The regulations in 9 CFR part 93 prohibit or restrict the importation of certain animals, birds, and poultry into the United States to prevent the introduction of communicable diseases of livestock and poultry. Subpart D of part 93 (§§ 93.400 through 93.435, referred to below as the regulations) governs the importation of ruminants. Section 93.406 of the regulations contains requirements for diagnostic tests for brucellosis and tuberculosis. Section 93.427 contains some additional safeguards against tick-borne diseases, brucellosis, and tuberculosis for cattle imported into the United States from Mexico.

Bovine tuberculosis is an infectious disease caused by the bacterium Mycobacterium bovis. Although commonly defined as a chronic debilitating disease, bovine tuberculosis can occasionally assume an acute, rapidly progressive course. While body tissue can be affected, lesions are most frequently observed in the lymph nodes, lungs, intestines, liver, spleen, pleura, and peritoneum. Although cattle are considered to be the true hosts of M. bovis, the disease has been reported in several other species of both domestic and nondomestic animals and in humans. Currently, all areas of the United States are considered to be free of bovine tuberculosis except for Texas, Michigan, New Mexico, and California.

Currently, the regulations for tuberculosis treat imported steers and spayed heifers differently from imported sexually intact cattle. Under § 93.406(a)(2)(i), steers and spayed heifers must have come from a herd of origin that tested negative to a whole herd test for tuberculosis within 1 year prior to the date of exportation to the United States; each of the animals must have tested negative to an additional official tuberculin test conducted within 60 days prior to the date of exportation to the United States; and any individual cattle that had been added to the herd must have tested negative to any individual tests for tuberculosis required by the Administrator. For sexually intact cattle from an accredited herd (a herd that has passed at least two consecutive annual official tuberculin tests and has no evidence of tuberculosis), the herd must have been certified as an accredited herd for tuberculosis within 1 year prior to the date of exportation to the United States. Sexually intact cattle not from an accredited herd must have originated from a herd of origin that tested negative to a whole herd test for tuberculosis within 1 year prior to the date of exportation to the United States. Each of these animals must also have tested negative to one additional official tuberculin test conducted no more than 6 months and no less than 60 days prior to the date of exportation to the United States, unless the animals are exported within 6 months of when the herd of origin tested negative to a whole herd test, in which case the additional test is not required. In addition, any individual cattle that had been added to the herd must have tested negative to any individual tests for tuberculosis required by the Administrator.

The higher level of risk of tuberculosis transmission associated with sexually intact cattle accounts for their more stringent regulatory treatment. Steers and spayed heifers are often imported as feeders and slaughtered before the age of 2 years. They usually graze with other feeders before being taken to feedlots and, subsequently, to slaughter. Sexually intact cattle, on the other hand, are typically imported for breeding purposes, and their average life span ranges from 7 to 12 years. The longer the life span of an animal, the greater the chances are that, if exposed to tuberculosis, it will contract the disease, develop generalized disease, and spread it to other animals. In addition, since bovine tuberculosis may be spread by nursing or aerosolization, an infected breeding cow may not only spread the disease to the other breeding cattle with which she is kept, but also to her offspring or the offspring of other breeding cattle.

Some imported steers and spayed heifers, however, have also been associated with higher levels of tuberculosis risk. Cattle with horn growth ( i.e. , cattle that are not polled or dehorned; hereafter referred to as exhibition animals) may be used for exhibitions, rodeos, and roping and bulldogging practices. Cattle used for these purposes are more expensive than feeder animals and are often maintained longer. In addition, exhibition animals are managed much differently than feeder animals. Exhibition animals are housed in or near arenas for rodeo events and practice sessions. When the season is over, these animals may be commingled with breeding animals or herds during the winter. This routine practice may be repeated over the course of 2 to 5 years. Consequently, exhibition animals have historically exhibited a significantly higher risk of spreading tuberculosis than have feeder cattle. It is our view that the risks presented by exhibition animals justify regulating their importation in a manner equivalent to the way we regulate sexually intact cattle.

In their current form, the regulations do not distinguish between steers and spayed heifers imported strictly as feeders and those whose horn growth may enable them to be used in exhibitions. Because steers or spayed heifers with horn growth are far more likely to be imported for use in exhibitions than those without horn growth, they may be associated with the additional risk factors described in the previous paragraph. Therefore, in order to offer greater protection to U.S. livestock herds against tuberculosis, we are amending the regulations in § 93.406(a)(2) to require that steers or spayed heifers intended for importation into the United States that have any evidence of horn growth meet the same tuberculosis testing requirements as sexually intact cattle imported into the United States. In addition, we are amending § 93.427(c)(3), which provides, among other things, for the detention at the U.S. port of entry of sexually intact cattle from Mexico until the cattle are tested for tuberculosis with negative results. Under this rulemaking, steers or spayed heifers from Mexico with any evidence of horn growth will also be subjected to this requirement.

This rulemaking, which requires that steers and spayed heifers with any evidence of horn growth that are entering the United States meet the same tuberculosis testing requirements as sexually intact animals entering the United States, is necessary on an emergency basis to reduce the risk of imported cattle transmitting tuberculosis to domestic livestock in the United States. Under these circumstances, the Administrator has determined that there is good cause under 5 U.S.C. 553 for issuing this rule as an interim rule rather than by publishing a notice of proposed rulemaking. We are making this rule effective 30 days after publication in the Federal Register to provide sufficient notice of the new requirements to Mexican animal health authorities and cattle exporters.

We will consider comments we receive during the comment period for this interim rule (see DATES above). After the comment period closes, we will publish another document in the Federal Register . The document will include a discussion of any comments we receive and any amendments we are making to the rule.

This rule has been reviewed under Executive Order 12866. The rule has been determined to be not significant for the purposes of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget.

This interim rule amends the animal importation regulations in §§ 93.406 and 93.427 to require that steers and spayed heifers with any evidence of horn growth that are entering the United States meet the same tuberculosis testing requirements as sexually intact animals entering the United States. This action is necessary to reduce the risk of imported cattle transmitting tuberculosis to domestic livestock in the United States.

The cattle industry plays an important role in the U.S. economy. Cash receipts from sales of meat, animals, and milk totaled about $65 billion in 2001. 1 Additionally, cattle and related product exports generated over $3 billion in sales. Other agricultural and nonagricultural sectors are highly dependent on the cattle industry for their economic activity. Maintaining favorable economic conditions for U.S. agriculture depends, in part, on continued aggressive efforts to eradicate tuberculosis from the U.S. cattle population.

Historically, most U.S. imports of live cattle and calves have come from Canada and Mexico. The United States imported 2,502,973 live cattle and calves in 2002, which were valued at $1,447 million. Of these, 1,686,508 were from Canada, and 816,460 were from Mexico. 2 Steers and spayed heifers that have horn growth and may be used for rodeo exhibitions are most likely to come to the United States from Mexico. In 2002, the number of steers from which roping steers were likely to be drawn totaled 747,069 or 91.5 percent of total imports from Mexico. 3 Of this total, about 6 percent are believed to be roping steers.

This interim rule will result in an additional tuberculosis testing requirement for steers and spayed heifers with horn growth imported into the United States, entailing some additional costs for importers. The cost of tuberculin testing is between $7.50 and $10 per head. The weighted average price of an imported steer from Mexico, which is likely to be the source of most of the animals affected by this interim rule, in 2002 was $364. The cost of the additional tuberculosis test represents about 2.4 percent of that value. If supply does not change as a result of the cost increase, U.S. importers will incur overall additional costs of between $336,180 and $549,000 annually. The exact impact of a 2.4 percent increase in cost on the supply of cattle from Mexico is unknown, but the possibility exists that the cost increase may decrease the supply of cattle from Mexico and increase lease fees and/or roping steer purchase prices.

The Regulatory Flexibility Act requires that agencies specifically consider the economic effects of their rules on small entities. Entities that may be affected by this interim rule include U.S. order buyers that import steers from Mexico and cow-calf operations that sell steers comparable in age and size to those imported from Mexico. The Small Business Administration (SBA) classifies cow-calf and stocker operations as small entities if their annual receipts are not more than $750,000. There were 1,032,000 of these operations in the United States in 2002, and over 99 percent were considered small. This interim rule will also affect industries that purchase and lease roping steers for their shows. The number and size distributions of this industry are not available, but their sizes are likely to be small. Additionally, as these animals retire from roping service, they are likely to be sold to feedlots, so some feedlots might also be affected. The SBA classifies cattle feedlots as small entities if their annual receipts are not more than $1.5 million. There were 95,189 feedlots in the United States in 2002, of which about 93,000 (nearly 98 percent) had capacities of fewer than 1,000 head. Average annual receipts for these small feedlots totaled about $35,300, a figure well below the SBA's small-entity criterion. However, as of January 1, 2003, the remaining 2 percent of the Nation's feedlots, which had capacities of at least 1,000 head, held 82 percent of all U.S. cattle and calves on feed.

This interim rule may lead to increased costs for U.S. importers of roping steers and a decrease in the number of roping steers imported from Mexico. Any negative economic impacts for U.S. importers may be offset somewhat by the benefits that may accrue to U.S. cow-calf operations that sell or lease domestic roping steers if the price of those steers rises. In addition, if any increase in U.S. feeder cattle prices results from this rule, U.S. cow-calf and stocker domestic operations will gain from a stronger market.

The overall benefits to the U.S. livestock industry of reducing the risk of importing tuberculosis-infected cattle by requiring additional testing for steers and spayed heifers with horn growth are expected to be of far greater significance than any other economic impacts, whether positive or negative, of this interim rule.

Under these circumstances, the Administrator of the Animal and Plant Health Inspection Service has determined that this action will not have a significant economic impact on a substantial number of small entities.

This rule has been reviewed under Executive Order 12988, Civil Justice Reform. This rule: (1) Preempts all State and local laws and regulations that are inconsistent with this rule; (2) has no retroactive effect; and (3) does not require administrative proceedings before parties may file suit in court challenging this rule.

This rule contains no new information collection or recordkeeping requirements under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

I. Background A. Overview

The Commodity Futures Modernization Act of 2000 (“CFMA”), appendix E of Public Law 106-554, 114 Stat. 2763 (2000), created a limited exemption from the Commission's jurisdiction for transactions conducted on certain electronic commercial markets (“exempt commercial markets,” “ECMs” or “section 2(h)(3) markets”). Specifically, section 2(h)(3) of the Act, as amended by the CFMA, provides that, except to the extent provided in section 2(h)(4), nothing in the Act shall apply to a transaction in an exempt commodity  1 that is: (a) entered into on a principal-to-principal basis solely between persons that are eligible commercial entities at the time the persons enter into the agreement, contract, or transaction; and (b) executed or traded on an electronic trading facility. Section 2(h)(4) provides that a transaction described in section 2(h)(3) shall be subject to certain specified provisions of the Act, such as the Act's antimanipulation and antifraud provisions, and furthermore, that such transactions shall be subject to price dissemination rules if the electronic trading facility serves a significant price discovery function for the underlying cash market. Section 2(h)(5) requires an electronic trading facility relying on the exemption in section 2(h)(3) to provide the Commission with certain information and to comply with trading information access provisions set out in section 2(h)(5)(B)(i). The regulations governing ECMs appear at section 36.3 of the Commission's Rules.

On November 25, 2003, the Commission published proposed amendments  2 to its part 36 regulations governing exempt commercial markets. With respect to information access, the proposal noted that section 2(h)(5)(B)(i) of the Act requires ECMs to provide the Commission with either: (1) “access to the facility's trading protocols and electronic access to the facility with respect to transactions conducted in reliance on the exemption [in section 2(h)(3)]”; or (2) “such reports * * * regarding transactions executed on the facility in reliance on the exemption [in section 2(h)(3)] as the Commission may from time to time request to enable the Commission to satisfy its obligations under this Act.” The proposal referred to these two statutory alternatives as, respectively, the “electronic access option” and the “reporting option.”

The proposal noted that, under the existing part 36 regulations, ECMs have generally chosen to comply with the information access requirements through the electronic access option. Under this alternative, the Commission has accepted from ECMs electronic access to their trading protocols ( i.e. , the trading agreements and/or other terms and conditions applicable to trades on the facility, generally available on their websites) in addition to view-only electronic access to the data stream of trades taking place on the system. In practice, however, the Commission has found that the information provided under the current electronic access option is neither as relevant, 3 nor as useful, 4 as anticipated.

Therefore, the Commission proposed to amend its regulations to focus Rule 36.3(b)(1) more precisely so as to provide the Commission with access to more relevant and useful information regarding trading activity on ECMs. Under the proposed rules, an ECM filing a notification with the Commission under Rule 36.3 would be required, initially and on an ongoing basis, to: (1) Provide the Commission with access to the facility's trading protocols, either electronically or in hard copy form; (2) identify those transactions conducted on the facility with respect to which it intends to rely on the exemption in section 2(h)(3); and (3) inform the Commission whether it intends to satisfy the information access requirement of section 2(h)(5)(B)(i) of the Act with respect to such transactions through either a revised reporting option or a revised electronic access option, as provided in the proposed rules.

The proposed new reporting option would require an ECM to file weekly a report for each business day, showing for each transaction executed on the facility in reliance on the exemption set forth in section 2(h)(3), certain basic commodity, maturity, price, time and quantity information. Alternatively, the proposed new electronic access option would require ECMs to grant the Commission electronic access to transactions conducted on the facility in reliance on the exemption in section 2(h)(3) that would allow the Commission to capture in permanent form a continuing record of trades on the facility such that the Commission would be able to reconstruct and compile the same information that would otherwise be provided by the trading facility under the reporting option described above.

The proposed information access rules also would require ECMs to maintain a record of allegations or complaints of instances of suspected fraud or manipulation on the facility and to provide the Commission with a copy of the record of each substantive complaint no later than three days after the complaint was received.

With respect to price discovery, the November 25 proposed rules noted that section 2(h)(4)(D) of the Act specifically provides that a transaction described in section 2(h)(3) shall be subject to:

The existing part 36 regulations provide that if the Commission finds by order, after notice and opportunity for a hearing, that a trading facility performs a significant price discovery function for transactions in the cash market in the underlying commodity, the facility must disseminate publicly price, trading volume and other trading data, to the extent appropriate, with respect to transactions executed in reliance on the exemption as specified in the order.

The November 25, 2003 proposed rules would add specificity to the Commission's price discovery regulations in several ways. First, the Commission proposed to adopt two criteria that it would use to determine whether a section 2(h)(3) market performs a significant price discovery function for the underlying cash market. Second, the Commission proposed to specify the information that must be disseminated by section 2(h)(3) markets that serve such a significant price discovery function. Third, the Commission proposed certain amendments to its procedures for making a price discovery determination. 5

The Commission received comments from two exempt commercial markets, the IntercontinentalExchange, Inc. (“ICE”) and the Natural Gas Exchange, Inc. (“NGX”). Both markets expressed concerns about various aspects of the proposed information access provisions. ICE also raised issues regarding certain elements of the price discovery provisions. The specific comments, and the Commission's responses, are described in the discussion of the Final Rules that appears below.

The proposed rules would require ECMs to “make their best effort to identify to the Commission those transactions conducted on the facility with respect to which it intends to rely on the exemption in section 2(h)(3).” Transactions so identified would then be subject to either the reporting requirement or the electronic access requirement. The preamble noted that the trading facility would not be required to include in such identification, agreements, contracts or transactions that are not contracts for future delivery of a commodity, or options, and are, therefore, not subject to the Commission's exclusive jurisdiction. Thus, for example, the trading facility would not be required to identify, or provide information with respect to, agreements, contracts or transactions involving “any sale of any cash commodity for deferred shipment or delivery.” Such transactions are excluded from the Commission's exclusive jurisdiction under section 1a(19) of the Act (commonly referred to as “the forward contract exclusion”). Neither would a trading facility be required to identify, or provide information with respect to, agreements, contracts or transactions that constitute cash or spot transactions, which are contracts for present, rather than future, delivery and likewise are not subject to the Commission's exclusive jurisdiction.

Both commenters express concern over the scope of Commission oversight, the scope of “reliance” on section 2(h)(3) and the burden of categorizing transactions for purposes of the information access requirements. ICE points out that, while the Act does give the Commission “limited jurisdiction to obtain information from ECMs,” it does not give the Commission “ongoing regulatory jurisdiction over ECMs.” According to ICE, the Act does not give the Commission “authority to require ECMs to maintain specific records or to submit prescribed reports” except to a “limited extent.” In this regard, ICE asserts that, “[i]n particular, if the ECM provides the Commission with access to its trading facility ( e.g. , ‘view only’ access) the CEA does not give the Commission the authority to require that the ECM submit reports to the Commission.” Thus, the proposed rules “go beyond the clear direction of the CEA and subject ECMs to ongoing regulatory oversight or requirements.”

The Commission agrees that the CEA does not give the Commission the same degree of oversight authority with respect to ECMs that it has over designated contract markets (“DCMs”) or derivatives transaction execution facilities (“DTFs”). Importantly, however, Congress did make ECMs subject to the antifraud and antimanipulation provisions of the Act. If the Commission is to have the ability to enforce those provisions, it must have access to meaningful information concerning transactions on ECMs. Congress would not have written section 2(h)(5)(B)(i) into the Act for the purpose of giving the Commission access to, or reports of, information that would not assist the Commission in detecting fraud or manipulation. ICE correctly points to the current “view only access” as an example of the type of information that the Commission might access from an ECM, but it is not the only example. For instance, under the Act the Commission would not be prohibited from requiring access to an ECM's proprietary screen, including the names of the parties to each transaction. Such information would certainly be more useful for antifraud and antimanipulation enforcement purposes than the anonymous transaction-related data proposed in the notice of proposed rulemaking. However, as noted in the letters of both commenters, ECMs are in competition with voice brokers and the Commission is well aware that requiring ECMs to provide counterparty names to the government could put them at a significant competitive disadvantage to their voice broker competitors. The information access provisions in these final rules (which have been significantly revised and narrowed, as discussed below) strike a balance between business concerns and the Commission's need for access to meaningful information with which to enforce its antifraud and antimanipulation authority as mandated by Congress.

Also with respect to competitive concerns, NGX notes that proposed Rule 36.3(b)(1)(ii)(A), the reporting option, would require ECMs to report (in addition to time, price, quantity, etc. ) “such other information as the Commission may determine.” NGX suggests that the Commission should reconsider using this phrase on the grounds that it would authorize routine collection of counterparty information, which should be available to the Commission only upon special call, and disclosure of which would put ECMs at a competitive disadvantage to voice brokers. NGX also asks that the Commission make clear that any counterparty information collected would be treated as “nonpublic” under the Commission's Freedom of Information Act (“FOIA”) regulations.

The language referring to “such other information as the Commission may determine” is necessary to give the Commission flexibility to seek additional transactional data and has not been changed in the final rules. However, it was not the Commission's intention that such language could be interpreted or applied to encompass counterparty information. Under these final rules, the Commission would expect to obtain counterparty information from an ECM pursuant to a special call issued under section 2(h)(5)(B)(iii) of the Act, in which case it would be classified as “nonpublic” under the FOIA.

ICE raises the same competitive issue about data publishers as about voice brokers. Like voice brokers, “data publishers similarly obtain and disseminate information regarding market transactions—including, in some cases, those executed on ECMs—and may also be involved in the execution of transactions. As a result, data publishers have as much, if not more, of an ability to influence pricing decisions in the cash and derivatives markets as ECMs. The Commission should, therefore, take into account the activities of voice brokers and data publishers and their roles in the market, and consider the competitive burdens that would be placed on ECMs, in determining the final form of the Proposed Rules.” As noted above, the proposed information access requirements for ECMs are not intrusive, and are consistent with appropriate enforcement of the Commission's antifraud and antimanipulation authority. The Act does not give the Commission authority to require data publishers to file reports, or grant access, like ECMs. However, to the extent such data publishers published knowingly inaccurate information, or participated in other cash or futures market manipulative activity within the Commission's jurisdiction, they would be subject to the Commission's enforcement authority. The string of recent Commission enforcement actions involving false natural gas price reporting is clear evidence that the Commission is committed to strictly enforcing that authority. To date, the Commission has filed 19 major enforcement actions as a result of its investigation of wrongdoing in the energy markets. Sixteen of these actions have been settled, with sanctions that include civil monetary penalties of over $220 million, while three actions remain pending.

ICE states that, “it will be unnecessarily burdensome for an ECM to identify all transactions for which it is relying on section 2(h)(3).” NGX, on the other hand, suggests that the Commission should reconsider its proposal to require ECMs to segregate out transactions that are subject to the Commission's exclusive jurisdiction from (for example) physical sales and to report, or provide access, only with respect to such (futures and options) data. NGX argues against narrowing the scope of information access because: (1) “The Commission needs all of the market data it is receiving” because its fraud and manipulation authority is not limited to futures and options, but extends to the cash market as well; and (2) “The proposal infers that only some ECM transactions (principally futures and options) are covered by section 2(h)(3),” but “the intent of section 2(h)(3) is to extend its benefits to all forms of transaction.”

The statute gives each ECM the right and the responsibility to determine its own reliance on the section 2(h)(3) exemption. Thus, an ECM has no choice but to identify those transactions for which it chooses to rely on the exemption. Under the final rules, if some of the transactions on the ECM's trading facility are, in its view, not within the Commission's exclusive jurisdiction—for example, the same day and next day spot trades mentioned in ICE's comments—the ECM need not rely on the exemption for those transactions and so need not provide information access with respect to those transactions. If, however, an ECM finds that making such an identification is “unnecessarily burdensome,” it can simply decide to rely on the exemption—and provide the Commission with information access—with respect to all transactions on the facility, just as ECMs are already doing with respect to the view-only electronic information provided to the Commission under the current rules. Thus, ECMs have the choice, but not the obligation, to limit their identification of transactions to futures and options. If ECMs voluntarily choose not to limit data to futures and options, the Commission would have access to the additional market data described in NGX's point one. However, to require ECMs to provide market data concerning transactions that are not within the Commission's exclusive jurisdiction, as suggested in NGX's point two, would appear to be contrary to the spirit of section 2(h)(3).

More significantly, in response to the commenters' concerns over the scope of the information access provisions, the Commission has determined to substantially narrow the reach of that provision. Under the final rules, an ECM will only be required to identify to the Commission (and file reports, or grant electronic access concerning) “transactions conducted on the facility with respect to which it intends, in good faith, to rely on the exemption in section 2(h)(3) of the Act, and which averaged five trades per day or more over the most recent calendar quarter. ” [emphasis supplied] The Commission's surveillance staff has determined that imposing such a volume threshold test will eliminate reports concerning many thinly traded contracts. Such reports would be of very limited utility in detecting market manipulation, due to the high incidence of “false positives”  6 in markets that experience infrequent trading. Thinly traded contracts that do not meet the volume test would, nevertheless, remain subject to the Commission's antifraud and antimanipulation authority (as well as the complaint reporting requirement, as discussed below).

By substantially narrowing the scope of information to be provided to that which will be of real utility to Commission surveillance staff, the final rules will also address the commenters' concerns over the scope of information to be provided and the attendant problems in segregating out contracts subject to the Commission's exclusive jurisdiction. Under this standard, new ECMs first beginning operations will not be required to make a determination under Rule 36.3(b)(1)(ii) until after the first full calendar quarter of trading and will not be required to provide information under the reporting option or the electronic access option until at least one contract traded on the facility meets the five trade per day volume threshold.

NGX states that attempting to draw lines between “futures” and “options” and other types of transactions has “engendered confusion and controversy including substantial legal uncertainty [and] the current proposal would restore that uncertainty.” NGX further notes that imposing “a formal duty by ECMs to confine their data streams to the Commission only to futures and options” could generate a high error rate (including some transactions the Commission does not wish to review and overlooking others that would be of interest). It would also subject ECMs to the penalties under section 9(a)(3) for knowingly omitting a material fact in a report to the Commission. ICE points out that requiring an ECM to “amend its notice to reflect the addition of, or amendments to, products traded in reliance on” section 2(h)(3) will be “burdensome and inconsistent with” the purposes of the CFMA. It may be difficult to determine whether modifications to an existing product transform it into a new product. Furthermore, requiring such frequent filings is “inconsistent with the CEA and * * * unwarranted.”

As pointed out in the preamble to the NPRM, ECMs identifying contracts with respect to which they intend to rely on section 2(h)(3), or amending such identifications, would not be subject to liability under section 4(a) for any contracts that were misidentified in good faith. ECMs would not be subject to penalties under section 9(a)(3) because that section is not among the provisions of the Act, listed in section 2(h)(3), which apply to ECMs.

With respect to legal uncertainty, consistent with section 2(i) of the Act, 7 even if an agreement, contract or transaction was identified as being traded in reliance on the section 2(h)(3) exemption, in any enforcement action involving any such agreement, contract or transaction, the Commission would be required to prove its jurisdiction independently of an ECM's identification of that agreement, contract or transaction for purposes of compliance with the information access provisions under Rule 36.3. Also, should a trading facility seeking in good faith  8 to comply with the information access provisions of Rule 36.3 fail to identify a particular agreement, contract or transaction, which is later determined to be a futures or option contract subject to the Commission's exclusive jurisdiction, such failure would not be construed by the Commission as a violation of section 4(a) of the Act. 9 However, such transaction would still remain subject to the Commission's antifraud and antimanipulation authority. Furthermore, in view of the new volume threshold test, the universe of contracts to which the identification will have to be applied should be significantly narrowed.

As noted in the preamble to the proposed rules, a trading facility that does not offer trading in any futures or option contracts subject to the Commission's exclusive jurisdiction—for example, a facility where only cash or forward contracts are traded—is not required to file a notification under Rule 36.3. Such a facility is not generally subject to the Act. 10

Trading facilities electing to provide information under the reporting option (Rule 36.3(b)(1)(ii)(A)) will be required to file weekly reports concerning only agreements, contracts or transactions with respect to which they are relying on the section 2(h)(3) exemption, and which meet the five trade per day volume standard for the preceding calendar quarter. Such reports will contain information that could be useful to the Commission in enforcing its antifraud and antimanipulation authority with respect to those trading facilities. Such reports would include, in a form and manner approved by the Commission, a report for each business day, showing for each qualifying transaction executed on the facility the following information: the commodity, the location, 11 the maturity date, whether it is a financially settled or physically delivered instrument, the date of execution, the time of execution, the price, the quantity, and such other information as the Commission may determine, and for an option instrument, in addition to the foregoing information, the type of option (call or put) and the strike price. Each such report would be required to be electronically transmitted weekly, within such time period as is acceptable to the Commission following the end of the week to which the data applies. At the beginning of each new calendar quarter, within such time period as is acceptable to the Commission, ECMs will be required to review trading for the previous calendar quarter to determine which of the contracts traded in reliance on section 2(h)(3) during that quarter also meet the five trade per day or more volume test. All contracts meeting both the reliance test and the volume test during the previous quarter will be subject to the weekly reporting requirement for the new quarter.

Those ECMs wishing to provide information pursuant to the electronic access option (Rule 36.3(b)(1)(ii)(B)) will be required, initially and on an ongoing basis, to provide the Commission with electronic access to those transactions conducted on the facility in reliance on the exemption in section 2(h)(3), which averaged five trades per day or more over the most recent calendar quarter. Such access must be structured so as to permit the Commission to capture in permanent form a continuing record of trades on the facility such that the Commission would be able to reconstruct and compile the same information regarding transactions on the trading facility that would otherwise be provided by the trading facility under the reporting option (Rule 36.3(b)(1)(ii)(A) described above). If a trading facility does not wish to undertake the task of determining which contracts meet the five-trade-per-day requirement, it can give the Commission access to information on all transactions conducted in reliance on section 2(h)(3) and the Commission will implement appropriate surveillance.

The Commission expects that the information that will be provided by ECMs in reports required under Rule 36.3(b)(1)(ii)(A), or compiled by the Commission through electronic access provided under Rule 36.3(b)(1)(ii)(B), will be useful in identifying aberrant price behavior, including intraday price spikes. Such price anomalies may serve as indicators of the need for further Commission investigation. In such instances, the Commission may, among other things, use the special call authority provided by section 2(h)(5)(B)(iii) of the Act to determine whether a fraud or manipulation may have been attempted or occurred warranting appropriate enforcement action.

The proposed rules would require ECMs to maintain a record of complaints received by the trading facility concerning instances of suspected fraud or manipulation. The nature of the information to be recorded (and subsequently reported) concerning complaints remains unchanged in the final rules. Thus, Rule 36.3(b)(1)(iii) will require an ECM to maintain a record of all allegations or complaints concerning instances of suspected fraud or manipulation. The record will be required to include the name of the complainant, if provided, the date of the complaint, the market instrument, the substance of the allegations, and the name of the person at the trading facility who received the complaint.

The proposed rules also would require ECMs to “Provide to the Commission * * * a copy of the record of each substantive complaint * * * no later than three business days after the complaint is received.” The preamble notes that the Commission's intent, in limiting the reporting requirement to “substantive” claims of manipulation or fraud, was to “allow an ECM to exercise its judgment to weed out clearly frivolous claims.”

ICE argues that the meaning of “substantive” is vague and potentially problematic. ICE is concerned that “substantive” could be construed to apply to every complaint, no matter how frivolous, provided the complaint, “relates to substantive, and not procedural, aspects of the ECM's operations.” The Commission agrees that “substantive”, in this context, is not a very precise term. In order to clarify the scope of the complaint-reporting requirement, the Commission has amended the final rules to provide that ECMs must report to the Commission complaints that allege, or relate to, facts that would constitute a violation of the Act or Commission regulations.

ICE further argues that requiring complaints to be reported to the Commission after only three days “is unnecessarily burdensome.” ICE recommends that the rules should be amended to allow ECMs 30 calendar days to report complaints to the Commission. The Commission agrees that, with respect to most complaints, 30 calendar days is an appropriate time frame within which to evaluate complaints and has amended the final rules accordingly. However, with respect to one class of complaints, the Commission believes that the reporting period should not be changed. In the case of an ongoing market manipulation or fraud, time is of the essence. Therefore, if a complaint alleges, or relates to, a suspected ongoing market manipulation or fraud, an ECM will be required to provide to the Commission a copy of the record thereof within the original three-business-day time limit.

Finally, ICE argues that the Commission should not require reports of complaints concerning markets “other than those in which the ECM performs a significant price discovery function.” The information access and price discovery portions of the proposed rules are based on separate statutory provisions with distinct purposes. The Commission's antifraud and antimanipulation authority and responsibility apply to all transactions conducted in reliance on the exemption in section 2(h)(3), not just those that perform a significant price discovery function. Thus, there is a statutory basis for requiring ECMs to provide records of complaints concerning all trades conducted in reliance on the exemption in section 2(h)(3), not just those relating to a significant price discovery function, if the Commission is to discharge its duties under the Act. Therefore, the scope of the reporting requirement for complaints has not been changed in the final rules. Moreover, the Commission notes, this means that the complaint recording and reporting requirements apply to all trades conducted in reliance on section 2(h)(3), not just those that meet the five-trade-per-day volume test. In such instances, the need for prompt review of any and all bona fide complaints alleging fraud or manipulation outweigh any inconvenience caused by applying the recording and reporting requirements to a larger group of agreements, contracts or transactions.

As the Commission notes above, with respect to price dissemination rules, section 2(h)(4)(D) specifically provides that a transaction described in § 2(h)(3) shall be subject to such rules and regulations as the Commission may prescribe to ensure timely dissemination of trading data if the Commission determines that the electronic trading facility performs a significant price discovery function for transactions in the underlying cash market for the commodity.

On August 10, 2001, the Commission published Rule 36.3, which implements the notification, information and other provisions of the CFMA related to section 2(h)(3) exempt commercial markets. See 66 FR 42255. Subsection (c)(2) of Rule 36.3 provides that the Commission may make a determination that such a trading facility performs a significant price discovery function under section 2(h)(4)(D) by order, and that such finding shall be made after notice and an opportunity for a hearing through submission of written data, views and arguments.

To date, ten electronic trading facilities have notified the Commission of their intent to operate as ECMs in reliance on the section 2(h)(3) exemption. In view of the Commission's receipt of these section 2(h)(3) notifications, the Commission proposed to add specificity to its price discovery rules in several ways. First, the Commission proposed to adopt two criteria to use to determine whether a section 2(h)(3) market performs a significant price discovery function for the underlying cash market. Second, the Commission proposed to specify the information that must be disseminated by section 2(h)(3) markets that serve such a significant price discovery function. Third, the Commission proposed certain amendments to its procedures for making a price discovery determination.

Price discovery commonly is defined as the process of determining prices through the interaction of buyers and sellers based on supply and demand conditions. Prices may be discovered by a single buyer and seller in a privately negotiated bilateral cash market transaction, or through the simultaneous interaction of multiple buyers and sellers in organized markets.

Organized markets, which include futures markets and certain cash markets where trading takes place in accordance with established rules, often perform an important role in facilitating price discovery in the broader cash markets. In particular, these markets facilitate price discovery in cash markets by efficiently incorporating supply and demand information for the underlying commodity into the transaction prices or bids and offers through the operation of a centralized market for the commodity. Thus, the price discovery process on organized markets may significantly enhance the efficiency of the overall cash market.

The extent to which price information is used in establishing prices for cash market transactions that occur outside of the organized markets provides a relevant factor for determining the contribution of that market to price discovery and for determining whether there is a federal interest in the public dissemination of such price information. 12 Such price information may be used in varying degrees to facilitate the establishment of prices and may also serve as one of a number of sources of price information that are consulted by cash market participants in developing bids, offers, or transaction prices. In certain circumstances, such price information may be sufficiently well regarded by the industry that it serves as an important benchmark for cash market participants to consider in setting bids or offers or in negotiating cash market transaction prices. 13 In other circumstances, prices discovered on a market may be such an integral and indispensable part of the price determination process in the underlying cash market that bids, offers or cash market transaction prices have a relatively high correlation to the prices discovered on the market. This latter practice is known as price basing.

Price basing is a frequently observed practice in many futures markets and some cash markets. As indicated above, under price basing, commercial entities establish transaction prices for the underlying commodity, or a related commodity, based directly on the prices discovered on an organized market. These entities may or may not trade in the organized market. The cash market transaction prices established through price basing may be either spot or forward prices.

The relative significance of prices discovered on an organized market for its underlying cash market is directly related to the extent to which such prices are used in establishing transaction prices between commercial entities. As a result of this relationship, the use of a market's prices for price basing, either directly or indirectly, provides observable indicia that the market performs a significant price discovery function that would serve as a basis for such a determination under section 2(h)(4).

While the Act authorizes the Commission to make a determination that a section 2(h)(3) market performs a significant price discovery function, it does not define that term or contain criteria to guide that determination. Accordingly, the Commission proposed two alternative criteria for making a determination that an ECM performs a significant price discovery function. The first criterion (the “price basing criterion”) is whether “cash market bids, offers or transactions are directly based on or quoted at a differential to the prices generated on the market on a more than occasional basis.”  14 This criterion reflects the commercial practice known as price basing. As explained in the proposed rules, price basing directly confirms that the prices being generated on the market have significant utility with regard to discovering prices in connection with cash market transactions.

In evaluating a section 2(h)(3) market's price discovery role, assessments under this criterion would include an analysis of whether cash market participants are quoting bid or offer prices or entering into transactions at prices that are set, either explicitly or implicitly, at a differential to prices established on a particular section 2(h)(3) market. Cash market prices are set explicitly at a differential to the section 2(h)(3) market when, for instance, they are quoted in dollars and cents above or below the reference market's prices. Cash prices are set implicitly at a differential to a section 2(h)(3) market's prices when, for instance, they are arrived at after adding to, or subtracting from, the section 2(h)(3) market's price, but then quoted or reported as a flat price. 15 The Commission will also consider whether cash market entities are quoting cash prices based on a section 2(h)(3) market's prices on a more than occasional basis. 16 The price-basing criterion is unchanged in the final rules.

The second criterion proposed by the Commission (the “price discovery criterion”) is whether “the market's prices are routinely disseminated in a widely distributed industry publication and are consulted by the industry on a more than occasional basis for pricing cash market transactions.” With respect to this second criterion, the Commission stated in its proposal that such publication and industry consultation “confirms that the prices are thought to be sufficiently reliable and acceptable to be considered a significant source of price discovery.”

ICE believes that the second test should be deleted for a number of reasons. First, it asserts that the term “consulted” is vague and potentially all encompassing. In ICE's view, any published information is potentially consulted by market participants on more than an occasional basis but might not be a principal component of pricing decisions and thus should not be a basis for determining that an ECM performs a significant price discovery function. ICE further asserts that this test is circular in that it uses publication as a basis for determining that timely dissemination is required. Finally, ICE asserts that this second criterion adds nothing to the first.

The Commission has considered ICE's comments and believes that the price discovery criterion is necessary to effectuate Congress's intent that ECMs that serve a “significant price discovery function” are subject to such rules as the Commission determines are necessary to ensure timely dissemination of trading data. If the Commission were to delete the second test, it essentially would be concluding that the only markets that can serve a significant price discovery function are those that are used for price basing. However, by imposing price dissemination requirements on markets that serve a significant price discovery function, in addition to those that serve a price basing function, Congress clearly did not intend such a result. In this regard, the Act explicitly references the price-basing role of futures markets in many places ( see, e.g. , section 4b(a)(2)(B)), and had Congress intended to limit the price discovery requirement with respect to ECMs only to those markets providing a price basing function, it would have set forth this requirement explicitly in the statute. Accordingly, the Commission has determined to retain the price discovery criterion, which will ensure that markets that serve a significant price discovery function, but do not necessarily serve a traditional price basing function, will be required to timely disseminate market data in the manner prescribed by the Commission's rules.

However, in response to ICE's concerns that a standard based on prices that are consulted “on a more than occasional basis” is too vague and all-encompassing, the Commission has revised Rule 36.3(c)(2)(i)(B). In describing the industry's use of a market's prices, the final rules replace the phrase, “are consulted by the industry on a more than occasional basis for pricing cash market transactions,” with the phrase, “are routinely consulted by industry participants in pricing cash market transactions.”

The Commission acknowledges the apparent circularity of the test in the price discovery criterion— e.g. , it requires ECMs to disseminate data based in large part upon a finding that the market is already disseminating such data—but notes that these rules will ensure that the trading data disseminated conforms to federal standards, subject to federal oversight, as Congress intended.

Under the final rules, in applying the price discovery criterion, consideration will be given to whether prices established on a section 2(h)(3) market are reported in a widely distributed industry publication, such as Platts Oil Gram, Inside FERC or the Lundberg Survey. In making this determination, the Commission will consider the reputation of the publication within the industry, how frequently it is published, and whether the information contained in the publication is routinely consulted by industry participants in pricing cash market transactions.

Under the final rules, an ECM will be required to notify the Commission when it has reason to believe that one or more of the markets on which it is conducting agreements, contracts, or transactions in reliance on section 2(h)(3) meet either of the specified criteria. 17 Upon receipt of such a filing, the Commission's staff will conduct an assessment of the markets on which the ECM is conducting agreements, contracts, or transactions in reliance on section 2(h)(3) to identify those markets that perform a significant price discovery function for the associated cash market. The scope of the inquiry conducted by the Commission will vary. In the course of its assessment, Commission staff might contact cash market participants to verify the extent to which they refer to the market for price basing. The assessment might also examine whether the section 2(h)(3) market, although occasionally performing a price discovery function, was not routinely consulted by industry participants in pricing cash market transactions and thus does not perform a significant price discovery function.

If the available information indicates that a market is serving a significant price discovery function for the underlying cash market, the Commission will notify the ECM that it appears to be performing a significant price discovery function and provide the market with an opportunity for a hearing through the submission of written data, views and arguments. The Commission's notification creates a presumption that the ECM is performing a significant price discovery function, which presumption the ECM can rebut during the hearing process. The Commission, after consideration of all relevant information, will issue an order determining whether or not the ECM serves a significant price discovery function. 18

The Commission has not previously addressed the nature and scope of the information that should be disclosed by a price discovery market subject to section 2(h)(4)(D), other than by incorporating in its rules the Act's requirement that the ECM disseminate publicly “price, trading volume and other trading data to the extent appropriate with respect to transactions executed in reliance on the exemption as specified in the order.” See Commission Rule 36.3(c)(2). In determining the nature and scope of the information that should be disclosed under the proposed rules, the Commission looked to other provisions of the Act that impose public dissemination requirements on other categories of regulated and unregulated markets.

With respect to other markets, sections 5(d)(7) and (8) of the Act require DCMs to make available to the public: (i) Information concerning the terms and conditions of the contracts and the mechanisms for executing transactions; and (ii) daily information on settlement prices, volume, open interest, and opening and closing ranges for actively traded contracts. Sections 5a(d)(4) and (5) require registered DTFs to disclose publicly: (i) information concerning contract terms and conditions, trading conventions, mechanisms and practices, financial integrity protections, and other information relevant to participation in trading on the facility; and (ii) if the Commission determines that the contracts perform a significant price discovery function for transactions in the cash market for the commodity underlying the contracts, daily information on settlement prices, volume, open interest, and opening and closing price ranges for contracts traded on the facility. Section 5d(d) requires exempt boards of trade (“EBOTs”) to disseminate publicly on a daily basis information on trading volume, opening and closing ranges, open interest, and other trading data appropriate to the market if the Commission determines that the EBOT is a significant source of price discovery for transactions in the cash market for the commodity underlying the contracts.

As noted, the Act only stipulates that an ECM should make available “price, trading volume and other trading data to the extent appropriate.” However, as also noted above, this requirement is unclear as to what precisely is intended to be made available to the public by ECMs, especially with regard to the term “price.” Based on the information that is required to be made available by the Act's other category of exempt market, the EBOT, the Commission requested comment on the reasonableness of requiring similar information, including trading activity measures, price information, and certain contextual information. The Commission also requested comment on what contextual information should be made available in order to assure that the public can accurately interpret the meaning of the trading activity and price information.

Specifically, the Commission requested comment on a requirement that the ECMs serving a significant price discovery function publicly disseminate the following information on a daily basis:

Contextual information:

• Contract terms and conditions or product descriptions; and

• Trading conventions, mechanisms, and practices.

Trading activity information:

• Trading volume; and

• Open interest, if available.

Price information:

• Opening and closing prices or price ranges;

• High and low prices;

• A volume-weighted average price; or

• Any other price information approved by the Commission. 19

The types of contextual, trading activity and price information that the Commission proposed to require to be published potentially would be useful to the price basing process; i.e. , this information potentially would be useful for commercial entities that do not participate directly in a market, but use the market's prices as a basis for setting prices for cash market transactions. Neither of the commenters commented on the contextual or trading information aspects of the proposed rules and the final rules with respect to public dissemination of that information are unchanged.

With respect to price information, however, ICE asked the Commission to clarify its statement in the preamble to the proposed rules that ECMs are required to publish certain market summary information without charge to the marketplace on a delayed basis. 20 Specifically, ICE suggested that the Commission clarify that, to the extent that ECMs are required to make information available on a delayed basis, DCMs are subject to the same requirement. ICE also requested clarification as to the meaning of the term “delayed,” and suggested that the Commission make express in its rules that delayed data be made available free of charge, if such a requirement is to be imposed. Finally, ICE requested clarification that the information dissemination requirements apply only to information on markets for which the ECM performs a significant price discovery function.

The Commission's discussion in the proposed rules of industry price dissemination practices was intended to provide a context for establishing price dissemination standards for this relatively new category of markets. The Commission is unable at this time to directly respond to ICE's request that the Commission amend its rules concerning price dissemination by DCMs since the Commission has not yet proposed rules in this area. To the extent further clarification is needed regarding the price reporting obligations of DCMs, the Commission will clarify those obligations in a separate rulemaking.

In response to ICE's request that the Commission clarify the meaning of the term “delayed,” the Commission is amending its proposed rules to provide that ECMs are required to make the data “readily available to the news media and the general public without charge no later than the business day following the day to which the information pertains.” An ECM should make such information available on a fair, equitable and timely basis and may make it available by such means as providing the information to a financial information service and by timely placement of the information on the ECM's Web site. The Commission confirms that the price dissemination rules apply only to information on markets for which the ECM performs a significant price discovery function.

In view of the different types of exempt markets, the Commission proposed, and the final rules provide, flexibility in regard to the specific price information to be published by section 2(h)(3) markets. Specifically, the final rules require that markets publish opening and closing prices or price ranges, daily high and low prices, or volume weighted average prices over a period of time that is representative of trading on the market. In addition, on a case-by-case basis, markets may publish other price information, in lieu of the price measures enumerated above, subject to the Commission's approval.

As noted above, the Act requires that opening and closing price ranges be provided by the Act's other category of exempt market—EBOTs. However, because not all exempt markets will have such information available, as a consequence of the way trading is conducted, the final rules provide that two alternative price measures, the day's high and low, or the day's volume weighted average price, may be used. Established exchanges commonly publish high and low prices for each trading session. In addition, high and low prices provide useful information regarding the range of daily trading activity. Volume weighted average prices provide a good estimate of the price applicable to most transactions executed on a market during daily trading sessions and, accordingly, may provide a better indication of the representative prices observed in a market on a given day than the other measures noted above. Finally, as noted, the final rules give ECMs the flexibility of publishing alternative price measures, subject to Commission approval, if such measures would provide the public with an adequate indication of the market's daily price levels.

Section 15(a) of the Act, as amended by section 119 of the CFMA, requires the Commission to consider the costs and benefits of its action before issuing a new regulation or order under the Act. By its terms, section 15(a) does not require the Commission to quantify the costs and benefits of its action or to determine whether the benefits of the action outweigh its costs. Rather, section 15(a) simply requires the Commission to “consider the costs and benefits” of the subject rule or order.

Section 15(a) further specifies that the costs and benefits of the proposed rule or order shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may, in its discretion, give greater weight to any one of the five enumerated areas of concern and may, in its discretion, determine that, notwithstanding its costs, a particular rule or order is necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the Act.

The Commission's proposal contained an analysis of its consideration of these costs and benefits and solicited public comment thereon. 68 FR at 66038. The Commission specifically invited commenters to submit any data that they had quantifying the costs and benefits of the proposed rules with their comment letters. Id . The Commission has considered the comment letters received, which included some narrative discussion of the costs and benefits of the proposed rule amendments, but neither of which set forth any data that quantified such costs and benefits.

The Commission has considered the costs and benefits of these rules in light of the specific areas of concern identified in section 15. The Commission has endeavored in these rules to impose the minimum requirements necessary to enable the Commission to perform its oversight functions, to carry out its mandate of assuring the continued existence of competitive and efficient markets and to protect the public interest in markets free of fraud and abuse. After considering their costs and benefits, the Commission has decided to adopt these rules as discussed above.

The Regulatory Flexibility Act (“RFA”), 5 U.S.C. 601, et seq. , requires federal agencies, in promulgating rules, to consider the impact of those rules on small entities. These rules will affect exempt commercial markets. The Commission has previously determined that exempt commercial markets are not small entities for purposes of the RFA. 21 The Commission received no comments regarding this determination.

The Paperwork Reduction Act of 1995 (“PRA”), 44 U.S.C. 3507(d), which imposes certain requirements on federal agencies (including the Commission) in connection with their conducting or sponsoring any collection of information as defined by the PRA, does not apply to these rules. The rules do not contain information collection requirements that require the approval of the Office of Management and Budget.

In 1996, Congress amended section 18 of the Securities Act to exempt from State registration requirements securities listed, or authorized for listing, on the New York Stock Exchange (“NYSE”), the American Stock Exchange (“Amex”), or the National Market System of the Nasdaq Stock Market (“Nasdaq/NMS”) (collectively, the “Named Markets”), or any national securities exchange determined by the Commission to have substantially similar listing standards to those markets. 1 More specifically, section 18(a) of the Securities Act provides that “no law, rule, regulation, or order, or other administrative action of any State * * * requiring, or with respect to, registration or qualification of securities * * * shall directly or indirectly apply to a security that—(A) is a covered security.” 2 Covered securities are defined in section 18(b)(1) of the Securities Act to include those securities listed, or authorized for listing, on the Named Markets, or securities listed, or authorized for listing on a national securities exchange (or tier or segment thereof) that has listing standards that the Commission determines by rule are “substantially similar” to the Named Markets. 3

The Commission adopted Rule 146 pursuant to section 18(b)(1)(B) of the Securities Act. 4 Rule 146(b) lists those national securities exchanges, or segments or tiers thereof that the Commission has determined to have listing standards substantially similar to those of the Named Markets, and thus securities listed on such exchanges are covered securities. 5 The ISE has petitioned the Commission to amend Rule 146(b) to determine that its listing standards for securities listed on the ISE are substantially similar to those of the Named Markets and, accordingly, that securities listed pursuant to such listing standards are covered securities for purposes of section 18(b) of the Securities Act. 6

On March 22, 2004, the Commission issued a release proposing to amend Rule 146(b) to designate options listed on the ISE as covered securities for purposes of section 18(a) of the Securities Act. 7 The Commission solicited comment on the proposal, and received one comment letter in response to the proposal. 8

After careful comparison, the Commission concludes that the current listing standards of the ISE are substantially similar to the listing standards of the Amex. Accordingly, the Commission today is amending Rule 146(b) to designate options listed on the ISE as covered securities under section 18(b)(1) of the Securities Act. Amending Rule 146(b) to include options listed on ISE as covered securities will exempt those securities from State registration requirements as set forth under section 18(a) of the Securities Act.

In 1998, the Chicago Board Options Exchange, Inc. (“CBOE”), Pacific Exchange, Inc. (“PCX”), the Philadelphia Stock Exchange, Inc. (“Phlx”), and the Chicago Stock Exchange (“CHX”) petitioned the Commission to adopt a rule determining that specified portions of the exchanges' listing standards were substantially similar to the listing standards of the Named Markets. 9 In response to the petitions, and after extensive review of the petitioners' listing standards, the Commission adopted Rule 146(b), determining that the listing standards of the CBOE, Tier 1 of the PCX, and Tier 1 of the Phlx were substantially similar to those of the Named Markets and that securities listed pursuant to those standards would be deemed covered securities for purposes of section 18 of the Securities Act. 10

In its petition, ISE has asked the Commission to amend Rule 146(b) based on a determination that its listing standards are substantially similar to those of the Named Markets so that securities listed on ISE will be “covered securities” under section 18(b) of the Securities Act. 11 The ISE currently lists only standardized options issued and guaranteed by the Options Clearing Corporation (“OCC”) that are already listed on at least one of the other options exchanges named in section 18(b)(1)(A) of the Securities Act or Rule 146— i.e. , Amex, CBOE, PCX and Phlx. These options are by definition “covered securities” for purposes of section 18 of the Securities Act. ISE, however, stated that it may in the future list standardized options issued and guaranteed by OCC that are not listed on one of the other options exchanges specified in section 18(b)(1)(A) of the Securities Act or Rule 146. Accordingly, the ISE requested that the Commission amend Rule 146(b) to designate securities listed on ISE as covered securities for purposes of section 18 of the Securities Act.

As noted above, the Commission received one comment letter in response to the proposed rule amendment, which supported ISE's petition to amend Rule 146(b). 12 The OCC Letter noted that designating options listed on the ISE as “covered securities” would place the ISE on an equal competitive footing with other options exchanges whose listed securities are presently exempt from State blue sky laws. The OCC agreed with the Commission's preliminary view that ISE's selection and maintenance requirements for underlying securities are substantially similar to those of Amex. Finally, in response to the Commission's request for comment on whether the absence of an express provision in ISE's rules that it will monitor news sources for information indicating that an underlying security no longer meets the requirements for continued approval should impact the Commission's determination of whether ISE's rules are “substantially similar” to Amex's rules, the OCC Letter explained that the absence of such a provision in the ISE maintenance requirements is a difference without substance. The OCC expressed its view that, because the ISE is obligated under sections 6 and 19(g) of the Securities Exchange Act of 1934 (“Exchange Act”) to enforce its rules, including its maintenance requirements, the ISE is required to monitor for corporate events that render a security ineligible to underlie ISE listed options.

The Commission has reviewed the ISE listing standards for options traded on the ISE and determines that they are substantially similar to those of Amex. The Commission notes that, under section 18(b)(1)(A) of the Securities Act, the Commission has the authority to compare the listing standards of a petitioner with those of either the NYSE, Amex, or Nasdaq/NMS. Because Amex is the only Named Market that lists standardized options, the Commission compared ISE's listing standards to the listing standards applicable to options traded on the Amex.

In addition, the Commission has interpreted the “substantially similar” standard to require listing standards at least as comprehensive as those of the Named Markets. 13 To the extent that the ISE's listing standards are stricter than those of Amex, the Commission may determine that they meet the substantially similar standard. Finally, the Commission notes that differences in language or approach do not necessarily lead to a determination that the listing standards of the petitioner are not substantially similar to those of a Named Market.

The Commission reviewed ISE's listing standards for each class of security it trades, specifically equity options and index options. Using the approach outlined above, the Commission concludes that currently the listing standards of the ISE are substantially similar to the listing standards of the Amex.

With respect to equity options, the ISE listing and maintenance requirements closely track the corresponding Amex provisions. 14 Specifically, the ISE's original listing requirements pertaining to the public float, distribution of shares and trading volume of the underlying security are identical to those of the Amex. 15 The ISE and Amex also impose the same initial listing and maintenance requirements for options on American Depositary Receipts (“ADRs”), International Funds, Restructured Companies, Exchange-Traded Fund shares (“ETFs”), 16 and Trust Issued Receipts. 17 The only difference, identified in the Proposing Release, between the ISE and Amex original listing standards was a provision in the Amex rules that permits Amex members to propose the listing of an option that otherwise meets established listing requirements. ISE rules do not contain a similar provision. The Commission has determined that because this difference does not impact the quality of ISE's listing standards, it does not render ISE's listing standards less comprehensive than Amex's listing standards. 18 Further, as noted above, differences in language or approach of listing standards are not dispositive.

With regard to the maintenance standards for equity options, the ISE's maintenance requirements for its equity options substantively track those of the Amex. 19 With respect to the underlying security of an equity option, the ISE and Amex have identical maintenance requirements regarding the number of publicly traded shares, their distribution, trade volumes and market price. Failure to meet any one of these criteria may result in delisting the option. 20

Both Amex and ISE may withdraw approval for options trading if the issuer of an underlying security that is principally traded on a national securities exchange is delisted from trading on that exchange and neither meets National Market System (“NMS”) criteria nor is traded through the facilities of a national securities association. Amex and ISE may also withdraw approval for options trading on a security that is principally traded through facilities of a national securities association, if such security is no longer designated as an NMS security. 21 Likewise, the ISE and Amex impose the same maintenance requirements for continued listing of options on ADRs, ETFs, Trust Issued Receipts, and Holding Company Depositary Receipts. 22

The Commission noted in the Proposing Release that ISE did not have an express provision requiring the ISE to monitor on a daily basis news sources for information of corporate actions, which may indicate that an underlying security no longer meets requirements for continued approval, while Amex rules did have this express provision. Because ISE is obligated under sections 6 and 19(g) of the Exchange Act to comply with its own rules, which necessitates ISE monitoring corporate events that have a bearing on whether an underlying security satisfies ISE's listing standards, the Commission finds that the absence of such express provision does not represent a significant enough difference between the ISE and the Amex to change our conclusion that their listing standards are substantially similar. The Commission notes that the OCC supported this conclusion by stating that “[t]he fact that ISE's rules do not describe specifically how ISE will conduct such monitoring does not mean that ISE's maintenance standards are less comprehensive.”  23

With respect to index options, the Commission finds that the ISE and the Amex have substantially similar requirements for stock indices that may underlie index options. With regard to broad-based index options, both the ISE and the Amex require that the listing of a class of options on a new underlying index must be filed with the Commission as a proposed rule change under section 19(b) of the Exchange Act. 24 Furthermore, the Commission finds that the exchanges have substantially similar provisions for the designation of narrow-based indices as eligible to underlie index options, including rules that allow certain options to be traded on certain narrow-based indices using an expedited procedure, which involves submitting to the Commission a Form 19b-4(e) under Rule 19b-4(e) of the Exchange Act. 25 The listing and maintenance requirements for component securities comprising narrow-based index options listed on the ISE appear in all material respects to be substantially similar to those of the Amex. 26 Specifically, the ISE and the Amex appear to have substantially similar criteria for index components relating to market value, trading volume, calculation of the index, and inclusion of non-U.S. component securities or ADRs. 27 In addition, the Commission believes that ISE and Amex requirements for the index regarding weighting, index components, rebalancing, information barriers maintained by broker-dealers, and the dissemination of index values are substantially similar. 28 Likewise, the ISE rules setting forth position and exercise limits, margin requirements, and settlement terms applicable to index options are substantially similar to those of the Amex. 29 Accordingly, the Commission has determined that the listing standards of the ISE and the Amex for index options are substantially similar.

Therefore, the Commission has determined that the ISE's listing standards are substantially similar to a Named Market and is amending Rule 146(b) to reflect this determination, designating options listed on the ISE as “covered securities” for purposes of section 18 of the Securities Act.

The Commission notes that designating ISE options as covered securities under Rule 146(b)(1) subjects ISE's listing standards to Rule 146(b)(2). Rule 146(b)(2) under the Securities Act conditions the designation of securities as “covered securities” under Rule 146(b)(1) on the identified exchange's listing standards continuing to be substantially similar to those of the Named Markets. In essence, Congress intended for the Commission to monitor the listing and maintenance requirements of the exchanges, consistent with our supervisory responsibility under the Exchange Act, to evaluate the continued integrity of these markets and the protection of investors. Thus, under Rule 146(b)(2), the designation of its securities as covered securities is conditioned on the ISE maintaining listing standards that are substantially similar to those of the Named Markets.

As required under the Securities Act, 30 the Commission has considered the proposed rule's impact on efficiency, competition and capital formation. Options exchanges are prohibited by Commission rule from prohibiting, conditioning or limiting the listing of any stock options class first listed on another options exchange. 31 Nevertheless, options exchanges do compete for listings of non-equity options such as index options. The Commission believes that designating ISE-listed options as “covered securities” by amending Rule 146(b) will permit ISE to better compete for new options and listings, which will increase competition and, potentially, the overall liquidity of the U.S. securities markets. The Commission does not, however, believe that the amendment to Rule 146(b) will have any impact—positive or negative—on capital formation because options are not used by issuers to raise money. The Commission solicited comment on the proposed amendment's effect on competition, efficiency and capital formation. No comments were received. Thus, the Commission concludes that the proposed amendment to Rule 146(b) would promote efficiency and competition.

The Paperwork Reduction Act of 1995 does not apply because the proposed amendment to Rule 146(b) does not impose recordkeeping or information collection requirements or other collection of information, which require the approval of the Office of Management and Budget under 44 U.S.C. 3501 et seq.

Congress amended section 18 of the Securities Act to exempt covered securities from State registration requirements. Covered securities are those listed on the Named Markets or any other national securities exchange determined by the Commission to have substantially similar listing standards to the Named Markets. 32 Consistent with statutory authority, the Commission has determined that the listing standards of the ISE are substantially similar to those of the Amex, the only Named Market that lists standardized options. Options listed on the ISE are therefore covered securities subject only to Federal regulation.

By exempting options listed on ISE from State law registration requirements, the Commission expects that the listing process will become easier by avoiding duplicative regulation. Moreover, we also expect adoption of the rule to minimize the administrative burden ISE and the OCC face inasmuch as compliance with State registration requirements is preempted.

The Commission also believes that the amendment to Rule 146(b) will permit ISE to compete with other markets whose options are exempt from State registration requirements for new options products and listings. This result has the potential to enhance competition and liquidity, thus benefiting market participants and the public.

The Commission does not believe that there are any significant costs to investors associated with the preemption of State registration requirements for options listed with the ISE. The Commission notes that there may be some cost to investors through the loss of the benefits of State registration and oversight, although the cost is difficult to quantify and, in any event, is unlikely to be significant. Furthermore, we believe that Congress contemplated this potential cost in relation to the economic benefits of exempting covered securities from State regulation. The Commission solicited comment as to the costs and benefits associated with the proposed amendment. No comments were received.

In the Proposing Release, 33 the Commission certified, pursuant to section 605(b) of the Regulatory Flexibility Act, 34 that amending Rule 146(b) would not have a significant economic impact on a substantial number of small entities. The Commission solicited comment as to the nature of any impact on small entities, including empirical data to support the extent of such impact costs and benefits associated with the proposed amendment. No comments were received.

The Commission is amending Rule 146(b) pursuant to the Securities Act of 1933 (15 U.S.C. 77a et seq. ), particularly sections 18(b)(1)(B) and 19(a) (15 U.S.C. 77r(b)(1)(B) and 77s(a)).

In general, the FCPIAA (28 U.S.C. 2461, as amended by the Debt Collection Improvement Act of 1996) requires Federal agencies to issue regulations to adjust for inflation each civil monetary penalty provided by law within their jurisdiction. The FCPIAA directs agencies to adjust the civil monetary penalties by October 23, 1996, and to make additional adjustments at least once every 4 years thereafter. The adjustments are based on changes in the cost of living, and the FCPIAA defines the cost of living adjustment as:

The FCPIAA also prescribes a rounding method based on the amount of the calculated increases, but states that the initial adjustment of a civil monetary penalty may not exceed 10 percent of the penalty.

The FCPIAA defines a civil monetary penalty as:

Congress enacted the FCPIAA, in part, because it found that the impact of civil monetary penalties had been reduced by inflation and that reducing the impact of civil monetary penalties had weakened their deterrent effect.

In the Federal Register of December 1, 2003 (68 FR 67094), we published a proposed rule that identified 14 civil monetary penalties that fall within our jurisdiction and are subject to adjustments under the FCPIAA. The proposal amended our civil money penalties hearing regulations at part 17 (21 CFR part 17) to establish a new § 17.2, entitled “Maximum penalty amounts” to show the current maximum civil monetary penalty amounts that were adjusted under the FCPIAA.

The proposal also revised § 17.1 which lists statutory provisions authorizing civil money penalties that were governed by the civil money penalty regulations as of August 28, 1995. The proposed revision simply updated the statutory citations.

We received two comments on the proposed rule. A description of those comments and our responses follow. To make it easier to identify comments and our responses, the word “Comment,” in parentheses, will appear before the comment's description, and the word “Response,” in parentheses, will appear before our response. We have also numbered each comment to help distinguish between different comments. The number assigned to each comment is purely for organizational purposes and does not signify the comment's value or importance or the order in which it was received.

(Comment 1) One comment stated that the adjusted penalties were not severe enough to “keep crooked manufacturers from stopping their criminal acts which injure the American people.” The comment said that the penalties should be increased by another 25 percent, and claimed that some drugs have caused more harm than benefits to individuals.

The comment also made remarks concerning compensation afforded to pharmaceutical executives and the drug approval process.

(Response) As we previously stated and in the preamble to the proposed rule, the FCPIAA prescribes a formula for calculating the increase for a civil monetary penalty and states that the initial adjustment of a civil monetary penalty may not exceed 10 percent of the penalty. (See 68 FR at 67094.) Thus, while higher civil monetary penalties might be a better deterrent, the FCPIAA does not authorize increases in penalties greater than 10 percent. Instead, the FCPIAA creates a framework for calculating and limiting the increases to a civil monetary penalty, and so the comment's suggestion to increase the penalties by 25 percent is not consistent with the FCPIAA.

As for the comment's remarks concerning alleged harm from human drug products, executive compensation, and drug approval, such matters are outside the scope of this rulemaking.

(Comment 2) A comment from the General Accounting Office stated that we had miscalculated the increases for several civil monetary penalties and that the correct amounts should be higher. The comment said that four of the proposed adjustments were not consistent with the law regarding inflation increases and explained that the errors were probably due to applying the specified 10-percent cap before rounding instead of after the prescribed rounding. Thus, because all 14 rounded CPI adjustments exceeded the specified 10-percent cap, each penalty should be increased by exactly 10 percent to be consistent with the FCPIAA.

Consequently, the four civil monetary penalty adjustments, as originally proposed and as revised under the comment's interpretation of the FCPIAA's rounding and increase cap formulas, are as follows:

This document contains amendments to 26 CFR part 1 under section 461(f) of the Internal Revenue Code (Code). On November 21, 2003, temporary regulations (TD 9095) were published in the Federal Register (68 FR 65634) relating to the transfer of money or other property to provide for the satisfaction of an asserted liability that a taxpayer is contesting. A notice of proposed rulemaking (REG-136890-02) cross-referencing the temporary regulations also was published in the Federal Register (68 FR 65645) on November 21, 2003. No public hearing was requested or held. One comment was received responding to the notice of proposed rulemaking. After consideration of the comment, the proposed regulations are adopted by this Treasury decision.

The temporary regulations clarify that, in general, economic performance does not occur in the taxable year in which a taxpayer transfers money or other property to a trust, escrow account, or court to provide for the satisfaction of an asserted liability under section 461(f) for which payment constitutes economic performance. Rather, economic performance occurs in the taxable year in which a taxpayer transfers money or other property to the person asserting the liability that the taxpayer is contesting, or in the taxable year in which payment from the trust, escrow account, or court registry is made to the person to which the liability is owed. The temporary regulations also indicate that economic performance may be satisfied under section 468B and the regulations thereunder (relating to designated settlement funds and qualified settlement funds).

A commentator suggested that the regulations provide an example of a transfer to a contested liability fund that qualifies for a deduction in the taxable year of transfer because it also satisfies the requirements for a qualified settlement fund under § 1.468B-1. The final regulations do not adopt this comment because the requirements for establishing a qualified settlement fund under § 1.468B-1 are complex and are beyond the scope of these regulations.

In general, these final regulations apply to transfers made in taxable years beginning after December 31, 1953, and ending after August 16, 1954. However, these regulations apply to transfers of any stock of the taxpayer or any stock or indebtedness of a related person on or after November 19, 2003. Additionally, § 1.461-2(e)(2)(i), relating to economic performance, applies to transfers of money or other property after July 18, 1984, the effective date of section 461(h). Section 1.461-2(e)(2)(ii) applies to (1) transfers of money or other property after July 18, 1984, to satisfy workers compensation or tort liabilities, and (2) transfers of money or other property in taxable years beginning after December 31, 1991, the effective date of § 1.461-4(g), to satisfy payment liabilities designated under § 1.461-4(g) (other than liabilities for workers compensation or tort).

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

The principal author of these regulations is Norma Rotunno of the Office of the Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury participated in their development.

On January 3, 2001, the Treasury Department and the IRS published in the Federal Register (66 FR 319) a notice of proposed rulemaking (REG-104683-00) providing guidance with respect to the application of sections 902 and 904. Several comments were received, and a public hearing was held on April 26, 2001. After consideration of the comments, certain portions of the regulations are withdrawn and the remainder of the regulations are finalized substantially as proposed. The discussion below summarizes the comments received and describes the reasons for withdrawing portions of the proposed regulations and the modifications to the remainder of the regulations. A notice of withdrawal published in the Proposed Rules section in this issue of the Federal Register withdraws the proposed amendments to §§ 1.902-0, 1-902-1 and 1.904-4(g).

Under the proposed amendments to § 1.902-1(a), the multi-year pooling of a foreign corporation's post-1986 undistributed earnings and foreign income taxes would have terminated if the ownership requirements of section 902(c)(3)(B) were not met as of the end of any taxable year, and such earnings and earnings subsequently accumulated in periods during which the stock ownership requirements of section 902 were not met would have been treated as pre-1987 accumulated profits subject to the annual layering rules of section 902(c)(6). Prop. § 1.902-1(a)(8), (10) and (13). The proposed amendments also provided for the pooling of earnings and taxes to resume in the first subsequent taxable year as of the end of which the foreign corporation again has a qualifying domestic corporate shareholder. The proposed regulations were intended to alleviate the difficulties of reconstructing accumulated earnings and taxes accounts in connection with a U.S. shareholder's acquisition of stock in a foreign corporation previously owned by U.S. shareholders after an intervening period of foreign ownership.

The Treasury Department and the IRS have determined that the potential simplification benefits of the proposed regulations would be outweighed by other administrative difficulties, including those associated with redeterminations of deemed-paid foreign taxes under section 905(c). Accordingly, the Treasury Department and the IRS are withdrawing the proposed amendments to § 1.902-1(a) in a notice of withdrawal published in the Proposed Rules section in this issue of the Federal Register .

The proposed regulations would have expanded the exception from passive income for active rents and royalties to include rents and royalties received from related payors. The proposed regulations provide that this change would apply to rents and royalties paid or accrued more than 60 days after the date that the final regulations are published in the Federal Register . Several comments requested that the amendment to the rents and royalties exception apply retroactively. The Treasury Department and the IRS continue to believe this amendment, which modifies existing final regulations, should apply only prospectively. Therefore, the amendment is adopted without change, and the new final regulations are applicable to rents and royalties paid or accrued more than 60 days after the date that the final regulations are published in the Federal Register .

Under section 904(d)(3) and the Treasury regulations thereunder, a U.S. shareholder (as defined in section 951(b)) is allowed look-through treatment for dividends received from a controlled foreign corporation (CFC) if paid out of earnings and profits (E&P) accumulated during periods in which the foreign corporation was a CFC. Section 904(d)(4) allows look-through treatment for dividends paid by a noncontrolled section 902 corporation (10/50 corporation) to a domestic corporation that meets the ownership requirements of section 902(a) from E&P accumulated in a taxable year beginning after December 31, 2002. Section 904(d)(4) provides the Secretary with authority to issue regulations addressing the treatment of dividends paid by a 10/50 corporation out of pre-acquisition E&P.

The proposed regulations would not have provided look-through treatment for a dividend paid by a CFC or 10/50 corporation out of E&P accumulated during a post-2002 period in which the corporation was a CFC or 10/50 corporation if paid after an intervening period during which the corporation was a less-than-10%-U.S.-owned corporation. Prop. § 1.904-4(g)(3)(i)(C)(2). Similarly, the proposed regulations would not have provided look-through treatment for a dividend from a CFC out of E&P accumulated during a pre-2003 period in which the corporation was a CFC if paid after an intervening pre-2003 period in which the CFC was a 10/50 corporation or less-than-10%-U.S.-owned corporation. Prop. § 1.904-4(g)(3)(i)(C)(1) and (2). The proposed regulations also include a transition year rule that treated E&P accumulated and distributions made during the year in which a CFC or 10/50 corporation loses its look-through status ( i.e. , becomes a non-CFC for pre-2003 tax years or a less-than-10%-U.S.-owned corporation for post-2002 tax years) as E&P accumulated or distributions made after the loss of look-through status. Prop. § 1.904-4(g)(3)(i)(C). The effect of this transition year rule would be to deny look-through treatment for a dividend or an amount treated as a dividend under section 1248(a) from a CFC or 10/50 corporation out of E&P accumulated while the corporation was a look-through entity.

Several comments suggested that the proposed regulations were inconsistent with section 904(d)(2)(E), which provides that a CFC is not treated as a 10/50 corporation with respect to any distribution out of its E&P for periods during which it was a CFC. Comments also criticized the effect of the transition year rule described above. After consideration of the comments, the Treasury Department and the IRS are withdrawing the proposed amendments to § 1.904-4(g) in a notice of withdrawal published in the Proposed Rules section in this issue of the Federal Register .

The final regulations correct an error in an example relating to the grouping of items of income for purposes of determining whether the items are high-taxed income within the meaning of section 904(d)(2)(F).

The proposed regulations under section 904(b) provide guidance concerning the application of the capital gain net income limitation of section 904(b)(2)(A) and 904(b)(2)(B)(i). Prop. § 1.904(b)-1(a). The proposed regulations require a taxpayer to reduce foreign source capital gains to the extent the taxpayer's capital gain net income from foreign sources (in the aggregate) exceeded the taxpayer's entire capital gain net income. A taxpayer with a capital gain rate differential for the year and capital gain net income in two or more rate groups within a separate category with capital gain net income would be required to allocate such reduction pro rata to each such rate group in the separate category. The proposed regulations do not provide specific guidance concerning short-term capital gains for these purposes. The final regulations clarify that short-term amounts are treated as a rate group for purposes of § 1.904(b)-1. Specifically, the final regulations clarify that a taxpayer with capital gain net income from foreign sources in a separate category attributable to capital gain net income in the short-term rate group and in one or more long-term rate groups allocates any reduction pursuant to the capital gain net income limitation pro rata to the short-term rate group and each applicable long-term rate group. The final regulations add an example involving short-term capital gain to illustrate this rule.

The proposed regulations also contain a rule limiting net capital gain from foreign sources (in the aggregate) to worldwide net capital gain. Prop. § 1.904(b)-1(a). This rule is intended to limit the amount of capital gains from foreign sources (remaining after application of the capital gain net income limitation of section 904(b)(2)(A) and (b)(2)(B)(i)) subject to the rate differential adjustments of section 904(b)(2)(B)(i) and paragraph (c)(1) of the regulations to the extent a taxpayer has a net long-term capital loss from sources within the United States that does not reduce long-term capital gains from foreign sources pursuant to the capital gain net income limitation. This can occur when a taxpayer has short-term capital gains. The final regulations clarify the operation of the net capital gain limitation. In addition, because the net capital gain limitation applies solely for purposes of determining the amount of capital gains from foreign sources subject to the rate differential adjustments of section 904(b)(2)(B)(i) and paragraph (c)(1) of the regulations, the provisions addressing the net capital gain limitation have been moved to paragraph (c)(1) in the final regulations.

The proposed regulations also provide guidance concerning the rate differential adjustments required by section 904(b)(2)(B). Prop. § 1.904(b)-1(c) and (d). The final regulations add a rule that permits qualifying noncorporate taxpayers to elect not to apply the rate differential adjustments for any taxable year. Under the final regulations, a noncorporate taxpayer that is not subject to tax under section 55 for the taxable year may elect not to apply the rate differential adjustments if the highest rate of tax imposed on the taxpayer's taxable income (excluding net capital gain and qualified dividend income) for the taxable year under section 1 does not exceed the highest rate of tax in effect under section 1(h) for the taxable year and the amount of the taxpayer's net capital gain from foreign sources, plus the amount of the taxpayer's qualified dividend income from foreign sources, is less than $20,000. Under the tax rates currently in effect, an individual with less than $20,000 of net capital gain and qualified dividend income from foreign sources would be eligible to make the election if the highest rate of tax applicable to such individual's taxable income (excluding net capital gain and qualified dividend income) under section 1 is 28 percent. For example, taxpayers whose filing status is married filing jointly would be eligible to make the election for the 2004 taxable year if their taxable income (excluding net capital gain and qualified dividend income) for 2004 does not exceed $178,650 and the total of their net capital gain and qualified dividend income, from foreign sources, is less than $20,000. A similar election applies to a noncorporate taxpayer subject to the alternative minimum tax for the taxable year. A qualifying taxpayer is presumed to elect out of the rate differential adjustments unless the taxpayer indicates otherwise on its return for the taxable year. The rule is intended to permit taxpayers to avoid the complexity of computing the rate differential adjustments in cases where the failure to make the adjustments does not result in a significant divergence from the results contemplated by section 904(b)(2)(B).

Because capital gains of corporations are not eligible for reduced rates of tax, the eligibility for the election is limited to noncorporate taxpayers.

The proposed regulations contain rules for coordinating the adjustments pursuant to section 904(b)(2) with section 904(f). Prop. § 1.904(b)-1(g). The final regulations provide additional guidance concerning the interaction between section 904(b)(2) and (f). First, the final regulations provide that a capital loss from sources within the United States that reduces capital gains from foreign sources pursuant to section 904(b)(2)(A) (or 904(b)(2)(B)(i)) and paragraph (a) of the regulations is disregarded in determining the amount of a taxpayer's taxable income from sources within the United States for purposes of computing the amount of any additions to the taxpayer's overall foreign loss accounts. This rule is intended to prevent the double-counting of capital losses from sources within the United States. Second, the final regulations provide that a taxpayer's loss from sources in the United States (within the meaning of section 904(f)(5)(D)) is the amount by which the taxpayer's foreign source taxable income (in the aggregate after taking into account adjustments pursuant to section 904(b)(2) and the final regulations) exceeds the taxpayer's entire taxable income (after taking into account adjustments pursuant to section 904(b)(2)(B) and the final regulations). The rule is intended to prevent distortions to the foreign tax credit limitation fraction that would otherwise result when a taxpayer has capital gains or losses from sources within the United States. The final regulations add examples to illustrate the operation of these coordination rules.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), Public Law 108-27 (117 Stat. 752), extended the capital gain rates under section 1(h) to qualified dividend income of noncorporate taxpayers. JGTRRA provides that rules similar to the rules of section 904(b)(2)(B) (the rate differential adjustment rules) apply with respect to such qualified dividend income. The final regulations implement the coordination rule contained in JGTRRA by requiring a taxpayer to make rate differential adjustments to the taxpayer's qualified dividend income in a manner similar to the adjustments for a taxpayer's capital gains. The final regulations contain an election for noncorporate taxpayers, similar to the election for capital gains and losses, allowing a qualifying taxpayer to elect out of the rate differential adjustments with respect to the taxpayer's qualified dividend income.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

The principal author of these final regulations is Bethany A. Ingwalson of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service. However, other personnel from the IRS and the Treasury Department participated in their development.

Section 301.7701-3(a) provides that an eligible entity with two or more owners may elect to be classified as an association (and thus a corporation under § 301.7701-2(b)(2)) or a partnership, and an eligible entity with a single owner may elect to be classified as an association or to be disregarded as an entity separate from its owner. Section 301.7701-3(b) provides that, unless the entity elects otherwise, a domestic eligible entity is a partnership if it has two or more owners or is disregarded as an entity separate from its owner if it has a single owner. Section 301.7701-3(c) describes the time and place for filing an entity classification election. Section 301.7701-3(c)(1)(i) provides that an eligible entity may elect to be classified as other than its default classification or to change its classification by filing Form 8832, “Entity Classification Election”, with the service center designated on the form.

A taxpayer whose default classification is a partnership or a disregarded entity may seek to be classified as an S corporation. In these cases, the taxpayer must elect to be classified as an association under § 301.7701-3(c)(1)(i) by filing Form 8832 and must elect to be an S corporation under section 1362(a) by filing Form 2553, “Election by a Small Business Corporation.” In some cases, an entity may timely file the Form 2553 but fail to file the Form 8832. The entity must then submit a letter ruling request for an extension of time under § 301.9100 to file a late entity classification election. The temporary regulation provides relief for these entities. In other cases, the Form 2553 and the Form 8832 are filed late, and the entity must submit a ruling request under § 301.9100 to file a late entity classification election and under section 1362(b)(5) to file a late S corporation election. Rev. Proc. 2004-48, I.R.B. 2004-32, provides relief for these entities.

Requiring eligible entities to file two elections in order to be classified as S corporations creates a burden on those entities and on the Internal Revenue Service (IRS). The temporary regulation simplifies these paperwork requirements by eliminating, in certain cases, the requirement that the entity elect to be classified as an association. Instead, an eligible entity that makes a timely and valid election to be classified as an S corporation will be deemed to have elected to be classified as an association taxable as a corporation.

The temporary regulation amends § 301.7701-3(c)(1)(v) to provide that, if an eligible entity makes a timely and valid election to be an S corporation under section 1362(a)(1), it is treated as having made an election to be classified as an association under § 301.7701-3. However, if the eligible entity's election is not timely and valid, the default classification rules provided in § 301.7701-3(b) will apply to the entity unless the Service provides late S corporation election relief or inadvertent invalid election relief. If the late or invalid election is not perfected, the default rules will maintain the passthrough taxation treatment by classifying the entity as a partnership or a disregarded entity.

The regulations apply to elections to be an S corporation filed on or after July 20, 2004. However, eligible entities that timely filed S elections before July 20, 2004, may also rely on the provisions of the regulation.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore a regulatory assessment is not required. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analysis section of the preamble to the Notice of proposed rulemaking on this subject published elsewhere in this issue of the Federal Register .

The principal author of this regulation is Rebekah A. Myers, Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

The revised DoD Directive 6000.6 is available at http://www.dtic.mil/whs/ directives/corres/dir2.html.

This action is rulemaking on a non-regulatory planning document intended to ensure the maintenance of air quality in the Cincinnati Area.

1. The Regional Office has established an electronic public rulemaking file available for inspection on EDOCKET and a hard copy file which is available for inspection at the Regional Office. EPA has established an official public rulemaking file for this action under Docket ID No. R05-OAR-2004-OH-0001. The official public file consists of the documents specifically referenced in this action, any public comments received, and other information related to this action. Although a part of the official docket, the public rulemaking file does not include Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. The official public rulemaking file is the collection of materials that is available for public viewing at the Air Programs Branch, Air and Radiation Division, EPA Region 5, 77 West Jackson Boulevard, Chicago, Illinois 60604. EPA requests that if at all possible, you contact the person listed in the For Further Information Contact section to schedule your inspection. The Regional Office's official hours of business are Monday through Friday, 8:30 a.m. to 4:30 p.m. excluding Federal holidays.

2. Electronic Access. You may access this Federal Register document electronically through the regulations.gov Web site located at http://www.regulations.gov where you can find, review, and submit comments on Federal rules that have been published in the Federal Register , the Government's legal newspaper, and are open for comment.

For public commenters, it is important to note that EPA's policy is that public comments, whether submitted electronically or in paper, will be made available for public viewing at the EPA Regional Office, as EPA receives them and without change, unless the comment contains copyrighted material, CBI, or other information whose disclosure is restricted by statute. When EPA identifies a comment containing copyrighted material, EPA will provide a reference to that material in the version of the comment that is placed in the official public rulemaking file. The entire printed comment, including the copyrighted material, will be available at the Regional Office for public inspection.

You may submit comments electronically, by mail, or through hand delivery/courier. To ensure proper receipt by EPA, identify the appropriate rulemaking identification number by including the text “Public comment on proposed rulemaking Region 5 Air Docket “R05-OAR-2004-OH-0001” in the subject line on the first page of your comment. Please ensure that your comments are submitted within the specified comment period. Comments received after the close of the comment period will be marked “late.” EPA is not required to consider these late comments.

For detailed instructions on submitting public comments and on what to consider as you prepare your comments see the ADDRESSES section and the section I General Information of the SUPPLEMENTARY INFORMATION section of the related proposed rule which is published in the Proposed Rules section of this Federal Register .

Ohio held a public hearing on the State Implementation Plan (SIP) revision request on March 30, 2004, in Cincinnati, Ohio. The formal comment period extended until April 2, 2004, to allow a full 30 days for public comment. No adverse comments were received. Ohio submitted transcripts of the public hearing and copies of the announcement of the 30 day public comment period to EPA. Ohio sent a letter dated March 15, 2004, which requested that EPA initiate review of the existing data and proceed to parallel process the request. The official submittal with all documentation including transcripts of the hearing were submitted in a letter dated April 19, 2004. Only one comment was received and that comment was in support of the revision request.

Ohio is requesting a change to the transportation conformity budget in the approved 1-Hour ozone maintenance plan for Cincinnati. The Cincinnati-Hamilton ozone nonattainment/maintenance area is a bi-state area. The Ohio Counties include Hamilton, Butler, Clermont and Warren and the Kentucky Counties include Boone, Campbell and Kenton. The currently approved maintenance plan was approved by EPA on June 19, 2000, (65 FR 37879-37900). In the June 19, 2000, notice, EPA approved the maintenance plan and also a redesignation request to redesignate the Cincinnati area to attainment/maintenance for the 1-Hour ozone standard. The redesignation was challenged and subsequently vacated; however, the maintenance plan approval was upheld.

In this submittal, Ohio is requesting a change to the transportation conformity budget. The approved maintenance plan has a “safety margin” of emissions which can be allocated to the MVEB. The requested change only changes the NO X budget for transportation conformity.

A transportation conformity budget is the projected level of controlled emissions from the transportation sector (mobile sources) that is estimated in the State Implementation Plan (SIP). The SIP controls emissions through regulations, for example, on fuels and exhaust levels for cars. The emissions budget concept is further explained in the preamble to the November 24, 1993, transportation conformity rule (58 FR 62188). The preamble also describes how to establish the MVEB in the SIP and how to revise the emissions budget. The transportation conformity rule allows the MVEB to be changed as long as the total level of emissions from all sources remains below the attainment level.

A “safety margin” is the difference between the attainment level of emissions (from all sources) and the projected level of emissions (from all sources) in the maintenance plan. The attainment level of emissions is the level of emissions during one of the years in which the area met the air quality health standard. For example: Cincinnati first attained the one hour ozone standard during the 1996-1999 time period. The State uses 1996 as the attainment level of emissions for the Cincinnati area. The emissions from point, area and mobile sources in 1996 equaled 212.7 tons per day of VOC and 411.2 tons per day of NO X . The Ohio Environmental Protection Agency projected emissions out to the year 2010 and projected a total of 195.9 tons per day of VOC and 363.7 tons per day of NO X from all sources in the Ohio portion of the Cincinnati area. The safety margin for the Ohio portion of the Cincinnati area is calculated to be the difference between these amounts or 16.8 tons per day of VOC and 46.5 tons per day of NO X . Detailed information on the estimated emissions from each source category is summarized in the proposed approval of the maintenance plan at 65 FR 3638 published on January 24, 2000. Ohio has requested to allocate 10 tons per day of the NO X safety margin to the mobile source emission budgets for NO X . With the added safety margin in the motor vehicle emission estimate for 2010 the total NO X emissions for the area continue to be below the 1996 attainment year. Ohio is not asking to use the entire safety margin in the maintenance plan. Even with the allocation of 10 tons per day of NO X to mobile sources, it leaves the area with 36.5 tons per day NO X safety margin.

The emissions are projected to maintain the area's air quality consistent with the air quality health standard. The safety margin credit can be allocated to the transportation sector. The total emission level, even with this allocation will be below the attainment level or safety level and thus is acceptable. The safety margin is the extra safety points that can be allocated as long as the total level is maintained.

This action changes the budget for mobile sources. The maintenance plan is designed to provide for future growth while still maintaining the ozone air quality standard. Growth in industries, population, and traffic is offset with reductions from cleaner cars and other emission reduction programs. Through the maintenance plan the State and local agencies can manage and maintain air quality while providing for growth.

In the submittal, Ohio requested to allocate a portion of the NO X safely margin to the 2010 MVEB. The VOC MVEB will remain the same as approved and only the NO X budget is requested to change. The NO X MVEB will change from 52.3 tons of NO X to 62.3 tons of NO X . This budget would be the constraining number for mobile sources and transportation conformity. The Transportation Plan and Transportation Improvement Program for Cincinnati will need to be below the MVEB to demonstrate conformity. These requirements are detailed in the transportation conformity regulations which were approved as part of the Ohio SIP on May 16, 1996 (61 FR 24702) and approved as amended in a Federal Register notice dated May 30, 2000 (65 FR 34395).

Ohio is submitting these budgets as subarea budgets which are only applicable to the Ohio portion of the Cincinnati area. Subarea budgets will allow conformity to be determined for Ohio and Kentucky separately. Kentucky currently has approved 2010 mobile source budgets. In separate actions, both States (Ohio and Kentucky) are formally electing to use subarea budgets per 40 CFR 93.124(d) for the purpose of determining transportation conformity in the areas within their individual state. Subarea budgets will still require the Cincinnati area to conduct transportation conformity for the entire area (both Ohio and Kentucky portions). However, subarea budgets will allow transportation projects in each State to be implemented if and only if the budget test is met for that particular State.

The emissions from point, area and mobile sources in 1996 equaled 212.7 tons per day of VOC and 411.2 tons per day of NO X . This is the level of emissions which allow attainment of the one hour ozone standard. The Ohio Environmental Protection Agency projected emissions out to the year 2010 and projected a total of 195.9 tons per day of VOC and 363.7 tons per day of NO X from all sources in the Ohio portion of the Cincinnati area. The allocation of the safety margin will keep the total emissions below the attainment level. Thus, the emissions are projected to maintain the area's air quality consistent with the air quality health standard. After review of the SIP revision request, EPA finds that the allocation of the 10 tons per day from the safety margin to the 2010 NO X MVEB for the Cincinnati Ohio area is approvable because the new MVEB for NO X will maintain the total emissions at or below the attainment year inventory level as required by the transportation conformity regulations.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget.

For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001).

This action merely approves state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ).

Because this rule approves pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4).

This rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).

This action also does not have Federalism implications because it does not have substantial direct effects on the States, on the relationship between the National government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely approves a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act.

This rule also is not subject to Executive Order 13045 “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.

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

This rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

The Congressional Review Act, 5 U.S.C. section 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register . A major rule cannot take effect until 60 days after it is published in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. section 804(2).

Under section 307(b)(1) of the Clean Air Act, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by September 20, 2004. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this rule for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements. (See section 307(b)(2).)

Regulated Entities: Entities potentially regulated by this action include:

World wide Web (WWW) . In addition to being available in the docket, an electronic copy of this action will also be available on the WWW through the Technology Transfer Network (TTN). Following signature, a copy of this action will be posted on EPA's TTN policy and guidance page for newly proposed or promulgated rules: http://www.epa.gov/ttn/oarpg . The TTN at EPA's web site provides information and technology exchange in various areas of air pollution control.

On November 20, 1990, the Federal Register published EPA's revision of the National Emission Standards for Hazardous Air Pollutants for Asbestos (asbestos NESHAP), 40 CFR part 61, subpart M, (55 FR 48406). That rule contained regulatory provisions for the labeling of asbestos waste that cited to regulations then in place from the Occupational Safety and Health Administration (OSHA) for proper labeling of asbestos waste. Subsequent to the publication of that rule, OSHA renumbered the provisions cited in the asbestos NESHAP.

On September 18, 2003, the Federal Register published EPA's amendments to the National Emission Standards for Hazardous Air Pollutants for Asbestos (asbestos NESHAP), 40 CFR part 61, subpart M, (55 FR 48406). Those amendments correctly identify the current OSHA regulatory citations for properly labeling asbestos waste that is managed under the asbestos NESHAP. However, typographical errors occurred in Table 1: Cross Reference to Other Asbestos Regulations in the Federal Register publication of that notice and today's final rule amendments correct the errors.

The current OSHA permissible exposure limit (PEL) is 0.1 fibers per cubic centimeter (f/cc). However, Table 1 found at 40 CFR 61.156 erroneously identifies the OSHA PEL as 0.2 f/cc. Today's action corrects Table 1 at 40 CFR 61.156, to reference the OSHA regulation but the NESHAP will not reference the current level of the PEL. Therefore, the section of Table 1 which is being corrected now reads as follows:

We find for good cause under 5 U.S.C. 553(b)(B) that notice and comment procedures are unnecessary, and we are not soliciting comments on the amendments. The corrections are nonsubstantive in nature and do not affect the requirements for subject persons under the regulations. The regulations will continue to cite to the same OSHA regulations, and merely revise commentary statements accompanying the citations. In addition, the changes are noncontroversial and simply correct two typographical errors. Finally, the final rule amendments raise no new substantive issues beyond those raised in the previous direct final rule and notice of proposed rulemaking published on September 18, 2003. The EPA received no adverse comments regarding those notices, so an additional period of public comment is unnecessary.

Under Executive Order 12866, Regulatory Planning and Review (58 FR 51735, October 4, 1993), this action is not a “significant regulatory action” and is, therefore, not subject to review by the Office of Management and Budget. This action is not a “major rule” as defined by 5 U.S.C. 804(2). The final rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ). Because EPA has made a “good cause” finding that this action is not subject to notice and comment requirements under the APA or any other statute, it is not subject to the regulatory flexibility provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ), or to sections 202 and 205 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). In addition, this action does not significantly or uniquely affect small governments or impose a significant intergovernmental mandate, as described in sections 203 and 204 of the Unfunded Mandates Reform Act. The final rule does not have substantial direct effects on the States, or on the relationship between the national government and the States, as specified in Executive Order 13132, Federalism (64 FR 43255, August 10, 1999). Today's action also does not significantly or uniquely affect the communities of tribal governments, as specified by Executive Order 13175, Consultation and Coordination with Indian Tribal Governments (65 FR 67249, November 6, 2000). Also, the final rule is not subject to Executive Order 13045, Protection of Children from Environmental Health and Safety Risks (62 FR 1985, April 23, 1997) because it is not economically significant. The final rule is not subject to Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use (66 FR 28355, May 22, 2001) because it is not a significant regulatory action under Executive Order 12866. The final rule does not involve changes to the technical standards related to test methods or monitoring methods; thus the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272) do not apply. Also, the final rule does not involve special consideration of environmental justice-related issues as required by Executive Order 12898, Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations (59 FR 7629, February 16, 1994). The EPA has complied with Executive Order 12630, Governmental Actions and Interference With Constitutionally Protected Property Rights (Takings) (53 FR 8859, March 15, 1988) by examining the takings implications of the final rule in accordance with the “Attorney General's Supplemental Guidelines for the Evaluation of Risk and Avoidance of Unanticipated Takings” issued under the Executive Order. In issuing the final rule, EPA has taken the necessary steps to eliminate drafting errors and ambiguity, minimize potential litigation, and provide a clear legal standard for affected conduct, as required by section 3 of Executive Order 12988, Civil Justice Reform (61 FR 4729, February 7, 1996). The Congressional Review Act (5 U.S.C. 801 et seq. ), as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. The EPA will submit a report containing the final rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register . The final rule is not a “major rule” as defined by 5 U.S.C. 804(2).

EPA issued a final rule on July 1, 2004 (69 FR 40004) that amended the transportation conformity rule to include criteria and procedures for the new 8-hour ozone and fine particulate matter (PM 2.5 ) national ambient air quality standards (NAAQS or “standards”). The final rule also addressed a March 2, 1999 ruling by the U.S. Court of Appeals for the District of Columbia Circuit ( Environmental Defense Fund v. EPA, et al. , 167 F. 3d 641, D.C. Cir. 1999). The preamble to the July 1, 2004 final rule contains two errors. This notice is intended to correct these errors.

First, the table in Section II. D. What Parts of the Final Rule Apply to Me? (69 FR 40006-7), which lists the issues addressed in the final rule, is incomplete and contains a number of incorrect references to other sections of the rule. The table provides a roadmap for determining whether a specific final rule revision included in the July 1, 2004 rulemaking would apply in your area. The table illustrates which parts of the final rule are relevant for various pollutants and standards.

The following is the corrected table:

Second, a paragraph was omitted from the end of Section XXIII.G. Use of Adequate and Approved Budgets in Conformity (69 FR 40066). The missing paragraph was intended to explain that we are not changing all of the PM 10 requirements in § 93.109(g). We are reprinting the entire paragraph in the regulatory section of the July 1, 2004 final rule to ensure that the Code of Federal Regulations is updated correctly.

The following paragraph should be inserted at the end of Section XXIII.G.:

The final rule includes some of the existing conformity rule's text for PM 10 requirements in § 93.109(g) to ensure that the Code of Federal Regulations is updated correctly. For example, § 93.109(g)(3)(ii) is not being changed in this final rule, but is affected by the reorganization of paragraph (g) in this section. EPA notes that this and other such parts of paragraph (g) have been addressed through past rulemakings and are not being reopened through this final rule.

No changes are being made to the final rule language or other preamble language published on July 1, 2004. EPA finds good cause to make this correction notice effective less than 30 days after publication in the Federal Register . The final rule published July 1 will become effective August 2, 2004. Today's correction notice does not make any changes to the final rule. This correction notice only clarifies explanatory text in the preamble to the final rule which were intended to aid conformity implementors in implementing the rule. Therefore EPA concludes that it will be in the public interest to have this correction notice also become effective on August 2, 2004.

On October 8, 1996 the President signed the Maritime Security Act of 1996 establishing the Maritime Security Program (MSP) for FYs 1996 through 2005 to provide financial assistance of up to $2.1 million per vessel per year to operators of U.S.-flag vessels with approved MSP Operating Agreements. The MSP is funded at $100 million per year for each year from FY 1996 through FY 2005, which covers a maximum of 47 vessels.

On November 24, 2003, the President signed the National Defense Authorization Act for Fiscal Year 2004, which contained the MSA 2003 creating a new MSP for FY 2006 through FY 2015. This program also provides financial assistance to operators of U.S.-flag vessels that meet certain qualifications. The MSA 2003 requires that the Secretary of Transportation, in consultation with the Secretary of Defense, establish a fleet of active, commercially viable, militarily useful, privately-owned vessels to meet national defense and other security requirements. Section 53111 of the MSA 2003 authorizes $156 million annually for FYs 2006, 2007, and 2008; $174 million annually for FYs 2009, 2010, and 2011; and $186 million annually for FYs 2012, 2013, 2014, and 2015 to support the operation of up to 60 U.S.-flag vessels in the foreign commerce of the United States. Payments to participating operators are limited to $2.6 million per ship per year for FYs 2006 through 2008, $2.9 million per ship per year for FYs 2009 through 2011, and $3.1 million per ship per year for FYs 2012 through 2015. Payments are subject to annual appropriations. Participating operators are required to make their commercial transportation resources available upon request by the Secretary of Defense during times of war or national emergency.

Subtitle A, section 3517 of the MSA 2003 provides for a pilot program under which the Secretary of Transportation may enter into an agreement(s) to reimburse MSP vessel operators up to 80 percent of the cost of performing maintenance and repairs in U.S. shipyards versus the cost of performing this work in a geographic region in which the MSP vessel generally operates. Funding to perform qualified maintenance and repair work in the United States on MSP vessels is authorized to be appropriated in the amount of $19.5 million for each of fiscal years 2006 through 2011.

The U.S. Transportation Command, on behalf of the Secretary of Defense, will issue a press release or another form of announcement within 20 days after the issuance of this regulation describing the current operational requirements of the Department of Defense for determining the award of operating agreements within a priority. Current requirements may be stated in terms of capability to perform a particular mission or in terms of vessel characteristics (militarily useful square footage, deck height, deck strength, draft, ammunition certification, etc.) or in other operational terms.

This rulemaking is considered to be an economically significant regulatory action under section 3(f) of Executive Order 12866. This interim final rule is also considered a major rule for purposes of Congressional review under Pub. L. 104-121. Since the program is designed to support up to 60 vessels in FY 2006, each receiving up to $2.6 million annually, the Maritime Administrator finds that the program may have an annual effect on the economy of $100 million or more. Thus, it is considered to be a significant rule under Executive Order 12866 and DOT's Regulatory Policies and Procedures (44 FR 11034, February 26, 1979), and has been reviewed by OMB. Changes made in response to OMB suggestions or recommendations will be documented in the public record. Under Executive Order 12866, MARAD is required to provide an analysis of information developed as part of its decisionmaking process, including the benefits anticipated from the regulatory action, the costs anticipated from the action, and an assessment of the costs and benefits of potentially effective and reasonably feasible alternatives to the regulatory action. MARAD's regulatory analysis follows.

The Maritime Security Act of 1996 (MSA) was passed with strong bipartisan support in Congress and was signed into law on October 8, 1996. The MSA outlined, in detail, the establishment of a fleet of vessels, pursuant to agreement, engaged in U.S. foreign commerce and available for use by the Department of Defense during times of war or national emergency. Based on the success of the program under the original MSA, Congress, as part of the recently enacted Maritime Security Act of 2003 (MSA 2003), created a new program that permits an increase in both the number of participant vessels as well as the payment amounts such vessels will receive under the program.

The major benefit of the MSA 2003 is that it will provide the Department of Defense (DOD) with assured access of up to 60 vessels that may be used during times of war or national emergency. The existing MSP fleet of 47 vessels consists primarily of containerships, which are mainly designed for the sustainment phase of sealift operations that support military operations. In Operation Iraqi Freedom, 35 MSP vessels were employed in support of military operations. In addition, the MSP provides necessary support to help maintain a U.S.-flag presence in international commerce. The MSP vessels are a major component of the U.S.-flag capability that contributes to the U.S. mariner base for utilization on both commercial and DOD organic fleet.

From the inception of the program, Congress set strict limits, not subject to the Secretary of Transportation's discretion, on the number of participant vessels and the annual payment per vessel. The MSA 2003 will permit an increase in the number of participant vessels from 47 authorized under the original MSA (for FYs 1996-2005) to 60 (authorized for FYs 2006-2015). Similarly, the payments per vessel may be increased from $2.1 million (under the original MSA for FYs 1997-2005) to $2.6 million (for FYs 2006-2008); $2.9 million (for FYs 2009-2011); and $3.1 million (for FYs 2012-2015). The maximum programmatic payment that Congress directed through the MSA 2003 is $156 million, $174 million, and $186 million per year for FYs 2006-2008, 2009-2011, and 2012-2015 respectively, subject to appropriation.

The MSA 2003 expands the MSP program that was originally established by Congress in 1996 by increasing the number of participant vessels, annual funding amounts, and expenditure amounts for the new MSP program. However, beyond the increased size of the new MSP program under the MSA 2003, the underlying statutes are substantially similar, and envision a new MSP program that is essentially a continuation of the prior MSP program under the original MSA. Under both the original MSA and the MSA 2003, Congress prescribed the salient details of the MSP program, including ship ownership, vessel eligibility, vessel documentation, program duration, the number of participants, the amount of funding, and, under the MSA 2003, guidelines regarding the composition of the fleet. Since the MSA 2003 provides detailed requirements for continuing the MSP program, MARAD has little discretion to propose regulatory options. In fact, given the highly prescriptive nature of both the original MSA and MSA 2003, MARAD believes that no viable regulatory alternatives exist in lieu of implementing these regulations, which continue and expand the current MSP program.

Pursuant to authority granted by section 3533 of the MSA 2003, which provides an exception from compliance with the notice and comment requirements of section 553 of Title 5, United States Code, MARAD is publishing this rule as an interim final rule. This will facilitate establishment of the new MSP as early as possible. A final rule will be published in the Federal Register after MARAD has had an opportunity to consider all comments on this interim final rule. Section 3533 provides that all interim rules under that section that are not superseded earlier by final rules shall expire no later than 270 days after the effective date of Subtitle C, or October 1, 2004. Accordingly, these interim regulations shall no longer be effective after June 27, 2005.

We have analyzed this rulemaking in accordance with the principles and criteria contained in Executive Order 13132 (“Federalism”) and have determined that it does not have sufficient Federalism implications to warrant the preparation of a Federalism summary impact statement. The regulations have no substantial effects on the States, the current Federal-State relationship, or the current distribution of power and responsibilities among various local officials. Therefore, consultation with State and local officials was not necessary.

MARAD does not believe that this interim final rule will significantly or uniquely affect the communities of Indian tribal governments when analyzed under the principles and criteria contained in Executive Order 13175 (Consultation and Coordination with Indian Tribal Governments). Therefore, the funding and consultation requirements of this Executive Order do not apply.

Because no notice of proposed rulemaking is required for this interim final rule, as set forth in section 3533 of Subtitle C, Title XXXV, of the National Defense Authorization Act for Fiscal Year 2004, the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) do not apply. However, the Maritime Administrator certifies that this interim final rule will not have a significant economic impact on a substantial number of small entities. We anticipate that few, if any, small entities will participate in this program due to the nature of the shipping industry and the capital costs associated with ships that are eligible for the program.

This interim final rule will not impose an unfunded mandate under the Unfunded Mandates Reform Act of 1995. It will not result in costs of $100 million or more, in the aggregate, to any of the following: State, local, or Native American tribal governments, or the private sector. This interim final rule is the least burdensome alternative that achieves this objective of U.S. policy.

We have analyzed this interim final rule for purposes of compliance with the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et seq. ) and we have concluded that, under the categorical exclusions provision in section 4.05 of Maritime Administrative Order (MAO) 600-1, “Procedures for Considering Environmental Impacts,” 50 FR 11606 (March 22, 1985), neither the preparation of an Environmental Assessment, an Environmental Impact Statement, nor a Finding of No Significant Impact for this rulemaking is required. This interim final rule does not change the environmental effects of the current MSP, which has been operational since FY 1997, and thus no further analysis under NEPA is required. The vessels eligible for the MSP under the MSA 2003 (1) will continue to operate under the U.S. flag, and will continue to be governed by U.S.-flag state control while operating in the foreign commerce of the United States; and (2) are and will continue to be designed, constructed, equipped and operated in accordance with stringent United States Coast Guard and International Maritime Organization standards for maritime safety and maritime environmental protection.

MARAD has requested that the Office of Management and Budget revise its approval of an information collection under the Paperwork Reduction Act of 1995 (44 U.S.C. 3507 et seq. ). The title of the information collection is Application and Reporting Elements for Participation in the Maritime Security Program, OMB #2133-0525.

This information collection requires vessel operators to continue to submit initial applications, amendments to applications (if necessary), and monthly and annual reports. We estimate that the number of annual respondents under the new MSP program will increase from 12.5 to 15, the average total number of annual responses will increase from 132 to 198.5, and that the average annual recordkeeping and reporting burden program total will increase from 152 hours to 224 hours. We estimate that the total average annual cost burden associated with this information collection will be $10,726.65, or $715.11 per respondent.

In accordance with the Paperwork Reduction Act, MARAD published a 60-day notice in the Federal Register seeking public comment on the information collection on May 28, 2004 (69 FR 30744).

Anyone is able to search the electronic form of all comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). You may review DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (Volume 65, Number 70; Pages 19477-78) or you may visit http://dms.dot.gov.

Information related to this final rule, including the associated environmental assessment (EA), public comments on related actions, guidelines for differentiating serious and non-serious injury, and the guidelines for preparing marine mammal stock assessment reports, is available on the Internet at http://www.nmfs.noaa.gov/pr/ (see “Recent News and Hot Topics”).

On July 9, 2003 (68 FR 40888), NMFS published an advance notice of proposed rulemaking (ANPR) describing options for defining provisions of the ZMRG, including the requirement under the MMPA for commercial fisheries to reduce incidental mortality and serious injury of marine mammals to insignificant levels approaching a zero mortality and serious injury rate. On April 29, 2004, NMFS issued a proposed rule (69 FR 23477) defining an insignificance threshold as the upper limit of annual incidental mortality and serious injury of marine mammal stocks by commercial fisheries considered to be insignificant levels approaching a zero mortality and serious injury rate. An insignificance threshold is estimated as 10 percent of the PBR for a stock of marine mammals. If certain parameters (e.g., maximum net productivity rate or the recovery factor in the calculation of the stock's PBR) can be estimated or otherwise modified from default values, the Assistant Administrator for Fisheries (Assistant Administrator) may use a modification of the number calculated from the simple formula for the insignificance threshold. The Assistant Administrator may also use a modification of the simple formula when information is insufficient to estimate the level of mortality and serious injury having an insignificant effect on the affected population stock and provide a rationale for using the modification. The preamble to the proposed rule described the ZMRG under MMPA section 118(b), in simple form, to include the following:

(1) A target for reducing incidental mortality and serious injury and a deadline by which the target is to be achieved;

(2) A statement to exclude fisheries achieving and maintaining such levels of incidental mortality from the requirement to further reduce incidental mortality and serious injury;

(3) A requirement for submitting a report to Congress describing fisheries' progress toward the target and noting fisheries for which additional information is required to assess levels of incidental mortality and serious injury; and

(4) A mechanism (the TRP process) to reduce levels of incidental mortality and serious injury for fisheries not meeting the target. The economics of the fishery, availability of existing technology, and existing fishery management plans must be taken into account in the long-term goal of a TRP to reduce incidental mortality and serious injury of marine mammals to insignificant levels approaching a zero morality and serious injury rate.

The preamble to the proposed rule also addressed key issues related to the implementation of the ZMRG. The key issues were summarized under headings posing the following questions:

(1) What is an insignificant level of incidental mortality and serious injury;

(2) Why is the deadline important;

(3) How will incidental mortality and serious injury levels approach a zero rate; and

(4) Would a fishery be closed if it missed the target mortality and serious injury level by the deadline?

Details of the options NMFS considered for implementing the ZMRG and a detailed description of the implementation of the ZMRG are included in the ANPR and proposed rule. The ANPR summarized the legislative history of the ZMRG within the MMPA. These descriptions are not repeated in the preamble to this final rule.

NMFS received letters with comments from 12 organizations or agencies, five of which were from the conservation community, five were from the fishing industry, and two were from governmental agencies. Several of the letters appended comments on the ANPR. Comments on the ANPR were summarized, and responses to these summary comments were included, in the preamble to the proposed rule; these comments and responses are not repeated here.

Comment 1: We support the proposed threshold of 10 percent of the PBR level as the most effective means to meet the ZMRG.

The Regional Administrator (RA) modified the season for the commercial fishery in the area from the U.S.-Canada Border to Cape Falcon, OR to open July 8 and close at midnight on July 12, 2004, then reopen on July 16 through July 19, with the provision that no vessel may possess, land, or deliver more than 100 chinook for each open period. On July 2 the Regional Administrator had determined available catch and effort data indicated that the effort predicted preseason was low and that restricting the fishery to slow the catch of chinook would allow additional time for fishers to access more of the coho quota. The fishery was scheduled to be reevaluated by an inseason conference call on July 14, and any further adjustments announced.

All other restrictions remain in effect as announced for 2004 ocean salmon fisheries. This action was necessary to conform to the 2004 management goals. Modification of fishing seasons is authorized by regulations at 50 CFR 660.409(b)(1)(i) and (ii).

In the 2004 annual management measures for ocean salmon fisheries (69 FR 25026, May 5, 2004), NMFS announced the commercial fishery for all salmon in the area from the U.S.-Canada Border to Cape Falcon, OR would open July 8 through the earlier of September 15, or a 14,700-chinook preseason guideline, or a 67,500-coho quota. The 67,500-coho quota included a subarea quota of 8,000 coho for the area between the U.S.-Canada border and the Queets River, WA. The fishery was scheduled to be open Thursday through Monday prior to August 11, and Wednesday through Sunday thereafter, with the restriction that no vessel may possess, land, or deliver more than 125 chinook for each 5-day open period.

On July 2, 2004, the RA consulted with representatives of the Pacific Fishery Management Council, Washington Department of Fish and Wildlife, and Oregon Department of Fish and Wildlife by conference call. Information related to catch to date, the chinook catch rate, and effort data indicated that the effort predicted preseason was low and that restricting the fishery to slow the catch of chinook would allow additional time for fishers to access more of the coho quota. As a result, on July 2 the states recommended, and the RA concurred, that the area from the U.S.-Canada Border to Cape Falcon, OR open July 8 and close at midnight l.t. on July 12, 2004 (5 days open), then reopen on July 16 through midnight l.t. on July 19, 2004 (4 days open), with the provision that no vessel may possess, land, or deliver more than 100 chinook for each open period. All other restrictions that apply to this fishery remain in effect as announced in the 2004 annual management measures.

The RA determined that the best available information indicated that the catch and effort data, and projections, supported the above inseason action recommended by the states. The states manage the fisheries in state waters adjacent to the areas of the U.S. exclusive economic zone in accordance with these Federal actions. As provided by the inseason notice procedures of 50 CFR 660.411, actual notice to fishers of the already described action was given, prior to the time the action was effective, by telephone hotline number 206-526-6667 and 800-662-9825, and by U.S. Coast Guard Notice to Mariners broadcasts on Channel 16 VHF-FM and 2182 kHz.

This action does not apply to other fisheries that may be operating in other areas.

The Assistant Administrator for Fisheries, NOAA (AA), finds that good cause exists for this notification to be issued without affording prior notice and opportunity for public comment under 5 U.S.C. 553(b)(B) because such notification would be impracticable. As previously noted, actual notice of this action was provided to fishers through telephone hotline and radio notification. This action complies with the requirements of the annual management measures for ocean salmon fisheries (69 FR 25026, May 5, 2004), the West Coast Salmon Plan, and regulations implementing the West Coast Salmon Plan 50 CFR 660.409 and 660.411. Prior notice and opportunity for public comment was impracticable because NMFS and the state agencies had insufficient time to provide for prior notice and the opportunity for public comment between the time the fishery catch and effort data were collected to determine the extent of the fisheries, and the time the fishery modifications had to be implemented in order to allow fishers access to the available fish at the time the fish were available. The AA also finds good cause to waive the 30-day delay in effectiveness required under U.S.C. 553(d)(3), as a delay in effectiveness of these actions would unnecessarily limit fishers appropriately controlled access to available fish during the scheduled fishing season.

This action is authorized by 50 CFR 660.409 and 660.411 and are exempt from review under Executive Order 12866.