The NRC published a direct final rule in the Federal Register on May 3, 2012 (77 FR 26149) and a confirmation of the effective date on June 22, 2012 (77 FR 37553). The direct final rule amended the NRC's access authorization fees charged to licensees for work performed under the MAAP and the IAAP. This document is necessary to correct an email address, a codification error, a misspelled abbreviation, and the authority citations in the codified text. The following corrects the SOC to the May 3, 2012, document:

1. On page 26150, in the second column before the table, the first paragraph, the last sentence is corrected to read as follows:

The NRC's licensees can also obtain the current OPM investigation billing rates schedule by contacting the NRC's Personnel Security Branch (PSB), Division of Facilities and Security (DFS), Office of Administration (ADM) by email to Licensee_Access_Authorization_Fee.Resource@nrc.gov.

2. On page 26150, in the first column after the table, the first paragraph, the fifth sentence is corrected to read as follows:

Copies of the current NRC access authorization fee can be obtained by contacting the NRC's Personnel Security Branch, Division of Facilities Security, Office of Administration by email to Licensee_Access_Authorization_Fee.Resource@nrc.gov.

For the reasons set out in the preamble and under the authority of the Atomic Energy Act of 1954, as amended; the Energy Reorganization Act of 1974, as amended; and 5 U.S.C. 552 and 553, the NRC is adopting the following amendments to 10 CFR parts 11 and 25.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) (Pub. L. 111-203, 124 Stat. 1376 (2010)), was enacted on July 21, 2010. Section 1075 of the Dodd-Frank Act amends the Electronic Fund Transfer Act (“EFTA”) (15 U.S.C. 1693 et seq. ) by adding a new section 920 regarding debit card interchange transaction fees and rules for payment card transactions.

Section 920 of the EFTA provides that, effective July 21, 2011, the amount of any interchange transaction fee that an issuer receives or charges with respect to an electronic debit transaction must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. 1 This section requires the Board to establish standards for assessing whether an interchange transaction fee is reasonable and proportional to the cost incurred by the issuer with respect to the transaction and requires the Board to establish rules prohibiting network exclusivity on debit cards and issuer and network inhibitions on merchant transaction routing choice. The Board's final rule (Regulation II, Debit Card Interchange Fees and Routing) implementing standards for assessing whether interchange transaction fees meet the requirements of Section 920(a) and establishing rules regarding network exclusivity and routing choice required by Section 920(b) became effective October 1, 2011, although issuers had until April 1, 2012, or later to comply with the network exclusivity provisions. 2

Under EFTA Section 920(a)(5), the Board may allow for an adjustment to the amount of an interchange transaction fee received or charged by an issuer if (1) such adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit card transactions involving that issuer, and (2) the issuer complies with fraud-prevention standards established by the Board. Those standards must be designed to ensure that any adjustment is limited to the reasonably necessary fraud-prevention allowance described in clause (1) above; takes into account any fraud-related reimbursements (including amounts from chargebacks) received from consumers, merchants, or payment card networks in relation to electronic debit transactions involving the issuer; and requires issuers to take effective steps to reduce the occurrence of, and costs from, fraud in relation to electronic debit transactions, including through the development and implementation of cost-effective fraud-prevention technology.

In issuing the standards and prescribing regulations for the adjustment, EFTA Section 920(a)(5) requires the Board to consider (1) the nature, type, and occurrence of fraud in electronic debit transactions; (2) the extent to which the occurrence of fraud depends on whether the authentication in an electronic debit transaction is based on a signature, personal identification number (PIN), or other means; (3) the available and economical means by which fraud on electronic debit transactions may be reduced; (4) the fraud-prevention and data-security costs expended by each party involved in the electronic debit transactions (including consumers, persons who accept debit cards as a form of payment, financial institutions, retailers, and payment card networks); (5) the costs of fraudulent transactions absorbed by each party involved in such transactions (including consumers, persons who accept debit cards as a form of payment, financial institutions, retailers, and payment card networks); (6) the extent to which interchange transaction fees have in the past reduced or increased incentives for parties involved in electronic debit transactions to reduce fraud on such transactions; and (7) such other factors as the Board considers appropriate.

In December 2010, the Board requested comment on two approaches to a framework for the fraud-prevention adjustment to the interchange transaction fee standards: a technology-specific approach and a non-prescriptive approach. The technology-specific approach would allow an issuer to recover some or all of its costs incurred for implementing major innovations that would likely result in substantial reductions in total, industry-wide fraud losses. Under this approach, the Board would identify paradigm-shifting technologies that would reduce debit card fraud in a cost-effective manner. The alternative approach would establish more general standards that an issuer must meet to be eligible to receive an adjustment for fraud-prevention costs. 3

In general, commenters did not agree about which approach to pursue, but commenters generally opposed the Board's mandating use of specific technologies. Most merchants generally favored a paradigm-shifting approach where issuers would be eligible for a fraud-prevention adjustment only for implementing technologies that reduced fraudulent transactions to a level materially below the level for PIN transactions. By contrast, issuers of all sizes and payment card networks preferred the non-prescriptive approach that would provide issuers with flexibility to tailor their fraud-prevention activities to address most effectively the risks they face and changing fraud patterns. Issuer commenters also opposed a fraud-prevention adjustment only for particular authentication methods, noting that an adjustment favoring a particular authentication method may not provide sufficient incentives to invest in other potentially more effective authentication methods. 4 The Board considered these comments in the development of an interim final rule.

In June 2011, the Board adopted a non-prescriptive approach to the fraud-prevention standards, set forth in 12 CFR 235.4, as an interim final rule, issued in connection with its final rule implementing other provisions of EFTA Section 920. 5 The interim final rule allows an issuer to receive or charge an additional amount of no more than 1 cent per transaction to the interchange fee permitted under § 235.3 if the issuer satisfies the Board's fraud-prevention standards. Those standards require an issuer to develop and implement policies and procedures reasonably designed to (i) identify and prevent fraudulent electronic debit transactions; (ii) monitor the incidence of, reimbursements received for, and losses incurred from fraudulent electronic debit transactions; (iii) respond appropriately to suspicious electronic debit transactions so as to limit the fraud losses that may occur and prevent the occurrence of future fraudulent electronic debit transactions; and (iv) secure debit card and cardholder data. In addition, an issuer must review its fraud-prevention policies and procedures at least annually, and update them as necessary to address changes in the prevalence and nature of fraudulent electronic debit transactions and the available methods of detecting, preventing, and mitigating fraud. The interim final rule provides that if an issuer meets these standards and wishes to receive the adjustment, it must annually certify its compliance with the Board's fraud-prevention standards to the payment card networks in which the issuer participates. The Board requested comment on all aspects of the interim final rule.

The Board received 42 comments on the interim final rule from debit card issuers, depository institution trade associations, payment card networks, merchants, merchant trade associations, a card-payment processor, technology companies, a member of Congress, individuals, and public interest groups.

The comments received generally focused on the following aspects of the interim final rule: (1) The amount of the adjustment; (2) the non-prescriptive standards in the interim final rule; and (3) the issuer-certification process. These comments are summarized below and are described in more detail in the Section-By-Section Analysis.

Fraud-prevention adjustment amount. Most issuers and their trade associations, payment card networks, a public interest group, and a technology company supported permitting a fraud-prevention adjustment to the amount of an interchange transaction fee an issuer may receive or charge but believed the fraud-prevention adjustment amount in the interim final rule to be too low. Commenters that supported a higher adjustment amount did so for several reasons, including encouraging innovation and investment in fraud-prevention activities; maintaining consumer and merchant confidence in the security of electronic debit transactions; and reducing potential adverse effects on exempt issuers that have higher per-transaction fraud-prevention costs than nonexempt issuers. These commenters suggested that the Board could increase the adjustment amount by expanding the costs used in determining the adjustment amount; setting the adjustment amount to the fraud-prevention amount at the cost of the issuer at the 80th percentile (as with the interchange fee standard in § 235.3) rather than at the median issuer's cost; including an additional ad valorem component to the adjustment; and not capping the adjustment amount. Commenters suggested including costs such as fraud-prevention research and development costs, data-security costs, fraud-related customer inquiry costs, and exempt issuer costs.

By contrast, merchants and their trade associations asserted that the fraud-prevention adjustment amount in the interim final rule is too high. In general, these commenters argued that the fraud-prevention amount in the interim final rule does not take into consideration the fraud-prevention costs of merchants and other parties to electronic debit transactions, for example, by deducting merchants' costs from issuers' costs. Several of these commenters recommended that, in setting the adjustment amount, the Board include only activities that are demonstrably effective and cost-effective, and one commenter recommended that the Board exclude costs of activities to detect and mitigate fraudulent electronic debit transactions.

Approach to fraud-prevention standards. Debit card issuers, their trade associations, and payment card networks overwhelmingly supported the non-prescriptive framework for the fraud-prevention standards largely as set forth in the interim final rule for several reasons. 6 These reasons included providing better incentives to invest in fraud prevention, retaining flexibility for each issuer to respond effectively to the dynamic fraud environment, diversifying fraud-prevention technologies employed throughout the industry, and limiting public information about issuers' fraud-prevention activities, which, commenters argued, could benefit fraudsters. In addition, several commenters opposed a technology-specific adjustment, arguing that the Board does not have the expertise to identify the most effective and commercially feasible fraud-prevention technologies and that such an approach could result in underinvestment in new, and potentially more effective, fraud-prevention technologies that are not identified in the standards.

By contrast, most merchants and merchant trade associations, a public interest group, and a member of Congress opposed the fraud-prevention standards as set forth in the interim final rule because the standards do not include specific metrics to measure the effectiveness and cost-effectiveness of an issuer's fraud-prevention activities. Several of these commenters argued that fraud-prevention standards that lack such a metric are inconsistent with EFTA 920(a)(5). A number of these commenters supported a proposal made by a coalition of merchants. This proposal suggested metrics for measuring the effectiveness and cost-effectiveness of fraud-prevention activities that would assess whether the fraud-prevention technology results in a fraud rate materially lower than that associated with PIN transactions and whether the cost of implementing a technology is less than the amount of fraud losses eliminated by its use.

In contrast to the other commenters, several technology companies supported the specification of particular fraud-prevention technologies in the Board's standards.

Issuer certification. The Board received several comments about the certification process in § 235.4(c). Many commenters opposed the “certification” requirement in the interim final rule because they believed it improperly delegates assessment of an issuer's compliance from an issuer's primary supervisor to an issuer or payment card network. Other commenters supported the certification requirement as described in the interim final rule or requested clarification about the role of payment card networks in the certification process. Commenters also disagreed as to whether the Board should specify a uniform certification process and reporting period. In addition, one payment card network supported a so-called “cure period” for issuers to come into compliance with the Board's fraud-prevention standards after a deficiency finding and a 30-day time period for networks to change the status of an issuer once a network is notified of an issuer's noncompliance with the Board's standards.

EFTA Section 920(a)(4)(C) directs the Board to consult, as appropriate, with the Comptroller of the Currency, the Board of Directors of the Federal Deposit Insurance Corporation, the National Credit Union Administration Board, the Administrator of the Small Business Administration, and the Director of the Bureau of Consumer Financial Protection in the development of the interchange fee standards. Board staff consulted with staff from these agencies in development of a final rule on standards for receiving or charging a fraud-prevention adjustment.

EFTA Section 920(a)(5) requires the Board to consider several different factors in prescribing regulations related to the fraud-prevention adjustment. This section discusses each of those factors.

Nature, type, and occurrence of fraud. The Board's survey of debit card issuers and payment card networks provided information about the nature, type, and occurrence of fraud in electronic debit transactions. 7 From the card issuer and network surveys of 2009 data, the Board estimates that industry-wide fraud losses to all parties to debit card transactions were approximately $1.34 billion in 2009. 8 Based on data provided by covered issuers, about 0.04 percent of purchase transactions were fraudulent, with an average loss per purchase transaction of about 4 cents, or about 9 basis points of transaction value. 9

The most commonly-reported and highest-value fraud types were counterfeit card fraud; mail, telephone, and Internet order (or “card-not-present”) fraud; and lost and stolen card fraud. 10 Counterfeit card fraud represented 0.01 percent of all purchase transactions, with an average loss of 2 cents per transaction and 4 basis points of transaction value. Mail, telephone, and Internet order fraud also represented 0.01 percent of all purchase transactions with an average loss of 1 cent per transaction and 2 basis points of transaction value. Lost and stolen card fraud represented less than 0.01 percent of all purchase transactions with an average loss of 1 cent per transaction and 1 basis point of transaction value.

Extent to which the occurrence of fraud depends on authentication mechanism. The issuer survey data for 2009 also provided information about the extent to which the occurrence of fraud depends on whether the transaction was processed by a signature or a PIN network. 11 Of the approximately $1.34 billion estimated industry-wide fraud losses, about $1.11 billion of these losses arose from signature debit card transactions and about $181 million arose from PIN debit card transactions. 12 The higher losses for signature debit card transactions are attributable to both a higher rate of fraud and higher transaction volume for signature debit card transactions. 13 The data showed that about 0.06 percent of signature debit and 0.01 percent of PIN debit purchase transactions were reported as fraudulent. For signature debit, the average loss was 5 cents per transaction, and represented about 13 basis points of transaction value. For PIN debit, the average loss was 1 cent per transaction, and was about 3 basis points of transaction value. Thus, on a per-dollar basis, signature debit fraud losses were approximately 4 times PIN debit fraud losses. 14

The different fraud loss rates for signature and PIN transactions reflect, in part, differences in the ease of committing fraud associated with the two card- and cardholder-authentication methods. A signature debit card transaction requires information that is typically contained on the card itself in order for card and cardholder authentication to take place. Therefore, a thief need only steal the card or information on the card in order to commit fraud. 15 By contrast, card- and cardholder-authentication of a PIN debit card transaction requires not only the card or information contained on the card, but also something only the cardholder should know, namely, the PIN. In the case of PIN transactions, a thief generally needs both the card, or information on the card, and the cardholder's PIN to commit fraud. Virtually all PIN debit transactions currently occur in a card-present environment, and virtually all transactions in card-not-present environments (i.e., Internet) are routed over signature debit networks. For Internet transactions, the cardholder typically does not authenticate the transaction with a signature, although an issuer or merchant may have other means of authenticating the cardholder or card, such as the use of a Card Verification Value (CVV) number or the input of cardholder information at the time of purchase.

Card issuers responding to the Board's survey reported that card-present fraud losses for signature debit transactions were over 3 times greater than the fraud loss value, in basis points, associated with PIN debit card-present transactions. Issuers also reported that fraud losses across all parties on transactions over signature debit networks were higher for card-not-present transactions than for card-present transactions. 16 On a transactions-weighted average basis, card-not-present fraud losses represented 17 basis points of the value of card-not-present signature debit transactions. Card-present fraud losses represented 11 basis points of the value of card-present signature debit transactions.

Available and economical means by which fraud may be reduced. The Board requested information about issuers' fraud-prevention activities and costs in its survey. Issuers identified several categories of activities used to detect, prevent, and mitigate fraudulent electronic debit transactions, including transaction monitoring; merchant blocking; card activation and authentication systems; PIN customization; system and application security measures, such as firewalls and virus protection software; and ongoing research and development focused on making an issuer's fraud-prevention practices more effective.

Based on reported information, the median issuer spent 1.8 cents per transaction on all fraud-prevention activities. The most commonly reported activity in the fraud-prevention section of the survey was transaction monitoring, which generally includes activities related to the authorization of a particular electronic debit transaction, such as the use of neural networks and automated fraud risk scoring systems that may lead to the denial of a suspicious transaction. At the median, issuers reported spending approximately 0.7 cents per transaction on transaction monitoring activity. 17 The costs associated with research and development, card-activation systems, PIN customization, merchant blocking, and card-authentication systems were all small when measured on a per-transaction basis, typically less than one-tenth of a cent each. For all data-security costs reported by issuers in the issuer card survey, the median was 0.1 cents.

Fraud-prevention costs expended by parties involved in electronic debit transactions. As discussed above, issuers incur costs for a variety of fraud-prevention activities. In addition, other parties involved in debit card transactions incur fraud-prevention costs. For example, some consumers routinely monitor their accounts for unauthorized debit card purchases, which could be measured as an opportunity cost of the consumers' time; however, the opportunity cost of consumers' time to monitor their account is difficult to put into monetary terms. Merchants and acquirers incur costs for fraud-prevention tools such as terminals that enable merchants to use various card- and cardholder-authentication mechanisms, address verification, geolocation services, and data-encryption technologies. In addition to services they may purchase from others, merchants may develop their own fraud-prevention tools. For example, many large Internet merchants implement extra security measures to verify the legitimacy of a purchase. Typically these checks occur between the time a transaction is authorized by the issuer and the product is shipped to the purchaser. In their comments on the proposed rule, several online merchants noted that they have developed sophisticated fraud-risk management systems that include both manual review and automated processes, which have reduced fraud rates to levels at or below card-present rates at other merchants. In addition to these investments, merchants also take steps to secure data and comply with Payment Card Industry Data Security Standards (PCI-DSS). 18 In their comments on the proposed rule and interim final rule, several merchants noted that merchants incur substantial costs for PCI-DSS compliance as well as other fraud-prevention activities.

Costs of fraudulent transactions absorbed by different parties involved in fraudulent transactions. Various laws and regulations allocate the costs of fraudulent electronic debit transactions among different parties to the transactions. For example, the Consumer Financial Protection Bureau's Regulation E limits a consumer's liability for unauthorized electronic fund transfers to $50 in certain circumstances. 19 In addition, payment card network rules implement a chargeback process to allocate loss between issuers and acquirers, either of which may, if permitted by network rules, pass on some or all of the loss to the cardholder or merchant. Typically, the allocation of fraud losses under network rules varies by the type of transaction, cardholder authentication method, and procedures followed at the point of sale, among other factors.

Using the issuer survey data for 2009, the Board estimated the cost of fraudulent transactions absorbed by different parties to debit card transactions. Based on the issuer survey responses, almost all of the reported fraud losses associated with debit card transactions fall on the issuers and merchants. In particular, across all types of transactions, 62 percent of reported fraud losses were borne by issuers and 38 percent were borne by merchants. The fraud loss borne by cardholders is low in dollar terms, but may also include costs associated with the time spent rectifying fraudulent transactions. Most issuers reported that they impose zero or very limited liability on cardholders, even where they would be permitted to impose some liability under the EFTA and Regulation E. Payment card networks and merchant acquirers also reported that they bore very limited fraud losses, indicating that merchant acquirers pass through fraud losses to merchants.

The distribution of fraud losses between issuers and merchants varies based on the authentication method used in a debit card transaction. Issuers and payment card networks reported that nearly all the fraud losses associated with PIN debit card transactions (96 percent) were borne by issuers. By contrast, reported fraud losses were distributed much more evenly between issuers and merchants for signature debit card transactions. Specifically, issuers and merchants bore 59 percent and 41 percent of signature debit fraud losses, respectively. 20

The distribution of fraud losses also varies based on whether or not the card was present at the point of sale. According to the survey data, merchants assume approximately 74 percent of signature debit card fraud for card-not-present transactions, compared to 23 percent for card-present signature debit card fraud.

Extent to which interchange transaction fees have in the past affected fraud-prevention incentives. Issuers have a strong incentive to protect cardholders and reduce fraud independent of interchange fees received. Competition among issuers for cardholders suggests that protecting their cardholders from fraud is good business practice for issuers. Higher interchange revenues may have allowed issuers to offset both their fraud losses and fraud-prevention costs and fund innovation on fraud-prevention tools and activities. Merchant commenters stated that, historically, the higher interchange revenue for signature debit relative to PIN debit has encouraged issuers to promote the use of signature debit over PIN debit, even though signature debit has substantially higher rates of fraud.

The Board has considered all comments received and has adopted a final rule for the fraud-prevention adjustment to the amount of an interchange transaction fee that an issuer may receive or charge. The final rule permits an issuer that satisfies the Board's fraud-prevention standards to receive or charge an amount of no more than 1 cent per transaction in addition to any interchange transaction fee it receives or charges in accordance with § 235.3, the same amount as permitted in the interim final rule. The final rule emphasizes the statutory requirements by establishing fraud-prevention standards that require an issuer to develop and implement policies and procedures reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions, including through the development and implementation of cost-effective fraud-prevention technology. An issuer's policies and procedures must address (1) methods to identify and prevent fraudulent electronic debit transactions; (2) monitoring of the volume and value of its fraudulent electronic debit transactions; (3) appropriate responses to suspicious electronic debit transactions in a manner designed to limit the costs to all parties from and prevent the occurrence of future fraudulent electronic debit transactions; (4) methods to secure debit card and cardholder data; and (5) such other factors as the issuer considers appropriate.

The final rule requires an issuer to review its fraud-prevention policies and procedures, and their implementation, at least annually, and update them as necessary in light of (i) their effectiveness in reducing the occurrence of, and cost to all parties from, fraudulent electronic debit transactions involving the issuer; (ii) their cost-effectiveness; and (iii) changes in the types of fraud, methods used to commit fraud, and available methods for detecting and preventing fraudulent electronic debit transactions that the issuer identifies from (A) its own experience or information; (B) information provided to the issuer by its payment card networks, law enforcement agencies, and fraud-monitoring groups in which the issuer participates; and (C) applicable supervisory guidance.

To be eligible to receive or charge a fraud-prevention adjustment, an issuer must annually notify its payment card networks that it complies with the Board's fraud-prevention standards. Finally, if an issuer is substantially noncompliant with the Board's fraud-prevention standards, as determined by the issuer or the agency with responsibility for enforcing the issuer's compliance with Regulation II, the issuer must notify its payment card networks that it is no longer eligible to receive or charge a fraud-prevention adjustment no later than 10 days after the date of the issuer's determination or notification from the agency and must stop receiving or charging the fraud-prevention adjustment no later than 30 days after notifying its networks.

The Board made various changes throughout § 235.4, and accompanying commentary, in response to comments and additional information available to it. The final rule is explained more fully below.

Section 235.4(a) of interim final rule permits an issuer to increase the amount of the interchange fee it may receive or charge under § 235.3 by no more than 1 cent if the issuer complies with the Board's fraud-prevention standards in § 235.4(b) of the interim final rule. The adjustment amount is the same irrespective of authentication method, transaction type, or issuer.

The Board surveyed issuers regarding their total cost incurred in 2009 for fraud-prevention and data-security activities, as well as for research and development activities related to an issuer's fraud-prevention program. The Board also asked issuers to report the costs associated with the following: card-activation systems, PIN customization, merchant blocking, transaction monitoring, specialized authorization services, cardholder-authentication systems, card-authentication systems, data-access controls, and data encryption. The Board also invited issuers to report other fraud-prevention and data-security activities, and the costs incurred from those activities.

The interim final rule included costs related to activities used by issuers to “detect, prevent, and mitigate” fraudulent electronic debit transactions, as reported by issuers in the Board survey. 21 For example, the interim final rule included issuer costs related to authenticating the card and cardholder (such as PIN management and card-authentication technologies embedded in the card), providing alerts to cardholders about suspicious electronic debit transactions, receiving and processing reports of lost and stolen debit cards, reissuing debit cards used or suspected to have been used to make fraudulent electronic debit transactions, tracking and sharing information with payment card networks about compromised debit cards, monitoring compromised card databases, processing fraud claims and disputes of cardholders, activating cards, securing data systems, encrypting data, and ongoing research and development activities. Costs that were not included as part of the fraud-prevention adjustment included the cost of due diligence at account opening, the cost of routine mailings of newly issued or reissued cards, and the cost of fraud losses and any other costs allowed under the base interchange fee standard.

The adjustment amount in the interim final rule corresponds to the reported fraud-prevention costs, excluding those fraud-prevention costs included in the interchange fee standards in § 253.3, of the issuer at the median of the survey respondents. The median issuer's 2009 per-transaction fraud-prevention cost reported to the Board was 1.8 cents. The costs associated with research and development, card-activation systems, PIN customization, merchant blocking, and card-authentication systems were all small when measured on a per-transaction basis, typically less than one-tenth of a cent each. For all data-security costs reported by issuers in the card issuer survey, the median was 0.1 cents.

