 5h of the Act; and
(6) Establish procedures for the remediation of noncompliance issues found during compliance office reviews, look backs, internal or external audit findings, self-reported errors, or through validated complaints.
(c)
(d)
(i) The compliance of the swap execution facility with the Act; and
(ii) The policies and procedures, including the code of ethics and conflict of interest policies, of the swap execution facility.
(2)
(i) Submit each report described in paragraph (d)(1) of this section with the appropriate financial report of the swap execution facility that is required to be submitted to the Commission pursuant to section 5h of the Act; and
(ii) Include in the report a certification that, under penalty of law, the report is accurate and complete.
(a)
(b)
(ii) The chief compliance officer shall have supervisory authority over all staff acting at the direction of the chief compliance officer.
(2)
(ii) No individual disqualified from registration pursuant to sections 8a(2) or 8a(3) of the Act may serve as a chief compliance officer.
(3)
(ii) The swap execution facility shall notify the Commission within two business days of the appointment or removal, whether interim or permanent, of a chief compliance officer.
(4)
(5)
(6)
(c)
(1) Overseeing and reviewing compliance of the swap execution facility with section 5h of the Act and any related rules adopted by the Commission;
(2) Taking reasonable steps, in consultation with the board of directors or the senior officer of the swap execution facility, to resolve any material conflicts of interest that may arise;
(3) Establishing and administering written policies and procedures reasonably designed to prevent violations of the Act and the rules of the Commission;
(4) Taking reasonable steps to ensure compliance with the Act and the rules of the Commission;
(5) Establishing procedures reasonably designed to handle, respond, remediate, retest, and resolve noncompliance issues identified by the chief compliance officer through any means, including any compliance office review, look-back, internal or external audit finding, self-reported error, or validated complaint;
(6) Establishing and administering a compliance manual designed to promote compliance with the applicable laws, rules, and regulations and a written code of ethics for the swap execution facility designed to prevent ethical violations and to promote honesty and ethical conduct by personnel of the swap execution facility;
(7) Supervising the self-regulatory program of the swap execution facility with respect to trade practice surveillance; market surveillance; real-time market monitoring; compliance with audit trail requirements; enforcement and disciplinary proceedings; audits, examinations, and other regulatory responsibilities (including taking reasonable steps to ensure compliance with, if applicable, financial integrity, financial reporting, sales practice, recordkeeping, and other requirements); and
(8) Supervising the effectiveness and sufficiency of any regulatory services provided to the swap execution facility by a regulatory service provider in accordance with § 37.204.
(d)
(1) A description and self-assessment of the effectiveness of the written policies and procedures of the swap execution facility, including the code of ethics and conflict of interest policies to reasonably ensure compliance with the Act and applicable Commission regulations;
(2) Any material changes made to compliance policies and procedures during the coverage period for the report and any areas of improvement or recommended changes to the compliance program;
(3) A description of the financial, managerial, and operational resources set aside for compliance with the Act and applicable Commission regulations;
(4) Any material non-compliance matters identified and an explanation of the corresponding action taken to resolve such non-compliance matters; and
(5) A certification by the chief compliance officer that, to the best of his or her knowledge and reasonable belief, and under penalty of law, the annual compliance report is accurate and complete in all material respects.
(e)
(2)
(3)
(ii) An amendment shall contain the certification required under paragraph (d)(5) of this section.
(4)
(f)
(g)
1. This appendix provides guidance on complying with core principles, both initially and on an ongoing basis, to maintain registration under section 5h of the Act and this part. Where provided, guidance is set forth in paragraph (a) following the relevant heading and can be used to demonstrate to the Commission compliance with the selected requirements of a core principle of this part. The guidance for the core principle is illustrative only of the types of matters a swap execution facility may address, as applicable, and is not intended to be used as a mandatory checklist. Addressing the issues set forth in this appendix would help the Commission in its consideration of whether the swap execution facility is in compliance with the selected requirements of a core principle; provided however, that the guidance is not intended to diminish or replace, in any event, the obligations and requirements of applicants and swap execution facilities to comply with the regulations provided under this part.
2. Where provided, acceptable practices meeting selected requirements of core principles are set forth in paragraph (b) following the guidance. Swap execution facilities that follow specific practices outlined in the acceptable practices for a core principle in this appendix will meet the selected requirements of the applicable core principle; provided however, that the acceptable practice is not intended to diminish or replace, in any event, the obligations and requirements of applicants and swap execution facilities to comply with the regulations provided under this part. The acceptable practices are for illustrative purposes only and do not state the exclusive means for satisfying a core principle.
(A)
(B)
(a)
(b)
A swap execution facility shall:
(A) Establish and enforce compliance with any rule of the swap execution facility, including the terms and conditions of the swaps traded or processed on or through the swap execution facility and any limitation on access to the swap execution facility;
(B) Establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, including means to provide market participants with impartial access to the market and to capture information that may be used in establishing whether rule violations have occurred;
(C) Establish rules governing the operation of the facility, including rules specifying trading procedures to be used in entering and executing orders traded or posted on the facility, including block trades; and
(D) Provide by its rules that when a swap dealer or major swap participant enters into or facilitates a swap that is subject to the mandatory clearing requirement of section 2(h) of the Act, the swap dealer or major swap participant shall be responsible for compliance with the mandatory trading requirement under section 2(h)(8) of the Act.
(a)
(ii) Ethics training for SEF trading specialists should account for the level and nature of SEF trading specialists' responsibilities within a swap execution facility. The training should address topics such as an explanation of applicable laws and regulations and the rules, policies, and procedures of the swap execution facility; how to act honestly and fairly and with due skill, care, and diligence in furtherance of the interests of market participants and the integrity of the market; protection of confidential information; and avoidance, proper disclosure, and handling of conflicts of interest. Such ethics training should also seek to ensure that SEF trading specialists remain current with regard to the ethical ramifications of new developments with respect to evolving technology, trading practices, products, and other relevant changes.
(iii) A swap execution facility, at its discretion, may develop and implement its own ethics training program or utilize a program offered by a third-party provider, or may implement some combination thereof. Third-party providers may include independent persons, firms, or industry associations. No specific format or class training is required, as the needs of a swap execution facility may vary according to its size and number of personnel that are SEF trading specialists. A swap execution facility may utilize electronic media, such as video presentations, internet-based transmissions, and interactive software programs as part of its ethics training program. A swap execution facility should ascertain the credentials of any provider of ethics training or training materials and should ensure that such persons have the appropriate level of industry experience and knowledge, including with respect to the swap execution facility's rules, policies, procedures, and operations.
(iv) A swap execution facility may determine the frequency and duration of ethics training but such frequency and duration should promote a corporate culture of high ethical and professional conduct and a continuous awareness of industry standards and practices.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(b)
The swap execution facility shall permit trading only in swaps that are not readily susceptible to manipulation.
(a)
(b)
The swap execution facility shall:
(A) Establish and enforce rules or terms and conditions defining, or specifications detailing:
(1) Trading procedures to be used in entering and executing orders traded on or through the facilities of the swap execution facility; and
(2) Procedures for trade processing of swaps on or through the facilities of the swap execution facility; and
(B) Monitor trading in swaps to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process through surveillance, compliance, and disciplinary practices and procedures, including methods for conducting real-time monitoring of trading and comprehensive and accurate trade reconstructions.
(a)
(1)
(2)
(3)
(4)
(b)
The swap execution facility shall:
(A) Establish and enforce rules that will allow the facility to obtain any necessary information to perform any of the functions described in section 5h of the Act;
(B) Provide the information to the Commission on request; and
(C) Have the capacity to carry out such international information-sharing agreements as the Commission may require.
(a)
(b)
(A)
(B)
(1) Set its position limitation at a level no higher than the Commission limitation; and
(2) Monitor positions established on or through the swap execution facility for compliance with the limit set by the Commission and the limit, if any, set by the swap execution facility.
(a)
(b)
The swap execution facility shall establish and enforce rules and procedures for ensuring the financial integrity of swaps entered on or through the facilities of the swap execution facility, including the clearance and settlement of the swaps pursuant to section 2(h)(1) of the Act.
(a)
(b)
The swap execution facility shall adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, as is necessary and appropriate, including the authority to liquidate or transfer open positions in any swap or to suspend or curtail trading in a swap.
(a)
(1) A swap execution facility should have rules that authorize it to take certain actions in the event of an emergency, as defined in § 40.1(h) of this chapter. A swap execution facility should have the authority to intervene as necessary to maintain markets with fair and orderly trading and to prevent or address manipulation or disruptive trading practices, whether the need for intervention arises exclusively from the swap execution facility's market or as part of a coordinated, cross-market intervention. A swap execution facility should have the flexibility and independence to address market emergencies in an effective and timely manner consistent with the nature of the emergency, as long as all such actions taken by the swap execution facility are made in good faith to protect the integrity of the markets. However, the swap execution facility should also have rules that allow it to take market actions as may be directed by the Commission, including actions that the Commission requires the swap execution facility to take as part of a coordinated, cross-market intervention.
(2) A swap execution facility should promptly notify the Commission of its exercise of emergency action, explaining its decision-making process, the reasons for using its emergency authority, and how conflicts of interest were minimized, including the extent to which the swap execution facility considered the effect of its emergency action on the underlying markets and on markets that are linked or referenced to the contracts traded on its facility, including similar markets on other trading venues. Information on all regulatory actions carried out pursuant to a swap execution facility's emergency authority should be included in a timely submission of a certified rule pursuant to part 40 of this chapter.
(b)
(A)
(B)
(a)
(b)
(A)
(1) Maintain records of all activities relating to the business of the facility, including a complete audit trail, in a form and manner acceptable to the Commission for a period of five years;
(2) Report to the Commission, in a form and manner acceptable to the Commission, such information as the Commission determines to be necessary or appropriate for the Commission to perform the duties of the Commission under the Act; and
(3) Keep any such records relating to swaps defined in section 1a(47)(A)(v) of the Act open to inspection and examination by the Securities and Exchange Commission.
(B)
(a)
(b)
Unless necessary or appropriate to achieve the purposes of the Act, the swap execution facility shall not:
(A) Adopt any rules or take any actions that result in any unreasonable restraint of trade; or
(B) Impose any material anticompetitive burden on trading or clearing.
(a)
(b)
The swap execution facility shall:
(A) Establish and enforce rules to minimize conflicts of interest in its decision-making process; and
(B) Establish a process for resolving the conflicts of interest.
(a)
(b)
(A)
(B)
(a)
(b)
(1)
(i) Costs attributable solely to sales, marketing, business development, product development, or recruitment and any related travel, entertainment, event, or conference costs;
(ii) Compensation and related taxes and benefits for swap execution facility personnel who are not necessary to ensure that the swap execution facility is able to comply with the core principles set forth in section 5h of the Act and any applicable Commission regulations;
(iii) If a swap execution facility offers two or more
(iv) Costs for acquiring and defending patents and trademarks for swap execution facility products and related intellectual property;
(v) Magazine, newspaper, and online periodical subscription fees;
(vi) Tax preparation and audit fees;
(vii) To the extent not covered by paragraphs (b)(1)(ii) or (iii) above, the variable commissions that a voice-based swap execution facility may pay to its SEF trading specialists (as defined under § 37.201(c)), calculated as a percentage of transaction revenue generated by the voice-based swap execution facility. Unlike fixed salaries or compensation, such variable commissions are not payable unless and until revenue is collected by the swap execution facility; and
(viii) Any non-cash costs, including depreciation and amortization.
(2)
(i) Maintain sufficient documentation that reasonably shows the extent to which an expense is partially attributable to an excludable expense;
(ii) Identify any pro-rated expense in the financial reports that it submits to the Commission pursuant to § 37.1306; and
(iii) Sufficiently explain why it pro-rated any expense. Common allocation methodologies that can be used include actual use, headcount, or square footage. A swap execution facility may provide documentation, such as copies of service agreements, other legal documents, firm policies, audit statements, or allocation methodologies to support its determination to pro-rate an expense.
(3)
(i) Maintain sufficient documentation that reasonably shows the extent to which the shared expense is attributable to and paid for by the swap execution facility and/or affiliated entity;
(ii) Identify any shared expense in the financial reports that it submits to the Commission; and
(iii) Sufficiently explain why it pro-rated any shared expense. A swap execution facility may provide documentation, such as copies of service agreements, other legal documents, firm policies, audit statements, or allocation methodologies, that reasonably shows how expenses are attributable to, and paid for by, the swap execution facility and/or its affiliated entities to support its determination to pro-rate an expense.
The swap execution facility shall:
(A) Establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, through the development of appropriate controls and procedures, and automated systems, that:
(1) Are reliable and secure; and
(2) Have adequate scalable capacity;
(B) Establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allow for:
(1) The timely recovery and resumption of operations; and
(2) The fulfillment of the responsibilities and obligations of the swap execution facility; and
(C) Periodically conduct tests to verify that the backup resources of the swap execution facility are sufficient to ensure continued:
(1) Order processing and trade matching;
(2) Price reporting;
(3) Market surveillance; and
(4) Maintenance of a comprehensive and accurate audit trail.
(a)
(1)
(2)
(3)
(i) Coordinate its business continuity-disaster recovery plan with those of the market participants it depends upon to provide liquidity, in a manner adequate to enable effective resumption of activity in its markets following a disruption causing activation of the swap execution facility's business continuity-disaster recovery plan;
(ii) Initiate and coordinate periodic, synchronized testing of its business continuity-disaster recovery plan with those of the market participants it depends upon to provide liquidity; and
(iii) Ensure that its business continuity-disaster recovery plan takes into account such plans of its telecommunications, power, water, and other essential service providers.
(b)
(A)
(B)
(1) Report directly to the board or to the senior officer of the facility;
(2) Review compliance with the core principles in this subsection;
(3) In consultation with the board of the facility, a body performing a function similar to that of a board, or the senior officer of the facility, resolve any conflicts of interest that may arise;
(4) Be responsible for establishing and administering the policies and procedures required to be established pursuant to this section;
(5) Ensure compliance with the Act and the rules and regulations issued under the Act, including rules prescribed by the Commission pursuant to section 5h of the Act; and
(6) Establish procedures for the remediation of noncompliance issues found during compliance office reviews, look backs, internal or external audit findings, self-reported errors, or through validated complaints.
(C)
(D)
(1)
(i) The compliance of the swap execution facility with the Act; and
(ii) The policies and procedures, including the code of ethics and conflict of interest policies, of the swap execution facility.
(2)
(i) Submit each report described in clause (1) with the appropriate financial report of the swap execution facility that is required to be submitted to the Commission pursuant to section 5h of the Act; and
(ii) Include in the report a certification that, under penalty of law, the report is accurate and complete.
(a)
(b)
(1)
The swap execution facility shall permit trading only in swaps that are not readily susceptible to manipulation.
(a)
(1)
(2)
(i) Where a swap execution facility itself generates the reference price, the swap execution facility should establish calculation procedures that safeguard against potential attempts to artificially influence the price. For example, if the reference price is derived by the swap execution facility based on a survey of cash market sources, then the swap execution facility should maintain a list of such reputable sources with knowledge of the cash market. In addition, the sample of sources polled should be representative of the cash market, and the poll should be conducted at a time when trading in the cash market is active and include the most liquid markets.
(ii) Where an independent, private-sector third party calculates the reference price, the swap execution facility should verify that the third party utilizes business practices that minimize the opportunity or incentive to manipulate the cash-settlement price series. Such safeguards may include lock-downs, prohibitions against derivatives trading by its employees, or public dissemination of the names of sources and the price quotes they provide. Because a cash-settled swap contract may create an incentive to manipulate or artificially influence the underlying commercial market from which the cash-settlement price is derived or to exert undue influence on the cash-settlement computation in order to profit on a derivative position in that commodity, a swap execution facility should, whenever practicable, enter into an information-sharing agreement with the third-party provider which would enable the swap execution facility to better detect and prevent manipulative behavior. A swap execution facility should also consider the need for a licensing agreement that will ensure the swap execution facility's rights to the use of the price series to settle the listed contract.
(3)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(b)
(1)
(2)
(i) Commercially available imports;
(ii) Product which is in storage at the delivery point(s) specified in the swap contract; and
(iii) Product which is available for sale on a spot basis within the marketing channels that normally are tributary to the delivery point(s). Furthermore, an estimate of deliverable supply should exclude quantities that at current price levels are not economically obtainable or deliverable or were previously committed for long-term agreements. The size of commodity supplies that are committed to long-term agreements may be estimated by consulting with market participants. However, if the estimated deliverable supply that is committed for long-term agreements, or significant portion thereof, can be demonstrated by the swap execution facility to be consistently and regularly made available to the spot market for shorts to acquire at prevailing economic values, then those “available” supplies committed for long-term contracts may be included in the swap execution facility's estimate of deliverable supply for that
(iv)
(3)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(c)
The Commission believes that, provided the underlying swap complies with the relevant guidance in this Appendix C, any specification of the following terms would be acceptable; the primary requirement is that such terms be specified in an objective manner in the option contract's rules:
(1) Exercise method;
(2) Exercise procedure;
(3) Strike price provisions;
(4) Automatic exercise provisions;
(5) Contract size;
(6) Option expiration and last trading day; and (vii) option type and trading convention; and
(7) For non-standardized swap contracts, a swap execution facility may allow these contract terms to be negotiable.
(d)
(1) Under the Commission's regulations, the term “option on physicals” refers to option contracts that do not provide for exercise into an underlying futures contract. Upon exercise, options on physicals can be settled via physical delivery of the underlying commodity or by a cash payment. Thus, options on physicals raise many of the same issues associated with trading in other types of swap contracts such as the adequacy of deliverable supplies or acceptability of the cash settlement price series. In this regard, an option that is cash settled based on the settlement price of a futures contract or a swap contract would be considered an “option on physicals” and the futures or swap settlement price would be considered the cash price series.
(2) In view of the above, acceptable practices for the terms and conditions of options on physicals contracts include, as appropriate, those practices set forth above for physical-delivery or cash-settled swap contracts plus the practices set forth for options on swap contracts.
7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C. 8325.
(b) * * *
(7)
(B) Each derivatives clearing organization shall coordinate with each clearing member that is a futures commission merchant, swap dealer, or major swap participant to establish systems that enable the clearing member, or the derivatives clearing organization acting on its behalf, to accept or reject each agreement, contract, or transaction submitted to the derivatives clearing organization for clearing by or for the clearing member or a customer of the clearing member as quickly as would be technologically practicable if fully automated systems were used.
(ii)
(A) For which the executing parties have clearing arrangements in place with clearing members of the derivatives clearing organization;
(B) For which a derivatives clearing organization has been identified as the intended clearinghouse; and
(C) That satisfy the criteria of the derivatives clearing organization, including, but not limited to, applicable risk filters; provided that such criteria are non-discriminatory across trading venues and are applied as quickly as would be technologically practicable if fully automated systems were used.
7 U.S.C. 2(a), 12a(5) and 24a, as amended by Pub. L. 111-203, 124 Stat. 1376 (2010).
As used in this part:
(1) Involves a swap that is listed on a registered swap execution facility or designated contract market;
(2) Is executed on a registered swap execution facility or occurs away from a designated contract market's trading system or platform and is executed pursuant to that designated contract market's rules;
(3) Has a notional or principal amount at or above the appropriate minimum block size applicable to such swap; and
(4) Is reported subject to the rules and procedures of the registered swap execution facility or designated contract market and the rules described in this part, including the appropriate time delay requirements set forth in § 43.5.
(1) Unless otherwise provided in this part—
(i) Any executed swap that is an arm's-length transaction between two parties that results in a corresponding change in the market risk position between the two parties; or
(ii) Any termination, assignment, novation, exchange, transfer, amendment, conveyance, or extinguishing of rights or obligations of a swap that changes the pricing of the swap.
(2) Examples of executed swaps that do not fall within the definition of publicly reportable swap may include:
(i) Internal swaps between one-hundred percent owned subsidiaries of the same parent entity; and
(ii) Portfolio compression exercises.
(3) These examples represent swaps that are not at arm's length and thus are not publicly reportable swap transactions, notwithstanding that they do result in a corresponding change in the market risk position between two parties.
The following appendices will not appear in the Code of Federal Regulations.
On this matter, Chairman Giancarlo and Commissioners Quintenz, Behnam, and Stump voted in the affirmative. Commissioner Berkovitz voted in the negative.
I start by referencing an important White Paper written in 1970 by a young graduate student in economics at UC Berkeley. That White Paper, entitled, “Preliminary Design for an Electronic Market,” written for the Pacific Commodity Exchange, was the world's first written conceptualization of a fully electronic, for-profit futures exchange.
The White Paper was written by Dr. Richard Sandor. That White Paper has now been republished in a new book by Dr. Sandor.
What I found fascinating in Dr. Sandor's recounting of this five-decade long evolution from trading pits to electronic trading of futures was the absence of any grand plan behind the transformation. Instead, it was a series of incremental commercial developments and technology innovations. At all times, the impetus was the demands of market participants and the response of market operators to reduce trading costs and transaction friction. At no time, did government step in and say, “Henceforth, all futures trading shall be on electronic exchanges.” Instead, market evolution happened because a good idea was coupled with capable technology and mutual commercial interest with enough time to catch on and gain traction.
Before I joined the Commission, I spent a decade and a half at a leading operator of swaps marketplaces. We launched many innovative electronic platforms still in use today. Some of the platforms caught right on with our customers, others did not. Yet, we designed all of them to increase efficiency and reduce trading friction. It was just that sometimes our competitors designed better or cheaper ones or just simply got the timing right.
The point is that the design of trading platforms and the evolution of market structure is best done by platform operators, through trial and error, customer demand, commercial response and technological innovation. Regulators will never be close enough to the heartbeat of the markets, the spark of technology or the cost of development to prescribe the optimal design of trading platforms or business methods. Regulators can never know which trading methods will work best in the full range of market conditions, from low to extreme volatility.
Congress understood this. That is why Title VII of Dodd-Frank permits Swap Execution Facilities (SEFs) to conduct their activities through “any means of interstate commerce,” not “such means that may be chosen by regulators.”
Once regulators step in and dictate who serves who with what type of service, we are picking winners and losers. We are simply not authorized, nor are we competent, to act in this way. If we do, the winners will invariably be those with the most persuasive voices and best lobbyists.
Congress knew that swaps are not traded by retail participants, but for sophisticated, institutional traders. Wall Street banks, hedge funds, prop shops and large energy companies have the wherewithal to demand the transaction services they need without regulators holding their hands. And the platform operators are not public utilities, but seasoned competitors. If there is money to be made, trading efficiencies to be achieved, customers to be served or costs to be saved, they will find them. If there is a better mousetrap to be built, they will build it.
Unfortunately, the CFTC did not listen to Congress. Contrary to provisions of Dodd-Frank that permit SEFs to operate by “any means of interstate commerce,” the current SEF rules constrain swaps trading to two methods of execution—request-for-quote or order book. While swaps not subject to the trade execution mandate can utilize other methods, SEFs must nevertheless provide an order book for such permitted transactions. All other “required” transactions have to be executed exclusively on one of those two options. Further, the rules incorporate a number of practices from futures markets that are antithetical to swaps trading, such as the 15 second “cross” and execution of block trades off platform. Additionally, the SEF core principles are interpreted in ways that are not conducive to environments in which swaps liquidity is formed and price discovery is conducted.
One effect of this approach has been to incentivize the shift of swaps price discovery and liquidity formation away from SEFs to introducing brokers (or “IBs”). SEFs have turned into booking engines for trades formulated elsewhere, often on IBs. Yet, IBs are not appropriate vehicles to formulate swaps transactions. The intended purpose of IBs in the CFTC's regulatory framework is to solicit orders for futures transactions, not swaps. Moving swaps price discovery and liquidity formation away from SEFs to IBs is not what Congress intended in Dodd-Frank. The goal was to have the entire process of swaps liquidity formation, price discovery and trade execution take place on licensed SEF platforms. IBs are not subject to conduct and compliance requirements appropriate for swaps trading. Their employees are not required to pass exams for proficiency in serving institutional market participants in over-the-counter swaps markets but they are for retail customers who are prohibited from trading swaps.
Another effect of the current approach is the paucity of platform innovation and new platform operators competing for market share. The stagnation has allowed a few incumbents to consolidate and dominate market share. According to one large swaps trader, “the biggest disappointment of SEFs is that nothing has really changed. I'm still trading the same way today as I was 10 years ago.”
I have written a few white papers of my own. I have called for revising our current restrictions on SEF activity and allowing flexible methods of execution for swaps transactions using any means of interstate commerce, exactly as Congress intended.
Today's proposal does just that. It will allow SEFs to innovate to meet customer demand and operate trading environments that are more salutatory to the more episodic nature of swaps liquidity. At the same time, it will make the “made available for trading” determination synonymous with the clearing determination to include all swaps subject to the clearing requirement and listed by a SEF or DCM. This is meant to bring the full range of liquidity formation, price discovery and trade execution on SEFs for a broader range of swaps products.
The promotion of swaps trading on SEFs brings “daylight to the marketplace” by subjecting a much broader range of swaps products to SEF record keeping, regulatory supervision and oversight, just as Congress intended.
It is said that if CFTC mandates for minimum trading functionality go away, so will the current degree of electronic execution in the market. Sorry, but that is a naïve concern. Those electronic SEF platforms that are successful provide too much competitive advantage and cost efficiency and sunk costs to be shut down simply because they are no longer subject to a regulatory mandate. No firm is going to give up electronic trading market share and profitability and increase trading friction because regulation suddenly becomes less prescriptive.
A word about “impartial access,” Dodd-Frank requires SEFs to have rules to provide market participants with “impartial access” to the market
“Impartial access” means just that, “impartial”. It does not mean that SEFs must serve every type of market participant in an all-to-all environment. If it did, then Congress would not have allowed SEFs to establish rules for limitation of access.
The new proposal would establish what is meant by “impartial access”. The proposal will generally define “impartial” as transparent, fair and non-discriminatory as applied to all similarly situated market participants in a fair and non-discriminatory manner based on objective, pre-established requirements.
Today's proposal would also enhance the professionalism of SEF personnel who exercise discretion by adopting proficiency requirements and conduct standards suitable for swaps. Furthermore, the proposal adopts rule changes in a number of places where staff has previously issued guidance or no-action relief from the current rules, thereby increasing regulatory clarity and certainty.
We have approached today's proposal with the principle that the CFTC engage its international counterparts with respect and due consideration. The staff of the CFTC and I have made every effort to ensure that non-U.S. authorities had the opportunity to review and discuss the 2015 SEF White Paper that set out the concepts underlying today's proposal. Based on that outreach, I see no reason why today's proposal would be viewed as inconsistent with the regulatory systems of other G20 jurisdictions. We certainly welcome further dialogue with them. In fact, today's proposal is entirely consistent with, and anticipated by, recent discussions with foreign authorities about the CFTC's SEF regime, including the equivalence agreement for swaps trading platforms with the European Commission that EC Vice President Dombrovskis and I announced one year ago here in this room. That agreement, which focused on an outcomes-based approach toward EU equivalence and CFTC exemptions, was made by both parties with full knowledge and understanding of the changes advocated in the 2015 SEF White Paper and presented to us today.
Let me briefly address today's request for comment on the practice of name give up in swaps markets. There are a range of perspectives on this market practice. I have an open mind as to the advisability of restrictions on the practice and what form a rule would take, if at all. I look forward to comments and hearing more about the current impact of this practice in the marketplace.
One final point: Today's proposal will invariably be slammed by opponents of change as a “rollback” of Dodd-Frank. Any such characterization would be disingenuous.
Those who examine my record know that I have been a consistent supporter of the swaps reforms embodied in Title VII of the Dodd-Frank Act. In fact, of the current five Commissioners, I may have been the first to publicly state my support for Title VII.
My support for the Title VII reforms—swaps clearing, swap dealer registration and requirements, trade reporting and regulated swaps execution—is not based on academic theory or political ideology. It is based on fifteen years of commercial experience. Done right, the reforms are good for American markets.
So is today's proposal. It is not a rollback, but a policy improvement, a step forward, to enhance swaps market health and vitality that is true to Congressional intent and purpose. I trust that market participants and interested parties will fairly consider it with the good faith with which it is presented. I look forward to a broad and active discussion.
In closing, I compliment the DMO staff for putting together a balanced rule proposal and request for comment. I would like to commend them for their many hours of hard work, the quality of the written proposal and their thoughtfulness and engagement throughout.
You know, it is satisfying to see how an old White Paper, with ample time and reflection, can become a formal proposal, an arrow hitting its mark.
I look forward to the public's comments, healthy discussion, and a final rule in 2019.
I will vote in favor of issuing today's proposed rule and the request for comment reforming the regulatory regime of swap execution facilities (SEFs). The Chairman has shown great thought leadership and transparency in consistently and fully articulating his vision for swaps trading rules that would create a more cohesive, liquid swap marketplace. Today's proposal represents a significant step toward executing that vision. I look forward to hearing from market participants about how these broad reforms will work collectively to impact SEF trading dynamics and liquidity formation. Mr. Chairman, I know this day has been a long time coming, and I congratulate you and the Division of Market Oversight for all of your and their tireless work on this proposed rule.
Today, the Commission votes to issue proposed rules that would constitute an overhaul of the existing framework for swap execution facilities (SEFs). Given the breadth and complexity of the proposed rules before us, the process of public comment is particularly important. I look forward to receiving input from market participants and the public who would be impacted, in any way, by a reworking of the SEF rules.
As we consider the goals and therefore the direction of any SEF reform, I think it is very important that we first review how we got where we are today. Prior to the 2008 financial crisis, swaps were largely exempt from regulation and traded exclusively over-the-counter, rather than on a regulated exchange.
As part of the Dodd-Frank effort to provide more transparency, in 2013 the Commission adopted the part 37 rules in order to implement a regulatory framework for SEFs.
The relatively young SEF framework has in many ways been a success. There are currently 25 registered SEFs.
This is not to say that the SEF rules were perfect from the start and would not benefit from some targeted changes. Most SEFs operate under multiple no-action letters granted by the Division of Market Oversight. While the purpose of this form of targeted relief was often to smooth the implementation of the SEF framework, codifying or eliminating the need for existing no-action relief would provide market participants with greater legal certainty.
The current SEF rules have not brought as much trading onto SEFs as intended or envisioned. We can improve upon that. Currently, the Commission has a regulatory process for SEFs to demonstrate through a multi-factor analysis that a swap has been made-available-to-trade, or “MAT,”
While I believe targeted reforms could bring more products onto SEFs, increase transparency, and lower costs for market participants, today's NPRM is far from targeted, and in some instances may represent a regulatory overreach. I therefore have a number of very serious concerns with the NPRM's approach and its far-ranging alterations. First, the NPRM violates the clear language of the Act, which states that one of the major goals of the SEF regulatory regime is to promote pre-trade transparency in the swaps market. As discussed below, the NPRM does exactly the opposite. Second, in addition to reducing transparency, the proposed rule also increases limitations on access to SEFs. The NPRM purports to increase choice and flexibility for SEFs; however, it simultaneously allows SEFs to limit choice and flexibility for market participants. Third, as commenters and the Commission think about the NPRM, I think it is also important to consider whether we would be creating a new registration scheme that adds significant costs for market participants, while failing to address the fixable issues that exist in the market today.
Section 1a(50) of the Act defines a SEF as “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce. . . .”
I am concerned that the NPRM goes too far by allowing, literally, any means of execution. The NPRM's preamble states that the approach “
That is not to say that expanding methods of execution—in a more limited and targeted way—is a bad idea or violates the Act. There are likely other execution methods that fit within section 1a(50) and would promote pre-trade transparency. I look forward to hearing from commenters as to what those methods might be, and debating with my fellow Commissioners as to whether they are appropriate within the confines of congressional intent and ultimately the Act.
As I mentioned earlier, the MAT process is seemingly broken. The Commission stopped receiving MAT submissions after an initial set of submissions for the most standardized and liquid swaps contracts.
My concern, however, is that there may be products that are more appropriately traded off SEF. In addition, tying the trade execution requirement to the clearing requirement could have unintended consequences—it could actually discourage voluntary central clearing.
I look forward to hearing from commenters regarding the appropriate interpretation of the term “made available to trade”, including how to improve the existing process.
One of the most troubling aspects of the NPRM is that it would alter the Commission's interpretation of “impartial access” under SEF Core Principle 2. Core Principle 2 of the Act requires SEFs to establish and enforce participation rules that “provide market participants with impartial access to the market.”
Today's NPRM would roll back this interpretation, leaving the term “impartial access” an empty shell. The proposed rule would “allow SEFs to serve different types of market participants or have different access criteria for different execution methods.” This is exactly the type of discrimination that the “impartial access” provision in the Act was intended to prevent.
I believe that
I would like to turn for a minute to the potential costs to market participants—and the Commission—from this proposed rule. Currently, there are 25 registered SEFs.
The new registration regime, and the many changes that come along with it, will result in substantial costs all around: To both existing SEFs and new SEF registrants, and to their participants. I note with some concern that, while the preamble provides a laundry list of what rule changes will result in costs, there is no effort to quantify them. Operating or participating in a regulated market comes with costs; but, these incremental costs are offset, in part, by the benefits of having access to a transparent, safe market ecosystem that demands accountability and punishes wrongdoers. I do not mean to suggest anything else. However, as the Commission proceeds with this NPRM, I am hopeful that the best, most cost effective regulatory solutions will prevail as the Commission seeks to improve and advance the health and vibrancy of the SEF marketplace.
I also want to quickly raise a non-substantive concern, but one that may greatly impact the substance of the NPRM. The comment period for the proposal is only 75 days. As I have stated previously, this rulemaking is complex and impacts a wide range of market participants in fundamental ways. There are 105 numbered questions for commenters in the NPRM's preamble, in addition to general requests for comment. I think it is very important that we give market participants time to carefully consider the proposed rule and make reasoned comments. Recent proposed rules that raised complex issues, like the capital rule and Reg AT, had 90 day comment periods followed by extensions of at least an additional 60 days.
Before I conclude, I would like to turn briefly to the name give-up request for comment that is before us as well, as it is inextricably tied to the SEF NPRM. Post-trade name give-up also relates to the issue of impartial access, which I discussed earlier. While today's SEF NPRM reworks the SEF rules generally, the NPRM does not address the long standing practice of disclosing the identity of each swap counterparty to the other after a trade has been matched anonymously. Instead, the Commission is voting to issue a request for comment seeking public comment on the practice. While I appreciate the desire to be measured and thoughtful on this issue, I fear that not taking a view at this time in the proposal may function as an endorsement of the status quo. The request for comment puts name give-up on a slower track than the rest of the rule. Any rule to address the issue will now be well behind the process for the rest of the SEF rules.
As outlined above, I have numerous concerns about this NPRM, both in terms of what the Commission
As I read through the NPRM, I noticed a common thread that naturally aims to shift the current part 37 regime to a less prescriptive, and more principles based regime. The frequent weaving of words into the text of the NPRM like,
In remarks I delivered in February of this year, I stated, “. . . [w]hile I strongly oppose any roll backs of Dodd-Frank initiatives, I believe a principles-based approach to implementation can be suitable in certain instances. A principles-based approach provides greater flexibility, but more importantly focuses on thoughtful consideration, evaluation, and adoption of policies, procedures, and practices as opposed to checking the box on a predetermined, one-size-fits-all outcome. However, the best principles-based rules in the world will not succeed absent: (1) Clear guidance from regulators; (2) adequate means to measure and ensure compliance; and (3) willingness to enforce compliance and punish those who fail to ensure compliance with the rules.”
If the Commission was voting on a final rule today, my vote would be no. However,
I respectfully dissent from the Commodity Futures Trading Commission's (“CFTC” or “Commission”) notice of proposed rulemaking regarding Swap Execution Facilities and Trade Execution Requirement (the “Proposal”). This Proposal would reduce competition and diminish price transparency in the swaps market, which will lead to higher costs for end users and increase systemic risks.
The Proposal would abandon the commitments the United States made at the G20 Summit in Pittsburgh in 2009 to trade standardized swaps on exchanges or electronic trading platforms and is contrary to Congressional direction in the Dodd-Frank Act and the Commodity Exchange Act (“CEA”) reflecting those commitments. It would retreat from the progress made by the Commission and the financial industry in implementing those reforms.
The Proposal would reduce competition by cementing the oligopoly of the largest bank dealers as the main source of liquidity and pricing in the swaps markets. It would diminish transparency by removing the requirement that highly liquid swaps be traded through competitive methods of trading. By reducing competition and diminishing price transparency, the Proposal would increase systemic risks and lead to higher swaps prices for commercial and financial end-users. Ultimately, the millions of Americans who indirectly participate in the swaps market through their investments in retirement accounts, pension plans, home mortgages, and mutual funds will pay that higher cost. Finally, the Proposal would provide SEFs with too much discretion to set their own rules and in so doing, weaken regulatory oversight and enforcement capabilities.
The evidence is clear that the Dodd-Frank reforms, including the Commission's swap execution regulations, have led to more competition, greater liquidity, more electronic trading, better price transparency, and lower prices for swaps that are required to be traded on regulated platforms. Numerous academic studies and reports by market consultants have documented these benefits.
The Proposal would jettison the regulatory foundation for the way swap execution facilities (“SEFs”) currently operate. It would delete the requirement that swaps that are subject to the trade execution mandate (“Required Transactions”) be traded either on Order Book or by a request for quote from at least three market participants (“RFQ-3”). This would undermine the Congressional directive in the Dodd-Frank Act that for Required Transactions, a SEF provide multiple participants with “the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system.”
The Proposal also would gut the impartial access requirement in the Dodd-Frank Act. The statute requires SEFs to establish rules that “provide market participants with impartial access to the market.”
In pursuit of the goal of “flexibility” for SEF markets, the Proposal deletes, reverses, or waters down many key trading, access, and compliance requirements for SEFs. The wide latitude that would be granted to SEFs as to how swaps may be traded, who may trade them, the oversight of the marketplace, and the conduct of the brokers looks very much like the “light-touch” approach to regulation that was discredited by the financial crisis.
Seven years ago, as the Commission was formulating the current regulations, very little data was available on swap trading and pricing. But now, after six years of experience with those regulations, we have an extensive amount of data, collected by SEFs and swap data repositories. The Commission should base its regulatory decisions on this data and the studies and literature that have analyzed this data and demonstrated the benefits of the current swap trading requirements.
Unfortunately, the Proposal does not consider the available data and market studies that demonstrate the current RFQ-3 system is working well to provide highly competitive prices and low transaction costs. For example, the Proposal ignores the following studies and conclusions:
•
•
•
The Proposal conjectures that novel “flexible methods of execution” will benefit the trading of all swaps. The Proposal, however, does not identify any trading methodology that can provide lower costs than the RFQ-3 method as applied to interest rate swaps and index CDS subject to the current trade execution mandate. In discarding the trading requirements for Required Transactions to bring more swaps onto SEFs, the Proposal throws the baby out with the bathwater.
Today, a small number of large dealers provide liquidity to the swaps market. Five very large banks were party to over 60 percent of interest rate swap transactions.
One of the fundamental purposes of the CEA is to “promote responsible innovation
The current system is not perfect; there are flaws that should be addressed. But the evidence is clear that the current system has provided substantial benefits over the unregulated system that existed prior to the financial crisis and the Dodd-Frank reforms. The Proposal would return the swaps market to the dealer-dominated, trade-however-you-want system heavily reliant on voice brokers that existed prior to the financial crisis. At the G20 Summit in Pittsburgh in 2009, the United States made an international commitment to move away from the dealer-dominated, voice-brokered approach and Congress expressly rejected the dealer-dominated, flexible approach when it adopted the Dodd-Frank Act.
My sense from working with and talking to swap market participants is that many do not see a need for a major overhaul of the swaps regulatory framework. The benefits of the current system are due not just to the regulations, but also are the result of major efforts and investments by market participants and operators of SEFs in electronic trading technology and personnel. Many market participants do not want to deal with another round of costs and uncertainties that wholesale regulatory changes will generate. They believe the current system is working, despite its flaws. They prefer that we consider more targeted reforms to address specific issues with the current system, rather than scrap the current system entirely. They do not want to face the possibility that the Commission will continue to engage in a repetitive cycle of de-regulation and re-regulation.
Rather than completely rewrite the SEF regulatory structure, and turn our back on the progress made in transparency and competition, I favor a more limited, data-based approach to build on our progress and improve upon the current structure. This could be accomplished by removing some of the unnecessary barriers to greater participation on SEFs. Banks and other swap dealers play a critical role in providing liquidity. We need them to participate. However, a highly concentrated dealer oligopoly is not a prerequisite for sufficient liquidity. We should seek ways to bring in more sources of liquidity and competition. Robust competition leads to healthier markets and improves the overall welfare of all market participants.
I support the goal of bringing more types of swaps onto the SEF trading environment. I could support a more narrow approach to achieve this goal that does not undermine the progress that has been made to date.
I am not persuaded that we should continue to have two separate pools of liquidity in the swaps market for all types of swaps, regardless of liquidity characteristics—one in which the dealers trade amongst themselves, and another in which the dealers trade with customers. Perhaps we should look for ways to consolidate rather than separate the swaps markets.
Specifically, I support considering the following regulatory measures to improve competition in the swaps market:
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We should explore these and other ways to increase competition in the swaps market rather than retreat from the progress that has been made. What follows is a more detailed explanation of how the current regulatory system has improved the swaps market and how the Proposal would undermine those improvements.
The Proposal raises the following specific concerns:
The first three concerns—higher prices, less competition, and less transparency—arise from the repeal of two critical and inter-related provisions of the current regulations.
The Proposal would delete the Order Book/RFQ-3 requirement, even for swaps already traded on SEFs and subject to the trade execution requirement. Instead, the Proposal states that “a SEF may utilize `any means of interstate commerce' for purposes of execution and communication, including, but not limited to, the mail, internet, email and telephone.”
The Proposal would replace this critical requirement and allow each SEF to establish exclusionary criteria determining what
Under the Discriminatory Access Provision, it is reasonable to expect that the large bank swap dealers would encourage discriminatory SEF participation criteria such that only large bank swap dealers would be “similarly situated market participants” able to participate in dealer-to-dealer liquidity pools. Proprietary trading firms and smaller dealers provide competition to the large banks in pricing swaps, and are one major reason customers are able to obtain favorable prices through the current RFQ process. If discrimination is permitted, these other types of firms would not be able to use the dealer-to-dealer market to effectively hedge or offset trades with customers, and therefore would not be able to compete with the large bank swap dealers in the dealer-to-customer market. In this manner, the Discriminatory Access Provision would result in a significant loss of competition in the dealer-to-customer market, which ultimately would result in higher prices for end users.
If the current trade execution requirement is repealed, dealers also could establish single-dealer platforms and call them SEFs to siphon liquidity away from the RFQ platforms. The dealers wield significant market power in the swaps market. Five dealers currently account for nearly two-thirds of the interest rate swap market, which is the largest swap product category.
“There is no commercial explanation for having a market that is not open to a lot more people. It just doesn't make any sense. But the ability of people to enforce change outside the incumbent dealers is very limited,” says the expert. “The part that frustrates me more than anything is pretending that the leverage of the incumbent dealers over this market isn't real. When I hear people talk about the natural market evolution, I would contend that progress has been 100% prevented to date.”
Robert Mackenzie Smith,
The Proposal asserts that all-to-all markets are “inimical” to “fundamental” swaps trading features.
Similarly, the Proposal eliminates the RFQ requirement because it states that this method of execution may be unsuitable for some additional types of swaps that are currently traded off SEF. “[T]he Commission believes that [Order Book and RFQ-3] would not be suitable for the broad swath of the swaps market that would become newly subject to the trade execution requirement.”
This reasoning is flawed. From the proposition that an Order Book may be unsuitable for
The Bank of England Study also assessed the impact of the SEF trading mandate on dealer market power.
Other studies have found similar results. Collin-Dufresne, Junge, and Trolle compared the prices on the Order Books used in the interdealer market with the prices generated in the dealer-to-customer market through the RFQ system. The authors found that prices customers obtained in the dealer-to-customer market through the RFQ system often were better than the prices that were available on the interdealer Order Book.
Economists in the CFTC's Office of Chief Economist examined data regarding the customer trading of index CDS on the Bloomberg and Tradeweb SEFs, which are the leading SEFs for dealer-to-customer trading.
The CFTC economists concluded that the current regulatory structure is working well: “Judged from our evidence, SEF-traded index CDS market seems to be working well after Dodd-Frank—dealers' response rates are high, the vast majority of customer orders result in trades and customers' transaction costs are low.”
The transaction costs of on-the-run CDX.NA.IG and iTraxx Europe have a mean around 0.2 bps and a standard deviation of 1.4 bps, so the average transaction cost is statistically and economically close to zero. For on-the-run CDX.NA.HY and iTraxx Crossover, the average costs are larger, at about 0.5 and 1.1 bps, but again not significant compared to their standard deviations of about 2.6 and 3.5 bps. The first off-the-run contracts have comparable average transaction costs but a much higher standard deviation due to the relatively few number of trades in these contracts.
Market participants have expressed similar concerns about removing the Order Book/RFQ-3 and impartial access requirements. One senior executive at a trading firm recently stated that the SEF regulations have helped halve the bid-offer spread in US dollar swaps and increased price competition. “My fear is we take too big a step back from having the competitive pricing in the market,” he said. “It is still a dealer-controlled market and if the biggest dealers simply say: `Great, I don't have to put a competitive price on the screen anymore, and if someone wants my most competitive price then you've got to pick up the phone again,' I don't want to take that step backwards.”
Similarly, the CEO of one SEF cautioned, “[o]ne of the risks of this concept of `any means of interstate commerce' is you have benchmarks and fixings that rely on better liquidity coming in from liquid Clobs. You wouldn't want to go backwards in that respect.”
In 2016, Greenwich Associates reported that “the buy side feels the executions they are receiving under the current paradigm are sufficient, if not excellent.”
The Proposal does not reference any of these findings or views of market participants. In contrast to these data-based empirical studies regarding the benefits of the current regulatory system, the Proposal speculates—without any evidentiary support—that the “flexibility” afforded by the elimination of the Order Book/RFQ-3 requirement
However, the Proposal provides no factual basis for any of these hypothetical benefits. In light of the very low execution costs that have been documented for interest rate and index CDS swaps traded through RFQ-3, it is difficult to understand why RFQ-3 should be eliminated, at least for the swaps to which it currently applies.
In asserting that the expanded execution mandate will increase on-SEF liquidity, the Proposal appears to measure liquidity solely in terms of volume. But volume does not equal liquidity. It is not apparent how simply moving this volume from off SEF to being traded within a SEF will have any effect on other traditional measures of liquidity, such as cost of transaction or price dispersion. Indeed, the only difference is that the swaps would be traded on SEF, but by the same people and using the same methods that they now use to trade them off SEF. It is not apparent how this would lead to any greater price transparency or lower costs.
The Proposal notes that an estimated 57% of the notional amount of interest rate swaps are being traded on SEF, and that 85% are subject to the clearing requirement. Accordingly, an upper bound of about 28% of interest rate swaps could be moved on SEF under the Proposal.
Again, it is not apparent how moving the trading of bespoke swaps from being traded by introducing brokers (“IBs”) outside a SEF to being traded by swap trading specialists inside a SEF will have any effect on the prices of those bespoke swaps. It is even less apparent how the trading of these bespoke swaps within a SEF will have any impact upon the trading of the highly liquid standardized swaps already being traded within a SEF under the RFQ-3 methodology. In fact, eliminating RFQ-3 for those liquid swaps could raise the prices for those swaps, and in turn may also negatively impact pricing for less liquid swaps, because most interest rate swaps—including bespoke swaps—are priced in part on a standard rate curve developed from prices for liquid swaps at various point along the curve.
Documentation of executed swaps would no longer be required at the time of execution, but as soon as technologically
Many of the changes in the Proposal would allow the SEF to exercise discretion in brokering trades and establishing rules to facilitate broking away from electronic platforms. The Proposal explains that one of the reasons for granting the SEF greater discretion is to allow voice-broking to occur directly within the SEF.
Traditional introducing broking, by its nature, is slower and less transparent at establishing prices as compared to electronic trading. As a broker calls around to multiple dealers for prices, the broker might make trade adjustments over time and prices from one call to the next may change. As time passes, prices may become stale, even within seconds. Dealers and other liquidity providers will add a cushion to the spread to account for this delay. This means that as the length of time increases between when a quote is first received and when the trade is executed and the price is reported, spreads become wider and pricing becomes less transparent. For certain trades, such as block trades, timing delays in price transparency might be appropriate for reasons related to the unique nature of each trade. However, we should not be adopting regulations that would degrade the current level of transparency for liquid swaps that are being efficiently traded using an Order Book or RFQ system.
Similarly, the Proposal would allow extensive pre-trade negotiation for all swaps so long as the SEF defines it into the SEF's trading rules. Pre-trade negotiation may be appropriate for certain bespoke or large sized swaps. However, to create flexibility in SEF trading methods, the Proposal would allow SEFs to include pre-trade negotiations for any and all types of swaps including standardized swaps currently traded electronically. However, the Proposal would allow SEFs to include pre-trade negotiations for more liquid, standardized swaps for which pre-trade price transparency is better achieved through electronic trading, as explained in the studies discussed above.
In addition, the Proposal would allow SEF trading specialists, when acting as brokers, to exercise discretion in sharing different market information with different market participants. The Proposal acknowledges that this “trading discretion exercised by SEF trading specialists may affect the manner in which market participants are treated on a facility.”
The statements above should not be interpreted as critical of intermediary broking services. These services provide important options for trading and pricing certain types of swaps, such as bespoke swaps, package trades, and block sizes. Rather, my concern is that these important services and the professionals who provide them may become less regulated, and that they will become intermediaries for transactions that are required to be traded electronically.
I am also concerned that this Proposal waters down the robust, and uniform, standards of conduct and supervision to which it currently holds SEFs, IBs, associated persons (“APs”) of IBs, and other market participants. This could lead to SEFs reducing their focus on compliance, require the Commission to take on an enhanced oversight role, and constrain the Commission's ability to investigate and prosecute abusive trade practices involving SEFs.
As previously discussed, this Proposal grants extensive discretion to SEFs to create rules governing their operations and does away with some of the specific compliance and recordkeeping obligations currently required by the regulations governing SEFs, set forth in Part 37 of the Commission's Regulations.
As an example, the Proposal would remove the requirement set forth in Regulation 37.203(c) that a SEF establish and maintain sufficient compliance staff and resources to (i) conduct specific monitoring, including audit trail reviews, trade practice and market surveillance, and real-time market monitoring; (ii) address unusual market or trading events; and (iii) complete investigations in a timely manner. Rather, the Proposal would only require that the SEF establish and maintain sufficient compliance staff and resources to ensure that it can fulfill its self-regulatory obligations under the CEA and Commission Regulations. Without specific requirements on what compliance resources are needed, each SEF will be free to determine what level of resources is sufficient for such a broad mandate. In essence, the SEF need not map its compliance resources to specific compliance tasks. Additionally, experience has shown that conducting oversight and examinations of the sufficiency of a registrant's compliance resources is more difficult to undertake on a standard and fair basis across registrants when each one has a different view of what resources will meet the generalized requirement.
As another example, the Proposal eliminates the specific requirements that a SEF establish an annual audit trail review and related enforcement program, and retain certain categories of documents currently required by Regulation 37.205. The Proposal assumes, however that “SEFs would continue to fulfill their information collection burdens in a manner similar to the status quo.”
As a final example, the Proposal removes some of the specific requirements in Regulation 37.204 for oversight of third-party regulatory services. SEFs would no longer be required to conduct regular meetings with, and periodic reviews of, service providers or provide records of such oversight to the Commission. Instead, SEFs are given broad latitude to determine the necessary processes to supervise these providers. When registrants delegate critical functions to third-party providers, it is imperative that the registrant maintain diligent supervision over the provider's handling of these functions.
Equally concerning is the sweeping change the Proposal makes to the way in which SEFs and their employees and agents will be registered, and in turn, the Commission's oversight of their conduct. Under the current system, swaps broking entities that meet the definition of an IB must be registered with
Under the Proposal, which limits the activity that can be conducted off SEF, IBs will need to register with the Commission as SEFs to continue to broker swaps transactions. Given that the majority of IBs engaging in swap transactions on SEF are affiliated with SEFs, it is likely that many of these entities, or their employees, will merge into or join the affiliated SEF. We can also expect to see the formation of new SEFs, which presumably would not be required to register as IBs.
Further, the Proposal creates an entirely new category of persons: The SEF trading specialist. As proposed, SEF trading specialists will perform “core functions” that facilitate swaps trading and execution, including negotiating trade terms, arranging bids and offers, and discussing market color with market participants, or directly supervising a person who engages in such functions. In fact, the Proposal notes that broadening the SEF registration and trade execution requirements would increase the level of discretion that these SEF employees and agents would exercise in connection with swaps trading. However, despite these key, customer-facing functions, SEF trading specialists would not be required to register with the Commission.
For this reason, I am also concerned that the Proposal would weaken the supervisory function within the SEF. Regulation 166.3 imposes a duty on all Commission registrants who act in a supervisory capacity, including APs, to diligently supervise the activities of employees and agents relating to their business as a Commission registrant.
Finally, in at least one instance, the flexibility afforded to SEFs to establish a code of conduct for their SEF trading specialists is in direct conflict with the supervision rules applicable to all registrants under Regulation 166.3. The Proposal states that a SEF's Code of Conduct “
This Proposal is a fundamental overhaul of the SEF regulatory regime. The changes create a trading system that is so flexible that all swaps traded on SEFs—including the most liquid—could be traded the same way they were before the Dodd-Frank reforms were adopted. The Proposal would allow the largest dealers to establish separate dealer-to-dealer liquidity pools through exclusionary access criteria. Competition would be reduced and price transparency diminished. This is not what Congress intended when it passed the Dodd-Frank Act.
I am open to appropriate, targeted amendments to the regulations, several of which I have suggested above. However, empirical studies have shown that the existing SEF regulations have made great progress in achieving the statutory goals of promoting on-SEF trading and pre-trade price transparency. With respect to the swaps markets that are working and providing low costs to the buy side and end users, we should live by the adage, “if it ain't broke, don't fix it.”
Centers for Medicare & Medicaid Services (CMS), HHS.
Proposed rule.
This proposed rule would amend the Medicare Advantage (MA) program (Part C) regulations and Prescription Drug Benefit program (Part D) regulations to support health and drug plans' negotiation for lower drug prices and reduce out-of-pocket costs for Part C and D enrollees.
To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on January 25, 2019.
In commenting, please refer to file code CMS-4180-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.
Comments, including mass comment submissions, must be submitted in one of the following three ways (please choose only one of the ways listed):
1.
2.
3.
For information on viewing public comments, see the beginning of the
Christian Bauer, (410) 786-6043, Part D Issues. Marty Abeln, (410) 786-1032, Jelani Murrain, (410) 786-2274, or Brandy Alston, (410) 786-1218, Part C Issues.
Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.
The primary purposes of this proposed rule are to: Make revisions to the Medicare Advantage (MA) program (Part C) and Prescription Drug Benefit Program (Part D) regulations to support health and drug plans' negotiation for lower drug prices; and reduce out-of-pocket costs for enrollees. This regulation would improve the regulatory framework to facilitate development of Part C and Part D products that better meet the individual beneficiary's healthcare needs and reduce out-of-pocket spending for beneficiaries at the pharmacy and other sites of care.
Current Part D policy requires sponsors to include on their formularies all drugs in six categories or classes: (1) Antidepressants; (2) antipsychotics; (3) anticonvulsants; (4) immunosuppressants for treatment of transplant rejection; (5) antiretrovirals; and (6) antineoplastics; except in limited circumstances. This regulatory provision proposes three exceptions to this protected class policy that would allow Part D sponsors to: (1) Implement broader use of prior authorization (PA) and step therapy (ST) for protected class drugs, including to determine use for protected class indications; (2) exclude a protected class drug from a formulary if the drug represents only a new formulation of an existing single-source drug or biological product, regardless of whether the older formulation remains on the market; and (3) exclude a protected class drug from a formulary if the price of the drug increased beyond a certain threshold over a specified look-back period.
The first proposed exception would allow Part D sponsors to use PA and ST for protected class drugs, including to determine use for protected class indications, without distinguishing between new starts and existing therapies, as is currently allowed for all other drug categories and classes. We would also allow indication-based formulary design and utilization management for protected class drugs. This would be consistent with our July 25, 2018 Health Plan Management System (HPMS) memorandum titled, “Indication-Based Utilization Management.” It would also be consistent with our August 29, 2018 HPMS memorandum titled, “Indication-Based Formulary Design Beginning in Contract Year (CY) 2020,” and we are proposing to codify this policy for protected class drugs. This would also allow Part D sponsors to exclude the protected class drug from the formulary for non-protected class indications. As is required for all other drug categories and classes, these formulary design and utilization management edits would be subject to CMS review and approval as part of our annual formulary review and approval process, which includes reviews of prior authorization and step therapy edits that would restrict access, step therapy criteria, prior authorization outliers, and prior authorization criteria. (For an extensive description of our annual formulary checks see the January 2014 proposed rule (79 FR 1939).)
The second proposed exception would permit Part D plans to exclude from the formulary protected class drugs that are a new formulation of a protected class Part D drug, even if the older formulation is removed from the market. That is, Part D plans would be permitted to exclude from their formularies a protected class drug that is a new formulation that does not provide a unique route of administration, regardless of whether the older formulation remains on the market.
The third proposed exception is to permit Part D sponsors to exclude from the formulary any protected class drug whose price increases, relative to the price in a baseline month and year, beyond the rate of inflation. The rate of inflation would be calculated based on
This rule proposes to require that Part D plan sponsors implement an electronic real-time benefit tool (RTBT) capable of integrating with prescribers' e-Prescribing (eRx) and electronic medical record (EMR) systems under section 1860D-4(e)(2)(D) of the Act. We believe that requiring Part D plan sponsors' implementation of electronic access to real-time benefits (RTB) information would be appropriate given the timing requirements at section 1860D-4(e)(2)(D) of the Act, and would improve the cost-effectiveness of the Part D benefit. RTBTs have the ability to make beneficiary-specific drug coverage and cost information visible to prescribers who want to consider that information at the point-of-prescribing. Because we believe that there currently are no industry-wide electronic standards for RTBTs, we are proposing that each Part D plan implement at least one RTBT of its choosing that is capable of integrating with prescribers' e-Rx and EMR systems to provide prescribers who service its beneficiaries complete, accurate, timely and clinically appropriate patient-specific real-time formulary and benefit (F&B) information (including cost, formulary alternatives and utilization management requirements) by January 1, 2020.
This rule proposes requirements under which MA plans may apply step therapy as a utilization management tool for Part B drugs. In this proposed rule, we reaffirm MA plans' existing authority to implement appropriate utilization management and prior authorization programs for managing Part B drugs to reduce costs for both beneficiaries and the Medicare program. The use of utilization management tools, such as step therapy, for Part B drugs would enhance the ability of MA plans to negotiate Part B drug costs and ensure that taxpayers and MA enrollees face lower per unit costs or pay less overall for Part B drugs while maintaining medically necessary access to Medicare-covered services and drugs. Additionally, and in order to make sure enrollees maintain access to all medically necessary Part B covered drugs, we propose to modify Part C adjudication time periods for organization determinations and appeals involving Part B drugs.
The “negotiated prices” of drugs, as the term is currently defined in § 423.100, must include all pharmacy payment adjustments except those contingent amounts that cannot “reasonably be determined” at the point-of-sale. As a result of this exception, negotiated prices typically do not reflect any performance-based pharmacy price concessions that lower the price a sponsor ultimately pays for a drug, based on the rationale that these amounts are contingent upon performance measured over a period that extends beyond the point of sale and thus cannot reasonably be determined at the point of sale.
In this proposed rule, we are considering for a future year, which could be as soon as 2020, eliminating this exception for contingent pharmacy price concessions. We are considering deleting the existing definition of “negotiated prices” at § 423.100 and adopting a new definition for the term “negotiated price” at § 423.100, which would mean the lowest amount a pharmacy could receive as reimbursement for a covered Part D drug under its contract with the Part D plan sponsor or the sponsor's intermediary (that is, the amount the pharmacy would receive net of the maximum negative adjustment that could result from any contingent pharmacy payment arrangement and before any additional contingent payment amounts, such as incentive fees). To implement the change we are considering to the definition of negotiated price at the point of sale, Part D sponsors and their PBMs would load revised drug pricing tables reflecting the lowest possible reimbursement into their claims processing systems that interface with contracted pharmacies.
We are also considering adding a definition of “price concession” at § 423.100. While “price concession” is a term important to the adjudication of the Part D program, it has not yet been defined in the Part D statute, Part D regulations, or sub-regulatory guidance. We are considering defining price concession in a broad manner to include all forms of discounts and direct or indirect subsidies or rebates that serve to reduce the costs incurred under Part D plans by Part D sponsors.
The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) created a new “Part C” in the Medicare statute (sections 1851 through 1859 of the Social Security Act (the Act)) which established what is now known as the Medicare Advantage (MA) program. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173), enacted on December 8, 2003, added a new “Part D” to the Medicare statute (sections 1860D-1 through 42 of the Act) entitled the Medicare Prescription Drug Benefit Program (PDP), and made significant changes to the existing Part C program, which it renamed the Medicare Advantage (MA) Program. The MMA directed that important aspects of the Part D program be similar to, and coordinated with, law for the MA program. Generally, the provisions enacted in the MMA took effect January 1, 2006. The final rules implementing the MMA for the MA and Part D prescription drug programs appeared in the January 28, 2005
Since the inception of both Parts C and D, we have periodically revised our regulations to improve the CMS customer experience through our knowledge obtained through experience with both programs. For instance, in the April 2018 final rule (83 FR 16440), we revised certain delivery and disclosure requirements to be consistent with changing technologies and beneficiary access to on-line information and to revise the marketing and communication standards applicable to MA organizations and Part D Sponsors to focus our mandatory review of marketing materials more effectively.
Through our experience implementing the Part C and D programs and through the research conducted in developing the HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (May 16, 2018, 83 FR 22692), we have identified several proposed regulatory changes that would lower the cost of medications and reduce out-of-pocket costs for enrollees in the Part D program. These changes would also streamline different aspects of the Part D program and reduce associated burden on the government and sponsoring organizations of MA plans and Part D plans.
Section 1860D-4(b)(3)(G) of the Act requires Part D sponsors to include in their formularies all Part D drugs in classes and categories of clinical concern identified by the Secretary using criteria established through rulemaking. The statute specifies that until such time as the Secretary establishes the criteria to identify drug categories or classes of clinical concern through rulemaking, the following categories or classes shall be identified as categories or classes of clinical concern: Anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants for the treatment of transplant rejection. This policy is frequently called the “protected class” policy in the Part D program, with the drug categories and classes of clinical concern being the “protected classes.” Section 1860D-4(b)(3)(G) of the Act permits the Secretary to establish exceptions that permit a Part D sponsor to exclude from its formulary (or to otherwise limit access to such a drug, including through prior authorization or utilization management) a particular Part D drug that is otherwise required to be included in the formulary. The Secretary must engage in rulemaking to establish these exceptions. Section 423.120(b)(2)(vi) currently provides three regulatory exceptions to the protected class policy that permit Part D sponsors to exclude from their formulary therapeutically equivalent drugs, apply utilization management edits for safety, and exclude other drugs that CMS specifies through a medical and scientific process which also permits public notice and comment.
We are not proposing to change or remove any of the protected classes identified in section 1860D-4(b)(3)(G)(iv) of the Act. Instead, we are proposing to use the authority under section 1860D-4(b)(3)(G) of the Act to establish additional exceptions to the requirement that all drugs in a protected class be included in the formulary and to permit additional use of prior authorization and utilization management. We propose to revise § 423.120(b)(2)(vi) to permit Part D sponsors to implement prior authorization and step therapy requirements for protected class drugs for broader purposes than allowed currently. We also propose to permit Part D sponsors to exclude specific protected class drugs from their formularies if they are a singlesource
Section 1860D-11(e)(2)(D)(i) of the Act requires that in order to approve a plan, we must not find that the design of the plan and its benefits (including any formulary and tiered formulary structure) are likely to substantially discourage enrollment by certain Part D-eligible individuals. We refer to this as our “non-discrimination” policy. Under this authority, in 2005 before the start of the Part D program, we directed Part D sponsors through guidance to include on their formularies all or substantially all drugs in six categories or classes: (1) Antidepressants; (2) antipsychotics; (3) anticonvulsants; (4) immunosuppressants for treatment of transplant rejection; (5) antiretrovirals; and (6) antineoplastics.
This guidance helped to ensure a smooth transition of the approximately 6 million Medicare-Medicaid dually-eligible enrollees who were converting from Medicaid drug coverage to Medicare drug coverage at the start of the Part D program (79 FR 1937). Under the circumstances existing at the time of implementation of the Part D benefit, any formularies that did not have all or substantially all drugs in these categories or classes potentially would have been discriminatory for the dually-eligible population, because state Medicaid program formularies were generally open at the time compared to the Part D formularies that we were anticipating Part D sponsors to adopt prior to the beginning of the Part D program. Thus, it stood to reason that dually-eligible enrollees and many of their providers were largely unaccustomed to drug utilization management techniques. That is, for the most part they had little experience dealing with the rejection of a drug claim at the point-of-sale because the drug was either not on formulary, or another drug needed to be tried first, or because more information was required to determine whether the drug could be covered under the plan. Moreover, because the majority of the dually-eligible enrollees did not make a decision to elect their new plan but were instead auto-enrolled into a Part D plan, these individuals may not have understood or known whether their current medications would continue to be covered under their new Medicare Part D plan. Because the Part D program would be administered by private plans with extensive experience managing prescription drug costs through tighter formularies and a variety of utilization management techniques, we anticipated the need for a learning curve to avoid delays associated with navigating new plan prescription drug benefit processes beginning January 1, 2006 that might put at risk the enrollees who needed access to drugs in these particular categories or classes. Therefore, we established our policy for coverage of the six drug classes of clinical concern.
However, the circumstances that existed when this policy was originally implemented have changed dramatically in the nearly 12 years the program has been in operation. In addition to advances in e-prescribing, which can also provide streamlined e-prior authorization processes, CMS, Part D sponsors, providers, our partners that assist enrollees with making enrollment choices, and particularly dually-eligible enrollees and their advocates have had a great deal of experience working with Part D plans since 2005. Additionally, under § 423.120(b)(3), each Part D sponsor must provide for an appropriate transition process for Part D drugs that are not on its formulary. (For a detailed explanation of our transition requirements, see section 30.4 of Chapter 6 of the Medicare Prescription Drug Benefit Manual, available at
After the Part D provisions of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) were enacted in 2003, the Medicare Improvements for Patients and Providers Act (MIPPA) was enacted in 2008 and established specific criteria that should be used to identify drug categories or classes of Part D drugs of clinical concern for which all Part D drugs therein shall be included on Part D sponsor formularies. While we worked to identify them, the Patient Protection and Affordable Care Act was enacted in 2010 and superseded the MIPPA provisions. Section 3307 of the Patient Protection and Affordable Care Act amended section 1860D-4(b)(3)(G) of the Act to specify that the existing drug categories or classes of clinical concern would remain so until such time as the Secretary established new criteria to identify drug categories or classes of clinical concern under section 1860D-4(b)(3)(G) of the Act through notice and comment rulemaking.
Our next applicable notice and comment rulemaking was the January 2014 proposed rule titled “Medicare Program; Contract year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs” (79 FR 1917) (hereinafter referred to as the January 2014 proposed rule). For purposes of the remainder of this Background section, we are summarizing the January 2014 proposed rule but are including detail when it is directly relevant to our current proposal.
In the January 2014 proposed rule (79 FR 1936), we proposed to interpret the Patient Protection and Affordable Care Act authority at section 1860D-4(b)(3)(G)(i) of the Act to limit protected classes to those for which access to all
The protected class policy, inclusive of its current limitations on prior authorization, is unique to the Medicare Part D program and does not appear elsewhere in other Federal programs, such as the Veteran's Health Administration (VA), TRICARE, the Federal Employees Health Benefits Program (FEHBP), the Affordable Care Act Essential Health Benefits (EHB) Benchmark Plans, or in commercial private health plans. We are concerned that requiring essentially open coverage of certain drug categories and classes presents both enrollee cost and welfare concerns, as well as increased costs for the Part D program as a result of overutilization (for example, antipsychotics used for sedation or lack of safety edits) and increased drug prices due to lack of competition between manufacturers to achieve inclusion on plan formularies. We have previously detailed concerns that the policy potentially facilitates the overutilization of drugs within the protected classes. By limiting the ability of Part D sponsors to implement utilization management tools (for example, prior authorization or step therapy requirements) for an entire category or class, we also limit their ability to prevent the misuse or abuse of drugs that are not medically necessary. Not only can this increase Part D costs, but inappropriate use can also lead to adverse effects that can harm the beneficiary and require medical treatment that would otherwise not have been necessary. We believe the profitability of products not subject to normal price negotiations as the result of protected class status is a strong incentive for the promotion of overutilization, particularly off-label overutilization, of some of these drugs.
Additionally, an open coverage policy substantially limits Part D sponsors' ability to negotiate price concessions in exchange for formulary placement of drugs in these categories or classes. Since the beginning of the Part D program we have heard from stakeholders that this policy—frequently referred to as the “protected classes” policy—significantly reduces any leverage the sponsor has in price negotiations and results in higher Part D costs. A report by the OIG in March 2011 documented similar assertions from selected Part D sponsors, including assertions that “they received either no or minimal rebates for the drugs in these six classes,” that “there is little incentive for drug manufacturers to offer rebates for these six classes of drugs because they do not need to compete for formulary placement,” and that “ `if [a rebate] is provided, it's probably at a lower percentage than [the rebate for the drugs] that had some competition.' ” (HHS Office of Inspector General, “Concerns with Rebates in the Medicare Part D Program”, March 2011, OEI-02-08-00050) (For a detailed explanation of these concerns, see the January 2014 proposed rule, 79 FR 1937.) We solicit comments on these concerns. Specifically, we ask commenters to provide evidence and research indicating that these concerns are warranted given real world experience.
