Federal Register Vol. 83, No.231,

I. Background

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),1 is the operating circular that is most relevant to the Reserve Banks' check collection activities. Subpart B of Regulation J provides rules to govern funds transfers through the Reserve Banks' Fedwire Funds Service. This service is also governed by the Reserve Banks' Operating Circular No. 6, “Funds Transfers through the Fedwire Funds Service” (OC 6).2

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 (i.e., electronic images and electronic information derived from a paper item) by defining the terms “electronic check” and “electronic returned check,” creating Check-21-like warranties for electronic checks and electronic returned checks, and applying existing paper-check warranties to electronic checks and electronic returned checks.

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 Regulation CC. The Board proposed similar amendments to the provisions of Regulation J that currently address returning checks as electronic items.

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.3 As described above, the final rule cross references Regulation CC's warranties and indemnities in Regulation J, including Regulation CC's ECI indemnities.

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.4 The terms “instrument,” “promise,” and “order” are defined under the U.C.C. as requiring a writing.5 Because they never existed in tangible form and therefore do not qualify as writings, ECIs are not “items” as defined in Regulation J.

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.6 Another commenter stated that the Board's proposal limited consumer choice because ECIs may be initiated by consumers that do not have access to a debit or credit card. Commenters stated that the Board's proposal discouraged the evolution of the check system to an all-electronic payment system that would result in lower barriers to entry, lower cost, increased speed, and increased parity among financial institutions. Two commenters requested the Board to conduct further studies on ECIs. One commenter expressed concern that institutions would be unable to identify ECIs and requested that the Board provide guidance on how banks can recognize ECIs. Another commenter requested that the Board expressly set out rules for alternative methods of direct exchange of ECIs in its final rule and guidance.

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 Strategies for Improving the U.S. Payment System paper,7 the Federal Reserve is committed to improving the speed and efficiency of the U.S. payment system from end-to-end while maintaining a high level of safety and accessibility. As explained in that paper, “credit-push payments,” which allow the paying bank to authenticate the customer and confirm “good funds” are available to support the transaction, have become the expectation when making electronic person-to-person, business-to-business and certain bill payments. Unlike “credit-push payments,” “debit-pull payments” such as ECIs have a higher risk profile because they generally do not have the same authentication processes and may allow unauthorized parties who have access to a payer's account information to fraudulently pull funds out of the payer's account. To date, there has not been the industry support or necessary investment to address the heightened risk profiles created by processing electronically-created debit instruments through the check collection system. Moreover, there is legal uncertainty as to the status of ECIs that are processed as if they were checks under the U.C.C. and the Electronic Funds Transfer Act. The Board believes that the heightened risk profile and legal uncertainty surrounding ECIs currently outweigh the potential benefits of ECIs mentioned by the commenters and, accordingly, will not conduct further studies on ECIs at this time.

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.8 With respect to noncash items, Regulation J provides that a Reserve Bank may require settlement by cash, by a debit to an account on a Reserve Bank's books or “by any of the following that is in a form acceptable to the collecting Reserve Bank: Bank draft, transfer of funds or bank credit, or any other form of payment authorized by State law.” 9 Regulation J also currently provides that a Reserve Bank may require a nonbank payor to settle for items by cash, or by “any of the following that is in a form acceptable to the Reserve Bank: Cashier's check, certified check, or other bank draft or obligation.” 10 In order to facilitate the efficient collection of items, the Reserve Banks' current practice is generally to settle for items by debit to an account on the Reserve Bank's books. The use of cash is rare, typically only done in emergency situations, and could be covered by a provision allowing “other form of settlement to which the Reserve Bank agrees.”

The Board proposed to revise certain settlement provisions of Regulation J to remove references to cash and other specified forms of settlement (e.g., cashier's checks or certified checks) and instead state that the Reserve Banks may settle by a debit to an account on the Reserve Bank's books, or another form of settlement acceptable to the Reserve Banks. The Board requested comment on possible implications that the proposed changes may have on financial institutions with which the Reserve Banks settle for the presentment of items.

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.11 ISO 20022 is an international standard that employs terminology that differs in key respects from that used in U.S. funds-transfer law, including Regulation J. The Board proposed an amendment to subpart B of Regulation J that would clarify that terms used in financial messaging standards, such as ISO 20022, do not confer or connote legal status or responsibilities.

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 not the item is payable in the Reserve Bank's district. This amendment reflects current practice in the Reserve Banks' check service and is not expected or intended to have a substantive affect. The Board also proposed to capitalize the term “Administrative Reserve Bank” wherever it appears to conform to the defined term in § 210.2(c).

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.” 12 The group letter requests that the Board add commentary in Regulation J to clarify that the warranty does not require that the electronic check capture those characteristics of the paper check, such as watermarks, microprinting, or other physical security features, that cannot survive the imaging process.

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.13 The commentary to the corresponding substitute check warranty states “a substitute check need not capture other characteristics of the check, such as watermarks, microprinting, or other physical security features that cannot survive the imaging process or decorative images, in order to meet the accuracy requirement.” 14 The Board's amendments to Regulation J requiring the sender to make all applicable warranties and indemnities set forth in Regulation CC also cross reference the relevant commentary in Regulation CC. Accordingly, the Board does not believe it is necessary to add additional commentary in Regulation J and adopts the revisions as proposed.

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 ordinary care under Regulation J or Regulation CC. The Board proposed to redesignate this paragraph as § 210.5(a)(5)(iii) and make conforming changes to cross-references.

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 or returning bank is liable to a Reserve Bank. The Board proposed to redesignate this paragraph as § 210.12(c)(4) and amend the paragraph to correspond with the proposed amendments to the section on sender's liability to a Reserve Bank (§ 210.5(a)(4)). The proposed amendments were intended to create consistent liability provisions for senders, paying banks, and returning banks.

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 (e.g., ISO 20022), including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. The proposed amendment would specify that Regulation J, Article 4A of the U.C.C., and the operating circulars of the Reserve Banks govern the rights and obligations of parties to the Fedwire Funds Service and supersede any inconsistency between a financial messaging standard adopted by the Fedwire Funds Service. The proposal would also make a conforming change to § 210.25(b)(2). Additionally, the Board proposed to add in the commentary examples of inconsistent terminology between the ISO 20022 financial messaging standard and U.S. funds transfer law.

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 subject to a competitive-impact analysis, even if competitive effects are not apparent on the face of the proposal. If such legal differences exist, the Board will assess whether the same objectives could be achieved by a modified proposal with lesser competitive impact or, if not, whether the benefits of the proposal (such as contributing to payments-system efficiency or integrity or other Board objectives) outweigh the materially adverse effect on competition.15

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.16 Accordingly, there is no paperwork burden associated with the rule.

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 et seq. (RFA). In the IRFA, the Board requested comment on the effect of the proposed rule on small entities and on any significant alternatives that would reduce the regulatory burden on small entities. The Board did not receive any comments. The RFA requires an agency to prepare a final regulatory flexibility analysis (FRFA) unless the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. In accordance with section 3(a) of the RFA, the Board has reviewed the final regulation. Based on its analysis, and for the reasons stated below, the Board certifies that the rule will not have a significant economic impact on a substantial number of small entities.

The final rule will apply to all depository institutions regardless of their size.17 Pursuant to regulations issued by the Small Business Administration (13 CFR 121.201), a “small banking organization” includes a depository institution with $550 million or less in total assets. Based on call report data, there are approximately 9,631 depository institutions that have total domestic assets of $550 million or less and thus are considered small entities for purposes of the RFA. The Board's final rule generally does not have any projected reporting, recordkeeping or other compliance requirements, as the revisions to Regulation J 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. The final rule's warranties and indemnities are similar to the warranties and indemnities that apply to paper and electronic checks under existing Regulation J and other law. The final rule does not require any bank to change the form in which it submits checks, nor do they require any bank to submit reports, maintain records, or provide notices or disclosures.

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.

For the reasons set forth in the preamble, the Board amends 12 CFR part 210 as follows:

Discussion

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 Federal Register on August 10, 2018 (83 FR 39626). The NPRM was prompted by a determination that more restrictive maintenance requirements and airworthiness limitations are necessary. The NPRM proposed to require 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, 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:

You may examine the MCAI in the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0642.

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 ADDRESSES section.

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.

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

Discussion

On May 23, 2018, at 83 FR 23827, the Federal Register published our notice of proposed rulemaking (NPRM), which proposed to amend 14 CFR part 39 by adding an AD that would apply to AgustaWestland S.p.A. (now Leonardo) Model AW189 helicopters with a tail plane lower fitting part number (P/N) 8G5350A07051 installed. The NPRM proposed to require replacing the tail plane lower fitting with an improved tail plane lower fitting. The proposed requirements were intended to prevent a crack on a tail plane fitting, which could result in failure of the tail plane fitting and loss of helicopter control.

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.

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

Discussion

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 Federal Register on August 3, 2018 (83 FR 38086). The NPRM was prompted by LCF cracking of the fuel manifold leading to an engine fire. The NPRM proposed to require 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.

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. registry. We estimate the following costs to comply with this AD:

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

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

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.

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

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 ADDRESSES section.

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 ADDRESSES section. Include the docket number FAA-2018-0869 and Product Identifier 2018-NE-32-AD at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this final rule. We will consider all comments received by the closing date and may amend this final rule because of those comments.

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

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.

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

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.

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 Federal Register, the COTP or a designated representative will inform the public through Broadcast Notices to Mariners (BNMs), Local Notices to Mariners (LNMs), Marine Safety Information Bulletins (MSIBs), and/or through other means of public notice as appropriate at least 24 hours in advance of each enforcement.

Summary of the Major Provisions of This Regulatory Action: We announce these final priorities, requirements, definitions, and selection criteria to achieve two main goals.

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 academically poor-performing public schools; 1 experience operating or managing multiple charter schools; plans to expand their reach into new and diverse communities; logical connections between their proposed projects and intended outcomes for the students they propose to serve; and plans to evaluate the extent to which their proposed projects, if funded, yield intended outcomes.

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 educationally disadvantaged students, as well as students who traditionally have been underserved by charter schools, such as Native American students and students in rural communities. Specifically, among other things, the final priorities, requirements, definitions, and selection criteria enable the Department to give priority to applications that propose to: Replicate or expand high-quality charter schools with an intentional focus on recruiting students from racially and socioeconomically diverse backgrounds, and maintaining racially and socioeconomically diverse student bodies, consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws; serve a meaningful proportion of students who are individuals from low-income families; and replicate or expand high-quality charter schools that serve high school students, students in rural communities, and Native American students. Further, in order to meet the final requirements announced in this document, CMO applicants must describe how the schools they intend to replicate or expand would recruit and enroll educationally disadvantaged students and support such students in mastering State academic standards.

Costs and Benefits: The Department of Education (Department) believes that the benefits of this regulatory action outweigh any associated costs, which we believe would be minimal. While this action imposes cost-bearing requirements on participating CMOs, we expect that applicants will include requests for funds to cover such costs in their proposed project budgets. We believe this regulatory action strengthens accountability for the use of Federal funds by helping to ensure that the Department awards CSP grants to CMOs that are most capable of expanding the number of high-quality charter schools available to our Nation's students. Please refer to the Regulatory Impact Analysis in this document for a more detailed discussion of costs and benefits.

Purpose of Program: The major purposes of the CSP are to: Expand opportunities for all students, particularly students facing educational disadvantages and students who traditionally have been underserved by charter schools, to attend high-quality charter schools and meet challenging State academic standards; provide financial assistance for the planning, program design, and initial implementation of public charter schools; increase the number of high-quality charter schools available to students across the United States; evaluate the impact of charter schools on student achievement, families, and communities; share best practices between charter schools and other public schools; encourage States to provide facilities support to charter schools; and support efforts to strengthen the charter school authorizing process. Through the CMO grant program, the Department provides funds to CMOs on a competitive basis to enable them to replicate or expand one or more high-quality charter schools. More specifically, grant funds may be used to expand the enrollment of one or more existing high-quality charter schools, or to open one or more high-quality charter schools by replicating an existing high-quality charter school model.

Program Authority: Title IV, Part C of the Elementary and Secondary Education Act of 1965, as amended by the Every Student Succeeds Act (ESEA).

We published a notice of proposed priorities, requirements, definitions, and selection criteria for this program in the Federal Register on July 27, 2018 (83 FR 35571) (NPP). The NPP contained background information and our reasons for proposing the particular priorities, requirements, definitions, and selection criteria.

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, academically low-performing public schools as charter schools. In addition, we have revised Priority 2 to require applicants to address each subpart in order to meet the priority. Second, we have revised Priority 3—High School Students to clarify that there is a broad range of postsecondary education options for which high-quality charter schools that serve high school students may prepare their students, including certain one-year training programs as well as two- and four-year colleges and universities. We have also revised Priority 3 to specify that high school students include educationally disadvantaged students. In addition, we have revised Priority 4—Low-Income Demographic to require applicants receiving priority points to demonstrate that they will maintain a poverty threshold that is the same as, or substantially similar to, the level specified in the grant application for the entire grant period. Further, we have revised Priority 7 and related definitions to include students who are Native Hawaiian or Native American Pacific Islander, as well as students who are Indians (including Alaska Natives), and to clarify that applicants must meaningfully collaborate with community leaders. Finally, we have revised Selection Criterion (b)—Significance of Contribution in Assisting Educationally Disadvantaged Students to emphasize students with disabilities 2 and English learners. We discuss these changes in detail in the Analysis of Comments and Changes section of this document.

Public Comment: In response to our invitation in the NPP, 36 parties submitted comments on the proposed priorities, requirements, definitions, and selection criteria.

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.

Analysis of Comments and Changes: An analysis of the comments and changes in the priorities, requirements, definitions, and selection criteria since publication of the NPP follows.

Comments: One commenter suggested that we include a focus on students from military families, noting that military families may not be able to afford charter school tuition.

Discussion: First, we note that charter schools are public schools and, by definition, may not charge tuition (ESEA section 4310(2)). Nonetheless, we agree that military- and veteran-connected students often face unique challenges. On March 2, 2018, the Department published in the Federal Register (83 FR 9096) the Secretary's Final Supplemental Priorities and Definitions for Discretionary Grant Programs (Supplemental Priorities), which are available for use in all of the Department's discretionary grant programs, including the CMO grant program. In recognition of the unique challenges faced by military families, Priority 11 in the Supplemental Priorities focuses on ensuring that service members, veterans, and their families have access to high-quality educational options. In any fiscal year in which the Department awards new grants under the CMO grant program, we may use this supplemental priority in conjunction with the priorities, requirements, definitions, and selection criteria in the ESEA and established in this document. Therefore, we decline to revise the final priorities, requirements, definitions, and selection criteria to add a focus on military families.

Changes: None.

Comments: Seven commenters urged the Department to clarify through these final priorities, requirements, definitions, and selection criteria that virtual charter schools must ensure that all students, particularly students with disabilities, can access virtual and online content. Several commenters requested that we require all virtual public schools, including virtual charter schools, to demonstrate compliance with the Web Content Accessibility Guidelines (WCAG). Other commenters suggested that applicants proposing to replicate or expand virtual charter schools be required to focus on enrollment and retention of, and academic outcomes for, educationally disadvantaged students, and make performance and compliance data available publicly and in a timely manner. One commenter suggested that we refrain from awarding grants to virtual charter schools altogether.

Discussion: Section 4310(2)(G) of the ESEA requires charter schools receiving CSP funds to comply with various laws, including section 504 of the Rehabilitation Act of 1973 (Section 504), the Americans with Disabilities Act of 1990 (ADA), and Part B of the Individuals with Disabilities Education Act (IDEA). Thus, consistent with the requirements in Section 504 and Title II of the ADA, virtual charter schools must ensure that all content is accessible to students with disabilities enrolled in the school as well as prospective students with disabilities and parents or guardians. Similarly, like other local educational agencies (LEAs), public charter schools that operate as LEAs under State law, including virtual charter school LEAs and LEAs that include virtual charter schools among their public schools, must ensure that eligible students with disabilities enrolled in these schools receive a free appropriate public education (FAPE) in accordance with the requirements of Part B of the IDEA.3 To meet this obligation, these schools must provide instructional materials to students with disabilities in accessible formats, consistent with the requirements in Section 504 and Title II of the ADA. If web-based instruction or online instructional platforms are used, these schools must ensure that the information provided through those sources is accessible to students with disabilities, consistent with the requirements in Section 504 and Title II of the ADA. Because these requirements are already established by Federal law, we decline to revise these final 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, educationally disadvantaged students, to receive a grant under the CMO grant program, an applicant must provide, among other things, student assessment results and attendance and retention rates for all students served by its schools, including educationally disadvantaged students (ESEA section 4305(b)(3)(A)). Further, CMO grantees must assure that each charter school receiving CSP funds makes annual performance and enrollment data publicly available (ESEA section 4303(f)(2)(G)(v)). CMO applicants must also provide the Department with information on existing significant compliance and management issues (ESEA section 4305(b)(3)(A)(iii)). These requirements apply to all CMO grantees, regardless of whether they intend to replicate or expand virtual or brick-and-mortar charter schools.

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.

Changes: None.

Comments: Several commenters requested that we clarify that charter schools are obligated to serve students with disabilities. One commenter stated that charter schools must adhere to the IDEA, hold regular individualized education plan meetings, and offer face-inclusive policies as codified by State law. Another commenter urged the Department to focus specifically on the needs of students with Tourette's syndrome and obsessive compulsive disorder. Several commenters suggested that we include a priority for applicants that propose to replicate or expand high-quality charter schools that serve students with disabilities.

Discussion: It is unclear what the commenter meant by “face-inclusive policies,” but we agree that students with disabilities face unique educational challenges. As stated above, all eligible students with disabilities attending public charter schools and their parents retain all rights under Part B of the IDEA, including the right to receive FAPE. In addition, these final priorities, requirements, definitions, and selection criteria include a requirement that applicants for CMO grants describe how they intend to comply with Part B of the IDEA.

Further, a number of priorities, requirements, definitions, and selection criteria under this program focus on educationally disadvantaged students, which include students who are children with disabilities, as defined in section 8101(4) of the ESEA. The Supplemental Priorities also include two priorities that focus on the needs of students with disabilities and could be used in future CMO grant competitions. These priorities are: Priority 1—Empowering Families and Individuals to Choose a High-quality Education that Meets their Unique Needs (which includes a specific option for focusing on students with disabilities) and Priority 5—Meeting the Unique Needs of Students and Children with Disabilities and/or Those with Unique Gifts and Talents. For these reasons, we decline to include a specific priority for students with disabilities or to focus this priority on students with a particular disability or impairment, such as Tourette's Syndrome or obsessive compulsive disorder.

Changes: None.

Comments: Several commenters urged the Department to clarify whether applicants could still apply for CMO grants as groups or consortia and, if so, what the Department's expectations are for how a group or consortium application should be organized.

Discussion: Federal regulations at 34 CFR 75.127-75.129 specifically authorize applicants to apply as a group or consortium, and prescribe the requirements governing such applications. These final priorities, requirements, definitions, and selection criteria do not alter the requirements for group applications in 34 CFR 75.127-75.129. Therefore, we decline to make any changes in this area.

Changes: None.

Comments: One commenter suggested that the Department allow high-performing applicants to submit streamlined applications for CMO grants. The commenter also suggested that we increase per-seat funding caps for CMOs that are expanding grades in schools because grade expansion can often be as costly as opening new schools. In addition, the commenter asked that we allow CMOs to apply for CMO grants and subgrants under section 4303 of the ESEA. Finally, the commenter asked that we issue nonregulatory guidance that would broadly interpret the term “minor facilities repairs” to ensure that charter schools can use CSP funds to ensure that students attend safe, clean, and well-maintained schools.

Discussion: Although the Department may have information regarding the past performance of some applicants—in particular, CMOs that have received CSP grants previously—we rely on the expertise of independent peer reviewers to evaluate the quality of applications submitted under a grant competition in order to ensure the fairness and integrity of the competition. Further, each application proposes to carry out different activities, and an applicant's successful implementation of one project does not guarantee the successful implementation of subsequent projects. To ensure an equal playing field, we believe it is critical that all applicants be required to submit the same general information for review. Therefore, we decline to enable high-performing applicants to submit streamlined applications, as suggested by the commenter.

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 Federal Register. When establishing funding limits under a CMO grant competition for a given fiscal year, the Department considers a number of factors, including the availability of funds.

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 (i.e., charter school developers and charter schools) to enable such eligible applicants to open and prepare for the operation of new charter schools and replicated high-quality charter schools, and to expand high-quality charter schools. The ESEA does not explicitly prohibit an entity that qualifies as a CMO and an eligible applicant from applying for both a CMO grant under section 4305(b) and a subgrant under section 4303(b). In order to receive funds under both programs, however, the CMO must propose to carry out different activities under each application and demonstrate that it has the resources and capability to administer multiple projects effectively and efficiently.

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)).4 We believe this provision affords CMO grantees the flexibility they need to ensure that the charter schools they manage occupy buildings and facilities that are safe, clean, and well-maintained. For examples of the types of repairs that could qualify as “minor facilities repairs” under section 4305(c), please see the Department's nonregulatory guidance entitled, “Charter Schools Program New Flexibilities under the Every Student Succeeds Act (ESSA): Frequently Asked Questions.” 5

Changes: None.

Comments: One commenter suggested that we add a priority for CMOs that propose to replicate or expand high-quality charter schools that focus on dropout recovery and academic re-entry in order to maintain consistency with the authorizing statute.

Discussion: We agree that these final priorities, requirements, definitions, and selection criteria should align with the ESEA and believe that they do. Section 4305(b)(5)(D) of the ESEA authorizes the Secretary to give priority to applicants that “propose to operate or manage high-quality charter schools that focus on dropout recovery and academic re-entry.” We believe this statutory language is clear. Like the other statutory priorities as well as the priorities established under this NFP, the Secretary may choose to apply the statutory priority for dropout recovery and academic re-entry charter schools under a CMO grant competition in FY 2019 and future years. Accordingly, we decline to add a priority for CMOs that propose to replicate or expand high-quality charter schools that focus on dropout recovery and academic re-entry.

Changes: None.

Comments: Several commenters suggested that we designate specific priorities as absolute priorities or competitive preference priorities for competitions in FY 2019 and later years.

Discussion: Federal regulations at 34 CFR 75.105 authorize the Department to establish annual priorities and to designate the priorities as invitational, competitive preference, or absolute. Therefore, we do not need to revise the final priorities in order to designate them as absolute or competitive preference priorities for competitions in FY 2019 and in later years. In accordance with 34 CFR 75.105(c), we will designate specific priorities as invitational, absolute or competitive preference priorities for the FY 2019 competition, and competitions in later years, through a notice inviting applications (NIA) in the Federal Register.

Changes: None.

Comments: Several commenters expressed support for a priority that encourages diverse student populations. One commenter recommended that we follow a specific methodology for assessing whether applicants meet the priority. Several commenters questioned whether an applicant could meet this priority and Priority 4—Low-Income Demographic, stating that it may be difficult for a school focused on socioeconomic diversity to maintain a high percentage of students who are individuals from low-income families. Some commenters recommended that the Department expand the scope of the priority to include students with disabilities, in addition to students from racially and socioeconomically diverse backgrounds. Finally, two commenters expressed concern about the priority's effect on communities and school districts more broadly. Specifically, one commenter argued that providing incentives for CMOs that propose to replicate or expand charter schools with diverse student bodies is unlikely to be successful because students typically attend schools in or near their neighborhoods, and neighborhoods, particularly in cities, tend to be segregated due to decades of deeply rooted societal forces, including racially motivated housing practices and school assignments. Another commenter suggested that we revise the priority to require that any efforts to replicate or expand high-quality charter schools with an intentional focus on diversity yield “zero net effect” on the demographics of the schools from which the students are recruited.

Discussion: We believe that students can benefit from attending high-quality charter schools with racially and socioeconomically diverse student bodies. We agree that following a rubric, or methodology, for determining whether an applicant meets the priority can be useful. We will determine an appropriate method for reviewing applications addressing this priority in the NIA for a given competition.

We agree with the commenters that some aspects of Priority 1—Promoting Diversity could potentially conflict with certain subparts of Priority 4—Low-Income Demographic and, as such, it may be challenging for a CMO grant application to meet both priorities. The Department has flexibility in choosing priorities, requirements, and selection criteria for its grant competitions. In FY 2019 and in future years, we will select a combination of priorities, requirements, and selection criteria that is appropriate for the CMO program and aligned with the Secretary's policy objectives.

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.6 Further, we believe it is important that the final priority aligns with the statutory priority for this program in ESEA section 4305(b)(5)(A), which focuses on replicating or expanding high-quality charter schools with racially and socioeconomically diverse student bodies.

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 educationally disadvantaged students but that many factors, such as safe and reliable transportation to and from school, can impact a family's realistic educational choices. This priority focuses on applicants that propose to replicate or expand high-quality charter schools with an intentional focus on racial and socioeconomic diversity, but it does not dictate how a CMO should approach this work. Promising practices for promoting diversity continue to emerge, and charter schools have great flexibility to choose an educational program that attracts students from diverse backgrounds and geographic areas outside of the immediate area surrounding the school. The intent of this priority is to encourage CMOs to replicate or expand high-quality charter schools with purposefully diverse student bodies through strategies that comply with non-discrimination requirements in the U.S. Constitution and in Federal civil rights laws, make sense for their local contexts, and are aligned with reliable research on the relationship between academic achievement and racial and socioeconomic diversity in schools.

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.

Changes: None.

Comment: None.

Discussion: Upon further review, we determined that it is critical to remind applicants addressing Priority 1 of their nondiscrimination obligations under Federal law. As such, we are revising the priority to clarify that proposed projects must be consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws.

Changes: We have added the phrase “consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws” to the priority.

Comments: Several commenters expressed support for this priority. One commenter asked that we revise the priority to encourage applications from CMOs that can share best practices for turning around low-performing traditional public schools. Two commenters requested that we clarify whether an applicant could address the priority by proposing to open a new charter school, rather than to reopen an academically poor-performing public school as a charter school. One commenter suggested that we focus the priority on reopening academically poor-performing middle and high schools as charter schools.

Discussion: We agree with the commenters that the purpose of this priority—to “reopen” academically poor-performing charter schools—could be clearer. An applicant proposing only to open new charter schools, and not “reopen” an academically poor-performing public school as a charter school, would not meet this specific priority (but could meet other priorities established in this NFP). Therefore, in order to clarify the purpose of this priority, we are replacing the term “restart” with “reopen.” In addition, we agree that starting a new school is an important endeavor, and note that opening new high-quality charter schools is a key element of the CSP. We also believe that charter schools can play an important role in helping to improve academic outcomes for students in low-performing public schools. Therefore, this priority is specifically focused on CMOs that propose to reopen academically poor-performing public schools as charter schools.

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 academically poor-performing public school or schools that were designated as persistently lowest-achieving schools or priority schools under the School Improvement Grant program or ESEA flexibility. Under this standard, an applicant can share best practices working with traditional public schools as well as nontraditional public schools, such as public charter schools.

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 reopen an academically poor-performing middle school or high school as a charter school as it sees fit. Therefore, we decline to revise the priority to focus on reopening academically poor-performing middle schools and high schools.

Changes: We have revised the priority to replace the term “restart” with “reopen.” In addition, we have revised the stem of the priority so that all subparts must be addressed in order for an applicant to meet the priority.

Comments: Several commenters opined that there is a disproportionately high percentage of students with disabilities in turnaround schools and suggested that we require CMOs proposing to reopen academically poor-performing public schools as charter schools to address the issue.

Discussion: A major goal of these priorities, requirements, definitions, and selection criteria is to expand high-quality educational opportunities for educationally disadvantaged students, including students with disabilities. CMO grantees, and the charter schools they manage, must comply with applicable laws, including Part B of the IDEA, Section 504, and Title II of the ADA. Further, to meet the priority, an applicant must propose a strategy that targets a student population that is demographically similar to that of the academically poor-performing public school. Therefore, we decline to revise this priority in the manner suggested by the commenter.

Changes: None.

Comments: Several commenters requested that the Department clarify its policy regarding admissions lotteries, including how a CMO might use a weighted lottery to address this priority. One commenter urged the Department to ensure that any grantee using a weighted lottery meet all relevant statutory requirements, and another commenter suggested that we ensure that any weighted lotteries are designed to enroll students with disabilities in proportion to the enrollment of such students in neighboring schools. Several commenters suggested that the Department update its nonregulatory guidance to clarify that CMOs that are reopening academically poor-performing public schools as charter schools could exempt from admissions lotteries students who are enrolled in the academically poor-performing public school at the time it is reopened.

Discussion: Under section 4303(c)(3) of the ESEA, charter schools receiving funds under a CMO grant generally may use “a weighted lottery to give slightly better chances for admission to all, or a subset of, educationally disadvantaged students,” so long as weighted lotteries in favor of such students are not prohibited under State law and are not used to create schools that would serve a particular group of students exclusively.7 Therefore, a charter school could use a weighted lottery for the purpose of enrolling a proportionate number of students with disabilities in the charter school as compared to the number of such students enrolled in neighboring schools. As such, the Department declines to expand the statutory requirements for weighted lotteries as they apply to CMO grants.

Further, the Department's most recent update to the CSP nonregulatory guidance was issued in January 2014.8 Although that guidance was issued prior to enactment of the ESSA, much of it is applicable to the CSP lottery requirement in section 4310(2)(H) of the ESEA. Specifically, the January 2014 CSP Nonregulatory Guidance identifies several categories of students who may be exempted from a charter school's lottery, including students who are enrolled in a public school at the time it is converted into a charter school. The Department may update this guidance to address changes to the CSP made by the ESSA. In the meantime, CMO grantees may continue to follow the guidelines in the January 2014 CSP Nonregulatory Guidance regarding the categories of students who may be exempted from the lottery requirement.

Changes: None.

Comments: One commenter recommended that we use Priority 2 cautiously because available research on charter school performance is mixed.

Discussion: We agree that, where possible, Federal funding should be used primarily to support strategies that are based on research. To meet this priority, applicants would need to demonstrate past success working with academically poor-performing public schools. In addition, all applicants, regardless of whether they address this priority, must disclose compliance issues, provide a logic model for how they will replicate or expand high-quality charter schools, and describe how they currently operate or manage high-quality charter schools. This program specifically supports the replication and expansion of high-quality charter schools, and the final priorities, requirements, definitions, and selection criteria are designed to differentiate between high-quality applications that are likely to be successful and low-quality applications that have little chance of succeeding.

Changes: None.

Comment: None.

Discussion: Upon further review, we determined that it is critical to remind applicants addressing Priority 2 of their nondiscrimination obligations under Federal law. As such, we are revising the priority to clarify that proposed projects must be consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws.

Changes: We have added the phrase “consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws” to the priority.

Comments: Several commenters expressed support for the priority but asked that we revise it to require applicants to demonstrate that their proposed strategy for replicating or expanding high-quality charter high schools is evidence-based. One commenter also suggested that applicants be required to provide data on former students' postsecondary degree attainment and employment. Conversely, another commenter suggested we use this priority cautiously due to a lack of research on charter high schools.

Discussion: We agree that using research to inform CMO grant proposals is useful in certain contexts, but we also understand that research in this area is limited. The Department's regulations at 34 CFR 75.226 specifically authorize the Secretary to give priority to applications that are supported by “evidence.” The Department may choose to implement such a priority under the CMO grant competition in a given year.

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 performance measures that will provide reliable information about the grantee's progress in meeting the objectives of the project. We believe these requirements will generate the necessary information to enable peer reviewers to evaluate the quality of applications without placing an undue burden on applicants. For these reasons, we decline to revise the priority in the manner suggested by the commenters.

Changes: None.

Comments: Several commenters suggested that we broaden the priority to focus on high schools that prepare students for paths to career and technical training and military service, as well as enrollment in two- and four-year colleges and universities. Several other commenters suggested that we revise the priority to encompass high schools that focus on transitional programming for students with disabilities.

Discussion: We agree that sending students to two- or four-year colleges and universities is not the only measure of a charter high school's success and that, for some students, getting a job or attending technical school may be the best option immediately after high school. Accordingly, we are revising subparts (ii) and (iii) of the priority to encompass a broader range of postsecondary education, training, and career options. Specifically, for this priority, postsecondary education institutions include both IHEs and educational institutions that offer one-year training programs that prepare students for gainful employment in a recognized occupation (as described in section 101(b)(1) of the Higher Education Act of 1965, as amended (HEA)). For clarity, we are also defining “IHE” in this NFP. The definition we are adding to the NFP is the same as the definition of “IHE” in section 8101(29) of the ESEA.

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 (i.e., Reserve Officers' Training Corps (ROTC)) focus, so long as the charter school meets the definition of “high-quality charter school” in section 4310(8) of the ESEA and the terms of its charter. Our ultimate focus remains on ensuring that students graduate from high school prepared to succeed in a wide variety of postsecondary education options.

We also agree with the commenters that ensuring that students with disabilities (as well as other educationally disadvantaged students) graduate from high school with adequate preparation for postsecondary education options is paramount. Therefore, we are revising the priority to include specific references to educationally disadvantaged students where appropriate. Also, as stated above, eligible students with disabilities attending public charter schools and their parents retain their right to receive FAPE, and the IDEA requirements for transition services apply beginning with the first individualized education plan (IEP) to be in effect when the student turns 16, or younger if determined appropriate by the IEP team.9 Further, in order to be considered a high-quality charter school (a key aspect of this program), a charter school that serves high school students must have demonstrated success in increasing student academic achievement and graduation rates, and must provide that information disaggregated by subgroups of students defined in section 1111(c)(2) of the ESEA, which includes children with disabilities, as defined in the IDEA. Therefore, while we are revising the priority to include specific references to educationally disadvantaged students, we decline to revise the priority to include a specific focus on high schools that provide transitional programming (i.e., preparation for specific postsecondary education options) for students with disabilities.

Changes: We have revised Priority 3—High School Students to include specific references to educationally disadvantaged students and to clarify that the priority applies to high-quality charter schools that prepare high school students to attend IHEs, which generally consist of two- and four-year colleges and universities, as well as certain postsecondary education institutions that offer one-year training programs. We have also added a definition for “IHE;” this change is discussed later in this notice.

Comments: Several commenters expressed support for the priority but requested that we revise it to support only CMOs that can demonstrate that at least 60 percent of the students across all of the charter schools they operate or manage are individuals from low-income families. One commenter stated that the vast majority of CMOs operate schools with at least 60 percent students who are individuals from low-income families, so this priority would not meaningfully differentiate applicants. Another commenter suggested that we keep the priority's original structure but revise it to support CMOs that can demonstrate that 60 to 90 percent, instead of 40 to 60 percent, of the students across all of the charter schools that they operate or manage are individuals from low-income families.

Discussion: We believe that this priority is essential to provide incentives for CMOs to support charter schools that serve student populations with the most need. As written, the priority affords the Secretary discretion to establish a poverty threshold of 40 percent, 50 percent, or 60 percent individuals from low-income families under the CMO grant competition in a given fiscal year. We believe that 40 percent is an appropriate lower bound for this priority because it is aligned with the poverty threshold a Title I school generally must meet in order to operate a schoolwide program under section 1114 of the ESEA. For this reason, we decline to revise the priority to establish only one poverty threshold of 60 percent individuals from low-income families.

We also decline to revise the priority to require that CMOs operate or manage charter schools with 60 to 90 percent students who are individuals from low-income families since, as stated above, the priority could potentially conflict with Priority 1—Promoting Diversity in a single competition. We recognize that many CMOs focus their efforts in high-need communities, but we believe it is also important to support high-quality charter schools that are designed with an intentional focus on racial and socioeconomic diversity. In any given year, we may include in an NIA one or more of these final priorities, requirements, definitions, and selection criteria individually or in combination with each other; therefore, we decline to revise the priority as suggested by the commenters.

Changes: None.

Comments: One commenter stated that applicants addressing this priority must demonstrate past success. The commenter also suggested that we revise the priority to encourage applicants to provide transportation and meal services to students.

Discussion: While applicants' past performance is not an explicit focus of this priority, it is embedded in the program through the various application priorities, requirements, definitions, and selection criteria, including the Quality of the Eligible Applicant selection criterion. We also recognize that transportation and meals are important issues for charter schools that serve large numbers of low-income students. While CSP funds may be used to provide transportation and “healthy snacks” for students in limited circumstances, a number of other Federal, State, and local programs (such as the United States Department of Agriculture's National School Lunch Program) provide resources specifically for those purposes. For this reason, we decline to revise the priority to encourage applicants to provide transportation and meal services to students.

Changes: None.

Comments: One commenter asked that we expand the priority to focus on other high-need populations, such as students with disabilities and English learners.

Discussion: Many aspects of the CMO grant program and these priorities, requirements, definitions, and selection criteria focus on educationally disadvantaged students, which include students with disabilities and English learners. In addition, we are revising some selection factors under the Contribution in Assisting Educationally Disadvantaged Students criterion to include specific references to students with disabilities and English learners. Further, the Supplemental Priorities, which may be used under the CMO grant program, include several priorities (e.g., Priority 1(b)(ii) and (iii) and Priority 5) that focus on students with disabilities and English learners. Therefore, we decline to revise this priority to focus on other high-need groups, such as students with disabilities or English learners.

Changes: None.

Comments: One commenter requested that we clarify how the priority would work as a competitive preference priority in a competition. Specifically, the commenter asked us to clarify whether points would be awarded on a sliding scale (e.g., one point for an applicant that can demonstrate its schools have at least 40 percent students who are individuals from low-income families, two points for an applicant that can demonstrate its schools have at least 50 percent students who are individuals from low-income families, and three points for an applicant that can demonstrate its schools have at least 60 percent students who are individuals from low-income families). The commenter expressed concern that an applicant could receive the maximum number of priority points for a higher poverty threshold, but only be required to maintain the minimum threshold throughout its grant project. The commenter also expressed concern that the focus of the priority is on all schools operated or managed by the CMO, and not only on the charter schools to be replicated or expanded as part of the grant project.

Discussion: While the priority is written in a manner that gives the Department flexibility to apply one, two, or all three poverty standards in a single competition, we do not anticipate applying more than one poverty standard in a single competition or assigning points on a sliding scale.

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 individuals from low-income families may fluctuate on an annual basis and, for this reason, believe the priority should focus on all schools operated by a CMO and not just the charter schools to be replicated or expanded as part of the grant project.

Changes: We have added a requirement that applicants demonstrate that they will maintain for the entire grant period a poverty threshold across the schools they operate or manage that is the same as, or substantially similar to, the poverty level proposed in the grant application.

Comments: Several commenters suggested that we use the priority sparingly or remove it altogether. One commenter noted that the size of a CMO does not directly correlate to the quality of its schools, and another cited recent research suggesting that CMO size should not be used as a proxy for other characteristics. Other commenters expressed concern that the priority would dilute the quality of funded applications because it would create several smaller competitions for CMO grants. One commenter questioned the purpose of the priority, noting that if the intent is to support smaller, less-established CMOs, we may get better results using the priority for novice applicants in 34 CFR 75.225.

Discussion: We agree that size is not necessarily positively correlated with quality. We note, however, that the Department can employ several mechanisms, established in the ESEA and these final priorities, requirements, definitions, and selection criteria, to assess the quality of an applicant and its proposal. This priority, by itself, is not intended to assess quality with respect to the size of the applicant. Rather, this priority is designed primarily to enable the Secretary to give a competitive advantage to small, medium, or large CMOs in a given year based on the Department's policy objectives for that year. We understand the concern that this priority could be used to create smaller sub-competitions that would decrease the amount of available funds for other CMOs. In any year in which we announce a competition, we will select a combination of priorities, requirements, and selection criteria that meet the requirements of the CMO grant program and is aligned with the Secretary's policy objectives.

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.

Changes: None.

Comments: Several commenters expressed support for the priority but questioned whether an applicant could meet the priority by proposing to replicate or expand schools in a combination of rural communities and other communities.

Discussion: As written, this priority gives the Department flexibility to establish an absolute or competitive preference priority for applications that propose to replicate or expand one or more high-quality charter schools in a rural community or one or more high-quality charter schools in a non-rural community. To meet the priority, an applicant would need to propose to replicate or expand at least one high-quality charter school in a rural community or at least one high-quality charter school in a non-rural community, depending on the Department's policy objectives in a given year and which prong of the priority the applicant is addressing. The priority language does not preclude an applicant from also proposing to replicate or expand high-quality charter schools in other communities. We believe the priority is clear and, therefore, decline to revise it.

Changes: None.

Comments: One commenter asked that we revise the priority to focus on opening new charter schools in rural areas. Conversely, another commenter raised concerns that new charter schools in rural areas would drain resources from traditional public schools.

Discussion: The purpose of the CMO grant program is to replicate or expand high-quality charter schools. Although replicated charter schools are based on educational models at existing high-quality charter schools, for all practical purposes, they are new charter schools. Further, in light of the unique challenges faced by rural communities, we believe prospective applicants for CMO grants should have the flexibility to design their projects in a way that meets the specific needs of the communities they plan to serve, including determining whether a particular rural community would be best served by creating a new, or replicated, charter school or by expanding an existing charter school.

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 rural communities will help improve student academic achievement not only in charter schools, but also in traditional public schools in the community. For these reasons, we decline to revise the priority.

Changes: None.

Comments: Several commenters urged the Department to add a priority that would support Indian students by encouraging CMOs to replicate or expand dual language immersion schools that focus primarily on Indian languages. Another commenter suggested that the Department consider a CMO's ability to meaningfully engage with Tribal communities when making CMO grant decisions.

Discussion: As discussed in the “Definitions” section below, we have replaced the term “students who are Indians” with the term “Native American students” in this priority. These changes allow applicants to receive priority points for proposing to replicate or expand high-quality charter schools that serve Native Hawaiian and Native American Pacific Islander students, as well as students who are Indians (including Alaska Natives). We agree with the commenters that cultivating strong relationships with the communities to be served is crucial, and that focusing on Native American language immersion is a promising strategy for building and maintaining those relationships and improving academic outcomes for Native American students. To meet this priority, an applicant must propose to replicate or expand a high-quality charter school that will meet the unique needs of Native American students. The applicant may employ various strategies that reflect and preserve Native American language, culture, and history, including a “dual language immersion” program that focuses on Native American languages. Thus, an applicant proposing to replicate or expand a high-quality charter school with a dual language immersion program that focuses on Native American languages could meet this priority.

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.

Changes: We have revised the priority to replace the phrase “demonstrate a commitment to meaningfully collaborate” with “meaningfully collaborate.”

Comments: One commenter expressed support for the priority but suggested that we revise it to require applicants to submit a resolution or official document, rather than a letter, from surrounding Indian Tribes or Indian organizations that demonstrates their support for the proposed project. The commenter also suggested that we clarify our expectations for the composition of the board for a charter school to be replicated or expanded under the grant, and suggested that we require the board to have a percentage of Indian Tribe or Indian organization members that is comparable to the percentage of Native American students enrolled in the school. Finally, the commenter suggested that we revise the priority to require that applicants demonstrate a record of success in Tribal communities, particularly for applicants proposing to replicate or expand virtual charter schools.

Discussion: We agree that a CMO with strong support from surrounding Indian Tribes or Indian organizations is more likely to succeed in replicating or expanding high-quality charter schools that serve a high proportion of Native American students. Accordingly, in order to meet this priority, the applicant must submit a letter of support from an Indian Tribe or Indian organization located in the area to be served by the charter school. While a resolution is not required, an applicant is not precluded from submitting a resolution, or other official document, to demonstrate support.

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 Indian Tribes or Indian organizations could limit the ability of applicants to fully respond to the needs of the communities they propose to serve. In order to meet the priority, however, CMOs will need to collaborate with an Indian Tribe or Indian organization in the communities in which they propose to replicate or expand high-quality charter schools to ensure that school boards represent their students appropriately. While a school board with a percentage of members of Indian Tribes or Indian organizations that is comparable to the percentage of Native American students to be served could satisfy the substantial percentage requirement in this priority, there may be circumstances where a smaller or larger percentage of members from an Indian Tribe or Indian organization is appropriate. For these reasons, we decline to revise the priority as suggested by the commenter.

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 (see Requirement (e)). We believe that Indian Tribes and Indian organizations located in the community to be served by the replicated or expanded charter school are in the best position to determine whether a particular CMO applicant has the requisite knowledge and experience to serve Native American students effectively. Therefore, the requirements that an applicant obtain a letter of support from, and meaningfully collaborate with, a local Indian Tribe or Indian organization should prevent CMOs that lack the knowledge and experience necessary to serve Tribal communities successfully from meeting the priority. For these reasons, we decline to revise the priority in the manner suggested by the commenter.

Changes: None.

Comment: None.

Discussion: Upon further review, we determined that it is critical to remind applicants addressing Priority 7 of their nondiscrimination obligations under Federal law. As such, we are revising the priority to clarify that proposed projects must be consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws.

Changes: We have added the phrase “consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws” to the priority.

Requirements

Comments: A few commenters requested that we clarify which requirements we would include in future CMO grant competitions. One commenter also requested that we clarify which requirements represent existing obligations under Federal law.

Discussion: As a general matter, the CSP statute prescribes the priorities, requirements, definitions, and selection criteria that apply to all CMO grants, regardless of the fiscal year in which the grant is awarded. In addition, the Department's regulations at 34 CFR part 75 prescribe the procedures the Department must follow when awarding and administering discretionary grants. The main purposes of these final priorities, requirements, definitions, and selection criteria are to clarify the Department's interpretation of certain statutory requirements and to establish other priorities, requirements, definitions, and selection criteria consistent with congressional intent. The Department generally has discretion to choose specific priorities, requirements, definitions, and selection criteria to apply to CMO grants in a given year based on the Department's policy objectives for that year. All of the requirements in this NFP are aligned with existing requirements for CMO grants under the ESEA and the Department's regulations.

Changes: None.

Comments: One commenter suggested that we require applicants to disclose whether any charter schools in their network meet the definition of “academically poor-performing public school.” The commenter also suggested that we differentiate between “schools” and “campuses” because States vary in how they define the two terms.

Discussion: We agree that knowing whether an applicant has “academically poor-performing public schools” in its network could give the Department an indication of the overall quality of the CMO's charter schools. On the other hand, there are many reasons why a charter school may qualify as an academically poor-performing public school and, ultimately, the existence of one or more academically poor-performing public schools in a CMO's network is not necessarily dispositive proof that the CMO is unable to administer a CMO grant effectively and efficiently. For example, it would not be unusual for an applicant that has reopened one or more low-achieving public schools to have an academically poor-performing public school in its network. Under Requirement (e), any CMO that receives a grant must provide evidence of success, regardless of whether the CMO has operated or managed academically poor-performing public schools.

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.

Changes: None.

Definitions

Comments: Several commenters requested that we clarify the definition of “high proportion,” as that term is used in Priority 7. One commenter provided data suggesting that the definition of “high proportion” may not be ambitious enough. Conversely, one commenter suggested that we define “high proportion” as 25 percent students who are Indians, consistent with one of the requirements in section 6112 of the ESEA.

Discussion: As discussed above, we are revising Priority 7—Replicating or Expanding High-Quality Charter Schools to Serve Native American Students to replace “students who are Indians” with “Native American students.” As written, the priority gives applicants an opportunity to explain why the number of Native American students it proposes to serve constitutes a “high proportion,” based on the specific circumstances and context of the community in which the charter school is or will be located. For this reason, we decline to require charter schools to serve a specific percentage of Native American students, such as 25 percent, in order to meet the priority.

We appreciate that some data may suggest that many charter schools have student bodies comprised of 75 percent or more Native American students. Such schools would generally meet the definition of high proportion established in this document. On the other hand, if an applicant proposes to replicate or expand a charter school that has less than a majority of Native American students but provides a compelling rationale for why the school should be considered to have a high proportion of Native American students, we may consider the applicant to have met the standard. Applicants addressing Priority 7 must, among other things, meaningfully collaborate with Indian Tribes or Indian organizations and must replicate or expand high-quality charter schools that have an academic program purposely designed to meet the unique needs of Native American students. We believe that all of the components of Priority 7, including the definition of “high proportion,” set an appropriately rigorous bar for CMO applicants while also affording some flexibility. Therefore, we decline to revise the definition of high proportion as suggested by the commenters.

Changes: None.

Comments: A few commenters suggested that we revise the definition of “Indian” to include Native Hawaiians.

Discussion: We agree that Native Hawaiian students have many of the same unique educational needs as students who are Indians. We also believe that students who are Native American Pacific Islanders have similar educational needs. Therefore, as stated above, we are replacing the terms “Indian” and “Indian language,” respectively, with “Native American” and “Native American language” throughout the final priorities, requirements, definitions, and selection criteria. Likewise, we are removing the definition of the term “Indian” and adding definitions for “Native American” and “Native American language,” based on the definitions for those terms in section 8101(34) of the ESEA.10 The ESEA definition of “Native American” explicitly includes Indians (including Alaska Natives), Native Hawaiians, and Native American Pacific Islanders.

Changes: We have removed the definition of “Indian” and added definitions for “Native American” and “Native American language.”

Comments: One commenter suggested that we use the term “Tribal organization” instead of “Indian organization” because “Tribal organization” is the term used in the ESEA.

Discussion: While the term “Tribal organization” is used under several ESEA programs, the term is not defined in section 8101 of the ESEA, which provides general definitions that apply to programs authorized under the ESEA. The term “Indian organization” is used in the authorizing statute for the Department's Indian Education program (20 U.S.C. 7401-7492) and defined in the Department's regulations implementing the Indian Education program at 34 CFR 263.20. We think it is important to maintain consistency with the Indian Education program.

Changes: None.

Comments: One commenter suggested that we revise Selection Criterion (b)—Contribution in assisting educationally disadvantaged students to enable the Department to assess better the extent to which an applicant would effectively support students with disabilities. Specifically, the commenter suggested that we add a selection factor focused on attendance rates and outcomes for educationally disadvantaged students, including students with disabilities and English learners, and revise the existing selection factors to focus on effective instructional strategies for educationally disadvantaged students.

Discussion: Two major purposes of the CSP are to expand educational opportunities for educationally disadvantaged students and to assist such students in meeting State academic content and performance standards. As written in the NPP, this selection criterion would enable the Department to evaluate the quality of an application with respect to achieving these two objectives. While educationally disadvantaged students include students with disabilities, we agree with the commenter that an emphasis should be placed on students with disabilities and English learners because enrollment of such students in charter schools tends to be lower than enrollment of such students in neighboring traditional public schools. Therefore, we are revising the selection criterion to emphasize students with disabilities and English learners.

Changes: We have revised two selection factors in Selection Criterion (b) to sharpen the criterion's focus on serving educationally disadvantaged students. We also have revised the title of the criterion to clarify the focus on the significance of the contribution in assisting educationally disadvantaged students.

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 academically poor-performing public schools or schools that previously were designated as persistently lowest-achieving schools or priority schools under the former School Improvement Grant program or in States that exercised ESEA flexibility, respectively, under the ESEA, as amended by the No Child Left Behind Act of 2001; and

(ii) Propose to use grant funds under this program to reopen one or more academically poor-performing public schools as charter schools during the project period by—

(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 academically poor-performing public schools, consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws.

Under this priority, applicants must propose to—

(i) Replicate or expand high-quality charter schools to serve high school students, including educationally disadvantaged students;

(ii) Prepare students, including educationally disadvantaged students, in those schools for enrollment in postsecondary education institutions through activities such as, but not limited to, accelerated learning programs (including Advanced Placement and International Baccalaureate courses and programs, dual or concurrent enrollment programs, and early college high schools), college counseling, career and technical education programs, career counseling, internships, work-based learning programs (such as apprenticeships), assisting students in the college admissions and financial aid application processes, and preparing students to take standardized college admissions tests;

(iii) Provide support for students, including educationally disadvantaged students, who graduate from those schools and enroll in postsecondary education institutions in persisting in, and attaining a degree or certificate from, such institutions, through activities such as, but not limited to, mentorships, ongoing assistance with the financial aid application process, and establishing or strengthening peer support systems for such students attending the same institution; and

(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 educationally disadvantaged students, for enrollment in postsecondary education institutions and in supporting those students in persisting in and attaining a degree or certificate from such institutions. An applicant addressing this priority and receiving a CMO grant must provide data that are responsive to the measure(s), including performance targets, in its annual performance reports to the Department.

(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 Student Succeeds Act, and one-year training programs that meet the requirements of section 101(b)(1) of the HEA.

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 individuals from low-income families, and that the applicant will maintain the same, or a substantially similar, percentage of such students across all of its charter schools during the grant period;

(ii) That at least 50 percent of the students across all of the charter schools the applicant operates or manages are individuals from low-income families, and that the applicant will maintain the same, or a substantially similar, percentage of such students across all of its charter schools during the grant period; or

(iii) That at least 60 percent of the students across all of the charter schools the applicant operates or manages are individuals from low-income families, and that the applicant will maintain the same, or a substantially similar, percentage of such students across all of its charter schools during the grant period.

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 rural community; or

(ii) A community that is not a rural community.

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 high proportion of Native American students, consistent with nondiscrimination requirements contained in the U.S. Constitution and Federal civil rights laws;

(B) Have a mission and focus that will address the unique educational needs of Native American students, such as through the use of instructional programs and teaching methods that reflect and preserve Native American language, culture, and history; and

(C) Have a governing board with a substantial percentage of members who are members of Indian Tribes or Indian organizations located within the area to be served by the replicated or expanded charter school;

(ii) Submit a letter of support from at least one Indian Tribe or Indian organization located within the area to be served by the replicated or expanded charter school; and

(iii) Meaningfully collaborate with the Indian Tribe(s) or Indian organization(s) from which the applicant has received a letter of support in a timely, active, and ongoing manner with respect to the development and implementation of the educational program at the charter school.

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 Federal Register. The effect of each type of priority follows:

Absolute priority: Under an absolute priority, we consider only applications that meet the priority (34 CFR 75.105(c)(3)).

Competitive preference priority: Under a competitive preference priority, we give competitive preference to an application by (1) awarding additional points, depending on the extent to which the application meets the priority (34 CFR 75.105(c)(2)(i)); or (2) selecting an application that meets the priority over an application of comparable merit that does not meet the priority (34 CFR 75.105(c)(2)(ii)).

Invitational priority: Under an invitational priority, we are particularly interested in applications that meet the priority. However, we do not give an application that meets the priority a preference over other applications (34 CFR 75.105(c)(1)).

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, et seq.) and its implementing regulations, including 34 CFR 106.34.

(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 school, including in the area of school governance.

(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 educationally disadvantaged students in mastering challenging State academic standards.

(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.

Academically poor-performing public school means:

(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.

Educationally disadvantaged student means a student in one or more of the categories described in section 1115(c)(2) of the ESEA, which include children who are economically disadvantaged, students who are children with disabilities, migrant students, English learners, neglected or delinquent students, homeless students, and students who are in foster care.

High proportion, when used to refer to Native American students, means a fact-specific, case-by-case determination based upon the unique circumstances of a particular charter school or proposed charter school. The Secretary considers “high proportion” to include a majority of Native American students. In addition, the Secretary may determine that less than a majority of Native American students constitutes a “high proportion” based on the unique circumstances of a particular charter school or proposed charter school, as described in the application for funds.

Indian organization means an organization that—

(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.

Indian Tribe means a federally-recognized or a State-recognized Tribe.

Individual from a low-income family means an individual who is determined by a State educational agency or local educational agency to be a child from a low-income family on the basis of (a) data used by the Secretary to determine allocations under section 1124 of the ESEA, (b) data on children eligible for free or reduced-price lunches under the Richard B. Russell National School Lunch Act, (c) data on children in families receiving assistance under part A of title IV of the Social Security Act, (d) data on children eligible to receive medical assistance under the Medicaid program under title XIX of the Social Security Act, or (e) an alternate method that combines or extrapolates from the data in items (a) through (d) of this definition.

Institution of higher education means an educational institution in any State that—

(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.

Native American means an Indian (including an Alaska Native), Native Hawaiian, or Native American Pacific Islander.

Native American language means the historical, traditional languages spoken by Native Americans.

Rural community means a community that is served by a local educational agency that is eligible to apply for funds under the Small Rural School Achievement (SRSA) program or the Rural and Low-Income School (RLIS) program authorized under title V, part B of the ESEA. Applicants may determine whether a particular local educational agency is eligible for these programs by referring to information on the following Department websites. For the SRSA program: www2.ed.gov/programs/reapsrsa/eligible16/index.html. For the RLIS program: www2.ed.gov/programs/reaprlisp/eligibility.html.

(a) Quality of the eligible applicant. In determining the quality of the eligible applicant, the Secretary considers one or more of the following factors:

(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 educationally disadvantaged students served by the charter schools operated or managed by the applicant have exceeded the average academic achievement results for such students served by other public schools in the State.

(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) Significance of contribution in assisting educationally disadvantaged students.

In determining the significance of the contribution the proposed project will make in expanding educational opportunities for educationally disadvantaged students and enabling those students to meet challenging State academic standards, the Secretary considers one or more of the following factors:

(i) The extent to which charter schools currently operated or managed by the applicant serve educationally disadvantaged students, particularly students with disabilities and English learners, at rates comparable to surrounding public schools or, in the case of virtual charter schools, at rates comparable to public schools in the State.

(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 educationally disadvantaged students, particularly students with disabilities and English learners.

(c) Quality of the evaluation plan for the proposed project.

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) Quality of the management plan.

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.

Note: This document does not solicit applications. In any year in which we choose to use one or more of these priorities, requirements, definitions, and selection criteria, we invite applications through a notice in the Federal Register.

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 governments in the exercise of their governmental functions.

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.

Intergovernmental Review: This program is subject to Executive Order 12372 and the regulations in 34 CFR part 79. One of the objectives of the Executive order is to foster an intergovernmental partnership and a strengthened federalism. The Executive order relies on processes developed by State and local governments for coordination and review of proposed Federal financial assistance.

This document provides early notification of our specific plans and actions for this program.

Accessible Format: Individuals with disabilities can obtain this document in an accessible format (e.g., braille, large print, audiotape, or compact disc) on request to the program contact person listed under FOR FURTHER INFORMATION CONTACT.

Electronic Access to This Document: The official version of this document is the document published in the Federal Register. You may access the official edition of the Federal Register and the Code of Federal Regulations via the Federal Digital System at: www.thefederalregister.org/fdsys. At this site you can view this document, as well as all other documents of the Department published in the Federal Register, in text or Portable Document Format (PDF). To use PDF you must have Adobe Acrobat Reader, which is available free at the site.

You may also access documents of the Department published in the Federal Register by using the article search feature at: www.federalregister.gov. Specifically, through the advanced search feature at this site, you can limit your search to documents published by the Department.

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.1 Having reviewed and carefully considered these comments, the Office is issuing a final rule that is nearly identical to the rule proposed in the NPRM on group newsletters, and substantially similar to the rule proposed in the NPRM on group serials; in both cases, the Office has made a few modifications reflecting the concerns raised by the comments regarding online registration and electronic submission of deposits regarding group registration of serials, which are discussed in more detail below.2

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” (e.g., weekly, every two weeks, monthly), and requires that the issues be “published in a given three month period” within “the same calendar year.” The proposed rule reflected the current practice that issues must be published at intervals of one week or more, however, the Copyright Alliance noted that publishers sometimes distribute two issues during the same week, such as when a “special” issue is published in addition to a regularly scheduled issue.3 To accommodate these practices, the final rule clarifies that a serial must “generally” be published at intervals of one week or more. The Copyright Alliance also explained that issues may be published in one month but contain an issue date for the following month and, in the case of issues published in December, may contain the issue date for January of the following year.4 Based on this information, the final rule eliminates the requirements that the issues themselves must bear issue dates reflecting the same three-month period and the same calendar year. Instead, applicants will be required to provide a publication date for each issue in the group.

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.” 5 The Office does not believe a change to the language of the rule is necessary. If a particular issue contains enhanced content, such as an embedded video, the registration will cover that material if it is included within the deposit and if the examiner can access and view that material in the context where it appears within the actual serial.6 Any additional content that appears on the publisher's website—but does not appear within the issues themselves—must be registered separately.

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.7

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 process,' ” it questioned whether the electronic registration system is capable of handling large digital files, whether the process of uploading these files may be burdensome for some publishers, and whether the Office has implemented and deployed robust security measures to protect its digital deposits.8 The Copyright Alliance suggested that the Office should gradually phase out the paper application and continue to accept physical deposits “[u]ntil the registration system is able to fully accommodate the digital deposit process.” 9 After carefully reviewing these comments, the Office has decided to adopt the online digital deposit requirement proposed in the NPRM, but to give publishers time to adjust to this change, the Office will continue to accept physical deposits and paper applications for another twelve months. Generally, if a publisher submits a Form SE/Group or submits a physical deposit after the phase-out period has expired, the Office will refuse to register the claim.

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.10 The Office utilizes a multi-level security design to ensure the confidentiality and integrity of the files that are stored within this system. The system is certified to operate at the moderate security level, as defined by the FIPS 200 and SP 800-53 standards published by the National Institute of Standards and Technology.11 The entire system operates on hardware and software that is dedicated to this system and it does not share storage resources with other systems. Strict access controls have been placed throughout the system that enforce the principle of “least privilege,” meaning that each type of user may access only what is needed for that particular role. The system is also protected by multiple levels of network firewalls and other network-based security, such as anti-malware protection, and it is continuously monitored to ensure that these security controls remain effective.

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.12

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.13 But the Library currently does not provide public access to digital registration deposits for any other type of work, including deposits submitted under the group registration option for serial issues. As noted in the NPRM on group newspapers, the Library would like to expand the regulation to include other types of digital registration deposits, but before doing so, the Office will conduct separate rulemakings to provide notice and seek comment from the public.14

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.15 But newsletter and serial issues that are submitted to the Office for purposes of registration will no longer satisfy the mandatory deposit requirement set forth in section 407 of the Copyright Act.16

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.17 These provisions permit the Office to waive the online filing requirement in “an exceptional case” and “subject to such conditions as the Associate Register and Director of the Office of Registration Policy and Practice may impose on the applicant.” Registrants who do not have internet access or are unable to use the online applications may contact the Office, and the Office will review the specific details of their cases and determine their eligibility. The rule also provides that applicants may request special relief under § 202.20(d) if they are unable to comply with the deposit requirements for these group options. These provisions are consistent with recently amended rules for group registration of contributions to periodicals and of photographs (published and unpublished) and for supplemental registration.18

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 Compendium of U.S. Copyright Office Practices, Third Edition and updated Circulars that discuss these group registration options and the mandatory deposit requirements for these types of works. The Office will also update the onscreen instructions and help text that accompanies the online applications for each type of claim, and add warnings to the corresponding paper applications to notify applicants that Forms G/DN and SE/Group will soon be phased out.

For the reasons set forth in the preamble, the Copyright Office amends 37 CFR parts 201 and 202 as follows:

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 PM2.5 nonattainment area classified as Serious. Moreover, we concluded that if the State submits the changes it committed to submit in its July 16, 2018 commitment letter, the identified deficiencies will be cured.

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 www.regulations.gov and in hard copy at the EPA Region IX Office (please contact the person identified in the FOR FURTHER INFORMATION CONTACT section of this preamble for more information).

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 et seq.);

• 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 et seq.);

• 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 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. The EPA will submit a report containing this action and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. A major rule cannot take effect until 60 days after it is published in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Part 52, Chapter I, Title 40 of the Code of Federal Regulations is amended as follows:

Preamble Outline I. General Information II. Statutory Authority III. When will this interim final rule be effective? IV. Background Information A. Regulation of Airbag Modules and Airbag Inflators Under RCRA B. Background on the Takata Inflator Recalls C. Damage Incidents Related to Airbag Inflator Recycling D. Impact of Takata Bankruptcy and the Amended Preservation Order on Management of Takata Inflators V. Rationale for Conditional Exemption for Collection of Airbag Waste VI. Summary of Requirements of the Conditional Exemption for Collection of Airbag Waste A. Applicability of Conditional Exemption B. Limits on Accumulation Times and Quantities at Airbag Waste Handlers C. Packaging, Labeling and Transportation Requirements for Airbag Waste Handlers D. Tracking and Recordkeeping Requirements for Airbag Waste Handlers E. Prohibition on Reuse of Defective Airbag Modules and Airbag Inflators VII. State Authorization VIII. Statutory and Executive Order (E.O.) Reviews I. General Information A. Does this action apply to me?

This action applies to entities that manage airbag waste (i.e., discarded airbag modules and airbag inflators) that are subject to hazardous waste regulations. The dealerships performing the Takata recall work constitute the majority of the facilities that will be impacted by this rule. These dealerships fall under NAICS code 441: Motor Vehicle and Parts Dealers. EPA estimates that about 15,256 dealerships may be affected by this rule. Other potentially affected entities include those in NAICS code 336: Transportation Equipment Manufacturing, and in NAICS code 562: Waste Management and Remediation Services.

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.” 1 This report emphasizes that as the inflators get older, each day that passes brings forth an increased danger. In addition, as noted in a November 15, 2017 report prepared by the Independent Monitor for the Takata Restructuring on The State of the Takata Recalls, “[t]he words `grenade' and `ticking time bomb' accurately convey the lethal potential of these defective inflators.” 2

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 for long-term storage but may now send them directly for disposal. EPA is encouraging this through today's conditional exemption, since long-term storage of recalled inflators can make the defect more dangerous. These recalled inflators that are sent directly to disposal are not covered by the amended Preservation Order and thus are regulated as hazardous waste, whereas in the past they were not regulated as waste under the original Preservation Order. As a result, many automobile dealers and other entities who continue to replace recalled airbag inflators at the current rate of repair could 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. 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 would result in the slowdown, rather than the necessary acceleration, of the recall effort, resulting in even greater harm to human health and the environment.3

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 4 , and before that, on July 13, 2017, a death in Australia 5 as well as another on July 19, 2017 in Florida 6 as a result of defective Takata airbags.

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 Federal Register, “except . . . a substantive rule which grants or recognizes an exemption or relieves a restriction . . . or as otherwise provided by the agency for good cause”. RCRA section 3010(b) has similar provisions for an immediate effective date. It provides for an immediate effective date, rather than the usual six month period, for “(1) a regulation with which the Administrator finds the regulated community does not need six months to come into compliance . . . . or (3) other good cause found and published with the regulation,” among other exceptions.

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.” Omnipoint Corp. v. FCC, 78 F.3d 620, 630 (D.C. Cir. 1996); see also United States v. Gavrilovic, 551 F.2d 1099, 1104 (8th Cir. 1977) (quoting legislative history). Similarly, as noted above, whether the regulated community needs a period of time to come into compliance is relevant to the application of RCRA section 3010(b). Because this rule grants a conditional exemption from certain RCRA hazardous waste requirements, it qualifies for the APA exemption for any rule that “recognizes or grants an exemption or relieves a restriction” as well as the RCRA exemption for any rule for which “the regulated community does not need six months to come into compliance.”

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.” Gavrilovic, 551 F.2d at 1105. EPA has also applied this balancing test to the RCRA effective date provision for purposes of this rule. This rule facilitates 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 from hazardous waste requirements so long as certain conditions are met. Because this action provides an exemption to certain requirements that automobile dealers and other parties would otherwise need to follow under RCRA, and because this exemption is optional, the regulated community does not need time to prepare for this rule. Specifically, as further discussed in this preamble, the conditions for the exemption mirror how recalled airbag modules and airbag inflators have been managed under the DOT Preservation Order during the past three years, and therefore no additional time is needed to start operating under the exemption. In contrast, the necessity of immediate implementation is great, as previously discussed.

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 the propellant and, therefore, when discarded, would meet the definition of ignitable hazardous waste under the RCRA hazardous waste regulations at 40 CFR 261.21(a)(4), which states that a solid waste exhibits the characteristic of ignitability if, “[i]t is an oxidizer.” 7 In addition, due to the explosive propellant component, discarded airbag modules and airbag inflators meet the definition of reactive hazardous waste at 40 CFR 261.23(a)(6), which states that a solid waste exhibits the characteristic of reactivity if, “[i]t is readily capable of detonation or explosive reaction if it is subjected to a strong initiating source or if heated under confinement.” 8 The deployment of airbag inflators generally results in the depletion of the ignitable and/or reactive components to cause the release of inert gas, after which the inflators would no longer exhibit the ignitable or reactive characteristics under the RCRA regulations.

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, 2018.9 As the memo explains, the applicable RCRA hazardous waste regulations for airbag modules and airbag inflators depend on the type of device, and how it is managed. However, it is important to note that, as the memo explains, recalled Takata airbag modules and airbag inflators removed from vehicles do not qualify for the exemptions and exclusions available to non-recalled airbag modules and airbag inflators because, as described in this preamble, the Takata recalled airbag inflators cannot be safely reused or deployed.

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 2018.10 These airbag inflator recalls constitute the largest automotive recall in U.S. history, with 19 vehicle manufacturers affected and approximately 65-70 million airbag inflators scheduled to be recalled by December 2019. Of these affected airbag inflators, 50 million inflators in an estimated 37 million vehicles were recalled as of August 2018 and the remaining inflators will be recalled by December 2019.11 Included in this number are tens of thousands of “Alpha” airbag inflators, which have a significantly higher risk of rupture due to a manufacturing defect resulting in low-density propellant in addition to the propellant defect described below. Nine of the 15 fatalities in the U.S. were caused by Alpha airbag inflators.12

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.13 In its Coordinated Remedy Order, 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.” 14

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.15 In some cases, this over-pressurization causes the metal canister to rupture, producing shrapnel-like metal shards during airbag inflation. To mitigate these effects, Takata began manufacturing PSAN airbag inflators containing desiccant to prevent the adsorption of moisture to the PSAN particles. While some inflators with desiccant have been recalled, others are still under evaluation and may or may not be recalled in the future.16

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.” 17 The firefighting measures described in the SDS include evacuating personnel and emergency responders for 1500 feet (1/3 mile). In the event of spilled material from damaged devices, the SDS recommends that an explosive expert conduct the cleanup using anti-static equipment.

Propagation and bonfire testing results submitted to EPA by Takata provides further information regarding the hazards posed by recalled Takata inflators.18 In September 2016, a third-party company performed sympathetic propagation testing on two types of recalled Takata airbag inflators for Takata. The testing generally consisted of bundling several inflators together and deploying the center inflator in order to observe the effects of deployment on the surrounding inflators. The results of the testing showed that deployment of one inflator does not cause deployment of surrounding inflators. In some tests, the center inflator fragmented, but it still did not cause surrounding inflators to deploy or fragment, although some superficial damage to the surrounding inflators did occur. In April 2017, a third-party company performed the UN 6(c) external fire (bonfire) test on recalled Takata airbag inflators in individual fiberboard boxes. The inflators did not mass detonate when exposed to fire, but they did initiate, as would be expected when inflators are exposed to temperatures generated by this type of fire. In some cases, they were propelled from their initial locations of rupture, throwing fragments beyond the initial location of the inflator.

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.19 In that incident, one worker was hospitalized with head injuries and burns. In March 2018, a large explosion at a different airbag recycling facility in the dedicated airbag recycling area killed one worker and seriously injured another.20 This explosion is suspected to have been caused by the ignition of aluminum dust, which was created in the process of shredding airbag inflators. These incidents demonstrate the characteristically hazardous nature of waste airbag inflators and their component materials and the potential risk they pose to human health during processing.

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.21 22 Additionally, EPA clarified that Takata recalled airbag inflators would be considered “used” (i.e., spent materials), and therefore a solid waste, once the preservation requirements are lifted. When the recalled Takata airbag inflators are discarded as a solid waste, EPA believes that they meet both the ignitability and reactivity hazardous waste characteristics.23

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, 2018.24 Takata's manufacturing assets were sold to Key Safety Systems, another automobile safety system manufacturer, and the money from the sale was used to settle debts and legal claims. A small portion of the company emerged from bankruptcy and has a section dedicated to facilitating the replacement of recalled airbag inflators.25 Takata's plan sets aside funds designated for the removal, handling and eventual disposal of recalled airbag inflators received before the effective date of the bankruptcy, April 10, 2018, and states that Takata will continue to provide replacement airbag inflators until the recall process is finished, expected in 2020.26 Takata will also continue to receive recalled airbag inflators for storage prior to testing or eventual disposal after April 10, 2018, although it is not required to do so. EPA's understanding is that Takata will charge the automobile manufacturers to cover the costs associated with storage and eventual disposal of these inflators received after April 10, 2018. These costs include the overhead expenses associated with Takata managing the collection, storage, and disposal of airbag inflators, including wages and benefits for their workers that are involved in handling and coordinating the movement of the inflators. Prior to the bankruptcy effective date, Takata accepted and managed these inflators from the affected vehicle manufacturers free of charge.

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.27 The Amendment also requires Takata to implement a control plan for the inspection, testing, or analysis of those inflators.

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, proportionate to the overall number of inflators received from each State and of each type of inflator, for future analysis. The Amendment allows Takata to submit Disposal Designations to NHTSA, identifying a specific quantity of inflators to be released from preservation and disposed. The designated inflators are considered released from the Preservation Order fifteen business days after NHTSA's confirmation of receipt of the Disposal Designation.

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.” 28

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.29 The automobile manufacturers are worried that, because of their lack of familiarity and expertise with full RCRA hazardous waste generator regulations and the additional costs related to the management of hazardous waste in these higher generator categories, if the dealers were to become fully regulated small or large quantity generators due to handling recalled airbag waste, they may slow down or stop removing recalled airbag inflators altogether. In addition, some stakeholders have expressed their concern of a lack of hazardous waste transportation capacity, especially in more sparsely populated rural areas of the country. As hazardous waste generators, dealers would be required to use certified hazardous waste transporters, which are less numerous and more expensive than standard hazardous material transporters used to transport recalled inflators under the DOT preservation order. Thus, placing full hazardous waste generator requirements on dealers or salvage yards would not be the most efficient or environmentally protective approach for the above reasons. In contrast, as explained in the following section, an airbag waste collection facility 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 the recalls or a designated facility as defined in 40 CFR 260.10, has greater expertise and familiarity in properly managing hazardous waste.

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 transportation for the airbag modules. Once a pallet of validated airbag modules is collected (approximately 100-110 pieces), the pallet is sent for disposal and a certificate of destruction is provided. The airbag modules are transported in compliance with DOT hazardous materials regulations. According to this vendor, if the airbag modules must be handled as RCRA hazardous waste when removed from a vehicle in the salvage yard, the salvage yards would likely stop removing them.

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, e.g., Military Toxics Project v. EPA, 146 F. 3d 948 (DC Cir. 1998) (upholding conditional exemption for storage of military munitions, based on EPA determination that such wastes are subject to binding standards that meet or exceed RCRA standards, in addition to an institutional oversight process.) EPA has interpreted the statutory definition of hazardous waste in RCRA section 1004(5)(B) as incorporating the idea that a waste that is otherwise hazardous does not require regulation under RCRA so long as it is properly managed.

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.30 However, EPA has determined, based on the nature of the waste and the damage cases that have occurred at airbag recycling facilities, an exemption for the final disposition of airbag waste would not be protective of human health and the environment. While the collection of intact airbag modules and inflators by vehicle manufacturers or their authorized representatives according to DOT requirements can be done safely without imposing RCRA requirements beyond the conditions of the exemption discussed in this preamble, processing the airbag inflator, which requires treatment of the ignitable and reactive propellant inside the inflator, is another matter. As discussed earlier, there have been at least two explosions at airbag recycling facilities, including one that resulted in a fatality, and in the case of the recalled Takata airbag inflators, the degraded nature of the propellant makes the potential for explosive reactions even worse. The protections provided by a RCRA Subtitle C hazardous waste permitted facility, including personnel training, inspections, contingency planning and emergency response, and an informed community through public participation address the risk of explosion from the end-of-life management of the collected airbag waste.

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 (i.e., airbag modules and airbag inflators) collected from auto dealers or other airbag waste handlers for the purpose of safe disposal. Entities that generate airbag waste under the conditional exemption are referred to as “airbag waste handlers” and can include automobile dealers, independent repair facilities, collision centers, and salvage and scrap yards.

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 (i.e., a small truckload).31

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 (i.e., a little over one small truckload) allows the dealer and other airbag waste handlers to prepare one truckload for shipping while continuing to accumulate airbag waste for future shipments. The 180-day timeframe is based on the small quantity generator limits in 40 CFR 262.16, and addresses the future situation when the Takata recalls near completion, resulting in a slower turn-around in recalled inflators accumulated at the dealer. At that point it may take much longer to reach the 250-item limit, and the 180-day time limit ensures storage does not extend indefinitely, and that the airbag waste is safely disposed and not abandoned.

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 (i.e., airbag modules or airbag inflators) shipped, and the name and address of the destination facility or airbag waste collection facility. This recordkeeping requirement may be fulfilled by ordinary business records, such as bills of lading, including electronic records. In addition, airbag waste handlers are required to maintain confirmations of receipt from the designated facility or airbag waste collection facility in order to verify that the airbag waste reached its intended destination and was not diverted. These receipts must be maintained at the airbag waste handler for a period of three years. Specifically, the airbag waste handlers must maintain documentation of receipt that includes the name and address of the designated facility or airbag waste collection facility, the type and quantity of airbag waste (i.e., airbag modules or airbag inflators) received, and the date which it was received. The Agency is not requiring a specific template or format for confirmations of receipt and anticipates that routine business records (e.g., financial records, bills of lading, copies of DOT shipping papers, electronic confirmations of receipt, etc.) could contain the appropriate information sufficient for meeting this requirement. Note that these recordkeeping requirements will be implemented under an emergency Information Collection Request (ICR). Based on the public comments received on this rule, EPA will publish a separate revised ICR. See Section VIII.C in this preamble.

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.32 Any person who reuses a defective inflator or causes it to be reused may therefore be placing another person in imminent danger of death or serious injury. Such a reuse would not meet the definition of legitimate recycling in 40 CFR 260.43 and would be considered sham recycling under 40 CFR 261.2(g). Specifically, because the defective airbag modules and airbag inflators cannot serve as an effective substitute for a commercial product, and do not otherwise provide a useful contribution per 40 CFR 260.43(a)(1), their reuse is considered to be sham recycling and prohibited under the hazardous waste regulations.

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”, is available in the docket. This analysis estimates the impacts of the rule relative to two separate baseline scenarios. The first baseline scenario assumes that all aspects of the Preservation Order established between Takata and the Department of Transportation in February 2015 and amended in April 2018 will remain in effect until the completion of the recall process. The alternative baseline scenario assumes the removal of the Preservation Order provisions that allow dealerships to disregard the volume of recalled airbag inflators when determining their hazardous waste generator status (e.g., LQG) under RCRA. For each baseline and for the rule, EPA created a monthly schedule in order to estimate the number of airbag inflators shipped, accumulated, and disposed of by affected entities. EPA then assigned unit costs for storage, transport, management, and disposal of airbag inflators for each scenario to estimate the cost savings associated with this regulation. The cost impacts of the rule were then calculated as the difference between post-rule costs and costs under each baseline scenario. In summary, this regulatory action is expected to result in a total cost savings between $7.6 million and $56.9. million for the duration of the Takata recalls, resulting in an estimated annual cost savings of $1.7 million to $13.0 million per year (discounted at 7%).

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, e.g., permitting electronic submission of responses. EPA will consider the comments received and amend the ICR as appropriate.

Respondents/affected entities: The respondents will primarily be composed of automobile dealerships. These dealerships fall under NAICS code 441: Motor Vehicle and Parts Dealers.

Respondent's obligation to respond: The recordkeeping requirements for the interim final rule consist of maintaining at the airbag handler for no less than three years records of (1) all off-site shipments and (2) confirmations of receipt of airbag waste. The recordkeeping requirements may be fulfilled by ordinary business records, such as bills of lading, and are intended to allow the Agency to verify that the airbag waste reaches its intended destination and is not diverted back into vehicles. The statutory authority to require the recordkeeping activities derives from 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).

Estimated number of respondents: EPA estimates that there will be 15,256 respondents per year.

Frequency of response: EPA estimates that average facility will make 3 relevant shipments per year over a 5-year period. The facilities must retain documentation for each shipment.

Total estimated burden: 4,200 hours (per year). Burden is defined at 5 CFR 1320.3(b).

Total estimated cost: $130,791 (per year), includes $0 annualized capital or operation & maintenance costs.

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 Federal Register and publish a technical amendment to 40 CFR part 9 to display the OMB control number for the approved information collection activities contained in this final rule.

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 between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

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.

For the reasons set out in the preamble, title 40, chapter I of the Code of Federal Regulations is amended as follows:

I. Background

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 Federal Register (82 FR 1210, January 5, 2017). Comments from both the NPRM and the reopening notification were considered in the development of the final rule. The provisions of that rule were to be effective March 6, 2017; however, through a series of rules, HHS delayed the effective date of the January 5, 2017, final rule until July 1, 2019 (83 FR 25943, June 5, 2018). On November 2, 2018, HHS issued a proposed rule (83 FR 55135) to cease any further delay of the January 5, 2017, final rule and to change the effective date from July 1, 2019, to January 1, 2019. HHS received a number of comments both supporting and opposing the delay. After consideration of the comments received, HHS has decided to change the effective date of the January 5, 2017, final rule to January 1, 2019. The substantive provisions included in the January 5, 2017, final rule were subject to extensive public comment, and have been delayed several times. HHS has considered the full range of comments on the substantive issues in the January 5, 2017, final rule.

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.

Comment: Some commenters urge HHS not to change the effective date to January 1, 2019, and to further delay the rule to refocus the 340B Program on its mission, and issue new reforms. Commenters also express concern that the new ceiling price system has not yet been released, substantive guidance on the system has not been issued, and stakeholders will not have had an opportunity to gain experience in the system before the enforcement mechanism for the system becomes effective. These commenters recommend that HHS delay implementation until it rolls out the new ceiling price system in a thoughtful manner. Finally, the commenters state that first issuing substantive guidance on the new pricing system would be more consistent with fundamental fairness in a civil penalty enforcement context, inasmuch as program stakeholders should understand their substantive obligations and the timeframes for compliance prior to any enforcement activity.

Response: HHS does not believe that the issuance of additional guidance is needed in order to implement this final rule. Current policies under the 340B Program already provide stakeholders with sufficient guidance regarding programmatic compliance. More specifically, the January 5, 2017, final rule contains information related to the calculation of the 340B ceiling price and the imposition of CMPs against manufacturers who knowingly and intentionally overcharge a covered entity. In addition, the development of the 340B ceiling price reporting system has proceeded under a separate information collection request (ICR) process that is operational in nature and has not been contingent upon the specific provisions contained in the January 5, 2017, final rule. The ICR was submitted and approved by OMB on September 28, 2015, after a formal notice and comment process (80 FR 22207, April 21, 2015, OMB No. 0915-0327). HHS plans to release the 340B ceiling pricing reporting system shortly and HHS will communicate further information through its website. HRSA will also ensure all impacted stakeholders receive education and training to prepare to utilize the 340B ceiling price reporting system.

Comment: Commenters disagree with HHS that changing the effective date of the rule is necessary. Commenters also disagree that HHS has meaningfully responded to comments or considered the full range of comments on the substantive issues in the January 5, 2017, final rule, despite the rule being delayed several times. Commenters urge HHS to fully reconsider substantive comments on the January 5, 2017, final rule as the rule contains several policies that are inconsistent with the 340B statute and imposes unnecessary costs and needless administrative burdens on manufacturers.

Response: HHS has decided to change the effective date of the final rule to January 1, 2019, as the rule has been subject to extensive public comment. HHS believes that it has had adequate time to consider comments on the substantive issues in the January 5, 2017, final rule. The rule is consistent with the 340B statute. HHS has the statutory authority under section 340B(d)(1)(B)(i)(I) of the PHSA to develop and publish through appropriate policy or regulatory issuance, the precisely defined standards and methodology for the calculation of 340B ceiling prices. HHS has undertaken the effort to issue the January 5, 2017, final rule to comply with this statutory provision. Section 340(d)(1)(B)(vi) of the PHSA also provides for the imposition of sanctions in the form of civil monetary penalties against manufacturers that knowingly and intentionally charge a covered entity a price for a 340B drug that exceeds the 340B ceiling price. HHS believes that CMPs provide a critical enforcement mechanism for HHS if manufacturers do not comply with statutory pricing obligations under the 340B Program.

Comment: Some commenters express concern that HHS has not provided an adequate rationale for its change of view on the need for additional rulemaking and HHS has not released information related to the “comprehensive policies” that it has suggested it intends to promulgate. The commenters explain that HHS made a decision to change course and put the Final Rule into effect before it has fully analyzed and explained to the public its conclusions on key issues it identified as requiring further consideration. The commenters contend that this contradicts the deliberative rulemaking principles at the heart of the Administrative Procedures Act.

Response: The effective date of the final rule, for which comments were collected multiple times, has now been delayed for almost two years. It has now been more than eight years since Congress instructed HHS to issue regulations concerning CMPs. The issues that HHS was examining are well documented in the January 5, 2017, final rule. Furthermore, HHS does not believe that a January 1, 2019, effective date will undermine the comprehensive policies under consideration within the Department to address rising drug prices. Given the significant delays, HHS feels that it would be more efficient for the rule to go into effect and assess the need for further rulemaking and guidance after the rule is in effect.

Comment: Some commenters express concern that HHS has not fully considered any new comprehensive policies that will curb the rising cost of drug prices and the 340B Program's impact on those rising prices. The commenters state that in previous rulemaking, HHS has stated that it would be counterproductive to effectuate the final rule prior to a more deliberative process of considering additional or alternative drug reform measures as HHS is in the process of developing new comprehensive policies to address the rising cost of prescription drugs, not limited to the 340B Program. These comments also explain that there is no basis for HHS to suddenly move up the effective date by six months and there is no material development that rationally justifies HHS's change of view on the need for additional rulemaking. They urge HHS to further delay until additional rulemaking is completed, as opposed to specifying a date certain.

Response: HHS disagrees with the commenters. HHS has issued several policies related to lowering prescription drug prices, particularly in the Medicare Program. HHS also notes that as previously discussed in other rulemaking related to this issue, HHS continues to explore other policy documents related to drug pricing in government programs, including the 340B Program.

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.

Comment: Several commenters urge HHS to specify that the January 5, 2017, final rule's effective date is at least two quarters after the final rule's publication in the Federal Register. These commenters raise that in the January 5, 2017, final rule, HHS explicitly noted that the implementation date would be April 1, 2017, the beginning of the next quarter thereby providing a full quarter for implementation. They believe that HHS should follow the same logic here and anticipate publication of a final rule around January 1, 2019, with implementation coinciding with the beginning of the second quarter of 2019, April 1, 2019. They contend that many companies have not completed operational and other process changes because manufacturers fully expected that HHS would revisit the rule and address the rule's significant infirmities. These commenters raise that HHS previously indicated that it would delay the January 5, 2017, final rule to July 1, 2019, and an abrupt change such as this, with fewer than 60 days to implement, makes it difficult for companies—particularly smaller manufacturers—to upgrade their operational systems in time to ensure compliance with the rule. These commenters explain that there is no precedent where the established effective date of a rule imposing substantial compliance burdens on regulated parties was accelerated. Finally, these commenters state that reducing the effective date by six months will negatively affect their ability to come into compliance, which could be compounded by the implementation of the CMP provisions.

Response: Based on the review of the comments received, HHS has determined that the January 5, 2017, final rule will be effective January 1, 2019. The implementation date and the effective date will be the same. Unlike the previous rule, which was effective in the middle of a quarter, this rule is effective at the beginning of a quarter. HHS does not agree that a further delay is necessary for implementation. Manufacturers that offer 340B ceiling prices as of the quarter beginning January 1, 2019, must comply with the requirements of the January 5, 2017, final rule. HHS believes that since the January 5, 2017, final rule was issued, stakeholders have had sufficient time to adjust systems and update their policies and procedures.

Comment: Some commenters urge HHS to publish the ceiling price data on a secure website shortly after January 1, 2019, because the website is essential for effective enforcement of the 340B Program. These commenters explain that entities have no way of detecting overcharges and are at the mercy of manufacturers.

Response: While the ceiling price reporting system is not directly governed by this rule, HHS agrees that covered entities will be able to utilize the system to detect overcharges. As previously stated, the 340B ceiling pricing reporting system is forthcoming, and HHS will convey further updates through its website. HRSA will ensure all impacted stakeholders receive education and training on how to utilize the system.

Comment: Many commenters supported changing the effective date to January 1, 2019, and stated that any other delay would be unreasonable and would continue to reward manufacturers that are flouting ceiling price requirements. The commenters urge HHS to promptly enforce the final rule in order to bring drug companies into compliance and to ensure that 340B providers are able to “stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services” as Congress intended. The commenters state that the rule is entirely consistent with HHS's stated goal of addressing the issue of the rising costs of prescription drugs. These commenters also explain that CMPs are an important deterrent to manufacturers who knowingly overcharge entities and initiatives to strengthen manufacturer transparency should be supported.

Response: For reasons stated above, HHS agrees with the commenters that any other delay is unreasonable and will change the effective date of the January 5, 2017, final rule, to January 1, 2019.

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 de minimis costs.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) and the Small Business Regulatory Enforcement and Fairness Act of 1996, which amended the RFA, require HHS to analyze options for regulatory relief of small businesses. If a rule has a significant economic effect on a substantial number of small entities, the Secretary must specifically consider the economic effect of the rule on small entities and analyze regulatory options that could lessen the impact of the rule. HHS will use an RFA threshold of at least a three percent impact on at least five percent of small entities.

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 that the economic impact on small entities and small manufacturers will be minimal and less than 3 percent.

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.

I. Background

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 DATES section under the heading “Comment period.” We inadvertently stated that comments on the payment classifications assigned to the interim Medicare Ambulatory Payment Classification (APC) assignments and/or status indicators of new or replacement Level II Healthcare Common Procedure Coding System (HCPCS) codes in the final rule with comment period must be received no later than 5 p.m. EST on December 3, 2018. The corrected date is January 2, 2019, 60 days from the date of filing for public inspection.

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 Federal Register before the provisions of a rule take effect. Similarly, section 1871(b)(1) of the Act requires the Secretary to provide for notice of the proposed rule in the Federal Register and provide a period of not less than 60 days for public comment. In addition, section 553(d) of the APA and section 1871(e)(1)(B)(i) mandate a 30-day delay in effective date after issuance or publication of a rule. Sections 553(b)(B) and 553(d)(3) of the APA provide for exceptions from the notice and comment and delay in effective date of the APA requirements; in cases in which these exceptions apply, sections 1871(b)(2)(C) and 1871(e)(1)(B)(ii) of the Act provide exceptions from the notice and 60-day comment period and delay in effective date requirements of the Act as well. Section 553(b)(B) of the APA and section 1871(b)(2)(C) of the Act authorize an agency to dispense with normal rulemaking requirements for good cause if the agency makes a finding that the notice and comment process is impracticable, unnecessary, or contrary to the public interest. In addition, both section 553(d)(3) of the APA and section 1871(e)(1)(B)(ii) of the Act allow the agency to avoid the 30-day delay in effective date where such delay is contrary to the public interest and an agency includes a statement of support.

We believe that this correcting document does not constitute a rulemaking that would be subject to these requirements. This correcting document corrects a technical error in the preamble to the CY 2019 OPPS/ASC final rule with comment period but does not make substantive changes to the policies or payment methodologies that were adopted in the final rule. Rather, it is intended to ensure that the public has 60 days to comment on the payment classifications assigned to the interim APC assignments and/or status indicators of new or replacement Level II HCPCS codes in the CY 2019 OPPS/ASC final rule with comment period, which is the duration of the typical comment period on these topics.

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 DATES section, under the heading “Comment Period,” correct “December 3, 2018” to read “January 2, 2019”.

Possession and Trip Limit Increase for Georges Bank Cod

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.

Electronic Access

This document is accessible online at the Office of the Federal Register's website at http://www.thefederalregister.org/fdsys/search/home.action. Background information and documents are available at NMFS' West Coast Region website at www.westcoast.fisheries.noaa.gov/fisheries/management/whiting/pacific_whiting.html

Pacific whiting (Merluccius productus) is a very productive species with highly variable recruitment (the biomass of fish that mature and enter the fishery each year) and a relatively short life span when compared to other groundfish species. Pacific whiting has the largest annual allowable harvest levels (by volume) of the more than 90 groundfish species managed under the Pacific Coast Groundfish Fishery Management Plan (FMP), which governs the groundfish fishery off Washington, Oregon, and California. The coastwide Pacific whiting stock is managed jointly by the United States and Canada, and mature Pacific whiting are commonly available to vessels operating in U.S. waters from April through December. Background on the stock assessment, and the establishment of the 2018 Total Allowable Catch (TAC), for Pacific whiting was provided in the final rule for the 2018 Pacific whiting harvest specifications, published May 15, 2018 (83 FR 22401). Pacific whiting is allocated to the Pacific Coast treaty tribes (tribal fishery) and to three non-tribal commercial sectors: The catcher/processor cooperative (C/P Coop), the mothership cooperative (MS Coop), and the Shorebased Individual Fishery Quota (IFQ) Program.

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.