In setting the interchange fee standard in § 235.3, the Board included costs of transaction-monitoring systems that are integral to the authorization of a transaction. Transaction monitoring systems assist in the authorization process by providing information to the issuer before the issuer decides to approve or decline the transaction. Because these costs are already included for all covered issuers as a basis for establishing the interchange fee standards, the Board excluded them in determining the fraud-prevention adjustment amount. The median issuer's transactions-monitoring cost is 0.7 cents per transaction. The fraud-prevention adjustment of 1 cent represents the difference between the median issuer's fraud-prevention cost of 1.8 cents per transaction less the median issuer's transaction-monitoring cost of 0.7 cents, rounded to the nearest cent.

In general, issuers and networks encouraged the Board to include costs of a broad set of fraud-prevention activities. In particular, these commenters recommended that the Board include in the calculation of the adjustment costs related to routine account monitoring, customer notifications, routine and non-routine card issuance and reissuance, name and address verification, chargeback costs, research and development of new fraud-prevention technologies, data security, card-activation systems, neural networks, transaction scoring, PIN customization, merchant blocking, other software systems, and lost revenue due to customers not having access to their debit card while awaiting reissuance. Some commenters encouraged the Board to include, in particular, the costs of activities undertaken in response to merchant data breaches.

Issuers also suggested that the Board include the costs of cardholder inquiries related to fraud, including providing payment transaction clarity so that customers are able to identify merchants listed on their statements. These commenters asserted that fraudulent transactions almost always involve a cardholder inquiry and that responding to cardholder inquiries is a fundamental and an economical means of preventing fraud as it permits issuers to gather information about lost and stolen cards, which is necessary to make decisions regarding appropriate responses to prevent fraud in connection with such cards. These commenters also noted that time and expense associated with cardholder inquiries is quantifiable and that the Board should try to determine the portion of cardholder inquiry costs related to fraud prevention.

A number of issuer commenters also encouraged the Board to base the fraud-prevention adjustment amount on the fraud-prevention costs of issuers that are exempt from the interchange fee standards in § 253.3 and the fraud- prevention adjustment in § 235.4. 22 Trade groups representing small issuers were concerned that the interchange fee standards, including the fraud-prevention adjustment, will become the de facto interchange fee level across the industry and that small issuers will suffer disproportionately because they tend to have higher per-transaction fraud-prevention costs.

Merchants, on the other hand, argued that the Board included too many fraud-prevention costs. One commenter asserted that including costs to detect and mitigate fraud goes beyond “preventing fraud.” Additionally, merchants argued that the Board included costs of activities that have not been proven to prevent fraud, such as PIN customization (which one commenter argued makes PINs easier to guess) and research and development. Another commenter suggested that the Board more precisely delineate between activities that prevent fraud and those that do not.

Most merchant and merchant group commenters also asserted that the Board failed to take into account merchant's fraud-prevention costs, as required by EFTA Section 920(a)(5)(B). Several of these merchant commenters encouraged the Board to offset the adjustment amount by merchants' fraud-prevention costs or by the amount issuers recoup from other parties to the fraudulent electronic debit transaction through chargebacks or other means. One commenter argued that the desire to avoid or minimize the administrative burden associated with surveying merchants is not a sufficient reason for not measuring merchant costs. Another commenter argued that, by not considering specific merchants' fraud-prevention costs, merchants that have mostly card-not-present transactions essentially subsidize fraud prevention for the rest of the network, because those merchants tend to invest more in fraud prevention (to deal with higher rates of fraud in the card-not-present environment) than merchants that have mostly card-present transactions. One merchant commenter suggested that the Board take merchant costs into account by prohibiting issuers from imposing any fraud loss costs or PCI-DSS (or similar costs) on merchants if the fraud relates to transactions that qualify for the fraud-prevention adjustment.

Section 920(a)(5)(A)(i) of the EFTA permits the Board to allow an adjustment to the amount of an interchange fee that an issuer may receive or charge if “such adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit transactions involving that issuer.” Fraud prevention involves a broad range of activities in which an issuer may engage before, during, or after an electronic debit transaction. Fraud-prevention activities include activities to detect fraudulent transactions. Detecting possible fraud during the authorization process, for example, can lead to actions such as denying a transaction or contacting the cardholder to verify the legitimacy of a previously authorized transaction. In this way, detecting possible fraudulent electronic debit transactions can prevent the fraud from happening. Similarly, issuers can take steps once fraud is discovered to mitigate the loss associated with the fraudulent activity. For example, an issuer may place an alert on a debit card indicating that the card or account information may have been compromised or cancel a compromised card and issue a new card to the cardholder in order to prevent future fraudulent transactions using the card. Thus, although the initial fraudulent transaction(s) may not have been prevented, an issuer can prevent additional fraud loss by taking such steps. Therefore, the Board has determined that activities that detect and mitigate fraudulent electronic debit transactions contribute to preventing fraud and that the costs of such activities are appropriate to include for purposes of the fraud-prevention adjustment.

Costs associated with research and development of new fraud-prevention technologies, card reissuance due to fraudulent activity, data security, card activation, and merchant blocking are all examples of costs that are incurred to detect and prevent fraudulent electronic debit transactions. Therefore, the Board has included the costs of these activities in setting the fraud-prevention adjustment amount to the extent the issuers reported these costs in response to the survey on 2009 costs. As in the interim final rule, the Board has determined to exclude from the adjustment amount any costs included in the interchange fee standards in § 253.3. Thus, the costs of transaction monitoring activities such as the use of neural networks and transactions scoring systems that assist in the authorization process by providing information to the issuer before the issuer decides to approve or decline the transaction were not considered.

Section 920(a)(5) allows the Board to permit an adjustment to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit transactions. Accordingly, the Board did not include costs incurred to prevent fraud to a cardholder's transaction account through means other than fraudulent electronic debit transactions, or costs incurred to prevent fraud in connection with other payment methods such as credit cards. For example, name and address verification used in opening a checking account is an excluded activity because it involves preventing fraud with respect to the entire account relationship and is performed whether or not a debit card is issued as a means of making payments from the account. Similarly, the costs of activities employed solely to prevent fraudulent credit card transactions are not included. To the extent an issuer engages in an activity or activities to prevent both fraudulent credit card and debit card transactions (e.g., securing data across all of its card programs), issuers were instructed to allocate such joint costs in the issuer survey based on the relative proportion of the cost of the activity that was tied to debit card transactions, and only that proportion of costs was included in determining the fraud-prevention adjustment.

Additionally, fraud losses, including ATM losses, and the lost revenue due to customers' inability to use their debit cards while awaiting reissuance are not costs incurred to prevent fraudulent electronic debit transactions and are excluded. Similarly, costs of purchasing fraud-loss insurance or recovering losses also are excluded as these are not costs incurred to prevent fraudulent electronic debit transactions.

Fraud-prevention costs of exempt issuers. EFTA Section 920(a)(6)(A) provides an exemption from EFTA Section 920(a) for any issuer that, together with its affiliates, has assets of less than $10 billion. EFTA, however, does not provide the Board with specific authority to require networks to implement these exemptions in any particular way. The Board recognizes the concerns raised by small issuers that market forces could lead to a convergence of the interchange fee levels of exempt and nonexempt issuers and that small issuers could suffer disproportionately because they tend to have higher per-transaction fraud-prevention costs. Nonetheless, the Board's interchange fee standard, including the fraud-prevention adjustment, does not itself limit the amount of interchange fees small issuers may receive or charge. Moreover, the Board recognizes that requesting that small issuers record and report their costs associated with authorizing, clearing, and settling electronic debit transactions and the costs associated with fraud prevention and data security would impose administrative burden on these entities. Therefore, the Board has determined not to include in the adjustment the fraud-prevention costs incurred by small issuers. As noted in the preamble to the Board's final rule implementing other provisions of EFTA Section 920, the Board is monitoring the effectiveness of the exemption for small issuers and notes that, in the fourth quarter of 2011, the first quarter during which the interchange fee standards went into effect, nearly all payment card networks offered small issuers a higher interchange fee than that set forth in the standards and that the average interchange fee for small issuers is about the same as it was for all issuers in 2009. 23

Fraud-prevention costs incurred by other parties. EFTA Section 920(a)(5)(B)(ii) requires the Board to consider the fraud-prevention and data-security costs expended by each party involved in electronic debit transactions. The Board recognizes that all parties to electronic debit transactions, including merchants, incur fraud-prevention costs. For example, both merchants and issuers incur costs to comply with PCI-DSS and network rules related to fraud prevention. Moreover, certain merchants, such as Internet merchants, have developed customized approaches to prevent fraud and secure customer data in response to the particular fraud risks faced in their sales environments.

The Board has given consideration to, and taken into account, the fraud-prevention costs of other parties by setting the adjustment based on the costs of the median issuer (as opposed to the interchange fee standards in § 253.3, which were set at the 80th percentile issuer). 24 This lower amount is intended, in part, to reduce the adjustment as a way to recognize the fraud-prevention and data-security costs of merchants and parallels the ad valorem component of the base interchange fee standard (5 basis points multiplied by the transaction value), which was set at the median issuer's per-transaction fraud losses. Further, as discussed in connection with the Board's fraud-prevention standards in § 235.4(b), the Board also is requiring issuers to take into account whether, and to what extent, fraud-prevention technologies implemented by an issuer are likely to impose costs on other parties. Requiring an issuer to take into account the costs borne by other parties in these ways obviates the need to impose a burdensome survey on merchants and other parties about their fraud-prevention costs.

The maximum permissible fraud-prevention adjustment amount in the interim final rule is 1 cent. In general, issuers, depository industry trade associations, and payment card networks supported increasing the adjustment amount and asserted that the adjustment amount in the interim final rule would discourage innovation and investment in fraud-prevention activities, particularly in technology requiring substantial upfront investment. Issuers also argued that the 1-cent adjustment amount would undermine the goal of protecting cardholder financial information. Another commenter stated that an insufficient fraud-prevention adjustment could lead to an increase in declined transactions at the point of sale as issuers become more conservative in transaction authorizations. Another issuer commenter believed that the fraud-prevention adjustment disproportionately shifts the burden on issuers to implement fraud-prevention measures without reasonable compensation.

Several issuers suggested setting the adjustment amount based on the costs of the issuer at the 80th percentile, consistent with the interchange fee standards in § 235.3. Issuer commenters stated that the Board provided no explanation for setting the adjustment at the median while the interchange fee standard was set at the 80th percentile of issuers' reported costs or for why the fraud-prevention activities of issuers with costs above the median were not viewed as cost-effective.

A few issuers suggested incorporating an ad valorem component because issuers often target their fraud-prevention investments at large-value transactions. One issuer suggested that an ad valorem component also could vary based on the type of merchant in order to compensate issuers for fraud-prevention costs associated with riskier merchants.

Other comments from issuers suggested other manners in which the fraud-prevention amount could vary. Specifically, one issuer suggested increasing the adjustment amount for those issuers with higher-than-average fraud losses because such issuers will both absorb more fraud losses and incur more costs to prevent and mitigate fraud. Another issuer suggested imposing a higher fraud-prevention adjustment on merchants that are not PCI-DSS compliant or to set the fraud-prevention adjustment amount as a percentage of interchange fee revenue. 25 One issuer group suggested varying the fraud-prevention adjustment based on the charge-back rate of the merchant involved in the transaction.

One technology company suggested that issuers receive an additional amount for adopting specific fraud-prevention technologies such as biometric facial recognition software or other authentication methods not yet prevalent in the industry.

In general, merchants and their associations urged the Board to adopt a lower adjustment amount. Some merchant groups opposed the use of the data collected from issuers to determine the amount of the adjustment, arguing that the survey was flawed. These commenters argued that the Board did not reveal results from the survey until it published the interim final rule, that only a small subset of covered issuers responded, and that there was no independent verification. One merchant commenter supported the adjustment amount in recognition of the fact that issuers ultimately are subject to complying with the Board's fraud-prevention standards, but opposed the Board increasing the adjustment amount higher than 1 cent. One merchant questioned whether a fraud-prevention adjustment was necessary given the amount an issuer could receive or charge under the base interchange fee standard.

The Board has considered the comments and has determined to retain the 1-cent fraud-prevention adjustment amount that is permitted in the interim final rule. As mentioned above, the Board initially set the adjustment amount at the fraud-prevention cost of the median issuer based on 2009 fraud-prevention costs reported by issuers in response to the Board's 2010 survey, minus those fraud-prevention costs that are already part of the interchange fee standards in § 253.3. The Board chose to set the adjustment based on the median cost to balance the fraud-prevention and data-security costs incurred by issuers and those incurred by merchants, some of which are incurred due to the fraud-prevention methods selected by issuers. This consideration and approach parallels the approach taken with respect to the ad valorem component of the base interchange fee standard. The ad valorem component, which accounts for fraud losses incurred by issuers, was set at the median issuer's fraud losses (i.e., 5 basis points multiplied by the transaction value). In setting the ad valorem component, the Board explicitly recognized that both issuers and merchants incur fraud losses. 26

The Board has considered the comments suggesting an ad valorem component and has determined not to include such a component in the fraud-prevention adjustment amount. An ad valorem component is more appropriate for measuring fraud losses, for which there is a direct correlation between transaction value and the amount of the loss, than when measuring fraud-prevention costs, which may, but do not necessarily, vary with the value of a transaction. The Board notes that the 1-cent adjustment does not limit a payment card network's ability to vary the overall interchange fee rate based on the type of merchant, for any of the aforementioned reasons, so long as an issuer does not receive interchange fees, including the fraud-prevention adjustment, greater than permitted in Regulation II.

The Board has also determined not to permit issuers to receive or charge an adjustment above the 1-cent amount for adopting certain new authentication methods. As noted below in connection with § 235.4(b), the Board has taken a non-prescriptive approach to allow for flexibility in using a variety of methods to prevent fraudulent electronic debit transactions.

As previously noted, the Board is using the fraud-prevention cost data as reported by issuers for 2009 in determining the maximum fraud-prevention adjustment amount permitted in Regulation II. Since that time, the Board has surveyed issuers that are not exempt from the interchange fee standards for their data for calendar year 2011. At the time of this final rule, the Board is still processing and analyzing the 2011 data. The Board will take into account data from the 2011 survey and future surveys when considering any future revisions to the fraud-prevention adjustment.

The interim final rule permits an issuer to receive or charge the fraud-prevention amount for all types of electronic debit transactions. Several merchant commenters encouraged the Board to permit an adjustment only for PIN-based transactions, due to the lower fraud rates of PIN-based debit compared to signature-based debit. Other merchant commenters suggested the Board permit an adjustment only for authentication methods that have fraud rates demonstratively lower than those for PIN transactions. One individual suggested that the Board provide greater disincentives, such as a negative adjustment, for less secure technologies and asserted that doing so was consistent with the statutory directive to consider the extent to which the occurrence of fraud depended on the authentication method.

Issuers and networks supported applying the adjustment to all debit card transactions. These commenters argued that not all authentication methods are available for all transactions. One consequence of this, they argued, is that lower fraud rates and losses for PIN may be due to the fact that signature is the only method available for Internet transactions and that PIN fraud, unlike signature fraud, often manifests itself as ATM fraud, which the Board did not take into account. Some of these commenters also argued that limiting the adjustment to PIN transactions would create disincentives to invest in signature and other non-PIN based fraud prevention. Authentication technology providers also supported not limiting the adjustment to authentication methods that exist and are used widely today.

The Board has considered the comments and has determined that an eligible issuer may receive or charge a fraud-prevention adjustment for all electronic debit transactions irrespective of the authentication method used for the transaction. As recognized in the interim final rule, limiting the adjustment to only a subset of authentication methods, or only those available today, may not provide issuers with sufficient flexibility to develop other methods of authentication that may be more effective than today's alternatives and may not require a PIN. Limiting the transactions eligible for a fraud-prevention adjustment also may reduce the incentives for issuers to improve fraud-prevention techniques for authentication methods that, for a variety of reasons, experience higher fraud rates. Further, because issuers are less likely to receive a higher interchange fee for signature-based transactions than in the past, the Board believes that issuers' incentives to encourage cardholders to use their signature rather than their PIN to authenticate transactions at the point of sale will diminish.

The Board's 2010 proposed rule did not contain a specific proposal for a fraud-prevention adjustment to the interchange fee standards. Instead, as discussed above, the Board requested comment on two general approaches to an adjustment: a technology-specific approach, which would permit an issuer to recover costs for major innovations identified by the Board as likely to result in substantial reductions in fraud losses, and a non-prescriptive approach, which would involve more general standards for an issuer to satisfy without the prescription of specific technologies. 27 With respect to that initial proposal, commenters generally opposed the Board mandating specific technologies for many reasons, including that a technology-specific approach would not necessarily be more effective than an approach that involves a variety of technologies, practices, and methods and that a technology-specific approach could deter investment in new technologies.

Issuers, depository institution trade associations, and payment card networks preferred the non-prescriptive approach because that approach would maintain issuer flexibility to respond to existing and emerging fraud risks and to do so in a timely manner. Merchants supported an approach that provided incentives to issuers and networks to switch from the current methods and technologies to more effective (“paradigm shifting”) fraud-prevention technologies. One merchant group's suggestion, supported by many other merchant commenters, proposed an approach under which any technologies issuers wanted to offer to merchants must undergo an application and approval process managed by the Board before the issuer would be eligible to receive the fraud-prevention adjustment. This merchant group suggested that, as part of the application and approval process, an issuer must demonstrate that the technology reduces fraud to a level materially lower than that associated with PIN debit transactions. 28

The Board adopted the non-prescriptive approach to fraud-prevention standards in the interim final rule. The Board determined that the dynamic nature of the debit card fraud environment necessitates standards that permit issuers to identify the best methods to detect, prevent, and mitigate fraud losses for the size and scope of their debit card programs and to respond to frequent changes in fraud patterns. In addition, specifying and limiting the set of technologies for which issuers recover their costs may weaken the long-term effectiveness of the specified technologies. The reasons for selecting the non-prescriptive approach for the interim final rule are set forth more fully in the Federal Register notice announcing the interim final rule. 29

Section 235.4(b)(1) of the interim final rule requires an issuer, in order to be eligible to receive a fraud-prevention adjustment, to develop and implement policies and procedures reasonably designed to: (1) Identify and prevent fraudulent electronic debit transactions; (2) monitor the incidence of, reimbursements received for, and losses incurred from fraudulent electronic debit transactions; (3) respond appropriately to suspicious electronic debit transactions so as to limit the fraud losses that may occur and prevent the occurrence of future fraudulent electronic debit transactions; and (4) secure debit card and cardholder data. Procedures could include practices, activities, methods, or technologies that are used to implement and make effective an institution's fraud-prevention policies. The commentary to § 235.4(b) discusses the types of fraud that an issuer's policies and procedures should address, which includes the unauthorized use of a debit card ( see interim final rule comment 4(b)-2). The commentary to the interim final rule also provides examples of practices that may be part of an issuer's policies and procedures that are reasonably designed to achieve each of the fraud-prevention goals in § 235.4(b)(1). 30 The commentary to the interim final rule, and changes thereto, are discussed below more fully in connection with the applicable fraud-prevention objective set forth in § 235.4(b).

Issuers and networks overwhelmingly supported the non-prescriptive framework and standards in § 235.4(b). Issuers and networks asserted that the non-prescriptive approach would provide incentives to prevent fraud and invest in new fraud-prevention technologies, while also providing flexibility for each issuer to determine its optimal fraud-prevention solutions (including non-technology based solutions) and enabling issuers, networks, and acquirers to compete based on fraud-prevention tools. Issuers and networks opposed a technology-specific approach, which they argued would lock the industry into particular technologies, give fraudsters advance notice of fraud-prevention methods, slow the implementation of new technology, and result in an inefficient allocation of resources by discouraging new investments in other technologies. Moreover, issuers and networks did not believe that the government was better positioned than industry participants to select the most effective and commercially feasible fraud-prevention technology.

Merchants opposed both specifying particular fraud-prevention technologies in the rule (although supported Board-involvement in approving eligible technologies) and the standards as set forth in the interim final rule. Many merchants opposed the standards in the interim final rule because they believed that the standards, as drafted, would permit issuers to qualify for an adjustment by adopting existing fraud-prevention technologies, which the merchant commenters believed to be ineffective at preventing fraud. In addition, one merchant believed that the standards were too vague and may inadvertently lead to issuers adopting policies and procedures that are inconsistent with providing economical means of reducing fraud. Merchants restated their support for the paradigm-shifting approach suggested in response to the proposed rule in which an issuer would be eligible for the fraud-prevention adjustment only if the issuer adopted a technology that reduced fraud to levels that are materially lower than the levels experienced with PIN debit, and only after the issuer documented the technology's effectiveness and cost-effectiveness to the Board. 31 The approach proposed by merchants also would require the Board to request public comment on the effectiveness and cost-effectiveness of fraud-prevention technologies and formally approve particular technologies prior to an issuer being able to receive a fraud-prevention adjustment for transactions that use the technology. One merchant commenter supported an alternative approach under which issuers, not networks, would offer technologies to merchants and merchants would determine which issuers' solutions to implement based on the solution's cost and effectiveness.

Issuers widely supported the Board's standards in the interim final rule and argued that they should be eligible for the adjustment without demonstrating actual reductions in fraud because fraud may be caused by factors outside of the issuer's control. By contrast, merchants and their trade groups believed the standards to be inconsistent with EFTA Section 920(a)(5)'s requirements. Specifically, merchants argued that the standards should require an issuer to demonstrate quantifiable reductions in the incidence of fraud prior to receiving a fraud-prevention adjustment. One merchant commenter argued that requiring issuers' policies and procedures to be “reasonably designed” to achieve the Board's objectives is not equivalent to requiring issuers to take “effective” steps to prevent fraud, which is the requirement in EFTA Section 920(a)(5). 32

Merchant commenters, as well as a member of Congress, encouraged the Board to adopt metrics-based standards to ensure that issuers receive the fraud-prevention adjustment only if they reduce fraud losses or the occurrence of fraud to specified levels, for example, at or below the industry fraud levels for PIN debit transactions. This approach, the commenters argued, would ensure that the market has proper incentives to adopt effective fraud-prevention technology.

Merchants also argued that the Board's standards were inconsistent with EFTA Section 920(a)(5)'s requirement that issuers develop and implement cost-effective fraud-prevention technology. Merchants argued that the Board's standards failed to demonstrate the cost-effectiveness of fraud-prevention measures. One merchant group believed that the cost- effective requirement could be satisfied only if the adjustment is based on issuer-specific fraud reduction and cost. By contrast, one issuer argued that whether or not a fraud-prevention activity is “cost-effective” may not be apparent at the outset, because new fraud-prevention activities must be monitored over time to assess cost-effectiveness. This issuer suggested that the Board continue gathering additional information about issuers' costs for new fraud-prevention activity.

Finally, merchants argued that the Board's standards do not require an issuer receiving the adjustment to demonstrate that it has made any investments in fraud-prevention activities that reduce fraud.

The Board has considered the comments and has adopted fraud-prevention standards in the final rule that largely follow the non-prescriptive approach set forth in the interim final rule. The Board has revised § 235.4(b)(1) to provide that, in order to be eligible for a fraud-prevention adjustment to the amount of any interchange fee received or charged in accordance with § 235.3, an issuer must develop and implement policies and procedures reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions, including through the development and implementation of cost-effective fraud-prevention technologies. New § 235.4(b)(2) will continue to require an issuer's policies and procedures to address fraud-prevention objectives similar to those in the interim final rule (discussed further below), but the Board is expanding the scope of those policies and procedures to permit issuers to consider factors other than those explicitly listed, if appropriate.

After considering the comments received, the Board has determined that the final rule should not prescribe specific technologies that an issuer must implement in order to be eligible to receive an adjustment. The dynamic nature of the debit card fraud environment and the variation in issuer debit card portfolios, customer base, and transaction-processing arrangements requires standards that permit issuers to determine the best methods to detect and prevent fraudulent transactions, and mitigate fraud losses from those transactions, as well as to respond to the frequent changes in industry fraud types and methods, and available fraud-prevention methods. Standards that incorporate a technology-specific approach would not provide issuers with sufficient flexibility to design and modify policies and procedures that best meet a particular issuer's needs and that most effectively reduce fraud losses to all parties involved in the transactions.

Similarly, standards that restrict eligible fraud-prevention technologies to those that an issuer has demonstrated to be effective and that have been subject to a Board approval process would not provide sufficient flexibility to issuers. Moreover, because existing fraud-prevention technologies are implemented as part of broader fraud-prevention programs, requiring issuers to isolate and measure the effectiveness of a particular fraud-prevention technology would be impractical.

Prescribing one eligible technology or a limited set of eligible technologies also could inhibit investment in new, “non-eligible” technologies (i.e., those for which effectiveness has not yet been demonstrated because they are not implemented in the marketplace), which ultimately could become more effective than “eligible” technologies. Specifically prescribing eligible fraud-prevention technologies also would provide fraudsters with information on the fraud-prevention technologies prevalent in the industry, which could make those technologies less effective over time.

Moreover, even the most effective fraud-prevention technologies issuers could implement would not prevent all fraudulent electronic debit transactions. This fact underscores the need for a fraud-prevention program that also involves non-technology-based policies and procedures (such as notifying customers of potentially fraudulent transactions) that complement technology-based fraud-prevention solutions.

In its proposed rule, the Board did not include a definition of “fraud” or “fraudulent electronic debit transaction,” but suggested that fraud in the debit card context should be defined as “the use of a debit card (or information associated with a debit card) by a person, other than the cardholder, to obtain goods, services, or cash without authority for such use.”  33 The Board noted that this definition was derived from the EFTA's definition of “unauthorized electronic fund transfer.”  34 After considering the comments received on the proposed rule, the Board determined that fraud is broader than unauthorized use and that whether a transaction is fraudulent depends on the facts and circumstances. 35 Accordingly, the Board did not include a regulatory definition of “fraudulent electronic debit transaction” in the interim final rule. Instead, the Board provided three examples in the interim final rule's comment 4(b)-2 of the types of fraud that an issuer's policies and procedures should address: (1) A person uses a stolen debit card to make an unauthorized purchase; (2) a merchant uses cardholder information from a previous transaction to make a subsequent, unauthorized transaction; and (3) a hacker obtains card information and uses that information to make an unauthorized purchase. The Board requested comment on whether the rule should include a definition of “fraud” or “fraudulent electronic debit transaction,” and if so, what would be an appropriate definition.

Commenters were divided as to whether the Board should define “fraud” or “fraudulent electronic debit transaction” in the regulatory text. Some issuers opposed defining either term because fraud is constantly changing and defining the term in the regulatory text would provide issuers with less flexibility to adapt their fraud-prevention programs to changing fraud. Other issuers opposed including a definition arguing that what is fraud is a judicial concept that should not be defined in the regulatory text. In general, commenters that supported including a definition of “fraud” or “fraudulent electronic debit transaction” appeared to do so as a means to either limit or expand the types of fraud-prevention activities an issuer's policies and procedures should address. 36

Commenters that supported including a definition of “fraud” or “fraudulent electronic debit transaction” in the regulatory text were divided as to how the Board should define any such term. One merchant commenter suggested that the definition be limited to the unauthorized use of the debit card in order to exclude transactions by fraudulent merchants and fraudulent cardholders, such as those who legitimately own the card but are using it to commit fraud. One issuer suggested defining “fraudulent electronic debit transaction” as including both the unauthorized use of a debit card from which the cardholder receives no benefit and the use of a debit card by a cardholder, or person acting in concert with a cardholder, with fraudulent intent. Some issuers suggested that the definition include ATM fraud losses because often these losses are a result of security breaches at the point of sale. One depository institution trade group, while not commenting explicitly on the appropriateness of a regulatory definition, opposed the commentary's examples of fraudulent debit card transactions, because the commenter believed that by including the examples, the Board was suggesting that issuers were the appropriate party to prevent the fraud in each example, even though the merchant may be in the best position to prevent fraud in the examples provided.

The final rule does not include a regulatory definition of either “fraud” or “fraudulent electronic debit transaction.” The Board continues to believe that which transactions are considered fraudulent will be determined based on the facts and circumstances and may evolve over time. The Board also continues to believe that fraudulent electronic debit transactions should not be limited to the “unauthorized” use of a debit card, as that term is used elsewhere in the EFTA, because all types of fraud impose costs on system participants. Accordingly, an issuer's policies and procedures should be designed to reduce the occurrence of, and costs to all parties from, all types of fraud and not merely the unauthorized use of a debit card.

The Board, however, has made clarifying changes to interim final rule comment 4(b)-2, which is redesignated as comment 4(b)(1)-1 (hereinafter referred to as comment 4(b)(1)-1). In the interim final rule, the comment provided that the listed examples of fraud are types of fraud that could be “effectively addressed by the issuer, as the entity with the direct relationship with the cardholder and that authorizes the transaction.” The Board recognizes that in some instances the issuer may be able to use its direct relationship with the cardholder to prevent these types of fraud ( e.g., through comparing the unauthorized transaction to its cardholder's typical transaction pattern). Although an issuer may be unable to effectively address all of these types of fraud in all situations, an issuer should be able to develop and implement policies and procedures designed to detect and prevent fraudulent transactions of the types listed. For example, an issuer could develop and implement policies and procedures to deactivate a card upon notice that the card has been stolen. Therefore, the Board is removing from comment 4(b)(1)-1 the statement that the examples correspond to the types of fraud that an issuer can prevent. The Board also has revised that comment to clarify that the types of fraud an issuer's policies and procedures should address are not limited to those included in the examples. The Board also made other minor editorial changes to this comment.

Section 920(a)(5) of the EFTA mandates that the Board's fraud-prevention standards require an issuer to take effective steps to reduce the occurrence of, and costs from, fraud in relation to electronic debit transactions, including through the development and implementation of cost-effective fraud-prevention technologies. In assessing whether an issuer is taking effective steps to reduce fraudulent electronic debit transactions, the Board does not believe that Section 920(a)(5) requires that the steps an issuer takes prevent all fraud. Moreover, the Board does not believe, as some merchant commenters argued, that an issuer be required to demonstrate that a particular fraud-prevention measure directly led to a reduction in fraudulent electronic debit transactions before the cost of that measure is included in the fraud-prevention adjustment. Isolating the effectiveness of a particular fraud-prevention measure is virtually impossible due to the numerous fraud-prevention methods and technologies implemented by an issuer and the fact that the effectiveness of a particular measure may not be evident until a year or more after implementation. In addition, an issuer's incidence of fraudulent electronic debit transactions may fluctuate for various reasons, including factors outside the issuer's control (e.g., a data breach at a large merchant processor).

EFTA Section 920(a)(5) requires that an issuer take effective steps to reduce fraudulent electronic debit transactions, without any reference to the size of the reduction. The language of EFTA Section 920(a)(5) does not compel the Board to impose a maximum permissible level of fraudulent electronic debit transactions for an issuer to be eligible to receive a fraud-prevention adjustment. In addition, selecting a benchmark fraud level would not necessarily ensure that issuers continue to take effective steps to reduce fraudulent transactions due to the variety of sales channels and evolving fraud-prevention technologies. An issuer may not have incentives to develop or invest in new and potentially more effective fraud-prevention technologies for sales channels that experience fraud levels below the selected benchmark level or if the issuer experiences fraud at a level below the selected benchmark. Moreover, deeming an issuer to be eligible for an adjustment if the issuer's fraud rate is below some industry rate would not necessarily satisfy the requirement that the Board's standards require an issuer to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions involving that issuer. For example, an issuer with a fraud rate significantly below the benchmark may be able to qualify for a fraud-prevention adjustment even if the steps that issuer is taking are no longer effective in reducing the occurrence of, and costs from, fraud in relation to electronic debit transactions involving that issuer.

In addition, requiring issuers to maintain fraud below a benchmark level, particularly one based on technology that may not be available widely for all point-of-sale channels, could have adverse consequences for consumers. Cardholders may not always be able to use lower-fraud fraud-prevention methods (such as PIN) in all point-of-sales channels. 37 Issuers may, for example, set more restrictive authorization rules for transactions in the sales channels for which the benchmarked cardholder-authentication technology is not available.

The final rule permits an issuer to receive the fraud-prevention adjustment if it develops and implements policies and procedures reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions and if those policies and procedures address the fraud-prevention aspects in revised § 235.4(b)(2). This approach recognizes that, at the outset, an issuer cannot predict with certainty that any particular policies and procedures will effectively prevent fraud in relation to electronic debit transactions. The Board believes that providing specific factors that issuers must address in their policies and procedures, but providing flexibility in how those policies and procedures may be implemented to address those factors, over time will allow for more effective fraud prevention. This approach permits issuers to adjust their practices based on new fraud-prevention technologies and practices, new patterns of fraud, changes to the size of their debit card programs, and changes in how their customers use debit cards. ( See discussion below of § 235.4(b)(2) and commentary.) Under the final rule, an issuer must be able to demonstrate that its policies and procedures are reasonably designed to take effective steps to reduce fraudulent electronic debit transactions.

The Board has added new comment 4(b)(1)-2 to clarify that an issuer's policies and procedures must be designed to reduce fraud, where cost-effective, across all types of electronic debit transactions in which its cardholders engage. 38 An issuer may enable multiple types of card-authentication methods on its debit cards (e.g., a chip or a code embedded in the magnetic strip) as well as permit multiple cardholder-authentication methods (e.g., a signature or a PIN). Accordingly, the Board believes that an issuer should consider whether its fraud-prevention policies and procedures are effective for each method used to authenticate the card and the cardholder. In addition, the effectiveness of the card- and cardholder-authentication methods an issuer has enabled on its debit cards likely will vary based on the sales channel in which the debit card is used. For example, in a card-not-present environment (e.g., the Internet), a chip or a code embedded in the magnetic strip may not be used to authenticate the card. Therefore, new comment 4(b)-2 provides that an issuer should consider the effectiveness of its fraud-prevention policies and procedures for different sales channels for which the card is used (e.g., card-present and card-not-present).

The Board has not adopted the language in interim final rule comment 4(b)(1)(i)-2 requiring an issuer to consider practices to encourage its cardholders to use the materially more effective authentication method and to consider methods for reducing fraud for the less effective authentication method. Since October 1, 2011, when the Board's interchange fee standards became effective, the differential in interchange fee revenue across networks supporting different authentication methods largely has been eliminated for issuers that are subject to the interchange fee standards. Accordingly, issuers no longer have the incentive to steer cardholders to one type of authentication method over another. Issuers, however, will continue to be required to review the effectiveness of each of their authentication methods as part of the required review of their fraud-prevention policies and procedures.

Relatedly, the Board requested comment on whether the Board's standards should require an issuer to assess whether its customer rewards or similar programs provide inappropriate incentives to use an authentication method that is demonstrably less effective in preventing fraud. A few issuers opposed requiring issuers to assess customer rewards policies because doing so was outside the Board's authority and unnecessary. Specifically, these issuers believed that the interchange fee standards in § 235.3 likely would reduce the prevalence of reward programs. In addition, issuers argued that they consider a variety of factors when determining whether to offer rewards programs and expressed confusion as to what would constitute an “inappropriate incentive.” One merchant trade group supported prohibiting issuers from receiving a fraud-prevention adjustment if they provide incentives to use a high-fraud authentication method, and one consumer group supported a requirement on issuers to assess whether their rewards programs are encouraging the use of less secure fraud-prevention technologies.

For reasons similar to the determination not to adopt the language in interim final rule comment 4(b)(1)(i)-2, the Board has neither imposed a specific requirement that issuers assess whether their rewards programs provide incentives to cardholders to use higher-fraud authentication methods nor prohibited issuers from receiving a fraud-prevention adjustment due to their use of rewards and other incentives. Issuers offer rewards programs to cardholders for a variety of reasons, and, to the extent rewards programs were based on differentials in interchange fees across networks, § 235.3 effectively has largely eliminated a covered issuer's incentive to offer rewards for transactions over one network. Accordingly, the potential fraud-prevention benefit from explicitly requiring issuers to assess whether cardholder rewards or similar incentive programs provide an inappropriate incentive to use higher-fraud authentication methods is significantly outweighed by the added burden that would be imposed on issuers.

EFTA Section 920(a)(5) also provides that an issuer must take effective steps to reduce “costs from” fraudulent electronic debit transactions. 39 EFTA Section 920(a)(5)(A)(i)(II) is silent as to which parties' costs the Board's standards must ensure that an issuer take effective steps to reduce. EFTA Section 920(a)(5)(B)(ii), however, explicitly requires the Board to consider the costs of fraudulent transactions absorbed by each party involved in such transactions. As a result of various laws, regulations, and payment card network rules (discussed above) that allocate the costs of fraudulent electronic debit transactions among different parties to the fraudulent transactions, issuers, acquirers, and merchants typically all absorb losses from fraudulent electronic debit transactions. 40 The Board believes that an issuer should take effective steps to reduce costs from fraudulent transactions that are incurred by all parties to such transactions, and not merely steps that reduce the issuer's own fraud losses. Accordingly, the Board is providing in revised § 235.4(b) that an issuer must reasonably design its policies and procedures “to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions” (emphasis added).

New comment 4(b)-3 provides guidance on the reduction in the occurrence of, and costs to all parties from, fraudulent electronic debit transactions. A reduction in the occurrence of fraudulent electronic debit transactions can be measured by determining whether there is a reduction in the number of an issuer's electronic debit transactions that are fraudulent relative to the issuer's total electronic debit transactions. The Board believes that measuring a reduction in the occurrence of fraudulent electronic debit transactions in relation to an issuer's total transactions is more appropriate than measuring the reduction in terms of the absolute number of fraudulent transactions. Measuring only the change in the number of an issuer's fraudulent electronic debit transactions would not, for example, account for an increase in the number of electronic debit transactions initiated by an issuer's cardholders. In addition, an issuer must implement policies and procedures that are reasonably designed to reduce the value of its electronic debit transactions that are fraudulent relative to non-fraudulent transactions. New comment 4(b)-3 emphasizes that an issuer's policies and procedures should be reasonably designed to reduce the costs of fraudulent transactions to all parties, irrespective of whether the issuer ultimately bears the fraud losses as a result of regulations or network rules.

New comment 4(b)-4 recognizes that the number and value of an issuer's fraudulent electronic debit transactions relative to non-fraudulent transactions may vary materially from year to year and that, in certain circumstances, an issuer's policies and procedures may be effective notwithstanding a relative increase in transactions that are fraudulent in a particular year. For example, a data breach at a merchant processor that exposes the data of a substantial portion of an issuer's cards and cardholders could result in the issuer having a relatively higher number of fraudulent transactions in one year than in the preceding year, even if the issuer had implemented the same or improved fraud-prevention policies and procedures. This could be a circumstance in which an issuer's policies and procedures may be effective notwithstanding a relative increase in transactions that are fraudulent.

Continuing increases in an issuer's fraudulent transactions relative to non-fraudulent transactions, however, would warrant further scrutiny as to the effectiveness of an issuer's policies and procedures. For example, instead of at a merchant processor, the data breach might occur at the issuer or the issuer's processor. As a result, an issuer may experience higher fraud rates in one year and, in the following years, the share of that issuer's transactions that are fraudulent may continue to increase. Further scrutiny would be warranted to determine, for example, whether the issuer's policies and procedures are designed to take effective steps to prevent fraudulent transactions as a direct result of the initial data breach and to prevent subsequent data breaches from occurring.

EFTA Section 920(a)(5) states that the Board's fraud-prevention standards must require an issuer to take effective steps to reduce the occurrence of, and costs from, fraudulent electronic debit transactions, including through the development and implementation of cost-effective fraud-prevention technologies. Some merchant commenters argued that the Board's standards in the interim final rule failed to require issuers to demonstrate the cost-effectiveness, particularly vis-à-vis merchants, of their fraud-prevention measures prior to receiving the fraud-prevention adjustment. One commenter believed that the Board's standards could not satisfy the cost-effective requirement in the statute unless the adjustment amount is based on issuer-specific fraud reduction and cost. By contrast, one issuer asserted that measuring the cost-effectiveness of a particular activity at the outset may not be possible because new fraud-prevention activities must be monitored over time to assess cost-effectiveness. 41

EFTA Section 920 does not define the term “cost-effective.” Dictionaries, in general, define “cost-effective” as the quality of being economical in terms of the benefits, including goods or services received for the money spent. 42 Interpreting “cost-effective” as requiring a precise measurement of effectiveness of a particular technology vis-à-vis its cost to an issuer as well as merchants would necessitate, in addition to an issuer calculating its own implementation costs, the extremely burdensome and complex analyses of calculating the costs to merchants and others of implementing and using the fraud-prevention technology and isolating the amount of fraudulent electronic debit transactions prevented by a particular technology, rather than by other means. Moreover, the complexity of this analysis would be increased further if an issuer were required to demonstrate cost-effectiveness prior to implementing a new technology or else take the risk of investing in a new technology only to find afterwards that it could not demonstrate the technology's cost-effectiveness and, thus, not be eligible to receive a fraud-prevention adjustment.

An alternate interpretation of the cost-effectiveness requirement is that, instead of requiring an issuer to affirmatively demonstrate the cost-effectiveness of a particular fraud-prevention technology, the requirement acts as a limitation on the fraud-prevention methods the Board's standards may require issuers to develop and implement. Thus, the Board could not adopt standards that would require an issuer to develop and implement new fraud-prevention technologies the costs of which far exceed any expected benefit from adopting the technologies. 43

EFTA Section 920(a)(5)(A)(ii) is silent as to which party's perspective is relevant for the cost-effectiveness of a particular technology. EFTA Section 920(a)(5)(B) requires the Board to consider, among other factors, the fraud-prevention and data-security costs expended by each party involved in electronic debit transactions. There are numerous fraud-prevention methods an issuer may use or adopt. Some of these fraud-prevention methods, such as the use of neural networks, do not impose costs on other parties to the transaction. Other fraud-prevention methods, such as card-authentication technology built into the card, impose costs on merchants that must ensure their point-of-sale terminals are compatible with the card-authentication technology embedded in the card. Therefore, the Board believes that it is appropriate, when assessing the cost-effectiveness of a particular fraud-prevention technology, for an issuer to consider whether and to what extent the fraud-prevention method it implements will impose costs on other parties. The Board recognizes, however, that an issuer may not have complete information about the costs that other parties may incur. Nonetheless, an issuer should consider the approximate magnitude of the costs imposed on other parties, even though an issuer may not have complete information about the extent of the costs imposed on other parties.

New comment 4(b)-5 clarifies that a consideration of the cost-effectiveness of a fraud-prevention technology involves considering the expected cost of a technology relative to the expected effectiveness of that technology in reducing fraud. This approach recognizes that an issuer likely will be unable to measure the issuer's actual cost and the actual effectiveness of a fraud-prevention technology, particularly if the technology is new, but will be able to form a reasonable expectation as to both the cost of and effectiveness of a given fraud-prevention technology. In calculating the expected cost of a particular fraud-prevention method, an issuer should consider both the expected initial implementation costs and the expected ongoing costs of using the fraud-prevention method.

New comment 4(b)-6 provides that an issuer need not develop fraud-prevention technologies itself to satisfy the standards in § 235.4(b), but may implement appropriate fraud-prevention technologies developed by a third party. Fraud-prevention technologies vary in their technological complexity, including the technological expertise and investment required for their development. Issuers—typically entities engaged in banking activities—often do not have the technological expertise to develop, or have opted not to specialize in the development of, complex fraud-prevention technologies. Instead, issuers often purchase fraud-prevention solutions (e.g., neural networks) developed by third parties. Although not developed by the issuer, these technologies nonetheless may be cost effective. Moreover, many issuers would not find it to be economical to devote resources to in-house research and development of all the fraud-prevention technologies they implement.

Section 235.4(b)(1) of the interim final rule requires an issuer, in order to be eligible to charge or receive a fraud-prevention adjustment, to develop and implement policies and procedures reasonably designed to (i) identify and prevent fraudulent electronic debit transactions, (ii) monitor the incidence of, reimbursements received for, and losses incurred from fraudulent electronic debit transactions, (iii) respond appropriately to suspicious electronic debit transactions so as to limit the fraud losses that may occur and prevent the occurrence of future fraudulent electronic debit transactions, and (iv) secure debit card and cardholder data. The interim final rule's commentary to § 235.4(b)(1) provides additional detail on the types of policies and procedures considered reasonably designed to achieve the fraud-prevention objectives in § 235.4(b)(1)(i) through (iv).

In addition to the comments received on the overall framework of the fraud-prevention standards (discussed above), the Board received more targeted comments on the policies and procedures designed to achieve the specified fraud-prevention objectives. These comments are discussed below in connection with each fraud-prevention objective.

In the final rule, revised § 235.4(b)(1) more generally requires an issuer to develop and implement policies and procedures that are “reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions.” Section 235.4(b)(2), in turn, sets forth elements of a fraud-prevention program that an issuer's policies and procedures must address. The Board believes, for the reasons set forth below, that developing and implementing policies and procedures that address these specific elements are steps that are effective in reducing the occurrence of, and costs from, fraudulent electronic debit transactions. These required aspects of a fraud-prevention program are similar to the fraud-prevention objectives in interim final rule § 235.4(b)(1).

Several commenters emphasized that one of the benefits of a non-prescriptive approach to fraud-prevention is that such an approach provides an issuer with greater flexibility to tailor its fraud-prevention program to the size and scope of its debit card program and to ever-changing fraud-types and patterns. The Board agrees that a flexible approach to fraud prevention is preferable to a one-size-fits-all approach. Accordingly, the Board has determined to add new comment 4(b)(2)-1 that provides that an issuer may tailor its fraud-prevention policies and procedures to address its particular debit card program. Relevant considerations when tailoring its policies and procedures include the size of its debit card program, the types of transactions in which its cardholders commonly engage ( e.g., card-present or card-not-present), fraud types and methods experience by the issuer, and the cost of implementing new fraud-prevention methods in light of the expected reduction in fraud from implementing such new methods. Likewise, the Board recognizes that an issuer may determine that fraud-prevention factors other than those listed in §§ 235.4(b)(2)(i)-(iv) are appropriate for its policies and procedures to address. Accordingly, the Board has determined to revise § 235.4(b)(2) to provide that an issuer's policies and procedures also must address “such other factors as the issuer considers appropriate.”

In interim final rule § 235.4(b)(1), the first fraud-prevention objective of an issuer's policies and procedures is identifying and preventing fraudulent electronic debit transactions. The commentary to interim final rule § 235.4(b)(1) provides that an issuer's policies and procedures should include activities to prevent, detect, and mitigate fraud even if the costs of the activities are not recoverable as part of the fraud-prevention adjustment. The commentary also provides examples of policies and procedures designed to identify and prevent fraudulent electronic debit transactions. For example, an issuer could use an automated mechanism to assess the risk that a particular electronic debit transaction is fraudulent during the authorization process. An issuer also could implement practices that support cardholder-reporting of lost or stolen cards or suspected incidences of fraud. The commentary also provides that an issuer could specify the use of particular technologies or methods to better authenticate the cardholder at the point of sale. Finally, the commentary provides that an issuer's policies and procedures should include an assessment of the effectiveness of the different authentication methods that the issuer enables its cardholders to use and that, if the issuer determines one method is more effective than the other, the issuer should consider practices to encourage its cardholders to use the more effective authentication method, as well as consider adopting new methods of authentication that are materially more effective than those currently available to its cardholders.

One commenter suggested that Board state in the commentary that an issuer should review the effectiveness of its authorization rules that govern automated fraud-detection mechanisms. Another commenter suggested that the Board add language encouraging issuers to specify the use of particular technologies or methods in order to authenticate the payment device and cardholder at the time of the transaction because there may be two authentication processes—one that identifies the card and one that identifies the cardholder. 44

Section 235.4(b)(2)(i) of the final rule requires that an issuer's policies and procedures address “methods to identify and prevent fraudulent electronic debit transactions.” The Board has revised comment 4(b)(2)(i)-1.i (interim final rule comment 4(b)(1)(i)-2.iii) to include the concept of card authentication at the time of the transaction, as suggested by the commenter, in recognition of the fact that fraud may be in the form of unauthorized use of a legitimate debit card or unauthorized use of a counterfeit debit card. The Board believes that an issuer should implement policies and procedures designed to prevent both types of fraud. The Board also has revised comment 4(b)(2)(i)-1.i to clarify that an issuer may specify the use of particular technologies or methods only to the extent that doing so does not inhibit the ability of a merchant to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions ( see § 235.7 and commentary thereto). In other words, an issuer may not specify the use of a particular technology if that technology is enabled for only one network, or two affiliated networks, on the debit card, but may specify the use of a particular technology that is available for at least two unaffiliated networks enabled on the card. This addition prevents potential conflicts with Regulation II's other requirements.

In addition, the Board has adopted comments 4(b)(2)(i)-1.ii and 4(b)(2)(i)-1.iii as set forth in interim final rule comments 4(b)(1)(i)-1.i and 4(b)(1)(i)-1.ii, respectively, and has made minor clarifying changes to comment 4(b)(2)(i)-1.iii. The Board has not revised the commentary to provide that an issuer review the effectiveness of any rules for its automated fraud-detection mechanisms, as suggested by a commenter. This review is encompassed in new § 235.4(b)(3), which requires an issuer to review its policies and procedures, and their implementation, in light of their effectiveness.

Section 235.4(b)(1)(ii) of the interim final rule requires issuers to monitor the incidence of, reimbursements received for, and losses incurred from fraudulent electronic debit transactions. Under that section, an issuer's policies and procedures must be designed to monitor the types, number, and value of electronic debit transactions, as well as its and its cardholders' losses from fraudulent electronic debit transactions, fraud-related chargebacks to acquirers, and reimbursements from other parties (such as from fines assessed to merchants for noncompliance with Payment Card Industry Data Security Standards). ( See interim final rule comment 4(b)(1)(ii)-1). The Board imposed this monitoring requirement on issuers as necessary in order for an issuer to inform its policies and procedures. The Board received one comment related to the monitoring requirement. This commenter expressed support for the standard's flexibility in requiring issuers to monitor the incidence of fraud. The final rule retains the requirements that the policies and procedures developed and implemented by an issuer address monitoring the volume and value of its fraudulent electronic debit transactions, as well as the types of fraudulent electronic debit transactions it experiences.

The Board has made minor, clarifying revisions to comment 4(b)(2)(ii)-1 (interim final rule comment 4(b)(1)(ii)-1). Specifically, the Board has revised this comment to clarify that the monitoring requirement is imposed on an issuer with respect to the number and value of the issuer's fraudulent electronic debit transactions, as opposed to the number and value of fraudulent transactions experienced across the industry. The Board also has revised comment 4(b)(2)(ii)-1 in recognition of the fact that an issuer may not be able to monitor the value of losses imposed on its cardholders by merchants. Rather, issuers must monitor the losses from fraudulent transactions that it passes on to its cardholders. Finally, the Board has revised comment 4(b)(2)(ii)-1 to emphasize that an issuer should establish procedures to retain fraud-related information necessary to perform its reviews under § 235.4(b)(3) and to retain and report information as required under § 235.8.

Section 235.4(b)(1)(iii) of the interim final rule requires an issuer to develop and implement policies and procedures reasonably designed to “respond appropriately to suspicious electronic debit transactions so as to limit the fraud losses that may occur and prevent the occurrence of future fraudulent electronic debit transactions.” Interim final rule comment 4(b)(1)(iii)-1 explains that whether an issuer's response to fraudulent or suspicious electronic debit transactions is appropriate depends on the circumstances and the risk of future fraudulent electronic debit transactions. The comment also provides examples of appropriate responses. Interim final rule comment 4(b)(1)(iii)-2 clarifies that an issuer's policies and procedures do not provide an appropriate response if they merely shift the loss to another party, other than the party that committed the fraud.

The Board received comments on this provision from two issuers. One issuer supported the Board's position that an “appropriate” response depends on the circumstances and suggested that the Board clarify that these “circumstances” include an issuer's debit card program, specific fraud experiences, and data analysis. Another issuer expressed concern that comment 4(b)(1)(iii)-2 could be construed in a manner that adversely affects the incentives and risks imposed by network rules ( e.g., the chargeback rules).

The final rule retains the requirement that an issuer's policies and procedures address appropriate responses to suspicious electronic debit transactions. The Board, however, has revised § 235.4(b)(2)(iii) (interim final rule § 235.4(b)(1)(iii)) to clarify that an issuer's response should be designed to limit potential costs to all parties from fraudulent electronic debit transactions. The Board has made changes to comment 4(b)(2)(iii)-1 (interim final rule comment § 235.4(b)(1)(iii)-1) to clarify that the issuer's assessment of the risk of future fraudulent electronic debit transactions is one example of the facts and circumstances that determines the appropriateness of the response.

Interim final rule comment 4(b)(1)(iii)-2 provides that merely shifting the loss to another party is not an appropriate response to a suspicious electronic debit transaction. One commenter expressed concern that this statement could adversely affect network rules that allocate fraud losses. Interim final rule comment 4(b)(1)(iii)-2 was intended to emphasize that an issuer's response should mitigate the issuer's fraud losses in addition to the fraud losses of other parties. The Board, however, does not believe that interim final rule comment 4(b)(1)(iii)-2 is necessary to provide guidance on the appropriateness of an issuer's response to suspicious transactions in light of the clarifications to revised § 235.4(b)(2)(iii). Accordingly, the Board has removed the comment.

Section 235.4(b)(1)(iv) of the interim final rule requires an issuer to develop and implement policies and procedures reasonably designed to secure debit card and cardholder data. Interim final rule comment 4(b)(1)(iv) further explains that debit card and cardholder data should be secured during transaction processing, during storage by the issuer (or its service provider), and when carried on media by employees or agents of the issuer. That comment recognizes that this standard may be incorporated into an issuer's information security program required by Section 501(b) of the Gramm-Leach-Bliley Act. 45

One commenter suggested that the Board revise its commentary to require an issuer to secure debit card and cardholder data only when such data are transmitted by the issuer and not apply the requirement to situations where the issuer is receiving data, because the issuer cannot control the transmission of data from third parties. As set forth in the interim final rule, comment 4(b)(1)(iv) states that an issuer should secure debit card and cardholder data when the issuer or its service provider is the party transmitting or storing the data. Although the issuer may not have direct control over every piece of information transmitted by its service provider, the issuer should select a service provider that sufficiently secures data the service provider transmits that relates to the issuer's debit cards and cardholders' data. An issuer is not required to develop and implement policies and procedures that address the security of debit card and cardholder information when received and processed by third parties that are not acting as the issuer's agent. Accordingly, the Board has determined not to make any changes to § 235.4(b)(2)(iv) (interim final rule § 235.4(b)(1)(iv)) and the accompanying commentary as set forth in the interim final rule.

Section 235.4(b)(2) of the interim final rule requires an issuer to review its fraud-prevention policies and procedures at least annually and to update those policies and procedures as necessary to address changes in the prevalence and nature of fraudulent electronic debit transactions and available methods of detecting, preventing, and mitigating fraud. Interim final rule comment 4(b)(2) explains that an issuer may need to review and update its policies and procedures more frequently than once a year; an additional review could be necessary, for example, if there is a significant change in fraud types, fraud patterns, or fraud-prevention methods or technologies before an issuer's next-scheduled annual review. In addition, comment 4(b)(1)(i)-2 to the interim final rule provides that an issuer should assess of the effectiveness of the different authentication methods that the issuer enables its cardholders to use and that, if the issuer determines one method is more effective than the other, the issuer should consider practices to encourage its cardholders to use the more effective authentication method, as well as consider adopting new methods of authentication that are materially more effective than those currently available to its cardholders.

The Board received comments on both of these provisions related to an issuer's review of its policies and procedures. One issuer explicitly supported requiring issuers to review their fraud-prevention policies and procedures on an annual basis. This issuer also suggested that, rather than requiring additional reviews based on the undefined “significant change” in fraud or fraud patterns, an issuer should determine whether changes in fraud types, fraud patterns, or fraud-prevention technologies or methodologies have an impact on the issuer's policies and procedures that would require additional review of and update to its policies and procedures.

One issuer suggested that the Board revise the language in comment 4(b)(1)(i)-2 to the interim final rule to recognize that the effectiveness of an authentication method in preventing fraud is only one of many factors issuers consider in promoting a particular authentication method, and that other factors an issuer may consider include acceptance and cost. In addition, one issuer argued that whether a particular authentication method is “materially more effective” should be determined by each issuer and that issuers should not be required to adopt any specific authentication method. 46 By contrast, merchant commenters supported standards that would require issuers to promote the technology with the lowest rate of fraud, as opposed to requiring that an issuer “consider” promoting the lower-fraud technology.

Section 235.4(b)(3) of the final rule retains the requirement that an issuer review, at least annually, its fraud-prevention policies and procedures, and their implementation, and update them as necessary. The Board, however, has revised the review requirement to provide more guidance on the required elements of the reviews and when reviews and updates to an issuer's policies and procedures, and their implementation, are necessary.

Section 235.4(b)(3)'s review requirement is intended to ensure that an issuer continues to take effective steps to reduce fraudulent electronic debit transactions, including through the development and implementation of cost-effective technologies. Accordingly, the Board has revised the provision relating to an issuer's review to require an issuer to review its policies and procedures, and their implementation, in light of their effectiveness (§ 235.4(b)(3)(i)) and cost-effectiveness (§ 235.4(b)(3)(ii)). New comment 4(b)(3)-1.i provides that an issuer's assessment should consider whether its policies and procedures are reasonably designed to reduce the number and value of its fraudulent electronic debit transactions relative to its non-fraudulent electronic debit transactions and are cost effective. 47

The Board has made additional revisions to the interim final rule's requirement that an issuer update its policies and procedures, as necessary, “to address changes in the prevalence and nature of fraudulent electronic debit transactions and available methods of detecting, preventing, and mitigating fraud.” One reason for adopting the non-prescriptive approach to fraud-prevention standards is to ensure that an issuer has sufficient flexibility to adjust its fraud-prevention methods in light of the rapidly changing nature of fraud and the availability of fraud-prevention methods. For this flexibility to be most beneficial and effective in preventing fraudulent electronic debit transactions, an issuer must update its policies and procedures in light of the changing nature of fraud and availability of fraud-prevention methods. The Board, however, believes that the most important source of information to an issuer about types and methods of fraud is the issuer's own experience and information. The Board also believes the additional burden on issuers of continuous open-ended monitoring of the types of fraud and methods used to commit fraud throughout the industry may exceed the benefit of this information to the issuers. To the extent an issuer experiences changes in fraud types and methods, it should identify them through its monitoring and update its policies and procedures, as necessary, in light of the subsequent identification from its own experience.

In addition to its own experience, an issuer may learn of changes in the types of fraud, methods used to commit fraud, and available methods for detecting and preventing fraud from other sources. Specifically, payment card networks may provide their issuers with information regarding common types and methods of fraudulent transactions based on the networks' monitoring of transactions or may provide an issuer with information on new fraud-prevention methods that are available for an issuer to enable on its cards. In addition, law enforcement agencies or fraud-monitoring groups in which the issuer participates may inform the issuer of changes in the nature of fraud and available methods of preventing fraud. Finally, an issuer may learn of changes in the nature of fraud and fraud-prevention methods from supervisory guidance. The Board believes that, at a minimum, an issuer should be expected to consider any changes in the types of fraud, methods used to commit fraud, and available methods to prevent fraudulent electronic debit transactions that it learns about from these sources. The Board, therefore, has revised § 235.4(b)(3) to specify the sources of information regarding the changing nature of fraud and available methods of preventing fraud that an issuer must consider in determining whether updates to its policies and procedures are necessary.

New comment 4(b)(3)-2 provides that an issuer may need to review its policies and procedures more frequently than on an annual basis based on information obtained from monitoring its fraudulent electronic debit transactions, changes in the types or methods of fraud, and available fraud-prevention methods. The revised comment eliminates the “significant change” trigger in the interim final rule and requires an issuer to determine whether more frequent review is necessary. The Board considered the comments received on this provision and determined that objectively defining “significant change” could inhibit an issuer from more frequently reviewing its policies and procedures. Each issuer will have unique fraud-prevention programs, and a change in debit card fraud, industry fraud types and methods, and available fraud-prevention methods may be “significant” for one issuer, but not another issuer. Therefore, the Board believes that an issuer will be in the best position to determine whether changes in its debit card fraud, industry trends in fraud types and methods, and available fraud-prevention methods necessitate a more-frequent-than-annual review of its fraud-prevention programs. An issuer's determination as to the necessity of more frequent reviews and updates is subject to supervisory review under § 235.9.

The Board has added new comment 4(b)(3)-3 to provide guidance on the interaction between an issuer's required fraud-prevention program reviews and updates and an issuer's eligibility to receive the fraud-prevention adjustment under § 235.4. The required review of an issuer's fraud-prevention policies and procedures, and their implementation, is intended to ensure that an issuer's policies and procedures continue to be reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions. The review requirements also ensure that an issuer is assessing its fraud-prevention policies and procedures against changing fraud trends and available fraud-prevention methods. The Board anticipates that updates to an issuer's fraud-prevention policies and procedures may be necessary, although the Board does not expect substantial updates to be necessary often.

An issuer could be deterred from making necessary updates to its policies and procedures if an issuer becomes ineligible to receive the fraud-prevention adjustment after merely determining that any updates to its fraud-prevention program are necessary. In fact, one of the effective steps that an issuer can take to prevent fraudulent electronic debit transactions, and reduce the losses from such transactions, is to revise its fraud-prevention policies and procedures to make them more effective. Therefore, the Board has added new comment 4(b)(3)-3 to provide that an issuer does not become ineligible to receive the fraud-prevention adjustment merely because it determines updates are necessary or appropriate. In order to remain eligible to receive or charge a fraud-prevention adjustment under § 235.4, however, an issuer should develop and implement such updates as soon as reasonably practicable in light of the circumstances. For example, an issuer may determine that it should enable new card-authentication methods, and such new card-authentication methods require the reissuance of cards. Such an issuer should issue the new cards as soon as reasonably practicable in light of the process for ordering new cards and distributing them to cardholders. This process could take longer than, for example, improving algorithms on a neural network program it uses.

Section 235.4(c) of the interim final rule provides that, in order to be eligible to receive or charge a fraud-prevention adjustment, an issuer that satisfies the standards set forth in § 235.4(b) must certify its compliance to its payment card networks on an annual basis. The interim final rule does not establish a process for this certification and, instead, leaves it up to the payment card networks to develop their own processes for identifying issuers eligible for the adjustment. Interim final rule comment 4(c)-1.

The Board received several comments on the certification provision. Merchants and their trade groups generally opposed the certification provision because they believed that the issuers and networks would be the ultimate judges of whether an issuer's policies and procedures satisfy the Board's standards. One commenter expressed concern that placing the compliance determination with the network would lead each network to favor its own fraud-prevention technology. Commenters that opposed placing the compliance determination with issuers and networks suggested that, alternatively, issuers should be required to certify their compliance with the fraud-prevention standards to their regulator in order to ensure that issuers are receiving adjustments only when the issuer complies with the Board's standards. One commenter supported a network-certification requirement but only if such a requirement was limited to identifying which issuers have self-certified as complying with the Board's standards.

The Board also received comments on whether the Board should establish a uniform certification process, assuming the Board required some certification. Some issuers opposed establishing a uniform certification process in support of allowing industry participants to develop the process. These issuers argued that industry-established processes would enable more consistency with the network-established processes for identifying issuers that are exempt and not exempt from the interchange fee standard. One commenter thought a network-established process was appropriate because networks currently are able to ensure compliance with the network's fraud-prevention standards. By contrast, other commenters representing issuers supported the Board establishing a consistent certification process across networks to ensure that all issuers are treated fairly, provided that the process is sufficiently flexible to support operational and system differences across networks. Other commenters recommended that the Board establish a uniform certification process that would allow consumers and merchants to have access to compliance filings.

The final rule requires an issuer to inform its payment card networks, on an annual basis, of its compliance with the rule's fraud-prevention standards in § 235.4(b) before the issuer may receive or charge a fraud-prevention adjustment. The Board has, however, revised § 235.4(c) to refer to this requirement as a “notification” requirement instead of a “certification” requirement, as in the interim final rule. Based on the comments received, the term “certification” connoted a more official and final determination by the issuer and payment card networks of an issuer's compliance than the Board intended. Compliance with the fraud-prevention standards in § 235.4(b), like compliance with all other provisions of Regulation II, is subject to administrative enforcement in accordance with § 235.9. Accordingly, the Federal agency with responsibility for enforcing an issuer's compliance with Regulation II is the entity that ultimately determines an issuer's compliance with the Board's fraud-prevention standards. The Board believes that referring to the requirement as a “notification” more accurately conveys that the purpose of this requirement is to place an affirmative requirement on an issuer to inform networks of what the issuer has determined to be its compliance with the fraud-prevention standards.

The Board also did not establish a uniform notification process in its final rule. In issuing the final rule implementing the other provisions of EFTA Section 920, the Board determined not to establish a uniform certification process for issuers that were exempt from the interchange fee standards or that issued debit cards that were exempt from the interchange fee standards. 48 The Board continues to believe that payment card networks should have the flexibility to develop their own processes for identifying issuers that are eligible to receive a fraud-prevention adjustment. 49 The Board believes it is unnecessary to impose additional processes by rule that serve the same function as those already developed by payment card networks. The final rule, however, continues to specify that an issuer must notify its payment card networks of its compliance on an annual basis.

The interim final rule does not explicitly address steps an issuer must take if it is found to be non-compliant with the Board's fraud-prevention standards by the Federal agency with responsibility for enforcing compliance with Regulation II. One network encouraged the Board to provide for a cure period in the event the Federal agency with responsibility to enforce an issuer's compliance under § 235.9 determined that a particular issuer was no longer eligible to receive a fraud-prevention adjustment. This network suggested that the Board allow such an issuer 90 to 180 days to come into compliance after a finding of a deficiency. This network also supported providing networks 30 days advance notice prior to the date on which an issuer may no longer receive a fraud-prevention adjustment in order to allow the network to reprogram its systems.

The Board has added new § 235.4(d) to the final rule to address a change in the issuer's compliance status. EFTA Section 920(a)(5) provides that the Board may allow for a fraud-prevention adjustment to the permissible interchange fee only if an issuer complies with the Board's fraud-prevention standards. As recognized in new comment 4(b)(3)-3, in the course of reviewing its fraud-prevention policies and procedures, an issuer may determine that updates are necessary. Likewise, the agency with responsibility for enforcing an issuer's compliance with Regulation II under § 235.9 also may identify updates that are necessary for an issuer to continue to be eligible to receive or charge a fraud-prevention adjustment. Merely determining that updates to its policies and procedures are necessary does not render an issuer ineligible to receive or charge a fraud-prevention adjustment; the Board anticipates that issuers may need to update their policies and procedures regularly to ensure their continued effectiveness and cost-effectiveness.

The Board believes that if an issuer is in substantial non-compliance with the Board's fraud-prevention policies and procedures, the issuer should not be eligible to receive a fraud-prevention adjustment. Under the non-prescriptive approach adopted by the Board, there are likely to be varying degrees of deficiencies in an issuer's fraud-prevention policies and procedures. Whether the deficiencies constitute substantial non-compliance will depend on the facts and circumstances, including the severity of the deficiencies. For example, an issuer's policies and procedures may fail to address appropriate responses to suspicious transactions as required by § 235.4(b)(2)(iii). Another issuer's policies and procedures may address appropriate responses to suspicious transactions, but the manner in which the response is made may be less effective in light of recent changes to fraud types experienced by the issuer. Failure to address an entire category of fraud-prevention activity could be one circumstance in which an issuer is substantially non-compliant with the Board's fraud-prevention standards.

New § 235.4(d) provides that an issuer is not eligible to receive or charge a fraud-prevention adjustment if the issuer is substantially noncompliant with the Board's fraud-prevention standards in § 235.4(b). A finding of substantial noncompliance would be made by the issuer or the Federal agency with responsibility for enforcing an issuer's compliance with Regulation II under § 235.9. New § 235.4(d) also provides that an issuer found to be substantially noncompliant with the Board's standards must notify its payment card networks that it is no longer eligible to receive or charge a fraud-prevention adjustment no later than 10 days after determining or receiving notification from the appropriate agency under § 235.9 that the issuer is substantially noncompliant. In addition, the issuer must stop receiving and charging the fraud-prevention adjustment no later than 30 days after notifying its payment card networks. This is the amount of time that a network-commenter suggested as the minimum amount of time necessary for a network to reprogram its interchange fee schedules. The Board does not believe it is necessary to incorporate a cure period in the final rule because the need to regularly update an issuer's policies and procedures does not make the issuer ineligible to receive the fraud-prevention adjustment, assuming the updates are made on a timely basis. Moreover, the Board does not believe that issuers in substantial noncompliance with the Board's standards should be entitled to receive the fraud-prevention adjustment during a cure period.

In addition, the final rule does not specify the steps an issuer must take to become eligible to receive the fraud-prevention adjustment after it has come into compliance. A determination of substantial non-compliance will be made by the appropriate agency under § 235.9. The Board believes that it is appropriate for that agency to determine the steps an issuer must take to satisfy the agency that the issuer has remedied deficiencies in its fraud-prevention program.

Section 904(a)(2) of the EFTA requires the Board to prepare an economic analysis of the impact of the regulation that considers the costs and benefits to financial institutions, consumers, and other users of electronic fund transfers. The analysis must address the extent to which additional paperwork would be required, the effect upon competition in the provision of electronic fund transfer services among large and small financial institutions, and the availability of such services to different classes of consumers, particularly low income consumers. 50

The Section-by-Section Analysis above, as well as the Final Regulatory Flexibility Analysis and Paperwork Reduction Act analysis below, contain a more detailed discussion of the costs and benefits of various aspects of the proposal. This discussion is incorporated by reference in this section.

As permitted by Section 920(a)(5) of the EFTA, this final rule allows an issuer that is subject to the interchange fee standards to receive or charge an amount of no more than 1 cent per transaction in addition to its interchange transaction fee if the issuer develops and implements policies and procedures that are reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions. 51 The final rules sets forth fraud-prevention aspects that an issuer's policies and procedures must address and requires an issuer to review its policies and procedures at least annually, and update them as necessary in light of their effectiveness, cost-effectiveness, and changes in the types of fraud, methods used to commit fraud, and available fraud-prevention methods. An issuer must notify its payment card networks annually that it complies with the Board's fraud-prevention standards and must also notify its payment card networks that it is no longer eligible to receive or charge a fraud-prevention adjustment no later than 10 days of determining or receiving notification from the appropriate agency under § 235.9 that the issuer is substantially non-compliant with the Board's fraud-prevention standards. The issuer must stop receiving or charging the fraud-prevention adjustment no later than 30 days after notifying its networks.

The collection of information required by this final rule is found in § 235.4 of Regulation II (12 CFR part 235). The new paperwork requirements of this final rule are discussed below in the Paperwork Reduction Act section, which contains a more detailed estimate for burden hours for being eligible to receive or charge the fraud-prevention adjustment. This final rule does not impose additional paperwork requirements related to the reporting to the Board required under § 235.8; issuers that do not qualify for the small issuer exemption (“covered issuers”) would be required to provide cost data to the Board independent of whether they qualify for the fraud-prevention adjustment. Covered issuers also would be required under § 235.8 to retain records that demonstrate compliance with the requirements of Regulation II for not less than five years after the end of the calendar year in which the electronic debit transaction occurred. If an issuer receives actual notice that it is subject to an investigation by an enforcement agency, the issuer must retain the records until final disposition of the matter. For smaller institutions that are not required to submit cost information to the Board under Regulation II, the regulation does not impose any reporting requirements.

As required by EFTA Section 920(a)(6), Regulation II exempts small issuers (i.e., those issuers that, together with affiliates, have consolidated assets of less than $10 billion) from the interchange fee standards, as well as the provisions relating to the fraud-prevention standards and adjustment. Regulation II, however, does not mandate that payment card networks adopt a two-tier interchange fee structure in which exempt issuers receive higher interchange fees. Since the interchange fee provisions of Regulation II (including the 1-cent fraud-prevention adjustment) became effective on October 1, 2011, most payment card networks have offered a two-tier interchange fee structure in which exempt issuers receive higher average interchange fees than those received by non-exempt issuers. 52 The 1-cent adjustment in the final rule, which is already permitted under the interim final rule, is not likely to affect the continuation of a two-tier interchange fee structure. 53

Some covered issuers may find that the additional cost of complying with the fraud-prevention standards are greater than the additional revenue generated from receiving the adjustment and so choose to not qualify for the adjustment. To the extent payment card networks provide the adjustment, covered issuers that qualify for the adjustment will likely experience an increase in their interchange revenue compared to covered issuers that do not qualify for the adjustment. In such a situation, covered issuers that do not qualify for the adjustment may need to adjust fees and account terms in response to the lower interchange revenue, whereas covered issuers that qualify may not. Under this scenario, consumers may shift their purchases of some financial services from covered issuers that do not qualify for the adjustment to exempt issuers or covered issuers that qualify for the adjustment in response to changes in fees and account terms at covered issuers that do not qualify for the adjustment. However, covered issuers that do not qualify for the adjustment and that have diversified product lines may look to retain customers by promoting alternative products not covered by the interchange fee standards, such as credit cards.

The competitive effects of any changes in fees or account terms across covered and exempt issuers due to the adjustment will depend on the degree of substitution among exempt issuers, covered issuers that qualify for the adjustment, and covered issuers that do not qualify for the adjustment. If the degree of substitutability of debit card and account services between covered issuers that qualify for the adjustment and covered issuers that do not qualify is large, then substantial shifts in the customer market share of each group of issuer may occur in response to less favorable changes in fees and account terms by issuers which do not qualify for the adjustment. Conversely, if substitution between covered issuers that qualify for the adjustment and covered issuers that do not is low, then any changes in fees and account terms may generate small shifts in customer market shares across covered issuers.

As the previous analysis suggests, the effect on competition among covered and exempt financial institutions will depend on a number of factors, including the extent to which payment card networks retain two-tier fee structures, the differentials in interchange fees across tiers in such structures, the product and service lines offered by covered and exempt financial institutions, and the substitutability of products and services across covered and exempt financial institutions. As noted above, most debit card networks have implemented two-tier fee structures. There is, however, no requirement that the networks continue to do so, and the level of interchange fees that will prevail in the long term is not known and will depend on market dynamics. Prior economic research suggests that competition between large and small depository institutions is weaker than competition within either group of institutions, likely because these institutions serve different customer bases. 54 For example, large institutions have tended to attract customers who desire expansive branch and ATM networks and a wide variety of financial instruments. By contrast, smaller institutions often market themselves as offering more individualized, relationship-based service and customer support to consumers and small businesses. This research suggests that substitution effects in response to changes in fees or account terms are stronger between depository institutions of similar sizes than across depository institutions of different sizes. Therefore, there may be greater substitution away from covered issuers that do not qualify for the adjustment to covered issuers that do qualify for the adjustment because most covered issuers are large, but less substitution away from covered issuers that do not qualify to exempt issuers (which are mostly small).

The ultimate effect of the final rule on consumers will depend on the behavior of various participants in the debit card market. Specifically, the effect of the rule on any individual consumer will depend on a variety of factors, including the consumer's current payment behavior (e.g., cash user or debit card user), changes in the consumer's payment behavior, the competitiveness of the merchants from which the consumer makes purchases, changes in merchant payment method acceptance, and changes in the behavior of banks.

For low-income consumers, to the extent that fees and other account terms become more attractive as a result of the issuer receiving the adjustment, some low-income consumers may be more willing or more able to obtain debit cards and related deposit accounts. Similarly, more attractive fees and account terms may cause certain low-income consumers who previously did not hold debit cards and deposit accounts to use those products. At the same time, however, low-income consumers who currently use cash for purchases may face higher prices at the point of sale if retailers that they frequent set higher prices to reflect higher costs of debit card transactions because of the adjustment. Therefore, the net effect on low-income consumers will depend on various factors, including each consumer's payment and purchase behavior, as well as market responses to the rule.

EFTA Section 904(a)(3) provides that “to the extent practicable, the Board shall demonstrate that the consumer protections of the proposed regulations outweigh the compliance costs imposed upon consumers and financial institutions.” Based on the analysis above and in the Section-by-Section Analysis, the Board cannot, at this time, determine whether the benefits to consumers exceed the possible costs to financial institutions. The overall effects of the final rule on financial institutions and on consumers are dependent on a variety of factors, and the Board cannot predict the market response to the final rule.

A final regulatory flexibility analysis (RFA) was included in the interim final rule in accordance with Section 3(a) of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA). The Board incorporated by reference the final RFA analysis published with the other provisions of the Board's Regulation II. The final analysis applicable to the other provisions of Regulation II applied to the regulation as a whole, including the fraud-prevention adjustment adopted in the interim final rule.

The RFA requires an agency to prepare a final regulatory flexibility analysis (FRFA) unless the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. The Board believes it is possible, but unlikely, that the fraud-prevention provisions in Regulation II will have a direct, significant economic impact on a substantial number of small entities. 55 Nonetheless, the Board has prepared the following FRFA pursuant to the RFA.

1. Statement of the need for, and objectives of, the final rule. EFTA Section 920 requires the Board to establish standards for assessing whether an interchange transaction fee received or charged by an issuer is reasonable and proportional to the cost incurred by the issuer with respect to the transaction. EFTA Section 920 authorizes the Board to allow for an adjustment to the amount of an interchange transaction fee received or charged by an issuer if (1) such adjustment is reasonably necessary to make an allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit transactions involving that issuer, and (2) the issuer complies with fraud-prevention standards established by the Board. The final rule is intended to provide issuers with additional incentives to engage in activities that prevent fraud in relation to electronic debit transactions, and require issuers wishing to receive the adjustment to develop and implement fraud-prevention policies and procedures.

2. Summary of significant issues raised by public comments in response to the Board's IRFA, the Board's assessment of such issues, and a statement of any changes made as a result of such comments. The Board did not receive any comments explicitly about the final RFA included in the interim final rule. Commenters, however, discussed the proposed rule's impact on small entities, particularly small issuers. EFTA Section 920(a)(6)(A) and § 235.5(a) exempt from the interchange fee restrictions any issuer that, together with its affiliates, has assets of less than $10 billion. Consequently, like Regulation II's other provisions governing interchange fees, the provisions related to the fraud-prevention adjustment to the interchange fee restrictions do not directly affect small issuers. Commenters, however, were concerned that the small issuer exemption would not be effective in practice if payment card networks do not implement two-tier fee structures.

As mentioned above and in the preamble to the Board's final rule implementing the other provisions of EFTA Section 920, the Board is monitoring the effectiveness of the exemption for small issuers. The Board also publishes annual lists of institutions above and below the small issuer exemption asset threshold in order to reduce the administrative burden associated with identifying small issuers that qualify for the exemption. Based on information reported to the Board by payment card networks, the average interchange fee received by exempt issuers in the fourth quarter of 2011, following the implementation of the interchange fee standard, was about the same as the amount they received in 2009.

3. Description and estimate of small entities affected by the final rule. This final rule applies directly to financial institutions that, together with affiliates, have assets of $10 billion or more. A financial institution generally is considered small if it has assets of $175 million or less. 56 Therefore, this final rule does not directly affect small entities.

4. Projected reporting, recordkeeping, and other compliance requirements. The Board's final rule does not apply to small entities and, therefore, in general, does not impose compliance requirements on small entities. 57

5. Steps taken to minimize the economic impact on small entities; significant alternatives. In its proposed rule, the Board requested comment on any approaches, other than the proposed alternatives, that would reduce the burden on all entities, including small entities. As noted above, the Board will publish lists of institutions above and below the small issuer exemption asset threshold to facilitate the implementation of two-tier interchange fee structures (including the fraud-prevention adjustment) by payment card networks. In addition, the Board plans to publish annually information regarding the average interchange fees received by exempt issuers and covered issuers in each payment card network; this information may assist exempt issuers in determining the networks in which they wish to participate.

In accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501—3521; 5 CFR Part 1320 Appendix A.1), the Board has reviewed the final rule under the authority delegated to the Board by the Office of Management and Budget (OMB). The Board may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid OMB control number. The OMB control number will be assigned.

On July 20, 2011, notice of the interim final rule was published in the Federal Register (76 FR 43478). The Board invited comment on (1) whether the proposed collection of information is necessary for the proper performance of the Board's functions, including whether the information has practical utility; (2) the accuracy of the Board's estimate of the burden of the proposed information collection, including the cost of compliance; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology. The comment period for the interim final rule expired on September 30, 2011. No comments were received specifically addressing the paperwork burden estimates. One commenter, however, stated that it was difficult to determine whether the Board's estimate of 40 hours to review an issuer's policies and procedures was adequate in light of the fact that the compliance burden could increase in the future should the standards become more specific. The Board is restating its burden estimates from the interim final rule to reflect updates to the respondent count and to include burden estimates for the disclosure requirement under § 235.4(d), change in status.

The final rule contains requirements subject to the PRA. The collection of information required by this final rule is found in § 235.4 of Regulation II (12 CFR part 235). Under the final rule, if an issuer meets standards set forth by the Board, it may receive or charge an adjustment of no more than 1 cent per transaction to any interchange transaction fee it receives or charges in accordance with § 235.3.

To be eligible to receive the fraud-prevention adjustment under § 235.4(a)(1), an issuer must develop and implement policies and procedures reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions, including through the development and implementation of cost-effective fraud-prevention technology. An issuer's policies and procedures must address (1) methods to identify and prevent fraudulent electronic debit transactions; (2) monitoring of the volume and value of its fraudulent electronic debit transactions; (3) appropriate responses to suspicious electronic debit transactions in a manner designed to limit the costs to all parties from and prevent the occurrence of future fraudulent electronic debit transactions; (4) methods to secure debit card and cardholder data; and (5) such other factors as the issuer considers appropriate.

An issuer must review its fraud-prevention policies and procedures, and their implementation, at least annually, and update them as necessary in light of (i) their effectiveness in reducing the occurrence of, and cost to all parties from, fraudulent electronic debit transactions involving the issuer; (ii) their cost-effectiveness; and (iii) changes in the types of fraud, methods used to commit fraud, and available methods of detecting and preventing fraudulent electronic debit transactions that the issuer identifies from (A) its own experience or information; (B) information provided to the issuer by its payment card networks, law enforcement agencies, and fraud-monitoring groups in which the issuer participates; and (C) applicable supervisory guidance. Finally, an issuer must notify the payment card networks in which the issuer participates, on an annual basis, of its compliance with the Board's standards, as well as of its substantial noncompliance, as determined by the issuer or Federal agency with responsibility for enforcing the issuer's compliance with Regulation II. The final rule will be effective on October 1, 2012.

The final rule will apply to issuers that, together with their affiliates, have consolidated assets of $10 billion or more. The Board estimates that there are as many as 564 chartered issuers required to comply with the recordkeeping and reporting provisions under § 235.4. 58

The Board estimates that the 564 issuers will take, on average, 160 hours (one month) to develop and implement policies and train appropriate staff to comply with the recordkeeping provisions under § 235.4. This one-time annual PRA burden is estimated to be 90,240 hours. On a continuing basis, the Board estimates issuers will take, on average, 40 hours (one business week) annually to review its fraud prevention policies and procedures, updating them as necessary, and estimates the annual PRA burden to be 22,560 hours. The Board estimates 564 issuers will take, on average, 30 minutes to comply with the disclosure provision under § 235.4(c) (annual notification), and estimates the annual reporting burden to be 282 hours. Lastly, the Board estimates 564 issuers will take, on average, 30 minutes to comply with the disclosure requirement under § 235.4(d) (change in status), and estimates the annual reporting burden to be 283 hours. The total annual PRA burden for this information collection is estimated to be 113,364 hours.

The Federal Reserve has a continuing interest in the public's opinions of our collections of information. At any time, comments regarding the burden estimate, or any other aspect of this collection of information, including suggestions for reducing the burden, may be sent to: Secretary, Board of Governors of the Federal Reserve System, Washington, DC 20551 Paperwork Reduction Project (Docket # R-1404), Washington, DC 20503.

Section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809) requires the Board to use “plain language” in all final rules published after January 1, 2000. The Board has sought to present this final rule in a simple and straight forward manner. The Board received no comments on whether the interim final rule was clearly stated and effectively organized, or on how the Board might make the text of the rule easier to understand.

For the reasons set forth in the preamble, the Board amends Title 12, Chapter II of the Code of Federal Regulations as follows:

History

On May 21, 2012, the FAA published in the Federal Register a notice of proposed rulemaking (NPRM) to amend Class E airspace for the Sweetwater, TX, area, creating additional controlled airspace at Avenger Field Airport (77 FR 29917) Docket No. FAA-2011-0829. Interested parties were invited to participate in this rulemaking effort by submitting written comments on the proposal to the FAA. No comments were received. Class E airspace designations are published in paragraph 6005 of FAA Order 7400.9V dated August 9, 2011, and effective September 15, 2011, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designations listed in this document will be published subsequently in the Order.

This action amends Title 14 Code of Federal Regulations (14 CFR) Part 71 by amending Class E airspace extending upward from 700 feet above the surface to accommodate new standard instrument approach procedures at Avenger Field Airport (formerly Avenger Field), Sweetwater, TX. This action is necessary for the safety and management of IFR operations at the airport. Geographic coordinates of the airport are updated to coincide with the FAA's aeronautical database.

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. Therefore, this regulation: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this rule, when promulgated, will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the U.S. Code. Subtitle 1, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it amends controlled airspace at Avenger Field Airport, Sweetwater, TX.

The FAA has determined that this action qualifies for categorical exclusion under the National Environmental Policy Act in accordance with FAA Order 1050.1E, “Environmental Impacts: Policies and Procedures,” paragraph 311a. This airspace action is not expected to cause any potentially significant environmental impacts, and no extraordinary circumstances exist that warrant preparation of an environmental assessment.

In consideration of the foregoing, the Federal Aviation Administration amends 14 CFR part 71 as follows:

History

On May 21, 2012, the FAA published in the Federal Register a notice of proposed rulemaking (NPRM) to amend Class E airspace for the Battle Creek, MI, area, creating additional controlled airspace at W.K. Kellogg Airport (77 FR 29918) Docket No. FAA-2011-1110. Interested parties were invited to participate in this rulemaking effort by submitting written comments on the proposal to the FAA. No comments were received. Class E airspace designations are published in paragraph 6005 of FAA Order 7400.9V dated August 9, 2011, and effective September 15, 2011, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designations listed in this document will be published subsequently in the Order.

This action amends Title 14 Code of Federal Regulations (14 CFR) Part 71 by amending Class E airspace extending upward from 700 feet above the surface to accommodate new standard instrument approach procedures at W.K. Kellogg Airport, Battle Creek, MI. This action is necessary for the safety and management of IFR operations at the airport. Geographic coordinates are updated to coincide with the FAA's aeronautical database.

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. Therefore, this regulation: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this rule, when promulgated, will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the U.S. Code. Subtitle 1, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it amends controlled airspace at W.K. Kellogg Airport, Battle Creek, MI.

The FAA has determined that this action qualifies for categorical exclusion under the National Environmental Policy Act in accordance with FAA Order 1050.1E, “Environmental Impacts: Policies and Procedures,” paragraph 311a. This airspace action is not expected to cause any potentially significant environmental impacts, and no extraordinary circumstances exist that warrant preparation of an environmental assessment.

In consideration of the foregoing, the Federal Aviation Administration amends 14 CFR Part 71 as follows:

History

On May 21, 2012, the FAA published in the Federal Register a notice of proposed rulemaking (NPRM) to amend Class E airspace for the Lemmon, SD, area, creating additional controlled airspace at Lemmon Municipal Airport (77 FR 29920) Docket No. FAA-2012-0391. Interested parties were invited to participate in this rulemaking effort by submitting written comments on the proposal to the FAA. No comments were received. Class E airspace designations are published in paragraph 6005 of FAA Order 7400.9V dated August 9, 2011, and effective September 15, 2011, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designations listed in this document will be published subsequently in the Order.

This action amends Title 14 Code of Federal Regulations (14 CFR) Part 71 by amending Class E airspace extending upward from 700 feet above the surface to accommodate new standard instrument approach procedures at Lemmon Municipal Airport, Lemmon, SD. This action is necessary for the safety and management of IFR operations at the airport. Geographic coordinates are updated to coincide with the FAA's aeronautical database.

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. Therefore, this regulation: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this rule, when promulgated, will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the U.S. Code. Subtitle 1, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it amends controlled airspace at Lemmon Municipal Airport, Lemmon, SD.

The FAA has determined that this action qualifies for categorical exclusion under the National Environmental Policy Act in accordance with FAA Order 1050.1E, “Environmental Impacts: Policies and Procedures,” paragraph 311a. This airspace action is not expected to cause any potentially significant environmental impacts, and no extraordinary circumstances exist that warrant preparation of an environmental assessment.

In consideration of the foregoing, the Federal Aviation Administration amends 14 CFR part 71 as follows:

Background and Purpose

The Coast Guard established a special local regulation and a safety zone for the sailing regattas being conducted on the waters of San Francisco Bay associated with the 34th America's Cup sailing events taking place adjacent to the City of San Francisco waterfront in the vicinity of the Golden Gate Bridge and Alcatraz Island. The special local regulation and safety zone regulate the on-water activities associated with the “2012 America's Cup World Series” regatta scheduled for August 21-26, 2012, and will temporarily restrict vessel traffic in a portion of the San Francisco Bay, prohibit vessels not participating in the America's Cup sailing events from entering the designated race area, and create a temporary safety zone around racing vessels (77 FR 41902, July 17, 2012).

This notice announces the availability of the 2012 program calendar referenced in the rulemaking published in association with the “2012 America's Cup World Series” regattas. This program calendar is available in the docket, as indicated in the ADDRESSES section, and includes the dates and times that event programming is expected to occur.

The Coast Guard may enforce the special local regulation and safety zone as early as noon on any program day. In general, however, the Coast Guard anticipates beginning enforcement approximately one hour before the first scheduled event on each program day, and ending enforcement as soon as possible after the last event on each program day. The Coast Guard will use a Broadcast Notice to Mariners to indicate when the zone is being enforced and when enforcement has ended and normal vessel operations may occur.

This notice is issued under the authority of 5 U.S.C. 552(a) and 33 CFR 1.05-1.

The Louisiana Department of Transportation and Development has requested a temporary deviation from the operating schedule of the US 90 (Danzinger) Bridge across the Inner Harbor Navigational Canal, mile 3.1, at New Orleans, LA. The vertical clearance of the bridge in the closed-to-navigation position is 50 feet above Mean High Water, elevation 5.0 feet Mean Sea Level.

In accordance with 33 CFR 117.458(b), the draw of the US90 (Danzinger) Bridge, mile 3.1, shall open on signal, except that, from 8 p.m. to 7 a.m. the draw shall open on signal if at least four hours notice is given, and the draw need not be opened from 7 a.m. to 8:30 a.m. and 5 p.m. to 6:30 p.m. Monday through Friday. This deviation allows the bridge to remain closed to navigation for 48 consecutive hours from 6 p.m. on Monday, August 27, 2012 until 6 p.m. on Wednesday, August 29, 2012 and for 30 consecutive days from 12:01 a.m. on Friday, September 7, 2012 until 11:59 p.m. on Saturday, October 6, 2012.

The closure is necessary to replace the wire rope lifting cables, and for the rehabilitation of most electrical motors and components, most mechanical components and the operator house. This maintenance is essential for the continued operation of the bridge. Notices will be published in the Eighth Coast Guard District Local Notice to Mariners and will be broadcast via the Coast Guard Broadcast Notice to Mariners System.

Navigation on the waterway consists of commercial and recreational vessels and sailboats and small tugs with and without tows. An alternate route is available via the Rigolets or Chef Menteur Pass. Vessels with vertical clearance requirements of less than 50 feet above Mean High Water may pass under the bridge while in the closed-to-navigation position.

Due to prior experience and coordination with waterway users, it has been determined that this closure will not have a significant effect on vessels that use the waterway.

In accordance with 33 CFR 117.35(e), the drawbridge must return to its regular operating schedule immediately at the end of the designated time period. This deviation from the operating regulations is authorized under 33 CFR 117.35.

The Route 1 Bridge across the Mystic River at mile 2.8, has a vertical clearance of 4 feet at mean high water and 7 feet at mean low water. The drawbridge operation regulations are listed at 33 CFR 117.211.

The normal waterway users are predominantly recreational craft of various sizes.

The Coast Guard issued two previous temporary deviations, (75 FR 78163) effective from December 2, 2010 through April 15, 2011 and (76 FR 70348) effective from December 1, 2011 through April 15, 2012, to facilitate this major bridge rehabilitation project that allowed the Route 1 Bridge to remain closed during the winter months when the bridge rarely opens. Both previous temporary deviations achieved successful results without any problems or complaints from the mariners that normally transit the Mystic River.

The owner of the bridge, Connecticut Department of Transportation, has requested a third temporary deviation from the regulations to allow the bridge to remain in the closed position to complete rehabilitation repairs at the bridge.

Under this temporary deviation the Route 1 Bridge may remain in the closed position from November 1, 2012 through April 15, 2013, to facilitate completion of bridge rehabilitation repairs. Vessels that can pass under the bridge in the closed position may do so at any time.

The bridge has received few requests to open during this time period during the past three years. The waterway users were advised of the requested bridge closure and no objections were received.

In accordance with 33 CFR 117.35(e), the bridge must return to its regular operating schedule immediately at the end of the designated time period. This deviation from the operating regulations is authorized under 33 CFR 117.35.

On July 20, 2012, the Coast published a notice of temporary deviation from regulations in the Federal Register (77 FR 42637). The BNSF Railway Company requested this temporary deviation from the operating schedule of the swing span railroad bridge across Bayou Boeuf, mile 10.2, at Amelia, St. Mary Parish, Louisiana, for August 16, 2012, to perform repairs necessitated by an allision. Due to delay in production and delivery of repair equipment, the BNSF Railway requested a modification to the effective date from August 16, 2012 to September 13, 2012. The bridge provides no vertical clearance in the closed-to-navigation position.

Notices will be published in the Eighth Coast Guard District Local Notice to Mariners and will be broadcast via the Coast Guard Broadcast Notice to Mariners System.

In accordance with 33 CFR 117.5, the bridge currently opens on signal for the passage of vessels. This deviation allows the vertical lift span of the bridge to remain in the closed-to-navigation position from 7 a.m. through 11 p.m. on Thursday, September 13, 2012.

In accordance with 33 CFR 117.35(e), the drawbridge must return to its regular operating schedule immediately at the end of the designated time period. This deviation from the operating regulations is authorized under 33 CFR 117.35.