Second, as a means to negotiate additional rebates, Part D sponsors can, in theory, subject enrollees to higher cost sharing by placing protected class drugs on non-preferred tiers (for example, non-preferred brand or non-preferred generic) or the “specialty tier.” However, Part D sponsors can only utilize the “specialty tier” if the cost of the drug exceeds the specialty tier threshold of $670 per month. Moreover, the 11.7 million dually-eligible enrollees whom the policy was originally intended to protect are shielded from the cost sharing usually applied to drugs on the non-preferred and specialty tiers because they receive a low-income cost-sharing subsidy. Thus, while a 2013 Avalere study found that Part D sponsors place anticonvulsants on higher tiers than do commercial plans, the data do not support the same conclusion for the five remaining protected classes. (Brantley, Kelly, Wingfield, Jacqueline, and Washington, Bonnie, Avalere, “An Analysis of Access to Anticonvulsants in Medicare Part D and Commercial Health Insurance Plans,” June 2013,
Indeed, many expert studies continue to demonstrate the role that the protected class policy plays in higher drug prices for protected class drugs in general. A 2008 study conducted by the actuarial and consulting firm Milliman found that the six protected drug classes disproportionately accounted for between 16.8 percent and 33.2 percent of total drug spend among sponsors surveyed (Kipp RA, Ko C). (See “Potential cost impacts resulting from CMS guidance on `Special Protections for Six Protected Drug Classifications' and Section 176 of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) (Pub. L. 110-275)” available at:
In contrast to the numerous studies we reviewed that support the assertion that the limited negotiation ability Part D sponsors have for protected class drugs results in higher prices for such drugs, we identified at least one report, published by The Pew Charitable Trusts, that suggested that given the current high rates of generic use within the protected classes, there may be limited potential for savings from changes to the protected class policy, and that rebates on protected-class drugs are consistent with other brand-name drugs. (The Pew Charitable Trusts. “Policy Proposal: Revising Medicare's Protected Classes Policy.” March 7, 2018.
We conclude that despite some formulary flexibility and ability to use drug utilization techniques for protected class drugs, Part D sponsors are not able to negotiate rebates across the protected classes at levels commensurate with other Part D drugs or prescription drugs covered in the commercial market. Consequently, although we are not proposing to eliminate any of the protected classes, we now propose to use the authority under section 1860D-4(b)(3)(G) of the Act to propose revisions to § 423.120(b)(2)(vi). Specifically, we propose to permit Part D sponsors to implement prior authorization and step therapy requirements on protected class drugs for broader purposes than allowed currently and to exclude specific protected class drugs from their formularies based upon price increases or if they are a new formulation of a single-source drug or biological product with the same active ingredient or moiety that does not provide a unique route of administration, regardless of whether the older formulation is removed from the market. By “single-source drug or biological product,” we mean a covered Part D drug that is either produced or distributed under a new drug application (NDA) under section 505(b) of the Federal Food, Drug, and Cosmetic Act (FDCA) or is an authorized generic as defined in section 505(t)(3) of the FDCA, or a biological product licensed under section 351 of the Public Health Service Act. We believe these exceptions would strengthen the Part D program by allowing Part D sponsors to better manage the protected class drugs to help ensure their safe and appropriate use, limit the protected class requirements to the intended protected class indications, and provide Part D sponsors with additional tools to negotiate as competitive a price as possible in order to provide drug pricing relief to Medicare Part D enrollees. Specifically, we are proposing three exceptions that would allow Part D sponsors to: (1) Implement broader use of prior authorization and step therapy for protected class drugs, including to determine use for protected class indications; (2) exclude a protected class drug from a formulary if the drug is a new formulation of an existing single-source drug or biological product, regardless of whether the older formulation remains on the market; and (3) exclude a protected class drug from a formulary if the price of the drug increased beyond a certain threshold over a specified look back period. However, we note that these exceptions would apply only to the requirement that the drug be included on the formulary because it is a protected class drug. In other words, an exception from the protected class policy would not supersede our other formulary requirements in § 423.120(b)(2).
Under section 1860D-4(b)(3)(G)(i)(II) of the Act, the Secretary can establish exceptions to permit a Part D sponsor to exclude from its formulary, or otherwise limit access through prior authorization or utilization management, a particular Part D drug that is otherwise required to be on the formulary because it is in a protected class. Moreover, this authority applies without regard to whether an enrollee is initiating therapy (new starts) or is currently taking a drug (existing therapy).
As explained earlier, although Part D sponsors can employ some drug utilization management techniques within the protected classes, their ability to do so is not comparable with the commercial market. We find this concerning because prior authorization, as a standard feature of larger, industry-wide utilization management programs, is an important tool to identify clinically inappropriate therapy and control costs within the Part D program. For example, coverage under Part D is not available for drugs that are not medically necessary or used for a medically-accepted indication, or for drugs covered under Medicare Parts A or B as prescribed and dispensed or administered. Therefore, existing limits on Part D coverage permit prior authorization as a tool to determine whether a drug is a Part D drug being used for a medically-accepted indication, as defined in section 1860D-2(e)(4) of the Act, or to verify a drug is medically necessary or is not covered under Medicare Parts A or B as prescribed and dispensed or administered, as specified under sections 1860D-2(e)(3)(A) and 1860D-2(e)(2)(B) of the Act. As another example, as previously discussed in this preamble, we have concerns regarding the overutilization of protected class drugs, and in particular, antipsychotic drugs, among Medicare Part D enrollees. (For a detailed explanation of these
For example, antineoplastic and immunosuppressant drugs are also used for medically-accepted indications (that is, a use that is approved by the Food and Drug Administration (FDA) or is supported by one or more citations included or approved for inclusion in specified compendia) that are not protected class indications, such as rheumatological disorders. Thus, unless a Part D sponsor can use prior authorization to determine the indication for which the drug has been prescribed, there is the potential to increase Part D program costs when there may be a less expensive alternative available to treat rheumatological disorders that would be clinically appropriate. Under this proposed policy, prior authorization requirements would be allowed for any protected class drug with more than one medically-accepted indication to determine that it is being used for a protected class indication, regardless of its status as a new start or existing therapy. This would strengthen an important tool Part D sponsors use to ensure clinically appropriate therapy (for example, to ensure use for a medically appropriate indication or medical necessity, or to implement step therapy or quantity limits), differentiate between protected and non-protected indications, and appropriate management of costs.
This proposal would expand the use of prior authorization within the protected classes to be consistent with what is currently permitted for non-protected classes given that (1) section 1860D-4(b)(3)(G)(i)(II) of the Act authorizes us to allow Part D sponsors to limit access to protected class drugs through prior authorization and utilization management for both new starts and existing therapy; (2) our expedited exception, coverage determination, and appeals processes are mature and have proven workable; and (3) Part D sponsors need additional tools to control costs of protected class drugs. Unlike our proposal in the January 2014 proposed rule, this expansion would preserve the six protected classes. Specifically, we propose to allow Part D sponsors to use prior authorization as is currently allowed for all other drug categories and classes, including to implement step therapy for protected class drugs or to determine use for protected class indications or both, without distinguishing between new starts or existing therapies, consistent with section 30.2.2 of Chapter 6 of the Medicare Prescription Drug Benefit Manual. We would also allow indication-based formulary design and utilization management for protected class drugs. This would be consistent with our July 25, 2018 Health Plan Management System (HPMS) memorandum titled, “Indication-Based Utilization Management,” in which we clarified that Part D sponsors can use indication-based utilization management for non-protected class drugs. (While the HPMS memo allows indication-based utilization management for non-protected class drugs starting in 2019, indication-based utilization management for protected class drugs would not be permitted until 2020, if this proposal is finalized.) It would also be consistent with our August 29, 2018 HPMS memorandum titled, “Indication-Based Formulary Design Beginning in Contract Year 2020,” which we are proposing to codify for protected class drugs later in this rule. While we are proposing to permit prior authorization for protected class drugs for both new starts and existing therapy, we would not approve onerous prior authorization criteria that are not clinically supported. As is required for all other drug categories and classes, these utilization management edits would be subject to our review and approval, as part of our annual formulary review and approval process, which includes formulary tier review, and relative to prior authorization and step therapy, restricted access, step therapy criteria, prior authorization outlier, and prior authorization criteria reviews. (For an extensive description of our annual formulary checks see the January 2014 proposed rule (79 FR 1939)). Also, we seek comment on whether this exception should be limited to new starts only.
We propose to codify this proposal by redesignating current § 423.120(b)(2)(vi)(C) as § 423.120(b)(2)(vi)(F), and adding an exception at new § 423.120(b)(2)(vi)(C) for prior authorization and step therapy requirements that are implemented to confirm that the intended use is for a protected class indication, ensure clinically appropriate use, promote utilization of preferred formulary alternatives, or a combination thereof, subject to CMS review and approval.
It has been brought to our attention that some Part D sponsors have assumed that, because all protected class drugs have to be on the formulary, that there is no need for retrospective drug utilization review, as described in section 10.6.1 of Chapter 6 of the Medicare Prescription Drug Benefit Manual (available at
Additionally, we note that the August 2018 HPMS memorandum entitled, “Prior Authorization and Step Therapy for Part B Drugs in Medicare Advantage” and section II.F. of this proposed rule, entitled “Medicare Advantage and Step Therapy for Part B Drugs” would allow MA-PD plans to require step therapy of a Part B drug before a Part D drug. If both proposals in section II.A.2. of this proposed rule (this proposal, Broader Use of Prior Authorization for Protected Class Drugs) and section II.F. of this proposed rule are finalized, the result would be to allow MA-PD plans, starting in 2020, to require step therapy of Part B drugs before Part D drugs for the protected classes as well. Again, as is required for all other drug categories and classes, these step therapy requirements would be subject to our review and approval as part of our annual formulary review and approval process, which includes formulary tier review, and relative to prior authorization and step therapy, restricted access, step therapy criteria, prior authorization outlier, and prior authorization criteria reviews.
Before the start of the Part D program, we directed Part D sponsors to include on their formularies all or substantially all drugs in the six protected classes. “Substantially all” in this context meant that all drugs and unique dosage forms in these categories were expected to be included on Part D sponsor formularies, with the following exceptions:
• Multiple-source drugs of the identical molecular structure.
• Extended-release products when the immediate-release product is included.
• Products that have the same active ingredient or moiety.
• Dosage forms that do not provide a unique route of administration (for example, tablets and capsules versus tablets and transdermals).
However, we codified in our June 2010 final rule (75 FR 32858) an exception at § 423.120(b)(2)(vi)(A) for drug products that are rated as therapeutically equivalent (under the FDA's most recent publication of “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known as the Orange Book).
Since that time, one manufacturer introduced a more expensive extended-release version of a drug to the market while also withdrawing from the market the predecessor immediate-release version when no generic was available. We are concerned that such a scenario could arise with a protected class drug that might leave Part D sponsors with no option but to add the new, more expensive product to their formularies and could result in increased costs for Part D enrollees and the Part D program. To prevent such behavior from occurring within the protected classes, we propose to permit Part D sponsors to exclude from their formularies a protected class single-source drug or biological product for which the manufacturer introduces a new formulation with the same active ingredient or moiety that does not provide a unique route of administration.
First, we would revise § 423.120(b)(2)(vi)(A) to reflect the forthcoming introduction of interchangeable biological products to the market. Specifically, we propose to amend § 423.120(b)(2)(vi)(A) to specify drug or biological products that are rated as—(1) therapeutically equivalent (under the Food and Drug Administration's most recent publication of “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known as the Orange Book); or (2) interchangeable (under the FDA's most recent publication of the Purple Book: Lists of Licensed Biological Products with Reference Product Exclusivity and Biosimilarity or Interchangeability Evaluations).”
Second, we propose to add a new exception at new paragraph § 423.120(b)(2)(vi)(D) that would specify that, in the case of a single-source drug or biological product for which the manufacturer introduces a new formulation with the same active ingredient or moiety that does not provide a unique route of administration, the new formulation may be excluded from a Part D sponsors' formulary.
Part D plans are not required to include a new formulation of a drug on their formularies when the older formulation is still available. This policy would still apply. In other words, the purpose of this proposed exception is to specify that even if a new formulation of a single-source drug or biological product in the protected class becomes the only formulation available, Part D sponsors could exclude it from their formularies, except as required by our other formulary requirements in § 423.120(b)(2) and subject to our review and approval, as part of our annual formulary review and approval process.
As noted earlier, over the course of the Part D benefit, a number of Part D sponsors and pharmacy benefit managers (PBMs) have asked CMS to address their limited ability to negotiate manufacturer rebates and achieve appreciable savings relative to drugs within the protected classes. In addition to Part D sponsors' limited ability to negotiate rebates for protected class drugs, internal CMS analysis has also shown price trends for brand drugs are consistently higher for drugs in protected classes than such drugs in non-protected classes. On the whole, protected class drug prices have increased more than other, non-protected drug classes between 2012 and 2017. More recently, the allowed cost per days' supply increased by 24 percent for protected class brand drugs between 2015 and 2016 and by 14 percent between 2016 and 2017. In contrast, the allowed cost per days' supply increased by 16 percent for non-protected class brand drugs from 2015 to 2016, and showed no growth at all for such drugs from 2016 to 2017. Accordingly, in developing exceptions to the protected class policy to obtain better pricing for drugs in these classes, CMS considered whether protected class drugs with price increases over a certain threshold during a particular look-back period should be required to be on all Part D formularies.
We propose, effective for plan years starting on or after January 1, 2020, to permit Part D sponsors to exclude from their formularies any single-source drug or biological product that is a protected class drug whose price increases, relative to the price in a baseline month and year, beyond the rate of inflation. The rate of inflation would be calculated using the Consumer Price Index for all Urban Consumers (CPI-U). Specifically, we propose to add an exception at § 423.120(b)(2)(vi)(E) to specify that a part D sponsor can exclude from its formulary protected class single-source drug or biological products subject to our other formulary requirements in § 423.120(b)(2), that the Part D sponsor identifies, for which wholesale acquisition cost between the baseline date and any point in the applicable period has increased more than the cumulative increase in the CPI-U over the same period. The baseline date would be—(1) September 1, 2018 for drugs on the market as of September 1, 2018; or (2) the first day of the first full quarter after the launch date for drugs that enter the market after September 1, 2018. We also propose to add to § 423.100 a definition for the “applicable period” that would mean with respect to exceptions in accordance with § 423.120(b)(2)(vi)(E)—
• For contract year 2020, September 1, 2018 through February 28, 2019; or
• For contract year 2021 and subsequent years, September 1 of the third year prior to the contract year in which the exception would apply, through August 31 of the second year prior to the contract year in which the exception would apply.
First, we seek comment on whether an alternative pricing threshold to the CPI-U should be considered for this exception. The CPI-U is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. We proposed this pricing threshold for a variety of reasons. First, provided by the U.S. Department of Labor, Bureau of Labor Statistics, the CPI-U is a widely used and publicly available indicator of price inflation. There are also several examples of the CPI-U being used as an indicator of inflation in the administration of the Medicare and Medicaid programs. For example, the CPI-U is used as an integral part of the computation of the unit rebate amounts for innovator drugs in the Medicaid Drug Rebate Program. (The amount of rebate due for each unit of an innovator drug is based on statutory formulas of the greater of 23.1 percent of the Average Manufacturer Price (AMP) per unit or the difference between the AMP and the best price per unit and adjusted by the CPI-U based on launch date and current quarter AMP.) Moreover, several income and asset limits used to determine some aspects of Medicare eligibility are currently indexed to the CPI-U. Eligibility for Part D Low-Income Subsidies (LIS) depends on an applicant's assets falling below certain thresholds that are updated annually by the change in the CPI-U, and cost-sharing amounts paid by Part D LIS beneficiaries for Part D drugs are indexed to the CPI-U. The annual adjustment to the Part D catastrophic coverage threshold is also partially linked to the CPI-U. However, there are price indices that are more specific to health care inflation; there is a CPI specific to prescription drugs (CPI-PD), as well as a CPI specific to medical care more broadly (CPI-M). CMS would be open to considering one of these alternative measures for inflation, although these indices are not, to our knowledge, currently used in CMS programs as an indicator of inflation. While the fact that prices increase more quickly for protected class drugs may or may not have a greater impact on the CPI-PD, we note that one concern CMS considered with using the CPI-PD for this policy is that it would be “self-fulfilling”—that is, the CPI-PD would just measure the existing increase in drug prices, which we believe is unsustainable and would defeat the purpose of this proposed exception. We solicit comment as to whether one of these more specific indices should serve as the pricing threshold for this policy as opposed to the more general CPI-U. For more information on the price indices referenced here, see the website for the Bureau of Labor Statistics at
Next, we are soliciting comment on whether an increase in a price other than the drug's WAC, such as the negotiated price, or some other pricing standard (for example, the Average Wholesale Price (AWP) or the National Average Drug Acquisition Cost (NADAC)), should be used to determine whether the protected class drug could be excluded from a Part D formulary. We are proposing to use WAC as the pricing standard because it is a widely available, published list price, and thus verifiable by CMS. WAC is also widely used across the pharmacy supply chain, and commonly forms the basis of acquisition costs and pharmacy reimbursement (negotiated price). For more information on historical drug pricing trends, see National Health Expenditures information at
We also recognize that using the WAC (or any other public pricing standard) is mostly applicable to single-source drugs and biological products, given that payers typically use proprietary maximum allowable cost (MAC)—based pricing methodologies to pay for multisource generic drugs. Because MAC-based pricing methodologies are not generally public and transparent, we do not have a publicly available, reliable way to validate increases in MAC prices for generic drugs. Also, payers already pay a “maximum” cost for generic drugs, which makes changes in public list prices less relevant. Moreover, MAC price is the same for all generics related to the reference product, regardless of the list price. Per our discussion earlier in this preamble, we consider “single-source drugs and biological products” to be Part D drugs that are—(1) approved under a new drug application under section 505(b) of the FDCA; (2) an authorized generic drug as defined in section 505(t)(3) of the FDCA; or (3) in the case of a biological product, licensed under section 351 of the Public Health Service Act. We believe that limiting this exception policy to single-source drug and biological products is appropriate given the current lack of incentive to reduce prices as a result of the generally limited competition for such drugs. We also solicit comment on whether this exception policy should apply only to single-source drug and biological products, or whether a broader mix of drugs should be eligible for formulary exclusion in accordance with this proposed exception policy.
Further, because different medical conditions can warrant different routes of administration, multiple dosage forms may exist for a particular drug or biological product. Since drugs are available in multiple strengths and dosage forms, with each strength and form having its own, or even multiple, national drug code(s) (NDC), we propose to identify a protected class drug for purposes of this policy as all the NDCs assigned to the single-source drug or biological product name, including NDCs for all strengths, dosage forms, and routes of administration associated with a particular drug. Further, we propose that if the WAC for any NDC assigned to the drug increases faster than inflation (as described previously), that the Part D sponsor can exclude from its formulary all NDCs assigned to that drug. We solicit comment as to whether an increase in WAC beyond CPI-U for any NDC assigned to a particular brand drug or single-source generic drug should be grounds for allowing a sponsor to exclude all NDCs assigned to that drug from the formulary.
Moving into the operational components of the proposal, when determining the proposed baseline for drugs currently on the market, we wanted to select a date prior to the publication of this proposed rule and before the usual price increases that generally take place the first day of the last quarter of the year. That way, opportunities for price gaming would be decreased, and any price increases planned prior to the release of this proposed rule would not be incorporated and result in a higher baseline. For drugs not currently on the market, we believed choosing the WAC as of the beginning of a quarter would aid in operational ease and consistency. We therefore propose that the baseline WAC, which Part D sponsors would use to determine whether a protected class drug's price has increased faster than inflation, would be determined as follows: (1) For a single-source drug or biological product that was first marketed in the United States on or before September 1, 2018, the baseline WAC would be the WAC as of September 1, 2018; (2) for a single-source drug or biological product that is first marketed in the United States after September 1, 2018, the baseline WAC would be the WAC as of the date that is the first day of the first full quarter after the date the single-source drug or biological product was first marketed in the United States. For example, if a protected class drug is first marketed on
As previously noted, we propose that the increase in protected class drug's WAC would be compared to the corresponding cumulative increase in the CPI-U for the same period. To make this comparison, we propose that the baseline CPI-U for a protected class drug would be determined as follows: (1) For a single-source protected class drug or biological product that was first marketed in the United States on or before September 1, 2018, the baseline CPI-U would be the September 2018 CPI-U (which will be released in October 2018, but which we refer to as the September 2018 CPI-U in this proposed rule); and (2) for a single-source protected class drug or biological product that is first marketed in the United States after September 1, 2018, the baseline CPI-U would be the CPI-U for month in which the baseline WAC is established for the drug or biological product. To use our previous example, if a protected class drug is first marketed on July 15, 2019, the baseline CPI-U would be the CPI-U for October 2019.
We further propose that in making the comparison of the increase in a protected class drug's WAC to the corresponding increase in the CPI-U, the rate of change of CPI-U must be calculated on a cumulative basis for the same months for which the change in WAC is observed. For example, the change in WAC for a drug between September 1, 2018 and February 19, 2019 would be compared to the corresponding cumulative change in the CPI-U between September 2018 and February 2019. We also want to highlight that in the rare case that a CPI-U may be negative during the applicable period, note if the CPI-U goes down in a year that could lower the cumulative CPI-U for the applicable period.
We propose that in order for a protected class drug to be excluded from the formulary for a given plan year, the comparison of the WAC increase to the cumulative CPI-U increase would need to be measured for an “applicable period,” which we propose to define as described in this proposed rule. For contract year 2020, we propose that the applicable period is September 1, 2018 through February 28, 2019. The applicable period for contract years 2021 and thereafter would begin on September 1st, 3 years before the contract year in which the exception would apply, and end August 31st of the second year prior to the contract year in which the exception would apply (see Table 1). We note that the proposed applicable period for contract year 2020 is shorter given that the bids for contract year 2020 are due in June 2020, and in order for this policy to take effect in contract year 2020, a shorter applicable period is necessary to align with the Part D bid cycle, and for beneficiaries to start to benefit from this policy change, if finalized, as quickly as possible.
If a Part D sponsor determines that a protected class drug's WAC has increased faster than the corresponding cumulative increase in the CPI-U within the applicable period, we propose that the Part D sponsor could exclude the protected class drug from its formulary for the contract year associated with that applicable period. To effectuate such an exclusion, the Part D sponsor would be required to submit, along with its formulary submission, information sufficient to demonstrate that the drug or biological product meets the criteria for exclusion that we are proposing. CMS would review the information as part of its formulary review and approval process.
Please see Table 1 for an illustration of how we project the timeline for the implementation of this proposal.
We believe this timeline would allow Part D sponsors to take this policy into account as they negotiate pricing and rebates with manufacturers for the applicable contract year (that is, the contract year in which the exception from protected class status would apply). We understand that Part D sponsors begin negotiations with manufacturers for formulary status in early fall (October/November) of the year preceding the year in which bids are due for the upcoming plan year (that is, for contract year 2021, we believe that plans will begin negotiation with manufacturers in the fall of 2019, in advance of bids for contract year 2021 being due in June 2020). Ending the applicable period at the end of the third quarter annually allows the Part D sponsor to determine which protected class drugs (if any) could be excluded from the formulary in time to negotiate for their formulary inclusion and placement if desired.
We understand that the proposed applicable periods for contract year 2020 and contract year 2021 overlap from September 1, 2018 through February 28, 2019, such that if a manufacturer increases the WAC for a protected class drug during that time at a rate faster than the growth in CPI-U during that time, a Part D sponsor could exclude the drug from its formulary for both contract years 2020 and 2021. Part D sponsors should note that even if the exclusion policy is triggered for both plan years 2020 and 2021, our approval of formularies for each plan year would have to be obtained separately for the applicable formulary submission.
For additional clarity, we provide another example of how the proposed applicable periods would work. For contract year 2022, the applicable period would be September 1, 2019 through August 31, 2020. If during any month in the applicable period, the WAC for a protected class drug increases more than the cumulative change from the baseline CPI-U to the CPI-U at any time during the relevant applicable period, a Part D sponsor could exclude the drug from its formulary for contract year 2022.
For further clarity on this proposal, we provide an example of how we foresee calculations would take place to monitor changes in price to determine which protected class drugs could be excluded from the formulary on the basis of price increases.
The WAC for Drug Y grew by 10 percent between September 2018 and February of 2019, whereas the CPI-U only grew by 5 percent cumulatively over the same time period. Therefore, the WAC for Drug Y grew faster than inflation in February 2019, which falls in the proposed applicable periods for both contract year 2020 and 2021. Thus, in this example, a Part D sponsor could exclude Drug Y from its formulary for both contract years 2020 and 2021.
Under our proposal, Part D sponsors would be responsible for monitoring price increases, determining the cumulative CPI-U increases for the corresponding applicable periods, and deciding whether they wish to submit for our approval a formulary that excludes protected class drugs with price increases that exceed the rate of inflation. As an alternative to this approach, we also considered an approach where each year, CMS would produce a list of protected class drugs a Part D sponsor could exclude from its formulary for a specified contract year as a result of the drug's WAC increasing, such that it exceeds the rate of inflation (that is, the CPI-U) as compared to the drug's baseline WAC. However, we declined to propose this approach, because we believe Part D sponsors will be better able to make these determinations more quickly, and we see merit and benefit in providing Part D sponsors with the flexibility to determine whether they would exclude the drug or negotiate with the manufacturer for formulary inclusion and placement. Having sponsors monitor price increases allows them immediate access to the information needed to inform bid submissions, particularly for contract year 2020. We solicit comment on the merits of our proposal to have Part D sponsors operationalize this exception policy by monitoring changes in WAC and CPI-U, or if a more effective approach would be for CMS to monitor these price changes and produce a list of drugs that could be excluded from Part D formularies for a given contract year. If commenters believe that CMS should be providing such a list, we solicit comment as to when that list should be released each year.
As noted previously, we propose that once a drug can be excluded from formularies as a result of a price increase described previously (that is, during any month of the applicable period), that the drug can be excluded
However, we note that just because a protected class drug
In order to maximize the impact this policy would have on addressing high-cost drugs in protected classes, we also considered whether we should apply this price threshold exception to
To assuage any concerns that the proposed regulatory change would reduce access to protected class drugs, we again note that even if a protected class drug could be excluded from a Part D formulary under this proposed policy, Part D sponsors are not required to do so. Nothing in this proposal would prohibit the Part D sponsor from including the drug on its formulary. Moreover, it is our expectation that this exception policy would benefit the program and beneficiaries by encouraging manufacturers to work with Part D sponsors to ensure formulary inclusion and favorable access (for instance, better cost sharing, more competitive negotiated prices, etc.) for Part D enrollees, rather than a loss of formulary inclusion for drugs in the protected classes. Finally, we note that existing enrollee protections, namely the coverage determination and appeal process, and the Part D formulary requirements as discussed elsewhere in this preamble, provide safeguards to access to all prescription drugs. These safeguards would continue to be available to protect enrollees' access to their medically necessary medications. For instance, our annual formulary review and approval process includes extensive checks to ensure adequate representation of all necessary Part D drug categories or classes for the Medicare population. We remind stakeholders, in particular Part D sponsors, that even if a protected class drug could be excluded from the formulary for a contract year, on the basis of this proposed exception to the protected class requirements, the drug may be required to be included on the formulary for other reasons, for example, if the drug is needed to fulfill other applicable formulary requirements, such as the protected class drug in question is required to be on formulary because it is the only drug available in its category or class. CMS solicits comment on the impact of this policy proposal on Part D enrollees.
In considering whether exceptions to the added protections afforded by the protected class policy are appropriate, we take other enrollee protections in the Part D program into account. There are five such enrollee protections, and these are formulary transparency, formulary requirements, reassignment formulary coverage notices, transition supplies and notices, and the expedited exception, coverage determination, and appeals processes. (For a detailed discussion of these protections, see the January 2014 proposed rule, 79 FR 1938.) Our formulary review and approval process includes a formulary tier review, and for prior authorization and step therapy, we also conduct restricted access, step therapy criteria, prior authorization outlier, and prior authorization criteria reviews. Additionally, our formulary review and approval process takes into consideration the applicable indication, proposed applicability to new or continuing therapy, and likelihood of comorbidities when reviewing PA/ST criteria submitted to CMS by Part D plans. We note that best practice utilization management practices would not require an enrollee who has been stabilized on an existing therapy of a protected class drug for a protected class indication to change to a different drug in order to progress through step therapy requirements, and we would not expect Part D sponsors to require, nor would CMS be likely to approve, this if our proposed exceptions to the protected class policy were finalized. Moreover, we believe our current approach that ensures at least one drug within the class is offered on a preferred tier and free of prior authorization and step therapy requirements are working well and should be maintained. Currently, Part D formularies frequently have more than one protected class drug at a preferred cost sharing level, especially in classes with significant generic availability, without any prior authorization or step therapy requirement, and we would not expect that this proposal would prompt Part D sponsors to stop including protected class drugs on tiers with preferred cost sharing. (For a detailed discussion of our formulary review processes, see the January 2014 proposed rule, 79 FR 1939.) Finally, our transition policy will continue to require Part D sponsors to provide all new enrollees that are currently taking a protected class drug with an approved month's supply if the Part D sponsor will be utilizing prior authorization to confirm if an enrollee is a taking a protected class drug for a protected class indication. (For a detailed discussion of our transition requirements, see the January 2014 proposed rule, 79 FR 1940, and regulations at § 423.120(b)(3).)
Nonetheless, we wish to make certain that our three proposed exceptions (that is, broader use of prior authorization, new formulations, and pricing thresholds) to the protected class policy would not introduce interruptions for
We seek comment on whether there are additional considerations that would be necessary to minimize: (1) Interruptions in existing therapy of protected class drugs for protected class indications during prior authorization processes; and (2) increases in overall Medicare spending from increased utilization of services secondary to adverse events from interruptions in therapy. These could include, but are not limited to, for example, special transition considerations for on-formulary protected class drugs for which the Part D sponsor has established prior authorization requirements, or as another example, for transitioning some enrollees taking protected class drugs for protected class indications to alternative Part D drugs. If so, we seek comment on why our current requirements and protections are inadequate, or could be improved. In addition, we seek comment on what specific patient population(s), individual patient characteristic(s), specific protected class drugs or individual protected drug classes would require such additional special transition or other protections and how such population(s) can be consistently identified. Finally, we seek comment on other tools that could be used to minimize interruptions in existing therapy of protected class drugs for protected class indications during prior authorization processes, for example, wider use of diagnosis codes on prescriptions, e-PA during e-prescribing, targeting protected class drugs in Medication Therapy Management (MTM) programs, or, as another example, expanded use of a data-sharing tool to exchange information for enrollees transitioning from one plan to another.
In October 2018, Congress enacted the “Know the Lowest Price Act of 2018” (Pub. L. 115-262). The measure, which amends section 1860D-4 of the Act by adding a paragraph (m), prohibits Medicare Part D plan sponsors from restricting their network pharmacies from informing their Part D plan enrollees of the availability of prescription drugs at a cash price that is below what that the enrollee would be charged (either the cost sharing amount or the negotiated price when it is less than the enrollee's cost sharing amount) for the same drug under the enrollee's Part D plan. In effect, the legislation prohibits Part D sponsors from including in their contracts with their network pharmacies “gag clauses”, a term used within the prescription drug benefit industry that refers to provisions of drug plan pharmacy contracts that restrict the ability of pharmacies to discuss with plan enrollees the availability of prescriptions at a cash price that is less than the amount the enrollee would be charged when obtaining the prescription through their insurance. The measure becomes effective with the plan year starting January 1, 2020.
To make the Part D regulations consistent with the statute governing the Part D program, we propose to incorporate the new requirement into the Part D regulations. Specifically, we propose to amend the set of pharmacy contracting requirements at § 423.120(a)(8) by adding a paragraph (iii) that provides that a Part D sponsor may not prohibit a pharmacy from, nor penalize a pharmacy for, informing a Part D plan enrollee of the availability at that pharmacy of a prescribed medication at a cash price that is below the amount that the enrollee would be charged to obtain the same medication through the enrollee's Part D plan.
Section 101 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) requires the adoption of Part D eRx standards. Prescription Drug Plan (PDP) sponsors and Medicare Advantage (MA) organizations offering Medicare Advantage Prescription Drug Plans (MA-PD) are required to establish electronic prescription drug programs that comply with the e-prescribing standards that are adopted under this authority. There is no requirement that prescribers or dispensers implement eRx. However, prescribers and dispensers who electronically transmit and receive prescription and certain other information for covered drugs prescribed for Medicare Part D eligible beneficiaries, directly or through an intermediary, are required to comply with any applicable standards that are in effect. For a further discussion of the statutory basis for this proposed rule and the statutory requirements at section 1860D-4(e) of the Act, please refer to section I. of the eRx and the Prescription Drug Program February 2005 proposed rule (70 FR 6256).
Part D eRx standards are periodically updated to take new knowledge, technology, and other considerations into account. CMS currently requires providers and dispensers to utilize the National Council for Prescription Drug Programs (NCPDP) SCRIPT standard, Implementation Guide Version 10.6, which was approved November 12, 2008, to provide for the communication of a prescription or prescription-related information for certain named transactions. As of January 1, 2020, however, prescribers and dispensers will be required to use the NCPDP SCRIPT standard, Implementation Guide Version 2017071, which was approved July 28, 2017 to provide for the communication of prescription or prescription-related information between prescribers and dispensers for the old named transactions and a handful of new transactions named at § 423.160(b)(2)(iv). We also currently require (under § 423.160(b)(5)) Medicare Part D plan sponsors and prescribers to convey electronic formulary and benefits information amongst themselves using either Version 1, Release 1 (Version 1.0), from October 2005, or Version 3 Release 0 (Version 3.0), from April 2012 of the National Council for Prescription Drug Programs (NCPDP) Formulary and Benefits Standard Implementation Guides. (For a detailed discussion of the regulatory history of eRx standards see the November 2017 proposed rule (82 FR 56437 and 56438).
The NCPDP SCRIPT eRx standards (SCRIPT) and the NCPDP Formulary and Benefits standards (F&B) have become critical components of the Part D program. Thus far in 2018, 66 percent of Part D prescriptions were written electronically using the applicable SCRIPT standard, and all Part D plans implement electronic F&B using one of the adopted standards. However, based on industry feedback, we understand that while some prescribers rely on electronic F&B transactions to support prescribers during the eRx process, others do not. For example, vendors of electronic medical records (EMR) systems have stated that some of their clients find F&B data useful, but approximately half of their clients chose not to access F&B data at all. F&B is a batch mode transaction standard by definition, and therefore does not provide real-time information. A batch transaction allows plans to send the information nightly, weekly or even monthly. As plans make routine changes in their formularies, they may/may not be captured on the batch
We are proposing to require a real-time benefit tool (RTBT) requirement on Part D sponsors to serve as a critical adjunct to the existing SCRIPT and F&B electronic standards. There is no requirement that prescribers or dispensers implement electronic prescribing but the existing SCRIPT standard allows prescribers means of conducting electronic prescribing, while the F&B standard allows a prescriber to see what is on the plan's formulary, but neither of those standards can convey patient-specific real-time cost or coverage information that includes formulary alternatives or utilization management data to the prescriber at the point of prescribing. If finalized, RTBT data would be layered on top of F&B data to gain a complete view of the beneficiary's prescription benefit information. It will augment the information available in F&B because, though F&B is useful, it is a batch mode transaction standard by definition and therefore does not provide real-time information. Further F&B provides information on a contract level, rather than a patient level, and consequently could not provide information about out-of-pocket costs for a given patient at a given point in time.
