The Federal Deposit Insurance Act (the FDI Act) requires that the deposit insurance assessment system be risk-based. 1 It defines a risk-based system as one based on an institution's probability of causing a loss to the Deposit Insurance Fund (the DIF), taking into account the composition and concentration of the institution's assets and liabilities and any other factors that the FDIC determines are relevant, the likely amount of any such loss, and the revenue needs of the DIF. The FDI Act allows the FDIC to “establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund.”  2

On February 7, 2011, the FDIC Board adopted a final rule that amended its assessment regulations, by, among other things, establishing a new methodology for determining assessment rates for large and highly complex institutions (the February rule). 3 4 The February rule eliminated risk categories for large institutions and combined CAMELS ratings and certain forward-looking financial ratios into one of two scorecards, one for highly-complex institutions and another for all other large institutions. The scorecards calculate a total score for each institution. 5 The total score is then converted to the institution's initial base assessment rate, which, after certain adjustments, results in the institution's total assessment rate. 6 To calculate the amount of the institution's quarterly assessment, the total base assessment rate is multiplied by the institution's assessment base and the result divided by four.

One of the financial ratios used in the scorecards is the ratio of higher-risk assets to Tier 1 capital and reserves. 7 Higher-risk assets are defined as the sum of construction and land development (C&D) loans, leveraged loans, subprime loans, and nontraditional mortgage loans. The February rule used existing interagency guidance to define leveraged loans, nontraditional mortgage loans, and subprime loans but refined the definitions to minimize reporting discrepancies. In arriving at these definitions, the FDIC took into account comments that were received in response to the two notices of proposed rulemaking that led to adoption of the February rule. 8

While institutions already reported C&D loan data in their quarterly reports of condition and income (the Call Reports and the Thrift Financial Reports or TFRs), they did not report the needed data for the other loans, thus requiring new line items in these reports. Therefore, on March 16, 2011, the Office of the Comptroller of the Currency, the Board of the Federal Reserve System, the Office of Thrift Supervision, the Treasury, and the FDIC (collectively, the agencies) published a Paperwork Reduction Act of 1995 (PRA) notice under normal PRA clearance procedures requesting comment on proposed revisions to the Call Reports, the TFRs, and the Federal Financial Institutions Examination Council (FFIEC) 002/002S reports that would provide the data needed by the FDIC to implement the February 2011 rule beginning with the June 30, 2011, report date (March PRA notice). 9

The agencies received 19 comments in response to the March PRA notice. Of these 19 comments, 17 addressed the new items for subprime and leveraged loans added to Call Reports and TFRs. The commenters stated that institutions generally do not maintain data on these loans consistent with the definitions used in the February rule and would be unable to report the required data by the June 30, 2011, report date. These data availability concerns had not been raised during the rulemaking process leading up to the February rule. 10

As a consequence of this unexpected difficulty, the agencies applied to the Office of Management and Budget (OMB) under emergency clearance procedures to allow institutions to identify and report subprime and leveraged loans and securitizations originated or purchased prior to October 1, 2011, using either their existing internal methodologies or the definitions contained in existing supervisory guidance. The reporting options are referred to as “transition guidance” and are outlined in the General Instructions for Schedule RC-O of the Reports of Condition and Income, Memorandum Items 6 through 15 for leveraged loans and subprime loans. Because the assessment-related reporting revisions needed to remain in effect beyond the limited approval period associated with an emergency clearance request, the agencies, under the auspices of the FFIEC, submitted the reporting revisions under normal PRA clearance procedures and requested public comment on July 27, 2011 (July PRA notice). 11

The agencies collectively received four comments in response to the July PRA notice before the comment period closed on September 26, 2011. The commenters recommended extending the transition guidance for reporting subprime and leveraged loans until more workable and accurate definitions were developed. The commenters requested that the definitions of subprime and leveraged loans be revised because they do not effectively measure the risk that the FDIC intended to capture. Rather, commenters maintained that the definitions would capture loans that are not subprime or leveraged (i.e., are not higher-risk assets) and require burdensome reporting that could result in inconsistencies among banks. A joint comment letter from three industry trade groups also recommended that the definition of nontraditional mortgage loans be revised.

On September 28, 2011, the FDIC informed large and highly complex institutions via email (followed by changes to Call Report instructions) that the deadline for the transition guidance would be extended to April 1, 2012, and that the FDIC would review the definitions of subprime and leveraged loans to determine whether changes to the definitions would alleviate commenters' concerns without sacrificing accuracy in risk determination for deposit insurance pricing purposes.

As part of its review, the FDIC considered all comments related to the higher-risk asset definitions that were submitted in response to the March and July PRA notices. The FDIC also engaged in extensive discussions with the industry and industry trade groups over the last few months to better understand their concerns and to solicit potential solutions to these concerns.

The FDIC proposes amendments to the assessment system for large and highly complex institutions that would: (1) Revise the definitions of certain higher risk assets, specifically leveraged loans, which would be renamed “higher-risk C&I loans and securities,” and subprime consumer loans, which would be renamed “higher-risk consumer loans and securities”; (2) clarify the timing of classifying an asset as higher risk; (3) clarify the way securitizations (including those that meet the definition of nontraditional mortgage loans) are to be identified; and (4) further define terms that are used in the large bank pricing rule. The names of the categories of assets included in the higher-risk assets to Tier 1 capital and reserves ratio have been changed to avoid confusion between the definitions used in the deposit insurance assessment regulations and the terms that generally are used within the industry and in other regulatory guidance. The definitions of C&D loans would not be amended under the NPR and these loans would continue to be defined as in the February rule. Nontraditional mortgage loans would continue to be defined as in the February rule, but the NPR clarifies how securitizations of nontraditional mortgage loans would be identified under the definition. The FDIC believes that the proposed amendments would result in more consistent reporting, better reflect risk to the FDIC, significantly reduce reporting burden, and satisfy many of the concerns voiced by the industry after adoption of the February 2011 rule.

The proposed amendments would be effective on October 1, 2012, predicated on changes to the Call Report. The effective date is discussed in detail in Section F below.

The FDIC uses the amount of an institution's higher-risk assets to calculate the institution's concentration score and total score. The concentration measure captures the institution's lending (and securities owned) in higher-risk areas; concentrations in these higher-risk assets contributed to the failure of some institutions during the recent financial crisis and economic downturn.

Under the proposal, higher-risk commercial and industrial (C&I) loans and securities would include:

• Any commercial loan (funded or unfunded, including irrevocable and revocable commitments) owed by a borrower to the evaluating depository institution with an original amount greater than $5 million if the conditions specified in (a) or (b) below are met as of origination, or, if the loan has been refinanced, as of refinance, and the loan does not meet the asset based lending (ABL) exclusion or the floor plan line of credit exclusion (discussed in Appendix C).

(a)(i) The purpose of any of the borrower's debt (whether owed to the evaluating insured depository institution or another lender) that was incurred within the previous seven years was to finance a buyout, acquisition or capital distribution and such debt was material; 12 13 and

(ii) The ratio of the borrower's total debt to trailing twelve-month EBITDA ( i.e., operating leverage ratio) is greater than 4 or the ratio of the borrower's senior debt to trailing twelve-month EBITDA ( i.e., operating leverage ratio) is greater than 3;  14 or

(b) Any of the borrower's debt (whether owed to the evaluating institution or another lender) is designated as a highly leveraged transaction (HLT) by a syndication agent.

• All securities held by the evaluating institution that are issued by a commercial borrower, if the conditions specified in (a) or (b) above are met, except securities classified as trading book; and

• All securitizations held by the evaluating institution that are more than 50 percent collateralized by commercial loans or securities that would meet the higher-risk C&I loans and securities definition if directly held by the evaluating institution, except securities classified as trading book.

The definition of a higher-risk C&I loan and security would exclude the maximum amount that is recoverable from the U.S. government, its agencies, or government-sponsored agencies under guarantee or insurance provisions, and loans that are fully secured by cash collateral. 15

An institution would be required to use information reasonably available to a sophisticated investor in reasonably determining whether a securitization meets the 50 percent threshold. 16 Information reasonably available to a sophisticated investor should include, but is not limited to, offering memorandums, indentures, trustee reports, and requests for information from servicers, collateral managers, issuers, trustees, or similar third parties. When determining whether a revolving trust or similar securitization would meet the threshold, an institution could use established criteria, model portfolios, or limitations published in the offering memorandum, indenture, trustee report or similar documents.

Sufficient information necessary for an institution to make a definitive determination may not, in every case, be reasonably available to the institution as a sophisticated investor. In such a case, the institution may exercise its judgment in making the determination. Nevertheless, the FDIC would retain the right to review and audit for compliance with the rule any determination that a securitization does not meet the 50 percent threshold.

In cases where a securitization is required to be consolidated on the balance sheet as a result of SFAS 166 and SFAS 167, and a large institution or highly complex institution has access to the necessary information, an institution may evaluate individual loans in the securitization on a loan-by-loan basis. Any loan within the securitization that meets the definition of a higher-risk asset would be reported as a higher-risk asset and any loan within the securitization that does not meet the definition of a higher-risk asset would not be reported as such. When making this evaluation, the institution would have to follow the transition guidance described in Appendix C, Section C. Once an institution evaluated a securitization for higher-risk asset designation on a loan-by-loan basis, it would have to continue to evaluate all securitizations for which it has the required information in a similar manner ( i.e., on a loan-by-loan basis). For securitizations for which the institution does not have access to information on a loan-by-loan basis, the institution would be required to determine whether the securitization meets the 50 percent threshold as described previously for other securitizations.

When an institution acquires a C&I loan or security, it would have to determine whether the loan or security meets the definition of a higher-risk C&I loan or security using the origination criteria and analysis performed by the original lender. If this information were unavailable, however, the institution would have to obtain recent, refreshed data from the borrower or other appropriate third-party. 17

Appendix C provides detailed definitions of many of the terms used in the foregoing definition.

In arriving at its proposal, the FDIC carefully reviewed the comments submitted in response to the March and July PRA notices on the leveraged loan definition contained in the February rule. Of the 19 respondents commenting on the March PRA notice, 17 raised concerns over the leveraged loan definition; 6 of the 8 respondents to the July PRA notice raised such concerns. Further, as the FDIC noted in the public comment file for the July PRA notice, the FDIC met with representatives of four industry trade groups and twice with large and highly complex institutions prior to the close of the comment period on the PRA notice.

Three industry trade groups commented on the July PRA notice that the minimum size for leveraged loans included in the February rule ($1 million or higher) is too low since it would capture a large number of small business loans that are not normally considered leveraged. These trade groups commented that the $1 million level overstates leveraged exposures and creates a significant reporting burden, since banks do not generally gather the data required to make a leveraged loan determination for these smaller loans. The commenters further noted that loans under $5 million are typically characterized by additional risk-reducing requirements, such as borrower's guarantees and additional collateral. When these risk-reducing mitigants are prevalent, relying solely on the debt-to-EBITDA test could be a less accurate measure of the risk of these borrowers.

The proposal would increase the threshold level to $5 million. The increased threshold would result in better identification of higher-risk C&I loans and would also reduce the reporting burden.

In response to the July PRA Notice, three banking industry trade groups in a joint letter to the FDIC stated that the definition of leveraged loans used in the February rule does not capture risk as intended and is not a reliable measure of a leveraged loan. They maintained that an institution's debt-to-EBITDA ratio is not, by itself, a reliable indicator of risk, particularly if the loans are asset based or are to companies or industries that traditionally have higher leverage levels. They added that the definition of leveraged loans in the February rule captures such a large portion of an institution's loan portfolio that it does not provide a meaningful differentiation of risk among institutions and creates a reporting burden. The trade groups suggested that considering the purpose of the loan in conjunction with the borrower's operating leverage ratio would result in more accurate identification of risk. 18

The proposed definition would combine a test of the borrower's operating leverage ratio with a purpose test, namely, that if the purpose of any of the borrower's debt (whether owed to the evaluating insured depository institution or another lender) was to finance a buyout, acquisition, or capital distribution, and that debt was material, a C&I loan or security to that borrower would be classified as higher risk. The purpose of the debt would help identify risk to the FDIC and reflect the method used internally by most banks to identify higher-risk loans. The purpose test would identify those borrowers with certain higher-risk characteristics, such as a heavy reliance on either enterprise value or improvement in the borrower's operating efficiencies. 19

The industry suggested in a comment letter to the July PRA Notice and in subsequent discussions that banks should look back to the original purpose of debt only if the debt was originally incurred during the previous five years. Under the proposal, however, banks would have to look back to the original purpose of any of the borrower's debt incurred during the previous seven years. During the most recent buyout boom of the mid to late 2000s, a seven-year maturity was often the longest dated maturity for loans that facilitated a leveraged buyout. Under the proposal, where the purpose test is met, loans originated in 2007 (near the end of the leveraged buyout boom) to a borrower that remains above the proposed debt-to-EBITDA ratio thresholds would continue to be classified as higher-risk assets, even when they are refinanced; loans that are refinanced from the same time period but where the borrower has de-levered through either EBITDA growth or debt repayment would not be defined as higher-risk under the proposal.

Under the proposal, debt to finance a buyout, acquisition, or capital distribution would also have to be material. Such debt would be material if it resulted in a 20 percent or greater increase anytime within 12 months in the total funded debt of the borrower. 20 During discussions with the industry, bankers have suggested that total funded debt should have to increase by 50 percent or more to be considered a material buyout, acquisition, or capital distribution. Under the proposal, only a 20 percent increase is required. A 20 percent increase would be high enough to ensure that the FDIC does not capture transactions that do not materially increase the risk profile of the borrower, but low enough to capture transactions such as capital distributions that benefit the borrower's shareholders while increasing the risk to the lending institutions.

The joint comment letter to the July PRA Notice also noted that collateral was not appropriately considered in the leveraged loan definition included in the February rule. The commenters stated that loans would be classified as leveraged even though they had strong collateral backing them, which should result in significantly lower loss rates than loans that are dependent primarily on the enterprise value of a highly-leveraged company. Examples of the loans commenters thought should be excluded from the leveraged loan definition were asset-based loans and dealer floor plan loans.

After considering the comments, the proposed rule would exclude certain well-collateralized asset-based loans and floor plan loans from the definition of higher-risk C&I loans and securities. Because these loans carry significant operational risk, the exclusions would apply only to loans that are well secured by self-liquidating collateral (i.e., accounts receivable and inventory) and only when the institution can demonstrate that it has a history of strong risk management and internal controls over these loans. Excluding loans under these conditions should result in better differentiation of credit risk among institutions and should reduce reporting burden.

Under the February rule, higher-risk assets included securitizations where more than 50 percent of the assets backing the securitization meet the criteria for leveraged loans. In their joint comment letter, three industry trade groups stated that the reporting criteria for securitizations in the February rule is problematic given the challenges in evaluating individual loans in the securitization given the lack of standardized disclosure requirements that align with the FDIC's definition of higher-risk assets.

Under the proposal, higher-risk C&I loans and securities would continue to include securitizations where more than 50 percent of the assets backing the securitization meet the criteria for higher-risk C&I loans or securities. Concentrations in higher-risk assets, whether they are in the form of a whole loan or a securitization, increase the risk of loss to the FDIC during times of prolonged periods of economic stress. Large and highly complex institutions are sophisticated investors and can typically obtain the information needed to determine whether a securitization meets the 50 percent threshold described above when they purchase interests in these securitizations.

Trade groups also commented that categorizing securitizations as higher-risk assets based solely on the underlying collateral ignores important risk mitigants such as credit enhancements. The performance of a securitization, however, is highly correlated with the performance of the underlying assets, even when the securitization contains terms or conditions intended to reduce risk. As stated in an interagency NPR issued in December 2011, “during the crisis, a number of highly rated senior securitization positions were subject to significant downgrades and suffered substantial losses.”  21 Even where losses have not yet been realized (as in many collateralized loan obligations), the market value of these securitizations declined precipitously during the crisis, reflecting the decline in the market value of the underlying assets and the increased risk of loss.

Under the proposal, higher-risk consumer loans and securities would be defined as:

(a) All consumer loans where, as of origination, or, if the loan has been refinanced, as of refinance, the probability of default (PD) within two years (the two-year PD) was greater than 20 percent, excluding those consumer loans that meet the definition of a nontraditional mortgage loan;  22 and

(b) Securitizations that are more than 50 percent collateralized by consumer loans meeting the criteria in (a), except those classified as trading book. 23

An institution would be required to use the information that is or would be reasonably available to a sophisticated investor in reasonably determining whether a securitization meets the 50 percent threshold. Information reasonably available to a sophisticated investor should include, but is not limited to, offering memorandums, indentures, trustee reports, and requests for information from servicers, collateral managers, issuers, trustees, or similar third parties. When determining whether a revolving trust or similar securitization would meet the threshold, an institution could use established criteria, model portfolios, or limitations published in the offering memorandum, indenture, trustee report or similar documents.

Sufficient information necessary for an institution to make a definitive determination may not, in every case, be reasonably available to the institution as a sophisticated investor. In such a case, the institution may exercise its judgment in making the determination. Nevertheless, the FDIC would retain the right to review and audit for compliance with the rule any determination that a securitization does not meet the 50 percent threshold.

In cases where a securitization is required to be consolidated on the balance sheet as a result of SFAS 166 and SFAS 167, and a large institution or highly complex institution has access to the necessary information, an institution may evaluate individual loans in the securitization on a loan-by-loan basis. Any loan within the securitization that meets the definition of a higher-risk asset would be reported as a higher-risk asset and any loan within the securitization that does not meet the definition of a higher-risk asset would not be reported as such. When making this evaluation, the institution would have to follow the transition guidance described in Appendix C, Section C. Once an institution evaluated a securitization for higher-risk asset designation on a loan-by-loan basis, it would have to continue to evaluate all securitizations for which it has the required information in a similar manner (i.e., on a loan-by-loan basis). For securitizations for which the institution does not have access to information on a loan-by-loan basis, the institution would be required to determine whether the securitization meets the 50 percent threshold as described previously for other securitizations.