Table of Acronyms DHS Department of Homeland Security FR Federal Register NPRM Notice of Proposed Rulemaking A. Regulatory Information

The Coast Guard is issuing this temporary final rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for not publishing a notice of proposed rulemaking (NPRM) with respect to this rule. This rule re-establishes a safety zone necessary to protect life and property from hazards associated with the ongoing floodwall repair and construction project. The Coast Guard established the initial safety zone for this project in a Temporary Final Rule on January 25, 2012 at docket USCG-2011-1128 (77 FR 3609) to be enforced through June 30, 2012. The floodwall repair and construction project are still ongoing and this safety zone is needed immediately to ensure there is no gap in providing the necessary safety measures to protect personnel, general public, vessel and tows, and mariners from hazards associated with the ongoing floodwall repair and construction process. Publishing a NPRM would unnecessarily delay the effective date for this rule which would be contrary to the public interest. Delaying this project for the NPRM process would also interfere with the contractually imposed timeline for repair of the floodwall.

For the same reasons, under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the Federal Register . Delaying the effective date for this temporary rule to provide a full 30 days notice is contrary to protect persons and vessels from potential safety hazards associated with the floodwall repair and construction project.

The Coast Guard is reestablishing the safety zone in the Gulf Intracoastal Waterway, Mile Marker 35.2 to Mile Marker 35.5, bank to bank, West of Harvey Locks. The U.S. Army Corps of Engineers contracted installation of a new sheetpile floodwall on the waterward side of the existing Larose Floodwall and construction of a new rip-rap barge impact barrier on the waterward side of the new floodwall. This construction and repair project is now scheduled to continue through January 1, 2013.

The Coast Guard determined that reestablishing the temporary safety zone is needed during these operations. The legal basis and authorities for this rulemaking establishing a safety zone are found in 33 U.S.C. 1231, 46 U.S.C. Chapter 701, 3306, 3703; 50 U.S.C. 191, 195; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5; Public Law 107-295, 116 Stat. 2064; and Department of Homeland Security Delegation No. 0170.1, which collectively authorize the Coast Guard to establish and define regulatory safety zones.

The purpose of this safety zone is to protect life and property during the continued construction of the floodwall in Larose in the vicinity of GIWW Mile Marker 35.2 to Mile Marker 35.5. This construction project poses significant safety hazards to both vessels and mariners operating in the vicinity of GIWW Mile Maker 35.2 to Mile Marker 35.5.

The Coast Guard is reestablishing a temporary Safety Zone in the Gulf Intracoastal Waterway, Mile Marker 35.2-35.5, bank to bank, West of Harvey locks. The temporary Safety Zone will continue through January 1, 2013. Vessels and tows shall transit at slowest safe speed to minimize wake and, after leaving the slowest safe speed zone, proceed with caution to minimize interference with construction activities.

All work on the project is scheduled to be complete by January 1, 2013.

Continuing through January 1, 2013, two barges will be staged on the south side of the waterway at all times but will remain clear of the main channel limit. The COTP Morgan City or a designated representative will inform the public through Broadcast Notice to Mariners of changes in the effective and enforcement periods for the safety zone. This rule is enforceable with actual notice on July 1, 2012. Mariners can contact the contractor via VHF-FM channel 69.

Mariners shall transit at their slowest safe speed to minimize wake and proceed with caution while passing through the construction area.

Charts: 11355.

We developed this 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 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 that Order.

This rule creates a safety zone implementing slowest safe speed to minimize wake. Vessels will be allowed to enter and transit through the area. Advance notifications to the marine community regarding this safety zone and any restrictions or closures related to the floodwall repair and construction project will be made through Broadcast Notice to Mariners and Local Notice to Mariners. The impacts on routine navigation are expected to be minimal.

The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601-612, as amended, requires federal agencies to consider the potential impact of regulations on small entities during rulemaking. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.

This rule will affect the following entities, some of which may be small entities: The owners or operators of vessels intending to transit through the Safety Zone through January 1, 2013. This Safety Zone will not have a significant economic impact on a substantial number of small entities for the following reasons: The zone is limited in size, is of short duration and vessel traffic are allowed to transit through the safety zone at slowest safe speed.

If you are a small business entity and are significantly affected by this regulation, please contact ENS Nicholas Jones, Marine Safety Unit Houma, at (985) 857-8507 ext. 232.

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 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.

Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.

This rule calls for no 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 State or local governments and would either preempt State law or impose a substantial direct cost of compliance on them. We have analyzed this rule under that Order and have determined that it 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 rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.

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

This 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 rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and does not create an environmental risk to health or risk to safety that may disproportionately affect children.

This rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does 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 action is not a “significant energy action” under Executive order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use.

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

We have analyzed this 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 concluded this action is one of a category of actions which do not individually or cumulatively have a significant effect on the human environment. This rule is categorically excluded, under figure 2-1, paragraph (34) (g.), of the Instruction. This rule will be in effect until January 1, 2013, but is not expected to result in any significant adverse environmental impact as described in NEPA.

An environmental analysis checklist and a categorical exclusion determination will be provided and made available at the docket as indicated in the ADDRESSES section.

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

This action is directed to the public in general. Since this action may apply to anyone, the Agency has not attempted to describe all the specific entities that may be affected by this action. If you have any questions regarding the applicability of this action to a particular entity, consult the person listed under FOR FURTHER INFORMATION CONTACT .

Section 553 of the Administrative Procedure Act (APA) (5 U.S.C. 533(b)(3)(B)) provides that, when an agency for good cause finds that notice and public procedure are impracticable, unnecessary, or contrary to the public interest, the agency may issue a rule without providing notice and an opportunity for public comment. EPA has determined that there is good cause for making this rule final without prior proposal and opportunity for comment. These changes update the organizational name of the EPA office responsible for administration of FIFRA, FFDCA section 408, and TSCA, and correct various Agency addresses. Notice and public comment on such changes is unnecessary. EPA finds that this constitutes good cause under 5 U.S.C. 533(b)(3)(B).

This final rule implements technical corrections and does not otherwise impose or change any requirements. As such, this action does not require review by OMB under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993), the Paperwork Reduction Act (44 U.S.C. 3501 et seq. ), or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). Nor does it impose any enforceable duty, contain any unfunded mandate, or impose any significant or unique impact on small governments as described in the Unfunded Mandates Reform Act (UMRA) (2 U.S.C. 1501 et seq. ).

This action will not have substantial direct effects on State or Tribal governments, on the relationship between the Federal Government and States or Indian tribes, or on the distribution of power and responsibilities between the Federal Government and States or Indian tribes. As such, it will not have any “federalism implications” as described by Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10,1999) or “tribal implications” as described by Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000). Nor does it involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note), environmental justice-related issues that would require consideration under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994), or otherwise involve anything that would have any adverse effect on the supply, distribution, or use of energy that would require consideration under Executive Order 13211, entitled “Actions Concerning Regulations that Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001).

In addition, since this action is not subject to notice-and-comment requirements under the APA or any other statute, it is not subject to the regulatory flexibility provisions of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq. ), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

This preamble is organized as follows:

Entities potentially affected by this action include state, local, and tribal governments that would participate in the initial area designation process for the 2010 SO 2 standard.

The EPA has established a docket for designations for the 2010 SO 2 NAAQS under Docket ID No. EPA-HQ-OAR-2012-0233. All documents in the docket are listed in the www.regulations.gov index. Although listed in the index, some information is not publicly available, e.g., confidential business information or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, will be publicly available only in hard copy. Publicly available docket materials are available either electronically in www.regulations.gov or in hard copy at the EPA Docket Center EPA/DC, EPA West, Room 3334, 1301 Constitution Avenue NW, Washington, DC The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566-1744, and the telephone number for the EPA Docket Center is (202) 566-1742.

An electronic copy of this document is also available at www.epa.gov/so2designations.

On June 2, 2010, the EPA Administrator signed a notice of final rulemaking that revised the primary SO 2 NAAQS (75 FR 35520, published on June 22, 2010) after review of the existing two primary SO 2 standard promulgated on April 30, 1971 (36 FR 8187). 1 The EPA established the revised primary SO 2 NAAQS at 75 parts per billion (ppb) which is attained when the 3-year average of the annual 99th percentile of 1-hour daily maximum concentrations does not exceed 75 ppb. The EPA determined in that rulemaking that this is the level necessary to provide protection of public health with an adequate margin of safety, especially for children, the elderly and those with asthma. These groups are particularly susceptible to the health effects associated with breathing SO 2 .

After the EPA establishes or revises a NAAQS pursuant to CAA section 109, the CAA directs the EPA and the states to begin taking steps to ensure that those NAAQS are met. The first step is to identify areas of the country that do or do not meet the new or revised NAAQS. This step is known as the initial area designations. Section 107(d)(1) of the CAA provides that, “By such date as the Administrator may reasonably require, but not later than 1 year after promulgation of a new or revised NAAQS for any pollutant under section 109, the Governor of each state shall * * * submit to the Administrator a list of all areas (or portions thereof) in the state” that designated those areas as nonattainment, attainment, or unclassifiable. The CAA defines an area as nonattainment if it is violating the NAAQS or if it is contributing to a violation in a nearby area. See CAA section 107(d)(1)(A)(i).

The CAA further provides, “Upon promulgation or revision of a NAAQS, the Administrator shall promulgate the designations of all areas (or portions thereof) * * * as expeditiously as practicable, but in no case later than 2 years from the date of promulgation of the new or revised NAAQS. Such period may be extended for up to 1 year in the event the Administrator has insufficient information to promulgate the designations.” See CAA section 107(d)(1)(B)(i).

After the states submit their recommendations, but no later than 120 days prior to promulgating designations, the EPA is required to notify a state of any intended modifications to the state's recommended designation. The state then has an opportunity to demonstrate why any proposed modification is inappropriate. Whether or not a state provides a recommendation, the EPA must promulgate the designation that the agency deems appropriate within two years of promulgation of the NAAQS (or within 3 years if the EPA extends the deadline).

For the June 2010 SO 2 NAAQS, the deadline for states to submit designation recommendations to the EPA for their areas was June 3, 2011. The EPA has been evaluating these recommendations and conducting additional analyses to determine whether it is necessary to modify any of the state recommendations. The EPA was originally intending to complete the initial designations for the 2010 SO 2 NAAQS on a 2-year schedule, by June 3, 2012. We explained this intent in the preambles to the notices of proposed and final rulemakings for the revised SO 2 NAAQS, and in subsequently issued guidance documents suggesting how states could develop their designations recommendations and how they could develop and submit state implementation plans (SIPs) for attainment, maintenance and enforcement of the NAAQS. We received numerous comments in response to our guidance, including suggestions that we take the extra year allowed under the CAA to issue designations where insufficient information exists, and, for the reasons discussed below, we are persuaded that it is more reasonable to take extra time allowed in these circumstances, a year or less as appropriate, rather than to proceed with our prior intention to issue designations by June 3, 2012.

We first explained our intentions for designations under the new SO 2 NAAQS in the preamble to the proposed NAAQS rule, published in the Federal Register on December 8, 2009 (74 FR 64810). In the proposal, we explained that since the new SO 2 ambient monitoring network and any newly sited monitors would not be generating sufficient monitoring data in time to inform the EPA decisions on designations, even if the EPA took an extra year, we intended to issue initial area designations on a 2-year schedule, by June 2012, based on 3 years of complete, quality assured, certified air quality monitoring data from the pre-existing monitoring network (74 FR 64858). We then expected to base designations on air quality data from the years 2008-2010 or 2009-2011, using hourly reported data from existing monitors, and to designate as nonattainment any area with a monitor indicating a violation of the 1-hour SO 2 NAAQS, regardless of whether that monitor is located such that it could be counted towards meeting the proposed new network requirements (74 FR at 64859). The EPA further explained, however, that if the monitor indicates that the monitoring site meets the 1-hour SO 2 NAAQS, the EPA's designation decision would be made on a case-by-case basis, including possibly an unclassifiable designation due to the EPA being unable to determine, due to lack of data, whether the area is violating the NAAQS or is contributing to a violation in a nearby area (74 FR 64859).

In the published June 22, 2010, final NAAQS rulemaking preamble, partly in response to comments on the proposal, the EPA described a different intended approach to issuing initial area designations in order to make it more consistent with what we then described as our historical approach to implementing the prior SO 2 NAAQS (75 FR 35550). For designations, we indicated that approach would rely upon both monitoring data from the existing SO 2 network for the years 2008-2010, as well as any refined SO 2 dispersion modeling for sources that may have the potential to cause or contribute to a NAAQS violation, provided that it is recent and available (75 FR 35569). Under this approach, the EPA would designate as nonattainment an area that has monitoring or refined modeling results showing a NAAQS violation, and as attainment an area that has both monitoring data and appropriate modeling results showing no violations (75 FR 35569). In general, other areas, including those with SO 2 monitors showing no violations but without modeling showing no violations, the EPA would designate as unclassifiable (75 FR 35569). However, the EPA further explained that it anticipated making determinations of when monitoring alone could be appropriate to support a designation for a specific area on a case-by-case basis, informed by the area's factual record and after examining the historic treatment of the area with respect to prior SO 2 designations as well as whether the area is one in which monitoring would be the more appropriate technical tool for determining attainment of the 1-hour NAAQS (75 FR 35552).

The final NAAQS preamble also explained that the EPA received comments expressing concerns with the perceived burdens of implementing the proposed monitoring network as well as the sufficiency of its scope for purposes of identifying NAAQS violations (75 FR 35570). Some of these commenters suggested using modeling to determine the scope of monitoring requirements, or favored modeling over monitoring to determine attainment of the NAAQS (75 FR 35570). In response to these commenters, we explained our modified expectations at that time for issuing designations, as well as our intention to issue further modeling guidance (75 FR 35570). However, as we expected that it would take some time to issue guidance, and that modeling several hundred sources would represent a substantial burden, we clarified that we did not expect states to complete such modeling and incorporate their results in designations recommendations due in June 2011 (75 FR 35570). Rather, we expected states would generally submit designations recommendations of unclassifiable, and that most areas' informational records would be insufficient to support initial designations of either attainment or nonattainment (75 FR 35571).

In March 2011, the EPA then issued a memorandum, included in the docket for today's extension, providing non-binding guidance on designations for the 2010 primary SO 2 NAAQS, including modeling guidance (March 2011 Guidance). In this guidance, the EPA stated its intention at that time to promulgate initial designations for this standard within 2 years from the promulgation of the NAAQS ( i.e., by June 3, 2012). (March 2011 Guidance at pp. 1-2.) Under the CAA, states were to submit their primary SO 2 NAAQS designation recommendations to the EPA by June 3, 2011. The EPA stated in its guidance that if the EPA intends to modify any state's recommendation, the EPA will notify the state no later than 120 days prior to the EPA's action to promulgate designations ( i.e., by February 3, 2012, for designations then expected to be promulgated by June 3, 2012). The EPA again explained that in general, due to an expected absence of monitoring or modeling information showing whether areas were meeting or not meeting the revised NAAQS, most areas would likely be initially designated as unclassifiable (March 2011 Guidance at p. 2).

In this March 2011 Guidance, the EPA also discussed a suggested analytic approach that would use both air quality monitoring and modeling information (a “hybrid” modeling and monitoring approach) to determine if an area meets or does not meet the 2010 primary SO 2 NAAQS initially described in the preamble for the June 2010 primary SO 2 NAAQS. Under such an approach, areas would generally be designated as: (1) Nonattainment, where monitoring data or an appropriate modeling analysis or other appropriate information indicate a violation; (2) attainment, where there are no monitored violations and an appropriate modeling analysis or other appropriate information demonstrate no violations; or (3) unclassifiable, where there are no monitored violations and no appropriate modeling analysis or other appropriate information sufficient to support an alternate designation (March 2011 Guidance at pp. 3-5). The March 2011 Guidance also explained that given the currently limited network of SO 2 monitors and our expectation that states will not yet have completed appropriate modeling of all significant SO 2 sources, we anticipated that most areas of the country will be designated “unclassifiable.”

In September 2011, the EPA issued a draft guidance document on SIP submissions for the 2010 primary SO 2 NAAQS (September 2011 Draft Guidance). The EPA published a notice of availability of this draft guidance in the Federal Register on October 3, 2011 (76 FR 61098). The EPA invited public comment on this draft document from October 3, 2011, to December 2, 2011 (76 FR 66925; October 28, 2011). This draft document includes guidance on how states could support future NAAQS attainment demonstrations in SIPs using a hybrid modeling and monitoring approach.

The EPA received several comments questioning the appropriateness of using the hybrid modeling and monitoring approach to demonstrate attainment of the SO 2 NAAQS. ( See comments at Docket ID No. EPA-HQ-OAR-2010-1059.) Although the September 2011 Draft Guidance did not specifically address designations, commenters expressed their concerns regarding the hybrid approach both for initial designations purposes as well as for future SIP planning and attainment demonstration purposes. These concerns included, for example, industry sources and state regulators not having adequate time to conduct modeling to inform either designations recommendations that were due in June 2011 or SIP submissions due under the CAA in June 2013. Even in areas that may have monitored violations of the primary NAAQS, some commenters asserted uncertainty from where contributions to those violating ambient concentrations were coming.

Commenters claimed that the EPA's guidance to date did not sufficiently enable sources and states to fully identify nearby contributing areas or determine the boundaries of possible nonattainment areas. Consequently, these commenters urged the EPA to take the additional time allowed under the CAA in situations where available data is insufficient before issuing initial designations and use that additional time to further refine and improve the EPA's expected overall approach to implementing the 1-hour SO 2 NAAQS for both current conditions influencing initial designations and future conditions supporting SIP attainment demonstrations.

Subsequently, in April 2012, the EPA's Assistant Administrator for Air and Radiation sent letters to representatives of state and local government and tribal agencies that described the EPA's modified expectations regarding some SO 2 implementation aspects, and that reiterated the agency's intent to proceed with initial area designations as expeditiously as possible given available data. ( See sample letters at www.epa.gov/airquality/sulfurdioxide/implement.html. ) Then, in late May and early June 2012, the EPA held numerous meetings with environmental advocacy, state and local government, and industry stakeholders regarding the EPA's overall implementation approach to the 2010 primary SO 2 NAAQS, and in these discussions stakeholders repeated their concerns and suggestions regarding designations, including the recommendations to take the extra time allowed under CAA section 107 where insufficient data is available. In addition, the EPA has publicly distributed a “white paper” raising for discussion possible alternative implementation approaches to those that were presented in the September 2011 Draft Guidance. ( See “White Paper” at www.epa.gov/airquality/sulfurdioxide/implement.html. ) The EPA has recently received numerous comments on the “white paper” and on the stakeholder discussions, several of which also address designations and which recommend taking additional time to promulgate them. Some of these comments also suggest that the EPA should significantly revise the modeling guidance contained in the March 2011 Designations Guidance, to account for the 1-hour form of the 2010 SO 2 NAAQS, as some commenters believe that the current approved modeling protocol is not well suited for use in designations for the 1-hour NAAQS.

The EPA is still reviewing comments and has not yet determined whether to revise its overall approach for issuing initial designations. At the same time, the EPA has also received a notice of intent to sue from environmental advocacy stakeholders under CAA section 304(a)(2) for having missed the June 3, 2012, statutory deadline for issuing designations that applies in the absence of a determination by the EPA to take the extra year allowed under CAA section 107 based on insufficient data.

In light of the comments received on the September 2011 Guidance, including those regarding the timing and approach for issuing initial area designations, and the subsequent comments received as part of the stakeholder outreach process in May and June 2012, the EPA acknowledges that it remains significantly uncertain what analytic approach sources, states, and the EPA will consistently and cooperatively use to make the determinations required under the CAA with respect to both current and future air quality. Because the issues involved, and the comments received on the draft guidance, relate to determinations of both the boundaries of areas currently meeting or not meeting the NAAQS and whether such areas will or will not meet the NAAQS in the future, the EPA agrees that it should make effective use of the additional time allowed under the CAA to promulgate designations. The EPA has insufficient data at this time to promulgate designations, including where it is necessary to identify nearby contributing areas and to determine boundaries of possible nonattainment areas, which the EPA cannot expect to definitively determine with full cooperation of stakeholders in advance of resolving outstanding issues and uncertainty regarding the most appropriate implementation approach, including determining whether an area meets or does not meet the new NAAQS. Therefore, the EPA concludes that it currently has insufficient information to promulgate designations by June 2012, and intends under these circumstances to take additional time, up to 1 additional year, allowed under the CAA for promulgating initial designations for the 2010 primary SO 2 NAAQS.

By taking the additional time, the EPA is now required under CAA section 107 to promulgate designations by June 3, 2013. The EPA expects to take additional time, as necessary, to appropriately assess designations. For some areas, EPA anticipates it will not be necessary to take the full additional year, and in those cases EPA will proceed sooner than June 2013. For example, the EPA intends to make its best effort to promulgate final designations for areas with monitored violations of the SO 2 NAAQS by the end of calendar year 2012, subject to being able to resolve issues related to nonattainment boundary determinations and contributions from nearby areas, rather than take until June 2013 for those areas. The EPA believes this deadline extension is appropriate because the continued uncertainty regarding the overall analytic approach to determining an area's compliance status affects not only the initial identification of nonattainment areas, but also the appropriate nonattainment area boundaries, which involves clearly identifying nearby areas that are (and are not) contributing to violations. The EPA expects to resolve these outstanding issues this year, and, once resolved, will proceed expeditiously to complete the designations process.

I. General Information A. What entities may be affected by this rule?

Citizens concerned with water quality in Florida may be interested in this rulemaking. Entities discharging phosphorus to waters upstream of the Everglades Protection Area could be indirectly affected by the Phosphorus Rule and EFA, although not specifically by this rule because the rule merely publishes the text changes that reflect the prior disapproval by the EPA of certain provisions of the Phosphorus Rule and EFA. Any indirect affect to entities would be because the water quality standards contained in the State's regulation and statute are used in determining National Pollutant Discharge Elimination System (NPDES) permit limits. With this in mind, categories and entities that ultimately may be indirectly affected include:

This table is not intended to be exhaustive, but rather provides a guide for entities that may be affected indirectly by this action. This table lists the types of entities of which EPA is now aware that potentially could be indirectly affected by this action. Other types of entities not listed in the table could also be affected directly or indirectly. Any parties or entities conducting activities within watersheds of the Florida waters covered by this rule, or who rely on, depend upon, influence, or contribute to the water quality of the Everglades Protection Area, might be indirectly affected by this rule. To determine whether your facility or activities may be affected by this action, you should examine the rule. If you have questions regarding the applicability of this action to a particular entity, consult the person listed in the preceding section, entitled FOR FURTHER INFORMATION CONTACT .

Docket. EPA has established an official public docket for this action under Docket ID No. EPA-HQ-OW-2011-0515. The official public docket is the collection of materials that is available for public viewing at the Water Docket in the EPA Docket Center, (EPA/DC) EPA West, Room 3334, 1301 Constitution Ave. NW., Washington, DC 20460. Publicly available docket materials are available electronically through www.regulations.gov and in hard copy at the EPA Docket Center Public Reading Room, open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the public Reading Room is (202) 566-1744 and the telephone number for the Water docket is (202) 566-2426.

Incorporation by reference. Documents that are being incorporated by reference through this rule may be found in the docket as described above, on EPA Web site established for this rulemaking at http://water.epa.gov/lawsregs/rulesregs/floridaeverglades_index.cfm, and through the National Archives and Records Administration (NARA) by sending a request by email to fedreg.info@nara.gov, or by mail to the following address: Office of the Federal Register (NF), The National Archives and Records Administration, 8601 Adelphi Road, College Park, MD 20740-6001. For information on the availability of this material at NARA, call 202-741-6030, or go to the following Web site http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.htm.

EPA is promulgating this rule to identify provisions of Florida's Water Quality Standards for Phosphorus in the Everglades Protection Area (Phosphorus Rule) and Florida's Amended Everglades Forever Act (EFA) that EPA has disapproved and that therefore are not applicable water quality standards for purposes of the Clean Water Act. EPA is promulgating this final rule following its disapproval of these provisions and EPA's specific directions to the State of Florida to correct these deficiencies in the Phosphorus Rule and EFA. EPA's disapproval and specific directions to the State implement two orders by the U.S. District Court for the Southern District of Florida. Pursuant to the Court's orders and consistent with Clean Water Act section 303(c), EPA provided the State a period of time to correct the deficiencies. The State has not corrected the deficiencies within that time period. Therefore, EPA is promulgating this rule. The rule incorporates by reference two documents that identify the specific provisions of Florida's Phosphorus Rule and EFA that are not applicable water quality standards for purposes of the Clean Water Act. The specific provisions that are not applicable water quality standards are indicated with “strikeout” text in the documents that are incorporated by reference into the Code of Federal Regulations.

Section 303(c) (33 U.S.C. 1313) of the Clean Water Act (CWA) directs States, with oversight by EPA, to adopt water quality standards to protect the public health and welfare, enhance the quality of water and serve the purposes of the CWA. Under section 303, States are required to develop water quality standards for waters of the United States within the State. Section 303(c) and EPA's implementing regulations (40 CFR part 131) provide that water quality standards shall include designated uses of the water and water quality criteria necessary to protect those uses.

States must submit any new or revised water quality standards for EPA review and approval/disapproval. EPA must approve/disapprove any new or revised standards within 60-90 days. (Section 303(c)(3)). If EPA disapproves any standard, EPA is to specify the changes to meet the requirements of the CWA. If the changes are not adopted by the State, EPA is to promulgate standards to address the necessary changes in the State standards that EPA has disapproved. In this rulemaking, EPA is identifying the portions of Florida's standards that EPA disapproved and that, after EPA notification of necessary changes, the State has not adopted through changes in State publications.

In 2005, the Florida Department of Environmental Protection (FDEP) submitted to EPA for review pursuant to CWA section 303(c), provisions of Florida Administrative Code (“FAC”) 62-302.540 entitled “Water Quality Standards for Phosphorus Within the Everglades Protection Area” (Phosphorus Rule or Rule). The Rule established a numeric water quality criterion for phosphorus as well as implementing provisions for the numeric criterion within the Everglades Protection Area. In 2005 and 2006, EPA issued a series of decisions approving certain provisions of the Phosphorus Rule and concluding that other provisions were not new or revised water quality standards and did not require EPA approval or disapproval under CWA section 303(c).

The Florida Legislature enacted the Everglades Forever Act in 1994 to maintain and restore the ecosystem of the Everglades. See Miccosukee Tribe of Indians v. United States, 105 F.3d. 599, 601 (11th Cir. 1997). EPA subsequently reviewed and approved one section of the EFA (section 4(f)) as a new or revised water quality standard in 1999. The Legislature enacted amendments to the EFA in 2003. EPA reviewed the amendments and issued a decision in 2003 that the amendments were not new or revised water quality standards requiring EPA approval or disapproval under section 303(c) of the CWA.

In consolidated litigation, environmental and Native American plaintiffs challenged (1) EPA's 2003 decision that the EFA amendments were not water quality standards and (2) EPA's 2005 and 2006 decisions regarding the Phosphorus Rule. In a July 29, 2008 decision, the U.S. District Court for the Southern District of Florida upheld in part and remanded in part EPA's decisions. Miccosukee Tribe of Indians & Friends of the Everglades v. U.S. Environmental Protection Agency, Florida Department of Environmental Protection, et al., No. 04-21488-CIV-Gold/McAliley (S.D. Fla.). The Court upheld EPA's 2005 approval of the Phosphorus Rule's numeric phosphorus criterion and the “four-part” test for determining attainment of the criterion. The Court overturned (1) EPA's decision that certain implementing provisions of the Phosphorus Rule were not new or revised water quality standards, and (2) EPA's approval of other provisions of the Phosphorus Rule, finding EPA's approval to be arbitrary and capricious. The Court also rejected EPA's position that the legislative amendments to the EFA did not constitute new or revised water quality standards subject to EPA review (and approval or disapproval) under section 303(c) of the CWA. The Court remanded to EPA to take further action consistent with the Court's decision.

On December 3, 2009, EPA issued a new Determination in response to the Court's remand. Consistent with the Court's 2008 decision, EPA disapproved certain amendments to the EFA. It is those disapproved provisions of the EFA that are, in part, the subject of this rulemaking. In addition, EPA reviewed the provisions of the Phosphorus Rule that the Court either found were new or revised standards or that the Court had held EPA's prior approval invalid. Consistent with the Court's decision, EPA disapproved certain provisions of the Phosphorus Rule in December of 2009 and those disapproved provisions also are reflected in this final rulemaking.

Plaintiffs challenged EPA's December 2009 Determination, alleging, in part, that EPA failed to (1) specify the changes that Florida must make to the Phosphorus Rule and EFA to bring them into compliance with the CWA and (2) commit to promulgate if the State fails to act. The Court, in an order dated April 14, 2010, remanded EPA's 2009 Determination and ordered EPA to issue an Amended Determination (AD) by September 3, 2010. Miccosukee Tribe of Indians & Friends of the Everglades v. U.S. Environmental Protection Agency, Florida Department of Environmental Protection, et al., No. 04-21488-CIV-Gold/McAliley (April 14, 2010, S.D. Fla.) (Order). While the Court did not take issue with EPA's disapprovals, the Court nevertheless ordered that EPA's AD “shall specifically direct the State of Florida to correct deficiencies in the Amended EFA and Phosphorus Rule that have been invalidated,” attaching copies of the Rule and EFA with strikeout markings indicating the exact language from the Rule and EFA that the EPA was to direct the State to correct. Order at 44. The Court ordered that in the AD, “EPA shall require the State of Florida to commence and complete rulemaking for the Phosphorus Rule within 120 days from the date of the Amended Determination and shall require amendments to the Amended EFA to be enacted by July 1, 2011.” Order at 44-45. The Court further ordered that “[i]n the event the State of Florida fails to timely act, the EPA shall provide timely notice, and the EPA Administrator “shall promulgate such standard[s]” pursuant to 33 U.S.C. 1313(c).” Order at 45. This rulemaking complies with that Court order.

Consistent with the Court's April 14, 2010 Order, EPA prepared an Amended Determination (AD) dated September 3, 2010. The AD directed the State of Florida to correct deficiencies in the Phosphorus Rule and Amended EFA. The AD included as attachments copies of the Phosphorus Rule and EFA with strikeout markings indicating the language changes necessary to meet Clean Water Act requirements. EPA's AD stated that if FDEP has not finalized revisions by January 1, 2011 and the Legislature has not enacted amendments to the EFA by July 1, 2011, then EPA would initiate rulemaking to promulgate the necessary changes consistent with the Court's Order.

Although FDEP initiated a rulemaking, with a notice of rule development published on March 26, 2010, to adopt the necessary revisions to the Phosphorus Rule and the EFA amendments consistent with EPA's AD, the State rulemaking agencies did not complete that process on the Phosphorus Rule changes by January 1, 2011. Nor has the State completed its rulemaking process on the Phosphorus Rule since that date. The Florida Legislature also did not introduce or enact any amendments to the EFA consistent with EPA's AD. The Florida Legislature adjourned and did not reconvene prior to July 1, 2011. Therefore, EPA proceeded, consistent with the Court's Order and EPA's AD, to initiate this rulemaking process to promulgate the proposed federal rulemaking identifying the necessary changes to the Phosphorus Rule and EFA to meet Clean Water Act requirements.

Proposed Rule: EPA's proposed rule identified those provisions in the Phosphorus Rule and Everglades Forever Act (EFA) that EPA had disapproved and therefore are not applicable water quality standards for purposes of the CWA. The provisions are those that EPA previously disapproved in December 2009 that the Court identified in its April 2010 Order, and that EPA subsequently identified in its September 2010 AD. EPA initiated this rulemaking to promulgate the necessary changes to the Phosphorus Rule and EFA, consistent with the April 2010 Order and EPA's AD, after the State failed to make changes to the regulation and statute, respectively, by specified dates.

For the purposes of codifying the changes, EPA proposed to incorporate by reference into the Code of Federal Regulations copies of the Phosphorus Rule and EFA with the strikeout markings, identifying the provisions and language that are not applicable water quality standards for purposes of the CWA. EPA explained that the approach of incorporation by reference was the most appropriate among the approaches that the Agency considered to correct the deficiencies in the State's regulation and statute. Therefore, copies of the two documents to be incorporated were placed in the rulemaking docket. In addition, EPA identified the specific provisions of the Phosphorus Rule and EFA that are not applicable water quality standards for purposes of the CWA in Tables 1 and 2 of the proposal.

EPA further explained in the proposal that the remaining provisions of the Phosphorus Rule and EFA either (1) had already been approved by EPA as new or revised water quality standards (i.e., are applicable water quality standards for the purposes of the CWA), or (2) are not water quality standards subject to EPA review and approval (or disapproval) under the Clean Water Act. Therefore, EPA did not propose to promulgate any of the remaining provisions that EPA had previously approved or that are not water quality standards.

For the convenience of the reader and to improve the readability of the two documents to be incorporated by reference, EPA included in its proposal a few minor text changes to the Phosphorus Rule and EFA in the docket. These changes were identified by underline. EPA included these few text changes in a submission filed with the Court and the Court subsequently indicated that it would modify its April 2010 to reflect these changes. EPA added text when deletion of the disapproved language rendered the remaining text difficult to understand. For example, in EFA section 10, EPA added text to restore language that existed prior to enactment of EFA amendments. In these sections, EPA did not propose to establish new or revised water quality standards with these text changes. Similarly, for ease of readability, the docket versions of the Phosphorus Rule and Amended Everglades Forever Act struck the definitions of “optimization” (which corresponded to regulatory language already disapproved) from sections 2(l) and 3(f), as discussed in the proposed rule preamble.

The public was given an opportunity to review the proposed rule and provide comments over a thirty-day period.

Comments: EPA received comments from eight separate commenters including the two litigants in the District Court case and other interested parties. A few commenters challenged EPA's authority to promulgate this rule, arguing that the Agency lacks legal authority to promulgate a rule after disapproval of water quality standards when the remaining approved water quality standards meet CWA requirements. EPA disagrees that it has no authority to promulgate water quality standards following disapproval. CWA section 303(c) does not specifically address the issue. It was reasonable and consistent with the CWA for EPA to promulgate this final rule that identifies only those provisions of Florida law that EPA has disapproved and that therefore are not applicable water quality standards for purposes of the Clean Water Act, where EPA concluded that the State should revise its existing standards to remove the disapproved provisions and the State failed to take such action. Otherwise, the provisions of the revised State water quality standards that EPA disapproved would remain applicable under State law. EPA's action will remove any potential for confusion and identify the provisions of State law that EPA has disapproved and that, therefore, are not in effect for federal CWA purposes.

To the extent EPA would be promulgating as federal regulations provisions of state water quality standards that EPA has approved (or provisions associated with approved water quality standards that are not themselves water quality standards), the CWA does not provide for such action. The CWA provides that when EPA approves a new or revised state water quality standard, “such standard shall thereafter be the water quality standard for the applicable waters of the State.” CWA section 303(c)(3). Only if EPA disapproves a state water quality standard or makes a determination that a new or revised water quality standard is necessary to meet the requirements of the Clean Water Act under section 303(c)(4)(B) and the state fails to make the necessary changes, does the Act direct EPA to promulgate such water quality standards for navigable waters of the state. There are many provisions of the Phosphorus Rule that EPA approved. EPA does not believe it would be appropriate to promulgate those provisions as federal regulations.

Second, except for the disapproved provisions of the EFA amendments, EPA has not approved or disapproved the remaining provisions of the EFA (with one exception) as new or revised water quality standards under the Clean Water Act. Therefore, it would not be appropriate for EPA to promulgate such provisions as federal water quality standards.

Copies of the public comments and the EPA's responses can be found in the docket associated with this rulemaking (see instructions above under General Information).

Final Rule: EPA has made no changes to its proposal in this final rule. EPA believes that the incorporation by reference approach described in the proposed rule, as well as the content of the proposed rule, remain appropriate for promulgation.

For the convenience of persons reviewing this final rule, EPA has included copies of the Phosphorus Rule and Amended Everglades Forever Act in the docket that included the strikeout markings indicating the language that EPA identifies as not being applicable water quality standards for purposes of the CWA. The provisions of the Phosphorus Rule and EFA that are not applicable water quality standards for purposes of the CWA are summarized again here in Tables 1 and 2 below.

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. Potentially affected entities may include, but are not limited to those engaged in the following activities:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

This listing is not intended to be exhaustive, but rather to provide a guide for readers regarding entities likely to be affected by this action. Other types of entities not listed in this unit could also be affected. The North American Industrial Classification System (NAICS) codes have been provided to assist you and others in determining whether this action might apply to certain entities. If you have any questions regarding the applicability of this action to a particular entity, consult the person listed under FOR FURTHER INFORMATION CONTACT .

You may access a frequently updated electronic version of EPA's tolerance regulations at 40 CFR part 180 through the Government Printing Office's e-CFR site at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl .

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2011-0563 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before October 2, 2012. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing that does not contain any CBI for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit a copy of your non-CBI objection or hearing request, identified by docket ID number EPA-HQ-OPP-2011-0563, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov . Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statue.

• Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), Mail Code: 28221T, 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.htm .

In the Federal Register of August 26, 2011 (76 FR 53372) (FRL-8884-9), EPA issued a notice pursuant to FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), announcing the filing of a pesticide petition (PP 1E7883) by IR-4, 500 College Rd. East, Suite 201W, Princeton, NJ 08540. The petition requested that 40 CFR 180.478 be amended by establishing tolerances for residues of the herbicide rimsulfuron, N -((4,6- dimethoxypyrimidin-2-yl)aminocarbonyl)-3-(ethylsulfonyl)-2-pyridinesulfonamide, including its metabolites and degradates, in or on chicory, roots at 0.01 parts per million (ppm) and chicory, tops at 0.01 ppm. That notice referenced a summary of the petition prepared by DuPont, the registrant, which is available in the docket, http://www.regulations.gov . There were no comments received in response to the notice of filing.

Section 408(b)(2)(A)(i) of FFDCA allows EPA to establish a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the tolerance is “safe.” Section 408(b)(2)(A)(ii) of FFDCA defines “safe” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Section 408(b)(2)(C) of FFDCA requires EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue * * *”

Consistent with FFDCA section 408(b)(2)(D), and the factors specified in FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action. EPA has sufficient data to assess the hazards of and to make a determination on aggregate exposure for rimsulfuron including exposure resulting from the tolerances established by this action. EPA's assessment of exposures and risks associated with rimsulfuron follows.

In the Federal Register of January 25, 2012 (77 FR 3621) (FRL-9332-1), EPA published a final rule establishing tolerances residues of herbicide rimsulfuron, N -((4,6-dimethoxypyrimidin-2-yl)aminocarbonyl)-3-(ethylsulfonyl)-2-pyridinesulfonamide, including its metabolites and degradates, in or on the caneberry subgroup 13-07A and the bushberry subgroup 13-07B. The human health risk assessment used to support this final rule (“Rimsulfuron. Human Health Risk Assessment for Proposed Section 3 Uses on Caneberry and Bushberry”), included not only the caneberrry and bushberry tolerances but tolerances for chicory roots and tops as well. Therefore, the aggregate risks for rimsulfuron for this action are not changed from those discussed in the January 25, 2012 Federal Register .

In that document the EPA concluded that there are no acute or cancer points of departure as well as no residential uses registered. EPA concluded that chronic exposure to rimsulfuron from food and water will utilize < 1% of the chronic population adjusted dose (cPAD) for children 1-2 years old, the population group receiving the greatest exposure. Therefore, EPA concluded that there is a reasonable certainty that no harm will result to the general population and to infants and children from aggregate exposure to rimsulfuron residues. Refer to the January 25, 2012 Federal Register document, available at http://www.regulations.gov, for a detailed discussion of the aggregate risk assessments and determination of safety. EPA relies upon those risk assessments and the findings made in the Federal Register document in support of this action.

Adequate enforcement methodology (liquid chromatography with tandem mass spectroscopy (LC/MS/MS)) is available to enforce the tolerance expression. The method may be requested from: Chief, Analytical Chemistry Branch, Environmental Science Center, 701 Mapes Rd., Ft. Meade, MD 20755-5350; telephone number: (410) 305-2905; email address: residuemethods@epa.gov .

In making its tolerance decisions, EPA seeks to harmonize U.S. tolerances with international standards whenever possible, consistent with U.S. food safety standards and agricultural practices. EPA considers the international maximum residue limits (MRLs) established by the Codex Alimentarius Commission (Codex), as required by FFDCA section 408(b)(4). The Codex Alimentarius is a joint United Nations Food and Agriculture Organization/World Health Organization food standards program, and it is recognized as an international food safety standards-setting organization in trade agreements to which the United States is a party. EPA may establish a tolerance that is different from a Codex MRL; however, FFDCA section 408(b)(4) requires that EPA explain the reasons for departing from the Codex level.

The Codex has not established a MRL for rimsulfuron on chicory.

Therefore, tolerances are established for residues of rimsulfuron, N -((4,6-dimethoxypyrimidin-2-yl)aminocarbonyl)-3-(ethylsulfonyl)-2-pyridinesulfonamide, including its metabolites and degradates, in or on chicory tops at 0.01 ppm and chicory roots at 0.01 ppm.

This final rule establishes tolerances under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this final rule has been exempted from review under Executive Order 12866, this final rule is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This final rule does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA), 44 U.S.C. 3501 et seq., nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the tolerance in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ) do not apply.

This final rule directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this final rule. In addition, this final rule does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub. L. 104-4).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTTAA), Public Law 104-113, section 12(d) (15 U.S.C. 272 note).

The Congressional Review Act, 5 U.S.C. 801 et seq., generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of this final rule in the Federal Register . This final rule is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

I. Does this action apply to me?

The Agency included in the final rule a list of those who may be potentially affected by this action. If you have questions regarding the applicability of this action to a particular entity, consult the person listed under FOR FURTHER INFORMATION CONTACT .

In the Federal Register of May 14, 2012 (77 FR 28270) (FRL-9346-7), EPA issued a final rule establishing tolerances for the new fungicide active ingredient fluxapyroxad (40 CFR 180.666) in or on various commodities. Inadvertently, the commodity terminology for the oilseed crop group and for dried plums was incorrectly expressed. This document is being issued to correct the terminology for these commodities.

Section 553 of the Administrative Procedure Act (APA), 5 U.S.C. 553(b)(3)(B), provides that, when an Agency for good cause finds that notice and public procedure are impracticable, unnecessary or contrary to the public interest, the Agency may issue a final rule without providing notice and an opportunity for public comment. EPA has determined that there is good cause for making this technical amendment final without prior proposal and opportunity for comment, because this technical amendment only revises the terminology of two (2) commodities, with no other related changes to tolerance levels or any requirements of the final rule. EPA finds that this constitutes good cause under 5 U.S.C. 553(b)(3)(B).

This technical amendment only revises the terminology of two commodities and does not otherwise change the original requirements of the final rule. As a technical amendment, this action is not subject to the statutory and Executive Order review requirements. For information about the statutory and Executive Order review requirements as they relate to the final rule, see Unit VI. in the Federal Register of May 14, 2012 (77 FR 28270) (FRL-9346-7).

The Congressional Review Act, 5 U.S.C. 801 et seq., generally provides that before a rule may take effect, the Agency promulgating the rule must submit a rule report to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of this final rule in the Federal Register . This final rule is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR part 180 is amended as follows:

This is a summary of the Commission's Report and Order (R&O), FCC 12-76, MD Docket No. 12-116, adopted on July 13, 2012 and released on July 19, 2012.

1. This Report and Order does not contain any new or modified information collection burden for small business concerns with fewer than 25 employees, pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4).

2. The Commission will send a copy of this Report and Order to Congress and the Government Accountability Office pursuant to the Congressional Review Act. 1

3. As required by the Regulatory Flexibility Act of 1980 (“RFA”), 2 the Commission has prepared a Final Regulatory Flexibility Analysis (“FRFA”) relating to this Report and Order. The FRFA is set forth in the section entitled Final Regulatory Flexibility Analysis.

4. In this Report and Order, we conclude the process of assessing and collecting regulatory fees for Fiscal Year (“FY”) 2012 to collect $339,844,000 in regulatory fees for FY 2012. Section 9(a)(1) of the Communications Act of 1934, as amended (the “Act”) directs the Commission to collect regulatory fees “to recover the costs of * * * enforcement activities, policy and rulemaking activities, user information services, and international activities.”  3 Section 9(a)(2) stipulates that regulatory fees for the enumerated activities “shall be collected only if, and only in the total amounts, required in Appropriation Acts,” and must “be established in amounts that will result in collection, during each fiscal year, of any amount that can reasonably be expected to equal the amount appropriated” for the performance of the activities enumerated in section 9(a)(1) during that fiscal year. Since FY 2009, Congress has directed the Commission to assess and collect regulatory fees in an amount equal to the entire amount appropriated. 4 Congress appropriated $339,844,000 for the Commission in FY 2012, 5 and the regulatory fees established in this FY 2012 Report and Order are calculated so as to collect this entire amount. 6 In this annual regulatory fee proceeding, we retain many of the current methods, policies, and procedures for collecting section 9 regulatory fees adopted by the Commission in prior years. Consistent with our established practice, we intend to collect these regulatory fees during a September 2012 filing window in order to collect the required amount by the end of our fiscal year. 7

5. In this FY 2012 Report and Order, we address the following issues: (1) Incorporating 2010 Census data into our broadcast population data, (2) assessing a regulatory fee for each broadcasting facility operating either in an analog or digital mode (but not both) for Low Power, Class A, and TV Translators/Boosters, (3) maintaining the FY 2012 Interstate Telecommunications Service Provider (ITSP) fee rate at the same level as in FY 2011, (4) using an online filing system for the filing of requests for a refund, waiver, fee reduction, or deferment of payment of an application or regulatory fee, (5) maintaining the Commercial Mobile Radio Service (“CMRS”) Messaging Service at the rate of $.08 per subscriber, and (6) the Commission will continue to promote greater use of technology (and less use of paper) in improving its regulatory fee notification and collection processes. The resulting FY 2012 Schedule of Regulatory Fees appears in Table B.

6. In this FY 2012 Report and Order, we retain the same regulatory fee methodology used in FY 2011 and in prior fiscal years, with some adjustments to maintain the FY 2012 ITSP fee rate at the same level as in FY 2011. These adjustments are reflected in the ITSP fee rate, as well as in the fee rates of all remaining fee categories listed in Table B.

7. Since FY 1999, the Commission has allocated the amount appropriated by Congress across the various fee categories, and then divided these allocated amounts by the number of estimated payment units in each fee category to determine the unit fee. 8 As in prior years, for cases involving small multiyear fees ( e.g., licenses that are renewed over a multiyear term), we divided the allocated amounts by their respective estimated payment units, as well as by the term of the license (5-year or 10-year) to determine the unit fee, which was then rounded to be consistent with the requirements of section 9(b)(2)(B) of the Act. This process is illustrated in Table A and yields the FY 2012 regulatory fees shown in Table B.

8. We then calculated the number of payment units subject to the fee. In some instances, Commission licensee databases were used in calculating payment units; in other instances, actual prior year payment records and/or industry and trade association projections were used (see Table C). 9 Where appropriate, we adjusted and rounded our final estimates to take into account factors that could affect the number of units for which a fee is paid. 10 Such factors include waivers and exemptions filed in FYs 2011 and 2012, as well as fluctuations in the number of licenses or station operators due to economic, technical, or other reasons. Our estimated FY 2012 payment units, therefore, were adjusted to account for the variable factors relevant to each fee category. The fee rate may also have been rounded or adjusted slightly to reflect these variables.

In order to calculate individual service fees for FY 2012, we adjusted FY 2011 payment units for each service to more accurately reflect expected FY 2012 payment liabilities. We obtained our updated estimates through a variety of means. For example, we used Commission licensee databases, actual prior year payment records and industry and trade association projections when available. The databases we consulted include our Universal Licensing System (“ULS”), International Bureau Filing System (“IBFS”), Consolidated Database System (“CDBS”) and Cable Operations and Licensing System (“COALS”), as well as reports generated within the Commission such as the Wireline Competition Bureau's Trends in Telephone Service and the Wireless Telecommunications Bureau's Numbering Resource Utilization Forecast.

We sought verification for these estimates from multiple sources and, in all cases, we compared FY 2012 estimates with actual FY 2011 payment units to ensure that our revised estimates were reasonable. Where appropriate, we adjusted and/or rounded our final estimates to take into consideration the fact that certain variables that impact on the number of payment units cannot yet be estimated with sufficient accuracy. These include an unknown number of waivers and/or exemptions that may occur in FY 2012 and the fact that, in many services, the number of actual licensees or station operators fluctuates from time to time due to economic, technical, or other reasons. When we note, for example, that our estimated FY 2012 payment units are based on FY 2011 actual payment units, it does not necessarily mean that our FY 2012 projection is exactly the same number as in FY 2011. We have either rounded the FY 2012 number or adjusted it slightly to account for these variables.

9. On May 4, 2012, we released the FY 2012 Notice of Proposed Rulemaking   11 to seek comment on the proposed FY 2012 regulatory fees. We received two comments and no reply comments (see Table D). We address the issues raised in our FY 2012 Notice of Proposed Rulemaking and the comments received below.

10. The fee methodology for AM and FM radio stations is based on a number of factors, including facility attributes ( e.g. power, channel/frequency) and the population served by each station. The calculation of the population served is determined by applying current United States Census Bureau data to the station's technical and engineering data, as detailed in Table E. In FY 2012, the Commission will incorporate the results of the 2010 Census data into our broadcast population data, which could precipitate a change in population count for some radio stations. These population counts, along with the station's class and type of service, are the basis for determining regulatory fees. We sought comment, but did not receive any on this issue. We conclude that the 2010 census data should be incorporated into our broadcast population data when determining regulatory fees.

11. The digital transition to full-service television stations was completed on June 12, 2009, but Low Power, Class A, and TV Translators/Boosters are not required to make the digital transition until September 1, 2015. Historically, we have only considered the digital transition in the context of regulatory fees applicable to full-service television stations. Consequently, the “digital only” exemption does not apply to Low Power, Class A, and TV Translator/Booster facilities. Because the digital transition in the Low Power, Class A, and TV Translator/Booster facilities is still voluntary, these facilities may transition from analog to digital service at varying times prior to September 1, 2015. During this period of transition, licensees of Low Power, Class A, and TV Translator/Booster facilities may be operating in analog mode, in digital mode, or in an analog and digital simulcast mode. We sought comment on how this should be reflected in the regulatory fees paid by licensees of these facilities, but we did not receive any comments in response. In the absence of comment, we conclude that a single fee will be assessed for each facility regardless of whether it transmits in analog or digital mode, digital mode, or simulcasting in both analog and digital modes. As more of these facilities convert to digital mode, the Commission will revisit how regulatory fees will be assessed.

12. In our FY 2011 Report and Order, we assessed the Interstate Telecommunications Service Provider (“ITSP”) industry a regulatory fee of $.00375 per revenue dollar. This fee reflected the Commission's decision to limit the increase in ITSP regulatory fees in light of the continuing decrease in the revenue base upon which ITSP regulatory fees are calculated, and pending a more comprehensive rebalancing of ITSP fees as part of our reexamination of the factual and methodological predicates of our regulatory fee program. This reexamination will commence shortly. For that reason we proposed in our FY 2012 Notice of Proposed Rulemaking to assess FY 2012 ITSP regulatory fees at the same fee rate as in FY 2011, and to allocate the remaining revenue requirement across all other fee categories. 15

13. We received one comment from the United States Telecom Association (“USTA”). USTA supports the Commission's effort to rebalance its regulatory fee structure, including updating the calculation of full-time equivalents (“FTEs”) and adjusting the way costs are currently allocated. 16 USTA also contends that today's separate communication platforms, e.g. wireless, cable, and wireline, are capable of providing similar communication services, and it is therefore critical for the Commission to establish fee parity among the providers utilizing these platforms. 17

14. We have initiated a separate proceeding in which we are requesting comment on these and other issues. 18 Because we expect to use the comments that are received and other data in setting next year's regulatory fees, we will adopt our proposal to maintain the FY 2012 ITSP fee rate in the interim at the FY 2011 rate of .00375.

15. In our FY 2012 Notice of Proposed Rulemaking, we sought comment on requiring regulatees filing a request for a refund, waiver, fee reduction, or deferment of payment of an application or regulatory fee to use an online filing system rather than submitting their requests in hardcopy format. 19 We believe that an online filing system will complement other existing online Commission systems already in place, such as the Broadcast Radio and Television Electronic Filing System (more commonly referred to as CDBS), the Cable Operations and Licensing System (COALS), and Consumer Complaint Forms. The resulting fee waiver filing system will include such documents as the filed request, any relevant supporting documentation, and the resulting decision. We also proposed to apply the provisions of section 0.459 to requests that electronically-filed material be withheld from public inspection. 20

16. We received no comments on this issue. We will therefore adopt our proposal and require that all requests for refunds, waivers, fee reductions, or deferments of payment be filed using an online system. We direct the Office of Managing Director to take the necessary steps to assist regulatees in transitioning to electronic filing.

17. In response to our FY 2012 Notice of Proposed Rulemaking, the Commission received a comment from the Critical Messaging Association (“CMA”) regarding the CMRS messaging service regulatory fee category. CMA contends that even though the Commission has not acted on its FY 2008 Further Notice of Proposed Rulemaking to review, among other things, the CMRS messaging service fee category, the Commission should maintain the CMRS messaging fee at $.08 per subscriber as a minimum appropriate action to take in FY 2012. 21 As stated in paragraph 11, we anticipate revising our regulatory fee program in time to calculate FY 2013 fees. For that reason, and because we agree with CMA that the prevailing circumstances in FY 2003 still exist today, 22 we find it appropriate that the FY 2012 CMRS Messaging regulatory fee remain at a rate of $0.08 per subscriber.

18. In FY 2009, the Commission implemented several procedural changes that simplified the payment and reconciliation processes of regulatory fees. In FY 2012, the Commission will continue to promote greater use of technology (and less use of paper) in improving our regulatory fee notification and collection processes. We sought comment on how we might do this, but we received no specific comment in response. Accordingly, the Commission will continue its own efforts to promote greater efficiency in its regulatory fee notification and collection processes, subject to appropriate notice and comment.

19. In FY 2009, we instituted a mandatory filing requirement using the Commission's electronic filing and payment system (also known as “Fee Filer”). 23 Regulatees filing their annual regulatory fee payments were required to begin the process by entering the Commission's Fee Filer system with a valid FCC Registration Number (“FRN”) and password. 24 This change, which required regulatees to use Fee Filer for the filing of annual regulatory fees, not the payment of such regulatory fees  25 was beneficial to both licensees and to the Commission. For licensees, the mandatory use of Fee Filer eliminates the need to manually complete and submit a hardcopy Form 159, and for the Commission, the data in electronic format makes it much easier to process payments efficiently and effectively. We sought comment on how to improve the mandatory use of Fee Filer for filing annual regulatory fees. We received no specific comments or reply comments on this issue. Accordingly, we will continue our own efforts to refine our fee filing and payment procedures, subject to appropriate notice and comment.

20. Included below are procedural items as well as our current payment and collection methods which we have revised over the past several years to expedite the processing of regulatory fee payments. We do not propose changes to these procedures. Rather, we include them here as a useful way of reminding regulatory fee payers and the public about these aspects of the annual regulatory fee collection process.

21. Each year we post public notices and fact sheets pertaining to regulatory fees on our Web site. These documents contain information about the payment due date and relevant regulatory fee payment procedures. We will continue to post this information on http://transition.fcc.gov/fees/regfees.html , rather than mailing it to regulatees.

22. In prior years, the Commission mailed pre-bills via surface mail to regulatees in select regulatory fee categories: ITSPs, Geostationary (“GSO”) and Non-Geostationary (“NGSO”) satellite space station licensees, 26 holders of Cable Television Relay Service (“CARS”) licenses, and Earth Station licensees. 27 The remaining regulatees did not receive pre-bills. In our FY 2009 Report and Order, the Commission decided to make the information contained in these pre-bills viewable in Fee Filer, rather than mailing pre-bills to licensees via surface mail. 28 We continued this practice in FY 2010 and FY 2011 by placing the pre-bill information on Fee Filer, where it could be accessed by regulatees through the Commission's Web site. Regulatees can also look to the Commission's Web site for information on upcoming events and deadlines relating to regulatory fees.

23. Beginning in FY 2003, we sent fee assessment notifications via surface mail to media services entities on a per- facility basis. 29 These notifications provided the assessed fee amount for the facility in question, as well as the data attributes that determined the fee amount. We have since refined this initiative to be more electronic and paperless. 30 In our FY 2010 Notice of Proposed Rulemaking, we sought comment to discontinue mailing the media notifications beginning in FY 2011, relying instead on information on the Commission's Web site and the use of the Commission-authorized Web site at www.fccfees.com . 31 We received no comments or reply comments in FY 2010, and beginning in FY 2011, we discontinued the mailing of fee assessment notifications via surface mail to media service entities. In FY 2012, we will continue the practice of not mailing hardcopy notification assessment letters to media licensees.

24. We will continue to follow our current procedures for conveying CMRS subscriber counts to providers. We will mail an initial assessment letter to Commercial Mobile Radio Service (CMRS) providers using data from the Numbering Resource Utilization Forecast (“NRUF”) report that is based on “assigned” number counts that have been adjusted for porting to net Type 0 ports (“in” and “out”). 32 The letter will include a listing of the carrier's Operating Company Numbers (“OCNs”) upon which the assessment is based. 33 The letters will not include OCNs with their respective assigned number counts, but rather, an aggregate total of assigned numbers for each carrier.

25. A carrier wishing to revise its subscriber count can do so by accessing Fee Filer after receiving its initial CMRS assessment letter. Providers should follow the prompts in Fee Filer to record their subscriber revisions, along with any supporting documentation. 34 The Commission will then review the revised count and supporting documentation and either approve or disapprove the submission in Fee Filer. If the submission is disapproved, the Commission will contact the provider to afford the provider an opportunity to discuss its revised subscriber count and/or provide additional supporting documentation. If we receive no response or correction to the initial assessment letter, or we do not reverse our initial disapproval of the provider's revised count submission, we expect the fee payment to be based on the number of subscribers listed on the initial assessment letter. Once the timeframe for revision has passed, the subscriber counts are final and are the basis upon which CMRS regulatory fees are expected to be paid. Providers can also view their final subscriber counts online in Fee Filer. A final CMRS assessment letter will not be mailed out.

26. Because some carriers do not file the NRUF report, they may not receive an initial assessment letter. In these instances, the carriers should compute their fee payment using the standard methodology  35 that is currently in place for CMRS Wireless services ( e.g., compute their subscriber counts as of December 31, 2011), and submit their fee payment accordingly. Whether a carrier receives an assessment letter or not, the Commission reserves the right to audit the number of subscribers for which regulatory fees are paid. In the event that the Commission determines that the number of subscribers paid is inaccurate, the Commission will bill the carrier for the difference between what was paid and what should have been paid.

27. The Commission will continue to permit cable television operators to base their regulatory fee payment on their company's aggregate year-end subscriber count, rather than requiring them to report cable subscriber counts on a per community unit identifier (“CUID”) basis. This significantly lessens the cable operators' burden in calculating and paying their regulatory fees.

28. In FY 2006, we streamlined the CMRS payment process by eliminating the requirement for CMRS providers to identify their individual call signs when making their regulatory fee payment, instead allowing CMRS providers to pay their regulatory fees only at the aggregate subscriber level without having to identify their various call signs. 36 We will continue this practice in FY 2012. In FY 2007, we consolidated the CMRS cellular and CMRS mobile fee categories into one fee category with a single fee code, thereby eliminating the requirement for CMRS providers to separate their subscriber counts into CMRS cellular and CMRS mobile fee categories during the regulatory fee payment process. This consolidation of fee categories enabled the Commission to process payments more quickly and accurately. For FY 2012, we will continue this practice of combining the CMRS cellular and CMRS mobile fee categories into one regulatory fee category.

29. In FY 2007 , we adopted a proposal to round lines 14 (total subject revenues) and 16 (total regulatory fee owed) on FCC Form 159-W worksheet to the nearest dollar. This revision enabled the Commission to process the ITSP regulatory fee payments more quickly because rounding was performed in a consistent manner, thereby eliminating processing issues. For FY 2012, we will continue to round lines 14 and 16 when calculating the FY 2012 ITSP fee obligation. In addition, we will continue the practice of not mailing out Form 159-W via surface mail.

30. All lock box payments to the Commission for FY 2012 will be processed by U.S. Bank, St. Louis, Missouri, and payable to the FCC. During the fee season for collecting FY 2012 regulatory fees, regulatees can pay their fees by credit card through Pay.gov, 37 by check, money order, or debit card, 38 or by placing their credit card number on Form 159-E (Remittance Advice form) and mailing their fee and accompanying Form 159-E to the following address: Federal Communications Commission, Regulatory Fees, P.O. Box 979084, St. Louis, MO 63197-9000. Additional payment options and instructions are posted at http://transition.fcc.gov/fees/regfees.html .

31. The receiving bank for all wire payments is the Federal Reserve Bank, New York, New York (TREAS NYC). When making a wire transfer, regulatees must fax a copy of their Fee Filer generated Form 159-E to U.S. Bank, St. Louis, Missouri at (314) 418-4232 at least one hour before initiating the wire transfer (but on the same business day) so as not to delay crediting their account. Regulatees should discuss arrangements (including bank closing schedules) with their bankers several days before they plan to make the wire transfer to allow sufficient time for the transfer to be initiated and completed before the deadline. Complete instructions for making wire payments are posted at http://transition.fcc.gov/fees/wiretran.html .

32. Regulatees whose total FY 2012 regulatory fee liability, including all categories of fees for which payment is due, is less than $10 are exempted from payment of FY 2012 regulatory fees.

33. The Commission will accept fee payments made in advance of the window for the payment of regulatory fees. The responsibility for payment of fees by service category is as follows:

• Media Services: Regulatory fees must be paid for initial construction permits that were granted on or before October 1, 2011 for AM/FM radio stations, VHF/UHF full service television stations, and satellite television stations. Regulatory fees must be paid for all broadcast facility licenses granted on or before October 1, 2011. In instances where a permit or license is transferred or assigned after October 1, 2011, responsibility for payment rests with the holder of the permit or license as of the fee due date.

• Wireline (Common Carrier) Services: Regulatory fees must be paid for authorizations that were granted on or before October 1, 2011. In instances where a permit or license is transferred or assigned after October 1, 2011, responsibility for payment rests with the holder of the permit or license as of the fee due date. We note that audio bridging service providers are included in this category. 39

• Wireless Services: CMRS cellular, mobile, and messaging services (fees based on number of subscribers or telephone number count): Regulatory fees must be paid for authorizations that were granted on or before October 1, 2011. The number of subscribers, units, or telephone numbers on December 31, 2011 will be used as the basis from which to calculate the fee payment. In instances where a permit or license is transferred or assigned after October 1, 2011, responsibility for payment rests with the holder of the permit or license as of the fee due date.

• The first eleven regulatory fee categories in our Schedule of Regulatory Fees (see Table B) pay “small multi-year wireless regulatory fees.” Entities pay these regulatory fees in advance for the entire amount of their five-year or ten-year term of initial license, and only pay regulatory fees again when the license is renewed or a new license is obtained. We include these fee categories in our Schedule of Regulatory Fees to publicize our estimates of the number of “small multi-year wireless” licenses that will be renewed or newly obtained in FY 2012.

• Multichannel Video Programming Distributor Services (cable television operators and CARS licensees): Regulatory fees must be paid for the number of basic cable television subscribers as of December 31, 2011. 40 Regulatory fees also must be paid for CARS licenses that were granted on or before October 1, 2011. In instances where a permit or license is transferred or assigned after October 1, 2011, responsibility for payment rests with the holder of the permit or license as of the fee due date.

• International Services: Regulatory fees must be paid for earth stations, geostationary orbit space stations and non-geostationary orbit satellite systems that were licensed and operational on or before October 1, 2011. In instances where a permit or license is transferred or assigned after October 1, 2011, responsibility for payment rests with the holder of the permit or license as of the fee due date.

• International Services: Submarine Cable Systems: Regulatory fees for submarine cable systems are to be paid on a per cable landing license basis based on circuit capacity as of December 31, 2011. In instances where a license is transferred or assigned after October 1, 2011, responsibility for payment rests with the holder of the license as of the fee due date. For regulatory fee purposes, the allocation in FY 2012 will remain at 87.6 percent for submarine cable and 12.4 percent for satellite/terrestrial facilities.

• International Services: Terrestrial and Satellite Services: Finally, regulatory fees for International Bearer Circuits are to be paid by facilities-based common carriers that have active (used or leased) international bearer circuits as of December 31, 2011 in any terrestrial or satellite transmission facility for the provision of service to an end user or resale carrier, which includes active circuits to themselves or to their affiliates. In addition, non-common carrier satellite operators must pay a fee for each circuit sold or leased to any customer, including themselves or their affiliates, other than an international common carrier authorized by the Commission to provide U.S. international common carrier services. “Active circuits” for these purposes include backup and redundant circuits as of December 31, 2011. Whether circuits are used specifically for voice or data is not relevant for purposes of determining that they are active circuits. In instances where a permit or license is transferred or assigned after October 1, 2011, responsibility for payment rests with the holder of the permit or license as of the fee due date. For regulatory fee purposes, the allocation in FY 2012 will remain at 87.6 percent for submarine cable and 12.4 percent for satellite/terrestrial facilities.

34. To be considered timely, regulatory fee payments must be received and stamped at the lockbox bank by the due date of regulatory fees. Section 9(c) of the Act requires us to impose a late payment penalty of 25 percent of the unpaid amount to be assessed on the first day following the deadline date for filing of these fees. 41 Failure to pay regulatory fees and/or any late penalty will subject regulatees to sanctions, including those set forth in § 1.1910 of the Commission's Rules  42 and in the Debt Collection Improvement Act of 1996 (“DCIA”). 43 We also assess administrative processing charges on delinquent debts to recover additional costs incurred in processing and handling the related debt pursuant to the DCIA and § 1.1940(d) of the Commission's Rules. 44 These administrative processing charges will be assessed on any delinquent regulatory fee, in addition to the 25 percent late charge penalty. In case of partial payments (underpayments) of regulatory fees, the payor will be given credit for the amount paid, but if it is later determined that the fee paid is incorrect or not timely paid, then the 25 percent late charge penalty (and other charges and/or sanctions, as appropriate) will be assessed on the portion that is not paid in a timely manner.

35. We will withhold action on any applications or other requests for benefits filed by anyone who is delinquent in any non-tax debts owed to the Commission (including regulatory fees) and will ultimately dismiss those applications or other requests if payment of the delinquent debt or other satisfactory arrangement for payment is not made. 45 Failure to pay regulatory fees can also result in the initiation of a proceeding to revoke any and all authorizations held by the entity responsible for paying the delinquent fee(s).

36. As required by the Regulatory Flexibility Act (“RFA”), 46 the Commission prepared an Initial Regulatory Flexibility Analysis (“IRFA”) in its Notice of Proposed Rulemaking (NPRM) to determine the possible economic impact on small entities by the policies and rules proposed in its NPRM. Written public comments were sought on the FY 2012 fee proposal, including on the IRFA. This Final Regulatory Flexibility Analysis (“FRFA”) conforms to the RFA. 47

37. This rulemaking proceeding was initiated by the Commission to revise its Schedule of Regulatory Fees to collect $339,844,000, the amount that Congress has required the Commission to recover in regulatory fees. This Report and Order revises the fee rates in its Schedule of Regulatory Fees to reflect changes in estimated unit counts, if any, and the amount required by the Commission to collect in regulatory fees. Pursuant to rules adopted in this Order, the FCC will collect these fees in September 2012 in a manner that is efficient ( e.g. using the Commission's various electronic filing and payment systems) and without undue public burden (less reliability on paper transactions and more reliability on pre-loaded payment data).

38. Section 9(a)(1) of the Communications Act of 1934, as amended (the “Act”) directs the Commission to collect regulatory fees “to recover the costs of * * * enforcement activities, policy and rulemaking activities, user information services, and international activities.”  48 Section 9(a)(2) stipulates that regulatory fees for the enumerated activities “shall be collected only if, and only in the total amounts, required in Appropriation Acts,” and must “be established in amounts that will result in collection, during each fiscal year, of any amount that can be reasonably be expected to equal the amount appropriated” for the performance of the activities enumerated in section 9(a)(1) during that fiscal year. In this annual regulatory fee proceeding, we retain many of the current methods, policies, and procedures for collecting section 9 regulatory fees adopted by the Commission in prior years. Consistent with our established practice, we intend to collect these regulatory fees during a September 2012 filing window in order to collect the required amount by the end of our fiscal year. 49

NMFS manages the groundfish fishery in the GOA exclusive economic zone according to the Fishery Management Plan for Groundfish of the Gulf of Alaska (FMP) prepared by the North Pacific Fishery Management Council under authority of the Magnuson-Stevens Fishery Conservation and Management Act. Regulations governing fishing by U.S. vessels in accordance with the FMP appear at subpart H of 50 CFR part 600 and 50 CFR part 679.

The third seasonal apportionment of the Pacific halibut bycatch allowance specified for the deep-water species fishery in the GOA is 400 metric tons (mt) as established by the final 2012 and 2013 harvest specifications for groundfish of the GOA (77 FR 15194, March 14, 2012), for the period 1200 hrs, A.l.t., July 1, 2012, through 1200 hrs, A.l.t., September 1, 2012. This apportionment is reduced to 208 mt after allocating 192 mt to vessels participating in cooperatives in the Central GOA Rockfish Program. Rockfish Program allocations are established annually once NMFS receives information about the vessel composition of each cooperative. The 2012 Central GOA Rockfish Program allocations are available at http://www.alaskafisheries.noaa.gov/sustainablefisheries/rockfish/.

In accordance with § 679.21(d)(7)(i), the Administrator, Alaska Region, NMFS, has determined that the third seasonal apportionment of the Pacific halibut bycatch allowance specified for the trawl deep-water species fishery in the GOA has been reached. Consequently, NMFS is prohibiting directed fishing for the deep-water species fishery by vessels using trawl gear in the GOA. The species and species groups that comprise the deep-water species fishery include sablefish, rockfish, deep-water flatfish, rex sole, and arrowtooth flounder. This closure does not apply to fishing by vessels participating in the cooperative fishery in the Rockfish Program for the Central GOA.

After the effective date of this closure the maximum retainable amounts at § 679.20(e) and (f) apply at any time during a trip.

This action responds to the best available information recently obtained from the fishery. The Acting Assistant Administrator for Fisheries, NOAA (AA), finds good cause to waive the requirement to provide prior notice and opportunity for public comment pursuant to the authority set forth at 5 U.S.C. 553(b)(B) as such requirement is impracticable and contrary to the public interest. This requirement is impracticable and contrary to the public interest as it would prevent NMFS from responding to the most recent fisheries data in a timely fashion and would delay the closure of the deep-water species fishery by vessels using trawl gear in the GOA. NMFS was unable to publish a notice providing time for public comment because the most recent, relevant data only became available as of July 27, 2012.

The AA also finds good cause to waive the 30-day delay in the effective date of this action under 5 U.S.C. 553(d)(3). This finding is based upon the reasons provided above for waiver of prior notice and opportunity for public comment.

This action is required by § 679.21 and is exempt from review under Executive Order 12866.