As described in more detail in the next section, we believe requiring plans to make one or more RTBT available to prescribers will lead to higher prescriber use of F&B information during the eRx process. To be eligible for selection by a Part D sponsor, we propose to require that the RTBT be capable of integrating with prescribers' eRx and EMR systems and providing patient-specific coverage information at the point of prescribing to enable the prescriber and patient to collaborate in selecting a medication based on clinical appropriateness and cost. We believe that furthering prescription price transparency is critical to lowering overall drug costs, and patients' out-of-pocket costs, and anticipate improved medication adherence, and supports for the MMA objectives of patient safety, quality of care, and efficiencies and cost savings in the delivery of care if our proposals are finalized.
The Medicare Part D program allows contracted entities that offer coverage through the program latitude to design plan benefits, provided these benefits comply with all relevant program requirements. This flexibility results in variation in Part D plans' benefit design, cost-sharing amounts, utilization management tools (that is, prior authorization, quantity limits, and step therapy), and formularies (that is, covered drugs). We are aware of several Part D prescription drug plans that have begun to offer RTBT inquiry and response capabilities to some physicians to make beneficiary-specific drug coverage and cost data visible to prescribers who wish to use such data at the point-of-prescribing. We have reviewed multiple RTBT software solutions and have found that they are generally designed to provide patient-specific clinically appropriate information on lower-cost alternative therapies through the prescribers' eRx or EMR systems, if available, under the beneficiary's prescription drug benefit plan. However, for those software solutions that are capable of providing such decision support, based on our current experience, we understand that the prescribers will only embrace the technology if the prescriber finds the information to be readily useful. Thus, to ensure success, we believe that the Part D sponsor must present prescribers with formulary options that are all clinically appropriate and accurately reflect the costs of their patient's specific formulary and benefit options under their drug benefit plan. In addition, those who use plans' current RTBT technology report that prescribers are most likely to use the information available through RTBT transactions if the information is integrated into the eRx workflow and electronic medical record (EMR) system. This would allow the prescriber and patient, when appropriate, to choose among clinically acceptable alternatives while weighing costs. Since eRx can generally be performed within the provider's EMR system, integration of the RTBT function within the EMR generally, and the eRx workflow specifically appears to be critical for the successful implementation of the technology. However, we recognize that without a standard for RTBT, prescribers may be offered multiple technologies, which may overwhelm and create burden for EMR vendors. We also recognize that without a standard, the RTBT tool provided may not be integrated with a prescribers' EMR, thus limiting its utility.
We are interested in fostering the use of these real-time solutions in the Part D program, given their potential to lower prescription drug spending and minimize beneficiary out-of-pocket costs. Not only can program spending and beneficiary out-of-pocket costs be reduced, but evidence suggests that reducing medication cost also yields benefits in patients' medication adherence. In a 2012 review of studies investigating how patient out-of-pocket costs affects medication adherence and outcomes, researchers found that 85 percent of studies demonstrated that increasing patient cost-share for a medication was associated with a significant decrease in medication adherence.
Therefore, we are proposing that each Part D sponsor be required to implement a RTBT capable of integrating with prescribers' eRx and EMR systems to provide complete, accurate, timely, clinically appropriate and patient-specific real-time formulary and benefit information to the prescriber. While we recognize that there currently is no industry-established transaction standard for RTBTs for CMS to propose adopting, we believe it is appropriate to require implementation of solutions based on available technologies. There appear to be multiple existing technologies capable of interfacing with multiple EMR systems and providing to prescribers the patient-specific real-time coverage information we have described in this preamble, and, given that, that it would be inappropriate to wait any longer for an industry-wide standard to be developed given current concerns about drug prices. Under this proposed rule Part D plan sponsors would be required to select or develop an RTBT capable of integration with at least one prescriber's EMR and eRx systems; we
We are interested in bringing RTBT's benefits to the Part D program as soon as feasible. In evaluating how quickly plans could choose and implement an RTBT functionality, we note that a number of firms have already developed the technology required to provide the information we describe through some eRx/EMR systems. Pharmacy benefit managers (PBMs) that service the majority of Part D plans, and a few plans themselves, have successfully implemented RTBTs for a small subsection of the plans' enrollment, which were capable of conveying the information described and interfacing with most EMR and eRx products. We believe that should RTBT systems continue to result in reduced drug costs, plans will expand the number of prescribers who have access to RTBT technologies over the next several years, ultimately paving the way for universal RTBT deployment within Part D in contract year 2020. As plans develop their formularies and benefit packages for 2020, we believe that they will be able to include RTBT implementation in the 2020 planning process. Because section 1860D-12(f)(2) of the Act prohibits the implementation of “significant” regulatory requirements on a prescription drug plan other than at the beginning of the calendar year, if finalized, we are proposing to implement the RTBT requirement on January 1, 2020.
We also encourage plans to use RTBTs to promote full drug cost transparency by showing each drug's full negotiated price (as defined in 42 CFR 423.100), in addition to the beneficiary's out-of-pocket cost information. Displaying both values would provide prescribers with additional decision support by providing visibility into both their patients' cost-sharing amounts as well as total cost to the Medicare program. Viewing negotiated price at the point of prescribing would be of particular interest when alternative drugs in a plan's formulary have comparable out-of-pocket costs and clinical value; in those cases a prescriber may consider negotiated prices as well, which would be of value to the Medicare program. For this reason we encourage plans to include negotiated price with their RTBT solution, although we are not proposing to make it a requirement at this time.
We believe that beneficiaries will benefit from their prescribers' use of RTBT. However, we would caution that RTBT should not be used by providers to evaluate alternatives for drugs prior to discussing whether the patient intends to self-pay for the prescribed drug. Such practices will preserve the patient's ability to exercise their right under the privacy regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA)
Therefore covered health care providers using the RTBT should ensure that individuals are aware that information about services or treatment, such as a future prescription, may be disclosed to the plan by the tool and effectuate the individual's disclosure restriction request by refraining to use the tool in instances in which the patient intends to self-pay in full. Covered health care providers should discuss with the individual whether the individual desires the prescriber to use the RTBT as doing so would generally eliminate the beneficiary's ability to request disclosure restrictions as the plan would already be in possession of the query data regarding the desire to prescribe something for a specified condition.
We considered building upon the existing F&B standard to provide prescribers with decision support. Under this scenario, we would require that plans use the existing NCDP Formulary and Benefit (F&B) Standard (version 1.0 or 3.0) but modify our requirement for Part D so that plans would be required to populate certain optional fields such as copay tier, dollar copay value, and utilization management criteria for each drug. We considered this option as a solution because it would be built upon an existing transaction standard and allow interface with all EMR systems to deliver the information to the prescriber within the normal workflow. However, we believe that a prescriber tool that relied on the F&B would fail to provide the real-time information currently used by many plans. Many prescribers have chosen not to include F&B information in their EMRs because they view the information presented as unreliable as the data is not specific to the patient's benefit plan. Given the inherent complexities associated with Part D formularies and benefits, we concluded that under this option, the patient information available to the practitioner at the time of prescribing would often lack sufficient and current detail necessary for clinical decision-making, which could lead to confusion for prescribers and patients. For example, we understand that a plan that had a prior authorization in place for a targeted portion of its population conveyed the prior authorization requirement for all patients. The plan's rationale was that they would not know which patient was accessing the F&B data, so the plan chose to include the requirement for all enrollees rather than the reverse which would be to omit the requirement for some of their enrollees. Similarly the F&B standard could convey a step therapy requirement for the population at large, but could not discern whether or not an individual patient had fulfilled the requirement.
However, in spite of these shortcomings, including the inherent lack of beneficiary-specific formulary information or its batch-only
Prior to proposing that each Part D plan choose an RTBT tool to support, we sought to identify an industry standard that could be used throughout the Part D program. We prefer industry-wide standards when they are available due to their significance in promoting collaboration and interoperability across industry partners. Unfortunately, we were unable to identify a suitable RTBT standard that has been balloted and approved by an accredited standard setting body to ensure interoperability. However, we are aware that efforts are underway to develop RTBT standards, and are hopeful that they will come to fruition in the near future. We are interested in, and solicit comments on, assessments from knowledgeable parties about whether any of the standards that are currently under development may be suitable to meet our intended purposes described herein. Based on these considerations, we are proposing to amend § 423.160(b) by adding the requirement that all Part D plan sponsors implement one or more RTBT by January 1, 2020 to be used with the patient's consent. This would require that each Part D plan carefully review the drugs that exist on the formulary and determine which, if any, formulary alternatives exist. The plan's RTBT system would integrate with automated prescriber systems (eRx or EMR) to present a list of the formulary alternatives to the prescriber along with any applicable utilization management requirements and patient's cost sharing for each one. This would allow, with the patient's consent, a prescriber to consider both the clinical appropriateness and patient copayment of a drug during the prescribing process. If finalized, this tool could provide complete, accurate, timely and clinically appropriate patient-specific real-time formulary and benefit information that could be capable of integrating with prescriber's eRx and EMR systems. Formulary and Benefits information delivered through the RTBT would be required to include patient-specific adjudication and out-of-pocket cost information, and would be required to provide decision support reflecting clinically appropriate formulary alternatives and utilization management requirements such as step therapy, quantity limits and prior authorization requirements.
We welcome comments on this proposal, including the feasibility for plans to meet the proposed January 1, 2020 deadline. We understand that should this proposal be finalized some Part D plans may need to invest considerable resources in order to execute effective RTBT solutions. At a minimum, each plan will need to scrutinize individual formulary drugs to see whether lower cost alternatives exist, and evaluate how these alternatives can be presented in such a way that will be helpful to clinicians who make prescribing decisions for patients who may have multiple co-morbidities and conditions. We also realize that RTBT can only achieve the desired cost savings if plans can partner with medical records and eRx vendors to support these efforts by transmitting accurate the information to the prescriber in an easily actionable format. We welcome comments on how this proposal may or may not, expedite our goal of giving each Part D enrollee and the clinicians who serve them, access to meaningful decision support through RTBT. We also seek relevant feedback about RTBT standardization efforts; this includes the planned fulfillment of any milestones that standardization bodies have already met, or are likely to meet in advance of the proposed January 1, 2020 deadline. We would consider retraction of this proposed rule if we receive feedback indicating that the rule would be contrary to advancing RTBT within Part D, or if a standard has been voted upon by an accredited Standard Setting Organization or there are other indications that a standard will be available before the 2020 effective date of this proposed provision. In such case, we would review such standard, and if we find it suitable for our program consider proposal of that standard as a requirement for implementation in our 2021 rulemaking, effective January 1, 2021. We are also soliciting comments regarding the impact of this proposal on plans and providers, including overall interoperability and the impact on medical record systems. Finally, we are soliciting comments regarding the impact of the proposed effective date on the industry and other interested stakeholders.
Section 1860D-4(a)(1)(A)(4) of the Act requires Part D sponsors to furnish to each of their enrollees a written explanation of benefits (EOB) and, when the prescription drug benefits are provided, a notice of the benefits in relation to the initial coverage limit and the out-of-pocket threshold for the current year. We codified this EOB and notice requirement at § 423.128(e) by requiring the Part D EOB to include all of the following information written in a form easily understandable to enrollees:
• The item or service for which payment was made and the amount of said payment.
• Notice of an individual's right to an itemized statement.
• Cumulative, year-to-date total amount of benefits provided (including the deductible, initial coverage limit, and the annual out-of-pocket threshold for the current benefit year).
• The cumulative, year-to-date total of incurred costs.
• Any applicable formulary changes.
Part D sponsors must provide enrollees with EOB no later than the end of the month following any month in which the enrollee utilized their prescription drug benefit.
Lowering prescription drug costs is of critical and immediate concern to beneficiaries, CMS and the Administration. “The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” released in May 2018
The items required to be included in the EOB under the current regulation do not include information about negotiated price changes for each of the prescription drugs covered for a beneficiary, nor do they specify including information about lower cost therapeutic alternatives. Because we do not require this information under the regulation as currently written, for contract year 2019 as specified in the July 24, 2018, HPMS Memorandum, “Model Notice and Policy Updates,” we added an option for sponsors to use the existing notes field in the EOB for information on drug price increases and more affordable formulary alternatives.
We propose to redesignate paragraphs (e)(5) and (e)(6) of § 423.128(e) as paragraphs (e)(6) and (e)(7) to add a new paragraph (e)(5) to require sponsors to include information about negotiated price changes and lower-cost therapeutic alternatives in the Part D EOBs. First, as to information about negotiated drug price increases, we propose to require that Part D sponsors include the cumulative percentage change in the negotiated price since the 1st day of the current benefit year for each prescription drug claim in the EOB. For example, when a beneficiary fills a prescription under his or her Part D plan in April of the current benefit year that begins on January 1, the cumulative percentage by which the negotiated price has changed since January 1 of that year would display in the EOB. To illustrate, if the negotiated price of the beneficiary's medication was $100 in January, $102 in February, $103.50 in March, and $104 in April, the April EOB would display a 4 percent increase in the drug's negotiated price. Thus, this information would provide drug price trend information for the beneficiary for all their covered Part D drugs. We specifically request stakeholder feedback on operationalizing this in the EOB to best serve beneficiaries which could include, for instance, including information in the EOB on the percent change in negotiated price since the close of open enrollment in addition to the percent change in price since the 1st day of the benefit year.
Second, as to information about lower-cost therapeutic alternatives, CMS proposes to require that Part D sponsors provide information about drugs that are therapeutic alternatives with lower cost-sharing, when available as determined by the plan, from the applicable approved plan formulary for each prescription drug claim. Also, the plan may include therapeutic alternatives with the same copayments if the negotiated price is lower.
Lower-cost therapeutic alternatives (meaning drugs with lower cost-sharing or lower negotiated prices) would not be limited to therapeutically equivalent generics if the original prescription fill is for a brand drug. It could also include a different drug, not within the same category or class, but one that has a medically-accepted indication to treat the same condition. Additionally, we would not require information about formulary therapeutic alternatives available at lower cost sharing to be beneficiary-specific, and we acknowledge that alternatives may not always be available. However, Part D sponsors would be permitted and encouraged by CMS to include relevant beneficiary-specific information, such as diagnosis, the indication for the prescription and complete step therapy or exception requests, when providing formulary therapeutic alternatives in the EOB that have lower cost-sharing. As with including the negotiated price changes on EOBs, this mechanism would provide even greater transparency for beneficiaries when reviewing their annual out-of-pocket costs for prescriptions.
These two proposed requirements would help improve cost transparency of Part D prescriptions. Updating the Part D EOB requirements as we propose would provide greater information to beneficiaries by displaying the fluctuations in their prescription drug prices, so that they can become more educated concerning their drug costs and about potential lower cost alternative drugs. This in turn should spark dialogue between the Part D beneficiaries and their providers about possible lower cost therapeutic alternatives, and empower them to make more informed decisions when choosing a prescription.
The Part D EOB is one of the principal documents that beneficiaries can rely on to understand where they are in the benefit phases and their changing out-of-pocket costs throughout the year. This document is provided to beneficiaries every month for the immediately preceding month that the Part D benefit is used. As a retroactive monthly report, the EOB is the means by which beneficiaries can monitor their benefit utilization and prescription costs on a regular and frequent basis.
Given the frequency of EOB issuance, the proposed policy would help call beneficiaries' attention to drug prices and more affordable options on an ongoing, regular basis. The current structure of the model EOB is well-suited to include additional information on individual prescription drug claims. Other beneficiary materials are delivered on an annual basis. These documents are geared toward assisting Part D beneficiaries make enrollment decisions whether to remain with their current prescription drug plan or switch to another. By viewing these costs on a monthly basis in EOBs, beneficiaries would be much more up-to-date with regard the impact of drug prices and whether there are less expensive options available. We solicit comment on these proposed changes to the Part D explanation of benefits, including impact on the beneficiary.
In a HPMS memo released August 7, 2018,
We believe that these tools will better enable MA organizations to take steps to ensure that MA plans and MA enrollees pay less overall or per unit for Part B drugs which could result in lower MA capitation payments by the government to MA organizations and lower average sales prices for Part B drugs, on which Medicare FFS payments for such drugs are based, while also maintaining access to medically necessary Medicare-covered drugs and services. These goals—reducing costs across the Medicare program while ensuring access to medically-necessary Medicare-covered benefits—underlie this proposal. In the regulatory text, we propose adding a new regulation, at § 422.136, entitled “Medicare Advantage and Step Therapy for Part B Drugs.”
Sections 1852(c)(1)(G) and (c)(2)(B) of the Act, and the MA regulations at § 422.4(a)(1)(ii) expressly, reference a MA plan's application of utilization management tools, like prior authorization and other “procedures used by the organization to control utilization of services and expenditures;” this indicates that MA plans are not prohibited by the statute from implementing utilization management tools such as step therapy. Therefore, we are proposing requirements under which MA plans may apply step therapy as a utilization management tool for Part B drugs. We are also proposing to define step therapy in § 422.2. We solicit comments concerning the impact that allowing step therapy for Part B drugs would have on MA plans and enrollees. For contract year 2020 and subsequent years, coupling drug management coordination with rewards and incentives remains an option for MA plans to pass back savings to beneficiaries. Anticipated savings not passed on to beneficiaries through rewards and incentives must be reflected in the plan's bid. Additional Part C rebate dollars associated with the lower bid, as with all Part C rebate dollars, must be used to provide supplemental benefits and/or lower premiums for the plans' enrollees.
We acknowledge the potential for utilization management tools like step therapy to create administrative burden and process challenges for network providers. In light of that, we expect MA plans to work closely with the provider community and to adopt best practices that streamline requirements and minimize burden. We also encourage continued development and advancement of electronic prior authorization processes to more efficiently administer this process. We note that existing requirements in §§ 422.112(b) and 422.152 already require care coordination activities that are sufficient to promote positive health outcomes for both drugs and services, so we are not proposing text at § 422.136 that an MA plan must offer a drug management program. We solicit comment whether our proposed regulation text imposing education and information responsibilities in combination with existing regulations on care coordination are sufficient to ensure that MA organizations specifically address step therapy programs for Part B drugs as part of those care coordination responsibilities and if we should finalize a provision in § 422.136 that addresses the administrative burden imposed on network providers by MA plans.
This proposed rule would impose a number of safeguards that ensure enrollees have timely access to all medically necessary Medicare Part B medications. MA plans would be required to administer the existing organization determination and appeals processes under new proposed time frames that are similar to the timeframes applicable in Part D for coverage determinations; enrollees can request an organization determination if they believe that they need direct access to a Part B drug that would otherwise only be available after trying an alternative drug. MA plans would adjudicate these organization determinations based on medical necessity criteria. If an enrollee is dissatisfied with the plan's organization determination, the enrollee has the right to appeal. CMS monitors organization determination and appeals activity through the audit process to ensure enrollee requests are appropriately evaluated and processed within applicable timeframes.
Consistent with our existing disclosure requirements at § 422.111, when applying step therapy to Part B drugs, MA plans must disclose that Part B drugs may be subject to step therapy requirements in the plan's Annual Notice of Change (ANOC) (when initially adopted or subsequently changed) and Evidence of Coverage (EOC) documents. In the ANOC, this information must be included under the Changes to Benefits and Costs for Medical Services. In the EOC, this information must be included in the Medical Benefits Chart under “Medicare Part B prescription drugs.” Under existing requirements at § 422.202(b), MA plans must establish policies and procedures to educate and fully inform contracted health care providers concerning plan policies on utilization management, which would include the plan's step therapy policies. We propose to also include a requirement at § 422.136(a)(2) for plans to establish policies and procedures to educate and inform health care providers and enrollees specifically concerning its step therapy policies. We note that preferred provider organization plans (PPOs) are required, as part of the definition of PPO at section 1852(e)(3)(iv)(II) of the Act and under the MA regulation at § 422.4(a)(1)(v)(B) to reimburse or cover benefits provided out of network; while higher cost sharing is permitted, PPOs are prohibited from using prior authorization or preferred items restrictions in connection with out of network coverage. As such, preferred provider organization plans (PPOs) must provide reimbursement for all plan-covered medically necessary services received from non-contracted providers without prior authorization or step therapy requirements. We solicit comment whether the final rule should include a specific regulatory provision clarifying this issue.
Under proposed paragraph (a)(3), MA plans would be required to use a Pharmacy and Therapeutics (P&T) committee to review and approve step
Our proposal for the P&T committee mirrors the Part D requirements for such committees currently codified at § 423.120(b) with regard to membership, scope, and responsibilities. We believe existing Part D P&T requirements at § 423.120(b) are adequate to ensure MA plans implement step therapy for Part B drugs that is medically appropriate. We note that if necessary we may release subregulatory guidance concerning application of the P&T committee requirements in the context of Part B drugs.
The proposed requirements in § 422.136(b) are consistent with Part D requirements for a P&T committee. Specifically, we propose that the majority of members comprising the P&T committee would be required to be practicing physicians and/or practicing pharmacists. The committee would be required to include at least one practicing physician member and at least one practicing pharmacist; these specific individuals would be required to be independent and free of conflict with the MA organization, the MA organization's plans, and the pharmaceutical manufacturers. In addition, the plan would be required to include at least one practicing physician member and one practicing pharmacist who are experts in the care of elderly and disabled persons. We also encourage MA plans to select P&T committee members representing various clinical specialties (for example, geriatrics, behavioral health) to ensure that all conditions are adequately considered in the development of step therapy programs. We are proposing to include provisions for the responsibilities and scope of the P&T Committee at proposed § 422.136(b)(4) through (11) that mirror the current regulation text applicable to Part D P&T Committees under § 423.120(b)(1)(iv) through (xi), with minor revisions to tailor proposed § 422.136(b) to the Part B drug step therapy programs offered by MA plans. These proposed provisions include requirements applicable to P&T committee membership, to the standards and considerations used in reviewing step therapy programs and to documenting its reviews. We reiterate here that we are proposing to substantially align the requirements of a P&T committee reviewing Part B drugs with Part D requirements because CMS has found that Part D requirements for administrative efficiency between the Part C and Part D programs and because the Part D requirements have proved sufficient in ensuring that plans implement medically appropriate step therapy and utilization management protocols in Part D.
Under § 422.136(a)(1) of the proposed rule, step therapy would not be permitted to disrupt enrollees' ongoing Part B drug therapies. We are proposing that step therapy only be applied to new prescriptions or administrations of Part B drugs for enrollees who are not actively receiving the affected medication. MA plans would be required to have a look-back period of 108 days, consistent with Part D policy with respect to transition requirements for new prescriptions, to determine if the enrollee is actively taking a Part B medication. The Part D look back period was created with clinical and pharmaceutical input and CMS believes the same criteria is appropriate for Part B drugs. Further, when an enrollee elects a new MA plan (regardless of whether previously enrolled in a MA plan, traditional Medicare, or new to Medicare), our proposal would require the MA plan to determine whether the enrollee has taken the Part B drug (that would otherwise be subject to step therapy) within the past 108 days. We propose this time period to align with applicable Part D subregulatory guidance on this topic. If the enrollee is actively taking the Part B drug, such enrollee would be exempted from the plan's step therapy requirement concerning that drug. Under our proposal, we would allow MA plans flexibility in implementing step therapy for Part B drugs within specific parameters. Specifically, MA plans would be able to ensure that an enrollee who is newly diagnosed with a particular condition would begin treatment with a cost-effective biological product approved under section 351(k) of the Public Health Service Act or generic medication before progressing to a more costly drug therapy if the initial treatment is ineffective or if there are adverse effects. While proposed § 422.136 does not specifically address the standard for exemptions or movement within a step therapy program, we rely on the MA plan's responsibility to provide all medically necessary covered services and items under the original Medicare program as meaning that cases raising ineffectiveness or adverse effects of treatment as being sufficient basis to grant an exemption or move an enrollee to a higher step in the protocol. However, we propose limits on flexibility in paragraphs (c) and (d).
Consistent with existing Part D guidelines, at § 422.136(c) we are proposing to permit MA plans to require an enrollee to try and fail an off-label medically-accepted indication (that is, an indication supported by one or more citations in the statutory compendia) before providing access to a drug for an FDA-approved indication (on-label indication). Using off-label drugs in step therapy would only be permitted in cases where the off-label indication is supported by widely used treatment guidelines or clinical literature that CMS considers best practices. We are soliciting comments on our proposal to permit MA plans to use off-label drugs only when such drugs are supported by widely used treatment guidelines or clinical literature that CMS considers to represent best practices in a step therapy program.
Additionally, we propose to prohibit an MA organization from using a non-covered drug as a step in the step therapy program (that is, as a condition to coverage). Each step in a step therapy program should be another drug covered under Part B by the MA plan or Part D
Section 1852(g)(1) of the Act prescribes that MA organizations must have a procedure for making determinations regarding whether an enrollee is entitled to receive a health service under the MA program and the amount (if any) that the enrollee is required to pay with respect to such service. Such procedures must provide for organization determinations to be made on a timely basis, as required by section 1852(g)(3) of the Act, which prescribes what constitutes timely notice to an enrollee of an expedited organization determination and reconsideration. With respect to expedited organization determinations and reconsiderations, the MA organization must notify the enrollee (and the physician involved, as appropriate) of the decision under time limitations established by the Secretary, but no later than 72 hours from the receipt of the request for the organization determination or reconsideration (or receipt of the information necessary to make the decision) or such longer period as the Secretary may permit in specified cases. For standard reconsiderations, section 1852(g)(2) of the Act states that a reconsideration shall be within a time period specified by the Secretary but shall be made (subject to the expedited provision in section 1852(g)(3)) no later than 60 days after the date the reconsideration request is received.
We are proposing that requests for Part B drugs, including Part B drugs subject to step therapy, be processed under the same adjudication timeframes as used in the Part D drug program, such as in § 423.568(b). While the proposed timeframes for processing organization determinations and appeals for Part B drugs are a departure from the current adjudication timeframes that apply to organization determinations and appeals for medical items and services under the MA program, we believe the clinical circumstances that typically accompany requests for Part B drugs warrant application of the shorter adjudication timeframes that apply in Part D. In keeping with this rationale, we are not proposing that the adjudication timeframes for Part B drugs could be extended, as is allowed for other Part B organization determinations and appeals. This proposed approach not only creates greater consistency in how requests for drugs are handled throughout the initial coverage decision and appeals processes under Part B and Part D, but we believe that adopting the Part D adjudication timeframes for Part B drugs would allow MA-PD plans to better coordinate their drug benefits, specifically in cases where there is uncertainty about coverage under Part B or Part D. These proposed changes would affect the adjudication timeframes through the Part C IRE level of review. We are not proposing to change how Part C appeals, whether for Part A, Part B or supplemental benefits, are processed by the Office of Medicare Hearings and Appeals (OMHA) and the Medicare Appeals Council (Council) which is housed within the Departmental Appeals Board (DAB).
The rules related to organization determinations and appeals under Part 422, subpart M apply to all benefits an enrollee is entitled to receive under an MA plan, including basic benefits as described under § 422.100(c)(1) and mandatory and optional supplemental benefits as described under § 422.102, and the amount, if any, that the enrollee is required to pay for covered benefits. A request for covered medical items or services (including Part B drugs) is currently adjudicated under the timeframes set forth at §§ 422.568, 422.572, and 422.590, with specific requirements related to expediting determinations at §§ 422.570 and 422.584. Requirements for effectuating standard and expedited reconsidered determinations (that is, reversals by the MA organization itself, the independent review entity, or other adjudicator on appeal of an initial denial of coverage), are identified in §§ 422.618 and 422.619.
We are proposing to do all of the following:
• Add adjudication timeframes at §§ 422.568, 422.572(a), and 422.590(c) and (e)(2) for, respectively, standard organization determinations, expedited organization determinations, standard reconsiderations, and expedited reconsiderations related to coverage of Part B drugs that are the same as the timeframes for these appeal stages for Part D drugs under §§ 423.568, 423.572, and 423.590.
• Add references to determinations regarding Part B drugs to §§ 422.568(d) and (e)(4), 422.584(d), 422. 618(a) and (b), and 422.619(a), (b) and (c).
• Specify in §§ 422.568(b)(2), 422.572(a), and 422.590(c) and (e)(2) that the rules related to extending the adjudication timeframe related to requests for medical services and items (at §§ 422.568(b)(1)(i), 422.572(b) and redesignated § 422.590(f)) do not apply to the timeframes for resolving standard organization determinations, expedited organization determinations, standard reconsiderations, and expedited reconsiderations for Part B drugs.
• Make conforming changes that reference the applicable proposed timeframes and deadlines for determinations regarding Part B drugs and update cross-references in §§ 422.570(d)(1), 422.584(d)(1), and 422.618(a).
• Add a reference to an “item” to regulation text to clarify that the scope covers services and items at §§ 422.568(b), (d), and (e); 422.572(a) and (b), 422.590(a), (e), and (f); and 422.619(a) and (b).
• Redesignate existing regulatory paragraphs at § 422.568(b)(1) and (2) to § 422.568(b)(1)(i) and (ii), at § 422.590(c)-(f) to § 422.590(d)-(f), and at § 422.619(c)(2) to § 422.619(c)(3), without substantive change.
We discuss our proposal in more detail later in this section.
Under the regulations at § 422.572(a), an MA organization must notify an enrollee (and the physician involved, as appropriate) of an expedited organization determination as expeditiously as the enrollee's health requires, but no later than 72 hours after receiving the request. For expedited organization determination requests for a Part B drug, we are proposing at new paragraph (a)(2) of § 422.572 that an MA organization must make its determination and notify the enrollee (and the physician or prescriber involved, as appropriate) of its decision no later than 24 hours after receipt of the request. This proposed 24-hour timeframe for expedited organization determinations involving a Part B drug is permissible by statute, as section 1852 (g)(3)(B)(iii) of the Act requires that the enrollee be notified of an expedited decision under time limitations established by the Secretary, but not later than 72 hours from the time the request is received. With respect to pre-service standard organization determinations, the regulations at § 422.568(b) state that the MA organization must notify the enrollee of its decision as expeditiously as the enrollee's health condition requires, but no later than 14 calendar days after the MA organization receives the request for a standard determination. For consistency with the timeframe for standard Part D coverage determinations, we are proposing at § 422.568(b)(2) that, for a request for a Part B drug, an MA organization must notify the enrollee (and the prescribing physician or other prescriber involved, as appropriate) of its determination no later than 72 hours after receipt of the request. Section 422.568(b)(1) relates to standard requests for services and sets forth the existing timeframe of 14 calendar days, while proposed new paragraph (b)(2) would establish the 72-hour timeframe for standard organization determination requests for Part B drugs. We are proposing to redesignate existing paragraphs (b)(1) and (b)(2) with respect to extensions and notice of extensions for requests for service to § 422.568(b)(1)(i) and (ii), respectively. We are also proposing corresponding changes to § 422.568(d) and (e)(4) related to notice requirements to specifically reference Part B drug requests, to distinguish these requests from requests for medical services.
In all circumstances, the MA organization must notify the enrollee, and the physician or other prescriber involved, as appropriate of its decision as expeditiously as the enrollee's health condition requires, but no later than the proposed timeframes of 24 hours for expedited organization determination requests and 72 hours for standard organization determination requests for a Part B drug. As noted previously, we believe the nature of drug benefits supports shorter adjudication timeframes so enrollees have timely access to necessary prescription drugs. To that end, we are not proposing to permit MA organizations to extend the proposed timeframes for requests for Part B drugs under current rules at §§ 422.568(b)(1) and 422.572(b), and are proposing specific prohibitions on such extensions for Part B drugs in new text at §§ 422.568(b)(1), 422.572(b), and 422.590(c) and (e). Extending adjudication timeframes is not permitted under the Part D program and we do not believe extensions are warranted in the case of a request for a Part B drug due to the clinical circumstances typically involved in a request for a drug. The overall goal of these proposals is to ensure that MA enrollees have timely access to Part B drugs and to establish more consistency in the adjudication timeframes applicable to requests for Medicare drug benefits. At proposed §§ 422.568(b)(1)(i), 422.572(b), and redesignated § 422.590(f), we are specifying that the rules related to extending the adjudication timeframe relate to requests for medical services and items, but not requests for Part B drugs.
We recognize that there may be circumstances under which an enrollee would not be able to satisfy a Part B drug step therapy requirement due to the enrollee's medical condition and believe these issues can be resolved under the organization determination process. Further, under current regulation at § 422.111, MA organizations must disclose to enrollees the benefits under a plan, including applicable conditions and limitations, premiums and cost-sharing (such as copayments, deductibles, and coinsurance) and any other conditions associated with receipt or use of benefits. Therefore, MA organizations must disclose prior authorization rules and other review requirements (for example, step therapy) that condition or limit coverage and must be met in order to ensure payment for services. In addition, the rules at § 422.112 require MA organizations to have policies and procedures (coverage rules, practice guidelines, payment policies, and utilization management) that allow for individual medical necessity determinations. We believe the rules on disclosure of utilization management requirements and individualized medical necessity determinations, coupled with the right to request an organization determination, ensure that an enrollee is informed about applicable step therapy requirements and has an opportunity for an individualized medical necessity determination related to a Part B drug step therapy requirement. An MA plan can determine through the organization determination process that a particular enrollee should be exempted from step therapy requirements for reasons of medical necessity; as with other organization determinations under existing regulations, the enrollee would be notified that he/she has been determined eligible for such exemption. Although not required under our proposal, an MA organization may establish an evaluation process for the appropriateness of enforcing its step therapy protocols on an enrollee when the enrollee's healthcare provider's assessment of medical necessity for the Part B drug indicates that the lower or earlier steps in the step therapy protocol are not clinically appropriate for that enrollee (such as in cases of allergy or a prior unsuccessful use of the preferred drug). MA organizations may work with their network providers to develop processes that eliminate the necessity for an enrollee to file a request for an organization determination in such cases. We are not proposing to require such additional policies or processes but we are similarly not prohibiting them.
At § 422.590, we are proposing at redesignated paragraph (e)(2) that if an MA organization approves a request for an expedited reconsideration, it must complete its reconsideration and give the enrollee and the physician or other prescriber involved, as appropriate notice of its decision as expeditiously as the enrollee's health condition requires but no later than 72 hours after receiving the request. At redesignated paragraph (e)(3), we are proposing to add the term “orally” to existing regulation text to clarify that if the MA organization first notifies an enrollee of a completely favorable expedited reconsideration orally, it must also mail written confirmation to the enrollee within 3 calendar days.
