Prior documents in this proceeding: Notice of Hearing issued on November 2, 2000, and published in the November 8, 2000, issue of the Federal Register (65 FR 66935); Recommended Decision and Opportunity to File Written Exceptions issued on March 27, 2002, and published in the April 3, 2002, issue of the Federal Register (67 FR 15747).

This administrative action is governed by the provisions of sections 556 and 557 of Title 5 of the United States Code and, therefore, is excluded from the requirements of Executive Order 12866.

The proposed amendments were formulated based on the record of a public hearing held in Portland, Oregon, on November 29, 2000. Notice of this hearing was published in the Federal Register on November 8, 2000. The hearing was held to consider the proposed amendment of Marketing Agreement and Order No. 927, regulating the handling of winter pears grown in Oregon and Washington, hereinafter referred to collectively as the “order.” The hearing was held pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601 et seq. ), hereinafter referred to as the “Act,” and the applicable rules of practice and procedure governing the formulation of marketing agreements and orders (7 CFR Part 900). The notice of hearing contained several proposals submitted by the Committee, and one proposed by the Agricultural Marketing Service (AMS).

The Committee's proposed amendments included: authorizing the Committee to recommend maturity regulations; authorizing the Committee to recommend container and marking requirements; and changing provisions related to alternate Committee members serving for absent members at Committee meetings.

The Fruit and Vegetable Programs of AMS proposed to allow such changes as may be necessary to the order, if any of the proposed changes are adopted, so that all of the order's provisions conform with the effectuated amendments.

Upon the basis of evidence introduced at the hearing and the record thereof, the Administrator of AMS on March 27, 2002, filed with the Hearing Clerk, U.S. Department of Agriculture, a Recommended Decision and Opportunity to File Written Exceptions thereto by May 3, 2002. No exceptions were filed.

Pursuant to the requirements set forth in the Regulatory Flexibility Act (RFA), AMS has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this final regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of business subject to such actions so that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act and amendments thereto are unique in that they are normally brought about through group action of essentially small entities acting on their own behalf. Thus, both the RFA and the Act are compatible with respect to small entities.

According to the Small Business Administration (13 CFR 121.201), small handlers are those having annual receipts of less than $5,000,000 and small agricultural producers are defined as those with annual receipts of less than $750,000. Based on testimony presented at the hearing, a majority of the winter pear producers are considered small under the SBA definition. Of the 1,800 winter pear growers, 80 to 85 percent are estimated to have sales equal to or less than $750,000. There are 90 handlers operating in the production area. The majority of these handlers fit the SBA definition of a small handler. Thus, this action will apply primarily to small entities.

This decision proposes making the following amendments to the winter pear marketing order: (1) To amend § 927.51(a)(1) of the order to specifically authorize the establishment of maturity regulations; (2) To amend § 927.51 of the order to authorize the establishment of container requirements which would encompass capacity, weight, dimensions, and packing of the container, or containers, which may be used in packaging or handling of pears; and (3) To amend § 927.28 of the order to authorize additional alternates to serve for a Committee member in the event that both that member and that member's alternates are unable to attend a Committee meeting.

These actions are designed to enhance the quality of winter pears at consumer outlets through the regulation of maturity regulations, to create more orderly marketing conditions for winter pears through the implementation of container uniformity, to improve grower returns through these combined actions, and to ensure grower and handler representation at all Committee meetings.

Members of the Winter Pear Control Committee attending the hearing testified that the proposal to grant authority to establish maturity regulations has been widely discussed within the grower community, an estimated 80 to 85 percent of which qualify as small producers. Moreover, among the witnesses testifying, it was often stated that implementing maturity requirements would equally benefit small and large producers by standardizing industry requirements and enhancing overall product quality in the market.

Small handlers from both Oregon and Washington were present and participated in the hearing, and indicated their support for this proposal. When asked if such regulations would increase handler costs, one small handler responded that while some additional inspection costs would be incurred, those costs are expected to be offset with the increase in consumption. Ultimately, witnesses testifying at the hearing indicated that net returns to both handlers and producers would increase.

Testimony also indicated that the proposal to grant authority to fix the size, capacity, weight, dimensions, markings, or pack of the container, or containers, used in the packaging or handling of winter pears has been widely discussed within the winter pear industry. The proposed changes also include definitions of “pack” and “container” that are added based upon testimony at the hearing. Among the witnesses testifying, it was widely stated that implementing this authority would equally benefit both small and large handlers and growers. By standardizing container and packing requirements, handling costs would decrease through reduced inventories and more efficient packing procedures. Uniformity in the market would also facilitate standardized transactions by ensuring more equitable cost per unit comparisons and producer returns on product.

Small handlers testifying at the hearing indicated their support for this proposal. When asked if such regulations would increase handler costs, one small handler explained that the costs of new containers are likely to be offset by gains in packing efficiency and a more transparent cost per unit comparisons in handler to retailer transactions. Small producers testifying to this issue realized that increased costs in packing material would more than likely be passed from the handler to the grower, but the net gain from container standardization will ultimately benefit the industry as a whole, including the small producer. It was stated that by removing confusion related to container size in the marketplace, growers should get a fairer return on their product.

In the case of districts having only two Committee members, a temporary alternate will be selected by the absent Committee member from the collective pool of alternates from all districts and will represent the same group (grower or handler). The amendment proposed in this decision represents a modification to the Committee's proposal in order to better effectuate its terms. This method of selecting a temporary alternate would ensure representation of all growers and handlers (both large and small) at Committee meetings while having little or no increase in Committee administrative costs. Moreover, testimony demonstrated that the authority to temporarily assign alternates would improve representation of the small producers and handlers.

The collection of information under the marketing order would not be affected by these amendments to the marketing order. Current information collection requirements for Part 927 are approved by OMB under OMB number 0581-0089.

As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies.

USDA has not identified any relevant Federal rules that duplicate, overlap or conflict with this proposed rule. All of these amendments are designed to enhance the administration and functioning of the marketing order to the benefit of the industry.

Committee meetings held to discuss these proposals, as well as the hearing, were widely publicized throughout the Oregon and Washington winter pear production area. All interested persons were invited to attend the meetings and the hearing, and participate in Committee deliberations on all issues. All Committee meetings and the hearing were public forums, and all entities, both large and small, were able to express views on these issues.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at the following Web site: http://www.ams.usda.gov/fv/moab.html. Any questions about the compliance guide should be sent to Jay Guerber at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

The amendments proposed herein have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have retroactive effect. If adopted, the proposed amendments will not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with the amendments.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after date of the entry of the ruling.

The findings and conclusions, rulings, and general findings and determinations included in the Recommended Decision set forth in the April 3, 2002, issue of the Federal Register are hereby approved and adopted.

Annexed hereto and made a part hereof is the document entitled “Order Amending the Order Regulating the Handling of Winter Pears Grown in Oregon and Washington.” This document has been decided upon as the detailed and appropriate means of effectuating the foregoing findings and conclusions.

It is hereby ordered, That this entire decision be published in the Federal Register .

It is hereby directed that a referendum be conducted in accordance with the procedure for the conduct of referenda (7 CFR part 900.400 et seq. ) to determine whether the annexed order amending the order regulating the handling of winter pears grown in Oregon and Washington is approved or favored by growers, as defined under the terms of the order, who during the representative period were engaged in the production of winter pears in the production area.

The representative period for the conduct of such referendum is hereby determined to be July 1, 2001, through June 30, 2002.

The agent of the Secretary to conduct such referendum is hereby designated to be Gary Olson, Northwest Marketing Field Office, Marketing Order Administration Branch, Fruit and Vegetable Programs, AMS, USDA, 1220 S.W. Third Avenue, room 369, Portland, Oregon 97204; telephone (503) 326-2724.

The findings and determinations hereinafter set forth are supplementary and in addition to the findings and determinations which were previously made in connection with the issuance of the marketing agreement and order; and all said previous findings and determinations are hereby ratified and affirmed, except insofar as such findings and determinations may be in conflict with the findings and determinations set forth herein.

(a) Findings and Determinations Upon the Basis of the Hearing Record.

Pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601 et seq. ), and the applicable rules of practice and procedure effective thereunder (7 CFR part 900), a public hearing was held upon the proposed amendments to the Marketing Agreement and Order No. 927 (7 CFR part 927), regulating the handling of winter pears grown in Oregon and Washington. Upon the basis of the evidence introduced at such hearing and the record thereof, it is found that:

(1) The marketing agreement and order, as amended, and as hereby proposed to be further amended, and all of the terms and conditions thereof, will tend to effectuate the declared policy of the Act;

(2) The marketing agreement and order, as amended, and as hereby proposed to be further amended, regulate the handling of winter pears grown in the production area in the same manner as, and are applicable only to, persons in the respective classes of commercial and industrial activity specified in the marketing agreement and order upon which hearings have been held;

(3) The marketing agreement and order, as amended, and as hereby proposed to be further amended, are limited in their application to the smallest regional production area which is practicable, consistent with carrying out the declared policy of the Act, and the issuance of several orders applicable to subdivisions of the production area would not effectively carry out the declared policy of the Act;

(4) The marketing agreement and order, as amended, and as hereby proposed to be further amended, prescribe, insofar as practicable, such different terms applicable to different parts of the production area as are necessary to give due recognition to the differences in the production and marketing of winter pears cherries grown in the production area; and

(5) All handling of winter pears grown in the production area as defined in the marketing agreement and order, is in the current of interstate or foreign commerce or directly burdens, obstructs, or affects such commerce.

It is therefore ordered, That on and after the effective date hereof, all handling of winter pears grown in Oregon and Washington shall be in conformity to, and in compliance with, the terms and conditions of the said order as hereby proposed to be amended as follows:

The provisions of the proposed marketing agreement and order amending the order contained in the Recommended Decision issued by the Administrator on March 27, 2002, and published in the Federal Register on April 3, 2002, will be and are the terms and provisions of this order amending the order and are set forth in full herein.

This rule is issued under Marketing Agreement and Order No. 930 (7 CFR part 930), regulating the handling of tart cherries grown in the States of Michigan, New York, Pennsylvania, Oregon, Utah, Washington, and Wisconsin, hereinafter referred to as the “order.” The marketing agreement and order are effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.”

The Department of Agriculture (USDA) is issuing this rule in conformance with Executive Order 12866.

This rule has been reviewed under Executive Order 12988, Civil Justice Reform. Under the marketing order now in effect, tart cherry handlers are subject to assessments. Funds to administer the order are derived from such assessments. It is intended that the assessment rates as issued herein would be applicable to all assessable tart cherries beginning July 1, 2002, and continue until amended, suspended, or terminated. This rule will not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. Such handler is afforded the opportunity for a hearing on the petition. After the hearing USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.

This rule would increase the assessment rate established for the Board for the 2002-2003 and subsequent fiscal periods for cherries that are utilized in the production of tart cherry products other than juice, juice concentrate, or puree from $0.00175 to $0.0021 per pound of cherries. The assessment rate for cherries utilized for juice, juice concentrate, or puree would be increased from $0.000875 to $0.00105 per pound.

The tart cherry marketing order provides authority for the Board, with the approval of USDA, to formulate an annual budget of expenses and collect assessments from handlers to administer the program. The members of the Board are producers and handlers of tart cherries. They are familiar with the Board's needs and with the costs for goods and services in their local area and are thus in a position to formulate an appropriate budget and assessment rates. The assessment rates are formulated and discussed in a public meeting. Thus, all directly affected persons have an opportunity to participate and provide input.

For the 2001-2002 fiscal period, the Board recommended, and the Department approved, assessment rates that would continue in effect from fiscal period to fiscal period unless modified, suspended, or terminated by the USDA upon recommendation and information submitted by the Board or other information available to USDA.

Section 930.42(a) of the order authorizes a reserve sufficient to cover one year's operating expenses. The increased rates are expected to generate enough income to meet the Board's operating expenses in 2002-2003.

The Board met on January 24, 2002, and unanimously recommended 2002-2003 expenditures of $522,500. The Board also recommended an assessment rate of $0.0021 per pound of tart cherries utilized in the production of tart cherry products other than juice, juice concentrate, and puree products and an assessment rate of $0.00105 per pound for juice, juice concentrate, and puree products. In comparison, last year's budgeted expenditures were $442,500. The recommended assessment rates of $0.0021 and $0.00105 are higher than the current rates of $0.00175 and $0.000875, respectively. The Board recommended increased assessment rates to generate larger revenue to meet its expenses and keep its reserves at an acceptable level.

The order provides that when an assessment rate based on the number of pounds of tart cherries handled is established, it should provide for differences in relative market values for various cherry products. The discussion of this provision in the order's promulgation record indicates that proponents testified that cherries utilized in high value products such as frozen, canned, or dried cherries should be assessed one rate while cherries used to make low value products such as juice concentrate or puree should be assessed at one-half that rate.

The major expenditures recommended by the Board for the 2002-2003 fiscal period include $85,000 for meetings, $170,000 for compliance, $185,000 for personnel, $80,000 for office expenses, and $2,500 for industry educational efforts. Budgeted expenses for those items in 2001-2002 were $80,000 for meetings, $100,000 for compliance, $185,000 for personnel, $75,000 for office expenses, and $2,500 for industry educational efforts, respectively.

In deriving the recommended assessment rates, the Board determined assessable tart cherry production for the fiscal period at 260 million pounds. It further estimated that about 220 million pounds of the assessable poundage would be utilized in the production of high-valued products, like frozen, canned, or dried cherries, and that about 15 million pounds would be utilized in the production of low-valued products, like juice, juice concentrate, or puree. Potential assessment income from the high valued products would be approximately $462,000 (220 million pounds × $0.0021 per pound). The potential income from tart cherries utilized for juice, juice concentrate, or puree would be $15,750 (15 million pounds × $0.00105 per pound). No assessment income would be received by the Board on approximately 25 million pounds of the projected production of 260 million pounds of tart cherries. Cherries used for export and other diversion outlets are exempt from assessment obligations. Therefore, total assessment income for 2002-2003 is estimated at $477,750. This amount plus adequate funds in the reserve and interest income would be adequate to cover budgeted expenses. Funds in the reserve (approximately $233,000) would be kept within the approximately six months' operating expenses as recommended by the Board consistent with § 930.42(a).

The assessment rates established in this rule would continue in effect indefinitely unless modified, suspended, or terminated by USDA upon recommendation and other information submitted by the Board or other available information.

Although the assessment rates are effective for an indefinite period, the Board will continue to meet prior to or during each fiscal period to recommend a budget of expenses and consider recommendations for modification of the assessment rates. The dates and times of Board meetings are available from the Board or the USDA. Board meetings are open to the public and interested persons may express their views at these meetings. USDA would evaluate Board recommendations and other available information to determine whether modifications of the assessment rates are needed. Further rulemaking would be undertaken as necessary. The Board's 2002-2003 budget and those for subsequent fiscal periods would be reviewed and, as appropriate, approved by the USDA.

The Agricultural Marketing Service (AMS) has considered the economic impact of this action on small entities and has prepared this initial regulatory flexibility analysis. The Regulatory Flexibility Act (RFA) allows AMS to certify that regulations do not have a significant economic impact on a substantial number of small entities. However, as a matter of general policy, AMS's Fruit and Vegetable Programs (Programs) no longer opts for such certification, but rather performs regulatory flexibility analyses for any rulemaking that would generate the interest of a significant number of small entities. Performing such analyses shifts the Programs' efforts from determining whether regulatory flexibility analyses are required to the consideration of regulatory options and economic or regulatory impacts.

The purpose of the RFA is to fit regulatory actions to the scale of business subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and the rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf. Thus, both statutes have small entity orientation and compatibility.

There are approximately 40 handlers of tart cherries who are subject to regulation under the order and approximately 900 producers of tart cherries in the regulated area. Small agricultural service firms have been defined by the Small Business Administration (13 CFR 121.201) as those having annual receipts less than $5,000,000, and small agricultural producers are those whose annual receipts are less than $750,000. A majority of the tart cherry handlers and producers may be classified as small entities.

The Board unanimously recommended 2002-2003 expenditures of $522,500 and assessment rate increases from $0.00175 to $0.0021 per pound for cherries that are utilized in the production of tart cherry products other than juice, juice concentrate, or puree, and from $0.000875 to $0.00105 per pound for cherries utilized for juice, juice concentrate, or puree.

This rule would increase the assessment rate established for the Board and collected from handlers for the 2002-2003 and subsequent fiscal periods for cherries that are utilized in the production of tart cherry products other than juice, juice concentrate, or puree from $0.00175 to $0.0021 per pound, and the assessment rate for cherries utilized for juice, juice concentrate, or puree from $0.000875 to $0.00105 per pound. The Board unanimously recommended 2002-2003 expenditures of $522,500. The quantity of assessable tart cherries expected to be produced during the 2002-2003 crop year is estimated at 260 million pounds. Assessment income, based on this crop, along with interest income and reserves, would be adequate to cover budgeted expenses.

The major expenditures recommended by the Board for the 2002-2003 fiscal period include $85,000 for meetings, $170,000 for compliance, $185,000 for personnel, $80,000 for office expenses, and $2,500 for industry educational efforts. Budgeted expenses for those items in 2001-2002 were $80,000 for meetings, $100,000 for compliance, $185,000 for personnel, $75,000 for office expenses, and $2,500 for industry educational efforts, respectively.

The Board discussed the alternative of continuing the existing assessment rates, but concluded that would cause the amount in the operating reserve to be reduced to an unacceptable level.

The principal demand for tart cherries is in the form of processed products. Tart cherries are dried, frozen, canned, juiced, and pureed. Data from the National Agricultural Statistics Service (NASS) states that during the period 1995/96 through 1999/00, approximately 91 percent of the U.S. tart cherry crop, or 280.5 million pounds, was processed annually. Of the 280.5 million pounds of tart cherries processed, 62 percent was frozen, 29 percent was canned, and 9 percent was utilized for juice.

Based on NASS data, acreage in the United States devoted to tart cherry production has been trending downward. In the ten-year period, 1987/88 through 1997/98, the tart cherry area decreased from 50,050 acres, to less than 40,000 acres. In 1999/00, approximately 90 percent of domestic tart cherry acreage was located in four States: Michigan, New York, Utah and Wisconsin. Michigan leads the nation in tart cherry acreage with 70 percent of the total. Michigan produces about 75 percent of the U.S. tart cherry crop each year. In 1999/00, tart cherry acreage in Michigan decreased to 28,100 acres from 28,400 acres the previous year.

In deriving the recommended assessment rates, the Board estimated assessable tart cherry production for the fiscal period at 260 million pounds. It further estimated that about 220 million pounds of the assessable poundage would be utilized in the production of high-valued products, like frozen, canned, or dried cherries, and that about 15 million pounds would be utilized in the production of low-valued products, like juice, juice concentrate, or puree. Potential assessment income from the high valued products would be approximately $462,000 (220 million pounds X $0.0021 per pound). The potential income from the tart cherries utilized for juice, juice concentrate, or puree would be $15,750 (15 million pounds X $0.00105 per pound). No assessment income would be received by the Board on approximately 25 million pounds of the projected production of 260 million pounds of tart cherries. Cherries used for export and other diversion outlets are exempt from assessment obligations. Therefore, total assessment income for 2002-2003 is estimated at $477,750. This amount plus adequate funds in the reserve and interest income should be adequate to cover budgeted expenses. Funds in the reserve (approximately $233,000) will be kept within the approximately six months' operational expenses as recommended by the Board which would be consistent with the order (§ 930.42(a)).

While this action would impose additional costs on handlers, the costs are in the form of assessments which are applied uniformly. Some of the costs may also be passed on to producers. However, these costs are offset by the benefits derived from the operation of the marketing order. The Board's meeting was widely publicized throughout the tart cherry industry and all interested persons were invited to attend the meeting and participate in Board deliberations on all issues. Like all Board meetings, the January 24, 2002, meeting was a public meeting and all entities, both large and small, were able to express views on this issue. Finally, interested persons are invited to submit information on the regulatory and informational impacts of this action on small businesses.

This action would impose no additional reporting or recordkeeping requirements on either small or large tart cherry handlers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies.

USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this rule.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at: http://www.ams.usda.gov/fv/moab.html . Any questions about the compliance guide should be sent to Jay Guerber at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

A 30-day comment period is provided to allow interested persons to respond to this proposed rule. Thirty days is deemed appropriate because: (1) The 2002-2003 fiscal period begins on July 1, 2002, and ends on June 30, 2003, and the marketing order requires that the rate of assessment for each fiscal period apply to all assessable tart cherries handled during such fiscal period; (2) the Board needs to have sufficient funds to pay its expenses which are incurred on a continuous basis; and (3) handlers are aware of this action which was unanimously recommended by the Board at a public meeting and is similar to other assessment rate actions issued in past years.

For the reasons set forth in the preamble, 7 CFR part 930 is proposed to be amended as follows:

Interested persons are invited to participate in the making of the proposed rule by submitting such written data, views, or arguments as they may desire. Communications should identify the Rules Docket number and be submitted in triplicate to the address specified above. All communications received on or before the closing date for comments, specified above, will be considered before taking action on the proposed rule. The proposals contained in this action may be changed in light of the comments received.

Comments are specifically invited on the overall regulatory, economic, environmental, and energy aspects of the proposed rule. All comments submitted will be available, both before and after the closing date for comments, in the Rules Docket for examination by interested persons. A report summarizing each FAA-public contact concerned with the substance of this proposal will be filed in the Rules Docket.

Commenters wishing the FAA to acknowledge receipt of their comments submitted in response to this action must submit a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket Number 99-NE-44-AD.” The postcard will be date stamped and returned to the commenter.

Any person may obtain a copy of this NPRM by submitting a request to the FAA, New England Region, Office of the Regional Counsel, Attention: Rules Docket No. 99-NE-44-AD, 12 New England Executive Park, Burlington, MA 01803-5299.

A proposal to amend part 39 of the Federal Aviation Regulations (14 CFR part 39) to add an airworthiness directive (AD), applicable to Pratt & Whitney Canada PT6A series turboprop engines with turbine exhaust ducts part number (P/N) 3012290, P/N 3031988, P/N 3032117, P/N 3035784, P/N 3035786, P/N 3105890-01, P/N 3112167-01, P/N 3112171-01, and P/N 3111780-01, was published as a notice of proposed rulemaking (NPRM) in the Federal Register on December 8, 1999 (64 FR 68640). That proposal would have required initial and repetitive inspections for cracks of certain turbine exhaust ducts, and, if necessary, replacing the duct if the cracks exceed allowable limits. That proposal was prompted by reports of cracks along the weld seams of certain turbine exhaust ducts that were modified by Standard Aero Limited (SAL) of Winnipeg, Canada, before September 1, 1997. Transport Canada, which is the airworthiness authority for Canada, notified the FAA that an unsafe condition may exist on Pratt & Whitney Canada (P&WC) PT6A series turboprop engines. Transport Canada advised the FAA that certain part numbers of exhaust ducts were modified before September 1, 1997, by Standard Aero Limited (SAL) of Winnipeg, Canada, using an alternate gas tungsten arc welding (GTAW) process instead of the resistance (seam or stitch) weld process that was specified in P&WC service bulletin (SB) 1430. Some of those ducts have experienced cracking that may be attributed to the GTAW process. Transport Canada issued AD CF-98-41 on November 26, 1998, in order to assure the airworthiness of these P&WC PT6A series turboprop engines in Canada. That condition, if not corrected, could result in possible separation of the reduction gearbox and propeller from the engine, and possible loss of control of the airplane.

Since the issuance of that proposal, further investigation by the FAA has determined that a number of additional companies have used the same GTAW process as SAL. As a result, the affected population of turbine exhaust ducts has expanded. Therefore, this proposal is no longer confined to turbine exhaust ducts modified by SAL, and is expanded to include the entire affected duct population. This proposal differs from Transport Canada AD CF 98-41. That AD is confined to SAL modified turbine exhaust ducts only. A total of 116 turbine exhaust ducts have been discovered with cracks along the affected weld seam. Since these changes expand the scope of the originally proposed rule, the FAA has determined that it is necessary to reopen the comment period to provide additional opportunity for public comment.

Pratt & Whitney Canada has issued Service Bulletin (SB) No. PT6A-72-1610, dated January 24, 2002, and SB No. PT6A-72-12173, dated January 24, 2002, that specify procedures for inspection of turbine exhaust duct weld seams for low-quality welds created during repair, initial and repetitive inspections of affected ducts for cracks, and serviceable turbine exhaust duct criteria.

This engine model is manufactured in Canada and is type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Pursuant to this bilateral airworthiness agreement, Transport Canada (TC) has kept the FAA informed of the situation described above. The FAA has examined the findings of TC, reviewed all available information, and determined that AD action is necessary for products of this type design that are certificated for operation in the United States.

Since an unsafe condition has been identified that is likely to exist or develop on other PT6A series engines of the same type design registered in the United States, this proposal requires:

• At the next shop visit or within 150 hours time-in-service after the effective date of the AD, inspection for low-quality welds created during repair on turbine exhaust ducts near flange “A”.

• Initial and repetitive inspections for cracks of affected exhaust ducts.

The actions would be required to be done in accordance with the SB's described previously.

There are approximately 22,000 engines of the affected design in the worldwide fleet. The FAA estimates that 7,000 engines would be affected by this proposed AD, that it would take approximately 2 work hours per engine to do one inspection, and that the average labor rate is $60 per work hour. Based on these figures, the total cost of the proposed AD on U.S. operators for one inspection is estimated to be $840,000.

This proposed rule does not have federalism implications, as defined in Executive Order 13132, because it would not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, the FAA has not consulted with state authorities prior to publication of this proposed rule. For the reasons discussed above, I certify that this proposed regulation (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and (3) if promulgated, 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 draft regulatory 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.

Accordingly, pursuant to the authority delegated to me by the Administrator, the Federal Aviation Administration proposes to amend part 39 of the Federal Aviation Regulations (14 CFR part 39) as follows:

The Commission is publishing for comment a proposed amendment to Rule 15c3-3  1 under the Securities Exchange Act of 1934 (“Exchange Act”).

The Commission is proposing an amendment to its customer protection rule, Rule 15c3-3, under which broker-dealers may pledge, when borrowing fully paid or excess margin securities from customers, such collateral as the Commission may designate by order. Proceeding by Commission order would allow new categories of collateral to be designated as permissible more expeditiously and, if necessary, with conditions to account for differences among collateral types. The flexibility to impose conditions on the use of certain additional collateral would permit the establishment of safeguards designed to ensure that the objective of Rule 15c3-3(b)(3) “ the full collateralization of such loans “ is not compromised. In addition, the amendment would allow for a wider range of broker-dealer assets to be deemed permissible collateral, thereby adding liquidity to the securities lending markets and lowering borrowing costs for broker-dealers. For these reasons, we expect that the amendment will promote two fundamental Commission goals: (1) The protection of broker-dealer customers, and (2) the promotion of efficient securities markets.

The Commission adopted Rule 15c3-3 in 1972 in response to a congressional directive to create rules regarding, among other things, the acceptance, custody, and use of customer securities. 2 The rule requires broker-dealers to take steps to protect the securities that customers leave in their custody. These steps include the requirement that broker-dealers promptly obtain and thereafter maintain possession or control of all “fully paid”  3 and “excess-margin”  4 securities carried for the accounts of customers  5 (“customer securities”). The possession or control requirement is designed to ensure that broker-dealers do not put customers at risk by borrowing their securities to expand or otherwise further the broker-dealer's proprietary activities. 6

Subparagraph (b)(3) of Rule 15c3-3 sets forth conditions under which broker-dealers may borrow fully paid or excess margin securities from customers for their own use without violating the rule's possession or control requirement. These conditions include the requirement that broker-dealers and their lending customers enter into written agreements that (1) set forth the basis of compensation for the loans as well as the rights and liabilities of the parties in the borrowed securities, (2) require the broker-dealers to provide the lenders with schedules of the securities actually borrowed, (3) require the broker-dealers to provide the lenders with, at least, 100% collateral consisting exclusively of cash, United States Treasury bills and notes, or an irrevocable letter of credit issued by a bank, and (4) contain a prominent notice that the provisions of the Securities Investor Protection Act of 1970  7 may not protect the lenders with respect to the securities loan transactions. 8 Moreover, the loaned securities and pledged collateral must be marked to market daily, and additional collateral posted if necessary to maintain the 100% collateralization requirement. 9 These requirements are designed to ensure that these borrowings remain fully collateralized for the term of the loan.

Generally, broker-dealers borrow securities in order to meet obligations to deliver securities that they do not possess. This situation frequently arises in the normal course of a broker-dealer's business, such as when it sells securities that have been purchased but not received, sells securities it does not own to open a “short” position, needs to deliver securities against the exercise of a derivatives contract, or needs to cover a failed transaction in a securities settlement system. 10 Broker-dealers also borrow securities as part of the services they provide their customers, and as intermediaries in securities lending transactions. On the other hand, customers generally lend securities to increase the rate of return earned on their portfolios through compensation paid by the broker-dealers for the loan of the securities. Typically, the customers that lend securities are large institutions such as pension funds.

Since the rule was adopted, the securities lending markets have grown substantially, particularly in the last ten years. These markets also have become more global in scope. In addition, market participants now use a broad array of highly complex financial products. These factors make it necessary for U.S. broker-dealers to borrow a wider range and greater volume of domestic and foreign securities in order to accommodate the trading activities of their customers. Market participants believe that increasing the categories of permissible collateral under Rule 15c3-3 would add liquidity to the securities lending markets and help to lower borrowing costs. We preliminarily agree with that assessment. Rather than expressly add new categories of collateral into the rule, we propose amending Rule 15c3-3(b)(3) to permit the use of other collateral designated as permissible through Commission order as necessary or appropriate in the public interest and consistent with the protection of investors after giving consideration to the collateral's liquidity, volatility, market depth and location, and the issuer's creditworthiness.

The relative weight given to these factors will vary on a case-by-case basis. Moreover, orders permitting a type of collateral may impose limitations and conditions on its use to account for the fact that some permitted securities may not be appropriate as collateral in all situations. Such conditions should further the rule's goal of maintaining full collateralization of the customer's loan.

The Commission's aim is to increase liquidity and decrease costs, while maintaining the customer protection objectives of Rule 15c3-3. The Commission believes our proposal should achieve this goal because it would allow the Commission to select collateral that has been shown to be sufficiently liquid, and to tailor its orders to account for liquidity and other differences among the categories of collateral selected. The proposed amendment would require the Commission to consider the quality and liquidity of a particular instrument before designating it as permissible collateral. This would include a consideration of the creditworthiness of the issuer of the instrument, the depth of the instrument's market, the locations where the instrument is traded, and the historical volatility of the instrument's price.

Moreover, adding collateral through orders would provide the Commission with the flexibility to place conditions on the use of less liquid instruments. For example, in this release the Commission is seeking comment on ten categories of collateral the Commission is considering adding by order to the permissible categories of collateral under Rule 15c3-3. Two of these categories consist of instruments that may be pledged only when borrowing instruments with similar risk characteristics. The ability to prescribe such conditions would allow for a wider range of broker-dealer assets to be designated as permissible collateral. In addition, should a designated category of collateral become insufficiently liquid or should the conditions to use the collateral need to be modified, the Commission could issue an order withdrawing its designation, limiting its use as collateral, or altering the conditions to use it as collateral.

The Commission anticipates that, if it were to issue orders designating additional categories of permissible collateral pursuant to the proposed amendment, the Commission would take into account several considerations. The Commission likely would consider whether the risks of customer losses associated with permitting a new category of collateral would be sufficiently small relative to the benefits the additional kinds of collateral are expected to provide to justify permitting the new category of collateral. Those expected benefits would include adding liquidity to the securities lending markets and lowering borrowing costs for broker-dealers. The Commission also expects it would draw on its experience in assessing the liquidity of markets in a variety of contexts including, for example, the net capital requirements for broker-dealers.

Should the Commission adopt the amendment, the Commission is considering whether to delegate its authority to the Division of Market Regulation to issue exemptive orders designating additional categories of collateral permissible under the rule. The Commission preliminarily believes this delegation would allow for flexibility in the establishment of collateral requirements that are more responsive to changes in the securities lending markets.

If the Commission adopts the amendment, the Commission is considering issuing an order that would permit the following categories of collateral to be permissible under the rule. The Commission seeks comment on these collateral types and the conditions specified, including whether they would be appropriate to meet the rule's goal of ensuring that borrowings of customer securities remain fully collateralized. For example, the Commission seeks comment on whether the one and five percent over-collateralization requirements for cross-currency transactions are appropriate for addressing currency risk. 11

1. “Government securities” as defined in Section 3(a)(42)(A) and (B) of the Exchange Act may be pledged when borrowing any securities.

2. “Government securities” as defined in Section 3(a)(42)(C) of the Exchange Act issued or guaranteed as to principal or interest by the following corporations may be pledged when borrowing any securities: (i) The Federal Home Loan Mortgage Corporation, (ii) the Federal National Mortgage Association, (iii) the Student Loan Marketing Association, and (iv) the Financing Corporation.

3. Securities issued by, or guaranteed as to principal and interest by, the following Multilateral Development Banks—the obligations of which are backed by the participating countries, including the U.S.—may be pledged when borrowing any securities: (i) The International Bank for Reconstruction and Development, (ii) the Inter-American Development Bank, (iii) the Asian Development Bank, (iv) the African Development Bank, (v) the European Bank for Reconstruction and Development, and (vi) the International Finance Corporation.

4. Mortgage-backed securities meeting the definition of a “mortgage related security” set forth in Section 3(a)(41) of the Exchange Act may be pledged when borrowing any securities.

5. Negotiable certificates of deposit and bankers acceptances issued by a “bank” as that term is defined in Section 3(a)(6) of the Exchange Act, and which are payable in the United States and deemed to have a “ready market” as that term is defined in 17 CFR 240.15c3-1 (“Rule 15c3-1”), 12 may be pledged when borrowing any securities.

6. Foreign sovereign debt securities may be pledged when borrowing any securities, provided that, (i) at least one nationally recognized statistical rating organization (“NRSRO”) has rated in one of its two highest rating categories  13 either the issue, the issuer or guarantor, or other outstanding unsecured long-term debt securities issued or guaranteed by the issuer or guarantor; and (ii) if the securities pledged are denominated in a different currency than those borrowed, 14 the broker-dealer shall provide collateral in an amount that exceeds the minimum collateralization requirement in paragraph (b)(3) of Rule 15c3-3 (100%) by 1% when the collateral is denominated in the Euro, British pound, Swiss franc, Canadian dollar or Japanese yen, or by 5% when it is denominated in another currency. 15

7. Foreign sovereign debt securities that do not meet the NRSRO rating condition set forth in Item 6 above may be pledged only when borrowing non-equity securities issued by a person organized or incorporated in the same jurisdiction (including other debt securities issued by the foreign sovereign); provided that, if such foreign sovereign debt securities have been assigned a rating lower than the securities borrowed, such foreign sovereign debt securities must be rated in one of the four highest rating categories by at least one NRSRO. If the securities pledged are denominated in a different currency than those borrowed, the broker-dealer shall provide collateral in an amount that exceeds the minimum collateralization requirement in paragraph (b)(3) of Rule 15c3-3 by 1% when the collateral is denominated in the Euro, British pound, Swiss franc, Canadian dollar or Japanese yen, or by 5% when it is denominated in another currency. 16

8. The Euro, British pound, Swiss franc, Canadian dollar or Japanese yen may be pledged when borrowing any securities, provided that, when the securities borrowed are denominated in a different currency than that pledged, the broker-dealer shall provide collateral in an amount that exceeds the minimum collateralization requirement in paragraph (b)(3) of Rule 15c3-3 by 1%.

9. Foreign currency other than the Euro, British pound, Swiss franc, Canadian dollar or Japanese yen may be pledged only when borrowing non-equity securities denominated in the same currency.

10. Non-governmental debt securities may be pledged when borrowing any securities, provided that, in the relevant cash market they are not traded flat or in default as to principal or interest, and are rated in one of the two highest rating categories by at least one NRSRO. If such securities are not denominated in U.S. dollars or in the currency of the securities being borrowed, the broker-dealer shall provide collateral in an amount that exceeds the minimum collateralization requirement in paragraph (b)(3) of Rule 15c3-3 by 1% when the securities pledged are denominated in the Euro, British pound, Swiss franc, Canadian dollar or Japanese yen, or by 5% when they are denominated in any other currency. 17

The categories of potential permissible collateral identified above do not include securities that (i) have no principal component, or (ii) accrue interest at the time of the pledge at a stated rate equal to or greater than 100% per annum (expressed as a percentage of the actual principal amount of the security).

In issuing an order, the Commission may require broker-dealers pledging new types of collateral to include in the written agreements with the customers a notice that some of the securities being provided by the borrower as collateral under the agreement may not be guaranteed by the United States, in addition to satisfying the notice requirements already contained in paragraph (b)(3) of Rule 15c3-3.

The Commission solicits comments on the above proposals. The Commission specifically solicits comment on the types of collateral that, if deemed permissible, would materially add liquidity to the securities lending markets, and, at the same time, meet the customer protection objectives of Rule 15c3-3. Further, the Commission solicits comment on whether the correct factors for evaluating potentially permissible collateral have been selected, or should additional factors be considered or identified factors be eliminated. The Commission also solicits comments on the appropriate methods for evaluating the potentially permissible collateral.

The Commission also seeks comment generally on whether Rule 15c3-3(b)(3)(iii) should limit the types of collateral that must be supplied by a broker-dealer in borrowing from an institutional customer or whether the collateral should be left to negotiation between a particular institutional customer and broker-dealer after adequate disclosure. If the latter, should the ability to negotiate collateral be limited to a certain category of institutional customers? How should we define this category? What disclosures would be necessary if the collateral were left to negotiation? Should there be any required minimum amount of collateral to protect the customer and the broker-dealer?

The proposal does not require a new collection of information. The proposed amendment does not alter the range of collateral that a broker-dealer can pledge when borrowing customer securities, but instead amends the rule to establish criteria that the Commission will consider when issuing an order. In connection with Rule 15c3-3, the Commission submitted to the Office of Management and Budget, pursuant to the Paperwork Reduction Act, a request for approval and received an OMB control number for the rule, OMB control number 3235-0078.

The Commission is considering the costs and benefits of the proposed amendment to Rule 15c3-1.

The primary benefits of the amendment should be lowered borrowing costs and increased liquidity in the securities lending markets. The current collateral requirements in Rule 15c3-3 make it more economical for broker-dealers to borrow securities from other broker-dealers (which are not customers) since customers must be provided with a limited range of collateral. In such a case, the broker-dealer would be limited to borrowing the securities from broker-dealers agreeable to accepting another type of collateral. Expanding the categories of collateral will increase the supply of eligible lenders, which should decrease costs as a consequence of greater competition.

On the other side, customers will have the opportunity to enter into more lending transactions with broker-dealers. This will allow them to earn the fees associated with such transactions and thereby realize greater returns on their securities portfolios. The increased opportunities to borrow and lend securities should add liquidity to the securities lending markets.

The Commission does not believe there are any direct costs associated with the proposal, as it is deregulatory. The amendment will have no impact on broker-dealers that do not borrow customer securities or customers that do not lend securities. For those who participate in such transactions, the amendment is not imposing any changes as to how they must be structured. As described above, it will provide greater opportunities; however, it also maintains the status quo, and therefore, broker-dealers and customers do not have to avail themselves of these new opportunities. Broker-dealers can continue to pledge the types of collateral currently allowed under the rule and, while new categories of collateral may have risk characteristics that differ from those applicable to currently permitted collateral, customers could choose not to accept new categories of collateral.

The Commission requests comment on this analysis of the costs and benefits of the proposed rule amendments and invite commenters to submit their own estimates of costs and benefits that would result from the proposal. In order to evaluate fully the costs and benefits associated with the proposed amendments, we request that commenters' estimates of the costs and benefits of the proposed amendments be accompanied by specific empirical data supporting their estimates.

Section 3(f) of the Exchange Act requires the Commission, when engaged in rulemaking where it is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider whether the action would promote efficiency, competition, and capital formation. Section 23(a)(2) of the Exchange Act requires the Commission to consider the impact on competition of any rule proposed under that Act. In addition, the law requires that the Commission not adopt any rule that would impose a burden on competition not necessary or appropriate in the furtherance of the purposes of the Exchange Act.

The Commission preliminarily believes the proposed amendment should improve efficiency, competition, and capital formation by adding liquidity to the securities lending markets, lowering the costs of borrowing securities, and providing investors with the opportunity to realize greater returns on their securities portfolios. In addition, the proposed amendment should have no anticompetitive effects not necessary or appropriate in furtherance of the purposes of the Act because it would apply equally to all broker-dealers.

To evaluate more fully the effects on competition of the proposed amendments, the Commission is requesting that commenters provide views and specific empirical data as to any effects their adoption would have on competition. The Commission also requests comments on what effect the proposals, if adopted, would have on efficiency and capital formation.

Section 3(a) of the Regulatory Flexibility Act 18 requires the Commission to undertake an initial regulatory flexibility analysis of the effects of proposed rules and rule amendments on small entities, unless the Chairman certifies that the rules and rule amendments, if adopted, would not have a significant economic impact on a substantial number of small entities. 19

The amendment is unlikely to have a significant economic impact on a substantial number of small entities because it concerns an activity that is only engaged in by entities that are not deemed “small” under the Regulatory Flexibility Act. Under Rule 15c3-3, a broker-dealer must pledge certain specified categories of collateral when borrowing fully paid or excess margin securities from its customers. The proposed amendment to Rule 15c3-3 would increase the range of permissible collateral by allowing broker-dealers to pledge such other collateral as the Commission designates by Order as being appropriate in the public interest and consistent with the protection of investors after giving consideration to the collateral's liquidity, volatility, market depth and location, and the issuer's creditworthiness.

According to the Commission's Office of Economic Analysis, as of December 31, 2000, there were approximately 409 broker-dealers that carried customer securities, and therefore could conceivably borrow fully paid or excess margin securities from their customers. Of these 409 broker-dealers, only sixteen firms met the definition of a “small business” or “small organization” as those terms are defined in Commission Rule 17 CFR 240.0-10. Moreover, not one of these sixteen “small” broker-dealers reported borrowed securities on their balance sheets in their quarterly FOCUS filings during 1998, 1999 and 2000. This would indicate that these broker-dealers do not borrow any securities, let alone customer securities, as part of their business activities. Accordingly, the proposed amendment—which relates to broker-dealer borrowings of customer securities—should have no impact on the few “small” entities that could conceivably engage in this activity. The primary effect of the proposal would be on broker-dealers that are not considered small entities under the Regulatory Flexibility Act.

The Chairman has certified that the proposed amendments would not have a significant economic impact on a substantial number of small entities. A copy of the certification is attached as Appendix A.

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, the Commission is also requesting information regarding the potential impact of the proposed rules and rule amendments on the economy on an annual basis. Commenters should provide empirical data to support their views.

Pursuant to the Exchange Act and particularly Sections 15(c)(3), 23(a) and 36 thereof, 15 U.S.C. 78o(c)(3), 78w, and 78mm, the Commission proposes to amend § 240.15c3-3 of Title 17 of the Code of Federal Regulation in the manner set forth below.

In accordance with the foregoing, the Commission proposes to amend Title 17, Chapter II of the Code of Federal Regulations as follows.

The CFMA permits the trading of security futures, i.e., futures contracts on individual securities and on narrow-based security indexes. 1 The CFMA defines security futures both as “securities” under the federal securities laws, 2 and as futures contracts for purposes of the Commodity Exchange Act (“CEA”). 3 Accordingly, the SEC and the Commodity Futures Trading Commission (“CFTC”) have joint jurisdiction over the intermediaries and markets that trade security futures products (“SFPs”).

Because they are subject to regulation both as securities and as futures contracts, SFPs must be traded on trading facilities and through intermediaries that are registered with both the SEC and the CFTC. The CFMA amended the CEA and the Exchange Act to provide notice registration procedures for persons that may be required to register with the SEC or the CFTC solely because they are effecting SFP transactions. Under the notice registration procedures, a futures commission merchant (“FCM”) may register with the SEC pursuant to Section 15(b)(11) of the Exchange Act and the rules adopted by the SEC  4 (“Notice BD”) and a broker-dealer may register with the CFTC pursuant to Section 4f(a)(2) of the CEA and rules adopted by the CFTC  5 (“Notice FCM”).

Notice BDs are exempt from certain provisions of the Exchange Act, 6 and Notice FCMs are exempt from certain provisions of the CEA. 7 These statutory provisions were designed to allow persons that previously had engaged “solely” in either the securities or futures business to participate in SFP business without being subject to conflicting or duplicative regulation. The CFMA does not exempt firms that are “fully-registered” with both the CFTC and the SEC (“Full FCM/Full BDs”) from any provisions of the Exchange Act or the CEA.

The CFMA requires the SEC, in consultation with the CFTC, to issue such rules, regulations, or orders as are necessary to avoid duplicative or conflicting regulations applicable to Full FCM/Full BDs with respect to the treatment of customer funds, securities, or property, maintenance of books and records, financial reporting, or other financial responsibility rules, involving SFPs. 8 In absence of this proposed rulemaking, every firm effecting transactions in SFPs would need to comply with all of the confirmation disclosure requirements of the Exchange Act and the CEA, which would create the kind of duplicate regulation for SFPs that the CFMA's direction attempts to avoid.

Generally, Exchange Act Rule 10b-10 requires broker-dealers that effect transactions for customers in securities, other than U.S. savings bonds or municipal securities, 9 to provide a confirmation, at or before the completion of each transaction, disclosing certain basic terms of the transaction. The confirmation requires, among other things, the disclosure of: the date, identity, price, and number of shares bought or sold;  10 the capacity of the broker-dealer;  11 the net dollar price and yield of a debt security;  12 and, under specified circumstances, the amount of compensation paid to the broker-dealer and whether payment for order flow is received. 13 The customer confirmation requirement, portions of which have been in effect for over 50 years, provides basic investor protections by conveying information allowing investors to verify the terms of their transactions; alerting investors to potential conflicts of interest with their broker-dealers; acting as a safeguard against fraud; and providing investors a means to evaluate the costs of their transactions and the quality of their broker-dealer's execution. 14

Although the CFMA exempted Notice BDs from certain Exchange Act provisions, including Exchange Act Section 11, 15 it did not exempt them from Exchange Act Section 10 and the rules promulgated thereunder, including Exchange Act Rule 10b-10. 16 In addition, as stated previously, the CFMA did not exempt Full FCM/Full BDs from any provisions of the Exchange Act or the rules promulgated thereunder. Accordingly, under the CFMA, entities effecting SFP transactions in futures accounts currently are required to meet the confirmation disclosure requirements of both the CEA and the Exchange Act and the rules thereunder.

CEA Rule 1.33(b) 17 provides the disclosure requirements FCMs effecting futures transactions must follow. However, although CEA Rule 1.33(b) requires an FCM to provide a customer with a “written confirmation of each commodity futures transaction,”  18 it does not specify what information must be included in the confirmation. 19 The rules of certain futures exchanges, such as the Chicago Mercantile Exchange (“CME”) and the Chicago Board of Trade (“CBOT”), 20 require an FCM to disclose in writing no later than the following business day after each transaction specific information regarding that transaction effected in a futures account. Information that must be disclosed includes the commodity bought or sold, the quantity, the price, and the delivery month. 21 The CBOT also requires disclosure of the name of the other party to the contract (in other words, the FCM on the opposite side of the contract) or a notice disclosing that such information is available upon request. 22

In a joint release issued by the SEC and the CFTC (“the Commissions”) proposing customer protection, reccordkeeping, reporting, and bankruptcy rules for accounts holding SFPs, 23 the Commissions requested comment on the application to transactions in SFPs of their confirmation rules (Rule 10b-10 under the Exchange Act  24 and Rule 1.33(b) under the CEA  25 ). Of the three comment letters the Commissions received, two specifically addressed the Commissions' requests for comments on the subject of confirmations for SFPs. 26

As an initial matter, the Commissions asked whether the application of the confirmation rules to FCMs and broker-dealers should follow from the type of account in which the SFPs are effected. One commenter supported having confirmation statements follow the type of the account and recommended that the SEC adopt a rule that would exempt SFPs carried in futures accounts from Exchange Act Rule 10b-10. 27 The other commenter suggested that the SEC clarify that Exchange Act Rule 10b-10 would not apply to a Notice BD or a Full FCM/Full BD carrying SFPs in a futures account. 28

The Commissions also asked whether the information that FCM customers currently receive on confirmations would fulfill the purposes of Rule 10b-10 or whether FCMs should provide the particular information required by Rule 10b-10 to customers in SFP transactions upon the customers' request, to the extent that information is not already provided on the confirmations that the FCM prepares. In addition, the Commissions asked what it would cost FCMs to provide the information required under Rule 10b-10 on SFP confirmations.

One commenter noted that confirmations of futures transactions generally provide much of the same information required by Rule 10b-10. Moreover, this commenter stated that futures customers understand that they have a right to request information in addition to that specifically disclosed on the confirmation. Some of this additional information includes the time of the transaction and the name of the person on the opposite side of the transaction. 29 The commenter noted this is the same information that Rule 10b-10 generally allows broker-dealers to choose whether to disclose in the confirmation or to make available upon written request of the customer. 30 This commenter also maintained that applying Rule 10b-10(a)(2)—which requires a broker-dealer to disclose whether it is acting as a principal or agent in a transaction—to confirmations of SFP transactions would create operational and programming burdens for FCMs without providing corresponding benefits. 31

The Commissions also requested information on whether there would be any costs to broker-dealers to provide the information required under CEA Rule 1.33(b) on SFP confirmations and how long it would take firms to implement systems to provide this information. In addition, the Commissions asked whether any other considerations relating to customers should be taken into account. The Commissions did not receive any comments on these queries.

After carefully considering all of the comments received, the SEC has decided to avoid duplicate regulation by proposing a new paragraph (e) to Rule 10b-10. New paragraph (e) would clarify the type and nature of information a Notice BD and a Full FCM/Full BD must disclose under Rule 10b-10 in confirmations of SFP transactions effected in futures accounts. In doing so, we have taken into account the disclosure requirements of CEA Rule 1.33(b) and the disclosure rules of the CME and the CBOT. 32

Amended Rule 10b-10(e) would require essentially the same type and nature of information required under CEA Rule 1.33(b) and the above-described futures exchange rules, as well as additional information concerning the capacity in which the Notice BD or Full FCM/Full BD is acting when effecting an SFP transaction and information regarding payment for order flow. It also would conform to the timing requirements that are customary for futures confirmations.

Specifically, Rule 10b-10(e)(1) would provide that, as long as certain conditions are met, the requirements of paragraphs (a) and (b) of Rule 10b-10 will not apply to a Notice BD or a Full FCM/Full BD that effects transactions for customers in SFPs in a futures account (as that term is defined in proposed Exchange Act Rule 15c3-3(a)(15)). 33 First, under subparagraph (i) of proposed paragraph (e)(1), the Notice BD or Full FCM/Full BD must give or send to the customer, no later than the next business day after execution of any SFP transaction, written notification disclosing: the date the transaction was executed, the identity of the single security or narrow-based security index underlying the contract for the SFP, the number of shares or units (or principal amount) of such SFP purchased or sold, the price, and the delivery month. Second, under subparagraph (ii) of proposed paragraph (e)(1), the Notice BD or Full FCM/Full BD must give or send to the customer no later than the next business day after execution of any SFP transaction, written notification disclosing the source and amount of any remuneration received or to be received in connection with the transaction. This includes, but is not limited to, any markup, commissions, costs, fees, and other charges incurred in connection with the transaction.

From discussions with industry participants, our staff understands that this information is routinely disclosed in confirmations on futures transactions. 34 The staff also understands from these discussions that customers in the futures markets may negotiate to pay commissions or fees on futures transactions based on the purchase and subsequent liquidating sale or based on the sale and subsequent covering purchase rather than paying the commissions or fees at both the initiating and closing trade. 35

Regardless, confirmation statements are sent to customers after both the initiating and closing trades, and the remuneration information in these confirmation statements reflects how the customers have chosen to pay commissions and fees. This disclosure system is designed to ensure that the customer is consistently aware of the nature and amount of the commissions and fees he is paying for the transactions effected in his futures account. 36 Accordingly, we believe that this same disclosure system for fees and commissions for SFP transactions effected by Notice BDs and Full FCM/Full BDs in futures accounts is sufficient for purposes of Rule 10b-10(e)(1)(ii).

Subparagraph (iii) of Rule 10b-10(e)(1) would also require the Notice BD or Full FCM/Full BD to give or send to the customer no later than the next business day after execution of any SFP transaction, written notification disclosing the fact that certain information will be available upon written request of the customer. This includes information about the time of the execution of the transaction and the identity of the other party to the contract. We believe that, while this information does not necessarily need to appear on the confirmation statement itself, the customer should have notice that it is available and will be provided upon written request.

Subparagraph (iii) also would require the Notice BD or Full FCM/Full BD to disclose that it will provide upon written request of the customer information regarding whether the broker or dealer is acting as agent for such customer, as agent for some other person, as agent for both such customer and some other person, or as principal for its own account; and, if the broker or dealer is acting as principal, whether it is engaging in a block transaction or an exchange of SFPs for physical securities (“EFP”). Although Rule 10b-10(a)(2) requires this information to appear in a confirmation of a securities transaction, we note that confirmations of futures transactions do not generally include this information. A commenter has also noted that customers would be aware of block trades and exchanges for physicals because these transactions require customer consent and that it would be unduly burdensome to require futures confirmations systems to capture and transmit this information. 37

The nature of the futures markets appears to provide the reasons for this disparity. First, the CEA and CFTC Regulations require most futures transactions to be agency transactions. 38 An FCM conducts futures transaction in a principal capacity only when conducting a block trade or an EFP. 39 Block trades and EFPs are privately-negotiated transactions that may be traded apart from the public auction market either on or off the exchange trading floor. 40 In addition, a block trade executed on an exchange generally cannot trigger the execution of conditional orders, such as stop orders, or otherwise affect orders in the regular market. 41 An FCM that effects block trades and EFPs must meet stringent exchange rules, including keeping and maintaining detailed records of the transactions, timely reporting the transactions to the relevant exchange and/or clearing organization, and obtaining customer consent for the transactions. 42

Nevertheless, an SFP is not only a futures product but a security product, and, as reflected in Rule 10b-10(a)(2) and Exchange Act Section 11(d)(2), 43 we consider that a broker-dealer's capacity when effecting a securities transaction is important information that should be available to a customer. We recognize, however, that requiring a confirmation of an SFP transaction effected in futures accounts to disclose whether the Notice BD or Full FCM/Full BD effected the transaction as an agent (and who the entity was an agent for) or a principal could create operational and programming burdens. Therefore, Rule 10b-10(e)(1)(iii) would require only that the information be made available upon written request of the customer.

Because the futures industry has never previously been required to provide this type of information on a regular basis, it may need additional time to adjust its members' operational systems, not only to capture this information when necessary, but also to disclose on the confirmation itself that the information is available upon a customer's written request. Therefore, as explained further below, new Rule 10b-10(e)(2) would provide that the provisions of Rule 10b-10(e)(1)(iii) do not become effective for broker-dealers effecting SFP transactions in futures accounts until June 1, 2003, as long as the broker-dealers meet certain conditions. This transitional provision should provide the futures industry with sufficient time to make the necessary adjustments to their systems to comply with Rule 10b-10(e)(1)(iii).

Finally, subparagraph (iv) of Rule 10b-10(e)(1) would require a Notice BD or Full FCM/Full BD to give or send to the customer no later than the next business day after execution of any SFP transaction, written notification disclosing whether it receives payment for order flow for effecting SFP transactions. It must also disclose the fact that the source and nature of any compensation received in connection with the particular transaction will be furnished upon the customer's written request. Our staff understands from discussions with industry representatives that payment for order flow is not currently practiced in the futures industry. 44 There is no reliable method to predict whether the practice of payment for order flow will develop in relation to SFP transactions. Nevertheless, subparagraph (iv) provides a foundation to address the disclosure of payment for order flow in the event it arises in relation to SFP transactions. Because payment for order flow is not currently a practice in the futures industry, it is unlikely that the operational systems for futures accounts would currently capture such information for disclosure purposes. Therefore, as explained further below, Rule 10b-10(e)(2) would provide the futures industry additional time to modify their systems to capture payment for order flow information.

Because the futures industry may need additional time to make the necessary changes to comply with all of the requirements of Rule 10b-10(e)(1), the Commission proposes to provide a transitional provision to allow the futures industry the extra time to make those changes. Specifically, Rule 10b-10(e)(2)(i) would provide that subparagraph (iii) of Rule 10b-10(e)(1) does not become effective until June 1, 2003, provided that, if the broker-dealer receives a written request from a customer for the information Paragraph (e)(1)(iii) requires the broker-dealer to disclose upon a customer's written request, the broker-dealer makes the information available to the customer. Rule 10b-10(e)(2)(ii) would provide that Paragraph (e)(1)(iv) shall also become effective June 1, 2003.

In proposing these amendments to Rule 10b-10, we believe it is important to remind broker-dealers that they would continue to be subject to the antifraud provisions of the federal securities laws, including Exchange Act Rule 10b-5. We note in this regard that the preliminary note to Rule 10b-10 explains that the disclosure confirmation requirements of Rule 10b-10 are in addition to “a broker-dealer's obligation under the general antifraud provisions of the federal securities laws to disclose additional information to a customer at the time of the customer's investment decision.” In addition, broker-dealers are still subject to self-regulatory organization rules that, in their current form, require broker-dealers to disclose information that would not be required by our proposed amendments to Rule 10b-10. 45

We invite comment on all aspects of this amendment to Rule 10b-10. We especially invite comment on the following subjects: (i) What, if any, burdens would result from requiring futures confirmation systems to capture and transmit information regarding capacity and payment for order flow for SFP transactions effected by Notice BDs or Full FCM/Full BDs in a futures accounts; (ii) what, if any, competitive burdens would affect Notice BDs effecting SFP transactions in futures accounts that similarly situated Full FCM/Full BDs would not be subject to; (iii) whether the amendments to Rule 10b-10 providing confirmation requirements for SFP transactions effected in futures accounts could result in competitive disadvantages for broker-dealers effecting SFP transactions in securities accounts that must follow all of the disclosure requirements of Rule 10b-10; (iv) if so, whether the requirements of paragraph (e) should be applied to all SFP transactions regardless of whether the transactions are effected in a securities account or in a futures account; (v) whether there are rules of other exchanges that provide different disclosure requirements that we should consider; (vi) whether there is any additional information that should be disclosed to customers; and (vii) whether the transitional period provides sufficient time to develop the necessary systems to capture the information required to be disclosed under proposed Rule 10b-10(e).

Exchange Act Rule 10b-10(a)(9)  46 generally requires that a broker-dealer effecting securities transactions for a customer, or a broker-dealer clearing or carrying a customer's account, disclose in the confirmation if such broker-dealer is not a member of the Securities Investor Protection Corporation (“SIPC”). 47 This requirement is intended to make clear when customers are not protected by SIPC.

Under the Securities Investor Protection Act of 1970 (“SIPA”), most broker-dealers registered under Exchange Act Section 15(b) must be members of SIPC. 48 When a SIPC member is liquidated in a SIPC proceeding, due to bankruptcy or other financial difficulties, SIPC will return to customers their cash and securities held by the broker-dealer. To the extent that the broker-dealer does not have sufficient resources to return the cash and securities to customers, SIPC will replace the missing assets, up to $500,000 per customer (including $100,000 for cash claims). 49

We required that a broker-dealer disclose in its confirmations when it is not a SIPC member after we witnessed several incidents involving the financial failure of registered broker-dealers and their unregistered affiliates where customers became confused regarding the application of SIPC coverage to their accounts. 50 For example, in one of these cases, the failure of a registered broker-dealer and its government securities affiliate, which shared personnel and office facilities and did not distinguish between the two entities in certain written and oral communications, led to customer confusion concerning SIPC coverage. Because government securities brokers and dealers registered under Exchange Act 15C are not members of SIPC, the accounts of the customers of the government securities affiliates were not protected by SIPC. 51

The SIPC disclosure requirement is in addition to a separate regulatory scheme pursuant to Exchange Act Section 15(c)(3) and Exchange Act Rule 15c3-3 to protect customers. That scheme protects the assets of broker-dealer customers by requiring a broker-dealer to follow certain steps to assure that customer assets are not used to fund the broker-dealer's business. 52

The CEA has a different customer protection scheme for customers of FCMs. Under the CEA, customer funds must be segregated and separately accounted for by FCMs. 53

The CFMA amended the Exchange Act and SIPA to provide that a Notice BD is not subject to Exchange Act Section 15(c)(3), or the rules promulgated thereunder, and that a Notice BD may not become a member of SIPC. 54 In addition, the CFMA amended the CEA to provide that a Notice FCM is not subject to the segregation requirements of the CEA. 55

Full FCM/Full BDs do not have similar exemptions. Accordingly, the SEC and the CFTC have proposed rules that would permit Full FCM/Full BDs either to choose, or allow their customers to choose, whether SFP positions will be held in a futures account subject to CEA segregation requirements or a securities account subject to Rule 15c3-3 and SIPA. 56 These rules would also require that, before a Full FCM/Full BD accepts an order from a customer for an SFP transaction, the Full FCM/Full BD must obtain a signed acknowledgement that the customer understands which protections would apply to the customer's particular account. The acknowledgment would have to specify which regulatory regime applies, and the customer would have to sign the acknowledgement stating that he understands that his particular account will not be protected under the alternative regulatory scheme. This acknowledgement is designed to help a customer understand that an SFP held in a futures account is not covered by SIPA and an SFP held in a securities account is not protected by segregation. Notice registrants are not required to obtain this acknowledgment from customers because they are subject only to one customer protection regulatory scheme.

We are requesting comment on whether certain Notice BDs should be required, pursuant to Exchange Act Rule 10b-10(a)(9), to inform customers on a transaction-by-transaction basis that they are not members of SIPC. Should such a requirement be applicable to all notice registrants or to a subset that creates the greatest risk of confusion, such as those notice registrants that are associated persons  57 of fully-registered SIPC-member broker-dealers? In addition, we request comment on whether customers would benefit from being informed on a transaction-by-transaction basis that the protections provided by Exchange Act Rule 15c3-3 and SIPA do not apply to SFPs held in futures accounts by Full FCM/Full BDs. Further, we are interested in receiving comment on whether the absence of such disclosures in transaction confirmations could lead to the type of customer confusion the SIPC disclosure requirement in Exchange Act 10b-10(a)(9) was designed to address.

In addition, we note that self-regulatory organizations, such as the National Association of Dealers, Inc. and the National Futures Association, are working to develop model disclosure documents for SFPs. If these documents informed customers that the protections provided by Exchange Act Rule 15c3-3 and SIPA do not apply to SFPs held in futures accounts, would such disclosures provide them with sufficient information so that they would not need to be informed on a transaction-by-transaction basis?

Exchange Act Rule 10b-10(a)(2)  58 generally requires that a broker-dealer effecting a transaction for a customer must provide written notification at or before the completion of a transaction disclosing the capacity in which the broker-dealer acted when effecting a securities transaction. Similarly, Exchange Act Section 11(d)(2)  59 prohibits a broker-dealer from effecting any transaction for a customer with respect to any security (other than an exempted security) unless the broker-dealer “discloses to such customer in writing at or before the completion of the transaction whether he is acting as a dealer for his own account, as a broker for such customer, or as a broker for some other person.”

As explained above, amended Rule 10b-10 would provide Full FCM/Full BDs and Notice BDs a conditional exception from the requirement in Exchange Act Rule 10b-10 to disclose the capacity in which they are acting when they effect SFP transactions for a customer in a futures account. Amended Rule 10b-10, however, would not provide an exception from the disclosure requirement of Exchange Act Section 11(d)(2). Under the CFMA, Notice BDs are exempt from the provisions of Exchange Act Section 11. 60 This exemption, however, does not apply to Full FCM/Full BDs.

We believe that requiring Full FCM/Full BDs to comply with the disclosure requirement of Exchange Act Section 11(d)(2) would be inconsistent with the relief provided in the proposed amendments to Rule 10b-10. Therefore, to provide consistent relief, we are proposing an exemption from the disclosure requirement of Exchange Act Section 11(d)(2). 61 This exemption would be available only to Full FCM/Full BDs that effect SFP transactions in futures accounts and would allow them to effect SFP transactions in futures accounts without being required to disclose the capacity in which they are acting when they effect these transactions.

We invite comments on all aspects of proposed Rule 11d2-1. We especially invite comment on whether this exemption for Full FCM/Full BDs will have any anticompetitive impact on broker-dealers that are not eligible for this exemption.

We invite interested persons to submit written comments on all aspects of the proposed amendments and new rule, in addition to the specific requests for comments included in the release. Further, we invite comment on other matters that might have an effect on the proposals contained in the release, including any competitive impact.

Additionally, we request comment on whether broker-dealers executing trades in futures accounts for certain customers should be subject only to the confirmation requirements prescribed by the CFTC and the futures exchanges. Specifically, should broker-dealers effecting SFP transactions in customers' futures accounts be exempted from the disclosure requirements of Rule 10b-10 for their sophisticated institutional customers who are “qualified investors,” as that term is defined in the Exchange Act Section 3(a)(54), 62 if: (1) The institutional customers, after receiving full disclosure, knowingly agree not to receive information on the capacity in which a broker-dealer is acting when effecting SFP transactions in a customer's futures account and any information regarding payment for order flow; and (2) the disclosure rules of the CFTC and/or the futures exchanges, at a minimum, require disclosure of basic information, as specified in proposed paragraph (e)(1)(i) and (ii), the identity of the other party to the contract, and the time of the execution of the transaction (or the fact that information regarding the identity of the other party to the contract and the time of the execution of the transaction will be available upon request)? Should we use the statutory definition of “qualified investors” for purposes of this exemption, or should we define the category of customers differently?

More generally, in order to help us determine whether, and to what extent, direct regulation in this area is necessary, and to minimize the burdens associated with duplicative regulation while maintaining investor protection, we request detailed comments from futures exchanges that plan to trade security futures on their rules that will apply to the trading of security futures and whether there are any differences or similarities between those rules and the proposed amendments to Rule 10b-10 regarding the information required to be provided to customers effecting security futures transactions in futures accounts.

Certain provisions of the proposed amendments to Exchange Act Rule 10b-10 contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995. 63 The Commission has submitted the proposed amendment to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The Commission is revising the collection of information entitled “Proposed Confirmation of Transactions Amendment,” OMB Control Number 3235-0444. An agency may not conduct or sponsor , and a person is not required to respond to, a collection of information unless it displays a currently valid control number.

As discussed previously in this release, the Proposed Confirmation of Transactions Amendment would permit alternative information disclosure requirements in confirmations provided to customers for transactions in SFPs in a futures account. This alternative information includes, the date the transaction was executed; the identity and number of shares or units bought or sold; the price and delivery month; the source and amount of broker remuneration; whether the broker received payment for order flow; and, the fact that other specified information about the execution of the transaction will be available upon written request. This information would be provided to a customer in the form of a confirmation.

The purpose of the proposed amendments to Rule 10b-10 is to provide to investors the information necessary to evaluate their securities transactions and the broker-dealers effecting those transactions. In the absence of the Rule's requirements, investors may not be fully informed of important information relating to their securities transactions. In addition, the confirmations may be used by the Commission, self-regulatory organizations, and other securities regulatory authorities in the course of examinations, investigations, and enforcement proceedings. No governmental agency regularly would receive any of the information described above.

The proposed amendments to Rule 10b-10 potentially apply to all of the approximately 8,000 fully registered broker-dealers and the projected 1,399 notice registered broker-dealers registered with the Securities and Exchange Commission provided they effect transactions for customers. It is important to note, however, that the provisions of the Proposed Confirmation of Transactions Amendments would apply only to the approximately 5,600 fully registered broker-dealers that conduct business with the general public and the approximately 1,399 of the projected notice registered broker-dealers that conduct business with the general public.

We estimate that there will be 100 million confirmations during the first year of trading of security futures products. In our April 29, 2002 order adjusting the fee rates under Section 31 of the Exchange Act, we estimated that we would collect $450,000 in assessments on round turn transactions in security futures in fiscal 2003. 64 This estimate was based on the Congressional Budget Office's August 28, 2001 estimate of collections for that fiscal year, adjusted to reflect the reduction in the assessment rate included in the Investor and Capital Markets Fee Relief Act. 65 Dividing the estimated $450,000 in collections on round turn transactions in security futures by the assessment rate of $0.009 per round turn transaction yields 50 million round turn transactions. Because each of the estimated 50 million round turn transaction will involve at least two confirmations, we estimate that there will be approximately 100 million confirmations.

Because the process of generating a confirmation is automated, the Commission staff estimates from information provided by industry participants that it takes about one minute to generate and send a confirmation. The Commission staff also estimates from information provided by industry participants that broker-dealers effecting SFP transactions will spend 1.7 million hours complying with the proposed amendments to Rule 10b-10 (100 million confirmations at one minute per confirmation = 100 million minutes; 100 million minutes/60 minutes per hour = 1.7 million hours).

Broker-dealers routinely use confirmations for billing purposes. In addition, broker-dealers would send customers some type of statement regardless of the requirements of the proposed amendments to Rule 10b-10. The amount of confirmations sent and the cost of the confirmations vary from firm to firm. Smaller firms send fewer confirmations than larger firms because they effect fewer transactions.

As stated earlier, the Commission staff estimates that broker-dealers effecting SFP transactions will send approximately 100 million confirmations annually. According to the information provided by industry participants, the average cost per confirmation is estimated to be 89 cents, including postage. The annual cost to the industry for fiscal year 2003 is therefore estimated to be $89 million.

This collection of information is mandatory.

The collection of information pursuant to the proposed amendments to Rule 10b-10 would be provided by broker-dealers to customers, and also would be maintained by broker-dealers.

Exchange Act Rule 17a-4(b)(1)  66 requires broker-dealers to preserve confirmations for three years, the first two years in an accessible place.

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to:

(i) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility;

(ii) Evaluate the accuracy of the Commission's estimate of the burden of the proposed collection of information;

(iii) Enhance the quality, utility, and clarity of the information to be collected; and

(iv) Minimize the burden of the collection of information on those required to respond, including through the use of automated collection techniques or other forms of information technology.

Persons desiring to submit comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609, and refer to File No. S7-19-02. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this release in the Federal Register , therefore, comments to OMB are best assured of having full effect if OMB receives them within 30 days of this publication. The Commission has submitted the proposed collections of information to OMB for approval. Requests for the materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-19-02, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street, NW., Washington, DC 20549.

For the reasons discussed above, new Exchange Act Rule 11d2-1 provides an exemption from the capacity disclosure requirement in Exchange Act Section 11(d)(2) for Full FCM/Full BDs that are effecting transactions for customers in SFPs in futures accounts. This exemption from a statutory requirement does not impose recordkeeping or information collection requirements, or other collections of information that require approval of the Office of Management and Budget under 44 U.S.C. 3501, et seq. Accordingly, the Paperwork Reduction Act does not apply.

Passage of the CFMA in December of 2000 permitted the trading of SFPs and established a framework for joint regulation of SFPs by the CFTC and the SEC. This framework was necessary because the CFMA defined an SFP to be, at the same time, both a security and a contract for future delivery and therefore subject to both the CEA and the Exchange Act and the rules thereunder. Recognizing that some entities may be subject to duplicative or conflicting regulations, the CFMA amended the CEA and the Exchange Act to: (1) Exempt notice-registrants from certain (but not all) sections of the CEA, Exchange Act, and the rules thereunder, and (2) direct the CFTC and the SEC to issue rules, regulations, or orders, as necessary, to avoid certain duplicative or conflicting regulations relating to Full FCM/Full BDs. 67 Consistent with these provisions, the SEC is proposing to amend Exchange Act Rule 10b-10 by adding new paragraph (e) to Rule 10b-10, and proposing Exchange Act Rule 11d2-1.

The proposed amendments to Rule 10b-10 strive to avoid duplicate regulation by requiring disclosure of essentially the same type and nature of information currently required to be disclosed in confirmations of futures transactions at essentially the same time. Specifically, proposed Rule 10b-10(e) provides that a Full FCM/Full BD and a Notice BD that effects transactions for customers in security futures products in a futures account (as that term is defined in Exchange Act Rule 15c3-3(a)(15)) does not have to comply with the disclosure requirements of paragraphs (a) and (b) of Rule 10b-10 if the Full FCM/Full BD or Notice BD discloses on the SFP transaction confirmations the date the transaction was executed; the identity and number of shares or units bought or sold; the price and delivery month; the source and amount of broker remuneration; and the fact that the time of the execution of the transaction, the identity of the other party to the contract, and the capacity in which the broker-dealer was acting in effecting the transaction will be available upon written request. The information to be made available upon written request is the same type of information that futures confirmations currently disclose is available to the customer upon written request. Proposed Rule 10b-10(e) also provides that Full FCM/Full BDs and Notice BDs must disclose whether they receive payment for order flow, and if so, must provide the source and nature of such remuneration upon request. In addition, proposed Rule 10b-10(e)(2) provides a phase-in period. Under that provision, broker-dealers are not required until June 1, 2003, to disclose in SFP confirmations information on payment for order flow and the fact that certain information will be provided upon request.

In considering the potential costs and benefits of the proposed amendments to Rule 10b-10, we have considered the transaction confirmation practices of both the futures industry and the securities industry and our duty to protect consumers by requiring adequate disclosure on securities transactions. In addition, we have considered how Full FCM/Full BDs and Notice BDs effecting SFP transactions in futures accounts will have to restructure their confirmation technology. Finally, we have identified specific costs and benefits, and requested comment on additional costs or benefits that may stem from proposed Rule 10b-10(e).

As stated previously, under the CFMA, Notice BDs and Full FCM/Full BDs effecting SFP transactions in futures accounts currently are required to meet the disclosure requirements of both the CEA and the Exchange Act and the rules thereunder. The proposed amendments to Rule 10b-10 are designed to benefit Notice BDs and Full FCM/Full BDs by avoiding conflicting and duplicative regulation of the disclosure requirements of SFP transactions effected in futures accounts. The proposed amendments accomplish this benefit by clarifying the type and nature of information these entities must disclose under Rule 10b-10 in confirmations of SFP transactions effected in futures accounts. Without the proposed amendments to Rule 10b-10, all Notice BDs and Full FCM/Full BDs would need to change their confirmation systems to comply with all of the disclosure requirements of Rule 10b-10.

The amendments would require delivery of a confirmation at the same point in time and containing essentially the same type and nature of information these registrants currently provide in confirmations of transactions in futures accounts. In addition, the amendments would provide a phase-in period that gives the affected entities until June 1, 2003, to disclose in SFP confirmations information on payment for order flow and the fact that certain information will be provided upon request. Because such information is not generally provided in confirmations of futures transactions, the transitional period will allow these broker-dealers time to make the necessary adjustments to their confirmation technology, not only to amend their confirmations to make the required additional disclosures, but also to ensure that their systems are capturing all of the information that customers are entitled to receive if they make a written request.

The confirmations for SFP transactions effected in futures accounts pursuant to the proposed amendments of Rule 10b-10 should benefit customers who choose to effect SFP transactions in a futures account but have not previously traded in a futures account by providing them with information similar to the type of information they would receive if they receive confirmations of trades effected in a securities account. In addition, the confirmations of the SFP transactions effected in the futures accounts will disclose specific additional information that the customer may receive if he makes a written request. The amendments should also benefit customers that already have experience in the futures markets and decide to effect SFPs in a futures account by providing them with a confirmation that is similar in type and information to the kind of confirmations they are used to receiving on transactions effected in futures accounts. In addition, customers should also benefit from the proposed Rule 10b-10 requirement that, if entities begin to receive payment for order flow for SFP transactions executed in futures accounts, they must disclose that fact and disclose upon written request the source and nature of the remuneration.

Pursuant to paragraph (e)(1)(i) of proposed Rule 10b-10, a Full FCM/Full BD and a Notice BD that effect transactions in SFPs in a customer's futures account will not be required to meet the disclosure requirements of Exchange Act Rule 10b-10(a) and (b), which broker-dealers effecting securities transactions must generally meet. Rather, the Full FCM/Full BD and Notice BD would be required to disclose certain information in the confirmation and also disclose in the confirmation the fact that certain additional information is available upon a customer's written request.

Subparagraphs (i) and (ii) of proposed Rule 10b-10(e)(1) require Full FCM/Full BDs and Notice BDs to give or send to the customer no later than the next business day after execution of any SFP transaction, written notification disclosing the date the transaction was executed, the identity of the single security or narrow-based security index underlying the contract for the security futures product, the number of shares or units (or principal amount) of such security futures product purchased or sold, the price, the delivery month, the source and amount of any remuneration received or to be received by the broker in connection with the transaction, including, but limited to, commissions, costs, fees, and other charges incurred in connection with the transaction. We understand that futures confirmations already provide this information. 68 Therefore, the SEC does not believe that requiring this information on confirmations of SFP transactions effected in futures accounts generates any additional costs to the futures industry.

Subparagraph (iii) of Rule 10b-10(e)(1) would require the Notice BD or Full FCM/Full BD to give or send to the customer no later than the next business day after execution of any futures securities product transaction, written notification disclosing the fact that certain information will be available upon written request of the customer. This includes information about the time of the execution of the transaction, and the identity of the other party to the contract. We understand from discussions with industry representatives that futures confirmations generally disclose that this information is available upon the customer's request. 69 Therefore, the SEC does not anticipate that this requirement will impose additional costs on the futures industry.

Subparagraph (iii) of Rule 10b-10(e)(1) would also require the Notice BD or Full FCM/Full BD to give or send to the customer no later than the next business day after execution of any futures securities product transaction, written notification disclosing that information regarding whether the broker or dealer is acting as agent for such customer, as agent for some other person, as agent for both such customer and some other person, or as principal for its own account; and if the broker or dealer is acting as principal, whether it is engaging in a block transaction or an exchange of securities futures products for physical securities, will be available upon written request of the customer. From discussions with industry representatives, the SEC staff understands that Full FCM/Full BDs and Notice BDs would not incur substantial expense by adding a disclosure that information regarding the capacity in which the Full FCM/Full BD or Notice BD acted in effecting the transaction is available upon a customer's request. 70 The SEC staff, however, understands from these discussions that there would be some expense involved in requiring the collection of information relating to the capacity in which the orders are executed in the trading systems, although industry representatives were unable to quantify the potential expenses. 71 Because the futures industry has never previously been required to provide this type of information on a regular basis, it may need additional time to adjust its members' operational systems, not only to capture this information when necessary, but also to disclose on the confirmation itself that the information is available upon a customer's written request. Thus, the proposed rule contains a transitional provision. Under proposed Exchange Act Rule 10b-10(e)(2), broker-dealers have until June 1, 2003 to disclose that certain information will be provided upon written request, as long as that information can be made available if a customer submits a written request. This transitional provision should provide the futures industry with sufficient time to make the necessary adjustments to their systems to comply with this provision of proposed Exchange Act Rule 10b-10(e)(1)(iv).

Subparagraph (iv) of proposed Rule 10b-10(e)(1) also requires that the Notice BD or Full FCM/Full BD give or send to the customer no later than the next business day after execution of any futures securities product transaction, written notification disclosing whether the entity receives payment for order flow for such transactions and, if it does, it must disclose the fact that the source and nature of the compensation will be furnished upon written request of the customer. The SEC staff understands from discussions with futures industry participants that payment for order flow is not currently a practice in the futures industry. 72 Accordingly, if the practice does not arise in connection with SFP transactions effected in futures accounts, there would be no costs associated with the proposed disclosure requirement of subparagraph (iii) because there would be nothing to report.

If, however, Full FCM/Full BDS or Notice BDs begin to receive payment for order flow for SFP transactions effected in futures accounts then those entities would need to adjust their operating systems to capture this information. Based on discussions with industry representatives, the SEC understands that systems development costs should be relatively low given the fact that the rule allows for the use of a generic disclaimer, as opposed to information that would require a trade-by-trade coding change. The SEC also understands from these discussions that more extensive costs would be associated with providing specific disclosures upon request about the nature and source of any payment for order flow received in connection with a transaction. Industry representatives, however, could not quantify the potential costs, in part, perhaps, because the representatives were uncertain whether payment for order flow will become a practice in connection with SFP transactions. 73

In considering the costs Notice BDs and Full FCM/Full BDs would have to make to their confirmation systems in order to comply with the proposed amendments, we understand from discussions with industry representatives that these costs are less than the costs these entities would incur if they would have to adjust their confirmation systems to meet all of the Rule 10b-10 disclosure requirements. 74 Accordingly, the amendments to Rule 10b-10 actually reduce the costs to the affected entities.

We do not anticipate that the proposed amendments to Rule 10b-10 will provide any benefits or costs to broker-dealers effecting SFP transactions in securities accounts because they do not apply to SFP transactions effected in securities accounts. Accordingly, we believe that broker-dealers effecting SFP transactions in securities accounts would use existing systems that currently conform to all of the disclosure requirements of Rule 10b-10 for securities transactions. However, we have solicited comment on that issue and may apply the proposed amendments to Rule 10b-10 to such broker-dealers if it would result in a significant cost savings.

As we noted above, the proposed amendments to Rule 10b-10 would apply only to the approximately 5,600 fully registered broker-dealers that conduct business with the general public and the approximately 1,399 of the projected notice registered broker-dealers that conduct business with the general public. Also, as noted above, we estimate that there will be 100 million confirmations during the first year of trading of security futures products. According to the information provided by industry participants, the average cost per confirmation is estimated to be 89 cents, including postage. Therefore, we estimate that the annual paperwork cost to the industry for fiscal year 2003 will be $89 million.

We request comments on the costs and benefits of the proposed amendments to Rule 10b-10. Commenters are strongly encouraged to identify and supply any relevant data, analysis, and estimates concerning the costs and/or benefits of the proposed amendments. Commenters should address in particular whether the proposed amendments to Rule 10b-10 will generate the anticipated benefits or impose the anticipated costs. As always, commenters are specifically invited to share additional quantifiable costs and benefits that they believe may be imposed or generated by the proposed amendments to Rule 10b-10.

Proposed Exchange Act Rule 11d2-1 would provide to Full FCM/Full BDs that are effecting SFP transactions for customers futures accounts an exemption from the requirement in Exchange Act Section 11(d)(2) that a broker-dealer effecting a transaction for a customer disclose in writing, at or before the completion of the transaction, the capacity in which the broker-dealer acted when effecting the transaction. As we have previously explained, we believe that requiring Full FCM/Full BDs to comply with the capacity disclosure requirement of Exchange Act 11(d)(2) would be inconsistent with the exemptive relief provided in proposed amendments to Rule 10b-10 that does not require automatic disclosure of capacity. Therefore, to provide consistent relief, we are proposing new Rule 11d2-1.

We do not anticipate that this exemption will generate large benefits or impose great costs. However, we have identified some potential benefits and costs that could result from Rule 11d2-1.

This proposed exemption benefits Full FCM/Full BDs by avoiding any potential conflicting regulation regarding the disclosure of capacity when Full FCM/Full BDs effect SFP transactions for customers in futures accounts. This proposed exemption also is designed so that Notice BDs and Full FCM/Full BDs effecting SFP transactions in futures accounts will not have different disclosure requirements. Finally, if the Commission did not propose an exemption from Exchange Act Section 11(d)(2), certain of the anticipated benefits of the proposed amendments to Rule 10b-10 would be undermined.

Proposed Rule 11d2-1 would exempt Full FCM/Full BDS that effect SFP transactions in futures accounts from a statutory requirement to provide specific information to customers regarding the capacity those entities acted in when effecting such transactions. The exemption, therefore, prevents customers from learning this information from the confirmations they receive about these transactions. This cost, however, is ameliorated to a large extent by the fact that, pursuant to proposed amendments to Rule 10b-10, the confirmations of these transactions would inform the customers that information on capacity is available upon the customers' written request.

We request comments on the costs and benefits of proposed Rule 11d2-1 and ask commenters to provide supporting empirical data for any positions advanced. Commenters should address in particular whether proposed Rule 11d2-1 will generate the anticipated benefits or impose the anticipated costs. As always, commenters are specifically invited to share additionally quantifiable costs and benefits that they believe may be imposed or generated by proposed Rule 11d2-1.

Section 3(f) of the Exchange Act 75 requires the Commission, whenever it is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider whether the action will promote efficiency, competition, and capital formation. The proposed amendments to Rule 10b-10 and proposed Rule 11d2-1 are intended to clarify the disclosures broker-dealers effecting SFPs in customer futures accounts must make in the confirmations sent to customers regarding those transactions. We preliminarily believe that delineating the broker-dealers' disclosure obligations regarding SFP products effected in futures accounts should serve as an efficient and cost-effective means for those entities to reconcile their conflicting confirmation disclosure requirements with respect to SFPs. The proposed amendments to Rule 10b-10 and proposed Rule 11d2-1 should promote efficiency because firms may still use their present confirmation systems, after making the required adjustments, rather than having to build new confirmation systems.

In addition, the proposed amendments to Rule 10b-10 and proposed new Rule 11d2-1 are designed to give investors the information necessary to evaluate their securities transactions and the broker-dealers effecting those transactions. We preliminarily believe that our proposals would improve investor confidence and will therefore promote capital formation.

Section 23(a)(2) of the Exchange Act 76 requires the Commission, in making rules under the Exchange Act, to consider the impact that any such rule would have on competition. Exchange Act Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. As stated previously, the proposed amendments to Rule 10b-10 and new Rule 11d2-1 are designed to clarify the confirmation disclosure requirements only for broker-dealers effecting SFP transactions in customers' futures accounts and do not apply to broker-dealers effecting SFP transactions in customers' securities accounts. It is possible that the different disclosure requirements provided by the amendments to Rule 10b-10 and new Rule 11d2-1 may place a competitive burden on broker-dealers who must comply with all of the disclosure requirements of Rule 10b-10 because they effect SFP transactions in securities accounts. However, we preliminarily believe that any competitive burden imposed by these amendments and new rule are necessary and appropriate in furtherance of the purposes of the Exchange Act. In addition, we have solicited comment on whether the amendments and new rule impose any costs on broker-dealers effecting SFP transactions in securities accounts, and if so, whether they should also apply to broker-dealers effecting SFP transactions in securities accounts.

The Commission requests comment on whether the proposed amendments are expected to promote efficiency, competition, and capital formation.

Section 3(a) of the Regulatory Flexibility Act  77 requires the Commission to undertake an initial regulatory flexibility analysis of the effects of proposed rules and rule amendments on small entities, unless the Chairman certifies that the rules and rule amendments, if adopted, would not have a significant economic impact on a substantial number of small entities. 78

The proposed amendments to Rule 10b-10 and proposed Rule 11d2-1 would apply only to broker-dealers that plan to effect security futures product transactions in futures accounts for the benefit of customers. The Commission's Office of Economic Analysis has determined that as of March 31, 2001, 90 broker-dealers were also registered with the CFTC as FCMs. None of those broker-dealers is a small entity. 79 There are also 1,399 entities (which includes FCMs and introducing brokers) that may be eligible to be registered as Notice BDs. 80 The CFTC has determined that FCMs are not small entities for the purposes of the RFA. 81 In addition, the CFTC has stated that it would evaluate within the context of a particular rule proposal whether some or all of affected introducing brokers would be considered to be small entities and, if so, what economic impact that rule would have on them. 82

Under the CFMA, all Notice BDs and Full FCM/Full BDs, regardless of size, that effect SFP transactions in futures accounts must comply with Rule 10b-10, and all Full FCM/Full BDs effecting SFP transactions in futures accounts must comply with the disclosure requirements of Section 11. These disclosure requirements are in addition to the disclosures required under the CEA. The proposed amendments to Rule 10b-10 would conditionally exclude the affected firms from the general disclosure requirements of Rule 10b-10. Proposed Rule 11d2-1 would exempt affected Full FCM/Full BDs from the disclosure requirements of Section 11. Accordingly, all Notice BDs and Full FCM/Full BDs effecting SFP transactions in futures accounts would be able to send confirmations that are substantially similar to those confirmations they already provide to their customers for other futures transactions. Thus, the proposed amendments to Rule 10b-10 and proposed Rule 11d2-1, if adopted, would actually reduce the burden these entities face in meeting the disclosure requirements of both the Exchange Act and the CEA. Accordingly, we do not believe that the proposed amendments to Exchange Act Rule 10b-10 and proposed Rule 11d2-1 would have a significant economic impact on a substantial number of small entities.

The Chairman has certified that the proposed rules and amendments, if adopted, would not have a significant economic impact on a substantial number of small entities. A copy of the certification is attached as Appendix A.

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, the Commission is also requesting information regarding the potential impact of the proposed rules and rule amendments on the economy on an annual basis. Commenters should provide empirical data to support their views.

The Commission is proposing amendments to Rule 10b-10 and proposing new Rule 11d2-1 under the Exchange Act pursuant to the authority conferred by the Exchange Act, including Sections 10, 11, 17, 23(a), and 36(a)(1).  83

This proposal addresses the approval of local GBUAPCD Rule 432 and SCAQMD Rules 1158 and 1186. In the Rules and Regulations section of this Federal Register , we are approving these local rules in a direct final action without prior proposal because we believe this SIP revision is not controversial. If we receive adverse comments, however, we will publish a timely withdrawal of the direct final rule and address the comments in subsequent action based on this proposed rule. We do not plan to open a second comment period, so anyone interested in commenting should do so at this time. If we do not receive adverse comments, no further activity is planned. For further information, please see the direct final action.

See the information provided in the Direct Final action of the same title which is located in the Rules and Regulations section of this Federal Register .

Throughout this document, “we,” “us” and “our” refer to EPA.

Table 1 lists the rule addressed by this proposal with the dates that it was adopted by SJVUAPCD and submitted by the California Air Resources Board (CARB).

On January 22, 2002, EPA found Rule 4101 met the completeness criteria in 40 CFR part 51 appendix V. These criteria must be met before formal EPA review may begin.

EPA has received two prior versions of Rule 4101. SJVUAPCD adopted the first version on December 17, 1992 and CARB submitted this rule to EPA on September 28, 1994. SJVUAPCD adopted the second version on June 21, 2001 and CARB submitted the rule on October 30, 2001. EPA has not acted on these versions of the rule. While we can act on only the most recently submitted version listed in Table 1, we have reviewed materials provided with these previous submittals.

Rule 4101 limits the emissions of visible air contaminants of any type; usually, but not always particulate matter from combustion sources and industrial sites. Specifically, the rule prohibits emissions beyond a defined opacity standard. Administratively, Rule 4101 replaces the individual county-level visible emissions rules now in the SIP. The TSD has more information about Rule 4101 and the county-level rules it replaces.

Generally, SIP rules must be enforceable (see section 110(a) of the Act), must meet Reasonably Available Control Measure (RACM) requirements for nonattainment areas (see section 189), and must not relax existing requirements (see sections 110 (1) and 193). The SJVUAPCD regulates a PM nonattainment area (see 40 CFR part 81), so Rule 4101 must fulfill RACM.

Guidance and policy documents that we used to help evaluate enforceability and RACM requirements consistently include the following:

1. Portions of the proposed post-1987 ozone and carbon monoxide policy that concern RACT, 52 FR 45044, November 24, 1987.

2. “Issues Relating to VOC Regulation Cutpoints, Deficiencies, and Deviations; Clarification to appendix D of November 24, 1987 Federal Register Notice,” (Blue Book), notice of availability published in the May 25, 1988 Federal Register .

We believe Rule 4101 is consistent with the relevant policy and guidance regarding enforceability, RACM, and SIP relaxations. Prior SJVUAPCD constituent county Rules 401, 402, and 403 are now consolidated within a single rule format. The cumulative effect of the changes to these rules through the creation and amendment of Rule 4101 does not weaken the pre-existing county-level rules' emission limits. The 20% opacity limit is retained, limited exemptions are added, and an exemption is removed. The TSD has more specific information on our evaluation.

We have no recommendations at this time.

Because EPA believes the submitted rule fulfills all relevant requirements, we are proposing to fully approve it as described in section 110(k)(3) of the Act. We will accept comments from the public on this proposal for the next 30 days. Unless we receive convincing new information during the comment period, we intend to publish a final approval action that will incorporate this rule into the federally enforceable SIP.

Visible emission rules with their opacity standards are basic components of an air quality regulation program and a general RACM requirement for PM-10 regulations. Section 110(a) of the CAA requires states to submit regulations that control VE emissions. Table 2 lists some of the national milestones leading to the submittal of these local agency VE rules.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed 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 proposed 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 proposed 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 proposed 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 proposes to approve 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 proposes to approve 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 proposed 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. 22 note) do not apply. This proposed 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. ).

For additional information, see the Direct Final rule which is located in the Rules section of this Federal Register .

Under section 111(d) of the Clean Air Act, EPA published regulations at 40 CFR part 60, subpart B which require states to submit control plans to control emissions of designated pollutants from designated facilities. In the event that a state does not have a particular designated facility located within its boundaries, EPA requires that a negative declaration be submitted in lieu of a control plan.

The Maine DEP submitted the negative declaration to satisfy the requirements of 40 CFR part 60, subpart B. In the Final Rules section of this Federal Register , EPA is approving the Maine negative declaration as a direct final rule without a prior proposal. EPA is doing this because the Agency views this action as a noncontroversial submittal and anticipates that it will not receive any significant, material, and adverse comments. A detailed rationale for the approval is set forth in the direct final rule. If EPA does not receive any significant, material, and adverse comments to this action, then the approval will become final without further proceedings. If EPA receives adverse comments, the direct final rule will be withdrawn and EPA will address all public comments received in a subsequent final rule based on this proposed rule. EPA will not begin a second comment period.

For additional information, see the Direct Final rule which is located in the Rules section of this Federal Register .

Supporting Materials, and Official Record

The index and the following supporting materials are available on the Internet: “Finding a Better Cover,” Stephen F. Dwyer, Civil Engineering , January 2001, pages 58-63; “USEPA Workshop for Bioreactor Landfills, September 6-7, 2000,” U.S. EPA, September 2001; “Prediction and Measurement of Leachate Head on Landfill Liners,” Debra R. Reinhart, Florida Center for Solid and Hazardous Waste Management, Report #98-3, July 1998; “Technical Resource Document: Assessment and Recommendations for Improving the Performance of Waste Containment Systems,” EPA, Office of Research and Development, Grant # CR-821448-01-0, February 2002, (R. Bonaparte, D. Daniel, and R. M. Koerner). You can find these materials at: http://www.epa.gov/epaoswer/non-hw/muncpl/mswlficr/index.htm .

The official record for this action will be kept in paper form. Accordingly, EPA will transfer all comments received electronically into paper form and place them in the official record, which will also include all comments submitted directly in writing. The official record is the paper record maintained at the address in ADDRESSES at the beginning of this document.

EPA responses to comments, whether the comments are written or electronic, will be in a notice in the Federal Register or in a response to comments document placed in the official record for this rulemaking. EPA will not immediately reply to commenters electronically other than to seek clarification of electronic comments that may be garbled in transmission or during conversion to paper form, as discussed above.

Entities potentially affected by this action are public or private owners or operators of landfills. Affected categories and entities include the following:

This table is a guide for readers that describes which entities are likely to be affected by this action. It lists the types of entities that EPA is aware could potentially be impacted by today's action. It is possible that other types of entities not listed in the table could also be affected. To determine whether you would be impacted by this action, you should carefully examine the applicability criteria. If you have questions about whether this action applies to a particular facility, please consult Mr. Dwight Hlustick, U. S. Environmental Protection Agency, Office of Solid Waste (5306W), 1200 Pennsylvania Ave., SW., Washington, DC 20460, 703 308-8647, hlustick.dwight@epamail.epa.gov.

The authority for this proposed revision to the Criteria for Municipal Solid Waste Landfills (40 CFR part 258) is sections 1008, 2002(a), 4004, 4005(c) and 4010 of the Resource Conservation and Recovery Act of 1976 (RCRA), as amended, 42 U.S.C. 6907, 6912(a), 6944, 6945(c), 6949a.

Subtitle D of the Resource Conservation and Recovery Act (RCRA) provides that states will have the primary authority for regulating municipal solid waste. The role of the federal government is to establish an overall regulatory direction through the development of minimum national standards for nonhazardous solid waste disposal facilities, which include municipal solid waste landfills (MSWLFs). On October 9, 1991, EPA issued revised Criteria for Municipal Solid Waste Landfills (56 FR 50978). These criteria, codified in 40 CFR part 258, establish minimum national standards to ensure that “no reasonable probability of adverse effects on health or the environment” will result from solid waste disposal facilities receiving hazardous household waste and small quantity generator hazardous wastes (56 FR 50979). Today, EPA is proposing an amendment to the MSWLF criteria to allow for the issuance of limited permits for research, development, and demonstration projects. States with permit programs determinated to be adequate pursuant to RCRA section 4005(c) and 40 CFR part 239 (“approved States”) would decide whether or not to adopt this provision in their approved programs.

Today's proposed rule would allow the Director of an approved State to issue research, development, and demonstration (RD&D) permits to owners and operators of municipal solid waste landfills. The Director of a non-approved State would not have the option of issuing RD&D permits. EPA is proposing this provision to stimulate the development of new technologies and alternative operational processes for the landfilling of municipal solid waste. This proposed rule would allow the State director to waive specific provisions of the MSWLF criteria, including the (1) operating criteria, except procedures for excluding hazardous waste and explosive gas control in subpart C; (2) the design criteria in subpart D; and (3) the closure and post-closure care criteria in subpart F. In order to issue an RD&D permit waiving any of these criteria, the State Director must be satisfied that a landfill operating under an RD&D permit will pose no additional risk to human health and the environment beyond that which would result from a landfill operating under the current MSWLF criteria. Today's proposed rule is modeled on the research, development, and demonstration permit provisions in 40 CFR 270.65. That provision allows states with approved hazardous waste management programs to issue RD&D permits for innovative and experimental treatment technologies or processes at hazardous waste treatment facilities.

The permit variance proposed today is similar to that already allowed by some States which have more restrictive or stringent standards than those established in the 1991 MSWLF criteria. However, under the present federal standards set forth in the criteria, these state research permits are very limited in their scope, i.e., state rules cannot be less stringent than the MSWLF criteria. Today's proposed rule would allow more latitude in these existing state programs as well as allowing the development of new programs in other States.

EPA is proposing to allow permits for alternative design and operating requirements because EPA has become aware of new or improved technologies for landfill operations and design since the promulgation of the MSWLF criteria in 1991. These include: (1) Improvements in liner system design and materials; (2) improvements in the design of, and materials used in leachate drainage and recirculation systems; (3) new processes for more rapid degradation of waste which require the addition of water or steam; (4) new liquid distribution techniques (see EPA Docket Number F-2000-ALPA-FFFFF for FR Notice: Alternative Liner Performance, Leachate Recirculation, and Bioreactor Landfills: Request for Information and Data, April 6, 2000, FR18014); and (5) improvements in various monitoring devices (i.e., “Prediction and Measurement of Leachate Head on Landfill Liners,” Debra R. Reinhart, Florida Center for Solid and Hazardous Waste Management, Report #98-3, July 1998). As a result, the approved States would have flexibility in allowing the operation of new and innovative technologies in permitting the landfilling of municipal solid waste. The State and the owner/operator must assure there is no increased risk to human health and the environment when instituting any of the new techniques or processes which would be allowed by today's proposed rule changes.

EPA has determined that in order to ensure that human health and the environment are protected, specific criteria developed for municipal solid waste landfills should not be able to be waived. Therefore, today's proposed rule would not allow State directors to deviate from the requirements addressing: (1) Location restrictions in subpart B; (2) ground-water monitoring and corrective action in subpart E; (3) financial assurance in subpart G; (4) explosive gases control in 40 CFR 258.23 of subpart C; and (5) hazardous waste control in 40 CFR 258.20 of subpart C. EPA believes that these provisions are necessary to assure a national minimum level of protection by requiring (1) landfills to be properly located safe distances from airports, outside of wetlands, and floodplains; (2) ground-water to be adequately monitored and corrective action measures to be implemented, if needed; (3) adequate financial safeguards to be in place for closure and post-closure action; (4) explosive gases to be monitored and controlled; and (5) procedures to be in place to prevent the dumping of regulated quantities of hazardous waste in MSW landfills.

An example of a modification to the operation of an MSWLF that would be allowed to be issued under an RD&D permit would be the addition of non-hazardous liquids to accelerate decomposition in a MSWLF unit constructed with an alternative liner ( i.e ., a liner that complies with the performance design criteria in 40 CFR 258.40(a)(1) rather than a liner that complies with the design specifications in 40 CFR 258.40(a)(2)). This practice is not allowed under the existing municipal landfill criteria. Today's proposed rule would grant State Directors in approved States the authority to issue permits allowing for the addition of these liquids, provided the owner/operator demonstrates that there will be no increased risk to human health and the environment. The MSWLF owner/operator would therefore be required to demonstrate groundwater protection, landfill stability, as well as earlier landfill gas collection and control sooner than is currently required under EPA air regulations (40 CFR part 60, subparts CC and WWW). The plan for landfill gas control would need to be included as a requirement in the RD&D permit.

Another example of a variance for which an RD&D permit could be issued is use of an alternate landfill cover rather than that which is specified in the MSWLF criteria. Although the current regulations provide approved States with flexibility regarding covers for landfills, this proposed rule would allow State directors in approved States additional flexibility, while maintaining the assurance that human health and the environment are protected. EPA believes that flexibility is warranted due to varying climates, topography, and waste handling techniques in approved States. However with additional flexibility, there is the need to more closely monitor the operations of those landfills that have been issued RD&D permits.

EPA has also considered the applicability of this proposed rule to owners/operators of small landfills that are exempt from part 258 subparts D and E as specified in 40 CFR 258.1(f). EPA concluded that these small landfills should also be allowed to apply and receive RD&D permits under today's rule for the following reason: EPA is proposing to allow this because permits will be issued on a site-specific basis and the State Director has the authority to modify or eliminate the above exemptions as is needed to protect human health and the environment. Therefore, the exemptions for these facilities would remain applicable if the owner/operator applies for a permit under today's proposal, unless the State Director determines otherwise.

EPA is not proposing a process or methodology for obtaining an RD&D permit, but is leaving permit application and issuance procedures up to the States wishing to issue these permits. EPA will work with interested States in developing these procedures and will issue guidance if we determine that there is sufficient interest and need for such guidance.

Today's proposed rule would limit the duration of initial RD&D permits to three years. EPA believes that three years is an appropriate length of time to initially test and assess the performance of an innovative technology or process in an MSWLF. Similar to the RD&D permit provision for hazardous waste treatment facilities, this rule would allow the permit to be renewed for three years up to three times. Therefore, this proposal would allow for a maximum permit period of 12 years. While this is a relatively short time in the life of a landfill and a longer time may be needed for some projects, EPA believes that this is sufficient time to determine whether a project will be successful in meeting its stated goals. If a project proves successful and the owner/operator and State agree that it should continue longer than 12 years, EPA may develop a site-specific rule or other appropriate regulatory modification to the MSWLF criteria. EPA requests comment on whether three years is an appropriate permit duration and whether three permit renewals for a total project duration of 12 years is also appropriate.

EPA considered placing a size limitation on the RD&D projects to be permitted. This included the area of the landfill, as well as the quantity of waste placed in the landfill. EPA determined that due to the variation in types of projects, limitations based on size of landfill, quantity of waste, or other limitations should be determined by the State Director on a site-specific basis. Therefore, EPA is not proposing to establish any limitations based on size or waste quantity, but rather, recommends that the Directors of approved States consider whether size or capacity limitations are warranted, based on the project goals, in order to protect the environment and human health and stay within the maximum duration of the RD&D permit. However, EPA requests comment on whether there should be any limitations on the size of the landfill or quantity of waste placed in the landfill.

To ensure that projects operating under an RD&D permit meet the expectations of the research, development, or demonstration project, EPA is also proposing to require that the permittee test, monitor, and submit information to the State Director as specified in the RD&D permit in order for the Director to determine the progress of the project, insure proper operation of the landfill, and assure protection of human health and the environment. EPA is not proposing particular monitoring testing, or recordkeeping requirements, nor does the proposal specify monitoring frequency. The Agency believes that each project should be evaluated individually to determine the appropriate monitoring, testing, and records to be kept, as well as to determine how often such monitoring or testing should take place. Therefore, under the proposed rule, the State Director would make this assessment and include specific monitoring, testing, and recordkeeping requirements in each permit. Similarly, EPA is proposing that the State Director specify the reporting requirements in the permit on a site-specific basis.

As a separate requirement, the proposed rule would require the landfill owner/operator to submit an annual report to the State Director summarizing progress on how well the project is attaining its goals. Examples of goals include environmental protection, cost benefits, community benefits, compost recovery, improved ground water protection, more rapid and/or complete decomposition of waste, improved landfill gas recovery. These goals should be clearly stated in the permit in objective, measurable terms where possible. EPA specifically requests comments on whether these monitoring and reporting requirements are appropriate.

The municipal solid waste landfill criteria are implemented in one of two ways. The first, and preferred alternative, is that each State implements the criteria after EPA reviews its municipal solid waste landfill permit program or other system of prior approval and finds it to be adequate pursuant to 40 CFR part 239. The criteria contain provisions that allow States to develop and rely on alternative approaches to address site-specific conditions. Therefore, the actual planning and direct implementation of solid waste programs is principally a function of State governments and those owners and operators, including local governments, of MSWLFs, rather than the federal government. The criteria can also be “self-implementing” by landfill owners and operators in those States that have not received EPA approval of their MSWLF permitting programs. In this case, the regulations provide less flexibility for owners and operators. As of January 1, 2002, 49 States and territories had received approval of their programs and are implementing these regulations.

As discussed in a prior Federal Register notice (63 FR 57027, October 23, 1998), Tribes are not included in the definition of State under RCRA, and therefore EPA does not have authority under RCRA to approve tribal MSWLF permitting programs. However, tribes can seek the same flexibility as afforded owners and operators located in approved States through a site-specific rulemaking as discussed in the EPA draft guidance entitled, “Site Specific Flexibility Requests for Municipal Solid Waste Landfills in Indian Country,” EPA530-97-016, August 1997.

Today's proposed rule to allow RD&D permits would not be self implementing. MSWLF owners/operators would only be able to obtain an RD&D permit in approved States that adopt authority to issue such permits. Because today's proposed rule provides more flexibility than existing federal criteria, States would not be required to amend their permit programs which have been determined to be adequate under 40 CFR part 239. States would have the option to amend statutory or regulatory definitions pursuant to today's proposed rule. If a State chooses to amend its statutory or regulatory authority, and if doing so modifies the State's solid waste permit program, the State would be required to notify the EPA Regional Administrator of the modification as provided by 40 CFR 239.12. Whether a State chooses to incorporate today's proposed rule into its solid waste program would have no effect on its existing status with respect to EPA approval, i.e., State revisions to issue RD&D permits will not open previously approved solid waste programs for Federal review.

Tribes may also receive RD&D permits allowed by today's proposed rule similar to owners and operators located in approved States through a site-specific rulemaking outlined in the previously referenced draft guidance document, “Site Specific Flexibility Requests for Municipal Solid Waste Landfills in Indian Country.”

Under Executive Order 12866 [58 FR 51735 (October 4, 1993)], the Agency must determine whether a regulatory action is significant and therefore subject to OMB review and the requirements of the Executive Order. A significant regulatory action is defined by Executive Order 12866 as one that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or rights and obligations or recipients thereof; or (4) raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in Executive Order 12866. Today's proposed rule would allow, but would not require, States to provide RD&D permits to individual MSWLFs. The proposed rule would not require any MSWLF to apply for such a permit, but would provide an opportunity to those MSWLFs seeking to try innovative or new technology or processes with respect to landfilling municipal solid waste.

It has been determined that today's proposed rule is not a significant regulatory action under Executive Order 12866 and is therefore not subject to OMB review. Today's proposed rule would impose no new requirements and is intended to give more flexibility to the regulated community with significant potential net cost savings. Although net cost savings are expected, EPA is unable to estimate the magnitude of the savings because it is yet to be seen how many RD&D permits will be authorized or what kinds of permit changes or innovations might be undertaken.

The RFA generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedure Act or any other statute unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions.

For purposes of assessing the impacts of today's proposed rule on small entities, small entity is defined as: (1) a small business that is primarily engaged in the collection and disposal of refuse in a landfill operation as defined by NAICS codes 562212 and 924110 (also defined by SIC codes 4953 and 9511) with annual receipts less than 10 million dollars, as defined in accordance with the Small Business Administration (SBA) size standards established for industries listed in the North American Industry Classification System ( see http://www.sba.gov/size/NAICS-cover-page.html ); (2) a small governmental jurisdiction that is a government of a city, county, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.

SBREFA amended the Regulatory Flexibility Act to require Federal Agencies to provide a statement of the factual basis for certifying that a rule will not have a significant economic impact on a substantial number of small entities (SISNOSE). The following discussion explains EPA's determination.

After considering the economic impacts of today's proposed rule on small entities, I certify that this action will not have a significant economic impact on a substantial number of small entities (SISNOSE), since the rule has direct effects only on state agencies. The purpose of this rule is to add flexibility to the MSWLF criteria. This rule would add no new requirements to the MSWLF criteria for either existing or new facilities, nor will it increase costs for new or existing MSWLFs regardless of size. In conclusion, EPA has determined that this rule would not impose significant new burdens on small entities. Instead, this rule is expected to provide net annual benefits (in the form of regulatory relief; potential research, development, and innovation advancements; and long-term benefits) from the voluntary participation by facilities in the private sector.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and Tribal governments, and the private sector. Under section 202 of the UMRA, EPA generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local, and tribal governments, in the aggregate, or to the private sector, of $100 million or more in any one year. Before promulgating an EPA rule for which a written statement is needed, section 205 of the UMRA generally requires EPA to identify and consider a reasonable number of alternatives and adopt the least costly, most cost effective or least burdensome alternative that achieves the objective of the rule. The provisions of section 205 do not apply when they are inconsistent with applicable law. Moreover, section 205 allows EPA to adopt an alternative other than the least costly, most cost-effective or least burdensome alternative if the Administrator publishes with the final rule an explanation why that alternative was not adopted. Before EPA establishes any regulatory requirements that may significantly or uniquely affect small governments, including tribal governments, it must have developed under section 203 of the UMRA a small government agency plan. The plan must provide for notifying potentially affected small governments, enabling officials of affected small governments to have meaningful and timely input in the development of EPA regulatory proposals with significant Federal intergovernmental mandates, and informing, educating, and advising small governments on compliance with the regulatory requirements.

EPA's analysis of compliance with the Unfunded Mandates Reform Act of 1995 found that this proposed rule imposes no additional enforceable burden on any State, local or tribal governments or the private sector. Thus, today's proposed rule is not subject to the requirements of sections 202, 203, and 205 of UMRA.

The information collection requirements in this proposed rule will be submitted for approval to the Office of Management and Budget (OMB) under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. An Information Collection Request (ICR) document will be prepared by EPA and a copy, when completed, may be obtained from Susan Auby by mail at Collection Strategies Division; U.S. Environmental Protection Agency (2822); 1200 Pennsylvania Ave., NW., Washington, DC 20460, by email at auby.susan@epamail.epa.gov, or by calling (202) 260-2740. A copy can also be downloaded off the internet at http://www.epa.gov/icr when it is available.

The ICRs affected by this rule are for 40 CFR parts 239, Requirements for State Permit Program Determination of Adequacy and part 258, MSWLF Criteria. EPA has submitted the ICR for part 239 (ICR# 1608.03, OMB# 2050-152) to OMB for review. EPA included estimates of the cost for approved States to revise their existing program for today's rule. The estimated cost was $5,680 per respondent. EPA is requesting comments from States which plan to make these revisions so that EPA can better understand the expected burden that would be incurred by states who wish to make these changes. EPA is estimating that approximately five states will revise their rules to take advantage of today's proposal. In addition, EPA is also requesting information from MSWLF owners/operators on the reporting burden that they would incur due to this rule under the part 258, MSWLF criteria ICR (ICR# 1381.06, OMB# 2050-0122). Information which States are expected to require include the annual report specified in the rule as well as additional monitoring and testing requirements which may be specified by a State authority. Additional monitoring requirements could include the measurement of leachate head on the liner; landfill temperature at various locations; type, application rate and application method of various wastes including liquid wastes and water that maybe placed in the landfill; additional hydraulic studies; landfill settlement rate determinations, etc. At present EPA estimates that only two to three landfills a year will be permitted under this proposed rule over the next few years. Reporting requirements are estimated to cost between $15,000 and $25,000 per year per landfill. So total reporting costs are estimated at $30,000 to $75,000 per year for the first year and increasing at a rate of $50,000 per year for the next three years thereafter. Burden means the total time, effort, or financial resources expended by persons to generate, maintain, retain, or disclose or provide information to or for a Federal agency. This includes the time needed to review instructions; develop, acquire, install, and utilize technology and systems for the purposes of collecting, validating, and verifying information, processing and maintaining information, and disclosing and providing information; adjust the existing ways to comply with any previously applicable instructions and requirements; train personnel to be able to respond to a collection of information; search data sources; complete and review the collection of information; and transmit or otherwise disclose the information.

An Agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The OMB control numbers for EPA's regulations are listed in 40 CFR part 9 and 48 CFR chapter 15.

Comments are requested on the Agency's need for this information, the accuracy of the provided burden estimates, and any suggested methods for minimizing respondent burden, including through the use of automated collection techniques. Send comments on the ICR to the Director, Collection Strategies Division; U.S. Environmental Protection Agency (2823); 1200 Pennsylvania Avenue, N.W., Washington, DC 20460-0001; and to the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th St., N.W., Washington, DC 20503, marked “Attention: Desk Officer for EPA.” Include the ICR number in any correspondence. Since OMB is required to make a decision concerning the ICR between 30 and 60 days after June 10, 2002, a comment to OMB is best assured of having its full effect if OMB receives it by July 10, 2002. The final rule will respond to any OMB or public comments on the information collection requirements contained in this proposal.

Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” are defined in the Executive Order to include regulations 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.”

This proposed rule does not have federalism implications. It would not have substantial direct effects on the States, on the relationship between the national government and the States, 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. Implementation of this proposed rule by a State would be at the State's discretion and would not be required. Nevertheless, although section 6 of Executive Order 13132 does not apply to this rule, EPA has consulted with States through the Association of State and Territorial Solid Waste Management Officials during the development of this proposal. Thus, Executive Order 13132 does not apply to this proposed rule change.

In the spirit of Executive Order 13132, and consistent with EPA policy to promote communications between EPA and State and local governments, EPA specifically solicits comment on this proposed rule from State and local officials.

Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 6, 2000), requires EPA to develop an accountable process to ensure “meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications.” “Policies that have tribal implications” are defined in the Executive Order to include regulations that have “substantial direct effects on one or more Indian tribes, on the relationship between the Federal government and the Indian tribes, or on the distribution of power and responsibilities between the Federal government and Indian tribes.”

Under section 5(b) of Executive Order 13175, EPA may not issue a regulation that has tribal implications, that imposes substantial direct compliance costs, and that is not required by statute, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by tribal governments, or EPA consults with tribal officials early in the process of developing the proposed regulation. Under section 5(c) of Executive Order 13175, EPA may not issue a regulation that has tribal implications and that preempts tribal law, unless the Agency consults with tribal officials early in the process of developing the proposed regulation.

EPA has concluded that this proposed rule would have no new tribal implications. It would not present any additional burden on the tribes, but would allow more flexibility for compliance with the MSWLF criteria. It would neither impose substantial direct compliance costs on tribal governments, nor preempt State law. Thus, the requirements of sections 5(b) and 5(c) of the Executive Order do not apply to this rule.

Executive Order 13045, “Protection of Children from Environmental Health Risks and Safety Risks” applies to any rule that: (1) Is determined to be “economically significant” as defined under Executive Order 12866, and (2) concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency.

This proposed rule is not subject to Executive Order 13045 because it is not an economically significant rule as defined by Executive Order 12866, and because it would not affect decisions involving the environmental health or safety risks to children.

Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (“NTTAA”), Public Law No. 104-113, 12(d) (15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus standards bodies. The NTTAA directs EPA to provide explanations to Congress, through OMB, when the Agency decides not to use available and applicable voluntary consensus standards.

This proposed rulemaking does not involve technical standards. Therefore, EPA is not considering the use of any voluntary consensus standards.

Under Executive Order 12898, “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations,” as well as through EPA's April 1995, “Environmental Justice Strategy, OSWER Environmental Justice Task Force Action Agenda Report,” and National Environmental Justice Advisory Council, EPA has undertaken to incorporate environmental justice into its policies and programs. EPA is committed to addressing environmental justice concerns, and is assuming a leadership role in environmental justice initiatives to enhance environmental quality for all residents of the United States. The Agency's goals are to ensure that no segment of the population, regardless of race, color, national origin, or income, bears disproportionately high and adverse human health and environmental effects as a result of EPA's policies, programs, and activities, and all people live in clean and sustainable communities.

The Agency believes that today's proposed rule which would provide for research, development, and demonstration permits for municipal solid waste landfills would not have an adverse environmental or economic impact on any minority or low-income group, or on any other type of affected community since these standards would not significantly affect the location of any solid waste collection facility.

This proposed rule is not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)) because it is not a significant regulatory action under Executive Order 12866.

For the reasons set forth in the preamble, EPA is proposing to amend 40 CFR part 258 as follows:

Section 104 of the Marine Mammal Protection Act of 1972, as amended (16 U.S.C. 1361-1407) (MMPA), sets a general moratorium, with certain exceptions, on the taking and importation of marine mammals and marine mammal products and makes it unlawful for any person to take, possess, transport, purchase, sell, export, or offer to purchase, sell, or export, any marine mammal or marine mammal product unless authorized. Take, as defined by section 3(13) of the MMPA means to harass, hunt, capture, or kill, or attempt to harass, hunt, capture, or kill any marine mammal.

“Harassment” is defined at section 3(18) of the MMPA as any act of pursuit, torment, or annoyance which—(i) has the potential to injure a marine mammal or marine mammal stock in the wild; or (ii) has the potential to disturb a marine mammal or marine mammal stock in the wild by causing disruption of behavioral patterns, including, but not limited to migration, breathing, nursing, breeding, feeding, or sheltering (16 U.S.C. 1362). You can find other definitions relevant to our proposed action at 50 CFR 18.27(c).

The MMPA contains exceptions to the moratorium. For example, section 101(a)(5)(A) authorizes the Secretary, upon request by citizens of the United States who engage in a specified activity (other than commercial fishing) within a specified geographical region, to allow the incidental, but not intentional, take of small numbers of a species or stock of marine mammal if certain findings are made and regulations prescribed. The Secretary must find that the total of such taking during the specified time period (not more than five consecutive years each) will have a negligible impact on the species or stock and will not have an unmitigable impact on the availability of such species or stock for subsistence uses. The regulations implementing the MMPA define “negligible impact” as an impact resulting from the specified activity that cannot be reasonably expected to, and is not reasonably likely to, adversely affect the species or stock through effects on annual rates of recruitment or survival (50 CFR 18.27(c)). If such findings are made, we would then establish specific regulations setting forth permissible methods of taking pursuant to such activity, means of effecting the least practicable adverse impact on the species or stock and their habitat, and requirements for monitoring and reporting such taking. We have determined that the subsistence provision requiring a finding that the total taking not have an unmitigable impact on the availability of the species or stock for subsistence uses is not applicable to Florida manatees.

Following promulgation of incidental take regulations, U.S. citizens (including government agencies) could apply for a Letter of Authorization, which, if granted, would authorize incidental take associated with an applicant's activities. Procedures for obtaining a Letter of Authorization are described at 50 CFR 18.27(f).

The largest known human-related cause of manatee deaths is collisions with watercraft. Between 1976 and 1999, watercraft-related deaths increased at an average of 7.2 percent per year. In 2000 and 2001, watercraft-related deaths accounted for 29 percent and 25 percent, respectively. From 1996 to 2001, watercraft-related deaths have been the highest on record, ranging from 54 to 82.

In the State of Florida, County, State, and Federal agencies engage in a variety of activities that may result in the incidental, unintentional take of manatees by watercraft. Many of these activities relate to the use and regulation of watercraft operated in Florida waters accessible to manatees, including: (1) Regulating boater behavior on the water (e.g., speed zones and vessel registration); (2) permitting construction of watercraft access facilities (marinas, docks, boat ramps); (3) funding construction of watercraft access facilities; (4) operating watercraft access facilities; and (5) operating watercraft. To date, there is no authorization for the incidental, unintentional death, injury, or harassment of manatees caused by these otherwise legal activities.

We engage in, or have the authority to engage in, each of the above five categories of activities; therefore, our activities could result in the incidental, unintentional take of manatees. As such, we have initiated development of incidental take regulations for our own activities related to watercraft in Florida. We have also encouraged other Federal and State agencies involved in these same types of activities to join us in this evaluation in order to develop a more comprehensive rule that could address a broader range of activities that may result in watercraft-related take of manatees.

The Environmental Impact Statement will evaluate the environmental effects of the incidental take regulations, and will evaluate alternatives for structuring and implementing the proposed regulations.

Persons wishing to provide relevant information and comments regarding this activity should submit these to the above address. For information, please contact the individual identified above in the section entitled FOR FURTHER INFORMATION CONTACT.

Interested persons are invited to submit comments regarding our preparation of an EIS related to development of incidental take regulations for manatees in Florida. We welcome any and all suggestions, materials, and recommendations to assist and guide us in this endeavor. Specifically, we are seeking:

• Information on the direct, secondary and cumulative effects of this rulemaking on manatees, manatee habitat, and other aspects of the human environment;

• Suggestions regarding the range of alternatives to be considered in the EIS, including alternatives for structuring the proposed incidental take regulations, and alternatives to incidental take regulations;

• Information regarding the potential social and economic effects of the proposed regulations;

• Information on potential mitigative measures, including technological measures, that would result in the least practicable impact on manatees and their habitat; and,

• Suggested means and measures to report and monitor the effects of incidental take on manatees.

Our practice is to make comments, including names and home addresses of respondents, available for public review during regular business hours. Individual respondents may request that we withhold their name and home address from the EIS record, which we will honor to the extent allowable by law. If you wish us to withhold your name and/or address, you must state this prominently at the beginning of your comment. However, we will not consider anonymous comments. We will make all submissions from organizations or business, and from individuals identifying themselves as representatives or officials of organizations or businesses, available for public inspection in their entirety.