Institutions would have to determine the PD of a consumer loan as of origination, or, if the loan has been refinanced, as of refinance. When an institution acquires a consumer loan or security, it would have to determine whether the loan or security meets the definition of a higher-risk consumer loan or security using the origination criteria and analysis performed by the original lender. If this information is unavailable, however, the institution would have to obtain recent, refreshed data from the borrower or other appropriate third-party. 24

In arriving at its proposal, the FDIC carefully reviewed the comments submitted in response to the March and July PRA notices on the subprime loan definition contained in the February rule. Of the 19 respondents commenting on the March PRA notice, 17 raised concerns over the subprime loan definition; 6 of the 8 respondents to the July PRA notice raised such concerns. Further, as the FDIC noted in the public comment file for the July PRA notice, the FDIC met with representatives of four industry trade groups and twice with large and highly complex institutions prior to the close of the comment period on the PRA notice.

The representatives stated that institutions generally do not maintain the data necessary to identify consumer loans as higher-risk under the February rule, and would not be able to collect such data prior to filing their Call Reports for the June 30, 2011, report date. Commenters also stated that adapting current reporting systems to capture such loans automatically would, in some cases, be impossible and would require ongoing manual intervention, which is costly and burdensome. 25

A group representing the industry also asserted that the definition of subprime loans does not correlate with more sophisticated risk-grading systems generally used by banks internally. While these systems consider the factors included in the subprime definition, they consider these jointly rather than individually, and incorporate other information such as the size and type of delinquency and other measures of the borrower's debt capacity. As a consequence, the group believed that using the definition contained in the February rule would greatly overstate institutions' exposure to subprime loans and relative risk. In the group's view, this overstatement of exposure and relative risk could reduce credit or increase its cost for some types of consumers, such as students, since an institution factors the cost of assessments into its credit and pricing decisions.

The proposed definition would better capture and differentiate higher-risk consumer loans and securities among banks compared to the current definition. In addition, the proposal should be easier for institutions to adopt and implement as it more closely aligns with how they currently measure risk.

This same industry group proposed an alternative definition of subprime consumer loans based on PD within one year from origination. Under the proposal, institutions would report the outstanding balance of consumer loans in their retail portfolios stratified by a specified number of products and PD bands. The FDIC has engaged in extensive discussions with industry representatives regarding this proposal and incorporated many of the proposal's major elements into the NPR.

The FDIC chose to propose a two-year, instead of a one-year, PD in order to more closely align with the time horizon used by recognized third party vendors that produce standard validation charts. These charts include observed default rates over a specified two-year period by credit score and product type. If these charts were modified to conform to the PD estimation guidelines in Appendix C, institutions could use them to classify consumer loans under the proposed definition.

A PD estimated according to the guidelines should reflect the average two-year, stress period performance of loans across a range of remaining maturities, as opposed to the performance of loans within the first two years of origination. The FDIC is concerned with potential default risk throughout the life of the loan and not just over the first two years following origination. By considering different origination time periods and various remaining maturities, the proposed approach should better represent the default risk throughout the life of the loan. Different product types tend to have different default profiles over time, with some products resulting in peak default rates sooner after origination than other products. An approach that considers various remaining maturities should mitigate the default timing bias between products following origination of a loan.

The FDIC intends to collect two-year PD information on various types of consumer loans from large and highly complex institutions. However, the types of information collected and the format of the information collected on the Call Report would be subject to a PRA notice, providing an opportunity for comment, published in the Federal Register . The following table is an example of how the FDIC may collect the consumer loan information. Once the definition of higher-risk consumer loans is adopted in a final rule, the FDIC anticipates that appropriate changes to the Call Reports would be made and that institutions would report consumer loans according to the definition in the final rule. As suggested in the example table below and in Appendix 1, institutions would report the outstanding amount of all consumer loans, including those with a PD below the subprime threshold, stratified by the 10 product types and 12 two-year PD bands. 26 In addition, for each product type, institutions would indicate whether the PDs were derived using scores and default rate mappings provided by a third party vendor or an internal approach. 27 Institutions would report the value of all securitizations that are more than 50 percent collateralized by higher-risk consumer loans (other than trading book) as a separate item.

The proposed 20 percent PD threshold was determined based on an evaluation of performance data provided by a couple of large third party vendors of consumer credit scores. Specifically, for each vendor, this data contained observed, two-year default rates and the proportion of consumer accounts captured by credit score and product type. Default rates were calculated in a manner similar to the guidelines in Appendix C. The FDIC considered the proportion of consumer accounts and range of scores that would be deemed higher-risk under different PD thresholds, overall and by product type, and how those results compare to score-based definitions of subprime commonly used by the industry. The FDIC would use the information that would be included in the Call Report to determine whether the PD threshold should be changed in the future. 28

The FDIC anticipates that it may receive additional or updated information from third party vendors prior to the Board adopting a final rule. The FDIC would consider any additional information received before it proposes that a particular PD threshold be adopted in the final rule. In reviewing the PD threshold, the FDIC would use a methodology similar to the methodology described above. The methodology used would include consideration of the proportion of consumer accounts and range of scores that would be deemed higher risk under different PD thresholds and how those compare to score-based definitions of subprime commonly used in the industry.

During discussions with the industry, a few institutions suggested that the FDIC have the flexibility to modify the time periods used for PD estimation without further notice-and-comment rulemaking. The institutions suggested that the FDIC could either change the time period considered or add additional time periods to the existing time period. The FDIC agrees that having the flexibility to modify the time periods, as part of the risk-based assessment system, would allow the FDIC to better differentiate risk among institutions. For example, a material change in consumer behavior or the development of new consumer products or default data might suggest changes to what should be considered a higher-risk consumer loan. Under these circumstances, incorporating new or additional time periods might better capture either the changes in consumer behavior or new potentially higher-risk consumer products so that FDIC can better identify and measure emerging risks. The FDIC would also have, as part of the risk-based assessment system, the flexibility to increase or decrease the PD threshold of 20 for identifying higher-risk consumer loans to reflect the updated consumer default data from the different time periods selected without the necessity of further notice-and-comment rulemaking. Before making changes to the established PD threshold, the FDIC would analyze resulting potential changes in the distribution of the higher-risk consumer loans and would consider the resulting effect on total deposit insurance assessments and risk differentiation among institutions. The FDIC would provide institutions with at least one quarter advance notice of any changes to the PD estimation time periods or the PD threshold. 29

The proposal does not make changes to the definition of a nontraditional mortgage loan; however, it does clarify how securitizations of nontraditional mortgage loans would be identified under the current definition. 30

In a comment letter in response to the March and July PRA notices, three industry trade groups stated that the criteria outlined for identifying nontraditional mortgage loans in the February rule do not fully differentiate risk among banks or among nontraditional mortgage loans. The commenters maintained that not all nontraditional mortgage loans contain the same level of risk. The industry suggested that banks identify and report nontraditional mortgage loans by the PD within one year from origination as determined as of origination by a credit scoring system, similar to their recommendation for reporting subprime consumer loans.

After reviewing the merits of the industry's suggestions, the FDIC has concluded that identifying a mortgage loan using a one-year PD would be inappropriate given the unique risks of nontraditional mortgage loans. Unlike leveraged loans and subprime loans, institutions have not indicated any difficulty complying with the existing definition of nontraditional mortgage loans and the FDIC believes that changes to the definition would not result in better risk determination for deposit insurance pricing purposes. The FDIC will monitor future rulemakings regarding Qualified Residential Mortgages and the capital treatment of nontraditional mortgage loans to determine whether any changes to the definition should be considered.

Large and highly complex institutions are sophisticated investors and can typically obtain the information needed to determine whether a securitization meets the 50 percent threshold described above when they purchase interests in these securitizations. The proposal clarifies that an institution would be required to use information reasonably available to a sophisticated investor in reasonably determining whether a securitization meets the 50 percent threshold of the assets backing a securitization contain nontraditional mortgage loans.

Information reasonably available to a sophisticated investor should include, but is not limited to, offering memorandums, indentures, trustee reports, and requests for information from servicers, collateral managers, issuers, trustees, or similar third parties. When determining whether a revolving trust or similar securitization would meet the threshold, an institution could use established criteria, model portfolios, or limitations published in the offering memorandum, indenture, trustee report or similar documents.

Sufficient information necessary for an institution to make a definitive determination may not, in every case, be reasonably available to the institution as a sophisticated investor. In such a case, the institution may exercise its judgment in making the determination. Nevertheless, the FDIC would retain the right to review and audit for compliance with the rule any determination that a securitization does not meet the 50 percent threshold.

In cases where a securitization is required to be consolidated on the balance sheet as a result of SFAS 166 and SFAS 167, and a large institution or highly complex institution has access to the necessary information, an institution may evaluate individual loans in the securitization on a loan-by-loan basis. Any loan within the securitization that meets the definition of a higher-risk asset would be reported as a higher-risk asset and any loan within the securitization that does not meet the definition of a higher-risk asset would not be reported as such. When making this evaluation, the institution would have to follow the transition guidance described in Appendix C, Section C. Once an institution evaluated a securitization for higher-risk asset designation on a loan-by-loan basis, it would have to continue to evaluate all securitizations for which it has the required information in a similar manner (i.e., on a loan-by-loan basis). For a securitizations for which the institution does not have access to information on a loan-by-loan basis, the institution would be required to determine whether the securitization meets the 50 percent threshold as described previously for other securitizations.

Under the proposal, institutions would also have to determine whether residential loans and securities meet the definition of a nontraditional mortgage loan as of origination, or, if the loan has been refinanced, as of refinance, subject to requirements similar to those proposed for higher-risk consumer loans.

When an institution acquires a residential loan or security, it would have to determine whether the loan or security meets the definition of a nontraditional mortgage loan using the origination criteria and analysis performed by the original lender. If this information were unavailable, however, the institution would have to obtain recent, refreshed data from the borrower or other appropriate third-party. 31

The FDIC proposes that institutions evaluate C&I and consumer loans as of origination and refinance to determine whether they meet the criteria for higher-risk assets. A loan that is determined to be both a higher-risk consumer and a nontraditional mortgage loan should be reported only as a nontraditional mortgage loan, not both.

The FDIC currently has the ability to adjust a large or highly complex institution's total score (which is used to determine its deposit insurance assessment rate) by a maximum of 15 points (the large bank adjustment). 32 Because the proposed definitions should result in better risk identification and consistent application across the industry, the FDIC anticipates that there would be limited circumstances where the FDIC would consider a large bank adjustment as a result of perceived mitigants to an institution's higher-risk concentration measure. The proposed revised definitions, which include specific exceptions for well-collateralized loans, should result in generally equal treatment of similar loans at different institutions.

Several of the proposed changes could require periodic auditing to ensure consistent reporting across the industry. For example, the PD calculation, whether through credit score mapping or through an internal approach, if not properly monitored, could potentially result in inconsistent application. Also, institutions would need to carefully evaluate their controls for asset-based and floor plan lending to determine whether they can exclude these loans from their higher-risk C&I loans and securities totals. The FDIC expects institutions will have appropriate systems in place for the proper identification and reporting of higher-risk assets. Enhanced review procedures for higher-risk asset reporting should be part of these systems. Institutions' higher-risk identification and reporting programs should include applicable policies, procedures, reviews, and validation (through internal or external audits). The results of any internal reviews or external audits of higher-risk assets reporting should be made available to the FDIC upon request. The FDIC may review and audit for compliance all determinations made by insured institutions for assessment purposes. The FDIC may also review specific details of an institution's reporting, including loans that are excluded from higher-risk assets. Any weakness identified in the reporting of higher-risk assets may be considered when forming supervisory strategies or in the application of adjustments to an institution's total score as outlined in the Guidelines.

As set forth in the February rule, the FDIC has the flexibility to update the minimum and maximum cutoff values used in each scorecard annually without further rulemaking as long as the method of selecting cut-off values remains unchanged. 33 The FDIC can add new data for subsequent years to its analysis and can, from time to time, exclude some earlier years from its analysis. Updating the minimum and maximum cutoff values and weights allows the FDIC to use the most recent data, thereby improving the accuracy of the scorecard method. 34

The new definitions would allow the FDIC to better measure the risk present in large and highly-complex institutions, but they do not change that risk. Unless the FDIC re-calibrates cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio, however, the proposed changes to the definitions of higher-risk assets could result in significant increases or decreases in the amount of total deposit insurance assessments collected from large and highly complex banks. Each scorecard measure, including the higher-risk assets to Tier 1 capital and reserves ratio, is converted to a score between 0 and 100 based upon minimum and maximum cutoff values for the measure (where the minimum and maximum cutoff values get converted to a score of 0 or 100). Most of the minimum and maximum cutoff values represent the 10th and 90th percentile values for each measure, which are derived using data on large institutions over a ten-year period beginning with the first quarter of 2000 through the fourth quarter of 2009. Since the cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio were calibrated using higher-risk assets data reported in accordance with an institution's existing methodology for identifying leveraged or subprime loans and securities, changing the definitions of these higher-risk assets may result in significant differences in the volume of higher-risk assets reported by institutions, and differences in the amount of deposit insurance assessments collected by the FDIC.

The FDIC does not intend for the proposed changes in definitions to result in the FDIC collecting higher or lower deposit insurance assessment revenue from large and highly complex institutions as a whole (although it may result in individual institutions paying higher or lower deposit insurance assessments). Consequently, the FDIC anticipates that it may need to use its flexibility to update cutoff values to update the minimum and maximum cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio. 35 Changes in the distribution of the higher-risk assets to Tier 1 capital and reserves ratio scores and the resulting effect on total assessments and risk differentiation between institutions would be taken into account in determining changes to the cutoffs. In addition, because the FDIC has not collected any data under the proposed definitions, changes to cutoff values for the higher-risk assets to Tier 1 capital and reserves ratio could be made more frequently than annually. This review would ensure proper risk differentiation between institutions. 36

To allow time for institutions to implement systems to comply with the revised definitions, predicated on Call Report changes, the proposed amendments would become effective October 1, 2012. Because the FDIC is proposing no amendments to the definitions of construction and land development loans and nontraditional mortgage loans (other than to clarify how securitizations that meet the definition of a nontraditional mortgage loan are to be identified), the FDIC proposes that institutions continue to define and report these higher-risk assets as they have been doing under the February rule.

Prior to October 1, 2012, large institutions and highly complex institutions will continue to use the transition guidance for leveraged loans and subprime loans as outlined in the General Instructions (Instructions) for Schedule RC-O of the Consolidated Reports of Condition and Income, Memorandum items 6 through 15. The Instructions will be updated as of March 31, 2012 to reflect October 1, 2012 (formerly April 1, 2012) as the date to begin identifying newly originated loans and securities according to the proposed definitions of these two higher-risk asset categories.

This transition guidance provides that, for loans or securities originated or purchased before October 1, 2012, an institution may use either the definition in the February rule or continue to use its existing internal methodology for identifying loans and securities as leveraged or subprime for Schedule RC-O assessment reporting purposes. Institutions that do not have an existing methodology in place to identify loans and securities as leveraged or subprime (because they are not required to report these exposures to their primary federal regulator for examination or other supervisory purposes or do not measure and monitor loans and securities with these characteristics for internal risk management purposes) may continue to apply existing guidance provided by their primary federal regulator, by the agencies' 2001 Expanded Guidance for Subprime Lending Programs, (for consumer loans and securities) or by the February 2008 Comptroller's Handbook on Leveraged Lending (for C&I loans and securities).

Effective October 1, 2012, the proposed definitions described above would apply to:

(1) All C&I loans and securities originated or purchased on or after October 1, 2012;

(2) All consumer loans and securities, except securitizations of consumer loans and securities, whenever originated or purchased;

(3) All residential real estate loans and securities, except securitizations of residential real estate loans, whenever originated or purchased; and

(4) All securitizations of C&I, consumer, and residential real estate loans originated or purchased on or after October 1, 2012.

For consumer and residential real estate loans and securities (other than securitizations) originated or purchased prior to October 1, 2012, an institution would have to determine whether the loan or security met the definition of a higher-risk consumer loan or security no later than December 31, 2012, using information as of the date of the origination of the loan or security if the institution had that information. 37 If the institution did not have that information, it would have to use refreshed data to determine whether a loan or security met the definition. Refreshed data would be defined as the most recent data available as if the loan or security were being originated in the fourth quarter of 2012. In all instances, the refreshed data used would have to be as of July 1, 2012 or later.

For C&I loans and securities originated or purchased before October 1, 2012, and all securitizations originated or purchased before October 1, 2012, institutions would be required to either continue to use their existing internal methodology or existing guidance provided by their primary federal regulator or use the proposed definitions to determine whether to include the loan, security or securitization as a concentration in a risk area for purposes of the higher-risk assets to Tier 1 capital and reserves ratio.

The FDIC seeks comment on every aspect of this proposed rule. In particular, the FDIC seeks comment on the questions set out below. The FDIC asks commenters to include specific reasons for their positions.

a. Is the collateral test in the higher-risk C&I loans and securities definition appropriately specified?

b. Is the purpose test in the higher-risk C&I loans and securities definition appropriately specified?

c. Can institutions identify and report C&I loans as higher-risk?

d. Is the definition of material appropriate?

e. Should other risk measures, besides PD, be considered to define higher-risk consumer loans and securities?

f. Can institutions report all of their consumer loans into the proposed products and PD bands?

g. Is the proposed PD level of 20 appropriate to identify higher-risk consumer loans?

h. Is the definition of refinance appropriate?

i. Are all definitions clear and are institutions able to implement the definitions as proposed?

a. What are the costs and what is the extent of regulatory burden of the proposal compared to the February rule?

b. Will the new effective date for the transition guidance (October 1, 2012) allow institutions sufficient time to update systems to accurately identify and report higher-risk assets as defined in the proposed definitions? If not, what date should the transition guidance be extended to?

c. Are the requirements in the proposed regulation clearly stated? If not, how could the regulation be more clearly stated?

d. Does the proposed regulation contain language that is not clear? If so, which language requires clarification?

e. Large institutions and highly-complex institutions would be required to define their higher-risk assets as outlined in Appendix C. Is the direction and language used in Appendix C clear?

Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The FDIC invites your comments on how to make this proposal easier to understand. For example:

• Are the requirements in the proposed regulation clearly stated? If not, how could the regulation be more clearly stated?

• Does the proposed regulation contain language or jargon that is not clear? If so, which language requires clarification?

• Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes to the format would make the regulation easier to understand?

• What else could the FDIC do to make the regulation easier to understand?

The Regulatory Flexibility Act (RFA) requires that each federal agency either certify that a proposed rule would not, if adopted in final form, have a significant economic impact on a substantial number of small entities or prepare an initial regulatory flexibility analysis of the rule and publish the analysis for comment. 38 For RFA purposes a small institution is defined as one with $175 million or less in assets.

As of September 30, 2011, of the 7,436 insured commercial banks and savings associations, there were 3,989 small insured depository institutions, as that term is defined for purposes of the RFA. The proposed rule, however, would apply only to institutions with $10 billion or greater in total assets. Consequently, small institutions for purposes of the RFA will experience no significant economic impact should the FDIC implement the proposal in a final rule.

No collections of information pursuant to the Paperwork Reduction Act of 1995, 44 U.S.C. 3501-3521 (PRA), are contained in the proposed rule.

The FDIC has determined that the proposed rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, enacted as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 (Pub. L. 105-277, 112 Stat. 2681).

For the reasons set forth above, the FDIC proposes to amend 12 CFR part 327 as follows:

Title II of the Dodd-Frank Act provides for the appointment of the FDIC as receiver of a covered financial company that poses a systemic risk to the nation's economic stability and outlines the process for the orderly resolution of a covered financial company following the FDIC's appointment as receiver. Section 209, codified at 12 U.S.C. section 5389, authorizes the FDIC, in consultation with the Financial Stability Oversight Council, to prescribe rules and regulations as the FDIC considers necessary or appropriate with respect to the rights, interests, and priorities of creditors, counterparties, security entitlement holders, or other persons with respect to any covered financial company and other matters necessary or appropriate to the implementation of the orderly liquidation authority established under Title II of the Act. Pursuant to the authority granted by section 209, the FDIC is issuing the Proposed Rule, with request for comments.

Fundamental to the orderly liquidation of a covered financial company is the ability to continue key operations, transactions and services that will maximize the value of the firm's assets and operations and avoid a disorderly collapse in the marketplace. To facilitate this continuity of operations, the Dodd-Frank Act provides several tools to preserve the value of the covered financial company's assets and business lines, including the powers granted in section 210(c)(16), codified at 12 U.S.C. 5390(c)(16). Specifically, section 210(c)(16) provides that:

In providing for the orderly liquidation authority of Title II, Congress recognized the structural complexity of large financial companies that might pose a threat to the financial stability of the nation. Accordingly, the Dodd-Frank Act provides certain particular authorities with respect to subsidiaries and affiliates of the covered financial company. For instance, section 210(a)(1)(E) of the Dodd-Frank Act provides an expedited procedure to allow the Corporation to appoint itself as the receiver of certain subsidiaries of a covered financial company if the Corporation and the Secretary of the Treasury jointly determine that such subsidiary is in default or in danger of default and that such action would mitigate serious adverse effects on the financial stability of the United States and would facilitate the orderly liquidation of the covered financial company. That section further provides that upon such an appointment, the subsidiary would be treated as a covered financial company, and the Corporation would be able to exercise the full range of special powers available to the receiver.

In certain cases, however, the receiver for the covered financial company may find that the best course of action to maximize the value of the covered financial company and to mitigate systemic risk would be to avoid actions that place subsidiaries in danger of default or that necessitate complex interlocking receiverships. The affiliated legal entities that collectively comprise a complex financial institution typically share and provide intra-group funding, guarantees, administrative support, human resources and other operational and business functions. Some of these operations and activities may be critical to the day-to-day functions and overall operations of the group. In addition, certain significant subsidiaries of a covered financial company may be essential to core business lines or conduct critical operations that, if discontinued, may threaten the stability of the financial markets. In these circumstances, orderly liquidation of a covered financial company may best be accomplished by establishing a single receivership of the parent holding company and transferring valuable operations and assets to a solvent bridge financial company, including the stock or other equity interests of the company's various subsidiaries. Accordingly, the Dodd-Frank Act provides the FDIC with the tools and flexibility to act effectively as receiver for the covered financial company at the holding company or parent level without placing solvent subsidiaries into receivership. This approach may be the best means of preserving value, minimizing the shock to the financial system, providing additional flexibility to mitigate cross-border resolution issues for global systemically-important financial companies, and allowing for a more expeditious resolution of a covered financial company.

Where such an approach is adopted, the powers granted to the receiver under section 210(c)(16) are essential to preservation of going-concern value of the subsidiaries for the benefit of the parent in receivership. Absent this statutory provision, counterparties to contracts of subsidiaries and affiliates could exercise contractual rights to terminate their agreements based upon the insolvency of the specified covered financial company. As a result, otherwise viable affiliates of the covered financial company could become insolvent, thereby inciting the collapse of interrelated companies and potentially amplifying ripple effects throughout the economy.

As described in more detail below, this Proposed Rule would clarify the scope of the authority granted in section 210(c)(16) as well as conditions and requirements applicable to the receiver. The Proposed Rule makes clear that the effect of this enforcement authority is that no party may exercise any remedy under a contract simply as a result of the appointment of the receiver and the exercise of its orderly liquidation authorities as long as the receiver complies with the statutory requirements. The Proposed Rule would address requirements for notice to affected counterparties and defines key terms. It also would clarify the term “adequate protection” in a manner consistent with its interpretation under the Bankruptcy Code.

The Proposed Rule would clarify that the power of the Corporation as receiver to enforce contracts of subsidiaries and affiliates under Dodd-Frank Act section 210(c)(16) effectively preserves contractual relationships of subsidiaries and affiliates of the covered financial company during the orderly liquidation process. The Proposed Rule would identify certain contracts that are “linked to” the covered financial company within the meaning of the statute, as well as contracts that also are “supported by” the covered financial company. Under the statute, a contract is “linked to” a covered financial company if it contains a provision that provides a contractual right to “cause the termination, liquidation or acceleration of such contract based solely on the insolvency, financial condition, or receivership of the covered financial company.” That type of provision, called a “specified financial condition clause” in the Proposed Rule, is more fully defined in the Proposed Rule. Although the statute speaks in terms of the power to enforce a contract to which the receiver is not a party, the Proposed Rule would recognize the practical effect of the intent of this authority, which is that the counterparty to such a contract may not exercise remedies in connection with a specified financial condition clause if the statutory conditions are met. No action is required of the receiver to enforce a linked contract; the Proposed Rule would make clear that the contract would remain in full force and effect unless the receiver failed to meet the requirements with respect to any supporting obligations of the covered financial company.

The Proposed Rule would establish that if the subsidiaries' obligations under the linked contract are supported by the covered financial company through, for example, guarantees or the granting of collateral that supports the obligations, the Corporation as receiver must either (a) transfer such support (along with all related assets and liabilities) to a qualified transferee not later than 5 p.m. (eastern time) on the business day following the appointment of the receiver, or (b) provide “adequate protection” to contract counterparties following notice given to the counterparties in accordance with the guidelines set forth in the Proposed Rule by the one-business-day deadline.

The Proposed Rule also would clarify the meaning of the statutory provision regarding a contractual obligation that is “guaranteed or otherwise supported by” the covered financial company. Support includes guarantees that may or may not be collateralized, netting arrangements and other examples of financial support of the obligations of the subsidiary or affiliate under the contract. In circumstances where a contract of a subsidiary or affiliate is linked to the financial condition of the parent company via a “specified financial condition clause,” but where the obligations of the subsidiary or affiliate are not “supported by” the covered financial company through guarantees or similar supporting obligations, the requirement to transfer support and related assets or provide adequate protection does not apply. The mere existence of a “specified financial condition clause” does not constitute a “support” obligation by the covered financial company, and the Proposed Rule would make it clear that the subsidiary contract remains enforceable without any requirement to effectively create new support where none originally existed. This is consistent with the effect of sections 210(c)(13), providing that ipso facto clauses in contracts of the covered financial company are unenforceable, and 210(c)(8) of the Dodd-Frank Act, providing that “walkaway clauses” in qualified financial contracts of the covered financial company are unenforceable. In the case of those types of contractual provisions, there is no specified entity required to provide support, hence the concept of alternate support or adequate protection is inapplicable. In the same way, under the Proposed Rule, the concept of adequate protection does not arise in the absence of supporting obligations by the specified entity.

The Proposed Rule similarly applies broadly to all contracts, and not solely to qualified financial contracts. For example, a real estate lease or a credit agreement, neither of which would typically be classified as a qualified financial contract, would be subject to enforcement under section 210(c)(16) and the Proposed Rule notwithstanding a specified financial condition clause that might, for instance, give a lessor the right to terminate a lease based upon a change in financial condition of the parent of the lessee. A swap agreement of a subsidiary or affiliate would be subject to section 210(c)(16) and the Proposed Rule in the same manner if the agreement contains specified financial condition clause.

The Proposed Rule would not affect other provisions of the Dodd-Frank Act governing qualified financial contracts, such as sections 210(c)(8) (“Certain Qualified Financial Contracts”) and 210(c)(9) (“Transfer of Qualified Financial Contracts”). For example, where a covered financial company's support of a subsidiary or affiliate obligation would itself be considered a qualified financial contract, such as a securities contract, the provisions of section 210(c)(9) that prohibit the selective transfer of qualified financial contracts with a common counterparty (or a group of affiliated counterparties) would continue to apply. Likewise, the provisions in section 210(c)(10) of the Dodd-Frank Act applicable to counterparties of qualified financial contracts also would continue to apply. On the other hand, if the covered financial company's support of a subsidiary or affiliate consists of multiple contracts that are not qualified financial contracts, the Corporation as receiver may transfer all or a portion of such group of contracts as long as it provides adequate protection for the supporting obligations that were not transferred. Similarly, the Corporation may transfer all or a portion of “related assets and liabilities” that are not qualified financial contracts if it provides adequate protection for the portion of the assets and liabilities that was retained by the Corporation as receiver.

Paragraph (a) of the Proposed Rule would state the general rule with respect to the authority granted under section 210(c)(16) of the Dodd-Frank Act, i.e., that the contracts of a subsidiary or affiliate of a covered financial company are enforceable notwithstanding the existence of a “specified financial condition clause” that provides a counterparty with the right to terminate or exercise remedies based upon the financial condition of the parent or affiliate covered financial company, provided that the FDIC as receiver for the covered financial company transfers all support and related assets and liabilities that back the obligations of such subsidiary or affiliate. To the extent that the receiver fails to transfer all support and related assets and liabilities, it must provide adequate protection to such counterparty to preserve its right to enforce the contracts of the subsidiary. The effect of this ability to enforce the contract is intended to be broad enough to preclude the counterparties from terminating or exercising other remedies such as requiring additional collateral but is intended to be limited in scope solely to remedies arising out of a specified financial condition clause not other contractual defaults by the subsidiary or affiliate. The ability either to transfer support or to provide adequate protection can be exercised in the alternative, or in combination. For example, if some, but not all collateral is transferred, appropriate adequate protection may be provided in lieu of the collateral not transferred.

The deadline for the transfer of support is the same as the time limit applicable to the transfer of qualified financial contracts under section 210(c)(10) of the Dodd-Frank Act, i.e., by 5 p.m. (eastern time) on the next business day. Although the decision to provide adequate protection in lieu of transferring support must also be made and steps must be taken that are reasonably calculated to provide notice within a business day, the language of the Proposed Rule does not require that the adequate protection be fully in place by that next-day deadline. Although the failure to complete within a business day the documentation or transactions necessary should not be deemed to be a waiver of the right to enforce the contract, once the receiver has provided notice of its intent to transfer support or provide adequate protection, the counterparty would be entitled to the benefit of the adequate protection even before the documentation or transfer of collateral were fully completed, if necessary.

The Proposed Rule would provide that a qualified transferee such as a bridge financial company or solvent third-party acquirer, as well as the Corporation as receiver, would have the authority to enforce linked contracts under the section 210(c)(16) of the Dodd-Frank Act. This is consistent with the intent of the statute that subsidiary and affiliate contracts should remain in effect and enforceable through the entire orderly resolution process. Also, the subsidiary or affiliate continues to have the ability to enforce the terms of such contract as well. In essence, the effect of such authority to enforce is substantively the same as a prohibition of the counterparty to assert a specified financial condition clause against the subsidiary or affiliate. Effectively, the Proposed Rule would make clear that the practical effect of the operation of section 210(c)(16) is similar to that of section 210(c)(13) (prohibiting counterparties from the exercise of certain rights arising out of ipso facto clauses) and section 210(c)(8) (prohibiting counterparties to qualified financial contracts from the exercise of certain rights arising out of walkaway clauses); i.e., that the counterparties are prohibited from exercising remedies under a specified financial condition clause if the statutory conditions are met.

The statute expressly states that the power to enforce contracts of a subsidiary in the circumstances described in section 210(c)(16) is vested in “[t]he Corporation, as receiver for a covered financial company or as receiver for a subsidiary of a covered financial company (including an insured depository institution).” This is captured in subparagraph (a)(3) of the Proposed Rule. This recognizes that the preservation of value through the enforcement of subsidiary and affiliate contracts is important to all of the interconnected entities that are related to the entity in receivership. The effect of the statute is to prohibit the counterparty from terminating or exercising remedies based solely on the condition of the covered financial company. Once the essential link to the covered financial company is established via the specified financial condition clause, all of the subsidiaries of the covered financial company as well as the bridge financial company or qualified transferee share the benefit of the authority to enforce.

The Proposed Rule would include eight definitions: “linked,” “specified financial condition clause,” “support,” “related assets and liabilities,” “qualified transferee,” “subsidiary,” “affiliate,” and “control.”

A contract is “linked” to a covered financial company if it contains a specified financial condition clause naming the covered financial company as the specified company.

The term “specified financial condition clause” is intended to broadly capture any provision that gives any counterparty a right to terminate, accelerate or exercise default rights or remedies as a result of any action or circumstance that results in or arises out of the exercise of the orderly liquidation authority. Each aspect of the definition of the term “specified financial condition clause” should be read expansively to effectuate the statutory intent that counterparties are effectively stayed from exercising rights under such a clause to terminate contracts or exercise other remedies during a Title II resolution process if the requirements of the statute are met. Thus, a specified financial condition clause includes any clause that might be interpreted as giving rise to a termination right or other remedy due to the insolvency of the specified covered financial company that might have precipitated the appointment of the receiver, such as an act of insolvency or a downgrade in a rating from a rating agency. Likewise, the definition is broad enough to include a change in control provision that creates termination rights or other remedies upon the appointment of the FDIC as receiver or other change in control, such as the transfer of stock in the subsidiary to the bridge financial company or the sale, conversion or merger of the bridge financial company or its assets. The intent is to allow the subsidiary or affiliate contract to remain in effect despite the exercise of any or all of the authorities granted to the FDIC as receiver for a covered financial company throughout the orderly liquidation process.

Although the language of the statute refers to the counterparty's rights as “termination, liquidation or acceleration,” that list of remedies is not intended to be exclusive as the overall intent of the statute is to provide the FDIC with the power it needs to preserve going-concern value of the covered financial company as long as the rights of counterparties to receive bargained-for support is respected. Accordingly, the Proposed Rule uses the broader phrase “terminate, liquidate, accelerate or declare a default under” the contract. In effect, the specified financial condition clause is unenforceable if the statutory requirements are met. In addition, by clarifying that the link created by the specified financial condition clause may operate “directly or indirectly,” the Proposed Rule clarifies that the scope of the defined term includes contracts where the specified company under the clause may be another company or an affiliate in the corporate structure so long as the ultimate triggering event relates to the financial condition of the covered financial company or the Title II actions take with respect to that covered financial company. The term “specified company” used in the definition is consistent with terminology commonly used in such provisions in derivatives contracts to refer to the company whose financial condition is the basis for the termination right or other remedy.

Language in this definition is borrowed from sections of the Dodd-Frank Act addressing related matters, such as the enforceability of contracts of the covered financial company notwithstanding ipso facto clauses (section 210(c)(13)) and walkaway clauses with respect to qualified financial contracts (section 210(c)(8)(F)). The fact that this language is adapted and expanded upon should not be deemed to reflect any interpretation of the meaning or possible limitations of those sections. The broad language of this definition reflects the intent that it be read to accomplish the purpose of section 210(c)(16) to ensure that the receiver has the power to avoid precipitous terminations by counterparties of the subsidiary resulting in disorderly collapse and a loss of value to the covered financial company.

In the event a counterparty (including its affiliates) has more than one contract with the subsidiary or affiliate of the covered financial company, any contract with a cross-default provision with respect to another contract containing a specified financial condition clause also would be “linked.”

The term “support” means to guarantee, indemnify, undertake to make any loan, advance or capital contribution, maintain the net worth of the subsidiary or affiliate, or provide other financial assistance. The proposed definition does not include other assistance that is not financial in nature, such as an undertaking to conduct specific performance. Generally, if the obligation of the counterparty to perform is linked to the financial condition of the parent, the support also would likely be financial, and other types of arrangements are beyond the scope of what was intended by the statute. We are requesting comments with respect to whether this definition is sufficiently comprehensive in the Notice of Proposed Rulemaking.

The term “related assets and liabilities” includes assets of the covered financial company serving as collateral securing the covered financial company's support obligation, and setoff rights or netting arrangements to which the covered financial company is subject if they are related to the covered financial company's support. It should be noted, however, that if the “support” were in the nature of a non-recourse guarantee, or an unsecured limited recourse guarantee, the related assets and liabilities would not consist of all of the assets of the covered financial company. The transfer of an unsecured guarantee or obligation to a qualified transferee would meet the requirements of the Proposed Rule in this regard, without the transfer of any particular assets. The definition also broadly includes any liabilities of the covered financial company that directly arise out of or relate to its support of the obligations or liabilities of the subsidiary or affiliate. In some instances, this definition may be redundant with the definition of support, as a guaranty could be both a related liability or a supporting obligation. The broader definition is intended to make clear that the full range of supporting obligations and related assets and liabilities must be transferred to ensure that the counterparties are in substantially the same position as they were prior to the transfer to the qualified transferee.

It is important to note that in some situations “support” and “related assets and liabilities” are themselves qualified financial contracts. Section 210(c)(8)(D)(ii)(XII) of the Act includes “securities contracts” as qualified financial contracts, and defines securities contracts to include “any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in this clause, including any guarantee or reimbursement obligation in connection with any agreement or transaction referred to in this clause.” To the extent such support and related assets and liabilities are securities contracts or other forms of qualified financial contracts, they are subject to the rules applicable to the treatment of qualified financial contracts, including the so-called all-or-none rule under section 210(c)(9).

The term “qualified transferee” specifically includes a bridge financial company as well as any other unrelated third parties that assume the support of the covered financial company (and all related assets and liabilities). A qualified transferee can include both the bridge financial company and a subsequent transferee; for instance, if assets and liabilities, including the support and related assets and liabilities are transferred first to a bridge financial company and then to another acquirer either prior to or upon the termination of the bridge financial company pursuant to the orderly liquidation authorities granted under Title II of the Dodd-Frank Act.

The definition of the terms “subsidiary” and “affiliate” are consistent with the definitions given to such terms in the Dodd-Frank Act. Section 2(18) of the Act, codified at 12 U.S.C. 5301(18), provides that these terms will have the same meanings as in section 3 of the FDI Act (12 U.S.C. 1813). Under the FDI Act, the term “subsidiary” is broadly defined as “any company which is owned or controlled directly or indirectly by another company * * *.” “Affiliate is defined by reference to the Bank Holding Company Act, 12 U.S.C. 1841(k) as “any company that controls, is controlled by, or is under common control with another company.”

The statute refers to the definition of “control” provided in the FDI Act, which in turn, refers to the definition provided in the Bank Holding Company Act, 12 U.S.C. 1841(a). The Proposed Rule streamlines these cross references, clarifies that certain provisions of the Bank Holding Company Act definition are inapplicable in this context, and adopts the flexible approach of conforming to the relevant provisions of the Bank Holding Company Act and regulations promulgated thereunder at the time of appointment of the receiver.

In effect, the Proposed Rule would define “control” to include a company that directly or indirectly or acting through one or more persons owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company. Under the Proposed Rule, a company may also exercise “control” if that company controls in any manner the election of a majority of the directors or trustees of the company. This definition is consistent with the Bank Holding Company Act definition as it has been reflected in regulations promulgated under that section, including Regulation W (12 CFR 223.3(g)) and Regulation Y (12 CFR 225.2(e)).

Section 2 of the Dodd-Frank Act expressly adopts the FDI Act definitions that incorporate the Bank Holding Company Act definitions “except to the extent the context otherwise requires.” Parts of the Bank Holding Company Act definition of “control” are inapposite to the context of section 210(c)(16). Provisions that provide for a determination of “control” made by the Federal Reserve Board of Governors pursuant to a notice and hearing are inconsistent with the expedited decisionmaking expressly required by section 210(c)(16) and would undermine the statutory goal of providing prompt certainty to counterparties with respect to their contractual rights and remedies.

Paragraph (c) of the Proposed Rule describes the different ways that the Corporation may provide adequate protection in the event that it does not transfer a covered financial company's support to a qualified transferee. The definition of adequate protection is consistent with the definition in section 361 of the Bankruptcy Code, which also formed the basis of the definition of adequate protection in the context of treatment of certain secured creditors under 12 CFR 380.52. Adequate protection may include any of the following: (1) Making a cash payment or periodic cash payments to the counterparties of the contract to the extent that the failure to cause the assignment and assumption of the covered financial company's support and related assets and liabilities causes a loss to the counterparties; (2) providing to the counterparties a guaranty, issued by the Corporation as receiver for the covered financial company, of the obligations of the subsidiary or affiliate of the covered financial company under the contract; or (3) providing relief that will result in the realization by the claimant of the indubitable equivalent of the covered financial company's support. The phrase “indubitable equivalent,” which appears in section 361 of the Bankruptcy Code, is intended to have a meaning consistent with its meaning in bankruptcy, in conformance with section 209 of the Dodd-Frank Act that requires rules promulgated under Title II of the Act to be “harmonized” with the Bankruptcy Code where possible.

It is important to note that although a guaranty of the Corporation as receiver is expressly included among the enumerated examples of “adequate protection” in paragraph (c) of the Proposed Rule, the omission of such specific reference in 12 CFR 380.52 is not intended to suggest that such a guaranty would not constitute adequate protection to secured creditors under to 12 CFR 380.52. The guaranty of the receiver is, in any event, the indubitable equivalent of any guaranty or support that it may replace, and the express mention of the guaranty is added only for the avoidance of any doubt. Any such guaranty issued in accordance with the Act would be backed by the assets of the covered financial company, and also would be supported by the orderly liquidation fund and the authority of the Corporation as manager of the orderly liquidation fund to assess the financial industry pursuant to section 210(o) of the Act. Such a guaranty would in all events qualify as the indubitable equivalent of any guaranty or support that it may replace. The express mention of the guarantee is added merely for the avoidance of any doubt. The NPR will request comment on whether the interpretation of “adequate protection” under Section 380.52 should be consistent with the interpretation under the Proposed Rule, and whether Section 380.52 should be amended to include the express reference to the receiver's guarantee for the sake of consistency and clarity.

Paragraph (d) of the Proposed Rule provides that if the Corporation as receiver transfers any support and related assets and liabilities of the covered financial company or decides to provide adequate protection in accordance with subparagraphs (a)(1) and 2, it will promptly take steps to notify contract counterparties of such transfer or provision of adequate protection. Although the statute does not contain a notice requirement, the Proposed Rule would require that these reasonable steps be taken to provide notice in recognition of the practical reality that contract counterparties will need to know whether they may exercise remedies under a specified financial condition clause. In acknowledgement of the public's growing reliance on communication using the Internet as well as the prevalence of online commerce, the Proposed Rule provides that the Corporation may post such notice on its public Web site, the Web site of the covered financial company or the subsidiary or affiliate, or provide notice via other electronic media. While the Corporation will endeavor to provide notice in a manner reasonably calculated to provide notification to the parties in a timely manner, the provision of actual notice is not a condition precedent to enforcing such contracts. Any action by a counterparty in contravention of section 210(c)(16) will be ineffective, whether or not such counterparty had actual notice of the transfer of support or provision of adequate protection. Further, where the contract of the subsidiary or affiliate is linked to the covered financial company but not otherwise supported by the covered financial company, actual notice of by the Corporation of its appointment as receiver or its intent to exercise the authority under section 210(c)(16) is not required.

The FDIC seeks comments on all aspects of the Proposed Rule. Comments will be considered by the FDIC and appropriate revisions will be made to the Proposed Rule, if necessary, before a final rule is issued. Comments are specifically requested on the following:

1. What terms defined by the Proposed Rule require further clarification, and how should they be defined?

2. Are there other terms used in the Proposed Rule that should be defined? Should the term “Business Day” be defined in the regulation consistent with the definition found in section 210(c)(10)(D) of the Dodd-Frank Act?

3. Are the scopes of the definitions of “support” and “related assets and liabilities” sufficiently broad so as to cover substantially all of the forms of financial assistance and related assets and liabilities that a company may provide in support of the obligations of the subsidiary or affiliate? If the scope is not sufficiently broad, please provide specific examples if possible.

4. Is the definition of “control” used for purposes of determining whether an entity is a subsidiary or affiliate of the covered financial company sufficient? Is it sufficiently clear?

5. Is the definition of “adequate protection” appropriately consistent with the definition found elsewhere in Part 380, in particular with the definition found at 12 CFR 380.52? Is the specific mention of guarantees of the receiver as a form of adequate protection necessary to clearly signal that this is one of the options available to the receiver? If so, should 12 CFR 380.52 be amended to specifically reference guarantees of the receiver as a form of adequate protection to assure that these provisions will be interpreted in harmony?

6. Under the Proposed Rule, the Corporation is required to promptly take steps to notify contract counterparties when the covered financial company's support and related assets and liabilities have been transferred to a qualified transferee, or when the Corporation provides adequate protection with respect to the obligations of a subsidiary or affiliate of the covered financial company. Are the steps described reasonably calculated to provide notice? Is the scope of circumstances in which notice is provided appropriate?

7. Is the Proposed Rule sufficiently clear that no action is required of the receiver to preserve the enforceability of a contract as long as the conditions with respect to the transfer of support or provision of adequate protection are met?

8. Is the Proposed Rule definition of specified financial condition clear? Is the definition broad enough to cover all orderly liquidation events from the point at which the covered financial company is insolvent or in danger of default to the final liquidation and transfer of assets of the covered financial company? Is it sufficiently limited to make clear that the ability to enforce contracts is limited to events arising out of the specified financial condition clause and is not intended to affect rights or remedies arising out of defaults unrelated to the financial condition of the covered financial company or the related exercise of orderly liquidation authority?

In accordance with the Paperwork Reduction Act (44 U.S.C. 3501, et seq. ) (“PRA”), the FDIC may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid Office of Management and Budget (OMB) control number. The Proposed Rule would not involve any new collections of information pursuant to the Paperwork Reduction Act (44 U.S.C. 3501, et seq. ). Consequently, no information will be submitted to the Office of Management and Budget for review.

The Regulatory Flexibility Act 5 U.S.C. 601, et seq. (RFA) requires each federal agency to prepare a final regulatory flexibility analysis in connection with the promulgation of a final rule, or certify that the final rule will not have a significant economic impact on a substantial number of small entities. 1 Pursuant to Section 605(b) of the Regulatory Flexibility Act, the FDIC certifies that the Proposed Rule will not have a significant economic impact on a substantial number of small entities.

Under regulations issued by the Small Business Administration (“SBA”), a “small entity” includes those firms within the “Finance and Insurance” sector with asset sizes that vary from $7 million or less in assets to $175 million or less in assets. 2

The Proposed Rule will clarify rules and procedures for the liquidation of a nonviable systemically important financial company, to provide internal guidance to FDIC personnel performing the liquidation of such a company and to address any uncertainty in the financial system as to how the orderly liquidation of such a company would be conducted. As such, the Proposed Rule will not have a significant economic impact on small entities.

The FDIC has determined that the Proposed Rule will not affect family well-being within the meaning of Section 654 of the Treasury and General Government Appropriations Act, enacted as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 (Pub. L. 105-277, 112 Stat. 2681).

Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 Stat. 1338, 1471), requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The FDIC has sought to present the Proposed Rule in a simple and straightforward manner.

For the reasons stated above, the Board of Directors of the Federal Deposit Insurance Corporation proposes to amends part 380 of title 12 of the Code of Federal Regulations as follows:

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-2012-0298; Directorate Identifier 2011-NM-072-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 we receive about this proposed AD.

Transport Canada Civil Aviation (TCCA), which is the airworthiness authority for Canada, has issued Canadian Airworthiness Directive CF-2011-04, dated March 8, 2011 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:

Bombardier has issued Service Bulletin 84-57-22, Revision B, dated February 16, 2011; and Service Bulletin 84-57-23, Revision B, dated February 16, 2011. 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 another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design.

Based on the service information, we estimate that this proposed AD would affect about 74 products of U.S. registry. We also estimate that it would take about 36 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $33,632 per product. Where the service information lists required parts costs that are covered under warranty, we have assumed that there will be no charge for these parts. As we do not control warranty coverage for affected parties, some parties may incur costs higher than estimated here. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $2,715,208, or $36,692 per product.

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);

3. Will not affect intrastate aviation in Alaska; and

4. 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:

We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2012-0299; Directorate Identifier 2011-NM-029-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 because of 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 we receive about this proposed AD.

We have received damage reports on MDSCD latch pin fittings. Six operators have reported that broken latch pin retention bolts were found on eight airplanes. On one airplane that had accumulated 101,609 total flight hours and 12,862 total flight cycles, the retention bolts on both the #9 and #10 latch pin fittings were broken. Latch pin #10 had migrated aft and was not engaging the latch cam. On another airplane that had accumulated 33,983 total flight hours and 4,723 total flight cycles, the retention bolt on the #10 latch pin fitting was broken and the #9 latch pin was damaged. On another airplane that had accumulated 67,188 total flight hours and 14,440 total flight cycles, the retention bolt for the #10 latch pin fitting was completely sheared, which allowed the latch pin to migrate aft until it no longer engaged the door latch cam. On four airplanes, only the retention bolt on the #10 latch pin fitting was found to be broken. On one airplane, the retention bolt on the #10 latch pin fitting was damaged. A loose, broken, or missing retention bolt can result in a migrated latch pin, which can become disengaged from the cargo door latch cams and lead to increased loads in the adjacent latch pin fittings and latch cams. Increased loads can cause damage to the cargo door latch mechanism and/or the lower sill structure. The migration of two or more latch pins and subsequent failure of the latch mechanism or lower sill structure can result in the inability of the cargo door to carry limit loads. This condition, if not corrected, could result in the loss of the cargo door and rapid depressurization of the airplane.

We reviewed Boeing Alert Service Bulletin 747-52A2294, Revision 1, dated August 16, 2011, as revised by Boeing Alert Service Bulletin 747-52A2294, Revision 2, dated December 12, 2011. For information on the procedures and compliance times, see this service information at http://www.regulations.gov by searching for Docket No. FAA-2012-0299.

We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would require repetitive detailed inspections of the 10 MDSCD latch pin fittings to detect loose, broken, missing, or damaged retention bolts and nuts; measuring latch pin diameter; and related investigative and corrective actions, if necessary. The related investigative actions include a torque check of the latch pin retention bolt to determine if the bolt is broken; and checking the latch pin for migration and, if necessary, a detailed inspection for damage of the latch pin fitting and the adjacent (forward and aft) latch pin fittings, the door cutout structure, the affected latch cam and the adjacent latch cams, and the door structure. The corrective actions include replacing the latch pin, the retention bolt, and related parts with a new latch pin, retention bolt, and related parts; and repairing of any damage to the adjacent door, door cutout structure, and latch cams.

This proposed AD would also require modifying the MDSCD latch pin fittings, replacing the latch pins with new latch pins, and replacing the latch pin retention fasteners with new latch pin retention fasteners. In addition, this proposed AD would require post-modification/replacement repetitive detailed inspections of the MDSCD latch pin fittings to detect damaged latch pins, and loose, broken, or missing retention bolts and nuts; measuring the latch pin diameter; and related investigative and corrective actions if necessary. The related investigative actions include checking the latch pin for migration and, if necessary, a detailed inspection for damage of the latch pin fitting and the adjacent latch pin fittings, the door cutout structure, the affected latch cam and the adjacent latch cams on the door, and the door structure. The corrective actions include replacing the latch pin, the retention bolt, and related parts with a new latch pin, retention bolt, and related parts; or repairing any damage.

Boeing Alert Service Bulletin 747-52A2294, Revision 1, dated August 16, 2011. as revised by Boeing Alert Service Bulletin 747-52A2294, Revision 2, dated December 12, 2011, specifies to contact the manufacturer for instructions on how to repair certain conditions, but this proposed AD would require repairing those conditions in one of the following ways:

• In accordance with a method that we approve; or

• Using data that meet the certification basis of the airplane, and that have been approved by the Boeing Commercial Airplanes Organization Designation Authorization (ODA) whom we have authorized to make those findings.

We estimate that this proposed AD will affect 77 airplanes of U.S. registry.

We estimate the following costs to comply with this proposed AD:

We estimate the following costs to do necessary repairs and replacements that would be required based on the results of the proposed inspection. We have no way of determining the number of aircraft that might need these repairs.

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),

(3) Will not affect intrastate aviation in Alaska, and

(4) 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.

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

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-2012-0300; Directorate Identifier 2011-NM-276-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 we receive about this proposed AD.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directive 2011-0227, dated December 6, 2011 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:

The FAA has examined the underlying safety issues involved in fuel tank explosions on several large transport airplanes, including the adequacy of existing regulations, the service history of airplanes subject to those regulations, and existing maintenance practices for fuel tank systems. As a result of those findings, we issued a regulation titled “Transport Airplane Fuel Tank System Design Review, Flammability Reduction and Maintenance and Inspection Requirements” (66 FR 23086, May 7, 2001). In addition to new airworthiness standards for transport airplanes and new maintenance requirements, this rule included Special Federal Aviation Regulation No. 88 (66 FR 23086, May 7, 2001) (“SFAR 88,” Amendment 21-78, and subsequent Amendments 21-82 and 21-83).

Among other actions, SFAR 88 (66 FR 23086, May 7, 2001) requires certain type design (i.e., type certificate (TC) and supplemental type certificate (STC)) holders to substantiate that their fuel tank systems can prevent ignition sources in the fuel tanks. This requirement applies to type design holders for large turbine-powered transport airplanes and for subsequent modifications to those airplanes. It requires them to perform design reviews and to develop design changes and maintenance procedures if their designs do not meet the new fuel tank safety standards. As explained in the preamble to the rule, we intended to adopt airworthiness directives to mandate any changes found necessary to address unsafe conditions identified as a result of these reviews.

In evaluating these design reviews, we have established four criteria intended to define the unsafe conditions associated with fuel tank systems that require corrective actions. The percentage of operating time during which fuel tanks are exposed to flammable conditions is one of these criteria. The other three criteria address the failure types under evaluation: single failures, single failures in combination with a latent condition(s), and in-service failure experience. For all four criteria, the evaluations included consideration of previous actions taken that may mitigate the need for further action.

The Joint Aviation Authorities (JAA) has issued a regulation that is similar to SFAR 88 (66 FR 23086, May 7, 2001). (The JAA is an associated body of the European Civil Aviation Conference (ECAC) representing the civil aviation regulatory authorities of a number of European States who have agreed to co-operate in developing and implementing common safety regulatory standards and procedures.) Under this regulation, the JAA stated that all members of the ECAC that hold type certificates for transport category airplanes are required to conduct a design review against explosion risks.

We have determined that the actions identified in this AD are necessary to reduce the potential of ignition sources inside fuel tanks, which, in combination with flammable fuel vapors, could result in fuel tank explosions and consequent loss of the airplane.

Fokker Services B.V. has issued Fokker Service Bulletin SBF100-28-067, dated September 2, 2011. 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 another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design.

Based on the service information, we estimate that this proposed AD would affect about 4 products of U.S. registry. We also estimate that it would take about 8 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $0 per product. Where the service information lists required parts costs that are covered under warranty, we have assumed that there will be no charge for these parts. As we do not control warranty coverage for affected parties, some parties may incur costs higher than estimated here. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $2,720, or $680 per product.

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);

3. Will not affect intrastate aviation in Alaska; and

4. 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:

Public Participation

Interested persons are invited to participate in this rulemaking by submitting written data, views, or arguments on all aspects of this proposed rule. U.S. Customs and Border Protection (CBP) also invites comments that relate to the economic, environmental, or federalism effects that might result from this proposed rule. Comments that will provide the most assistance to CBP in developing these procedures will reference a specific portion of the proposed rule, explain the reason for any recommended change, and include data, information, or authority that supports such recommended change. See ADDRESSES above for information on how to submit comments.

Individuals entering the United States must declare all articles acquired abroad to CBP at the port of first arrival in the United States. Returning residents and nonresidents arriving in the United States must make a declaration, either oral or written, of the merchandise they are importing and must pay duty on the merchandise unless specifically exempted by law. See 19 U.S.C. 1202 (General Note 3(i), Harmonized Tariff Schedule of the United States (HTSUS)). Unless an oral declaration is accepted, a person arriving in the United States must complete a written declaration on CBP Form 6059-B and present the form to the CBP officer at inspection.

Subheadings 9804.00.65, 9804.00.70 and 9804.00.72, Chapter 98, HTSUS, extend, under prescribed circumstances, duty exemptions to certain articles imported by or for the account of any person arriving in the United States who is a returning resident of the United States. The duty exemptions (also known as personal exemptions) set forth in these tariff schedule subheadings specify the aggregate fair retail value of merchandise that a returning resident may bring back to the United States without having to pay duty. As authorized by General Note 3(i), HTSUS, part 148 of title 19 of the Code of Federal Regulations (19 CFR) (CBP regulations) sets forth regulations pertaining to personal declarations and exemptions under subchapter IV (Personal Exemptions Extended to Residents and Nonresidents), Chapter 98, HTSUS.

When members of a family residing in one household travel together on their return to the United States, a responsible family member may make a joint declaration, either oral or written, for all members of the family traveling together. This joint family declaration is contingent upon the value of the articles acquired abroad not exceeding the total amount of the exemption to which the family group is entitled. See 19 CFR 148.14. CBP regulations also allow for the aggregation, or grouping, of exemptions by members of a family for articles acquired abroad and for the aggregation of duty allowances for household goods by members of a family. See 19 CFR 148.14, 148.34, and 148.103. For example, when members of a family residing in one household travel together on their return to the United States, the $800 or $1,600 exemption, which each family member may be entitled to claim, may be grouped together without regard to which member of the family is the owner of the articles. 1 19 CFR 148.34.

Under the current regulations relating to family declarations, a family may file a single, aggregated customs declaration only if they satisfy the definition of “members of a family residing in one household.” See 19 CFR 148.34(b) and 148.103(b). This definition requires that members of a family traveling together who return to the United States be related “by blood, marriage, or adoption;” live together in the same household at their last permanent residence; and intend to live in the same household after returning to the United States. CBP does not believe that the current definition encompasses other relationships where members of the public travel together as a family. CBP believes that the definition unnecessarily limits the number of individuals who may file a family customs declaration for articles acquired abroad.

This NPRM proposes to expand the definition of “members of a family residing in one household” for purposes of filing a customs declaration for returning U.S. residents to more accurately reflect relationships among members of the public who are traveling together as a family.

By expanding the definition of “members of a family residing in one household,” CBP anticipates that the number of declarations (CBP Form 6059-Bs) will be reduced, which would make the processing of passengers by CBP officers more streamlined and efficient. Additionally, CBP believes the traveling public will benefit because more members of a family traveling together can aggregate their individual personal duty exemptions upon their return to the United States.

Under this NPRM, CBP is proposing to include foster children, stepchildren, half-siblings, legal wards, other dependents, and individuals with an in loco parentis or guardianship relationship within the definition of “members of a family residing in one household.” CBP also is proposing that the definition include two adult individuals in a committed relationship wherein the partners share financial assets and obligations, and are not married to, or a partner of, anyone else, including, but not limited to, long-time companions, and couples in civil unions or domestic partnerships. This NPRM proposes to add these relationships to the definition of “members of a family residing in one household” and refer to them as “domestic relationships.” The proposed term “domestic relationship” would not extend to roommates or other cohabitants not otherwise meeting the above definition. Additionally, the proposed changes would not alter the residency requirements that, in order to file a family declaration, members of a family residing in one household must live together in one household at their last permanent residence and intend to live together in one household after their arrival in the United States.

This proposal would also remove outdated references to “resident servants” of a family and state instead that individuals employed by the household but not related by blood, marriage, domestic relationship, or adoption cannot be included in the family declaration.

Finally, this NPRM proposes to remove the phrase “regardless of age” where it currently appears in the introductory text of §§ 148.34(b) and 148.103(b), because it would not be consistent with the proposed definition of “domestic relationships,” which is limited to adults.

Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule has been designated a “significant regulatory action” although not economically significant, under section 3(f) of Executive Order 12866. Accordingly, the Office of Management and Budget has reviewed this rule.

This section examines the impact of the rule on small entities as required by the Regulatory Flexibility Act (5 U.S.C. 603), as amended by the Small Business Regulatory Enforcement and Fairness Act of 1996 (SBREFA), which requires an agency to prepare and make available to the public a regulatory flexibility analysis that describes the effect of a proposed rule on small entities (i.e., small business, small organizations, and small governmental jurisdictions) when the agency is required to publish a general notice of proposed rulemaking for any proposed rule.

This rule directly regulates individuals and families, and these are not considered small entities. Therefore, CBP certifies that this rule will not have a significant economic impact on a substantial number of small entities. CBP welcomes any comments on this conclusion.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507), an agency may not conduct, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by Office of Management and Budget (OMB). The information collected under 19 CFR part 148 is included under OMB control number 1651-0009. There are no new collections of information proposed in this document. The estimated burden hours related to the completion of the CBP Form 6059-B (Customs Declaration) for OMB control number 1651-0009 by members of the public traveling by air and sea have been updated below to reflect the slight decrease in the number of Customs Declarations that are submitted if the definition of a “member of a family residing in one household” in this proposal is adopted, as follows

Estimated Number of Respondents (Travelers): 1,100,000.

Estimated Time per Response: 4 minutes.

Estimated Total Responses: −1,100,000.

Estimated Total Annual Burden Hours: −2,600.

The Customs Declaration (CBP Form 6059B) is due to expire in February 2014. CBP Form 6059B can be seen on the following Web site: http://www.cbp.gov/xp/cgov/travel/vacation/sample_declaration_form.xml . CBP seeks public comment as to as to whether and how the Customs Declaration form could more clearly inform U.S. residents of the definition of family for the purposes of filling out a customs declaration.

This regulation is being issued in accordance with 19 CFR 0.1(a)(1) pertaining to the authority of the Secretary of the Treasury (or that of his or her delegate) to approve regulations pertaining to certain customs revenue functions.

For the reasons set forth above, part 148 of the CBP regulations (19 CFR part 148) is proposed to be amended as set forth below.

Background

The notice of proposed rulemaking that is the subject of these corrections are under sections 162, 167, 168, and 263 of the Internal Revenue Code.

As published on December 27, 2011 (76 FR 81128), the notice of proposed rulemaking (REG-168745-03), contains errors which may prove to be misleading and are in need of clarification.

Accordingly, the publication of the notice of proposed rulemaking (REG-168745-03), which were the subject of FR. Doc. 2011-32024, is corrected as follows:

Accordingly, 26 CFR part 1 is corrected my making the following correcting amendment:

Background

The notice of proposed rulemaking that is the subject of these corrections is under sections 162, 167, 168, and 263 of the Internal Revenue Code.

As published on December 27, 2011 (76 FR 81128), the notice of proposed rulemaking (REG-168745-03), contains errors which may prove to be misleading and are in need of clarification.

Accordingly, the publication of the notice of proposed rulemaking (REG-168745-03), which were the subject of FR. Doc. 2011-32024, is corrected as follows:

1. On page 81128, column one, in the preamble under the caption DATES , lines one, two and three, the language “Written and/or electronic comments and requests for a public hearing must be received by March 26,” is corrected to read “Written and/or electronic comments must be received by March 26,”.

2. On page 81128, column one, line 6 under the caption DATES, the language “hearing scheduled for April 4, 2012 at” is corrected to read “hearing scheduled for May 9, 2012 at”.

3. On page 81128, column three, line two of the second paragraph under the caption “Comments and Public Hearing” the language “for April 4, 2012, beginning at 10 a.m.” is corrected to read “for May 9, 2012, beginning at 10 a.m.”.

4. On page 81128, column three, line three in the preamble under the caption “Drafting Information”, the language “Katherine Reed, Office of the Associate” is corrected to read “Kathleen Reed, Office of the Associate”.

5. On page 81130, column one, Par. 11., item one is redesignated as item 3 and the language “Revising paragraphs (a) through (l)(1); and” is corrected to read as “Revising paragraphs (a) through (h) and revising paragraphs (j) through (l)(1).”

6. On page 81130, column one, under Par. 11. instructions, newly redesignated item one reads as “Removing paragraphs (l), (l)(1), (l)(2) and (l)(3) and redesignating paragraphs (k), (k)(1), (k)(2), and (k)(3) as paragraphs (l), (l)(1), (l)(2) and (l)(3) respectively.”

7. On page 81130, column one, under Par. 11. instructions, newly redesignated paragraph item 2 is corrected to read as “Redesignating paragraph (j) as paragraph (k) and redesignating paragraph (i) as paragraph (j), and adding a new paragraph (i).”

8. On page 81130, column one, under Par. 11. instructions, newly redesignated item 4 reads as “Adding paragraph (m).”

Section 105(e) of the Federal Alcohol Administration Act (FAA Act), codified in the United States Code at 27 U.S.C. 205(e), authorizes the Secretary of the Treasury (Secretary) to prescribe regulations relating to the packaging, marking, branding, labeling, and size and fill of containers of alcohol beverages that will prohibit consumer deception and provide the consumer with adequate information as to the identity and quality of the product. Section 105(e) of the FAA Act also generally requires bottlers and importers of alcohol beverages to obtain certificates of label approval prior to bottling or importing alcohol beverages for sale in interstate commerce. Regulations implementing those provisions of section 105(e) as they relate to distilled spirits are set forth in part 5 of title 27 of the Code of Federal Regulations (27 CFR part 5). The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers the FAA Act pursuant to section 111(d) of the Homeland Security Act of 2002, codified at 6 U.S.C. 531(d). The Secretary has delegated various authorities through Treasury Department Order 120-01 (Revised), dated January 21, 2003, to the TTB Administrator to perform the functions and duties in the administration and enforcement of this law.

TTB's regulations prohibit the release of bottled distilled spirits from customs custody for consumption unless an approved Certificate of Label Approval (COLA) covering the product has been deposited with the appropriate Customs officer at the port of entry. See 27 CFR 5.51. The TTB regulations also generally prohibit the bottling or removal from a plant of distilled spirits unless the proprietor possesses a COLA covering the labels on the bottle. See 27 CFR 5.55.

The TTB labeling regulations require that the class and type of distilled spirits appear on the product's brand label. See 27 CFR 5.32(a)(2) and 5.35. Those regulations provide that the class and type must be stated in conformity with § 5.22 of the TTB regulations (27 CFR 5.22) if defined therein. Otherwise, the product must be designated in accordance with trade and consumer understanding thereof, or, if no such understanding exists, by a distinctive or fanciful name, and in either case (with limited exceptions), followed by a truthful and adequate statement of composition.

Section 5.22 establishes standards of identity for distilled spirits products and categorizes these products according to various classes and types. As used in § 5.22, the term “class” refers to a general category of spirits, such as “whisky” or “brandy.” Currently, there are 12 different classes of distilled spirits recognized in § 5.22, including whisky, rum, and brandy. The term “type” refers to a subcategory within a class of spirits. For example, “Cognac” is a type of brandy, and “Canadian whisky” is a type of whisky.

Brandy is Class 4 in the standards of identity, where it is defined in § 5.22(d) as “an alcoholic distillate from the fermented juice, mash, or wine of fruit, or from the residue thereof, produced at less than 190° proof in such manner that the distillate possesses the taste, aroma, and characteristics generally attributed to the product, and bottled at not less than 80° proof.” “Pisco” is a term recognized by both the governments of Peru and Chile as a designation for a distilled spirits product made from grapes. However, “Pisco brandy” is not currently listed as a type of brandy in Class 4. Rather, it is provided in Class 11, at § 5.22(k)(3), as an example of a geographical name that is not a name for a distinctive type of distilled spirits, and that has not become generic.

Pursuant to the United States-Peru Trade Promotion Agreement, the United States recognized Pisco Perú as a distinctive product of Peru (Article 2.12(2) of the Agreement). Accordingly, the United States agreed not to permit the sale of any product as Pisco Perú unless it has been manufactured in Peru in accordance with the laws and regulations of Peru governing Pisco.

In addition, pursuant to the United States-Chile Free Trade Agreement, the United States recognized Pisco Chileno (Chilean Pisco) as a distinctive product of Chile (Article 3.15(2) of the Agreement). Accordingly, the United States agreed not to permit the sale of any product as Pisco Chileno (Chilean Pisco) unless it has been manufactured in Chile in accordance with the laws and regulations of Chile governing the manufacture of Pisco.

In like manner, Peru and Chile agreed, respectively, to recognize Bourbon Whiskey and Tennessee Whiskey (which is defined in both Agreements as a straight Bourbon Whiskey authorized to be produced only in the State of Tennessee), as distinctive products of the United States, and not to permit the sale of any product as Bourbon Whiskey or Tennessee Whiskey unless it has been manufactured in the United States in accordance with the laws and regulations of the United States governing the manufacture of Bourbon Whiskey and Tennessee Whiskey. (TTB notes that there are alternative spellings for the same term—“whisky” in the TTB regulations in 27 CFR part 5 and “whiskey” in the Agreements with Peru and Chile.)

“The Oxford Companion to Wine” (Jancis Robinson, ed., Oxford University Press, 2d ed., 2001, p. 536) reports that Spanish colonists began producing aguardiente (grape spirits) in both Peru and Chile since the sixteenth century, in addition to describing the spirits produced in the area near the town of Pisco in Peru. Further, “The Oxford Companion to Wine” says “Pisco” is an aromatic brandy made in Peru, Chile, and Bolivia, mainly from Moscatel (muscat) grapes.” According to “Alexis Lichine's Encyclopedia of Wines and Spirits” (Alexis Lichine, ed., 5th ed., Alfred A. Knopf, Inc., 1987), “Pisco brandy” is brandy distilled from Muscat wine in Peru, Chile, Argentina, and Bolivia. Peru and Chile have promulgated standards for the production of Pisco, which, under both countries' respective regulations, is distilled from grapes that were grown in delimited geographical areas.

After reviewing the standards of identity in 27 CFR part 5, TTB's COLA database, and the laws and regulations of Peru and Chile, TTB has determined that amending § 5.22 is appropriate to clarify the status of Pisco under the standards of identity.

TTB believes that Pisco generally meets the U.S. standard for brandy and should be classified as a type of brandy. TTB also believes that evidence suggests that the generally recognized geographical limits of the Pisco-producing areas do not extend beyond the boundaries of Chile and Peru. The wine and spirits authorities cited above indicate that Pisco production is not associated with any areas outside of South America. COLAs naming “Pisco” as the brand name or fanciful name of a distilled spirits product are almost exclusively for products from Chile and Peru. TTB could not locate any COLAs naming “Pisco” as the brand name or fanciful name for any products from Argentina, or from any other country in South America with the exception of Peru, Chile, and Bolivia. COLAs for products from Bolivia that name “Pisco” as the brand name or fanciful name also use the term “Singani.” “The Oxford Companion to Wine” defines “Singani” as an “aromatic grape-based spirit rather like pisco in that it is high in terpenes and made under a strictly controlled regime, principally from Muscat of Alexandria grapes” and a specialty of Bolivia (Robinson, p. 638). Bolivia maintains standards for Singani production in Bolivia, but does not have standards for Pisco production.

Therefore, TTB proposes to amend the standard of identity in § 5.22(d) by adding Pisco as a type of brandy that is manufactured in Peru or Chile in compliance with the laws of the country of production regulating the manufacture of Pisco. The proposed amendment also recognizes the phrases “Pisco Perú” (with or without the diacritic mark, i.e., “Pisco Perú” or “Pisco Peru”), “Pisco Chileno,” and “Chilean Pisco,” as equivalent class and type names of the product, to reflect the provisions of the trade agreements. Further, if Pisco is recognized as a type of brandy, persons who distribute it in the United States will be entitled to label the product according to its type designation “Pisco” without the term “brandy” on the label, in the same way that a product labeled with the type designation “Cognac” is not required to also bear the class designation “brandy.”

TTB notes that the Peruvian standard allows products designated as Pisco to have an alcohol content ranging from 38 to 48 percent alcohol by volume, and the Chilean standard allows products designated as Pisco to have an alcohol content as low as 30 percent alcohol by volume. However, since the standard proposed in this document would identify Pisco as a type of brandy, and the U.S. standard requires that brandy must be bottled at not less than 40 percent alcohol by volume, any Pisco imported into the United States would have to conform to this minimum bottling proof requirement. A product that is bottled at below 40 percent alcohol by volume would fall outside this class and type designation. Depending on the way that such a product is manufactured, it could be labeled as a “diluted Pisco” or as a distilled spirits specialty product bearing a statement of composition.

Finally, TTB believes that it is appropriate to remove both “Pisco brandy” and “Cognac” from § 5.22(k)(3), where they are listed as examples of geographical names that are not names for distinctive types of distilled spirits, and that have not become generic. Pisco will appear in new § 5.22(d)(9), where it will be a type of brandy defined as grape brandy manufactured in Peru or Chile in accordance with the laws and regulations governing the manufacture of Pisco of the country of manufacture.

Cognac currently appears in § 5.22(d)(2), where it is a type of brandy defined as “grape brandy distilled in the Cognac region of France, which is entitled to be so designated by the laws and regulations of the French Government.” The inclusion of “Cognac” in the list of examples of geographical names that are not names for distinctive types of distilled spirits, and that have not become generic, in § 5.22(k)(3) is duplicative and confusing. Accordingly, TTB proposes to remove the reference to Cognac in § 5.22(k)(3) as a technical correction to the regulations.

If finalized, this change to the regulations would revoke by operation of regulation any COLAs that specify “Pisco” as the class and type or brand name or fanciful name of distilled spirits products that are not products of Peru or Chile. TTB has searched its COLA database, and believes that this rulemaking will affect only a small number of labels.

We invite comments from interested members of the public on this proposed rulemaking.

Please submit your comments by the closing date shown above in this notice. You may submit comments in one of the following three ways:

• Federal e-Rulemaking Portal: You may send comments via the online comment form associated with this notice in Docket No. TTB-2012-0001 on “Regulations.gov,” the Federal e-rulemaking portal, at http://www.regulations.gov. A direct link to that docket is available under Notice No. 126 on the TTB Web site at http://www.ttb.gov/spirits/spirits-rulemaking.shtml. Supplemental files may be attached to comments submitted via Regulations.gov. For information on how to use Regulations.gov, click on the site's Help tabs.

• U.S. Mail: You may send comments via postal mail to the Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, P.O. Box 14412, Washington, DC 20044-4412.

• Hand Delivery/Courier: You may hand-carry your comments or have them hand-carried to the Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Suite 200-E, Washington, DC 20005.

Your comments must reference Notice No. 126 and include your name and mailing address. Your comments also must be made in English, be legible, and be written in language acceptable for public disclosure. TTB does not accept anonymous comments, does not acknowledge receipt of comments, and considers all comments as originals.

If you are commenting on behalf of an association, business, or other entity, your comment must include the entity's name as well as your name and position title. If you comment via Regulations.gov, please enter the entity's name in the “Organization” blank of the comment form. If you comment via mail, please submit your entity's comment on letterhead.

You may also write to the Administrator before the comment closing date to ask for a public hearing. The Administrator reserves the right to determine whether to hold a public hearing.

All submitted comments and attachments are part of the public record and subject to disclosure. Do not enclose any material in your comments that you consider confidential or inappropriate for public disclosure.

On the Federal e-rulemaking portal, Regulations.gov, TTB will post, and the public may view, copies of this notice and any electronic or mailed comments we receive about it. A direct link to the Regulations.gov docket containing this notice and the posted comments received on it is available on the TTB Web site at http://www.ttb.gov/spirits/spirits-rulemaking.shtml under Notice No. 126. You may also reach the docket containing this notice and its related comments through the Regulations.gov search page at http://www.regulations.gov.

All posted comments will display the commenter's name, organization (if any), city, and State, and, in the case of mailed comments, all address information, including email addresses. TTB may omit voluminous attachments or material that the Bureau considers unsuitable for posting.

You and other members of the public may view copies of this notice and any electronic or mailed comments TTB receives on it by appointment at the TTB Information Resource Center, 1310 G Street NW., Washington, DC 20005. You may also obtain copies at 20 cents per 8.5 x 11-inch page. Contact the TTB information specialist at the above address or by telephone at 202-453-2270 to schedule an appointment or to request copies of comments or other materials.

It has been determined that this proposed rule is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required.

Pursuant to the requirements of the Regulatory Flexibility Act (5 U.S.C. chapter 6), TTB certifies that this notice of proposed rulemaking will not have a significant economic impact on a substantial number of small entities. The propose rule would clarify the statue of Pisco under the standards of identity for distilled spirits and, if promulgated, will not impose, or otherwise cause, a significant increase in reporting, recordkeeping, or other compliance burdens on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required.

Karen Welch of the Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, drafted this notice.

For the reasons discussed in the preamble, TTB proposes to amend 27 CFR part 5 as follows:

Section 503(a) of the Act permits a State to assume primacy for the regulation of surface coal mining and reclamation operations on non-Federal and non-Indian lands within its borders by demonstrating that its State program includes, among other things, “a State law which provides for the regulation of surface coal mining and reclamation operations in accordance with the requirements of this Act * * *; and rules and regulations consistent with regulations issued by the Secretary pursuant to this Act.” See 30 U.S.C. 1253(a)(1) and (7). On the basis of these criteria, the Secretary of the Interior conditionally approved the Montana program on April 1, 1980. You can find background information on the Montana program, including the Secretary's findings, the disposition of comments, and conditions of approval of the Montana program in the April 1, 1980, Federal Register (45 FR 21560). You can also find later actions concerning Montana's program and program amendments at 30 CFR 926.15, 926.16, and 926.30.

By letter dated July 20, 2011, Montana sent us a proposed amendment to its program (Administrative Record Docket ID No. OSM-2011-0012) under SMCRA (30 U.S.C. 1201 et seq. ). Montana submitted the amendment to include changes made to the MSUMRA as a result of the 2011 Montana Legislature passage of Senate Bill 286 relating to coal prospecting.

Specifically, Montana proposes to amend the MSUMRA to modify the coal prospecting procedures to allow for a new type of coal prospecting permit when prospecting is conducted to determine the location, quantity, and quality of coal that is (1) outside an area designated as unsuitable, (2) does not remove more than 250 tons, and (3) does not substantially disturb the natural land surface. The effect of the modified procedures causes MSUMRA to have three tiers of prospecting regulation, rather than the currently approved two tiers. The full text of the program amendment is available for you to read at the locations listed above under ADDRESSES .

We announced receipt of the proposed amendment in the October 17, 2011, Federal Register (200 FR 64047; Administrative Record No. OSM 2011-0012-0001), provided an opportunity for a public hearing or meeting on its substantive adequacy, and invited public comment on its adequacy. Because no one requested a public hearing or meeting, none was held. The public comment period ended on November 17. 2011. We received comments from the Mine Safety and Health Administration stating that it agreed with the proposed revisions. We did not receive any comments from the general public.

During our review of the amendment, we identified areas needing clarification at MSUMRA Section 82-4-226. We notified Montana of our concerns by letter dated November 22, 2011 (Administrative Record No. OSM-2011-0012-0005). Montana responded in a letter dated December 22, 2011, by submitting additional explanatory information (Administrative Record No. OSM-2011-0012-0006). Specifically, Montana clarified when prospecting operations would be regulated under proposed MSUMRA Section 82-4-226(7), and that prospecting operations conducted under proposed MSUMRA Sections 82-4-226(7)(b) and (8) would not be allowed to substantially disturb the natural land surface. Finally, Montana clarified that proposed MSUMRA Section 82-4-226(7) would be interpreted and implemented based upon legislative history and the rules of statutory construction so that when operations are permitted under MSUMRA Section 82-4-226(8), subsections (1) and (2) would not apply, but subsections (3) through (6) would apply.

Under the provisions of 30 CFR 732.17(h), we are seeking your comments on whether the submission satisfies the applicable program approval criteria of 30 CFR 732.15. If we approve the amendment, it will become part of the Montana program.

Before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you may ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so. We cannot ensure that comments received after the close of the comment period (see DATES ) or sent to an address other than those listed above (see ADDRESSES ) will be included in the docket for this rulemaking and considered.

If you submit written comments, they should be specific, confined to issues pertinent to the proposed regulations, and explain the reason for any recommended change(s). We would appreciate all comments relating to this specific issue, but those most useful and likely to influence decisions on the final rule will be those that either involve personal experience or include citations to and analysis of the Surface Mining Control and Reclamation Act of 1977, its legislative history, its implementing regulations, case law, other State or Federal laws and regulations, data, technical literature, or other relevant publications.

If you wish to speak at the public hearing, contact the person listed under FOR FURTHER INFORMATION CONTACT by 4 p.m., m.s.t. on April 11, 2012. If you are disabled and need reasonable accommodations to attend a public hearing, contact the person listed under FOR FURTHER INFORMATION CONTACT . We will arrange the location and time of the hearing with those persons requesting the hearing. If no one requests an opportunity to speak, we will not hold the hearing.

To assist the transcriber and ensure an accurate record, we request, if possible, that each person who speaks at a public hearing provide us with a written copy of his or her comments. The public hearing will continue on the specified date until everyone scheduled to speak has been given an opportunity to be heard. If you are in the audience and have not been scheduled to speak and wish to do so, you will be allowed to speak after those who have been scheduled. We will end the hearing after everyone scheduled to speak and others present in the audience who wish to speak, have been heard.

If there is only limited interest in participating in a public hearing, we may hold a public meeting rather than a public hearing. If you wish to meet with us to discuss the amendment, please request a meeting by contacting the person listed under FOR FURTHER INFORMATION CONTACT . All such meetings are open to the public and, if possible, we will post notices of meetings at the locations listed under ADDRESSES . We will make a written summary of each meeting a part of the administrative record.

This rule is exempted from review by the Office of Management and Budget (OMB) under Executive Order 12866 (Regulatory Planning and Review).

When a State submits a program amendment to OSM for review, our regulations at 30 CFR 732.17(h) require us to publish a notice in the Federal Register indicating receipt of the proposed amendment, its text or a summary of its terms, and an opportunity for public comment. We conclude our review of the proposed amendment after the close of the public comment period and determine whether the amendment should be approved, approved in part, or not approved. At that time, we will also make the determinations and certifications required by the various laws and executive orders governing the rulemaking process and include them in the final rule.

We will accept written comments and information during this reopened comment period on our proposed critical habitat for Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica that was published in the Federal Register on July 27, 2011 (76 FR 45078), our DEA of the proposed designation, our Draft EA, our amendment of required determinations, our proposal to revise critical habitat unit boundaries for Ipomopsis polyantha units 2 and 4, and for Phacelia submutica units 6, 7, and 9, and additional areas being considered for exclusion from critical habitat for Penstemon debilis unit 3 provided in this document. We will consider information and recommendations from all interested parties. We are particularly interested in comments concerning:

(1) The reasons why we should or should not designate habitat as “critical habitat” under section 4 of the Act (16 U.S.C. 1531 et seq. ) including whether there are threats to these species from human activity, the degree of which can be expected to increase due to the designation, and whether that increase in threat outweighs the benefit of designation such that the designation of critical habitat may not be prudent;

(2) Specific information on:

(a) The amount and distribution of Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica habitat;

(b) What areas that are occupied and that contain features essential to the conservation of these species should be included in the designation and why;

(c) Special management considerations or protection that may be needed in critical habitat areas we are proposing, including managing for the potential effects of climate change;

(d) What areas not occupied at the time of listing are essential for the conservation of these species and why; and

(e) Means to quantify the amount of natural and human-caused disturbance these species prefer or can tolerate.

(3) Land use designations and current or planned activities in the subject areas and their possible impacts on proposed critical habitat.

(4) Information on the projected and reasonably likely impacts of climate change on Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica and proposed critical habitat.

(5) Any probable economic, national security, or other relevant impacts of designating any area that may be included in the final designation; in particular, any impacts on small entities or families, and the benefits of including or excluding areas that exhibit these impacts.

(6) Whether any specific areas we are proposing for critical habitat designation should be considered for exclusion under section 4(b)(2) of the Act, especially the Mount Callahan Natural Area, the Mount Callahan Saddle Natural Area, newly designated areas at the Mt. Logan mine, and other lands owned by OXY USA (Oxy) for Penstemon debilis, and whether the benefits of potentially excluding any specific area outweigh the benefits of including that area under section 4(b)(2) of the Act.

(7) Information on the extent to which the description of potential economic impacts in the DEA is complete and accurate.

(8) Whether the DEA makes appropriate assumptions regarding current practices and any regulatory changes that will likely occur if we designate critical habitat.

(9) Whether the DEA correctly assesses the effect of regional costs associated with land use controls that may result from the designation of critical habitat.

(10) Whether the DEA identifies all Federal, State, and local costs and benefits attributable to the proposed designation of critical habitat, and information on any costs that have been inadvertently overlooked.

(11) Whether the Draft EA adequately presents the purpose of and need for the proposed action, the proposed action and alternatives, and the evaluation of the direct, indirect, and cumulative effects of the alternatives.

(12) Whether our approach to designating critical habitat could be improved or modified in any way to provide for greater public participation and understanding, or to better accommodate public concerns and comments.

You may submit your comments and materials concerning our proposed rule or the associated DEA and draft EA by one of the methods listed in ADDRESSES.

If you submit a comment via http://www.regulations.gov , your entire comment—including your personal identifying information—will be posted on the Web site. If you submit a hardcopy comment that includes personal identifying information, you may request at the top of your document that we withhold this information from public review. However, we cannot guarantee that we will be able to do so. We will post all hardcopy comments on http://www.regulations.gov.

Comments and materials we receive, as well as supporting documentation we used in preparing this proposed rule, DEA, and Draft EA, will be available for public inspection on http://www.regulations.gov, or by appointment, during normal business hours, at the U.S. Fish and Wildlife Service, Colorado Ecological Services Office (see FOR FURTHER INFORMATION CONTACT ). You may obtain copies of the proposed critical habitat, the DEA, and the Draft EA on the Internet at http://www.regulations.gov at docket number FWS-R6-ES-2011-0040, or at http://www.fws.gov/mountain-prairie/species/plants/3ColoradoPlants/index.html, or by mail from the Western Colorado Ecological Services Office (see FOR FURTHER INFORMATION CONTACT ).

It is our intent to discuss only those topics directly relevant to the proposed designation of critical habitat for Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica. For more information on previous Federal actions concerning I. polyantha, P. debilis, and P. submutica, refer to the proposed designation of critical habitat published in the Federal Register on July 27, 2011 (76 FR 45078). Approximately 9,641 acres (ac) (3,902 hectares (ha)) are being proposed for designation as critical habitat for I. polyantha. Approximately 19,155 ac (7,752 ha) are being proposed for designation as critical habitat for P. debilis. Approximately 25,484 ac (10,313 ha) are being proposed for designation as critical habitat for P. submutica. In total, approximately 54,280 ac (21,967 ha) are being proposed for designation as critical habitat for the three species. The proposed critical habitat is located in Archuleta, Garfield, and Mesa Counties, Colorado. The original proposal had a 60-day public comment period, ending September 26, 2011. We will submit for publication in the Federal Register a final critical habitat designation for I. polyantha, P. debilis, and P. submutica on or before the statutory deadline of July 27, 2012.

For additional information on the biology of these species, see the July 27, 2011, final rule to list Ipomopsis polyantha as endangered, and to list Penstemon debilis, and Phacelia submutica as threatened (76 FR 45054); as well as the July 27, 2011 proposed critical habitat rule (76 FR 45078).

Section 3 of the Act defines critical habitat as the specific areas within the geographical area occupied by the species, at the time it is listed in accordance with the Act, on which are found those physical or biological features essential to the conservation of the species and that may require special management considerations or protection; and specific areas outside the geographical area occupied by the species at the time it is listed upon a determination that such areas are essential for the conservation of the species. If the proposed rule is made final, section 7 of the Act will prohibit destruction or adverse modification of critical habitat by any activity funded, authorized, or carried out by any Federal agency. Federal agencies proposing actions that affect critical habitat must consult with us on the effects of their proposed actions, under section 7(a)(2) of the Act.

Section 4(b)(2) of the Act requires that we designate or revise critical habitat based upon the best scientific data available, after taking into consideration the economic impact, impact on national security, or any other relevant impact of specifying any particular area as critical habitat. We may exclude an area from critical habitat if we determine that the benefits of excluding the area outweigh the benefits of including the area as critical habitat, provided such an exclusion will not result in the extinction of the species.

When considering the benefits of inclusion for an area, we consider the additional regulatory benefits that area would receive from the protection from adverse modification or destruction as a result of actions with a Federal nexus (activities conducted, funded, permitted, or authorized by Federal agencies), the educational benefits of mapping areas containing essential features that aid in the recovery of the listed species, and any benefits that may result from the designation due to State or Federal laws that may apply to critical habitat.

When considering the benefits of exclusion, we consider, among other things, whether exclusion of a specific area is likely to result in conservation; the continuation, strengthening, or encouragement of partnerships; or implementation of a management plan. In the case of Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica, the benefits of critical habitat include public awareness of the presence of these species and the importance of habitat protection, and, where a Federal action exists, increased habitat protection for these species due to protection from adverse modification or destruction of critical habitat. In practice, situations with a Federal action occur primarily on Federal lands or for projects undertaken by Federal agencies.

The final decision on whether to exclude any areas will be based on the best scientific data available at the time of the final designation, including information obtained during the comment period and information about the economic impact of designation. Accordingly, we have prepared a DEA concerning the proposed critical habitat designation, which is available for review and comment (see ADDRESSES ).

The purpose of the DEA is to identify and analyze the potential economic impacts associated with the proposed critical habitat designation for Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica. The DEA describes the economic impacts of all potential conservation efforts for I. polyantha, P. debilis, and P. submutica. Some of these costs will likely be incurred regardless of whether or not we designate critical habitat. The economic impact of the proposed critical habitat designation is analyzed by comparing scenarios both “with critical habitat” and “without critical habitat.” The “without critical habitat” scenario represents the baseline for the analysis, considering protections already in place for these species ( e.g., under the Federal listing and other Federal, State, and local regulations). Therefore, the baseline represents the costs incurred regardless of whether critical habitat is designated. The “with critical habitat” scenario describes the incremental impacts associated specifically with the designation of critical habitat for these species. The incremental conservation efforts and associated impacts are those not expected to occur absent the designation of critical habitat for these species. In other words, the incremental costs are those attributable solely to the designation of critical habitat above and beyond the baseline costs; these are the costs we may consider in the final designation of critical habitat. The analysis looks retrospectively at baseline impacts incurred since these species were listed, and forecasts both baseline and incremental impacts likely to occur if we finalize the proposed critical habitat designation.

The DEA provides estimated costs of the foreseeable potential economic impacts of the proposed critical habitat designation for Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica over the next 20 years, which was determined to be the appropriate period for analysis because planning information was available for most activities to reasonably forecast activity levels for projects for a 20-year timeframe. The DEA identifies potential incremental costs as a result of the proposed critical habitat designation; these are those costs attributed to critical habitat over and above those baseline costs attributed to listing. The DEA quantifies economic impacts of conservation efforts for Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica associated with the following categories of activity: (1) Energy development; (2) transportation projects; (3) agriculture and grazing; and (4) recreation.

Because of uncertainty regarding the level and distribution of future oil and gas development, the DEA presents a low and high cost scenario for baseline and incremental economic impacts. Over the next 20 years, potential baseline impacts in areas proposed for designation are estimated to be $3.85 million to $9.81 million (low and high cost scenarios; approximately $340,000 to $866,000 on an annualized basis), assuming a seven percent discount rate. Baseline impacts in areas considered for exclusion are estimated to be $2.36 million. The DEA estimates that total potential incremental economic impacts associated with a critical habitat designation in areas proposed as critical habitat for all three species over the next 20 years will be $967,000 to $14.8 million (low and high cost scenarios; approximately $85,300 to $1.3 million on an annualized basis), assuming a 7-percent discount rate (Table 1). The largest contributor to potential incremental costs is impacts to oil and gas development, which represent approximately 90 percent of incremental impacts in the low-cost scenario and 99 percent of impacts in the high-cost scenario. Impacts to agriculture and grazing, recreation, and transportation projects combined represent less than ten percent of the incremental impacts in both scenarios analyzed.

In the low cost scenario, proposed Unit 2 for Phacelia submutica has the highest incremental impacts (65 percent of total), followed by proposed Unit 8 for P. submutica (11 percent of total) and proposed Unit 6 for P. submutica (five percent of total). In the high cost scenario, these same three units (proposed Units 2, 8, and 4 for P. submutica ) have the highest incremental impacts with 72 percent, seven percent, and five percent of the total incremental impacts, respectively.

As stated earlier, we are seeking data and comments from the public on the DEA and the Draft EA, as well as all aspects of the proposed rule and our amended required determinations. We may revise the proposed rule or supporting documents to incorporate or address information we receive during the public comment period. In particular, we may exclude an area from critical habitat if we determine that the benefits of excluding the area outweigh the benefits of including the area, provided the exclusion will not result in the extinction of the species.

When the range of a species includes States within the U.S. Tenth Circuit Court of Appeals, pursuant to the ruling in Catron County Board of Commissioners v. U.S. Fish and Wildlife Service, 75 F .3d 1429 (10th Cir. 1996), we will complete an analysis under the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq. ) (NEPA), on critical habitat designations. The range of Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica is entirely within the State of Colorado, which is within the Tenth Circuit.

The Draft EA presents the purpose of and need for critical habitat designation, the proposed action and alternatives, and an evaluation of the direct, indirect, and cumulative effects of the alternatives under the requirements of NEPA as implemented by the Council on Environmental Quality regulations (40 CFR 1500 et seq. ) and according to the Department of the Interior's NEPA procedures.

The Draft EA will be used by the Service to decide whether or not critical habitat will be designated as proposed; if the proposed action requires refinement, or if another alternative is appropriate; or if further analyses are needed through preparation of an environmental impact statement. If the proposed action is selected as described (or is changed minimally) and no further environmental analyses are needed, then a Finding of No Significant Impact (FONSI) would be the appropriate conclusion of this process. A FONSI would then be prepared for the environmental assessment.

In this document, we are proposing changes to some of the critical habitat units that were defined in the July 27, 2011, proposed designation of critical habitat for Ipomopsis polyantha, Penstemon debilis, and Phacelia submutica. We describe these changes below and provide updated critical habitat unit maps in this notice. Maps illustrating the changes from the previously proposed unit boundaries are available on the Internet at http://www.regulations.gov at docket number FWS-R6-ES-2011-0040, or at http://www.fws.gov/mountain-prairie/species/plants/3ColoradoPlants/index.html.

We are proposing to modify our proposed critical habitat Units 2 and 4 for Ipomopsis polyantha based on comments we have received from the U.S. Forest Service (USFS) and based on field visits made during the summer of 2011. Changes in acreage are depicted in Table 2.

We are proposing to reduce the size of Unit 2, the O'Neal Hill Botanical Area from 784 ac (317 ha) to 564 ac (228 ha). We are modifying this unit so that the thick pasture grass and riparian areas in the bottomlands that do not contain any of the primary constituent elements (PCEs) for Ipomopsis polyantha would no longer be included (USFS 2011, p. 1). We believe there is still enough area to provide protection for pollinators if this site is used as an introduction area in the future. This area is unoccupied and is owned by the USFS with 279 ac (113 ha), or 49 percent of the unit within the O'Neal Hill Special Botanical Area that was designated to protect another Mancos shale endemic, Lesquerella pruinosa (Pagosa bladderpod). Because L. pruinosa is sometimes found growing with I. polyantha, we believe the site has high potential for introduction of I. polyantha. Aside from the changes described here, the unit description from our proposed critical habitat rule still applies (76 FR 45078).

We are proposing to reduce the size of Unit 4, Eight Mile Mesa, from 1,180 ac (478 ha) to 1,146 ac (464 ha). We are modifying this unit so that isolated patches that are separated from the large contiguous potential habitat by roads are not included (USFS 2011, p. 2). These isolated patches would not be suitable as potential introduction sites in the future because they are small and separated from the large block of contiguous habitat by roads. This unit is unoccupied and is owned by the USFS. Aside from the changes described here, the unit description from our proposed critical habitat rule still applies (76 FR 45078).

For Phacelia submutica, we are modifying three of the proposed critical habitat units, all of which are occupied: Ashmead Draw (Unit 6), Baugh Reservoir (Unit 7), and Anderson Gulch (Unit 9). Changes to the acreages are depicted in Table 3. All three units have been made larger. The boundaries of all units were expanded based on 2011 field surveys in historical sites and in suitable habitat near these sites (Service 2011, pp. 1-12; CNHP 2011, pp. 1-3, spatial data).

We are proposing to increase the size of Unit 6, Ashmead Draw, from 1,220 ac (494 ha) to 1,276 ac (516 ha). In the spring of 2011, we revisited a historical location we had used to delineate the unit in our proposed rule and found that the site extended slightly to the east of where it was previously mapped (Service 2011, pp. 1-4). To accommodate this situation, we are proposing the boundary changes described here. The unit comprises both Federal and private lands in Mesa County, Colorado. Eighty-seven percent of this unit is managed by the Bureau of Land Management (BLM). The entire unit is within the Westwide Energy corridor, and 87 percent is within several grazing allotments. This unit is currently occupied. Aside from the changes described here, the unit description from our proposed critical habitat rule still applies (76 FR 45078).

We are proposing to increase the size of Unit 7, Baugh Reservoir, from 28 ac (12 ha) to 430 ac (174 ha). In the spring of 2011, we revisited the historical location we had used to delineate the unit in our proposed critical habitat rule and found that the site was actually south of where it was originally mapped. After visiting the site, we discovered more suitable habitat in the area than previously known. We located two additional sites nearby during subsequent field surveys (Service 2011, pp. 5-12). The unit is 61 percent privately owned and 39 percent owned by the BLM. This unit is currently occupied. Several roads run through the unit close to Phacelia submutica sites. The entire unit is within the Westwide Energy corridor and one grazing allotment. Aside from the changes described here, the unit description from our proposed critical habitat rule still applies (76 FR 45078).

We are proposing to increase the size of Unit 9, Anderson Gulch, from 301 ac (122 ha) to 341 ac (138 ha). Surveys during the spring of 2011 extended the known sites to the north (CNHP 2011, pp. 1-3, spatial data). To accommodate this situation, we are proposing the boundary changes described here. The unit comprises both State and private lands in Mesa County, Colorado. Within the unit, 56 percent of the lands are managed by the Colorado Division of Wildlife, within the Plateau Creek State Wildlife Area, and 44 percent is private. This unit is currently occupied. Aside from the changes described here, the unit description from our proposed critical habitat rule still applies (76 FR 45078).

Three of the four viable (large and robust) populations of Penstemon debilis are on lands owned by Oxy, all within the proposed Unit 3 (Mount Callahan). Conservation of the species cannot occur without cooperation from Oxy. P. debilis populations protected through Colorado Natural Areas agreements may receive better protection than they would otherwise receive through the protections of the Act on private lands. Given this, and to facilitate our partnership, in our original critical habitat proposal we announced that we would consider the exclusion of areas on Oxy lands that are protected under a voluntary conservation agreement with the Colorado Natural Areas Program (CNAP).

We are now considering excluding under section 4(b)(2) of the ESA additional lands for Penstemon debilis based on the efforts of the landowner (OXY) and a potential agreement with CNAP. Oxy is working with CNAP to expand their agreement to include the Mt. Logan Mine area so that all three viable Penstemon debilis populations on Oxy lands are protected (see figure below) (Oxy 2010, pp. 1-6). If designated, we also would consider excluding this area. For areas outside these Natural Areas, Oxy also is working to develop best management practices to protect adjacent habitat and the pollinators found in these adjacent habitats. If these best management practices are adequately described in their Natural Areas agreement, we also would consider excluding Oxy lands that are covered by these best management practices outside of suitable habitat (barren cliff areas). If further protections were provided for suitable habitat, we would consider this in our decision. We do not yet know where the boundaries of the potential Natural Area at Mt. Logan Mine would be so we have depicted this area with a generalized map. We also have delineated, to the best of our abilities, suitable habitat for P. debilis in the map of Unit 3.

Public Comments

We will accept written comments and information during this reopened comment period on our proposed designation of critical habitat for these eight mussels that was published in the Federal Register on October 4, 2011 (76 FR 61482), our DEA of the proposed designation, and the amended required determinations provided in this document. We will consider information and recommendations from all interested parties. We are particularly interested in comments concerning:

(1) The reasons why we should or should not designate habitat as “critical habitat” under section 4 of the Act (16 U.S.C. 1531 et seq. ), including whether there are threats to the species from human activity, the degree of which can be expected to increase due to the designation, and whether that increase in threat outweighs the benefit of designation such that the designation of critical habitat is not prudent.

(2) Specific information on:

(a) The distribution of the eight mussels;

(b) The amount and distribution of habitat for these eight mussels; and

(c) What areas occupied by these species at the time of listing contain features essential for the conservation of the species that we should include in the designation and why, and

(d) What areas not occupied at the time of listing are essential to the conservation of these species and why.

(3) Land use designations and current or planned activities in the subject areas and their possible impacts on proposed critical habitat.

(4) Any foreseeable economic, national security, or other relevant impacts that may result from designating any area that may be included in the final designation. We are particularly interested in any impacts on small entities, and the benefits of including or excluding areas from the proposed designation that are subject to these impacts.

(5) The projected and reasonably likely impacts of climate change on these eight mussels and on the critical habitat we are proposing.

(6) Whether our approach to designating critical habitat could be improved or modified in any way to provide for greater public participation and understanding, or to assist us in accommodating public concerns and comments.

(7) Information on the extent to which the description of economic impacts in the DEA is complete and accurate.

(8) The likelihood of adverse social reactions to the designation of critical habitat, as discussed in the DEA, and how the consequences of such reactions, if likely to occur, would relate to the conservation and regulatory benefits of the proposed critical habitat designation.

If you submitted comments or information on the proposed rule (76 FR 61482) during the initial comment period from October 4, 2011, to December 5, 2011, please do not resubmit them. We will incorporate them into the public record as part of this comment period, and we will fully consider them in the preparation of our final determination. Our final determination concerning designation of critical habitat will take into consideration all written comments and any additional information we receive during both comment periods. On the basis of public comments, we may, during the development of our final determination, find that areas proposed are not essential, are appropriate for exclusion under section 4(b)(2) of the Act, or are not appropriate for exclusion.

You may submit your comments and materials concerning the proposed rule or DEA by one of the methods listed in the ADDRESSES section. We request that you send comments only by the methods described in the ADDRESSES section.

If you submit a comment via http://www.regulations.gov, your entire comment—including any personal identifying information—will be posted on the Web site. We will post all hardcopy comments on http://www.regulations.gov as well. If you submit a hardcopy comment that includes personal identifying information, you may request at the top of your document that we withhold this information from public review. However, we cannot guarantee that we will be able to do so.

Comments and materials we receive, as well as supporting documentation we used in preparing the proposed rule and DEA, will be available for public inspection on http://www.regulations.gov at Docket No. FWS-R4-ES-2011-0050, or by appointment, during normal business hours, at the U.S. Fish and Wildlife Service, Panama City Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT section, above). You may obtain copies of the proposed rule and the DEA on the Internet at http://www.regulations.gov at Docket Number FWS-R4-ES-2011-0050, or by mail from the Panama City Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT section, above).

It is our intent to discuss only those topics directly relevant to the designation of critical habitat for the Alabama pearlshell, round ebonyshell, southern sandshell, southern kidneyshell, Choctaw bean, tapered pigtoe, narrow pigtoe, and fuzzy pigtoe in this document. For more information on previous Federal actions concerning these eight species, or their biology and habitat needs, refer to the proposed listing and designation of critical habitat published in the Federal Register on October 4, 2011 (76 FR 61482). This document is available online at http://www.regulations.gov (at Docket Number FWS-R4-ES-2011-0050) or from the Panama City Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT section, above).

On October 4, 2011, we published a proposed rule to list and designate critical habitat for these species (76 FR 61482). We proposed to designate approximately 2,406 kilometers (km) (1,495 miles (mi)) of stream and river channels within Bay, Escambia, Holmes, Jackson, Okaloosa, Santa Rosa, Walton, and Washington Counties, Florida; and Barbour, Bullock, Butler, Coffee, Conecuh, Covington, Crenshaw, Dale, Escambia, Geneva, Henry, Houston, Monroe, and Pike Counties, Alabama. We will submit for publication in the Federal Register a final critical habitat designation for these eight species on or before October 4, 2012.

Section 3 of the Act defines critical habitat as the specific areas within the geographical area occupied by a species, at the time it is listed in accordance with the Act, on which are found those physical or biological features essential to the conservation of the species and that may require special management considerations or protection, and specific areas outside the geographical area occupied by a species at the time it is listed, upon a determination that such areas are essential for the conservation of the species. If the proposed rule is made final, section 7 of the Act will prohibit destruction or adverse modification of critical habitat by any activity funded, authorized, or carried out by any Federal agency. Federal agencies proposing actions affecting critical habitat must consult with us on the effects of their proposed actions, under section 7(a)(2) of the Act.

Section 4(b)(2) of the Act requires that we designate or revise critical habitat based upon the best scientific data available, after taking into consideration the economic impact, impact on national security, or any other relevant impact of specifying any particular area as critical habitat. We may exclude an area from critical habitat if we determine that the benefits of excluding the area outweigh the benefits of including the area as critical habitat, provided such exclusion will not result in the extinction of these species.

When considering the benefits of inclusion for an area, we consider the additional regulatory benefits that area would receive from the protection from adverse modification or destruction as a result of actions with a Federal nexus (activities conducted, funded, permitted, or authorized by Federal agencies), the educational benefits of mapping areas containing essential features that aid in the recovery of the listed species, and any benefits that may result from designation due to State or Federal laws that may apply to critical habitat.

When considering the benefits of exclusion, we consider, among other things, the economic impacts of designation; whether exclusion of a specific area is likely to result in conservation; the continuation, strengthening, or encouragement of partnerships; or implementation of a management plan. In the case of these eight mussels, the benefits of critical habitat include public awareness of the presence of these species and the importance of habitat protection, and, where a Federal nexus exists, increased habitat protection for these species due to protection from adverse modification or destruction of critical habitat. In practice, situations with a Federal nexus exist primarily on Federal lands or for projects undertaken by Federal agencies.

We have not proposed to exclude any areas from critical habitat. However, the final decision on whether to exclude any areas will be based on the best scientific data available at the time of the final designation, including information obtained during the comment period and information about the economic impact of designation. Accordingly, we have prepared a draft economic analysis concerning the proposed critical habitat designation (DEA), which is available for review and comment (see ADDRESSES section, above).

The purpose of the DEA is to identify and analyze the potential economic impacts associated with the proposed critical habitat designation for these eight mussels. The DEA separates conservation measures into two distinct categories according to “without critical habitat” and “with critical habitat” scenarios. The “without critical habitat” scenario represents the baseline for the analysis, considering protections otherwise afforded to the eight mussels (e.g., under the Federal listing and other Federal, State, and local regulations). The “with critical habitat” scenario describes the incremental impacts specifically due to designation of critical habitat for these species. In other words, these incremental conservation measures and associated economic impacts would not occur but for the designation. Conservation measures implemented under the baseline (without critical habitat) scenario are described qualitatively within the DEA, but economic impacts associated with these measures are not quantified. Economic impacts are only quantified for conservation measures implemented specifically due to the designation of critical habitat (i.e., incremental impacts). For a further description of the methods of the analysis, see Chapter 2, “Framework for the Analysis,” of the DEA.

The DEA provides estimated costs of the foreseeable potential economic impacts of the proposed critical habitat designation for these eight mussels over the next 20 years, which was determined to be the appropriate period for analysis because limited planning information is available for most activities to forecast activity levels for projects beyond a 20-year timeframe. It identifies potential incremental costs as a result of the proposed critical habitat designation; these are those costs attributed to critical habitat over and above those baseline costs attributed to listing. The DEA quantifies economic impacts of mussel conservation efforts associated with the following categories of activity: (1) Impoundments, dams, and diversions; (2) dredging, channelization, and in-stream mining; (3) transportation and utilities; (4) residential and commercial development; (5) timber management, agriculture, and grazing; and (6) oil wells/drilling.

Based on discussions with State and local regulatory authorities, including Alabama Department of Environmental Management, Florida Department of Environmental Protection, and Northwest Florida Water Management District, land and water management practices are not expected to change due to the designation of critical habitat.

The present value of the total incremental cost of critical habitat designation is estimated at $1.41 million over 20 years assuming a 7 percent discount rate, or $125,000 on an annualized basis. Transportation and utility activities are likely to be subject to the greatest incremental impacts at $1.02 million over 20 years, followed by development at $62,300; timber management, agriculture, and grazing activities at $56,600; and impoundments, dams, and diversions at $13,100 (present values over 20 years assuming a 7 percent discount rate). No incremental impacts to dredging, channelization, and in-stream mining are anticipated because these activities are not expected to occur within proposed critical habitat boundaries. No incremental impacts to oil wells or drilling operations are anticipated because there is no Federal nexus for these activities that would require section 7 consultation. Please refer to the DEA of the proposed critical habitat designation for a more detailed discussion of potential economic impacts.

As we stated earlier, we are soliciting data and comments from the public on the DEA, as well as all aspects of the proposed rule and our amended required determinations. We may revise the proposed rule or supporting documents to incorporate or address information we receive during the public comment period. In particular, we may exclude an area from critical habitat if we determine that the benefits of excluding the area outweigh the benefits of including the area, provided the exclusion will not result in the extinction of these species.

In our October 4, 2011, proposed rule (76 FR 61482), we indicated that we would defer our determination of compliance with several statutes and executive orders until the information concerning potential economic impacts of the designation and potential effects on landowners and stakeholders became available in the DEA. We have now made use of the DEA data to make these determinations. In this document, we affirm the information in our proposed rule concerning Executive Order (E.O.) 12866 (Regulatory Planning and Review), E.O. 12630 (Takings), E.O. 13132 (Federalism), E.O. 12988 (Civil Justice Reform), the Unfunded Mandates Reform Act (2 U.S.C. 1501 et seq. ), the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ), the National Environmental Policy Act (42 U.S.C. 4321 et seq. ), and the President's memorandum of April 29, 1994, “Government-to-Government Relations with Native American Tribal Governments” (59 FR 22951). However, based on the DEA data, we are amending our required determinations concerning the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ), E.O. 13211 (Energy, Supply, Distribution, or Use), and the Unfunded Mandates Reform Act (2 U.S.C. 1501 et seq. ).

Under the Regulatory Flexibility Act (RFA; 5 U.S.C. 601 et seq. ), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA; 5 U.S.C. 801 et seq. ), whenever an agency is required to publish a notice of rulemaking for any proposed or final rule, it must prepare and make available for public comment a regulatory flexibility analysis that describes the effects of the rule on small entities (i.e., small businesses, small organizations, and small government jurisdictions). However, no regulatory flexibility analysis is required if the head of the agency certifies the rule will not have a significant economic impact on a substantial number of small entities. The SBREFA amended the RFA to require Federal agencies to provide a certification statement of the factual basis for certifying that the rule will not have a significant economic impact on a substantial number of small entities. Based on our DEA of the proposed designation, we provide our analysis for determining whether the proposed rule would result in a significant economic impact on a substantial number of small entities. Based on comments we receive, we may revise this determination as part of our final rule making.

According to the Small Business Administration, small entities include small organizations such as independent nonprofit organizations; small governmental jurisdictions, including school boards and city and town governments that serve fewer than 50,000 residents; and small businesses (13 CFR 121.201). Small businesses include manufacturing and mining concerns with fewer than 500 employees, wholesale trade entities with fewer than 100 employees, retail and service businesses with less than $5 million in annual sales, general and heavy construction businesses with less than $27.5 million in annual business, special trade contractors doing less than $11.5 million in annual business, and agricultural businesses with annual sales less than $750,000. To determine if potential economic impacts to these small entities are significant, we considered the types of activities that might trigger regulatory impacts under this designation as well as types of project modifications that may result. In general, the term “significant economic impact” is meant to apply to a typical small business firm's business operations.

To determine if the proposed designation of critical habitat for these species would affect a substantial number of small entities, we considered the number of small entities affected within particular types of economic activities, such as residential or commercial development entities. In order to determine whether it is appropriate for our agency to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities, we considered each industry or category individually. In estimating the numbers of small entities potentially affected, we also considered whether their activities have any Federal involvement. Critical habitat designation will not affect activities that do not have any Federal involvement; designation of critical habitat only affects activities conducted, funded, permitted, or authorized by Federal agencies. In areas where the these eight mussels are present, Federal agencies already are required to consult with us under section 7 of the Act on activities they fund, permit, or implement that may affect these species. If we finalize the proposed critical habitat designation, consultations to avoid the destruction or adverse modification of critical habitat would be incorporated into the existing consultation process.

In the DEA, we evaluated the potential economic effects on small entities resulting from implementation of conservation actions related to the proposed designation of critical habitat for the eight mussels. This analysis estimates that six small governments (counties) may be affected by the rule. The affected counties represent 9 percent of small counties in Alabama and Florida. We anticipate approximately three to four counties could be affected each year, with an impact of approximately $875 per county. Assuming annual county tax revenues of at least $1 million, per county impacts represent approximately 0.02 percent of annual revenues. Approximately 20 small development-related entities are likely to incur administrative costs associated with section 7 consultations. Assuming that all of these entities are small, they represent approximately 0.04, or less than one, percent of all small developers and homebuilders in the affected counties. Annualized impacts per entity are approximately $48, which represents less than one percent of annual, per entity revenues. Please refer to the DEA of the proposed critical habitat designation for a more detailed discussion of potential economic impacts to small businesses.

In summary, we have considered whether the proposed designation would result in a significant economic impact on a substantial number of small entities. Information for this analysis was gathered from the Small Business Administration, stakeholders, and the Service. For the above reasons and based on currently available information, we certify that, if promulgated, the proposed critical habitat designation would not have a significant economic impact on a substantial number of small business entities. Therefore, an initial regulatory flexibility analysis is not required.

As outlined in the DEA and in the amended RFA determination above, we do not believe that this rule will significantly or uniquely affect small governments. It will not produce a Federal mandate of $100 million or greater in any year, and therefore is not a “significant regulatory action” under the Unfunded Mandates Reform Act. The designation of critical habitat imposes no obligations on state or local governments. By definition, Federal agencies are not considered small entities, although the activities they fund or permit may be proposed or carried out by small entities. After careful review of the DEA we have determined that a Small Government Agency Plan is not required.

On May 18, 2001, the President issued an Executive Order (E.O. 13211; Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use) on regulations that significantly affect energy supply, distribution, and use. E.O. 13211 requires agencies to prepare Statements of Energy Effects when undertaking certain actions. The Office of Management and Budget provides guidance for implementing this executive order, and outlines the situations that are considered to have a “significant energy effect” when compared with the regulatory action under consideration. As outlined in the DEA, we do not anticipate impacts to oil wells and drilling activities in the study area (critical habitat reaches and associated watersheds). Thus, we do not anticipate a “significant energy effect” from this rulemaking.

The primary authors of this notice are the staff members of the Panama City Ecological Services Field Office.

The authority for this action is the Endangered Species Act of 1973, as amended (16 U.S.C. 1531 et seq. ).

The NE Multispecies FMP specifies management measures for 16 species in Federal waters off the New England and Mid-Atlantic coasts, including both large-mesh and small-mesh species. Small-mesh species include silver hake (whiting), red hake, offshore hake, and ocean pout, and large-mesh species include Atlantic cod, haddock, yellowtail flounder, pollock, American plaice, witch flounder, white hake, windowpane flounder, Atlantic halibut, winter flounder, redfish, and Atlantic wolffish. Large-mesh species, which are referred to as “regulated species,” are divided into 19 fish stocks, and along with ocean pout, comprise the groundfish complex.

Amendment 16 to the NE Multispecies FMP (Amendment 16) established a process for setting acceptable biological catches (ABCs) and ACLs for regulated species and ocean pout, as well as distributing the available catch among the various components of the groundfish fishery. Amendment 16 also established accountability measures (AMs) for the 20 groundfish stocks in order to prevent overfishing of these stocks and correct or mitigate any overages of the ACLs. Framework 44 to the NE Multispecies FMP (Framework 44) set the ABCs and ACLs for FYs 2010-2012. In 2011, Framework 45 to the NE Multispecies FMP (Framework 45) revised the ABCs and ACLs for five stocks for FYs 2011-2012.

The Council adopted Framework 47 on November 16, 2011, and submitted it to NMFS on February 7, 2012, for approval. The Council developed Framework 47 as part of the biennial review process established in the FMP to revise measures necessary to prevent overfishing and rebuild overfished stocks, and achieve the goals and objectives of the NE Multispecies FMP. The Council developed Framework 47 to respond to recent stock assessments and updated stock information, as well as to revise management measures after the fishery has operated for more than 1 year under ACLs and AMs. If approved, Framework 47 will be implemented at the start of FY 2012 on May 1, 2012. One measure, if approved, would apply retroactively to the 2011 scallop fishing year, which ended on February 28, 2012, as described in Item 11 of this preamble.

The Council reviewed the proposed regulations, as drafted by NMFS, and deemed them to be consistent with Framework 47 and necessary to implement the proposed measures as specified in section 303(c) of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act). Some of the measures included in this action are being proposed by NMFS under the authority of section 305(d) of the Magnuson-Stevens Act, which provides that the Secretary of Commerce may promulgate regulations necessary to ensure that fishery management plans or amendments are carried out in accordance with the Magnuson-Steven Act. These measures, which are identified and described in this preamble, are necessary to implement changes to the Atlantic Sea Scallop FMP proposed by the Council in Framework 47, as well as revisions to the regulations that are not included in Framework 47, but that are necessary to achieve the objectives of the FMP. This proposed rule also includes management measures for the common pool fishery for FY 2012 that are not included in Framework 47, but that may be considered by the Regional Administrator (RA) under authority provided by the FMP.

Amendment 16 updated the status determination criteria for existing NE multispecies regulated species and ocean pout stocks based on the best available scientific information as determined by the 2008 Groundfish Assessment Review Meeting (GARM III). Framework 45 updated the status determination criteria for pollock to reflect the results of a new pollock stock assessment conducted in 2010. New assessments were conducted for Gulf of Maine (GOM), Georges Bank (GB), and Southern New England/Mid-Atlantic (SNE/MA) winter flounder in June 2011. In addition, a new assessment for GOM cod was conducted in December 2011. Therefore, Framework 47 proposes to update the status determination criteria for the three winter flounder stocks and GOM cod to incorporate the results of the recent stock assessments into the FMP. The proposed revisions are based on the best scientific information available.

The results from GARM III indicated that overfishing was occurring for GB and SNE/MA winter flounder and GOM cod, and SNE/MA winter flounder was overfished. The overfished and overfishing status for GOM winter flounder was unknown. Based on the new assessments, overfishing is no longer occurring for GB or SNE/MA winter flounder. Also, the overfishing status is no longer unknown for GOM winter flounder, and overfishing is not occurring for this stock. Based on the recent GOM cod stock assessment, overfishing is occurring for GOM cod, and the stock is overfished.

The revised biomass target for GB and SNE/MA winter flounder is spawning stock biomass at maximum sustainable yield (SSB MSY ), and the maximum fishing mortality rate (F) threshold is F MSY . The revised maximum F threshold for GOM winter flounder is F at 40 percent of the maximum spawning potential (F 40 % MSP ). The biomass target for this stock is still undefined. For GOM cod, the biomass target is unchanged from GARM III and is SSB at 40 percent MSP (SSB 40 % MSP ). The maximum F threshold proxy is also unchanged from GARM III and is F 40 % MSP . The revised status determination criteria proposed in Framework 47 are presented in Table 1, and the numerical estimates of these criteria are presented in Table 2.

GB yellowtail flounder is jointly managed with Canada under the U.S./Canada Resource Sharing Understanding (Understanding). Framework 45 revised the GB yellowtail flounder rebuilding program, based on the best available scientific information, to rebuild the stock by 2016 with a 50-percent probability of success. This revision extended the rebuilding program to the maximum 10-year rebuilding period allowed by the Magnuson-Stevens Act in order to maximize the amount of GB yellowtail flounder that could be caught while the stock rebuilds.

Under the International Fisheries Agreement Clarification Act (IFACA) enacted into law on January 4, 2011, the Council and NMFS have flexibility in establishing rebuilding programs for stocks that are jointly managed with Canada under the Understanding. For rebuilding stocks managed under the Understanding, the IFACA provides that the Council and NMFS may consider decisions under the Understanding as management measures under an international agreement in order to provide an exception to the Magnuson- Stevens Act's maximum 10-year rebuilding period requirement.

Each year, pursuant to the Understanding, the TMGC meets to consider the scientific advice of the Transboundary Resources Assessment Committee and to make decisions regarding total allowable catch (TAC) recommendations for the upcoming year for each stocks managed under the Understanding. The TMGC adopts harvest strategies to guide its annual TAC recommendations. At its September 2011 meeting, the TMGC reaffirmed its harvest strategy for GB yellowtail flounder to maintain a low to neutral risk of exceeding the fishing mortality limit reference (F ref ) of 0.25. Based on that harvest strategy, the TMGC developed its 2012 TAC recommendation for GB yellowtail flounder and forwarded the recommendation to the Council for approval See Item 5 for more information on the 2012 TMGC TAC recommendations..

Given the IFACA, and that the TMGC decisions regarding a GB yellowtail flounder harvest strategy and annual TAC are considered management measures under an international agreement, the rebuilding program for GB yellowtail flounder can exceed 10 years. Therefore, Framework 47 proposes to revise the rebuilding strategy for GB yellowtail flounder. The proposed rebuilding strategy for GB yellowtail flounder would rebuild the stock by 2032 with a 50-percent probability of success. This rebuilding strategy is based on an F of 0.21 and would extend 26 years beyond the rebuilding program start date (2006). The proposed rebuilding time period is as short as possible, taking into account the Understanding and decisions made under it, and the needs of the fishing communities, and will provide more flexibility for negotiating annual catches with Canada.

The overfishing level (OFL) for each stock is calculated using the estimated stock size and F MSY (i.e., the fishing mortality rate that, if applied over the long term, would result in maximum sustainable yield). ABCs for each stock are recommended by the Council's Scientific and Statistical Committee (SSC), and are lower than the OFLs in order to account for scientific uncertainty. The ABCs are calculated using the estimated stock size for a particular year and are based on the catch associated with 75 percent of F MSY or the F required to rebuild the stock within the defined rebuilding time period (F rebuild ), whichever is lower. For SNE/MA winter flounder, the ABC is calculated using the F expected to result from management measures that are designed to achieve an F as close to zero as practicable. The Canadian share/allowance of an ABC, or the expected Canadian catch, is deducted from the ABC available for each pertinent stock. The U.S. ABC is the amount available to the U.S. fishery after accounting for Canadian catch.

Framework 44 specified OFLs and ABCs for each stock for FY 2010-2012 based on the best scientific information available, and Framework 45 revised the OFLs and ABCs for five stocks for FY 2011-2012 based on updated stock information. Framework 47 proposes to set the OFLs and ABCs for nine stocks for FY 2012-2014 that are assessed with an index-based stock assessment or that have had a recent stock assessment completed, as well as set the OFL and ABC for FY 2012-2013 for GB yellowtail flounder based on updated stock information (Table 3). For nine stocks, Framework 47 proposes to adopt the OFLs and ABCs for FY 2012 that were previously specified in Framework 44 or Framework 45 (Table 3). These stocks were last assessed at GARM III. The SSC determined that projections from the GARM III assessment were not a reliable basis for providing catch advice for these stocks for FY 2013-2014. As a result, stock assessment updates were completed in February 2012 for these stocks, and the results of these updates will be used to set OFLs and ABCs for FY 2013-2014. The Council intends to incorporate the assessment update results and specify OFLs and ABCs for FY 2013-2014 for these stocks in a future framework action. A new stock assessment is scheduled for SNE/MA yellowtail flounder in June 2012. The results of this stock assessment will be used to specify OFLs and ABCs for the stock for FY 2013-2014, and will also be incorporated into a future framework action by the Council. Updated information for stocks assessed with an index-based assessment may also be used to revise the OFLs and ABCs for FY 2013-2014 specified in this action. The OFLs and ABCs proposed in Framework 47 are based on the most recent stock assessment information, which is the best scientific information available.

Framework 47, as approved by the Council on November 16, 2011, proposed to set specifications for GOM cod for FY 2012-2014 based on the most recent stock assessment that was completed in December 2011. The results of the assessment indicate that the stock is overfished and overfishing is occurring. The assessment results also indicate that GOM cod cannot rebuild by its rebuilding end date of 2014 even in the absence of all fishing mortality. Given the final results of the GOM cod assessment, and that rebuilding cannot be achieved within the rebuilding period, NMFS concluded that the NE Multispecies FMP is not making adequate progress toward ending overfishing and rebuilding GOM cod. NMFS notified the Council of this determination in a letter dated January 26, 2012, and of the requirement for the Council to implement a plan by May 1, 2013, to immediately end overfishing for GOM cod. The Council was also notified that it has up to 2 years to address GOM cod rebuilding, although NMFS urged the Council to do this by the beginning of FY 2013 to coincide with measures to end overfishing. In addition, NMFS indicated that the Magnuson-Stevens Act provides some flexibility for NMFS to only reduce overfishing, rather than end it immediately, during FY 2012 while the Council develops measures to address GOM cod.

At its January 25, 2012, meeting, the Council's SSC met to discuss the GOM cod stock assessment. At the request of the Council, the SSC did not recommended ABCs for GOM cod for FY 2012-2014. The SSC reviewed the stock assessment and identified issues that may warrant a closer examination and that may influence the interpretation of the assessment results. Subsequently, at its February 1, 2012, meeting, the Council did not adopt ABCs for GOM cod to be implemented in Framework 47. The Council requested that NMFS implement an interim action for FY 2012 to reduce overfishing on GOM cod while the Council responds to the new GOM cod stock assessment and develops measures for FY 2013 that will immediately end overfishing. NMFS has committed that it intends to implement an interim action to reduce overfishing for GOM cod and establish catch levels for this stock for FY 2012.

Therefore, this action does not include OFLs and ABCs for GOM cod for FY 2012-2014. If no action is taken to specify a new ABC for GOM cod for FY 2012, the FY 2012 ABC previously specified in Framework 44 (9,018 mt) would go into effect on May 1, 2012. The SSC will meet in the future to recommend ABCs for FY 2013-2014 for GOM cod, and the Council intends to adopt these ABCs in a future management action.