With respect to the independent review entity (IRE) level of review, the current contract with the Part C IRE
We are proposing a conforming change to § 422.584(d)(1) to reference the proposed 7-day timeframe for standard Part B drug requests at § 422.590(c). If a MA organization denies a request for expedited reconsideration of a Part B drug, it must automatically transfer the request to the standard timeframe and make the determination within the 7 calendar day timeframe in proposed § 422.590(c). The timeframe begins the day the MA organization receives the request for expedited reconsideration.
We are also proposing conforming changes at § 422.570(d). At paragraph (d), with respect to actions following a denial of a request for an expedited determination, we are proposing to add a reference to the proposed 72-hour timeframe for standard Part B drug requests to existing text that specifies automatic transfer to the 14-calendar day timeframe for standard determinations regarding services. So, if an MA organization denies a request for an expedited determination, it must automatically transfer a request to the standard timeframe and make the determination within the proposed 72-hour timeframe at § 422.568(b)(2) for standard determinations regarding Part B drugs. The timeframe begins when the MA organization receives the request for expedited determination.
As a corollary to the proposed changes to the adjudication timeframes, we are proposing changes to the effectuation timeframes at §§ 422.618 and 422.619. As with the proposals related to the adjudication timeframes, the proposed changes to the effectuation timeframes are intended to ensure that MA organization enrollees receive necessary Part B drugs in a timely manner and are consistent with the Part D timeframes. Specifically, we are proposing a new § 422.618(a)(3) to state that if, on a standard reconsideration of a request for a Part B drug, the MA organization reverses its organization determination, the MA organization must authorize or provide the Part B drug under dispute as expeditiously as the enrollee's health condition requires, but no later than 7 calendar days after the date the MA organization receives the request for reconsideration. We are also proposing a new § 422.618(b)(3) to state that if, on a standard reconsideration of a request for a Part B drug, the MA organization's determination is reversed in whole or in part by the independent outside entity, the MA organization must authorize or provide the Part B drug under dispute within 72 hours from the date it receives notice reversing the determination and, further, that the MA organization must inform the independent outside entity that the organization has effectuated the decision.
We are proposing to add § 422.619(a)(1) and (2) whereby paragraph (a)(1) would include the existing regulation text at § 422.619(a) related to reversals by the MA organization for expedited requests for a service. Proposed paragraph (a)(2) of § 422.619 would account for reversals by the MA organization for expedited reconsideration requests for a Part B drug. We are proposing that paragraph (a)(2) state that if the MA organization reverses its organization determination on an expedited reconsideration request for a Part B drug, the MA organization must authorize or provide the Part B drug under dispute as expeditiously as the enrollee's health condition requires, but no later than 72 hours after the date the MA organization receives the request for reconsideration. At § 422.619, we are proposing to add paragraphs (b)(1) and (2). Proposed § 422.619(b)(1) would include the existing regulation text at § 422.619(b) related to reversals by the independent outside entity for expedited reconsideration requests for a service and proposed § 422.619(b)(2) would account for reversals by the independent outside entity for expedited reconsideration requests for a Part B drug. We are proposing that paragraph (b)(2) state that if, on expedited reconsideration, the MA organization's determination is reversed in whole or in part by the independent outside entity, the MA organization must authorize or provide the Part B drug under dispute as expeditiously as the enrollee's health condition requires but no later than 24 hours from the date it receives notice reversing the determination. The MA organization must inform the outside entity that the organization has effectuated the decision. At § 422.619(c)(2) we are proposing to redesignate paragraph (c)(2) as new paragraph (c)(3) and propose that new paragraph (c)(2) address reversals of decisions related to Part B drugs by other than the MA organization or the independent outside entity. Specifically, we are proposing that paragraph (c)(2) state that if the independent outside entity's expedited determination is reversed in whole or in part by an ALJ/attorney adjudicator or at a higher level of appeal, the MA organization must authorize or provide the Part B drug under dispute as expeditiously as the enrollee's health condition requires but no later than 24 hours from the date it receives notice reversing the determination. The MA organization must inform the outside entity that the organization has effectuated the decision. Finally, we are proposing a change to § 422.619(a) to update a cross-reference to § 422.590 affected by these proposed changes.
Finally, we are also proposing to add a reference to an “item” as it relates to regulatory requirements applicable to medical items and services, rather than just a reference to “services” as some of the regulatory text currently reads. At §§ 422.568(b), (d) and (e), 422.572(a) and (b), 422.590(a), (e), and (f), and 422.619(a) and (b) we have revised the language to include a reference to “items” to more clearly distinguish requests for medical services and items from requests for Part B drugs and requests for payment, to clarify the regulation text and have it conform to how items and services may be covered benefits.
We solicit comments on these proposals for various requirements, described in this preamble, under which MA plans could apply step therapy as a utilization management tool for Part B drugs in 2020 and subsequent years. Through these proposals to permit use of step therapy for Part B drugs and the application of shorter adjudication timeframes for Part B drug requests, we are seeking to balance the goals of cost savings and efficiencies with enrollee access, enhanced quality of care and due process protections. We are expressly soliciting comment on the following aspects of our proposal and whether there are additional considerations that would further these goals:
• The restriction to new starts.
• The new requirement for a P&T committee for MA plans that implement step therapy and the use of that P&T committee.
• The prohibition on using non-covered drugs, and in certain circumstances, off-label drugs, in the step therapy programs.
• The organization determination and appeals timelines and processes that would be applicable to Part B drugs, particularly our proposal to not permit MA organizations to extend the
Finally, we note that in a recent proposed rule, CMS-4185-P, entitled “Medicare and Medicaid Programs; Policy and Technical Changes to the Medicare Advantage, Medicare Prescription Drug Benefit, Program of All-inclusive Care for the Elderly (PACE), Medicaid Fee-For-Service, and Medicaid Managed Care Programs for Years 2020 and 2021” and published in the
Part D sponsors and their contracted PBMs have been increasingly successful in recent years at negotiating price concessions from network pharmacies. The data Part D sponsors submit to CMS as part of the annual required reporting of direct or indirect remuneration (DIR) show that pharmacy price concessions, net of all pharmacy incentive payments, have grown faster than any other category of DIR received by sponsors and PBMs. This means that pharmacy price concessions now account for a larger share than ever before of reported DIR and thus a larger share of total gross drug costs in the Part D program.
The data show that pharmacy price concessions, net of all pharmacy incentive payments, grew more than 45,000 percent between 2010 and 2017. The data also show that much of this growth occurred after 2012, when the use by Part D sponsors of performance-based payment arrangements with pharmacies became increasingly prevalent. Performance-based pharmacy price concessions, net of all pharmacy incentive payments, increased, on average, nearly 225 percent per year between 2012 and 2017 and now comprise the second largest category of DIR received by sponsors and PBMs, behind only manufacturer rebates.
Such price concessions are negotiated between pharmacies and sponsors or their PBMs, independent of CMS, and are often tied to the pharmacy's performance on various measures defined by the sponsor or its PBM. Under the current definition of “negotiated prices” at § 423.100, negotiated prices must include all price concessions from network pharmacies except those that cannot reasonably be determined at the point of sale. However, because these performance adjustments typically occur after the point of sale, they are not included in the price of a drug at the point of sale. We further understand, through comments received from the pharmacy industry in response to our Request for Information on pharmacy price concessions (included in the November 2017 proposed rule (82 FR 56419 through 56428)), that the share of pharmacies' reimbursements that are contingent upon their performance under such arrangements has grown steadily each year. (We discuss the comments received in response to this Request for Information in more detail later in this section.) As a result, sponsors and PBMs have been recouping increasing sums from network pharmacies after the point of sale (pharmacy price concessions) for “poor performance,” sums that are far greater than those paid to network pharmacies after the point of sale (pharmacy incentive payments) for “high performance.”
When pharmacy price concessions are not reflected in the price of a drug at the point of sale, beneficiaries might see lower premiums, but they do not benefit through a reduction in the amount they must pay in cost-sharing, and thus, end up paying a larger share of the actual cost of a drug. Moreover, given the increase in pharmacy price concessions in recent years, when the point-of-sale price of a drug that a Part D sponsor reports on a PDE record as the negotiated price does not include such discount, the negotiated price is rendered less transparent at the individual prescription level and less representative of the actual cost of the drug for the sponsor. Finally, variation in the treatment of these price concessions by Part D sponsors may have a negative effect on the competitive balance under the Medicare Part D program. These issues are discussed in more detail later in this section.
At the time the Part D program was established, we believed, as discussed in the January 2005 final rule (70 FR 4244), that market competition would encourage Part D sponsors to pass through to beneficiaries at the point of sale a high percentage of the price concessions they received, and that establishing a minimum threshold for the price concessions to be applied at the point of sale would only serve to undercut these market forces. However, actual Part D program experience has not matched expectations in this regard. In recent years, less than 1 percent of plans have passed through any price concessions to beneficiaries at the point of sale, and the amount that is passed through is less than 1 percent of the total price concessions those plans receive. Instead, because of the advantages that accrue to sponsors in terms of lower premiums (also an advantage for beneficiaries), the shifting of costs, and increases in plan revenues (given the treatment of price concessions under the Part D payment methodology), sponsors may face distorted incentives as compared to what we anticipated in 2005.
For this reason, as part of the November 2017 proposed rule, we published a “Request for Information Regarding the Application of Manufacturer Rebates and Pharmacy Price Concessions to Drug Prices at the Point of Sale,” (82 FR 56419 through 56428). We solicited comment on whether CMS should require that the point-of-sale price for a covered Part D drug must include all price concessions that the Part D sponsor could potentially collect from a network pharmacy for any individual claim for that drug. Of the many timely comments received, the majority were from pharmacies, pharmacy associations, and beneficiary advocacy groups that supported the adoption of such a requirement because it would: (1) Lower beneficiary out-of-pocket costs (especially critical for beneficiaries who utilize high cost drugs); (2) stabilize the operating environment for pharmacies (because of greater transparency and predictability of the minimum reimbursement on a per-claim level, thus allowing more accurate budgeting and improved ability to evaluate proposed contracts from PBMs); and (3) standardize the way in which plan sponsors and their PBMs treat pharmacy price concessions. Some commenters—mostly Part D sponsors
In this rule we are considering for a future year, which could be as soon as 2020, adopting a new definition of “negotiated price” to include all pharmacy price concessions received by the plan sponsor for a covered Part D drug, and to reflect the lowest possible reimbursement a network pharmacy will receive, in total, for a particular drug. As part of the policy being considered, we would first delete the current definition of “negotiated prices” (in the plural) and add a definition of “negotiated price” (in the singular) to make clear that a negotiated price can be set for each covered Part D drug, and the amount of the pharmacy price concessions may differ on a drug by drug basis. Then, we would implement a definition of “negotiated price” that is intended to ensure that the prices available to Part D enrollees at the point of sale are inclusive of all pharmacy price concessions. We believe such an approach would be more reflective of current pharmacy payment arrangements.
Section 1860D-2(d)(1) of the Act requires that a Part D sponsor provide beneficiaries with access to negotiated prices for covered Part D drugs. Under the definition of “negotiated prices” at § 423.100, the negotiated price is the price paid to the network pharmacy or other network dispensing provider for a covered Part D drug dispensed to a plan enrollee that is reported to CMS at the point of sale by the Part D sponsor. This point-of-sale price is used to calculate beneficiary cost-sharing. More broadly, the negotiated price is the primary basis by which the Part D benefit is adjudicated, as it is used to determine plan, beneficiary, manufacturer (in the coverage gap), and government liability during the course of the payment year, subject to final reconciliation following the end of the coverage year.
Under current law, Part D sponsors can generally choose whether to reflect in the negotiated price the various price concessions they or their intermediaries receive. Specifically, section 1860D-2(d)(1)(B) of the Act requires that negotiated prices “shall take into account negotiated price concessions, such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations, for covered part D drugs. . . .” Currently, Part D sponsors are allowed, but generally not required, to apply rebates and other price concessions at the point of sale to lower the price upon which beneficiary cost-sharing is calculated. The only exception is the requirement under the existing definition of negotiated prices at § 423.100 that negotiated prices must include all price concessions from network pharmacies that can reasonably be determined at the point of sale.
To date, very few pharmacy price concessions have been included in the negotiated price at the point of sale. All pharmacy and other price concessions that are not included in the negotiated price must be reported to CMS as DIR at the end of the coverage year using the form required by CMS for reporting Summary and Detailed DIR (OMB control number 0938-0964). These data on price concessions are used in our calculation of final plan payments, which, under the statute, are required to be based on costs actually incurred by Part D sponsors, net of all applicable DIR.
When price concessions are applied to reduce the negotiated price at the point of sale, some of the concession amount is apportioned to reduce beneficiary cost-sharing. In contrast, when price concessions are applied after the point of sale, as DIR, the majority of the concession amount accrues to the plan, and the remainder accrues to the government. For further discussion on this matter, please see the CMS Fact Sheet from January 19, 2017 “
The main benefit to a Part D beneficiary of price concessions applied as DIR at the end of the coverage year (and not to the negotiated price at the point of sale) is a lower plan premium. A sponsor must factor into its plan bid an estimate of the expected DIR for the upcoming payment year. That is, in the bid the sponsor must lower its estimate of plan liability by a share of the projected DIR, which has the effect of reducing the price of coverage under the plan. Under the current Part D benefit design, applying price concessions after the point of sale as DIR reduces plan liability (and thus premiums), more than applying price concessions at the point of sale.
Therefore, to the extent that plan bids reflect accurate DIR estimates, the pharmacy and other price concessions that Part D sponsors and their PBMs negotiate, but do not include in the negotiated price at the point of sale, put downward pressure on plan premiums, as well as the government's subsidies of those premiums. The average Part D basic beneficiary premium grew at an average rate of only about 1 percent per year between 2010 and 2017, and the average premium has declined each year since 2017 due in part to sponsors' projecting in their bids that DIR growth would outpace the growth in projected gross drug costs each year. The average Medicare direct subsidy paid by the government to cover a share of the cost of coverage under a Part D plan has also declined, by an average of 9.4 percent per year between 2010 and 2017, partly for the same reason.
However, any DIR a sponsor receives that is above the projected amount factored into its plan bids contributes primarily to plan profits, not lower premiums. The risk-sharing construct established under the Part D statute at section 1860D-15(e) of the Act allows sponsors to retain as plan profit the majority of all plan revenues above the bid-projected amount. Given that plan bids, and, thus, plan revenues, are based on cost
Under the Part D risk corridors, if a plan's actual drug costs are within +/−5 percent of the drug costs estimated in its bid, the plan assumes all of the losses or savings. If its costs are more than 5 percent above or below its bid, the government assumes a growing share of the losses or savings, and the plan assumes the remainder. Any unexpected losses or savings that a plan assumes affect its final profit margin. Thus, when a plan underestimates the amount of DIR that it will receive, any additional amount of DIR constitutes additional plan revenues. In the event that overall
To capture the relative premium and other advantages that price concessions, including pharmacy price concessions, applied as DIR offer sponsors over lower point-of-sale prices, sponsors sometimes opt for higher negotiated prices in exchange for higher DIR and, in some cases, even prefer a higher net cost drug over a cheaper alternative. This may put upward pressure on Part D program costs and, as explained in this proposed rule, shift costs from the Part D sponsor to beneficiaries who utilize drugs in the form of higher cost-sharing and to the government through higher reinsurance and low-income cost-sharing subsidies.
Beneficiary cost-sharing is generally calculated as a percentage of the negotiated price. When pharmacy price concessions and other price concessions are not reflected in the negotiated price at the point of sale (that is, are applied instead as DIR at the end of the coverage year), beneficiary cost-sharing increases, covering a larger share of the actual cost of a drug. Although this is especially true when a Part D drug is subject to coinsurance, it is also true when a drug is subject to a copayment because Part D rules require that the copayment amount be at least actuarially equivalent to the coinsurance required under the defined standard benefit design. For many Part D beneficiaries who utilize drugs and thus incur cost-sharing expenses, this means, on average, higher overall out-of-pocket costs. Higher costs to beneficiaries have occurred even after accounting for the premium savings tied to higher DIR. For the millions of low-income beneficiaries whose out-of-pocket costs are subsidized by Medicare through the low-income cost-sharing subsidy, those higher costs are borne by the government. See the lowest possible reimbursement example later in this section of the rule for a specific example of the effect the change to the definition of negotiated price being considered would have on the determination of beneficiary cost-sharing.
This potential for cost shifting to beneficiaries grows increasingly pronounced as pharmacy price concessions increase as a percentage of gross drug costs and continue to be applied outside of the negotiated price. Numerous research studies suggest that higher cost-sharing can impede beneficiary access to necessary medications, which leads to poorer health outcomes and higher medical care costs for beneficiaries and Medicare.
Finally, beneficiaries progress through the four phases of the Part D benefit as their total gross drug costs and cost-sharing obligations increase. Because both of these values are calculated based on the negotiated prices reported at the point of sale, when pharmacy price concessions are not applied at the point of sale, the higher negotiated prices result in more rapid movement of Part D beneficiaries through the Part D benefit phases. This, in turn, shifts more of the total drug spend into the catastrophic phase, where Medicare liability is highest (80 percent, paid as reinsurance) and plan liability is at its lowest (except with respect to applicable drugs in coverage gap) (15 percent). With such cost-shifting to the government under current rules, Part D sponsors may have weak incentives, and, in some cases no incentive, to lower prices at the point of sale. See the Regulatory Impact Statement in this proposed rule for a discussion of cost impacts to beneficiaries, the government, and plan sponsors.
Given the significant growth in pharmacy price concessions in recent years, when such amounts are not reflected in the negotiated price, it has become increasingly difficult for consumers to know at the point of sale what share, or approximate share, they are paying of the costs of their prescription drugs to the plan; nor are negotiated costs reflected on the Medicare Prescription Drug Plan Finder (Plan Finder) tool. Consequently, consumers cannot efficiently minimize both their costs and costs to the taxpayers by seeking and finding the lowest-cost drug or a plan that offers them the lowest-cost drug and pharmacy combinations.
The quality of information available to consumers is even less conducive to producing efficient choices when pharmacy price concessions are treated differently by different Part D sponsors; that is, when they are applied to the point-of-sale price to differing degrees and/or estimated and factored into plan bids with varying degrees of accuracy. First, when some sponsors include pharmacy price concessions in negotiated prices while others treat them as DIR, the concept of negotiated price no longer has a consistent meaning across the Part D program, undermining meaningful price comparisons and efficient choices by consumers. Second, if a sponsor's bid is based on an estimate of net plan liability that is understated because the sponsor has been applying pharmacy price concessions as DIR at the end of the coverage year rather than using them to reduce the negotiated price at the point of sale, it follows that the sponsor may be able to submit a lower bid than a competitor that applies pharmacy price concessions at the point of sale. This lower bid results in a lower plan premium, which could allow the sponsor to capture additional market share. The resulting competitive advantage accruing to one sponsor over another in this scenario stems only from a technical difference in how plan costs are reported to CMS. Therefore, the opportunity for differential treatment of pharmacy price concessions could result in bids that are not comparable and in premiums that are not valid indicators of relative plan efficiency.
Finally, the one-sided nature of the pharmacy payment arrangements that currently exist also creates competition concerns by discouraging independent pharmacies from participating in a plan's network and thereby increasing market share for the sponsors' or PBMs' own pharmacies. Part D is a market-based approach to delivery of prescription drug benefits, and relies on healthy market competition. Thus, adopting policies that promote competition is an important and relevant consideration in protecting Medicare beneficiaries and the Medicare trust fund from unwarranted costs. Market competition is best achieved when a wide variety of pharmacies are able to compete in the market for selective contracting with plan sponsors and PBMs.
As previously discussed, Part D sponsors and PBMs have been recouping increasing sums from network pharmacies after the point of sale in the form of pharmacy price concessions. We addressed concerns about these pharmacy payment adjustments when we established the existing requirements for negotiated price reporting in the May 2014 final rule (79 FR 29844). In that rule, we amended the definition of “negotiated prices” at § 423.100 to require Part D sponsors to include in the negotiated price at the point of sale all pharmacy price concessions and incentive payments to pharmacies—with an exception, intended to be narrow, that allowed the exclusion of contingent pharmacy payment adjustments that cannot reasonably be determined at the point of sale (the reasonably determined exception). However, when we formulated these requirements in 2014, the most recent year for which DIR data was available was 2012, and we did not anticipate the growth of performance-based pharmacy payment arrangements that we have observed in subsequent years.
We now understand that the reasonably determined exception we currently allow applies more broadly than we had initially envisioned because of the shift by Part D sponsors and their PBMs towards contingent pharmacy payment arrangements. As suggested by numerous stakeholders in response to CMS's November 2017 Request for Information (82 FR 56419 through 56428), nearly all performance-based pharmacy payment adjustments may be excluded from the negotiated price on the grounds that they cannot reasonably be determined at the point of sale. Specifically, several stakeholders have suggested to us that sponsors apply the reasonably determined exception to all performance-based pharmacy payment adjustments. These stakeholders assert that the amount of these adjustments, by definition, is contingent upon performance measured over a period of time that extends beyond the point of sale and, thus, cannot be known in full at the point of sale. Therefore, performance-based pharmacy payment adjustments cannot “reasonably be determined” at the point of sale as they cannot be known in full at the point of sale. These assertions are supported by the information plan sponsors report to CMS as part of the annual DIR reports. As a result, the reasonably determined exception prevents the current policy from having the intended effect on price transparency, consistency (by reducing differential reporting of pharmacy payment adjustments by sponsors), and beneficiary costs.
Given the predominance of the use of performance-contingent pharmacy payment arrangements by plan sponsors, we do not believe that the existing requirement that pharmacy price concessions be included in the negotiated price can be implemented in a manner that achieves the goals previously discussed: Meaningful price transparency, consistent application of all pharmacy payment concessions by all Part D sponsors, and prevention of cost-shifting to beneficiaries and taxpayers. Therefore, to establish a requirement that accomplishes these goals while better reflecting current pharmacy payment arrangements, we are considering adding a definition of the term “Negotiated price” at § 423.100 to mean the lowest amount a pharmacy could receive as reimbursement for a covered Part D drug under its contract with the Part D sponsor or the sponsor's intermediary (that is, the amount the pharmacy would receive net of the maximum possible negative adjustment that could result from any contingent pharmacy payment arrangement). First, we are considering deleting the current definition of “Negotiated prices” (in the plural) and adding a new definition of “Negotiated price” (in the singular) in order to make clear that a negotiated price can be set for each covered Part D drug, and the amount of pharmacy price concessions may differ on a drug-by-drug basis. Next, we are considering the policy that the negotiated price for a covered Part D drug must include all pharmacy price concessions and any dispensing fees, and exclude additional contingent amounts, such as incentive fees, if these amounts increase prices. Finally, we are considering continuing to permit Part D sponsors to elect whether to pass-through non-pharmacy price concessions and other direct or indirect remuneration amounts (for example, manufacturer rebates, legal settlement amounts, and risk-sharing adjustments) to enrollees at the point of sale. These considered provisions are discussed in the following sections.
Requiring that all pharmacy price concessions be included in the negotiated price, as we have described, would lead to more accurate comparability of drug prices, Part D bid pricing, and plan premiums. When negotiated prices reflect relative plan efficiencies, there would not be unfair competitive advantages accruing to one sponsor over another based on a technical difference in how costs are reported. In short, because Part D is a market-based approach to delivering prescription drug benefits, and relies on healthy market competition, we believe the policy being considered could make the Part D market more competitive and efficient.
We are considering the policy that the new definition of “Negotiated price” omit the reasonably determined exception. That is, we would require that all price concessions from network pharmacies, negotiated by Part D sponsors and their contracted PBMs, be reflected in the negotiated price that is made available at the point of sale and reported to CMS on a PDE record, even when such price concessions are contingent upon performance by the pharmacy.
Section 1860D-2(d)(1)(B) of the Act requires that negotiated prices “shall take into account negotiated price concessions, such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations, for covered part D drugs . . .” We have previously interpreted this language to mean that some, but not all, price concessions must be applied to the negotiated price (see, for example, 70 FR 4244 and 74 FR 1511). However, we now believe that our initial interpretation may have been overly definitive with respect to the intended meaning of “take into account.” Requiring that all pharmacy price concessions be applied at the point of sale would ensure that negotiated prices “take into account” at least some price concessions and, therefore, would be consistent with the plain language of section 1860D-2(d)(1)(B) of the Act.
To effectively capture all pharmacy price concessions at the point of sale consistently across sponsors, we are considering requiring the negotiated price to reflect the lowest possible reimbursement that a network pharmacy could receive from a particular Part D sponsor for a covered Part D drug. Under this approach, the price reported at the point of sale would need to include all price concessions that could potentially flow from network pharmacies, as well as any dispensing fees, but exclude any additional contingent amounts that could flow to network pharmacies and thus increase prices over the lowest reimbursement level, such as incentive fees. That is, if a performance-based payment arrangement exists between a sponsor and a network pharmacy, the point-of-
By requiring that sponsors assume the lowest possible pharmacy performance when reporting the negotiated price, we would be prescribing a standardized way for Part D sponsors to treat the unknown (final pharmacy performance) at the point of sale under a performance-based payment arrangement, which many Part D sponsors and PBMs have identified as the most substantial operational barrier to including such concessions at the point of sale. We believe, based on the overwhelming support received from commenters on our November 2017 Request for Information, that this is the best approach to achieve our goals, as noted previously, of—(1) consistency (standardized reporting of negotiated prices and DIR); (2) preventing cost-shifting to beneficiaries; and (3) price transparency for beneficiaries, the government, and other stakeholders.
Regarding consistency in reporting, we believe that the approach we are considering would be clearer for Part D sponsors to follow than the requirements in place today, which require Part D sponsors to assess which types of pharmacy payment adjustments fall under the reasonably determined exception. We expect this increased clarity would reduce sponsor burden in terms of the resources necessary to ensure compliance in the absence of a clear standard. Finally, we believe that the change we are considering would improve the quality of drug pricing information available across Part D plans and thus improve market competition and cost efficiency under Part D.
Requiring the negotiated price to reflect the lowest possible pharmacy reimbursement, would move the negotiated price closer to the final reimbursement for most network pharmacies under current pharmacy payment arrangements, and thus closer to the actual cost of the drug for the Part D sponsor. We have learned from the DIR data reported to CMS and feedback from numerous stakeholders that pharmacies rarely receive an incentive payment above the original reimbursement rate for a covered claim. We gather that performance under most arrangements dictates only the magnitude of the amount by which the original reimbursement is reduced, and most pharmacies do not achieve performance scores high enough to qualify for a substantial, if any, reduction in penalties.
Finally, we are considering requiring that all contingent incentive payments be excluded from the negotiated price. As noted previously, we understand that such incentive payments are quite rare. Furthermore, even in those instances in which a pharmacy may qualify for such a payment, including the amount of any contingent incentive payments to pharmacies in the negotiated price would make drug prices appear higher at a “high performing” pharmacy, which receives an incentive payment, than at a “poor performing” pharmacy, which is assessed a penalty, and would also reduce price transparency. This pricing differential could also potentially create a perverse incentive for beneficiaries to choose a lower performing pharmacy for the advantage of a lower price. We believe the approach we are considering would prevent these unintended consequences and thus avoid reducing the competitiveness of high performing pharmacies by increasing the negotiated price charged to the beneficiary at those pharmacies. Additionally, Part D sponsors and their intermediaries have argued in the past that network pharmacies lose motivation to improve performance when all performance-based adjustments are required to be reported up-front. Revising the negotiated price definition as we are considering doing would mitigate this concern by allowing sponsors and their intermediaries to motivate network pharmacies to improve their performance with the promise of future incentive payments that would increase pharmacy reimbursement from the level of the lowest possible reimbursement per claim. Further, we emphasize that the policy being considered would not require pharmacies to be paid in a certain way; rather we would be requiring standardized reporting to CMS of drug prices at the point of sale.
To illustrate how Part D sponsors and their intermediaries would report costs under the approach we are considering, we provide the following example. Suppose that under a performance-based payment arrangement between a Part D sponsor and its network pharmacy, the sponsor will implement one of three scenarios: (1) Recoup 5 percent of its total Part D-related payments to the pharmacy at the end of the contract year for the pharmacy's failure to meet performance standards; (2) recoup no payments for average performance; or (3) provide a bonus equal to 1 percent of total payments to the pharmacy for high performance. For a drug that the sponsor has agreed to pay the pharmacy $100 at the point of sale, the pharmacy's final reimbursement under this arrangement would be: (1) $95 for poor performance; (2) $100 for average performance; or (3) $101 for high performance. Under the current definition of negotiated prices, the reported negotiated price is likely to be $100, given the reasonably determined exception for contingent pharmacy payment adjustments. However, under the approach we are considering here, for all three performance scenarios the negotiated price reported to CMS on the PDE record at the point of sale for this drug would be $95, or the lowest reimbursement possible under the arrangement. Thus, if a plan enrollee were required to pay 25 percent coinsurance for this drug, then the enrollee's costs under all scenarios would be 25 percent of $95, or $23.75, which is less than the $25 the enrollee would pay today (when the negotiated price is likely to be reported as $100). Finally, any difference between the reported negotiated price and the pharmacy's final reimbursement for this drug would be reported as DIR at the end of the coverage year. Under this requirement, the sponsor would report $0 as DIR under the poor performance scenario ($95 minus $95), -$5 as DIR under the average performance scenario ($95 minus $100), and -$6 as DIR under the high performance scenario ($95 minus $101), for every covered claim for this drug purchased at this pharmacy.
In order to implement the change being considered, we would leverage existing reporting mechanisms to confirm that sponsors are appropriately applying pharmacy price concessions at
Additionally, we note that the negotiated price is also the basis by which manufacturer liability for discounts in the coverage gap is determined. We are considering whether to require sponsors to include pharmacy price concessions in the negotiated price in the coverage gap, for purposes of determining manufacturer coverage gap discounts, as would be required of sponsors in all other phases of the Part D benefit under approach being considered. We request comment on the alternate approaches.
Under section 1860D-14A(g)(6) of the Act, the term “negotiated price” has the meaning it was given in § 423.100 as in effect as of the enactment of the Patient Protection and Affordable Care Act, except that it excludes any dispensing fee. This definition is codified in the coverage gap discount program regulations at § 423.2305. Because the statutory definition of negotiated price for purposes of the coverage gap discount program references price concessions that the Part D sponsor has
If we do not require sponsors to include pharmacy price concessions in the negotiated price in the coverage gap, we would need to operationalize different definitions of “negotiated price” for the coverage gap versus the non-coverage gap phases of the Part D benefit. Under this alternative approach, during the non-coverage gap phases, claims would be adjudicated using the negotiated price determined as described in the lowest possible reimbursement example above. In contrast, during the coverage gap, plans would have the flexibility to determine how much of the pharmacy price concessions to pass through at the point of sale, and beneficiary, plan, and manufacturer liability in the coverage gap would be calculated using this alternate negotiated price.
We also request comment on a considered alternative to the lowest possible reimbursement approach that would require Part D sponsors to apply less than 100 percent,
In addition, we are considering an option to develop a standard set of metrics from which plans and pharmacies would base their contractual agreements. We request commenter feedback on whether these metrics could be designed to provide pharmacies with more predictability in their reimbursements while maintaining plan's ability to negotiate terms. Additionally, we seek comment on the most appropriate agency or organization to develop these standards, or whether this a matter better left to private negotiations.
Finally, given the many considerations outlined above, we have not concluded, at this time and without the benefit of public comment, that we should move forward with changing the definition of negotiated price for contract year 2020 or otherwise. However, we seek comment on whether we should do so, including whether to adopt in the final rule the approach considered above or a logical outgrowth of it, whether to make such a change for the contract year 2020, and on the contours and contentment of the policy considered and outlined above. If such a change is adopted, we anticipate the regulation text at § 423.100 would read as follows:
(1) The Part D sponsor (or other intermediary contracting organization) and the network dispensing pharmacy or other network dispensing provider have negotiated as the lowest possible reimbursement such network entity will receive, in total, for a particular drug and
(2) Meets all of the following:
(i) Includes all price concessions (as defined at § 423.100) from network pharmacies or other network providers;
(ii) Includes any dispensing fees; and
(iii) Excludes additional contingent amounts, such as incentive fees, if these amounts increase prices.
(3) Is reduced by non-pharmacy price concessions and other direct or indirect remuneration that the Part D sponsor has elected to pass through to Part D enrollees at the point of sale.
We are aware that some sponsors and their intermediaries believe certain fees charged to network pharmacies—such as “network access fees,” “administrative fees,” “technical fees,” or “service fees”—represent valid administrative costs and, thus, do not believe such fees should be treated as price concessions. However, pharmacies and pharmacy organizations report that they do not receive anything of value for such administrative service fees other than the ability to participate in the Part D plan's pharmacy network.
Thus, we are restating the conclusion we provided in the May 2014 final rule (79 FR 29877): When pharmacy administrative service fees take the form
The regulations governing the Part D program require that price concessions be fully disclosed. If not reported at all, these amounts would result in another form of so-called PBM spread in which inflated prices contain a portion of costs that should be treated as administrative costs. That is, even if these costs did represent services rendered by an intermediary organization for the sponsor, then these costs would be administrative service costs, not drug costs, and should be treated as such. Failure to report these costs as administrative costs in the bid would allow a sponsor to misrepresent the actual costs necessary to provide the benefit and thus to submit a lower bid than necessary to reflect its revenue requirements (as required at section 1860D-11(e)(2)(C) of the Act and at § 423.272(b)(1) of the regulations) relative to another sponsor that accurately reports administrative costs consistent with CMS instructions.
Section 1860D-2(d)(1)(B) of the Act stipulates that the negotiated price shall take into account negotiated price concessions, such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations, for covered Part D drugs. Section 1860D-2(d)(2) of the Act further requires that Part D sponsors disclose to CMS the aggregate negotiated price concessions by manufacturers that are passed through in the form of lower subsidies, lower monthly beneficiary premiums, and lower prices through pharmacies and other dispensers. While “price concession” is a term important to the adjudication of the Part D program, it has not yet been defined in the Part D statute or in Part D regulations and subregulatory guidance. Therefore, to avoid confusion among Part D sponsors and other stakeholders of the Part D program resulting from inconsistent terminology, we are considering providing a definition for the term “price concession” at § 423.100. We would consider implementing, for 2020 or another future year, a provision that defines price concession in a broad manner, to include all forms of discounts, direct or indirect subsidies, or rebates that serve to reduce the costs incurred under Part D plans by Part D sponsors.
In considering how to define price concession, we believe it is important to define the term in a broadly applicable manner, while maintaining clarity. We believe the approach we are considering would be consistent with the statute, would support consistent accounting by plan sponsors of amounts that are price concessions, and would ensure that certain forms of discounts are not inappropriately excluded from being considered price concessions.
An alternative would be not to define price concession at all. However, this option would not support consistent accounting of amounts that are price concessions among Part D sponsors, which is particularly important in light of the change being considered for the definition of negotiated price.
If such a change is adopted, we anticipate the regulation text at § 423.100 would read as follows:
We note that the change we are considering for the definition of price concession would not affect the way in which price concessions must be accounted for by Part D sponsors in calculating costs under a Part D plan. Defining price concessions as we are considering doing also would not require the renegotiation of any contractual arrangements between a sponsor and its contracted entities. Therefore, this definition we are considering for price concession has no impact under the federal requirements for Regulatory Impact Analyses.
Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501
• The need for the information collection and its usefulness in carrying out the proper functions of our agency.
• The accuracy of our estimate of the information collection burden.
• The quality, utility, and clarity of the information to be collected.
• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.
In this proposed rule, we are soliciting public comment on each of these issues for the following sections of this rule that contain proposed “collection of information” requirements as defined under 5 CFR 1320.3 of the PRA's implementing regulations.
To derive average costs for the private sector, we used data from the U.S. Bureau of Labor Statistics' (BLS's) May 2017 National Occupational Employment and Wage Estimates for all salary estimates (
As indicated, we are adjusting our employee hourly wage estimates by a factor of 100 percent. This is necessarily a rough adjustment, both because fringe benefits and overhead costs vary significantly from employer to employer, and because methods of estimating these costs vary widely from study to study. We believe that doubling the hourly wage to estimate total cost is a reasonably accurate estimation method.
The requirements and burden related to the proposed justification under § 423.120(b)(2)(vi)(E) will be submitted to OMB for approval under control number 0938-0763 (CMS-R-262).
As described in section III.B. of this rule, the proposed new paragraph at § 423.120(b)(2)(vi) would implement the authority granted to CMS by section 1860D-4(b)(3)(G) of the Act to establish exceptions that would permit a Part D sponsor to exclude from its formulary (or to otherwise limit access to such a drug, including through prior authorization or utilization management) a particular Part D drug that is otherwise required to be included in the formulary. For the proposed exceptions that expand the use of prior authorization and step therapy for protected class drugs at § 423.120(b)(2)(vi)(C) and the exceptions for protected class drugs that are new formulations at § 423.120(b)(2)(vi)(D), the burden would consist of the time and effort for Part D sponsors to submit their formularies to CMS under the existing annual submission process. The annual submission requirements and burden are currently approved by OMB under control number 0938-0763 (CMS-R-262). The proposed provisions would not impose any new or revised information collection requirements or burden. Consequently, the provisions are not subject to the PRA.
For the proposed exceptions related to § 423.120(b)(2)(vi)(E), for protected class drugs for which a Part D sponsor chooses to exclude from their formulary due to a price increase beyond a certain threshold, Part D sponsors would be required to submit an additional justification to CMS during the annual formulary submission process. The justification must explain why the Part D sponsor is excluding such drug from their formulary. The burden associated with this exception would consist of the time and effort put forth by Part D sponsors to prepare and submit their formularies to CMS along with the justification.
While the annual formulary preparation and submission process and burden are currently approved by OMB without the need for change, we estimate that it would take an average of 10 minutes (0.167 hours) at $117.04/hr for a pharmacist to prepare and submit each justification. Because Part D sponsors already research list prices to inform the existing formulary negotiation process, we only consider the time necessary to prepare and submit the justification to CMS. We estimate that all 218 Part D plan sponsors (32 PDP parent organizations and 186 MA-PD parent organizations, based on plan year 2018 plan participation) would be subject to this requirement. In aggregate, we estimate an annual burden of 36 hours (0.167 hr × 218 sponsors) at a cost of $4,213 (36 hr × $117.04/hr).
This proposed change would codify in Part D regulation a ban on contract provisions that prohibit network pharmacies from informing Part D enrollees about instances where the pharmacy has a cash price for a prescribed drug that is lower than the out-of-pocket cost that would be charged to the enrollee. Since this would not change any existing practice and the provisions do not have any information collection implications, the provisions are not subject to the PRA.
This provision proposes that each Part D plan sponsor adopt one or more Real Time Benefit Tool (RTBT) tools that are capable of integrating with e-prescribing (eRx) and electronic medical record (EMR) systems for use in part D E-Prescribing (eRx) transactions beginning on or before January 1, 2020. We are advancing a provision with unclear costs and impacts to reflect the direction that the industry is moving in, and we want to ensure that protections and guidance are given before it becomes too widespread. Because of a desire to address the high costs of drugs and the potential savings that could be realized through RTBT we do not wish to delay such a proposal. This provision also supports the MMA objectives of patient safety, quality of care, and efficiencies and cost savings in the delivery of care if our proposals are finalized.
Because of our inability to quantitatively score this provision, we are soliciting comments on potential information collection implications.
Section 1860D-4(a)(1)(A)(4) of the Act requires that Part D sponsors furnish to each of their enrollees a written explanation of benefits (EOB) and, when the prescription drug benefits are provided, a notice of the benefits in relation to the initial coverage limit and the out-of-pocket threshold for the current year.
In this rule we are proposing to require that sponsors include the cumulative percentage change in the negotiated price since the first day of the current benefit year for each prescription drug claim in the EOB. Sponsors would also be required to include information about drugs that are therapeutic alternatives with lower cost-sharing. The intent is to provide enrollees with greater transparency, thereby encouraging lower costs. Since plans use formularies we believe it is reasonable to assume that all plans already have the negotiated drug price
We assume that half a day of programming work (4 hours) per contract at $98.54 an hour is needed to link alternative prices to EOB Model. Therefore, the aggregate first year impact is 2,240 hours (560 Part D contracts * 4 hours per contract) at an aggregate cost of $0.2 million (560 Part D Sponsors and PDPs * 4 hours * $98.54/hr). Since this is a first time impact only, the annualized impact over 3 years is 747 hours (2,240/3) at a cost of $73,609 (747 hours * $98.54/hr).
This rule proposes protections that ensure beneficiaries maintain access to medically necessary Part B drugs while permitting MA plans to implement step therapy protocols that support stronger price negotiation and cost and utilization controls. In order to implement a step therapy program for one or more Part B drugs, we are proposing that an MA plan must establish and use a P&T Committee to review and approve step therapy programs used in connection with Part B drugs. The proposed P&T Committee requirements are the same as the requirements applicable to Part D plans under § 423.120(b). We propose to allow MA-PD plans to use the Part D P&T Committee to satisfy the new requirements proposed in this rule related to MA plans and Part B drugs. For MA plans that do not cover Part D benefits already, they may use the Part D P&T committee of another plan under the same contract. Under § 422.4(c), every MA contract must have at least one plan offering Part D. Because of the small amount of work needed annually (and estimated in this rule) we believe it is reasonable to assume that no new committees will be formed and that the added work will be performed by the existing P&T Committees. We estimate it would take 1 hour at $69.08/hr for a P&T Committee business specialist to perform certain tasks and review and retain documentation and information as described in § 422.136(b)(4) and (9). The one hour estimate reflects half the Part D P&T Committee burden (or two hours) that is currently approved by OMB under control number 0938-0964 (CMS-10141). We believe that the added hour is reasonable since the P&T Committee requires significantly less work for Part B than for Part D. In aggregate we estimate an annual burden of 634 hours (1 hour × [697 plans—63 Prescription Drug plans which don't offer Part B]) at a cost of $43,797 (634 hr × $69.08/hr).
Another proposed beneficiary protection measure is related to organization determinations and reconsiderations for Part B drugs. The proposal only changes the adjudication timeframes for an MA plan (including an MA-PD plan). We are not proposing to change any other requirements (for example, notice requirements, content, standards for decision making, etc.). Consequently, the provision is not subject to the PRA.
We are considering redefining “negotiated price” as the baseline, or lowest possible, payment to a pharmacy and adding a definition of “price concession.” The definitions being considered would not impose any new or revised information collection requirements or burden on sponsors, pharmacies, or any other stakeholders. Consequently, the provisions would not be subject to the PRA.
We have submitted a copy of this proposed rule to the Office of Management and Budget (OMB) for its review of the rule's information collection and recordkeeping requirements. These requirements are not effective until they have been approved by OMB.
To obtain copies of the supporting statement and any related forms for the proposed collections previously discussed, please visit CMS's website at:
We invite public comments on these proposed information collection requirements. If you wish to comment, please submit your comments electronically as specified in the
See the
This rule proposes to support Medicare health and drug plans' negotiation for lower drug prices and reduce out-of-pocket costs for Part C and D enrollees. Although satisfaction with the MA and Part D programs remains high, these proposals are responsive to input we received from stakeholders while administering the programs, as well as through our requests for comment.
HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (May
We examined the impact of this proposed rule as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act (the Act), section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) (March 22, 1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999), the Congressional Review Act (5 U.S.C. 804(2)), and Executive Order 13771 on Reducing Regulation and Controlling Regulatory Costs (January 30, 2017).
The RFA, as amended, requires agencies to analyze options for regulatory relief of small businesses, if a rule has a significant impact on a substantial number of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions.
This proposed rule affects MA plans and Part D sponsors (NAICS category 524114) with a minimum threshold for small business size of $38.5 million (
To clarify the flow of payments between these entities and the federal government, note that MA organizations submit bids (that is, proposed plan designs and projections of the revenue needed to provide those benefits, divided into three categories—basic benefits, supplemental benefits, and Part D drug benefits) in June 2019 for operation in contract year 2020. These bids project payments to hospitals, providers, and staff as well as the cost of administration and profits. These bids in turn determine the payments from the Medicare Trust Fund to the MA organizations that pay providers and other stakeholders for their provision of covered benefits to enrollees. Consequently, our analysis will focus on MA organizations.
There are various types of Medicare health plans, including MA plans, Part D sponsors, demonstrations, section 1876 cost plans, prescription drug plans (PDPs), and Program of All-Inclusive Care for the Elderly (PACE) plans. Forty-three percent of all Medicare health plan organizations are not-for-profit, and 31 percent of all MA plans and Part D sponsors are not-for-profit. (These figures were determined by examining records from the most recent year for which we have complete data, 2016.)
There are varieties of ways to assess whether MA organizations meet the $38.5 million threshold for small businesses. The assessment can be done by examining net worth, net income, cash flow from operations, and projected claims as indicated in their bids. Using projected monetary requirements and projected enrollment for 2018 from submitted bids, 32 percent of the MA organizations fell below the $38.5 million threshold for small businesses. Additionally, an analysis of 2016 data—the most recent year for which we have actual data on MA organization net worth—shows that 32 percent of all MA organizations fall below the minimum threshold for small businesses.
If a proposed rule may have a significant impact on a substantial number of small entities, the proposed rule must discuss steps taken, including alternatives, to minimize burden on small entities. While a significant number (more than 5 percent) of not-for-profit organizations and small businesses are affected by this proposed rule, the impact is not significant. To assess impact, we use the data in Table 14, which show that the raw (not discounted) net effect of this proposed rule over 5 years is $1.2 billion. Comparing this number to the total monetary amounts projected to be needed just for 2020, based on plan submitted bids, we find that the impact of this proposed rule is significantly below the 3 to 5 percent threshold for significant impact. Had we compared the 2020 impact of the proposed rule to projected 2020 monetary need, the impact would be still less.
Consequently, the Secretary has determined that this proposed rule will not have a significant economic impact on a substantial number of small entities, and we have met the requirements of the RFA. In addition, section 1102(b) of the Act requires us to prepare a regulatory analysis for any final rule under title XVIII, title XIX, or Part B of Title XI of the Act that may have significant impact on the operations of a substantial number of small rural hospitals. We are not preparing an analysis for section 1102(b) of the Act because the Secretary certifies that this proposed rule will not have a significant impact on the operations of a substantial number of small rural hospitals.
Section 202 of UMRA also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2018, that threshold is approximately $150 million. This proposed rule is not anticipated to have an effect on state, local, or tribal governments, in the aggregate, or on the private sector of $150 million or more.
Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule that imposes substantial direct requirement costs on state and local governments, preempts state law, or otherwise has federalism implications. Since this proposed rule does not impose any substantial costs on state or local governments, the requirements of Executive Order 13132 are not applicable.
If regulations impose administrative costs on reviewers, such as the time needed to read and interpret this proposed rule, then we should estimate the cost associated with regulatory review. There are currently 750 MA contracts (which also includes PDPs), 50 State Medicaid Agencies, and 200 Medicaid Managed Care Organizations (1,000 reviewers total). We assume each entity will have one designated staff member who will review the entire rule. Other assumptions are possible and will be reviewed after the calculations.
Using the wage information from the Bureau of Labor Statistics (BLS) for medical and health service managers (code 11-9111), we estimate that the cost of reviewing this rule is $107.38 per
Note that this analysis assumed one reader per contract. Some alternatives include assuming one reader per parent entity or assuming (major) pharmacy benefit managers (PBMs) will read this rule. Using parent organizations instead of contracts would reduce the number of reviewers to approximately 500 (assuming approximately 250 parent organizations), and this would cut the total cost of reviewing in half. However, we believe it is likely that reviewing will be performed by contract. The argument for this is that a parent organization might have local reviewers; even if that parent organization has several contracts that might have a reader for each distinct geographic region, to be on the lookout for effects of provisions specific to that region.
As for PBMs, it is reasonable that only the major PBMs would review this rule. There are 30-50 major PBMs, and this would increase the estimate by 0.3 to 0.5 percent. Using these alternate estimates, we can safely say that the cost of reviewing is between half a million (50 percent * $816,000) and a million (1.005 percent * $816,000). Thus, we consider the $816,000 a reasonable midpoint figure to estimate review cost.
In accordance with the provisions of Executive Order 12866, this rule was reviewed by the Office of Management and Budget (OMB).
CMS is proposing three exceptions to the protected class policy that would allow Part D sponsors to: (1) Implement broader use of prior authorization and step therapy for protected class drugs, including to determine use for protected class indications; (2) exclude a protected class drug from a formulary if the drug represents only a new formulation of an existing single-source drug or biological product, regardless of whether the older formulation remains on the market; and (3) exclude a protected class single-source drug or biological product from a formulary if the price of the drug increased beyond a certain threshold over a specified look-back period.
Under this proposal, we reviewed the total expenditure, the rebate amounts, expected patent expirations, and the generic availability for all drugs in the six protected classes and determined that the proposal will have meaningful impact on three classes, which are the anticonvulsants, antidepressants, and antipsychotics. For the remaining three classes, antineoplastics, antiretrovirals, and immunosuppressants, the narrower indications and complicating clinical criteria would limit Part D sponsors' ability to do significant management. Due to restrictions on disclosure of rebate data, CMS is not able to release this analysis to the public.
Granting Part D sponsors additional management flexibility provides them with greater negotiating power in determining manufacturer rebate levels. Additionally, utilization management will promote generic substitution when appropriate and reduce wasteful or inappropriate prescriptions. For example, if an antipsychotic drug is prescribed to a beneficiary and the beneficiary does not have a diagnosis for a condition that requires such a drug, these additional tools will allow Part D sponsors to better manage utilization of that drug. We did not assume any interactions with Part D sponsors' ability to use indication-based coverage, as no experience on that coverage is currently available.
Since manufacturers have been paying relatively high rebates for some drugs, we assume that the rebates would not increase for those drugs whose manufacturers pay for 25 percent or more of their costs. However, there are different market forces behind those drugs whose manufacturers pay lower rebates. Therefore, we assume the rebates will increase by a modest 5 percent for most of those drugs currently with rebates less than 25 percent of their costs. Further, for those drugs with generic versions available, we assume that 5 percent of the brand-name prescriptions will be shifted to generic versions. Since there were no data readily available, we relied upon pharmacy benefit management experience and actuarial judgment to arrive at these 5 percent estimates. Lastly, in the absence of data, and using actuarial judgment, we estimate an overall 0.5 percent of cost reduction due to a reduction in wasteful or inappropriate prescriptions when Part D sponsors implement broader use of prior authorization (for the reasons discussed previously and in section III.B.2. of this proposed rule). We considered studies such as the 2014 NIH study
Because the current rebates concentrate on a handful of drugs for which manufacturers already pay relatively high rebates, the further rebate increases are projected to be only about $11 million in 2020. The projected increase in generic substitution affects more than the highly rebated drugs in those three classes (antidepressants, anticonvulsants, and antipsychotics) because most of them have generic competition. Estimated savings to the Medicare Trust Fund for these generic substitutions are $104 million in 2020. The projected savings to the Medicare Trust Fund from reduced overall prescriptions are $77 million in 2020 with 0.5 percent being applied to the total cost adjusted for the projected impact from the generic substitution. Table 4 presents the projected yearly total savings to the Medicare Trust Fund for 2020-2029, carving out the effects of ordinary inflation. The annual savings to the Medicare Trust Fund for 2020-2029 is projected to be $192 to $320 million. The annual savings for Part D enrollees, comprising both lower premiums and lower cost sharing, for 2020-2029 is projected to be $51 to $88 million.
Factors entering into the trend considerations were based on internal CMS data and assumptions on Part D expenditures. We also carved out ordinary inflation of 2.6 percent.
At this time, we do not anticipate any adverse effects upon enrollee access to drugs in the protected classes. The reasons for this are two-fold. First, we are not proposing to change or remove any of the protected classes identified in section 1860D-4(3)(G)(iv) of the Act. Second, in considering whether exceptions to the added protections afforded by the protected class policy are appropriate, we took into account the many other enrollee protections in the Part D program, which are mature and have proven workable. These protections include: Formulary transparency, formulary requirements, reassignment formulary coverage notices, transition supplies and notices, and the expedited exception, coverage determination, and appeals processes.
Out of an abundance of caution to make certain that our three proposed
These projected dollar savings to the Medicare Trust Fund are classified as transfers because the money on brand drugs would instead be spent on generic drugs. While brand drugs are more expensive, the primary driver of this expense is the research and development (R&D) that went into them,
We solicit comment on these estimates.
This provision proposes to codify existing practice and therefore is expected to produce neither savings nor cost.
This provision proposes that each Part D plan sponsor adopt one or more Real Time Benefit Tool (RTBT) tools that are capable of integrating with e-prescribing (eRx) and electronic medical record (EMR) systems for use in part D E-Prescribing (eRx) transactions beginning on or before January 1, 2020. CMS believes that requiring Part D sponsors to implement real-time benefits (RTB) information may improve the cost effectiveness of the Part D benefit, as required by section 1860D-4(e)(2)(D) of the Act. As discussed earlier in this preamble, we understand that some PBMs and a few prescription drug plans have already begun to use RTBT tools capable of meeting the specifications listed in our preamble discussion, which includes providing beneficiary-specific drug coverage and out-of-pocket cost information at the point-of-prescribing. CMS seeks to accelerate the use of such real time solutions in the Part D program so as to realize their potential to improve adherence, lower prescription drug costs, and minimize beneficiary out-of-pocket cost sharing. These tools have the capability to inform prescribers when lower-cost alternative therapies are available under the beneficiary's prescription drug benefit. We are interested in fostering the use of these real-time solutions in the Part D program, given their potential to lower prescription drug spending and minimize beneficiary out-of-pocket costs. Not only can program spending and beneficiary out-of-pocket costs be reduced, but (as discussed above) evidence suggests that reducing medication cost also yields benefits in patients' medication adherence.
We first give a high-level description of impact. The major savings of this provision would be use of RTBT to encourage prescribing of lower tier cost sharing drugs. This would result in a dollar savings to the Medicare Trust Fund. However, we are unable to fully quantify the impact of this provision due to lack of adequate data. Because of lack of data we are not scoring this provision. We however, provide below a list of data items needed and solicit comments on any of these factors.
To illustrate the potential both for costs and savings we present below some estimates on costs below. We hope commenters can help provide us with information so we can have a more concrete estimate at the time of the final rule.
The list of items for which we do not have adequate data are the following:
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Prior to stating estimates we outline how they are used. We estimate cost at the parent organization level since software available from a parent organization would suffice for all its contracts. Thus each per parent-organization estimate is multiplied by 240 (the number of parent organizations). This figure is based on all parent organizations creating software is used as a factor in scenarios. For example—
• If we assume 50 percent of parent organizations have adequate software (or cheap intermediaries) then our estimate for cost would be 50 percent * 240 (parent organizations) * Cost per parent organization.
• If we assume 25 percent of parent organizations have adequate software or cheap intermediaries) then our estimate for cost would 25 percent * 240 * Cost per parent organization.
In other words the calculation of cost per parent organization is simply a factor that is to be used in computations of impact by scenario.
Rather than include an assumption about how many parent organizations need to program software, we did not calculate the cumulative impact of the potential costs for software implementation across parent organizations. As discussed below, we are seeking comment on how many plans are already doing RTBT (and conversely, how many would incur costs for software implementation).
We now estimate separately the following:
• Savings from RTBT.
• Cost for software implementation per parent organization.
Cost for intermediaries is not estimated since we have no basis and there is concern that rates might go up.
Any such savings would be classified as a transfer since there is no reduction in consumption of goods (prescription drugs) but rather a transfer of expense from one drug to another. However, this transfer (between manufacturers of drugs) would result in reduced dollar spending by Part D Sponsors and enrollees and would result in reduced spending by the Medicare Truest Fund.
Cost of plans writing their own software: We are not aware of all software requirements. Therefore, we estimate a minimum requirement and show that even that is prohibitive. We obtain hourly wages from the BLS website. Minimum daily costs are summarized in Table 5.
We assume that minimally a plan would need a unit of two software developers, two programmers, two physicians and two pharmacists. The total cost per day for this minimal unit is $8,192. The needs for each of these occupations should be clear: Programmers to write the code and software developers for business requirements. Both physicians and pharmacists would be needed to identify clinically equivalent drugs. The use of “two” is simply a minimum number. We again emphasize that this minimal unit is a factor not a statement of actual need. The following examples of impacts of scenarios are illustrative:
• If we assume a year of work we would need $2.1 million (52 weeks * 5 days a week * $8,192 cost per day = $2.1 million).
• If we further assume that four of each occupation is needed we would double this (2 (twice as many staff) * 52 weeks * 5 days a week * $8,192 cost per day) = 2 * $2.1 million = $4.2 million).
• If we assume only 6 months are needed then half would be needed ($1.05 million or $2.1 million/2).
Similarly, maintenance costs could be obtained by multiplying number of days needed for maintenance by daily costs. For example if a week each month is needed, maintenance costs would be $0.7 million ($8192 * 12 months * 5 days). If more or less are needed then the maintenance numbers would go up or down.
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We are soliciting input from stakeholders on the following questions in order to inform the impact analysis and to help us develop an estimate of the impacts of this proposal across plans:
• How many plans are already doing RTBT?
• What were the costs?
• Are there further costs in going from a trial run to a full run if that is applicable?
• Are the cost estimates for creating software realistic and consistent with plan experience?
• Are plans using intermediaries to provide this service?
• What are the costs for high volume usage?
• What training is provided to prescribers when RTBT is implemented, and how much does that training cost?
• Are providers actively using the RTBT software? What specific provider patterns of usage of RTBT are relevant to this proposal.
• What will the extra cost be to imposing this requirement and then implementing the NCPDP standard?
• Was there a change in prescribing patterns once RTBT was implemented? Did it lead to reduce spending on drugs?
We are also interested in comments that would help us to understand whether the potential benefits or cost savings associated with this proposal outweigh the potential costs of this proposal.
In the Collection of Information portion of this document we have detailed the $0.2 million cost to Part D sponsors to update their EOB templates. Additionally, CMS Central Office staff will have to develop the model language to be used by the Part D sponsors.
Significant effort goes into developing a model, including developing instructions and obtaining clearance. We therefore estimate that it would take two GS-13-Step 5 employees a month, each working a half a day, or 160 hours (2 employees * 4 hours a day * 5 days a week * 4 weeks) to develop the templates. It would additionally take a supervisory GS-15 staff, five hours to give approval.
Wages for 2018 for CMS staff may be obtained from the OPM website at
Step therapy is a type of utilization management (for example, prior authorization) for drugs that begin medication for a medical condition with the most preferred drug therapy and progress to other therapies only if necessary, promoting more cost effective therapies, potentially better clinical decisions, and lower costs for treatment. The lower costs of treatment primarily benefit MA enrollees and plans and are transferred to the government as savings.
A further source of savings is negotiations. If a plan offers all drugs, then it typically will purchase drugs at market price. There could be a pair of drugs that have the same effect on a medical condition but differ significantly in price and the plan is allowed to use step therapy. This creates an incentive for drug manufacturers to lower further the cost of the less expensive drug of the drug pair and then incentivize drug manufacturers to negotiate with MA plans so that their drugs become the drug selected by the plan as the first step in a therapy.
However, it is difficult to numerically estimate the savings from increased negotiations because, unlike other impact events, negotiations vary. Furthermore, we do not have access to negotiation data as this is proprietary information between MA plans and manufacturers and is not submitted in the MA bid. For these two reasons (lack of data and volatility) we are leaving the negotiation of increased savings as a qualitative, rather than a quantitative event. We believe that the potential savings from negotiations is significant, but have no way of quantifying the effect.
We note that although we are not estimating the savings from front-end negotiations, we do estimate the savings from back-end negotiations, more specifically, from the rebates manufacturers give plans with favorable drug management practices. Such rebates also occur on the Part D side and we have the data to estimate their effect. This is done in this section of this proposed rule when discussing the impact on the Medicare Trust Fund and beneficiary cost sharing due to step therapy.
Despite the rationale just stated, there are various studies suggesting that step therapy may be costly either economically or health-wise. There are two primary reasons for this.
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The estimate of the impact on the Medicare Trust Fund includes the effects of—(1) back-end negotiations, rebates from manufacturers to plans; (2) less expensive biological products approved under section 351(k) of the Public Health Service Act (
CMS acknowledges that step therapy is a widely accepted tool for utilization management. Sixty percent of commercial insurers were using step therapy in 2010; in 2014, 75 percent of large employers offered enrollees plans with step therapy. Furthermore, the concerns expressed in this RIA section are not unique to Federal insurance programs such as Medicare Parts C and D. Eighteen states have enacted laws on the use of step therapy.
This provision will allow MA plans to use this utilization management tool for Part B drugs and examine the most effective ways to use step therapy to achieve savings while also ensuring access to medically necessary treatment options.
In the remainder of this section we estimate the impact on the Medicare Trust Fund and enrollee cost sharing. We now explain the calculations which are summarized in Table 6.
We obtain projected MA enrollment from the 2018 Medicare Trust Fund report. This is presented in Column (A) of Table 6.
• 2016 is the most recent year for which we have Part B drug spending and utilization from the CMS data systems. Column (B) presents the average amount that MA enrollees pay per month on Part B drugs. This amount is trended (from 2016) to reflect medical inflation (5.2 percent a year) with ordinary inflation (2.6 percent) carved out. The inflation factors are obtained from the Medicare Trust Fund report. The product of MA enrollment and average Part B spending per month provides the aggregate MA Part B spending per month.
• The Part B spending per month is multiplied by 12 (Column (C)) to obtain the aggregate spending on Part B drugs annually.
• We estimate that, because of this step therapy provision, plans will save 1.6 percent (Column (D)) on the aggregate annual cost of Part B drugs. There are several points about this 1.6 percent. First, it represents the effect of the proposed provision (proposed § 422.136) in this proposed rule. An HPMS memo was issued by CMS rescinding an earlier memo prohibiting step therapy. This proposal surpasses this memo and it is the effects of this provision that the 1.6 percent captures. The 1.6 percent represents three factors contributing to savings from Step Therapy:
• Drugs for which there will be a less expensive biological product approved under section 351(k) of the Public Health Service Act in 2020.
• Pairs of drugs which are clinically comparable but differ significantly in price. For example, Avastin®, Eylea®, and Lucentis® for the treatment of macular degeneration.
• Drugs for which the manufacturer gives a rebate to MA plans with favorable management patterns. This happens in drugs with sufficient competition, particularly in the treatment of rheumatoid arthritis. Using our experience on manufacturers providing rebates on Part D drugs, we are able to estimate the savings effects of similar rebates on Part B drugs. As mentioned previously, this corresponds to a savings in step-therapy from back-end negotiations.
• The multiplication of enrollment, average Part B cost per member per month, number of months per year and 1.6 percent represents the total dollar savings from this provision.
• We use this total dollar savings to estimate separately savings to the Medicare Trust Fund and savings to enrollees in cost sharing.
• To obtain savings to the Medicare Trust Fund we multiply the aggregate savings from step therapy by the average rebate percentage and the average backing out of part B premium
• To obtain savings to beneficiaries, we used the 2019 projected bid data submitted by MA plans to CMS in June 2018. These data show that on average 13 cents of every dollar paying for Part B drugs goes to cost sharing. We obtained this number by dividing the cost sharing for Part B drugs by the total cost of Part B drugs. This percentage is found in Column (H).
• We next have to adjust the savings due to step therapy. Recall that column (D) indicates that step therapy will save 1.6 percent, the 1.6 percent arising from three factors listed previously. Of those three factors, enrollees do not benefit from manufacturer rebates. To illustrate this, consider a $20 drug for which the beneficiary pays a 20 percent copay ($4). At the end of the year, manufacturers and pharmacists give a rebate to plans that have used their products. Let us suppose (for purposes of illustration) that the rebate is $3. Theoretically the enrollee should get 60 cents of this $3 (20 percent copay * $3). However, the enrollee does not get a portion of the rebate. We estimate that 1.6 percent savings has a 1.4 percent component from manufacturer rebates and a 0.2 percent rebate from the other factors listed previously. It follows that for the enrollee, the savings from step therapy are 0.2 percent, not 1.6 percent. This is listed in column (I).
• To obtain aggregate annual beneficiary savings we multiply MA enrollment (column (A)), average cost of prescription drugs per month (column (B)), number of months per year (column (C)) and the 0.2 percent, the savings to enrollees from this step therapy provision (Column (I)). This gives the total dollar savings, of which enrollees pay 13 percent (column (H)). The result is presented in column (J).
The results of our calculations are summarized for 2020-2029 in Columns (G) and (J) of Table 6. The savings to enrollees are between $5 and $8 million; the savings to the Medicare Trust Fund are between $145 and $240 million.
These projected dollar savings to the Medicare Trust Fund are classified as transfers because the money on brand drugs would instead be spent on generic drugs. While brand drugs are more expensive, the primary driver of this expense is the research and development (R&D) that went into them, and for drugs that are already on the market R&D has already been done and would not change. In other words, although this proposed regulatory provision would reduce the return on drug development because enrollees who are expected to purchase the brand and thus pay for the initial R&D would instead purchase generics, this reduced return would be experienced after the initial R&D has been completed; consequently, any immediate reduction in R&D services would not impact the availability of new drugs until later. There would be also no reduction in production of drugs, since generic manufacturers would produce the drugs consumed by enrollees rather than brand manufacturers. However, the cost to the enrollee and the Medicare Trust Fund would be significantly less because the enrollee and Trust Fund would no longer pay for the initial R&D. In conclusion, this provision would not reduce activities of production but rather transfers the performance of those services from brand manufacturers to generic manufacturers; however, as a consequence, the enrollees and Trust Fund would experience reduced dollars spent.
The allowance of step therapy could result in a higher appeal rate. We estimate the aggregate increase in cost in 2016 due to expected increased appeals as $0.8 million. Details are presented in Table 7. The following narrative explains this table.
Data for appeals are plan reported. It typically takes 2 years for CMS to validate these data. Hence the latest year for which we have complete data is 2016. Appeals can happen at various levels. The first level is reconsiderations where an appeal is made for a plan to reconsider a decision. If this is denied it goes on to the IRE (a CMS contractor) to be reviewed. If this is also denied it can be appealed to an administrative law judge (ALJ) if the amount in controversy is met.
For 2016, we have 328,857 and 58,023 reconsiderations and IRE cases respectively in the MA program. We estimate that in general 6 percent of cases reaching the IRE go on to an ALJ.
Based on data pulled from the Medicare Appeals System for part D appeals, 1.19 percent of plan level appeals involving step therapy were denied. We use this as a proxy for the percent of cases involving part B drugs subject to step therapy that we expect to be appealed since we have no other basis. We believe it is reasonable to consider Part D appeals data related to cases that involve drugs subject to step therapy in developing these estimates. We also use the 1.19 percent as a proxy for the percent of reconsiderations and ALJ cases that involve step therapy. We acknowledge that percentages might be different at different appeal levels but the 1.19 percent is the only proportion we have.
Having derived the expected number of appeals involving step therapy we note that section 1852(g)(2) requires a reconsideration by a MA plan to deny coverage on the basis of medical necessity to be reviewed by a physician with the appropriate expertise; CMS has adopted a MA regulation (§ 422.566(d)) that implements this requirement for denials based on medical necessity determinations. We believe it is
Multiplying the number of appeals * 0.8 hour per appeal * $203.26 cost per hour we arrive at total cost for each appeal level. Adding these together we obtain the $0.8 million estimate, based on 2016 data.
Factors that enter into appeal rates include enrollment rates and changes in plan benefit packages. Appeal rates change from year to year. One major factor in appeal rates is enrollment. If enrollment increases by 10 or 20 percent then it is very reasonable that the number of appeals will approximately increase by that amount.
Thus to obtain estimates of cost for 2018 we would multiply the $0.8 million by the ratio of enrollment in 2018 to 2016. Similarly to obtain estimates for 2020-2024 we multiply by ratios of enrollment.
The ratio of 2018 to 2016 is 1.1585 based on enrollment figures from the CMS website. Projected enrollment for 2020-2029 may be obtained from Table IV.C1 in the 2018 Trustee report. Using these numbers we obtain the estimated cost of increased appeals for 2020-2029, presented in Table 8, as $1.0-$1.3 million.
In this rule, we include an extensive discussion of the consideration of a new definition of “negotiated price” that includes all pharmacy price concessions received by the plan sponsor for a covered Part D drug, and reflects the lowest possible reimbursement a network pharmacy will receive, in total, for a particular drug. As we are not proposing to move forward with such a policy for 2020, there is no impact in this regard. As moving forward with the policy is an alternative that is under consideration, we provide and seek comment on the following regulatory impact analysis.
As part of the approach being considered, we would first delete the current definition of “negotiated prices” (in the plural) and add a definition of “negotiated price” (in the singular) to make clear that a negotiated price can be set for each covered Part D drug, and the amount of the pharmacy price concessions may differ on a drug by drug basis. Then, we would implement a definition of “negotiated price” that is intended to ensure that the prices available to Part D enrollees at the point of sale are inclusive of all pharmacy price concessions. We believe such an approach would be more reflective of current pharmacy payment arrangements.
We note Part D sponsors and their contracted PBMs have been increasingly successful in recent years at negotiating price concessions from network pharmacies. Performance-based pharmacy price concessions, net of all pharmacy incentive payments, increased, on average, nearly 225 percent per year between 2012 and 2017 and now comprise the second largest category of DIR received by sponsors and PBMs, behind only manufacturer rebates.
Pharmacy price concessions are negotiated between pharmacies and sponsors or their PBMs, independent of CMS, and are often tied to the pharmacy's performance on various measures defined by the sponsor or its PBM. Under the current definition of “negotiated prices” at § 423.100, negotiated prices must include all price concessions from network pharmacies except those that cannot reasonably be determined at the point of sale. However, because these performance adjustments typically occur after the point of sale, they are not included in the price of a drug at the point of sale.
We further understand, through comments received from the pharmacy industry in response to our Request for Information on pharmacy price concessions (included in the November 2017 proposed rule (82 FR 56419 through 56428) and evaluation of the DIR data submitted by Part D sponsors, that the share of pharmacies' reimbursements that are contingent upon their performance under such arrangements has grown steadily each year. As a result, sponsors and PBMs have been recouping increasing sums from network pharmacies after the point of sale (pharmacy price concessions) for “poor performance,” sums that, in some instances, are far greater than those paid to network pharmacies after the point of sale (pharmacy incentive payments) for “high performance.”
