In this rule, FNS is proposing to amend the SNAP regulations at 7 CFR 274.6 to give States an option for handling requests for multiple replacement cards. Current regulations do not allow State agencies to require clients requesting multiple replacement cards to contact the agency and provide an explanation before a new card is issued, even though such requests sometimes indicate fraudulent activity. Under this rule, States could choose to withhold the benefit card when the client has requested an excessive number of replacements, until the client makes contact with the State agency and provides an explanation for the request. State agencies taking up this option would be expected to establish a threshold beyond which contact must be made, but in no instance may that threshold be fewer than four cards in a 12 month period prior to the request, except as provided below. The proposed minimum threshold is based on an analysis by FNS of electronic transaction data that demonstrates a statistically significant difference when a client reaches his or her fourth replacement card, indicating that transaction activity is three times more likely to be flagged as potential trafficking, which is the exchange of benefits for cash or other consideration, compared to clients with three or fewer replacement cards. The State agency would need to notify the client when he or she reaches the threshold for excessive card replacements, as determined by the State agency, and indicate what actions the State agency would take if the client requests another card replacement. The State agency would be expected to refer clients to the fraud investigation unit that respond to the agency request for contact but do not provide an appropriate explanation for such requests and must issue a replacement card while the investigation is ongoing. In all cases, States would be required to protect vulnerable persons who lose EBT cards but are not committing fraud.

FNS proposes to further amend 7 CFR 274.6 to change the EBT card replacement timeframes. Currently, State agencies must ensure that clients receive replacement EBT cards within two business days (or five business days if using a centralized mail issuance system) after the client notifies the State agency that the card has been lost or stolen. The proposed changes would place the requirement on the mailing end instead of the receiving end by requiring State agencies to make replacement cards available for pick up or to place the card in the mail within one business day following notice by the client. The proposed change would alleviate State agencies' responsibility for mail delays beyond their control. Finally, this proposed rule would also clarify the definition of trafficking to include actions that clearly express the intent to sell SNAP benefits or EBT cards in person or online through web sites and social media.

FNS proposes to amend regulations in order to provide States with options when clients request an excessive number of EBT card replacements. States would be able to withhold a replacement card until the client makes contact by phone or in-person with the State agency and provides an explanation for the excessive EBT card requests. The State agency would need to determine what it considers to be excessive, but the threshold may not be less than four card replacements requested within 12 months prior to the request; unless the State agency has sufficient, additional evidence indicating potential misuse that warrants noticing the client sooner than the fourth card request. These might be individuals about whom the State agency has gathered other evidence of suspected fraudulent activity. In these circumstances, the State agency may require the client to provide an explanation by phone or in person before the fifth card request, and, if deemed appropriate, refer the client for investigation. Evidence indicating potential misuse may include, but is not limited to, transactions made with retailers found by FNS to be guilty of trafficking, benefit cards that have a zero balance for both SNAP and cash assistance when the request is made, cards that follow established patterns of trafficking, etc. Further, States with sufficient evidence to warrant noticing the client sooner that the fourth replacement card request are encouraged to begin an investigation without waiting for the client to request another card. States would be required to notify clients when clients reach the threshold number of card replacement requests (not less than upon the fourth card in 12 months prior to the request or as otherwise provided by this proposed rule) prior to taking any action upon receiving a subsequent card replacement request. The notice must inform the client that the next request for card replacement will require contact with the State agency to provide an explanation for the requests, before the replacement card will be issued. The notice must be written in clear and simple language to ensure that the notice is understood.

Many States currently monitor multiple card replacements as a possible indicator of trafficking or other suspicious activity. However, it is difficult for States to prove trafficking on this information alone. States report that they often ask the client to come in to speak with them, but many do not respond. Current regulations do not allow State agencies to require client contact to obtain additional card replacements. FNS proposes to change the regulations so that State agencies have this latitude to require contact prior to issuing another card replacement once a significant threshold has been reached and the client notified. This change would provide States with another opportunity to gather potentially important information and to determine whether assistance or further investigation is warranted. Providing States with this new option supports FNS' commitment to Program integrity while maintaining the intent of the Program to provide nutrition benefits to low income households.

FNS is concerned that when clients request multiple EBT card replacements over a short period of time, there may be one of two possible problematic explanations. It may indicate that the client does not know how to use his or her EBT card properly, and needs additional help or training to protect the card and access benefits. It may also indicate that the client has sold his or her card, perhaps repeatedly, in order to obtain cash or other ineligible items. If the client does not understand how to use, maintain or protect the card, requiring him or her to contact the State office, either in-person or by phone, would allow the State to identify the problem and to assist the client with using the EBT card. On the other hand, the State agency may determine through such contacts, that the client is possibly or likely selling his or her cards, and could then refer him or her to the fraud unit for further investigation. In either event, the client who contacts the State agency would be provided a replacement card and must be allowed to continue to participate. If the client does not contact the State agency, the card may be held until he or she does so and the case must be turned over to the fraud unit for further investigation to determine if there is enough evidence to pursue an Intentional Program Violation (IPV). If the client does contact the State agency but refuses to explain the card losses, the card must be provided and the case must be turned over to the fraud unit for further investigation.

This proposed rule would not require States to pursue these cases, but does provide States with the option to pursue cases when they determine that the requests for card replacement are excessive. In all cases, States would be required to protect vulnerable persons who lose EBT cards but are not committing fraud. FNS is particularly focused on ensuring that persons who may have a greater tendency to lose multiple cards for legitimate reasons such as individuals with disabilities, homeless individuals, or the elderly, are protected and treated appropriately by State agencies that elect to exercise this authority. Furthermore, it is FNS's expectation that upon contact, should the State agency identify that the explanation for the request is appropriate, the State agency must use the contact to educate the client on proper use of the card, document this activity, and should not require contact upon subsequent requests that could be seen as a barrier to participation. It would only be appropriate to require contact upon subsequent requests if the pattern of activity has changed since the initial contact that indicates a likelihood of potential fraud.

State agencies have the option to provide replacement EBT cards in person at the local State SNAP office or by mail. For many clients, having to go into the local SNAP office to pick up a card can present a substantial barrier to getting a replacement card quickly. However, as the United States Postal Service (USPS) scales back its delivery services in many areas, State agencies are finding it more and more difficult to ensure clients receive replacement EBT cards within the timeframes required by FNS. Because State agencies do not have control over the length of time it takes the USPS to get a replacement EBT card into the hands of a SNAP household, FNS believes it is more appropriate to prescribe a timeframe by when the State agency must place the card in the mail instead of when the client must actually receive the card in the mail. FNS continues to believe that clients who have legitimately lost their card or had it stolen must receive a replacement card within a reasonable amount of time to ensure that they have access to benefits needed to meet their dietary needs. To this end, FNS is proposing to require State agencies to act on a notice by the client of a lost or stolen EBT card within one business day. The State would accomplish this requirement by either providing the client with a card for pick-up at the local office or by placing the card in the mail. Similar requirements apply to lost or stolen Personal Identification Numbers (PINs). However, if a PIN is being mailed in combination with a card, States would continue to follow industry standards for mailing PINs separate from the card.

FNS has received numerous reports regarding abuses of the Program involving attempts to sell SNAP benefits in person or online. In an effort to combat fraud and abuse, FNS has taken many steps to assist States in their ability to identify and further investigate instances of SNAP fraud, including trafficking, and is committed to continuing those efforts. To further assist States, FNS believes it is necessary to clarify the definition of trafficking to include the intent to sell SNAP benefits online or in person. FNS is basing these proposed changes on the existing definition of trafficking while acknowledging that there is another rulemaking in process which proposed additional changes to the trafficking definition. (76 FR 35787, proposed June 20, 2011). That regulation is not yet final. FNS will reflect all changes to the existing definition of trafficking in the final rule at the time of publication.

States have expressed concern with the growing popularity of social media Web sites as a format for advertising SNAP benefits for sale. The use of social media networking sites as a vehicle for trafficking SNAP is an area that needs increased monitoring. FNS has heard from a number of States and from the public that recipients are posting SNAP benefits for sale online and that the frequency of this activity is on the rise. FNS has taken action to discourage several of these Web sites from posting such advertisements, yet the Agency is aware that it still occurs.

Clarifying that the definition of trafficking to include activities demonstrating the intent to sell SNAP benefits would eliminate the common misunderstanding that one must observe or witness an actual transaction in order to pursue these cases as IPVs. State agencies can disqualify a recipient for posting or soliciting SNAP benefits for sale and assign the appropriate penalty to those individuals, such as permanent disqualification and criminal penalties, for particularly egregious offenses. The clarification would also include practices of individuals who target people outside of grocery stores or other locations, offering to sell their benefits for cash or other non-eligible items.

Through discussions with States regarding these issues, FNS has learned that State agencies have difficulty prosecuting these individuals because State agencies believe that the current regulations do not cover these types of activities. By amending the definition, FNS would be clarifying that an IPV for trafficking occurs when there is an attempted sale of benefits before the sale is completed. These proposed changes to regulations would help to ensure that the integrity of the Program is upheld and the benefits are used as intended.

Executive Orders 12866 and 13563 direct agencies to assess all 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 proposed rule has been designated non-signficant under section 3(f) of Executive Order 12866.

This Regulatory Flexibility Act (5 U.S.C. 601-612) requires Agencies to analyze the impact of rulemaking on small entities and consider alternatives that would minimize any significant impacts on a substantial number of small entities. Pursuant to that review, it has been certified that this rule would not have a significant impact on a substantial number of small entities. This proposed rule would not have an impact on small entities because they do not administer SNAP or investigate suspected intentional Program violations.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local and tribal governments and the private sector. Under section 202 of the UMRA, the Department generally must prepare a written statement, including a cost benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures by State, local or tribal governments, in the aggregate, or the private sector, of $100 million or more in any one year. When such a statement is needed for a rule, Section 205 of the UMRA generally requires the Department to identify and consider a reasonable number of regulatory alternatives and adopt the most cost effective or least burdensome alternative that achieves the objectives of the rule.

This rule does not contain Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local and tribal governments or the private sector of $100 million or more in any one year. Thus, the rule is not subject to the requirements of sections 202 and 205 of the UMRA.

The Supplemental Nutrition Assistance Program is listed in the Catalog of Federal Domestic Assistance Programs under 10.561. For the reasons set forth in the final rule in 7 CFR part 3015, subpart V, and related Notice (48 FR 29115, June 24, 1983), this program is excluded from the scope of Executive Order 12372 which requires intergovernmental consultation with State and local officials.

Executive Order 13132 requires Federal agencies to consider the impact of their regulatory actions on State and local governments. Where such actions have federalism implications, agencies are directed to provide a statement for inclusion in the preamble to the regulations describing the agency's considerations in terms of the three categories called for under Section (6)(b)(2)(B) of Executive Order 13121. The Department has determined that this rule does not have Federalism implications. This rule does not impose substantial or direct compliance costs on State and local governments. Therefore, under Section 6(b) of the Executive Order, a Federalism summary impact statement is not required.

This rule has been reviewed under Executive Order 12988, Civil Justice Reform. This rule is intended to have preemptive effect with respect to any State or local laws, regulations or policies which conflict with its provisions or which would otherwise impede its full and timely implementation. This rule is not intended to have retroactive effect unless so specified in the Effective Dates section of the final rule. Prior to any judicial challenge to the provisions of the final rule, all applicable administrative procedures must be exhausted.

FNS has reviewed this rule in accordance with the Department Regulation 4300-4, “Civil Rights Impact Analysis,” to identify and address any major civil rights impacts the rule might have on minorities, women, and persons with disabilities. After a careful review of the rule's intent and provisions, FNS has determined that this rule will not in any way limit or reduce in any way the ability of protected classes of individuals to receive SNAP benefits on the basis of their race, color, national origin, sex, age or disability.

Executive Order 13175 requires Federal agencies to consult and coordinate with Tribes on a government-to-government basis on policies that have Tribal implications, including regulations, legislative comments or proposed legislation, and other policy statements or actions that have substantial direct effects on one or more Indian Tribes, on the relationship between the Federal Government and Indian Tribes, or on the distribution of power and responsibilities between the federal government and Indian Tribes.

A. In the fall of 2010, USDA engaged in a series of consultative sessions to obtain input by Tribal officials or their designees concerning the impact of this rule on the tribe or Indian Tribal governments. The Joint Consultation sessions were coordinated by USDA's Office of Tribal Relations and held on the following dates and locations:

B. In the spring of 2011, FNS offered opportunities for consultation with Tribal officials or their designees to discuss the impact of the Healthy, Hunger-Free Kids Act of 2010 (HHFKA), Public Law 111-296, on tribes or Indian Tribal governments. The consultation sessions were coordinated by FNS and held on the following dates and locations:

There were no comments about this regulation during any of the aforementioned Tribal Consultation sessions.

C. In late 2010 and early 2011, USDA engaged in a series of consultative sessions to obtain input by Tribal officials or their designees concerning the effect of this and other rules on Tribes or Indian Tribal governments, or whether this rule may preempt Tribal law.

Reports from the consultative sessions will be made part of the USDA annual reporting on Tribal Consultation and Collaboration. FNS will respond in a timely and meaningful manner to Tribal government requests for any consultation concerning this rule. Currently, FNS provides regularly scheduled quarterly consultation sessions through the end of FY2012 as a venue for collaborative conversations with Tribal officials or their designees.

USDA will offer future opportunities, such as webinars and teleconferences, for collaborative conversations with Tribal leaders and their representatives concerning ways to improve rules with regard to their affect on Indian country.

We are unaware of any current Tribal laws that could be in conflict with the proposed rule. We request that commenters address any concerns in this regard in their responses.

The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 1320) requires the Office of Management and Budget (OMB) approve all collections of information by a Federal agency before they can be implemented. Respondents are not required to respond to any collection of information unless it displays a current valid OMB control number. This rule does not contain information collection requirements subject to approval by OMB under the Paperwork Reduction Act of 1995.

The Food and Nutrition Service is committed to complying with the E-Government Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

For the reasons set forth in the preamble, 7 CFR parts 271 and 274 are proposed to be amended as follows:

1. The authority citation for 7 CFR parts 271 and 274 continue to read as follows:

I. Background and Authority II. Summary of the Notice of Proposed Rulemaking III. Discussion A. Statutory Plumbing Requirements 1. Test Procedures for Showerheads and Faucets 2. Test Procedures for Water Closets and Urinals 3. Test Procedure for Commercial Prerinse Spray Valves 4. Design Requirements for Showerheads 5. Definitions B. Supplementary Plumbing Requirements 1. Definition of a Basic Model 2. Statistical Sampling Plans for Certification 3. Information To Be Provided in Certification Reports IV. Procedural Issues and Regulatory Review A. Review Under Executive Order 12866 B. Review Under the Regulatory Flexibility Act Showerheads and Faucets Water Closets and Urinals Commercial Prerinse Spray Valves C. Review Under the Paperwork Reduction Act of 1995 D. Review Under the National Environmental Policy Act of 1969 E. Review Under Executive Order 13132 F. Review Under Executive Order 12988 G. Review Under the Unfunded Mandates Reform Act of 1995 H. Review Under the Treasury and General Government Appropriations Act, 1999 I. Review Under Executive Order 12630 J. Review Under the Treasury and General Government Appropriations Act, 2001 K. Review Under Executive Order 13211 L. Review Under Section 32 of the Federal Energy Administration Act of 1974 V. Public Participation A. Attendance at the Public Meeting B. Procedure for Submitting Requests To Speak C. Conduct of Public Meeting D. Submission of Comments E. Issues on Which DOE Seeks Comment VI. Approval of the Office of the Secretary I. Background and Authority

Title III, Part B of the Energy Policy and Conservation Act of 1975 (EPCA), Public Law 94-163 (42 U.S.C. 6291-6309, as codified), established the Energy Conservation Program for Consumer Products Other Than Automobiles, which includes the showerheads, faucets, water closets, and urinals that are the subjects of today's notice. 1

Under EPCA, this program consists essentially of four parts: (1) Testing, (2) labeling, (3) Federal energy and water conservation standards, and (4) certification and enforcement procedures. The testing requirements include test procedures that manufacturers of covered products must use as the basis for (1) certifying to the DOE that their products comply with applicable energy and water conservation standards adopted under EPCA and (2) making representations about the energy or water consumption of those products on labels and other materials. Similarly, DOE must use these test procedures to determine whether the products comply with any relevant standards promulgated under EPCA.

EPCA also includes a water conservation standard and test procedure for commercial prerinse spray valves, which are also addressed in this notice. While commercial prerinse spray valves were originally referenced in Part B of EPCA, DOE noted in a final rule published October 18, 2005, that placement of commercial prerinse spray valves in Part B rather than part C of EPCA, which established the Energy Conservation Program for Certain Commercial and Industrial Equipment, 2 was the result of a legislative drafting error, and subsequently adopted the provisions for commercial prerinse spray valves into 10 CFR part 431. 70 FR 60407, 60409.

In 42 U.S.C. 6293, EPCA sets forth the criteria and procedures DOE must follow when prescribing or amending test procedures for covered products. EPCA provides, in relevant part, that any test procedures prescribed or amended under this section shall be reasonably designed to produce test results which measure energy efficiency, energy use, water use (in the case of showerheads, faucets, water closets and urinals), or estimated annual operating cost of a covered product during a representative average use cycle or period of use and shall not be unduly burdensome to conduct. (42 U.S.C. 6293(b)(3))

In addition, if DOE determines that a test procedure amendment is warranted, it must publish proposed test procedures and offer the public an opportunity to present oral and written comments on them. (42 U.S.C. 6293(b)(2)) Finally, in any rulemaking to amend a test procedure, DOE must determine to what extent, if any, the proposed test procedure would alter the measured energy efficiency or energy use, or, in this case, water use, of any covered product as determined under the existing test procedure. (42 U.S.C. 6293(e)(1)) If DOE determines that the amended test procedure would alter the measured water use of a covered product, DOE must amend the applicable water conservation standard accordingly. (42 U.S.C. 6293(e)(2))

Effective 180 days after an amended test procedure applicable to a covered product is prescribed, no manufacturer may make any representation with respect to water usage of such product unless such product has been tested in accordance with such amended test procedure and such representation fairly discloses the results of such testing. (42 U.S.C. 6293(c)(2)) However, the 180-day period may be extended for an additional 180 days if the Secretary of Energy (Secretary) determines that this requirement would impose an undue burden. (42 U.S.C. 6293(c)(3))

EPCA states that the procedures for testing and measuring the water use of faucets and showerheads shall be ASME/ANSI Standard A112.18.1M-1989, “Plumbing Fixture Fittings,” for faucets and showerheads, and ASME/ANSI Standard A112.19.6-1990, “Hydraulic Requirements for Water Closets and Urinals,” for water closets and urinals; EPCA further specifies that if ASME/ANSI revises these requirements, the Secretary shall adopt such revisions if they conform to the basic statutory requirements for test procedures. (42 U.S.C. 6293(b)(7)-(8)) DOE last amended test procedures for these products in a final rule published in March 1998 (March 1998 final rule), which incorporated by reference ASME/ANSI Standard A112.18.1M-1996, “Plumbing Fixture Fittings,” for showerheads and faucets, and ASME/ANSI Standard A112.19.6-1995, “Hydraulic Performance Requirements for Water Closets and Urinals,” for water closets and urinals. 63 FR 13308 (March 18, 1998). Since publication of the March 1998 final rule, ASME/ANSI has revised both procedures and issued the most recent versions as A112.18.1-2011, “Plumbing Supply Fittings,” for showerheads and faucets in June 2011, and A112.19.2-2008, “Ceramic Plumbing Fixtures,” for water closets and urinals in August 2008.

In today's notice, DOE proposes to amend its existing test procedures for showerheads, faucets, water closets, and urinals by adopting, with the exception of certain provisions regarding rounding of measured values, the most recent versions of the corresponding ASME/ANSI procedures for measuring the water consumption of these products. DOE has evaluated these industry procedures and has preliminarily determined that the revised ASME/ANSI test procedures for showerheads, faucets, water, closets, and urinals would (1) produce test results that more accurately measure water use during a representative average use cycle or period of use; and (2) not be unduly burdensome to conduct. 42 U.S.C. 6293(b)(1), (3). DOE has also determined that the adoption of these revised procedures would not alter the measured water use of these products. DOE's determination that the measured water use of showerheads, faucets, water closets, and urinals is not altered is based on an evaluation of the changes to the procedures described in Section III.A for each of the covered products.

Section 135(b)(1) of EPACT 2005 amended section 323(b) of EPCA (42 U.S.C. 6293(b)) to add subsection (14), which states that test procedures for measuring the flow rate for commercial prerinse spray valves “shall be based on [the] American Society for Testing and Materials [ASTM] Standard F2324, entitled `Standard Test Method for Pre-Rinse Spray Valves.' ” In a final rule published on December 8, 2006, DOE incorporated by reference the 2003 version of ASTM Standard F2324 in 10 CFR 431.263, and established it as the uniform test method for measurement of the flow rate of commercial prerinse spray valves in section 431.264. 71 FR 71340.

While commercial prerinse spray valves are included in Part B of EPCA as consumer products rather than in Part C, which addresses commercial and industrial equipment, DOE notes that Part C also contains the same provision regarding periodic review of test procedures for covered equipment at least once every seven years. 42 U.S.C. 6314(a)(1)(A). To fulfill this statutory requirement, DOE initiated this rulemaking and proposes in this NOPR to amend its test procedures for commercial prerinse spray valves. Specifically, DOE proposes to update its references in DOE's current test procedures to the latest version of the ASTM Standard by incorporating by reference ASTM Standard F2324-03 (2009), “Standard Test Method for Prerinse Spray Valves.”

The two statutory provisions that address representative test results and test burden for consumer products, which are discussed in the previous paragraph, also apply to DOE review of the test procedures for commercial and industrial equipment. 42 U.S.C. 6314(a)(2). In this light, DOE has evaluated ASTM F2324-03(2009), “Standard Test Method for Prerinse Spray Valves,” and has preliminarily determined that these two provisions are met. ASTM F2324-03(2009) does not involve any substantive amendment to the current DOE test procedure for commercial prerinse spray valves, which is based on ASTM F2324-03. However, to reflect the reapproval of the F2324-03 standard by ASME in 2009, DOE is proposing to incorporate by reference the reapproved version in 10 CFR 431.264.

DOE also proposes to retain the existing descriptors for measures of maximum permissible water use for water closets, urinals, faucets, and showerheads currently found in 10 CFR 430.23(s) through 430.23(v) (gallons or liters per minute or cycle, and gallons or liters per flush), and to retain the existing water use descriptors (gallons or liters per minute) for commercial prerinse spray valves in 10 CFR 431.264.

DOE considers the activity initiated by this proposed rule sufficient to satisfy the statutory requirement that DOE must review its test procedures for all covered products, including plumbing products, at least once every 7 years and either amend the applicable test procedures or publish a determination in the Federal Register not to amend them. (42 U.S.C. 6293(b)(1)(A) and 42 U.S.C. 6314(a)(1))

The current test procedures for showerheads and faucets are found in appendix S of 10 CFR part 430, subpart B, (Appendix S) and require that tests be conducted in accordance with the test procedure requirements specified in section 6.5, “Flow Capacity Test,” of ASME/ANSI Standard A112.18.1M-1996. In the revised ASME/ANSI Standard A112.18.1-2011, the flow capacity test has been moved to section 5.4 of that standard, titled “Flow Rate.” Minor substantive changes to the flow capacity test include (1) a requirement that the pressure differential measurement be within ±1 pound per square inch (psi) for faucets and ±2 psi for showerheads (not previously specified for either product), (2) a change in the test procedure temperature range to 5 to 71 °C for faucets (previously 4 to 66 °C) and to 32 to 44 °C for showerheads (previously 4 to 66 °C), (3) a requirement that a container large enough to hold water collected over a minimum of 1 minute be used when using the time/volume test procedure method for faucets and showerheads (not previously specified), and (4) a requirement that flow be maintained during testing for at least 1 minute for showerheads (not previously specified). DOE sees no evidence that the changes identified in this paragraph will result in a change in the measured water use of faucets or showerheads, and therefore proposes to incorporate by reference the applicable section of ASME/ANSI Standard A112.18.1-2011 for testing showerheads and faucets at Appendix S.

The existing test procedure language in Appendix S of 10 CFR part 430 also requires, for all faucets and showerheads, that measurements be recorded at the resolution of the test instrumentation and that calculations be rounded off to the same number of significant digits as the previous step. It also requires that the final water consumption value be rounded to one decimal place for non-metered faucets and for showerheads, and to two decimal places for metered faucets. DOE originally introduced these provisions as part of its 1998 final rule in order to establish uniformity in the calculated results reported in certifications of compliance. 63 FR at 13310. DOE has not received any information since that time indicating that these rounding provisions should be modified, and proposes to retain them without change.

DOE requests comment on these proposed amendments to the existing test procedures for showerheads and faucets, including provisions pertaining to representations of water consumption and calculations of those values.

The current test procedure for water closets and urinals is found in appendix T of 10 CFR part 430, subpart B, (Appendix T) and incorporates by reference ASME/ANSI Standard A112.19.6-1995. The test procedure in Appendix T is divided into two sections: “Test Apparatus and General Instructions,” and “Test Measurement,” both of which reference corresponding provisions in A112.19.6-1995. When ASME merged ASME/ANSI Standard A112.19.6-1995 with ASME/ANSI Standard A112.19.2-2003 “Vitreous China Plumbing Fixtures” to produce ASME/ANSI Standard A112.19.2-2008, several sections of the water consumption tests for water closets and urinals that DOE refers to in Appendix T were renumbered and no longer correspond to the same sections DOE references.

DOE proposes to amend its regulations to correspond to the changes that ASME made in the 2008 version of its procedures for water closets. Specifically, the existing DOE test procedure in Appendix T requires that the test apparatus and instructions for testing water closets conform to the requirements specified in section 7.1.2, “Test Apparatus and General Instructions,” subsections 7.1.2.1, 7.1.2.2, and 7.1.2.3, of ASME/ANSI Standard A112.19.6-1995, whereas DOE now proposes that its test procedure reference ASME/ANSI Standard A112.19.2-2008, and in particular the sections that specify the requirements for test apparatus instructions and instructions for testing water closets in 7.1.1, 7.1.2, 7.1.3, and 7.1.4. These sections include minor changes to the test setup, which are described in the next paragraph.

The existing DOE test procedure requires that the measurement of the water flush volume of water closets be conducted in accordance with the test requirements specified in ASME/ANSI Standard A112.19.6-1995, section 7.1.6, “Water Consumption and Hydraulic Characteristics.” In the updated ASME/ANSI A112.19.2-2008, the test procedure for measuring the water flush volume of water closets is found in section 7.4, “Water Consumption Test.” Dual-flush water closets, which are not addressed in the 1995 ASME/ANSI procedure or in DOE's current test procedure, are required under ASME/ANSI A112.19.2-2008  3 to meet the flush volume requirement for low consumption water closets of 1.6 gallons per flush when the full flush volume is activated. Additional minor updates found in ASME/ANSI A112.19.2-2008 include (1) a required filter in the apparatus set-up (not previously required), (2) required receiving vessel calibration in increments of 0.25 liters (0.07 gallons) (decreased from 0.1 gallons), (3) required use of an electric timer with increments that are accurate within a tenth of a second to verify that the actuator is held for a maximum of 1 second (not previously specified), (4) revised static pressure requirements for flushometer valves with siphonic bowls to 80 psi for one round of tests and 35 psi for the second two rounds (previously one round of tests at each of three pressures: 80, 50, and 15 psi) and a similar provision for flushometer valves with blowout bowls, but at 80 and 45 psi (previously 80, 50, and 35 psi), and (5) required rounding of the total flush volume down to the nearest 0.25 liters (0.07 gallons) (not previously specified). DOE sees no evidence that the changes identified in this paragraph will result in a change in the measured water use of water closets, would produce test results that less accurately measure the water use of water closets during a representative average use cycle, or would be more burdensome to conduct, and therefore proposes to incorporate by reference the applicable sections of ASME/ANSI Standard A112.19.2-2008 for testing water closets into Appendix T, except the rounding provisions, as discussed in section III.A.2.c.

The current DOE test procedure for urinals is also found in Appendix T and incorporates by reference ASME/ANSI Standard A112.19.6-1995. The existing DOE test procedure requires that the test apparatus and instructions for testing urinals conform to the requirements specified in ASME/ANSI Standard A112.19.6-1995, section 8.2, “Test Apparatus and General Instructions,” subsections 8.2.1, 8.2.2, and 8.2.3. In updated ASME/ANSI Standard A112.19.2-2008, the section that specifies the requirements for test apparatus instructions and instructions for testing urinals is 8.2, “Test Apparatus and General Instructions,” which includes subsections 8.2.1, 8.2.2, and 8.2.3. The existing DOE test procedure requires that the measurement of the water flush volume of urinals be conducted in accordance with the test requirements specified in ASME/ANSI A112.19.6-1995, section 8.5, “Water Consumption.” In the 2008 version of A112.19.2, these requirements have been moved to section 8.6, “Water Consumption Test.” Additionally, minor updates to the water consumption test found in ASME/ANSI A112.19.2-2008 include (1) a required filter in the apparatus set-up (not previously specified), (2) required receiving vessel calibration of 0.25 liters (0.07 gallons) (decreased from 0.1 gallons), and (3) required rounding of the total flush volume down to the nearest 0.25 liters (0.07 gallons) (not previously specified). DOE sees no evidence that the changes identified in this paragraph will result in a change in the measured water use of urinals, produce test results that less accurately measure the water use of urinals during a representative average use cycle, or would be more burdensome to conduct, and therefore proposes to incorporate by reference the applicable sections from ASME/ANSI Standard A112.19.2-2008 for testing urinals into Appendix T, except for the rounding provision, as discussed in section III.A.2.c.

For both urinals and water closets, the existing DOE test procedure language in Appendix T requires that measurements be recorded at the resolution of the test instrumentation; that calculations be rounded off to the same number of significant digits as the previous step; and that the final water consumption value be rounded to one decimal place for water closets and for urinals. DOE added these provisions in its 1998 final rule (63 FR 13310-11) and has not received any information since that time indicating that these rounding provisions should be modified. However, in order to maintain consistency with the measurement and calculation methods in the ASME/ANSI A112.19.2-2008 procedure, DOE proposes to amend the rounding provisions in Appendix T to require that the final value of water consumption for each tested unit retain the number of significant digits present in the measured test value. Because EPCA uses gallons as the primary unit of measurement for assessing compliance with the standards for these products, the test values for each model would be converted to gallons after applying the applicable sample statistics in 10 CFR 429.30 or 429.31, and the rated value of water consumption rounded to the nearest 0.01 gallon per flush (or nearest 0.01 liter per flush).

As previously discussed, DOE is proposing to require that dual-flush water closets be tested according to ANSI/ASME Standard A112.19.2-2008 to determine their maximum flush volume, as observed in full flush mode. However, DOE is aware that other testing and reporting metrics have been developed for these products in order to reflect the reduction in average water consumption that results from use of the reduced flow mode. In particular, the Environmental Protection Agency (EPA) WaterSense program's  4 specifications for water closets permit the overall water consumption of dual-flush water closets to be represented as a weighted average of the flush volumes, in which it is assumed that two thirds of all flushes will be the reduced flow ( see EPA WaterSense Specification for Tank-Type Toilets version 1.1, section 3.2, available at http://www.epa.gov/WaterSense/docs/revised_het_specification_v1.1_050611_final508.pdf, or DOE Docket Number EERE-2011-BT-TP-0061, No. 1, p. 1).

DOE is proposing a test procedure to measure the water use of a dual-flush water closet over a representative average period of consumer use (“average representative water use”). DOE may, in a future rulemaking, consider amendments to the certification provisions for water closets that could account for the impact of the reduced flush on the water consumption of dual-flush water closets.

Under the proposed test procedure, the flush volume of the reduced flush would be measured using section 7.4 of ASME/ANSI Standard A112.19.2-2008 in the same manner as the full flush, and the average representative water use would be calculated using the composite average of two reduced flushes and one full flush.

In order to ensure that DOE has considered all relevant aspects of this approach, DOE requests comments on (1) its proposal to develop a test procedure to measure the average representative water use of dual-flush water closets in general, (2) whether the use of a composite average of the flush volumes of a dual-flush water closet is representative of the average water use of these products, and (3) whether the specific ratio of flush volumes proposed in this notice (i.e., two reduced flushes and one full flush) is an appropriate measure of the representative average water use of dual-flush water closets.

DOE requests comment on these proposed amendments to the existing test procedures for water closets and urinals, including provisions pertaining to representations of water consumption and calculations of those values, and the appropriate means of determining the representative average water use of dual-flush water closets.

The current DOE test procedure for commercial prerinse spray valves is found in section 431.264 of 10 CFR part 431, subpart O, and requires that the test procedure to determine the water consumption flow rate of commercial prerinse spray valves be conducted in accordance with the test requirements specified in sections 4.1 and 4.2 (Summary of Test Method), 5.1 (Significance and Use), 6.1 through 6.9 (Apparatus) except 6.5, 9.1 through 9.5 (Preparation of Apparatus), 10.1 through 10.2.5 (Procedure), and calculations in accordance with sections 11.1 through 11.3.2 (Calculation and Report) of ASTM F2324-03, “Standard Test Method for Prerinse Spray Valves.” ASTM has not updated the portions of this ASTM standard that are referenced in the DOE test procedure since DOE incorporated this standard by reference in the December 2008 final rule. 71 FR 71340. After considering that ASTM reapproved this standard in 2009 without making any substantive changes, DOE proposes in this NOPR to amend its current test procedure by incorporating by reference the most recent version of this standard as ASTM Standard F2324-03 (2009), “Standard Test Method for Prerinse Spray Valves.”

The existing DOE test procedure for commercial prerinse spray valves found at 10 CFR 431.264 requires that measurements be recorded at the resolution of the test instrumentation; that calculations be rounded off to the same number of significant digits as in the previous step; and that the final water consumption value be rounded off to one decimal place as follows: (1) a fractional number at or above the midpoint between two consecutive decimal places shall be rounded up to the higher of the two decimal places, or (2) a fractional number below the midpoint between two consecutive decimal places shall be rounded down to the lower of the two decimal places. DOE proposes to retain these provisions without change.

DOE invites comments on its proposal to retain the existing test procedure for commercial prerinse spray valves, with incorporation by reference of the most recent version of the ASTM standard, and is interested in any views on the suitability of this procedure for meeting the requirements of EPCA with respect to representativeness of measurements and test burden.

In addition to the water consumption standards that were promulgated by EPCA for showerheads, the statute includes a provision that showerheads must also meet the requirements of section 7.4.3(a) of ASME/ANSI A112.18.1M-1989, which requires that if a flow control insert is used as a component of a showerhead, the showerhead must be manufactured such that a pushing or pulling force of 8 pounds (8 lbf.) or more is required to remove the insert. DOE subsequently adopted this provision in 10 CFR 430.32(p).

In the March 1998 final rule that adopted ASME/ANSI A112.18.1M-1996 as the test procedure for showerheads and faucets, DOE amended the text in section 430.32(p) to reflect that the aforementioned provision of the ASME/ANSI standard had been moved to section 7.4.4(a). 63 FR 13309-10. This provision was retained in the updated A112.18.1-2011, but has been moved to section 4.11.1 of that standard. Additionally, the language for this provision in the 2011 version of the ASME standard has changed slightly from the 1996 version in that the force required to remove the flow-restricting insert is no longer referred to specifically as a “pushing or pulling” force, but rather, is described only as a force of 36 Newtons (N) (8.0 lbf) or more, where the Newton measurement represents a conversion of the original lbf measurement to the International System of Units (SI, or metric units) after rounding to a whole number. Since the amount of force expressed in inch/pound units has not changed, DOE does not view this as a substantive change in the industry requirement and proposes to incorporate the text of this provision from ASME/ANSI Standard A112.18.2-2011 at section 430.32(p) of 10 CFR part 430 as a direct replacement of the existing provision. However, for the purposes of compliance with Federal standards, DOE proposes to retain the 8 lbf metric as the applicable standard in order to maintain consistency with the original statutory provision in 42 U.S.C. 6295(j), which references the 8 lbf requirement as described in the first paragraph of this section. Thus, the proposed text lists 8 lbf as the primary measure, with the equivalent 36 N included as a secondary metric for reference purposes.

While DOE is not proposing any change to this design requirement, DOE notes that no specific test procedure exists in ASME Standard A112.18.1-2011, or in any previous version of that standard, for verifying that a flow-restricting insert remains mechanically retained when subjected to a force of 8 lbs. DOE searched for a more general test method for assessing a pulling or pushing force of this type and was unable to identify any standardized method for this purpose. One of the testing organizations DOE contacted did provide information about the types of test configurations and equipment it typically uses for assessing compliance with this requirement during the compliance tests for showerheads, which generally apply either a pushing or pulling force that is measured using a calibrated force meter. However, since the design configuration of flow-restricting inserts varies among models, a standardized method based upon the setups currently used by test laboratories may not be useful in all cases, particularly if a flow-restricting insert is a threaded screw-in type, wherein a torque would be required to remove it as opposed to a pulling or pushing force. Other flow-restricting inserts are secured to the inlet of the showerhead with a retainer or plastic plate that requires the testing laboratory to adapt its test depending on the specific location of the flow-restricting insert and retainer.

In the absence of any publicly available standard test method, and with limited information about how variation in the designs of flow-restricting inserts may complicate the development of a standardized method, DOE is unable at this time to propose, for inclusion in the test procedure for showerheads, a specific method of verifying the force required to remove a flow-restricting insert. However, since the adoption of a standardized approach would enable manufacturers to more effectively demonstrate compliance with this provision in the case of a challenge and would enable DOE or others to independently verify compliance in a standardized manner, DOE is interested in receiving comments and information on prospective methods for verifying that the 8 lbf requirement in section 4.11.1 of ASME/ANSI Standard A112.18.1-2011 has been met. DOE is also interested in comments and information on showerhead designs that may complicate verification of this provision or make it unnecessary. Based upon information received, DOE may consider proposing a test method as part of a supplemental notice of proposed rulemaking.

To address certain provisions of the revised ASME/ANSI procedures that were not contemplated in the versions referenced by the existing DOE test procedure, and to establish greater clarity with respect to product coverage, DOE proposes to adopt new definitions for the terms “accessory,” “body spray,” and “fitting,” based on the definitions for these components in ASME/ANSI Standard A112.18.1-2011, and a definition for “dual-flush water closet” from ASME/ANSI Standard A112.19.2-2008, all of which would be incorporated into 10 CFR part 430, section 430.2. DOE also proposes a definition for “hand-held showerhead,” which is not found in ASME/ANSI A112.18.1-2011, but was derived from the description of these products found in the WaterSense Specification for Showerheads, Version 1.0, developed by the EPA ( See http://www.epa.gov/WaterSense/docs/showerheads_finalspec508.pdf, or DOE Docket Number EERE-2011-BT-TP-0061, No. 2, p. 1). Finally, DOE proposes an amendment to the existing definition of “showerhead” currently found in 10 CFR 430.2. The proposed definition is based upon the definition for showerhead included in ASME/ANSI A112.18.1-2011, but has been modified to more clearly define the extent of DOE's coverage of these products, and to specifically state that safety shower showerheads are not covered products, that hand-held showerheads are covered, and that DOE considers a body spray to be a showerhead for the purposes of regulatory coverage.

DOE also notes that the proposed application of the terms “fitting” and “accessory” to showerheads, specifically within the context of their coverage under DOE standards, may diverge slightly from previous use of these terms in other DOE documents addressing these products. DOE is proposing to adopt definitions for fitting and accessory, and a definition of showerhead that uses these terms, in order to more closely align the regulatory terminology with that of the industry standards upon which the DOE test procedure and water conservation standards are based, and to ensure that the meanings of these terms are consistent as applied to the products covered by DOE standards.

All components that are defined as an “accessory” (or a combined set of accessories) to a supply fitting represent a single covered product that must meet the DOE standard. Any components that are part of the “fitting” that is supplying water to an accessory, such as a valve (or valves) and connected piping, are not part of the covered product. Because the applicable water conservation standard applies to a basic model of a covered product as distributed in commerce, individual basic models that are packaged and sold, or otherwise distributed in commerce, separately and installed into a system by the purchaser would be subject to the standard individually, not as an installed system. In contrast, a system of spraying components that is packaged and/or distributed in commerce as a single “accessory” or a single set of “accessories,” designed to be attached to a single fitting, would be defined as a single showerhead and would be subject to the 2.5 gallon per minute (gpm) standard assigned to these products under 42 U.S.C. 6295(j).

DOE invites comments on its proposal to adopt definitions for “accessory,” “body spray,” “hand-held showerhead,” “fitting,” and “dual-flush water closet,” and to amend the definition of “showerhead” as shown in the proposed regulatory text at the end of this notice.

DOE defines a “basic model” as it applies to showerheads, faucets, water closets, and urinals in 10 CFR 430.2, and it defines “basic model” as it applies to commercial prerinse spray valves in section 431.262. With respect to the definitions of “basic model” as they apply to showerheads, faucets, and commercial prerinse spray valves, DOE has received no information since the adoption of these definitions indicating that a revision is necessary, and does not propose any revisions to these definitions in this proposed rule.

With respect to water closets and urinals, DOE has received information indicating that confusion may exist among manufacturers regarding how to properly apply the concept of a basic model to certain types of water closets and urinals. More specifically, in the case of flushometer valve water closets and urinals, 5 and certain gravity tank water closets in which the tank and flushing device are concealed within the wall rather than attached directly to the bowl, DOE has been made aware that the water consumption of a given model of bowl for a water closet or urinal can be directly affected by the specific flushometer valve or tank-type flushing device that is paired with that bowl. This has complicated the process of testing, reporting, and labeling water closets and urinals under the existing DOE compliance, certification, and enforcement provisions due to the various combinations of valves and/or tanks from different manufacturers that could be paired with a given bowl.

DOE proposes to retain the existing definitions of a basic model of water closet and basic model of urinal, but emphasizes that the manner in which individual models may be grouped together as basic models for the purposes of reporting water consumption in accordance with 10 CFR 429.12 should be based upon the maximum flow for a given bowl (or urinal body) and the valve or tank with which it is designed to operate. In other words, by certifying a given pairing of water closet bowl and valve (or tank) or urinal body and valve as a basic model under the existing certification and compliance framework, the manufacturer would be certifying that the pairing on which that basic model's rating is based is the maximum flush volume that model of water closet bowl or urinal body is designed to provide, and that it could not be paired with a flushing device or tank that would provide a higher flush volume and still function properly.

Under the compliance certification framework described in the previous paragraph, a manufacturer would be permitted to represent the rated flush volume of a particular model of water closet bowl or urinal body using a representative model of flushometer valve or gravity tank that provides a flush volume at this maximum level, regardless of any other such pairings that may be possible using valves or tanks from other manufacturers. Since, by design, none of the individual models of that basic model of water closet or urinal could operate using a flushing device providing a higher volume, the pairing upon which the certification is based, as well as all other pairings, would be compliant with the applicable water consumption standard. In addition, manufacturers are permitted under the certification provisions of 10 CFR part 429 to rate products conservatively at the maximum flush volume, even if certain combinations of bowls and flushing devices consume less water per flush than the maximum volume permitted by the relevant water consumption standard. Note, however, that if a manufacturer wishes to make representations of the water consumption of a given pairing that provides a lower volume flush than the maximum design volume, such as on product labels or in advertising or marketing materials, that particular pairing must be certified as a separate basic model and rated at the specific flush volume that the manufacturer intends to use in representations.

As a theoretical example of this method, a manufacturer wishes to certify a particular model of flushometer water closet, referred to here as “model A.” This model is designed to operate using flushometer valves that provide a volume as high as 1.6 gallons per flush (the Federal standard), and as low as 1.28 gallons per flush (the EPA WaterSense standard). There are many available flushometer valves that meet these requirements, but the manufacturer has tested model A with two flushometer valves: model 1, which operates at 1.6 gallons per flush, and model 2, which operates at 1.28 gallons per flush. The individual model pairings are identified as models A1 and A2, respectively. If the manufacturer is not concerned about labeling this model at any rating less than the Federal standard, then it is permissible to rate the model using valve model 1, and certify model A at 1.6 gallons per flush. To indicate that the basic model can use multiple flush valves, under this model numbering convention it could be certified as basic model A*, with the asterisk as a placeholder value to allow for other valve models. However, if the manufacturer wishes to label a version of model A as meeting the 1.28 gallon per flush standard, the combination that provides that rating must be certified separately as basic model A2.

DOE invites comments on this interpretation of the current definition of a basic model of water closet and urinal, and any other factors that DOE should consider in clarifying the definition of basic model and how manufacturers may group models and rate their water consumption.

The statistical sampling plans required for determining the rated values of water consumption for faucets, showerheads, water closets, urinals, and commercial prerinse spray valves are specified in sections 429.28, 429.29, 429.30, 429.31, and 429.51, respectively, of 10 CFR part 429. While DOE is not proposing to change these provisions in today's NOPR, DOE is interested in receiving comments on all elements of these provisions, including the confidence limits and potential revisions to the respective sampling plans that might better reflect the level of repeatability and reproducibility that is achievable for each test, and the variability in measured water consumption that is inherent for each product.

10 CFR part 429 describes the information that manufacturers are required to supply to DOE to certify that covered products comply with energy and water conservation standards. Section 429.12 lists the information that manufacturers are required to report for all products, and specific requirements for plumbing products are identified in section 429.28 (for faucets), section 429.29 (for showerheads), section 429.30 (for water closets), section 429.31 (for urinals), and section 429.51 (for commercial prerinse spray valves). DOE proposes to retain the existing reporting requirements for all five product types. DOE proposes to move the rounding provision for the rated value of water consumption for all five product types from the applicable test procedures to part 429 to clarify that rounding of the final rated value of water consumption for a basic model should occur after application of the sampling statistics.

The Office of Management and Budget (OMB) has determined that test procedure rulemakings do not constitute “significant regulatory actions” under section 3(f) of Executive Order 12866, “Regulatory Planning and Review,” 58 FR 51735 (Oct. 4, 1993). Accordingly, this proposed action was not subject to review under the Executive Order by the Office of Information and Regulatory Affairs (OIRA) in the OMB.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires preparation of an initial regulatory flexibility analysis (IRFA) for any proposed rule, unless the agency certifies that the rule, if promulgated, will not have a significant economic impact on a substantial number of small entities. As required by Executive Order 13272, “Proper Consideration of Small Entities in Agency Rulemaking,” 67 FR 53461 (August 16, 2002), DOE published procedures and policies on February 19, 2003, so that the potential impacts of its rules on small entities are properly considered during the rulemaking process. 68 FR 7990 (February 12, 2003). DOE has made its procedures and policies available on the Office of the General Counsel's Web site at http://www.gc.doe.gov/gc/office-general-counsel.

DOE reviewed the proposed rule to amend the test procedures for plumbing equipment including showerheads, faucets, water closets, urinals and commercial prerinse spray valves under the provisions of the Regulatory Flexibility Act and the procedures and policies published on February 19, 2003. DOE certifies that the proposed rule, if adopted, would not result in significant economic impacts on small entities. The factual basis for this certification is set forth in the following paragraphs.

For the plumbing equipment manufacturing industry, the Small Business Administration (SBA) has set a size threshold, which defines those entities classified as “small businesses” for the purpose of the statute. DOE used the SBA's size standards to determine whether any small entities would be required to comply with the rule. The size standards are codified at 13 CFR part 121. The standards are listed by North American Industry Classification System (NAICS) code and industry description and are available at www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf. Plumbing equipment manufacturers are classified under NAICS 332913, “Plumbing Fixture Fitting and Trim Manufacturing,” and NAICS 327111, “Vitreous China Plumbing Fixture and China and Earthenware Bathroom Accessories Manufacturing.” The SBA sets a threshold of 500 employees or less for NAICS 332913, and 750 employees or less for NAICS 327111, for an entity to be considered a small business within these categories.

DOE conducted a focused inquiry into small business manufacturers of products covered by this rulemaking. During its market survey, DOE used all available public information to identify potential small manufacturers. DOE's research involved the review of industry trade association membership directories (including the American Society of Plumbing Engineers), product databases ( e.g., Federal Trade Commission (FTC), the Thomas Register, California Energy Commission (CEC), and ENERGY STAR databases), individual company Web sites, and marketing research tools ( e.g., Dun and Bradstreet reports, Manta) to create a list of companies that manufacture or sell plumbing products covered by this rulemaking. Using these sources, DOE identified 83 manufacturers of showerheads, faucets, water closets, urinals and commercial prerinse spray valves.

DOE then reviewed this data to determine whether the entities met the SBA's definition of a small business manufacturer of covered plumbing products and screened out companies that do not offer products covered by this rulemaking, do not meet the definition of a “small business,” or are foreign owned and operated. Based on this review, DOE has identified 48 manufacturers that would be considered small businesses. Through this analysis, DOE determined the expected impacts of the rule on affected small businesses and whether an IRFA was needed (i.e., whether DOE could certify that this rulemaking would not have a significant economic impact on a substantial number of small entities).

Table 1 stratifies the small businesses according to their number of employees. The smallest company has 4 employees and the largest company 375 employees. The majority of the small businesses affected by this rulemaking (88 percent) have fewer than 100 employees. Annual revenues associated with these small manufacturers were estimated at $492.5 million ($10.3 million average annual sales per small manufacturer). According to DOE's analysis, small entities comprise 58 percent of the entire plumbing equipment manufacturing industry covered by the proposed rule.

As noted in the Summary and Background sections of this NOPR, EPCA requires that DOE review its test procedures for covered products at least once every seven years and to amend them if the Secretary determines that to do so would provide test procedures that would more accurately or completely measure water use and that are not unduly burdensome to conduct. ( See 42 U.S.C. 6293(b)(1)) To comply with EPCA, this rule proposes to incorporate amendments to ASME/ANSI test procedures, which have been updated for faucets, showerheads, water closets and urinals. Additionally, EPCA prescribes use of the ASTM Standard F2324 for commercial prerinse spray valves, which is a product that is also covered in this rulemaking.

DOE is proposing to update its testing procedures for showerheads and faucets by incorporating by reference AMSE/ANSI Standard A112.18.1-2011. These proposed changes involve minor adjustments in test methodology, such as changes in temperatures and inclusion of instrument tolerances that were not previously specified, none of which would require any additional equipment and are not expected to lengthen the time required to complete the test. Because there are no major changes in testing procedures, calculation methodology or certification requirements associated with this proposal, DOE has tentatively determined there would be no incremental cost burden to small entities associated with this change.

DOE is proposing to update its water closet and urinal test procedures from those set forth in ASME/ANSI A112.19.6-1995 to comply with ASME/ANSI A112.19.6-2008. The proposed changes involve minor adjustments in test setup, the specification of certain instrumentation tolerances, and minor adjustment to test pressures, none of which would require additional equipment or lengthen the time required to complete the test. Because there are no major changes in testing procedures or requirements for these products, DOE proposes to incorporate this change by reference. The changes proposed in this rule would not alter current testing procedures, calculation methodologies or enforcement. Therefore, DOE has tentatively concluded there would be no incremental cost burden to small manufacturers associated with the non-substantive changes in this proposed rule.

DOE currently requires that commercial prerinse spray valves be tested according to the ASTM Standard Test Method for Prerinse Spray Valves (ASTM F2324-03). This proposed rule would not make any alterations to this test, as it has not been updated since the 2003 version that DOE incorporated in the Code of Federal Regulations. 70 FR 60407 (October 18, 2005). Thus, DOE determines there would be no incremental cost burden to manufacturers of commercial prerinse spray valves associated with this proposed rule.

As indicated previously, DOE has analyzed the manufacturing industry for showerheads, faucets, water closets, urinals and commercial prerinse spray valves and has determined that 58 percent of all plumbing equipment manufacturers could be classified as small entities according to the SBA classification. Although 58 percent of the market is a significant portion of the overall industry, these manufacturers would not be significantly affected by this rule because there would be no incremental costs to any entity due to its implementation. In the absence of potential cost impacts, the proposed rule by definition would not have disproportionate effects on small businesses.

Based on the criteria outlined in the preceding paragraph, DOE has tentatively concluded that the proposed testing procedure amendments would not have a “significant economic impact on a substantial number of small entities,” and the preparation of an IRFA is not warranted. DOE will transmit the certification and supporting statement of factual basis to the Chief Counsel for Advocacy of the Small Business Administration for review under 5 U.S.C. 605(b).

DOE seeks comment on its tentative conclusion that the proposed test procedure changes will not have a significant impact on a substantial number of small entities.

Manufacturers of showerheads, faucets, water closets, urinals, and commercial prerinse spray valves must certify to DOE that their products comply with any applicable water conservation standards. In certifying compliance, manufacturers must test their products according to the DOE test procedures for showerheads, faucets, water closets, urinals, and commercial prerinse spray valves, including any amendments adopted for those test procedures. DOE has established regulations for the certification and recordkeeping requirements for all covered consumer products and commercial equipment, including showerheads, faucets, water closets, urinals, and commercial prerinse spray valves. 76 FR 12422 (March 7, 2011). The collection-of-information requirement for the certification and recordkeeping is subject to review and approval by OMB under the Paperwork Reduction Act (PRA). This requirement has been approved by OMB under OMB control number 1910-1400. Public reporting burden for the certification is estimated to average 20 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information.

Notwithstanding any other provision of the law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the PRA, unless that collection of information displays a currently valid OMB Control Number.

In this notice, DOE proposes to amend its test procedure for showerheads, faucets, water closets, and urinals to improve the ability of DOE's procedures to more accurately account for the water consumption of these products. DOE has determined that this rule falls into a class of actions that are categorically excluded from review under the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq. ) and DOE's implementing regulations at 10 CFR part 1021. Specifically, this rule amends an existing rule without changing its environmental effect, and, therefore, is covered by the Categorical Exclusion in 10 CFR part 1021, subpart D, paragraph A5. The exclusion applies because this rule would establish revisions to existing test procedures that would not affect the amount, quality, or distribution of energy usage, and, therefore, would not result in any environmental impacts. Accordingly, neither an environmental assessment nor an environmental impact statement is required.

Executive Order 13132, “Federalism,” imposes certain requirements on agencies formulating and implementing policies or regulations that preempt State law or that have Federalism implications. 64 FR 43255 (August 10, 1999). The Executive Order requires agencies to examine the constitutional and statutory authority supporting any action that would limit the policymaking discretion of the States and to carefully assess the necessity for such actions. The Executive Order also requires agencies to have an accountable process to ensure meaningful and timely input by State and local officials in the development of regulatory policies that have Federalism implications. On March 14, 2000, DOE published a statement of policy describing the intergovernmental consultation process that it will follow in developing such regulations. 65 FR 13735. DOE examined this proposed rule and determined that it would not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. EPCA governs and prescribes Federal preemption of State regulations as to energy conservation for the products that are the subject of this proposed rule. States can petition DOE for exemption from such preemption to the extent, and based on criteria, set forth in EPCA. (42 U.S.C. 6297) No further action is required by Executive Order 13132.

Regarding the review of existing regulations and the promulgation of new regulations, section 3(a) of Executive Order 12988, “Civil Justice Reform,” imposes on Federal agencies the general duty to adhere to the following requirements: (1) Eliminate drafting errors and ambiguity; (2) write regulations to minimize litigation; (3) provide a clear legal standard for affected conduct rather than a general standard; and (4) promote simplification and burden reduction. 61 FR 4729 (Feb. 7, 1996). Section 3(b) of Executive Order 12988 specifically requires that Executive agencies make every reasonable effort to ensure that the regulation specifies the following: (1) the preemptive effect, if any; (2) any effect on existing Federal law or regulation; (3) a clear legal standard for affected conduct while promoting simplification and burden reduction; (4) the retroactive effect, if any; (5) definitions of key terms; and (6) other important issues affecting clarity and general draftsmanship under any guidelines issued by the Attorney General. Section 3(c) of Executive Order 12988 requires Executive agencies to review regulations in light of applicable standards in sections 3(a) and 3(b) to determine whether they are met or whether it is unreasonable to meet one or more of them. DOE has completed the required review and determined that, to the extent permitted by law, this proposed rule meets the relevant standards of Executive Order 12988.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub. L. 104-4; 2 U.S.C. 1501 et seq. ) requires each Federal agency to assess the effects of Federal regulatory actions on State, local, and Tribal governments and the private sector. For a proposed regulatory action likely to result in a rule that may cause the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector of $100 million or more in any one year (adjusted annually for inflation), section 202 of UMRA requires a Federal agency to publish estimates of the resulting costs, benefits, and other effects on the national economy. (2 U.S.C. 1532(a)-(b)) UMRA also requires a Federal agency to develop an effective process to permit timely input by elected officers of State, local, and Tribal governments on a proposed “significant intergovernmental mandate,” and requires an agency plan for giving notice and opportunity for timely input to potentially affected small governments before establishing any requirements that might significantly or uniquely affect such governments. On March 18, 1997, DOE published a statement of policy on its process for intergovernmental consultation under UMRA. 62 FR 12820. (The policy is also available at http://www.gc.doe.gov/gc/office-general-counsel. ) This proposed rule contains neither an intergovernmental mandate nor a mandate that may result in an expenditure of $100 million or more in any year, so these requirements do not apply.

Section 654 of the Treasury and General Government Appropriations Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family Policymaking Assessment for any rule that may affect family well-being. This proposed rule would not have any impact on the autonomy or integrity of the family as an institution. Accordingly, DOE has concluded that it is not necessary to prepare a Family Policymaking Assessment.

DOE has determined, under Executive Order 12630, “Governmental Actions and Interference with Constitutionally Protected Property Rights,” 53 FR 8859 (March 18, 1988), that this proposed regulation would not result in any takings that might require compensation under the Fifth Amendment to the U.S. Constitution.

Section 515 of the Treasury and General Government Appropriations Act, 2001 (44 U.S.C. 3516 note) provides for agencies to review most disseminations of information to the public under guidelines established by each agency pursuant to general guidelines issued by OMB. OMB's guidelines were published at 67 FR 8452 (Feb. 22, 2002), and DOE's guidelines were published at 67 FR 62446 (Oct. 7, 2002). DOE has reviewed this proposed rule under OMB and DOE guidelines and has concluded that it is consistent with applicable policies in those guidelines.

Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use,” 66 FR 28355 (May 22, 2001), requires Federal agencies to prepare and submit to the Office of Information and Regulatory Affairs (OIRA) a Statement of Energy Effects for any proposed significant energy action. A “significant energy action” is defined as any action by an agency that promulgates or is expected to lead to promulgation of a final rule and that (1) is a significant regulatory action under Executive Order 12866, or any successor order; and (2) is likely to have a significant adverse effect on the supply, distribution, or use of energy; or (3) is designated by the Administrator of OIRA as a significant energy action. For any proposed significant energy action, the agency must give a detailed statement of any adverse effects on energy supply, distribution, or use if the proposal is implemented, and of reasonable alternatives to the action and their expected benefits on energy supply, distribution, and use.

This proposed regulatory action to amend the test procedures for measuring the water consumption of showerheads, faucets, water closets, and urinals is not a significant regulatory action under Executive Order 12866. It has likewise not been designated as a significant energy action by the Administrator of OIRA. Moreover, it would not have a significant adverse effect on the supply, distribution, or use of energy. Therefore, it is not a significant energy action, and, accordingly, DOE has not prepared a Statement of Energy Effects.

Under section 301 of the DOE Organization Act (Pub. L. 95-91; 42 U.S.C. 7101 et seq. ), DOE must comply with section 32 of the Federal Energy Administration Act of 1974, as amended by the Federal Energy Administration Authorization Act of 1977 (FEAA). (15 U.S.C. 788) Section 32 essentially provides in part that, where a proposed rule authorizes or requires use of commercial standards, the rulemaking must inform the public of the use and background of such standards. In addition, section 32(c) requires DOE to consult with the U.S. Attorney General (Attorney General) and the Chairman of the Federal Trade Commission (FTC) concerning the impact of the commercial or industry standards on competition.

The proposed modifications to the test procedures addressed by this proposed action incorporate testing methods contained in section 5.4 of commercial standard ASME/ANSI Standard A112.18.1-2011 and sections 7.1.1, 7.1.2, 7.1.3, 7.1.4, 7.4, 8.2.1, 8.2.2, 8.2.3, and 8.6 of commercial standard ASME/ANSI Standard A112.19.2-2008. DOE has evaluated these standards and is unable to conclude whether they fully comply with the requirements of section 32(b) of the FEAA (i.e., whether they were developed in a manner that fully provides for public participation, comment, and review.) DOE will consult with the Attorney General and the Chairman of the FTC about the impact on competition of using the methods contained in these standards, before prescribing a final rule.

The time, date and location of the public meeting are listed in the DATES and ADDRESSES sections of this document. If you plan to attend the public meeting, please notify Ms. Brenda Edwards at (202) 586-2945 or Brenda.Edwards@ee.doe.gov. As explained in the ADDRESSES section, foreign nationals visiting DOE Headquarters are subject to advance security screening procedures.

In addition, you can attend the public meeting via webinar. To participate via webinar, participants must notify DOE no later than Tuesday, July 17, 2012. Webinar registration information, participant instructions, and information about the capabilities available to webinar participants will be published on the following Web site: https://www1.gotomeeting.com/register/878216768. Participants are responsible for ensuring their systems are compatible with the webinar software.

Any person who has plans to present a prepared general statement may request that copies of his or her statement be made available at the public meeting. Such persons may submit requests, along with an advance electronic copy of their statement in PDF (preferred), Microsoft Word or Excel, WordPerfect, or text (ASCII) file format, to the appropriate address shown in the ADDRESSES section of this proposed rule. The request and advance copy of statements must be received at least one week before the public meeting and may be emailed, hand-delivered, or sent by mail. DOE prefers to receive requests and advance copies via email. Please include a telephone number to enable DOE staff to make a follow-up contact, if needed.

DOE will designate a DOE official to preside at the public meeting and may also use a professional facilitator to aid discussion. The meeting will not be a judicial or evidentiary-type public hearing, but DOE will conduct it in accordance with section 336 of EPCA (42 U.S.C. 6306). A court reporter will be present to record the proceedings and prepare a transcript. DOE reserves the right to schedule the order of presentations and to establish the procedures governing the conduct of the public meeting. After the public meeting, interested parties may submit further comments on the proceedings as well as on any aspect of the rulemaking until the end of the comment period.

The public meeting will be conducted in an informal, conference style. DOE will present summaries of comments received before the public meeting, allow time for prepared general statements by participants, and encourage all interested parties to share their views on issues affecting this rulemaking. Each participant will be allowed to make a general statement (within time limits determined by DOE) before the discussion of specific topics. DOE will permit, as time permits, other participants to comment briefly on any general statements.

At the end of all prepared statements on a topic, DOE will permit participants to clarify their statements briefly and comment on statements made by others. Participants should be prepared to answer questions by DOE and by other participants concerning these issues. DOE representatives may also ask questions of participants concerning other matters relevant to this rulemaking. The official conducting the public meeting will accept additional comments or questions from those attending, as time permits. The presiding official will announce any further procedural rules or modification of the procedures discussed in this section that may be needed for the proper conduct of the public meeting.

A transcript of the public meeting will be included in the docket, which can be viewed as described in the Docket section at the beginning of this notice. In addition, any person may buy a copy of the transcript from the transcribing reporter.

DOE will accept comments, data, and information regarding this proposed rule before or after the public meeting, but no later than the date provided in the DATES section of this proposed rule. Interested parties may submit comments using any of the methods described in the ADDRESSES section of this proposed rule.

Submitting comments via regulations.gov. The regulations.gov Web page will require you to provide your name and contact information. Your contact information will be viewable to DOE Building Technologies staff only. Your contact information will not be publicly viewable except for your first and last names, organization name (if any), and submitter representative name (if any). If your comment is not processed properly because of technical difficulties, DOE will use this information to contact you. If DOE cannot read your comment due to technical difficulties and cannot contact you for clarification, DOE may not be able to consider your comment.

However, your contact information will be publicly viewable if you include it in the comment or in any documents attached to your comment. Any information that you do not want to be publicly viewable should not be included in your comment or in any document attached to your comment. Persons viewing comments will see only first and last names, organization names, correspondence containing comments, and any documents submitted with the comments.

Do not submit to regulations.gov information for which disclosure is restricted by statute, such as trade secrets and commercial or financial information (hereinafter referred to as Confidential Business Information (CBI)). Comments submitted through regulations.gov cannot be claimed as CBI. Comments received through the Web site will waive any CBI claims for the information submitted. For information on submitting CBI, see the “Confidential Business Information” section.

DOE processes submissions made through regulations.gov before posting. Normally, comments will be posted within a few days of being submitted. However, if large volumes of comments are being processed simultaneously, your comment may not be viewable for up to several weeks. Please keep the comment tracking number that regulations.gov provides after you have successfully uploaded your comment.

Submitting comments via email, hand delivery, or mail. Comments and documents submitted via email, hand delivery, or mail also will be posted to regulations.gov . If you do not want your personal contact information to be publicly viewable, do not include it in your comment or any accompanying documents. Instead, provide your contact information on a cover letter. Include your first and last names, email address, telephone number, and optional mailing address. The cover letter will not be publicly viewable as long as it does not include any comments.

Include contact information each time you submit comments, data, documents, and other information to DOE. If you submit via mail or hand delivery, please provide all items on a CD, if feasible. It is not necessary to submit printed copies. No facsimiles (faxes) will be accepted.

Comments, data, and other information submitted to DOE electronically should be provided in PDF (preferred), Microsoft Word or Excel, WordPerfect, or text (ASCII) file format. Provide documents that are not secured, written in English and are free of any defects or viruses. Documents should not contain special characters or any form of encryption and, if possible, they should carry the electronic signature of the author.

Campaign form letters. Please submit campaign form letters by the originating organization in batches of between 50 to 500 form letters per PDF or as one form letter with a list of supporters' names compiled into one or more PDFs. This reduces comment processing and posting time.

Confidential Business Information. Any person submitting information that he or she believes to be confidential and exempt by law from public disclosure should submit via email, postal mail, or hand delivery two well-marked copies: one copy of the document marked confidential including all the information believed to be confidential, and one copy of the document marked non-confidential with the information believed to be confidential deleted. Submit these documents via email or on a CD, if feasible. DOE will make its own determination about the confidential status of the information and treat it according to its determination. 10 CFR 1004.11(e)

Factors of interest to DOE when evaluating requests to treat submitted information as confidential include: (1) A description of the items; (2) whether and why such items are customarily treated as confidential within the industry; (3) whether the information is generally known by or available from other sources; (4) whether the information has previously been made available to others without obligation concerning its confidentiality; (5) an explanation of the competitive injury to the submitting person which would result from public disclosure; (6) when such information might lose its confidential character due to the passage of time; and (7) why disclosure of the information would be contrary to the public interest.

It is DOE's policy that all comments may be included in the public docket, without change and as received, including any personal information provided in the comments (except information deemed to be exempt from public disclosure).

Although DOE welcomes comments on any aspect of this proposal, DOE is particularly interested in receiving comments and views of interested parties concerning the following issues:

1. DOE requests comment on its proposal to incorporate by reference ASME/ANSI Standard A112.18.1-2011, “Plumbing Supply Fittings,” specifically regarding the following substantive changes to the current DOE test procedures for showerheads and faucets: (1) A requirement that the pressure differential measurement be within +/^ 1 pound per square inch (psi) for faucets and +/^ 2 psi for showerheads (not previously specified for either product), (2) a change in the test procedure temperature range to 5 to 71 °C for faucets (previously 4 to 66 °C) and to 32 to 44 °C for showerheads (previously 4 to 66 °C), (3) required use of a container large enough to hold water collected over a minimum of 1 minute when using the time/volume test procedure method (not previously specified), and (4) a requirement that flow be maintained for at least 1 minute for showerheads (not previously specified).

2. DOE requests comment on the proposed incorporation by reference of the ASME/ANSI Standard A112.19.2-2008, “Ceramic Plumbing Fixtures,” specifically regarding the following substantive changes to the current test procedures for water closets and urinals: (1) A required filter in the apparatus set-up (not previously required), (2) receiving vessel calibration of 0.25 liters (0.07 gallons) (decreased from 0.1 gallons), (3) required use of an electric timer with increments that are accurate to within a tenth of a second to verify the actuator is held for a maximum of 1 second (not previously specified), (4) change in the static pressure requirements for a flushometer valve with a siphonic bowl to 80 and 35 psi (previously 80, 50, and 15 psi) and with blowout bowl to 80 and 45 psi (previously 80, 50, and 35 psi), and (5) requiring rounding of the calculated value for each tested unit to the number of significant digits resulting from the test in place of the 0.25 liter increment in the revised ANSI/ASME standard.

3. DOE requests comments on (1) its proposal to develop a test procedure to measure the average representative water use of dual-flush water closets in general, (2) whether the use of a composite average of the flush volumes of a dual-flush water closet is representative of the average water use of these products, and (3) whether the specific ratio of flush volumes proposed in this notice (i.e., two reduced flushes and one full flush) is an appropriate measure of the representative average water use of dual-flush water closets.

4. DOE requests comment on its proposal to retain the existing test procedure for commercial prerinse spray valves and incorporate by reference the most recent version of ASTM F2324-03. DOE is also interested in any views on the suitability of this procedure for meeting the requirements of EPCA with respect to representativeness of measurements and test burden.

5. DOE requests comments and information on prospective methods for verifying that the 8 lb. force requirement in section 4.11.1 of ASME/ANSI Standard A112.18.1-2011 has been met, and any showerhead designs that may complicate verification of the 8 lb. force provision or make it unnecessary.

6. DOE requests comment on its proposed definitions of the terms “accessory,” “body spray,” “fitting,” “hand-held showerhead,” and “dual-flush water closet,” and its proposed amendment to the existing definition of “showerhead.”

7. DOE requests comment on the current definition of a basic model of water closet and urinal and any other factors that DOE should consider in determining the appropriate means by which to group various combinations of water closet or urinal bowls with flushing devices as basic models and rate their water consumption.

8. DOE requests comment on all elements of the provisions for the calculation of test results, including the confidence limits; revisions to the sampling plans that might better reflect the level of precision that is achievable for each respective test; and variability in measured water consumption that is expected for each respective product.

9. DOE seeks comment on its tentative conclusion that the proposed test procedure changes will not have a significant impact on a substantial number of small entities.

The Secretary of Energy has approved publication of this proposed rule.

For the reasons stated in the preamble, DOE proposes to amend parts 429, 430 and 431 of chapter II of title 10 of the Code of Federal Regulations, to read as set forth below:

Title III of the Energy Policy and Conservation Act of 1975, as amended (“EPCA” or, in context, “the Act”) sets forth a variety of provisions designed to improve energy efficiency. Part A of Title III (42 U.S.C. 6291-6309) provides for the Energy Conservation Program for Consumer Products Other Than Automobiles. The National Energy Conservation Policy Act (NECPA), Public Law 95-619, amended EPCA to add Part A-1 of Title III, which established an energy conservation program for certain industrial equipment. (42 U.S.C. 6311-6317) The Department of Energy (“DOE”) is charged with implementing these provisions.

AEDMs and ARMs are computer modeling or mathematical tools that predict the performance of non-tested basic models. They are derived from mathematical models and engineering principles that govern the energy efficiency and energy consumption characteristics of a type of covered product. (In the context of this discussion, the term “covered product” applies both to consumer products and commercial equipment that are covered under EPCA.) These computer modeling and mathematical tools, when properly developed, can provide a relatively straight-forward and reasonably accurate means to predict the energy usage or efficiency characteristics of a basic model of a given covered product.

Where authorized by regulation, AEDMs and ARMs enable manufacturers to rate and certify their basic models by using the projected energy use or energy efficiency results derived from these simulation models, reducing the regulatory burden associated with testing.

DOE has issued a Notice of Proposed Rulemaking and is holding this public meeting and webinar to provide interested parties an opportunity to comment on DOE's proposed modifications to the regulations authorizing the use of alternative methods of determining energy efficiency or energy consumption of various consumer products and commercial equipment. The complete Notice of Proposed Rulemaking is posted on DOE's certification and enforcement Web page ( http://www1.eere.energy.gov/buildings/appliance_standards/certification_enforcement.html ).

In particular, DOE is interested in receiving comments and views of interested parties concerning the following issues:

1. DOE requests comment on its proposal not to add a pre-approval process for AEDMs and its proposal to no longer require pre-approval for use of an alternative rating method for residential central air conditioners and heat pumps.

2. DOE requests comment on its proposal to expand the use of AEDMs to other commercial products.

3. DOE requests comment on its proposal to require at least one basic model from each product class to be tested to substantiate the AEDM. Specifically, DOE requests comments from manufacturers as to whether additional clarification is needed for manufacturers of certain covered products to determine all the applicable product classes that would need to be tested to substantiate the AEDM. As part of these comments, the Department is interested in receiving feedback on how manufacturers currently develop any simulation tools to ensure they are applicable across a wide range of product classes.

4. DOE seeks product specific comments on proposed overall and individual tolerance levels by product type. Specifically, DOE seeks data which show that the variability seen in the manufacturing processes, test instrumentation, and testing procedures are such that a different tolerance should be considered.

5. DOE seeks comment on the criteria for selection of basic models and the number of basic models a manufacturer should be required to test for substantiation as well as whether the differences in testing requirements for distribution transformers are appropriate or necessary.

6. DOE seeks comment on the appropriate course of action and the time to complete such steps when a model tested by DOE fails to meet its certified rating.

7. DOE requests comment on the proposal to disallow the use of an AEDM if there is evidence that the mis-rating is willful and/or there are multiple instances of non-compliance.

8. DOE requests comment on the necessity of requiring re-substantiation when there is a change in standards or test procedure and requiring that AEDMs be re-substantiated with active models.

The time, date, and location of the public meeting are provided in the DATES and ADDRESSES sections at the beginning of this document. Anyone who wants to attend the public meeting must notify Ms. Brenda Edwards at (202) 586-2945. Foreign nationals visiting DOE headquarters are subject to advance security screening procedures.

Any person who has an interest in the topics addressed in this notice, or who is a representative of a group or class of persons that has an interest in these issues, may request an opportunity to make an oral presentation at the public meeting. Such persons may hand-deliver requests to speak to the address shown in the ADDRESSES section at the beginning of this notice between 9:00 a.m. and 4:00 p.m., Monday through Friday, except Federal holidays. Requests may also be sent by mail or email to: Ms. Brenda Edwards, U.S. Department of Energy, Building Technologies Program, Mailstop EE-2J, 1000 Independence Avenue SW., Washington, DC 20585-0121, or Brenda.Edwards@ee.doe.gov . Persons who wish to speak should include in their request a computer diskette or CD in WordPerfect, Microsoft Word, PDF, or text (ASCII) file format that briefly describes the nature of their interest in this rulemaking and the topics they wish to discuss. Such persons should also provide a daytime telephone number where they can be reached.

DOE requests that those persons who are scheduled to speak submit a copy of their statements at least one week prior to the public meeting. DOE may permit any person who cannot supply an advance copy of this statement to participate, if that person has made alternative arrangements with the Building Technologies Program in advance. When necessary, the request to give an oral presentation should ask for such alternative arrangements.

DOE will designate a DOE official to preside at the public meeting and may also employ a professional facilitator to aid discussion. The public meeting will be conducted in an informal, conference style. The meeting will not be a judicial or evidentiary public hearing, but DOE will conduct it in accordance with section 336 of EPCA (42 U.S.C. 6306). Discussion of proprietary information, costs or prices, market share, or other commercial matters regulated by U.S. anti-trust laws is not permitted.

DOE reserves the right to schedule the order of presentations and to establish the procedures governing the conduct of the public meeting. A court reporter will record the proceedings and prepare a transcript.

At the public meeting, DOE will allow time for presentations by participants, and encourage all interested parties to share their views on issues affecting this rulemaking. Each participant may present a prepared general statement (within time limits determined by DOE) before the discussion of specific topics. Other participants may comment briefly on any general statements. At the end of the prepared statements on each specific topic, participants may clarify their statements briefly and comment on statements made by others. Participants should be prepared to answer questions from DOE and other participants. DOE representatives may also ask questions about other matters relevant to this rulemaking. The official conducting the public meeting will accept additional comments or questions from those attending, as time permits. The presiding official will announce any further procedural rules or modification of procedures needed for the proper conduct of the public meeting.

DOE will make the entire record of this proposed rulemaking, including the transcript from the public meeting, available for inspection at the U.S. Department of Energy, 6th Floor, 950 L'Enfant Plaza SW., Washington, DC 20024, (202) 586-2945, between 9:00 a.m. and 4:00 p.m., Monday through Friday, except Federal holidays. Anyone may purchase a copy of the transcript from the transcribing reporter. Additionally, the record for this proposed rulemaking will be made available at www.regulations.gov.

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-2010-0856; Directorate Identifier 2010-NM-117-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 issued an NPRM to amend 14 CFR part 39 to include an AD that would apply to certain the Boeing Company Model 737-600, -700, -700C, -800, and -900 series airplanes. That NPRM was published in the Federal Register on September 23, 2010 (75 FR 57885). That NPRM proposed to require inspecting for part numbers of the operational program software (OPS) of the flight control computers (FCC), and doing corrective actions if necessary.

Since we issued the previous NPRM (75 FR 57885, September 23, 2010), we have determined that the software installation required by AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005), is out of date and new software would be required by this supplemental NPRM.

We gave the public the opportunity to comment on the previous NPRM (75 FR 57885, September 23, 2010). The following presents the comments received on the previous NPRM and the FAA's response to each comment.

The Airline Pilots Association, International (ALPA) supports the NPRM (75 FR 57885, September 23, 2010).

Continental Airlines (Continental) requested that we revise the NPRM (75 FR 57885, September 23, 2010) to supersede AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005). Continental explained that this would allow the new AD to be accomplished without needing an alternative method of compliance (AMOC) for AD 2005-07-20, which also applied to Model B737 FCC OPS.

Alaska Airlines (Alaska) also requested that we revise paragraph (b) of the NPRM (75 FR 57885, September 23, 2010) to include a reference to AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005), which installed a previous version of FCC software. Alaska explained that we should consider whether AD 2005-07-20 should be superseded by the NPRM.

We agree to revise the NPRM (75 FR 57885, September 23, 2010) by proposing in this supplemental NPRM to supersede AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005). AD 2005-07-20, for certain Model 737-600, -700, -800, and -900 series airplanes, requires installing and testing a certain version of OPS for the FCC. However, AD 2005-07-20 requires installation of an older version of the OPS for the FCC than what this supplemental NPRM would require. We have verified with the manufacturer that the software specified in Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, provides appropriate corrective actions for the unsafe condition identified for the software identified in AD 2005-07-20. We have revised this supplemental NPRM in order to supersede AD 2005-07-20. We have also added paragraph (i)(3) of this supplemental NPRM to give credit for existing AMOCs.

Continental requested that we revise the NPRM (75 FR 57885, September 23, 2010) by changing the Applicability section so that the NPRM only applies to airplanes with the earlier software. Continental explained that it has determined that the software required to be installed per Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, is a later version than required to be installed by AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005), per Boeing Alert Service Bulletin 737-22A1164, dated May 20, 2004. Continental expressed that later versions of software always seem to be an issue and require an AMOC. Continental stated that to eliminate this issue, we could either allow later software versions or revise the applicability so that it only applies to airplanes with the earlier software installed. Continental suggested that we revise the Applicability section of the NPRM to include the phrase, “with Flight Control Computers (FCC) Operational Program Software (OPS) 2271-COL-AC1-02, 2270-COL-AC1-03, or 2277-COL-AC1-04 installed.” Continental also contacted the FAA regarding its comment and provided examples of other AD applicabilities that might be used for this NPRM.

Alaska also requested that we revise the Applicability section of the NPRM (75 FR 57885, September 23, 2010) to exclude airplanes which had FCC software installed per an AMOC to AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005). Alaska explained that this AMOC to AD 2005-07-20 approved the same FCC software specified in the NPRM, i.e., FCC software 2276-COL-AC1-05 or 2275-COL-AC1-06.

We do not agree to revise the Applicability section of this supplemental NPRM to limit it to only airplanes with certain FCC software versions installed. The intent of this supplemental NPRM is to ensure that the proper software is installed on all airplanes listed in the variable number table in Section 1.A., Effectivity, of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. If the required software is found to already be installed by performing the software part number inspection specified in Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, then no more work is necessary. We have not changed the supplemental NPRM in this regard.

However, we do agree to revise this supplemental NPRM to allow for installation of versions of the FCC software that are approved by the Boeing Commercial Airplanes Organization Designation Authorization (ODA) after the issuance of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. We have revised paragraph (h)(1) of this supplemental NPRM accordingly. We have also clarified paragraph (h)(1) of this supplemental NPRM by referring to table 2 of that service bulletin for the improved software.

We agree to revise the Applicability section (paragraph (c)) of this supplemental NPRM for clarity by referring to the airplanes identified in the variable number table in Section 1.A., Effectivity, of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. We intend that this supplemental NPRM is applicable to all airplanes having variable numbers identified in that table, and that the applicability not be defined by the “Group 1” description in section 1.A. of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. We find that the effectivity by variable number in Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, adequately identifies the airplanes affected by the unsafe condition and assures that the unsafe condition is corrected on affected airplanes. We have revised the Applicability section in this supplemental NPRM accordingly.

Continental requested that we revise the NPRM (75 FR 57885, September 23, 2010) to include a note that states: “Validation by an operator that aircraft that have had part number (P/N) 831-5854-150 software loaded into their P/N 822-1604-101 or -151 Flight Control Computers in accordance with Boeing Service Letter 737-SL-22-059 constitutes a terminating action for this AD.” Continental reasoned that Boeing Service Letter 737-SL-22-059 was issued June 29, 2007, and that the letter advises operators that they can load software P/N 2275-COL-AC1-06 (Diskette Set Collins P/N 831-5854-150) into P/N 822-1604-101 and -151 FCCs. Continental explained that the software is listed in table 2 of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010.

We disagree to include the note requested by the commenter. We intend that the applicability of the supplemental NPRM includes all airplanes identified in the variable number table in Section 1.A, Effectivity, of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, requires that operators inspect the FCC OPS part numbers, and that if the software part number installed is listed in table 2 of that service bulletin (which includes P/N 831-5854-150, as the commenter stated), no more work is necessary. Compliance with the requirements of paragraph (h) of the supplemental NPRM is then complete. However, if the operator finds that a software part number listed in table 2 of that service bulletin is not installed, they must install new software. We have revised the AD applicability in paragraph (c) of this supplemental NPRM to more clearly define the affected airplanes. We have not otherwise changed the AD in this regard.

Boeing requested that we revise the Summary section and the Applicability section of the NPRM (75 FR 57885, September 23, 2010) to include the phrase, “airplanes delivered with the Collins Enhanced Digital Flight Control System (EDFCS).” Boeing reasoned that the NPRM is only applicable to that portion of the Model 737-600, -700, -700C, -800, and -900 series airplane fleet delivered with the Collins EDFCS installed at delivery.

We agree to revise this supplemental NPRM to include the phrase requested by Boeing, although we will use the full company name of the equipment supplier (“Rockwell Collins”). This revision may make it easier for operators to quickly determine whether or not this AD is applicable to their airplanes. Since the effectivity of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, is limited to airplanes equipped with the Rockwell Collins EDFCS, this change will have no actual effect on the AD applicability. We have revised the Applicability section of the supplemental NPRM accordingly.

Boeing requested that we revise the NPRM (75 FR 57885, September 23, 2010) by removing the words “and correct” from the phrase “detect and correct”. Boeing explained that the software change described in Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, does not “correct” erroneous radio altimeter outputs—it only “detects” them and inhibits the autothrottle landing flare retard mode.

We partially agree to revise the phrasing of the unsafe condition in the supplemental NPRM. The software change described in Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, enables the airplane systems to detect erroneous output from a radio altimeter channel and correct improper autothrottle system response to that erroneous output. While we disagree to completely remove the phrase “and correct” from the unsafe condition statement, we have revised the unsafe condition phrasing accordingly throughout the supplemental NPRM.

Boeing requested that we revise the NPRM (75 FR 57885, September 23, 2010) by adding the phrase, “absent proper crew response,” to the following sentence throughout the NPRM, as such: “We are proposing this AD to detect erroneous output from a radio altimeter channel, which, absent proper crew response, could result in premature autothrottle landing flare retard and the loss of automatic speed control, and may lead to loss of control of the airplane.” Boeing explained that this sentence should directly reflect the fact that proper crew response can avoid any of the listed contingencies.

We disagree to revise this supplemental NPRM to include the phrase requested by Boeing. We do not have information at this time that confirms Boeing's comment. We have not changed the AD in this regard.

Alaska requested that we clarify the applicability of the NPRM (75 FR 57885, September 23, 2010). Alaska explained that the effectivity section of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, could be interpreted to mean that airplanes with FCC software 2276-COL-AC1-05 or 2275-COL-AC1-06 installed did not require accomplishment of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, while the accomplishment section of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, could be interpreted to require that airplanes be inspected to verify that the correct software version is installed.

We agree to clarify the applicability of this supplemental NPRM, which includes all airplanes identified in the airplane variable number table in Section 1.A of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. The applicability of this supplemental NPRM is not defined by the “Group 1” description in that section of that service bulletin. We have revised paragraph (c) of this supplemental NPRM for clarity by referring to the variable number table. We have also added Note 1 to paragraph (c) of this supplemental NPRM.

Alaska requested that we revise the NPRM (75 FR 57885, September 23, 2010) to refer to the latest service information, if a later revision is issued. Alaska noted that “computer” is misspelled in the effectivity section of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010.

We acknowledge that “computer” is misspelled in the effectivity section of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. However, this typo does not affect the applicability of this supplemental NPRM. Also, we have not received any revised service information; Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, is the latest service information. Therefore, we have not changed this supplemental NPRM in this regard.

Continental requested that we acknowledge that the effectivity between the service information in AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005), and Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, is different.

We agree that the effectivities of Boeing Alert Service Bulletin 737-22A1164, dated May 20, 2004, and Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010; are different. (Boeing Alert Service Bulletin 737-22A1164, dated May 20, 2004, is the appropriate source of service information for AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005). However, we have verified that all airplanes in the effectivity of Boeing Alert Service Bulletin 737-22A1164, dated May 20, 2004, are also listed in the effectivity of Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010. Boeing Alert Service Bulletin 737-22A1211, dated April 13, 2010, is applicable to a larger group of airplanes than Boeing Alert Service Bulletin 737-22A1164, dated May 20, 2004. Therefore, we have not changed the supplemental NPRM in this regard.

We have removed paragraph (h) of the NPRM (75 FR 57885, September 23, 2010) from this supplemental NPRM. Paragraph (h) of the NPRM prohibited special flight permits. We have determined that special flight permits are allowed, as described in Section 21.197 and Section 21.199 of the Federal Aviation Regulations (14 CFR 21.197 and 21.199).

We are proposing this supplemental NPRM because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of these same type designs. Certain changes described above expand the scope of the original NPRM (75 FR 57885, September 23, 2010). As a result, we have determined that it is necessary to reopen the comment period to provide additional opportunity for the public to comment on this supplemental NPRM.

This supplemental NPRM would require accomplishing the actions specified in the service information described previously.

This proposed AD would retain all requirements of AD 2005-07-20, Amendment 39-14045 (70 FR 17603, April 7, 2005). Since AD 2005-07-20 was issued, the AD format has been revised, and certain paragraphs have been rearranged. As a result, the corresponding paragraph identifiers have changed in this proposed AD, as listed in the following table:

We estimate that this proposed AD affects 207 airplanes of U.S. registry.

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

We estimate the following costs to do any necessary installations 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 this installation:

According to the manufacturer, some of the costs of this proposed AD may be covered under warranty, thereby reducing the cost impact on affected individuals. We do not control warranty coverage for affected individuals. As a result, we have included all costs in our cost estimate.

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:

Comments Invited

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-2012-0490; Directorate Identifier 2012-NM-066-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 reports of fatigue cracking of the midspar fittings, and the engine and nacelle strut separating from the airplane. Operators have reported that the cracking occurred on more than 40 airplanes with approximately 9,900 to 63,000 flight hours. In addition, there has been a report of the engine number 3 nacelle strut separating from the airplane and contacting the engine number 4 nacelle strut, which also separated from the airplane. This condition, if not corrected, could result in a fractured midspar fitting, which could cause a separation of the nacelle strut and engine from the airplane while in flight, resulting in loss of controllability of the airplane.

We reviewed Boeing 707 Alert Service Bulletin A3537, dated January 30, 2012. That service information describes procedures for:

• Performing a detailed inspection of the midspar fittings of the engine number 2 and 3 nacelle struts to confirm that the correct part number is installed, and installing the correct part number if necessary.

• Performing HFEC inspections of the midspar fittings of the engine number 2 and 3 nacelle struts for cracks, and repairing if necessary.

• Performing repetitive general visual inspections of the nacelle struts of engine numbers 1, 2, 3, and 4 to verify that the nacelle strut has not drooped below its normal position, applying the droop stripe to the nacelle strut and sailboat fairing if necessary, and repairing if necessary.

The initial compliance times for the HFEC and general visual inspections, and the application of the droop stripe if necessary, is at the later of: (1) Within 1,500 flight cycles or 48 months from the replacement of the nacelle strut inboard and outboard midspar fittings, whichever occurs first, or (2) within 120 days.

For the HFEC inspection, the repetitive interval is within 250 flight cycles or 12 months, whichever occurs first.

For the general visual inspection, the repetitive interval is 30 flight cycles, except after both midspar fittings are replaced on the strut, the next inspection would be performed within 1,500 flight cycles or 48 months, whichever occurs first, from the replacement of both the nacelle strut inboard and outboard midspar fittings.

Boeing 707 Alert Service Bulletin A3537, dated January 30, 2012, refers to Boeing 707/720 Service Bulletin 3183, Revision 5, dated September 16, 1993, as an additional source of guidance for the HFEC inspections of the midspar fittings of the engine number 2 and 3 nacelle struts for cracks.

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 accomplishing the actions specified in the service information described previously, except as discussed under “Differences Between the Proposed AD and the Service Information.”

Boeing 707 Alert Service Bulletin A3537, dated January 30, 2012, 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.

Boeing 707 Alert Service Bulletin A3537, dated January 30, 2012, refers to “Manual 707, 720 NDT Part 6, 51-00-00 Figure 24 as an accepted procedure” for the HFEC inspection. This proposed AD would require that the inspection must be done in accordance with Subject 51-00-00 Figure 24, Steel Part Surface Inspection (Impedance Plane Display), of Part 6, Eddy Current, of the Boeing 707, 720 Nondestructive Test Manual, Document D6-48023, Revision 120, dated March 15, 2012.

We estimate that this proposed AD affects 11 airplanes of U.S. registry.

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

We estimate the following costs to do any necessary repairs 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:

I. Background

The MBDA, pursuant to Executive Order 11625, funds business centers that provide business development services to business concerns owned and controlled by individuals who are members of groups determined by the Department to be socially or economically disadvantaged. Based on the current definitions, the groups considered “socially and economically disadvantaged,” listed in Executive Order 11625, are “Black, Puerto-Ricans, Spanish-speaking Americans, American Indians, Eskimos, and Aleuts.”  1 In addition, Hasidic Jews, Asian Pacific Americans and Asian Indians have been included in the list of the groups who are socially or economically disadvantaged and thus eligible for assistance from the MBDA in 15 CFR part 1400.1(c).

The Department is considering the petition of the ADC requesting the addition of Arab-Americans to the list of persons considered “socially and economically disadvantaged” pursuant to E.O. 11625 and 15 CFR part 1400. An Arab-American may be defined as an American who traces his or her ethnic roots to one of the countries in the Arab World, including Algeria, Bahrain, Djoubti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Somalia, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen. According to the petition, Palestinians also fall under this category. The ADC petition describes the social and economic conditions that Arab-Americans have faced allegedly amounting to discrimination and prejudice in American society and resulting in conditions under which Arab-American individuals have been unable to compete in a business world. 2 The petition provides details of the social and economic discrimination faced by Arab-Americans. A summary of those details from the ADC petition are presented below in Section II.

According to the Petition, Arab-Americans are subject to many prejudices as a result of their distinct cultural and ethnic characteristics. While many of those who consider themselves Arabs are Muslim, the Arab-American Institute states that most Arab-Americans are Christian. 3 Most Arab-Americans speak Arabic, a language that has become one of the defining characteristics of the group. 4 Further, Arab-Americans are known for their different food dishes (tabouli, kibbah, and kabshah) and their unique music tradition that includes the use of percussion instruments not normally found in American culture. 5 These are just a number of ways in which Arab-American culture differs from American culture and the distinctions that have resulted in the prejudices aimed towards the group.

The petition states that Arab-Americans have faced discrimination since the late 1800s, similar to most other minority groups. 6 They were treated the same way as many other minority groups in the United States and had specific derogatory names directed towards them. 7 While this discrimination initially did not hinder their ability to obtain American citizenship, the situation changed in 1910 when the U.S. Census Bureau classified Syrian and Palestinian Arabs as “Asiatics.”  8 The Bureau of Immigration and Naturalization, which initially considered Syrians and Palestinians as “Caucasians,” subsequently issued a nationwide directive ordering the rejection of citizenship petitions for persons who were not “free white persons” or of “African nativity.”  9 Some courts declared that Syrians could be considered “white” while other courts ruled that they were not “free white persons.”  10 For example, after World War I, the government passed the Quota Act that limited the annual quota of nationality to 3 percent of the foreign-born persons from that country. 11 According to the ADC petition, even though the policy was facially race neutral, the implications for Arab-Americans, was dire. 12 The ADC petition notes that Arab immigrants were denied citizenship, except 100 persons annually, under the Quota Act which is widely viewed as an attempt to limit immigration from Arab countries. 13 While the policy was negated by the Immigration Bill in 1965, the ADC petition asserts that Arab-Americans continue to face discrimination in public and private employment, housing, government contracts and government benefits. 14

The ADC petition mentions a number of court cases that highlight discrimination against Arab Americans on the sole basis of their ethnic background, including a case where three elevator employees were awarded $30,000 in damages as a result of the years of harassment they endured. 15 This level of discrimination increased drastically after the September 11 attacks. 16 According to the petition, while the attacks were carried out by a small group of extremists, the entire Arab-American community suffered from the prejudices other American citizens formed. 17

The Petition notes that following September 11, 2001, the FBI and other institutions reported a substantial increase in reports of discrimination and harassment against Arab-Americans (the FBI reported a 1600 percent increase). 18 According to the ADC petition, these reports were exacerbated by government-implemented policies that inherently targeted Arab-Americans. The ADC petition asserts that, in the government's efforts to protect Americans, they essentially took away the rights of other Americans and provides the following as examples of such government-sponsored programs: The National Security Entry Exit Registration System NSEERS, which required non-immigrants to register at ports of entry and targeted males from Arab nations; stricter travel guidelines; and “no-fly” lists which predominantly contained the names of Arab-Americans. According to the Petition, these restrictions hindered the Arab-American community's freedom and as a result, their ability to contribute to a healthy American economy. 19

According to the ADC Petition, Arab-Americans also face economic discrimination as employees and business owners. Citing instances where employees are continuously harassed because of their ethnicity and are subject to constant name-calling and racial profiling, the petition asserts that Arab-Americans either have to constantly deal with discrimination enforced by their employers, their fellow employees or customers that frequent their places of employment. 20 The petition also notes that Arab-Americans have fewer job opportunities, a situation that has been exacerbated by the September 11 attacks and asserts that this fact is supported by a number of studies that highlight employment discrimination against Arab Americans as well as the high number of complaints the ADC receives yearly despite the time that has passed since 9/11. 21

According to the ADC Petition, the discrimination that Arab-American employees face has decreased their earnings. 22 One study showed that the earning potential of Arab American men dropped considerably between 2000 and 2002 as compared to U.S.-born non-Hispanic white men. 23 Their ability to positively contribute to the economy has also been significantly altered as a result of the increased instances of government-sponsored inspections of workplaces that may have hired individuals with suspected terrorist ties. 24

Arab-American business owners and entrepreneurs also face economic discrimination. Individuals from the Arab-American community are unable to earn up to their potential as compared to their non-Hispanic white counterparts in similar industries. The Petition notes that while many Arab-Americans are educated and would contribute tremendously to the U.S. economy if they were able to enter into the market, they are held back because of their ethnic background. Also, many times Arab-Americans are confined solely to the small Arab-American communities in which they live because they face harassment if they attempt to expand their business. The Petition further asserts that Arab Americans receive few prime government contracts, as exemplified by a case study conducted in San Francisco between 1992 and 1995. 25 During that time period, Arab-Americans received no construction contracts despite representing a significant amount of the available professional service firms. This can be compared to Latino-Americans, a group already included in the definition of “minority business enterprise,” who only received 1 percent of professional service dollars despite representing 6 percent of the professional service firms. 26

By categorizing Arab-Americans as “socially and economically disadvantaged business concerns” under 15 CFR part 1400, the same the benefits granted to other socially and economically disadvantaged persons specified under Part 1400 will be available to Arab-American persons and businesses. Specifically, under 15 CFR part 1400, Arab-Americans will be eligible to qualify for MBDA programs and opportunities that help minority businesses overcome discrimination and prejudice as business owners. 27

The comments received will be reviewed for applicability to the issues to be addressed. MBDA will consider only those comments that address the relevance of including Arab-Americans in the definition of those who are “socially and economically disadvantaged.” Commenters should address the following issues in the context of the requirements of the applicable regulations. 28 If any comments received meet the criterion, they will be included in the final decision.

MBDA solicits general comments and comments on the Petition that address the following specific issues:

1. Are there specific instances of social discrimination against Arab-Americans that occur over a sustained period of time, which results in significant social or economic disadvantage?

2. Are there any additional characteristics specific to the Arab-American community, other than those described in the ADC Petition, that invoke societal discrimination?

3. Is there evidence that demonstrates Arab-Americans have been subject to employment or educational discrimination? If so, please describe.

4. Is there evidence that demonstrates that Arab-Americans have been denied access to organizations, groups, professional societies or other types of business opportunities in comparison to individuals who are not considered socially or economically disadvantaged?

1. What evidence exists that demonstrates Arab-Americans have faced economic discrimination over a sustained period of time resulting in social or economic disadvantage?

2. Please provide any specific information which demonstrates that Arab-Americans have experienced difficulty in obtaining access to capital, technical, or managerial resources as compared to individuals who are not considered socially or economically disadvantaged.

3. Is there any additional evidence of denied opportunities for Arab-Americans to access to those things which would enable them to participate more successfully in the American economic system that is readily available to individuals not considered to be socially or economically disadvantaged?

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). 1 Title VII of the Dodd-Frank Act  2 amended the Commodity Exchange Act (“CEA”)  3 to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and comprehensive regulation of swap dealers and major swap participants; (2) imposing clearing and trade execution requirements on standardized derivative products; (3) creating robust recordkeeping and real-time reporting regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the Commission's oversight.

As amended by the Dodd-Frank Act, sections 4a(a)(2) and 4a(a)(5) of the CEA mandate that the Commission establish limits for futures and option contracts traded on a designated contract market (“DCM”), as well as swaps that are economically equivalent to such futures or options contracts traded on a DCM. This mandate directed the Commission to establish position limits on the expedited timeframe of 180 days from the date of enactment for exempt commodities and 270 days from the date of enactment for agricultural commodities. In response to the Congressional mandate, the Commission proposed and ultimately adopted final rules in part 151 regarding position limits for 28 physical commodity futures and option contracts (“Core Referenced Futures Contracts”) and physical commodity swaps that are economically equivalent to such contracts (collectively with Core Referenced Futures Contracts referred to as “Referenced Contracts”). 4

The regulations in the part 151 position limits regime, consistent with the Commission's historical approach to position limits, 5 generally includes three components: (1) The level of the limits, which set a threshold that restricts the number of speculative positions that a person may hold in the spot-month, individual month, and all months combined, 6 (2) an exemption for positions that constitute bona fide hedging transactions, 7 and (3) rules to determine which accounts and positions a person must aggregate for the purpose of determining compliance with the position limit levels. 8

The Commission published Part 151 in the Federal Register in November of 2011, but determined to phase in compliance with the new position limits regime. 9 Specifically, 60 days after the Commission publishes a joint final rulemaking with the Securities and Exchange Commission (“SEC”) further defining the term “swap” in the Federal Register , 10 the rules require market participants to comply with spot-month limits for the 28 physical commodities as well as non-spot month limits for the enumerated agricultural contracts. The Commission also established the spot-month position limit levels for cash-settled contracts on an interim final basis and solicited comments on the appropriateness of such levels. 11 Finally, for the remaining non-spot month limits ( i.e., all commodities other than the enumerated agricultural commodities), the rules require compliance on the first calendar day of the third calendar month following a Commission order providing the numerical level of the non-spot month limits based upon a formula provided in part 151. 12

As noted above, one of the three major components to the Commission's position limits regime is determining which accounts and positions a person must aggregate. 13 The final rule in regulation 151.7 largely adopted the Commission's existing aggregation policy under regulation 150.4. The aggregation provisions generally require that unless a particular exemption applies, a person must aggregate all positions for which that person controls the trading decisions with all the positions for which that person has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting pursuant to an express or implied agreement or understanding. 14

Regulation 151.7 retained the scope of exemptions from aggregation that were contained in regulation 150.4, including the ownership interests of limited partners in pooled accounts, 15 discretionary accounts and customer trading programs of futures commission merchants (“FCM”), 16 and eligible entities with independent account controllers that manage customer positions (“IAC” or “IAC exemption”). 17 Further, the Commission provided two additional exemptions for underwriters of securities, 18 and where the sharing of information between persons would cause either person to violate federal law or regulations adopted thereunder. 19 With the exception of the exemption for underwriters, market participants were required to file a notice with the Commission demonstrating compliance with the conditions applicable to each exemption. 20

On January 19th, 2012 the Commission received a petition for interim relief from, among other things, part 151's provision for aggregation of positions across accounts (hereinafter aggregation petition”)  21 under CEA section 4a(a)(7) for purposes of part 151. 22 The Commission has also received letters that generally support the aggregation petition. 23 In addition, several commenters opined on the aggregation rules in connection with the Commission's request for comment on the interim final rule for spot-month position limits on cash-settled contracts. 24 As further discussed below, the aggregation petition and certain interim final rule commenters argue that the Commission should clarify the exemption provided in regulation 151.7(i) where the sharing of information would cause a violation of federal law and expand the exemption to include circumstances in which state or foreign law would prohibit the sharing of information necessary to comply with the aggregation standard. In addition, the aggregation petition and commenters request that the Commission create an aggregation exemption for owned non-financial entities. 25 In this connection, some commenters argue that the Commission should only aggregate on the basis of control and not ownership. Finally, one commenter requests that the Commission expand the exemption provided in 151.7(g) for the ownership interests of broker-dealers connected with specific market-making activity.

As noted above, section 151.7(i) provides an exemption from aggregation where the sharing of information between persons would cause either person to violate federal law. The aggregation petition seeks to clarify that the exemption would apply to potential violations of federal law, 26 and also seeks to expand the exemption to apply to local, state, foreign and international law. 27 According to the aggregation petition, the standard in the rule could be read as limited to per se violations of the law, but not cover “indicia of improper market activity.”  28 Further, market participants may not be able to rely on the exemption where they take certain action to avoid the “potential” of a violation. Moreover, the Working Groups argue that the filing of an opinion of counsel to claim the exemption may act as a disincentive for market participants to avail themselves of the exemption because an adverse opinion would harm the applicant.

Similar to the petition, certain commenters to the interim final rule argue that the requirement that the sharing of information “would cause” a violation of federal law sets the bar too high to claim the exemption. 29 In this connection, commenters opine that such a high standard makes it too difficult to obtain an opinion of counsel to reach the necessary conclusion. 30 Therefore, several commenters argue that the Commission should clarify that the standard to claim the exemption is that the sharing of information presents either party with a reasonable risk of violating federal law. 31 Commenters also believe that the Commission should expand this exemption to cover potential violations of state and foreign law. 32 Finally, one commenter suggests that the Commission should remove the requirement to file an opinion of counsel to claim the exemption, which the commenter believes is burdensome. 33

As noted above, the proposed rules for part 151 proposed that a person with a 10 percent or greater ownership or equity interest in a non-financial entity need not aggregate the positions of the non-financial entity with his own positions, if the person filed an application with the Commission demonstrating compliance with certain conditions. This exemption was not part of the Commission's previously existing aggregation policy for position limits on the enumerated agricultural contracts in part 150. Ultimately, the Commission determined to largely retain its existing aggregation policy with limited additional exemptions, and did not adopt the proposed owned non-financial entity exemption.

According to the aggregation petition, the Commission's failure to include an exemption for a person's ownership interest in a non-financial entity will result in “serious adverse consequences” to the Working Groups participants, and represents a “drastic departure from current market practices.”  34 In light of these consequences, the aggregation petition includes a draft owned non-financial entity exemption for the Commission to incorporate into its aggregation policy. The draft exemption is similar, but not identical to, the owned non-financial entity exemption that the Commission proposed but did not adopt as part of its final rule. 35

The aggregation petition suggests that without an owned non-financial entity exemption, the rules would force information sharing and the coordination of trading between entities, which would be contrary to existing best practices for antitrust compliance. 36 Given the conflict with such practices, the Working Groups argue that compliance with the position limits rules may create liability under the antitrust laws. The Working Groups also argue that the aggregation rules, as adopted by the Commission, are contrary to certain industry best practices that “go beyond the letter of the law or applicable regulations in order to ensure that activities of unregulated entities are kept separate from activities of regulated entities to the greatest extent possible.”  37

The aggregation petition also opines that the information sharing between persons necessary to comply with the position limits would impose significant costs that would impact the physical and derivatives markets. 38 According to the Working Groups, entities with complex corporate structure arrangements that include established information barriers to ensure compliance with other regulatory requirements will face significant costs to monitor positions on an intra-day basis, notwithstanding the current lack of control over such trading. 39 In this case, the Working Groups claim that aggregation will significantly impact holding companies and firms that invest in commercial firms, particularly in the context of “passive investment.” Such firms will have to monitor the commercial firm for compliance with position limits and “insert itself into the management of the firm.”  40 In addition, according to the Working Groups, the aggregation of futures, cleared swaps and bilateral swaps across entities on a real time basis requires technology that does not yet exist. 41 The aggregation petition also points to concerns surrounding allocation and reporting of positions, sharing of information on physical inventories, and information sharing for the unwinding of accounts. 42

The Working Groups assert that the position limit rules represent a “drastic departure from the status quo.”   43 According to the aggregation petition, the Commission's position limits previously only applied to agricultural commodity futures and options on futures, and DCM position limits applied to futures on energy and metals commodities. 44 However, the Commission's new position limits rules will apply to swaps for the first time. Further, the Working Groups contend that DCMs previously provided “aggregation exemptions that provided the flexibility necessary for commercial enterprises to manage their position limit obligations across entities without undue burden.”  45 In addition, the aggregation of accounts across commercial firms could lead to decreased liquidity and competition in the energy derivatives market.

In light of these changes, the Working Groups believe that the Commission should provide relief in the form of an owned non-financial entity exemption. The aggregation petition includes a draft owned non-financial entity exemption that follows the Commission's prior proposed exemption with some modifications. 46

Similar to the aggregation petition, commenters to the interim final rule request that the Commission adopt an owned non-financial entity exemption. 47 FIA and EEI argue that without such an exemption, market participants would have to aggregate all positions held by any entity in which it has a ten percent ownership interest, even if such interest is passive without control over trading. According to FIA, such a consequence would “have an unnecessary and profoundly negative impact on users of Referenced Contracts, and their affiliates with no corresponding benefit to the stability or integrity of the market.”  48 EEI also argues that the owned non-financial entity exemption would provide commercial firms the same aggregation relief as eligible entities that rely on the independent account controller exemption. 49

Several commenters also address the requirement that persons aggregate based upon ownership of positions generally. These commenters recommend that the Commission only aggregate based on control, and not aggregate positions based upon an ownership interest in a position or account. 50 According to these commenters, aggregation through an ownership interest, absent control of trading decisions, will impose significant burdens for entities to aggregate on an intra-day basis, may harm liquidity, and does not address the potential concerns about coordinated trading. Similar to the comments regarding the owned non-financial entity exemption, commenters submit that aggregating positions based solely on ownership creates substantial compliance burdens within the context of a complex corporate structure. In this connection, EEI suggests that the Commission not require an entity to aggregate owned positions if an entity could show the independence of trading decisions of the owned entity. 51

As noted above, Commission rule 151.7(g) includes an exemption from the ownership criteria for aggregation if the ownership interest:

In response to the issues raised in the aggregation petition and comments to the interim final rule, the Commission has determined to propose modifications to certain position limits aggregation provisions.

The Commission is proposing to clarify that the scope of the exemption in regulation 151.7(i) includes a reasonable risk of a violation of federal law. The Commission intended to cover such risks in the final rule and is therefore proposing to amend regulation 151.7(i) to make clear that the exemption includes circumstances in which the sharing of information would create a reasonable risk of a violation of federal law or regulations adopted thereunder.

The proposed rules retain the requirement that market participants file an opinion of counsel to rely on the exemption in regulation 151.7(i). The opinion allows Commission staff to review the legal basis for the asserted regulatory impediment to the sharing of information, and is particularly helpful where the asserted impediment arises from laws and/or regulations that the Commission does not directly administer. Further, Commission staff will have the ability to consult with other federal regulators as to the accuracy of the opinion, and to coordinate the development of rules surrounding information sharing and aggregation across accounts in the future. The Commission also notes that the proposed clarification should address the concerns of commenters that obtaining an opinion of counsel could be difficult if the Commission read the existing standard to include only per se violations.

With regard to comments that the exemption should permit persons to rely upon “best practices” or other “guidelines,” the Commission notes that the proposed exemption applies to situations where the sharing of information creates a reasonable risk of violating federal law or regulations adopted thereunder. Whether a reasonable risk exists will depend on the interconnection of the applicable statute and regulatory guidance, as well as the particular facts and circumstances as applied to the statute and guidance. Notwithstanding the Commission's facts and circumstances review of potentially conflicting federal law or regulations, the exemption in regulation 151.7(i) is effective upon filing of the notice in 151.7(h) and opinion of counsel. These provisions authorize the Commission to request additional information beyond that contained in the notice filing, and the Commission may amend, suspend, terminate or otherwise modify a person's aggregation exemption upon further review. As the Commission gains further experience with the exemption for federal law information sharing restriction in regulation 151.7(i), the Commission anticipates providing further guidance to market participants.

For the same reasons the Commission adopted the exemption for federal information sharing restrictions, the Commission proposes extending the exemption to the law of a foreign jurisdiction. In addition, similar to the clarification for the exemption for federal law information sharing restriction, the Commission is also proposing an exemption where the sharing of information creates a reasonable risk of violating the law of a foreign jurisdiction. However, the Commission remains concerned that certain market participants could potentially use the existing and proposed expansion of the exemption in regulation 151.7(i) to evade the requirements for the aggregation of accounts. In this regard, this proposed rule, consistent with the exemption for federal law information sharing restriction, includes the requirement to file an opinion of counsel specifically identifying the restriction of law and facts particular to the market participant claiming the exemption. 54

The Commission notes that the aggregation petition references information sharing restrictions that arise from “international” law. The proposed rules include relief from aggregation for information sharing that could create a reasonable risk of violating the law of a foreign jurisdiction. The Commission seeks comment as to whether this proposal adequately addresses the concerns of market participants outlined in the interim final rule comments and the aggregation petition, and as to whether those concerns are valid. The Commission specifically requests comment on the types of “international” law, if any, which could create information sharing restrictions other than the law of a foreign jurisdiction. Should the regulation 151.7(i) exemption include “international” law or is it sufficient to refer to the “law of a foreign jurisdiction”? Alternatively, the Commission is considering a case-by-case approach through petitions submitted pursuant to CEA section 4a(a)(7). Should the Commission adopt such a case-by-case approach?

After consideration of the aggregation petition and the interim final rule comments the Commission is also proposing to establish an exemption for situations where information sharing restrictions could trigger state law violations. In addition, similar to the clarification for the exemption for federal law information sharing restriction, the Commission is also proposing that the state law information sharing restriction apply to situations where the sharing of information creates a reasonable risk of violating the state law. However, as noted above, the Commission remains concerned about the potential for evasion within the context of this exemption. In this regard, this proposed rule, consistent with the federal law information sharing restriction, includes the requirement to file an opinion of counsel specifically identifying the restriction of law and facts particular to the market participant claiming the exemption.

The Commission solicits comments as to the appropriateness of extending the information sharing exemption to state law. Should the Commission provide for such an exemption? Alternatively, the Commission is considering a case-by-case approach through petitions submitted pursuant to CEA section 4a(a)(7). Should the Commission adopt such a case-by-case approach and otherwise rely upon the preemption of state law in administering its aggregation policy?

The Commission notes that the aggregation petition cites to Texas Public Utility Code Substantive Rule 25.503, which provides that “a market participant shall not collude with other market participants to manipulate the price or supply of power.”  55 That provision applies to intra-state transactions and resembles regulations of the Federal Energy Regulatory Commission. 56 In this regard, should the Commission limit application of the proposed exemption for state law information sharing restrictions to laws that have a comparable provision at the federal level? What criteria should the Commission use in identifying state laws that a person may rely upon for an exemption from aggregation?

The Commission also solicits additional comment as to the types of state laws, including specific laws, which could create an information sharing restriction in conflict with the Commission's aggregation policy.

The Commission further notes that the aggregation petition seeks to extend the exemption to information sharing restrictions that arise from “local” law. 57 However, neither the aggregation petition nor interim final rule commenters have provided examples, and the Commission is concerned that an exemption for local law would be difficult to implement due to the number of laws and/or regulations that would need to be considered and the vast numbers of localities that might issue such laws and/or regulations.

The Commission solicits comment as to the appropriateness of extending the information sharing exemption to “local” law. Commenters are asked to provide the scope of local law and identify any specific laws that create information sharing restrictions that would conflict with the Commission's aggregation policy. What criteria could the Commission use in identifying local laws that a person may rely upon for an exemption from aggregation? Should the Commission adopt a case-by-case approach through petitions submitted pursuant to CEA section 4a(a)(7) and otherwise rely upon the preemption of local law in administering its aggregation policy?

The Commission continues to consider ownership an appropriate measure for aggregation. Section 4a(a)(1) of the CEA provides for the general aggregation standard with regard to position limits, and specifically provides:

In light of the language in section 4a, the legislative history and regulatory developments, the Commission has historically viewed, and continues to view, section 4a as requiring aggregation on the basis of either ownership or control. 62 The Commission also believes that aggregation of positions across accounts based upon ownership is a necessary part of the Commission's position limit regime. 63 An ownership standard establishes a bright-line test that provides certainty to market participants and the Commission. 64

Absent aggregation on the basis of ownership, the Commission would have to apply a control test in all cases, which poses significant administrative challenges to individually assess control across all market participants. Further, if the statute only required aggregation based on control, market participants may be able to use an ownership interest to circumvent aggregation in circumstances where an ownership interest is used to directly or indirectly influence control over the account or position. The Commission also notes that the ownership prong attributes a position to the beneficial owner of multiple accounts that amount to an unduly large position, which position limits are intended to prevent. Therefore, the proposed rules would continue to require aggregation based upon either ownership or control.

Regarding a threshold level to aggregate on the basis of ownership, the Commission has generally found that an ownership or equity interest of less than 10 percent in an account or position that is controlled by another person who makes discretionary trading decisions does not present a concern that such ownership interest results in control over trading or can be used indirectly to create a large speculative position through ownership interests in multiple accounts. As such, the Commission has traditionally viewed an ownership interest below 10 percent as not warranting aggregation. 65 Commenters suggest that a similar analysis should prevail for an ownership interest of 10 percent or more where such ownership represents a passive investment that does not involve control of the trading decisions of the owned entity. Commenters argue that under these conditions, such passive investments would present a reduced concern for trading pursuant to direct or indirect control, as well as a reduced risk for persons with positions in multiple accounts to hold an unduly large overall position.

While prior Commission rulemakings have generally restricted exemptions to the ownership criteria to limited partners of commodity pools and independent account controllers managing customer funds for an eligible entity, the Commission has considered a broader passive investment exemption. 66 Further, the Commission indicated in the part 151 final rule that the development of aggregation exemptions could occur over time. 67 This incremental approach to account aggregation standards reflects the Commission's historical practice. 68 Consistent with that practice, the Commission has considered the additional information provided and the concerns raised by the aggregation petition and interim final rule commenters, and believes it appropriate to propose certain relief from the ownership criteria of aggregation. 69

Proposed rule 151.7(b) continues the Commission's longstanding rule that persons with an ownership or equity interest in an account or position of less than 10 percent need not aggregate such positions solely on the basis of the ownership criteria. Persons with a 10 percent or greater ownership interest would still generally be required to aggregate the account or positions. However, proposed rule 151.7(b)(1) establishes a notice filing procedure to permit a person in specified circumstances to disaggregate the positions of a separately organized entity (“owned entity”), even if such person has a 10 percent or greater interest in the owned entity. The notice filing would need to demonstrate compliance with certain conditions set forth in 151.7(b)(1)(i), and such relief would not be available to persons with a greater than 50 percent ownership or equity interest in the owned entity. Similar to other exemptions from aggregation, the notice filing would be effective upon submission to the Commission, but the Commission may subsequently call for additional information as well as reject, modify or otherwise condition such relief. Further, such person is obligated to amend the notice filing in the event of a material change to the circumstances described in the filing.

The proposed criteria to claim relief under 151.7(b)(1) address the Commission's concerns that an ownership or equity interest of 10 percent and above may facilitate or enable control over trading of the owned entity or allow a person to accumulate a large position through multiple accounts that could overall amount to an unduly large position. Essentially, the proposed rules amending the ownership criteria for aggregation across accounts establish a rebuttable presumption that persons with an ownership or equity interest of 10 percent or greater must aggregate, but such persons may file for disaggregation relief if their ownership interest does not exceed 50 percent and they can demonstrate independence by meeting the criteria described below. 70

Proposed rule 151.7(b)(1)(i)(A) conditions aggregation relief for the ownership interest in another entity on a demonstration that a person filing for disaggregation relief and the owned entity do not have knowledge of the trading decisions of the other. The Commission believes that where an entity has an ownership interest in another entity and neither entity share trading information, such entities demonstrate independence. In contrast, persons with knowledge of trading decisions of another in which they have an ownership interest are likely to take such decisions into account in making their own trading decisions, which implicates the Commission's concern about independence and enhances the risk for coordinated trading. For purposes of this provision, the Commission does not consider knowledge of overall end-of-day position information to necessarily constitute knowledge of trading decisions, so long as the position information cannot be used to dictate or infer trading strategies. As such, the knowledge of end-of-day positions for the purpose of monitoring credit limits for corporate guarantees would not necessarily constitute knowledge of trading information. However, the ability to monitor the development of positions on a real time basis could constitute knowledge of trading decisions because of the substantial likelihood that such knowledge might affect trading strategies or influence trading decisions of the other.

Proposed rule 151.7(b)(1)(i)(B) conditions aggregation relief on a demonstration that such person seeking disaggregation relief and the owned entity trade pursuant to separately developed and independent trading systems. Further, proposed rule 151.7(b)(1)(i)(C) conditions relief on a demonstration that such person and the owned entity have, and enforce, written procedures to preclude the one entity from having knowledge of, gaining access to, or receiving data about, trades of the other. Such procedures must include document routing and other procedures or security arrangements, including separate physical locations, which would maintain the independence of their activities. The Commission has applied these same conditions in connection with the IAC exemption to ensure independence of trading between an eligible entity and an affiliated independent account controller. 71 Such conditions have been useful in ensuring that trading is not coordinated through the development of similar trading systems, and that procedures are in place to prevent the sharing of trading decisions between entities. Similar to the IAC exemption, the proposed owned entity exemption in proposed rule 151.1(b)(1) would permit disaggregation if there is independence of trading between two entities. Thus the Commission proposes to include the above conditions, which are already applicable in the IAC context, and which should also strengthen the independence between the two entities for the owned entity exemption.

Proposed rule 151.7(b)(1)(i)(D) conditions aggregation relief on a demonstration that such person does not share employees that control the owned entity's trading decisions, and the employees of the owned entity do not share trading control with such persons. The Commission is concerned that shared employees with knowledge of trading decisions undermine the independence of trading between entities. Similar to the restriction on information sharing, the sharing of employees with knowledge of trading decisions presents a strong risk to the independence of trading between entities. In the aggregation petition, the Working Groups submit that entities should be permitted to share “attorneys, accountants, risk managers, compliance and other mid- and back-office personnel.”  72 At this time, the Commission questions, and seeks comment regarding, whether the sharing of such persons compromises independence because it would provide each entity with knowledge of the other's trading decisions. 73

Proposed rule 151.7(b)(1)(i)(E) conditions aggregation relief on a demonstration that the person and the owned entity do not have risk management systems that permit the sharing of trades or trading strategies with the other. This condition addresses concerns that risk management systems that permit the sharing of trades or trading strategies with each other present a significant risk of coordinated trading through the sharing of information. 74 The Commission has not proposed a condition that the risk management system be separately developed from the risk management system of the owned entity, and the Commission seeks comment as to whether risk management systems that do not communicate trade information can maintain independence of trading between entities. 75

Proposed rule 151.7(b)(1)(ii) conditions aggregation relief on a demonstration that such person does not have greater than a 50 percent ownership or equity interest in the owned entity. An equity or ownership interest above 50 percent constitutes a majority ownership or equity interest of the owned entity and is so significant as to require aggregation under the ownership prong of Section 4a(a)(1) of the CEA. This proposal would provide administrative certainty and would address concerns about circumvention of position limits by coordinated trading or direct or indirect influence between entities. To the extent that the majority owner may have the ability and incentive to direct, control or influence the management of the owned entity, the proposed bright-line test would be a reasonable approach to the aggregation of owned accounts pursuant to Section 4a(a)(1). A person with a greater than 50 percent ownership interest in multiple accounts would have the ability to hold and control a significantly large and potentially unduly large overall position in a particular commodity, which position limits are intended to prevent. 76

The proposed owned entity exemption and the clarification and expansion of the violation of law exemption address concerns raised in the aggregation petition and interim final rule comments. First, the clarification and extension of the violation of law exemption responds to concerns that market participants could face increased liability under state, federal and foreign law. While the aggregation petition and other commenters argue that an owned non-financial entity exemption would reduce the risk of liability under antitrust and other laws, the proposed clarification and expansion would allow market participants to avail themselves of the violation of law exemption in those circumstances where the sharing of information creates a reasonable risk of violating the above mentioned bodies of law.

The proposed owned entity exemption applies to both financial and non-financial entities that have passive ownership interests. Market participants that qualify for the exemption can file a notice with the Commission demonstrating independence between entities and, thereafter, forgo the development of monitoring and tracking systems for the aggregation of accounts. The Commission seeks comment as to whether such passive interests present a significantly reduced risk of coordinated trading compared to owned entities that fail the criteria for the proposed exemption. In addition, the Commission specifically requests comment as to whether the proposed relief should be limited to ownership interests in non-financial entities.

While the owned non-financial entity exemption mentioned in the aggregation petition would permit disaggregation even if the owned entity is a wholly owned company, the Commission is concerned that an ownership interest greater than 50 percent presents heightened concerns for coordinated trading or direct or indirect influence over an account or position, and that permitting disaggregation at that level of ownership would be inconsistent with the statutory requirement to aggregate on the basis of ownership. Small ownership interests of less than 10 percent do not warrant aggregation. A 10 percent or greater ownership interest has served as a useful measure for aggregation, but the Commission has determined relief may be warranted for passive investments. However, for the reasons discussed above, an ownership interest greater than 50 percent requires aggregation because ownership at that level serves as a useful benchmark for the increased risk of direct or indirect influence over the trading of an owned entity. Because the circumstances facilitating control can be difficult to monitor, a facts and circumstances review would be difficult to administer by both market participants and the Commission. In addition, a person with a greater than 50 percent ownership interest in multiple accounts may have the ability to hold a significantly large and potentially unduly large overall position in a particular commodity, which position limits are intended to prevent. Therefore, the Commission proposes limiting the availability of the exemption to those having an ownership interest no greater than 50 percent because such a bright-line rule would provide clarity to market participants and a useful tool for the Commission to simplify aggregation where there is an increased and substantial risk of coordinated trading. 77

With regard to filing requirements for the exemption in regulation 151.7(b) (1), the Commission notes that market participants would be required to file in accordance with regulation 151.7(h). 78 As such, market participants must file a notice with the Commission with a description of how they adhere to the criteria in regulation 151.7(b)(1) and a certification that the conditions are met. This certification, as well as any other certification made under regulation 151.7(h), must come from a senior officer of the market participant with knowledge as to the contents of the notice. 79 Therefore, the Commission is proposing to clarify in regulation 151.7(h)(1)(ii) that such certification come from a senior officer. Further, regulation 151.7(h)(3) requires market participants to promptly update a notice filing in the event of a material change of the information contained in the notice filing. 80

With regard to the type of material necessary to file a notice to claim an exemption under 151.7(b)(1), the Commission notes that each submission must be specific to the facts of the particular entity. The person claiming the exemption must provide specific facts that demonstrate compliance with each condition of relief. Such a demonstration should likely include an organizational chart including the ownership and control structure of the involved entities, a description of the risk management system, a description of the information-sharing systems (including bulletin boards, and common email addresses of the entities identified), an explanation of how and to whom the trade data and position information is distributed (including the responsibilities of the individual receiving such information), and the officers that receive reports of the trade data and position information. 81

The Commission specifically requests comments as to the appropriateness of the owned entity exemption as well as the conditions applicable to the exemption. Should the Commission add additional criteria? If so, what criteria and why? Should the Commission require market participants to submit additional information to claim the exemption? If so, what information and why? With regard to the owned entity exemption, should the Commission alter the scope of the exemption? If so, how should it be altered and why? Further, at what percent of ownership interest should a market participant no longer be able to claim the exemption proposed in regulation 151.7(b)(1), if any? Are there specific circumstances in which a higher percentage of ownership than 50 percent would be appropriate to claim the exemption in regulation 151.7(b)(1) notwithstanding the concerns described above regarding coordinated trading, direct or indirect influence, and significantly large and potentially unduly large overall positions in a particular commodity? In addition, the Commission welcomes comment on the owned non-financial entity exemption set forth in appendix A of the aggregation petition as an alternative to the owned entity exemption proposed herein.

In connection with the Working Groups' request for the Commission to include an owned non-financial entity exemption, the Working Groups also request that the Commission provide relief from the filing requirements for claiming the exemption. Specifically, the aggregation petition argues that if an entity files a notice and claims the owned non-financial entity exemption, then “every higher-tier company (a company that holds an interest in the company that submitted the notice) need not aggregate the referenced contracts of the owned non-financial entities identified in the notice.”  82 Thus, the Commission is proposing rules that provide relief to such “higher-tier entities” within the context of a corporate structure. 83

Proposed rule 151.7(j) provides that higher-tier entities may rely upon a notice for exemption filed by the owned entity, and such reliance would only go to the accounts or positions specifically identified in the notice. For example, if company A has a 30 percent interest in company B, and company B has filed an exemption notice for the accounts and positions of company C, then company A may rely upon company B's exemption notice for the accounts and positions of company C. Should company A wish to disaggregate the accounts or positions of company B, company A would have to file a separate notice for an exemption.

The proposed rules also provide that a higher-tier entity that wishes to rely upon an owned entity's exemption notice must comply with conditions of the applicable aggregation exemption other than the notice filing requirements. Although higher-tier entities need not submit a separate notice to rely upon the notice filed by an owned entity, the Commission notes that it may, upon call, request that a higher-tier entity submit information to the Commission, including the possibility of an on-site visit, demonstrating compliance with the applicable conditions.

The Commission believes that these proposed rules, if adopted, should significantly reduce the filing requirements for aggregation exemptions. Further, the Commission does not anticipate that the reduction in filing will impact the Commission's ability to effectively survey the proper application of exemptions from aggregation. The initial filing of an owned entity exemption notice should provide the Commission with sufficient information regarding the appropriateness of the exemption, while repetitive filings of higher-tier entities would not be expected to provide additional substantive information. However, the Commission again notes that higher-tier entities would still be required to comply with the substantive conditions of the exemption specified in the owned entity's notice filing.

As noted above, Commission regulation 151.7(g) includes an exemption from aggregation where an ownership interest is in an unsold allotment of securities. FIA requests that the Commission expand the exemption to include situations where securities are owned in anticipation of demand as part of normal market-making activity, or as a result of a routine life cycle event, such as a stock distribution.

The Commission believes that the ownership interest of a broker-dealer registered with the SEC, or similarly registered with a foreign regulatory authority, 84 in an entity based on the ownership of securities acquired as part of reasonable activity in the normal course of business as a dealer is largely consistent with the ownership of an unsold allotment of securities covered by the underwriting exemption currently found in regulation 151.7(g). In both circumstances, the ownership interest is likely transitory and not to hold for investment purposes. Accordingly, the Commission is proposing an aggregation exemption in regulation 151.7(g) for such activity. 85

However, the Commission notes that this exemption would not apply where a broker-dealer acquires more than a 50 percent ownership interest in another entity because this would not be consistent with holding such a transitory interest for the purpose of market making and runs a higher risk of coordinated trading. 86 Therefore, a broker-dealer that acquires more than 50 percent ownership interest in another entity must aggregate that entity, in the absence of another aggregation exemption.

The Commission requests comment on whether ownership of stock, by a broker-dealer registered with the SEC or similarly registered with a foreign regulatory authority, that is acquired as part of reasonable activity in the normal course of business as a dealer, without other ownership interests or indicia of control or concerted action, warrants aggregation.

As noted above in section I.A of this release, section 151.7(f) provides an eligible entity with an exemption for the eligible entity's customer accounts that are managed and controlled by independent account controllers. In the part 151 rulemaking, the Commission adopted the same definitions of eligible entity and independent account controller found in the Commission's prior position limit regulations in regulation 150.1. The definition of eligible entity includes “the limited partner or shareholder in a commodity pool the operator of which is exempt from registration under § 4.13 of this chapter * * *.” However, with regard to a CPO that is exempt under regulation 4.13, the definition of an independent account controller only extends to “a general partner of a commodity pool the operator of which is exempt from registration under § 4.13 of this chapter.” At the time the Commission expanded the IAC exemption to include regulation 4.13 commodity pools, market participants generally structured such pools as limited partnerships. 87

The Commission understands that today, not all regulation 4.13 commodity pools are formed as partnerships. For example, regulation 4.13 pools may be formed as limited liability companies and have managing members, not general partners.

The Commission is proposing to expand the definition of independent account controller to include the managing member of a limited liability company. As such, regulation 4.13 commodity pools established as limited liability companies would be accorded the same treatment as such pools formed as limited partnerships. The limitation of the exemption to general partners was based upon a market structure that, historically, did not generally include regulation 4.13 commodity pools established as limited liability companies. In light of market developments since the Commission expanded IACs to include regulation 4.13 pools as eligible entities, it may not be appropriate for there to be a distinction between limited partnerships and limited liability companies in this regard. As such, the Commission is proposing to amend the definitions of eligible entity and independent account controller in part 151.1 to specifically provide for regulation 4.13 commodity pools established as limited liability companies.

The Commission intends to coordinate the disposition of the petition with the implementation of position limits under part 151. To do so, among other things, the Commission has directed staff to promptly review comment letters as soon as practicable following close of the comment period. Further, in order to provide an orderly transition to the compliance dates specified in part 151.4, the Commission intends to finalize consideration of the petition prior to the first compliance date of part 151.

Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing an order. 88 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations.

The proposed rules provide the public with an opportunity to comment on concerns raised in the aggregation petition and in comments on the interim final rule. The petitioner and the commenters seek clarification of certain provisions of the Commission's aggregation policy, and seek to alter or expand exemptions from aggregation to include circumstances where there may be a low risk of coordinated trading. The Commission requests comment on all aspects of its consideration of costs and benefits, including identification and assessment of any costs and benefits not discussed herein. In addition, the Commission requests that commenters provide data and any other information or statistics that they believe supports their positions with respect to the Commission's consideration of costs and benefits.

As discussed in section I.B. of this release, the Commission received a petition seeking relief from certain aggregation provisions in the final rules, as well as several comments regarding aggregation in response to the interim final rule on cash-settled contract limits. Among other things, the aggregation petition requests that the Commission provide an aggregation exemption for owned non-financial entities similar to an exemption that the Commission proposed but did not adopt in its final rules. 89

The aggregation petition states that compliance with the final rules' aggregation requirements would require information sharing and coordination of trading that is contrary to current best practices. 90 The aggregation petition contends that the aggregation rules may impede investment in commercial firms, impair liquidity and competition in energy derivatives markets, or cause firms to exit the market altogether. 91 Further, the aggregation petition states that the aggregation rules necessitate the development and implementation of extensive and expensive information technology systems that can track positions across numerous affiliates, even if those affiliates currently trade independently of each other. 92 The aggregation petition also submits that companies with an ownership position in a joint venture would have to divest their interest to avoid operational difficulties associated with aggregating positions. 93 The petitioner contends that these asserted costs could be mitigated if the Commission were to adopt a variant of the owned non-financial entity exemption, 94 clarify that the violation of law exemption applies to situations in which there is a “reasonable risk” of violating the applicable law, expand the violation of law exemption to include possible violations of local, state, foreign, and international law, 95 and adopt provisions relieving “higher-tier” entities of the filing requirement, as discussed above. 96

Several commenters to the Commission's interim final rule also suggest that the Commission adopt a version of the “owned non-financial entity” exemption; these commenters argue that even above 10 percent ownership, where there is no common control, there is no risk of coordinated trading and, therefore, no need for aggregation of positions. 97 These commenters recommend that the Commission aggregate based on control, and not based on an ownership interest in a position or account. 98 Commenters contend that aggregation of accounts in passive investments, where the owned entity is independently managed and controlled, will be costly and have a negative impact on markets and market participants. 99 Commenters also claim that many businesses establish information barriers between affiliates, and that the final rules would require the destruction of those barriers in order to ensure compliance. 100

As with the petitioners, commenters to the interim final rule also assert that the aggregation provisions impose significant operational challenges for entities and end-users in particular, requiring them to develop and maintain costly internal infrastructure mechanisms to ensure compliance. 101 FIA estimates that for a large conglomerate, costs to comply with the final rule's aggregation procedures could be high. In particular, FIA estimates that each entity could spend as much as $500,000 to $1,000,000 to identify all entities subject to aggregation and to establish protocols for reporting all commonly owned and controlled positions in Referenced Contracts; as much as $1,000,000 to $1,500,000 to establish new information technology systems for consolidating and tracking aggregated position information; and approximately $100,000 for each entity subject to aggregation to report position information to its affiliates and/or controlling entities. 102

With regard to the exemption for federal law information sharing restriction in regulation 151.7(i), several commenters also suggest that the Commission extend the exemption to include state and foreign jurisdictions. 103 One commenter wrote that the provision in regulation 151.7(i) that requires an opinion of counsel to obtain such an exemption was too burdensome and should be revised. 104

One commenter also suggests that the Commission extend the underwriting exemption in regulation 151.7(g) to include situations where a broker-dealer acquires positions for legitimate dealing reasons, such as in anticipation of increased demand, as part of its normal market-making activity, or as a result of a routine life-cycle event. 105

Exemption for Violation of Laws. In the final part 151 rules, the Commission included an exemption from aggregation for those entities for whom sharing the requisite information would violate federal law. The Commission seeks to clarify that it always intended the exemption to apply in those circumstances in which the sharing of information presents a “reasonable risk” of violating the applicable law(s).

As explained above, one commenter urged the Commission to drop the requirement that, to obtain the violation-of-laws exemption an entity must submit an opinion of counsel (as discussed in section II.C). Such an opinion allows the Commission to review the facts and circumstances supporting the claimed exemption, and thus the proposed rules would retain the requirement to submit an opinion of counsel.

In light of the aggregation petition and comments on the interim final rule, the Commission is including in this proposal an expansion of the violation-of-law exemption to include state law and the law of foreign jurisdictions. The existing rule allows entities who believe that the aggregation provisions would require them to violate state or foreign laws to seek an exemption on a case-by-case basis. The Commission seeks comment as to the scope of the proposed exemption.

Proposed Owned Entity Exemption. Proposed rule 151.7(b)(1) provides that any person with an ownership or equity interest in an entity (financial or non-financial) of 10 percent or greater may disaggregate the owned entity's positions upon demonstrating compliance with each of several specified indicia of independence. 106 The proposed indicia are that such person and the owned entity: (1) Do not have knowledge of the trading decisions of the other; (2) trade pursuant to separately developed and independent trading systems; (3) have in place policies and procedures to preclude sharing knowledge of, gaining access to, or receiving data about, trades of the other; (4) do not share employees that control the trading decisions of the other; and (5) maintain a risk management system that does not allow the sharing of trade information or trading strategies between entities. In addition, such person's ownership or equity interest in the owned entity cannot exceed 50 percent.

The aggregation petition and several of the other commenters urge that the Commission should permit market participants to disaggregate accounts in situations where ownership of an account is passive, as they contend there is a less of a concern regarding coordinated trading. 107 The aggregation petition and other commenters suggest that the Commission add an owned non-financial entity exemption, which they contend would incorporate such situations as well as alleviate potential negative impacts to liquidity and competition in both physical and derivatives markets.

The Commission is proposing to permit disaggregation of entities where a person has no greater than a 50 percent interest in the entity and meets certain other conditions. The proposed owned-entity exemption would apply to a person's passive investments in either financial or non-financial entities. Those who qualify under this proposal would have to demonstrate that they meet all of its conditions. The Commission seeks comment as to whether the concerns suggested by the aggregation petition and other commenters are valid, whether this proposal meets those concerns, and whether the 50 percent limit and other conditions are appropriate.

Expansion of the Underwriter Exemption. The Commission is also proposing to expand the exemption for the underwriting of securities that was adopted as regulation 151.7(g) to include ownership interests acquired through the market-making activities of an affiliated broker dealer. This proposal would exempt from aggregation ownership interests acquired as part of a person's reasonable market-making activity in the normal course of business as a broker-dealer registered with the SEC or comparable registration in a foreign jurisdiction, 108 so long as there is no other ownership interests or indicia of control or concerted action. The Commission intends for this proposal to apply to ownership interests that are likely transitory and not for investment purposes, and seeks comment as to whether such interests are at a low risk for the coordination of trading or whether this exemption could lead to evasion of applicable position limits. 109

Proposed “Higher-Tier” Entity Filing Relief. The Commission also is proposing to extend filing relief to “higher-tier” entities. As such, proposed regulation 151.7(j) provides that higher-tier entities may rely on exemption notices filed by owned entities. Commenters claim that such an exemption would reduce the burden of filing exemption notices by eliminating redundancies. The Commission seeks comment as to whether this proposal will in fact reduce the filing burden for claiming an exemption, and whether the proposal would affect the Commission's ability to oversee how exemptions are applied in the market.

Independent Account Controller Exemption. As discussed above, the IAC exemption in regulation 151.7(f) previously included commodity pools exempt from registration under § 4.13 that are structured as limited partnerships. The Commission is proposing to allow commodity pools structured as limited liability companies to rely on the IAC exemption. The Commission seeks comment as to whether there is any relevant distinction between limited partnerships and limited liability companies for purposes of this exemption.

It is the Commission's goal that this proposal uphold part 151's regulatory aims without diminishing its effectiveness. In so doing, the Commission adheres to its belief that aggregation represents a key element to prevent evasion of prescribed position limits and that its historical approach towards aggregation—one that appropriately blends consideration of ownership and control indicia—remains sound. 110

The Commission seeks comment as to whether compliance with this proposal will reduce the costs market participants will incur to comply with the aggregation requirements of the final rules. In particular, how would the cost of filing a notice for disaggregation relief compare with the cost of developing systems necessary to aggregate the positions of owned entities under the current version of part 151? Note that, in the preamble to part 151, the Commission estimated that the filing of a Notice of Disaggregation would create certain costs for market participants. 111 In particular, the Commission approximated that the aggregation-related reporting requirements would affect “ninety entities, resulting in a total burden, across all these entities, of 225,000 annual labor hours and $5.9 million in annualized capital, start-up, total operating, and maintenance costs.”  112 The Commission has estimated the additional burden that may result from the proposed rules as part of its Paperwork Reduction Act calculations, and requests comment on those estimations. 113 The Commission also seeks comment as to how many entities would be able to take advantage of the proposed exemption. Alternatively, how many entities would be able to take advantage of the owned non-financial entity exemption described in the aggregation petition?

Because costs associated with the aggregation of positions are highly variable and entity-specific, the Commission requests that commenters submit data from which the Commission can consider and quantify the costs of the proposed rules.

In assessing benefits, it is important for the Commission to determine whether the proposed rules will enhance the Commission's ability to monitor compliance with position limits by focusing the Commission's resources on those entities most at risk of coordinated trading through multiple accounts. The Commission seeks comment as to whether the proposed amendments to the Commission's aggregation policy will result in lower costs for market participants without compromising the core purposes of the position limits regime.

As the Commission has long held, position limits are an important regulatory tool that is designed to prevent concentrated positions of sufficient size to manipulate or disrupt markets. The aggregation of accounts for purposes of applying position limits represents an integral component that impacts the effectiveness of those limits. In the final rule, the Commission implemented a policy for the aggregation of accounts that largely tracked its longstanding standards of aggregation, which were designed to prevent evasion of those position limits. The proposed rules would amend this policy to introduce and expand certain exemptions. The Commission intends for the proposed rules to preserve the important protections of the existing aggregation policy, but at a lower cost for market participants. The Commission requests comment on its consideration of the costs and benefits of the proposed rules in relation to each of the Section 15(a) factors discussed herein.

The Commission wants to ensure that the exemptions proposed in these rules will not lessen the protection of market participants and the public that the aggregation policy in the Final Rule provides. Given that the account aggregation standards are necessary to implement an effective position limit regime, it is important that the clarified and expanded exemptions of the proposed rules be sufficiently tailored to exempt from aggregation only those accounts that do pose a low risk of coordinated trading. The Commission believes that clarifying the scope of the violation of law exemption to include the risk of violating the applicable law more accurately informs market participants as to the standard for claiming the exemption. The proposed owned-entity exemption maintains the Commission's historical presumption threshold of 10 percent ownership or equity interest and makes that presumption rebuttable only where several conditions indicative of independence are met. This exemption focuses on the conditions that impact trading independence. The Commission intends that any exemption it adopts would allow the Commission to direct its resources to monitoring those entities with a higher risk of coordinated trading and thus at a higher risk of circumventing position limits, without reducing the protection of market participants and the public that the Commission's aggregation policy affords.

Similarly, the Commission intends for the “higher-tier” entity exemption, and the expansion of the underwriting and IAC exemptions, to reduce costs for market participants without a compromise to the integrity or effectiveness of the Commission's aggregation policy.

The Commission welcomes comment regarding whether the proposed rules would impact protection of market participants and the public.

The Commission wants to ensure that the exemptions proposed in these rules would fully preserve account aggregation as a tool to uphold the integrity of the part 151 position limit regime, which helps maintain the overall competitiveness and integrity of derivatives markets. The Commission seeks comment regarding whether the proposed rules would impact the efficiency, competitiveness, and/or financial integrity of futures markets.

Similarly, the Commission wants to ensure that the exemptions proposed in these rules do not adversely impact the price discovery process, which the part 151 position limit regime (including the account aggregation provisions in § 151.7) is designed to protect. The Commission welcomes comment as to whether the proposed rules would impact price discovery.

The Commission wants to ensure that the exemptions proposed in these rules will not lessen the effectiveness of the sound risk management practices that the Final Rule promotes. The Commission welcomes comment as to whether the proposed rules would impact sound risk management practices.

The Commission has not identified any other public interest considerations related to the costs and benefits of the proposed rules. The Commission welcomes comment as to whether there are additional public interest considerations the Commissions should consider.

The Regulatory Flexibility Act (“RFA”) requires that agencies consider the impact of their regulations on small businesses. 114 The requirements related to the proposed amendments fall mainly on DCMs, swap execution facilities (“SEF”) that are trading facilities, FCMs, foreign brokers, and large traders. The Commission has previously determined that DCMs, FCMs, foreign brokers and large traders are not “small entities” for the purposes of the RFA. 115 Further, in the Commission's position limits rule, 116 the Commission determined that SEFs, which includes SEFs that are trading facilities, are not “small entities” for purposes of the RFA.

Accordingly, the Chairman, on behalf of the Commission, hereby certifies, on behalf of the Commission, pursuant to 5 U.S.C. 605(b), that the actions proposed to be taken herein would not have a significant economic impact on a substantial number of small entities.

The Paperwork Reduction Act (“PRA”) imposes certain requirements on Federal agencies in connection with their conducting or sponsoring any collection of information as defined by the PRA. 117 An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Certain provisions of the proposed regulations would result in new collection of information requirements within the meaning of the PRA. The Commission seeks to supplement the control number assigned by the Office of Management and Budget (“OMB”) for part 151—Position Limits for Futures and Swaps (OMB control number 3038-0077). Therefore the Commission is submitting this proposal to OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.

In January of 2012, the Commission received a petition requesting relief under section 4a(a)(7) of the CEA and clarification of certain aggregation requirements in regulation 151.7. In response to that petition, the Commission is proposing to clarify certain aspects of the aggregation standards, and to expand the scope of certain exemptions from aggregation. If adopted, responses to this collection of information would be mandatory to the extent persons wish to rely upon the exemptions contained within the proposed amendments to Commission regulation 151.7. The Commission will protect proprietary information according to the Freedom of Information Act and 17 CFR part 145, headed “Commission Records and Information.” In addition, the Commission emphasizes that section 8(a)(1) of the CEA strictly prohibits the Commission, unless specifically authorized by the CEA, from making public “data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers. 118 The Commission also is required to protect certain information contained in a government system of records pursuant to the Privacy Act of 1974. 119

Proposed rule 151.7(b)(1) establishes an exemption for a person to disaggregate the positions of a separately organized entity (“owned entity”). To claim the exemption, a person would need to meet certain criteria and file a notice with the Commission in accordance with regulation 151.7(h). The notice filing would need to demonstrate compliance with certain conditions set forth in regulations 151.7(b)(1)(i)-(vii). Similar to other exemptions from aggregation, the notice filing would be effective upon submission to the Commission, but the Commission may call for additional information as well as reject, modify or otherwise condition such relief. Further, such person is obligated to amend the notice filing in the event of a material change to the filing.

The proposed rules also amend regulation 151.7(i), which provides an exemption from aggregation where the sharing of information between persons would cause either person to violate federal law. The proposed amendments clarify that the exemption would apply to a situation where the sharing of information creates a reasonable risk of a violation of federal law or regulations adopted thereunder, and not solely a per se violation. For the same reasons the Commission adopted the exemption for information sharing restrictions for federal law, the Commission expanded the exemption in regulation 151.7(i) to generally extend to the state law and the law of a foreign jurisdiction. The proposed rules also retain the requirement that market participants file a notice demonstrating compliance with the condition and an opinion of counsel that the sharing of information could create a reasonable risk of a violation of state or federal law or the law of a foreign jurisdiction. The opinion allows Commission staff to review the legal basis for the asserted regulatory impediment to the sharing of information, and is particularly helpful where the asserted impediment arises from laws and/or regulations that the Commission does not directly administer. Further, Commission staff will have the ability to consult with other federal regulators as to the accuracy of the opinion, and to coordinate the development of rules surrounding information sharing and aggregation across accounts in the future.

The Commission is also proposing to amend the definitions of eligible entity and independent account controller in part 151.1 to specifically provide for regulation 4.13 commodity pools established as limited liability companies. These proposed amendments will likely expand the number of entities that can file for the independent account controller aggregation exemption.

Finally, the proposed rules include relief from notice filings for “higher-tier” entities, which, under proposed regulation 151.7(j), may rely on the filings submitted by owned entities. A “higher-tier” entity need not submit a separate notice pursuant to the notice filing requirements to rely upon the notice filed by an owned entity as long as it complies with conditions of the applicable aggregation exemption.

Proposed regulation 151.7(b)(1) specifies that qualified persons may file a notice claiming exemptive relief from aggregation. Proposed regulation 151.7(b)(1)(vii) states that the notice is to be filed in accordance with regulation 151.7(h), which requires a description of the relevant circumstances that warrant disaggregation and a statement that certifies that the conditions set forth in the exemptive provision have been met. Persons claiming the exemption would be required to submit to the Commission, as requested, such information as relates to the claim for exemption. An updated or amended notice must be filed with the Commission upon any material change.

With regard to the existing filing procedure for claiming exemptions from aggregation, in the part 151 final rule the Commission estimated that ninety entities would incur a burden of 225,000 annual labor hours as well as $5.9 million in annualized capital, start-up, total operating, and maintenance costs. This estimate was based on each entity submitting one notice of disaggregation per year at a burden of 2,500 labor hours. Given the expansion of the exemptions that market participants may claim, the Commission anticipates an increase in the number of notice filings; however, because of the relief for “higher-tier” entities under proposed regulation 151.7(j), the Commission expects that increase to be offset by a reduction in the number of filings by “higher-tier” entities. Thus, the Commission anticipates a small net increase in the number of filings under regulation 151.7 as a result of the proposed rules. The Commission believes that this small increase will create a small increase in the annual labor burden. However, because entities will have already incurred the capital, start-up, operating, and maintenance costs to file other exemptive notices, the Commission does not anticipate an increase in those costs.

In light of the Commission providing for these additional exemptions, the Commission estimates that 90 entities will each file two notices annually under proposed regulation 151.7(b)(1), at an average of 20 hours per filing. Thus, the Commission approximates a total per-entity burden of 40 labor hours annually. Using the same labor cost estimates as in the existing collection (OMB# 3038-0077), 120 such a burden would cost approximately $3,100 per entity for filings under proposed regulation 151.7(b)(1). Under proposed regulation 151.7(f), the Commission anticipates that 10 entities will annually file one notice each, at an average of 20 hours per filing, for a per-entity burden of 20 labor hours annually. Such a burden would cost approximately $1,600 per entity. Finally, the Commission anticipates that 45 entities will annually file one notice each under proposed regulation 151.7(i), at an average of 80 hours per filing, for a per-entity burden of 80 hours each. Such a burden would cost approximately $6,300 per entity. Monetary estimates have been rounded to the nearest hundred.

In sum, the Commission estimates that 145 entities would submit a total of 235 responses per year and incur a total burden of 7,400 labor hours at a cost of approximately $582,000 annually in addition to the existing burden under § 151.7.

The Commission invites the public and other federal agencies to comment on any aspect of the reporting and recordkeeping burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (1) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility, (2) evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information, (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected, and (4) minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

Comments may be submitted directly to the Office of Information and Regulatory Affairs, by fax at (202) 395-6566 or by email at OIRA-submissions@omb.eop.gov. Please provide the Commission with a copy of comments submitted so that all comments can be summarized and addressed in the final regulation preamble. Refer to the Addresses section of this notice for comment submission instructions to the Commission. A copy of the supporting statements for the collection of information discussed above may be obtained by visiting RegInfo.gov . OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this release. Consequently, a comment to OMB is most assured of being fully considered if received by OMB (and the Commission) within 30 days after the publication of this notice of proposed rulemaking.

In consideration of the foregoing, pursuant to the authority contained in the Commodity Exchange Act, the Commission hereby proposes to amend chapter I of title 17 of the Code of Federal Regulations as follows:

Section 83(a) of the Internal Revenue Code (Code) provides that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of (1) the fair market value of the property (determined without regard to lapse restrictions) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) the amount (if any) paid for such property, is included in the gross income of the service provider in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture. Section 83(c)(1) provides that the rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.

Section 1.83-3(c)(1) provides that, for purposes of section 83 and the regulations, whether a risk of forfeiture is substantial or not depends upon the facts and circumstances. Section 1.83-3(c)(1) further provides that a substantial risk of forfeiture exists where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if such condition is not satisfied. Illustrations provided in § 1.83-3(c)(2) of the regulations demonstrate when a substantial risk of forfeiture will be considered to exist.

In addition to providing that a person's rights in property are subject to a substantial risk of forfeiture if conditioned upon the future performance of substantial services by any individual, the legislative history indicates that the drafters intended that “in other cases the question of whether there is a substantial risk of forfeiture depends upon the facts and circumstances.” H.R. Rep. No. 91-413 (Pt. 1), 91st Cong., 1st Sess. 62, 88 (1969-3 Cum. Bull. 200, 255); S. Rep. No. 91-552, 91st Cong., 1st Sess. 119, 121 (1969-3 Cum. Bull. 423, 501). The current regulations adopt this approach by finding that a substantial risk of forfeiture may also arise if the rights to the property are subject to a condition related to the purpose of the transfer. Some confusion has arisen as to whether other conditions may also give rise to a substantial risk of forfeiture. See Robinson v. Commissioner, 805 F.2d 38 (1st Cir. 1986). The proposed regulations clarify that a substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer.

Similarly, confusion has arisen as to whether, in determining whether a substantial risk of forfeiture exists, the likelihood that a condition related to the purpose of the transfer will occur must be considered. Id. A conclusion that such likelihood need not be considered would lead to anomalies not intended by the statute. For example, assume that stock transferred by an employer to an employee was made nontransferable and also subject to a condition that the stock be forfeited if the gross receipts of the employer fell by 90% over the next three years. Assume further that the employer is a longstanding seller of a product and that there is no indication that either there will be a fall in demand for the product or an inability of the employer to sell the product, so that it is extremely unlikely that the forfeiture condition will occur. Although, arguably, the condition is a condition related to the purpose of the transfer because it would, to some degree, incentivize the employee to prevent such a fall in gross receipts, the Treasury Department and the IRS do not believe that such a condition was intended to defer the taxation of the stock transfer. Accordingly, the proposed regulations would clarify that, in determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered.

Finally, the proposed regulations would clarify that, except as specifically provided in section 83(c)(3) and § 1.83-3(j) and (k), transfer restrictions do not create a substantial risk of forfeiture, including transfer restrictions which carry the potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated. This position is supported by the legislative history of section 83. The Senate Report, under the heading “General reasons for change,” provides as follows:

S. Rep. No. 91-552, 1969-3 CB 423, 500. See also H. Rep. No. 91-413, 1969-3 CB 200, 254.

The legislative history shows that Congress intended for section 83 to be interpreted in such a way that precluded the use of transfer restrictions as a means of deferring the taxable event. If interpreted otherwise, section 83 would not alter the tax treatment of the particular transaction that Congress described as the reason for the statutory change.

Moreover, Congress later added section 83(c)(3) concerning sales that may give rise to suit under section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). See Public Law 97-34, sec. 252, 1981-2 CB 256, 303. Section 83(c)(3) provides that so long as the sale of property at a profit could subject a person to suit under section 16(b) of the Exchange Act, such person's rights in such property are (A) subject to a substantial risk of forfeiture, and (B) not transferable. Section 1.83-3(j) of the regulations further provides that, for purposes of section 83 and the regulations, if the sale of property at a profit within six months after the purchase of the property could subject a person to suit under section 16(b) of the Exchange Act, the person's rights in the property are treated as subject to a substantial risk of forfeiture and as not transferable until the earlier of (i) the expiration of such six-month period, or (ii) the first day on which the sale of such property at a profit will not subject the person to suit under section 16(b) of the Exchange Act.

Consistent with section 83(c)(3) and § 1.83-3(j), Revenue Ruling 2005-48 (2005-2 CB 259) provides that the only provision of the securities law that would delay taxation under section 83 is section 16(b) of the Exchange Act. The ruling further provides that other transfer restrictions (such as restrictions imposed by lock-up agreements or restrictions relating to insider trading under Rule 10b-5 of the Exchange Act) do not cause rights in property taxable under section 83 to be substantially nonvested. Revenue Ruling 2005-48 notes that the Treasury Department and the IRS intend to amend the section 83 regulations to explicitly set forth the holdings in the ruling.

The proposed regulations would amend the second sentence of § 1.83-3(c)(1) of the existing regulations to add the word “only” to the phrase “[a] substantial risk of forfeiture exists [only] where * * *” The purpose of this addition is to clarify that a substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer.

The proposed regulations would amend the second sentence of § 1.83-3(c)(1) of the existing regulations to delete the clause “if such condition is not satisfied.” The purpose of the deletion is to clarify that, in determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered.

The proposed regulations would amend § 1.83-3(c)(1) of the existing regulations to add a sentence stating that a transfer restriction, including a transfer restriction which carries the potential for forfeiture or disgorgement of some or all of the property or other penalties if the restriction is violated, does not create a substantial risk of forfeiture. The purpose of this addition is to incorporate the holding in Rev. Rul. 2005-48.

Furthermore, consistent with Rev. Rul. 2005-48, the proposed regulations would amend § 1.83-3(j)(2) to include an example illustrating the application of section 16(b) of the Exchange Act to an option. The regulations are not intended to provide guidance on the application of section 16(b) of the Exchange Act. Rather, for purposes of the examples it is assumed that the period of liability is determined in accordance with the applicable law, including any applicable court decisions. See, for example, Stella v. Graham-Paige Motors, 132 Fed. Supp. 100, 103 (S.D.N.Y. 1955), rev'd other grounds, 232 F.2d 299 (2d Cir.), cert. denied, 352 U.S. 831 (1956). The proposed regulations also would add two additional examples to § 1.83-3(c)(4) illustrating that a substantial risk of forfeiture is not created solely as a result of potential liability under Rule 10b-5 of the Exchange Act or a lock-up agreement. Rev. Rul. 2005-48 will be obsoleted when the proposed regulations are published as final regulations. See § 601.601(d)(2).

These regulations under section 83 are proposed to apply as of January 1, 2013, and will apply to property transferred on or after that date. Taxpayers may rely on the proposed regulations for property transferred after publication of these proposed regulations in the Federal Register .

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

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are timely submitted to the IRS. The IRS and the Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written or electronic comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

The principal authors of these proposed regulations are Thomas Scholz and Dara Alderman, Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and the Treasury Department participated in their development.

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

The collections of information contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget (OMB) for review and approval under OMB approval number 1545-1699 in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)).

Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:SP, Washington, DC 20224. Comments on the collection of information should be received by July 30, 2012.

Comments are specifically requested concerning:

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

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

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

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

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

The collections of information in the proposed regulations are in § 1.1502-77(c)(3), (c)(4), (c)(5), and (f)(3).

The proposed regulations provide that an entity that is the agent for the group, upon becoming the default successor, is required to notify the Commissioner in writing (under procedures prescribed by the Commissioner), in accordance with § 1.1502-77(c)(3), that it is the default successor.

The proposed regulations under § 1.1502-77(c)(4) further provide that, when the agent for the group designates an agent for the group under circumstances in which the agent for the group's existence terminates without a default successor, the agent for the group must notify the Commissioner in writing (under procedures prescribed by the Commissioner) of the designation and provide an agreement executed by the designated entity acknowledging that it will serve as the agent for the group. If the designated entity was not itself a member of the group during the consolidated return year because the designated entity is a successor of a member of the group for the consolidated return year, the agent for the group must furnish a statement by the designated entity acknowledging that it is or will be primarily liable for the tax as a successor of a member.

The proposed regulations at § 1.1502-77(c)(5) require a designated substitute agent to give notice to each member of the group when the Commissioner has designated a substitute agent for the group.

Under § 1.1502-77(f)(3), if an entity ceases to be a member of a group, such entity may file a written notice of that fact with the Commissioner and request a copy of the notice of deficiency with respect to the Federal income tax for a consolidated return year during which the entity was a member, or a copy of any notice and demand for payment of such deficiency, or both.

The collections of information are required to obtain a benefit, for example, to identify a substitute agent for the group. The likely respondents are business or other for-profit institutions.

The burden for the collection of information in § 1.1502-77(c)(3), (c)(4), (c)(5), and (f)(3) is as follows:

Estimated total annual reporting burden: 200 hours.

Estimated average annual burden per respondent: 2 hours.

Estimated number of respondents: 100.

Estimated annual frequency of responses: On occasion.

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

This document proposes amendments to 26 CFR part 1 under section 1502 of the Internal Revenue Code of 1986 (Code). Section 1.1502-77 provides the existing regulations concerning the agent for a group and the designation of a new agent to act for the group. Section 1.1502-77 was promulgated in 2002 in TD 9002 (June 28, 2002) (67 FR 43538), and supplemented by TD 9255 (71 FR 13001) (March 14, 2006) and TD 9343 (72 FR 40066) (July 23, 2007) (each providing authority to replace the common parent as agent where the parent is a foreign entity). Subsequent to 2002, the IRS and Treasury Department issued other regulations, §§ 1.856-9, 1.1361-4(a)(6), and 301.7701-2(c)(2)(iii), which provide that an entity treated as disregarded from its owner for Federal income tax purposes is not disregarded for purposes of its tax liability for periods during which it was not disregarded. These proposed regulations conform to the subsequent guidance by permitting a non-corporate entity to be agent for the group.

These proposed regulations provide greater certainty as to which entity will be the substitute agent for the group by identifying a default successor agent for the group. Under the proposed regulations, an entity (whether foreign or domestic) is a default successor if it becomes the single entity primarily liable, pursuant to applicable law (including, for example, by operation of a state or Federal merger statute), for the tax liability of the former agent of the group upon the termination of the agent's existence. (The determination of tax liability is made without regard to § 1.1502-1(f)(4) or § 1.1502-6(a)). When the agent for the group terminates under applicable law and there is no default successor, the agent for the group may designate a substitute agent.

Furthermore, as discussed under “Explanation of Provisions” the proposed amendments clarify and supplement the existing regulations to address other issues that have arisen. This notice of proposed rulemaking also requests comments with respect to several issues that the proposed amendments do not address.

These proposed regulations generally retain the rules, concepts and examples from the existing regulations regarding the agent for a consolidated group. However, the rules, concepts and examples from the existing regulations have been renumbered, restructured and revised to provide greater clarity. Examples in the final regulations also have been modified to reflect the more limited circumstances in which an agent may be selected by the IRS or the former agent. In addition, when these proposed regulations are adopted, the IRS plans to issue contemporaneous guidance in a revenue procedure superseding Rev. Proc. 2002-43 (2002-2 CB 99) (see § 601.601(d)(2)(ii)( b ) of this chapter). Rev. Proc. 2002-43 provides instructions regarding all communications relating to the determination of a substitute agent to act on behalf of a consolidated group. In general, it is anticipated that the instructions in the superseding revenue procedure will update Revenue Procedure 2002-43 to reflect the rules in the adopted regulations.

Under the existing regulations, a common parent that is going out of existence may designate its successor, another member of the group, or a group member's successor entity as the substitute agent for the group. In practice, the terminating common parent, when it has designated a substitute agent at all, has generally designated its successor rather than another member as the substitute agent.

The proposed regulations provide that the terminating agent's default successor automatically becomes the agent for the group. The former agent cannot designate an agent if there is a default successor, and the IRS can replace a default successor only in limited circumstances. See § 1.1502-77(c)(5). If the agent for the group has no default successor, the agent for the group may designate an entity that was a member of the group for the consolidated return year or a successor of such member. Narrowing the option to designate the agent for the group is consistent with the pattern of choices exhibited by taxpayers under the existing regulations and minimizes the difficulties that arise when a terminating agent fails to designate a substitute. In the rare cases in which an entity serving as agent terminates its existence without having a default successor, the IRS and Treasury Department expect that fact generally will be clear. Accordingly, IRS and taxpayers can readily identify situations in which a new agent must be designated. Furthermore, having the default successor become the substitute agent is the intuitively appropriate choice because it is generally consistent with the handling of tax matters involving non-consolidated entities and non-consolidated taxes.

A default successor must notify the IRS in writing (under procedures prescribed by the IRS) that it is the default successor. Until the IRS receives such notification, any notice of deficiency or other communication mailed to the predecessor agent for the group, even if no longer in existence, is considered as having been properly mailed to the agent for the group, and the IRS is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person (including the default successor) other than the predecessor agent for the group.

In general, § 1.1502-77(e) provides that the common parent, as agent for the group, ceases to be the agent for the group if its existence terminates under applicable law, if it becomes an entity disregarded from its owner for Federal tax purposes, or if it becomes an entity that is reclassified as a partnership for Federal tax purposes.

When the existing regulations were adopted in 2002, there was no direct guidance concerning whether the party liable for a disregarded entity's Federal taxes with respect to periods before it becomes disregarded should be the disregarded entity or its owner. Section 1.1502-77(e) generally precludes the common parent from continuing to serve as the agent for the group if it becomes a disregarded entity or partnership. Subsequent regulatory amendments provided that an entity treated as disregarded from its owner for Federal income tax purposes (whether a single member eligible entity, a Qualified Real Estate Investment Trust Subsidiary or a Qualified Subchapter S Subsidiary) is not disregarded for purposes of its tax liability for taxable periods during which it was not disregarded. See TD 9183 (70 FR 9220) (February 25, 2005), as supplemented in TD 9462 (74 FR 46903) (September 14, 2009) and TD 9553 (76 FR 66181) (October 26, 2011). Thus, such an entity, rather than its owner, is the party liable for the taxes arising in taxable periods before the entity became disregarded.

These proposed regulations include disregarded entities and partnerships among the entities capable of serving as substitute agents for prior years. Accordingly, the transformation or merger of a common parent into a disregarded entity or partnership after the taxable year of the return generally will result in the disregarded entity or partnership becoming the agent for the group. Because the entity that was formerly a corporation serving as the agent for the group is no longer treated as a corporation for Federal income tax purposes after the change in its classification, it will not be a continuing member of a consolidated group in future periods. Nevertheless, the continuing or successor juridical entity is the agent for the group for prior periods. This result will obtain whether the change in classification is effectuated by a merger under state law, a conversion under state law, or a tax election.

Section 402 of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat. 324) (TEFRA) provides that the tax treatment of partnership items shall be determined at the partnership level. These TEFRA provisions are in sections 6221 through 6234. A partner in a TEFRA partnership is subject to the provisions of sections 6221 through 6234. In general, the IRS will deal with the tax matters partner (TMP) regarding specified matters for the partners in a TEFRA partnership.

The existing regulations at § 1.1502-77(a)(6)(iii) provide that “[t]he Commissioner generally will deal directly with any member in its capacity as a partner of a [TEFRA] partnership” but also permits the Commissioner to deal with the common parent, as agent for the group, if requested to do so in accordance with the provisions of § 301.6223(c)-1(b). This provision was intended to facilitate IRS audits of TEFRA partnerships by permitting the IRS TEFRA audit team to deal with a member-partner without the involvement of the agent for the group. However, these rules have created some confusion, especially with respect to the execution of consents to extend the statute of limitations and settlement agreements in connection with TEFRA audits.

Subject to enumerated exceptions in (f)(2)(iii) (relating to a member's actions as TMP and the Commissioner's discretion to deal directly with the member-partner), section 1.1502-77(f)(2)(iii)(A) provides that the agent for the group is the agent for any matter related to a TEFRA partnership in which a member is a partner. Consistent with this general rule, these proposed regulations would delete the provision of the existing regulations that the common parent, as agent for the group, will not act as agent for a member that is a partner in a TEFRA partnership for purposes of executing a settlement agreement under section 6224(c). The proposed regulations also clarify that only the agent for the group can extend the statute of limitations with respect to items other than the items of the TEFRA partnership. Section 1.1502-77(g), Example 11.

The existing regulations at § 1.1502-77(d)(1)(i)(A) and (d)(1)(ii) provide that any designation of the substitute agent for the group must be approved by the Commissioner. The IRS is aware of having denied this approval only in the very limited circumstance in which the designation was not made in accordance with the regulations. Because the IRS would deny approval only infrequently, the proposed regulations do not require IRS approval of the designation of an agent for the group by the terminating agent. This proposed change will enhance efficiency and save resources. However, the proposed regulations retain the requirement that a terminating agent must notify the IRS in writing (under procedures prescribed by the IRS) of the designation of the agent for the group so that IRS records will reflect the identity of the agent for the group.

The proposed regulations also provide several limited circumstances in which the IRS may designate or replace the agent for the group, either on its own initiative or at the request of other members. The IRS will not, however, have the ability to replace a domestic default successor under circumstances in which it could not replace the common parent.

Under the existing regulations, a substitute agent is required to be a domestic entity for Federal income tax purposes. However, the existing regulations also provide that the Commissioner may designate another domestic member of the group to act as the agent for the group (a domestic substitute agent) if the common parent is an entity created or organized under the laws of a foreign country and is treated as a domestic corporation by reason of section 7874 (or regulations under that section) or a section 953(d) election (a foreign common parent). This rule recognizes that foreign agents may present unique logistical issues, and provides the Commissioner full discretion to replace a foreign agent should those issues arise.

Although a foreign entity may raise practical difficulties in certain cases, the IRS and Treasury realize that a foreign entity, especially a default successor, may have the best access to information relating to prior consolidated return years. Furthermore, the IRS and Treasury believe that it is important for a consolidated group to have, to the greatest extent practicable, an entity that is authorized to act on its behalf to enable the group to communicate with the IRS and to ensure that the group can timely meet its compliance obligations (for example, file a timely final return if the group terminates). The IRS and Treasury also believe that the interests of the government and taxpayers are best served by a rule that clearly identifies the group's agent. Balancing special logistical issues and the importance of continual agency, the proposed regulations do not preclude a foreign entity from being the agent for the consolidated group. However, the IRS retains discretion to replace a foreign entity that is an agent for a consolidated group.

These proposed regulations also provide that an entity cannot serve as the agent for the group during any winding up period that follows its dissolution.

The existing regulations predicate agency on the continued existence of the corporation under applicable law. Questions have arisen as to what actions can be performed by a dissolved entity that has a “winding up” period following its dissolution. In many states, a dissolved corporation or entity may continue to perform certain acts after its dissolution to wind up its affairs. The duration of such a winding up period and the scope of the permissible actions vary from jurisdiction to jurisdiction. To resolve questions about whether a dissolved entity may be the agent for the remaining members of the consolidated group during the winding up period, these proposed regulations provide that an entity that has dissolved or otherwise ceased to exist under applicable law can no longer be the agent for the group, irrespective of any winding up period under applicable law.

These proposed regulations include no new mechanism to address situations in which the agent for the group fails to fulfill its duties on behalf of the members of the consolidated group, for example by not filing a return, not requesting a refund, or not cooperating with an examination. Under those circumstances, the members might not be able to accurately file or determine their Federal tax liability or obtain their refunds. The government might have difficulty determining which, if any, member is entitled to a refund, forcing it to interplead all potential claimants in any such refund case.

The IRS and Treasury Department request comments on whether and how to implement a mechanism whereby the subsidiary members can request that the IRS designate another member of the group to be the agent when the common parent or substitute agent does not discharge its obligations as agent. Comments should consider under what circumstances and how this mechanism might be invoked to ensure that it is narrowly applied.

Under the existing regulations, a common parent, as agent for the group, remains the agent for the group for consolidated return years for which it was the common parent of the group. Only a termination of the common parent under applicable law will result in either the successor becoming the default substitute agent or an agent being designated for the group. The proposed regulations do not provide a mechanism for an existing agent to resign and limit the ability of the agent to displace its obligations transactionally by mandating the designation of any default successor. The Treasury Department and the IRS are considering whether, and under what circumstances, the regulations should allow an agent for the group to resign as the agent, and invite comments on this issue.

The amendments to § 1.1502-77 are proposed to apply to consolidated return years beginning on or after the date final regulations are published in the Federal Register . The current rules of § 1.1502-77 continue to apply with respect to consolidated return years beginning before the effective date of final regulations. Those regulations are proposed to be republished as § 1.1502-77B.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12666, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations primarily will affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are timely submitted to the IRS.

The Treasury Department and the IRS request comments on all aspects of the proposed rules. In addition, comments are requested on the treatment in the proposed regulations of entities that become disregarded as entities separate from their owners or classified as partnerships for Federal tax purposes.

All comments that are submitted by the public will be available for public inspection and copying at http://www.regulations.gov or upon request. A public hearing may be scheduled if requested in writing by any person who timely submits comments. If a public hearing is scheduled, notice of the date, time and place for the hearing will be published in the Federal Register .

The principal author of these proposed regulations is Richard M. Heinecke, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development.

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

On October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act), Public Law 107-56. Title III of the USA PATRIOT Act amends the anti-money laundering provisions of the Bank Secrecy Act (BSA), codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-5332, to promote the prevention, detection, and prosecution of international money laundering and the financing of terrorism. Regulations implementing the BSA appear at 31 CFR chapter X. The authority of the Secretary of the Treasury (“the Secretary”) to administer the BSA and its implementing regulations has been delegated to the Director of FinCEN. 1

Section 311 of the USA PATRIOT Act (“section 311”) added section 5318A to the BSA, granting the Secretary the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transaction, or type of account is of “primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” against the entity of primary money laundering concern. Section 311 identifies factors for the Secretary to consider and Federal agencies to consult before the Secretary may conclude that a jurisdiction, institution, class of transaction, or type of account is of primary money laundering concern. The statute also provides similar procedures, i.e., factors and consultation requirements, for selecting the specific special measures to be imposed against the primary money laundering concern.

Taken as a whole, section 311 provides the Secretary with a range of options that can be adapted to target specific money laundering and terrorist financing concerns most effectively. These options give the Secretary the authority to control and limit access to the U.S. financial system to any jurisdictions and institutions that pose money laundering threats. Through the imposition of various special measures, the Secretary can gain more information about the jurisdictions, institutions, transactions, or accounts of concern; can more effectively monitor the respective jurisdictions, institutions, transactions, or accounts; and can protect U.S. financial institutions from involvement with jurisdictions, institutions, transactions, or accounts that are of money laundering concern.

Before making a finding that reasonable grounds exist for concluding that a financial institution operating outside the United States is of primary money laundering concern, the Secretary is required to consult with both the Secretary of State and the Attorney General. The Secretary is also required by section 311 to consider “such information as the Secretary determines to be relevant, including the following potentially relevant factors  2 :

• The extent to which such financial institution is used to facilitate or promote money laundering in or through the jurisdiction;

• The extent to which such financial institution is used for legitimate business purposes in the jurisdiction; and

• The extent to which the finding that the institution is of primary money laundering concern is sufficient to ensure, with respect to transactions involving the institution operating in the jurisdiction, that the purposes of the BSA continue to be fulfilled, and to guard against international money laundering and other financial crimes.

If the Secretary determines that reasonable grounds exist for concluding that a financial institution operating outside the United States is of primary money laundering concern, the Secretary must determine the appropriate special measure(s) to address the specific money laundering risks. Section 311 provides a range of special measures that can be imposed individually, jointly, in any combination, and in any sequence. 3 The Secretary's imposition of special measures requires additional consultations to be made and factors to be considered. The statute requires the Secretary to consult with appropriate Federal agencies and other interested parties  4 and to consider the following specific factors:

• Whether similar action has been or is being taken by other nations or multilateral groups;

• Whether the imposition of any particular special measures would create a significant competitive disadvantage, including any undue cost or burden associated with compliance, for financial institutions organized or licensed in the United States;

• The extent to which the action or the timing of the action would have a significant adverse systemic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular jurisdiction; and

• The effect of the action on the United States national security and foreign policy. 5

In this rulemaking, FinCEN proposes to impose both the first special measure (31 U.S.C. 5318A(b)(1)) and the fifth special measure (31 U.S.C. 5318A(b)(5)) against JSC CredexBank (“Credex”). The first special measure imposes requirements with respect to recordkeeping and reporting of certain financial transactions and may be imposed by order prior to finalization of this proposed regulation, as explained in more detail below. The fifth special measure prohibits or conditions the opening or maintaining of correspondent or payable-through accounts for the identified institution by U.S. financial institutions and may be imposed only through the finalization of this proposed regulation.

Credex is a depository institution that is located and licensed in the Republic of Belarus and primarily services corporate entities. 6 Originally established on September 27, 2001, as Nordic Investment Bank Corporation by Ximex Executive Limited (“Ximex”), 7 8 the bank changed its name to Northern Investment Bank on April 5, 2006, and then to the current name of Credex on February 12, 2007. Credex is 96.82% owned by Vicpart Holding SA, based in Fribourg City, Switzerland. 9 With 169 employees  10 and a total capitalization of approximately $19 million, 11 the bank currently ranks as the 22nd largest among 31 commercial banks in Belarus in total assets. 12 Credex has six domestic branches and one representative office in the Czech Republic. 13 While the majority of its correspondent banking relationships are with domestic banks, Credex maintains correspondent relationships with Russian, Latvian, German, and Austrian banks. 14 According to available public information, Credex does not appear to have any direct U.S. correspondent relationship. 15

As a result of the finding on [INSERT DATE OF TREASURY FINDING], the Secretary, through his delegate, the Director of FinCEN, found that reasonable grounds exist for concluding that Credex is a financial institution of primary money laundering concern. Based upon that finding, the Director of FinCEN is authorized to impose one or more special measures. Following the required consultations and the consideration of all relevant factors discussed in the finding and in this notice of proposed rulemaking, the Secretary, through the Director of FinCEN, is proposing to impose the first and fifth special measures authorized by section 5318A(b). 16

The first special measure authorizes the Secretary, through the Director of FinCEN, to require any domestic financial institution “to maintain records, file reports, or both, concerning the aggregate amount of transactions, or concerning each transaction, with respect to” a financial institution operating outside of the United States found to be of primary money laundering concern. The fifth special measure authorizes a prohibition against the opening or maintaining of correspondent accounts  17 by any domestic financial institution or agency for or on behalf of a financial institution found to be a primary money laundering concern.

FinCEN is imposing the first special measure in addition to the fifth special measure in this case because of the special circumstances and concerns raised by the activities of Credex. Specifically, the pervasive lack of transparency surrounding Credex—including its engagement in a disproportionately large volume of transactions for a bank of its size and its ownership and use by shell companies in a manner that obscures the purpose and ownership of funds moving through the United States—indicates a high degree of money laundering risk and vulnerability to other financial crimes. This lack of transparency and use of the bank by shell corporations is the reason why FinCEN proposes to employ the first special measure in this case. The imposition of the first special measure in this case will serve a number of functions. Information gathered through reports submitted by financial institutions pursuant to the first special measure will provide FinCEN and law enforcement with greater insight into transactions or attempted transactions related to Credex, including details regarding the underlying beneficial owners. This knowledge, in turn, could help FinCEN and law enforcement pierce the veil of the shell corporations behind which the true owners of the funds involved hide.

Under Section 311, FinCEN may impose the first special measure by order prior to the implementation of any finalized rule, 18 provided that any such order be issued with a NPRM relating to the imposition of the special measure and that such order may not remain in effect for more than 120 days absent the promulgation of a rule on or before the end of the 120-day period beginning on the date the order was issued. 19 The authority to issue such an order immediately upon finding that an institution is of primary money laundering concern is particularly important in addressing illicit finance risks associated with the identified financial institution that could continue posing a threat to the U.S. financial system while a proposed rule is under consideration.

Although the factual circumstances surrounding Credex could merit an immediate imposition of the first special measure, FinCEN has elected not to issue an order to this effect in this case. Taking into account the fact that this NPRM marks the inaugural use of the first special measure in a Section 311 action, FinCEN has decided not to implement the first special measure prior to the finalization of the proposed rule in order to provide financial institutions and other interested parties with an opportunity to comment on how the first special measure could be implemented in a manner that most effectively mitigates the risk posed by the identified institution to the U.S. financial system and enables the collection of useful information while minimizing the overall burden on U.S. financial institutions.

As such, FinCEN requests comment on the scope and practicability of the potential obligations under the first special measure, and in particular, any input on the feasibility of implementing the first special measure by order prior to a final rule or in the absence of a prohibition on opening or maintaining correspondent accounts with an identified institution as proposed under fifth special measure. FinCEN will consider such input not only in the context of assessing whether to finalize the proposed rule, but also in the event that it determines that it is necessary in a future Section 311 action to issue an order imposing the first special measure prior to the finalization of a rule.

As to the form of records and reports required by the first special measure, Section 5318A(b)(1)(B) provides:

Such records and reports shall be made and retained at such time, in such manner, and for such period of time, as the Secretary shall determine, and shall include such information as the Secretary may determine, including—

(i) The identity and address of the participants in a transaction or relationship, including the identity of the originator of any funds transfer;

(ii) The legal capacity in which a participant in any transaction is acting;

(iii) The identity of the beneficial owner of the funds involved in any transaction, in accordance with such procedures as the Secretary determines to be reasonable and practicable to obtain and retain the information; and

(iv) A description of any transaction.

The Director of FinCEN determines that records and reports under the first special measure, if imposed, shall be made and retained as follows. The covered financial institution is required to take reasonable steps to collect and report to FinCEN the following information with respect to any transaction or attempted transaction related to Credex:

(i) The identity and address of the participants in a transaction or attempted transaction, including the identity of the originator and beneficiary of any funds transfer;

(ii) The legal capacity in which Credex is acting with respect to the transaction or attempted transaction and, to the extent Credex is not acting on its own behalf, then the customer or other person on whose behalf Credex is acting;

(iii) The identity of the beneficial owner of the funds involved in any transaction or attempted transaction; and

(iv) A description of the transaction or attempted transaction and its purpose.

A discussion of the section 311 factors relevant to imposing the first and fifth special measures follows.

Other countries or multilateral groups have not yet taken action similar to those proposed in this rulemaking that would: (1) Require domestic financial institutions and agencies to file reports concerning any transactions or attempted transactions related to Credex; and (2) prohibit domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of Credex, and to require those domestic financial institutions and agencies to screen their correspondents in a manner that is reasonably designed to guard against indirect use by Credex, including access through the use of nested correspondent accounts held by Credex. FinCEN encourages other countries to take similar action based on the findings contained in this rulemaking.

The first special measure sought to be imposed by this rulemaking would require domestic financial institutions and agencies to file reports concerning any transactions or attempted transactions related to Credex. Given the general recordkeeping and reporting obligations already in place, FinCEN does not expect incremental increase in the burden associated with these requirements to be significant. U.S. financial institutions generally apply some level of screening and (when required) reporting of their transactions and accounts, often through the use of commercially available software such as that used for compliance with the economic sanctions programs administered by the Office of Foreign Assets Control (OFAC) of the Department of the Treasury. They are also required to have enhanced due diligence policies and procedures, which involve the collection of beneficial ownership information for certain types of correspondent accounts with certain foreign financial institutions. As explained in more detail in the section-by-section analysis below, financial institutions should be able to easily adapt these current screening and reporting procedures to comply with this special measure. Moreover, the number of transactions or attempted transactions for which the recordkeeping and reporting obligations apply is expected to be relatively limited because, according to available public information, Credex does not appear to have any direct U.S. correspondent relationships. Thus, the additional reporting and recordkeeping requirements that would be required by this rulemaking are not expected to create a significant competitive disadvantage for U.S. financial institutions.

The fifth special measure sought to be imposed by this rulemaking would prohibit covered financial institutions from opening and maintaining correspondent accounts for, or on behalf of, Credex. As a corollary to this measure, covered financial institutions also would be required to take reasonable steps to apply special due diligence, as set forth below, to all of their correspondent accounts to help ensure that no such account is being used indirectly to provide services to Credex. FinCEN does not expect the burden associated with these requirements to be significant, given its understanding that, according to available public information, no U.S. financial institutions currently maintain a correspondent account for Credex. There is a minimal burden involved in transmitting a one-time notice to all correspondent account holders concerning the prohibition on indirectly providing services to Credex. As noted above, U.S. financial institutions generally apply some level of transaction and account screening, often through the use of commercially available software. As explained in more detail in the section-by-section analysis below, financial institutions should, if necessary, be able to easily adapt their current screening procedures to support compliance with this special measure. Thus, the special due diligence that would be required by this rulemaking is not expected to impose a significant additional burden upon U.S. financial institutions.

This proposed rulemaking targets Credex specifically; it does not target a class of financial transactions (such as wire transfers) or a particular jurisdiction. Credex is not a major participant in the international payment system and is not relied upon by the international banking community for clearance or settlement services. Thus, the imposition of the first and fifth special measures against Credex will not have a significant adverse systemic impact on the international payment, clearance, and settlement system. In light of the reasons for imposing these special measures, FinCEN does not believe that it will impose an undue burden on legitimate business activities, and notes that the presence of many larger banks in Belarus will alleviate the burden on legitimate business activities within that jurisdiction.

The additional recordkeeping and reporting requirements required by the first special measure would enhance the U.S. Government's understanding of the transactions engaged in by Credex and enhance transparency into Credex's activities of money laundering concern, which in turn would be utilized in efforts to detect and deter significant money laundering activity and other financial crimes. Such efforts would enhance national security, making it more difficult for terrorists and money launderers to access the substantial resources of the U.S. financial system.

The exclusion from the U.S. financial system of banks that serve as conduits for significant money laundering activity and other financial crimes required by the fifth special measure would similarly enhance national security by making it more difficult for terrorists and money launderers to access the substantial resources of the U.S. financial system.

More generally, the imposition of the first and fifth special measures would complement the U.S. Government's worldwide efforts to expose and disrupt international money laundering.

Therefore, pursuant to the finding that Credex is an institution of primary money laundering concern, and after conducting the required consultations and weighing the relevant factors, the Director of FinCEN is proposing to impose the first and fifth special measures.

Section 1010.658(a)(1) of the proposed rule defines Credex to include all branches, offices, and subsidiaries of Credex operating in Belarus or in any jurisdiction. FinCEN will provide updated information, as it is available; however, covered financial institutions should take commercially reasonable measures to determine whether a customer is a branch, office, or subsidiary of Credex. FinCEN is not aware of any subsidiaries of Credex.

Section 1010.658(a)(2) of the proposed rule defines the term “correspondent account” by reference to the definition contained in 31 CFR 1010.605(c)(1)(ii). Section 1010.605(c)(1)(ii) defines a correspondent account to mean an account established to receive deposits from, or make payments or other disbursements on behalf of, a foreign bank, or handle other financial transactions related to the foreign bank.

In the case of a U.S. depository institution, this broad definition includes most types of banking relationships between a U.S. depository institution and a foreign bank that are established to provide regular services, dealings, and other financial transactions including a demand deposit, savings deposit, or other transaction or asset account, and a credit account or other extension of credit. We are using the same definition of “account” for purposes of this rule as was established for depository institutions in the final rule implementing section 312 of the USA PATRIOT Act. 20

In the case of securities broker-dealers, futures commission merchants, introducing brokers-commodities, and investment companies that are open-end companies (mutual funds), we are also using the same definition of “account” for purposes of this rule as was established for these entities in the final rule implementing section 312 of the USA PATRIOT Act. 21

Section 1010.658(a)(3) of the proposed rule defines “covered financial institution” with the same definition used in the final rule implementing section 312 of the USA PATRIOT Act, 22 which in general includes the following:

• An insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h));

• A commercial bank;

• An agency or branch of a foreign bank in the United States;

• A Federally insured credit union;

• A savings association;

• A corporation acting under section 25A of the Federal Reserve Act (12 U.S.C. 611);

• A trust bank or trust company;

• A broker or dealer in securities;

• A futures commission merchant or an introducing broker-commodities; and a mutual fund.

Section 1010.658(a)(4) of the proposed rule defines “beneficial owner” as an individual who has a level of control over, or entitlement to, the funds involved in the transaction that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the funds. This definition derives from the definition used in the final rule implementing section 312 of the USA PATRIOT Act. 23

Section 1010.658(a)(5) of the proposed rule defines “subsidiary” as a company of which more than 50 percent of the voting stock or analogous equity interest is owned by another company. This definition means that the subsidiary is under the control of the owner of the majority interest.

The proposed rule imposing the first special measure would require that covered financial institutions take reasonable steps to collect and report to FinCEN specified information regarding any transaction or attempted transaction related to Credex that the covered financial institution is requested to engage in after the imposition of the first special measure in order to increase the transparency regarding Credex's attempts to engage in transactions in or through the U.S. financial system. Transactions related to Credex would include, but are not limited to, those that are conducted or are attempted by Credex itself. This proposed rule would not alter or otherwise impact other regulatory obligations of the covered financial institution requiring the reporting of suspicious activity.

Section 1010.658(b)(1)(i) of the proposed rule imposing the first special measure would require covered financial institutions to report the identity and address of the participants in any transaction or attempted transaction related to Credex, including the identity of the originator and beneficiary of any funds transfer. This information would include any identifying information in the possession of the financial institution in the ordinary course of business, including the information required under 31 CFR § 1010.410(f) (generally known as the “travel rule”), such as name, account number if used, address, the identity of the beneficiary's financial institution, or any other specific identifier of the recipient received with the transmittal order.

Section 1010.658(b)(1)(ii) of the proposed rule imposing the first special measure would require covered financial institutions to report the legal capacity in which Credex and any customer of Credex is acting with respect to the transaction or attempted transaction. This information would include any identifying information collected by the financial institution in the ordinary course of business and may include identification of the roles of Credex or any of its customers in the transaction such as transmittor or recipient of a funds transfer or intermediary financial institutions involved in the payment chain associated with the transaction.

Section 1010.658(b)(1)(ii) of the proposed rule imposing the first special measure would require covered financial institutions to report the identity of the beneficial owner of the funds involved in any transaction or attempted transaction related to Credex. Under existing FinCEN regulations, there are two limited situations where financial institutions are expressly obligated to obtain beneficial ownership information. Specifically, under the rules implementing Section 312 of the USA PATRIOT Act, certain “covered financial institutions,”  24 which include the same institutions covered by the scope of this proposed regulation, must implement enhanced due diligence programs, including obtaining beneficial ownership information, in two situations: (i) Covered financial institutions that offer private banking accounts are required to take reasonable steps to identify the nominal and beneficial owners of such accounts;  25 and (ii) covered financial institutions that offer correspondent accounts for certain foreign financial institutions  26 are required to take reasonable steps to obtain information from the foreign financial institution about the identity of any person with authority to direct transactions through any correspondent account that is a payable-through account, and the sources and beneficial owner of funds or other assets in the payable-through account. 27 The requirement to report beneficial ownership of funds information about transactions or attempted transactions related to Credex can be satisfied by employing the same policies and procedures as are used for the regulatory obligations mentioned in (ii) above promulgated under Section 312 of the USA PATRIOT Act, and covered financial institutions should follow the same procedures for obtaining such beneficial ownership information as they would for those obligations. Collecting such information may require personal contact with the correspondent. Where the covered financial institution is unable to identify the beneficial owner of funds associated with a Credex-related transaction, it should consider the transaction to be one of primary money laundering concern and determine, based on identified risks, whether or not it should process the transaction.

Section 1010.658(b)(1)(iii) of the proposed rule imposing the first special measure would require covered financial institutions to report a description of the transaction or attempted transaction and its purpose. The description would include additional details of the transaction, including amounts, and in particular, a general description of any underlying reason for the transaction or obligation which the financial transaction supports, such as the purchase of specific goods or services, initiation or repayment of a loan or other debt, settlement of a trade, transaction in foreign exchange, or other type of financial obligation, or other relevant information the covered financial institution may have available. To the extent a covered financial institution finds that it does not have sufficient information to enable it to report a description of the transaction and its purpose, it would be reasonable for the covered financial institution to inquire further (for example, with any applicable customer, respondent bank, or correspondent bank) to obtain additional information. In so doing, a covered financial institution should consider analogizing to procedures it would follow in fulfilling its obligation to determine whether a transaction should be reported as suspicious. Specifically, it should consider “examining the available facts, including the background and possible purpose of the transaction” in order to determine whether it is consistent with the type of transaction in which a particular customer would normally be expected to engage. 28

Section 1010.658(b)(2) of the proposed rule imposing the first special measure would require covered financial institutions to make the reports required by Section 1010.658(b)(1) within ten business days following the day when the covered financial institution engaged in the transaction or became aware of the attempted transaction. By ensuring that FinCEN receives information shortly after a transaction is executed, the contemplated time period will enable FinCEN to more effectively monitor the ongoing activities of Credex, thereby enhancing transparency. This time period was specifically chosen because it will provide FinCEN with reporting more quickly than that required for suspicious activity reporting. FinCEN requests comment on whether ten days is sufficient time for covered financial institutions to obtain the required information or whether some other period of time, still less than that allowed for the filing of suspicious activity reports, is more appropriate.

A covered financial institution would additionally be required to take reasonable steps to identify any reportable transaction or attempted transaction, direct or indirect, related to Credex, to the extent that such use can be determined from transactional records maintained by the covered financial institution in the normal course of business. For example, a covered financial institution would be expected to apply an appropriate screening mechanism to be able to identify a funds transfer order that on its face listed Credex as the originator's or beneficiary's financial institution, or otherwise referenced Credex in a manner detectable under the financial institution's normal screening processes. An appropriate screening mechanism could be the mechanism used by a covered financial institution to comply with various legal requirements, such as the commercially available software programs used to comply with the economic sanctions programs administered by OFAC. Willful failure to provide timely, accurate, and complete information in such reporting may constitute a violation of these requirements subject to civil and criminal penalties under 31 U.S.C. 5321 and 5322.

FinCEN specifically solicits comments on the requirement under the proposed rule that covered financial institutions take reasonable steps to screen their transactions in order to identify any transaction or attempted transaction related to Credex.

The proposed imposition of the fifth special measure would prohibit covered financial institutions from establishing, maintaining, or managing in the United States any correspondent account for, or on behalf of, Credex. As a corollary to this prohibition, covered financial institutions would be required to apply special due diligence to their correspondent accounts to guard against their indirect use by Credex. At a minimum, that special due diligence must include two elements. First, a covered financial institution must notify those correspondent account holders that the covered financial institution knows or has reason to know provide services to Credex that such correspondents may not provide Credex with access to the correspondent account maintained at the covered financial institution. Second, a covered financial institution must take reasonable steps to identify any indirect use of its correspondent accounts by Credex, to the extent that such indirect use can be determined from transactional records maintained by the covered financial institution in the normal course of business. A covered financial institution should take a risk-based approach when deciding what, if any, additional due diligence measures it should adopt to guard against the indirect use of its correspondent accounts by Credex, based on risk factors such as the type of services it offers and geographic locations of its correspondents.

Section 1010.658(c)(1) of the proposed rule imposing the fifth special measure prohibits all covered financial institutions from establishing, maintaining, administering, or managing a correspondent account in the United States for, or on behalf of, Credex. The prohibition would require all covered financial institutions to review their account records to ensure that they maintain no accounts directly for, or on behalf of, Credex.

As a corollary to the prohibition on maintaining correspondent accounts directly for Credex, section 1010.658(c)(2) of the proposed rule imposing the fifth special measure requires a covered financial institution to apply special due diligence to its correspondent accounts  29 that is reasonably designed to guard against their indirect use by Credex. At a minimum, that special due diligence must include notifying those correspondent account holders that the covered financial institution knows or has reason to know provide services to Credex that such correspondents may not provide Credex with access to the correspondent account maintained at the covered financial institution. A covered financial institution would, for example, have knowledge that the correspondents provide access to Credex through transaction screening software. A covered financial institution may satisfy this requirement by transmitting the following notice to its correspondent account holders that it knows or has reason to know provide services to Credex:

The purpose of the notice requirement is to help ensure cooperation from correspondent account holders in denying Credex access to the U.S. financial system. However, FinCEN does not require or expect a covered financial institution to obtain a certification from any of its correspondent account holders that indirect access will not be provided in order to comply with this notice requirement. Instead, methods of compliance with the notice requirement could include, for example, transmitting a one-time notice by mail, fax, or email to certain of the covered financial institution's correspondent account customers, informing them that they may not provide Credex with access to the covered financial institution's correspondent account, or including such information in the next regularly occurring transmittal from the covered financial institution to those correspondent account holders. FinCEN specifically solicits comments on the form and scope of the notice that would be required under the rule.

A covered financial institution also would be required to take reasonable steps to identify any indirect use of its correspondent accounts by Credex, to the extent that such indirect use can be determined from transactional records maintained by the covered financial institution in the normal course of business. For example, a covered financial institution would be expected to apply an appropriate screening mechanism to be able to identify a funds transfer order that on its face listed Credex as the financial institution of the originator or beneficiary, or otherwise referenced Credex in a manner detectable under the financial institution's normal screening processes. An appropriate screening mechanism could be the mechanism used by a covered financial institution to comply with various legal requirements, such as the commercially available software programs used to comply with the economic sanctions programs administered by OFAC. FinCEN specifically solicits comments on the requirement under the proposed rule that covered financial institutions take reasonable steps to screen their correspondent accounts in order to identify any indirect use of such accounts by Credex.

Notifying certain correspondent account holders and taking reasonable steps to identify any indirect use of its correspondent accounts by Credex in the manner discussed above are the minimum due diligence requirements under the proposed rule imposing the fifth special measure. Beyond these minimum steps, a covered financial institution should adopt a risk-based approach for determining what, if any, additional due diligence measures it should implement to guard against the indirect use of its correspondent accounts by Credex, based on risk factors such as the type of services it offers and the geographic locations of its correspondent account holders.

Under the proposed rule imposing the fifth special measure, a covered financial institution that obtains knowledge that a correspondent account is being used by a foreign bank to provide indirect access to Credex must take all appropriate steps to prevent such indirect access, including the notification of its correspondent account holder per section 1010.658(c)(2)(i)(A) and, where necessary, terminating the correspondent account. A covered financial institution may afford the foreign bank a reasonable opportunity to take corrective action prior to terminating the correspondent account. Should the foreign bank refuse to comply, or if the covered financial institution cannot obtain adequate assurances that the account will no longer be available to Credex, the covered financial institution must terminate the account within a commercially reasonable time. This means that the covered financial institution should not permit the foreign bank to establish any new positions or execute any transactions through the account, other than those necessary to close the account. A covered financial institution may reestablish an account closed under the proposed rule if it determines that the account will not be used to provide banking services indirectly to Credex. FinCEN specifically solicits comments on the requirement under the proposed rule that covered financial institutions prevent indirect access to Credex, once such indirect access is identified.

Section 1010.658(c)(3) of the proposed rule imposing the fifth special measure clarifies that the rule does not impose any reporting requirement upon any covered financial institution that is not otherwise required by applicable law or regulation. A covered financial institution must, however, document its compliance with the requirement that it notify those correspondent account holders that the covered financial institution knows or has reason to know provide services to Credex, such correspondents may not provide Credex with access to the correspondent account maintained at the covered financial institution.

FinCEN invites comments on all aspects of the proposals to impose the first and fifth special measures against Credex and specifically invites comments on the following matters:

1. The impact of the proposed special measures upon legitimate transactions with Credex involving, in particular, U.S. persons and entities; foreign persons, entities, and governments; and multilateral organizations doing legitimate business with persons or entities operating in Belarus.

2. The form and scope of the reports to FinCEN required under the proposed rule to impose the first special measure;

3. The appropriate time within which a covered institution would be required to report to FinCEN;

4. The appropriate scope of the proposed requirement for a covered financial institution to take reasonable steps to identify any reportable transactions by Credex;

5. The appropriate steps a covered financial institution should take once it identifies a transaction related to Credex; and

6. Whether a definition of “attempted transaction” needs to be included and what that definition should be.

7. The form and scope of the notice to certain correspondent account holders that would be required under the rule;

8. The appropriate scope of the proposed requirement for a covered financial institution to take reasonable steps to identify any indirect use of its correspondent accounts by Credex; and

9. The appropriate steps a covered financial institution should take once it identifies an indirect use of one of its correspondent accounts by Credex.

10. FinCEN has the authority, pursuant to 31 U.S.C. 5318A(b)(1), to impose the first special measure by order, without notice and comment, for up to 120 days prior to the implementation of a final rule imposing that special measure. FinCEN requests comment on the feasibility of so implementing the requirements of the first special measure by order prior to a final rule imposing the first special measure;

11. The feasibility of implementing an order imposing the first special measure in the absence of a prohibition on opening and maintaining correspondent accounts with the identified institution under the fifth special measure;

12. Whether the current definition of covered financial institutions would be appropriate if the first special measure were implemented by order; and

13. Whether there are any potential differences among the types of covered financial institutions that might make it more difficult for some to implement the order.

It is hereby certified that the proposed imposition of the first and fifth special measures would not have a significant economic impact on a substantial number of small entities.

On the basis of publicly available information, FinCEN understands that Credex currently maintains no correspondent accounts in the United States. Moreover, to the extent that a transaction related to Credex were to be processed through a U.S. financial institution, this would most likely involve the small subset of the largest financial institutions that actively engage in international transactions. Thus, the requirement to report transactions related to Credex under the first special measure would not have a significant impact on a substantial number of small entities. In addition, all U.S. persons, including U.S. financial institutions, currently must exercise some degree of due diligence in order to comply with various legal requirements. The tools used for such purposes, including commercially available software used to comply with the economic sanctions programs administered by OFAC and existing suspicious activity reporting programs, can easily be modified to monitor for and report transactions related to Credex. Thus, any increase in the reporting burden that would be required by the imposition of the first special measure— i.e., reporting of all transactions related to Credex on a timelier basis—would not impose a significant additional economic burden upon small U.S. financial institutions.

As noted above, FinCEN understands that Credex currently maintains no correspondent accounts in the United States. Thus, the prohibition on maintaining such accounts under the fifth special measure would not have a significant impact on a substantial number of small entities. In addition, all U.S. persons, including U.S. financial institutions, currently must exercise some degree of due diligence in order to comply with various legal requirements. The tools used for such purposes, including commercially available software used to comply with the economic sanctions programs administered by OFAC, can easily be modified to monitor for the use of correspondent accounts by Credex. Thus, the special due diligence that would be required by the imposition of the fifth special measure— i.e., the one-time transmittal of notice to certain correspondent account holders and the screening of transactions to identify any indirect use of correspondent accounts—would not impose a significant additional economic burden upon small U.S. financial institutions.

FinCEN invites comments from members of the public who believe there will be a significant economic impact on small entities from the imposition of the first and fifth special measures on Credex.

The collection of information contained in this proposed rule is being submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Desk Officer for the Department of Treasury, Office of Information and Regulatory Affairs, Office of Management and Budget, Paperwork Reduction Project (1506), Washington, DC 20503 (or by email to oira_submission@omb.eop.gov with a copy to FinCEN by mail or email at the addresses previously specified. Comments should be submitted by one method only. Comments on the collection of information should be received by July 30, 2012. In accordance with the requirements of the Paperwork Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A), and its implementing regulations, 5 CFR 1320, the following information concerning the collection of information as required by 31 CFR 1010.658 is presented to assist those persons wishing to comment on the information collection.

31 CFR 1010.658 is proposed imposing the first and fifth special measures under 31 U.S.C. 5318A. The Paperwork reduction act analysis for both follows.

The provisions in this proposed rule pertaining to the collection of information can be found in sections 1010.658(b)(1), 1010.658(c)(2)(i), and 1010.658(c)(3)(i). The information required to be reported by section 1010.658(b)(1) will be used by the U.S. Government to monitor the activities of the institution of primary money laundering concern. The notification requirement in section 1010.658(c)(2)(i) is intended to ensure cooperation from correspondent account holders in denying Credex access to the U.S. financial system. The information required to be maintained by section 1010.658(c)(3)(i) will be used by federal agencies and certain self-regulatory organizations to verify compliance by covered financial institutions with the provisions of 31 CFR 1010.658. The class of financial institutions affected by the notification requirement is identical to the class of financial institutions affected by the recordkeeping requirement. The collection of information is mandatory.

Description of Affected Financial Institutions: Banks, broker-dealers in securities, futures commission merchants and introducing brokers-commodities, and mutual funds.

Estimated Number of Affected Financial Institutions: 5,000.

Estimated Average Annual Burden Hours Per Affected Financial Institutions: The estimated average burden associated with the collection of information in this proposed rule is one hour per affected financial institution.

Estimated Total Annual Burden: 5,000 hours.

FinCEN specifically invites comments on: (a) Whether the proposed collection of information is necessary for the proper performance of the mission of FinCEN, including whether the information shall have practical utility; (b) the accuracy of FinCEN's estimate of the burden of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information required to be maintained; (d) ways to minimize the burden of the required collection of information, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to report the information.

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

Executive Orders 12866 and 13563 direct agencies to assess 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. It has been determined that the final rule is not a “significant regulatory action” for purposes of Executive Order 12866.

For the reasons set forth in the preamble, Chapter X of title 31 of the Code of Federal Regulations is proposed to be amended as follows:

1. The authority citation for Chapter X continues to read as follows:

2. Subpart F of Part Chapter X is proposed to be amended by adding new § 1010.658, as follows:

A. Under the undesignated center heading “SPECIAL DUE DILIGENCE FOR CORRESPONDENT ACCOUNTS AND PRIVATE BANKING ACCOUNTS” to read as follows:

We encourage you to participate in this rulemaking by submitting comments and related materials. All comments received will be posted without change to http://www.regulations.gov and will include any personal information you have provided.

If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation. You may submit your comments and material online at http://www.regulations.gov, or by fax, mail, or hand delivery, but please use only one of these means. If you submit a comment online, it will be considered received by the Coast Guard when you successfully transmit the comment. If you fax, hand deliver, or mail your comment, it will be considered as having been received by the Coast Guard when it is received at the Docket Management Facility. We recommend that you include your name and a mailing address, an email address, or a telephone number in the body of your document so that we can contact you if we have questions regarding your submission.

To submit your comment online, go to http://www.regulations.gov, type the docket number (USCG-2012-0358) in the “SEARCH” box and click “SEARCH.” Click on “Submit a Comment” on the line associated with this rulemaking.

If you submit your comments by mail or hand delivery, submit them in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying and electronic filing. If you submit comments by mail and would like to know that they reached the Facility, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period and may change the rule based on your comments.

To view comments, as well as documents mentioned in this preamble as being available in the docket, go to http://www.regulations.gov, type the docket number (USCG-2012-0358) in the “SEARCH” box and click “SEARCH.” Click on Open Docket Folder on the line associated with this rulemaking. You may also visit the Docket Management Facility in Room W12-140 on the ground floor of the Department of Transportation West Building, 1200 New Jersey Avenue SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

Anyone can search the electronic form of comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). You may review a Privacy Act notice regarding our public dockets in the January 17, 2008, issue of the Federal Register (73 FR 3316).

We do not now plan to hold a public meeting. But you may submit a request for one, using one of the methods specified under ADDRESSES . Please explain why you believe a public meeting would be beneficial. If we determine that one would aid this rulemaking, we will hold one at a time and place announced by a later notice in the Federal Register .

This fireworks display event is regulated at 33 CFR 165.506, Table to § 165.506, section (d.) line 5. Last year the Town of Currituck relocated its fireworks launch location to a site on land. Accordingly a temporary rule amended the regulation listed at 33 CFR 165.506 last year and was published in 76 FR 31843. The Coast Guard plans to permanently amend the regulation at 33 CFR 165.506 at a later date to reflect this change.

Recurring fireworks displays are frequently held on or adjacent to the navigable waters within the boundary of the Fifth Coast Guard District. For a description of the geographical area of each Coast Guard Sector—Captain of the Port Zone, please see 33 CFR 3.25.

The regulation listing annual fireworks displays within the Fifth Coast Guard District and safety zones locations is 33 CFR 165.506. The Table to § 165.506 identifies fireworks displays by COTP zone, with the COTP North Carolina zone listed in section “(d.)” of the Table.

The township of Corolla, North Carolina, sponsors an annual fireworks display held on July 4th over the waters of Currituck Sound at Corolla, North Carolina. The Table to § 165.506, at section (d.) event Number “5”, describes the enforcement date and regulated location for this fireworks event.

The location listed in the Table has the fireworks display originating from a fireworks barge on Currituck Sound. However, this proposed rule changes the fireworks launch location on July 4, 2012, to a position on shore at latitude 36°22′23.8″ N longitude 075°49′56.3″ W.

A fleet of spectator vessels is anticipated to gather nearby to view the fireworks display. Due to the need for vessel control during the fireworks display vessel traffic will be temporarily restricted to provide for the safety of participants, spectators and transiting vessels. Under provisions of 33 CFR 165.506, during the enforcement period, vessels may not enter the regulated area unless they receive permission from the Coast Guard Patrol Commander.

The Coast Guard proposes to temporarily suspend the regulation listed in Table to § 165.506, section (d.) event Number 5, and insert this temporary regulation at Table to § 165.506, at section (d.) as event Number “14”, in order to reflect that the fireworks display will originate from a point on shore and therefore the regulated area is changed. This change is needed to accommodate the sponsor's event plan. No other portion of the Table to § 165.506 or other provisions in § 165.506 shall be affected by this regulation.

The regulated area of this safety zone includes all water of the Currituck Sound within a 300 yards radius of latitude 36°22′23.8″ N longitude 075°49′56.3″ W.

This proposed safety zone would restrict general navigation in the regulated area during the fireworks event. Except for persons or vessels authorized by the Coast Guard Patrol Commander, no person or vessel may enter or remain in the regulated area during the effective period. The regulated area is needed to control vessel traffic during the event for the safety of participants and transiting vessels.

The enforcement period for this safety zone does not change from that enforcement period listed in § 165.506(d)5. Therefore, this safety zone would be enforced from 5:30 p.m. on July 4, 2012 through 1 a.m. on July 5, 2012.

In addition to notice in the Federal Register , the maritime community will be provided extensive advance notification via the Local Notice to Mariners, and marine information broadcasts so mariners can adjust their plans accordingly.

We developed this proposed rule after considering numerous statutes and executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes or executive orders.

This proposed rule is not a significant regulatory action under section 3(f) of Executive Order 12866, Regulatory Planning and Review, as supplemented by Executive Order 13563, Improving Regulation and Regulatory Review, and does not require an assessment of potential costs and benefits under section 6(a)(3) of Executive Order 12866 or under section 1 of Executive Order 13563. The Office of Management and Budget has not reviewed it under those Orders. This rule prevents traffic from transiting a portion of the Currituck Sound during the specified event, the effect of this regulation will not be significant due to the limited duration that the regulated area will be in effect and the extensive advance notifications that will be made to the maritime community via marine information broadcasts, local radio stations and area newspapers so mariners can adjust their plans accordingly. Additionally, this rulemaking changes the regulated area for the Currituck Sound fireworks event for July 4, 2012 only and does not change the permanent regulated area that is published in 33 CFR 165.506, Table to § 165.506, section (d.) event Number 5. In some cases vessel traffic may be able to transit the regulated area when the Coast Guard Patrol Commander deems it is safe to do so.

Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we have considered the impact of this proposed rule on small entities. The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule will not have a significant economic impact on a substantial number of small entities.

This rule would affect the following entities, some of which might be small entities: The owners or operators of vessels intending to transit or anchor in the Currituck Sound where fireworks events are being held. This regulation will not have a significant impact on a substantial number of small entities because it will be enforced only during the fireworks display event permitted by Coast Guard Captain of the Port North Carolina. The Captain of the Port will ensure that small entities are able to operate in the regulated area when it is safe to do so. In some cases, vessels will be able to safely transit around the regulated area at various times, and, with the permission of the Patrol Commander, vessels may transit through the regulated area. Before the enforcement period, the Coast Guard will issue maritime advisories so mariners can adjust their plans accordingly.

If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this rule would have a significant economic impact on it, please submit a comment (see ADDRESSES ) explaining why you think it qualifies and how and to what degree this rule would economically affect it.

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this proposed rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the FOR FURTHER INFORMATION CONTACT , above. The Coast Guard will not retaliate against small entities that question or complain about this proposed rule or any policy or action of the Coast Guard.

This proposed rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520.).

A rule has implications for federalism under Executive Order 13132, Federalism, if it has 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. We have analyzed this proposed rule under that Order and determined that this rule does not have implications for federalism.

The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the FOR FURTHER INFORMATION CONTACT section to coordinate protest activities so that your message can be received without jeopardizing the safety or security of people, places or vessels.

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this proposed rule would not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.

This proposed rule would not cause a taking of private property or otherwise have taking implications under Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights.

This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.

We have analyzed this proposed rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that might disproportionately affect children.

This proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

This proposed rule is not a “significant energy action” under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use because it is not a “significant regulatory action” under Executive Order 12866 and is not likely to have a significant adverse effect on the supply, distribution, or use of energy. The Administrator of the Office of Information and Regulatory Affairs has not designated it as a significant energy action. Therefore, it does not require a Statement of Energy Effects under Executive Order 13211.

This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.

We have analyzed this proposed rule under Department of Homeland Security Management Directive 023-01 and Commandant Instruction M16475.lD, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321-4370f), and have made a preliminary determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This proposed rule involves the temporary change of regulation listed at 33 CFR 165.506 for the event listed in Table to § 165.506, section (d.) event Number 5. This rule is categorically excluded from further review under paragraph 34(g) of Figure 2-1 of the Commandant Instruction. A preliminary environmental analysis checklist supporting this determination and a Categorical Exclusion Determination are available in the docket where indicated under ADDRESSES . We seek any comments or information that may lead to the discovery of a significant environmental impact from this proposed rule.

For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 165 as follows:

Executive Summary: Purpose: The Leahy-Smith America Invents Act provides that: (1) The Office may set or adjust any patent fee, provided that the revenue generated by patent fees recovers only the aggregate estimated costs to the Office for processing, activities, services, and materials relating to patents (including administrative costs); and (2) most fees set or adjusted under this authority are reduced by fifty percent with respect to small entities and by seventy-five percent with respect to micro entities. The Leahy-Smith America Invents Act also adds a new section to Title 35 of the United States Code that defines a “micro entity.” The rules of practice currently have provisions pertaining to small entity status, as the patent laws provided a small entity discount prior to the Leahy-Smith America Invents Act. This notice proposes changes to the rules of practice to implement the “micro entity” provisions added by the Leahy-Smith America Invents Act.

Summary of Major Provisions: The Office proposes to add a provision to the rules of practice pertaining to micro entity status. The provision will set out the requirements to qualify as a micro entity tracking the micro entity provision of Section 10 of the Leahy-Smith America Invents Act. The provision will also set out procedures relating to micro entity status that largely track the provisions in 37 CFR 1.27 for small entity status. These new procedures pertain to claiming micro entity status, paying patent fees as a micro entity, notifying the Office of loss of micro entity status, and correcting payments of patent fees paid erroneously in the micro entity amount. The procedures for claiming micro entity status require the filing of a certification of entitlement to micro entity status. The Office is developing forms (paper and electronic) for use by members of the public to provide a certification of micro entity status. The procedures for paying fees as a micro entity provide that a micro entity certification need only be filed once in an application or patent, but that a fee may be paid in the micro entity amount only if the applicant or patentee is still entitled to micro entity status on the date the fee is paid. The procedures pertaining to notifying the Office of loss of micro entity status and correcting payments of patent fees paid erroneously in the micro entity amount track the corresponding small entity provisions for notifying the Office of loss of small entity status and correcting payments of patent fees paid erroneously in the small entity amount.

Costs and Benefits: This rulemaking is not economically significant as that term is defined in Executive Order 12866 (Sept. 30, 1993).

Background: The Leahy-Smith America Invents Act was enacted into law on September 16, 2011. See Public Law 112-29, 125 Stat. 283 (2011). Section 10(a) of the Leahy-Smith America Invents Act provides that the Office may set or adjust by rule any patent fee established, authorized, or charged under title 35, United States Code, provided that fees only recover the aggregate estimated costs to the Office for processing, activities, services, and materials relating to patents (including administrative costs). See 125 Stat. at 316. Section 10(b) of the Leahy-Smith America Invents Act provides that “the fees set or adjusted under [section 10(a)] for filing, searching, examining, issuing, appealing, and maintaining patent applications and patents shall be reduced by 50 percent with respect to the application of such fees to any small entity that qualifies for reduced fees under [35 U.S.C.] 41(h)(1) * * *, and shall be reduced by 75 percent with respect to the application of such fees to any micro entity as defined in [35 U.S.C.] 123.” See 125 Stat. at 316-17. The patent laws provided in 35 U.S.C. 41(h) for small entities prior to the Leahy-Smith America Invents Act. Section 10(g) of the Leahy-Smith America Invents Act adds a new 35 U.S.C. 123 to define a “micro entity.” See 125 Stat. at 318-19.

35 U.S.C. 123(a) provides that the term “micro entity” means an applicant who makes a certification that the applicant: (1) Qualifies as a small entity as defined in 37 CFR 1.27; (2) has not been named as an inventor on more than four previously filed patent applications, other than applications filed in another country, provisional applications under 35 U.S.C. 111(b), or international applications for which the basic national fee under 35 U.S.C. 41(a) was not paid; (3) did not, in the calendar year preceding the calendar year in which the applicable fee is being paid, have a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986 (26 U.S.C. 61(a)), exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census; and (4) has not assigned, granted, or conveyed, and is not under an obligation by contract or law to assign, grant, or convey, a license or other ownership interest in the application concerned to an entity that, in the calendar year preceding the calendar year in which the applicable fee is being paid, had a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986, exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census. See 125 Stat. at 318. 35 U.S.C. 123(a) provides one basis under which an applicant may establish micro entity status. 35 U.S.C. 123(d) (discussed subsequently) provides another basis under which an applicant may establish micro entity status.

The Office will indicate the income level that is three times the median household income for the calendar year most recently reported by the Bureau of the Census (the income threshold set forth in 35 U.S.C. 123(a)(3) and (a)(4)) on its Internet Web site, with its Independent Inventor resource information, and on the Office's certification of micro entity status (gross income basis) form (Form PTO/SB/15A). The Office will also make available resources to micro entities to help navigate the new micro entity procedures.

35 U.S.C. 123(b) provides that an applicant is not considered to be named on a previously filed application for purposes of 35 U.S.C. 123(a)(2) if the applicant has assigned, or is under an obligation by contract or law to assign, all ownership rights in the application as the result of the applicant's previous employment. See id.

35 U.S.C. 123(c) provides that if an applicant's or entity's gross income in the preceding calendar year is not in United States dollars, the average currency exchange rate, as reported by the Internal Revenue Service, during that calendar year shall be used to determine whether the applicant's or entity's gross income exceeds the threshold specified in 35 U.S.C. 123(a)(3) or (4). See 125 Stat. at 319.

35 U.S.C. 123(d) provides that a micro entity shall also include an applicant who certifies that: (1) The applicant's employer, from which the applicant obtains the majority of the applicant's income, is an institution of higher education as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a)); or (2) the applicant has assigned, granted, conveyed, or is under an obligation by contract or law, to assign, grant, or convey, a license or other ownership interest in the particular applications to such an institution of higher education. See id. As explained earlier, 35 U.S.C. 123(a) provides one basis under which an applicant may establish micro entity status, and 35 U.S.C. 123(d) provides another basis under which an applicant may establish micro entity status.

35 U.S.C. 123(e) provides that in addition to the limits imposed by this section, the Director may, in the Director's discretion, impose income limits, annual filing limits, or other limits on who may qualify as a micro entity pursuant to this section if the Director determines that such additional limits are reasonably necessary to avoid an undue impact on other patent applicants or owners or are otherwise reasonably necessary and appropriate. 35 U.S.C. 123(e) also provides that at least three months before any limits proposed to be implemented pursuant to 35 U.S.C. 123(e) take effect, the Director shall inform the Committee on the Judiciary of the House of Representatives and the Committee on the Judiciary of the Senate of any such proposed limits. See id.

The micro entity provisions of 35 U.S.C. 123 are currently in effect. However, no patent fee is currently eligible for the seventy-five percent micro entity reduction as no patent fee has yet been set or adjusted under section 10 of the Leahy-Smith America Invents Act. The Office is in the process of proposing to set and adjust patent fees under section 10 of the Leahy-Smith America Invents Act in a separate rulemaking. The fees set or adjusted by the Office under section 10 of the Leahy-Smith America Invents Act for filing, searching, examining, issuing, appealing, and maintaining a patent application and patent will be reduced by: (1) Fifty percent for an applicant or patentee who establishes small (but not micro) entity status in the patent application or patent; and (2) seventy-five percent for an applicant or patentee who establishes micro entity status in the patent application or patent.

The Office plans to rely upon the applicant's certification of micro entity status (except where it conflicts with the information contained in the Office's records, such as where Office records indicate that the applicant is named as an inventor on more than four previously filed and unassigned nonprovisional patent applications) and will not require any additional documents from the applicant concerning the applicant's entitlement to claim micro entity status. This practice is similar to small entity practice where the Office generally does not question a claim of entitlement to small entity status. See 37 CFR 1.27(f) and MPEP 509.03.

The Office does not plan to provide advisory opinions on whether a particular entity is entitled to claim micro entity status. See MPEP 509.03. The Office, however, is providing the following information concerning procedures for micro entity status under 35 U.S.C. 123:

If an application names more than one applicant, each applicant must meet the requirements of 35 U.S.C. 123(a) or (d) for the applicants to file a micro entity certification in the application. For example, it would not be appropriate to file a micro entity certification for the application in the following situations in which there is more than one applicant: (1) some but not all of the applicants qualify as micro entities under 35 U.S.C. 123(a) ( e.g., some applicants exceed the gross income levels; some applicants have more than four other nonprovisional applications; or some applicants have assigned, granted, or conveyed the application or are under an obligation to do so, to an entity that exceeds the gross income levels) and the institution of higher education provisions of 35 U.S.C. 123(d) are not applicable to the non-qualifying applicants; or (2) some but not all of the applicants meet the higher education provisions of 35 U.S.C. 123(d) and the micro entity provisions of 35 U.S.C. 123(a) are not applicable to the remaining applicants. Additionally, where there is more than one applicant, the income level requirement in 35 U.S.C. 123(a)(3) applies to each applicant's income separately ( i.e., the combined gross income of all of the applicants need not be below the income level in 35 U.S.C. 123(a)(3)). Further, if an applicant assigns or is obligated to assign the invention to more than one assignee ( e.g., half interest in the invention to two assignees), each of the assignees must meet the requirements in the micro entity standard (either by meeting the income limit specified in 35 U.S.C. 123(a)(4), or by being an institution of higher education under 35 U.S.C. 123(d)) for the applicant to claim micro entity status under 35 U.S.C. 123.

An “institution of higher education” as that term is used in 35 U.S.C. 123(d), is defined in the Higher Education Act of 1965 (20 U.S.C. 1001(a)). Section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001) provides that: “For purposes of this chapter, other than subchapter IV, the term `institution of higher education' means an educational institution in any State that—(1) admits as regular students only persons having a certificate of graduation from a school providing secondary education, or the recognized equivalent of such a certificate, or persons who meet the requirements of section 1091(d)(3) of this title; (2) is legally authorized within such State to provide a program of education beyond secondary education; (3) provides an educational program for which the institution awards a bachelor's degree or provides not less than a 2-year program that is acceptable for full credit toward such a degree, or awards a degree that is acceptable for admission to a graduate or professional degree program, subject to review and approval by the Secretary; (4) is a public or other nonprofit institution; and (5) is accredited by a nationally recognized accrediting agency or association, or if not so accredited, is an institution that has been granted pre-accreditation status by such an agency or association that has been recognized by the Secretary for the granting of pre-accreditation status, and the Secretary has determined that there is satisfactory assurance that the institution will meet the accreditation standards of such an agency or association within a reasonable time.” Section 103 of the Higher Education Act of 1965 (20 U.S.C. 1003) provides “the term `State' includes, in addition to the several States of the United States, the Commonwealth of Puerto Rico, the District of Columbia, Guam, American Samoa, the United States Virgin Islands, the Commonwealth of the Northern Mariana Islands, and the Freely Associated States” and that the Freely Associated States means the “Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau.”

The Office proposes to include in the rules of practice the requirements for micro entity status and procedures for claiming micro entity status, paying patent fees as a micro entity, notifying the Office of loss of micro entity status, and correcting payments of patent fees paid erroneously in the micro entity amount. The Office is also developing forms for use by members of the public to provide a certification of micro entity status. The procedures track the corresponding provisions in 37 CFR 1.27 and 1.28 for small entities, except where the small entity procedure is not appropriate for micro entity status under the provisions of 35 U.S.C. 123. For example, 35 U.S.C. 123 requires a certification as a condition of an applicant being considered a micro entity. Thus, the process in 37 CFR 1.27(c)(3) for establishing small entity status by payment of certain fees in the small entity amount cannot be made applicable to establishing micro entity status, and the process in 37 CFR 1.28(a) for a refund based upon subsequent establishment of small entity status is not applicable where there is subsequent establishment of micro entity status. In addition, 35 U.S.C. 123(a)(3) and (a)(4) require that the income level be met for the calendar year preceding the calendar year in which the applicable fee is being paid. Thus, the provision in 37 CFR 1.27(g)(1) that the applicant need only determine continued eligibility to small entity status for issue and maintenance fee payments, but can pay intervening fees at small entity rate without determining whether still entitled to small entity status, cannot be made applicable to payment of patent fees as a micro entity.

The following is a discussion of proposed amendments to Title 37 of the Code of Federal Regulations, Part 1.

Section 1.29: Section 1.29 is proposed to be added to implement procedures for claiming micro entity status.

Since 35 U.S.C. 123(a) through (d) specify the requirements to qualify as a micro entity, the provisions in §§ 1.29(a) through (d) will track the provisions of 35 U.S.C. 123(a) through (d). 35 U.S.C. 123 uses the term “applicant” throughout, which was virtually synonymous with “inventor” on September 16, 2011 (the date of enactment of the Leahy-Smith America Invents Act as well as the effective date of 35 U.S.C. 123). 35 U.S.C. 118, effective on September 16, 2012 (one year after the effective date of 35 U.S.C. 123), however, permits an application to be made by a person to whom the inventor has assigned or is under an obligation to assign the invention. In addition, a person who otherwise shows sufficient proprietary interest in the matter may make an application for patent on behalf of and as agent for the inventor. Thus, on and after September 16, 2012, 35 U.S.C. 118 will allow a person other than the inventor to file an application as the applicant if the inventor has assigned or is under an obligation to assign the invention, or if the person shows sufficient proprietary interest in the matter. As the terms “applicant” and “inventor” will no longer be virtually synonymous on and after September 16, 2012, the Office invites public comment on the issue of whether the term “inventor” should be used in place of “applicant” at any instance in the proposed § 1.29.

Section 1.29(a) implements the provisions of 35 U.S.C. 123(a). Section 1.29(a) provides that an applicant claiming micro entity status under 35 U.S.C. 123(a) must certify that the applicant: (1) Qualifies as a small entity as defined in § 1.27; (2) has not been named as an inventor on more than four previously filed patent applications, other than applications filed in another country, provisional applications under 35 U.S.C. 111(b), or international applications for which the basic national fee under 35 U.S.C. 41(a) was not paid; (3) did not, in the calendar year preceding the calendar year in which the applicable fee is being paid, have a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986 (26 U.S.C. 61(a)), exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census; and (4) has not assigned, granted, or conveyed, and is not under an obligation by contract or law to assign, grant, or convey, a license or other ownership interest in the application concerned to an entity that, in the calendar year preceding the calendar year in which the applicable fee is being paid, had a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986, exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census.

Section 61(a) of the Internal Revenue Code of 1986 (26 U.S.C. 61(a)) provides that: “[e]xcept as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust.” The median household income for calendar year 2010 (the year most recently reported by the Bureau of the Census) was $49,445. See Income, Poverty, and Health Insurance Coverage in the United States: 2010 at pages 5 and 33 (Table A-1) (Sept. 2011). Thus, the income level specified in §§ 1.29(a)(3) and (a)(4) (three times the median household income) is $148,335 for calendar year 2010.

Section 1.29(b) implements the provisions of 35 U.S.C. 123(b). Section 1.29(b) provides that an applicant is not considered to be named on a previously filed application for purposes of § 1.29(a)(2) if the applicant has assigned, or is under an obligation by contract or law to assign, all ownership rights in the application as the result of the applicant's previous employment.

Section 1.29(c) implements the provisions of 35 U.S.C. 123(c). Section 1.29(c) provides that if an applicant's or entity's gross income in the preceding calendar year is not in United States dollars, the average currency exchange rate, as reported by the Internal Revenue Service, during that calendar year shall be used to determine whether the applicant's or entity's gross income exceeds the threshold specified in § 1.29(a)(3) or (a)(4). The Internal Revenue Service reports the average currency exchange rate (Yearly Average Currency Exchange Rates) on its Internet Web site ( http://www.irs.gov/businesses/small/international/article/0,,id=206089,00.html ).

Section 1.29(d) implements the provisions of 35 U.S.C. 123(d). Section 1.29(d) provides that an applicant claiming micro entity status under 35 U.S.C. 123(d) must certify that: (1) The applicant qualifies as a small entity as defined in § 1.27; and (2)(i) the applicant's employer, from which the applicant obtains the majority of the applicant's income, is an institution of higher education as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a)); or (ii) the applicant has assigned, granted, conveyed, or is under an obligation by contract or law, to assign, grant, or convey, a license or other ownership interest in the particular applications to such an institution of higher education. To the extent that 35 U.S.C. 123(d) (unlike 35 U.S.C. 123(a)) does not expressly require that an applicant qualify as a small entity under § 1.27, the Office is invoking its authority under 35 U.S.C. 123(e) to expressly require that a party claiming micro entity status via 35 U.S.C. 123(d) qualify as a small entity under § 1.27. The legislative history of 35 U.S.C. 123 is clear that it is directed to a subset of small entities, namely, “truly independent inventors.” See H.R. Rep 112-98 at 50 (2011) (“[t]he Committee was made aware, however, that there is likely a benefit to describing—and then accommodating—a group of inventors who are even smaller [than small entities], in order to ensure that the USPTO can tailor its requirements, and its assistance, to the people with very little capital, and just a few inventions, as they are starting out. This section of the Act defines this even smaller group—the micro-entity—that includes only truly independent inventors”). Thus, permitting an applicant who does not qualify as a small entity to take advantage of the benefits of micro entity status via 35 U.S.C. 123(d) would be inconsistent with the purposes of micro entity provisions of 35 U.S.C. 123. The statute and its legislative history do not, for example, contemplate a for-profit, large entity applicant becoming a “micro entity” (and thus obtaining a 75 percent discount) merely by licensing or assigning some interest (even merely a nominal or miniscule interest) to an institution of higher education. Accordingly, the Office has determined that requiring all micro entities to qualify as small entities is reasonably necessary and appropriate to ensure that applicants who do not qualify as a small entity do not inappropriately attempt to take advantage of micro entity status.

Section 1.29(e) provides that small entity status must be asserted in compliance with § 1.27 in an application for micro entity status to be established in such application. Section 1.29(e) further provides that micro entity status must be established in an application in which small entity status is or has previously been asserted in compliance with § 1.27 by filing a certification in writing that complies with either § 1.29(a) or § 1.29(d) and that is signed in compliance with § 1.33(b). Section 1.29(e) also contains provisions for a micro entity that correspond to the provisions of § 1.27(c)(4) for a small entity. Section 1.29(e) provides that: (1) Status as a micro entity must be specifically established by an assertion in each related, continuing, and reissue application in which status is appropriate and desired; (2) status as a small or micro entity in one application or patent does not affect the status of any other application or patent, regardless of the relationship of the applications or patents; and (3) the refiling of an application under § 1.53 as a continuation, divisional, or continuation-in-part application (including a continued prosecution application under § 1.53(d)), or the filing of a reissue application, requires a new certification of entitlement to micro entity status for the continuing or reissue application.

Section 1.29(f) contains provisions for a micro entity that correspond to the provisions of § 1.27(d) for a small entity. Section 1.29(f) provides that a fee may be paid in the micro entity amount only if it is submitted with, or subsequent to, the submission of a certification of entitlement to micro entity status.

Section 1.29(g) contains provisions for a micro entity that correspond to the provisions of § 1.27(e) for a small entity. Section 1.29(g) provides that a certification of entitlement to micro entity status need only be filed once in an application or patent, that micro entity status, once established, remains in effect until changed pursuant to § 1.29(i), but a fee may be paid in the micro entity amount only if status as a micro entity as defined in § 1.29(a) or (d) is appropriate on the date the fee is being paid. Thus, while an applicant is not required to provide a certification of entitlement to micro entity status with each fee payment, the applicant must still be entitled to micro entity status to pay a fee in the micro entity amount. For micro entity status under 35 U.S.C. 123(a), the applicant must determine that each applicant still meets the conditions of 35 U.S.C. 123(a) and § 1.29(a) to claim micro entity status ( e.g., that no applicant has had a change in gross income that exceeds the gross income threshold in 35 U.S.C. 123(a)(3) (a new determination must be made each year because gross income may change from year to year, and micro entity status is based upon gross income in the calendar year preceding the calendar year in which the applicable fee is being paid), that no applicant has made, or is obligated by contract or law to make, an assignment, grant, or conveyance to an entity not meeting the gross income threshold in 35 U.S.C. 123(a)(4), that no new applicant has been named in the application who does not meet the conditions specified in 35 U.S.C. 123(a) and § 1.29(a)). For micro entity status under 35 U.S.C. 123(d), the applicant must determine that each applicant still complies with 35 U.S.C. 123(d) and § 1.29(d) ( e.g., still obtains the majority of his or her income from an institution of higher education as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a)). Section 1.29(g) also provides that where an assignment of rights or an obligation to assign rights to other parties who are micro entities occurs subsequent to the filing of a certification of entitlement to micro entity status, a second certification of entitlement to micro entity status is not required.

Section 1.29(h) contains provisions for a micro entity that correspond to the provisions of § 1.27(f) for a small entity. Section 1.29(h) provides that prior to submitting a certification of entitlement to micro entity status in an application, including a related, continuing, or reissue application, a determination of such entitlement should be made pursuant to the requirements of § 1.29(a) or 1.29(d). Section 1.29(h) indicates that it should be determined that all parties holding rights in the invention qualify for micro entity status. Section 1.29(h) also indicates that the Office will generally not question certification of entitlement to micro entity status that is made in accordance with the requirements of § 1.29.

Section 1.29(i) contains provisions for a micro entity that correspond to the provisions of § 1.27(g)(2) for a small entity. Section 1.29(i) provides that notification of a loss of entitlement to micro entity status must be filed in the application or patent prior to paying, or at the time of paying, any fee after the date on which status as a micro entity as defined in § 1.29(a) or 1.29(d) is no longer appropriate. Section 1.29(k) provides for how to make such notification of loss of micro entity status. Also, the notification that micro entity status is no longer appropriate must be signed by a party identified in § 1.33(b). Payment of a fee in other than the micro entity amount is not sufficient notification that micro entity status is no longer appropriate. Once a notification of a loss of entitlement to micro entity status is filed in the application or patent, a written assertion of small entity status under § 1.27(c)(1) is required to obtain small entity status. Applicants will be expected to pay fees in the full (other than small entity) amount if a written assertion of small entity status is not submitted with the notification of loss of entitlement to micro entity status. The written assertion of small entity status under § 1.27(c)(1) may be submitted together with the notification of a loss of entitlement to micro entity status. In addition, a new certification of entitlement to micro entity status is required to again obtain micro entity status.

Section 1.29(j) contains provisions for a micro entity that correspond to the provisions of § 1.27(h) for a small entity. Section 1.29(j) provides that any attempt to fraudulently establish status as a micro entity, or pay fees as a micro entity, shall be considered as a fraud practiced or attempted on the Office, and that establishing status as a micro entity, or paying fees as a micro entity, improperly, and with intent to deceive, shall be considered as a fraud practiced or attempted on the Office.

Section 1.29(k) contains provisions for a micro entity that correspond to the provisions of § 1.28(c) for a small entity. Section 1.28(c) permits an applicant or patentee to correct the erroneous payment of a patent fee in the small entity amount if status as a small entity was established in good faith, and fees as a small entity were paid in good faith. See DH Tech. Inc. v. Synergystex Int'l Inc., 154 F.3d 1333 (Fed. Cir. 1998). Section 1.29(k) provides that if: (i) An applicant or patentee establishes micro entity status in an application or patent in good faith; (ii) the applicant or patentee pays fees as a micro entity in the application or patent in good faith; and (iii) applicant or patentee later discovers that such micro entity status either was established in error, or that the Office was not notified of a loss of entitlement to micro entity status as required by § 1.29(i) through error, the error will be excused upon compliance with the separate submission and itemization requirements of § 1.29(k)(1) and the deficiency payment requirement of § 1.29(k)(2).

Section 1.29(k)(1) provides that any paper submitted under § 1.29(k) must be limited to the deficiency payment (all fees paid in error) required for a single application or patent, and that where more than one application or patent is involved, separate submissions of deficiency payments ( e.g., checks) and itemizations are required for each application or patent. Section 1.29(k)(1) also provides that the paper must contain an itemization of the total deficiency payment and include the following information: (1) Each particular type of fee that was erroneously paid as a micro entity, ( e.g., basic statutory filing fee, two-month extension of time fee) along with the current fee amount for a small or non-small entity; (2) the micro entity fee actually paid, and the date on which it was paid; (3) the deficiency owed amount (for each fee erroneously paid); and (4) the total deficiency payment owed, which is the sum or total of the individual deficiency owed amounts as set forth in § 1.29(k)(2).

Section 1.29(k)(2) provides that the deficiency owed, resulting from the previous erroneous payment of micro entity fees, must be paid. The deficiency owed for each previous fee erroneously paid as a micro entity is the difference between the current fee amount for a small entity or other than a small entity, as applicable, on the date the deficiency is paid in full and the amount of the previous erroneous micro entity fee payment. The total deficiency payment owed is the sum of the individual deficiency owed amounts for each fee amount previously and erroneously paid as a micro entity. This corresponds to the procedure for fee deficiency payments based upon the previous erroneous payment of patent fees in the small entity amount. See § 1.28(c)(2)(i) (“[t]he deficiency owed for each previous fee erroneously paid as a small entity is the difference between the current full fee amount (for other than a small entity) on the date the deficiency is paid in full and the amount of the previous erroneous (small entity) fee payment”).

Section 1.29(k)(3) provides that if the requirements of §§ 1.29(k)(1) and (k)(2) are not complied with, such failure will either be treated at the option of the Office as an authorization for the Office to process the deficiency payment and charge the processing fee set forth in § 1.17(i), or result in a requirement for compliance within a one-month non-extendable time period under § 1.136(a) to avoid the return of the fee deficiency payment.

Section 1.29(k)(4) provides that any deficiency payment (based on a previous erroneous payment of a micro entity fee) submitted under § 1.29(k) will be treated as a notification of a loss of entitlement to micro entity status under § 1.29(i).

This notice proposes to amend the rules of practice in patent cases to implement the micro entity provisions of the Leahy-Smith America Invents Act. The changes being proposed in this notice do not change the substantive criteria for entitlement to micro entity status (except possibly for requiring in 37 CFR 1.29(d)(1) that an applicant claim small entity status in compliance with 37 CFR 1.27 in order to claim micro entity status; see 35 U.S.C. 123(e)), but simply specify the procedures pertaining to claiming micro entity status, paying patent fees as a micro entity, notification of loss of micro entity status, and correction of payments of patent fees paid erroneously in the micro entity amount. Therefore, these proposed changes (except as discussed previously) involve rules of agency practice and procedure and/or interpretive rules. See Bachow Commc'ns Inc. v. FCC, 237 F.3d 683, 690 (DC Cir. 2001) (rules governing an application process are procedural under the Administrative Procedure Act); Inova Alexandria Hosp. v. Shalala, 244 F.3d 242, 350 (4th Cir. 2001) (rules for handling appeals were procedural where they did not change the substantive standard for reviewing claims); Nat'l Org. of Veterans' Advocates v. Sec'y of Veterans Affairs, 260 F.3d 1365, 1375 (Fed. Cir. 2001) (rule that clarifies interpretation of a statute is interpretive).

Accordingly, prior notice and opportunity for public comment are not required pursuant to 5 U.S.C. 553(b) or (c) (or any other law), and thirty-day advance publication is not required pursuant to 5 U.S.C. 553(d) (or any other law), except possibly for the proposal to require in § 1.29(d)(1) that an applicant claim small entity status in compliance with 37 CFR 1.27 in order to claim micro entity status. See 35 U.S.C. 123(e); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), does not require notice and comment rulemaking for “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice”) (quoting 5 U.S.C. 553(b)(A)). The Office, however, is publishing this proposal for comment as it seeks the benefit of the public's views on the Office's proposed implementation of the micro entity provisions of the Leahy-Smith America Invents Act.

For the reasons set forth herein, the Deputy General Counsel for General Law of the United States Patent and Trademark Office has certified to the Chief Counsel for Advocacy of the Small Business Administration that changes proposed in this notice will not have a significant economic impact on a substantial number of small entities. See 5 U.S.C. 605(b).

This notice proposes changes to the rules of practice to allow a subset of small entities— i.e., micro entities—to pay further reduced fees, namely, a seventy-five percent discount. The notice proposes procedures pertaining to claiming micro entity status, paying patent fees as a micro entity, notification of loss of micro entity status, and correction of payments of patent fees paid erroneously in the micro entity amount. This notice does not propose to change the criteria in 35 U.S.C. 123(a) or (d) for entitlement to file a certification of micro entity status (except possibly for requiring in 37 CFR 1.29(d)(1) that an applicant claim small entity status in compliance with 37 CFR 1.27 in order to claim micro entity status; see 35 U.S.C. 123(e)). The micro entity procedures proposed in this notice track to the extent feasible the corresponding small entity procedures under 37 CFR 1.27. Thus, the burden to all entities, including small entities, imposed by these rules is no greater than those imposed by the current regulations pertaining to claiming small entity status, paying patent fees as a small entity, notification of loss of small entity status, and correction of payments of patent fees paid erroneously in the small entity amount.

Requiring that an applicant claim small entity status in compliance with 37 CFR 1.27 in order to claim micro entity status under 37 CFR 1.29(d)(1) will not have a significant economic impact on a substantial number of small entities. The Office uses the Small Business Administration business size standard for the purpose of paying reduced patent fees in 13 CFR 121.802 as the size standard when conducting an analysis or making a certification under the Regulatory Flexibility Act for patent-related regulations. See Business Size Standard for Purposes of United States Patent and Trademark Office Regulatory Flexibility Analysis for Patent-Related Regulations, 71 FR 67109, 67109 (Nov. 20, 2006). A small entity for purposes of the Regulatory Flexibility Act analysis is a small entity for purposes of paying reduced patent fees. Therefore, requiring in 37 CFR 1.29(d)(1) that an entity claim small entity status in compliance with 37 CFR 1.27 in order to claim micro entity status will preclude only an applicant or patentee who is a large entity ( i.e., not a small entity) from claiming micro entity status.

The Office estimates that a minority percentage of small entity applications will be filed by paying micro entity fees under these proposed rules. Based upon the data in the Office's Patent Application Locating and Monitoring (PALM) system, of the approximately 2,498,000 nonprovisional patent applications (utility, plant, design, and reissue) and requests for continued examination filed in total over the last five fiscal years, small entity fees were paid in approximately 669,000 (26.8 percent). Thus, an average of approximately 500,000 nonprovisional patent applications and requests for continued examination have been filed each year for the last five fiscal years, with small entity fees being paid in approximately 134,000 of the nonprovisional patent applications and requests for continued examination filed each year.

As indicated above, this rule provides a procedure for small entities to attain a 75 percent reduction in fees as a micro entity, as provided by statute. The procedures for micro entity status track the existing procedures for small entity status. While the rule impacts the entire universe of small entity applications and patents, the rule is necessary to implementing a reduction in fees, which is entirely beneficial, and no other provision has an economic impact on the affected small entities.

This rulemaking has been determined to be not significant for purposes of Executive Order 12866 (Sept. 30, 1993).

The Office has complied with Executive Order 13563. Specifically, the Office has, to the extent feasible and applicable: (1) Made a reasoned determination that the benefits justify the costs of the rule; (2) tailored the rule to impose the least burden on society consistent with obtaining the regulatory objectives; (3) selected a regulatory approach that maximizes net benefits; (4) specified performance objectives; (5) identified and assessed available alternatives; (6) involved the public in an open exchange of information and perspectives among experts in relevant disciplines, affected stakeholders in the private sector and the public as a whole, and provided on-line access to the rulemaking docket; (7) attempted to promote coordination, simplification, and harmonization across government agencies and identified goals designed to promote innovation; (8) considered approaches that reduce burdens and maintain flexibility and freedom of choice for the public; and (9) ensured the objectivity of scientific and technological information and processes.

This rulemaking does not contain policies with federalism implications sufficient to warrant preparation of a Federalism Assessment under Executive Order 13132 (Aug. 4, 1999).

This rulemaking will not: (1) Have substantial direct effects on one or more Indian tribes; (2) impose substantial direct compliance costs on Indian tribal governments; or (3) preempt tribal law. Therefore, a tribal summary impact statement is not required under Executive Order 13175 (Nov. 6, 2000).

This rulemaking is not a significant energy action under Executive Order 13211 because this rulemaking is not likely to have a significant adverse effect on the supply, distribution, or use of energy. Therefore, a Statement of Energy Effects is not required under Executive Order 13211 (May 18, 2001).

This rulemaking meets applicable standards to minimize litigation, eliminate ambiguity, and reduce burden as set forth in sections 3(a) and 3(b)(2) of Executive Order 12988 (Feb. 5, 1996).

This rulemaking does not concern an environmental risk to health or safety that may disproportionately affect children under Executive Order 13045 (Apr. 21, 1997).

This rulemaking will not effect a taking of private property or otherwise have taking implications under Executive Order 12630 (Mar. 15, 1988).

Under the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq. ), prior to issuing any final rule, the United States Patent and Trademark Office will submit a report containing the final rule and other required information to the United States Senate, the United States House of Representatives, and the Comptroller General of the Government Accountability Office. In addition, the United States Patent and Trademark Office will inform the Committee on the Judiciary of the House of Representatives and the Committee on the Judiciary of the Senate of any proposed limits under 35 U.S.C. 123(e) at least three months before any limits proposed to be implemented pursuant to 35 U.S.C. 123(e) take effect.

The changes in this notice are not expected to result in an annual effect on the economy of 100 million dollars or more, a major increase in costs or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets. Therefore, this notice is not expected to result in a “major rule” as defined in 5 U.S.C. 804(2).

The changes set forth in this notice do not involve a Federal intergovernmental mandate that will result in the expenditure by State, local, and tribal governments, in the aggregate, of 100 million dollars (as adjusted) or more in any one year, or a Federal private sector mandate that will result in the expenditure by the private sector of 100 million dollars (as adjusted) or more in any one year, and will not significantly or uniquely affect small governments. Therefore, no actions are necessary under the provisions of the Unfunded Mandates Reform Act of 1995. See 2 U.S.C. 1501 et seq.

This rulemaking will not have any effect on the quality of the environment and is thus categorically excluded from review under the National Environmental Policy Act of 1969. See 42 U.S.C. 4321 et seq.

The requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) are not applicable because this rulemaking does not contain provisions which involve the use of technical standards.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ) requires that the Office consider the impact of paperwork and other information collection burdens imposed on the public. An applicant who wishes to claim micro entity status must submit a certification of micro entity status, preferably by using Form PTO/SB/15A (gross income basis) or Form PTO/SB/15B (institution of higher education basis). The Office of Management and Budget (OMB) has determined that, under 5 CFR 1320.3(h), Forms PTO/SB/15A and B do not collect “information” within the meaning of the Paperwork Reduction Act of 1995.

This proposed rulemaking, however, does involve information collection requirements (for fee deficiency payment based upon the previous erroneous payment of patent fees in the micro entity amount) which are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3549). The collection of information involved in this notice has been submitted to OMB under OMB control number 0651-00xx. The proposed collection will be available at OMB's Information Collection Review Web site ( www.reginfo.gov/public/do/PRAMain ).

Title of Collection: Fee Deficiency Payments.

OMB Control Number: 0651-00xx.

Needs and Uses: This information collection is necessary so that patent applicants and patentees may pay the balance of fees due ( i.e., fee deficiency payment) when a fee was previously paid in error in a micro or small entity amount. The Office needs the information to be able to process and properly record a fee deficiency payment to avoid questions arising later either for the Office or for the applicant or patentees as to whether the proper fees have been paid in the application or patent.

Method of Collection: By mail, facsimile, hand delivery, or electronically to the Office.

Affected Public: Individuals or households; businesses or other for-profits; and not-for-profit institutions.

Estimated Number of Respondents: 3,000 responses per year. The basis is that the Office receives approximately 2,250 fee deficiency payments annually arising out of small entity filings. For purposes of this calculation, it was estimated that up to 750 fee deficiency payments could be made annually arising out of micro entity filings.

Estimated Time per Response: The Office estimates that the responses in this collection will take the public 2 hours.

Estimated Total Annual Respondent Burden Hours: 6,000 hours per year.

Estimated Total Annual Respondent Cost Burden: $2,040,000 per year.

The Office is soliciting comments to: (1) Evaluate whether the proposed information requirement is necessary for the proper performance of the functions of the Office, including whether the information will have practical utility; (2) evaluate the accuracy of the Office's estimate of the burden; (3) enhance the quality, utility, and clarity of the information to be collected; and (4) minimize the burden of collecting the information on those who are to respond, including by using appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology.

Please send comments on or before July 30, 2012 to Mail Stop Comments—Patents, Commissioner for Patents, P.O. Box 1450, Alexandria, VA, 22313-1450, marked to the attention of Raul Tamayo, Legal Advisor, Office of Patent Legal Administration, Office of the Deputy Commissioner for Patent Examination Policy. Comments should also be submitted to the Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10202, 725 17th Street NW., Washington, DC 20503, Attention: Desk Officer for the Patent and Trademark Office.

Notwithstanding any other provision of law, no person is required to respond to, nor shall a person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the Paperwork Reduction Act, unless that collection of information displays a currently valid OMB control number.

For the reasons set forth in the preamble, 37 CFR part 1 is proposed to be amended as follows:

When packaged in non-bulk packagings, a material with a flash point of 38 °C (100 °F) or more but less than 60 °C (140 °F) may be reclassed as a combustible liquid under the HMR. A combustible liquid in a non-bulk packaging that is not a hazardous substance, hazardous waste, or a marine pollutant is not subject to HMR in domestic transportation, by highway or rail. However, these same materials are regulated as flammable liquids when transported by vessel, in accordance with the International Maritime Dangerous Goods (IMDG) Code and by aircraft, in accordance with the International Civil Aviation Organization's Technical Instructions (ICAO Technical Instructions).

When packaged in bulk packagings, a material with a flash point between 60 °C (140 °F) and 93 °C (200 °F) is regulated as a combustible liquid in domestic transportation. A combustible liquid in bulk packagings is only minimally regulated in domestic transportation, and allows a shipper to use a less expensive, non-specification bulk packaging, in addition to having only to comply with the requirements contained in 49 CFR 173.150. In addition, bulk shipments of a combustible liquid must be placarded with a COMBUSTIBLE placard. When combustible liquids are shipped internationally, the COMBUSTIBLE placard is not recognized overseas because there is no combustible liquid hazard class under the international standards. Subsequently, shipments prepared in accordance with the HMR may be frustrated by inspectors and enforcement personnel who are not familiar with the U.S. requirements. To avoid confusion and delay in port areas, shippers and carriers often remove the COMBUSTIBLE placard prior to placing the shipment on board a vessel for overseas shipment. Conversely, shipments originating overseas and bound for the United States must affix the COMBUSTIBLE placard prior to the shipment's movement out of the port area.

In addition, a combustible liquid that is not a hazardous substance, a hazardous waste, or a marine pollutant is not subject to HMR requirements if it is a mixture of one or more components that has a flash point at or above 93 °C (200 °F), comprises at least 99 percent of the volume of the mixture, and is not transported as a liquid at a temperature at or above its flash point. Also, a combustible liquid that does not sustain combustion is not subject to the requirements of the HMR as a combustible liquid. Either the test method specified in ASTM D 4206 or the procedure in appendix H of part 173 of the HMR may be used to determine if a material sustains combustion when heated under test conditions and exposed to an external source of flame.

Further, the classification system in the UN Recommendations has no combustible liquid category or hazard class. There is no provision in the UN Recommendations, the International Civil Aviation Organization's Technical Instructions for the Safe Transport of Dangerous Goods by Aircraft (ICAO Technical Instructions), or the International Maritime Dangerous Goods (IMDG) Code for flammable liquids to be reclassed as combustible liquids. PHMSA recognizes that the HMR provisions for the transportation of combustible liquids may potentially be confusing to both domestic and international shippers and carriers of flammable and combustible liquid shipments. We have also received opinions that the lack of understanding or clarity of the U.S. regulations involving the transportation of combustible liquids may present a tangible safety concern, such as the mishandling or misidentification of these shipments in transportation, or the transportation of undeclared shipments.

On April 5, 2010, PHMSA issued an Advance Notice of Proposed Rulemaking (ANPRM) in the Federal Register [75 FR 17111] under Docket No. PHMSA-2009-0241 (HM-242) soliciting comments on whether PHMSA should consider harmonization of the Hazardous Materials Regulations (HMR; 49 CFR parts 171-180) applicable to the transportation of combustible liquids with the UN Recommendations, while maintaining an adequate level of safety, and provided a series of questions. In the ANPRM, we also indicated that we were considering amendments to the HMR as they apply to the transportation of combustible liquids. Specifically, we considered whether to harmonize the domestic regulations applicable to the transportation of combustible liquids with international transportation standards. In addition, we indicated that we were examining ways to revise, clarify, or relax certain regulatory requirements to facilitate the transportation of these materials while maintaining an adequate level of safety. The intent of the ANPRM was to invite public comments on how to accomplish these goals, provide an opportunity for comment on amendments PHMSA was considering, and present a forum for the public to offer additional recommendations for the safe transportation of combustible liquids.

In response to the ANPRM, comments were received from chemical distributors; printing, painting, explosives, international airline pilots, solid waste, railroad, trucking, tank truck carriers, and custom harvesters trade associations and a state farm bureau; international and national firefighters associations; the State of Alaska DOT and Public Facilities; and several international and national private citizens. The majority of the commenters opposed harmonization and elimination of the combustible liquid classification, while expressing support for maintaining the non-bulk and bulk combustible liquid packaging exceptions for domestic transportation. In addition, many commenters expressed the belief that burdens on the domestic industry would be increased for certain non-bulk shipments, and that the deregulation of bulk shipments would compromise the safety of the public and emergency responders if the domestic combustible liquid provisions were harmonized with the international United Nations (UN) Recommendations.

Although PHMSA's primary focus is on the safe transportation of hazardous materials, one of our associated goals is to facilitate international commerce through harmonization with international standards, to the extent that harmonization does not compromise our safety objectives. Presently and formerly, some in the regulated industry have asserted that the exceptions in the HMR for combustible liquids create a variance between domestic and international transportation and increase the potential for non-compliance. This being both a safety and economic issue, PHMSA disagrees with those who advocate elimination of the combustible liquid class altogether, believing that a significant number of domestically-regulated materials pose risks in transportation that cannot be ignored.

Therefore, because most commenters opposed harmonization that would eliminate the combustible liquids hazard class altogether, thereby removing the combustible liquids exceptions in domestic transportation in the U.S., in addition to PHMSA's own economic analysis that implementation costs could be significant, we are denying the International Vessel Operators Dangerous Goods Association (IVODGA) petition, P-1498, the Dangerous Goods Advisory Council (DGAC) petition, P-1531, and the U.S. Customer Harvesters, Inc. petition, P-1536. Accordingly, issuance of this notice constitutes a decision by PHMSA to withdraw the April 5, 2010 ANPRM [75 FR 17111] published in the Federal Register under Docket No. PHMSA-2009-0241 (HM-242).

In the April 5, 2010 ANPRM, PHMSA also solicited comments on issues related to three petitions pertaining to the transportation of combustible liquids in both domestic and international commerce. The petitions are discussed below.

The International Vessel Operators Dangerous Goods Association (IVODGA), formerly VOHMA, submitted a petition for rulemaking [P-1498; PHMSA-2007-28238] concerning differing domestic and international requirements for the transportation of combustible liquids. The UN Recommendations do not include a definition or classification for combustible liquids. In its petition, IVODGA asserts:

(a) The display of a UN identification number for shipments that are not regulated internationally may “confuse” foreign inspectors, interlining carriers, foreign stowage planners, and intermodal feeder systems in other jurisdictions [who may delay forwarding the shipments until the confusion is resolved];

(b) These frustrated shipments not only impede commerce but also result in additional risks in the ports and terminals where they are held;

(c) emergency responders might also be confused by the UN identification number marking on the bulk packaging such as “1263” or “1210”, which are the numbers assigned to flammable paint and flammable printing ink, respectively;

(d) Reclassed combustible liquid shipments “find [their] way” into international distribution “unlabeled and unmarked” with the result that they are undeclared as dangerous goods; and

(e) for materials with a flash point above 60 °C (140 °F) but below 93 °C (200 °F) authorize use of the proper shipping name “Combustible liquid, n.o.s. [if hazard class modified to read “combustible liquid” and intended for rail or highway transportation only].

IVODGA notes that the differing domestic and international requirements for combustible liquids has resulted in conflicting and confusing hazard communication requirements with the result that international shipments may be frustrated as foreign authorities attempt to reconcile HMR hazard communication schemes with international regulations. For example, IVODGA said that many paints, inks, adhesives, solvents, and petroleum products have flash points between 60 °C (140 °F) and 93 °C (200 °F) and are offered for transportation as combustible liquids within the United States. However, the HMR permit such shipments to be described on a shipping paper and to display markings, labels, and placards in the same manner as shipments of flammable liquids with flash points of less than 60 °C (140 °F). when these shipments are destined for export [by vessel] to a jurisdiction outside the United States, because of the confusion, such shipments may be delayed until the confusion is resolved.

The Dangerous Goods Advisory Council (DGAC) submitted a petition for rulemaking [P-1531; PHMSA-2008-0303] for amendment of the requirements for combustible liquids in bulk packagings in order to reduce port congestion and improve transportation efficiency in port areas. In its petition, DGAC asserts:

(a) The HMR requirements for high-flash-point combustible liquids (HFCL) are disruptive to the flow of goods in port areas and contribute to port congestion;

(b) The required markings and labels and/or placards (safety marks) that must be applied for purposes of U.S. domestic transport of an HFCL export shipment must be removed in the port area in order to bring the shipment into compliance with the requirements of the IMDG Code;

(c) Industry practice in transporting HFCL by vessel provides a higher level of safety than that afforded by the HMR, providing further justification for regulatory changes facilitating transport of HFCL transported by vessel;

(d) When HFCLs are transported by vessel [i.e., imported to the U.S.] they are transported in ISO portable tanks or Intermediate Bulk Containers (IBCs) conforming to the UN performance requirements (these packagings provide considerable package integrity beyond that provided by the HMR requirements which permit HFCL to be transported in non-specification packagings); and

(e) DGAC further petitions PHMSA to relieve IBCs containing HFCL from currently required HMR safety mark requirements independent of whether they are being transported in international commerce.

The DGAC petition highlights many of the same issues identified by IVODGA, with a particular focus on problems encountered in international transportation for shipments of materials DGAC terms “high flash point combustible liquids”—that is, combustible liquids with flash points between 60 °C (140 °F) and 93 °C (200 °F). DGAC suggests that the regulatory differences between the HMR and international regulatory requirements for these combustible liquids are disruptive to the flow of goods in port areas and contribute to port congestion. Imported bulk shipments of high flash point combustible liquids arriving in U.S. ports must be marked and placarded in accordance with HMR requirements. Similarly, the marks and placards that are applied to bulk shipments of combustible liquids for transportation in the U.S. must be removed in the port prior to export. DGAC estimates that export shipments are delayed for an average of three days awaiting removal of HMR-required marks and placards and import shipments are delayed an average of five days awaiting application of HMR-required marks and placards. To alleviate this problem, DGAC requests that PHMSA except HFCLs from all HMR requirements when transported in specification packages of less than 3,000 liters (793 gallons) capacity, or when in an ISO (UN) portable tank in international commerce.

U.S. Custom Harvesters, Inc. (Custom Harvesters) submitted a petition for rulemaking [P-1536; PHMSA-2009-0099] requesting modification of current requirements applicable to combustible liquids. In its petition, Custom Harvesters states that:

(a) A custom harvester has invested in the equipment (which includes grain harvesting combines, silage harvesters, grain trucks, tractors and grain carts) necessary to harvest 50% of the nation's wheat, 25% of the nation's corn, 50% of the nation's corn silage and 25% of the nation's cotton. Because of the tremendous cost of the equipment, it doesn't make sense for most farmers to invest in the harvesting equipment that will only be used one month of the year. Our industry replaces the farmer in the field during harvest;

(b) the custom harvesters' equipment has changed immensely over the past ten years. Custom harvesters have grown from using tandem axle trucks (which allows for the Class B CDL and a Restricted Class B Seasonal CDL license) to using tractor/trailer combinations which require the Class A CDL license. Under exemption 391.2, a Restricted Class B Seasonal CDL driver is allowed to transport hazardous materials limited to 1,000 gallons or less of diesel fuel. However, in order to legally drive the tractor/trailer combination, we are required to have Class A CDL drivers. The Restricted Class B Seasonal CDL driver is not required to take a written or driving test. The only requirement is to have a good driving record;

(c) custom harvesters hire seasonal truck drivers and combine operators, usually beginning in mid-May and lasting until November when the harvest has been completed. Most of the drivers hired do not have the Class A CDL license which is required for them to drive the tractor/trailer combinations. Once they are hired, the owner typically assists the truck drivers in obtaining the appropriate CDL licenses. The custom harvester hires seasonal drivers approximately two weeks prior to the beginning of harvest. Because the Hazardous Materials (hazmat) endorsement requires a 60-90 day wait period, the requirement of the hazmat endorsement to haul diesel fuel has created a great burden to our industry. It is not economically feasible for the custom harvester to hire its employees 60-90 days in advance of needing them. Additionally, many harvesters employ H2A workers. An H2A worker is currently allowed to obtain a nonresidential CDL, but is not lawfully able to obtain a hazmat endorsement;

(d) the harvesting equipment used requires 200+ gallons of diesel fuel per machine daily. Most custom harvesters have at least two or three machines and a tractor/grain cart combination. This combination of equipment would require up to 1,000 gallons of diesel fuel daily. The diesel fuel is hauled to the field to fill the harvesting equipment each day. In order to bring the fuel to the field, the diesel fuel is pumped from a pump at the local service station or farmer's COOP (just like it would be for a pickup truck or car) to a fuel tank that is mounted in a service vehicle. The distance to the farmer's field determines the distance the fuel is hauled, typically between 1 mile and 50 miles. The roads are always rural roads and highways. Once the fuel is unloaded into the harvest equipment, the fuel tank sits empty the rest of the day. At the end of the day, the service vehicle (and empty fuel tank) will be driven back to the town where the custom harvester is staying. (A harvester typically stays in one location for approximately two weeks.) Each morning, the refueling process will be repeated;

(e) the current limitation of the 119-gallon fuel tank puts a burden on the custom harvesting industry in more ways than one. First, the 119-gallon fuel tank requires the custom harvester to make several trips from the field to the fuel station each day just to fill each piece of harvesting equipment one time. Second, current requirements state the only persons who can legally drive the service vehicle down the road are those with hazmat endorsements. The custom harvesting business owner often ends up being the only person with the necessary endorsements due to time requirements for obtaining a hazmat endorsement. Having to drive the service vehicle limits the flexibility of the business owner, preventing him or her from driving other commercial vehicles in his or her fleet. When the harvesting job has been completed and the custom harvesting fleet is moved to the next location, the fuel tank on the service vehicle will be empty while moving on state and federal highways. The custom harvester will empty the fuel tank before moving to the next job location, eliminating the weight on the truck and preventing possible problems while on the road.

Currently, under the HMR, bulk shipments of combustible liquids must be placarded. In accordance with Federal Motor Carrier Safety Regulations (FMCSR) found at 49 CFR part 383, a hazmat endorsement is required for drivers of commercial motor vehicles that transport placarded shipments of hazardous materials. A hazmat endorsement on a CDL triggers the need to comply with the Department of Homeland Security's Transportation Security Administration's fingerprinting and background check. In its petition, the Custom Harvesters asks PHMSA to consider an exception from placarding for combustible liquids transported in bulk quantities that do not exceed 3,785 L (1,000 gallons) in a single packaging.

Approximately, one-hundred and forty (140) comments were received in response to the April 5, 2010 ANPRM on whether PHMSA should consider harmonization of the domestic regulations applicable to the transportation of combustible liquids with international transportation standards. Generally, the majority of commenters oppose harmonization, indicating that many of its members utilize the exceptions provided in §§ 173.120(c) and 173.150(f) for reclassification and packaging of their products or material as combustible liquids in domestic transportation, and that any changes to these exceptions will negatively impact their industry. Approximately twenty-nine (29) of the comments addressed harmonizing domestic and international classification standards for combustible liquids. Of the 29 comments, approximately seventeen (17) of the commenters on this issue were opposed to harmonization of the domestic combustible liquids regulations with the international standards for classification of flammable liquids and would maintain the combustible liquids hazard class and packaging exceptions in domestic transportation in commerce. In contrast, approximately twelve (12) of the commenters support harmonization, and elimination of the combustible liquids classification and packaging exceptions.

Of the one-hundred and forty (140) comments, approximately one-hundred and eleven (111) of the commenters were custom harvesters and the Indiana Farm Bureau, and support the U.S. Custom Harvesters, Inc., petition. The Custom Harvesters only requested that PHMSA consider an exception for agribusiness (i.e., the operations and businesses that are associated with large-scale farming) from placarding combustible liquids transported in bulk quantities that do not exceed 3,785 L (1,000 gallons) in a single packaging. Many commenters stress the difficulty of hiring seasonal, foreign workers who may not be able to obtain a CDL with a hazmat endorsement in a timely fashion.

Commenters, such as the American Trucking Associations (ATA); American Petroleum Institute (API); Institute Makers of Explosives (IME); National Tank Truck Carriers (NTTC); National Fire Protection Association (NFPA); Association of Hazmat Shippers, Inc. (AHS); Utility Solid Waste Activities Group (USWAG); Dow Corning Corporation; Evonik Degussa Corporation; Association of American Railroads (AAR); Council on Safe Transportation of Hazardous Articles (COSTHA); State of Alaska, Department of Transportation and Public Facilities, and Mr. Owen Bruce Bugg, citizen, expressed opposition to harmonization of the domestic combustible liquids requirements with the international standards for flammable liquids.

NTTC expresses the belief that more information is needed to determine what the benefits would be of deregulating combustible liquids with a flash point above 60 °C (140 °F) and below 93 °C (200 °F). NTTC strongly asserts that the HMR should continue to allow Class 3 materials with a flash point between 38 °C (100 °F) and 60 °C (140 °F) to be reclassified and transported as combustible liquids, further states that this has been the practice for many years, and it is not aware of any negative impact on safety.

The API said that the loss of the reclassification exception for non-bulk combustibles would move a large segment of the supply & distribution industry from “Not Regulated” to “Regulated Hazmat” status. API states that it does not support deregulation (e.g., a complete harmonization of the 49 CFR with IMO/IMDG) of HFCLs being transported in bulk cargo tanks or rail cars. The HMR, though sometimes confusing, provide a practical framework to handle HFCLs such as gas oils, diesels, fuel oil, or heating oil with flash points that actually “straddle” the international threshold of flammable liquids 60 °C (140 °F). These regulations (HMR) allow for consistent hazard communications for petroleum fuel and other products with a similar range of flash point.

The ATA has significant concerns with the potential changes to the classification and regulation of combustible liquids. The ATA states that while it appreciates the benefits of a globally harmonized classification of flammable liquids, it believes that deregulation of combustible liquids could create certain safety risks. For example, certain bulk tank trucks utilize compressed air to unload. These compressors generate air pressure and may reach a temperature of 170 °F. As such operators should not use these compressors to unload certain flammable and combustible liquids. In the absence of effective hazard communication requirements, a safety risk could be created, as operators may not know whether it is safe to use compressed air for unloading. In addition, effective hazard communication is needed to ensure that tools used to repair valves and other appurtenances to containers used to transport combustible materials are “non-sparking” to reduce the risk of ignition.

The IME said that over 3.4 million metric tons of high explosives, blasting agents, and oxidizers are consumed annually in the U.S. IME member companies produce ninety-nine percent of these commodities. These products are used in every state and are distributed worldwide. IME states that the most widely-used commercial explosive product in the U.S. is ammonium nitrate/fuel oil (“ANFO”). The fuel oils most commonly used in ANFO mixtures are transported as reclassed combustibles. Accordingly, IME members are very concerned that PHMSA is considering eliminating the reclassification option in the HMR. FO in the range of 38 °C (100 °F) to 93 °C (200 °F) is blended from multiple sources with varying flash points (e.g., 2D diesel; 4, 5, 6 diesels; used oil, and the like) including deliveries that exceed 60 °C (140 °F). Ordinarily, this does not pose a problem for its operations because multi-purpose bulk trucks (“MBTs”) technology allows accommodating adjustments to be made at the jobsite where custom mixing of the explosive materials occurs. This flexibility also allows commercial explosives companies to purchase FO with a flash point slightly above 60 °C (140 °F) when it is more economical to do so. Because adjustments for viscosity (FO flash point is directly proportional to viscosity) can be made at the jobsite, there is no need to separate the storage of fuels according to flash point (<60 °C (140 °F) and >60 °C 140 °F)). However, if the exception is eliminated and FO with a flash point between 38 °C (100 °F) and 60 °C (140 °F) is designated flammable and is deregulated at flash points above 60 °C (140 °F), IME members would be forced to test every load of FO before it is transferred from storage to an MBT in order to determine the proper transport classification. This would require testing every time the FO tank is replenished. All FO can therefore be stored in a single above ground storage tank. However, IME said that an exception is FO with a flash point at the lower end of the range (e.g., <115 °F) that is used for operations in colder climates.

The AHS said that some history may provide helpful guidance. Before HM-102, flammable liquids were defined with a ceiling open-cup flash point of 80 °F. In that docket, in order to harmonize with then relatively-new OSHA regulations, the two agencies worked together to set the ceiling at 100 °F and to change the closed-cup flash point method. At no time was there a claim that materials having flash points above 80 °F had posed a safety problem in transportation in non-bulk packaging sizes. Nonetheless, for convenience and harmony, the ceiling was raised to 100 °F. With the UN setting the international ceiling for Class 3 at 140 °F, DOT once again was faced with a harmonization issue. There was no history of safety problems with liquids in the 100-140 °F range in non-bulk packaging in the US, thus the basis for the exception now appearing in § 173.150(f). The facts remain unchanged. Transportation safety does not support imposing full Class 3 requirements on materials in ground transport in non-bulk packaging having a flash point above 100 °F. An enormous volume of materials, including paints and a variety of consumer products, falls within this range and the shippers and carriers of these materials have benefitted from this exception, without notable safety problems. AHS said, therefore, it believes it is critical for PHMSA to retain this exception.

The NFPA is concerned that adopting such a change in the domestic requirements for offering and transporting combustible liquids would negatively impact emergency response to incidents involving such materials. NFPA encourages PHMSA to retain the current requirements regarding classification and regulation for combustible liquids. NFPA recommends that PHMSA maintain the current requirements that include those combustible materials with flash point above 60 °C (140 °F) and below 93 °C (200 °F). NFPA states that this category of material is still capable of posing a fire or explosion hazard during transportation, especially if involved in an accident where other, more easily ignited materials are present. From the perspective of the emergency responder, any effort to deregulate combustible liquids represents a reduction in the current safety practices that protect and alert those responding to transportation incidents or other emergencies involving this class of hazardous material. Note that NFPA 30, Flammable and Combustible Liquids Code, has a category of liquid (Class IIIB) for those liquids with flash points equal to or greater than 93 °C (200 °F). This category presents much lower risk in a transportation accident.

Mr. Rich Sewell, State of Alaska, Department of Transportation and Public Facilities, Office of Statewide Aviation, states that many remote Alaskan communities receive fuel oil and diesel fuel by air cargo, and stresses this circumstance is particularly important as changes to the regulations governing the transportation of combustible liquids are considered. He further states that shipping of fuel by air cargo is common to rural Alaskan communities that sometimes encounter bitter cold during the winter, and that it is not over-stating the situation to say that lives depend on efficient distribution of fuel oil in rural Alaska. Mr. Sewell states that any changes to regulations that might increase the costs of fuel distribution in rural Alaska would be onerous and burdensome, where fuel in the past year has cost $8.50 per gallon in some rural communities, and asserts that power generation and heat are already very expensive in rural Alaska. In addition, he claims that most rural communities qualify as economically distressed. If any new rulemaking were to adversely affect fuel distribution in rural Alaska, Mr. Sewell urges an exception to the rules be made for the domestic transportation of combustible fuels in Alaska.

Commenters, such as the URS Corporation; Airline Pilots Association International; Bayer Material Science; International Vessel Operators Dangerous Goods Association, Inc.; Dangerous Goods Advisory Council; Air Products and Chemicals, Inc.; Momentive performance materials; Phillip Jonckheere of the European Chemical Industry Council (CEFIC); Mr. Roy Boneham, New Alchemy Training and Consultancy Organization, United Kingdom; the International Association of Fire Chiefs; and Applied Industrial Technologies support harmonization of the domestic combustible liquids regulations with the international standards for flammable liquids.

URS Corporation said that it supports international harmonization and the deregulation of combustible liquids, and expresses the belief that the Combustible Liquid placard is too similar to the Flammable Liquid placard, resulting in confusion and rejection of bulk shipments in the international community. URS stated that the HMR should no longer continue to apply to materials with a flash point above 60 °C (140 °F) and below 93 °C (200 °F).

Mr. Phillip Jonckheere said that the European Chemical Industry Council (CEFIC) supports the harmonization of the domestic regulations (HMR) applicable to the transportation of combustible liquids with international transportation standards. Mr. Jonckheere stated that the existing deviation on classification, marking and, placarding creates a burden on international trade rather than improving safety.

Bayer Material Science supports deregulation of materials with a flash point above 60 °C (140 °F) and below 93 °C (200 °F). Bayer said a temperature of 60 °C (140 °F) is generally recognized as the highest ambient temperature a material will encounter during the course of transportation. Therefore, a combustible liquid will not encounter conditions that will meet or exceed its flash point. This also allows for harmonization with the international regulations. Bayer expresses the belief that there would be an added cost benefit in product development and logistics to be able to move products in this category with one consistent classification. Emergency responders would still review the Material Safety Data Sheet as well as established procedures for dealing with these materials whether or not it was marked combustible.

Air Products and Chemicals, Inc. is both a shipper and carrier of hazardous materials in both bulk and non-bulk packaging utilizing all modes of transportation. Air Products fully supports the move towards global harmonization of dangerous goods transport regulations and expresses the belief that doing so will result in reduced risk, greater efficiency, lower costs, fewer delays, and much less confusion.

Momentive performance materials said that for over a year, it has been shipping bulk packages of combustible liquids from Europe into Canada by vessel and then trucking them through Canada into the United States for delivery to various locations because certain shipping lines do not allow these bulk packages to display the [ID] number “1993” on either a placard or an orange panel. Essentially, the number “1993” represents Flammable Liquids in the IMDG code, and combustible liquids are not recognized by the IMDG Code as a Dangerous Good. Therefore, as a result of the higher costs of such shipments of bulk packages and logistical difficulties, Momentive believes that PHMSA should harmonize the bulk package transportation of combustible liquids with international transportation standards, by removing Section 173.120(b)(1) from Title 49 CFR. Momentive also states that this declassification would pose no significant risk to human health or the environment due to the simplification of shipping routes by highway, which will significantly reduce the distance over which such shipments travel.

Applied Industrial Technologies states that while PHMSA continues to comment on trying to be in Harmonization with the United Nations Recommendations, it falls short by allowing the exception of “Combustible Liquids” and questions this practice. The commenter states that if this exception is eliminated; all “Flammable Liquids” would be regulated to the same standards, thereby allowing true Harmonization with the United Nations Recommendations. This would also eliminate any confusion with shipping domestically and internationally. The commenter further states that as a HazMat shipper with over twenty years of experience and providing training for its company, this aspect continues to be one of the most confusing parts of the HMR for its associates to learn.

DGAC said that the “HMR requirements for high flash point combustible liquids (HFCLs) are disruptive to the flow of goods in port areas,” costing between $300 to $500 for demurrage [the charge for detaining a ship beyond the time allowed for loading/unloading per container]. DGAC also stated that industry practice in transporting HFCL by vessel provides a higher level of safety than that afforded by the HMR; and that HFCLs should be excepted from all HMR requirements when transported in specification packages of less than 3,000 liters (793 gallons) capacity (the upper capacity limit for Intermediate Bulk Containers (IBCs)) or when in an ISO (UN) portable tank in international commerce.

Many of the comments supporting harmonization were ambiguous; some recommending retention of the non-bulk combustible liquids packaging exceptions, while others requested elimination of the bulk combustible liquids packaging exceptions, and vice versa. For example, DGAC states that the most significant benefit of deregulation of combustible liquids with a flash point above 60 °C (140 °F) and below 93 °C (200 °F) (hereafter referred to as high flash point combustible liquids or HFCLs) is that it would harmonize the HMR with the requirements used throughout the world, and in doing so, it would eliminate many of the frustrations that DGAC members experience in importing and exporting these materials. However, DGAC acknowledged that from the history of the combustible liquid requirements and considering that non-specification bulk packagings are authorized, it is clear the primary purpose of the existing combustible liquid requirements pertaining to high flash point combustible liquids is to alert emergency responders of the presence of a combustible liquid in the event of an incident. DGAC said that with this in mind the safety benefit of continuing to regulate HFCLs depends on the benefit derived from knowing a material involved in an incident is a combustible liquid.

The National Association of Chemical Distributors (NACD) said that although elimination of the reclassification exception would promote the desired objective of harmonization, level the playing field, eliminate confusion, and enhance safety, on the other hand, eliminating the reclassification exception would increase costs for some because it is more expensive to ship hazardous materials than non-hazardous materials, and could also potentially lead to negative safety implications. Further, deregulation of materials with a flash point above 60 °C (140 °F) and below 93 °C (200 °F) would result in more complete harmonization with international standards as these only regulate up to 60 °C (140 °F). This would minimize confusion in trade and commerce. However, NACD stated that the disadvantage is that this could result in complications for chemical distributors who receive regular visits from local fire officials. The NFPA has its own system of markings for various flashpoints, but generally follows DOT. In this case, the materials are NFPA Class III A Combustible Liquids. If these materials are not covered by the HMR and labeled accordingly, fire officials are likely to require NFPA labels on more packages because there would not be DOT hazardous materials markings to recognize. As well, NACD said those who currently ship these materials through areas such as tunnels that prohibit hazardous materials would have to avoid these areas and take alternative routes that could involve longer distances and conditions such as dangerous mountain passes.

The IAFC said it does not support Class 3 materials with flash points between 38 °C (100 °F) and 60 °C and (140 °F) to be reclassified and transported as combustible liquids. The IAFC stated that the primary benefit of not allowing a reclassification is to ensure all shipments of materials identified as flammable would continue to be identified as such because emergency response to flammable liquids versus combustible liquids may involve different fire and spill control tactics and agents, since combustible liquids are generally viewed as having a lower risk than a flammable liquid. By not taking the appropriate action for the material involved, the safety risk would increase. However, the IAFC said that materials with a flash point above 60 °C (140 °F) and below 93 °C (200 °F), also known as combustible liquids, have been subject to placard and label requirements for ease in identification and for the safety of emergency responders. IAFC asserted that while deregulation of those materials would decrease issues in international trade and ease the movement of those commodities, it would remove important warnings for emergency responders about the presence of combustible liquid. Further, the IAFC stated that while it appreciates the fact that these materials, in and of themselves, may pose a low risk due to their high flash point, there can be a significant risk factor in the event that these materials are exposed to a fire or other incident. Another consideration is whether or not such an exemption would increase security risk since these products can be used in combination with other products for the production of certain explosives such as ANFO (ammonium nitrate and fuel oil).

William J. Briner, Transportation Regulations Consultant, stated that the industry could adapt to the elimination of the combustible liquid classification and placard at a reasonable cost and with a reasonable amount of difficulty as long as the exceptions in § 173.150(f) are retained. These exceptions have proven over many years of use to be a safe means of transporting material with a flash point at or above 38 °C (100 °F) and at or below 60 °C (140 °F). Without the retention of the § 173.150 exceptions, a major disruption of the shipping operations of the Paint Industry and the Ag Chem industry would result.

Printing Industries of America (PIA) said it supports the deregulation of combustible liquids with high flash points as part of the effort to align the HMR with international standards. PIA states combustible liquids do not pose the same hazard as flammable liquids and therefore should not be subject to the same level of regulations. However, the PIA said the HMR should continue to permit Class 3 materials with flash points between 38 °C (100 °F) and 60 °C (140 °F) to be reclassed and transported as combustible liquids. PIA expresses the belief that removal of this exception will result in significant cost increases across the supply chain. Specifically, PIA is concerned that removing the domestic exception will cause printers, as offerors of hazardous materials in amounts that require placarding, to be subject to registration and security requirements.

American Coatings Association (ACA) supports the harmonization of regulatory requirements for materials with a flash point above 60 °C (140 °F) and below 93 °C (200 °F); ACA expressed the belief that for this class of materials, the HMR should not apply. ACA said PHMSA could then harmonize the definition of flammable liquid with that of the international standards, thereby eliminating the confusion in the ports regarding these shipments of combustible liquids that carry Class 3 markings. However, ACA said that for those Class 3 materials with a flash point between 38 °C (100 °F) and 60 °C (140 °F), the option to reclassify and transport as a combustible liquid should be retained.

PPG Industries, Inc. recommend harmonization, unless upon evaluation PHMSA feels there is a reason to continue regulation of large packages of HFCLs, then consideration should be given to limiting regulation to cargo tanks and tank cars which are domestic packages. Recommend retaining LFCL exception option (non-bulk) because it provides significant regulatory relief, and DOT reporting system is already cluttered with the reporting of inconsequential coatings incidents for small packagings of flammable liquids with flash points less than 100 °F.

The Indiana Farm Bureau Inc. supports petition P-1536 and said that given the changes in agricultural operations over the last few decades, its members believe that this change is warranted and necessary. In its comments, Indiana Farm Bureau states that tractors and combines now routinely have fuel tanks with a capacity well over 119 gallons. It is impractical for farm operations to transport quantities smaller than those needed to fully fill their tanks. Given that multiple implements may be used in the same field at any one time, it is not uncommon for quantities of fuel approaching or even exceeding 1,000 gallons to be needed to fill all the equipment at one time. Furthermore, 1,000 gallon fuel tender tanks are becoming more prevalent in the market and on farms. With the increasing size of farming operations and the resulting increased intensity of production in a small window for completion, farm-owner labor is often insufficient and supplemental labor through seasonal or temporary workers is often needed. The commenter further states that the regulations should recognize the necessity of these workers and the difficulty they may have in seeking a commercial driver's license with a hazmat endorsement in a timely manner.

In addition, the Indiana Farm Bureau Inc. states that for the sake of clarity in implementation, the regulations should be written so that they can be consistently applied across farming operations, regardless of how they are organized or whom they employ. As noted in the Custom Harvesters' petition, custom harvesters replace the farmer in the field during harvest. However, it is not only harvesting in which custom farming is done. Numerous farmers do some custom farming work for their neighbors, including but not limited to tillage, planting, spraying, and nutrient application. The members of the Indiana Farm Bureau Inc., support an expanded exception from placarding for transportation of combustible liquids in a quantity not to exceed 1,000 gallons, and that the change in the exception is needed to keep pace with agricultural production. Furthermore, its members are confident that the expanded exception will still maintain the necessary standards of safety needed to protect farm workers and the public.

Zeorian Harvesting & Trucking states that the HMR should provide an expanded exception for the current regulation for the transportation of combustible liquids to a threshold of 3,785 L (1,000 gallons), and that packaging, hazard communication and other requirements would be exempt, as they are now under the non-bulk packaging classification of 450 L (119 gallons). The commenter suggests that a brightly colored signage or labeling stating “Combustible Liquid—Diesel Fuel” could be placed on all visible sides of the fuel tank to allow emergency personnel and the general public knowledge of the type of liquid they are dealing with in case of an accident. The commenter asserts that the label would give more detail than the current “1993” placard, as not everyone knows what this means, and that anyone coming upon an accident in the agricultural areas of the nation will already know that an overturned service truck would more than likely have diesel fuel in the tank. The commenter expresses the belief a “Combustible Liquid—Diesel Fuel” label would verify this. Further, the commenter stated that the HMR could provide a “sub” classification for the class of materials identified as combustible liquids. This “sub” classification could be an agricultural classification which would provide the expanded exception of the transportation of combustible liquid to 3,785 L (1,000 gallons) and all packaging, hazard communication and other requirements would be exempt—as non-bulk packaging (450 L/119 gallons) currently is. The commenter concludes that such signage or labeling, “Combustible Liquid—Diesel Fuel” could be brightly colored and visible on all sides of the tank, and the costs would be minimal, i.e. the creation and costs involved in the signage, labeling or sticker.

Kent Braathen, currently Vice President of U.S. Custom Harvesters Inc., stated:

Alan Darrel Lutz said that as a custom harvester, we require laborers to travel for weeks and sometimes months at a time. This leads us to hire H2A workers and as they have limited time here, getting a HazMat endorsement as well as a CDL is impossible and unreasonable. With the numerous equipment our industry requires, and fields being twenty or more miles away from any town (fuel station), we need to haul the fuel to use it. It is not feasible to drive to a gas station twice a day for Choppers and Combines to re-fuel. Further, Mr. Lutz states that if we are allowed to haul at least 1,000 gallons, without the need of a Hazardous Materials Endorsement, we would conserve fuel, and traffic would be decreased along small two-lane highways. Not only does this allow for more conservation of fuel because of less running around, it reduces danger and risk to our help as well as other drivers. Less continuous travel back and forth on dangerous highways decreases the number of trucks on the road and therefore decreases the possibility of accidents. Please consider this change.

Many commenters in support of and in opposition to harmonization both said that more analysis of incident data is necessary. DGAC said that in deciding whether to deregulate this group of materials entirely, it recommends that PHMSA undertake an in depth analysis of its incident data in deciding whether to continue to regulate materials with a flash point above 60 °C (140 °F) and below 93° C (200 °F). API strongly recommends PHMSA consider the actual risk severity and frequency of incidents involving combustibles in non-bulk packagings before proposing changes to existing regulations in response to the IVODGA petition.

The IAFC said it recognizes and appreciates that container markings can create significant issues for the industry as related to compliance with hazardous materials shipping regulations; however, IAFC said eliminating the markings will pose an increased risk to emergency responders by removing critical hazard information. The IAFC recognize that providing some limited relief for shipments of HFCLs of certain quantities may be reasonable and appropriate, but would recommend a risk analysis be conducted to determine the appropriate volumes that would be acceptable.

COSTHA's members believe PHMSA should take a close look at the number of incidents involving these materials. COSTHA stated that in reviewing the 5800.1 reports posted on PHMSA's Web site, approximately 100,000 incidents involving Class 3 materials have been reported since 1998. Of those, only 8% involved materials classified as combustible liquids (3.8% of the total were packed in non-bulk packaging). Further, 0.02% of the nearly 8,300 incidents resulted in 21 fatalities. None of the reported fatal incidents involved non-bulk packaged combustible liquids but instead was in bulk packaging. Industry has estimated the number of combustible liquid shipments may be as many as 10,000-20,000 per day, and that with over 12 years of reporting, assuming the lower estimate, that would equate to nearly 44 million shipments of combustible liquids.

PHMSA invited commenters to submit comments on a series of questions, based on the discussion of the issues raised in the preamble of the ANPRM. The questions are as follows:

The commenters opposed to and in support of harmonization were both mostly opposed to: (1) Providing expanded exceptions for the transportation of combustible liquids, such as excepting combustible liquids below a certain threshold (e.g., not more than 1,893 L (500 gallons), 3,000 L (793 gallons), 3,785 L (1,000 gallons), or 13,249 L (3,500 gallons) from packaging, hazard communication, or other requirements; (2) expanded exceptions specifically for farm operations or agribusinesses; and 3) expanded materials of trade exceptions for persons who transport combustible liquids. Most of the commenters also do not support a requirement for all combustible liquids to be described as “Combustible liquid, n.o.s.”, and recommend that the HMR require the use of shipping names that most appropriately and accurately describe the material being transported. Commenters believe that proper shipping names such as Kerosene, Turpentine, Diesel fuel, Paint, etc., provide much better information to emergency responders than does “Combustible liquid, n.o.s.”

As well, except for U.S. Custom Harvesters' members, most commenters do not support providing for use of a unique combustible liquid marking (e.g., the words “COMBUSTIBLE” or “COMBUSTIBLE LIQUID”) in place of COMBUSTIBLE placards and other hazard communication for bulk shipments of combustible liquids. The commenters also do not support the use of the domestic identification number, NA1993, on bulk packages displaying a combustible liquid marking. Most commenters believe that COMBUSTIBLE placards must be maintained to communicate these hazards to emergency response personnel. Commenters believe a new marking to communicate the presence of Combustible Liquids would only add to confusion, and would increase cost for retraining employees and personnel.

Since none of these issues were raised or examined prior to, or in the April 5, 2010 ANPRM, and there has been no consideration or discussion given to these issues, PHMSA is not addressing these subjects in this notice, at this time.

Issue: Treatment of flammable liquids in the U.S. HMR is at variance with the UN Recommendations. In the U.S., flammable liquids may be reclassed as combustible liquids by the material's flash point—the temperature at which it emits an ignitable vapor and can catch fire. The lower the flash point, the higher the fire hazard. The two systems are comparable as follows, with the variance shaded:

On April 2, 2012, PHMSA published a NPRM proposing to amend the Federal Pipeline Safety Regulations to establish criteria and procedures PHMSA will use to determine the adequacy of state pipeline excavation damage prevention law enforcement programs; establish an administrative process for states to contest notices of inadequacy from PHMSA should they elect to do so; establish the Federal requirements PHMSA will enforce in states with inadequate excavation damage prevention law enforcement programs; and establish the adjudication process for administrative enforcement proceedings against excavators where Federal authority is exercised. In the absence of regulations specifying the criteria that PHMSA will use to evaluate a state's excavation damage prevention law enforcement program, PHMSA would take no enforcement action.

On May 14, 2012, the National Utility Contractors Association (NUCA) requested that PHMSA extend the NPRM comment period deadline from June 1, 2012, to August 1, 2012, to give NUCA's members enough time to share the NPRM with their membership and chapters nationwide, and to collect their members' responses and comments for Docket submission.

PHMSA has concurred in part with NUCA's request and has extended the comment period from June 1, 2012, to July 9, 2012. This extension will provide sufficient additional time for commenters to submit their comments.