Revocable inter vivos trusts, so-called “living trusts,” have become a popular estate planning device in the last several decades. In the typical living trust, the grantor (or settlor) conveys property in trust to a trustee (who is often the grantor) and retains a life estate, with the remainder to go to specified beneficiaries upon the termination of the life estate—all subject to the power of the grantor to revoke the trust entirely and to make lessor changes, such as substitutions of beneficiaries or trustees. In this regard, revocable living trusts have less in common with traditional irrevocable trusts, in which the grantor no longer retains substantial control over the administration of the trust or the disposition of the property, than with wills, which remain ambulatory until the death of the testator. Therefore, it is widely recognized that living trusts are “will substitutes.”

Section 102(f)(1) of the Ethics in Government Act of 1978, as amended (the Act), sets out the general financial disclosure requirements for beneficiaries of trusts and other financial arrangements:

The legislative history indicates several related purposes for this provision. First, there was an intent to prevent filers from avoiding reporting requirements “simply by transferring interests” to a trust or other entity that would still benefit the filer financially. H.R. Rep. No. 95-642, Part 1, at 40 (1977) (reporting on H.R. 6954). Second, there was concern that situations could arise in which there is an actual or apparent conflict of interest because “any impact on the financial status of the * * * trust also impacts significantly upon the financial status of the reporting individual.” Id. Third, it appears that the trust provision was included at least in part to deal with the fact that Federal officials already had created a variety of “blind” trusts, which did not follow any generally accepted standards, in an attempt to comply with conflict of interest requirements; Congress determined that any such pre-existing trusts should be subject to full disclosure if the trusts could not be brought into compliance with the new uniform standards for qualified blind trusts under the Act. See S. Rep. No. 95-170, at 123-124 (1977) (reporting on S. 555).

In 1980, OGE first published its “final regulations to state in greater detail than the Act the information which must be contained in the financial disclosure report (SF 278).” 45 FR 69776 (October 21, 1980). Included in those regulations was a provision stating in greater detail what kinds of interests in trusts and estates needed to be reported under the Act. Although the Act itself did not specifically address the distinction between vested and nonvested beneficial interests, the OGE regulation specified that nonvested interests in an estate need not be reported and that nonvested interests in certain trusts needed to be evaluated on a case-by-case basis in consultation with OGE. See 45 FR 69784. In 1992, this regulation was amended to provide even greater detail with respect to those interests in trusts that were deemed reportable under the Act. See 57 FR 11800 (April 7, 1992). In particular, nonvested beneficial interests were excluded altogether, and a definition of vested interests was provided. See 5 CFR 2634.310(a)(2). Although there is no discussion of the subject of nonvested interests in the preambles to these two rules, OGE clearly recognized that the statutory phrase “beneficial interest in principal or income” should not be read so broadly as to require the public disclosure of interests the enjoyment of which is so speculative and uncertain: “the uncertainty of the right of enjoyment * * * differentiates a ‘vested’ and a ‘nonvested’ interest.” 5 CFR 2634.310(a)(2). Furthermore, the reporting of nonvested interests would not further the statutory purpose of disclosing interests that pose a potential conflict of interest, because OGE determined that such interests generally are too uncertain to implicate the financial conflict of interest statute, 18 U.S.C. 208. See OGE's Public Financial Disclosure: A Reviewer's Reference 7-30 revised (1996), which is available in the publications section of the OGE Web site (http://www.usoge.gov).

On a related subject, OGE also has provided guidance concerning the reporting of potential interests as a beneficiary under a will. Of particular relevance, OGE determined that section 102(f)(1) of the Act and 5 CFR 2634.310 do not require filers to report the holdings and income of an estate of a living person just because they are named as beneficiaries under that person's will. Id. The Office of Government Ethics concluded that any potential beneficial interest created by the will of a living person is not vested, within the meaning of § 2634.310(a)(2). Likewise, OGE has determined that an employee does not have a disqualifying financial interest, under 18 U.S.C. 208(a), as a result of being named a beneficiary in a will of a person still living; in such cases, “the employee's interest in the assets to be distributed under the will is merely speculative since he may never inherit them.” 60 FR 47207, 47209 (September 11, 1995) (preamble to OGE's proposed financial conflict of interest regulation subsequently codified at 5 CFR part 2640).

Until now, OGE's regulations and other written guidance have not explicitly addressed the reporting requirements of beneficiaries under revocable living trusts. However, the approach taken in this final rule is consistent with, and follows from, OGE's prior treatment of nonvested interests in trusts and estates, including OGE's prior treatment of beneficiaries under the will of a living testator.

As a technical matter, it may be open to debate whether a remainder interest in a revocable living trust best should be viewed as vested or nonvested. Compare Randall v. Bank of America National Trust and Savings Ass'n. , 119 P.2d 754 (Cal. App. 1941) (vested), with Bezzini v. Department of Social Services, 715 A.2d 791 (Conn. App. 1998) (not vested interest, but mere expectancy). Nevertheless, OGE finds it unnecessary to settle this technical question, in view of the fact that revocable living trusts clearly have evolved into widely accepted will substitutes. The Office of Government Ethics has determined, for purposes of section 102(f)(1) of the Act, that any “interest” in the remainder of a revocable living trust is just as speculative as the mere expectancy enjoyed by the beneficiary of a living testator. The Office of Government Ethics sees little connection between the purposes of section 102(f)(1), as described above, and the disclosure of expectations that are so speculative and subject to the complete control of someone other than the filer, the filer's spouse or the filer's dependent children. Moreover, such disclosures necessarily would reveal the interests—and estate planning decisions—of persons beyond the filer and the filer's own spouse and dependent children, thus intruding unnecessarily into the private affairs of persons beyond the ordinary scope of financial disclosure under the Act.

Therefore, the final rule adds a note indicating that nothing in § 2634.310 requires the reporting of the holdings or income of a revocable living trust with respect to which the reporting individual has only a remainder interest. Under the language of this note, it is not necessary to determine whether the remainder is vested or nonvested. However, the note makes clear that filers are not excused from reporting the holdings and income of a revocable trust if the filer—or the filer's spouse or dependent child—also is the grantor of the trust. As should be clear from the discussion above, the grantor of a revocable living trust retains such rights of control and enjoyment with respect to the trust property that OGE must view the grantor as the true owner of the property; OGE believes this to be the case whether or not the grantor actually receives any distribution of trust income and whether or not the grantor actually serves as trustee.

The new note also provides that nothing in § 2634.310 requires the reporting of holdings or income of a revocable living trust from which the reporting individual receives any discretionary distribution, provided again that the filer (or the filer's spouse or dependent child) is not the grantor. It is true that section 102(f)(1) of the Act requires the disclosure of trusts “from which income is received” by the reporting individual, and that section 109(7) of the Act defines “income” as including “income from an interest in an estate or trust.” However, OGE does not view discretionary distributions to a beneficiary under a revocable living trust as income within the meaning of these provisions. In OGE's view, such a discretionary distribution is no different from a gift, because the distribution is made at the pleasure of the grantor. For purposes of financial disclosure, OGE sees no meaningful distinction between, for example, a gift of money from a filer's parent and a discretionary distribution of money from the parent's revocable living trust. The Act clearly treats income and gifts separately, and gifts are subject to different reporting requirements (and exclusions) than those found in section 102(f). Compare 5 U.S.C. app. 102(a)(1) (income), with section 102(a)(2) (gifts).

OGE emphasizes that nothing in the final rule changes the reporting requirements with respect to irrevocable trusts. In this connection, it should be noted that revocable living trusts themselves may become irrevocable upon the occurrence of certain events, such as the death of the grantor or circumstances specified in the trust instrument or State law.

Pursuant to 5 U.S.C. 553(b) and (d), as Director of the Office of Government Ethics, I find good cause exists for waiving the general notice of proposed rulemaking, public comment procedures, and 30-day delay in effectiveness as to this revision. The notice, comment, and delayed effective date are being waived because this minor amendment to OGE financial disclosure regulations is an interpretative rule clarifying OGE's view concerning the scope of section 102(f)(1) of the Ethics in Government Act. Furthermore, it is in the public interest that this amendment become effective promptly, because the amendment has the effect of relieving an unnecessary burden on filers of financial disclosure reports.

In promulgating this final rule amendment, the Office of Government Ethics has adhered to the regulatory philosophy and the applicable principles of regulation set forth in section 1 of Executive Order 12866, Regulatory Review and Planning. This amendment has not been reviewed by the Office of Management and Budget under that Executive order, since it is not deemed “significant” thereunder.

As Director of the Office of Government Ethics, I have reviewed this final amendatory regulation in light of section 3 of Executive Order 12988, Civil Justice Reform, and certify that it meets the applicable standards provided therein.

As Director of the Office of Government Ethics, I certify under the Regulatory Flexibility Act (5 U.S.C. chapter 6) that this proposed amendatory rule will not have a significant economic impact on a substantial number of small entities because it primarily affects Federal executive branch employees.

The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply because this final rule amendment does not contain information collection requirements that require the approval of the Office of Management and Budget.

For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. chapter 25, subchapter II), this final rule will not significantly or uniquely affect small governments and will not result in increased expenditures by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more (as adjusted for inflation) in any one year.

The Office of Government Ethics has determined that this proposed rulemaking involves a nonmajor rule under the Congressional Review Act (5 U.S.C. chapter 8) and has submitted a report thereon to the U.S. Senate, House of Representatives and General Accounting Office in accordance with that law.

Several reports of cracked wing lower spar caps on Air Tractor AT-500 series airplanes caused the manufacturer (Air Tractor) to recalculate the fatigue life of the wing lower spar cap on Air Tractor AT-400, AT-500, and AT-800 series airplanes. One report was of an accident where the wing separated from the airplane during flight. The cracks are originating in the outboard 3/8 -inch bolthole of the wing lower spar cap. To address this condition, FAA issued AD 2001-10-04, Amendment 39-12230 (66 FR 27014, May 16, 2001), to lower the safe life for the wing lower spar cap on Air Tractor AT-400, AT-500, and AT-800 series airplanes.

AD 2001-10-04 also allowed for inspection, using eddy current methods, of the wing lower spar cap for airplanes that are at or over the lower safe life and parts are not available. Operation of the airplane was not allowed if cracks were found and inspections had to be terminated when parts become available or after three repetitive inspections were done.

AD 2001-10-04 superseded AD 2000-14-51, Amendment 39-11837 (65 FR 46567, July 31, 2000). AD 2000-14-51 required inspection of the wing lower spar cap for cracks on Air Tractor Models AT-501, AT-502, and AT-502A airplanes, and modification or replacement of any cracked wing lower spar cap.

We inadvertently included certain AT-800 series airplanes in the Applicability of AD 2001-10-04. The AD should not have affected the AT-800 series airplanes equipped with the factory-supplied part number 80540 computerized fire gate. Therefore, we revised AD 2001-10-04 to incorporate this change. AD 2001-10-04 R1, Amendment 39-12247, was published in the Federal Register on June 4, 2001 (66 FR 29900).

In response to AD 2001-10-04 R1, FAA received a comment from the National Transportation Safety Board that recommended an eddy-current inspection requirement immediately prior to the accomplishment of the two-part modification described in Snow Engineering Service Letters #202 or #203, both Revised March 26, 2001, as applicable. This is to eliminate the possibility that a crack existing in a bolt hole prior to the modification is still present after accomplishing the modification. Prior to the modification, any crack present will be larger than it would appear after the outermost bolt holes are enlarged. This makes the crack easier to detect and gives the mechanic an area to concentrate on any post-modification inspections.

Additional analysis also indicates a higher wing root bending moment, which reveals the need to further reduce the safe life for certain AT-400 and AT-500 series airplanes with a certain configuration. Airplanes with this configuration either incorporate or have incorporated Marburger Enterprises, Inc. winglets on the wing lower spar cap. These winglets are installed in accordance with Supplemental Type Certificate (STC) SA00490LA. We have developed criteria for determining what the new safe life will be for airplanes that either incorporate or have incorporated these winglets.

This condition could result in fatigue cracks in the wing lower spar cap before the established safe life is reached. Fatigue cracks in the wing lower spar cap, if not detected and corrected, could result in the wing separating from the airplane during flight.

We issued a proposal to amend part 39 of the Federal Aviation Regulations (14 CFR part 39) to include an AD that would apply to certain Air Tractor, Inc. (Air Tractor) AT-400, AT-500, and AT-800 series airplanes. This proposal was published in the Federal Register as a notice of proposed rulemaking (NPRM) on December 27, 2001 (66 FR 66823). The NPRM proposed to supersede AD 2001-10-04 R1 with a new AD that would retain the safe life and would require you to eddy-current inspect the wing lower spar cap immediately prior to the replacement/modification in order to detect and correct any crack in a bolthole before it extends to the modified center section of the wing. The NPRM also proposed to further reduce the safe life for AT-400 and AT-500 series airplanes that incorporate or have incorporated Marburger Enterprises, Inc. winglets.

The FAA encouraged interested persons to participate in the making of this amendment. In addition to the comments, we received reports of several cracks originating in the outboard 3/8 -inch hole of the main spar lower cap on Air Tractor Models AT-502, AT-502A, AT-502B, and AT-503A airplanes at hours time-in-service (TIS) lower than the established safe life.

Based on this information, we have determined that:

—The safe life on Models AT-502, AT-502A, AT-502B, and AT-503A airplanes should be further reduced;

—These airplanes should be removed from the NPRM; and

—Final rule; request for comments (immediately adopted rule) AD action should be taken to address this condition.

We received one comment in favor of the NPRM as written. The following presents other comments received on the proposal and FAA's response to each comment:

Several commenters state that Step 8 of the Appendix to the proposed AD gives an overly conservative safe life for airplanes with the Marburger winglets installed when compared to that recommended by Air Tractor. The commenters recommend that FAA revise this calculation to be more in line with Air Tractor's recommendation.

After further evaluating this step in the calculation, we concur that Step 8 results in a more conservative safe life than we intended. We have modified these instructions for computing the safe life of the airplanes with the winglets installed. These modified instructions are included in the Appendix to this AD.

The accomplishment of these instructions will provide an increase in the safe life of the affected airplanes over that proposed in the NPRM. Therefore, the burden upon the public is reduced and there is no regulatory requirement for FAA to solicit additional public comments.

One commenter recommends repetitive inspections provided no cracks are found instead of mandatory modification as proposed in the NPRM and required by AD 2001-10-04 R1. The commenter states that this would reduce the economic impact on operators and minimize the risk of reduced agricultural production if the safe life limit is reached during the agricultural spraying season.

Although we concur that repetitive inspections may reduce the economic impact and minimize the risk of reduced agricultural production, this will not meet the safety intent of the AD. The FAA has determined that reliance on critical repetitive inspections carries an unnecessary safety risk when parts replacement or modifications exist. In determining what inspections are critical, FAA considers (1) the safety consequences of the airplane if the known problem is not detected by the inspection; (2) the reliability of the inspection such as the probability of not detecting the known problem; (3) whether the inspection area is difficult to access; and (4) the possibility of damage to an adjacent structure as a result of the problem.

We have included a provision for an alternative method of compliance that allows for repetitive 400-hour time-in-service (TIS) inspections up to 1,200 hours TIS after the safe life limit is reached. However, the replacement/modification must be scheduled. This will allow operators to continue operating during the agricultural spraying season.

We have not changed the final rule AD based on this comment.

One commenter opposes the required life limits for the affected airplanes with Marburger winglets installed because the commenter believes that there are other alternatives. The commenter believes that accomplishing one or more of the following options will meet the safety intent of the AD for those affected airplanes with winglets installed:

—Require a takeoff weight limitation that would include a placard and airplane flight manual changes. This weight reduction would offset increased wing bending moments due to the winglet installation;

—Place a maximum maneuver load factor limit (n z ) limitation to reduce the maximum wing bending moment and alleviate the effects of the winglet installation;

—Incorporate a damage tolerance-based inspection program. This program could be based on the initial inspection and subsequent 400-hour TIS inspections detailed in the alternative method of compliance in AD 2001-10-04 R1 and the NPRM and the Snow Engineering service letters; and/or

—Incorporate an inspection program and allow cold-working or reaming of the area where small cracks are found. The inspections could be based on the initial inspection and subsequent 400-hour TIS inspections detailed in the alternative method of compliance in AD 2001-10-04 R1 and the NPRM and specified in the Snow Engineering service letters.

We do not concur with incorporating any of these alternatives for the following reasons:

—Takeoff weight limitation: The FAA has determined that a weight placard limitation is not a reliable method of reducing wing root bending in airplanes utilized in CAM 8 operations. CAM 8 allows for the operation of restricted category agricultural airplanes at weights higher than that specified in the type certification data sheet (TCDS). To effectively alleviate fatigue spectrum loading, any weight limitation must reduce the typical or average weight seen in operation. We have determined that a maximum weight placard will not reliably reduce the fatigue spectrum loading the CAM 8 agricultural operations;

—Maximum Maneuver Load Factor Limits (n z ): These limits would have little effect on the fatigue loading spectrum seen in operation. Fatigue damage accumulates due to maneuvering, gusts, and ground load occurrences. The ground-air-ground cycle also contributes to fatigue damage. The aerial application spectrum displayed in DOT/FAA/CT-91-20 “General Aviation Aircraft—Normal Acceleration Data Analysis and Collection Project” shows only one occurrence of limit load factor in every 16,500 nautical miles flown. It also shows only one occurrence of 90 percent of limit load factor in every 3,300 nautical miles flown. Based on this, we have determined that reducing the maximum maneuver limit load factor would affect only a small percentage of fatigue damage and would not appreciably affect the fatigue safe life;

—Damage tolerance-based inspection program: Damage tolerance and service history-based inspection programs are acceptable methods to ensure continuing structural integrity. However, the commenter does not provide adequate substantiating data to justify an inspection-based system instead of the proposed safe life approach. Such a program should include a detailed crack growth analysis with a threshold or initial inspection time and repetitive inspection intervals. Such intervals would be based on the crack growth analysis. Service history-based inspection programs should be based on an extensive review and statistical analysis of the existing fleet's service experience. The commenter provides no substantiating data and refers only to the inspections proposed in the NPRM and required by AD 2001-10-04 R1. These inspections are limited in duration and used only to provide relief in the event that repair or replacement parts are not available; and

—Repair small cracks through cold-working or reaming the affected area: This is already allowed in limited capacity. Snow Engineering Service Letter #197, which is referenced in the NPRM, specifies drilling the bolt hole to the next larger size if a crack is detected during the eddy-current inspection. If a crack is still detected after the hole is drilled to the next larger size, the service bulletin specifies replacing the cracked part. The FAA infers that the commenter wants this concept used with an inspection program instead of the mandatory safe life modification/replacement program. As previously discussed, this would not meet the safety intent of the AD.

We have not changed the final rule (after NPRM) AD based on this comment.

One commenter states that certain Model AT-502A airplanes are equipped with a modification commonly known as the “Hoerner Tip.” The commenter suggests that FAA change the winglet usage factor for these airplanes.

We concur. Later serial numbers of the Model AT-502A airplanes should have a lower winglet usage factor. As discussed earlier, we are initiating final rule; request for comments (immediately adopted rule) AD action to further reduce the safe life of the Models AT-502, AT-502A, AT-502B, and AT-503A airplanes. We will take the commenter's concern into consideration when preparing this AD.

We have not changed the final rule (after NPRM) AD based on this comment.

One commenter recommends that FAA reduce the winglet usage factor for all airplanes. This recommendation is based on the weight usage penalty used on Dromader M-18 airplanes compared to the winglet usage factors on the affected Air Tractor airplanes.

We do not concur. We extensively reviewed the safe life limits specified in the Snow Engineering service letters along with the substantiating engineering analysis. We are confident in Air Tractor's relative analysis between the baseline airplanes and those modified with the Marburger winglet STC.

Relative fatigue life comparisons between different airplane models are difficult when the airplanes operate in different regions of the fatigue S-N curve, especially when even later serial numbers of the same model may operate at different stress levels. Relative comparisons based on ratios (as the commenter performed) assume a linear or “one-to-one” relationship between operating stress and fatigue life. When the operating stress of the two airplanes is significantly different, this “one-to-one” relationship assumption is inaccurate.

We have not changed the final rule (after NPRM) AD based on this comment.

One commenter suggests using airplane configuration changes to reduce the aerodynamic effect of the winglet installation and increase the inertia relief available from the winglet installation. This includes winglet incidence, flap droop, and ballast weight in the winglet to offset the increased wing bending moments due to the winglet installation.

While we acknowledge that configuration changes may successfully offset the effect of the winglet installation on the wing bending moments, the commenter provides no engineering data to specifically show the changes and substantiate reduced aerodynamic effect. The commenter may send this information to FAA at any time for consideration of an alternative method of compliance to the AD.

After careful review of all available information related to the subject presented above, we have determined that air safety and the public interest require the adoption of the rule as proposed except for the change in the winglet safe life calculation, the removal of certain airplanes from the applicability, and minor editorial corrections. We have determined that the change, removal, and minor corrections:

—Provide the intent that was proposed in the NPRM for correcting the unsafe condition; and

—do not add any additional burden upon the public than was already proposed in the NPRM.

We estimate that this AD affects 1,179 airplanes in the U.S. registry.

We estimate the following costs to accomplish the inspection:

AD 2001-10-04 R1 already established the safe life for the lower wing spar cap on the affected airplanes. Therefore, the replacement/modification is already required through that AD. The only difference in the cost impact upon the public of this AD and AD 2001-10-04 R1 is the cost for the eddy-current inspection upon replacement and the further safe life reduction for those AT-400 and AT-500 series airplanes that incorporate or have incorporated Marburger Enterprises, Inc. winglets.

The regulations adopted herein 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. Therefore, it is determined that this final rule does not have federalism implications under Executive Order 13132.

For the reasons discussed above, I certify that this action (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and (3) 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. A copy of the final evaluation prepared for this action is contained in the Rules Docket. A copy of it may be obtained by contacting the Rules Docket at the location provided under the caption ADDRESSES .

On April 11, 2002, the Federal Aviation Administration (FAA) issued AD 2002-08-06, amendment 39-12714 (67 FR 19104, April 18, 2002), applicable to certain Boeing Model 777-200 and -300 series airplanes. That AD requires a one-time torque check (inspection) of the bolts that attach the pivot fittings to the horizontal stabilizer through the upper and lower titanium straps, to determine if the bolts are adequately torqued, and follow-on actions. The actions required by that AD are intended to prevent failure of the pivot fittings, which could result in loss of control of the horizontal stabilizer and consequent loss of control of the airplane.

Information obtained recently from the manufacturer indicates that the compliance time for the reporting requirement in paragraph (d) of AD 2002-08-06 does not allow operators who have already done the inspection required by paragraph (a) of the AD enough time to submit the required information.

The FAA has determined that a correction to AD 2002-08-06 is necessary. The correction will add an option to allow operators a 30-day grace period for submission of the reporting requirements specified in paragraph (d) of the AD. The correction will add sub-paragraphs (d)(1) and (d)(2) to the AD to include that option.

This document corrects the error and correctly adds the AD as an amendment to section 39.13 of the Federal Aviation Regulations (14 CFR 39.13).

The AD is reprinted in its entirety for the convenience of affected operators. The effective date of the AD remains May 3, 2002.

Since this action only corrects a current requirement, it has no adverse economic impact and imposes no additional burden on any person. Therefore, the FAA has determined that notice and public procedures are unnecessary.

On April 29, 2002, the FAA proposed to amend 14 CFR part 71 establishing a Class E airspace area at Calipatria, CA (67 FR 20921). Additional controlled airspace extending upward from 700 feet or more above the surface is needed to contain aircraft executing the RNAV (GPS) RWY 08 SIAP to Cliff Hatfield Memorial Airport. This action will provide adequate controlled airspace for aircraft executing the RNAV (GPS) RWY 08 SIAP to Cliff Hatfield Memorial Airport, Calipatria, CA.

Interested parties were invited to participate in this rulemaking, proceeding by submitting written comments on the proposal to the FAA. No comments to the proposal were received. Class E airspace designations for airspace extending from 700 feet or more above the surface of the earth are published in paragraph 6005 of FAA Order 7400.9J, dated August 31, 2001, and effective September 16, 2001, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designation listed in this document will be published subsequently in the Order.

This amendment to 14 CFR part 71 establishes a Class E airspace area at Calipatria, CA. The establishment of a RNAV (GPS) RWY 08 SIAP to Cliff Hatfield Memorial Airport has made this action necessary. The effect of this action will provide adequate airspace for aircraft executing the RNAV (GPS) RWY 08 SIAP to Cliff Hatfield Memorial Airport, Calipatria, CA.

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

The Bureau of Industry and Security (BIS), formerly the Bureau of Export Administration (BXA), is amending the Export Administration Regulations (EAR) to implement understandings reached at the annual plenary meeting of the Australia Group (AG) chemical and biological weapons nonproliferation control regime that was held in Paris on October 1-4, 2001. The Australia Group is a multilateral forum, consisting of 33 participating countries, that maintains export controls on a list of chemicals, biological agents, and related equipment and technology that could be used in a chemical or biological weapons program. The AG periodically reviews items on its control list to enhance the effectiveness of participating governments' national controls and to achieve greater harmonization among these controls.

This final rule amends the EAR to implement an understanding on test kits that was reached at the October 2001 AG plenary meeting. Specifically, this rule authorizes exports without a license, to most destinations, of medical, analytical, diagnostic, and food testing kits containing small quantities of any chemicals controlled only by the AG, provided that the kits: (1) Are pre-packaged materials of defined composition, (2) are specifically developed, packaged, and marketed for diagnostic, analytical, or public health purposes, and (3) contain no more than 300 grams of any single AG-controlled chemical. In addition, an export license for such test kits continues to be required, to certain destinations and entities, for anti-terrorism (AT) reasons or for other reasons specified in the EAR ( e.g. , embargoes).

The following license requirements apply to such test kits. Test kits that contain CWC Schedule 1 chemicals continue to be controlled under ECCN 1C350 (note that this rule restructures 1C350.a to control certain Schedule 1 chemicals that are subject to the EAR). These test kits require a license for all destinations, including Canada, for CW reasons, and also require a license to certain destinations for chemical/biological (CB) and anti-terrorism (AT) reasons. Test kits that contain CWC Schedule 2 or 3 chemicals listed in restructured 1C350.b or .c, respectively, are now controlled under new ECCN 1C395 and continue to require a license to States not Party to the CWC, for CB and CW reasons, and to designated terrorist supporting countries ( i.e. , Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria), for AT reasons. Test kits that contain precursor chemicals listed in restructured 1C350.d, which are not subject to the CW controls described in that ECCN, are controlled under ECCN 1C995 for AT reasons only. This rule also amends Section 742.2 of the EAR by revising the license requirements to reflect the AG understanding on test kits described above.

Participants at the October 2001 AG plenary meeting also reached an understanding to control exports and reexports of critical components of certain AG-controlled chemical manufacturing equipment listed in ECCN 2B350. Specifically, this rule revises ECCN 2B350 to control the following components: (1) Impellers, blades or shafts designed for agitators controlled by 2B350.b; (2) tubes, plates, coils or blocks (cores) designed for heat exchangers or condensers controlled by 2B350.d; (3) liquid distributors, vapor distributors or liquid collectors designed for distillation or absorption columns controlled by 2B350.e; (4) casings (valve bodies) or preformed casing liners designed for valves controlled by 2B350.g; and (5) casing (pump bodies), preformed casing liners, impellers, rotors or jet pump nozzles designed for pumps controlled by 2B350.i.

The October 2001 AG plenary meeting also resulted in an understanding concerning the scope of controls on the genetic elements and genetically modified organisms controlled by ECCN 1C353. This rule adds a technical note to ECCN 1C353 to indicate that “genetic elements include, inter alia, chromosomes, genomes, plasmids, transposons, and vectors, whether genetically modified or unmodified.”

Finally, this rule amends the EAR to add Bulgaria as the newest participating country in the Australia Group (which now includes a total of 33 countries). Supplement No. 1 to Part 740 (Country Groups) is revised to add Bulgaria to Country Group A:3 (Australia Group) and Supplement No. 1 to Part 738 (Commerce Country Chart) is revised to remove the licensing requirements for Bulgaria under CB Columns 2 and 3 in conformance with the licensing policy that applies to other AG participating countries.

BIS is amending the EAR to implement three intersessional decisions by the AG, made subsequent to the October 2001 plenary meeting, that affect AG controls on valves, freeze-drying equipment, and protective and containment equipment. This rule revises AG controls on valves by amending ECCN 2B350 to control valves with nominal sizes greater than 1.0 cm in which all surfaces that come into direct contact with the chemical(s) being processed or contained are made from specified materials. The change more clearly defines valves that would pose a concern for proliferation reasons.

This rule also revises AG controls on freeze-drying equipment controlled by ECCN 2B352 by changing the control threshold for such equipment from a minimum condenser capacity of “greater than 50 kgs of ice in 24 hours” to a minimum condenser of “10 kgs of ice or greater in 24 hours.” As a result of this change, 2B352.e now controls steam sterilizable freeze-drying equipment that has a condenser capacity of 10 kgs of ice or greater, but less than 1,000 kgs of ice, in 24 hours.

In addition, this rule revises AG controls on the protective suits controlled by ECCN 2B352 to apply to hoods, as well as protective full and half suits, that are dependant upon a tethered external air supply and operate under positive pressure. A technical note is added to 2B352.f.1 to exclude from control those suits that are designed to be worn with self-contained breathing apparatus. In addition, this rule clarifies the controls that apply to Class III biological safety cabinets and isolators with similar characteristics by adding, in ECCN 2B352.f.2, several examples of the types of equipment subject to these controls ( e.g. , flexible isolators, dry boxes, anaerobic chambers, glove boxes or laminar flow hoods (closed with vertical flow)).

In addition to implementing the 2001 AG plenary and intersessional changes described above, BIS is amending the EAR by restructuring several entries on the CCL in order to clarify which chemicals and mixtures are controlled for CB (chemical/biological: AG-based) or CW (chemical weapons: CWC-based) reasons. This restructuring does not, by itself, alter the scope of the controls that apply to these chemicals and mixtures. Specifically, this rule amends ECCN 1C350 to reorganize the List of Items Controlled into four categories: (1) 1C350.a, which lists certain AG-controlled chemicals also identified on CWC Schedule 1 and controlled for CB, CW, and AT (anti-terrorism) reasons; (2) 1C350.b, which lists certain AG-controlled chemicals also identified on CWC Schedule 2 and controlled for CB, CW, and AT reasons; (3) 1C350.c, which lists certain AG-controlled chemicals also identified on CWC Schedule 3 and controlled for CB, CW, and AT reasons; and (4) 1C350.d, which lists AG-controlled chemicals controlled for CB and AT reasons only. This rule also amends ECCN 1C350 and ECCN 1C355 to place the description of the mixtures controlled by each entry in the List of Items Controlled for that entry. As part of this change, the mixtures notes for these two ECCNs have been revised to simplify the language describing the license requirements that apply to mixtures containing chemicals controlled by these ECCNs.

This rule also restructures ECCN 1C995 and adds a new ECCN 1C395 to provide greater clarity concerning the license requirements that apply to certain mixtures and test kits containing chemicals controlled by ECCN 1C350. Specifically, ECCN 1C995 is revised to control mixtures and test kits that require a license for AT reasons only. As a result of this change ECCN 1C995 now controls all mixtures that contain AG-controlled chemicals ( i.e., chemicals controlled by ECCN 1C350) in concentrations less than the control thresholds specified for mixtures identified in ECCN 1C350, except for those mixtures that contain greater than 10 percent, but less than 30 percent, by weight of any single AG-controlled chemical also identified under Schedule 2 of the CWC. The latter are controlled under new ECCN 1C395, because they require a license, for CB and CW reasons, for export to States not Party to the CWC. ECCN 1C995 continues to control the following mixtures for AT reasons only: (1) Mixtures that contain 10 percent or less, by weight, of any single AG-controlled chemical also identified under Schedule 2 of the CWC, (2) mixtures that contain less than 30 percent by weight of any single AG-controlled chemical also identified under Schedule 3 of the CWC, and (3) mixtures that contain less than 30 percent by weight of any single AG-controlled chemical not also identified under any schedule of the CWC (i.e., AG-controlled chemicals in ECCN 1C350 not also controlled for CW reasons). As noted below (see harmonization of AT controls), ECCN 1C995 is revised by this rule to also control, for AT reasons, mixtures not controlled by ECCN 1C355 that contain chemicals controlled by that ECCN. In addition, ECCN 1C995 controls test kits that contain precursor chemicals listed in 1C350.d, which are not subject to CW controls.

New ECCN 1C395 controls test kits excluded from control under ECCN 1C350.b and .c by License Requirement Note 4 of that ECCN ( i.e., test kits containing CWC Schedule 2 or 3 chemicals). These test kits are included in new ECCN 1C395, instead of ECCN 1C995, because they are controlled for CB and CW reasons to States not Party to the CWC. ECCN 1C395 also controls mixtures containing greater than 10 percent, but less than 30 percent, by weight of any single AG-controlled chemical also identified under Schedule 2 of the CWC. These mixtures are controlled under ECCN 1C395 for CB and CW reasons. All items controlled by new ECCN 1C395 require a license, for AT reasons, to designated terrorist supporting countries ( i.e., Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria).

This rule amends General Prohibition Seven (Section 736.2(b)(7) of the EAR) and the AG and CWC licensing requirements and policies in Sections 742.2 and 742.18 of the EAR to include references to new ECCN 1C395. The rule also amends the CWC licensing requirements and policies in Section 742.18 of the EAR to include references to mixtures controlled by ECCN 1C350, ECCN 1C355, or new ECCN 1C395.

BIS is also amending several AG and CWC-related entries on the CCL to harmonize the application of anti-terrorism (AT) controls among these entries. Specifically, this rule revises ECCN 1C355 to require a license, for AT reasons, to export or reexport any of the chemicals or mixtures controlled by this ECCN to all of the designated terrorist supporting countries ( i.e., Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria). Prior to the publication of this rule, the chemicals and mixtures listed in ECCN 1C355 required a license for CW reasons only. This action will have no impact on exports to Cuba, Iran, Iraq, Libya, and Sudan, which are subject to comprehensive trade sanctions, or on exports to Syria and North Korea, which continue to be subject to CW controls.

In addition, this rule revises ECCN 1C995 to harmonize the application of AT controls among ECCNs containing chemicals and chemical mixtures by requiring a license to export or reexport any mixture controlled by ECCN 1C995 to all of the designated terrorist supporting countries. Prior to the publication of this rule, mixtures controlled by ECCN 1C995 that contained chemicals controlled by ECCN 1C350 required a license, for AT reasons, only to Cuba, Libya, North Korea, and Iran. In practice, this action will have no impact on exports to Sudan and Iraq, which are subject to comprehensive trade sanctions, but it may have a slight impact on exports of these mixtures to Syria.

This rule also revises ECCN 1C995 to control, for AT reasons, mixtures not controlled by ECCN 1C355 that contain chemicals controlled by 1C355. Prior to the publication of this rule, these mixtures were classified as EAR99 and generally could be exported to most destinations, except embargoed destinations and entities ( i.e., Cuba, Iran, Iraq, Libya, and Sudan), without prior U.S. Government authorization. In practice, this action will have no impact on exports to Cuba, Iran, Iraq, Libya, and Sudan, which are subject to comprehensive trade sanctions, but it may have a slight impact on exports of these mixtures to Syria and North Korea.

In addition, this rule expands AT controls on test kits that were previously controlled under ECCN 1C995, but which are now controlled under ECCN 1C395 ( i.e., test kits containing AG-controlled chemicals also identified on CWC Schedule 2 or 3), by requiring a license, for AT reasons, to export these test kits to Iraq. This rule also expands AT controls, to include Iraq, for certain test kits that were previously controlled under ECCN 1C350, but which are now controlled under ECCN 1C995.c ( i.e., test kits containing AG-controlled chemicals that are not also controlled for CW reasons). Previously, exports of these test kits required a license, for AT reasons, only to Cuba, Iran, Libya, North Korea, Sudan, and Syria. This action will have no impact on exports of these test kits to Iraq, since that country is subject to comprehensive trade sanctions and a license also continues to be required, for CB and CW reasons, to export these test kits to Iraq.

Finally, this rule revises ECCN 1C350 to expand AT controls to include Iraq. Previously, items controlled by ECCN 1C350 were controlled for AT reasons to all designated terrorist-supporting countries, except Iraq ( i.e., Cuba, Iran, Libya, North Korea, Sudan, and Syria).

This rule also imposes a license requirement for exports to Canada of human pathogens and toxins, animal and plant pathogens, and genetically modified organisms that are controlled for CB reasons under ECCNs 1C351, 1C352, 1C353, and 1C354 and related technology controlled for CB reasons under ECCNs 1E001 and 1E351. Specifically, this rule amends the Commerce Country Chart (Supplement No. 1 to part 738 of the EAR) by inserting an “X” for Canada under CB Column 1. Prior to the publication of this rule, these items required a license to all destinations, except Canada. As a result of this action, these pathogens, toxins, and microorganisms require a license for export to all destinations, including Canada. This change harmonizes export controls on biological agents and related technology by requiring a license to export such items, worldwide.

This rule clarifies the control status of certain mixtures that contain only trace amounts of controlled chemicals. First, License Requirements Note 2 in ECCN 1C350 is revised to clarify that this entry does not control mixtures containing less than 0.5% aggregate quantities, by weight, of the CWC Schedule 1 chemicals controlled by 1C350.a as unavoidable by-products or impurities. Such mixtures are classified as EAR99, instead. However, all other mixtures containing these Schedule 1 chemicals are controlled by ECCN 1C350.a. Second, a new License Requirements Note is added in ECCN 1C995 to clarify that this ECCN does not control mixtures containing less than 0.5% of any single AG-controlled chemical listed in ECCN 1C350 (except those also identified as CWC Schedule 1 chemicals) or any single CW-controlled chemical listed in ECCN 1C355 as unavoidable by-products or impurities. Such mixtures are classified as EAR99, instead.

This rule makes two changes related to the CWC requirements in the EAR. First, the rule revises Supplement No. 2 to Part 745 (titled “States Parties to the Convention on the Prohibition of the Development, Production, Stockpiling, and Use of Chemical Weapons and on Their Destruction”) by adding the names of countries that have recently become States Parties to the CWC (i.e., Nauru and Uganda). Second, the rule clarifies (in Section 742.18 of the EAR and in the License Requirements sections of ECCNs 1C350, 1C355, and 1C395) that a license is required, for CW reasons, to reexport CWC Schedule 3 chemicals and mixtures identified in these ECCNs from a State not Party to the CWC (a destination not listed in Supplement No. 2 to part 745 of the EAR) to any other State not Party to the CWC and that applications for such reexports generally will be denied.

The Department of Commerce is taking these measures having consulted with the Department of State. The harmonization and expansion of AT controls on chemicals and chemical mixtures and the revised CB controls are described in a report to the Congress, dated May 30, 2002.

1. This rule has been determined to be not significant for purposes of Executive Order 12866.

2. Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the Paperwork Reduction Act, unless that collection of information displays a currently valid OMB Control Number. This rule contains collections of information subject to the requirements of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq. ). These collections have been approved by the Office of Management and Budget under Control Numbers 0694-0088 and 0694-0117.

3. This rule does not contain policies with Federalism implications as that term is defined in Executive Order 13132.

4. The provisions of the Administrative Procedure Act (5 U.S.C. 553) requiring notice of proposed rulemaking, the opportunity for public participation, and a delay in effective date, are inapplicable because this regulation involves a military and foreign affairs function of the United States (Sec. 5 U.S.C. 553(a)(1)). Further, no other law requires that a notice of proposed rulemaking and an opportunity for public comment be given for this final rule. Because a notice of proposed rulemaking and an opportunity for public comment are not required to be given for this rule under 5 U.S.C. 553 or by any other law, the analytical requirements of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) are not applicable.

Therefore, this regulation is issued in final form. Although there is no formal comment period, public comments on this regulation are welcome on a continuing basis. Comments should be submitted to Willard Fisher, Regulatory Policy Division, Bureau of Industry and Security, U.S. Department of Commerce, Room 2705, 14th Street and Pennsylvania Avenue, NW, Washington, DC 20230.

In the Federal Register of October 5, 1999 (64 FR 53960), we (FDA) proposed to amend our new drug and biological product regulations to identify the information needed to provide substantial evidence of the effectiveness of certain new drug and biological products used to reduce or prevent the toxicity of chemical, biological, radiological, or nuclear substances. We are finalizing that proposed rule by adding subpart I to part 314 (21 CFR part 314) and subpart H to part 601 (21 CFR part 601).

This final rule provides for approval of certain new drug and biological products based on animal data when adequate and well-controlled efficacy studies in humans cannot be ethically conducted because the studies would involve administering a potentially lethal or permanently disabling toxic substance or organism to healthy human volunteers and field trials are not feasible prior to approval. Under this rule, in these situations, certain new drug and biological products that are intended to reduce or prevent serious or life-threatening conditions can be approved for marketing based on evidence of effectiveness derived from appropriate studies in animals, without adequate and well-controlled efficacy studies in humans (§ 314.126). In assessing the sufficiency of animal data, the agency may take into account other data, including human data, available to the agency. Under this rule, FDA can rely on the evidence from animal studies to provide substantial evidence of the effectiveness of these products when:

1. There is a reasonably well-understood pathophysiological mechanism for the toxicity of the chemical, biological, radiological, or nuclear substance and its amelioration or prevention by the product;

2. The effect is demonstrated in more than one animal species expected to react with a response predictive for humans, unless the effect is demonstrated in a single animal species that represents a sufficiently well-characterized animal model (meaning the model has been adequately evaluated for its responsiveness) for predicting the response in humans;

3. The animal study endpoint is clearly related to the desired benefit in humans, which is generally the enhancement of survival or prevention of major morbidity; and

4. The data or information on the pharmacokinetics and pharmacodynamics of the product or other relevant data or information in animals and humans is sufficiently well understood to allow selection of an effective dose in humans, and it is therefore reasonable to expect the effectiveness of the product in animals to be a reliable indicator of its effectiveness in humans.

All studies subject to this rule must be conducted in accordance with preexisting requirements under the good laboratory practices (21 CFR part 58) regulations and the Animal Welfare Act (7 U.S.C. 2131 et. seq. ).

Safety evaluation of products is not addressed in this rule. Products evaluated for effectiveness under subpart I of part 314 and subpart H of part 601 will be evaluated for safety under preexisting requirements for establishing the safety of new drug and biological products. The agency believes that the safety of most of these products can be studied in human volunteers similar to the people who would be exposed to the product. FDA recognizes that some safety data, such as data on possible adverse interactions between the toxic substance itself and the new product, may not be available. This is not expected to keep the agency from making an adequate safety evaluation. FDA's procedures and standards for evaluating the safety of new drug and biological products are sufficiently flexible to provide for the safety evaluation of products evaluated for efficacy under subpart I of part 314 and subpart H of part 601.

This rule will not apply if product approval can be based on standards described elsewhere in our regulations (for example, accelerated approval based on human surrogate markers or clinical endpoints other than survival or irreversible morbidity). 1

We received comments on the proposed rule from two pharmaceutical companies and one physician affiliated with a university. We also received comments from the National Institutes of Health (NIH). The NIH comments were based on a prepublication draft of the proposed rule, but the comments were received too late to be addressed in the proposed rule. The NIH comments have been placed in the docket for this rule and are addressed in this document.

In addition to the changes we have made in response to comments, we have changed the titles of subpart I of part 314 and subpart H (formerly subpart G) of part 601 to better describe the scope of the subparts. Subpart I of part 314 is now entitled “Approval of New Drugs When Human Efficacy Studies Are Not Ethical or Feasible” and subpart H of part 601 is now entitled “Approval of Biological Products When Human Efficacy Studies Are Not Ethical or Feasible.” Proposed subpart G has been redesignated as subpart H in the final rule because subpart G has since been designated for regulations on postmarketing studies. Proposed §§ 601.60 through 601.65 have been renumbered §§ 601.90 through 601.95 in subpart H.

We have also changed, on our own initiative, the requirements proposed in §§ 314.610(c) and 601.61(c) (§§ 314.610(b)(3) and 601.91(b)(3) in this final rule). We have deleted the requirement that self-administered drug products approved under this rule be in unit-of-use packaging with attached patient labeling. In addition, we have eliminated the distinction between self- administered products and products administered by health professionals.

Whether a product is self-administered or administered by a health professional, it is important to inform patient recipients that a product approved under this rule has not been studied for efficacy in humans because of ethical or feasibility reasons. 2 It is also important that patient recipients receive information about indications, dosage and administration, contraindications, reasonably foreseeable risks, adverse reactions, anticipated benefits, and drug interactions. This rule requires that all of this information be provided to patient recipients of products approved under subpart I of part 314 and subpart H of part 601.

We believe, however, that the proposed unit-of-use packaging and attached patient-labeling requirement could have had the unintended effect of hampering the distribution and dispensing of these products in the event of an emergency. The added bulk of unit-of-use packaging could have made stockpiling and transporting more difficult in many cases. The proposed requirement might also have hampered the speedy distribution of products for additional indications previously approved outside of this rule.

Applicants may meet the requirements of new §§ 314.610(b)(3) and 601.91(b)(3) in a variety of ways, as long as sponsors make provisions to get the information to patients. For example, the sponsor could provide reproducible master copies of labeling information or presentations for patient recipients that would be appropriate in the event of an emergency.

We have also changed proposed §§ 314.610(c) and 601.61(c) (§§ 314.610(b) and 601.91(b) in this final rule) to require that the patient labeling explain that, for ethical or feasibility reasons, the product's approval was based on efficacy studies conducted only in animals. This explanation will better inform patient recipients about the nature and ethical basis of the product approval under this rule and how that approval differs from approval of products based on standard human efficacy studies.

Finally, we have added to §§ 314.610(b)(1) and 601.91(b)(1) (proposed §§ 314.610(a) and 601.61(a)) a requirement that applicants include a plan or approach to fulfilling postmarketing study commitments as part of their application. We recognize that such studies normally will not be conducted unless an emergency arises that requires the product's use. Furthermore, when the product is used in an emergency, it may not be feasible for sponsors to conduct postmarketing studies in a timely manner, nor is it our intention to require sponsors to send investigators into areas of exposure. We do, however, believe that applicants can plan a postmarketing study approach, in consultation with the agency, as part of an overall response to an event.

The requirement to submit a plan for postmarketing studies is consistent with the requirements for sponsors under the accelerated approval process provided for in subpart H of part 314.

The procedures in subpart H and in this rule are similar because, to assess efficacy, both allow use of an endpoint that is not a clinical endpoint showing a benefit. Instead the rules under subpart H allow for reliance on a clinical surrogate endpoint and this rule allows for the use of animal data as an endpoint.

Postmarketing studies are critical in both of these situations to verify and describe the clinical benefit of the drug or biological product. The postmarketing studies may provide us with data that directly verify that the product provides the desired benefit in humans, such as increased survival or prevention of major morbidity.

(Comment 1) One comment suggested that we define “lethal” and “permanently disabling.” The comment expressed concern that without such definitions, subpart I of part 314 and subpart H of part 601 will be misapplied in situations where clinical testing can and should be carried out.

The definitions of “lethal” and “permanently disabling” would seem to be well understood. Although we share the concern that too expansive an interpretation of “lethal” or “permanently disabling” could lead to attempts to apply this rule when human studies are, in fact, feasible, we are also concerned that too restrictive a definition of “lethal” or “permanently disabling” could lead to failure to apply subpart I of part 314 and subpart H of part 601 in situations where they should be applied to protect the public health. We believe that, as a general matter, we must rely on the good sense and responsibility of those health professionals who will be seeking to apply subpart I of part 314 and subpart H of part 601 in the future, and on responsible review of specific cases by FDA. Nevertheless, we can provide guidance for applying subpart I of part 314 and subpart H of part 601 by clarifying that a “lethal substance” is one that is likely to kill at least some of the humans who have been exposed to the substance and a “permanently disabling substance” is one that is likely to cause a permanent physical or mental impairment that substantially limits one or more of the major life activities in at least some of the humans who have been exposed to the substance.

(Comment 2) One comment stated that the rule does not explicitly cover infectious substances and pointed out that not all infectious substances produce toxins. The comment suggested replacing “toxic” with “toxic and/or infectious” in proposed §§ 314.600 and 601.60 (§ 601.90 in this final rule).

The rule is certainly intended to cover products for treatment of infections. At some level, an infectious agent that is lethal or permanently disabling is toxic to its host, even if that agent is not itself a “toxin” or a producer of “toxins” within a strict definition of the word. Because we do not use “toxin” in the rule, and “toxic” is accurate, we do not believe we need to replace “toxic” with “toxic and/or infectious” to indicate that products for the treatment of infections may be approved under this rule.

(Comment 3) One comment noted that the proposed rule did not discuss criteria that should be applied in determining if “an important medical need is not adequately met by currently available therapies.” The comment suggested that we state that we will use the criteria given in our guidance for industry entitled “Fast Track Drug Development Programs—Designation, Development, and Application Review” (September 1998).

We have decided to eliminate the requirement that “products would be expected to provide meaningful therapeutic benefits to patients over existing treatments,” as well as the limitation that the toxic agent be “without a proven treatment” (proposed §§ 314.600 and 601.60). Recent events involving the multiple exposures to anthrax in our population, and deaths resulting from those infections, have indicated a need for a wide range of therapeutic options that, in some instances, might be inappropriately limited by requiring new products to have a therapeutic benefit over existing treatments, or to be used only in the absence of a proven treatment. Availability of a variety of drug and biological products is important because, for example, patient recipients may be allergic to one product and require another, may be intolerant of a product because of side effects, or may respond more favorably to one product than another. We also believe that a wider variety of therapeutic choices will limit potential problems with availability, accessibility, and distribution of products. We have modified the final rule to address these concerns and help ensure the availability of more than one therapeutic option.

(Comment 4) One comment requested that antivenin and antitoxin products of animal origin be considered for inclusion specifically on the list of new drugs and biological products to which the rule applies.

There is no list of products that may be approved based on evidence of effectiveness from efficacy studies in animals. The rule provides criteria to determine if evidence of effectiveness from efficacy studies in animals may support approval of a product. If an antivenin or antitoxin product of animal origin meets the criteria specified in the rule, it may be approved on the basis of evidence of effectiveness from efficacy studies in animals.

(Comment 5) One comment requested that we revise proposed §§ 314.610 and 601.61 (§ 601.91 in this final rule) to state that substantiation in multiple animal species is required only where appropriate. The comment stated we should not limit ourselves to approvals only when there is substantiation in “multiple” animal species. The comment contended that where independent studies in a single species meet the general principles of independent substantiation as described in the guidance for industry entitled “Providing Clinical Evidence of Effectiveness for Human Drugs and Biological Products” (May 1998), those studies are sufficient to substantiate effectiveness as a matter of science and a requirement of substantiation in multiple species would result in an unnecessary delay of agency approval. According to the comment, these concerns are particularly important where viruses have a narrow host range and conducting efficacy trials in more than one animal species in such cases either is not feasible or provides only limited additional information that is relevant to the full-blown disease in humans. The comment suggested that the requirement of substantiation in multiple species in a given case should depend on the known host range and the availability of animal model systems.

We share some of the concerns expressed in the comment, but we believe the proposed remedy goes too far. Approval of the use of a drug lacking human evidence of effectiveness represents a significant departure from ordinary practice. There are countless examples of treatments with favorable effects in animals that did not prove effective in humans. Although this rule does, for good reason, allow reliance on animal studies when human studies cannot be conducted, in general we expect that the evidence, to be persuasive, should be developed in more than one animal species unless the effect is demonstrated in a single animal species that represents a sufficiently well-characterized animal model for predicting the response in humans. We recognize that conducting studies in more than one species can result in added expense, but we believe this is warranted because of the additional assurance they would provide.

Furthermore, reliance on our guidance entitled “Providing Clinical Evidence of Effectiveness for Human Drugs and Biological Products” is misplaced. That guidance was drafted to provide advice on the quantity of data from clinical studies needed to support a finding of effectiveness and, specifically, on when the agency ought to rely on a single human study. The guidance addressed cases in which the issue is the credibility of the data itself, not the relevance of the data to humans. In this rule, the issue is the ability of results from animal studies to predict the human response, and not the credibility of the animal finding itself (although, of course, the animal studies should be replicated or substantiated in each species as needed to ensure credible results). The need for multiple species in certain cases is to enhance the likelihood that the data are pertinent to humans.

We do recognize, however, that the multiple species requirement could be inappropriate or unnecessary in certain situations. For example, there may be only one species capable of reacting with a response predictive for humans. This would occur where there is only one nonhuman host for the targeted microorganism. There may also be other situations in which studies in a particular species are specifically well recognized as predictors of effectiveness in humans. Thus, circumstances in which the agency will rely on evidence from studies in one animal species to provide substantial evidence of the effectiveness of these products in humans would generally be limited to situations where the study model is sufficiently well-recognized so as to render studies in multiple species unnecessary. In addition, other human data for the product could provide support for such approvals.

Accordingly, we have changed proposed §§ 314.610 and 601.61 (§ 601.91(c) in this final rule) to require that approval be based on studies in more than one animal species unless the effect is demonstrated in a single animal species that represents a sufficiently well-characterized animal model for predicting the response in humans. The agency believes that demonstrating effectiveness in studies conducted in a single animal species using a well-characterized animal model will most often be done for anti-infective drug products. The pathophysiological mechanisms of infectious diseases are usually very well understood, and animal models for many infectious diseases have been studied for years and are very well characterized.

(Comment 6) One comment suggested we remove the requirement that there be a reasonably well-understood pathophysiological mechanism of the toxicity of the substance and its prevention or substantial reduction by the product. The comment stated it is hard to say when we understand something reasonably well and that, if we decide to retain the requirement, we should state at what level (e.g., cellular, molecular) the mechanism must be understood.

A disease's or toxin's mechanism of action does not need to be understood before a safe and effective treatment or preventative can be devised. Quinine and Jenner's smallpox vaccine were both developed before the acceptance of the germ theory of disease. Neither is there a general requirement that an applicant who is relying on human testing to establish effectiveness demonstrate the mechanism of action of the drug or biological product that is the subject of the marketing application. It is generally sufficient to demonstrate that a product is safe and effective. It is generally not required that an applicant demonstrate how or why the product is safe and effective.

It is true that a pathophysiologic understanding of a disease and treatment is not required when human studies are used to support approval. In the case of human drug or biological products approved on the basis of evidence of effectiveness from studies in animals, however, we are requiring an understanding of the mechanism of the toxic substance or infectious organism and its prevention or reduction by the product. This understanding helps provide assurance that the efficacy data from studies in animals can be applied to humans. We have not specified exactly what degree of pathophysiologic understanding is needed, and that will be a matter of judgment. The level of understanding could range from a complete understanding of how a toxic substance works at the cellular level in both human and animal cells together with a clear understanding of what the antidote does at the molecular level to a less complete understanding. The level of required understanding of the mechanism of action of the toxic substance or infectious organism and the product may vary from toxic substance to toxic substance or infectious organism to infectious organism and could even vary from one product to another intended to treat the same condition.

(Comment 7) One comment suggested that an institutional review board (IRB) or other ethical scientific review body determine if it would be unethical to conduct studies in humans. The comment also said we do not mention who would make the determination that it would be unethical to conduct studies in humans.

The final determination that it is unethical to conduct studies in humans will be made by the reviewing officials in FDA. We anticipate that in most cases the determination as to whether it would be unethical to conduct studies in humans will not be difficult. In those cases that are difficult, the views of one or more IRBs, individual ethicists and clinicians, and FDA advisory committees could be sought by a sponsor or FDA. A case where such a consultation could be useful is one in which a putatively subtoxic dose would be used in humans to establish at least a mechanism for protection, if not actual protection.

(Comment 8) One comment noted that we said in the proposed rule:

The comment asked us to consider requiring consultation with an advisory committee either before conducting the animal studies or before approval of the product, or both.

We want to reiterate our statement in the proposed rule that we intend usually to consult with an advisory committee during the approval process. Indeed, we may consult with an advisory committee more than once on a single product if circumstances warrant it. Consultation with an advisory committee could occur early in the development process, to discuss whether the concept of using certain animal data to support efficacy is reasonable.

Even though consultation with an advisory committee is generally desirable, it is not always practical. For example, products reviewed under this rule may be part of the response to a public health emergency; therefore, there may not be time to convene an advisory committee. Accordingly, we believe that it would be inappropriate to absolutely require consultation with an advisory committee.

(Comment 9) One comment questioned whether patient labeling is adequate to inform patients that a product has been approved on the basis of animal efficacy data, particularly in situations where military personnel are ordered to take a product approved under this rule. The comment did not suggest an alternative to the provisions of the rule.

Sections 314.610(b)(3) and 609.91(b)(3) provide that for products or specific indications approved under this rule, applicants must prepare, as part of their proposed labeling, labeling to be provided to patients or potential patients. The patient labeling, written in language that can be easily understood by the general public, must explain that, for ethical or feasibility reasons, the product's approval was based on efficacy studies conducted in animals alone. The labeling must give the product's indication(s), directions for use (dosage and administration), contraindications, a description of any reasonably foreseeable risks, adverse reactions, anticipated benefits, drug interactions, and any other relevant information required by FDA at the time of approval. If possible, the patient labeling must be available with the product to be provided to patients or potential patients prior to administration or dispensing of the product for the use approved under this rule. We intend that in interpreting § § 314.610(b)(3) and 601.91(b)(3), the word “possible” be given its ordinary and literal meaning. Situations in which it would be inconvenient or require some effort to make the labeling available for patients should not be equated with situations in which it would be impossible to do so.

These provisions, coupled with communications within a health care provider-patient relationship should, as a general matter in both civilian and military contexts, adequately ensure that patients are informed that the product they are taking has been approved based on animal efficacy data.

(Comment 10) One comment suggested that labeling a drug or biological product approved on the basis of evidence of effectiveness from studies in animals as “FDA approved” is misleading, because patients would assume that the product had been approved based on human studies. The comment suggested that we treat the product as an investigational new drug, but waive certain requirements generally applied to investigational new drugs, if those requirements would provide obstacles to the product's use in an emergency.

We agree that the labeling would be misleading if information were not included to explain to patients or potential patients that the effectiveness of the product was demonstrated in animals not humans, and that this reliance on animal efficacy data was based on ethical and feasibility concerns. Therefore, under sections 502(a) and 701(a) of the Federal Food, Drug, and Cosmetic Act (the act) (21 U.S.C. 352(a) and 372(a)) (and consistent with the legal authority cited in the preamble to the proposed rule (64 FR 53960 at 53964)), we have revised the language in §§ 314.610(b)(3) and 601.91(b)(3) to require that this information be included in the patient labeling.

Where the evidence of effectiveness comes from studies in animals, regulating new drug or biological products as investigational drugs presents several difficulties. These difficulties have led us to this rulemaking. The proposed rule describes our concerns with relying solely on the investigational new drug regulations (64 FR 53960 at 53963) for such approvals. There may be cases, however, when an application does not meet the criteria of this rule, and approval of the product is not feasible. Should an emergency situation arise under such circumstances, it is conceivable that the product could be used under the investigational new drug regulations.

(Comment 11) Another comment suggested that, unless “lay persons” may use the product, we prohibit advertising of drug or biological products approved on the basis of evidence of effectiveness from studies in animals. The comment further recommended stringent controls on the advertising of products that could be used by “lay persons.”

Such a sweeping prohibition would likely give rise to constitutional issues regarding the regulation of commercial speech. In addition, the suggestion presents serious public health concerns. A prohibition on advertising could limit health care providers' and public health and emergency preparedness officials' awareness of the products approved under this rule. Limiting awareness of these products, which are intended to reduce or prevent life-threatening or disabling toxicity, does not seem desirable or appropriate.

We believe that the advertising provisions in §§ 314.640 and 601.94 of this rule provide adequate protection against false or misleading advertising, and no additional requirements are needed. As discussed in the preamble to the proposed rule (64 FR 53960 at 53964), we proposed the requirements pertaining to promotional materials in order to provide for the safe and effective use of these products. These requirements, along with others, are similar to those in the accelerated approval regulations in subpart H of part 314 and in subpart E of part 601. In issuing the accelerated approval regulations, we stated that the special circumstances under which those products would be approved and the possibility that promotional materials could adversely affect the sensitive risk/benefit balance justified review of promotional materials before and after approval (57 FR 58942 at 58949). Similarly, the special circumstances of all product approvals under subpart I of part 314 and subpart H of part 601 and the possibility that promotional materials could adversely affect the even more sensitive risk/benefit balance justifies advance review of promotional materials.

We intend to review all such promotional materials under these new regulations promptly, and to notify the applicant of any identified problems as soon as possible (see also 57 FR 58942 at 58950). Also as with the accelerated approval regulations' requirements for promotional materials (§§ 314.560 and 601.46), FDA may terminate the requirements for advance submission of promotional materials under these new regulations at §§ 314.650 and 601.95 if the agency determines, on its own initiative or in response to a petition submitted by the sponsor, that the requirements are no longer necessary for safe and effective use of the product. When we remove the requirement for advance submission of promotional materials, we will continue to offer a prompt review of all voluntarily submitted promotional materials.

(Comment 12) We received some comments addressing questions posed in section VII, “Discussion,” of the proposed rule. In this final rule, we have addressed comments that dealt with the rule itself. Comments that dealt with questions related to the application of this rule, rather than the requirements, will be addressed if and when we draft a guidance on this subject.

We did not receive any comments discussing our legal authority to approve new drugs and biological products based on evidence of effectiveness from studies in animals. We have concluded, for the reasons set out in section V of the proposed rule, “Legal Authority,” (64 FR 53960 at 53964), that we have the legal authority to approve new drugs and biological products based on evidence of effectiveness from studies in animals.

(Comment 13) We received a comment asserting that under the court's holding in American Pharmaceutical Association v. Weinberger , 377 F.Supp. 824 (D.C.D.C. 1974) aff'd sub nom . American Pharmaceutical Association v. Mathews , 530 F.2d 1054 (D.C. Cir. 1976) ( per curiam ), we do not have the legal authority to impose the distribution controls proposed in §§ 314.610(b) and 601.61(b) (§§ 314.610(b)(2) and 601.91(b)(2) in this final rule). The comment asked that, if we disagree with their characterization of the law, distribution controls not be applied just because a product was approved under the provisions of this rule. The comment also asked that we give examples of situations where we would impose distribution restrictions.

For a full discussion of FDA's authority to impose distribution restrictions to ensure the safe use of drug products, see the agency's proposed and final rules amending part 314 by adding subpart H on accelerated approval of new drugs for serious or life-threatening illnesses (proposed rule at 57 FR 13234, April 15, 1992; final rule at 57 FR 59842, December 11, 1992). Those rules relied on sections 501, 502, 503, 505, and 701 of the act (21 U.S.C. 351, 352, 353, 355, and 372) as authority for FDA to issue regulations to help ensure the safety and effectiveness of new drugs.

We agree with the comment that distribution controls should not be placed on a product solely because it is approved under the provisions of this rule. New §§ 314.610(b)(2) and 601.91(b)(2) authorize distribution controls—they do not require them.

We do not believe it would be useful to give examples of situations where distribution controls may be necessary to ensure safe use of the product. Products approved under this rule could be indicated for widely differing conditions, and those products could be used in unique circumstances presenting many distinct safety concerns. It would not be practical to try to devise a list of representative examples of situations where distribution controls would be appropriate.

The agency has determined under 21 CFR 25.30(h) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.

FDA has analyzed this final rule in accordance with the principles set forth in Executive Order 13132. FDA has determined that the rule does not contain policies that have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, the agency has concluded that the rule does not contain policies that have federalism implications as defined in the Executive order and, consequently, a federalism summary impact statement is not required.

FDA has examined the impacts of the final rule under Executive Order 12866 and the Regulatory Flexibility Act (5 U.S.C. 601-612) (as amended by subtitle D of the Small Business Regulatory Fairness Act of 1996 (Public Law 104-121)) and the Unfunded Mandates Reform Act of 1995 (Public Law 104-4). Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). Unless the agency certifies that the rule is not expected to have a significant economic impact on a substantial number of small entities, the Regulatory Flexibility Act requires agencies to analyze regulatory options that would minimize any significant economic impact of a rule on small entities. Section 202 of the Unfunded Mandates Reform Act (Public Law 104-4) requires that agencies prepare an assessment of anticipated costs and benefits before proposing any rule that may result in expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million in any one year (adjusted annually for inflation).

The collection of information contained in these regulations has been previously reviewed and approved by the Office of Management and Budget under control number 1545-1774. Responses to this collection of information are voluntary. No material changes to this collection of information are made by these regulations.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to the collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

On March 12, 2002, the IRS and Treasury published in the Federal Register at 67 FR 11034 (2002-13 I.R.B. 668) temporary regulations under sections 337(d) and 1502 (the temporary regulations). The temporary regulations set forth rules that limit the deductibility of loss recognized by a consolidated group on the disposition of stock of a subsidiary member and that require certain basis reductions on the deconsolidation of stock of a subsidiary member. Section 1.1502-20T(i) of the temporary regulations provides that, in the case of a disposition or deconsolidation of a subsidiary before March 7, 2002, and for such transactions effected pursuant to a binding written contract entered into before March 7, 2002, that was in continuous effect until the disposition or deconsolidation, a consolidated group may determine the amount of allowable stock loss or basis reduction by applying § 1.1502-20 in its entirety, § 1.1502-20 without regard to the duplicated loss component of the loss disallowance rule, or § 1.337(d)-2T. For dispositions and deconsolidations that occur on or after March 7, 2002, and that are not within the scope of the binding contract rule, § 1.1502-20T(i) provides that allowable loss and basis reduction are determined under § 1.337(d)-2T, not § 1.1502-20.

Since the publication of the temporary regulations, several questions have been raised concerning the interpretation and application of the temporary regulations. In response to these questions, the IRS and Treasury are promulgating the regulations in this Treasury decision as temporary regulations to clarify and amend the temporary regulations as described below in this preamble. The following paragraphs describe these amendments.

Commentators requested that § 1.337(d)-2T be amended to provide a netting rule similar to that set forth in § 1.1502-20(a)(4), pursuant to which gain and loss from certain dispositions of stock may be netted. This Treasury decision adds § 1.337(d)-2T(a)(4) to provide such a rule and also adds § 1.337(d)-2T(b)(4), which provides a similar netting rule for basis reductions on deconsolidations of subsidiary stock.

Section 1.1502-20T(i) currently provides that an election to determine allowable loss by applying § 1.1502-20 (without regard to the duplicated loss component of the loss disallowance rule) or § 1.337(d)-2T must be made by including a statement with or as part of the original return for the taxable year that includes the later of March 7, 2002, and the date of the disposition or deconsolidation of the stock of the subsidiary, or with or as part of an amended return filed before the date the original return for the taxable year that includes March 7, 2002, is due. Commentators noted that this provision may not permit the election to be made on an original return for the 2001 taxable year where the disposition occurs during the 2001 taxable year. The IRS and Treasury believe that it is appropriate to permit the election to be made on such a return. Therefore, this Treasury decision amends § 1.1502-20T(i) to provide that the statement may be filed with or as part of a timely filed (including any extensions) original return for any taxable year that includes any date on or before March 7, 2002. In addition, if the date of the disposition or deconsolidation of the stock of the subsidiary is after March 7, 2002, the statement may be filed with or as part of a timely filed (including any extensions) original return for the taxable year that includes such date. This latter alternative effectively permits the statement to be filed with the original return that includes the date of the disposition or deconsolidation if, as of March 7, 2002, the disposition or deconsolidation was subject to a binding written contract entered into before March 7, 2002, that was in continuous effect until the date of the disposition or deconsolidation.

Commentators questioned whether an election to determine allowable loss by applying § 1.1502-20 (without regard to the duplicated loss component of the loss disallowance rule) or § 1.337(d)-2T was valid only if a statement of allowed loss described in § 1.337(d)-2T(c) or 1.1502-20(c), as appropriate, was or is filed with respect to the disposition or deconsolidation of subsidiary stock. The amendments to the temporary regulations in this Treasury decision clarify that no statement other than the one described in § 1.1502-20T(i)(4) is necessary to perfect an election to compute allowable loss or basis reduction by applying the provisions described in § 1.1502-20T(i)(2)(i) or (ii). Therefore, an election pursuant to § 1.1502-20T(i) may be made regardless of whether a statement of allowed loss described in § 1.337(d)-2T(c) or 1.1502-20(c) was or is filed with respect to the disposition or deconsolidation.

In addition, taxpayers determining allowable loss under § 1.1502-20 in its entirety will generally be treated as having satisfied the requirement to file a statement of allowed loss otherwise imposed by § 1.1502-20(c) even if no such statement is filed. Nothing in the temporary regulations or these amendments to the temporary regulations, however, affects the filing requirements regarding the election provided in § 1.1502-20(g).

Finally, a number of questions have been raised regarding the extent to which the election described in § 1.1502-20T(i) affects a taxpayer's items of income, gain, deduction, or loss other than the loss allowed on a disposition of subsidiary stock. In response to these questions, the temporary regulations are amended to explain that if, pursuant to an election under § 1.1502-20T(i), the loss allowed with respect to a disposition of subsidiary stock is increased, but the year of the disposition (or the year to which such loss would have been carried back or carried forward) is closed, to the extent that the absorption of such excess loss in such year would have affected the tax treatment of another item ( e.g., another loss that was absorbed in such year) that has an effect in an open year, the election will affect the treatment of such other item.

In addition, the regulations provide a special rule for situations in which a subsidiary of the group (the disposing member) recognized a loss on the disposition of stock of a lower-tier subsidiary member of the group, the loss was disallowed under § 1.1502-20, and, as a result, a group member's basis in the stock of the disposing member was reduced pursuant to § 1.1502-32 (because the disallowed loss was treated as a noncapital, nondeductible expense). In such cases, to the extent that all or some portion of the disallowed loss is allowed as a result of an election under § 1.1502-20T(i), but such loss would have been properly absorbed or expired in a closed year, the basis in the stock of the disposing member may be increased. This adjustment is to be made for purposes of determining the group's or the shareholder-member's Federal income tax liability for all open years.

In light of the Federal Circuit's decision in Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), the temporary regulations were necessary to provide taxpayers with immediate guidance regarding allowable loss and basis reductions in connection with dispositions and deconsolidations of subsidiary stock and to carry out the principles of General Utilities repeal pending the issuance of further guidance. These amendments to the temporary regulations clarify those rules and simplify their application in order to ease taxpayer compliance. Accordingly, good cause is found for dispensing with notice and public procedure pursuant to 5 U.S.C. 553(b)(B) and with a delayed effective date pursuant to 5 U.S.C. 553(d)(1) and (3). It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required.

The principal authors of these regulations are Sean P. Duffley and Lola L. Johnson, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545-1790. Responses to this collection of information are required to obtain a benefit.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register .

Books or records relating to the collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

On July 2, 1999, the IRS and Treasury published in the Federal Register (64 FR 36092 (1999-2 C.B. 34)) final regulations regarding certain deductions and losses of members that join a consolidated group. These regulations added § 1.1502-21(b)(3)(ii)(B), which permits an acquiring consolidated group to elect to waive, with respect to all consolidated net operating losses attributable to certain acquired members, the portion of the carryback period for which the corporation was a member of another group.

Section 172(b)(1) provides, in part, that a net operating loss for any taxable year must generally be carried back to each of the 2 taxable years preceding the taxable year of the loss. Section 172(b)(3) provides that any taxpayer entitled to a carryback period under section 172(b)(1) may elect to relinquish the carryback period with respect to a loss for any taxable year. An election to relinquish the carryback period under section 172(b)(3) must be made by the due date (including extensions) of the taxpayer's return for the taxable year of the loss and in the manner prescribed by the Secretary. Normally, this election is irrevocable.

Section 172(b)(1)(H), which was enacted as part of the Job Creation and Worker Assistance Act of 2002 (the Act), extended the 2-year carryback period to 5 years for losses arising in taxable years ending during 2001 and 2002 (hereafter, 2001 and 2002). Section 172(j), which was also enacted as part of the Act, allows a taxpayer entitled to the 5-year carryback period under section 172(b)(1)(H) to elect to relinquish that carryback period with respect to a loss for any taxable year. A taxpayer making this election generally must apply the 2-year carryback period set forth in section 172(b)(1), unless the taxpayer also elects to relinquish that carryback period under section 172(b)(3).

As described in Revenue Procedure 2002-40 (2002-23 I.R.B.), in order to give effect to the intent of Congress to allow taxpayers a 5-year carryback period to the maximum extent possible, the Service is permitting any taxpayer that previously elected under section 172(b)(3) to forgo the carryback period for losses arising in 2001 or 2002 to revoke such election in order to take advantage of the 5-year carryback period, provided the taxpayer revokes the election no later than October 31, 2002. Revenue Procedure 2002-40 also permits a taxpayer that filed an application for a tentative carryback adjustment or an amended return using the 2-year carryback period for a net operating loss arising in 2001 or 2002 to file certain forms to claim the 5-year carryback period provided under section 172(b)(1)(H).

Given the enactment of section 172(b)(1)(H) and taxpayers' ability to revoke prior elections under section 172(b)(3) and to make certain other filings in order to take advantage of the 5-year carryback period, the IRS and Treasury believe that it is appropriate to afford certain acquiring consolidated groups that did not make an election described in § 1.1502-21(b)(3)(ii)(B) with respect to certain acquired members an opportunity to waive the portion of the entire carryback period or the portion of the extended carryback period for 2001 and 2002 losses attributable to the acquired members, for pre-acquisition years. In this regard, the regulations in this Treasury decision add § 1.1502-21T(b)(3)(ii)(C), which sets forth two elections.

Pursuant to the first election, an acquiring group may waive the portion of the 5-year carryback period for 2001 and 2002 losses attributable to a member acquired from another group after June 25, 1999, for which the member was a member of another group. While this election effectively permits a waiver of the entire 5-year carryback period to the extent that it is prior to the acquisition with respect to a consolidated net operating loss arising in a particular taxable year, it is only available where none of such losses have previously been carried back to a taxable year of a group of which the acquired member was previously a member.

Pursuant to the second election, an acquiring group may waive the portion of the pre-acquisition carryback period for 2001 and 2002 losses attributable to a member acquired from another group to the extent that the Act increased the carryback period for such losses. This second election effectively permits a waiver of the third, fourth, and fifth carryback years to the extent that such years are prior to the acquisition and is available even where 2001 or 2002 losses have been carried back to the first or second carryback years of the acquired member that are pre-acquisition years. This second election, however, is only available with respect to consolidated net operating losses arising in a particular taxable year where none of such losses have been carried back to a taxable year of a group of which the acquired member was previously a member that is prior to the second taxable year preceding the taxable year of the loss.

Unlike the election under § 1.1502-21(b)(3)(ii)(B), the elections provided in these regulations apply only to losses for 2001 and 2002. In addition, the elections are made on a year-by-basis. That is, one election may be made for 2001 losses while another election, or no election, may be made for 2002 losses. An election that relates to consolidated net operating losses attributable to a taxable year ending during 2001 must be filed with the acquiring consolidated group's timely filed (including extensions) original or amended return for the taxable year ending during 2001, provided that such original or amended return is filed on or before October 31, 2002. An election that relates to consolidated net operating losses attributable to a taxable year ending during 2002 must be filed with the acquiring consolidated group's timely filed (including extensions) original or amended return for the taxable year ending during 2001 or 2002, provided that such original or amended return is filed on or before September 15, 2003.

If the acquiring consolidated group files or filed a valid election described in § 1.1502-21(b)(3)(ii)(B) with respect to the acquisition of a member, no election under § 1.1502-21T(b)(3)(ii)(C) needs to be (or should be) filed to ensure that 2001 or 2002 losses are not carried back to pre-acquisition years of the acquired member.

These temporary regulations are necessary to provide taxpayers with immediate elective relief from section 172(b)(1)(H), which was enacted as the part of the Job Creation and Worker Assistance Act of 2002. These regulations permit certain acquiring consolidated groups to elect to waive the 5-year carryback period with respect to certain acquired members. The regulations apply to losses arising in taxable years ending in 2001 and 2002. Based on these considerations, it is determined that this temporary regulation will provide taxpayers with the necessary guidance and authority to ensure equitable administration of the tax laws. Because of the need for immediate guidance, notice and public procedure are impracticable and contrary to the public interest pursuant to 5 USC 553(b)(B) and delayed effective date is not required pursuant to 5 USC 553(d)(1) and (3).

Further, it has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

The principal author of these temporary regulations is Marie Milnes-Vasquez. However, other personnel from the IRS and Treasury Department participated in their development.

On April 8, 2002 (at 67 FR 16950), the PBGC published a final rule on PBGC Benefit Payments. That final rule inadvertently (1) drops existing regulatory text from § 4044.13(b) of the PBGC's regulation on Allocation of Assets in Single-Employer Plans; and (2) omits two conforming amendments in the text that was dropped from that regulation. The conforming amendments that were omitted were included in the PBGC's proposed rule on PBGC Benefit Payments published December 26, 2000 (at 65 FR 81456). This document corrects that error.

In rule document 02-8340, make the following corrections:

This final rule adjusts Copyright Office fees in accordance with the applicable provisions of title 17, United States Code, and the Technical Amendments Act, Pub. L. No. 105-80, 111 Stat. 1529 (1997).

The Office submitted its proposed fee schedule to Congress on February 28, 2002. Congress has 120 days in which it could enact a law if it does not approve the schedule. If no such legislation is enacted the fees may be instituted. Should such legislation be enacted, the Copyright Office will publish a document in the Federal Register to notify its customers that this final rule and certain of the fees established herein will not take effect. Copyright customers should refer to the official Copyright Office website ( www.copyright.gov ) for the most current fee amounts. Official notices of any fee changes will also be published in the Federal Register .

In 1997 Congress authorized the Register of Copyrights to implement fees for services that were formerly set by Congress under a new procedure which first required the Register to conduct a study of the costs incurred for the registration of claims, the recordation of documents, and the provision of services. If the Register determines that fees should be adjusted after the review of all statutory criteria, the Register prepares a proposed fee schedule and submits the schedule and the accompanying economic analysis to Congress. The fees proposed in that schedule may be instituted in 120 days unless Congress enacts a law within that 120 day period stating that it does not approve the schedule. Technical Amendments Act, Pub L. 105-80, 111 Stat. 1529 (1997).

In 1998, the Copyright Office initiated a process to adjust fees by publication of a notice. 63 FR 43426 (August 13, 1998). At the end of the process, the Register forwarded a report with a proposed fee schedule to Congress on February 1, 1999, and increased most of its fees including the basic registration fees on July 1, 1999. See 64 FR 29518 (June 1, 1999). Implementation of the new system established by Congress means that the Office's fee schedule for certain services specified in title 17 as well as other special services is set out in regulations rather than in title 17. See 37 CFR 201.3.

When it adjusted fees in 1998-1999, the Office decided that it should next consider adjusting fees three years after that adjustment. Following a cost analysis initiated in fiscal year 2000, and completion of the other necessary steps, the Register forwarded a proposed fee schedule and the accompanying economic analysis to Congress on February 28, 2002. In the absence of legislation directing otherwise, the new fee schedule will take effect on July 1, 2002.

The proposed new fee schedule was submitted after the Office had both (1) completed the economic analysis required, evaluating the costs of providing the mandatory services identified in title 17, and (2) made a determination that the other statutory criteria, including the requirement that fees “should also be fair and equitable and give due considerations to the objectives of the copyright system,” 17 U.S.C. 708(b)(4), had been met.

At the conclusion of this analysis, the Register concluded that a number of fees needed to be increased to recover the full cost of providing the service; certain other fees needed to be increased slightly by the rate of inflation to maintain cost recovery; and the rest of the fees based on current and projected cost recovery should not be adjusted at this time. Services for which fees were increased to achieve or maintain cost recovery for providing the service include making a renewal registration, registering an original vessel hull design, recording a document, searching and preparing a report from Copyright Office records, and recording a designated online service provider agent.

For a number of reasons, the Register determined that an adjustment of the basic registration filing fee, which the Office had increased by 50% in 1999, was not warrented at this time. In her submission to Congress, the Register noted the level of cost recovery registration fees enjoyed in FY 2000 and FY 2001, the large increases imposed on the public in recent years, the negative effects of the decline in registrations that follow every fee increase, the costs associated with increasing the fee, and the changes in processing anticipated from the Copyright Office's business process re-engineering effort.

For public policy reasons, the Office eliminated the fee for inspection of Copyright Office records and also reduced the minimum cost for the first 15 pages of photocopying. Other statutory fees remain at the same level set in 1999.

In July of 1998, the Office adjusted non-statutory fees in a separate proceeding. For convenience, the non-statutory fees are slated for adjustment on the same schedule as statutory fees.

The “Analysis and Proposed Copyright Fee Schedule To Go Into Effect July 1, 2002” which was submitted to Congress is posted online at http://www.copyright.gov/reports/fees2002.html, in PDF format.

As discussed above, this final rule establishes copyright fees for certain services adjusted in the manner required by Congress. Therefore, prior notice and an opportunity for public comment are not required pursuant to 5 U.S.C. 553 (or any other law). The Office did post the proposed schedule on its website and is publishing the new fees in the Federal Register more than 30 days before they go into effect.

Although the Copyright Office, as a department of the Library of Congress and part of the legislative branch, is not an “agency subject to the Regulatory Flexibility Act,” 5 U.S.C. 601-612, the Register of Copyrights has considered the effect of these fee adjustments on individual authors and small entities. The Register does not propose increasing the basic registration fee and has issued more regulations permitting group registrations for individual authors. The Register has determined that the final regulations will not have a significant economic impact on a substantial number of individual authors or small entities that would require provision of special relief for small entities in the regulations, and that the final regulations are, to the extent consistent with the stated objectives of applicable statutes, designed to minimize any significant economic impact on small entities.

A comparison of existing and new fee amounts is included as an Appendix to the preamble.

Throughout this document, the term “me” refers to the reader of this rulemaking and the terms “we,” “us,” or “our” refer to the EPA.

Section 110 of the Clean Air Act (Act or CAA) requires states to develop air pollution control regulations and strategies to ensure that state air quality meets the national ambient air quality standards established by the EPA. Each state must submit the regulations and emission control strategies to the EPA for approval and promulgation into the federally enforceable SIP.

Each federally approved SIP protects air quality primarily by addressing air pollution at its points of origin. The SIPs can be and generally are extensive, containing many state regulations or other enforceable documents and supporting information, such as emission inventories, monitoring documentation, and modeling attainment demonstrations.

In order for state regulations to be incorporated into the federally enforceable SIP, states must formally adopt the regulations and emission control strategies consistent with state and federal requirements. This process generally includes public notice, public hearings, public comment periods, and formal adoption by state-authorized rulemaking bodies.

Once a state has adopted a rule, regulation, or emissions control strategy it submits it to us for inclusion into the SIP. We must provide public notice and seek additional public comment regarding the proposed federal action on the state submission. If we receive adverse comments we address them prior to any final federal action (we generally address them in a final rulemaking action).

The EPA incorporates into the federally approved SIP all state regulations and supporting information it has approved under section 110 of the Act. Records of such SIP actions are maintained in 40 CFR, part 52, titled “Approval and Promulgation of Implementation Plans.” The actual state regulations the EPA has approved are not reproduced in their entirety in the CFR, but are “incorporated by reference,” which means that EPA has approved a given state regulation (or rule) with a specific effective date.

Enforcement of a state rule before and after it is incorporated into a federally approved SIP is primarily a state responsibility. After the rule is federally approved as part of the SIP, however, it becomes enforceable by the EPA, which can then take enforcement actions against violators. The CAA also offers citizens legal recourse to address SIP violations, as provided in section 304 of the Act.

Section 112 of the Clean Air Act Amendments of 1990 requires that the EPA develop regulations for the control of hazardous air pollutant (HAP) emissions from major sources. On July 16, 1992, EPA published a list of source categories that emit one or more of these air toxics. For listed categories of major sources (those that emit 10 tons/year or more of a listed pollutant or 25 tons or more of a combination of pollutants), the Act requires EPA to develop standards that will reflect the application of maximum achievable control technology (MACT). On December 14, 1994 (59 FR 64303), EPA issued a final NESHAP for Bulk Gasoline Terminals and Pipeline Breakout Stations, 40 CFR part 63, Subpart R, which includes new vapor tightness standards for gasoline transports and a pressure standard for the tank internal vapor valve. EPA later published amendments changing compliance dates and making other corrections and clarifications (60 FR 7627, February 8, 1995; 60 FR 32912, June 26, 1995; 61 FR 7718, February 29, 1996; 62 FR 9087, February 28 1997). The CAA authorizes states to implement and enforce the NESHAP upon EPA approval.

Indiana's gasoline transport requirements contained in 326 IAC Article 8 provide for vapor tightness standards for the loading of gasoline cargo tanks at bulk gasoline terminals and pipeline breakout stations in Indiana.

Current State regulations at 326 IAC 8-4-7 (Gasoline transports) and 326 IAC 8-4-9 (Leaks from transports and vapor collection systems; records) require that gasoline transports loading at bulk gasoline terminals and pipeline breakout stations be vapor tight and tested annually for vapor tightness, following procedures consistent with Appendix A of “Control of Organic Compound Leaks from Gasoline Tank Trucks and Vapor Collection Systems,” EPA-450/2-78-051. The regulations apply to transport loading at terminals and breakout stations in Clark, Elkhart, Floyd, Hendricks, Lake, Marion, Porter, St. Joseph, Boone, Dearborn, Hamilton, Hancock, Harrison, Johnson, Morgan, and Shelby counties, and to all new sources.

Gasoline emissions are a significant source of air pollution within the State of Indiana. The amendments to 326 IAC Article 8 will tighten vapor standards for the loading of gasoline transports and will reduce HAP emissions, as well as volatile organic compound (VOC) emissions that contribute to the formation of ozone.

Indiana held public hearings on this rule on December 2, 1998 and May 5, 1999, in Indianapolis, Indiana. The Indiana Air Pollution Control Board adopted final rules on May 5, 1999. The rule revisions became effective November 5, 1999, and were formally submitted to EPA on July 18, 2000, as a revision to the Indiana SIP for ozone. In addition, Indiana submitted two addendums on January 11, 2002 and March 13, 2002 correcting typographical, clerical, or spelling errors found in the final rules submitted on July 18, 2000.

Indiana's amendments to 326 IAC 8-4-7 (Gasoline transports) and 326 IAC 8-4-9 (Leaks from transports and vapor collection systems; records) expand the NESHAP's new standards to apply to gasoline transports loading at all sources in the previously named counties and to new sources.

The NESHAP for Bulk Gasoline Terminals and Pipeline Breakout Stations (40 CFR part 63, subpart R) establishes an internal vapor valve pressure standard and more stringent limits for maximum allowable pressure or vacuum change in “Determination of Vapor Tightness of Gasoline Delivery Tank Using Pressure-Vacuum Test,” 40 CFR part 60, appendix A, Method 27, commonly referred to as the “modified Method 27 test.” The Indiana rule amends the testing requirement in 326 IAC 8-4-9 (Leaks from transports and vapor collection systems; records) for gasoline transports in order to be consistent with the standards in the modified Method 27 test.

The Indiana rule also expands the definition of “leak” in 326 IAC 8-4-7(a)(3), consistent with that found in the NESHAP at 40 CFR 63.425(f), and revises language in 326 IAC 8-4-7 to allow the use of instruments, in addition to visible detection, to detect leaks in gasoline transports. The rule adds the same definition of “leak” to 326 IAC 8-4-9(d) and changes the test method for vapor balance systems to be consistent with current test methods found at 40 CFR part 60, appendix A, Method 21. In addition, 326 IAC 20-10-1 (Applicability; incorporation by reference of federal standards) incorporates by reference the portions of the NESHAP for Bulk Gasoline Terminals and Pipelines Breakout Stations, 40 CFR part 63, subpart R, pertaining to the new standards.

The rest of the changes to the rule are administrative in nature and are intended to enhance the clarity of the rule.

Our review of the material submitted indicates that the changes made to the Indiana gasoline transports rule address and exceed the federal program requirements. These rule revisions are, therefore, approvable.

We are approving, through direct final rulemaking, revisions to Indiana's gasoline transport testing requirements. We are publishing this action without prior proposal because we view this as a noncontroversial revision and anticipate no adverse comments. However, in a separate document in this Federal Register publication, we are proposing to approve the SIP revision should adverse written comments be filed. This action will be effective without further notice unless we receive relevant adverse written comment by July 1, 2002. Should we receive such comments, we will publish a final rule informing the public that this action will not take effect. Any parties interested in commenting on this action should do so at this time. If no such comments are received, this action will be effective on July 30, 2002.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This action merely approves state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule approves pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Public Law 104-4).

This rule also does not have tribal implications because it will not have a substantial direct effect 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, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). This action also does not have Federalism implications because it does 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, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely approves a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This rule also is not subject to Executive Order 13045 “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. This rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

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. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the 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).

Under section 307(b)(1) of the Clean Air Act, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by July 30, 2002. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this rule for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements. (See section 307(b)(2).)

The BLM published a final rule in the Federal Register of May 6, 2002, containing the new address of the BLM Oregon State Office, which moved in January 2002. Inadvertently, we omitted amendatory language for the change. This document corrects that error.

Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date of the issue requested and enclose a check or money order payable to the Superintendent of Documents, or enclose your Visa or Master Card number and expiration date. Credit card orders can also be placed by calling the order desk at (202) 512-1800 or by faxing to (202) 512-2250. The cost for each copy is $9. As an alternative, you can view and photocopy the Federal Register document at most libraries designated as Federal Depository Libraries and at many other public and academic libraries throughout the country that receive the Federal Register . You may also obtain a copy from the following web sites:

Employers may need to be identified when they transmit information to health plans to enroll or disenroll an employee as a participant in a health plan. Employers, health care providers, and health plans may need to identify the source or receiver of eligibility or benefit information. Although the source is usually a health plan, it could be an employer. Employers and health plans may need to identify the employer when making or keeping track of health plan premium payments or contributions relating to an employee. In all cases, in health care transactions, where information about the employer is transmitted electronically, it will be beneficial to identify the employer using a standard identifier.

The Congress included provisions to address the need for a standard unique employer identifier and other administrative simplification issues in the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104-191, which became effective on August 21, 1996. Through subtitle F of title II of that law, the Congress added to title XI of the Social Security Act a new part C, titled Administrative Simplification (Public Law 104-191) affects several titles in the United States Code. Hereafter, we refer to the Social Security Act as the Act; we refer to the other laws cited in this document by their names.) The purpose of this part is to improve the Medicare and Medicaid programs in particular and the efficiency and effectiveness of the health care system in general by encouraging the development of a health information system through the establishment of standards and requirements to facilitate the electronic transmission of certain health information.

Part C of title XI consists of sections 1171 through 1179 of the Act. These sections define various terms and impose several requirements on the Secretary, health plans, health care clearinghouses, and certain health care providers concerning electronic transmission of health information, and security and privacy.

We discussed the legislation in greater detail in a final rule for Standards for Electronic Transactions (the Transactions Rule) published on August 17, 2000 (65 FR 50312), and in a final rule for Privacy of Individually Identifiable Health Information (the Privacy Rule), published on December 28, 2000 (65 FR 82462). Rather than repeating the discussion here, we refer the reader to those documents for further information.

Section 1172 of the Act makes any standard adopted under part C applicable to (1) all health plans, (2) all health care clearinghouses, and (3) any health care provider who transmits any health information in electronic form in connection with a transaction referred to in section 1173 (a)(1).

In complying with the requirements of part C of title XI, the Secretary must rely on the recommendations of the National Committee on Vital Health Statistics (NCVHS), consult with appropriate State, Federal, and private agencies or organizations, and publish the recommendations of the NCVHS in the Federal Register .

Paragraph (b) of section 1173 of the Act requires the Secretary to adopt standards for unique health identifiers for all employers (in addition to identifiers for individuals, health plans, and health care providers) for use in the health care system, and requires further that the adopted standards specify for what purposes unique health identifiers may be used.

On June 16, 1998 (63 FR 32784), we proposed a national standard employer identifier and requirements concerning its implementation. That rule would have established requirements that health plans, health care clearinghouses, and health care providers would have to meet to comply with the requirements for use of a unique employer identifier in electronic transactions.

We proposed to add a new part to title 45 of the Code of Federal Regulations (63 FR 32784) for health plans, health care providers, and health care clearinghouses in general. The new part would have been part 142 of title 45 and would have been titled Administrative Requirements. Subpart F would have contained provisions specific to the employer identifier. In this final rule, we have codified these provisions in Part 162.

The proposed rule for the employer identifier (63 FR 32784) discussed applicability of HIPAA to all health plans, all health care clearinghouses, and those health care providers that transmit any health information in electronic form in connection with transactions referred to in section 1173(a)(1) of the Act.

The Transactions Rule (65 FR 50312) contains general requirements for administrative simplification, including applicability of the regulations, general effective dates, and definitions. We refer the reader to that rule for the discussion of comments and responses and for the actual regulations that were codified in the Code of Federal Regulations for the general requirements (45 CFR part 160 Subpart A, and 45 CFR part 162 Subparts A and I). In addition, some provisions in part 160 were further revised by the Privacy Rule published on December 28, 2000 (65 FR 82462).

We proposed to define “employer” as 26 U.S.C. 3401(d) does: a person (or an entity) for whom an individual performs or performed any service, of any nature, as the employee of that person (or that entity) except for the following:

(1) If the entity for whom the individual performs or performed the services does not have control of the payment of the wages for the services, the term “employer” means the entity having control of the payment of the wages.

(2) If the entity pays wages on behalf of a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, the term “employer” means that entity.

We did not receive any comments on our definition of “employer.” We note here that our proposed definition incorrectly omitted a reference to 26 U.S.C. 3401(a) of the Internal Revenue Code that is part of the definition at 26 U.S.C. 3401(d) of the Internal Revenue Code. We clarify in this rule that our definition of “employer” is as it appears in 26 U.S.C. 3401(d). We also note that the use of the term “individual” in the definition at 26 U.S.C. 3401(d) is not the same as in the final Privacy Rule. In the Privacy Rule, the word “individual” means a person who is the subject of protected health information. In the definition of employer, the word “individual” means a person who is an employee.

The EIN is defined in 26 CFR 301.7701-12. We proposed to define “Employer identification number” (EIN) as 26 CFR 301.7701-12 does: “the taxpayer identifying number of an individual or other person (whether or not an employer) which is assigned pursuant to 26 U.S.C. 6011(b) or corresponding provisions of prior law, or pursuant to 26 U.S.C. 6109, and in which nine digits are separated by a hyphen, as follows: 00-0000000.”

In this final rule, we deleted the formatting description from our definition of EIN. We continue to define EIN as the employer identification number, as assigned by the IRS. Deletion of the formatting description from our regulatory definition gives us flexibility, in case the IRS should decide in the future to change the format of the EIN.

We proposed that § 142.602, National employer identifier standard, would describe the employer identifier standard. There currently exists no standard for employer identification that has been developed, adopted, or modified by a standard setting organization after consultation with the National Uniform Billing Committee (NUBC), the National Uniform Claim Committee (NUCC), the Workgroup for Electronic Data Interchange (WEDI), and the American Dental Association (ADA). Therefore, we would designate a new standard.

We proposed as the standard the employer identification number (EIN), which is assigned by the Internal Revenue Service (IRS), Department of the Treasury. As stated in II. Provisions of the Proposed Regulations, A. Definitions, we define EIN as the employer identification number assigned by the IRS, and we delete the formatting description in our definition.

Proposed § 142.602 has become § 162.605.

In the proposed rule (63 FR 32787), we noted that the Act does not bind employers to use the standard. However, covered health care providers, health plans, and health care clearinghouses are bound to use the standard, where required, in electronic health transactions.

1. Health plans.

In § 142.604, Requirements: Health plans, we proposed to require health plans to accept the EIN on all standard transactions and transmit the EIN on all standard transactions that require an employer identifier to identify a person or entity as an employer.

2. Health care clearinghouses.

We proposed to require in § 142.606, Requirements: Health care clearinghouses, that each health care clearinghouse use the EIN on all standard transactions that require an employer identifier to identify a person or entity as an employer.

3. Health care providers.

In § 142.608, Requirements: Health care providers, we proposed to require each health care provider to use the EIN, wherever required, on all standard transactions that require an employer identifier to identify a person or entity as an employer.

4. Employers.

In § 142.610, Requirements: Employers, we proposed to require each employer to disclose its EIN, when requested, to any entity that conducts standard electronic transactions that require that employer's identifier to identify a person or entity as an employer.

Proposed §§ 142.604, 142.606, and 142.608 have been consolidated into § 162.610, and proposed § 142.610 has been removed in this final rule.

We proposed that health plans would be required to comply with our requirements as follows:

• Each health plan that is not a small health plan would have to comply with the requirements of § 142.604, now consolidated into § 162.610, no later than 24 months after the effective date of the final rule. (Note, proposed § 142.104, General requirements for health plans, is addressed in the final Transactions Rule (65 FR 50369).)

• Each small health plan would have to comply with the requirements of § 142.604, now consolidated into § 162.610, no later than 36 months after the effective date of the final rule. (Note, proposed § 142.104, General requirements for health plans, is addressed in the final Transactions Rule (65 FR 50369).)

• If the Secretary adopts a modification to a standard or implementation specification, the implementation date of the modification would be no earlier than the 180th day following the adoption of the modification. The Secretary would determine the actual date, taking into account the time needed to comply due to the nature and extent of the modification. The Secretary would be able to extend the time for compliance for small health plans.

• We proposed that health care clearinghouses and health care providers must begin using the standard specified in § 142.602, now § 162.605, no later than 24 months after the effective date of the final rule.

All general comments on applicability of the HIPAA standards were addressed in the Transactions Rule. These comments will not be repeated here.

There were 61 commenters on the proposed rule. These commenters included Federal and State government agencies, private organizations (including health plans and health care provider professional organizations), and individuals.

Comment: Two commenters said there should be no regulation as to the use or non-use of the hyphen as part of the format for the EIN. Eight commenters stated the hyphen should be omitted when transmitting standard transactions. One commenter said it should be omitted on standard transactions but used in human-readable formats. One commenter stated that the use of a modifier would be beneficial for identifying specific State agencies under a single EIN; another commenter recommended that the EIN not be used with a modifier. A few commenters recommended a check digit be used with the EIN; a larger number of commenters recommended a check digit not be used.

Response: The hyphen is part of the EIN, as it is defined at 26 CFR 301.7701-12 and assigned by the IRS. The standard transaction formats use alphanumeric fields for the EIN. These fields can accommodate the EIN with or without the hyphen. The implementation guides for the standard transactions are silent on whether the hyphen must be transmitted. Most translator software can easily add the hyphen to or remove it from the EIN field within standard transactions. In spite of the flexibility of the standard transaction formats and the capability of translators to handle EINs with and without the hyphen, we believe that we should require standardization of the identifier format within the standard transactions, in order to promote simplification and savings. We further believe that it would be confusing to adopt the EIN as the standard unique employer identifier, but then to direct that the adopted standard be modified, by removing the hyphen, before use in standard transactions. It would be equally confusing to adopt “the EIN minus the hyphen” as the standard, because this identifier would still be referred to informally as the EIN, and it would not be clear when the hyphen is needed and when it is not. We believe it is advantageous to adopt the EIN exactly as assigned by the IRS. This strategy is clearer and more flexible, should the IRS, at some time in the future, modify its defined format of the EIN for any reason. We therefore require that the EIN as assigned by the IRS be used in the standard transactions, which means at present that the hyphen must be transmitted as part of the EIN.

The EIN was selected as a cost-effective choice for the standard employer identifier because the IRS is already issuing it and employers already have this identifier. The IRS has no project initiated at this time to modify the format of the EIN or to add a check digit to the EIN.

The presence of a check digit can help in detection of keying errors made in data entry of a number. We could have specified a check digit to be used with the IRS-issued EIN. However, we believe that in many cases where the EIN is used in standard transactions, it will be on file electronically and will not need to be inserted through data entry. Therefore, the benefits of a check digit would be modest.

Modification of the IRS-issued identifier by addition of modifiers or a check digit for use in health care transactions would require costly additional processes and would negate the benefits of using the existing IRS infrastructure; therefore, we do not add modifiers or a check digit to the IRS format.

Comment: Several commenters thought that the EIN was proposed to identify health care providers. Some stated that the EIN was not specific enough to uniquely identify health care providers. Others expressed privacy concerns if the EIN were used to identify health care providers.

Response: The same entity may have multiple roles in health care transactions. On May 7, 1998, we proposed that the National Provider Identifier, not the EIN, be adopted to uniquely identify health care providers (63 FR 25320). The EIN will be used to identify an entity in the employer role. For example, a hospital may be both an employer and a health care provider. The hospital would use its EIN to identify itself when conducting transactions in an employer role, for example, making premium payments on behalf of its employees. When making claims for health care services furnished, it would use its National Provider Identifier.

Comment: Several commenters thought that the EIN was proposed to identify the patient's health plan or insurance coverage. One commenter stated one identifier should be used for both payer and employer. One commenter stated it would be confusing to use a different identifier for employee welfare benefit plans and employers, since such plans are sponsored by employers.

Response: The EIN will be used to identify an entity acting in the employer role in standard transactions. It will not identify the patient's health plan or insurance coverage. It will not replace the group number, account number, policy number, or subscriber number. Although it is true that the employee welfare benefit plans are often sponsored by employers, the EIN will be used to identify only the employer, not the health plan. In a future proposed rule, HHS intends to propose a health plan identifier to identify health plans. Employee welfare benefit plans would be identified by a health plan identifier.

Comment: Several commenters supported the choice of the EIN. Two commenters stated the EIN did not meet the 10 criteria established for selection of a standard under the Act.

Response: Of the two commenters stating that the EIN did not meet the criteria (see 65 FR 50351-50352 for the list of criteria), one commenter was not specific about how the EIN did not meet the criteria. The second commenter incorrectly believed that the EIN was being proposed to identify the insurance coverage of a patient rather than to identify an employer in standard transactions.

Comment: One commenter stated that we should clarify the meaning of the terms “required” and “situational.” Many commenters stated that the usage of the EIN of the employer in health care transactions was unclear and requested clarification, i.e., whether the EIN was required, situational, etc. One commenter said the EIN of the employer should be a situational data element on all electronic data interchange (EDI) transactions. Several commenters stated that the EIN should be required only on transactions exchanged between an employer and a health plan. Several commenters said they needed clarification on which transactions would use the EIN.

Response: As used with respect to a data element in a standard transaction, the word “required” means that the data element is required according to the standard implementation guide for that transaction. The word “situational” means that the data element or choice of a specific code value is required if the data condition described in the standard implementation guide occurs. For purposes of this rule, if use of the employer identifier is situational and the data condition occurs, the EIN is considered to be required.

The X12N Version 4010 transaction implementation guides are the authority for specific information on the use of the EIN to identify the employer in X12N transactions. The following summarizes use of the EIN to identify the employer in X12N transactions:

• X12N 270/271 Eligibility for a Health Plan—Situational (Used to identify the employer as the source of eligibility information when the employer maintains that information.) (Note: Although the implementation guide does support the use by employers, and the information receiver can be identified specifically as an employer, employer participation in this transaction is not a HIPAA business purpose.)

• X12N 276/277 Health Care Claims Status—Situational (Used to identify the employer in worker's compensation claims. This usage covers situations where the employer is considered the subscriber for a patient when the claim is a result of a work-related injury or illness. In this circumstance, the health care provider and health plan are using the standard named in the final Transactions Rule although this is not required by the Final Rule because one or both are not covered entities or this is a business purpose not covered under the final Transactions Rule. In most cases, the health care provider will already know the EIN because it will have a relationship with the employer for worker's compensation cases or because provision of the EIN is required by local, State, or other regulation.)

• X12N 820 Health Plan Premium Payments—Situational (Used to identify an entity who is an employer as the remitter of the premium or as the entity to which the premium payment applies.)

• X12N 834 Enrollment and Disenrollment in a Health Plan—Required (when used to identify the sponsor of the health plan when the sponsor is an employer.) Situational (when used to identify the employer of a person covered under a health plan when that employer is not the sponsor. The non-sponsor employer is identified only when the contract between the sponsor and the health plan requires that the sponsor report this information.)

An employer identifier is not used to identify an entity as an employer in the following X12N standard transactions:

• X12N 278 Referral Certification and Authorization

• X12N 835 Health Care Payment and Remittance Advice

• X12N 837 Health Care Claims or Equivalent Encounter Information— Dental

• X12N 837 Health Care Claims or Equivalent Encounter Information—Professional

• X12N 837 Health Care Claims or Equivalent Encounter Information—Institutional

The EIN of the employer is optional in the NCPDP retail pharmacy transactions. The implementation guides for the NCPDP transaction standards are the authorities for specific information on the use of the EIN of the employer in the NCPDP standard transactions.

Comment: Many commenters expressed concern that health care providers would be required to report the EIN of the patient's or subscriber's employer on standard transactions. They requested more specific data related to the costs to health care providers of reporting these EINs. They noted that health care providers do not routinely obtain and patients do not generally know these EINs. Some commenters noted that, with the exception of the X12N 834 enrollment transaction, the X12N implementation guides specify the employer identifier is situational in all occurrences. Health care providers are not a party to the X12N 834 and thus would not be required to report a patient's employer's EIN. Many commenters therefore recommended that all references to the use of employer identifiers by health care providers be deleted from the regulation. One commenter noted that third party administrators sometimes require health care providers to report the employer on eligibility transactions, and that subcontracting health care providers in Provider Sponsored Organizations sometimes direct eligibility transactions to the employer. Some commenters stated that if health care providers were required to report or use the EIN of the patient's employer, health insurance cards should carry this EIN; otherwise, health cards should not carry the EIN.

Response: Health care providers do not conduct the X12N 834 enrollment transaction, the only standard transaction where the employer identifier is required. In all standard transactions that a health care provider might conduct, the employer identifier is either not a permitted value or is one of a choice of alternate values. In the situations where the employer identifier may be used in a standard transaction used by covered entities under HIPAA, the employer identifier is used only if the party being identified is an employer and its identifier has been given to the health care provider as the electronic transaction identifier for the employer as an information source in an eligibility transaction. The standard transaction for eligibility inquiry and response does not contain data elements for identifying the subscriber's employer. We expect that health care providers will be able to obtain the EIN from the employer, as is the current practice, for the limited cases when an EIN is needed in covered standard transactions initiated by the health care provider.

Comment: Some commenters stated that employers may not want to disclose their EINs and requested that the final rule explicitly state the penalties for an employer that does not disclose its EIN. Some were concerned that the EIN may not be accessible to parties needing the EIN for health care transactions. One commenter said that because of administrative costs, employers will not want to provide their EINs. Another commenter stated that employers would be so overwhelmed by requests for their EINs that they would place them on everything to limit staff time required for answering these requests.

Response: These concerns were generated because commenters incorrectly thought that EINs would be required in transactions initiated by health care providers or others who would not know the EIN. Although identification of the subscriber's employer was part of the data content of the institutional health care claim transaction in the proposed Transactions Rule, that data element was removed from the institutional health care claim transaction that was adopted by the final Transactions Rule. In fact, the EIN will be used, for the most part, in transactions initiated by the employer itself. The EIN is required for the enrollment in a health plan standard transaction, which is usually initiated by employers (which are not covered entities). In other transactions, such as the eligibility for a health plan transaction, the employer identifier only occurs in conjunction with the use of the standard transaction between one or more organizations who are noncovered entities under HIPAA, or as one of the possible choices of identifiers for the employer. In the eligibility for a health plan transaction, the employer identifier can be used as one of the permitted identifiers for the employer as the source or receiver of eligibility information. Thus, when a health care provider is initiating the eligibility for a health plan transaction to an employer, in the process of determining the proper electronic routing identifiers and other electronic identifiers, the health care provider has the opportunity to obtain an EIN if required by the employer as its electronic routing or other electronic identifier. We believe that use of the EIN will not generally create compliance problems for covered entities.

We had proposed to require each employer to disclose its EIN, upon request, to any covered entity that needed to use that employer's EIN in a standard transaction. This requirement is not adopted in this final rule because employers are not covered entities under the Administrative Simplification provisions of HIPAA. However, we believe that employers will have a strong incentive to continue the common business practice of providing their EINs voluntarily in those rare cases where it is not already known in order to maintain or improve the efficiency of administrative processes.

Comment: Many commenters thought that the EIN of the patient's employer or of the patient would be required in health care claim and encounter transactions. These commenters stated that use of the EIN in these transactions is an invasion of privacy, both personal and medical. Several commenters stated that implementation of a national standard employer identifier will permit unwarranted Federal monitoring of patient care and linking of medical records through employers. They stated that the possibility of Federal monitoring and linking of medical records will create barriers of distrust between doctors and patients and between employers and employees. They stated use of the EIN will eventually lead to a numbering system on citizens that will make it easier to track citizens from one employer to another, build citizen profiles, or discriminate against citizens based upon health status. One commenter thought that the use of the EIN would result in the collection of centralized medical records and had potential for abuse. Several commenters stated this regulation was an improper role of government. Several commenters said they would like to shelve the proposed rule, while others said there should be a nationally publicized hearing or that the use of the EIN should go to a public vote and not be decided by the government. Several commenters were concerned about the security of medical records stored in central computer locations. One commenter supported a “Patients' Bill of Rights” with enforcement through the court systems. One commenter requested clarification of penalties for patients who refuse to give the names or EINs of their employers. One commenter said that States should not be required to give employers access to benefit information. This commenter stated this would be unacceptable, based on confidentiality and administrative burden.

Response: Many commenters misunderstood the proposed application of the employer identifier. The inclusion of the employer identifier is optional in the NCPDP retail pharmacy claim. The employer identifier is not used at all to identify an entity as an employer in the X12N standard health care claim or equivalent encounter information transactions. It is used primarily to identify employers that are sending or receiving transactions for enrollment in a health plan or payment of premiums. Those transactions do not carry information about the treatment of individuals. We do not believe the employer identifier will facilitate federal monitoring of patient care, collection of central medical records, or tracking of citizens. We do not believe it will lead to barriers of distrust between doctors and patients, or between employers and employees. HHS proposed standards for security of health information, including medical records, in a proposed rule (63 FR 43242) published on August 12, 1998. HHS also adopted standards for privacy of individually identifiable health information in the Privacy Rule (65 FR 82462) published December 28, 2000. We do not require patients to give the EIN of their employers to anyone or require States to give employers access to benefit information.

Comment: One commenter recommended the revision of §§ 142.604 and 142.608 as follows: “Each health plan/health care provider must accept and transmit the national employer identifier of any employer that must be identified in any standard transaction.” One commenter stated that § 142.606 should be deleted since clearinghouses do not collect, validate, or supply data elements to the transaction.

Response: We agree that §§ 142.604 and 142.608 should be revised for clarity. We do not agree that § 142.606 should be deleted because health care clearinghouses are covered entities and are required to use the standards, but we made a similar revision as that made to §§ 142.604 and 142.608. These revisions are reflected in § 162.610.

Comment: One commenter recommended HHS notify employers of this proposal for national use of EINs.

Response: Employers are not covered entities, and this rule places no requirements upon them. In many cases, employers already use the EIN to identify themselves in standard transactions. Use of the EIN by employers in standard transactions will continue to be voluntary. While employers are not covered entities under this rule, health plans are free, as part of their business arrangements with employers, to require employers to use the standard transactions and to provide their EINs for this purpose. We have provided public notice of this proposal by publication of the proposed rule in the Federal Register on June 16, 1998 (63 FR 32784) and by publication of this final rule in the Federal Register .

Comment: Several commenters requested clarification of the employer enumeration process and how information in the employer identifier system would be maintained. They also stated that timely and accurate updates to this system are critical to accurate public health data collection efforts. One commenter wanted confirmation that the plans for authenticating prior to the IRS's issuance of an EIN would remain the same as today. It was suggested that one or more centers be established to answer questions about the employer identifier and redirect questions to the IRS or other Departments.

Response: The IRS maintains the EIN enumeration system and database, and makes information on the EIN available through its web site at http://www.irs.ustreas.gov/. The IRS authentication, enumeration and update processes and the IRS enumeration system will not be changed as a result of this regulation. The IRS answers questions about the EIN through its web site. HHS answers questions about the Administrative Simplification regulations through its web site at http://aspe.hhs.gov/admnsimp.

Comment: One commenter asked whether the EIN is always the same as the taxpayer identifying number.

Response: The taxpayer identifying number may be an EIN, a Social Security Number, or an IRS individual taxpayer identification number. The IRS, at 26 CFR 301.7701-12, defines the Employer Identification Number as “the taxpayer identifying number of an individual or other person (whether or not an employer) which is assigned pursuant to section 6011(b) or corresponding provisions of prior law, or pursuant to section 6109, and in which nine digits are separated by a hyphen, as follows: 00-0000000.”

Comment: A commenter wanted to know the IRS policy on reusing an EIN.

Response: Currently, the IRS does not reuse EINs; that is, it does not assign a previously used EIN to a new applicant for an EIN. IRS Publication Number 1635, “Understanding Your EIN, Employer Identification Numbers,” includes information on business and corporate changes that would allow continued use of an organization's EIN or would require issuance of a new EIN. This publication can be ordered by calling (800) 829-3676 or can be downloaded from the IRS web site at http://www.irs.ustreas.gov/plain/bus_info/pub1635.html.

Comment: Several commenters recommended the use of an online EIN database and suggested an IRS directory be established. Several commenters recommended use of a standards-based directory schema. Another stated it would be necessary to have a directory only if transactions other than the X12N 834 Health Care Benefit Enrollment were to require use of the EIN. This commenter stated the X12N 834 transaction would not require a directory since it is initiated by employers.

Response: For the most part, the EIN will be used in HIPAA transactions initiated by the employer. The employer will know its own EIN; therefore, an on-line public directory will not be necessary. In the few cases where a standard transaction that requires an employer's identifier is initiated by an entity other than the employer, we expect that the entity will obtain the EIN from the employer, as is the current practice.

Comment: A concern was raised by one commenter about the length of time it would take to receive an EIN and how both Medicare and Medicaid claims would be paid if the employer did not have an EIN. One commenter said that the proposed rule makes electronic transmissions impossible for any employer that lacks an EIN or refuses to disclose its EIN. Two commenters suggested that the IRS determine those employers that do not already have EINs and that HHS require those named by the IRS to obtain EINs. Another commenter suggested that instructions be made available on what to do if an employer does not have an EIN. One commenter stated that employers utilizing Social Security Numbers for tax reporting purposes should be required to apply for EINs.

Response: Many of these concerns were based on an incorrect belief that the patient's employer's EIN would be required in standard claim transactions. Actually, the patient's employer's EIN is not included in the X12N standard claim transactions and is optional in the NCPDP retail pharmacy claim. We know of no situation where an employer identifier would be required in a standard transaction and the employer would not have an EIN. The employer identifier is used in standard transactions to identify the employer of employees who are subjects in the transaction. Any business that pays wages to one or more employees is required to have an EIN as its taxpayer identifying number. A sole proprietor who has no employees or who files no excise or pension tax return is the only business person who is not required to obtain an EIN; a sole proprietor with no employees would not need to be identified as an employer in standard transactions. The IRS publication, “Understanding Your EIN, Employer Identification Numbers,” Publication 1635, states that the IRS generally assigns an EIN within 4-5 weeks of receiving an application by mail or assigns an EIN immediately via the tele-TIN telephone process. For the telephone number in each state, see the “Where to Apply” section in Publication 1635. Publication 1635 can be downloaded from the IRS web site at http://www.irs.ustreas.gov/plain/bus_info/pub1635.html or can be ordered by calling (800) 829-3676.

Comment: One Medicaid State agency requested clarification on whether Medicaid State agencies would use the EIN when making health plan premium payments or when making capitation payments to managed care plans. Other commenters had concerns of how health plan sponsors that are not employers would be identified in standard transactions. One commenter requested that the description on how to obtain an EIN (63 FR 32793) be expanded to include those non-employer entities that will need an identifier for HIPAA transactions.

Response: HIPAA requires that the Secretary adopt a standard unique health identifier for each individual, employer, health plan, and health care provider for use in the health care system. If the Medicaid State agency is making premium payments or capitation payments as an employer on behalf of its own employees, it would use its EIN. The law does not provide for adoption of a standard identifier for health plan sponsors that are not employers but that may enroll or make premium payments on behalf of other persons. We recognize that in some situations, the EIN is used to identify health plan sponsors that are not employers. This practice will not be affected by this final rule.

Comment: One commenter asked how foreign employers would be identified in standard transactions.

Response: Foreign employers are treated the same as all other employers under this rule. In this rule, we have intentionally adopted a definition of “employer” that is identical to the definition used by the Internal Revenue Service in 26 U.S.C. 3401(d). This definition covers foreign employers who pay wages to employees for whom tax withholding is required by the IRS. For purposes of this rule, it is important that any employer that enrolls or disenrolls employees in a health plan or that makes premium payments on behalf of employees to a health plan be able to be identified by the standard employer identifier. Since any business that pays wages to one or more employees is required to obtain an EIN as its taxpayer identifying number, we know of no employer that would not be able to be identified by an EIN when enrolling or disenrolling employees in a health plan or making premium payments on behalf of employees to a health plan.

Comment: In the proposed rule (63 FR 32793) we noted that some employer organizations have more than one EIN. We asked for comment on whether one EIN should be used consistently in health care transactions. One commenter noted that in some cases employer organizations with multiple EINs may be doing business with multiple health plans and using a different EIN with each plan, resulting in coordination of benefits problems. Several commenters recommended that specific guidelines be defined for using a single EIN across the board in health-related transactions. Several commenters stated that the use of multiple EINs would not be a problem. Several commenters made suggestions on which EIN should be designated for use in health care transactions, for example, the one that appears on the IRS Form W-2, Wage and Tax Statement, of the employee that is a subject of the transaction, the one that identifies the employee's employment address, or the one with the lowest numeric value. Some commenters noted that the intended purpose of the employer identifier is to identify the employer and that the employer should decide which EIN to use. Several commenters suggested that an IRS publication include information on IRS protocols for multiple EINs. Two commenters requested information about the IRS maintenance of EINs when corporate changes such as mergers occur.

Response: When a business entity is a consolidated group consisting of several corporations, each corporation may be separately identified for certain Federal tax reporting purposes, and may have its own EIN. The consolidated group may also have an EIN, under which it files a consolidated income tax return. For any relationship of an employer to an employee of that employer, only one unique EIN designates the employer. The standard unique employer identifier of an employer of a particular employee is the EIN that appears on that employee's IRS Form W-2, Wage and Tax Statement, from the employer.

The IRS regulations at 26 CFR 301.7701 contain definitions of entities that may be identified for Federal tax purposes. The instructions accompanying IRS Form SS-4, “Application for Employer Identification Number,” detail the kinds of entities that must have EINs and the situations that require an entity to obtain a new EIN. IRS publication 1635, “Understanding Your EIN, Employer Identification Numbers,” gives further information on business or corporate changes that do and do not require an entity to obtain a new EIN. IRS publications can be downloaded from the IRS web site at http://www.irs.ustreas.gov/plain/forms_pubs/index.html or ordered by calling (800) 829-3676.

Comment: One commenter was concerned about possibly conflicting Federal and State regulations for use of the EIN.

Response: This commenter did not note any particular conflicts in use of the EIN and we are not aware of any conflicts. Section 1178 of the Act discusses the effect of the Administrative Simplification provisions on State law. The general rule is that the standards adopted under the Act supersede any contrary provision of State law. For a more detailed discussion of the statutory preemption provisions and the regulatory implementation of those provisions, see 65 FR 82480 through 82481 and 65 FR 82579 through 82588.

Comment: One commenter stated that the regulations should not require the EIN on “past” health information. Another commenter expressed concern over the lack of guidelines and controls in dissemination and use of EINs for health care purposes. These commenters said that the regulation should clearly define the approved uses and cross-refer to penalties for misuse.

Response: This regulation does not require use of the EIN in transactions conducted before the compliance date. HHS intends to publish a proposed rule concerning enforcement of the HIPAA standards. Civil penalties for failure to comply with requirements and standards are covered in Section 1176 of the Act. Criminal penalties for misuse of an employer identifier are covered in Section 1177 of the Act.

Comment: One commenter questioned if the EIN would replace the United Business Identifier used in non-health transactions. Another asked if the EIN would replace other employer identifiers, or be used in addition to them.

Response: This rule does not address non-health care transactions. We cannot speak to the issue of what will happen in such transactions. The EIN is the only employer identifier in standard transactions.

Comment: Some commenters were concerned that employers would not want to use their EINs because of privacy issues. One commenter stated that effective security and confidentiality measures should protect the EIN. Three commenters stated that health data organizations and public policy researchers should have access to the EIN for public health surveillance. They wanted this access to be clarified.

Response: The confidentiality of the EIN is protected under the Internal Revenue Code. Section 26 U.S.C. § 6103 provides that, generally, taxpayer return information, including taxpayer identity (which includes a taxpayer identifying number), must be kept confidential and may not be disclosed by, among others, federal officers or employees, except as permitted by Title 26.

In this rule we make no changes to the existing access that health data organizations and public policy researchers have to the EIN. Health data organizations and researchers desiring access to data from a Federal system of records that contains the EIN should address their requests to the Freedom of Information Act official in the agency responsible for the system.

Comment: One commenter stated that the cost to implement the EIN would add to premiums paid by individuals and their families. Several commenters said the expense and resources to implement this identifier are greater than estimated. One commenter stated that more specific data related to the exact costs to health care providers should be made available for public comment prior to publication of the final rule.

Response: Those concerned with the cost of the identifier consisted primarily of commenters that incorrectly thought that health care providers would be required to use the EIN on health care claims. As noted in our previous responses, the EIN will be used primarily by employers on transactions they initiate; therefore, we do not expect the costs to be higher than those estimated in the proposed rule. When the employer identifier is used in standard transactions initiated by entities other than the employer, we expect that these entities will obtain the EIN from the employer, as is the current practice.

We are implementing the employer identifier standard, which we now refer to as the standard unique employer identifier, as we proposed in the proposed rule, incorporating minor revisions. Any revisions are noted in Section VI (Summary of Changes to the Proposed Rule).

The Internal Revenue Service (IRS) maintains the process for assigning EINs. A business can obtain an EIN by submitting, to the Internal Revenue Service, Internal Revenue Service Form SS-4, Application for Employer Identification Number. Any business that is required to furnish a taxpayer identification number (generally one that pays wages to one or more employees) must use an EIN as its taxpayer identifying number. (26 CFR 301.6109-1(a)(1)(ii)(C)). A sole proprietor who has no employees or who files no excise or pension tax returns is the only business person who does not need to have an EIN as the taxpayer identifying number. We know of no situations where an employer having employees would not be able to obtain an EIN. The EIN is currently the employer identifier in most widespread use in the enrollment and disenrollment in a health plan, the eligibility for a health plan, and the health plan premium payment transactions. Employers are not required by the Act to use the EIN or conduct standard transactions. However, we believe that many employers will find that it will be to their advantage to do so.

The IRS, in a letter to us dated January 16, 1998, stated that “the use of the EIN as a unique identifying number in all health care transactions would not present a problem for the (Internal Revenue) Service in any way.” The IRS further expressed the “hope that the use of the EIN in this capacity will bring about the consistency and accuracy that are required for these types of transactions.” Two years after adoption of this standard (3 years for small health plans) covered entities must use the EIN as the employer identifier in the health-related financial and administrative transactions for which standards have been adopted by the Secretary under 45 CFR Subchapter C that require an employer identifier. We note that employers that are not health plans, health care clearinghouses, or health care providers are not bound by the Act, and use of the EIN by employers to identify themselves in the employer role is voluntary.

Examples of approved uses in standard health care transactions are the following:

• Employers could use their EINs to identify themselves in transactions making health plan premium payments to health plans on behalf of their employees.

• Employers could use the EIN to identify themselves or other employers as the source or receiver of information about eligibility.

• Employers could use their EINs to identify themselves in transactions to enroll or disenroll their employees in a health plan.

We changed the title of this regulation from National Standard Employer Identifier to Standard Unique Employer Identifier to accurately reflect the requirement under the Act for the Secretary to adopt a standard unique health identifier for each employer for use in the health care system.

We deleted the formatting description from the definition of EIN. We continue to define EIN as the employer identification number as assigned by the IRS.

We clarified that our definition of employer is as it appears in 26 U.S.C. 3401(d).

We removed the requirement for each employer to disclose its EIN, upon request, to covered entities that need to use that employer's EIN in standard transactions.

We consolidated the requirements for health care providers, health plans, and health care clearinghouses in § 162.610.

Under the Paperwork Reduction Act of 1995 (PRA), agencies are required to provide a 30-day notice in the Federal Register and solicit public comment on a collection of information requirement submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we solicit comment on the following issues:

• Whether the information collection is necessary and useful to carry out the proper functions of the agency.

• The accuracy of the agency's estimate of the information collection burden.

• The quality, utility, and clarity of the information to be collected.

• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

We are soliciting public comment on each of these issues for the following section of this document that contains information collection requirements.

While this standard would replace the use of multiple identifiers, resulting in a reduction of burden, the requirement to use and disclose information using this standard meets the definition of an agency-sponsored third-party disclosure under the Paperwork Reduction Act of 1995 (PRA). However, the burden associated with the routine or ongoing use of this requirement is excluded under the definition of “burden” at 5 CFR 1320.3(b)(2). Health care clearinghouses do not normally obtain or use the EIN except to reformat it as part of translating one transaction format to another. Adoption of the EIN does not require any changes to the way health care clearinghouses process employer identifiers. Thus, the cost of this regulation for health care clearinghouses is negligible.

As explained earlier in this document in section III. Comments and Responses Concerning the Proposed Provisions, health care providers do not conduct the only standard transaction in which the employer identifier is a required data element. In standard transactions that include the employer identifier and which may be conducted by a health care provider, the employer identifier use is situational. In such transactions, if the employer identifier is not known by the health care provider, the health care provider does not have to furnish it. The cost of this regulation for health care providers, therefore, is negligible.

The remaining burden associated with this requirement, which is subject to the PRA, is the initial one-time burden on health plans and covered health care providers to modify their current computer systems.

In most cases where a health plan would need to use an employer identifier, the health plan would have received the identifier on an incoming transaction from the employer. We estimate the one-time burden over a 3-year period on the estimated 2.55 million health plans to modify their current computer systems software would be 2 hours/$60 per entity, for a total burden of 5.1 million hours/$153 million. The maximum annual burden would be 5.1 million hours divided by 3, or 1.7 million hours, and $153 million divided by 3, or $51 million. These figures are based on the assumption that this and the other burden calculations associated with HIPAA, Title II systems modifications, may overlap. This average also takes into consideration that: (1) this standard may already be in use by several of the estimated entities; (2) modifications may be performed in an aggregate manner during the course of routine business and/or; (3) modifications may be made by contractors such as practice management vendors, in a single effort for a multitude of affected entities.

As required by section 3504(h) of the Paperwork Reduction Act of 1995, we have submitted a copy of this document to the Office of Management and Budget (OMB) for its review of these information collection requirements.

We have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132. Executive Order 12866 directs 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). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). We estimate the total maximum annual costs for all health plans to modify their computer systems software to implement the employer identifier standard to be $51 million per year, for 3 years. Therefore, we do not believe that this rule is a major rule under Executive Order 12866 or 5 U.S.C. 804(2).

Section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. We have determined that this final rule will not have a significant impact on the operations of a substantial number of small rural hospitals.

We note that the costs and savings for the administrative simplification standards were presented in the final Transactions Rule (65 FR 50350). Due to a lack of data that would permit an analysis of each individual standard, the Department chose to analyze the impact of all of the standards in total, with the exception of the privacy standards. As the effect of any one standard is affected by the implementation of other standards, it can be misleading to discuss the impact of one standard by itself. Therefore, we have done an impact analysis on the total effect of all the standards in the final Transactions Rule (65 FR 50350). This employer identifier rule is expected to represent a minor portion of the costs or savings expected from the administrative simplification standards, because of the voluntary nature of the use of this identifier by employers and the limited use of an employer identifier in standard transactions conducted by covered entities.

This final rule has been reviewed in accordance with the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1501 et seq.) and Executive Order 12866. Section 202 of UMRA requires that agencies assess anticipated costs and benefits before issuing any rule that may result in expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million. As discussed in the combined impact analysis published at 65 FR 50350, HHS estimates that implementation of the administrative simplification standards overall will require the expenditure of more than $110 million by the private sector. However, we do not believe the implementation of the employer identifier standard to be a significant regulatory action under UMRA.

The Regulatory Flexibility Act (RFA) of 1980, Pub. L. 96-354, requires us to prepare a regulatory flexibility analysis if the Secretary certifies that a regulation would have a significant economic impact on a substantial number of small entities. On November 17, 2000, the Small Business Administration (SBA) published a final rule (65 FR 69432) changing the small business size standards for the health care industry. This SBA final rule became effective December 18, 2000. The size standards that the SBA now uses are those defined by the North American Industry Classification System. Prior to that, the SBA used size standards as defined by the Standard Industrial Codes. The size standard is no longer a uniform $5 million in annual revenues for all components in the health care sector. Rather, the size standard now ranges from $6 million to $29 million. The regulatory flexibility analysis for the employer identifier is linked to the aggregate regulatory flexibility analysis for all the administrative simplification standards that appeared in the final Transactions Rule published on August 17, 2000, which predated the SBA change. It is appropriate, for the purposes of this rule, to continue to use the $5 million small business size standard that was in effect at the time of publication of the final Transactions Rule. Nonprofit organizations are considered small entities. Small government jurisdictions with a population of less than 50,000 people are also considered small entities. Individuals and States are not considered small entities.

We do not believe that this regulation will have a significant economic impact on a substantial number of small entities. The EIN is already one of the identifiers most frequently used to identify the employer in electronic health care transactions. Most clearinghouses, including small clearinghouses, already have the ability to accept and transmit the EIN when an employer identifier is required. Many health plans and health care providers already use the EIN to identify the employer in any transactions that require an employer identifier. Their current practice is to obtain the EIN from the employer, if they are the initiator of the transaction and they do not already know the EIN. We believe these entities will incur few conversion costs as a result of this regulation. There are few situations when an employer identifier is required in standard transactions initiated by health plans and no such situations for those initiated by health care providers. Converting from other employer identifiers to the EIN primarily involves the database administration task of substituting one record identifier for another in a limited number of records, which is not a costly activity. Therefore, we believe this regulation will not impose a significant economic impact on small health plans or small health care providers that convert their systems to use the EIN to identify the employer in those few situations. As stated in the Collection of Information Requirements section in this rule, we estimate the total maximum annual costs for all health plans to modify their computer systems software to be $51 million per year, for 3 years. Employers are not bound by the Act to use the standards; therefore, any use of the EIN by employers will be voluntary. Most of the use of the employer identifier in transactions will be voluntary use by employers in transactions they initiate. Therefore, we believe this regulation will not impose a significant economic impact on small employers.

In accordance with the provisions of Executive Order 12866, this final rule was reviewed by the Office of Management and Budget.

This portion of the impact analysis relates specifically to the standard that is the subject of this regulation—the employer identifier. This section describes specific impacts that relate to the employer identifier. As we indicated in the introduction to this impact analysis, however, we do not associate the specific costs and savings to the specific standards.

In all standard transactions conducted by the health care provider, the employer identifier is not used or is situational. The employer identifier is used only if the data condition described in the implementation guide occurs. In the instances when an EIN could be used by a health care provider, the EIN is situationally required only if the entity being identified is an employer and the identifier is known to the health care provider. We expect health care providers will obtain the EIN from the employer in these limited cases. However, if the health care provider cannot obtain the EIN, then the data condition has not been met and its use is not required. There are no situations in which an employer identifier is required in a standard transaction initiated by a health care provider. Any negative impact on health care providers generally will be related to the initial implementation period for health care providers that currently use an identifier other than the EIN to identify the employer in electronic health transactions. Those health care providers will incur implementation costs for converting systems from use of other employer identifiers to use of the EIN. Some health care providers will incur those costs directly and others will incur them in the form of fee increases from billing agents and health care clearinghouses.

Health plans that engage in electronic commerce will have to modify their systems to use the EIN if they do not currently use the EIN to identify the employer in standard electronic health transactions that require an employer identifier. In most cases, health plans currently obtain and use the EIN of the employer in those standard transactions that require an employer identifier. Health plans currently using an employer identifier other than the EIN will have a one-time cost impact. We estimate the total maximum cost for all health plans to be $51 million per year, over 3 years, to make these systems modifications.

Health care clearinghouses will have to modify their systems to use the EIN if they do not currently use the EIN to identify the employer in standard electronic health transactions that require an employer identifier. In most cases, health care clearinghouses currently use the EIN of the employer in those standard transactions that require an employer identifier. Health care clearinghouses currently using an employer identifier other than the EIN will have a one-time cost impact.

The implementation teams charged with designating standards under the statute have defined, with significant input from the health care industry, a set of common criteria for evaluating potential standards (see 65 FR 50351-50352). These criteria are based on direct specifications in HIPAA, the purpose of the law, and principles that support the regulatory philosophy set forth in Executive Order 12866 of September 30, 1993, and the Paperwork Reduction Act of 1995.

We assessed the various options for an employer identifier against those criteria with the overall goal of achieving the maximum benefit for the least cost. We found that the EIN met all the criteria. No other alternative employer identifier is in widespread use. No other alternative met a majority of the criteria, especially those supporting the regulatory goal of cost-effectiveness. We assessed the costs and benefits of the EIN, but we did not assess the costs and benefits of other identifier options, because they did not meet the criteria.

All covered health care providers, health plans, and health care clearinghouses that do not currently use the EIN to identify the employer in electronic health transactions that require an employer identifier would have to convert. Because the EIN is currently in widespread use as an employer identifier throughout the industry, adopting the EIN would not require conversion for most health care providers, health plans or health care clearinghouses. The selection of the EIN imposes a far smaller burden on the industry than any nonselected option and presents significant advantages in terms of cost-effectiveness, universality, and flexibility.

The first two digits of the EIN reflect the issuing Internal Revenue district. However, the EIN does not rely significantly on embedded intelligence (coded information that is part of the identifier) to identify the specific employer. For those health care providers, health plans, and health care clearinghouses that must convert to use the EIN, the complexity of the conversion would be significantly affected by the degree to which their processing systems currently rely on employer identifiers that contain embedded intelligence. Converting from one identifier that contains no embedded intelligence to another is less complex than modifying software logic to obtain needed information from other data elements. However, the use of an identifier that does not contain embedded intelligence meets the guiding principle of assuring flexibility.

In general, the shorter the identifier, the easier it is to implement. It is more likely that a shorter identifier, such as the EIN, would fit into existing data formats.

The selection of the EIN does not impose a greater burden on the industry in terms of the complexity of conversion than the nonselected options.

Executive Order 13132 of August 4, 1999, Federalism, published in the Federal Register on August 10, 1999 (64 FR 43255) requires us to ensure meaningful and timely input by State and local officials in the development of rules that have Federalism implications. Although the proposed rule (63 FR 32784) was published before the enactment of this Executive Order, the Department consulted with State and local officials as part of an outreach program early in the process of developing the proposed regulation. The Department received comments on the proposed rule from State agencies and from entities who conduct transactions with State agencies. Many of the comments referred to the costs incurred by State and local governments that will result from implementation of the HIPAA standards. We assume that government entities will have these costs offset by future savings, consistent with our projections for the private sector (see the combined impact analysis (65 FR 50350)). A Congressional Budget Office analysis made the following points: States are already in the forefront of administering the Medicaid program electronically, Medicaid State agencies can compensate (for these costs) by reducing other expenditures, and the Federal Government pays a portion of the cost of converting State Medicaid Management Information Systems.

Other comments regarding States expressed the need for clarification as to when State agencies were subject to the standards. Responses to comments from States and State organizations regarding the employer identifier standard are found elsewhere in this preamble.

In complying with the requirements of part C of title XI, the Secretary established interdepartmental implementation teams that consulted with appropriate State and Federal agencies and private organizations. These external groups consisted of the NCVHS' Subcommittee on Standards and Security, the Workgroup for Electronic Data Interchange (WEDI), the National Uniform Claim Committee (NUCC), the National Uniform Billing Committee (NUBC) and the American Dental Association (ADA). The teams also received comments on the proposed regulation from a variety of organizations, including State Medicaid agencies and other Federal agencies.

The clause at DFARS 252.247-7023, Transportation of Supplies by Sea, contains requirements for use of U.S.-flag vessels when transporting supplies by sea under a DoD contract. The clause requires a contractor to (1) submit any request for use of other than U.S.-flag vessels in writing to the contracting officer;

(2) provide a copy of the bill of lading to the contracting officer and the Maritime Administration after each shipment of supplies by sea; (3) provide with the final invoice a representation as to whether ocean transportation and U.S.-flag vessels were used in performance of the contract; and (4) include the clause in subcontracts for construction supplies, noncommercial items, and certain commercial items.

Prior to this rule, the DFARS exempted contracts and subcontracts at or below the simplified acquisition threshold from use of the clause at DFARS 252.247-7023. In accordance with 10 U.S.C. 2631, Supplies: Preference to United States Vessels, this rule eliminates the exemption. However, the rule prescribes an alternate version of the clause for contracts and subcontracts at or below the simplified acquisition threshold. The alternate version excludes the requirement for a contractor or subcontractor to provide a representation regarding ocean transportation with its final invoice.

DoD published a proposed rule at 66 FR 47153 on September 11, 2001. Five sources submitted comments on the proposed rule. A summary of the comments and the DoD response is provided below:

Comment: The rule is contrary to Section 4101 of the Federal Acquisition Streamlining Act of 1994 (FASA) (Public Law 103-355; 41 U.S.C. 429), which requires the Federal Acquisition Regulation (FAR) to include 10 U.S.C. 2631 in a list of laws that are inapplicable to contracts and subcontracts at or below the simplified acquisition threshold unless the Federal Acquisition Regulatory Council makes a written determination that it would not be in the best interest of the Federal Government to exempt such contracts and subcontracts.

DoD Response: The list of laws referred to by the respondent applies to laws enacted after FASA. 10 U.S.C. 2631 has been in existence since 1904. There is no statutory authority to exempt 10 U.S.C. 2631 for contracts or subcontracts at or below the simplified acquisition threshold. In addition, the policy in this DFARS rule is consistent with the FAR rule published at 65 FR 24324 on April 25, 2000, which applies the preference for U.S.-flag vessels to contracts awarded using simplified acquisition procedures.

Comment: The rule is contrary to Section 4201(a) of FASA (41 U.S.C. 427(a)), which requires that the FAR provide special simplified procedures for purchases of property and services for amounts not greater than the simplified acquisition threshold. Compliance with 10 U.S.C. 2631 for such purchases of property would impose unreasonable administrative burdens on affected contractors and subcontractors.

DoD Response: The rule is consistent with the provisions of 41 U.S.C. 427 in that it seeks to avoid overly burdensome reporting requirements for acquisitions at or below the simplified acquisition threshold. The rule does not require use of the provision at DFARS 252.247-7022, Representation of Extent of Transportation by Sea, or the clause at DFARS 252.247-7024, Notification of Transportation of Supplies by Sea, in acquisitions at or below the simplified acquisition threshold. Additionally, the rule limits the requirements of the clause at DFARS 252.247-7023, Transportation of Supplies by Sea, in contracts and subcontracts at or below the simplified acquisition threshold by excluding from those contracts and subcontracts the requirement for a contractor or subcontractor to provide a representation regarding ocean transportation with its final invoice.

Comment: DFARS 247.573(a)(2) exempts solicitations valued at or below the simplified acquisition threshold from the requirement for offerors to represent whether or not ocean transportation will be used in performance of the contract. This representation (252.247-7022) helps to ensure that an offeror is cognizant of requirements for use of U.S.-flag vessels and that the contracting officer is aware of requirements for ocean transportation. Elimination of this representation is likely to increase incidents of non-compliance with Cargo Preference laws and adversely impact the U.S.-flag merchant marine. In addition, the new Alternate III for the clause at 252.247-7023, Transportation of Supplies by Sea, eliminates the following requirements for contracts and subcontracts at or below the simplified acquisition threshold: (1) The requirement for a contractor to provide a representation regarding ocean transportation with its final invoice; (2) The requirement for the Government to reject and return an invoice that does not contain the required representation; and (3) The right of the Government to equitably adjust the contract for unauthorized use of non-U.S.-flag vessels. Elimination of these requirements diminishes the ability of the contracting officer to monitor and enforce compliance with Cargo Preference laws.

DoD Response: Due to the increased potential for use of ocean transportation in contracts exceeding the simplified acquisition threshold, the DFARS requires contractors to provide multiple representations and requires contracting officers to determine whether ocean transportation will be required during the solicitation phase of an acquisition. These actions ensure that the contracting officer has the information needed to perform the appropriate level of oversight for high dollar value acquisitions. Since only a very limited number of procurements at or below the simplified acquisition threshold will require ocean transportation, the type of representations required above the simplified acquisition threshold would create an unnecessary burden on the majority of contractors receiving contracts at or below the threshold. Therefore, DoD believes that the costs of enforcing these requirements in contracts with an anticipated value at or below the simplified acquisition threshold would far outweigh the benefits and would be contrary to the provisions of 41 U.S.C. 427. DoD believes that the rule is an appropriate balance between the need to enforce the Cargo Preference laws and the need to impose minimal burden on contractors and subcontractors (many small businesses) when the value of the contract or subcontract does not exceed the simplified acquisition threshold.

Comment: The rule removes DFARS 247.572-1(c), which (1) requires the contracting officer to ask each offeror if it will transport supplies by sea, (2) requires a contractor that did not anticipate transportation of supplies by sea when it submitted its offer to notify the Government if it later intends to use ocean transportation, and (3) requires the contractor to use U.S.-flag vessels in the transportation of supplies by sea and comply with other requirements of the clause at 252.247-7023, Transportation of Supplies by Sea. Elimination of these requirements will decrease Government oversight and will allow offerors and contractors to circumvent the requirements of the Cargo Preference laws.

DoD Response: The DFARS still contains these requirements. The text at DFARS 247.572-1(c) was removed because it was redundant of the policy found at DFARS 247.571(a), 247.573(a), 252.247-7022, 252.247-7023, and 252.247-7024.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

DoD certifies that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. , because most entities that provide ocean transportation of freight are not small businesses, and the rule minimizes the information required from offerors and contractors for acquisitions valued at or below the simplified acquisition threshold.

The Paperwork Reduction Act applies. This rule increases the number of contractors subject to the information collection requirements in paragraphs (d) and (e) of the clause at DFARS 252.247-7023. DoD estimates that this change will increase paperwork burden by approximately 240 hours. The Office of Management and Budget (OMB) has approved this information collection for use through July 31, 2004, under OMB Control Number 0704-0245.

This rule implements Section 8022 of the DoD Appropriations Act for Fiscal Year 2001 (Public Law 106-259). Section 8022 provides funding for incentive payments to DoD contractors, and subcontractors at any tier, that use Indian organizations and Indian-owned economic enterprises as subcontractors.

DoD published an interim rule at 66 FR 47110 on September 11, 2001. The rule revised DFARS 226.104 and added a new clause at DFARS 252.226-7001. The new clause is similar to the clause at FAR 52.226-1, Utilization of Indian Organizations and Indian-Owned Economic Enterprises, but contains the DoD requirement to provide for incentive payments to subcontractors at any tier.

Nineteen sources submitted comments in response to the interim rule. A summary of the comments and the DoD response is provided below:

Comment: The DFARS policy excludes contracts awarded using FAR Part 12 (commercial item) procedures from the Indian Incentive Program. This exclusion should be removed.

DoD Response: This exclusion was established under previous DFARS Case 99-D300, published at 65 FR 19858 on April 13, 2000. A change to this exclusion is outside the scope of the present case. However, the DoD Office of Small and Disadvantaged Business Utilization is continuing to study this issue.

Comment: The definition of “Indian” should be amended to include Native Hawaiians.

DoD Response: Do not concur. The statutory basis for the Indian Incentive Program is 25 U.S.C. Chapter 17 (Section 1544). The definition of “Indian” provided in 25 U.S.C. Chapter 17 (Section 1452) does not include Native Hawaiians.

Comment: Prime contractors should be required to sponsor subcontractor claims for incentive payments.

DoD Response: Do not concur. The statute authorizing the Indian Incentive Program (25 U.S.C. 1544) provides that a contractor or subcontractor may be allowed an additional amount of compensation for subcontracts awarded to Indian organizations or Indian-owned economic enterprises. There is no statutory authority for DoD to require a contractor to submit or sponsor claims for incentive payments for its subcontractors.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

DoD certifies that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. , because DoD already was implementing the Indian Incentive Program through use of the clause at FAR 52.226-1, Indian Organizations and Indian-Owned Economic Enterprises. The FAR clause permits incentive payments to large and small contractors that use Indian organizations or enterprises as subcontractors. The new DFARS clause expands the incentive payments to subcontractors at any tier. While this expansion should benefit small businesses that award lower-tier subcontracts to Indian organizations or enterprises, the economic impact should not be substantial.

The Paperwork Reduction Act does not apply because the rule does not impose any information collection requirements that require the approval of the Office of Management and Budget under 44 U.S.C. 3501, et seq.

This final rule amends the DFARS to specify that—

(1) The contractor will determine whether a particular subcontract item meets the definition of “commercial item”; and

(2) When conducting a contractor purchasing system review (CPSR), the administrative contracting officer will review the adequacy of rationale documenting commercial item determinations to ensure compliance with the definition of “commercial item” in FAR 2.101.

DoD published a proposed rule at 66 FR 47159 on September 11, 2001. Three sources submitted comments on the proposed rule. A summary of the comments and the DoD response is provided below:

Comment: Amend DFARS subpart 244.3 to add a requirement for the administrative contracting officer, when performing a CPSR, to ascertain whether the contractor is requiring its subcontractors to provide any form of cost or pricing data. This will provide insight as to whether prime contractors are correctly adhering to the definition of a commercial item.

DoD Response: The recommended additional requirement is beyond the intent of this DFARS rule. The intent of the rule is to clarify the responsibilities of contractors and administrative contracting officers regarding commercial item determinations for subcontracts, not to add new requirements for the performance of CPSRs. FAR subpart 44.3, as supplemented by this DFARS rule, provides sufficient policy regarding the extent of CPSRs.

Comment: The rule introduces additional confusion to the process of conducting CPSRs, which are now done on a risk evaluation basis. The rule does not have a threshold for the value of the prime contract or the subcontract. The rule will result in significant additional effort on the part of the buying organization to justify and support the commercial item determination for the subcontract.

DoD Response: Do not concur. In accordance with FAR 44.302, a CPSR is not performed for a specific contract. Rather, when a contractor's sales to the Government are expected to exceed $25 million during the next 12 months, the administrative contracting officer must perform a review to determine if a CPSR is needed. This rule does not change the CPSR process or increase the amount of Government oversight. The Government already had the authority to review all aspects of subcontracts that are subject to review as part of the CPSR. Documentation for commercial item determinations should be part of a contractor's normal business procedures; therefore, this rule should not result in significant additional effort.

Comment: Amend DFARS 244.402 to clarify that subcontractors are responsible for making commerciality determinations for lower-tier subcontracts.

DoD Response: The additional clarification is unnecessary, as the Government does not have privity of contract with subcontractors, and DoD administrative contracting officers do not review lower-tier subcontracts when conducting CPSRs.

Comment: The reference to FAR 15.403-1(c)(3) is unnecessary in that it pertains to the exceptions from obtaining cost or pricing data and does not clarify responsibilities for commercial item determinations.

DoD Response: The reference to FAR 15.403-1(c)(3) is relevant in situations where subcontract items are improperly designated as commercial and, as a result, are improperly exempted from cost or pricing data requirements. As outlined in FAR 44.305-3, recurring noncompliance with FAR 15.403 is a condition for withholding or withdrawing a contractor*s purchasing system approval. The language in DFARS 244.402(a) has been modified to make the point of the FAR reference clearer.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

DoD certifies that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. , because the rule merely clarifies responsibilities regarding commercial item determinations for subcontracts.

The Paperwork Reduction Act does not apply because the rule does not impose any information collection requirements that require the approval of the Office of Management and Budget under 44 U.S.C. 3501, et seq.