When pharmacy price concessions are not reflected in the price of a drug at the point of sale, beneficiaries might see lower premiums, but the following negative effects occur:
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For this reason, as part of the November 2017 proposed rule, we published a “Request for Information Regarding the Application of Manufacturer Rebates and Pharmacy Price Concessions to Drug Prices at the Point of Sale,” (82 FR 56419 through 56428). The majority of commenters, representing pharmacies, pharmacy associations, and beneficiary advocacy groups, supported the adoption of a requirement that pharmacy price
• Lower beneficiary out-of-pocket costs (especially critical for beneficiaries who utilize high cost drugs);
• Stabilize the operating environment for pharmacies (because of greater transparency and predictability of the minimum reimbursement on a per-claim level, thus allowing more accurate budgeting and improved ability to evaluate proposed contracts from PBMs); and
• Standardize the way in which plan sponsors and their PBMs treat pharmacy price concessions.
The proposal would have several impacts on a variety of stakeholders:
I. Impacts on prescription drug costs for beneficiaries and manufacturers.
II. One time administrative costs for Part D sponsors.
These impacts are summarized in the following tables and further discussed in narratives. These tables reflect two possible approaches to this concession provision:
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• Tables 9 and 10 summarize impacts on prescription drug costs for beneficiaries, Part D sponsors and manufacturers, under the all-phase assumption.
• Table 11 summarizes one-time administrative costs for Part D sponsors. This is independent of which approach is taken.
Table 10 summarizes the ten-year impacts we have modeled for requiring that sponsors move all pharmacy price concessions to the point of sale in all phases of the Part D benefit, including the coverage gap. Table 10 reflects ten year raw sums of the figures in Table 9. For example, the second row of Table 10 lists a $14.8 billion savings to beneficiaries. The row header references row (I) in Table 9. The sum of the numbers in row (I) of Table 9, is in fact $14.8 (0.8 + 0. 9 + . . . + 2.3 = 14.8). Throughout this narrative, the quantitative aspects of the discussion may be found in the corresponding labeled rows of Table 10. There are several key assumptions involved in the development of these estimates, particularly the expected growth of pharmacy price concessions in future years. Actual pharmacy price concessions have increased from $229 million in 2013 to $4 billion in 2017. The use of preferred pharmacy networks is now widespread, with over 85% of standalone prescription drug plans using a preferred network in 2017. Because the rate of growth has been volatile in recent years, and because so many plan sponsors have incorporated preferred networks into their plan design, we estimate that the growth rate for pharmacy price concessions will slow in future years. Our best estimate is that the average growth of pharmacy price concessions will be approximately 10% per year going forward. This still represents a significant increase in the price concessions as a percentage of gross drug cost, from 2.6% in 2017 to 3.5% in 2029, and is a reasonable estimate in our judgment. We note that this assumption has a high degree of uncertainty given the changes in price concessions over the past five years. If the actual growth rate emerges differently, it could materially change the results in tables 9, 10, 12, 13, and 14.
Under the policy to require the negotiated price reflect the lowest possible amount the pharmacy could receive for a covered Part D drug, beneficiaries would see lower prices at the point of sale at the pharmacy and on Plan Finder, beginning immediately in the year the policy takes effect. (This is summarized in Table 10 in the row “beneficiary costs” which reflects the sum of the rows “cost sharing” and “premiums”; these three rows correspond, as indicated in Table 10, to sums of rows K, I, and J, respectively in Table 9.) Lower point-of-sale prices would result directly in lower cost-sharing for non-low income beneficiaries. For low income beneficiaries, whose out-of-pocket costs are subsidized through Medicare's low-income cost-sharing subsidy, cost-sharing savings resulting from lower point-of-sale prices would accrue to the government. Plan premiums would likely increase as a result of the change to the definition of negotiated prices being considered—if all pharmacy price concessions are required to be passed through to beneficiaries at the point of sale, fewer such concessions could be apportioned to reduce plan liability in the bid, which would have the effect of increasing the cost of coverage under the plan. At the same time, the reduction in cost-sharing obligations for the average beneficiary would be large enough to lower their overall out-of-pocket costs. The increasing cost of coverage under Part D plans as a result of requiring pharmacy price concessions to be applied at the point of sale would likely have a more significant impact on government costs, which would increase overall due to the significant growth in Medicare's direct subsidies of plan premiums and low income premium subsidies.
The increase in direct subsidy and low-income premium subsidy costs for the government are partially offset by decreases in Medicare's reinsurance and low income cost-sharing subsidies. Decreases in Medicare's reinsurance subsidy result when lower negotiated prices slow down the progression of beneficiaries through the Part D benefit and into the catastrophic phase, and when the government's reinsurance payments, which reflect 80 percent of allowable drug costs incurred in the catastrophic phase less a share of the overall price concessions received by the plan sponsor, are based on lower negotiated prices. Similarly, low income cost-sharing subsidies would decrease as beneficiary cost-sharing obligations decline due to the reduction in prices at the point of sale. Finally, the slower progression of beneficiaries through the Part D benefit would also have the effect of reducing manufacturer coverage gap discount payments as fewer beneficiaries would enter the coverage gap phase or progress entirely through it.
One primary purpose or effect of performance-based pharmacy payment arrangements, according to Part D sponsors responding to our Request for Information, is to encourage generic substitutions for brand drugs. For example, a pharmacy may claim that its staff informs patients when a generic alternative is available for their prescription, and that they may have lower costs for the generic version. The pharmacy is willing to structure its payments contingent on meeting a generic dispensing rate through these interventions. Such substitutions, although saving money to enrollees and plan sponsors, are a transfer primarily between the manufacturers of brand drugs and the manufacturers of generic drugs.
These projected dollar savings to the Medicare Trust Fund are classified as transfers because the money on brand drugs would instead be spent on generic drugs. While brand drugs are more expensive, the primary driver of this expense is the research and development (R&D) that went into them, and for drugs that are already on the market R&D has already been done and would not change. In other words, although this proposed regulatory provision would reduce the return on drug development because enrollees who are expected to purchase the brand and thus pay for the initial R&D would instead purchase generics, this reduced return would be experienced after the initial R&D has been completed; consequently, any immediate reduction in R&D services would not impact the availability of new drugs until later. There would be also no reduction in production of drugs, since generic manufacturers would produce the drugs consumed by enrollees rather than brand manufacturers. However, the cost to the enrollee and the Medicare Trust Fund would be significantly less because the enrollee and Trust Fund would no longer pay for the initial R&D. In conclusion, this provision would not reduce activities of production but rather transfers the performance of those services from brand manufacturers to generic manufacturers; however, as a consequence, the enrollees and Trust Fund would experience reduced dollars spent.
We anticipate that this potential policy change would require Part D sponsors to make certain system changes related to the calculation of the amounts they report in one or two fields in the PDE data collection form. We anticipate that this would cause sponsors to incur one-time administrative costs.
Please note that the impact amounts for this policy are consistent with the feedback received through the Request for Information Regarding the Application of Manufacturer Rebates and Pharmacy Price Concessions to Drug Prices at the Point of Sale in the Medicare Program that was included in the proposed rule, entitled “Contract Year 2019 Policy and Technical Changes to the Medicare Advantage, Medicare Cost Plan, Medicare Fee-for-Service, the Medicare Prescription Drug Benefit Programs, and the Pace Program” (82 FR 56419).
To estimate the administrative costs associated with submission of PDE data, we consider the following factors: (1) The amount of data that must be submitted; (2) the number of plan sponsors (or sponsors' intermediaries) submitting data; and (3) the time required to complete the data processing and transmission transactions.
The estimated annual administrative costs related to submission of PDE data are shown in Table 11, along with the 1-year cost estimate for contract year 2020.
The discussion earlier in section C.6 of this regulatory impact analysis assumes cost based on the application of the new definition of “negotiated price” being considered to determine the price at the point of sale both outside the coverage gap and in it (that is, during all phases of the Part D benefit). For purposes of comparison, to allow for equal consideration of both options, we also provide a cost analysis of the provision based on the application of the new definition of “negotiated price” being considered to determine the price at the point of sale only outside the coverage gap. The 10-year impact is summarized in Table 12, which reflects raw sums of the figures in the corresponding rows in Table 13. The construction of and labels in Tables 12 and 13 are identical to those in Tables 9 and 10; therefore the explanatory narrative provided for Tables 9 and 10 in Section C.6 of this proposed rule, applies to Tables 12 and 13 and need not be repeated here.
Moreover, while not accounted for when modeling the impacts in Section C, we believe that requiring pharmacy price concessions to be included in the negotiated price, as we consider, would also lead to prices and Part D bids and premiums being more accurately comparable and reflective of relative plan efficiencies, with no unfair competitive advantage accruing to one sponsor over another based on a technical difference in how costs are reported. We believe this outcome could make the Part D market more competitive and efficient.
Any relevant expected benefits for enrollees, stakeholders, and the government have been fully discussed in section IV.C. of this proposed rule.
Previous proposals to address the protected classes were aimed at changing both the protected classes and exceptions to the requirement that formularies include all drugs in the protected class. However, we remain concerned that previous criteria, as established either by statute under the MIPPA authority, or by CMS under the Patient Protection and Affordable Care Act authority, did not strike the appropriate balance among enrollee access, quality assurance, cost-containment, and patient welfare that we were striving to achieve. Consequently, we elected not to propose any changes to the drug categories or classes that are the protected classes. As a result, the critical policy decision was how broadly or narrowly to establish exceptions to the requirement that all protected class drugs be included on the formulary. Overly broad exceptions might inappropriately limit the products within the protected classes, thereby creating access issues for Part D enrollees. Only narrow exceptions afford enrollee protections such as adequate access and improved quality assurance while also providing an incentive for manufacturers to aggressively rebate their products for formulary placement in an operationally feasible manner for Part D sponsors.
We propose to require that each Part D plan select a real time benefit tool (RTBT) of its choosing by January 1, 2020. We had considered delaying regulatory action around real time requirements until the industry has developed a real time standard that could be used by all Part D plans. However, we believe that the benefits that would come with a real time standard in the form of cost transparency are substantial and should not be further delayed. We also considered requiring that plans use the optional fields in the NCPDP Formulary and Benefit standards (F&B) to provide much of the cost data that we believe would be important for prescribers to know. However, by definition, the F&B standards are batch standards so that the information provided is, by definition, not contemporaneous and are not specific to each beneficiary. For these reasons we opted in favor of proposing RTBT rather than proposing to require that plans use enhanced F&B standards.
This rule proposes requirements under which MA plans may apply step therapy as a utilization management tool for Part B drugs. In this proposal, we confirm authority for MA plans to implement appropriate utilization management and prior authorization tools for managing Part B drugs and propose parameters on using step therapy to ensure it is implemented in a manner to reduce costs for both enrollees and the Medicare program. Our proposal includes specific parameters for how step therapy may be implemented for Part B drugs, including requiring approval from P&T Committee that meets specific standards and permitting step therapy only for new administrations of the drug (subject to a 108 look-back period). We also proposed new appeal timeframes and deadlines for MA plans to adjudicate
The critical policy decision was how to adapt the existing negotiated price reporting standards to best account for current pharmacy payment practices and achieve transparency and consistency in how pharmacy price concessions and drug costs are reported and treated
• The current regulatory structure implements the statute accurately and could have been maintained, but does not account for the performance-contingent pharmacy payment adjustments that dominate today.
• Another option would be to require Part D sponsors to adjust negotiated prices in the current period using pharmacy payment adjustments determined for prior periods, which would not allow for price transparency in the current period and could drive beneficiaries away from high performing pharmacies, for which the negotiated prices would include incentive payments and, thus, be higher than for poor performing pharmacies.
• An additional option we considered was to require Part D sponsors to include in the negotiated price an approximation of the pharmacy payment adjustments that would apply. However, this approach would have no effect on differential reporting among Part D sponsors given that the accuracy of the approximations would likely vary by Part D sponsor, and it would not allow for greater price transparency if the approximations are inaccurate. This option would also drive beneficiaries away from high performing pharmacies for which the negotiated prices would be higher than for poor performing pharmacies.
• Finally, we considered an option to develop a standard set of metrics from which plans and pharmacies would base their contractual agreements. We request commenter feedback on whether these metrics could be designed to provide pharmacies with more predictability in their reimbursements while maintaining plan's ability to negotiate terms. Additionally, we seek comment on the most appropriate agency or organization to develop these standards, or whether this a matter better left to private negotiations.
In summary, the revision to the definition of negotiated price we are considering would create uniform, easily interpreted standards for negotiated price reporting that would support consistent implementation by all Part D sponsors and, thus, impose the least amount of burden on Part D sponsors and their intermediaries.
The following table summarizes costs, savings, and transfers by provision.
As required by OMB Circular A-4 (available at
The following Table 15 summarizes savings, costs, and transfers by provision and formed a basis for the accounting table. For reasons of space, Table 15 is broken into Table 15A (2020 through 2024) and Table 15B (2025 through 2029), In these tables savings are indicated as negative numbers in columns marked savings while costs are indicated as positive numbers in columns marked costs. Transfers may be negative or positive with negative numbers indicating savings to the Medicare Trust Fund and positive numbers indicating costs to the Medicare Trust Fund. All numbers are in millions. The row “aggregate total by year” gives the total of costs and savings for that year but does not include transfers. Table 15 forms the basis for Table 14 and for the calculation to the infinite horizon discounted to 2016, mentioned in the conclusion.
As indicated in Table 14, we estimate that this proposed rule generates for each year in 2020-2029, net annualized costs of approximately $1.1 million primarily to entities involved with the Part D appeal process, such as Part D sponsors, the appeals contractor, and administrative law judges. The annualized $1.1 million cost primarily reflects increased appeals arising from the Step Therapy provision. There are additional (minor) first year costs in 2020 to (i) contractors for the Federal Government who will respond to requests for claims data, and (ii) to CMS staff for updating templates with the Part D EOB. The aggregate raw cost is $10.2 million from 2020-2029.
Although other impacts in this rule are classified as transfers as discussed in each provision, the aggregate effect of these transfers reduce dollar spending by Medicare Advantage enrollees and the Medicare Trust Fund:
•
•
The Department believes that this proposed rule, if finalized as proposed, is considered a regulatory action under Executive Order 13771. The Department estimates that this rule generates $0.9 million in annualized cost at a 7-percent discount rate, discounted relative to 2016, over a perpetual time horizon. Notably, however, this estimate does not include impacts related to the RTBT proposal. If this proposal were finalized, the related costs or cost savings (on which we seek comment below) would also be considered under Executive Order 13771.
Administrative practice and procedure, Health facilities, Health maintenance organizations (HMO), Medicare, Penalties, Privacy, and Reporting and recordkeeping requirements.
Administrative practice and procedure, Emergency medical services, Health facilities, Health maintenance organizations (HMO), Health professionals, Medicare, Penalties, Privacy, and Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend CFR chapter IV as set forth below:
42 U.S.C. 1302 and 1395hh.
(a)
(1) Apply step therapy only to new administrations of Part B drugs, using at least a 108 day look-back period;
(2) Establish policies and procedures to educate and inform health care providers and enrollees concerning its step therapy policies.
(3) Prior to implementation of a step therapy program, ensure that the step therapy program has been reviewed and approved by the MA organization's pharmacy and therapeutic (P&T) committee.
(b)
(1) Include a majority of members who are practicing physicians or practicing pharmacists.
(2) Include at least one practicing physician and at least one practicing pharmacist who are independent and free of conflict relative to—
(i) The MA organization and MA plan; and
(ii) Pharmaceutical manufacturers.
(3) Include at least one practicing physician and one practicing pharmacist who are experts regarding care of elderly or disabled individuals.
(4) Clearly articulate and document processes to determine that the requirements under paragraphs (b)(1) through (3) of this section have been met, including the determination by an objective party of whether disclosed financial interests are conflicts of interest and the management of any recusals due to such conflicts.
(5) Base clinical decisions on the strength of scientific evidence and standards of practice, including assessing peer-reviewed medical literature, pharmacoeconomic studies, outcomes research data, and other such information as it determines appropriate.
(6) Consider whether the inclusion of a particular Part B drug in a utilization management program, such as step therapy, has any therapeutic advantages in terms of safety and efficacy.
(7) Review policies that guide exceptions and other utilization management processes, including drug utilization review, quantity limits, generic substitution, and therapeutic interchange.
(8) Evaluate and analyze treatment protocols and procedures related to the plan's step therapy policies at least annually consistent with written policy guidelines and other CMS instructions.
(9) Document in writing its decisions regarding the development and revision and utilization management activities and make this documentation available to CMS upon request.
(10) Review and approve all clinical prior authorization criteria, step therapy protocols, and quantity limit restrictions applied to each covered Part B drug.
(11) Meet other requirements consistent with written policy guidelines and other CMS instructions.
(c)
(d)
(b)
(i)
(A) The enrollee requests the extension;
(B) The extension is justified and in the enrollee's interest due to the need for additional medical evidence from a noncontract provider that may change an MA organization's decision to deny an item or service; or
(C) The extension is justified due to extraordinary, exigent, or other non-routine circumstances and is in the enrollee's interest.
(ii)
(2)
(d)
(1) An MA organization decides to deny a service or an item, Part B drug, or payment in whole or in part, or reduce or prematurely discontinue the level of care for a previously authorized ongoing course of treatment.
(2) An enrollee requests an MA organization to provide an explanation of a practitioner's denial of an item, service or Part B drug, in whole or in part.
(e)
(4)(i) For service, item, and Part B drug denials, describe both the standard
(d) * * *
(1) Automatically transfer a request to the standard timeframe and make the determination within the 72 hour or 14-day timeframe, as applicable, established in § 422.568 for a standard determination. The timeframe begins when the MA organization receives the request for expedited determination.
(a)
(2)
(b)
(i) The enrollee requests the extension;
(ii) The extension is justified and in the enrollee's interest due to the need for additional medical evidence from a noncontract provider that may change an MA organization's decision to deny an item or service; or
(iii) The extension is justified due to extraordinary, exigent, or other nonroutine circumstances and is in the enrollee's interest.
(d) * * *
(1) Automatically transfer a request to the standard timeframe and make the determination within the 30 calendar day or 7 calendar day, as applicable, timeframe established in § 422.590(a) and (c). The timeframe begins the day the MA organization receives the request for expedited reconsideration.
(a)
(2) If the MA organization makes a reconsidered determination that affirms, in whole or in part, its adverse organization determination, it must prepare a written explanation and send the case file to the independent entity contracted by CMS as expeditiously as the enrollee's health condition requires, but no later than 30 calendar days from the date it receives the request for a standard reconsideration (or no later than the expiration of an extension described in paragraph (a)(1) of this section). The organization must make reasonable and diligent efforts to assist in gathering and forwarding information to the independent entity.
(b)
(2) If the MA organization affirms, in whole or in part, its adverse organization determination, it must prepare a written explanation and send the case file to the independent entity contracted by CMS no later than 60 calendar days from the date it receives the request for a standard reconsideration. The organization must make reasonable and diligent efforts to assist in gathering and forwarding information to the independent entity.
(c)
(2) If the MA organization makes a reconsidered determination that affirms, in whole or in part, its adverse organization determination, it must prepare a written explanation and send the case file to the independent entity contracted with CMS no later than 7 calendar days from the date it receives the request for a standard reconsideration. The organization must make reasonable and diligent efforts to assist in gathering and forwarding the information to the independent entity.
(d)
(e)
(2)
(3)
(4)
(5)
(f)
(i) The enrollee requests the extension; or
(ii) The extension is justified and in the enrollee's interest due to the need for additional medical evidence from a noncontract provider that may change an MA organization's decision to deny an item or service; or
(iii) The extension is justified due to extraordinary, exigent or other non-routine circumstances and is in the enrollee's interest.
(2) When the MA organization extends the deadline, it must notify the enrollee in writing of the reasons for the delay and inform the enrollee of the right to file an expedited grievance if he or she disagrees with the MA organization's decision to grant an extension. The MA organization must notify the enrollee of its determination as expeditiously as the enrollee's health condition requires, but no later than upon expiration of the extension.
(g)
(h)
(2) When the issue is the MA organization's denial of coverage based on a lack of medical necessity (or any substantively equivalent term used to describe the concept of medical necessity), the reconsidered determination must be made by a physician with expertise in the field of medicine that is appropriate for the services at issue. The physician making the reconsidered determination need not, in all cases, be of the same specialty or subspecialty as the treating physician.
(a)
(2)
(3)
(b) * * *
(3)
The revisions and addition read as follows:
(a)
(2)
(b)
(2)
(c) * * *
(2)
42 U.S.C. 1302, 1395w-101 through 1395w-152, and 1395hh.
(1) With respect to exceptions in accordance with § 423.120(b)(2)(vi)(E) for contract year 2020, September 1, 2018 through February 28, 2019; or
(2) With respect to exceptions in accordance with § 423.120(b)(2)(vi)(E) for contract year 2021 and subsequent years, September 1 of the third year prior to the contract year in which the exception would apply, through August 31 of the second year prior to the contract year in which the exception would apply.
The revision and additions read as follows:
(a) * * *
(8) * * *
(iii) May not prohibit a pharmacy from, nor penalize a pharmacy for, informing a Part D plan enrollee of the availability at that pharmacy of a prescribed medication at a cash price that is below the amount that the enrollee would be charged to obtain the same medication through the enrollee's Part D plan.
(b) * * *
(2) * * *
(vi) * * *
(A) Drug or biological products that are rated as either of the following:
(
(
(C) Prior authorization and step therapy requirements that are implemented to confirm use is intended for a protected class indication, ensure clinically appropriate use, promote utilization of preferred formulary alternatives, or a combination thereof, subject to CMS review and approval.
(D) In the case of a single-source drug or biological product for which the manufacturer introduces a new formulation with the same active ingredient or moiety that does not provide a unique route of administration.
(E) A single-source drug or biological product, meaning a Part D drug that is approved under a new drug application submitted under section 505(b) of the Federal Food Drug and Cosmetic Act (FDCA); an authorized generic as defined under section 505(t)(3) of the FDCA; or in the case of a biological product, licensed under section 351 of the Public Health Service Act, that a Part D sponsor identifies, for which the wholesale acquisition cost between the baseline date and any point in the applicable period, increased more than the cumulative increase in the consumer price index for all urban consumers over the same period. The baseline date is the following:
(
(
(e) * * *
(5) For each prescription drug claim, include the cumulative percentage change (if any) in the negotiated price since the first day of the current benefit year and therapeutic alternatives with lower cost-sharing, when available as determined by the plan, from the applicable approved plan formulary.
(b) * * *
(7)
Environmental Protection Agency (EPA).
Proposed rule.
Pursuant to the Federal Clean Air Act (CAA or the Act), the Environmental Protection Agency (EPA) is proposing to approve a portion of the revision to the Arkansas State Implementation Plan (SIP) that addresses certain requirements of the CAA and the EPA's regional haze rules for the protection of visibility in mandatory Class I Federal areas (Class I areas) for the first implementation period. The EPA is proposing to approve the portions of the SIP revision addressing the best available retrofit technology (BART) requirements for sulfur dioxide (SO
Written comments must be received on or before December 31, 2018.
Submit your comments, identified by Docket No. EPA-R06-OAR-2015-0189, at
Dayana Medina, 214-665-7241,
Throughout this document wherever “we,” “us,” or “our” is used, we mean the EPA.
Regional haze is visibility impairment that is produced by a multitude of sources and activities that are located across a broad geographic area and emit fine particulates (PM
Data from the existing visibility monitoring network, the “Interagency Monitoring of Protected Visual Environments” (IMPROVE) monitoring network, show that at the time the Regional Haze Rule was finalized in 1999, visibility impairment caused by air pollution occurred virtually all the time at most national parks and wilderness areas. The average visual range
In section 169A of the 1977 Amendments to the CAA, Congress created a program for protecting visibility in the nation's national parks and wilderness areas. This section of the CAA establishes as a national goal the prevention of any future, and the remedying of any existing, man-made impairment of visibility in 156 national parks and wilderness areas designated as mandatory Class I Federal areas.
Section 169A of the CAA directs states to evaluate the use of retrofit controls at certain larger, often under-controlled, older stationary sources in order to address visibility impacts from these sources. Specifically, section 169A(b)(2)(A) of the CAA requires states to revise their SIPs to contain such measures as may be necessary to make reasonable progress toward the natural visibility goal, including a requirement that certain categories of existing major stationary sources
The vehicle for ensuring continuing progress towards achieving the natural visibility goal is the submission of a series of regional haze SIPs that contain long-term strategies to make reasonable progress towards natural visibility conditions. As part of this process, States also establish RPGs for every Class I area to provide assessments of the improvements in visibility anticipated to result from the long-term strategies. States have significant flexibility in establishing long-term strategies and RPGs,
Arkansas submitted a SIP revision on September 9, 2008, to address the requirements of the first regional haze implementation period. On August 3, 2010, Arkansas submitted a SIP revision with mostly non-substantive revisions to Arkansas Pollution Control and Ecology Commission (APCEC) Regulation 19, Chapter 15.
Following the issuance of the Arkansas Regional Haze FIP, the State of Arkansas and several industry parties filed petitions for reconsideration and an administrative stay of the final rule.
EPA also published a notice in the
On August 8, 2018, Arkansas submitted a SIP revision (Arkansas Regional Haze SO
The Arkansas Regional Haze SO
The August 8, 2018, SIP revision is the subject of this proposed action, in conjunction with our proposed withdrawal of the parts of the Arkansas Regional Haze FIP corresponding to our proposed approval. We are proposing to approve ADEQ's revised identification of the 6A Boiler at the Georgia-Pacific Crossett Mill as BART-eligible; the additional information and technical analysis presented in the SIP revision in support of the determination that the Georgia-Pacific Crossett Mill 6A and 9A Boilers are not subject to BART; and the state's BART decisions for the seven subject-to-BART units listed above. We are proposing to withdraw our prior approval of Arkansas' reliance on participation in the Cross-State Air Pollution Rule (CSAPR) for ozone season NO
We are also proposing to approve Arkansas' reasonable progress determinations for Independence Units 1 and 2 and all other sources in Arkansas, and to approve the revised RPGs contained in the August 8, 2018, SIP revision. We are further proposing to find that, based on the state's currently approved SIP and the analyses and determinations we are proposing to approve in this action, the state's reasonable progress obligations for the first implementation period have been satisfied. At this time, the majority of the BART requirements for the Domtar Ashdown Mill are satisfied by a FIP.
Finally, we are proposing to approve the components of the long-term strategy addressed by the August 8, 2018, SIP revision and to find that Arkansas' long-term strategy for reasonable progress with respect to all sources other than Domtar is approved. The long-term strategy is the compilation of all control measures a state will use during the implementation period of the specific SIP submittal to make reasonable progress towards the goal of natural visibility conditions, including emission limitations corresponding to BART determinations. If the proposed approvals of the BART measures and the emission limitations for the Independence facility addressed in this action are finalized, those measures will also be integrated into the State's long-term strategy. Because the August 8, 2018, SIP revision does not address the BART requirements for Domtar, that component of the long-term strategy will remain satisfied by the FIP unless and until EPA has received and approved a SIP revision containing the required analyses and determinations for this facility.
We are also proposing to withdraw the majority of the Arkansas Regional Haze FIP we promulgated on September 27, 2016. Upon finalization of this proposed rulemaking, the majority of remaining FIP provisions would be replaced by the corresponding revisions to the SIP that we are proposing to approve in this proposed rulemaking. Specifically, we are proposing to withdraw the following components of the FIP: The SO
The SIP revision also includes a discussion on interstate visibility transport. Specifically, the SIP revision discusses the impacts of Arkansas sources on Missouri's Class I areas, as well as the most recent IMPROVE monitoring data for Missouri's Class I areas. The SIP revision concludes that Missouri is on track to achieve its visibility goals, that the visibility progress observed indicates that sources in Arkansas are not interfering with the achievement of Missouri's RPGs for the Hercules-Glades Wilderness Area and Mingo Wilderness Area, and that no additional controls on sources within Arkansas are necessary to ensure that other states' visibility goals for their Class I areas are met. We are deferring proposing action on the interstate visibility transport portion of the SIP revision until a future proposed rulemaking.
States are required to identify all the BART-eligible sources within their boundaries by utilizing the three eligibility criteria in the BART Guidelines
In our March 12, 2012, final action on the 2008 Arkansas Regional Haze SIP, we approved Arkansas' identification of BART-eligible sources with the exception of the Georgia-Pacific Crossett Mill 6A Boiler.
We are proposing to find that the analysis and documentation provided by Georgia-Pacific and included in the Arkansas Regional Haze SO
In determining BART, the state must consider the five statutory factors in section 169A of the CAA: (1) The costs of compliance; (2) the energy and nonair quality environmental impacts of compliance; (3) any existing pollution control technology in use at the source; (4) the remaining useful life of the source; and (5) the degree of improvement in visibility which may reasonably be anticipated to result from the use of such technology.
STEP 1—Identify All Available Retrofit Control Technologies,
STEP 2—Eliminate Technically Infeasible Options,
STEP 3—Evaluate Control Effectiveness of Remaining Control Technologies,
STEP 4—Evaluate Impacts and Document the Results, and
STEP 5—Evaluate Visibility Impacts.
As mentioned previously, EPA partially approved and partially disapproved the 2008 Arkansas Regional Haze SIP revision in a final action published on March 12, 2012.
As noted above, we approved certain parts of the 2008 Arkansas Regional Haze SIP in 2012.
The AECC Bailey Unit 1 has a wall-fired boiler, a gross output of 122 MW, and a maximum heat input rate of 1,350 million British thermal units per hour (MMBtu/hr). The unit is currently permitted to burn pipeline quality natural gas and fuel oil. The fuel oil burned is currently subject to a sulfur content limit of 2.3% by weight. AECC produced BART analyses dated March 2014 for Bailey Unit 1, which were evaluated by EPA and largely formed the basis for EPA's SO
In assessing SO
In considering the costs of compliance for fuel switching, AECC concluded that the fuel switching options evaluated would not require capital investments in equipment, but instead the annual costs would be based upon operation and maintenance costs associated with the different fuel types. AECC estimated that the cost-effectiveness of switching Bailey Unit 1 to No. 6 fuel oil with 1% and 0.5% sulfur content by weight is $1,198/ton and $2,559/ton, respectively. Switching to diesel, which has 0.05% sulfur content, is estimated to cost $5,382/ton. ADEQ stated that the cost in dollars per ton for diesel is out of the range of what is typically considered cost-effective, while the cost of both 1% and 0.5% sulfur No. 6 fuel oil is estimated to be within the range of what is typically considered cost-effective.
ADEQ stated that AECC's evaluation did not identify any energy or non-air quality environmental impacts associated with switching to 1% sulfur No. 6 fuel oil, 0.5% sulfur No. 6 fuel oil, or diesel. In assessing the remaining useful life of Bailey Unit 1, AECC concluded that this factor does not impact the annualized costs of the evaluated control options since fuel switching is not expected to require any significant capital costs in this case.
In assessing visibility impacts, the state's submittal included CALPUFF modeling evaluating the visibility benefits of switching from the baseline fuel oil (assuming 100% use of fuel oil) to the various fuel switching options. We summarize the results of that modeling in Table 1.
Switching to 1% sulfur No. 6 fuel oil is anticipated to achieve visibility benefits of approximately 0.137 dv at Caney Creek, 0.154 dv at Upper Buffalo, 0.162 dv at Hercules-Glades, and 0.173 dv at Mingo over baseline visibility conditions. Switching to 0.5% sulfur No. 6 fuel oil is anticipated to achieve visibility benefits of approximately 0.188 dv at Caney Creek, 0.221 dv at Upper Buffalo, 0.233 dv at Hercules-Glades, and 0.209 dv at Mingo over the baseline. The visibility benefits of switching to diesel are anticipated to be even greater, with benefits of approximately 0.246 dv at Caney Creek, 0.279 dv at Upper Buffalo, 0.299 dv at Hercules-Glades, and 0.284 dv at Mingo over the baseline.
Taking into consideration the cost-effectiveness and the anticipated visibility improvement of the fuel switching options, ADEQ concurred with AECC's recommendation that SO
We note that switching to diesel would result in additional reductions in SO
PM emissions are inherently low when burning natural gas, but are higher when burning fuel oil. Bailey Unit 1 does not currently have pollution control equipment for PM emissions. In assessing PM BART for Bailey Unit 1, ADEQ explained that AECC considered the five BART factors. In assessing feasible control technologies and their
Residual fuel, such as the baseline No. 6 fuel oil burned at Bailey Unit 1, has inherent ash that contributes to emissions of filterable PM. Reductions in filterable PM emissions are directly related to the sulfur content of the fuel.
In considering the costs of the PM control options, AECC noted that add-on controls such as a wet scrubber, cyclone, and wet ESP involve capital costs for new equipment, which AECC annualized over a 15-year period in the analysis. Based on this analysis, AECC determined that the estimated cost-effectiveness of the add-on control options are as follows: $3,558,286/ton for a wet scrubber; $54,570/ton for a cyclone; and $981,583/ton for a wet ESP. AECC determined that the estimated cost-effectiveness of the fuel switching options are as follows: $27,528/ton for No. 6 fuel oil with 1% sulfur content; $22,386/ton for No. 6 fuel oil with 0.5% sulfur content; $25,004/ton for diesel; and $2,327/ton for natural gas. AECC noted that it does not consider any of the PM control options to be cost-effective.
ADEQ explained that AECC's PM BART evaluation did not discuss any energy or non-air quality environmental impacts associated with fuel switching. AECC did identify certain energy and non-air quality environmental impacts associated with wet ESPs and wet scrubbers. These impacts, which are factored in the cost of compliance, include increased energy usage for operation of the control equipment, the generation of wastewater streams that must be treated on-site or sent to a waste water treatment plant, and the generation of a filter cake that would likely require land-filling. In assessing the remaining useful life of Bailey Unit 1, AECC concluded that this factor does not impact the annualized costs of the evaluated control options since the remaining useful life of Bailey Unit 1 is at least as long as the capital cost recovery period of 15 years.
In assessing visibility impacts, the state's submittal included CALPUFF modeling evaluating the visibility benefits of switching from the baseline fuel oil (assuming 100% use of fuel oil) to the various fuel switching options. We summarize the results of that modeling in Table 3.
The anticipated visibility benefits of add-on controls (
Taking into consideration the cost-effectiveness and the anticipated visibility improvement of the PM control options considered, ADEQ concluded that add-on controls are not cost-effective, with AECC estimating the cost of these controls to be approximately $55,000/ton and greater. ADEQ concluded that the cost of switching to lower sulfur fuels is also not a cost-effective method for reducing PM emissions. However, ADEQ noted that the SO
We do not agree with the use of a 15-year capital cost recovery period for calculating the average cost-effectiveness of a wet ESP, wet scrubber, and cyclone. Per the EPA Control Cost Manual, facilities are to rely on a 30-year capital cost recovery period for calculating the average cost-effectiveness of a wet ESP, wet scrubber, or cyclone barring a technical rationale to deviate from the 30-year capital cost recovery period. AECC Bailey Generating Station did not provide a technical rationale to deviate from the assumed 30-year capital cost recovery period. In addition, we are not aware of any enforceable shutdown date for the AECC Bailey Generating Station, nor did AECC's evaluation or ADEQ's SIP revision indicate any future planned shutdown or provide any reason for adopting a 15-year equipment life for the controls under consideration. Therefore, we believe that assuming a 30-year equipment life rather than a 15-year equipment life would be more appropriate for these control technologies.
