Pursuant to Marketing Order No. 911 (7 CFR Part 911), hereinafter referred to as the “order” and the applicable provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act,” it is hereby directed that a referendum be conducted to ascertain whether continuance of the order is favored by growers. The referendum shall be conducted during the period September 9, through September 28, 2002, among Florida lime growers in the production area. Only growers that were engaged in the production of Florida limes during the period of April 1, 2001, through March 31, 2002, may participate in the continuance referendum.

The USDA has determined that continuance referenda are an effective means for ascertaining whether growers favor continuation of marketing order programs. The USDA would consider termination of the order if less than two-thirds of the growers voting in the referendum and growers of less than two-thirds of the volume of Florida limes represented in the referendum favor continuance. In evaluating the merits of continuance versus termination, the USDA will consider the results of the referendum and other relevant information regarding operation of the order. The USDA will evaluate the order's relative benefits and disadvantages to growers, handlers, and consumers to determine whether continuing the order would tend to effectuate the declared policy of the Act.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the ballot materials used in the referendum herein ordered have been submitted to and approved by the Office of Management and Budget (OMB) and have been assigned OMB No. 0581-0189 for Florida limes. It has been estimated that it will take an average of 20 minutes for each of the approximately 75 growers of Florida limes to cast a ballot. Participation is voluntary. Ballots postmarked after September 28, 2002, will not be included in the vote tabulation.

Doris Jamieson and Chris Nissen of the Southeast Marketing Field Office, Fruit and Vegetable Programs, AMS, USDA, are hereby designated as the referendum agents of the USDA to conduct such referendum. The procedure applicable to the referendum shall be the “Procedure for the Conduct of Referenda in Connection With Marketing Orders for Fruits, Vegetables, and Nuts Pursuant to the Agricultural Marketing Agreement Act of 1937, as Amended” (7 CFR Part 900.400 et seq. ).

Ballots will be mailed to all growers of record and may also be obtained from the referendum agents and from their appointees.

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 2001-NE-11-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. 2001-NE-11-AD, 12 New England Executive Park, Burlington, MA 01803-5299.

On November 16, 1994, a TPE331-11U turboprop uncontained engine failure and in-flight shutdown occurred due to the separation of the first stage Ti 6-4 compressor impeller. The failed impeller, part number (P/N) 896223-3, which was weld repaired at 3,983 cycles-since-new (CSN), had accumulated 27,456 CSN. The crack initiated in the backface at the fillet adjacent to the curvic arm and propagated forward along the bore in low cycle fatigue (LCF). Compressor impellers, P/N's 896223-1, −2, −3 and −7 and 3107109-2, are similarly designed to P/N 896223-3, and are affected by this proposal. The FAA has determined that weld repairs and the associated heat treatment on these impellers reduce LCF mechanical properties and may contribute to impeller failures. Failure of the first stage compressor impeller, if not corrected, could result in an uncontained separation of the impeller, in-flight shutdown and secondary engine and aircraft damage.

The FAA has reviewed and approved the technical contents of Honeywell International Inc. Alert Service Bulletin (ASB) TPE331-A72-2083, Revision 1, dated May 17, 2002, which provides a listing of certain impellers by serial number which have been weld repaired and provides impeller replacement information.

Since an unsafe condition has been identified that is likely to exist or develop on other Honeywell International Inc TPE331-3, −5, −6, −8, −10, and −11 series turboprop and TSE331-3 series turboshaft engines of the same type design, the proposed AD would require the replacement of suspect impellers with serviceable impellers. The actions would be required to be done in accordance with the ASB described previously.

There are approximately 2,040 engines of the affected design in the worldwide fleet. The FAA estimates that 1,020 engines installed on aircraft of U.S. registry would be affected by this proposed AD. The FAA estimates that 1,000 engines will have the required actions done during a scheduled engine overhaul. The FAA also estimates that it would take approximately 2 work hours per engine to do the proposed actions during scheduled engine overhauls and 80 work hours per engine during unscheduled engine overhauls, and that the average labor rate is $60 per work hour. Required parts would cost approximately $9,600 per engine to do the proposed actions during scheduled engine overhauls and $14,600 per engine which includes consumables, during unscheduled engine overhauls. Based on these figures, the total cost of the proposed AD on U.S. operators is estimated to be $10,108,000.

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.

The Commission is requesting public comment on the proposed amendments to rule 206(4)-2 [17 CFR 275.206(4)-2]  2 under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (the “Advisers Act” or “Act”) and to Part II, Item 14 of Form ADV [17 CFR 279.1].

Rule 206(4)-2 under the Advisers Act requires each investment adviser that has custody of client funds or securities to deposit client funds in bank accounts and to segregate and identify client securities and hold them in safekeeping. The rule also requires the adviser to send quarterly account statements to each client whose assets are in the adviser's custody, and to have an independent public accountant conduct an annual surprise examination of the custodied assets.

The Commission is proposing to amend rule 206(4)-2 to reflect modern custodial practices and clarify circumstances under which an adviser has custody of client assets and thus must comply with the rule. The amendments would require advisers that have custody to maintain client funds and securities with a broker-dealer, bank or other “qualified custodian.” If the qualified custodian sends monthly account statements directly to an adviser's clients, the adviser would be relieved from sending its own account statements and undergoing an annual surprise examination. The proposed amendments would exempt advisers from the custody rule with respect to clients that are registered investment companies or are limited partnerships or other pooled investment vehicles that are subject to annual audit by an independent public accountant. The proposed amendments would also add a definition of “custody” to the rule and illustrate circumstances under which an adviser has custody of client assets. Finally, the proposed amendments would remove the requirement in Form ADV that advisers with custody include an audited balance sheet in their disclosure brochure to clients.

Rule 206(4)-2 requires advisers to protect the assets that their clients have entrusted to their custody. We adopted the rule in 1962, shortly after Congress amended the Advisers Act to give us rulemaking and inspection authority under the Act's anti-fraud provisions. 3 A key factor prompting us to ask Congress for this authority was concern about the custodial practices of advisers and the safety of client assets. 4

Rule 206(4)-2 applies to advisers that are registered with the Commission and that have custody of client funds or securities. 5 Under the rule, the adviser must deposit client funds in bank accounts that contain only client funds, and must segregate and identify client securities and hold them in a reasonably safe place. 6 Immediately after accepting custody of a client's funds or securities, the adviser must notify the client of where and how they will be maintained. 7 7 Each quarter, the adviser must send clients account statements, and at least once each year, the adviser must have an independent public accountant conduct a surprise examination of all client funds and securities in the adviser's custody. 8

We have not amended rule 206(4)-2 substantively since we adopted it over forty years ago. 9 Since then, custodial practices have changed and, as a result, portions of the rule have become outdated or inconsistent with modern custodial practices. 10 Advisers' business practices also have evolved, increasing the likelihood that advisers may obtain custody of client assets in circumstances that we may not have anticipated in 1962. 11 Our staff has attempted to accommodate these evolving business practices, and to reduce unnecessary compliance burdens on advisers, by issuing numerous no-action and interpretive letters and releases that helped to clarify the operation of the rule. 12 Many underlying issues remain, however, that can be resolved only through amendments to the rule. In addition, the accumulated guidance in these no-action and interpretive letters, while helpful to advisers, has diminished the transparency of the rule's requirements because an adviser seeking to understand the rule must review a large body of letters in addition to the rule itself.

Today, as part of our ongoing effort to review and modernize federal securities law, we are proposing comprehensive amendments to rule 206(4)-2 under the Advisers Act. The amendments, which we describe in more detail below, are designed to enhance the protections afforded to advisory clients' assets, harmonize the rule with current custodial practices, and clarify circumstances under which advisers have custody of client assets.

Currently, we define “custody” in our instructions to Form ADV. 13 We propose to incorporate that definition into rule 206(4)-2, provide examples that illustrate the application of the definition, and include, within the rule, a limited exception for advisers that inadvertently receive client assets.

The proposed definition would provide that an adviser has custody of client assets when it holds, “directly or indirectly, client funds or securities or [has] any authority to obtain possession of them.”  14 Accordingly, an adviser must comply with the rule when it has access to client funds and securities as well as when the adviser holds those assets. In either circumstance, clients are at risk that their assets may be lost, misused, misappropriated, or subject to the adviser's financial reverses. 15

We propose to include, in the definition, three examples designed to illustrate circumstances under which an adviser has custody of client assets. 16 The first example clarifies that an adviser has custody when it has any possession or control of client funds or securities. 17 An adviser that holds clients' stock certificates or cash, even temporarily, puts those assets at risk of misuse or loss. We recognize, however, that an adviser may inadvertently receive client assets when a third party sends funds or securities to a client via the adviser, or when a client attempts to route funds or securities to his custodian through the adviser's office. To avoid causing an adviser to violate the rule inadvertently as a result of actions by other persons, the rule would expressly exclude inadvertent receipt by the adviser of client funds or securities, so long as the adviser returns them to the sender within one business day of receiving them. 18 We also propose to clarify that an adviser's possession of a check drawn by the client and made payable to a third party will not be considered possession of client funds for purposes of the custody definition. 19 The client's relationship with the drawee bank should provide the client with protections comparable to the protections the proposed rule would provide. 20

The second example clarifies that an adviser has custody if it has the authority to withdraw funds or securities from a client's account. 21 An adviser with power of attorney to sign checks on a client's behalf, to withdraw funds or securities from a client's account, or to dispose of client assets for any purpose other than authorized trading has access to the client's assets. 22 Similarly, an adviser authorized to deduct advisory fees or other expenses directly from a client's account has access to, and therefore has custody of, the client funds and securities in that account. 23 These advisers might not have possession of client assets, but they have the authority to obtain possession.

The last example clarifies that an adviser has custody if it is the legal owner of the client assets or has access to those assets. 24 One common instance is a firm that acts as both general partner and investment adviser to a limited partnership. 25 By virtue of its position as general partner, the adviser generally has authority to dispose of funds and securities in the limited partnership's account and thus has custody of client assets. 26

Our proposed definition of “custody” is based on our longstanding interpretation of the term currently used in the rule.

• Should we revise the definition in any way?

• The proposed rule would continue to interpret “custody” broadly to include advisers’ access to client funds and securities. Does that definition continue to work well to protect client assets?

• Advisers that withdraw their fees from clients' accounts and rely on staff letters to avoid application of the custody rule send clients invoices detailing how those fees were calculated. Should our rules require advisers that deduct fees from clients' accounts to send such invoices to those clients?

• Will the examples be helpful? Are there additional examples we should add?

Rule 206(4)-2 currently requires advisers to maintain client funds with a bank, but does not require that client securities be held in a brokerage account or with any other type of financial institution. 27 Almost all advisers that have custody of client securities maintain them in accounts with a broker or a bank, but on occasion our examiners discover an adviser keeping certificates in office files or in a safety deposit box. Such practices do not provide adequate protection for client securities, because these certificates may too easily be lost, stolen, or destroyed. 28 We are therefore proposing to amend the rule to require that advisers maintain both client funds and securities with a qualified custodian in an account either under the client's name or under the adviser's name as agent or trustee for its clients. 29

“Qualified custodians” under the proposed rule would include the types of financial institutions that customarily provide custodial services and are regulated and examined by their regulators with respect to those services. 30 These would include banks, 31 savings associations, 32 registered broker-dealers, 33 and registered futures commission merchants. 34 We recognize that advisory clients often invest in securities traded on foreign exchanges and their advisers must, as a practical matter, maintain securities with financial institutions in foreign countries where the securities are traded. 35 With respect to securities for which the primary market is in a country other than the United States, and to cash and cash equivalents reasonably necessary to effect transactions in those securities, we would treat financial institutions that customarily hold financial assets in that country and that hold the client assets in customer accounts segregated from their proprietary assets as qualified custodians.

Many advisers registered with us also would be qualified custodians under the proposed rule. 36 These advisers could maintain their own clients' assets, subject to the account statement requirements described below and the custody rules imposed by the regulators of the advisers' custodial functions. Advisers could also maintain client assets with affiliates that are qualified custodians.

We request comment on our proposal to require client funds and securities to be maintained by a qualified custodian.

• Should we require that all client funds and securities be maintained with qualified custodians?

• Are there other financial institutions that should be included as qualified custodians?

• Is our proposal with respect to foreign qualified custodians too broad— should we limit them to entities regulated by a foreign financial regulatory authority? Alternatively, is the proposal too narrow—how many advisory clients would need to have a foreign custodian hold funds or securities other than those permitted under the proposed amendments?

• Should the rule permit advisers that are qualified custodians to maintain their clients' funds and securities themselves? With affiliated qualified custodians?

Rule 206(4)-2 seeks to deter misuse of client assets by requiring an adviser with custody to send each client quarterly account statements, 37 and to engage an independent public accountant to conduct an annual surprise examination of client assets in custody. 38 Advisers have complained about the cost of annual surprise examinations and have sought to avoid them. 39 Moreover, experience has shown that the current rule has limited deterrent effect. Advisers that intend to misuse client assets can fabricate client account statements  40 and, because the surprise examination is performed only annually, many months may pass before the accountant has an opportunity to detect a fraud.

After reviewing the operation of the current rule and evaluating its benefits and costs, we are proposing an entirely different approach to protect advisory clients—an approach that would rely on periodic disclosure of account information by a qualified custodian rather than rely on a surprise examination. We propose to exempt advisers from the requirements to send quarterly account statements and to undergo annual surprise examinations if the qualified custodian sends monthly account statements directly to each advisory client. 41 Qualified custodians' delivery of account statements to clients directly should provide clients with confidence that any erroneous or unauthorized transactions or withdrawals by an adviser have been reflected.

We recognize that our new approach may not work in all custodial arrangements. Some advisers do not disclose the identity of their clients to their custodians to prevent a potential competitor from having access to their clients. Others may wish to protect the privacy of certain well-known clients. To accommodate this business practice, the proposed rule would require an adviser to continue sending quarterly account statements to each client that does not receive account statements directly from the qualified custodian and to undergo an annual surprise examination to verify the funds and securities of those clients. 42 To enhance our ability to protect advisory clients' assets by intervening as early as possible, the proposed amendments would require notice of any material discrepancies found during the examination. The rule would require the accountant finding such discrepancies during an examination to notify our Office of Compliance Inspections and Examinations. 43

The proposed amendments contain a special provision requiring account statements (whether delivered by the qualified custodian or the adviser) to be sent directly to the limited partners of a limited partnership (or to their independent representative) if the adviser to the limited partnership also acts as its general partner and has custody of client assets. 44 As general partner, the adviser generally has custody of these client assets. 45 This special provision would avoid the adviser's being the sole recipient of account statements in its capacity as general partner of the limited partnership. 46 Delivery of account statements to the adviser but not to the limited partners would not, of course, deter the adviser's misuse of client assets.

• We request comments on our proposal to rely on account statements delivered to clients by qualified custodians instead of relying on investment advisers sending account statements and undergoing annual surprise examinations. Would the proposal afford equivalent protection to clients? Should the rule expressly require advisers to review the custodian's statement and identify any discrepancies?

• Should advisers that are acting as their clients' qualified custodians or that are using affiliated qualified custodians continue to be subject to annual surprise examinations?

• We understand that many, perhaps most, qualified custodians already send account statements directly to customers as a matter of practice, and therefore the effect of our proposal would be to eliminate the cost of annual surprise examinations for many advisers without imposing additional burdens. We request comment on our understanding and expectations.

• We propose to require monthly account statements from qualified custodians so that clients may identify any irregularities earlier. We understand that most qualified custodians send monthly account statements to clients as a matter of practice. 47 We request comment on this understanding.

• The proposed rule would permit independent representatives to receive account statements from qualified custodians on behalf of investors in limited partnerships and other pooled investment vehicles. Are there any other types of clients that need independent representatives to receive account statements on their behalf?

• We also request comment on our proposal to require advisers with custody to continue sending quarterly account statements to clients and to continue undergoing annual surprise examinations if the qualified custodian does not send account statements directly to the adviser's clients. We understand that most custodians do send statements directly—is there a need for this alternative procedure? Should we require these advisers to obtain their clients' informed consent prior to using this alternative procedure? If not, should we require advisers that use this alternative procedure to disclose, to clients, the risks involved in receiving account statements quarterly from the adviser itself rather than monthly from a qualified custodian, or to make other disclosures?

• Should we require additional safeguards to deter misuse of clients' assets by advisers that send account statements to clients themselves—for example, should we require these advisers to send their statements to clients monthly rather than quarterly? Should the rule require surprise examinations to be conducted more often than annually? Are there other requirements or procedures that would further protect these advisers' clients' assets?

We propose to exempt advisers from the rule with respect to clients that are registered investment companies. Registered investment companies and their advisers must comply with the strict requirements of section 17(f) of the Investment Company Act of 1940 and the custody rules we have adopted under that section. 48 We believe that applying rule 206(4)-2 in addition to those requirements may not increase safeguards on investment company assets.

We also propose to exempt advisers from the rule with respect to client assets held in pooled investment vehicles such as limited partnerships or limited liability companies if the pooled investment vehicle (i) has its transactions and assets audited at least annually; and (ii) distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 90 days of the end of its fiscal year. 49 These investors will have established, by contract, a means to protect themselves from misuse of pool assets. Moreover, a periodic report by auditors may be more useful to them than receiving reports of the large number of transactions in pool assets.

• We request comment on our proposal to exempt advisers from the rule with respect to pooled investment vehicles that are subject to an annual audit. Should the rule expressly require the adviser to maintain the assets of the pooled vehicle with a qualified custodian?

• We understand that this exemption would apply to most limited partnerships, limited liability companies and other pooled investment vehicles, and thus would eliminate a great number of issues and concerns that have arisen under the current rule and that have been addressed in numerous staff no-action or interpretive letters. 50 We ask for comment on this understanding.

We are not proposing to retain the current exemption from the rule for advisers that are also registered broker-dealers. 51 The proposed rule would permit advisers that are also registered broker-dealers (and advisers that are also other types of qualified custodians) to hold custody of their clients' funds and securities without being subject to annual surprise examinations so long as they send monthly statements to their clients. Broker-dealers already are required to send confirmations and account statements to their customers, including those that are advisory clients. 52 Most advisers that also are registered broker-dealers should therefore already be in compliance with the proposed rule and face no additional burdens.

Advisers that have custody of client assets must include, in their disclosure statements (“brochures”) sent to clients, a balance sheet audited by an independent public accountant. 53 We adopted the audited balance sheet requirement, in part, to assist clients in determining whether their adviser may face financial pressure to misuse the assets entrusted to it. 54 A balance sheet, however, may give an imperfect picture of the financial health of an advisory firm—many profitable advisers have few financial assets. Moreover, rule 206(4)-4  55 now requires advisers to disclose to their clients any financial condition that is reasonably likely to impair the adviser's ability to meet its contractual commitments to its clients, a disclosure requirement that did not exist in 1979 when the audited balance sheet requirement was adopted. 56 We believe that this current disclosure requirement is a better means to warn clients of when their assets may be at additional risk, and that clients should not have to rely for protection on reviewing balance sheet information. We are therefore proposing to eliminate the requirement that advisers with custody include a balance sheet in their client brochures.

• We request comment on this proposal. Have advisory clients found the balance sheet useful in evaluating the risks to their assets in advisers' custody? Should we retain the requirement?

The Commission requests comment on the rule amendments proposed in this Release, suggestions for additional changes to the rules and comment on other matters that might have an effect on the proposals contained in this Release. For purposes of the Small Business Regulatory Enforcement Fairness Act of 1966, the Commission also requests information regarding the potential impact of the proposed rule on the economy on an annual basis. Commenters should provide empirical data to support their views.

The Commission is sensitive to the costs and benefits resulting from its rules. Rule 206(4)-2 seeks to protect clients' assets in the custody of advisers from misuse or misappropriation, by requiring advisers to send each client quarterly account statements and to have independent public accountants conduct annual surprise examinations of the custodied assets. In the 40 years since we adopted the rule, custody practices in the securities markets have changed, and some provisions of the rule have become outdated. In addition, advisers have complained about the cost of annual surprise examinations. Moreover, experience has shown that the current rule has limited deterrent effect on investment advisers determined to misuse client assets. Our proposed amendments to the rule would require advisers to maintain clients' assets with qualified custodians and excuse advisers from annual surprise examinations if the qualified custodians send monthly account statements to the clients directly.

We believe the vast majority of advisers already maintain their clients' assets with qualified custodians who prepare monthly account statements. These amendments will enhance the protections afforded to clients' assets while at the same time reducing advisers' compliance burden. We have identified certain costs and benefits that may result from the proposed rule amendments. We request comment on the costs and benefits of the proposed rule amendments, and encourage commenters to identify, discuss, analyze, and supply relevant data regarding these or any additional costs and benefits.

Our rules currently require advisers with custody of client assets to deposit client funds in bank accounts that contain only client funds, and to segregate and identify client securities and hold them in a reasonably safe place. 57 Each quarter, these advisers must send clients account statements, and at least once each year, these advisers must have an independent public accountant conduct a surprise examination of all the client funds and securities in the advisers' custody. 58 In addition, advisers with custody of client funds or securities must include an audited balance sheet with the disclosure brochure they send to their clients.

Rule 206(4)-2 has not been substantively amended since its adoption over 40 years ago. The proposed amendments would make several changes to the existing rule, to modernize it to reflect developments in securities market custody practices. First, advisers with custody of client funds and securities would be required to maintain those assets in accounts with qualified custodians, such as a broker or a bank. 59 Under the current rule, advisers are required to maintain clients' funds in a bank, but they are not required to maintain clients' securities with a qualified custodian. Second, if the qualified custodian sends monthly account statements directly to the advisory clients, the adviser would not be required to send account statements. The current rule requires advisers to send each client a quarterly account statement itemizing the funds and securities in the advisers' custody and all transactions for the account. Third, if the qualified custodian sends monthly account statements directly to the advisory clients, the adviser would not be required undergo an annual surprise examination. Under the current rule, advisers with custody must have an independent public accountant conduct an annual verification of the accuracy of account statements provided to the adviser's clients. Fourth, for any advisers subject to the annual surprise examination requirement, their independent public accountants would be required to notify the Commission of any material discrepancies that they uncover in the examination. The current rule does not require any such notice. Fifth, we would eliminate the current requirement that advisers with custody include an audited balance sheet with their disclosure brochures.

In addition, the proposed amendments would add new provisions to the custody rule to enhance its transparency and reflect advisers' business practices. First, the proposed amendments insert a definition of “custody” into the rule (based on the definition currently used in Form ADV) together with examples to illustrate circumstances under which an adviser has custody. 60 Second, a special provision would require account statements to be sent directly to the limited partners (or beneficial owners in other types of pooled investment vehicles) if the adviser also serves as the general partner of the limited partnership and has custody (or holds a managing position in other types of pooled investment vehicles and has custody). Third, we would exempt client assets held in a limited partnership or other pooled investment vehicle from the requirements of the rule if the partnership is audited at least annually and the audited financial statements are delivered to limited partners.

Based on advisers' filings with us, we estimate that a relatively small portion of investment advisers registered with us—approximately 11 percent—have custody of clients' assets. 61 Of the 867 advisers who currently report having custody, many also report that they are broker-dealers (123) or banks (33). 62 Advisers that are also registered broker-dealers or banks would be “qualified custodians” under the proposed rule and may keep custody of their own clients' assets. We expect that all 156 of these advisers  63 would, in their capacity as qualified custodians, send monthly account statements to their advisory clients. Of the remaining 711 advisers that report having custody, 64 we estimate that 95 percent of them (675 advisers)  65 would arrange to have qualified custodians send monthly account statements to 99 percent of their clients, and would prepare their own statements for 1 percent of their clients. 66 We expect that the remaining 36 advisers  67 would prepare their own statements for all of their clients. 68

Improved protection for advisory clients. We have designed the proposed amendments to offer greater protection for advisory clients. As discussed above, the proposed amendments would exempt advisers from the requirements to send each client account statements and to undergo an annual surprise examination of the client's account if a qualified custodian sends monthly account statements directly to the advisory client. We expect that, as a result, most advisers will have qualified custodians deliver account statements directly to advisory clients, rather than pay the costs of annual surprise examinations. Clients' early identification of questionable transactions upon receipt of an accurate account statement from a qualified custodian on a monthly basis, rather than an annual surprise examination that may not occur for many months, should allow clients to move more swiftly and to reduce their assets' exposure to malfeasance by advisers. Similarly, we anticipate that the special provision for providing account statements for limited partnerships and other pooled investment vehicles should provide investors (or their independent representatives) the opportunity to identify any erroneous or unauthorized transactions or withdrawals by the partnership's adviser.

As discussed above, we expect that nearly all of the clients of advisory firms that currently have custody of their clients' assets will receive monthly statements from qualified custodians under the rule. 69 The potential benefit to each client is not, however, quantifiable. We also infer that most of these clients already receive monthly statements from qualified custodians, as a result of voluntary practices by their advisers. The potential benefit of having this practice institutionalized in a regulation is also not quantifiable.

In addition, as discussed above, we estimate that a few advisers will not avail themselves of the option to have qualified custodians send monthly account statements to some or all of their clients, and that approximately 28,845 clients will continue to be protected primarily by annual surprise examinations of these advisers as a result. 70 The proposed amendments would require independent public accountants conducting these examinations to advise the Commission of any material discrepancies they discover in the examination. This will enhance the safety of these clients' assets, because the Commission will be able to act promptly and preempt further losses resulting from malfeasance by the adviser. The potential benefit to clients in this regard is not quantifiable.

The rule will also provide greater protection for advisory clients by requiring advisers to maintain clients' securities with a qualified custodian. Based on our examination experience, it is rare for an adviser to retain physical custody of any particular client's securities. Thus, advisory clients are already receiving this benefit as a matter of practice in most instances. The potential benefit of having this practice institutionalized in a regulation is not quantifiable.

Remove unnecessary regulatory requirements. We estimate that approximately 744 advisers are currently required to undergo annual surprise examinations. 71 The Commission staff has estimated, in connection with Paperwork Reduction Act analyses, that on average, an adviser spends approximately 335 hours and pays an additional $8,000 annually in connection with undergoing annual surprise examinations under the existing rule. 72 The proposed amendments to rule 206(4)-2 would provide these advisers with the opportunity to avoid the costs of these annual surprise examinations. As discussed above, we estimate that only 36 advisers will continue to incur the costs of an annual surprise examination with respect to all their clients, and another 675 will only incur these costs with respect to one percent of their clients. 73 The new compliance requirements under the amended rule 206(4)-2 would focus on investment advisers ascertaining whether qualified custodians are sending monthly account statements to each of the adviser's clients. This sets forth a much simpler and less expensive compliance procedure.

We request comment on our estimates of the number of advisers that would avail themselves of the opportunity to avoid the time and costs of an annual surprise examination under the rule. We also request comments quantifying the reduction in costs that would be obtained through the new compliance procedure.

In addition, for other advisers who have custody but rely on procedures set out in staff no-action letters in lieu of complying with the annual surprise examination requirement, the proposed amendments would eliminate the cost of compliance with the procedures set forth in those letters. The number of advisers who have custody but rely on procedures set out in staff no-action letters in lieu of complying with the annual surprise examination requirement is difficult to estimate. 74 We request comments quantifying the costs advisers incur in connection with the alternative procedures under the staff no-action letters, how many advisers incur such costs, and the reduction in costs that would be obtained through the new compliance procedure.

The proposed amendments would also eliminate the requirement set forth in Form ADV that advisers with custody must include, in their disclosure brochures sent to clients, a balance sheet prepared and audited by an independent public accountant. The elimination of this balance sheet requirement would reduce advisers' compliance burden. The Commission staff has estimated, in connection with Paperwork Reduction Act analyses, that an adviser not otherwise required to prepare audited financial statements presently spends approximately $15,000 annually to comply with this requirement, and that approximately 580 advisers with custody are currently incurring these costs. 75 We request comment on our estimate of these costs and the number of advisers who would be relieved from these costs as a result of the proposed amendments.

We do not anticipate that eliminating the balance sheet requirement will reduce protections to clients. Many profitable advisers have few financial assets, and a balance sheet may give an imperfect picture of the financial health of an advisory firm. Moreover, some clients may not have experience in interpreting the financial information presented in a balance sheet. Finally, rule 206(4)-4  76 now requires advisers to disclose to their clients any financial condition that is reasonably likely to impair the adviser's ability to meet its contractual commitments to its clients, and this disclosure is likely to be more useful to clients than a balance sheet; accordingly, we do not expect any reduction in investor protection to result from the proposed change.

Improved clarity and transparency of the rule. We anticipate that investment advisers will find it easier to understand and to comply with the rule as a result of the proposed amendments, and that this increased transparency may result in cost savings for advisers. We adopted rule 206(4)-2 in 1962 and the rule was designed to operate in the securities markets of that time. The proposed amendments would improve the clarity and transparency of the rule by inserting a definition of “custody” into the rule and by incorporating current custodial practices into our requirements. The definition of “custody” is based on the definition that has been used in the instructions to Form ADV since 1985, but our proposed amendments make the definition easier to use by providing examples of the custodial situations most likely to be encountered by an adviser in today's securities markets. Advisers will benefit from this transparency because they (or their counsel) will no longer need to refer to other materials such as staff no-action letters for these examples. Similarly, advisers relying on certain procedures set out in staff no-action letters discussed above, as an alternative to the annual surprise examination requirement, will no longer need to refer to this body of letters. We request comment on the costs advisers currently incur in this regard, such as attorneys' fees, and on the likely savings advisers would experience under the proposed amendments to the rule.

The proposed amendments would require that all client funds or securities be maintained with a qualified custodian. This requirement may impose costs on advisers that are not already maintaining clients' securities in accounts with qualified custodians. Based on our experience in examining advisers' operations, however, we estimate that no more than 1 percent of advisers with custody keep any clients' securities in places other than accounts with qualified custodians, and even these advisers maintain almost all of their clients' assets with qualified custodians. We estimate that the additional cost of this requirement, if any, would therefore be minimal.

In addition, while the proposed amendments would exempt most advisers that have custody from the costs of undergoing annual surprise examinations and sending account statements, that exemption would be conditioned on qualified custodians sending monthly account statements directly to the advisers' clients. This condition may impose costs on some advisers. Our understanding is that, in most instances, qualified custodians are already delivering monthly account statements to advisers' clients as a matter of practice. 77 However, qualified custodians that are not delivering account statements directly to clients and that would have to do so at the request of advisers may pass on the new costs to advisers. These costs are necessary for the protection of advisory clients and we estimate that they should be no greater, at an aggregate level, than the costs incurred under the current account statement delivery requirement. Moreover, an investment adviser has the option to continue under the old approach, 78 in the unlikely event that the costs are greater. We request comments quantifying the costs that advisers would incur under either approach.

• The Commission requests comments on the potential costs and benefits identified in this release, as well as any other costs or benefits that may result from the proposals.

• We encourage comments to identify, discuss, analyze, and supply relevant data regarding these or additional costs and benefits.

The proposed amendments contain several “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995, 79 and the Commission has submitted the amendments 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 titles for the collections of information are “Rule 206(4)-2, Custody of Funds or Securities of Clients by Investment Advisers” and “Form ADV, Financial Information” under the Advisers Act. The rule and the form contain currently approved collection of information numbers under OMB control numbers 3235-0241 and 3235-0049, respectively. 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.

The collections of information under rule 206(4)-2 are necessary to ensure that clients' funds and securities in the custody of advisers are safeguarded, and information contained in the collections is used by staff of the Commission in its enforcement, regulatory, and examination programs. The respondents are investment advisers registered with us that have custody of clients' funds or securities. The collections of information under Form ADV are necessary for use by staff of the Commission in its examination and oversight program. The respondents are investment advisers seeking to register with the Commission or to update their registration. Responses provided to the Commission are not kept confidential.

According to our records, 867 out of the 7,583 advisers registered with the Commission have custody of client funds or securities. 80 These records also show that 123 advisers registered with us that report having custody are also registered broker-dealers exempted from the current rule. The proposed amendments would remove this exemption, but these advisers should be in compliance with the proposed rule without facing additional burdens. 81

The current rule requires advisers registered with us that have custody of clients' assets to send account statements to those clients at least quarterly and to undergo an annual surprise examination to verify the custodied assets. The proposed amendments would exempt advisers from these two requirements if qualified custodians send monthly account statements directly to the advisory clients. As discussed in detail below, we estimate that of the 867 advisers that reported to have custody of client assets, 156 would be fully exempted from these two requirements, 675 would be exempted from the requirements with respect to 99 percent of their clients and 36 would remain subject to both requirements with respect to all of their clients.

We estimate that advisers that are registered broker-dealers (123 firms) or banks (33 firms) would be exempt from these two requirements with respect to all of their clients. 82 We further estimate, based on our experience in examining advisers, that 95 percent of the other 711 advisers that have custody would use this exemption with respect to approximately 99 percent of their clients; these 675 advisers  83 would still be required to send account statements and undergo an annual surprise examination with respect to 1 percent of their clients; and 36 advisers would still be subject to these requirements with respect to all of their clients.

In addition, the proposed amendments would further reduce burdens by exempting all advisers from the custody rule with respect to their clients that are investment companies or audited limited partnerships. 84

The above analysis shows that the proposed amendments would generally reduce the paperwork burden for advisers. The currently approved annual aggregate burden of collection of information under rule 206(4)-2 is 21,625 hours. This approved annual aggregate burden was based on estimates that (i) 173 advisers were subject to the rule, (ii) the advisers had, on average, 50 clients each, and (iii) each of these advisers spent an average of 2.5 hours annually in responses with respect to each client.  85 In addition, the approved annual burden includes an aggregate cost estimate of $692,000. This cost was based on an estimate that an adviser would pay an independent public accountant $4,000 to conduct the annual surprise examination.  86

Updating those prior calculations based on current information from advisers registered with us, however, we would now estimate that (i) 744 advisers are subject to the existing rule, and (ii) advisers registered with us have, on average, 670 clients each. We would continue to estimate that the burden on each adviser is 2.5 hours annually for each client. These current data would increase the annual aggregate burden under the current rule to 1,246,200 hours.  87 In addition, we would now estimate the cost an adviser would incur in obtaining an annual surprise examination in the form of accounting fees would be $8,000, and these current data would increase the aggregate cost estimate to $5,952,000.  88

As stated above, however, for purposes of estimating the burden hours under the proposed amendments, we now estimate that the number of advisers subject to the collections of information with respect to all of their clients for whom they have custody would decrease to 36 (5 percent of the 711 advisers that have custody and are not broker-dealers or banks), and a further 675 advisers (711 advisers × 95 percent) would be subject to these burdens with respect to only 1 percent of their clients.  89 Assuming an average of 670 clients per adviser registered with us, the aggregate annual burden that advisers would face under the proposed amendments would decrease to 72,113 hours.  90 In addition, the proposed amendments would require an independent public accountant to notify our Office of Compliance Inspections and Examinations upon finding any material discrepancy during the course of conducting an annual surprise examination of the client funds and securities in an adviser's custody. Of the 711 annual surprise examinations that would occur under the proposed amended rule, we anticipate that not more than 1 examination per year would yield a material discrepancy, and that the burden on an accountant in providing notice to the Commission would be no more than 0.5 hours. This new requirement would not increase the total annual aggregate burden under the proposed amendments.  91

The aggregate cost estimate for accounting fees for the annual surprise examination would be $288,000 for the 36 advisers who will be subject to the collection of information for all of their clients.  92 We estimate that accounting fees for the 675 advisers who would be subject to the collection of information for 1 percent of their clients would decrease to $1,000 per adviser, for an aggregate of $675,000.  93 As a result, the aggregate cost estimate would decrease to $963,000.  94

We believe, however, that using the average of 670 clients per adviser affected by the rule may overstate the burden significantly. The 670 number is a mean, but a few large advisers represent a significant portion of the total client base, so the typical number of clients for advisers registered with us should be much smaller.

We propose to eliminate the requirement set forth in Part II, Item 14 of Form ADV that an adviser with custody must include in its brochure a balance sheet audited by an independent public accountant. 95 This would reduce paperwork burden for advisers that have custody of client assets. We would continue to require an adviser to provide an audited balance sheet if the adviser requires prepayment of advisory fees of more than $500 per client and more than six months in advance.

In the currently approved annual aggregate burden of collection of information, we inadvertently failed to include an estimate of the cost advisers incur to pay their independent public accountants to prepare audited balance sheets. We estimate that the current aggregate annual cost of this requirement for advisers registered with us is $11,460,000. This aggregate is based on our estimate that (i) each adviser who must obtain an audited balance sheet in order to comply with the requirement pays approximately $15,000 on average in accounting fees, (ii) 184 advisers incur these costs under the advance fees provision, and (iii) 580 additional advisers incur these costs under the custody provision. 96

For purposes of calculating this cost estimate under the proposed amendments, the 580 advisers that we estimate are currently incurring accountants' fees to comply with the balance sheet requirement under the custody provision will no longer incur these costs. Therefore, we estimate that the number of advisers subject to this requirement will be reduced to 184, and the aggregate annual cost of this requirement will be reduced to $2,760,000, for an average annual cost for each adviser registered with us of $364. 97

We request comment whether these estimates are reasonable. Any information received by the Commission related to the proposed rule amendments would not be kept confidential. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to:

• Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility;

• Evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information;

• Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and

• Determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

Persons wishing 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, Room 3208, Washington, DC 20503, and also should send a copy to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609 with reference to File No. S7-28-02. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, so a comment to OMB is best assured of having its full effect if OMB receives the comment within 30 days after publication of this release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-28-02, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street, NW, Washington, DC 20549.

The Commission has prepared the following Initial Regulatory Flexibility Analysis (“IRFA”) regarding proposed rule 206(4)-2 in accordance with section 3(a) of the Regulatory Flexibility Act. 98

Rule 206(4)-2 seeks to protect clients' assets in the custody of advisers by requiring advisers to deposit client funds in bank accounts and to segregate and identify client securities and hold them in safekeeping. The rule also protects custodied assets by requiring advisers to send each client quarterly account statements and to have an independent public accountant conduct an annual surprise examination of the custodied assets. We have not amended the rule substantively since we adopted it over 40 years ago. Since then, custodial practices have changed and, as a result, portions of the rule have become outdated or inconsistent with modern custodial practices. Advisers' business practices have also evolved, increasing the likelihood that advisers may obtain custody of client assets in circumstances that we may not have anticipated in 1962.

As part of our ongoing effort to review and modernize federal securities law, we are proposing comprehensive amendments to rule 206(4)-2. These amendments are designed to harmonize the rule with current custodial practices, enhance the protections afforded to client assets, and clarify circumstances under which advisers have custody of client assets. The amendments would require advisers to maintain client funds and securities with a broker-dealer, bank, or other “qualified custodian.” If the qualified custodian sends monthly account statements directly to an adviser's clients, the adviser would be relieved from sending its own account statements and from undergoing an annual surprise examination of those clients' accounts. The proposed amendments would exempt advisers from the rule with respect to clients that are registered investment companies, as well as with respect to limited partnerships and other pooled investment vehicles that are subject to annual audit by an independent public accountant.

The proposed amendments would add a definition of “custody” to the rule and illustrate the circumstances under which an adviser has custody of client assets. Advisers will benefit from this transparency because they (or their counsel) will no longer need to refer to other materials such as staff no-action letters for these examples. Finally, the proposed amendments would eliminate the requirement in Form ADV that advisers with custody include an audited balance sheet in their disclosure brochures to clients; other disclosures now provide clients with information that is likely to be more helpful to them in this regard.

The objectives of the proposed amendments to rule 206(4)-2 are threefold. First, the amendments would enhance the protections afforded to client assets. The proposed amendments would exempt advisers from the requirements to send each client account statements and to undergo annual surprise examinations of the client's account if the qualified custodian sends account statements directly to the advisory client monthly. Qualified custodians' delivery of account statements directly to clients should provide clients with confidence that any erroneous or unauthorized transactions by an adviser have been reflected. We believe nearly all advisers already maintain their clients' assets with qualified custodians, and will avail themselves of the option to avoid the costs of preparing statements and surprise examinations by electing to have the qualified custodian send account statements directly to the client.

Second, the amendments would harmonize the rule with current custodial practices. For example, the requirement under the current rule for advisers to segregate, identify, and safe-keep client securities assumes that securities are held as physical certificates. Now that most securities are held in book-entry form, the proposed amendments' requirement to maintain the securities with a qualified custodian would better reflect modern market practices.

Third, the amendments clarify circumstances under which advisers have custody of client assets, by providing a definition of custody that includes examples illustrating application of the definition. Advisers will benefit from this transparency because they (or their counsel) will no longer need to refer to other materials such as staff no-action letters for these examples.

The Commission is proposing to amend rule 206(4)-2 pursuant to the authority set forth in sections 206(4) and 211(a) of the Advisers Act [15 U.S.C. 80b-6(4) and 80b-11(a)]. Section 206(4) gives us authority to issue rules designed to prevent fraudulent, deceptive, or manipulative acts or practices. Section 211 gives us authority to clarify, by rule, persons and matters within our jurisdiction and to prescribe different requirements for different classes of persons, as necessary or appropriate to the exercise of our authority under the Act.

Under Commission rules, for the purposes of the Advisers Act and the Regulatory Flexibility Act, an investment adviser generally is a small entity if it: (i) Has assets under management having a total value of less than $25 million; (ii) did not have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had $5 million or more on the last day of its most recent fiscal year. 99 The Commission estimates that as of May 21, 2002 approximately 28 SEC-registered investment advisers that have custody of client assets were small entities. 100

The proposed rule would impose no new reporting and recordkeeping requirements. In addition, we believe that most advisers that maintain custody of client assets, including advisers that are small entities, already maintain these assets with qualified custodians. Therefore, the proposed amendments would not materially increase the effort necessary on advisers' behalf to comply with the Commission's rules. To the contrary, the proposed amendments provide advisers with the opportunity to eliminate costs they incur complying with the present rule's requirements to send account statements to clients and undergo an annual surprise examination. 101 In addition, we are proposing to amend Form ADV to eliminate the requirement that an adviser with custody of client assets provide its clients with a copy of its audited balance sheet, thereby further reducing advisers' compliance costs.

The Commission believes that there are no rules that duplicate, overlap, or conflict with the proposed rule.

The Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. In connection with the proposed rule, the Commission considered the following alternatives: (a) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (b) the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; (c) the use of performance rather than design standards; and (d) an exemption from coverage of the rule, or any part thereof, for such small entities.

The overall impact of the proposed amendments is to decrease regulatory burdens on advisers, and small advisers, as well as large ones, will benefit from the proposed rule. Moreover, the proposed amendments achieve the rule's objectives through alternatives that are already consistent in large part with advisers' current custodial practices. Therefore, the potential impact of the amendments on small entities should not be significant. For these reasons, alternatives to the proposed amendments, such as differing compliance or reporting requirements, simplification of compliance and reporting requirements, or the use of performance rather than design standards, are unlikely to minimize any impact that the proposed rule may have on small entities. Regarding exemption from coverage of the rule amendments, or any part thereof, for small entities, such an exemption would deprive small entities of the burden relief provided by the amendments. Moreover, since the protections of the Advisers Act are intended to apply equally to clients of both large and small advisory firms, it would be inconsistent with the purposes of the Act to specify different requirements for small entities or to establish different compliance or reporting requirements for small entities with regard to this requirement.

We encourage written comments on matters discussed in this IRFA. In particular, the Commission seeks comment on:

• The number of small entities that would be affected by the proposed rule; and

• Whether the effect of the proposed rule on small entities would be economically significant.

Commenters are asked to describe the nature of any effect and provide empirical data supporting the extent of the effect.

We are proposing amendments to rule 206(4)-2 pursuant to our authority set forth in sections 206(4) and 211(a) of the Advisers Act [15 U.S.C. 80b-6(4) and 80b-11(a)].

We are proposing amendments to Part II of Form ADV pursuant to the authority set forth in sections 203(c)(1), 204, and 211(a) of the Advisers Act [15 U.S.C. 80b-3(c)(1), 80b-4 and 80b-11(a)].

For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:

1. In this notice of inquiry (NOI), the Federal Energy Regulatory Commission (Commission) presents an opportunity for comments regarding its Negotiated Rates Policies and Practices, established in Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, Regulation of Negotiated Transportation Services of Natural Gas Pipelines, Statement of Policy and Request for Comments, 74 FERC ¶ 61,076 (1996). Specifically, the Commission is undertaking a review of the recourse rate as a viable alternative and safeguard against the exercise of market power of interstate gas pipelines, as well as the entire spectrum of issues related to its negotiated rate program, and welcomes comments on these issues.

2. Since 1996 pipelines have had the option to use negotiated rates as an alternative to cost-of-service ratemaking. The Commission introduced negotiated rates to allow pipelines choosing not to seek market base rates by establishing a lack of market power or to undertake an incentive rate program, to adopt another alternative to traditional cost-of-service regulation. The original program was developed at a time when there was a great deal of concern about capacity “turnback” as a result of Order Nos. 436 and 636, and other factors. 1 Because the industry was shifting from traditional supply sources to other sources, many existing pipeline shippers no longer needed the same amount of firm capacity from their traditional pipeline's supply regions, and as a result sought to “turn back” transmission capacity when their transportation contracts expired. The negotiated rates program was thus developed to help pipelines market that turned-back capacity to new shippers, such as electric generators, as well as to help retain local distribution customers whose existing contracts were expiring.

3. Under the negotiated rates program, instead of cost-of-service regulation, the pipeline and a shipper may negotiate rates that vary from the pipeline's otherwise applicable tariff. A recourse rate that is on file in the pipeline's tariff is always available for those shippers preferring traditional cost-of-service rates. The Commission recognized, however, that potential problems could occur if capacity became constrained, as for example, if shippers that were willing to pay more than the maximum rate through a negotiated rate were bidding against shippers that were bidding the maximum recourse rate. The Commission required that, in those situations, customers bidding more than the maximum rate would be treated as if they were bidding the recourse rate, and capacity was to be allocated pro rata among the negotiated rate bidder and recourse rate bidders. This, it was thought, would remove an incentive for negotiated rate shippers to bid more than the maximum recourse rates when capacity is constrained, because the shipper would have known it was paying more than was necessary to get the capacity. 2 In the last several years, there has been a significant increase in the reliance on negotiated rates to price natural gas transportation service. More recently, negotiated rate transactions based on price-index differentials have developed. These types of transactions, in particular, have raised serious concerns regarding the breadth and direction of the Commission's negotiated rate program. 3

4. When the Commission introduced negotiated rates, at the suggestion of certain industry participants, it expected that negotiated rates would help achieve flexible, efficient pricing when market-based rates are not appropriate. Negotiated rates offered greater rate flexibility while limiting market power through the availability of the recourse rate. 4 The recourse rate option, the Commission explained, “would prevent pipelines from exercising market power by assuring that the customer can fall back to cost-based, traditional service if the pipeline unilaterally demands excessive prices or withholds service.”  5

5. So important was the availability of the recourse rate option that, as the Commission explained, the success of the negotiated rate policy relied upon the recourse rate “remain[ing] a viable alternative to negotiated service.”  6 The failure of the recourse rate option to remain viable was an “impermissible” result.

6. Accordingly, the Commission finds that it is an appropriate time to assess the value and viability of its negotiated rate program. The Commission is seeking comments from all segments of the industry on these matters.

7. The Commission seeks responses to the following questions:

(A) Has the negotiated rate program been generally successful or unsuccessful in granting pipelines needed flexibility to serve new natural gas markets and retain existing markets? (Please support position taken with concrete specifics as much as possible.)

(B) Should the Commission modify its negotiated rate program?

(C) Do the negotiated rate filing requirements provide sufficient information for necessary transparency of the transactions? Should the Commission require pipelines to file negotiated rates on thirty days notice before such rates are implemented?

(D) Does the recourse rate option effectively mitigate pipeline market power? Are further mitigation measures necessary? And if so, which measures?

(E) Should the Commission disallow negotiated rates above the maximum recourse rate? Should the negotiated rate be limited to a certain multiple of the maximum recourse rate? Should the negotiated rate be limited to adjusting the levels of the reservations demand and commodity rate components, but the total revenue responsibility over the term of the contract remain equal the revenue responsibility under the recourse rate?

(F) Should the Commission disallow negotiated transportation rate deals based on price differentials of delivered gas between hubs?

(G) If such index price differential rates continue to be allowed, should some limits or restraints be placed on them? If so, what limits might be useful or appropriate?

8. The Commission invites interested persons to submit written comments on the matters and issues raised in this notice, including any related matters or alternative proposals that commenters may wish to discuss. Upon evaluation of those comments, the Commission will determine what further action, if any, will be appropriate. Comments are due August 26, 2002. Comments must refer to Docket No. PL02-6-000, and may be filed either in electronic or paper format. Those filing electronically do not need to make a paper filing.

9. Documents filed electronically via the Internet can be prepared in a variety of formats, including WordPerfect, MS Word, Portable Document Format, Real Text Format, or ASCII format, as listed on the Commission's Web site at http://ferc.gov , under the e-filing link. The e-filing link provides instructions for how to Login and complete an electronic filing. First time users will have to establish a user name and password. The Commission will send an automatic acknowledgment to the sender's e-mail address upon receipt of comments. User assistance for electronic filing is available at 202-208-0258 or by e-mail to efiling@ferc.gov . Comments should not be submitted to the e-mail address.

10. For paper filings, the original and 14 copies of such comments should be submitted to the Office of the Secretary, Federal Energy Regulatory Commission, 888 First Street, NE., Washington DC 20426.

11. All comments will be placed in the Commission's public files and will be available for inspection in the Commission's Public Reference Room at 888 First Street, NE., Washington DC 20426, during regular business hours. Additionally, all comments may be viewed, printed, or downloaded remotely via the Internet through FERC's home page using the FERRIS link.

12. In addition to publishing the full text of this document in the Federal Register , the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the Internet through FERC's home page ( http://www.ferc.gov ) and in FERC's Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.

13. From FERC's home page on the Internet, this information is available in the Federal Energy Regulatory Records Information System (FERRIS). The full text of this document is available on FERRIS in PDF and WordPerfect format for viewing, printing, and/or downloading. To access this document in FERRIS, type the docket number excluding the last three digits of this document in the docket number field.

14. User assistance is available for FERRIS and the FERC's Web site during normal business hours from our Help line at (202) 208-2222 or the Public Reference Room at (202) 208-1371 Press 0, TTY (202) 208-1659. E-Mail the Public Reference Room at public.referenceroom@ferc.gov .

The Foreign Trade Zones Act of 1934, as amended (19 U.S.C. 81a-u) (the “FTZA”), provides for the establishment and regulation of foreign trade zones. Foreign trade zones are secured areas to which foreign and domestic merchandise (except that prohibited by law) may be brought for the purposes enumerated in the FTZA without being subject to the customs laws of the U.S. Foreign trade zones, by virtue of being exempt from the customs laws, are intended to attract and promote international trade and commerce. Part 146, Customs Regulations (19 CFR part 146), sets forth the documentation and recordkeeping requirements governing, among other things, the admission of merchandise into a zone, its manipulation, manufacture, storage, destruction, or exhibition while in the zone, and its entry or removal from the zone.

Generally speaking, the FTZA provides that when foreign merchandise is sent from a zone into customs territory, it is subject to the laws and regulations of the United States affecting imported merchandise (19 U.S.C. 81c(a)). This would include customs law governing the entry of imported merchandise. To this end, section 1484 of the Tariff Act of 1930, as amended (19 U.S.C. 1484), sets forth the procedures generally governing the entry of imported merchandise for customs purposes.

Under 19 U.S.C. 1484, Customs has permitted a limited weekly entry procedure for foreign trade zones since May 12, 1986 (as authorized in T.D. 86-16, 51 FR 5040). This limited weekly entry procedure, appearing in § 146.63(c)(1), Customs Regulations (19 CFR 146.63(c)(1)), is restricted to merchandise that was manufactured or changed into its final form just shortly (within 24 hours) before physical transfer from the zone.

It is noted that further general support for the weekly entry procedure was furnished when 19 U.S.C. 1484 was subsequently amended by section 637 of the Customs Modernization Act (included as Title VI of the North American Free Trade Agreement Implementation Act, Pub. L. 103-182, 107 Stat. 2057, enacted on December 8, 1993).

The Customs entry law, 19 U.S.C. 1484, has now been further amended by section 410 of the Trade and Development Act of 2000 (Pub. L. 106-200, 114 Stat. 251, enacted on May 18, 2000). Section 410 of this Act adds a new paragraph (i) to section 1484 (19 U.S.C. 1484(i)), that specifically provides for an expanded weekly entry procedure for foreign trade zones under certain limitations. The expanded weekly entry procedure under the statute is inextricably tied, as further discussed below, to the assessment of the merchandise processing fee which only applies to merchandise entered for consumption; thus, this entry procedure is limited to merchandise that is to be removed from a zone for consumption.

Under 19 U.S.C. 1484(i)(1), the expanded weekly entry procedure covers all merchandise (including merchandise of different classes, types and categories), with the exception of merchandise the entry of which is prohibited by law and merchandise for which the filing of an entry summary is required before it may be released from customs custody. The effect of section 1484(i) is to expand the weekly entry system beyond its current coverage, primarily to allow goods stored in a zone for the purpose of warehouse and distribution to be removed from the zone under a weekly entry process.

Thus, merchandise falling within the expanded procedure of section 1484(i)(1) that is to be removed from a zone during any 7-day period (not limited to a calendar week) may be the subject of a single estimated entry or release.

In accordance with 19 U.S.C. 1484(i)(2)(A)(i) and (ii), weekly entries under the expanded weekly entry program would be required to be filed electronically through the Automated Broker Interface (ABI). The party making entry who chooses to file a weekly entry from a zone would have to do so using ABI, or employ an ABI-qualified Customs broker for this purpose.

The electronic entry would have to contain the data equivalent to that required on Customs Form 3461 for the estimated removals of merchandise intended to occur during the related 7-day period. As provided in section 1484(i)(1), this estimated entry would need to be filed on or before the first day of the 7-day period in which the merchandise is to be removed from the zone.

An electronic entry summary containing the data equivalent to that required on Customs Form 7501 would be filed within 10 working days after the first day of the 7-day period covered by the electronic entry, with payment of applicable duties and taxes likewise scheduled for no later than 10 working days after the date of entry, using the Automated Clearinghouse (ACH) as prescribed in § 24.25, Customs Regulations (19 CFR 24.25).

In addition, under 19 U.S.C. 1484(i)(2)(B), the operator and/or the user of the zone, as applicable, would be required to provide accounting, transportation, and related controls over merchandise subject to the weekly entry procedure that are adequate to protect the revenue and meet the requirements of other Federal agencies.

In the case of a general-purpose zone with multiple users, the operator of the zone, in compliance with § 146.4, Customs Regulations (19 CFR 146.4), would have to supervise and monitor the movement of merchandise, and provide for its proper storage and handling in the zone. The operator would also be required to maintain inventory records that accurately accounted for all transfers of merchandise from the zone related to the respective weekly entry of each person (zone user) using the procedure and otherwise comply with the requirements of § 146.4 and subpart B, Customs Regulations (19 CFR part 146, subpart B). Also, the person making entry (zone user) would have to keep inventory records with respect to the merchandise and its handling and/or processing in the zone that, if not computerized, would need to be maintained in an organized and readily retrievable manner, and be capable of being produced within a reasonable time after due notice.

The estimated weekly entry or release is treated under section 1484(i)(1) as a single entry or release for purposes of the assessment of the merchandise processing fee (MPF) under section 13031(a)(9)(A) of the Consolidated Budget Reconciliation Act of 1985 (COBRA) (19 U.S.C. 58c(a)(9)(A)), and all fee exclusions and limitations of section 13031 of the COBRA also apply to the weekly entry or release, including the maximum and minimum fee amounts under section 13031(b)(8)(A)(i) (19 U.S.C. 58c(b)(8)(A)(i)).

Under 19 U.S.C. 58c(a)(9)(A), the MPF is the fee that Customs assesses on importers in order to offset administrative costs (salaries and expenses) that Customs incurs in connection with the processing of imported merchandise that is formally entered or released. Except as otherwise provided, merchandise that is formally entered or released is currently subject to an ad valorem MPF of .21 percent (19 U.S.C. 58c(a)(9)(A); and § 24.23(b)(1)(i)(A), Customs Regulations (19 CFR 24.23(b)(1)(i)(A))). However, on any one weekly entry or release, the MPF may not exceed the maximum amount of $485, subject to certain provisions not here relevant (19 U.S.C. 58c(a)(9)(B)(i); 19 U.S.C. 58c(b)(8)(A)(i); and § 24.23(b)(1)(i)(B), Customs Regulations (19 CFR 24.23(b)(1)(i)(B))).

It should be observed in this regard that, by a document published in the Federal Register (62 FR 12129) on March 14, 1997, Customs had previously proposed a similar expansion of the weekly entry procedure for foreign trade zones, under the then-existing general authority of 19 U.S.C. 1484; but, by a document published in the Federal Register (64 FR 13142) on March 17, 1999, Customs withdrew this proposal.

Accordingly, based upon the foregoing, this document proposes to amend § 146.63(c), Customs Regulations (19 CFR 146.63(c)), to implement 19 U.S.C. 1484(i), by adding a provision covering the expanded weekly entry procedure for foreign trade zones. The principal purpose of this proposed rule is to require electronic entry filing under the expanded procedure pursuant to 19 U.S.C. 1484(i)(2)(A). In addition, for the sake of consistency and administrative efficiency, Customs has determined that the existing weekly entry procedure for certain manufactured articles in § 146.63(c)(1) should similarly be revised to require electronic entry filing and to provide that a weekly entry under § 146.63(c)(1) may cover any 7-day period, and need no longer be confined to a calendar week. Also, under the proposed rule, if requested by Customs, the electronic data submitted would need to include the equivalent of a pro forma invoice or schedule, showing the estimated number of units of each type of merchandise to be removed during the weekly period and their zone and dutiable values.

Before adopting this proposed rule as final, consideration will be given to any written comments that are timely submitted to Customs. Customs specifically requests comments on the clarity of this proposed rule and how it may be made easier to understand. Comments submitted will be available for inspection in accordance with the Freedom of Information Act (5 U.S.C. 552), § 1.4, Treasury Department Regulations (31 CFR 1.4), and § 103.11(b), Customs Regulations (19 CFR 103.11(b)), at the U.S. Customs Service, 799 9th Street, NW., Washington, DC during regular business hours. Arrangements to inspect submitted comments should be made in advance by calling Mr. Joseph Clark at (202) 572-8768.

The proposed amendments are essentially intended to conform the Customs Regulations with statutory law, including the provision in the law that allows a requirement for electronic entry filing. As such, pursuant to the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ), it is certified that, if adopted, the proposed amendments will not have a significant economic impact on a substantial number of small entities. Accordingly, the proposed amendments are not subject to the regulatory analysis or other requirements of 5 U.S.C. 603 and 604. Nor do the proposed amendments meet the criteria for a “significant regulatory action” under E.O. 12866.

The collections of information contained in this proposed rule have already been approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) and assigned the following OMB Control Numbers: 1515-0065 (Requirement to make entry; Entry summary and continuation sheet); and 1515-0214 (General recordkeeping and record production requirements). This proposed rule would not make any substantive changes to the existing approved information collections.

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

Customs duties and inspection, Exports, Foreign trade zones, Imports, Reporting and recordkeeping requirements.

Part 146, Customs Regulations (19 CFR part 146), is proposed to be amended as set forth below.

A notice of proposed rulemaking and notice of public hearing that appeared in the Federal Register on April 10, 2002 (67 FR 17309), and amended on June 28, 2002 (67 FR 43574), announced that a public hearing was scheduled for August 7, 2002 at 10 a.m., in Room 2615, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. The subject of the public hearing is proposed regulations under section 150 of the Internal Revenue Code. The public comment period for these proposed regulations expired on July 9, 2002.

The notice of proposed rulemaking and notice of public hearing, instructed those interested in testifying at the public hearing to submit a request to speak and an outline of topics to be addressed. As of July 18, 2002, no one has requested to speak. Therefore, the public hearing scheduled for August 7, 2002, is cancelled.

The Federal Alcohol Administration Act (FAA Act) at 27 U.S.C. 205(e) requires that alcohol beverage labels provide the consumer with adequate information regarding a product's identity and prohibits the use of deceptive information on such labels. The FAA Act also authorizes the Bureau of Alcohol, Tobacco and Firearms (ATF) to issue regulations to carry out the Act's provisions.

Regulations in 27 CFR part 4, Labeling and Advertising of Wine, allow the establishment of definitive viticultural areas. The regulations allow the name of an approved viticultural area to be used as an appellation of origin on wine labels and in wine advertisements. A list of approved viticultural areas is contained in 27 CFR part 9, American Viticultural Areas.

Section 4.25(e)(1), title 27 CFR, defines an American viticultural area as a delimited grape-growing region distinguishable by geographical features. Viticultural features such as soil, climate, elevation, and topography distinguish it from surrounding areas.

Section 4.25a(e)(2), title 27, CFR outlines the procedure for proposing an American viticultural area. Any interested person may petition ATF to establish a grape-growing region as a viticultural area. The petition must include:

• Evidence that the name of the proposed viticultural area is locally and/or nationally known as referring to the area specified in the petition;

• Historical or current evidence that the boundaries of the viticultural area are as specified in the petition;

• Evidence relating to the geographical features (climate, soil, elevation physical features, etc.) which distinguish the viticultural features of the proposed area from surrounding areas;

• A description of the specific boundaries of the viticultural area, based on features which can be found on United States Geological Survey (U.S.G.S.) maps of the largest applicable scale; and

• A copy of the appropriate U.S.G.S. map(s) with the boundaries prominently marked.

ATF has received a petition from Tom Frederick and Pam Welch of Capay Valley Vineyards proposing to establish a viticultural area known as “Capay Valley” in northwestern Yolo County, California. The valley has several wine grape growers, including one who recently received awards for his wines. The petitioners state that the proposed Capay Valley viticultural area covers approximately 150 square miles or about 102,400 acres. Approximately 25 acres are currently planted to wine grapes.

The petitioners submitted as evidence an excerpt from the book “Capay Valley: The Land & The People,” by Ada Merhoff. The information provided states the name “Capay Valley” was used in the late 1840's to identify the area when Pio Pico, Governor of the territory of Alta California, granted nine square leagues of land called the Rancho Canada de Capay to three Berryessa brothers. The book also contains a copy of an 1857 map of the valley, titled “Map of the Rancho Can ada De Capay.” A copy of a map titled “Property owners 1858 Canada de Capay Grant” on page 6 of the book shows further subdivisions as lands were sold.

In addition, Merhoff's book mentions the Adobe Ranch, a 19th century Capay Valley ranch owned by John Gillig which also contained a vineyard and winery. Merhoff references other works that also mention Gillig's ranch. “The Western Shore Gazeteer & Commercial Directory for the State of California—Yolo County” by C.P. Sprague and H.W. Atwell stated in 1869 that the Capay Valley Winery at Gillig's ranch processed grapes from his and several other small vineyards in the vicinity that yielded 30,000 gallons of wine in both red and white varieties. Frank T. Gilbert's “The Illustrated Atlas and History of Yolo County” stated in 1879 that Gillig's vineyard was “awarded the premium in 1861 for having the finest vineyard in the state.” Merhoff's book also states that the word “Capay” comes from the Wintun Indian's word “capi”, which means stream in their Native American language.

According to the petitioners, the proposed “Capay Valley” viticultural area is located in northwest Yolo County and borders Napa, Lake, and Colusa Counties. The natural boundaries of the valley are formed by the Blue Ridge Mountains to the west and the Capay Hills to the east. Additionally, Cache Creek runs the entire length of the valley. The boundaries of the petitioned viticultural area generally follow these natural physical boundaries. These also coincide with the boundaries of the Capay Valley General Plan, which is a subset of the Yolo County General Plan.

In addition to the required U.S.G.S. map, the petitioner provided a set of maps of Yolo County, California compiled in 1970 as part of a soil survey by the United States Department of Agriculture, Soil Conservation Service, and the University of California Agricultural Experiment Station. These maps show in further detail the boundaries of the proposed Capay Valley viticultural area.

The petitioners assert that the soils of the proposed “Capay Valley” viticultural area range from Yolo-Brentwood, which is a well-drained, nearly level, silty clay loam on alluvial fans, to Dibble-Millsholm, which is a well drained, steep to very steep loam to silty clay loam over sandstone.

Some areas have clay soils with creek rock and debris intermixed. Volcanic ash is also found in some areas, primarily in the rolling hills in the center of the valley. The petitioners contend that these clay soils intermixed with creek rock and volcanic ash, add a distinctive viticultural aspect to the area.

The petitioners state that one of the major soil differences between Capay Valley and the adjacent Central Valley area is the abundance of calcareous soils. This supply of calcium makes the clay soils of the Capay Valley less binding and allows grapevine roots to penetrate through the soils more easily. Water usage is therefore less than would be expected given the warm climatic conditions. The calcium-magnesium ratio in the soils is easier to manage because it is easier to add magnesium than calcium.

The petitioners state that the elevation boundaries of the proposed Capay Valley viticultural area range from 100 meters on the valley floor, to 750 meters at the top of the Blue Ridge and 550 meters at the top of the Capay Hills.

According to the petitioners, hot, dry summers and a long growing season characterize the climate of the proposed Capay Valley viticultural area. Portions of the valley receive moderating breezes from the Sacramento Delta and San Francisco Bay. Fog creeps over the tops of the Blue Ridge during heavy fog periods in the bay, but the valley is shielded from the ground fog that is pervasive in the Sacramento Valley. Winters are moderate and late spring frosts are occasional enough to negate the need for active frost protection.

Also, the petitioners state that the Capay Valley climate is warmer than the Napa Valley to the west. This allows the Capay Valley to avoid the frost problems that are common in Napa and also offers an earlier growing season, typically 3-4 weeks. This warmer climate also reduces the need for as many sulfur sprays throughout the growing season.

Additionally, the petitioners state that the Capay Valley differs from its Central Valley neighbors to the east in that, while they share a warmer climate, Capay Valley's bud-break is typically 1-2 weeks later.

ATF determined that this proposed regulation is not a significant regulatory action as defined in Executive Order 12866. Accordingly, this proposal is not subject to the analysis required by this Executive Order.

ATF certifies that the proposed regulations will not have a significant economic impact on a substantial number of small entities. The establishment of a viticultural area is neither an endorsement nor approval by ATF of the quality of wine produced in the area, but rather an identification of an area that is distinct from surrounding areas. ATF believes that the establishment of viticultural areas merely allows wineries to more accurately describe the origin of their wines to consumers and helps consumers identify the wines they purchase. Thus, any benefit derived from the use of a viticultural area name is the result of a proprietor's own efforts and consumer acceptance of wines from that area.

No new requirements are proposed. Accordingly, a regulatory flexibility analysis is not required.

The Paperwork Reduction Act of 1995, 44 U.S.C. chapter 35, and its implementing regulations, 5 CFR part 1320, do not apply to this notice of proposed rulemaking because the proposed regulation is not proposing new or revised record keeping or reporting requirements.

ATF requests comments from all interested parties. In addition, ATF specifically requests comments on the clarity of this proposed rule and how it may be made easier to understand. Comments received on or before the closing date will be carefully considered. Comments received after that date will be given the same consideration if it is practical to do so. However, assurance of consideration can only be given to comments received on or before the closing date.

During the comment period, any person may request an opportunity to present oral testimony at a public hearing. However, the Director reserves the right to determine, in light of all circumstances, whether a public hearing will be held.

Copies of the petition, the proposed regulations, the appropriate maps, and any written comments received will be available for public inspection by appointment at the ATF Library, Room 6480, 650 Massachusetts Avenue, NW., Washington, DC 20226. To make an appointment, telephone 202-927-7890. You may request copies of the full comments (at 20 cents per page) by writing to the ATF Reference Librarian at the address shown above.

ATF will not recognize any comment as confidential. All comments and materials will be disclosed to the public. If you consider your material to be confidential or inappropriate for disclosure to the public, you should not include it in the comments. We will also disclose the name of any person who submits a comment.

You may submit comments by facsimile transmission to (202) 927-8525. Facsimile comments must:

• Be legible.

• Reference this notice number.

• Be on paper 8 1/2 ″ x 11″ in size.

• Contain a legible written signature.

• Be not more than three pages.

We will not acknowledge receipt of facsimile transmissions. We will treat facsimile transmissions as originals.

You may submit comments by e-mail by sending the comments to nprm@atfhq.atf.treas.gov. You must follow these instructions. E-mail comments must:

• Contain your name, mailing address, and e-mail address.

• Reference this notice number.

• Be legible when printed.

We will not acknowledge receipt of e-mail. We will treat comments submitted by e-mail as originals.

You may also submit comments using the comment form provided with the online copy of the proposed rule on the ATF Internet Web site at: http://www.atf.treas.gov.

For the convenience of the public, ATF will post comments received in response to this notice on the ATF Web site. All comments posted on our web site will show the name of the commenter, but will have street addresses, telephone numbers, and e-mail addresses removed. We may also omit voluminous attachments or material that we do not consider suitable for posting. In all cases, the full comment will be available in the ATF library, as noted above. To access online copies of the comments on this rulemaking, visit http://www.atf.treas.gov, and select “Regulations,” then “Notices of Proposed Rulemaking (Alcohol)” and this notice. Then click on the “view comments” link.

The principal author of this document is Kristy Colon, Regulations Division, Bureau of Alcohol, Tobacco and Firearms.

Administrative practice and procedure, Alcohol and alcoholic beverages, Consumer protection, and Wine.

Title 27, Code of Federal Regulations, Part 9, American Viticultural Areas, is proposed to be amended as follows:

Motor vehicle crashes killed 41,821 individuals and injured 3,189,000 others in 6.4 million crashes in 2000. In addition to the terrible personal toll, these crashes make a huge economic impact on our society with an estimated annual cost of $230.6 billion, or an average of $820 for every person living in the United States. One of the most important ways in which NHTSA carries out its safety mandate is to issue and enforce Federal Motor Vehicle Safety Standards (FMVSS). Through these rules, NHTSA strives to reduce the number of crashes and to minimize the consequences of those crashes that do occur. NHTSA's rulemaking activities, via the Safety Performance Standards Program with support from the offices of Research and Development, Safety Assurance, Plans and Policy, and Chief Counsel, identify safety problem areas, develop countermeasures, and collect and analyze information to develop new FMVSS and amendments to existing FMVSS.

In the first years of the new century, NHTSA will strive to influence the automotive industry to incorporate the rapidly accelerating pace of advances in vehicle and safety technology into new vehicles while ensuring that the use of the new technologies enhances vehicle safety. The plan outlines the highlights of NHTSA's vehicle safety rulemaking plans through 2005. Agency priorities emanate from many sources, including: The size of the safety problem and likelihood of solutions, Executive initiatives, Congressional interest and mandates, petitions to the agency for rulemaking and other expressions of public interest, interest in harmonizing safety standards with those of other nations, and changes needed as a result of new vehicle technologies. The starting point for rulemaking priorities is the quest for the greatest potential protection of lives and prevention of injury.

The plan is organized along several broad categories: Crash Prevention includes crash avoidance data, driver distraction, vehicle visibility, crash warnings, and vehicle control and handling. Occupant Protection includes advanced crash dummies and protection in frontal, side, rollover, and rear crashes. Other sections cover Incompatibility Between Passenger Cars and Light Trucks, Heavy Truck Safety, and Special Population Protection, including safety for children, people with disabilities, and older people.

The plan includes several potential rulemaking projects that require additional research to determine whether rulemaking action is needed, but are priorities based on their potential for significantly sizeable death and injury prevention benefits. The plan also contains an appendix that discusses some other regulatory activities, particularly regulatory-related research activities, that may extend beyond the four-year horizon of the plan and that the agency considers important, although not rising to the same level of immediate high priority as the activities included in the main body of the plan. Another appendix discusses upcoming milestones in consumer information activities that the agency plans to pursue in the next few years, including the New Car Assessment Program (NCAP).

This document announces the availability of the document for public review and comment. The plan will be posted on NHTSA's website on July 23, 2002. Received comments will be evaluated and incorporated, as appropriate, into planned agency activities. The agency intends to periodically update the plan. Comments that cannot be accommodated in the current plan will be reviewed and considered in the context of future updates.

Your comments must be written and in English. To ensure that your comments are correctly filed in the Docket, please include the Docket number of this document (NHTSA-2002212391) in your comments.

Please send two paper copies of your comments to Docket Management or submit them electronically. The mailing address is U.S. Department of Transportation Docket Management, Room PL-401, 400 Seventh Street, SW., Washington, DC 20590. If you submit your comments electronically, log onto the Docket Management System Web site at http://dms.dot.gov and click on “Help & Information” or “Help/Info” to obtain instructions.

If you wish Docket Management to notify you upon its receipt of your comments, enclose a self-addressed, stamped postcard in the envelope containing your comments. Upon receiving your comments, Docket Management will return the postcard by mail.

If you wish to submit any information under a claim of confidentiality, send three copies of your complete submission, including the information you claim to be confidential business information, to the Chief Counsel, NCC-01, National Highway Traffic Safety Administration, Room 5219, 400 Seventh Street, SW., Washington, DC 20590. Include a cover letter supplying the information specified in our confidential business information regulation (49 CFR part 512).

In addition, send two copies from which you have deleted the claimed confidential business information to Docket Management, Room PL-401, 400 Seventh Street, SW., Washington DC 20590.

In our response, we will consider all comments that Docket Management receives before the close of business on the comment closing date indicated above under DATES. To the extent possible, we will also consider comments that Docket Management receives after that date.

Please note that even after the comment closing date, we will continue to file relevant information in the Docket as it becomes available. Further, some people may submit late comments. Accordingly, we recommend that you periodically check the Docket for new material.

You may read the comments by visiting Docket Management in person at Room PL-401, 400 Seventh Street, SW., Washington, DC from 10 a.m. to 5 p.m., Monday through Friday.

You may also see the comments on the Internet by taking the following steps:

1. Go to the Docket Management System (DMS) Web page of the Department of Transportation ( http://dms.dot.gov ).

2. On that page, click on “search.”

3. On the next page ( http://dms.dot.gov/search/ ) type in the four-digit Docket number shown at the beginning of this document (NHTSA-2002-212391). Click on “search.”

4. On the next page, which contains Docket summary information for the Docket you selected, click on the desired comments. You may also download the comments.

NMFS is responsible for determining whether species, subspecies, or distinct population segments (DPSs) of Pacific salmon and steelhead are threatened or endangered species under the ESA. NMFS has determined that DPSs are represented by ESUs of Pacific salmon and steelhead, and treats ESUs as a “species” under the ESA (ESU policy; 56 FR 58612, November 20, 1991). To date, NMFS has completed comprehensive coastwide status reviews of Pacific salmonids and identified 51 ESUs in California, Oregon, Washington, and Idaho. Five of these ESUs are currently listed under the ESA as endangered, and 21 ESUs are listed as threatened.

Section 4(b)(3)(A) of the ESA requires that, to the maximum extent practicable, within 90 days after receiving a petition for listing, reclassification, or delisting (among other things) the Secretary make a finding whether the petition presents substantial scientific information indicating that the petitioned action may be warranted. The ESA implementing regulations for NMFS define “substantial information” as the amount of information that would lead a reasonable person to believe that the measure proposed in the petition may be warranted (50 CFR 424.14(b)(1)). In evaluating a petitioned action, the Secretary must consider whether such a petition (1) clearly indicates the recommended administrative measure and the species involved, (2) contains a detailed narrative justification for the recommended measure, describing past and present numbers and distribution of the species involved and any threats faced by the species, (3) provides information regarding the status of the species over all or a significant portion of its range, and (4) is accompanied by appropriate supporting documentation (50 CFR 424.14(b)(2)). 50 CFR 424.11 describes the factors that must be considered in listing, reclassifying, or delisting a species under the ESA. Submitted petitions are considered in the context of these factors in determining whether a petition does or does not present substantial scientific and commercial information to suggest that the petitioned action may be warranted. A species may be listed or reclassified as a threatened or endangered species because of any one or a combination of the following factors: (1) The present or threatened destruction, modification, or curtailment of a species’ habitat or range; (2) overutilization for commercial, recreational, scientific or educational purposes; (3) disease or predation; (4) inadequacy of existing regulatory mechanisms; or (5) other natural or manmade factors affecting the species continued existence. A species may be delisted for one or more of the following reasons: (1) The species is extinct or has been extirpated from its previous range; (2) the species has recovered and is no longer endangered or threatened; or (3) investigations show that the best scientific or commercial data available when the species was listed, or the interpretation of such data, were in error.

On March 14, 2002, NMFS received a petition from the Central Coast Forest Association (CCFA petition) to delist the threatened Central California Coast (CCC) coho salmon ESU. On April 29, 2002, NMFS received two petitions from Trout Unlimited and several co-petitioners (hereafter, Trout Unlimited petitions) to redefine and list a total of 15 ESUs currently listed as threatened or endangered. One of the Trout Unlimited petitions seeks to define the threatened Oregon coast coho ESU as including only natural fish (i.e., naturally spawned fish and their progeny, exclusive of all hatchery fish), and to list it as a threatened species under the ESA. The other Trout Unlimited petition seeks to define 14 ESUs as including only natural fish, and to list these ESUs as threatened or endangered species under the ESA. This petition addresses the naturally spawned portions of the: Puget Sound, Upper Willamette River, Snake River spring/summer, Snake River fall, Upper Columbia River spring, and Lower Columbia River chinook ESUs; Hood Canal summer and Columbia River chum ESUs; Southern Oregon/Northern California Coasts coho ESU; and the Upper Willamette River, Snake River, Middle Columbia River, Upper Columbia River, and Lower Columbia River steelhead ESUs.

The petition findings on the CCFA and the Trout Unlimited petitions are informed by the September 2001 U.S. District Court ruling in Alsea Valley Alliance v. Evans (161 F. Supp. 2d 1154, D. Oreg. 2001; Alsea decision). The court ruled that it is arbitrary and capricious to exclude hatchery populations from listing if they are part of the same ESU as listed natural populations. The Court’s ruling set aside NMFS’ 1998 ESA listing of Oregon Coast coho salmon and ruled that the ESA does not allow NMFS to list a subset of an ESU by excluding hatchery fish within an ESU from listing. Although the Court’s ruling affected only one ESU, the interpretive issue raised by the ruling called into question nearly all of the agency’s Pacific salmonid listing determinations. In response to the Alsea decision, NMFS has announced that it will conduct status review updates for 25 ESUs potentially affected by the Court’s ruling (67 FR 6215, February 11, 2002). Additionally NMFS announced that it would revise its policy on how it considers hatchery populations in making ESA listing determinations.

The CCFA petition seeks delisting of the CCC coho salmon ESU as a result of the Alsea decision. The CCC coho ESU was listed as a threatened species on October 31, 1996 (61 FR 56138). Only naturally spawned populations in the ESU were listed, and within-ESU hatchery populations were excluded from listing protection. Hence, the ESA interpretive issue raised by the Alsea decision pertains to the listing determination for the CCC coho ESU. NMFS thereby concludes that the CCFA petition presents substantial scientific and commercial information indicating the petitioned action may be warranted. This determination is consistent with previous NMFS findings on several petitions seeking to delist 14 other ESUs with unlisted hatchery populations (67 FR 6215, February 11, 2002).

The Trout Unlimited petitioners assert that hatchery populations are functionally distinct from naturally spawned populations in the 15 petitioned ESUs, and that the ESUs should be redefined to include only the naturally spawned populations. They present information describing continued adverse impacts and threats from hatchery production to the habitat, ocean survival, and long-term genetic fitness of natural populations in these ESUs. The petitioners provide a substantial collection of technical documents from the peer-reviewed scientific literature, as well as from the gray literature (e.g., non peer-reviewed data, reports, and technical memoranda from Federal and state management agencies), addressing the ecological and genetic relationship between hatchery and naturally spawned populations. These references describe threats posed by hatchery populations to natural populations, as well as differences between hatchery and natural populations in behavior, genetic composition, and fitness. In light of the substantial scientific information provided, the petitioners further assert that the inclusion of hatchery fish in ESUs with naturally spawned fish is inconsistent with the ESA statutory language and Congressional intent, as well as with NMFS’ regulatory interpretations of the ESA.

NMFS maintains that its listing determinations have been wholly consistent with the existing regulations and policies guiding its listing determinations. The Alsea decision, however, ruled that NMFS’ regulations guiding its consideration of hatchery populations in listing determinations are not consistent with the ESA. As mentioned above, NMFS is in the process of revising its policy on the consideration of hatchery fish in its ESA listing determinations to be consistent with the Alsea decision, and has initiated coastwide salmonid status review updates. The Trout Unlimited petitions provide scientific information that is relevant to NMFS’ consideration of the relationship between hatchery and natural populations, and the delineation of Pacific salmon and steelhead ESUs. Accordingly, NMFS finds that the Trout Unlimited petitions present substantial scientific and commercial information indicating that the petitioned actions may be warranted.

NMFS has already committed to conducting status review updates for the 16 Pacific salmon and steelhead ESUs addressed in the CCFA and Trout Unlimited petitions, as well as for nine other ESUs (67 FR 6215, February 11, 2002). The agency is also in the process of clarifying its policy on how it considers hatchery populations in making ESA listing determinations. NMFS will consider the information presented and the issues raised by these petitions in the course of revising its listing policy and conducting the coastwide status review updates.

NMFS has already solicited technical information to assist in these status review updates during two 60-day comment periods ending April 12, 2002, and August 12, 2002. NMFS is now requesting information and comment on the ecological and genetic relationship of hatchery and natural populations in the 15 ESUs addressed in the Trout Unlimited petitions. Additionally, NMFS seeks information and comment on the potential risks and benefits posed by artificial propagation to naturally spawning populations, and the extent to which such efforts may contribute to, or hinder, efforts being made to protect the species.

The shrimp fishery off the Southern Atlantic States in the EEZ is managed under the FMP approved by NMFS, and implemented under the authority of the Magnuson-Stevens Fishery Conservation and Management Act by regulations at 50 CFR part 622.

In its preliminary qualitative analysis of Federally managed fisheries conducted in March 2001, NMFS classified the rock shrimp fishery off the southern Atlantic states as one of the fisheries where there are indications of over-capacity. With over-capacity and open access to the fishery, any gains in the health of the stocks would likely attract new entrants and an increase in harvesting capacity. Accordingly, Amendment 5 proposes a limited access program for the fishery off Georgia and the east coast of Florida. The intended effects are to minimize additional increases in harvesting capacity in the rock shrimp fishery; reduce the bycatch of small, unmarketable rock shrimp; enhance compliance with fishery management regulations; improve protection of essential fish habitat, including an area that contains the last 20 acres of intact Oculina coral remaining in the world; and ensure the long-term economic viability of the rock shrimp industry.

The current requirement for a Federal vessel permit for the rock shrimp fishery remains in effect. However, in addition, to participate in the fishery off Georgia and the east coast of Florida, a limited access endorsement for South Atlantic rock shrimp would be required. Initially, NMFS would issue a limited access endorsement to the owner of a vessel that had a valid Federal permit for South Atlantic rock shrimp on or before December 31, 2000, and that had landings of at least 15,000 lb of rock shrimp from the South Atlantic EEZ during one of the calendar years 1996 through 2000. A vessel that had a Federal permit for South Atlantic rock shrimp would be determined solely from NMFS' permit records. Claimed landings would be verified from landings data in state or Federal database systems; the landings must have been submitted on or before January 31, 2001. For the purpose of initial eligibility for a limited access endorsement, the owner of a vessel that had a permit for rock shrimp during the qualifying period would retain the rock shrimp landings record of that vessel during the time of his/her ownership, unless a sale of the vessel included a written agreement that credit for qualifying landings was transferred to the new owner.

An owner issued a limited access endorsement could request that the permit be transferred to another vessel or to another vessel owner by submitting an application for transfer to the Regional Administrator (RA). An owner must report any costs associated with such transfer on the application for transfer. A transfer of a limited access endorsement to a new owner would include the transfer of the vessel's entire catch history of South Atlantic rock shrimp to the new owner.

The RA would not reissue a limited access endorsement for South Atlantic rock shrimp if the permit is revoked or if a required application for renewal of the permit is not received within 1 year after the permit's expiration date. Additionally, a limited access endorsement for rock shrimp that is inactive for a period of 4 consecutive calendar years would not be renewed.

Historically, the cod end mesh size commonly used in the rock shrimp fishery was 1 7/8 to 2 inches (4.76 to 5.08 cm) stretched mesh. Some fishermen are now using smaller mesh or are putting a bag liner inside the cod end. This results in the catch of juvenile rock shrimp, some of which are unmarketable and are discarded dead. This Amendment would establish a minimum mesh size for the cod end of 1 7/8 inches (4.76 cm) and prohibit the use of smaller-mesh bag liners. This would allow escapement of juvenile rock shrimp. There is virtually no information available on either the extent of escapement of juvenile rock shrimp or on the quantity of other bycatch; thus, NMFS has initiated 100 days of observer coverage on this fishery to obtain such information. This information should be available for inspection in about a year.

This Amendment would require the use of a NMFS-approved vessel monitoring system (VMS) by each vessel that has been issued a limited access endorsement for South Atlantic rock shrimp when such vessel is on a trip off the southern Atlantic states (North Carolina through the east coast of Florida). The VMS would consist of a mobile transmitting unit placed on each vessel and an associated communication service provider that supplies the link between the unit and NMFS. The VMS would advise NMFS when and where a vessel was fishing or had been fishing. Thus, it would provide effort data and would significantly aid in enforcement of areas closed to trawling, particularly the Oculina Bank habitat area of particular concern. There is a critical need to increase the level of surveillance in this area because it contains the last 20 acres of intact Oculina coral remaining in the world.

NMFS would publish in the Federal Register a list of approved VMS mobile transmitting units and associated communications service providers that meet the minimum standards for the rock shrimp fishery. A vessel that has been issued a limited access endorsement for the South Atlantic rock shrimp fishery would be required to have an operating VMS commencing 270 days after the final rule implementing this amendment is published.

To enhance enforcement of fishery regulations, the Amendment proposes to require operator permits in the South Atlantic rock shrimp fishery. “Operator” is defined as the master or other individual aboard and in charge of a vessel. Each vessel that has a Federal permit for the fishery would be required to have on board at least one person who has an operator permit when the vessel is at sea or offloading. In addition to penalties that currently exist for violations of the regulations, an operator permit could be sanctioned. For example, an operator whose permit is suspended, revoked, or modified pursuant to subpart D of 15 CFR part 904 would not be allowed aboard any vessel subject to Federal fishing regulations in any capacity, if so sanctioned by NOAA, while the vessel is at sea or offloading. To enhance enforceability of this measure, a vessel's owner and operator would be responsible for ensuring that a person with such suspended, revoked, or modified operator permit is not aboard his/her vessel. A list of operators whose permits are revoked, suspended, or modified would be readily available from the RA. In general, an operator permit would be valid for a period of 3 years, expiring at the end of the individual's birth month.

Comments received by September 23, 2002, whether specifically directed to those management measures in Amendment 5 or to the proposed rule that NMFS plans to publish that would implement Amendment 5, will be considered by NMFS in its decision to approve, disapprove, or partially approve the proposed measures. Comments received after that date will not be considered by NMFS in this decision. All comments received by NMFS on Amendment 5 or the proposed rule during their respective comment periods will be addressed in the preamble of the final rule.

NMFS manages the U.S. groundfish fisheries of the Gulf of Alaska and the Bering Sea and Aleutian Islands management areas in the Exclusive Economic Zone (EEZ) under the groundfish FMPs. The North Pacific Fishery Management Council (Council) prepared the FMPs under the authority of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act). Regulations at 50 CFR part 679 implement the FMPs. General regulations that also pertain to U.S. fisheries appear at subpart H of 50 CFR part 600. Regulations implementing the interim Observer Program were published November 1, 1996 (61 FR 56425), amended December 30, 1997 (62 FR 67755) and December 15, 1998 (63 FR 69024), and extended through 2002 under a final rule published December 21, 2000 (65 FR 80381). The Observer Program provides for the collection of observer data necessary to manage the Alaska groundfish fisheries by providing information on total catch estimation, discard, prohibited species catch (PSC) and biological samples that are used for stock assessment purposes. The observers also provide information related to compliance with regulatory requirements.

The regulations implementing the Observer Program at § 679.50 require observer coverage aboard fishing vessels and shoreside processors that participate in the Alaska groundfish fisheries. Timely communication between the fishing industry and NMFS through catch reports submitted to NMFS by both industry and observers is crucial to the effective in-season monitoring of the groundfish quotas and PSC allowances. At its June 1995 meeting, the Council recommended that NMFS issue regulations that would require all catcher/processors, motherships, and shoreside processors that process groundfish to have computer hardware and software that would enable observers to send electronic data to NMFS. Catcher/processors and motherships were recommended to have satellite communications technology to allow transmission of the data from the vessel.

Regulations requiring electronic submission of observer reports were implemented in 1995 at § 679.50(f) for catcher/processors, motherships and shoreside processors through the application of an observer communications system (OCS), previously referred to as the “ATLAS” system. This system is composed of specified electronic hardware supplied by the vessel or shoreside processor and dedicated software provided by NMFS that together allow observers to communicate daily with NMFS, including transmitting data. This permits real-time data processing, improves timeliness of making data available to managers, and allows managers to assess daily activities of the fishing fleet. These data have led to fishery closures that more accurately reflect actual catch levels and facilitate conservation and optimal management of this valuable living marine resource.

In a letter dated February 7, 2000, NMFS informed the Council that the agency intended to initiate rulemaking that would implement upgrades in the specifications for required hardware and software that support the OCS, and would extend these requirements to some catcher vessels. At its February 2000 meeting, the Council noted its support for this initiative.

NMFS proposes to require operations already subject to OCS requirements to adopt hardware upgrades to meet current technology standards necessary to support the OCS software and to require hardware installed in vessels to be maintained in a functional mode. NMFS further proposes to exclude some catcher vessels from the requirements, thereby amending an error in the final rule implementing the 1995 OCS requirements, which erroneously included all catcher vessels. This proposed rule would, however, require all catcher vessels required to carry observers during 100 percent of their fishing days to comply with the regulations at § 679.50(f) governing the installation and maintenance of necessary equipment supporting the OCS system.

Hardware Upgrades. Current regulations stipulate that any vessel required to carry one or more observers must facilitate transmission of observer data to NMFS by providing equipment consisting of a computer and communications equipment that meet certain specifications. Hardware requirements specified in these regulations to support OCS were considered state of the art at the time they were implemented in 1995. Computer technology has advanced at a rapid rate since then. As a result, the current minimum hardware requirements are technologically out of date and are difficult to maintain or even obtain. The OCS software application developed by NMFS to effect at-sea communication with observers has been updated recently to be more effective and now requires more powerful computers on which to run. Requiring the updated hardware is necessary to meet current technology standards.

Included in this hardware update is a requirement that allowable communications equipment provide point-to-point communications, which is a necessary function to support all of the operations that OCS requires. A point-to-point communications system allows the computer with OCS software to connect directly to the NMFS host computer and modem. Point-to-point communication connections would allow direct confidential communication between NMFS and observers, which has been shown to be necessary for effective problem solving in various at-sea situations. Examples of communication systems that provide point to point communications are INMARSAT Standard-A, Standard-B, mini-M, and Iridium. Vessels using INMARSAT Standard C terminals and associated software to transmit data, which are allowed under current regulations, do not provide point-to-point communication connections and would not meet the hardware requirement proposed in this rule. The inability of INMARSAT Standard C to allow observers and NMFS to maintain secure communications without interfacing with vessel personnel is of particular concern.

Functionality. Current regulations requiring the communications equipment aboard vessels to support OCS do not require that the hardware be functional. The equipment would be considered functional when specified equipment aboard a vessel can initiate a data transmission to a device, such as a satellite, that provides a point-to-point communication connection with minimum specifications outlined in the regulations. The vessel would not be responsible for ensuring the actual reception of the data by the satellite or other device. Regulations for shoreside processor communication equipment do require the equipment to be maintained in a functional mode.

The inadvertent omission of an equipment functionality requirement for vessels has resulted in NMFS’ lack of ability to receive electronic observer data from up to nine catcher processors (approximately 10 percent of all catcher processors required to have this equipment) that have not properly installed or maintained the communications equipment. Additionally, other vessels have taken up to 7 months to repair or complete initial installation of functional equipment. This has compromised in-season monitoring of harvest quotas and has resulted in or contributed to events leading to quotas being exceeded. Therefore, NMFS proposes to amend the regulations to require that equipment be functional.

Catcher Vessels Requirements. Current regulations stipulate that any vessel required to carry one or more observers must facilitate transmission of observer data to NMFS by providing equipment meeting specifications outlined by regulations cited above. The original intent of the regulations was to apply these requirements to all catcher/processors, motherships, and shoreside processors subject to observer coverage requirements. Catcher-only vessels were not intended to be included in these requirements. The proposed rule for implementing these regulations (60 FR 45393, August 31, 1995) and the preamble to the final rule (61 FR 63759, December 2, 1996) correctly reflect the original intent to restrict the requirements to catcher/processor vessels, motherships, and shoreside processors. However, the regulatory language in the final rule incorrectly extends the regulations to all vessels subject to observer coverage, including all catcher vessels. This proposed rule would correct that error by amending the requirement so that it would not include indiscriminately all catcher vessels but would require all catcher vessels that are required to maintain 100-percent observer coverage as specified in regulations at § 679.50(c)(1)(iv) to install and maintain hardware and software supporting the OCS communications system as amended in this proposed rule.

Prior to 2000, all shoreside harvest data from processors were faxed to NMFS in a weekly production report. Weekly submission of these reports roughly matched the availability of observer data from shoreside processors. In 2000, an electronic reporting system (distinct from OCS) was implemented to replace the weekly production report. Daily electronic reports from shoreside processors of shoreside deliveries provide NMFS with landings information within one day of a delivery. This allows for partial real-time management of the groundfish species such as pollock that are specifically allocated to the inshore sector or of harvest restrictions specific to catcher vessels under the American Fisheries Act sideboard provisions. However, availability to NMFS of observer PSC and discard data for a given delivery does not match the timeliness of the landings data.

The necessary timely monitoring for in-season management of PSC and discard data is not possible under the observer data reporting system currently used by catcher vessels delivering to inshore processors. Shoreside catcher vessel observers opportunistically transmit data via fax to NMFS from a shoreside processor, which can be between 5 and 14 days after a given haul is made. This delay is caused in part by the fact that an observer usually must return to sea immediately upon completion of the delivery, leaving no time for the observer to compile data into a format appropriate for fax transmission to NMFS, most often several hours worth of work. Once received by NMFS, the faxed data subsequently must be hand entered into an electronic database, further delaying the availability to in-season managers. Even if a catcher vessel observer had time available for data compilation and transmission from the shoreside processor, logistical problems remain. Shoreside processors do support OCS communication systems for transmission of observer data. However, OCS software on these systems is designed specifically for shoreside processor applications and does not support observer data collected at sea. While the shoreside system could be adapted to support data collected by vessel observers, other logistical problems prevent reliable use of these systems by catcher vessel observers. These difficulties include vessel observers having to return to sea prior to data input and transmission via the OCS communications system, as well as the lack of reliance on access to shoreside computers and communications equipment that support the OCS system. Offices that house this equipment at the shoreside processors generally are not open 24 hours a day, while deliveries may be completed at any time during the day.

Installation of OCS software, in combination with point-to-point modem communication capability aboard shoreside catcher vessels would allow daily electronic transmission of catch data. This would provide NMFS with observer data from catcher vessels within 24 hours of receiving their delivery reports from the shoreside processor. At-sea discards and PSC could then be accounted for together with the landings data in real-time for each OCS-equipped vessel. Such real-time, in-season management would be expected to result in fisheries closures that better approximate actual quotas.

Additionally, observer data quality problems can have a significant impact on PSC estimates and fishery closure projections. Resulting management errors can include early closure of a fishery, which results in direct lost revenue to the fleet, or over-harvest of a PSC fishery allowance, which can impact other fisheries as the total annual PSC limit is reached.

The OCS program provides several advantages and improvements to NMFS’ current management systems which result in higher quality data. These include:

Improved data recording efficiency. Observers using OCS initially record data on deck forms. These data are then entered into the vessel's computer and sent electronically to NMFS. Data received by NMFS are automatically screened for errors and may be accessed by users in a database in a timely manner. Without OCS, data are transcribed from deck forms to paper and faxed to NMFS for subsequent electronic entry. Less paperwork provides observers with more time to dedicate to sampling.

Consistent, secure communications with observer program staff and a reduction in the overall frequency of errors. OCS communications allow NMFS to assign to each deployed observer an in-season advisor who screens data for errors and advises the observer throughout their deployment, resulting in improved observer performance and a reduction in errors. The quality of timely data available for in-season management decisions is thus greatly improved.

Faster, more efficient, and higher quality debriefing. The OCS application automatically screens out many potential data errors at the point of entry. These data are further screened by the in-season advisor, and all data are again screened by computer programs and corrected at the point of debriefing. These processes eliminate hand checking of paper data forms, further reducing debriefing time and allowing for faster availability of the final data.

Installation and maintenance of OCS aboard catcher vessels requiring 100-percent observer coverage would eliminate 1,100 faxed observer reports and the associated processing per year. Availability of timely data on PSC by this sector of the fleet, which is largely made up of American Fisheries Act-qualified catcher vessels that are members of inshore cooperatives, would improve in-season management of the BSAI pollock and Pacific cod trawl fisheries. In the BSAI pollock trawl fishery, salmon and herring PSC are of concern, and in the BSAI Pacific cod trawl fishery, halibut bycatch is of concern. Although the few Pacific cod trawl fishery closures that have occurred since 1998 have been based primarily on TACs being reached, prior to 1998, BSAI Pacific cod trawl fishery closures were based on halibut bycatch allowances being caught before the TAC was reached. Improved timeliness of PSC data transmission would allow NMFS resources to be reallocated to processing faxed data received from observers aboard vessels that are subject to 30-percent coverage requirements. Overall, this would result in the expedited availability to managers and improved quality of all in-season data from all catcher vessels in the BSAI and the Gulf of Alaska (GOA). This timely information is also of benefit to industry through access via NMFS web sites. Fleets coordinate their activity to avoid bycatch hot spots, reducing costly PSC closures. This can only work where rapid access to the information is available.

Additional need for more timely harvest data from catcher vessels comes from management measures implemented to temporally and spatially disperse some groundfish fisheries in near shore areas of the EEZ off Alaska (67 FR 956, January 8, 2002). These measures were developed in response to a Biological Opinion initiated as part of a formal consultation under section 7 of the Endangered Species Act on the impact of federally managed groundfish fisheries on endangered Steller sea lions in Alaska. The measures involve some time-area restrictions for the pollock, Pacific cod and Atka mackerel fisheries including harvest limits in Steller sea lion critical habitat. To ensure compliance with these measures, levels of groundfish harvest must be monitored on a real-time basis.

Catcher vessels delivering to catcher/processors and motherships deliver unsorted codends with no fish retained aboard the catcher vessel. They, therefore, require no observer coverage. These catcher vessels would not be required to install and maintain the OCS on board. Catcher vessels greater than 60 ft (18.3 m) LOA fishing for groundfish using pot gear are subject to 30-percent observer coverage during a calendar quarter and would therefore be unaffected by this proposed rule.

Shoreside Processor Requirements. Shoreside processor responsibilities are clarified. Specifically, all shoreside processors required to maintain observer coverage at any time during the year are also required to install and maintain electronic reporting equipment—hardware and software—as specified in the rule.

This proposed rule has been determined to be significant for purposes of Executive Order 12866.

NMFS prepared an RIR/IRFA, which describes the impact this proposed rule would have on small entities, if adopted.

An estimated five to 10 catcher/processors or motherships vessels would be required to upgrade their computers to meet the requirements in this proposed rule. Current market prices for a reliable computer at this level are about $800. An estimated 22 vessels would be required to upgrade their communications systems from INMARSAT Standard C communications hardware and would have to choose between Standard B hardware at about $20,000 per unit, Mini-M hardware at about $4,500, or Iridium at $2,200. The initial investment from all catcher processors and motherships required by these proposed requirements would be approximately $56,000, with annual maintenance and data transmission savings of $1,000. These savings relate to aggregate maintenance and data transmission costs for the catcher/processor or mothership class of vessels. The net savings of about $1,000 represent aggregate data transmission savings of about $2,263 minus aggregate additional annual maintenance costs of about $1,208.

Of the 27 shoreside processors that would be subject to requirements in this proposed rule, 15 are estimated to already be capable of using the new system. Eleven of the remaining shoreside processors need to install both the computer and the communications system; one shoreside processor needs to upgrade its computer. The initial investment from this sector as a whole would be approximately $34,000, with little change in annual maintenance and data transmission costs.

Assuming that none of the 31 catcher vessels required to carry an observer for 100 percent of their fishing days have installed the necessary communications equipment, but that approximately 30 percent of them have computers compatible with OCS specifications, the initial investment from this sector as a whole would be approximately $86,000, with annual maintenance and data transmission costs of about $19,000.

Catcher vessels requiring 30-percent observer coverage that deliver to shoreside processors would not be required by this proposed rule to install and maintain hardware and software needed to support the OCS. Although catcher vessels are not covered, had they been included in these requirements, the estimated initial investment from this sector as a whole would have been approximately $311,000, with annual maintenance and data transmission costs of $9,000. The $9,000 cost figure would have represented the aggregate cost for maintenance on catcher vessels requiring 30-percent observer coverage. Because the proposed rule does not apply to such catcher vessels, these costs are not incurred.

However, the benefits of real-time data reporting that the OCS would afford are significant. More timely availability of halibut PSC data from the GOA deep and shallow trawl complexes, as well as from the GOA Pacific cod hook-and-line gear fishery, is needed to improve the accuracy of those fisheries’ closures. Catcher vessels subject to 30-percent observer coverage requirements are a considerable component of the fleets in these fisheries. Closures in the flatfish trawl fisheries in the GOA are based entirely on halibut caps being reached, and the lack of timely halibut bycatch data is a significant contributor to GOA trawl halibut mortality caps being frequently exceeded. The GOA Pacific cod hook-and-line gear fishery closures have been based on halibut caps, but those caps are often reached nearly concurrently with the TAC. However, availability of observer halibut bycatch data in this fishery is critical, because a significant portion of this fleet is less than 60 ft (18.3 m) LOA, and therefore not subject to any observer coverage.

NMFS is seeking to eventually fully implement electronic reporting of observer data fleet-wide for those operations subject to observer coverage requirements in a practicable manner. Methods to implement this will be considered in the next few years. Options for consideration will include equipping observers with their own laptop computers or other electronic devices capable of supporting the OCS software, as well as options for linking the observer OCS with electronic logbook reporting requirements that are currently being considered for fleet-wide implementation. NMFS is specifically seeking comments on this issue.

An Initial Regulatory Flexibility Analysis (IRFA) was conducted in accordance with the Regulatory Flexibility Act of 1980 (RFA) and the Small Business Regulatory Enforcement Fairness Act of 1996.

In the IRFA, the proposed alternatives could affect the following estimated numbers of small regulated entities: 38 small catcher/processors, no motherships, 5 processing plants, 31 catcher vessels with 100-percent observer coverage, 389 catcher vessels with 30-percent observer coverage, and 6 community development quota groups representing 65 western Alaska communities. The preferred alternative, Alternative C, would affect 38 small catcher/processors, no motherships, 5 processing plants, 31 catcher vessels with 100-percent observer coverage, and no catcher vessels with 30-percent observer coverage.

Under the preferred alternative (Alt. C), small catcher/processors would incur average investment expenses equal, on average, to about 0.2 percent of one year’s gross revenues, and no additional annual operating expenses. Small catcher vessels required to have 100-percent coverage would incur average investment expenses equal, on average, to about 0.3 percent of one year’s gross revenues and average annual expenditures equal to about 0.1 percent of a year’s gross revenues. Small shoreside processors would incur average investment expenses equal to about 0.1 percent of annual gross revenues, and no significant additional expenses. The CDQ groups would be affected by the investments and joint ventures in catcher/processors, catcher vessels, and shoreside plants. The impacts on these entities were described above.

The RFA requires that the IRFA describe significant alternatives to the proposed rule that accomplish the stated objectives of the applicable statutes and minimize any impact on small entities. The IRFA must discuss significant alternatives to the proposed rule such as (1) establishing different reporting requirements for small entities that take into account the resources available to small entities; (2) consolidating or simplifying reporting requirements; (3) using performance rather than design standards; and (4) allowing exemptions from coverage for small entities.

An additional alternative that would have further reduced the burden on small entities was considered for implementation but was rejected. This alternative would have increased data entry staff at NMFS to ensure speedier input of faxed data into the electronic database for availability to in-season managers. However, this alternative would not sufficiently address the timeliness of data availability and could not match the inherent data quality control of the OCS.

Additionally, the overall implementation of the Interim Observer Program includes measures that minimize the significant economic impacts of observer coverage requirements on at least some small entities. Vessels less than 60 ft (18.3 m) LOA are not required to carry an observer while fishing for groundfish. Similarly, vessels 60 ft (18.3 m) and longer, but less than 125 ft (38.1 m) LOA, have lower levels of observer coverage than those 125 ft (38.1 m) LOA and above. These requirements, which have been incorporated into the requirements of the North Pacific Groundfish Observer Program since its inception in 1989, effectively mitigate the economic impacts on some small entities without significantly adversely affecting the implementation of the conservation and management responsibilities under the Magnuson-Stevens Act. A copy of this analysis is available from NMFS (see ADDRESSES ).

This proposed rule contains a collection-of-information requirement subject to the Paperwork Reduction Act. The collection of this information has been approved by the Office of Management and Budget, OMB Control Number 0648-0318.

Notwithstanding any other provision of the law, no person is required to respond to, and no person shall be subject to penalty for failure to comply with, a collection of information subject to the requirements of the PRA, unless that collection of information displays a currently valid OMB control number. Send comments regarding this burden estimate, or any other aspect of this data collection, including suggestions for reducing the burden, to NMFS and OMB (see ADDRESSES ).

Alaska, Fisheries, Reporting and recordkeeping requirements.

For the reasons set out in the preamble, 50 CFR part 679 is proposed to be amended as follows: