Title II of the Dodd-Frank Act establishes an Orderly Liquidation Authority (“OLA”) to resolve a large interconnected financial company upon a determination that its failure and resolution under otherwise applicable law would have serious adverse effects on financial stability in the United States and the use of OLA would avoid or mitigate such adverse effects. Under the systemic risk determination process set forth in the Dodd-Frank Act, certain designated Federal agencies, 2 on their own initiative or at the request of the Secretary of the Treasury (“Secretary”), may recommend that the Secretary appoint the FDIC as receiver of a financial company. Any written recommendation from the designated Federal agencies to the Secretary to make a systemic risk determination must include a number of specific findings, which are enumerated in section 203(a)(2) of the Dodd-Frank Act. 3 Then, based on the written recommendation of the appropriate agencies, the Secretary, in consultation with the President, must determine whether the conditions in section 203(b) of the Dodd-Frank Act have been satisfied so that the covered financial company can be placed into receivership. In making that determination, the Secretary must document any determination and retain such documentation. 4 This procedure is very similar to the way that systemic risk determinations are made under section 13 of the Federal Deposit Insurance Act (the “FDIA”). 5 Under section 201(a)(8) of the Dodd-Frank Act, a “covered financial company” is a “financial company”  6 for which a systemic risk determination has been made pursuant to section 203(b) of the Dodd-Frank Act but does not include an insured depository institution.

Once the Secretary makes a systemic risk determination, the FDIC can be appointed as receiver of the covered financial company. If the board of directors (or similar governing body) of the company consents to the appointment, the Secretary shall appoint the FDIC as receiver. If the company's governing body does not consent, section 202 of the Dodd-Frank Act requires the Secretary to petition the United States District Court for the District of Columbia for an order authorizing the Secretary to appoint the FDIC as receiver. In determining whether to grant the petition, the court will determine whether two of the Secretary's seven determinations—that the covered financial company is in default or in danger of default and that it meets the definition of financial company under Title II—are arbitrary and capricious. 7 If the court upholds the two reviewable determinations of the Secretary, the court will issue an order authorizing the Secretary to appoint the FDIC as receiver. If the court does not make a determination within twenty-four hours of receiving the Secretary's petition, then the appointment of the FDIC as receiver takes effect by operation of law.

The OLA in the Dodd-Frank Act is intended as a limited exception to bankruptcy or other applicable insolvency laws for purposes of ensuring that the resolution of a failing non-depository financial company does not have serious adverse effects on U.S. financial stability. Section 204(a) of the Dodd-Frank Act expressly provides that the purpose of OLA is to provide the means “to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.” Section 214(a) expressly provides that “[a]ll financial companies put into receivership under this title shall be liquidated. No taxpayer funds shall be used to prevent the liquidation of any financial company under this title.” Moreover, section 214(b) provides that “[a]ll funds expended in the liquidation of a financial company under this title shall be recovered from the disposition of assets of such financial company, or shall be the responsibility of the financial sector, through assessments.” Finally, section 214(c) provides that, “[t]axpayers shall bear no losses from the exercise of any authority under this title.”

To achieve the orderly liquidation of systemically important financial companies, the FDIC is given broad authority under the Dodd-Frank Act to: Transfer assets or liabilities to a bridge financial company, operate or liquidate businesses, sell assets, and resolve the liabilities of a covered financial company just after the FDIC's appointment as receiver or as soon as conditions make this appropriate. 8 This authority enables the FDIC to act immediately to sell any assets and liabilities of the covered financial company to another entity, or if that is not possible or consistent with maximizing the value of the assets of the covered financial company, to transfer assets and liabilities to a bridge financial company established by the FDIC and either sell the assets or liabilities over time while maintaining critical functions. Oftentimes, in administering a receivership, it is necessary to continue key operations, services, and transactions that will maximize the value of the firm's assets and avoid a disorderly collapse in the marketplace.

Section 210(n) of the Dodd-Frank Act establishes an Orderly Liquidation Fund (“OLF”) in the U.S. Treasury that will be available to the FDIC to carry out its responsibilities as receiver of a covered financial company and pay the costs of actions authorized under Title II of the Dodd-Frank Act, including: The orderly liquidation of covered financial companies, payment of administrative expenses, and the payment of principal and interest by the FDIC on obligations issued under section 210(n)(5) of the Dodd-Frank Act. The OLF will be comprised of amounts received by the FDIC, including: The proceeds of obligations issued to Treasury pursuant to section 210(n)(5), assessments received under section 210(o), interest and other earnings from investments, and repayments to the FDIC by covered financial companies. 9

In order for the FDIC to fulfill its obligations as receiver of a covered financial company, it may be necessary for the FDIC to borrow funds from the Treasury. Under section 210(n)(5) of the Dodd-Frank Act, the FDIC is authorized to issue obligations to Treasury upon the FDIC's appointment as receiver, and Treasury may purchase any such obligations, “upon such terms and conditions as to yield a return at a rate determined by the Secretary, taking into consideration the current average yield on outstanding marketable obligations of the United States of comparable maturity, plus an interest rate surcharge to be determined by the Secretary, which shall be greater than the difference between—(i) the current average rate on an index of corporate obligations of comparable maturity; and (ii) the current average rate on outstanding marketable obligations of the United States of comparable maturity.” Section 210(n)(9) of the Dodd-Frank Act provides that the FDIC must develop an Orderly Liquidation Plan (“OLP”) that is acceptable to the Secretary for each covered financial company for which the FDIC is appointed receiver, prior to funds in the OLF being made available to the FDIC with regard to such covered financial company. The FDIC may amend any OLP at any time with the concurrence of the Secretary. Section 210(n)(9) further requires that a mandatory repayment plan between the FDIC and Treasury be agreed to and in effect before Treasury may provide certain amounts to the FDIC within the limits defined in subparagraph (B) of section 210(n)(6) of the Dodd-Frank Act.

The Maximum Obligation Limitation (“MOL”), as set forth in section 210(n)(6) of the Dodd-Frank Act, limits the aggregate amount of outstanding obligations that the FDIC may issue or incur in connection with the orderly liquidation of a covered financial company. Specifically, the MOL provides as follows:

Section 210(n)(7) of the Dodd-Frank Act requires the Agencies, in consultation with the Financial Stability Oversight Council (“FSOC”), to jointly prescribe regulations governing the calculation of the MOL. In accordance with this section, the Agencies have consulted with the FSOC, and have determined that it would be most appropriate to adopt regulations that closely follow the statutory language for calculating the MOL, while defining certain terms referenced in the statute and seeking comment on those definitions. The terms in this proposed rule are defined solely for the purpose of calculating the MOL and are not applicable to any other statutory or regulatory requirements.

The Dodd-Frank Act does not define the term “obligation.” The proposed rule includes a definition of the term “obligation” that is derived from the definition of the term “obligation” in section 15(c) the FDIA (12 U.S.C. 1825(c)). Section 15(c) of the FDIA contains an MOL that limits the amount of obligations the FDIC may issue or incur in connection with the resolution of failed insured depository institutions. A comparison of the two MOLs reveals that the MOL under section 210(n)(6) of the Dodd-Frank Act is modeled after the FDIA MOL. The Agencies thus believe that defining the term “obligation” in a manner similar to the definition of such term in the FDIA is appropriate. More specifically, the proposed rule provides that in calculating the MOL, the term “obligation” means—

(i) Any guarantee issued by the FDIC on behalf of each covered financial company;

(ii) Any amount borrowed pursuant to Section 210(n)(5) in connection with each covered financial company; and

(iii) Any other obligation with respect to a covered financial company for which the FDIC has a direct or contingent liability to pay any amount.

For purposes of calculating the MOL, the FDIC shall value any contingent liabilities with respect to each covered financial company, including any guarantee issued by the FDIC, at their expected cost to the FDIC. 10

Section 210(n)(6)(A) of the Dodd-Frank Act provides that, in calculating the MOL, the amount of the total consolidated assets for each covered financial company shall be “based on the most recent financial statement available.” The Dodd-Frank Act does not define this term. Under the proposed rule, the term “most recent financial statement available” means: (1) The covered financial company's most recent financial statement filed with the SEC or any other regulatory body; (2) the covered financial company's most recent financial statement audited by an independent CPA firm; or (3) other available financial statements of the covered financial company. The Agencies will jointly determine which of the three types of financial statements is, in the judgment of the FDIC and the Secretary, most pertinent, taking into consideration the timeliness and reliability of the statements being considered. Generally, the Agencies intend to use financial statements filed with a regulatory body or financial statements audited by an independent CPA firm when they are available and timely as under most circumstances they would be considered to be reliable. However, if the covered financial company is both privately held and unregulated, statements filed with a regulatory body would not exist. In addition, financial statements audited by an independent CPA firm may not also exist or may not be as timely or relevant as unaudited financial statements. Accordingly, the Agencies propose to use the financial statements that they believe are most pertinent taking into consideration the timeliness and reliability of the statements being considered.

Section 210(n)(6)(B) of the Dodd-Frank Act provides that the total consolidated assets of each covered financial company be measured at their “fair value.” The Dodd-Frank Act does not define the term “fair value” for this purpose. The proposed rule defines “fair value” as the expected total aggregate value of each asset, or group of assets that are managed within a portfolio, of a covered financial company if such asset, or group of assets, was sold or otherwise disposed of in an orderly transaction. The Agencies initially considered a fair value definition based on a forced liquidation value or distressed sale basis, such as a liquidation under chapter 7 of the Bankruptcy Code. However, the Agencies determined that defining the term “fair value” based on a forced liquidation value would not accurately reflect the FDIC's responsibilities and authorities as receiver. For example, Section 210(a)(1)(B)(i) of the Dodd-Frank Act allows the FDIC as receiver to take over the assets of and operate the covered financial company with all the powers of the members or shareholders, the directors, and the officers of the covered financial company, and conduct all business of the covered financial company during the period of orderly liquidation. Section 210(a)(1)(B)(iv) of the Dodd-Frank Act requires the FDIC as receiver to manage the assets and property of the covered financial company, consistent with the maximization of the value of the assets in the context of an orderly liquidation. Section 202(d) gives the FDIC a three-year period to liquidate the covered financial company, which period may be extended for up to two additional years to maximize the net present value return from the sale of the assets of the covered financial company. Hence, the Agencies believe that the term “fair value” should be based on an orderly liquidation value using valuation analysis consisting of relevant factors estimating asset prices commensurate with the characteristics of the assets held by the covered financial company. Such measures are consistent with the authority of the FDIC to conduct an orderly liquidation in a manner that maximizes the value of the assets of the covered financial company over a three- to five-year period. The Agencies also believe that the proposed rule reflects this mandate by recognizing that fair value measurement is context dependant and the result of numerous variables, including the attributes of the specific asset; the period of time and the circumstances the asset is allowed to be marketed; and the presence of willing and able third-party buyers.

Finally, with respect to the term “total consolidated assets of each covered financial company that are available for repayment” in section 210(n)(6)(B) of the Dodd-Frank Act, the proposed rule defines this term to mean the difference between: (1) The total consolidated assets of the covered financial company that are available for liquidation during the operation of the receivership; and (2) to the extent included in (1), all assets that are separated from, or made unavailable to, the covered financial company by a statutory or regulatory barrier that prevents the covered financial company from possessing or selling and using the proceeds from the sale of such assets. The Agencies are proposing to define the term “assets * * * available for repayment” in a manner consistent with the FDIC's broad authority as receiver regarding the liquidation of assets of a covered financial company.

Under Title II, all of the assets on the books of the covered financial company would generally be available for sale and liquidation and, thereby, available as proceeds for repayment. It should be noted, for example, section 210(a)(1)(A)(i) provides that the FDIC as receiver succeeds to all rights, titles, powers, and privileges of the covered financial company and its assets. Section 210(a)(1)(D) further provides that the FDIC as receiver shall liquidate the covered financial company's assets and wind-up its affairs in such manner as the FDIC deems appropriate, including through the sale of assets, the transfer of assets to a bridge financial company, or the exercise of any other rights or privileges granted, but subject to all legally enforceable and perfected security interests and all legally enforceable security entitlements. Moreover, section 210(a)(1)(M) provides that notwithstanding any other provision of law, the FDIC's appointment as receiver terminates all rights and claims that shareholders and creditors of the covered financial company may have against the assets of the covered financial company, except for their right to payment or other satisfactory resolution of their underlying claims as provided by the Dodd-Frank Act.

Congress thus directed the FDIC as receiver to manage and liquidate the assets of a covered financial company, including assets that may be released from lien encumbrances by payment in the ordinary course of business, with a view toward maximizing the value of such assets over the course of the orderly liquidation. The Agencies believe that the FDIC's broad authority to liquidate the covered financial company's assets (including assets encumbered by liens), to pay secured creditors and to pay the FDIC's administrative expenses and other claimants in accordance with the priority of claims provisions, to the extent of available proceeds, renders those “assets * * * available for repayment.” However, the Agencies also recognize that there may be assets of a covered financial company that are not “assets * * * available for repayment.” For example, to the extent that the assets of a covered financial company's wholly-owned foreign subsidiary are “ring-fenced” by the subsidiary's foreign regulator, pursuant to valid statutory or regulatory authority, they would not be available for repayment. Other assets may not be on the balance sheet of a covered financial company and thus not available for repayment, such as customer name securities at a covered broker or dealer. 11

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2011-0959; Directorate Identifier 2011-NE-25-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of the Web site, anyone can find and read the comments in any of our dockets, including, if provided, the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc. ). You may review the DOT's complete Privacy Act Statement in the Federal Register published on April 11, 2000 (65 FR 19477-78).

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directive 2011-0080, dated May 6, 2011 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:

We are proposing this AD to prevent uncontained engine failure and damage to the airplane.

Rolls-Royce plc has issued Alert Service Bulletin RB.211-72-AG456, dated September 9, 2010. The actions described in this service information are intended to correct the unsafe condition identified in the MCAI.

This product has been approved by the aviation authority of the United Kingdom, and is approved for operation in the United States. Pursuant to our bilateral agreement with the United Kingdom, they have notified us of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all information provided by EASA, and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design.

We estimate that this proposed AD would affect about 125 products of U.S. registry. We also estimate that it would take about 10 work-hours per product to inspect and 10 additional work-hours for those combustion liners that require replacement. The average labor rate is $85 per work-hour. Required parts would cost about $525,000 per product. We expect that four front combustion liners will require replacement. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $2,209,650.

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

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

We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this proposed regulation:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.

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

The collection of information contained in this notice of proposed rulemaking relating to the furnishing of information in connection with the transfer of securities was previously reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2186. Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by February 23, 2012. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collection of information is in §§ 1.6045-1(c)(3)(xi)(C) and 1.6045A-1 of these proposed regulations and is an increase in the total annual burden from the burden in the current regulations to reflect the addition of debt instruments and options to the definition of covered securities. The collection of information is necessary to allow brokers that effect sales of transferred covered securities to determine and report the adjusted basis of the securities and whether any gain or loss with respect to the securities is long-term or short-term in compliance with section 6045(g) of the Internal Revenue Code. The collection of information is required to comply with the provisions of section 403 of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 (2008)). The likely respondents are brokers of securities and issuers, transfer agents, and professional custodians of securities that do not effect sales.

Estimated total annual reporting burden is 450,000 hours.

Estimated average annual burden per respondent is 15 hours.

Estimated average burden per response is 4 minutes.

Estimated number of respondents is 30,000.

Estimated total frequency of responses is 7 million.

The burden for the collection of information contained in the proposed amendments to § 1.6045-1 will be reflected in the burden on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” when revised to request the additional information in the regulation. The burden for the collection of information contained in the proposed amendments to § 1.6045B-1 will be reflected in the burden on Form 8937, “Report of Organizational Actions Affecting Basis of Securities,” when revised to request the additional information in the regulation.

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

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) relating to information reporting by brokers and others as required by section 6045 of the Internal Revenue Code (Code). This section was amended by section 403 of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 (2008)) (the Act) to require the reporting of adjusted basis for a covered security and whether any gain or loss upon the sale of the security is long-term or short-term. The Act also requires the reporting of gross proceeds for an option that is a covered security. In addition, the Act added section 6045A to the Code, which requires certain information to be reported in connection with a transfer of a covered security to another broker, and section 6045B, which requires an issuer of a specified security to file a return relating to certain actions that affect the basis of the security. Final regulations under these provisions relating to stock were published in the Federal Register on October 18, 2010, in TD 9504. The proposed regulations in this document address reporting by brokers under § 1.6045-1 for debt instruments and options. This document also contains proposed amendments to the Income Tax Regulations under sections 6045A and 6045B for debt instruments and options.

Section 6045(g)(1) requires every broker that is required to file a return with the IRS under section 6045(a) showing the gross proceeds from the sale of a covered security to include in the return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is long-term or short-term. Under section 6045(g)(3), a note, bond, debenture, or other evidence of indebtedness acquired on or after January 1, 2013, is a security subject to the information reporting rules in section 6045(g)(1). Section 6045(h) provides rules for reporting certain information, including gross proceeds, with respect to the sale, exercise, lapse, or other closing transaction with respect to an option on a specified security granted or acquired on or after January 1, 2013.

In general, these regulations would amend §§ 1.6045-1, 1.6045A-1, and 1.6045B-1 to require additional information reporting by a broker for a debt instrument acquired on or after January 1, 2013. The proposed regulations also require information reporting for an option granted or acquired on or after January 1, 2013. Many of the changes are technical provisions needed to incorporate debt instruments and options into the rules established for stock in the final regulations published in TD 9504. As a result of these changes, the general rules of § 1.6045-1 that currently apply to stock also will apply to a debt instrument or an option that is a covered security, including the wash sale and short sale provisions. In addition, the general rules of § 1.6045A-1 relating to transfer statement requirements and § 1.6045B-1 relating to issuer statement requirements will apply to a debt instrument or an option. Certain substantive changes were also needed to accommodate debt instruments and options. Certain other changes were made that will affect all specified securities, including stock. The significant substantive changes to the regulations are described in this preamble.

Under section 6045(h), for any sale or other closing transaction with respect to an option that is a covered security, a broker is required to report gross proceeds, adjusted basis, and whether any gain or loss is short-term or long-term.

For purposes of § 1.6045-1, certain options have been added to the definition of a security, specified security, and covered security. In general, an option on one or more specified securities, including an index of such securities or financial attributes of such securities, that is granted or acquired on or after January 1, 2013, will be a covered security. For example, as indicated by the Joint Committee on Taxation, the proposed regulations would apply to an option on the S&P 500 Index. See General Explanation of Tax Legislation Enacted in the 110th Congress, JCS-1-09 at 366.

An exception to the general rules described in proposed § 1.6045-1(m) for reporting basis for an option is provided for a compensation-related option. The proposed rules retain the existing rules for a compensation-related option, but make those rules applicable to all compensation-related options, and not just those granted or acquired before January 1, 2013. Under the regulations, if a customer exercises a compensation-related option, a broker is permitted, but not required, to adjust basis of the acquired stock for any amounts included as compensation income. Instructions to the Form 1040 (Schedule D) and other IRS forms and publications will be amended to remind a taxpayer that a reconciliation of basis may be required if the sale reported on a Form 1099-B is a sale of stock acquired through a stock grant or the exercise of a compensatory option. The IRS is exploring the possibility of adding an indicator on the Form 1099-B to denote a sale of compensation-related stock.

The definitions for the terms closing transaction and sale have been updated to be consistent with sections 1234 and 1234A and to accommodate the reporting of options granted or acquired on or after January 1, 2013. In particular, the cancellation, lapse, expiration, or other termination of an option will be a closing transaction, as will a cash settlement.

For an option that is a covered security, reporting requirements will depend on whether or not the option was physically settled. If an option is physically settled, the premium paid or received, as the case may be, will be used by the broker for the asset purchaser to adjust the basis of the purchased asset and by the broker for the asset seller to adjust reported proceeds. Publication 550, Investment Income and Expenses, contains a detailed explanation of the appropriate tax treatment of the exercise or lapse of an option. If an option that is a covered security is sold or is part of a closing transaction that does not entail physical settlement, a broker is required to report gross proceeds and whether the gain or loss is long-term or short-term. It should be noted that if a customer sells any option prior to expiration, including an option acquired prior to January 1, 2013, the regulations currently in effect already require a broker to report the gross proceeds from that sale except in cases in which an option is closed by offset.

If a customer receives a warrant or stock right in a section 305(a) distribution, a broker must determine the basis of the warrant or stock right by applying the rules described in sections 305 and 307.

Under section 6045(g), upon the sale of a debt instrument that is a covered security, a broker is required to report the adjusted basis of the debt instrument and whether any gain or loss is short-term or long-term. Pursuant to section 6045(g), the proposed regulations amend § 1.6045-1 to include a debt instrument in the definition of a specified security and a debt instrument acquired for cash in an account on or after January 1, 2013, in the definition of a covered security.

For purposes of § 1.6045-1, the proposed regulations define a debt instrument to include any instrument described in § 1.1275-1(d) and any instrument or position that is treated as a debt instrument under a specific provision of the Internal Revenue Code. This definition of a debt instrument applies whenever the term debt instrument, bond, debt obligation, or obligation is used anywhere in § 1.6045-1. Under the proposed regulations, solely for purposes of § 1.6045-1, a security classified as debt by the issuer is treated as a debt instrument. If the issuer has not classified the security, however, the security is not treated as a debt instrument unless the broker knows that the security is reasonably classified as debt under general Federal tax principles or that the instrument or position is treated as a debt instrument under a specific provision of the Internal Revenue Code.

Due to the difficulties in implementing a broker's reporting obligations under section 6045(g) that would arise with respect to debt instruments described in section 1272(a)(6) (debt instruments with principal subject to acceleration) that are acquired on or after January 1, 2013, the proposed regulations provide that a debt instrument described in section 1272(a)(6) is not a covered security.

If a debt instrument is acquired on or after January 1, 2013, a broker will be required to determine and account for original issue discount (“OID”), bond premium, acquisition premium, market discount, and principal payments to determine the adjusted basis of the debt instrument and whether any gain or loss upon the sale of the debt instrument is short-term or long-term. Further, a broker will be required to report the amount of any market discount that has accrued as of the date of a sale or transfer of a debt instrument.

Under § 1.6045-1(d)(6)(i) of the existing final regulations, a broker is not required to consider elections occurring outside the account. Consistent with this rule, a broker generally is required to calculate amounts relating to OID, bond premium, acquisition premium, and market discount by assuming that the customer has not made any elections with respect to the debt instrument. The proposed regulations, however, provide two exceptions to this general rule: (1) A broker must assume that a customer has elected to use the constant interest rate method under section 1276(b)(2) to determine the amount of accrued market discount; and (2) a broker must assume that the customer has elected under section 171 to amortize bond premium on a taxable debt instrument.

Both of these elections have the effect of minimizing the customer's ordinary income inclusion when compared with the alternatives available under the existing rules. It is also expected that prescribing which elections are to be ignored and which elections are assumed to be made will standardize, and therefore simplify, the information reporting required with respect to OID, bond premium, acquisition premium, and market discount.

The Treasury Department and the IRS recognize that the section 171 election assumption is inconsistent with the rule under section 6049 providing that a payor is not permitted to take premium into account for purposes of reporting a holder's interest or OID income on Form 1099-INT or 1099-OID each year. However, because the Treasury Department and the IRS believe that most holders will make a section 171 election to treat the premium as an offset to ordinary income rather than as a capital loss, the Treasury Department and the IRS believe that the section 171 election assumption will result in fewer instances in which a customer will need to reconcile the reported adjusted basis number to the proper number.

In general, the proposed regulations will result in the following outcomes for a debt instrument:

a. If a debt instrument is sold prior to maturity, a broker will report any accrued market discount as of the sale date based on a constant interest rate.

b. Except as provided in c below, a broker must determine a customer's basis in a debt instrument by computing any OID, bond premium, or acquisition premium using the default method described in the relevant provisions of the Code or regulations. A broker also must adjust the basis for any principal payments received.

c. If a taxable debt instrument has bond premium, a broker must assume a customer has elected current amortization when computing the amount of the customer's basis.

A broker generally must use a consistent accrual period to determine the accruals of discount or premium on a debt instrument. If a debt instrument has both OID and market discount, the accrual period used for the OID computation must be used for the market discount computation. In all other situations, a broker must use the shorter of an annual accrual period or a period that matches the frequency of regular coupon or principal payments.

The rules in § 1.6045-1(n) only apply for purposes of a broker's reporting obligation under section 6045. A customer can use any method or make any election permitted under the relevant provisions of the Code and regulations and is not bound by the assumptions that the broker uses to satisfy the broker's reporting obligations under section 6045. For example, even though a broker will compute and report any accrued market discount on a debt instrument by assuming that a customer made the constant yield election under section 1276(b)(2), the customer can determine the amount of accrued market discount using ratable accrual as described in section 1276(b)(1).

Notwithstanding the information reported by a broker, a customer is still required to comply with all relevant provisions of the Code and regulations. For example, if a customer sells a debt instrument at a loss in one account with Broker A and reacquires a substantially identical debt instrument in a different account with Broker B within 30 days of the loss transaction, Broker A is not required to apply the wash sale rules under section 1091 when reporting the sale. However, the customer is required to properly apply the rules of section 1091 to defer some or all of the loss and must make appropriate basis adjustments.

If a customer uses an assumption or method different from the assumption or method used by the broker to determine a debt instrument's adjusted basis or other information for purposes of the Form 1099-B sent to the customer, the customer must reconcile the amount reported on the Form 1099-B to the amount reported on the customer's tax return.

Under § 1.6045-1(d)(5) of the final regulations relating to stock, a broker may choose to report gross proceeds from the sale of a security as the entire proceeds from the sale or as the proceeds reduced by the commissions and transfer taxes related to the sale. Commenters requested that the regulations remove this choice in order to standardize broker reporting on Form 1099-B and taxpayer reporting on Form 1040. The proposed regulations adopt this request and require brokers to reduce reported gross proceeds by commissions and transfer taxes related to a sale.

Under § 1.6045-1(d)(6) of the final regulations relating to stock, a broker currently must adjust basis reported for an organizational action taken by an issuer of a security during the period the broker has custody of the security. For a transferred security, the regulations exclude adjustments for organizational actions taken on the transfer settlement date. The proposed regulations amend this exclusion to clarify that the exclusion applies only to the broker receiving custody of a transferred security. The proposed regulations require that a broker transferring a security reflect all necessary adjustments for organizational actions taken through and on the transfer settlement date when completing a transfer statement.

If a specified security is transferred between brokers, the transferring broker must provide the receiving broker with certain information related to the transferred security that will enable the receiving broker to properly report under section 6045. The existing regulations under § 1.6045A-1(b)(1) list information that must be reported for a transfer of any specified security. The proposed regulations under § 1.6045A-1 modify this existing list by adding information about whether the security was acquired through an equity-based compensation arrangement.

Because debt instruments and options are being added to the definition of specified security under proposed changes to § 1.6045-1(a)(14), the information required to be provided for stock under § 1.6045A-1(b)(1) also will be required to be provided for debt instruments and options. Further, additional data specific to the transfer of a debt instrument or an option is required to be provided. This additional data falls into two broad categories: (1) Data that adequately identifies the instrument; and (2) data that is specific to the particular customer, particularly trade date and price or premium.

This additional information is required to enable a broker that receives a debt instrument pursuant to a transfer to compute OID, market discount, bond premium, or acquisition premium. The description of the payment terms may be done in any manner that fully describes the debt instrument. The information can be in the form of a table of payments, or may be a description of the payment terms. The use of a single identifier, such as a CUSIP number, that can be used by the transferee broker to identify the security and its related payment terms is also an acceptable means of providing the additional information to the transferee broker.

For an option, a transfer statement must include the date the option was granted or acquired, the amount of the premium, and whether the premium was paid or received. The data also must include any other information required to describe fully the option. This information may be a description of the relevant terms, or it may be an identifier, such as a CUSIP or Options Clearing Corporation number or code that can be used by the transferee broker to identify the security and its related terms.

Under § 1.6045B-1, if the issuer of a specified security takes an organizational action that affects the basis of the security, the issuer must file an issuer return. A commenter asked for clarification about how this rule applies to option writers, because an organizational action usually is initiated by the issuer of the security underlying an option. The proposed regulations amend § 1.6045B-1 to provide rules for certain option writers if there is an organizational action. If the organizational action results in an option writer replacing the original option contract with a different number of option contracts, the option writer must prepare an issuer return as required by § 1.6045B-1.

These regulations are proposed to take effect when published in the Federal Register as final regulations. In general, the regulations regarding reporting of basis and whether any gain or loss on a sale is long-term or short-term under section 6045(g) are proposed to apply to debt instruments acquired on or after January 1, 2013. The regulations regarding reporting of gross proceeds, basis, and whether any gain or loss on a sale is long-term or short-term under section 6045(h) are proposed to apply to options granted or acquired on or after January 1, 2013.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. 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 this regulation.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this regulation will not have a significant economic impact on a substantial number of small entities, because any effect on small entities by the rules proposed in this document flows directly from section 403 of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 (2008)).

Section 403(a) of the Act modifies section 6045 to require that brokers report the adjusted basis of the securities and whether any gain or loss with respect to the securities is long-term or short-term when reporting the sale of a covered security. The Act also requires gross proceeds reporting for options. It is anticipated that these statutory requirements will fall only on financial services firms with annual receipts greater than $7 million and, therefore, on no small entities. Further, in implementing the statutory requirements, the regulation proposes to limit reporting to information required under the Act.

Section 403(c) of the Act added section 6045A, which requires applicable persons to furnish a transfer statement in connection with the transfer of custody of a covered security. The proposed modifications to § 1.6045A-1 effectuate the Act by giving the broker who receives the transfer statement the information necessary to determine and report adjusted basis and whether any gain or loss with respect to a debt instrument or option is long-term or short-term as required by section 6045 when the security is subsequently sold. Consequently, the regulation does not add to the impact on small entities imposed by the statutory scheme. Instead, it limits the information to be reported to only those items necessary to effectuate the statutory scheme.

Section 403(d) of the Act added section 6045B, which requires issuer reporting by all issuers of specified securities regardless of size and even when the securities are not publicly traded. The proposed modifications to § 1.6045B-1 limit reporting to the additional information for options necessary to meet the Act's requirements. Additionally, the regulation, as modified, retains the rule that permits an issuer to report each action publicly instead of filing a return and furnishing each nominee or holder a statement about the action. The regulation therefore does not add to the statutory impact on small entities but instead eases this impact to the extent the statute permits.

Therefore, because this regulation will not have a significant economic impact on a substantial number of small entities, a regulatory flexibility analysis is not required. The Treasury Department and IRS request comments on the accuracy of this statement. Pursuant to section 7805(f) of the Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are timely submitted to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed regulations and how they can be made easier to understand. The IRS and Treasury Department further request comments about suggested changes or improvements to sections of § 1.6045-1 that are not specifically affected by the proposed regulation. The IRS and Treasury Department also request comments on the accuracy of the certification that the regulation in this document will not have a significant economic impact on a substantial number of small entities. All comments will be available for public inspection and copying.

A public hearing has been scheduled for Friday, March 16, 2012, beginning at 10 a.m. in the IRS Auditorium, 1111 Constitution Avenue NW., Washington, DC. Due to building security procedures, visitors must enter through the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by February 23, 2012 and submit an outline of the topics to be discussed and the time to be devoted to each topic (a signed original and eight (8) copies) by Friday, February 24, 2012. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal author of these proposed regulations is Pamela Lew, Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and the Treasury Department participated in their development.

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

The Federal Emergency Management Agency (FEMA) proposes to make determinations of BFEs and modified BFEs for each community listed below, in accordance with section 110 of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4104, and 44 CFR 67.4(a).

These proposed BFEs and modified BFEs, together with the floodplain management criteria required by 44 CFR 60.3, are the minimum that are required. They should not be construed to mean that the community must change any existing ordinances that are more stringent in their floodplain management requirements. The community may at any time enact stricter requirements of its own or pursuant to policies established by other Federal, State, or regional entities. These proposed elevations are used to meet the floodplain management requirements of the NFIP and also are used to calculate the appropriate flood insurance premium rates for new buildings built after these elevations are made final, and for the contents in those buildings.

Comments on any aspect of the Flood Insurance Study and FIRM, other than the proposed BFEs, will be considered. A letter acknowledging receipt of any comments will not be sent.

National Environmental Policy Act. This proposed rule is categorically excluded from the requirements of 44 CFR part 10, Environmental Consideration. An environmental impact assessment has not been prepared.

Regulatory Flexibility Act. As flood elevation determinations are not within the scope of the Regulatory Flexibility Act, 5 U.S.C. 601-612, a regulatory flexibility analysis is not required.

Executive Order 12866, Regulatory Planning and Review. This proposed rule is not a significant regulatory action under the criteria of section 3(f) of Executive Order 12866, as amended.

Executive Order 13132, Federalism. This proposed rule involves no policies that have federalism implications under Executive Order 13132.

Executive Order 12988, Civil Justice Reform. This proposed rule meets the applicable standards of Executive Order 12988.

Accordingly, 44 CFR part 67 is proposed to be amended as follows:

Congress authorized Federal regulation of gas pipeline facilities and PHMSA has statutory authority to prescribe safety standards and practices for gas pipeline facilities. That authorization is codified in the Pipeline Safety Regulations (PSR) (49 U.S.C. 60101 et seq. ), a series of statutes that are administered by the DOT, PHMSA.

On October 24, 1992, Congress enacted the Pipeline Safety Act (PSA) of 1992 (Pub. L. 102-508). Section 104 of the PSA (codified as amended at 49 U.S.C. 60110) stated, in relevant part:

(1) Not later than 18 months after the date of the enactment of this subsection, the Secretary [of Transportation] shall issue regulations prescribing the circumstances, if any, under which operators of natural gas distribution systems must install excess flow valves in such systems. In prescribing such circumstances, the Secretary shall consider—

(A) The system design pressure and the system operating pressure;

(B) The types of customers to which the distribution system supplies natural gas, including hospitals, schools, and commercial enterprises;

(C) The technical feasibility and cost of the installation of such valves;

(D) The public safety benefits of the installation of such valves;

(E) The location of customer meters; and

(F) Such other factors as the Secretary determines to be relevant.

Section 104 further stated, in relevant part:

(2) Not later than two years after the date of the enactment of this subsection, the Secretary [of Transportation] shall issue regulations requiring operators of natural gas distribution systems to notify, in writing, their customers with lines in which excess flow valves are not required by law, but can be installed in accordance with the performance standards developed under paragraph (4)—

(A) Of the availability of excess flow valves for installation in such systems,

(B) Of any safety benefits to be derived from the installation, and

(C) Of any costs associated with the installation.

Such regulations shall provide that, except in circumstances under which the installation is required under paragraph (1), excess flow valves shall be installed at the request of a customer if the customer will pay all costs associated with the installation.

Finally, section 104 stated, in relevant part:

(3) Not later than 18 months after the date of the enactment of this paragraph, the Secretary [of Transportation] shall develop standards for the performance of excess flow valves used to protect lines in natural gas distribution systems. Such standards shall be incorporated into any regulations issued by the Secretary under this subsection. All installations of excess flow valves shall be made in accordance with such standards.

On June 20, 1996 (61 FR 31449), PHMSA's predecessor agency, the Research and Special Programs Administration (RSPA), issued a final rule on the installation of EFVs in single-family-residence service lines. RSPA determined that the mandatory installation of EFVs was not justified under any circumstances, primarily because the costs of such a requirement far exceeded the benefits. RSPA also adopted a standard for the performance and installation of EFVs in single-family-residence service lines (codified at 49 CFR 192.381). In a later final rule, dated February 3, 1998 (63 FR 5464), RSPA adopted a requirement that written notice about the availability of EFVs be provided to customers with single-family-residence service lines that operate at or above 10 pounds per square inch gauge (psig), and that those customers be further advised that the operator would install an EFV at the customer's expense.

Part 192 of the PSR in combination with measures mandated in the Distribution Integrity Management Program (DIMP) and continual monitoring of leaks has increased pipeline safety significantly in recent years. PHMSA continues to review the way pipelines are regulated and adopt strategies to improve pipeline safety. Programs such as damage prevention, public awareness, and operator qualifications have enhanced pipeline safety. Unfortunately, on rare occasions, the layers of protection fail and the results can have serious consequences.

On July 7, 1998, a natural gas explosion occurred at a single family residence in South Riding, Virginia, killing one person and injuring three others. NTSB investigated the incident and determined that the cause of the explosion was a service line failure. NTSB further concluded that an EFV would have cut off the flow of gas in the service line and prevented the explosion. Citing that conclusion, on June 22, 2001, the NTSB issued Safety Recommendation P-01-2 (SR P-01-2). SR P-01-2 recommended “that excess flow valves be installed in all new and renewed gas service lines, regardless of a customer's classification, when the operating conditions are compatible with readily available valves.”

On December 29, 2006, Congress enacted the Pipeline Inspection, Protection, Enforcement, and Safety (PIPES) Act of 2006 (Pub. L. 109-468). Section 9 of the PIPES Act (codified at 49 U.S.C. 60109(e)) stated that “[n]ot later than December 31, 2007, the Secretary [of Transportation] shall prescribe minimum standards for integrity management programs for distribution pipelines.” Section 9 further stated that those:

[M]inimum standards shall include a requirement for an operator of a natural gas distribution system to install an excess flow valve on each single family residence service line connected to such system if—

(i) The service line is installed or entirely replaced after June 1, 2008;

(ii) The service line operates continuously throughout the year at a pressure not less than 10 pounds per square inch gauge;

(iii) The service line is not connected to a gas stream with respect to which the operator has had prior experience with contaminants the presence of which could interfere with the operation of an excess flow valve;

(iv) The installation of an excess flow valve on the service line is not likely to cause loss of service to the residence or interfere with necessary operation or maintenance activities, such as purging liquids from the service line; and

(v) An excess flow valve meeting performance standards developed under section 60110(e) of title 49, United States Code, is commercially available to the operator, as determined by the Secretary.

On December 4, 2009, (74 FR 63934) PHMSA issued a final rule with minimum standards for distribution pipeline integrity management. Those standards included a mandatory installation requirement for EFVs (codified at 49 CFR 192.383):

(b) Installation required. An EFV installation must comply with the performance standards in § 192.381. The operator must install an EFV on any new or replaced service line serving a single-family residence after February 12, 2010, unless one or more of the following conditions is present:

(1) The service line does not operate at a pressure of 10 psig or greater throughout the year;

(2) The operator has prior experience with contaminants in the gas stream that could interfere with the EFV's operation or cause loss of service to a residence;

(3) An EFV could interfere with necessary operation or maintenance activities, such as blowing liquids from the line; or

(4) An EFV meeting performance standards in § 192.381 is not commercially available to the operator.

A requirement that operators report the number of installed EFVs on annual basis was also included in that regulation.

In Section 9 of the PIPES Act, Congress mandated that EFVs be installed on service lines serving single family residences. Other kinds of service lines, including those that serve branched single family residences, apartment buildings, other multi-residential dwellings, commercial properties, or industrial facilities, are not subject to that statutory mandate, even though such lines are susceptible to the same risks as single-family-residence service lines. Though Congress has not expressly mandated the use of EFVs to applications other than single-family residences, PHMSA has broad authority under 49 U.S.C. 60102 to prescribe safety standards requiring that EFVs be installed on those lines in appropriate cases. Operators of gas distribution systems can also expand the use of EFVs to applications other than service lines for single family residences as part of their broader obligation to develop and implement an integrity management program (49 CFR part 192 subpart B).

In June and August of 2009, PHMSA held public meetings on NTSB's recommendation in SR P-01-2 to expand the use of EFVs. The meeting participants included the National Association of Regulatory Utility Commissioners, the National Association of Pipeline Safety Representatives, the International Association of Fire Chiefs (IAFC) the National Association of State Fire Marshals (NASFM), natural gas distribution operators, trade associations, manufacturers, and the Pipeline Safety Trust. As a result of these meetings, PHMSA issued a report titled, “Interim Evaluation: NTSB Recommendation P-01-2 Excess Flow Valves in Applications Other Than Service Lines Serving One Single Family Residence” ( Interim Evaluation) (available in Docket No.: PHMSA-2011-0009 at http://www.regulations.gov. ). The Interim Evaluation incorporates input from the meeting participants and addresses issues related to the installation of EFVs on branched service lines serving more than one single family residence, multi-family residential dwellings such as apartments, commercial services and industrial applications on systems which operate above 10 psig where outside force damage could occur to a DOT regulated service. The report provides background on NTSB's recommendations and PHMSA's regulatory and non-regulatory initiatives targeted at reducing the occurrence of failures on service lines. The Interim Evaluation also describes the characteristics of U.S. distribution systems, EFVs' safety function to mitigate the consequences of an incident, industry's operating experience, the technical challenges, and the commercial availability of EFVs for installation in services other than single family residences. The report explores alternatives ( e.g., curb valves) to the installation of an EFV and discusses the information that is needed to develop an economic analysis. The report also considers the need for adoption and enhancement of EFV technical standards or guidelines.

Curb valves, essentially a service valve, often are installed close to the main for larger services which serve public buildings such as schools, churches, commercial buildings, as well as services with indoor residential meters. The location and operability of these valves in an emergency are relevant in terms of their use as a viable alternative to EFVs.

In recent years, PHMSA has expanded regulatory requirements aimed at reducing the risk of pipeline incidents. These measures have in large part been directed to lowering the likelihood of failures by preventing damage to pipelines. EFVs do not prevent accidents but do mitigate the consequences of incidents by greatly reducing the amount of gas released to the atmosphere when significant damage occurs. EFVs help mitigate the potential consequences of a high rate, high volume gas release. Where installed, EFVs are complementary to damage prevention programs and other pipeline safety efforts that focus on preventing accidents caused by outside forces. The following reasons have been identified for expanding the use of EFVs to additional classes of service:

• Likelihood of EFV mitigating the consequences of an incident: Based on incident report information submitted to PHMSA, during March 2004-December 2009, approximately 148 out of a total of 914 incidents (16%) were located on a service or meter/regulator set and potentially severe enough to trigger an EFV if one were present. These incidents were reported as leaks with a puncture, rupture, or a catastrophic failure.

• Likelihood of an incident occurring on a service line other than a single family residence: Of the 148 incidents deemed to be candidates for prevention by an EFV in the report, 87 (59%) were serving customers other than single family residences. Service lines serving other than a single-family residence represent approximately 30% of new and replaced natural gas service lines. Therefore, there is a much greater probability that failure of a service line other than a single family residence will result in an incident.

• Limitations to the Effectiveness of Damage Prevention Efforts to Prevent an Incident: The frequency of service line incidents caused by excavation damage has decreased, but there has not been a corresponding reduction in consequences, ( i.e., in terms of fatalities, injuries, fires, explosion or property damage). Furthermore, one-third of the incidents in which an EFV might have mitigated the consequences and for which the cause was listed as excavation damage occurred after a One- Call notification. While incidents occur less frequently when a One-Call notification is placed, the One-Call notification system does not eliminate incidents. PHMSA's evaluation found that the pipeline was marked in 80% of incidents where the operator received prior notification. Such incidents could be the result of unmapped facilities, un-locatable facilities, mismarked pipelines, excavators that fail to call in, excavators that are exempt from one-call requirements and do not call in, inadequate depth-of-cover, etc.

• Difficulty in Preventing Incidents Caused by Natural Forces and Other Outside Forces: Of the incidents that were candidates for EFV mitigation and where EFVs are not currently required, almost 8% were caused by natural forces and 25% were caused by other, non-excavation outside forces. Operators have less ability to prevent incidents from occurring due to these causes than from excavation damage.

• Views of the NASFM and the IAFCs: The associations' position on the installation of EFVs is that uncontrolled gas leaks pose a significant hazard to firefighters, emergency responders, and the public. According to these associations, the presence of an EFV can be a critical factor in suppressing a gas leak at the scene of an incident, where a first responder's ability to control gas flow is limited and dependent on the arrival of gas company personnel. While not frequently activated, an EFV is a critical tool in the event of a large volume release.

• Commercial Availability of EFVs for Other Applications: The EFV device is relatively simple and experience demonstrates that they operate reliably when sized appropriately for operating conditions. The principles of operation remain the same as sizes become larger and trip points are increased. EFVs are currently manufactured for the vast majority of services.

PHMSA has identified several situations where the installation of an EFV may not be technically practicable. These technical challenges are described in detail in Section 9 of the Interim Evaluation, “Technical Challenges Associated with Use of EFVs in Non-Single Family Residence Service.” In these situations, the installation of a readily-accessible curb valve and box might serve a similar safety function to an EFV. Although not instantaneous, a curb valve could facilitate the manual shut-off of natural gas service in an emergency and provide an alternative solution to an EFV. However, use of curb valves requires consideration of additional factors such as:

• EFVs shut-off the flow of gas instantaneously when the gas flow exceeds design limits. Curb valves must be manually closed. The incident may have already occurred before the curb valve can be closed.

• When the service is very short, the curb valve may be too close to a burning building to be safely operated.

• Curb valves can be used to shut-off the flow of gas under any flow conditions. EFVs are intended to shut-off the flow of gas when there has been a catastrophic failure to the service or its appurtenances. In situations when less severe damage occurs, an incident may be prevented by closing the curb valve to stop the flow of gas.

PHMSA has identified several issues related to the costs and benefits associated with mandatory EFV or curb valve installation that should be considered when performing the economic analysis (See Section 10 of the Interim Evaluation “Economic Analysis Considerations”). The expected benefits are preventing or reducing incident consequences. The magnitude of the expected benefits is believed to be dependent on the estimated number of incidents impacted and incident consequences avoided if an EFV or curb valve had been installed on a service. The primary incident consequences that would be reduced are deaths, injuries, and property damage. Additional benefits would be an expected reduction in the number of fires, explosions, and evacuations occurring at incidents, and the quantity of gas lost during incidents. Since the subset of incidents whose consequences potentially could have been mitigated if an EFV was installed versus those that potentially could have been mitigated by a curb valve is different, the magnitude of the expected benefits will also be different. 1

Expected costs include the installation and maintenance of the EFV or curb valve. Installation costs include material, labor, design, supply chain management, and training. For EFVs, maintenance costs include the cost of analyzing the cause of failure and the cost of replacing an EFV and any other associated costs. Possible EFV failures include false closure (closed when not intended), failure to close (did not close when service was severely damaged), and failure to reset (EFV did not reset after service was put back in operation). Operators may also need to replace EFVs when a customer's load increases above the capacity of the currently installed EFV. For curb valves, maintenance costs include periodically inspecting the curb valve to ensure it is operational and inspecting the box to ensure it is free of debris. Curb boxes may also require adjusting after surface condition occurrences such as road resurfacing or landscaping.

PHMSA has identified several potential areas in which enhanced or expanded technical standards and guidance for the performance, operation, installation, identification, and testing of EFVs could be valuable regardless of whether PHMSA decides to expand the classes of services requiring an EFV (See Section 4, “Technical Standards and Guidelines for EFVs” of the Interim Evaluation ). Currently, § 192.381 requires operators to use EFVs which are manufactured and tested by the manufacturer according to an industry specification or to the manufacturer's written specification.

While not incorporated by reference into the pipeline safety regulations, there are three technical standards that address the specification, manufacturing, and testing of EFVs. These standards are:

i. “Manufacturers Standardization Society (MSS) SP-115-2006—Design, Performance & Test.”  2

ii. “ASTM International (ASTM) F1802-04—Standard Test Method for Performance Testing of Excess Flow Valves.”  3

iii. “ASTM International (ASTM) F2138-01—Standard Specification for Excess Flow Valves for Natural Gas Service.”  4

These standards may not be applicable to all sizes and pressure ratings of EFVs that would be needed if they were mandated for use in applications other than single family residences and would likely need to be expanded to cover other sizes and pressure ratings. A number of factors affect the performance and reliability of EFVs such as: installation location, configuration, selection, sizing, identification, installation method, and operation. ASTM International (ASTM) F2138 “Standard Specification for Excess Flow Valves for Natural Gas Service” addresses some of these factors at a high level, but not in depth.

These standards may need to be expanded to better address the selection, installation, and performance testing of EFVs for a variety of design considerations and service line configurations. Operating conditions and system configurations under which EFVs are not compatible or potentially not advisable may need to be identified and integrated into the guidelines. PHMSA's recommended approach is to select and size EFVs with a trip point less than, but closest to, the gas flow rate of a full service line pipe break.

If these standards and guidance are enhanced or developed, PHMSA may consider if they are adequate to be incorporated by reference into the Pipeline Safety Regulations. Incorporating standards by reference provides PHMSA a mechanism to ensure that any changes to the standards do not lessen public safety. Lastly, the Interim Evaluation identifies areas where additional data is needed to further review EFV issues and to perform a cost-benefit analysis.

PHMSA will consider all comments received from the ANPRM plus any additional information available, and will finalize the Interim Evaluation after publication of this ANPRM. The Interim Evaluation, which was peer reviewed by PHMSA, NTSB and representatives of National Association of Regulatory Utility Commissioners, the National Association of Pipeline Safety Representatives, IAFC, NASFM, natural gas distribution operators, trade associations and the Pipeline Safety Trust will document the basis for any PHMSA decision and response to NTSB with respect to the EFV issue.

Although not mandated by Congress, PHMSA, in a direct response to the NTSB recommendation P-01-2, seeks public comment regarding the technical challenges, and the potential costs and the potential benefits of any expanded requirement to use EFVs in applications other than service lines serving single family residences. PHMSA additionally seeks comment as to whether to establish and/or adopt technical standards or guidance for the performance, specification, manufacturing, testing, installation, identification, and operation of EFVs. Specifically, PHMSA is asking for comment on the following issues:

1. Technical Challenges—Operators have identified technical challenges to installing EFVs on services other than single family residences. These challenges include (1) the effect of changing gas usage patterns; (2) snap loads; (3) business-critical gas supply applications; (4) system configuration; (5) pressure ratings; and (6) size of commercially available EFVs.

a. Does Section 9 “Technical Challenges Associated with Use of EFVs in Non-Single Family Residence Service” fully and accurately explain the technical challenges of EFVs in these other applications?

b. Are there additional technical challenges, obstacles to implementation, or reliability issues that should be considered for these other applications?

c. What are the technical challenges to installing and maintaining a curb valve when an EFV is not technically feasible?

d. What are the limitations to using a curb valve to stop the flow of gas during emergency situations where EFVs are not technically feasible?

e. What additional cases may exist where the installation of EFVs may not be feasible or practical other than those listed in Section 10.3.1, “Feasibility/Practicality”?

2. Economic Analysis Considerations (Potential Costs and Benefits)—In addition, PHMSA requests commenters to provide information and supporting data related to: the potential costs of modifying the existing regulatory requirements pursuant to the commenters suggestions; the potential quantifiable safety and societal benefits of modifying the existing regulatory requirements; the potential impacts on small business of modifying the existing regulatory requirements; and the potential environmental impacts of modifying the existing requirements.

The economic analysis of installation of EFVs on services other than single family residences involves challenges related to quantification and monetization of costs and/or benefits including distributional affects. It is important as part of the economic analysis to consider both benefits and costs that are distributed among sub-populations of particular concern so that decision makers can properly consider them along with the effects on economic efficiency. Therefore, it will be important to consider input from a variety of stakeholders. OMB A-4 (titled “REGULATORY ANALYSIS”) provides additional information about benefit-cost analyses and cost-effectiveness analyses. Any cost benefit analysis prepared in response to this ANPRM will be consistent with the guidance outlined in OMB Circular A-4, and any related policies.

a. Categories of Services To Be Considered—If the requirement for EFVs were expanded to other categories of services, would the classification described in Section 10.3.2, “Categories of Services” in the Interim Report be practicable to implement? If not, why not?

b. Cost Factors—Are there any other issues related to costs associated with mandatory EFV or curb valve installation that should be considered when performing the benefit-cost analysis, other than those listed in Section 10.4, “Defining Cost Factors” of the Interim Report ?

c. Who should be expected to pay for the installation and maintenance of EFV or other alternative and why?

d. Are there any opportunity costs associated with the installation of EFVs? Does there have to be a particular time of day when installation occurs? If so, why? How long does installation take?

e. Benefits Factors:

i. Are there any other issues related to benefits associated with mandatory EFV or curb valve installation that should be considered when performing the benefit-cost analysis, other than those listed in Section 10.5 “Defining Benefit Factors” of the Interim Report ?

ii. Is the method used in Section 2.3.3, “PHMSA Evaluation of Data Related to Incidents on Services,” of the Interim Report appropriate to quantify the expected number of incidents or the consequences averted, and to evaluate the risks of such incident occurring? Do the parameters used to evaluate incidents for the likelihood of prevention by an EFV ( i.e. location of the leak (incidents on service lines), reported cause of the leak (leaks due to damage), maximum allowable operating pressure (MAOP) of the system (>10 PSIG),additional information about the leak's characteristics (large leaks and ruptures) and classification of customer (customers other than stand-alone service line serving a single family residence)) satisfactorily allow a conclusion to be made?

3. Technical Standards and Guidance for EFVs—OMB Circular A-119 “Federal Participation in the Development and Use of Voluntary Consensus Standards and in Conformity Assessment Activities” directs Federal agencies to utilize voluntary standards both domestic and international, whenever feasible and consistent with law and regulation. The current DOT regulation applicable to excess flow valve standards is 49 CFR 192.381 which requires excess flow valves to be manufactured and tested by the manufacturer according to an industry specification or to the manufacturer's written specification but does not prescribe a specification. Without a standard prescribing EFV specification, the possibility exists that EFVs could be installed that do not meet currently accepted specifications.

4. Additionally, a number of factors affect the performance and reliability of EFVs such as installation location, configuration, selection, sizing, or installation method. PHMSA has determined that current industry standards do not address these factors in detail. PHMSA therefore requests comment on industry standards to determine the need and availability of consensus standards for EFV utilization.

a. Should PHMSA incorporate by reference the following technical standards? If not, why not?

b. Are there any alternatives to the standards listed below?

i. “Manufacturers Standardization Society (MSS) SP-115-2006—Design, Performance & Test.”  5

ii. “ASTM International (ASTM) F1802-04—Standard Test Method for Performance Testing of Excess Flow Valves.”  6

iii. “ASTM International (ASTM) F2138-01—Standard Specification for Excess Flow Valves for Natural Gas Service.”  7

c. Are guidelines or technical standards needed for developing and if so, why?:

i. A standard approach to sizing, specifying, performance testing, and installing EFVs for a variety of design considerations and service line configurations.

ii. Criteria for identifying operating conditions and system configurations under which EFVs are not compatible or potentially not advisable.

In addition, PHMSA requests commenters to provide information and supporting data related to:

• The potential costs of modifying the existing regulatory requirements pursuant to the commenter's suggestions.

• The potential quantifiable safety and societal benefits of modifying the existing regulatory requirements.

• The potential impacts on small businesses of modifying the existing regulatory requirements.

• The potential environmental impacts of modifying the existing regulatory requirements.

Executive Orders 12866 and 13563 require agencies to regulate in the “most cost-effective manner,” to make a “reasoned determination that the benefits of the intended regulation justify its costs,” and to develop regulations that “impose the least burden on society.” We therefore request comments, including specific data if possible, concerning the costs and benefits of revising the pipeline safety regulations to accommodate any of the changes suggested in this ANPRM.

Executive Order 13132 requires agencies to assure meaningful and timely input by State and local officials in the development of regulatory policies that may have a substantial, direct effect on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. PHMSA is inviting comments on the effect a possible rulemaking adopting any of the amendments discussed in this document may have on the relationship between National Government and the States.

Under the Regulatory Flexibility Act of 1980 (5 U.S.C. 601 et seq. ), we must consider whether a proposed rule would have a significant economic impact on a substantial number of small entities. “Small entities” include small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations under 50,000. If your business or organization is a small entity and if adoption of any of the amendments discussed in this ANPRM could have a significant economic impact on your operations, please submit a comment to explain how and to what extent your business or organization could be affected.

The National Environmental Policy Act of 1969 (NEPA) requires Federal agencies to consider the consequences of Federal actions and to prepare a detailed statement analyzing whether the action significantly affects the quality of the human environment. Interested parties are invited to address the potential environmental impacts of this ANPRM. PHMSA is particularly interested in comments about compliance measures that would provide greater benefit to the human environment or alternative actions the agency could take that would provide beneficial environmental impacts.

Executive Order 13175 requires agencies to assure meaningful and timely input from Indian Tribal government representatives in the development of rules that “significantly or uniquely affect” Indian communities and that impose “substantial and direct compliance costs” on such communities. PHMSA invites Indian Tribal governments to provide comments on any aspect of this ANPRM that may affect Indian communities.

Under 5 CFR part 1320, PHMSA analyzes the paperwork burdens of any information collection required by a rulemaking. PHMSA invites comment on the need for collection of information and the associated paperwork burdens, if any.