We also disagree with the total annual cost and cost-effectiveness values for fuel switching presented in AECC's PM BART analysis
The state's PM BART decision for Bailey Unit 1 is consistent with the BART decision EPA previously made in the FIP we promulgated on September 27, 2016.
The AECC McClellan Unit 1 has a wall-fired boiler, a gross output of 122 MW and a maximum heat input rate of 1,436 MMBtu/hr. The unit is currently permitted to burn pipeline quality natural gas and fuel oil. The fuel oil burned is currently subject to a sulfur content limit of 2.8% by weight. AECC produced BART analyses dated March 2014 for McClellan Unit 1, which were evaluated by EPA and largely formed the basis for EPA's SO
In assessing SO
In considering the costs of compliance for fuel switching, AECC concluded that the fuel switching options evaluated would not require capital investments in equipment, but instead the annual costs would be based upon operation and maintenance costs associated with the different fuel types. AECC estimated that the cost-effectiveness of switching McClellan Unit 1 to No. 6 fuel oil with 1% and 0.5% sulfur content by weight is $2,613/ton and $3,823/ton, respectively. Switching to diesel, which has 0.05% sulfur content, is estimated to cost $7,145/ton. ADEQ stated that the cost in dollars per ton for diesel is out of the range of what is typically considered cost-effective, while the cost of both 1% and 0.5% sulfur No. 6 fuel oil is estimated to be within the range of what is typically considered cost-effective.
ADEQ stated that AECC's evaluation did not identify any energy or non-air quality environmental impacts associated with switching to 1% sulfur No. 6 fuel oil, 0.5% sulfur No. 6 fuel oil, or diesel. In assessing the remaining useful life of McClellan Unit 1, AECC concluded that this factor does not impact the annualized costs of the evaluated control options since fuel switching is not expected to require any significant capital costs in this case.
In assessing visibility impacts, the state's submittal included CALPUFF modeling evaluating the visibility benefits of switching from the baseline fuel (assuming 100% use of fuel oil) to the various fuel switching options. We summarize the results of that modeling in Table 4.
Switching to 1% sulfur No. 6 fuel oil is anticipated to achieve visibility benefits of approximately 0.085 dv at Caney Creek, 0.035 dv at Upper Buffalo, 0.029 dv at Hercules-Glades, and 0.035 dv at Mingo over baseline visibility conditions. Switching to 0.5% sulfur No. 6 fuel oil is anticipated to achieve visibility benefits of approximately 0.300 dv at Caney Creek, 0.120 dv at Upper Buffalo, 0.116 dv at Hercules-Glades, and 0.092 dv at Mingo over the baseline. The visibility benefits of switching to diesel are anticipated to be even greater, with benefits of approximately 0.448 dv at Caney Creek, 0.193 dv at Upper Buffalo, 0.169 dv at Hercules-Glades, and 0.148 dv at Mingo over the baseline.
Taking into consideration the cost-effectiveness and the anticipated visibility improvement of the fuel switching options, ADEQ concurred with AECC's recommendation that SO
We note that switching to diesel would result in additional reductions in SO
PM emissions are inherently low when burning natural gas, but are higher when burning fuel oil. McClellan Unit 1 does not currently have pollution control equipment for PM emissions. In assessing PM BART for McClellan Unit 1, ADEQ explained that AECC considered the five BART factors. In assessing feasible control technologies and their effectiveness, AECC considered the following control technologies for PM BART: Dry ESP, wet ESP, fabric filter, wet scrubber, cyclone, and fuel switching. AECC's evaluation noted that the particulate matter from oil-fired boilers tends to be sticky and small, affecting the collection efficiency of dry ESPs and fabric filters. Dry ESPs operate by placing a charge on the particles through a series of electrodes, and then capturing the charged particles on collection plates,
Residual fuel, such as the baseline No. 6 fuel oil burned at McClellan Unit 1, has inherent ash that contributes to emissions of filterable PM. Reductions in filterable PM emissions are directly related to the sulfur content of the fuel. Therefore, switching to No. 6 fuel oil with a lower sulfur content is expected to result in lower filterable PM emissions. Also, ash content is much lower in a distillate fuel such as diesel and essentially zero in natural gas. The fuel switching options considered by AECC in the BART analysis are No. 6 fuel oil with 1% sulfur content by weight, No. 6 fuel oil with 0.5% sulfur content by weight, natural gas, and diesel. AECC estimated that switching to a lower sulfur fuel has a PM control efficiency ranging from approximately 44%-99%, depending on the fuel type. The estimated PM control efficiency of each control option is summarized in Table 5.
In considering the costs of the PM control options, AECC noted that add-on controls such as the wet scrubber, cyclone, and wet ESP involve capital costs for new equipment, which AECC annualized over a 15-year period in the analysis. Based on this analysis, AECC determined that the estimated cost-effectiveness of the add-on control options are as follows: $695,549/ton for a wet scrubber; $14,882/ton for a cyclone; and $266,237/ton for a wet ESP. AECC determined that the estimated cost-effectiveness of the fuel switching options are as follows: $53,044/ton for No. 6 fuel oil with 1% sulfur content; $31,338/ton for No. 6 fuel oil with 0.5% sulfur content; $32,952/ton for diesel; and $571/ton for natural gas. AECC noted that it does not consider any of the PM control options to be cost-effective.
ADEQ explained that AECC's PM BART evaluation did not discuss any energy or non-air quality environmental impacts associated with fuel switching. AECC did identify certain energy and non-air quality environmental impacts associated with wet ESPs and wet scrubbers. These impacts, which are factored in the cost of compliance, include increased energy usage for operation of the control equipment, the generation of wastewater streams that must be treated on-site or sent to a waste water treatment plant, and the generation of a filter cake that would likely require land-filling. In assessing the remaining useful life of McClellan Unit 1, AECC concluded that this factor does not impact the annualized costs of the evaluated control options since the remaining useful life of McClellan Unit 1 is at least as long as the capital cost recovery period of 15 years.
In assessing visibility impacts, the state's submittal included CALPUFF modeling evaluating the visibility benefits of switching from the baseline fuel oil (assuming 100% use of fuel oil) to the various fuel switching options. We summarize the results of that modeling in Table 6.
The anticipated visibility benefits of add-on controls (
Taking into consideration the cost-effectiveness and the anticipated visibility improvement of the PM control options considered, ADEQ concluded that add-on controls are not cost-effective, with AECC estimating the cost of these controls to be approximately $15,000/ton and greater. ADEQ concluded that the cost of switching to lower sulfur fuels is also not a cost-effective method for reducing PM emissions. However, ADEQ noted that the SO
We do not agree with the use of a 15-year capital cost recovery period for calculating the average cost-effectiveness of a wet ESP, wet scrubber, and cyclone. Per the EPA Control Cost Manual, facilities are to rely on a 30-year capital cost recovery period for calculating the average cost-effectiveness of a wet ESP, wet scrubber, or cyclone barring a technical rationale to deviate from the 30-year capital cost recovery period. AECC Bailey Generating Station did not provide a technical rationale to deviate from the assumed 30-year capital cost recovery period. In addition, we are not aware of any enforceable shutdown date for the AECC McClellan Generating Station, nor did AECC's evaluation or ADEQ's SIP revision indicate any future planned shutdown or provide any reason for adopting a 15-year equipment life for the controls under consideration. Therefore, we believe that assuming a 30-year equipment life rather than a 15-year equipment life would be more appropriate for these control technologies.
We also disagree with the total annual cost and cost-effectiveness values for fuel switching presented in AECC's PM BART analysis
The state's PM BART decision for McClellan Unit 1 is consistent with the BART decision EPA previously made in the FIP we promulgated on September 27, 2016.
SWEPCO Flint Creek Plant Boiler No. 1 has a 558 MW dry bottom wall-fired boiler that commenced operation in 1978, has a maximum heat input of 6,324 MMBtu/hr, and burns low sulfur western coal as a primary fuel, but is also permitted to combust fuel oil and tire-derived fuels. Fuel oil firing is only allowed during unit startup and shutdown, during startup and shutdown of pulverizer mills, for flame stabilization when coal is frozen, for No. 2 fuel oil tank maintenance, to prevent boiler tube failure in extreme cold weather when the unit is offline for maintenance, and during malfunction.
SWEPCO produced a BART analysis dated September 2013 for Flint Creek Plant Boiler No. 1, which was evaluated by EPA and largely formed the basis for EPA's SO
At the time that SWEPCO performed the BART analysis, no SO
In assessing SO
In considering the costs of compliance, SWEPCO estimated the capital and operating costs of a NID system and wet FGD based on EPA's Control Cost Manual and supplemented, where available, with vendor and site-specific information obtained by SWEPCO. These values were then used by SWEPCO to estimate the cost-effectiveness of controls. SWEPCO estimated the cost of the SO
SWEPCO determined that although wet FGD is expected to achieve a slightly higher level of SO
In assessing visibility impacts, the state's submittal included CALPUFF modeling evaluating the visibility benefits of dry FGD and wet FGD. We summarize the results of that modeling in Table 7.
The installation and operation of SO
As discussed above, SWEPCO determined that NID technology would result in considerable visibility improvement and is estimated to cost $3,845/ton. On the other hand, a wet scrubber is estimated to cost $4,919/ton, and would only achieve slightly more visibility benefit than NID technology (see Table 7).
Taking into consideration that the control equipment has already been installed and is operating at the facility, we are also proposing to approve the state's determination that the source must comply with the SO
Entergy Lake Catherine Unit 4 has a 558 MW tangentially-fired boiler with a maximum heat input of 5,850 MMBtu/hr. Lake Catherine Unit 4 is currently permitted to burn only pipeline quality natural gas, but until recently was also permitted to burn No. 6 fuel oil as a secondary fuel. Entergy produced a BART analysis dated May 2014 for Lake Catherine Unit 4, which was evaluated by EPA and largely formed the basis for EPA's BART evaluation in the FIP.
In the May 2014 BART analysis submitted by ADEQ as part of the SIP revision, Entergy explained that no fuel oil has been burned at Unit 4 since prior to the 2001-2003 baseline period and that the company does not project that it will burn fuel oil at the unit in the foreseeable future. Therefore, the May 2014 BART analysis does not consider emissions from fuel oil firing and does not include a BART five factor analysis or BART determinations for the fuel oil firing scenario. Entergy stated in the BART analysis that if conditions change such that it becomes economic to burn fuel oil in the future, it will submit a BART five factor analysis for the fuel oil firing scenario to the state for use in the development of a SIP revision, and that Entergy commits to not burn fuel oil at Lake Catherine Unit 4 until final EPA approval of BART for the fuel oil firing scenario. Furthermore, Unit 4 is not currently permitted to burn fuel oil.
Entergy White Bluff Units 1 and 2 each have tangentially-fired 850 MW boilers with a maximum heat input capacity of 8,950 MMBtu/hr. White Bluff also has a 183 MMBtu/hr Auxiliary Boiler that is permitted to burn only No. 2 fuel oil or biodiesel. Entergy produced a BART analysis for White Bluff dated October 2013, which was evaluated by EPA and largely formed the basis for EPA's SO
In assessing SO
Entergy estimated that by switching to low sulfur coal, Units 1 and 2 can achieve an emission rate of 0.6 lb/MMBtu,
The dry FGD control option considered by Entergy is SDA, which utilizes a fine mist of lime slurry sprayed into an absorption tower to absorb SO
In considering the costs of compliance, Entergy's coal suppliers provided the company with an estimated incremental cost of $0.50 per ton for delivering coal guaranteed to have a sulfur content consistent with achieving an SO
Entergy also explained that for DSI, enhanced DSI, and SDA, it developed two sets of cost estimates. The first is the actual cost Entergy anticipates incurring for each control option, and the second reflects the exclusion of certain cost items that are disallowed costs under the methodology in the EPA's Air Pollution Control Cost Manual (EPA Control Cost Manual).
Entergy determined that switching to low sulfur coal would entail an increased annual cost of operation based on purchase contract terms for the specific sulfur content of the coal. Based on estimates provided by the coal supplier of the cost premium for low sulfur coal and the estimated reduction in emissions, Entergy anticipated that the cost to guarantee that the units achieve an SO
In the BART analysis, Entergy noted that there were adverse energy and nonair quality environmental impacts associated with DSI, enhanced DSI, and SDA. These impacts were factored into the costs of compliance. With regard to consideration of the remaining useful life factor, Entergy stated in the August 2017 BART analysis that it anticipates cessation of coal combustion at White Bluff by the end of 2028 and that it will voluntarily take an enforceable restriction on Units 1 and 2 to that effect. Entergy's voluntary decision to cease coal combustion by the end of 2028 is enforceable by the state through an Administrative Order that has been adopted and incorporated in the SIP revision. Therefore, for White Bluff Units 1 and 2, ADEQ assumed a remaining useful life of 7 years to estimate the cost-effectiveness of SDA and a remaining useful life of 9 years to estimate the cost-effectiveness of DSI.
In assessing visibility impacts, the state's submittal included the CALPUFF modeling that was included in Entergy's August 18, 2017, BART analysis, evaluating the visibility benefits of switching to low sulfur coal, DSI, enhanced DSI, and SDA. We summarize the results of that modeling in Tables 9 and 10.
The SO
For White Bluff Unit 2, switching to low sulfur coal is anticipated by the state submittal to result in visibility improvement ranging from 0.097 to 0.137 dv at each affected Class I area. DSI is anticipated to result in visibility improvement ranging from 0.274 to 0.359 dv at each affected Class I area, while enhanced DSI is anticipated to result in visibility improvement ranging from 0.429 to 0.531 dv. SDA is anticipated to result in the greatest visibility improvement, ranging from 0.486 to 0.632 dv.
Taking into consideration the remaining useful life of White Bluff Units 1 and 2 and the resulting cost-effectiveness as well as the anticipated visibility improvement of the SO
In support of its assertion that a 3-year compliance deadline is needed to meet this emission limit, Entergy submitted a letter to ADEQ dated April 3, 2018, explaining that it is the company's practice to project how much coal will be needed in future years and to contract for a portion of its coal supply up to 3 years in advance.
With regard to the cost analysis for SO
We are also proposing to agree with ADEQ that the cost of compliance, in dollars per ton, for DSI and enhanced DSI is not cost effective when the
In determining BART for the White Bluff Auxiliary Boiler, ADEQ relied on Entergy's October 2013 BART analysis for White Bluff.
“Consistent with the CAA and the implementing regulations, States can adopt a more streamlined approach to making BART determinations where appropriate. Although BART determinations are based on the totality of circumstances in a given situation, such as the distance of the source from a Class I area, the type and amount of pollutant at issue, and the availability and cost of controls, it is clear that in some situations, one or more factors will clearly suggest an outcome. Thus, for example, a State need not undertake an exhaustive analysis of a source's impact on visibility resulting from relatively minor emissions of a pollutant where it is clear that controls would be costly and any improvements in visibility resulting from reductions in emissions of that pollutant would be negligible.”
Given the very small baseline visibility impacts from the Auxiliary Boiler, we believe it is appropriate to take a streamlined approach for determining BART in this case. Because of the very low baseline visibility impacts from the Auxiliary Boiler at each modeled Class I area, we believe that the visibility improvement that could be achieved through the installation and operation of controls would be negligible, such that the cost of those controls could not be justified. Therefore, we are proposing to approve the state's determination that the existing SO
We also note that in the Arkansas Regional Haze NO
In determining whether additional controls are necessary under the reasonable progress requirements and
Consistent with section 169A(b) of the CAA, 40 CFR 51.308(d)(3) requires that states include in their SIP a long-term strategy for making reasonable progress for each Class I area within their state. This long-term strategy is the compilation of all control measures a state will use during the implementation period of the specific SIP submittal to achieve reasonable progress, and thus to meet any applicable RPGs for a particular Class I area. The long-term strategy includes control measures determined necessary pursuant to both the BART and reasonable progress analyses.
In the Arkansas Regional Haze SO
Before presenting its broad analysis, the SIP identified the key pollutants and source categories that contribute to visibility impairment in Arkansas Class I areas. After presenting its broad analysis, the SIP presents an evaluation of which sources should be the focus of a narrow four-factor analysis and selected Independence as the only such source. The identification of the key pollutants and source categories that contribute to visibility impairment in Arkansas Class I areas, the broad reasonable progress analysis performed by ADEQ, the identification of Independence as the only source for which a narrow analysis would be performed, and ADEQ's determination regarding additional measures for Independence that are necessary for reasonable progress are discussed in the subsections that follow. We provide our assessment of each component of the reasonable progress section of the SIP revision before summarizing and assessing the next component.
As part of its reasonable progress analysis, ADEQ provided a discussion of the results of air quality modeling performed by the Central Regional Air Planning Association (CENRAP) in support of SIP development in the central states region for 2002 and projected 2018 emissions.
Based on the region-wide PSAT data, which looked at sources both in and outside Arkansas, it was found that point sources are the primary contributor to light extinction at Arkansas' Class I areas on the 20% worst days in 2002. Region-wide point sources were found to contribute 81.04 inverse Megameters (Mm
Based on the region-wide PSAT data, Arkansas also found that sulfate (SO
The region-wide PSAT data also showed that point sources are projected to remain the primary contributor to light extinction at Arkansas Class I areas, contributing 45.27 Mm
When looking at the PSAT data for sources within Arkansas only, the state found that the relative contribution of sources within Arkansas to total light extinction on the 20% worst days at Arkansas Class I areas is small. Species attributed to Arkansas sources contributed approximately 10% of the total light extinction on the 20% worst days in 2002 and were projected to contribute between 13 and 14% of the total light extinction on the 20% worst days in 2018. Additionally, the state found that when only the visibility impact of sources within Arkansas were considered, area sources actually had a larger impact on light extinction than point sources. Based on the Arkansas source PSAT data, area sources within Arkansas contributed 5.03 Mm
Based on the Arkansas source PSAT data, it was also found that SO
The Arkansas source PSAT data also showed that when only sources located in Arkansas are considered, area sources are projected to remain the primary contributor to light extinction at Arkansas Class I areas on the 20% worst days in 2018. Arkansas area sources are projected to contribute 4.85 Mm
Based on an assessment of both the region-wide PSAT data and the Arkansas source PSAT data, Arkansas identified SO
Arkansas also noted that only a small proportion of total light extinction is due to NO
Since Arkansas determined that SO
We agree with Arkansas that the PSAT results for Arkansas sources show that the relative contribution to light extinction of SO
In addition to the four reasonable progress factors under CAA section 169A(g)(1), ADEQ determined that visibility is also a relevant factor for consideration in its reasonable progress analysis. ADEQ's broad evaluation of the four reasonable progress factors plus visibility is summarized below.
ADEQ also stated that the visibility trajectory in Arkansas' Class I areas is a relevant factor for consideration in its reasonable progress analysis. According to ADEQ, if Arkansas Class I areas were making less progress than necessary to achieve the URP during the first planning period, then more costly controls could be warranted if found reasonable after consideration of the four statutory factors and other factors the state considers relevant. ADEQ stated that ADEQ therefore deems it reasonable to consider that Arkansas Class I areas are already below the 2018 point on the URP, in addition to considering the statutory reasonable progress factors, in evaluating whether additional controls are necessary under reasonable progress for the first implementation period.
Furthermore, ADEQ noted that market trends for coal and natural gas have already resulted in the decreased dispatch of coal-fired facilities, which has in turn resulted in a decrease in overall emissions of key pollutants that impact visibility at Arkansas Class I areas. ADEQ cited to data from the Energy Information Administration showing that the trend of decreased net electricity generation from coal and increased net electricity generation from natural gas and renewable energy is expected to continue for the remainder of the 2008-2018 implementation period, and well beyond.
In identifying which sources to evaluate for SO
Arkansas explained that, since White Bluff, Flint Creek, and Domtar are subject to BART and the BART analyses conducted to determine BART control requirements are based on an assessment of many of the same factors that must be evaluated in determining whether additional controls are needed under the reasonable progress provisions and thus in establishing the RPGs, no additional controls under reasonable progress are necessary for these sources in the first implementation period. For the remaining sources on the list, Arkansas calculated the total average actual emission rate (Q) in SO
As shown in Table 12, Arkansas found that only three sources had a maximum Q/D value greater than or equal to 10: Entergy Independence, FutureFuel Chemical Company, and John W. Turk Jr. Power Plant. Arkansas noted that Entergy Independence is the second largest point source of SO
We are proposing to find that Arkansas' overall method of identifying sources for potential further evaluation under the four reasonable progress factors is appropriate. We find that Arkansas' approach of narrowing down the list of sources to further evaluate under reasonable progress to only those sources that emitted at least 250 SO
We are proposing to find that Arkansas' use of a Q/D value of 10 as a threshold for identifying sources to further evaluate for reasonable progress controls is reasonable and appropriate. We agree with Arkansas, that the FutureFuel Chemical Company was
As noted above, ADEQ determined that application of the four factors to that specific source is also “relevant” in its reasonable progress analysis as a way of addressing EPA's previous analysis.
Section 169(A)(g)(1) of the CAA requires states to evaluate the costs of compliance, the time necessary for compliance, the energy and non-air quality environmental impacts of compliance, and the remaining useful life of any potentially affected sources, when determining reasonable progress. In its evaluation of the four reasonable progress factors for the Independence facility, Arkansas relied on information provided by Entergy for the Independence facility in the evaluation of low sulfur coal and dry scrubbers. Arkansas also relied on data developed by EPA in support of the Arkansas Regional Haze FIP in the evaluation of wet scrubbers and dry scrubbers. The Entergy Independence Power Plant is a coal-fired electric generating station with two identical 900 MW boilers. The boilers burn Wyoming Powder River Basin sub-bituminous coal as their primary fuel and No. 2 fuel oil or bio-diesel as start-up fuel. The layout and boiler units at this facility are similar to those at Entergy White Bluff, but since the units at Independence were installed in 1983 (9 years after the installation of the White Bluff units), Independence Units 1 and 2 are not BART eligible.
There is currently no SO
In contrast to switching to low sulfur coal, the installation of dry FGD and wet FGD is expected to require a large capital investment. Entergy provided Arkansas with Independence-specific cost estimates for dry scrubbers for use in Arkansas' cost analysis. Entergy estimated total capital costs of dry scrubbers at Independence to be $491,893,500 per unit based on “actual costs” and $355,391,500 per unit based on costs allowed under EPA's Control Cost Manual. Entergy annualized the capital cost for both sets of numbers assuming a 9-year amortization period, based on Entergy's plans to cease coal combustion at Independence by the end of 2030. Additionally, Entergy based its calculations of SO
Since Entergy did not provide Independence-specific cost estimates for wet scrubbers for Arkansas to base its cost analysis on, Arkansas relied on the cost estimates for Independence developed by EPA in the Arkansas Regional Haze FIP.
In addition to considering cost-effectiveness calculations in the cost analysis, Arkansas found that other cost-related factors were of relevance in its evaluation of the reasonable progress factors for the Independence facility. This includes total capital costs, cost to Arkansas communities, and the cost in terms of dollar per dv improvement in visibility anticipated from the control options evaluated ($/dv). Arkansas considered the capital costs of dry scrubbers and wet scrubbers to be high, even though the costs in terms of $/ton of SO
Based on its evaluation of the reasonable progress factors for the Independence facility, ADEQ arrived at the conclusion that no additional controls are necessary for reasonable progress during the first implementation period. According to ADEQ, the controls it evaluated would cost millions of dollars annually, which would be passed on to Arkansas ratepayers, for what ADEQ considers to be little visibility benefit when Arkansas' Class I areas are already making more progress than the URP.
Although ADEQ concluded that none of the controls evaluated for the Independence facility are necessary for achieving reasonable progress in the first planning period, ADEQ acknowledged Entergy's intention to switch to low sulfur coal at Independence Units 1 and 2 within the next 3 years. ADEQ noted that this measure would strengthen the SIP and result in some visibility benefit at Arkansas' Class I areas, while having no associated capital costs. According to ADEQ, the lack of any capital costs will provide Entergy with flexibility regarding the company's planned cessation of coal combustion at the Independence facility by the end of 2030. Therefore, Entergy's commitment to switch to low sulfur coal at Independence Units 1 and 2 has now been made enforceable by ADEQ as part of the long-term strategy for this implementation period, through an Administrative Order that has been adopted and incorporated in the SIP revision. The Administrative Order requires Independence Units 1 and 2 to meet an SO
After consideration of the statutory reasonable progress factors, along with an evaluation of the monitored trajectory of visibility impairment during the first implementation period, particulate source apportionment data, and SO
To reflect the control measures required in the Arkansas Regional Haze SO
As noted above, as part of its reasonable progress analysis, Arkansas
We are proposing to find that the reasonable progress requirements under section 51.308(d)(1) have been fully addressed for the first regional haze planning period. Specifically, we are proposing to find that the following components of Arkansas' analysis satisfy the reasonable progress requirements: Arkansas' discussion of the key pollutants and source categories that contribute to visibility impairment in Arkansas Class I areas based on the CENRAP's source apportionment modeling; the identification of a group of large SO
We are proposing to agree with Arkansas' cost analysis for dry scrubbers and switching to low sulfur coal for Independence Units 1 and 2, and with the state's decision to assume a 30-year capital cost recovery period in the cost analysis. It is appropriate to assume a 30-year capital cost recovery period in the cost analysis since Entergy's plans to cease coal combustion at the Independence facility are not state or federally-enforceable. We also agree with Arkansas' estimates of the cost of dry scrubbers, and note that the state's estimates of the cost effectiveness of dry scrubbers for Units 1 and 2 are very similar to the cost effectiveness estimates we developed in the Arkansas Regional Haze FIP.
Since the White Bluff and Independence facilities are sister facilities with nearly identical units and comparable levels of annual SO
In its reasonable progress analysis for the Independence facility, the statutory factor that appears to have been the most significant in Arkansas' reasonable progress determination is the cost of compliance, as well as visibility, which the state deemed to be a relevant factor for consideration in its analysis. Arkansas discussed its concerns regarding the significant capital cost of scrubber controls, noted that the evaluation of the $/dv metric demonstrated a greater difference in cost between dry FGD and low sulfur coal compared to the $/ton metric, and ultimately concluded that all the controls it evaluated would cost millions of dollars for what it considers to be little visibility benefit. We believe
We are also proposing to find that the method used by Arkansas to estimate revised 2018 RPGs for the 20% worst days for Caney Creek and Upper Buffalo is appropriate. We agree with Arkansas that this is the same method utilized by us to revise the RPGs in the Arkansas Regional Haze FIP. We are also proposing to find that Arkansas' use of the most recent 3 years of data (2014-2016) as opposed to use of the 5 most recent years of data (2009-2013) with the exclusion of the minimum and maximum values, as we used in the Arkansas FIP, is appropriate because it reflects updated data and we also agree with Arkansas that it will ensure that recent changes in dispatch at Arkansas EGUs are captured. Therefore, we are proposing to agree with Arkansas' revised 2018 RPGs of 22.47 dv for Caney Creek and 22.51 dv for Upper Buffalo.
As discussed elsewhere in this proposed rulemaking, BART controls for Domtar Power Boilers No. 1 and 2 are not addressed in the Arkansas Regional Haze SO
Section 169A(b) of the CAA and 40 CFR 51.308(d)(3) require that states include in their SIPs a 10 to 15-year strategy, referred to as the long-term strategy, for making reasonable progress for each Class I area within their state. This long-term strategy is the compilation of all control measures a state will use during the implementation period of the specific SIP submittal to meet any applicable RPGs for a particular Class I area. The long-term strategy must include “enforceable emissions limitations, compliance schedules, and other measures as necessary to achieve the reasonable progress goals” for all Class I areas within, or affected by emissions from, the state.
Section 51.308(d)(3)(v) requires that a state consider certain elements in developing its long-term strategy for each Class I area. These considerations are the following: (1) Emission reductions due to ongoing air pollution control programs, including measures to address reasonably attributable visibility impairment (RAVI); (2) measures to mitigate the impacts of construction activities; (3) emissions limitations and schedules for compliance to achieve the reasonable progress goal; (4) source retirement and replacement schedules; (5) smoke management techniques for agricultural and forestry management purposes including plans as currently exist within the state for these purposes; (6) enforceability of emissions limitations and control measures; and (7) the anticipated net effect on visibility due to projected changes in point, area, and mobile source emissions over the period addressed by the long-term strategy. Since states are required to consider emissions limitations and schedules of compliance to achieve the RPGs for each Class I area, the BART emission limits that are in a state's regional haze SIP are elements of the state's long-term strategy for each Class I area. In our March 12, 2012, final action on the 2008 Arkansas Regional Haze SIP, since we disapproved a portion of Arkansas' BART determinations for Arkansas' two Class I areas, we also disapproved the corresponding emissions limitations and schedules of compliance elements of the state's long-term strategy, while approving remaining elements under section 51.308(d)(3)(v).
As discussed above, the state is making enforceable Entergy's commitment to switch Independence Units 1 and 2 to low sulfur coal and comply with an SO
The Regional Haze Rule requires states to provide the designated Federal Land Managers (FLMs) with an opportunity for consultation at least 60 days prior to holding any public hearing on a SIP revision for regional haze for the first implementation period. Arkansas sent letters to the FLMs on October 27, 2017, providing notification of the proposed SIP revision and providing electronic access to the draft SIP revision and related documents.
The Regional Haze Rule at section 51.308(d)(3)(i) also provides that if a state has emissions that are reasonably anticipated to contribute to visibility impairment in a Class I area located in another state, the state must consult with the other state(s) in order to develop coordinated emission management strategies. Since Missouri has two Class I areas impacted by Arkansas sources, Arkansas sent a letter to the Missouri Department of Natural Resources (MDNR) on October 27, 2017, providing notification of the proposed SIP revision and providing electronic access to the draft SIP revision and related documents.
We are proposing to find that Arkansas provided an opportunity for consultation to the FLMs and to Missouri on the proposed SIP revision, as required under section 51.308(i)(2) and 51.308(d)(3)(i). We are also proposing to find that Arkansas has appropriately considered and provided written responses to comments from the FLMs in the final SIP submission. Therefore, we are proposing to find that Arkansas has satisfied the consultation requirements under sections 51.308(i)(2) and 51.308(d)(3)(i).
The SIP revision also includes a discussion on interstate visibility transport. Specifically, the SIP revision discusses the impacts of Arkansas sources on Missouri's Class I areas, as well as the most recent IMPROVE monitoring data for Missouri's Class I areas. The SIP revision concludes that Missouri is on track to achieve its visibility goals, that the visibility progress observed indicates that sources in Arkansas are not interfering with the achievement of Missouri's RPGs for Hercules Glades and Mingo, and that no additional controls on sources within Arkansas are necessary to ensure that other states' visibility goals for their Class I areas are met. We are deferring proposing action on the interstate visibility transport portion of the SIP revision until a future proposed rulemaking.
Section 110(l) of the CAA states that “[t]he Administrator shall not approve a revision of a plan if the revision would interfere with any applicable requirement concerning attainment and reasonable further progress or any other applicable requirement of this chapter.” We believe an approval of the Arkansas Regional Haze SO
Additionally, we do not believe an approval of the Arkansas Regional Haze SO
With respect to reasonable progress, we are proposing to approve Arkansas' determination that no additional controls under the reasonable progress requirements are necessary to achieve reasonable progress for the first implementation period. In contrast to the Arkansas Regional Haze FIP, the Arkansas Regional Haze SO
The EPA is proposing to approve the following revisions to the Arkansas Regional Haze SIP submitted to EPA on August 8, 2018: The SO
We are also proposing to find that the reasonable progress requirements under section 51.308(d)(1) have been fully addressed for the first implementation period. Specifically, we are proposing to approve the state's focused reasonable progress analysis and the reasonable progress determination that no additional SO
We are proposing to approve the components of the long-term strategy under section 51.308(d)(3) addressed by the August 8, 2018, SIP revision, including the BART measures contained in the SIP revision and the SO
We are proposing to withdraw those portions of the Arkansas Regional Haze FIP at 40 CFR 52.173 that impose SO
We are proposing to find that an approval of a portion of the Arkansas Regional Haze SO
In this action, we are proposing to include in a final rule regulatory text that includes incorporation by reference. In accordance with the requirements of 1 CFR 51.5, we are proposing to incorporate by reference revisions to the Arkansas source specific requirements as described in the Proposed Action section above. We have made, and will continue to make, these documents generally available electronically through
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, this action merely proposes to approve state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this action:
• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because this action does not involve technical standards; and
• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the proposed rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).
Environmental protection, Air pollution control, Best available retrofit technology, Incorporation by reference, Intergovernmental relations, Ozone, Particulate matter, regional haze, Reporting and recordkeeping requirements, Sulfur dioxide, Visibility.
Title 40, chapter I, of the Code of Federal Regulations is proposed to be amended as follows:
42 U.S.C. 7401
The revision and additions read as follows:
(d) * * *
(e) * * *
The revisions and additions read as follows:
(c)
(1)
(2) * * *
(4)
(5)
(B) The owner or operator must confirm the site-specific curve equation through stack testing. By October 27, 2017, the owner or operator must provide a report to EPA showing confirmation of the site specific-curve equation accuracy. Records of the quantity of fuel input to the boiler for each fuel type for each day must be compiled no later than 15 days after the end of the month and must be maintained by the owner or operator and made available upon request to EPA and ADEQ representatives. Each boiler-operating-day of the 30-day rolling average for the boiler must be determined by adding together the pounds of SO
(ii) If the air permit is revised such that Power Boiler No. 1 is permitted to burn only pipeline quality natural gas, this is sufficient to demonstrate that the boiler is complying with the SO
(iii) To demonstrate compliance with the NO
(iv) If the air permit is revised such that Power Boiler No. 1 is permitted to burn only pipeline quality natural gas, the owner or operator may demonstrate compliance with the NO
(7)
(8)
(ii) The owner or operator shall continue to maintain and operate a CEMS for SO
(iii) Continuous emissions monitoring shall apply during all periods of operation of the boiler listed in paragraph (c)(6) of this section, including periods of startup, shutdown, and malfunction, except for CEMS breakdowns, repairs, calibration checks, and zero and span adjustments. Continuous monitoring systems for measuring SO
(iv) If the air permit is revised such that Power Boiler No. 2 is permitted to burn only pipeline quality natural gas, this is sufficient to demonstrate that the boiler is complying with the SO
(v) If the air permit is revised such that Power Boiler No. 2 is permitted to burn only pipeline quality natural gas and the operation of the CEMS is not required under other applicable requirements, the owner or operator may demonstrate compliance with the NO
(10)
(11) Alternative
(12)
(g)
(h)
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration |