The recent financial crisis demonstrated the destabilizing effect that large, interconnected financial companies can have on the national economy, capital markets, and the overall financial stability of the banking system. Many governments and central banks across the world, including the U.S. government, responded to the crisis by providing unprecedented levels of support to companies in the financial sector to mitigate the impact of the crisis and to sustain the global financial system.

The financial crisis and the accompanying legislative response underscore the importance of strong bank supervision and regulation of the financial system. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)  1 to address, in part, weaknesses in the framework for the supervision and regulation of large U.S. financial companies. 2 These changes underscore the view that large, complex institutions can have a significant impact on capital markets and the economy and, therefore, need to be supervised and regulated more rigorously.

Following the financial crisis, the OCC developed a set of “heightened expectations” to enhance our supervision and strengthen the governance and risk management practices of large national banks. The first expectation, often referred to as preserving the sanctity of the charter, maintains that one of the primary fiduciary duties of an institution's board of directors is to ensure that the institution operates in a safe and sound manner. Since large banks are often one of several legal entities under a complex parent company, each bank's board must ensure that the bank does not function simply as a booking entity for its parent and that parent company decisions do not jeopardize the safety and soundness of the bank. This often requires separate and focused governance and risk management practices.

The second expectation generally requires large institutions to have a well-defined personnel management program that ensures appropriate staffing levels, provides for orderly succession, and provides for compensation tools to appropriately motivate and retain talent that does not encourage imprudent risk taking.

The third expectation pertains to risk appetite (or tolerance) and involves institutions defining and communicating an acceptable risk appetite across the organization, including measures that address the amount of capital, earnings, or liquidity that may be at risk on a firm-wide basis, the amount of risk that may be taken in each line of business, and the amount of risk that may be taken in each key risk category monitored by the institution.

The OCC also expects institutions to have reliable oversight programs under the fourth expectation, including the development and maintenance of strong audit and risk management functions. This expectation involves institutions comparing the performance of their audit and risk management functions to the OCC's standards and leading industry practices and taking appropriate action to address material gaps.

The fifth expectation focuses on the board of directors' willingness to provide a credible challenge to bank management's decision-making and thus requests independent directors to acquire a thorough understanding of an institution's risk profile and to use this information to ask probing questions of management and to ensure that senior management prudently addresses risks.

In 2010, the OCC began communicating these heightened expectations informally to institutions in the Large Bank program  3 through our supervisory function. Examiners met with independent directors and executive management from these institutions to discuss the standards and explain how each national bank should apply them. 4 Through its work with the Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS), the OCC found that many supervisors are establishing, or are considering establishing, similar expectations for the financial institutions they regulate. The OCC continued to refine and reinforce the heightened expectations during 2011, and in 2012, started examining each large institution for compliance with the expectations, including documenting its conclusions in the OCC's Report of Examination  5 to reflect each institution's progress in complying with the expectations. Currently, OCC examiners meet with each large institution's management team on a quarterly basis to discuss the institution's progress towards meeting the OCC's heightened expectations. The OCC has also applied aspects of the heightened expectations to institutions in the Midsize Bank program  6 to promote stronger governance and risk management.

Achievement and maintenance of the heightened expectations should help lessen the impact of future economic downturns on large institutions. Therefore, we are proposing standards developed from the heightened expectations in the form of enforceable guidelines. The OCC is proposing to issue the Guidelines as a new Appendix D to part 30 of our regulations. We believe the Guidelines will provide greater certainty to covered institutions and improve examiners' ability to assess compliance with the heightened expectations. As proposed, the Guidelines would be applicable to a broader group of institutions than those currently subject to the heightened expectations program. The proposal generally would apply to insured national banks, insured Federal savings associations, and insured Federal branches of foreign banks with average total consolidated assets of $50 billion or more (together, Banks and each a Bank). The proposal furthers the goal of the Dodd-Frank Act to strengthen the financial system by focusing management and boards of directors on strengthening risk management practices and governance, thereby minimizing the probability and impact of future crises. Below, we discuss the enforcement of the Guidelines and provide a detailed description of the standards contained in the Guidelines.

The OCC is proposing these Guidelines pursuant to section 39 of the Federal Deposit Insurance Act (FDIA). 7 Section 39 authorizes the OCC to prescribe safety and soundness standards in the form of a regulation or guidelines. For national banks, these standards currently include three sets of guidelines issued as appendices to part 30 of our regulations. Appendix A contains operational and managerial standards that relate to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. Appendix B contains standards on information security and Appendix C contains standards that address residential mortgage lending practices. For Federal savings associations, these standards are found in Appendices A and B to 12 CFR part 170. Part 30, part 170, and Appendices A and B were issued on an interagency basis and are comparable. 8

Section 39 prescribes different consequences depending on whether the standards it authorizes are issued by regulation or guidelines. Pursuant to section 39, if a national bank or Federal savings association  9 fails to meet a standard prescribed by regulation, the OCC must require it to submit a plan specifying the steps it will take to comply with the standard. If a national bank or Federal savings association fails to meet a standard prescribed by guideline, the OCC has the discretion to decide whether to require the submission of such a plan. 10 Issuing these heightened standards as guidelines rather than as a regulation provides the OCC with the flexibility to pursue the course of action that is most appropriate given the specific circumstances of a Bank's noncompliance with one or more standards, and the Bank's self-corrective and remedial responses.

The enforcement remedies prescribed by section 39 are implemented in procedural rules contained in parts 30 and 170 of the OCC's rules. Under these provisions, the OCC may initiate the enforcement process when it determines, by examination or otherwise, that a national bank or Federal savings association has failed to meet the standards set forth in the Guidelines. 11 Upon making that determination, the OCC may request, through letter or Report of Examination, that the national bank or Federal savings association submit a compliance plan to the OCC detailing the steps the institution will take to correct the deficiencies and the time within which it will take those steps. This request is termed a Notice of Deficiency. Upon receiving a Notice of Deficiency from the OCC, the national bank or Federal savings association must submit a compliance plan to the OCC for approval within 30 days.

If a national bank or Federal savings association fails to submit an acceptable compliance plan, or fails materially to comply with a compliance plan approved by the OCC, the OCC may issue a Notice of Intent to Issue an Order pursuant to section 39 (Notice of Intent). The bank or savings association then has 14 days to respond to the Notice of Intent. After considering the bank's or savings association's response, the OCC may issue the order, decide not to issue the order, or seek additional information from the bank or savings association before making a final decision. Alternatively, the OCC may issue an order without providing the bank or savings association with a Notice of Intent. In such a case, the bank or savings association may appeal after-the-fact to the OCC, and the OCC has 60 days to consider the appeal and render a final decision. Upon the issuance of an order, a bank or savings association is deemed to be in noncompliance with part 30 or part 170, as applicable. Orders are formal, public documents, and they may be enforced in district court or through the assessment of civil money penalties under 12 U.S.C. 1818.

The proposed Guidelines consist of three parts. Part I provides an introduction to the Guidelines, explains its scope, and defines key terms used throughout the Guidelines. Part II sets forth the minimum standards for the design and implementation of a Bank's risk governance framework (Framework). Part III provides the minimum standards for the board of directors' (Board) oversight of the Framework.

Under the proposed Guidelines, the OCC would expect a Bank to establish and implement a Framework that manages and controls the Bank's risk taking. The Guidelines establish the minimum standards for the design and implementation of the Framework and the minimum standards for the Board to use in overseeing the Framework's design and implementation. It is important to note that these standards are not intended to be exclusive, and that they are in addition to any other applicable requirements in law or regulation. For example, the OCC expects Banks to continue to comply with the operational and management standards articulated in Appendix A to part 30, including those related to internal controls, risk management, and management information systems.

If a Bank has a risk profile that is substantially the same as its parent company, the parent company's risk governance framework complies with these Guidelines, and the Bank has demonstrated through a documented assessment that its risk profile and its parent company's risk profile are substantially the same, the Bank may use its parent company's risk governance framework to satisfy the Guidelines. This assessment should be conducted at least annually or more often in conjunction with the review and update of the Framework performed by independent risk management as set forth in paragraph II.A. of the Guidelines. The term “risk profile” is defined in the Guidelines and discussed below. A parent company's and Bank's risk profiles would be considered substantially the same if, as of the most recent quarter-end Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income (Call Report), the following conditions are met: (i) The Bank's average total consolidated assets represent 95% or more of the parent company's average total consolidated assets; (ii) the Bank's total assets under management represent 95% or more of the parent company's total assets under management; and (iii) the Bank's total off-balance sheet exposures represent 95% or more of the parent company's total off-balance sheet exposures. A Bank that does not satisfy this test can submit to the OCC for consideration an analysis that demonstrates that the risk profile of the parent company and the Bank are substantially the same based on other factors.

The Bank would need to develop its own Framework if the parent company's and Bank's risk profiles are not substantially the same. While the Bank may use certain components of the parent company's risk governance framework, the Bank's Framework should ensure that the Bank's risk profile is easily distinguished and separate from its parent company's for risk management and supervisory reporting purposes and that the safety and soundness of the Bank is not jeopardized by decisions made by the parent company's board of directors or management. This includes ensuring that assets and businesses are not transferred into the Bank from nonbank entities without proper due diligence and ensuring that complex booking structures established by the parent company protect the safety and soundness of the Bank. OCC examiners will assist the Bank in determining which components of a parent company's risk governance framework may be used to ensure that the Bank's Framework complies with the Guidelines.

Question 1: The OCC requests comment on the proposed conditions for determining whether a Bank's risk profile is substantially the same as its parent company's risk profile.

Scope. The Guidelines would apply to a Bank with average total consolidated assets equal to or greater than $50 billion as of the effective date of the Guidelines (calculated by averaging the Bank's total consolidated assets, as reported on the Bank's Call Reports, for the four most recent consecutive quarters). For those Banks that have average total consolidated assets less than $50 billion as of the effective date of the Guidelines, but subsequently have average total consolidated assets of $50 billion or greater, the date on which the Guidelines would apply to such Banks is the as-of date of the most recent Call Report used in the calculation of the average. Once a Bank becomes subject to the Guidelines because its average total consolidated assets have reached or exceeded the $50 billion threshold, it would be required to continue to comply with the Guidelines even if its average total consolidated assets subsequently drop below $50 billion.

In order to maintain supervisory flexibility, the proposed Guidelines would reserve the OCC's authority to apply the Guidelines to a Bank whose average total consolidated assets are less than $50 billion if the OCC determines such entity's operations are highly complex or otherwise present a heightened risk as to require compliance with the Guidelines. In determining whether a Bank's operations are highly complex or present a heightened risk, the OCC will consider the following factors: complexity of products and services, risk profile, and scope of operations. For example, these Guidelines will generally apply to a bank with average total consolidated assets less than $50 billion, if the bank's parent company owns more than one bank and the aggregate average total consolidated assets of all of the banks is equal to or greater than $50 billion. In such cases, the OCC would consider the collective complexity of the banks' products and services, risk profile, and scope of operations.

Conversely, the Guidelines would also reserve the OCC's authority to delay the application of the Guidelines to any Bank, or modify the Guidelines as applicable to certain Banks. 12 Additionally, the OCC may determine that a Bank is no longer required to comply with the Guidelines. The OCC would generally make this determination if a Bank's operations are no longer highly complex or no longer present a heightened risk that would require continued compliance with the Guidelines. When exercising any of these reservations of authority, the OCC will apply notice and response procedures, when appropriate, consistent with those set out in 12 CFR 3.404.

The OCC has not included uninsured entities, such as trust banks and Federal branches or agencies of foreign banks, in the scope of the proposed Guidelines because section 39 of the FDIA applies only to “insured depository institutions.” Currently, OCC examiners are informally applying certain aspects of the heightened expectations to select uninsured entities. The OCC is considering whether it would be appropriate to apply the provisions in the Guidelines to these entities. The Guidelines could be applied to these entities informally, as is the current practice with the heightened expectations, or the OCC could issue a separate regulation. If the OCC decides to apply the Guidelines informally, we may issue a policy statement to address issues raised by the application of the Guidelines to these institutions. If the Guidelines were to apply to these entities, the OCC would not be able to use the part 30 enforcement scheme but would instead need to rely on our enforcement authority with respect to unsafe or unsound practices under 12 U.S.C. 1818.

As discussed above, the Guidelines would be enforceable pursuant to section 39 of the FDIA and part 30 of our rules. Part I of the Guidelines also provides that nothing in section 39 or the Guidelines in any way limits the authority of the OCC to address unsafe or unsound practices or conditions or other violations of law.

Definitions. Paragraph C of Part I includes a number of definitions used throughout the Guidelines. These include: Chief Audit Executive, Chief Risk Executive, front line unit, independent risk management, internal audit, risk appetite, and risk profile. The definitions of risk profile, Chief Audit Executive, and Chief Risk Executive are discussed in the next paragraph and the definitions for the remaining terms will be discussed below under Part II: Standards for Risk Governance Framework.

Risk profile is a point-in-time assessment of the Bank's risks, aggregated within and across each relevant risk category, using methodologies consistent with the risk appetite statement described in II.E. of the Guidelines. 13 The term Chief Audit Executive (CAE) means an individual who leads internal audit and is one level below the Chief Executive Officer (CEO) in the Bank's organizational structure. 14 The term Chief Risk Executive (CRE) means an individual who leads an independent risk management unit and is one level below the CEO in the Bank's organizational structure. 15

Question 2: The OCC requests comment on the advantages and disadvantages of having a single CRE, such as a Chief Risk Officer, provide oversight to all independent risk management units versus having multiple, risk-specific CREs providing oversight to one or more independent risk management units.

Part II of the proposed Guidelines sets out minimum standards for the design and implementation of a Bank's Framework. Under paragraphs A. and B., a Bank should establish and adhere to a formal, written Framework that covers the following risk categories that apply to the Bank: credit risk, interest rate risk, liquidity risk, price risk, operational risk, compliance risk, strategic risk, and reputation risk. The OCC has defined these eight categories of risks for supervision purposes, but Banks may choose to categorize underlying risks in a different manner for risk management purposes. Regardless of how a Bank categorizes its risks, the Framework must appropriately cover risks to the Bank's earnings, capital, liquidity, and reputation that arise from all of its activities, including risks associated with third-party relationships. Independent risk management should be responsible for the design of the Framework, and for ensuring it comprehensively covers the Bank's risks. Independent risk management should also review and update the Framework at least annually, and as often as needed to address changes in the Bank's risk profile caused by internal or external factors or the evolution of industry risk management practices. The Board or its risk committee would be responsible under this proposal for approving the Framework.

Roles and responsibilities. Paragraph C. sets out the proposed roles and responsibilities for the organizational units that are fundamental to the design and implementation of the Framework. These units are front line units, independent risk management, and internal audit. 16 They are often referred to as the three lines of defense and, together, should establish an appropriate system to control risk taking. These units should also ensure that the Board has sufficient information on the Bank's risk profile and risk management practices to provide credible challenges to management's recommendations and decisions. While all three units should ensure that the Board is adequately informed, the independent risk management and internal audit units must have unfettered access to the Board, or a committee thereof, with regard to their risk assessments, findings, and recommendations, independent from front line unit management and, when necessary, the CEO. This unfettered access to the Board is critical to ensuring the integrity of the Framework.

In carrying out their responsibilities within the Framework, front line units, independent risk management, and internal audit may engage the services of external experts to assist them. Such expertise can be useful in supplementing internal expertise and providing perspective on industry practices. However, no organizational unit in the Bank may delegate its responsibilities under the Framework to an external party.

1. Role and responsibilities of front line units. The term front line unit means any organizational unit within the Bank that: (i) Engages in activities designed to generate revenue for the parent company or Bank; (ii) provides services, such as administration, finance, treasury, legal, or human resources, to the Bank; or (iii) provides information technology, operations, servicing, 17 processing, 18 or other support to any organizational unit covered by these Guidelines. 19 The proposed definition of front line units includes those units that provide information technology, operations, servicing, processing, or other support to independent risk management and internal audit. By engaging in these activities, front line units create risks for the Bank.

The Guidelines provide that front line units should own the risks associated with their activities. This means that such units should be responsible for appropriately assessing and effectively managing all risks associated with their activities. Front line units should be held accountable by the CEO and the Board and should meet the standards specified in paragraph II.C.1. Under this paragraph, front line units should assess, on an ongoing basis, the material risks associated with their activities and use these risk assessments as the basis for fulfilling their responsibilities under paragraphs (b) and (c) of paragraph II.C.1. and for determining if they need to take action to strengthen risk management or reduce risk given changes in the unit's risk profile or other conditions. Paragraph (b) provides that the front line units should establish and adhere to a set of written policies that include front line unit risk limits, as discussed in paragraph II.E. of the proposed Guidelines. These policies should ensure that risks associated with the front line units' activities are effectively identified, measured, monitored, and controlled consistent with the Bank's risk appetite statement, concentration risk limits, and certain other of the Bank's policies established within the Framework pursuant to paragraphs II.C.2.(c) and II.G. through K. 20 of the Guidelines. Paragraph (c) provides that front line units should also establish and adhere to procedures and processes necessary to ensure compliance with the aforementioned written policies. For example, a front line unit's processes for establishing its policies should provide for independent risk management's review and approval of these policies to ensure they are consistent with other policies established within the Framework. The standards articulated in paragraphs (b) and (c) should not be interpreted as an exclusive list of actions front line units should take to effectively manage risk. As discussed above, front line units should use their ongoing risk assessments to determine if additional actions are necessary to strengthen risk management practices or reduce risk. For example, there may be instances where front line units should take action to manage risk effectively, even if the Bank's risk appetite or applicable concentration risk limits, or the unit's risk limits have not been exceeded. In addition, front line units should adhere to all applicable policies, procedures, and processes established by independent risk management. Front line units should also develop, attract, and retain talent and maintain appropriate staffing levels, and establish and adhere to talent management processes and compensation and performance management programs that comply with paragraphs II.L. and II.M., respectively, of the Guidelines.

2. Roles and responsibilities of independent risk management. The term independent risk management means any organizational unit within the Bank that has responsibility for identifying, measuring, monitoring, or controlling aggregate risks. 21 These units maintain independence from front line units by implementing the reporting structure specified in the Guidelines. Specifically, the Board or the Board's risk committee reviews and approves the Framework and any material policies established under the Framework. The Board or its risk committee approves all decisions regarding the appointment or removal of the CRE and approves the annual compensation and salary adjustment of the CRE. The Board or the Board's risk committee receives communications from the CRE on the results of independent risk management's risk assessments and activities, and other matters that the CRE determines are necessary. In addition, the Board or the Board's risk committee makes appropriate inquiries of management or the CRE to determine whether there are scope or resource limitations that impede the ability of independent risk management to execute its responsibilities. The CEO oversees the CRE's day-to-day activities. This includes resolving disagreements between front line units and independent risk management that cannot be resolved by the CRE and front line unit(s) executive(s). It also includes, but is not limited to, overseeing budgeting and management accounting, human resources administration, internal communications and information flows, and the administration of independent risk management's internal policies and procedures. Finally, no front line unit executive oversees any independent risk management units.

Paragraph II.C.2. of the proposed Guidelines provides that independent risk management should oversee the Bank's risk-taking activities and assess risks and issues independent of the CEO and front line units. In fulfilling these responsibilities, independent risk management should take primary responsibility for designing a Framework commensurate with the Bank's size, complexity, and risk profile that meets these Guidelines. Independent risk management should also identify and assess, on an ongoing basis, the Bank's material aggregate risks and use such risk assessments as the basis for fulfilling its responsibilities under paragraphs (c) and (d) of paragraph II.C.2., and for determining if actions need to be taken to strengthen risk management or reduce risk given changes in the Bank's risk profile or other conditions. Paragraph (c) provides that independent risk management should establish and adhere to enterprise policies that include concentration risk limits  22 and that ensure that aggregate risks within the Bank are effectively identified, measured, monitored, and controlled, consistent with the Bank's risk appetite statement and that the Bank's policies and processes established under paragraphs II.G. through K. of the Framework.

Independent risk management also should be held accountable by the CEO and the Board, and paragraphs (d) and (e) provides that independent risk management should establish and adhere to procedures and processes necessary to ensure compliance with the aforementioned policies and to ensure that the front line units meet the standards discussed in paragraph II.C.1. Independent risk management should also identify and communicate to the CEO and the Board or the Board's risk committee material risks and significant instances where independent risk management's assessment of risk differs from a front line unit as well as significant instances where a front line unit is not complying with the Framework.

The standards articulated in paragraphs (c) and (d) should not be interpreted as an exclusive list of actions independent risk management should take to effectively manage risk. As discussed above, independent risk management should use its risk assessments to determine if additional actions are necessary to strengthen risk management practices or reduce risk. For example, there may be instances where independent risk management should take action to effectively manage risk, even if the Bank's risk appetite or applicable concentration risk limits, or a front line unit's risk limits have not been exceeded.

Independent risk management should also identify and communicate to the Board or the Board's risk committee material risks and significant instances where independent risk management's assessment of risk differs from the CEO, and significant instances where the CEO is not adhering to, or holding front line units accountable for adhering to, the Framework. Finally, independent risk management should develop, attract and retain talent, maintain appropriate staffing levels, and establish and adhere to talent management processes and compensation and performance management programs that comply with paragraphs II.L. and II.M., respectively, of the Guidelines.

Question 3: Section II.C.3.(a) provides that internal audit should maintain a complete and current inventory of all of the Bank's material businesses, product lines, services, and functions. The OCC requests comment on whether the Guidelines should provide that independent risk management also maintain such an inventory in order to ensure that internal audit has identified all material businesses, product lines, services, and functions.

3. Roles and responsibilities of internal audit. The term internal audit means the organizational unit within the Bank that is designated to fulfill the role and responsibilities outlined in 12 CFR 30 Appendix A, II.B. 23 Internal audit is the third of a Bank's three lines of defense. Paragraph II.C.3. provides that internal audit should ensure that the Bank's Framework complies with the Guidelines and is appropriate for the Bank's size, complexity, and risk profile.

Internal audit maintains independence from front line and independent risk management units by implementing the reporting structure specified in the Guidelines. Specifically, the Board's audit committee reviews and approves internal audit's overall charter, risk assessments, and audit plans. In addition, the committee approves all decisions regarding the appointment or removal and annual compensation and salary adjustment of the CAE. The Board's audit committee also receives communications from the CAE on the results of internal audit's activities or other matters that the CAE determines are necessary and makes appropriate inquiries of management or the CAE to determine whether there are scope or resource limitations that impede the ability of internal audit to execute its responsibilities. The CEO oversees the CAE's day-to-day activities. This includes, but is not limited to, budgeting and management accounting, human resource administration, internal communications and information flows, and the administration of the unit's internal policies and procedures. If internal audit reports to the Board's audit committee, the audit committee or its chair would fill the aforementioned role of the CEO. Finally, no front line unit executive oversees internal audit.

The design and implementation of the audit plan is an important element of internal audit's role and responsibilities under the Framework. Internal audit should maintain a complete and current inventory of all of the Bank's material businesses, product lines, services, and functions and assess the risks associated with each. This inventory and assessment will form the basis of the audit plan. The audit plan should rate the risk presented by each front line unit, product line, service, and function. This includes activities that the Bank may outsource to a third party. Internal audit should derive these ratings from its Bank-wide risk assessments, and should periodically adjust these ratings based on risk assessments conducted by front line units and changes in the Bank's strategy and the external environment. The audit plan should include ongoing monitoring to identify emerging risks and ensure that units, product lines, services, and functions that receive a low risk rating are reevaluated with reasonable frequency. The audit plan should be updated at least quarterly and should take into account the Bank's risk profile as well as emerging risks and issues. The audit plan should require internal audit to evaluate the adequacy of and compliance with policies, procedures, and processes established by front line units and independent risk management under the Framework. This is in addition to internal audit's traditional testing of internal controls and the accuracy of financial records, as required by other laws and regulations at an appropriate frequency based on risk. This testing should require the evaluation of reputation and strategic risk, along with evaluations of independent risk management and traditional risks. This testing should enable internal audit to assess the appropriateness of risk levels and trends across the Bank. All changes to the audit plan should be communicated to the Board's audit committee.

Internal audit should report in writing to the Board's audit committee conclusions, issues, and recommendations resulting from the audit work carried out under the audit plan. These reports should identify the root cause of any issue and include a determination of whether the root cause creates an issue that has an impact on one organizational unit or multiple organizational units within the Bank, as well as a determination of the effectiveness of front line units and independent risk management in identifying and resolving issues in a timely manner. The report also should address potential and emerging concerns, the timeliness of corrective actions, and the status of outstanding issues. These reports should include objective measures that enable the identification, measurement, and monitoring of risk and internal control issues. Finally, audit reports should include comments on the effectiveness of front line units in identifying excessive risks and issues, emerging issues, and the appropriateness of risk levels relative to both the quality of the internal controls and the risk appetite statement.

Internal audit should also establish and adhere to processes for independently assessing the design and effectiveness of the Framework. The assessment should be done at least annually and may be conducted by internal audit, an external party, or a combination of both. The assessment should include a conclusion on the Bank's compliance with the Guidelines and the degree to which the Bank's Framework is consistent with leading industry practices. Internal audit should also communicate to the Board's audit committee significant instances where front line units or independent risk management are not adhering to the Framework. Internal audit should also establish a quality assurance department that ensures internal audit's policies, procedures, and processes comply with applicable regulatory and industry guidance, are appropriate for the size, complexity, and risk profile of the Bank, are updated to reflect changes to internal and external to risk factors, and are consistently followed. Internal audit should also develop, attract, and retain talent and maintain appropriate staffing levels, and establish and adhere to talent management processes and compensation and performance management programs that comply with paragraphs II.L. and II.M., respectively, of the Guidelines.

Question 4: The OCC requests comment on whether internal audit's assessment of the Bank's Framework should include a conclusion regarding whether the Framework is consistent with leading industry practices. Is such an assessment possible for internal audit given the wide range of practices in the industry and the challenges associated with determining what constitutes a leading industry practice? Are there any other concerns with such a requirement?

4. Stature. For the Framework to be effective, it is critical that independent risk management and internal audit have the stature needed to effectively carry out their respective roles and responsibilities. This stature is generally evidenced by the attitudes and level of support provided by the Board, CEO, and others within the Bank toward these units. The Board demonstrates support for these units by ensuring that they have the resources needed to carry out their responsibilities and by relying on the work of these units when carrying out the Board's oversight responsibilities set forth in Part III of the proposed Guidelines. The CEO and front line units demonstrate support by welcoming credible challenges from independent risk management and internal audit and including these units in policy development, new product and service deployment, changes in strategy and tactical plans, and organizational and structural changes.

Strategic plan. Paragraph D. of Part II of the proposed Guidelines provides that the CEO should develop a written strategic plan with input from front line units, independent risk management, and internal audit. The Board should evaluate and approve the strategic plan and monitor management's efforts to implement it at least annually. At a minimum, the strategic plan should cover a three-year period and should contain a comprehensive assessment of risks that currently impact the Bank or that could impact the Bank during this period, articulate an overall mission statement and strategic objectives for the Bank, and include an explanation of how the Bank will achieve those objectives. The strategic plan should also include an explanation of how the Bank will update, as necessary, the Framework to account for changes in the Bank's risk profile projected under the strategic plan. Finally, the strategic plan should be reviewed, updated, and approved, as necessary, due to changes in the Bank's risk profile or operating environment that were not contemplated when the strategic plan was developed.

Risk appetite statement. Paragraph E. of Part II of the proposed Guidelines provides that the Bank should have a comprehensive written statement that articulates the Bank's risk appetite and serves as a basis for the Framework (Statement). The term risk appetite means the aggregate level and types of risk the Board and management are willing to assume to achieve the Bank's strategic objectives and business plan, consistent with applicable capital, liquidity, and other regulatory requirements. 24 The Board and management should ensure that the level and types of risk they are willing to assume to achieve the Bank's strategic objectives and business plan are consistent with its capital and liquidity needs and requirements, as well as other laws and regulatory requirements applicable to the Bank.

The Statement should include both qualitative components and quantitative limits. The qualitative components of the Statement should describe a safe and sound “risk culture”  25 and how the Bank will assess and accept risks, including those that are difficult to quantify, on a consistent basis throughout the Bank. Setting an appropriate tone at the top is critical to establishing a sound risk culture, and the qualitative statements within the Statement should articulate the core values that the Board and CEO expect employees throughout the Bank to share when carrying out their respective roles and responsibilities within the Bank. These values should serve as the basis for risk-taking decisions made throughout the Bank and should be reinforced by the actions of the Board, executive management, Board committees, and individuals. Evidence of a sound risk culture includes, but is not limited to: (i) Open dialogue and transparent sharing of information between front line units, independent risk management, and internal audit; (ii) consideration of all relevant risks and the views of independent risk management and internal audit in risk-taking decisions; and (iii) compensation and performance management programs and decisions that reward compliance with the core values and quantitative limits established in the Statement, and hold accountable those who do not conduct themselves in a manner consistent with these articulated standards.

Quantitative limits should incorporate sound stress testing processes, as appropriate, and should address the Bank's earnings, capital, and liquidity positions. The Bank may set quantitative limits on a gross or net basis that take into account appropriate capital and liquidity buffers; in either case, these limits should be set at levels that prompt management and the Board to manage risk proactively before the Bank's risk profile jeopardizes the adequacy of its earnings, liquidity, and capital. Lagging indicators, such as delinquencies, problem asset levels, and losses generally will not capture the build-up of risk during healthy economic periods. As a result, these indicators are generally not useful in proactively managing risk. However, setting quantitative limits based on performance under various adverse scenarios would enable the Board and management to take actions that reduce risk before delinquencies, problem assets, and losses reach excessive levels. Examiners will apply judgment when determining which quantitative limits should be based on stress testing. They will consider several factors, including the value in using such measures for the risk type, the Bank's ability to produce such measures, the capabilities of similarly-situated institutions, and the degree to which the Bank's Board and management have invested in the resources needed to establish such capabilities. The Federal banking agencies issued guidance on stress testing in May 2012. 26 The guidance describes various stress testing approaches and applications, and Banks should consider the range of approaches and select the one(s) most suitable when establishing quantitative limits. Risk limits may be designed as thresholds, triggers, or hard limits, depending on how the Board and management choose to manage risk. Thresholds or triggers that prompt discussion and action before a hard limit is reached or breached can be useful tools for reinforcing risk appetite and proactively responding to elevated risk indicators.

When a Bank's risk profile is substantially the same as that of its parent company, the Bank's Board may tailor the parent company's risk appetite statement to make it applicable to the Bank. However, to ensure the sanctity of the national bank or Federal savings association charter, a Bank's Board must approve the Bank-level Statement and document any necessary adjustments or material differences between the Bank's and parent company's risk profiles.

Concentration and front line unit risk limits. Paragraph F. of Part II of the proposed Guidelines provides that the Framework should include concentration risk limits and, as applicable, front line unit risk limits for the relevant risks in each front line unit to ensure that these units do not create excessive risks. When aggregated across all such units, the risks should not exceed the limits established in the Bank's Statement. Depending on a Bank's organizational structure, concentration risk limits and front line unit risk limits may also need to be established for legal entities, units based on geographical areas, or product lines.

Risk appetite review, monitoring, and communication processes. Paragraph G. of Part II of the proposed Guidelines provides that the Framework should require: (i) Review and approval of the Statement by the Board or the Board's risk committee at least annually or more frequently, as necessary, based on the size and volatility of risks and any material changes in the Bank's business model, strategy, risk profile, or market conditions; (ii) initial communication and ongoing reinforcement of the Bank's Statement throughout the Bank to ensure that all employees align their risk-taking decisions with the Statement; (iii) independent risk management to monitor the Bank's risk profile in relation to its risk appetite and compliance with concentration risk limits and to report such monitoring to the Board or the Board's risk committee at least quarterly; (iv) front line units and independent risk management to monitor their respective risk limits and to report to independent risk management at least quarterly; and (v) when necessary due to the level and type of risk, independent risk management to monitor front line units' compliance with front line unit risk limits, ongoing communication with front line units regarding adherence to these risk limits, and to report any concerns to the CEO and the Board or the Board's risk committee, at least quarterly. With regard to the monitoring and reporting set forth in paragraph G., the frequency of such monitoring and reporting should be performed more often, as necessary, based on the size and volatility of the risks and any material change in the Bank's business model, strategy, risk profile, or market conditions.

Processes governing risk limit breaches. Paragraph H. of Part II of the proposed Guidelines sets out processes governing risk limit breaches. The Bank should establish and adhere to processes that require front line units and independent risk management, in conjunction with their respective responsibilities, to identify any breaches of the Statement, concentration risk limits, and front line unit risk limits, distinguish identified breaches based on the severity of their impact on the Bank and establish protocols for when and how to inform the Board, front line management, independent risk management, and the OCC of these breaches. The Bank should also include in the protocols discussed above the requirement to provide a written description of how a breach will be, or has been, resolved and establish accountability for reporting and resolving breaches that include consequences for risk limit breaches that take into account the magnitude, frequency, and recurrence of breaches. It is acceptable for Banks to have different escalation and resolution processes for breaches of the Statement, concentration risk limits, and front line unit risk limits. However, both processes are important elements of the overall Framework.

Concentration risk management. Paragraph I. of Part II of the proposed Guidelines provides that the Framework should include policies and supporting processes that are appropriate for the Bank's size, complexity, and risk profile that effectively identify, measure, monitor, and control the Bank's concentration of risk. Concentrations of risk can arise in any risk category, with the most common being identified with borrowers, funds providers, and counterparties. In addition, the OCC's eight categories of risk discussed earlier are not mutually exclusive; any product or service may expose a bank to multiple risks and risks may also be interdependent. 27 Furthermore, concentrations can exist on and off the balance sheet. Banks should continually enhance their concentration risk management processes to strengthen their ability to effectively identify, measure, monitor, and control concentrations that arise in all risk categories. 28

Risk data aggregation and reporting. Paragraph J. of Part II of the proposed Guidelines addresses risk data aggregation and reporting. This paragraph provides that the Framework should include a set of policies, supported by appropriate procedures and processes, designed to ensure that the Bank's risk data aggregation and reporting capabilities are appropriate for its size, complexity, and risk profile and support supervisory reporting requirements. These policies, procedures, and processes should provide for an information technology (IT) infrastructure that supports the Bank's risk aggregation and reporting needs in both normal times and times of stress. Processes should capture aggregate risk data and report material risks, concentrations, and emerging risks to the Board and the OCC in a timely manner. In addition, these policies, procedures, and processes should provide for the distribution of risk reports to all relevant parties at a frequency that meets the recipients' needs for decision-making purposes.

During the financial crisis, it became apparent that many banks' IT and data architectures were inadequate to support the broad management of financial risks. Many banks lacked the ability to aggregate risk exposures and identify concentrations quickly and accurately at the bank level, across business lines, and among legal entities. The OCC expects Banks to have risk aggregation and reporting capabilities that meet the Board's and management's needs for proactively managing risk and ensuring the Bank's risk profile remains consistent with its risk appetite. 29

Relationship of risk appetite statement, concentration risk limits, and front line unit risk limits to other processes. Paragraph K. of Part II of the proposed Guidelines addresses the relationship between the Statement, concentration risk limits, and front line unit risk limits to other Bank processes. The Bank's front line units and independent risk management should incorporate these elements into their strategic and annual operating plans, capital stress testing and planning processes, liquidity stress testing and planning processes, product and service risk management processes (including those for approving new and modified products and services), decisions regarding acquisitions and divestitures, and compensation performance management programs.

Talent management processes; compensation and performance management programs. Paragraphs L. and M. of Part II of the proposed Guidelines address the Bank's talent management processes and compensation and performance management programs, respectively. With regard to talent management, the proposal provides that the Bank should establish and adhere to processes for talent development, recruitment, and succession planning to ensure that those employees who are responsible for or influence material risk decisions have the knowledge, skills, and abilities to effectively identify, measure, monitor, and control relevant risks. A Bank's talent management processes should ensure that the Board or a Board committee: (i) Hires a CEO and approves the hiring of direct reports of the CEO with the skills and abilities to design and implement an effective Framework; (ii) establishes reliable succession plans for the CEO and his or her direct reports; and (iii) oversees the talent development, recruitment, and succession planning processes for individuals two levels down from the CEO. In addition, these processes should ensure that the Board or a Board committee: (i) Hires one or more CREs and a CAE that possess the skills and abilities to effectively implement the Framework; (ii) establishes reliable succession plans for the CRE and CAE; and (iii) oversees the talent development, recruitment, and succession planning processes for independent risk management and internal audit.

With regard to compensation and performance management programs, the Bank should establish and adhere to programs that meet the requirements of any applicable statute or regulation. These programs should be appropriate to ensure that the CEO, front line units, independent risk management, and internal audit implement and adhere to an effective Framework. The programs should also ensure front line unit compensation plans and decisions appropriately consider the level and severity of issues and concerns identified by independent risk management and internal audit. The programs should be designed to attract and retain the talent needed to design, implement, and maintain an effective Framework. In addition, the programs should prohibit incentive-based payment arrangements, or any feature of any such arrangement, that encourages inappropriate risks by providing excessive compensation or that could lead to material financial loss. 30

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2014-0031; Directorate Identifier 2013-CE-054-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, to http://regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

On March 18, 1999, we issued AD 99-07-11, Amendment 39-11096 (64 FR 14820, March 29, 1999) (“AD 99-07-11”). That AD required actions intended to address an unsafe condition on the products listed above.

Since we issued AD 99-07-11, SOCATA determined that the cause of the cracks in the horizontal stabilizer outboard hinge fitting was due to the incorrect installation of the fittings during production, which induced stress. SOCATA has issued new mandatory service information to require a modification to the outboard hinge fittings of the horizontal stabilizer to eliminate the stress.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued AD No. 2013-0035, dated February 22, 2013 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:

You may examine the MCAI on the Internet at http://www.regulations.gov by searching for and locating it in Docket No. FAA-2014-0031.

DAHER-SOCATA has issued TBM Aircraft Mandatory Service Bulletin SB 70-080, Amendment 2, dated August 2012. The actions described in this service information are intended to correct the unsafe condition identified in the MCAI.

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

We estimate that this proposed AD will affect 159 products of U.S. registry. We also estimate that it would take about 6.5 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $500 per product.

Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $167,347.50, or $1,052.50 per product.

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

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

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

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

(1) Is not a “significant regulatory action” under Executive Order 12866,

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

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

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

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

The collection of information contained in § 1.5000A-3(h)(3) and § 1.5000A-4(a)(1) of this notice of proposed rulemaking has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-0074 in conjunction with the final regulations under section 5000A (TD 9632). The information is necessary to determine whether the individual shared responsibility provision applies to a taxpayer and, if it applies, the amount of the payment. Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.

Comments on the collection of information should be received by March 28, 2014.

The Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)) (collectively, the Affordable Care Act), added section 5000A to the Internal Revenue Code. Section 5000A was subsequently amended by the TRICARE Affirmation Act of 2010, Public Law 111-159 (124 Stat. 1123) and Public Law 111-173 (124 Stat. 1215). Section 5000A provides that, for months beginning after December 31, 2013, a nonexempt individual must maintain minimum essential coverage or make a shared responsibility payment.

Final regulations under section 5000A (TD 9632) were published on August 30, 2013 (78 FR 53646). The preamble to the final regulations indicates that subsequent proposed regulations will provide that coverage under certain government-sponsored programs is not government-sponsored minimum essential coverage. The preamble to the final regulations also describes rules to be included in subsequent regulations for determining, for purposes of the lack of affordable coverage exemption, the required contribution for individuals eligible to enroll in an eligible employer-sponsored plan that provides employer contributions to health reimbursement arrangements (HRAs) or wellness program incentives. These proposed regulations address these issues, consistent with the rules contemplated in the preamble to the final regulations. In addition, these proposed regulations provide or clarify rules under section 5000A addressing the definition of excepted benefits, hardship exemptions that may be claimed on a Federal income tax return, and the computation of the monthly penalty amount.

Section 5000A(f)(1) enumerates the types of health care coverage that qualify as minimum essential coverage. They include, among others, coverage under specified government-sponsored programs and health benefits coverage that the Secretary of Health and Human Services (HHS), in coordination with the Secretary of the Treasury, recognizes as minimum essential coverage. Under section 5000A(f)(1)(A), specified government-sponsored programs include, among other things, the Medicaid program under title XIX of the Social Security Act and medical coverage under chapter 55 of title 10, United States Code, including the TRICARE program.

Section 1.5000A-2(b)(1)(ii) of the final regulations provides that government-sponsored programs that are minimum essential coverage include the Medicaid program under Title XIX of the Social Security Act (42 U.S.C. 1396 and following sections) other than certain Medicaid coverage that may provide limited benefits: (1) Optional coverage of family planning services under section 1902(a)(10)(A)(ii)(XXI) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(XXI)); (2) optional coverage of tuberculosis-related services under section 1902(a)(10)(A)(ii)(XII) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(XI)); (3) coverage of pregnancy-related services under section 1902(a)(10)(A)(ii)(IX) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(IX)); and (4) coverage limited to the treatment of emergency medical conditions in accordance with 8 U.S.C. 1611(b)(1)(A), as authorized by section 1903(v) of the Social Security Act (42 U.S.C. 1396b(v)).

Under section 5000A(f)(3) and § 1.5000A-2(g) of the final regulations, minimum essential coverage does not include any health insurance coverage that consists solely of excepted benefits described in section 2791(c)(1), (c)(2), (c)(3), or (c)(4) of the Public Health Service Act (42 U.S.C. 300gg-91(c)), or regulations issued under these provisions (45 CFR 148.220) (excepted benefits regulations). In general, excepted benefits are benefits that are limited in scope or are conditional. Under 2791(b)(1) of the Public Health Service Act (42 U.S.C. 300gg-91(b)(1)), health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise and including items and services paid for as medical care) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer.

Section 5000A(e)(1) and § 1.5000A-3(e)(1) of the final regulations provide that an individual is exempt for a month when the individual cannot afford minimum essential coverage. For this purpose, an individual cannot afford minimum essential coverage if the individual's required contribution (determined on an annual basis) for minimum essential coverage exceeds a percentage (8 percent for 2014) of the individual's household income for the most recent taxable year for which the Secretary of HHS, in consultation with the Secretary of the Treasury, determines information is available.

For individuals ineligible for coverage under an eligible employer-sponsored plan, the required contribution is the annual premium for the applicable plan reduced by the premium tax credit allowable under section 36B for the taxable year (determined as if the individual enrolled in a plan through an Exchange for the entire taxable year). The applicable plan is the lowest cost bronze plan available in the Exchange serving the rating area where the individual resides that would cover all members of the individual's nonexempt family taking into account the rating factors that an Exchange would use to determine the cost of coverage. If the Exchange serving the rating area where the individual resides does not offer a single bronze plan that would cover all members of the individual's nonexempt family, the premium for the applicable plan is the sum of the premiums for the lowest cost bronze plans available in the Exchange that provide coverage for all members of the nonexempt family.

Section 5000A(e)(5) and § 1.5000A-3(h)(1) of the final regulations provide that, in general, an individual is exempt for a month that includes a day on which the individual has in effect a hardship exemption certification. A hardship exemption certification is issued by an Exchange under section 1311(d)(4)(H) of the Affordable Care Act (42 U.S.C. 18031(d)(4)(H)) certifying that the individual has suffered a hardship (as that term is defined in 45 CFR 155.605(g)) with respect to the individual's ability to obtain coverage under a qualified health plan. Section 1.5000A-3(h)(3) of the final regulations provides that a taxpayer who meets the requirements of 45 CFR 155.605(g)(3) or 45 CFR 155.605(g)(5) may claim a hardship exemption for a calendar year on a Federal income tax return.

Pursuant to the authority under 45 CFR 155.605(g), the Secretary of HHS has established an additional hardship exemption that applies to individuals enrolling in a qualified health plan through an Exchange prior to the close of the initial open enrollment period. Specifically, an individual may claim a hardship exemption for the months prior to the effective date of the individual's coverage on a Federal income tax return for 2014 without the need to request an exemption from the Exchange. See HHS Centers for Medicare and Medicaid Services, Shared Responsibility Provision Question and Answer (Oct. 28, 2013).

Under section 5000A(c)(1), the amount of the shared responsibility payment imposed on any taxpayer for any taxable year is equal to the lesser of (A) the sum of monthly penalty amounts for months when one or more failures to maintain minimum essential coverage occurred, or (B) an amount equal to the national average premium for qualified health plans that satisfy requirements enumerated in section 5000A(c).

Under section 5000A(c)(2), the monthly penalty amount, for any month, is 1/12 of the greater of (A) the flat dollar amount, or (B) a specified percentage of the taxpayer's household income over the taxpayer's applicable return filing threshold (as defined in section 6012(a)(1)).

The flat dollar amount is the lesser of (A) the sum of the defined applicable dollar amounts for all individuals in the shared responsibility family who did not have minimum essential coverage in a particular month, or (B) 300 percent of the applicable dollar amount. Under section 5000A(c)(3), the applicable dollar amount is $95 in 2014, $325 in 2015, and $695 in 2016. After 2016, the applicable dollar amount will be indexed by a cost-of-living adjustment.

The specified percentage is 1.0 percent for taxable years beginning in 2014, 2.0 percent for taxable years beginning in 2015, and 2.5 percent for taxable years beginning after 2015.

The final regulations incorporate these provisions.

The Social Security Act provides states with flexibility to extend Medicaid eligibility to individuals with high medical expenses who would be eligible for Medicaid but for their income level (medically needy individuals). See section 1902(a)(10)(C) of the Social Security Act (42 U.S.C. 1396a(a)(10)(C)) and 42 CFR 435.300 and following sections. In general, individuals whose income is in excess of the maximum allowed for Medicaid eligibility but who are otherwise eligible for Medicaid may “spend down” their income, based on incurred medical expenses, and thereby become eligible for the benefits provided for medically needy individuals in the state. States providing coverage to medically needy individuals must establish a “budget period” lasting from one to six months. Eligibility for coverage as a medically needy individual, which must be determined each budget period, is provided only after an individual incurs sufficient medical expenses to spend down to the qualifying income level. Thus, depending on an individual's medical needs and the options exercised by the state program, eligibility may be assessed as frequently as every month, and an individual may move in and out of coverage for medically needy individuals multiple times in a year. States are permitted, and some states have adopted the option, to offer benefits to the medically needy that are more limited than the benefits generally provided to Medicaid beneficiaries.

Because the benefits provided to medically needy individuals are not required to be comprehensive, the coverage is analogous to coverage consisting of excepted benefits that is not minimum essential coverage under section 5000A(f)(3). Other types of coverage under government-sponsored programs that potentially provide limited benefits are not minimum essential coverage under the final regulations (for example, the optional coverage of family planning services under section 1902(a)(10)(A)(ii)(XXI) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(XXI)), and the optional coverage of tuberculosis-related services under section 1902(a)(10)(A)(ii)(XII) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(XII)). Accordingly, the proposed regulations provide that coverage for medically needy individuals generally is not government-sponsored minimum essential coverage. To the extent such coverage in a particular state is comprehensive coverage, such coverage may be recognized as minimum essential coverage by the Secretary of HHS, in coordination with the Secretary of the Treasury, under section 5000A(f)(1)(E).

Because individuals receiving medically needy coverage may not know at the time of open enrollment for the 2014 plan year that coverage under the program is not minimum essential coverage, Notice 2014-10 (available at www.irs.gov ), (see § 601.601(d)(2)(ii)(b) of this chapter), released concurrently with these proposed regulations, provides that a taxpayer is not liable for the shared responsibility payment for a month in 2014 with respect to individuals in the taxpayer's shared responsibility family who are enrolled in medically needy coverage.

Section 1115 of the Social Security Act (42 U.S.C. 1315) authorizes the Secretary of HHS to approve experimental, pilot, or demonstration projects that promote the objectives of the Medicaid program (“Section 1115 demonstration projects”). Some Section 1115 demonstration projects involve waivers of Medicaid requirements that affect individuals eligible under the approved Medicaid state plan (for instance, waivers to permit changes in manners of delivering Medicaid services), but do not change the basic requirement to provide comprehensive Medicaid coverage. Other Section 1115 demonstration projects, authorized under section 1115(a)(2) of the Social Security Act (42 U.S.C. 1315(a)(2)), allow a state to extend benefits to additional populations (expansion populations). Because the expansion populations are not described in approved Medicaid state plans, the coverage authorized under those Section 1115 demonstration projects is not required to be comprehensive and may be limited. Accordingly, the proposed regulations provide that coverage under Section 1115 demonstration projects authorized under section 1115(a)(2) of the Social Security Act generally is not government-sponsored minimum essential coverage. However, comprehensive coverage for expansion populations under certain Section 1115 demonstration programs may be recognized as minimum essential coverage by the Secretary of HHS, in coordination with the Secretary of the Treasury, under section 5000A(f)(1)(E).

The Treasury Department and IRS understand that individuals receiving benefits as part of an expansion population under a demonstration project authorized under section 1115(a)(2) may not know at open enrollment for the 2014 plan year that the coverage they receive under a Section 1115 demonstration project is not minimum essential coverage. Accordingly, Notice 2014-10 (available at www.irs.gov ), (see § 601.601(d)(2)(ii)(b) of this chapter), released concurrently with these proposed regulations, provides that a taxpayer will not be liable for the shared responsibility payment for a month in 2014 with respect to individuals in the taxpayer's shared responsibility family receiving benefits as part of an expansion population authorized under section 1115(a)(2).

Similar to Medicaid programs that provide a limited scope of benefits, two types of coverage provided under chapter 55 of Title 10, U.S.C., do not provide a scope of benefits comparable to the full TRICARE program under the same chapter. Under sections 1079(a), 1086(c)(1), and 1086(d)(1) of Title 10, U.S.C., the first type of limited-benefit coverage is provided for certain individuals who are excluded from TRICARE coverage for health care services from private sector providers and only eligible for space available care in a facility of the uniformed services (space available care). There is no guarantee of care and any care received is subject to the availability of space and facilities, as well as the capabilities of the medical and dental staff. Coverage potentially available to an affected individual may not be accessible if there is no space available at the facility where the individual seeks care or treatment. These affected individuals are not entitled to comprehensive health care coverage under chapter 55 of Title 10, U.S.C., and the Department of Defense has no statutory authority to pay claims for any outside care provided to these individuals.

Under sections 1074a and 1074b of Title 10, U.S.C., the second type of limited-benefit coverage is provided for certain individuals who are not on active duty and are entitled to episodic care for an injury, illness, or disease incurred or aggravated in the line of duty (line-of-duty care). Line-of-duty care is limited to care appropriate for treating the covered injury, illness, or disease. This type of limited-benefit coverage is similar to coverage consisting of excepted benefits, including workers' compensation, that is not minimum essential coverage under section 5000A(f)(3).

Neither of these types of limited-benefit coverage offers beneficiaries coverage for comprehensive medical care. Accordingly, the proposed regulations provide that Military Health System eligibility limited only to space available care and line-of-duty care are not government-sponsored programs providing minimum essential coverage. Because individuals enrolled in space available care or line-of-duty care may not know at open enrollment for the 2014 plan year that space available care and line-of-duty care are not minimum essential coverage, Notice 2014-10 (available at www.irs.gov ), (see § 601.601(d)(2)(ii)(b) of this chapter), released concurrently with these proposed regulations, provides that a taxpayer is not liable for the shared responsibility payment for a month in 2014 with respect to individuals in the taxpayer's shared responsibility family who are enrolled in either space available care or line-of-duty care.

Section 5000A(f)(3) and § 1.5000A-2(g) of the final regulations provide that minimum essential coverage does not include health insurance coverage that consists solely of excepted benefits. In the rulemaking process under section 5000A, the Treasury Department and the IRS have provided that minimum essential coverage does not include plans or programs that do not provide a comprehensive scope of benefits. See, for example, § 1.5000A-2(b)(1)(ii)(A) describing the Medicaid program for family planning services and § 1.5000A-2(b)(1)(v) excluding from the definition of minimum essential coverage medical care for veterans that does not provide comprehensive health care benefits. Consistent with this treatment, the proposed regulations clarify that minimum essential coverage excludes any coverage, whether insurance or otherwise, that consists solely of excepted benefits.

The preamble to the final regulations provides that guidance on how employer contributions to HRAs are counted in determining an employee's or a related individual's required contribution will be consistent with final rulemaking under section 36B. The regulations proposed under section 36B addressing the treatment of employer contributions to HRAs were published on May 3, 2013 (78 FR 25909) (the section 36B proposed regulations). The section 36B proposed regulations provide that amounts newly made available for the current plan year under an HRA that is integrated with an eligible employer-sponsored plan are counted toward the employee's required contribution in determining the affordability of the coverage if the employee may use the amounts only for premiums or may choose to use the amounts for either premiums or cost sharing. An HRA generally must be integrated with an eligible employer-sponsored plan to satisfy the market reform provisions imposed by Title I of the Affordable Care Act. See Notice 2013-54 (2013-40 IRB 287 (September 30, 2013)), (see § 601.601(d)(2)(ii)( b ) of this chapter), which is available at www.irs.gov.

Similar to the 36B proposed regulations, under these proposed regulations, an employer's new contributions to an HRA are taken into account in determining (in other words, they reduce) an employee's required contribution if the HRA is integrated with an employer-sponsored plan and the employee may use the amounts to pay premiums. Amounts in an HRA that may be used only for cost-sharing are not taken into account when determining affordability because they cannot affect the employee's out-of-pocket cost of acquiring minimum essential coverage.

Many employers maintain section 125 cafeteria plans under which employees are given the option of making salary reduction contributions toward the cost of non-taxable benefits or receiving an equivalent amount in taxable cash. The nontaxable benefit choices may include both health and non-health benefits. If an employee elects to make salary reduction contributions and to have those amounts applied towards the cost of premiums, those contributions are treated as employee contributions, and the employee's household income is increased by the amount of the contributions for purposes of the affordability determination under section 5000A(e)(1)(A).

Alternatively, employers may make contributions that can be received only in the form of nontaxable benefits under the plan (sometimes referred to as flex contributions). In addition, some employers subsidize benefits available under the section 125 cafeteria plan so that an employee can elect a benefit while making salary reduction contributions in an amount less than the value of the benefit. Some employers will provide contributions even if the employee declines the subsidized benefit. For example, an employer might offer a benefit with a value of $10,000 for an employee salary reduction of $4,000, but provide other benefits with a value of $3,000 if the employee declines the $10,000 benefit.

Comments are requested on the treatment of employer contributions under a section 125 cafeteria plan for purposes of section 5000A to the extent employees may not opt to receive the employer contributions as a taxable benefit, such as cash. Specifically, comments are requested regarding how these contributions should be taken into account for purposes of determining the affordability of coverage.

The preamble to the final section 5000A regulations provides that guidance on how wellness program incentives are counted in determining the affordability of coverage under section 5000A will be consistent with final rulemaking under section 36B. The proposed section 36B regulations address the treatment of wellness incentives by providing that, for purposes of determining an individual's required contribution for employer-sponsored coverage under section 36B(c)(2)(C)(i), wellness program incentives are treated as earned only if the incentives relate to tobacco use. This rule is consistent with other Affordable Care Act provisions (such as one allowing insurers to charge higher premiums based on tobacco use). Accordingly, these proposed regulations provide that, for purposes of determining for section 5000A an individual's required contribution for coverage under an employer-sponsored plan, wellness program incentives are treated as earned only if the incentives relate to tobacco use.

In general, for individuals ineligible for coverage under employer-sponsored plans, the required contribution is the premium for the applicable plan reduced by the maximum amount of any premium tax credit allowable under section 36B for the taxable year. In general, the applicable plan is the lowest cost bronze plan available in the individual market through the Exchange serving the rating area in which the individual resides that would cover all members of the individual's nonexempt family. Pursuant to section 36B(b)(3)(C), the premium tax credit allowable under section 36B is calculated by reference to the adjusted monthly premium for the applicable second lowest cost silver plan without regard to any premium discounts or rebates in a state participating in the wellness discount demonstration project described in section 2705(l) of the Public Health Service Act (42 U.S.C. 300gg-4(l)).

A comment received on previously issued proposed regulations under section 5000A asked that, for purposes of computing the required contribution for an individual not eligible for coverage under an eligible employer-sponsored plan, the applicable plan for an individual residing in a rating area in a state participating in the individual market wellness program demonstration project disregard any premium-based wellness incentive requirements, including incentives relating to tobacco use. Standards and processes implementing the individual market wellness program demonstration project have not yet been established. After the individual market wellness program demonstration project is implemented, additional guidance will be provided on whether and how individuals residing in a rating area participating in the project will take wellness incentives into account in determining the affordability of their coverage for purposes of section 5000A.

Proposed regulations previously issued under section 5000A (78 FR 7314) included an alternative method of identifying the premium for the applicable plan when a single bronze plan is not offered that would cover all members of the nonexempt family. During the comment period to the proposed regulations, questions arose concerning the efficacy of the proposed simplified method, as well as whether an election to use the simplified method should be revocable. The final regulations removed the proposed alternative method, and the Treasury Department and the IRS continue to consider this issue.

A taxpayer may be unable to find a single bronze plan that would cover all members of the taxpayer's nonexempt family. The final regulations provide the general rule that, if the Exchange serving the rating area where the individual resides does not offer a single bronze plan that would cover all members of the taxpayer's nonexempt family, the premium for the applicable plan is the sum of the premiums for the lowest cost bronze plans available in the Exchange that provide coverage for all members of the nonexempt family. The Treasury Department and the IRS request comments on alternative methods for identifying the premium for the applicable plan when a single bronze plan would not cover all members of the taxpayer's nonexempt family.

The final regulations specify that an individual who meets the requirements of 45 CFR 155.605(g)(3) (relating to individuals with gross income below the applicable return filing threshold who filed a return) or 45 CFR 155.605(g)(5) (relating to the affordability of coverage under an eligible employer-sponsored plan for family members) may claim a hardship exemption for a calendar year on a Federal income tax return. Consistent with guidance released by the Secretary of HHS on October, 28, 2013, the proposed regulations provide that an individual who enrolls in a plan through an Exchange during the open enrollment period for coverage for 2014 may claim a hardship exemption for months in 2014 prior to the effective date of the individual's coverage without obtaining a hardship exemption certification from an Exchange.

If additional situations are identified where an individual should be allowed to claim a hardship exemption without obtaining a hardship exemption certification from an Exchange, the Secretary of HHS and the Secretary of the Treasury will continue to coordinate guidance. To facilitate issuing guidance in this situation, the proposed regulations provide that a taxpayer may claim a hardship exemption on a return if the Secretary of HHS issues published guidance of general applicability describing the hardship and indicating that the hardship can be claimed on a Federal income tax return pursuant to guidance published by the Secretary of the Treasury, and the Secretary of the Treasury issues published guidance of general applicability allowing an individual to claim such hardship exemption on a Federal income tax return without obtaining a hardship exemption from an Exchange.

The final regulations provide that, for each taxable year, the shared responsibility payment is the lesser of the sum of monthly penalty amounts for each individual in the shared responsibility family or the sum of the monthly national average bronze plan premiums for the shared responsibility family. The monthly penalty amount is computed for the taxpayer, not for each individual in the shared responsibility family. To avoid any confusion about this treatment, the proposed regulations remove from § 1.5000A-4(a) the clause “for each individual in the shared responsibility family” and add a reference to the taxpayer on whom the shared responsibility payment is imposed under § 1.5000A-1(c).

These regulations are proposed to apply for months beginning after December 31, 2013.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to the proposed regulations. Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that the proposed regulations will not have a significant economic impact on a substantial number of small entities. The applicability of the proposed regulations is limited to individuals, who are not small entities as defined by the RFA (5 U.S.C. 601). Accordingly, the RFA does not apply. Therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Code, the proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “Addresses” heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request.

A public hearing has been scheduled for May 21, 2014, beginning at 10 a.m., in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments, and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 28, 2014. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal authors of the proposed regulations are Sue-Jean Kim and John B. Lovelace, Office of the Associate Chief Counsel (Income Tax & Accounting). Other personnel from the Treasury Department and the IRS participated in the development of the regulations.

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

Individual Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage

The revisions and addition read as follows.

The revisions read as follows:

The revisions and additions read as follows:

Throughout this document whenever “we,” “us,” or “our” is used, we mean EPA. Organization of this document. The following outline is provided to aid in locating information in this preamble.

On January 22, 2010, the Connecticut Department of Environmental Protection (now known as the Connecticut Department of Energy and Environmental Protection, CT DEEP) submitted a revision to its State Implementation Plan (SIP) consisting of Connecticut's Low Emissions Vehicle II (LEV II) program, as adopted on December 4, 2004, and subsequently amended on December 22, 2005 and August 4, 2009. The Connecticut LEV II program is cited as a weight-of-evidence measure in Connecticut's Attainment Demonstration SIP for the 1997 8-hour ozone standard, submitted to EPA on February 1, 2008.

On December 4, 2004, Connecticut repealed the provisions of section 22a-174-36 of the Regulations of Connecticut State Agencies, rescinding both the California Low Emission Vehicle I program and the National Low Emission Vehicle (NLEV) program. In accordance with section 177 of the Clean Air Act (CAA) and as required by Connecticut Public Act 04-84, 1 Connecticut adopted section 22a-174-36b, the California Low Emission Vehicle II (LEV II) program, including all “zero emission vehicle” program elements, commencing with 2008 model year vehicles.

On December 22, 2005, Connecticut amended section 22a-174-36b of the Regulations of Connecticut State Agencies, making minor technical corrections and clarifications; adopting California LEV II emission standards and related provisions for medium-duty vehicles commencing with the 2009 model year; adopting recently announced revisions concerning LEV II greenhouse gas emission standards and related provisions for passenger cars, light duty trucks and medium-duty passenger vehicles commencing with the 2009 model year in accordance with section 177 of the CAA and Connecticut Public Act 04-84; and providing additional clarification and flexibility with respect to the implementation of the zero emissions vehicle (ZEV) program in Connecticut.

On August 4, 2009, Connecticut adopted a third amendment consisting of revisions to two sections of the air quality regulations concerning motor vehicles. The recall, warranty, ZEV, and ZEV travel provision amendments update the Connecticut LEV program consistent with changes California made to its LEV program. Specifically, section 22a-174-36b was revised in three respects:

In addition to the amendments to the Connecticut LEV program, Connecticut's January 22, 2010 SIP revision includes a change in its motor vehicle emissions inspection program to exempt composite vehicles from tailpipe inspections. The first change to section 22a-174-27, “Emission standards and on-board diagnostic II test requirements for periodic motor vehicle inspection and maintenance,” consists of removing the definition of “composite vehicle” at section 22a-174-27(b)(3). This section previously stated, “Composite Motor Vehicle” means a vehicle that is designated “COMP” or “COMPO” in the “make” field of an applicable Connecticut motor vehicle registration certificate.” The second change was the removal of section 22a-174-27(e), “Composite motor vehicles,” which previously stated, “For 2005 and earlier model year composite motor vehicles, the maximum allowable emissions shall be 4.0 VOL. % CO [volume % carbon monoxide] and 800 ppm HC [parts per million hydrocarbons]. For 2006 and later model year composite motor vehicles, the maximum allowable emissions shall be 1.2 VOL. % CO and 220 ppm HC.” When EPA approved Connecticut's December 19, 2007 inspection and maintenance program SIP revision on December 5, 2008 (73 FR 74019), we approved the August 25, 2004 version of section 22a-174-27 into the SIP. The Connecticut regulation section 22a-174-27, adopted by Connecticut on August 25, 2004, does not reflect Connecticut's Public Act 07-167, which was signed into law on June 25, 2007 by the Governor of the State of Connecticut. Public Act 07-167, as codified in Connecticut General Statutes (C.G.S.) section 14-164c(c), exempts composite vehicles from on-board diagnostic emissions testing requirements. 3

CARB adopted the first generation of LEV regulations (LEV I) in 1990, which were effective through the 2003 model year. CARB adopted California's second generation LEV regulations (LEV II) following a November 1998 hearing. Subsequent to the adoption of the California LEV II program in February 2000, EPA adopted separate Federal standards known as the Tier 2 regulations (February 10, 2000; 65 FR 6698). In December 2000, CARB modified the California LEV II program to take advantage of some elements of the Federal Tier 2 regulations to ensure that only the cleanest vehicle models would continue to be sold in California. EPA granted California a waiver for its LEV II program on April 22, 2003 (68 FR 19811).

The LEV II regulations expanded the scope of the LEV I regulations by setting strict fleet-average emission standards for light-duty, medium-duty (including sport utility vehicles) and heavy-duty vehicles. The standards began with the 2004 model year and increased in stringency through the 2010 model year and beyond. The LEV II regulations provide flexibility to auto manufacturers by allowing them to certify their vehicle models to one of several different emissions standards. The different tiers of increasingly stringent LEV II emission standards to which a manufacturer may certify a vehicle are: Low emission vehicle (LEV), ultra-low emission vehicle (ULEV), super-ultra low emission vehicle (SULEV), partial zero emission vehicle (PZEV), advanced technology partial zero emission vehicle (ATPZEV) and zero emission vehicle (ZEV).

The manufacturer must show that the overall fleet for a given model year meets the specified phase-in requirements according to the fleet average non-methane hydrocarbon requirement for that year. The fleet average non-methane hydrocarbon emission limits are progressively lower with each model year. The program also requires auto manufacturers to include a “smog index” label on each vehicle sold, which is intended to inform consumers about the amount of pollution produced by that vehicle relative to other vehicles.

In addition to meeting the LEV II requirements, large or intermediate volume manufacturers must ensure that a certain percentage of the passenger cars and lightest light-duty trucks that they market in California are ZEVs. This is referred to as the ZEV mandate. California has modified the ZEV mandate several times since it took effect. Most recently, CARB has put in place an alternative compliance program (ACP) to provide auto manufacturers with several options to meet the ZEV mandate. The ACP established ZEV credit multipliers to allow auto manufacturers to take credit for meeting the ZEV mandate by selling more PZEVs and ATPZEVs than they are otherwise required to sell. On December 28, 2006, EPA granted California's request for a waiver of Federal preemption to enforce provisions of the ZEV regulations through model year 2011.

On October 15, 2005, California amended its LEV II program to include greenhouse gas (GHG) emission standards for passenger cars, light-duty trucks, and medium-duty passenger vehicles. On December 21, 2005, California requested that EPA grant a waiver of preemption under CAA section 209(b) for its greenhouse gas emission regulations. On June 30, 2009, EPA granted CARB's request for a waiver of CAA preemption to enforce its greenhouse gas emission standards for model year 2009 and later new motor vehicles (July 8, 2009; 74 FR 32744-32784). This decision withdrew and replaced EPA's prior denial of the CARB's December 21, 2005 waiver request, which was published in the Federal Register on March 6, 2008 (73 FR 12156-12169).

Section 209(a) of the CAA prohibits states from adopting or enforcing standards relating to the control of emissions from new motor vehicles or new motor vehicle engines. However, under section 209(b) of the CAA, EPA shall grant a waiver of the section 209(a) prohibition to the State of California unless EPA makes specified findings, thereby allowing California to adopt its own motor vehicle emissions standards. Other states may adopt California's motor vehicle emission standards under section 177 of the CAA.

For additional information regarding California's motor vehicle emission standards and adoption by other states, please see EPA's “California Waivers and Authorizations” Web page at URL address: http://www.epa.gov/otaq/cafr.htm . This Web site also lists relevant Federal Register notices that have been issued by EPA in response to California waiver and authorization requests.

The CAA allows California to seek a waiver of the preemption which prohibits states from enacting emission standards for new motor vehicles. EPA must grant this waiver before California's rules may be enforced. When California files a waiver request, EPA publishes a notice for public hearing and written comment in the Federal Register . The written comment period remains open for a period of time after the public hearing. Once the comment period expires, EPA reviews the comments and the Administrator determines whether the requirements for obtaining a waiver have been met.

According to CAA section 209—State Standards, EPA shall grant a waiver unless the Administrator finds that California:

The most recent EPA waiver relevant to EPA's proposed approval of Connecticut's LEV program is “California State Motor Vehicle Pollution Control Standards; Notice of Decision Granting a Waiver of Clean Air Act Preemption for California's 2009 and Subsequent Model Year Greenhouse Gas Emission Standards for New Motor Vehicles” (July 8, 2009; 74 FR 32744-32784). This final rulemaking allows California to establish standards to regulate greenhouse gas emissions from new passenger cars, light-duty trucks and medium-duty vehicles. The four new greenhouse gas air contaminants added to California's existing regulations for criteria and criteria-precursor pollutants and air toxic contaminants are: carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide (N 2 O), and hydrofluorocarbons (HFCs).

Section 177 of the CAA allows other states to adopt and enforce California's standards for the control of emissions from new motor vehicles, provided that, among other things, such state standards are identical to the California standards for which a waiver has been granted under CAA section 209(b). In addition, the state must adopt such standards at least two years prior to the commencement of the model year to which the standards will apply. EPA issued guidance (CISD-07-16)  4 regarding its cross-border sales policy for California-certified vehicles. This guidance includes a list and map of states that have adopted California standards, specific to the 2008-2010 model years. All SIP revisions submitted to EPA for approval must also meet the requirements of CAA section 110.

The provisions of Connecticut Public Act 04-84 and section 177 of the CAA both require the Connecticut Department of Energy and Environmental Protection to amend the Connecticut LEV program at such time as the State of California amends its California LEV program. Connecticut has demonstrated its commitment to maintain a Connecticut LEV program consistent with the California LEV program through the adoption of two regulatory amendments to Connecticut's initial LEV program.

EPA notes that a number of California Code of Regulations (CCR) Title 13 provisions incorporated-by-reference in section 22a-174-36b were amended by California in January of 2010 and became operative under California State law on February 13, 2010. As the Connecticut SIP revision was submitted to EPA on January 22, 2010, these subsequent revisions to California regulations will be addressed by Connecticut at a later date. 5

The Connecticut LEV program is included in Connecticut's February 1, 2008 8-hour ozone attainment demonstration SIP as a weight-of- evidence measure, but Connecticut does not rely on the LEV program for any specific level of emission reduction. If EPA finalizes its proposed approval of the Connecticut LEV program into the SIP, future emission benefit from this program could be calculated through EPA's Motor Vehicle Emissions Simulator Model, MOVES2010, which was officially released on March 2, 2010 (75 FR 9411).

Regulations of Connecticut State Agencies section 22a-174-27 establishes emissions standards and test requirements for the periodic motor vehicle inspection and maintenance program to ensure that EPA-required air quality benefits are achieved. EPA previously approved this motor vehicle inspection and maintenance program into the Connecticut SIP. (See December 5, 2008; 73 FR 74019.) On June 25, 2007, the Governor of the State of Connecticut signed into law Public Act 07-167, which the General Assembly adopted on June 4, 2007. Public Act 07-167 as codified in Connecticut General Statutes section 14-164c(c) added a specific exemption for composite vehicles from on-board diagnostic inspection, while maintaining that composite vehicles continue to be subject to inspection requirements of section 14-103a. The amendments to Connecticut General Statutes section 14-164c and its corresponding SIP amendments will exempt composite vehicles from unique tailpipe emission testing and on-board diagnostic inspection.

According to the Connecticut Department of Motor Vehicles, a composite vehicle is defined as, “Any motor vehicle composed or assembled from several parts of other motor vehicles, or the identification and body contours of which are so altered that the vehicle no longer bears the characteristics of any specific make of motor vehicle. Any vehicle not assembled by a manufacturer licensed as such in the State of Connecticut is classified as a composite motor vehicle.” Connecticut Inspection and Maintenance Program data indicates that in 2007, there were 359 composite motor vehicles in Connecticut. After application of existing emission inspection exemptions found in 14-164(c) of the Connecticut General Statutes, only 100 of 359 composite motor vehicles would be required to be inspected by the Division of Motor Vehicles each year. Exempting these 100 vehicles from Connecticut's Inspection and Maintenance program, which applies to approximately 1,959,000 vehicles, will not have significant air quality impacts.

During the inspection and maintenance cycle of January 1, 2008 to December 31, 2009, 1,934,285 gasoline-powered vehicles and 24,758 diesel-powered vehicles received initial Connecticut inspection and maintenance testing. Exempting the 100 cars, which have all emission-related components and settings and are subject to all applicable emission regulations, from a state emission inspection will not change the motor vehicle inspection and maintenance program inputs in MOVES2010, nor will it change the resulting motor vehicle emission factors generated by MOVES2010. Furthermore, EPA believes removing composite motor vehicle from emission testing does not contravene the anti-backsliding provisions established in section 110(l) of the CAA.

EPA is proposing to approve into the Connecticut SIP Connecticut's section 22a-174-36b, Low Emission Vehicle (LEV II) program, which was submitted to EPA on January 22, 2010. EPA is also proposing to approve section 22a-174-36(i) of the Connecticut State Regulations, which eliminates Connecticut's earlier National Low Emission Vehicle (NLEV) program and Connecticut's Low Emission Vehicle (LEV I) program and replaces them with the Connecticut LEV II program. The Connecticut Low Emission Vehicle II program adopted by Connecticut includes: The California LEV II light-duty program beginning with model year 2008; the California LEV II medium-duty vehicle emission standards beginning with model year 2009; the California LEV II green house gas emission standards for passenger cars, light-duty trucks and medium-duty passenger vehicles commencing with 2009 model year vehicles; environmental performance labeling (with labels containing both smog scores and global warming scores) for 2008 model year and later vehicles; and the California ZEV provision. EPA is proposing to approve the Connecticut LEV II program requirements into the SIP because EPA has found that the requirements are consistent with the CAA.

Finally, EPA is proposing to remove Connecticut's section 22a-174-27(b)(3), the definition of composite motor vehicle, and section 22a-174-27(e), the maximum allowable composite motor vehicle emissions, from the Connecticut SIP. Composite motor vehicles were eliminated from Connecticut's motor vehicle emission inspection program in 2007, consistent with Public Act 07-167 as codified in section 14-164c(c) of the General Statute of Connecticut.

EPA is soliciting public comments on the issues discussed in this notice or on other relevant matters. These comments will be considered before taking final action. Interested parties may participate in the Federal rulemaking procedure by submitting written comments to the EPA New England Regional Office listed in the ADDRESSES section of this Federal Register .

Under the Clean Air Act, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. Accordingly, this proposed action merely approves state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this proposed action:

• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Order 12866 (58 FR 51735, October 4, 1993);

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

• is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);

• is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act; and

• does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).

In the final rules section of the Federal Register , EPA is approving the state's SIP and Operating Permits Program revision as a direct final rule without prior proposal because the Agency views this as a noncontroversial revision amendment and anticipates no relevant adverse comments to this action. A detailed rationale for the approval is set forth in the direct final rule. If no relevant adverse comments are received in response to this action, no further activity is contemplated in relation to this action. If EPA receives relevant adverse comments, the direct final rule will be withdrawn and all public comments received will be addressed in a subsequent final rule based on this proposed action. EPA will not institute a second comment period on this action. Any parties interested in commenting on this action should do so at this time. Please note that if EPA receives adverse comment on part of this rule and if that part can be severed from the remainder of the rule, EPA may adopt as final those parts of the rule that are not the subject of an adverse comment. For additional information, see the direct final rule which is located in the rules section of this Federal Register .

ESA Statutory Provisions and Policy Considerations

On January 25, 2013, we received a petition submitted by the People for the Ethical Treatment of Animals Foundation on behalf of the Animal Legal Defense Fund, Orca Network, Howard Garrett, Shelby Proie, Karen Munro, and Patricia Sykes to include the killer whale ( Orcinus orca) known as Lolita in the ESA listing of the Southern Resident killer whales. Lolita is a female killer whale captured from the Southern Resident population in 1970, who currently resides at the Miami Seaquarium in Miami, Florida. Copies of the petition are available upon request (see ADDRESSES, above) and on our Web page at: http://www.westcoast.fisheries.noaa.gov/protected_species/marine_mammals/killer_whale/lolita_petition.html.

In accordance with section 4(b)(3)(A) of the ESA, to the maximum extent practicable within 90 days of receipt of a petition to list or delist a species as threatened or endangered, the Secretary of Commerce is required to make a finding on whether that petition presents substantial scientific or commercial information indicating that the petitioned action may be warranted, and to promptly publish such finding in the Federal Register (16 U.S.C. 1533(b)(3)(A)). The Secretary of Commerce has delegated this duty to NMFS. If we find that the petition presents substantial information indicating that the petitioned action may be warranted, we must commence a review of the status of the species concerned, during which we will conduct a comprehensive review of the best available scientific and commercial information. On April 29, 2013 (78 FR 25044), we made a finding that there was sufficient information indicating that the petitioned action may be warranted and requested comments to inform a status review.

After accepting a petition and initiating a status review, within 12 months of receipt of the petition we must conclude the review with a determination that the petitioned action is not warranted, or a proposed determination that the action is warranted. Under specific facts, we may also issue a determination that the action is warranted but precluded. In this notice, we make a finding that the petitioned action to include the killer whale known as Lolita in the ESA listing of the Southern Resident killer whale DPS is warranted and propose to amend the regulatory language describing the DPS by removing the current exclusion for captive whales.

Under the ESA, the term “species” means a species, a subspecies, or a DPS of a vertebrate species (16 U.S.C. 1532(16)). A joint NMFS-U.S. Fish and Wildlife (USFWS) policy clarifies the Services' interpretation of the phrase “Distinct Population Segment,” or DPS (61 FR 4722; February 7, 1996). The DPS Policy requires the consideration of two elements when evaluating whether a vertebrate population segment qualifies as a DPS under the ESA: (1) Discreteness of the population segment in relation to the remainder of the species/taxon, and, if discrete; (2) the significance of the population segment to the species/taxon.

A species is “endangered” if it is in danger of extinction throughout all or a significant portion of its range, and “threatened” if it is likely to become endangered within the foreseeable future throughout all or a significant portion of its range (ESA sections 3(6) and 3(20), respectively, 16 U.S.C. 1532(6) and (20)). Thus, we interpret an “endangered species” to be one that is presently in danger of extinction. A “threatened species,” on the other hand, is not presently in danger of extinction, but is likely to become so in the foreseeable future (that is, at a later time). In other words, the primary statutory difference between a threatened and endangered species is the timing of when a species may be in danger of extinction, either presently (endangered) or in the foreseeable future (threatened). Pursuant to the ESA and our implementing regulations, we determine whether a species is threatened or endangered based on any one or a combination of the following section 4(a)(1) factors: The present or threatened destruction, modification, or curtailment of habitat or range; overutilization for commercial, recreational, scientific, or educational purposes; disease or predation; inadequacy of existing regulatory mechanisms; and any other natural or manmade factors affecting the species' existence (16 U.S.C. 1533(a)(1), 50 CFR 424.11(c)).

We make listing determinations based on the best available scientific and commercial data available after conducting a review of the status of the species and after taking into account efforts being made by any State or foreign nation or political subdivision thereof to protect the species.

Three distinct forms or ecotypes of killer whales, termed residents, transients, and offshores, are recognized in the northeastern Pacific Ocean. Resident killer whales in U.S. waters are distributed from Alaska to California, with four distinct populations: Southern, Northern, Southern Alaska, and Western Alaska (Krahn et al., 2002; 2004). Resident killer whales are fish eaters and live in stable matrilineal pods. The West Coast transient killer whales have a different social structure, are found in smaller groups, and eat marine mammals. Offshore killer whales are found in large groups, and their diet is presumed to consist primarily of fish, including sharks. While the ranges of the different ecotypes of whales overlap in the northeastern Pacific Ocean, available genetic data indicate that there is a high degree of reproductive isolation among residents, transients, and offshores (Krahn et al., 2004; NMFS, 2013).

The Southern Resident killer whale population consists of three pods, identified as J, K, and L pods, that reside for part of the year in the inland waterways of Washington State and British Columbia (Strait of Georgia, Strait of Juan de Fuca, and Puget Sound), principally during the late spring, summer, and fall (NMFS, 2008). Pods visit coastal sites off Washington and Vancouver Island, and travel as far south as central California and as far north as Southeast Alaska (Ford et al., 2000; NMFS, 2008; Department of Fisheries and Oceans, unpublished data).

In 2001 we received a petition to list the Southern Resident killer whale population as threatened or endangered under the ESA (CBD, 2001) and we formed a Biological Review Team (BRT) to assist with a status review (NMFS, 2002). After conducting the status review, we determined that listing the Southern Resident killer whale population as a threatened or endangered species was not warranted because the science at that time did not support identifying the Southern Resident killer whale population as a DPS as defined by the ESA (67 FR 44133; July 1, 2002). Because of the uncertainties regarding killer whale taxonomy (i.e., whether killer whales globally should be considered as one species or as multiple species and/or subspecies), we announced we would reconsider the taxonomy of killer whales within 4 years. Following the determination, the Center for Biological Diversity and other plaintiffs challenged our “not warranted” finding under the ESA in U.S. District Court. The U.S. District Court for the Western District of Washington issued an order on December 17, 2003, which set aside our “not warranted” finding and remanded the matter to us for redetermination of whether the Southern Resident killer whale population should be listed under the ESA ( Center for Biological Diversity v. Lohn, 296 F. Supp. 2d. 1223 (W.D. Wash. 2003)). The court found that where there is “compelling evidence that the global Orcinus orca taxon is inaccurate,” the agency may not rely on “a lack of consensus in the field of taxonomy regarding the precise, formal taxonomic redefinition of killer whales.” As a result of the court's order, we co-sponsored a Cetacean Taxonomy workshop in 2004, which included a special session on killer whales, and reconvened a BRT to prepare an updated status review document for Southern Resident killer whales (NMFS, 2004).

The BRT agreed that the Southern Resident killer whale population likely belongs to an unnamed subspecies of resident killer whales in the North Pacific, which includes the Southern and Northern Residents, as well as the resident killer whales of Southeast Alaska, Prince William Sound, Kodiak Island, the Bering Sea and Russia (but not transients or offshores). The BRT concluded that the Southern Resident killer whale population is discrete from other populations within the North Pacific Resident taxon and significant with respect to the North Pacific Resident taxon and therefore should be considered a DPS. In addition, the BRT conducted a population viability analysis which modeled the probability of species extinction under a range of assumptions. Based on the findings of the status review and an evaluation of the factors affecting the DPS, we published a proposed rule to list the Southern Resident killer whale DPS as threatened on December 22, 2004 (69 FR 76673). After considering public comments on the proposed rule and other available information, we reconsidered the status of the Southern Resident killer whale DPS and issued a final rule to list the Southern Resident killer whale DPS as endangered on November 18, 2005 (70 FR 69903). The regulatory language in the listing limited the DPS to whales from J, K and L pods, wherever they are found in the wild, and not including Southern Resident killer whales placed in captivity prior to listing or their captive born progeny.

Following the listing, we designated critical habitat, completed a recovery plan, and conducted a 5-year review for the Southern Resident killer whale DPS. We issued a final rule designating critical habitat for the Southern Resident killer whale DPS on November 29, 2006 (71 FR 69055). After engaging stakeholders and providing multiple drafts for public comment, we announced the Final Recovery Plan for the Southern Resident killer whale DPS on January 24, 2008 (73 FR 4176). We have continued working with partners to implement actions in the recovery plan. In March 2011, we completed a 5-year review of the ESA status of the Southern Resident killer whale DPS concluding that no change was needed in its listing status, and that the Southern Resident killer whale DPS would remain listed as endangered (NMFS, 2011). The 5-year review also noted that there was no relevant new information for this species regarding the application of the DPS policy.

On August 2, 2012, we received a petition submitted by the Pacific Legal Foundation on behalf of the Center for Environmental Science Accuracy and Reliability, Empresas Del Bosque, and Coburn Ranch to delist the endangered Southern Resident killer whale DPS under the ESA. We made a 90-day finding accepting the petition and soliciting information to inform a status review (77 FR 70733; November 27, 2012). Based on a review of the scientific information (NWFSC, 2013) and our full status review, we issued a 12-month finding on August 5, 2013, that the petitioned action was not warranted and the Southern Resident killer whale DPS remains listed as endangered (78 FR 47277).

On January 25, 2013, we received a petition submitted by the People for the Ethical Treatment of Animals Foundation on behalf of the Animal Legal Defense Fund, Orca Network, Howard Garrett, Shelby Proie, Karen Munro, and Patricia Sykes to include the killer whale ( Orcinus orca ) known as Lolita in the ESA listing of the Southern Resident killer whales. The petition describes Lolita, a female killer whale captured from the Southern Resident population in 1970, who currently resides at the Miami Seaquarium in Miami, Florida, as the only remaining member of the Southern Residents alive in captivity. The petitioners present information about Lolita's origin and contend that Lolita is a member of the endangered Southern Resident DPS and should be included within the ESA listing. In addition, they provide a legal argument that “the ESA applies to captive members of listed species” and assert that “NMFS has a non-discretionary duty to include Lolita in the listing of the Southern Resident killer whales under the ESA.” The petition also includes information about how each of the five section 4(a)(1) factors applies with respect to Lolita. Lastly, the petitioners contend that including Lolita in the ESA listing will contribute to conservation of the wild Southern Resident killer whale population.

On April 29, 2013, we found that the information contained in the petition, viewed in the context of information readily available in our files, presented substantial scientific information that would lead a reasonable person to believe that the petitioned action may be warranted (78 FR 25044). We noted that the information on Lolita's genetic heritage and consideration of captive individuals under the ESA provided a basis for us to accept the petition. The petition included an assessment of how listing Lolita would help conserve the wild Southern Resident population and also a review of the 4(a)(1) factors described earlier and considered in listing determinations. Our 90-day finding accepting the petition, however, was based on the biological information regarding Lolita's genetic heritage and consideration of the applicability of the ESA to captive members of endangered species. Our review of Lolita's status with respect to the Southern Resident killer whale DPS similarly focuses on these two aspects and does not include a review of the 4(a)(1) factors for Lolita or the wild population. Our status review considers the best available information, including information received through the public comment period, a review of scientific information conducted by our Northwest Fisheries Science Center (Center), and information in the petition.

Upon publishing our 90-day finding accepting the petition, we initiated a status review and solicited information from the public to help us gather any additional information to inform our review of Lolita's relationship to the Southern Resident killer whale DPS. During the public comment period, which closed on June 28, 2013, we received 1,837 comments from citizens, researchers, non-profit organizations, government agencies, and the public display industry, from the United States and around the world. While we solicited information concerning Lolita's genetic heritage and status, the vast majority of individual commenters simply stated their support for the petition to include Lolita as a member of the Southern Resident killer whale DPS. Along with support for the petition or as a stand-alone comment, many commenters suggested that Lolita be freed from her captivity and returned to her native waters of the Pacific Northwest. Commenters also expressed concern over Lolita's current care at the Miami Seaquarium, which is regulated by the United States Department of Agriculture's Animal and Plant Health Inspection Service under the Animal Welfare Act (AWA) and beyond the scope of our determination regarding the petition. Because the AWA captive care requirements are not under NMFS jurisdiction and are beyond the scope of our determination, those comments are not addressed in this proposed rule. Five comments, all submitted by groups associated with the public display industry, provided substantive comments opposing the petition. Eight comments from conservation organizations, individuals, or government agencies were substantive in support of the petition, many citing recent Federal Register notices from the USFWS that provide information on the consideration of captive individuals under the ESA with respect to the listing status of captive chimpanzees (78 FR 35201; June 12, 2013) and the status of captive individuals from three listed antelope species (78 FR 33790; June 5, 2013).

The recent review of biological information and our DPS determination conducted by the Center in response to the petition to delist the Southern Resident killer whale DPS included a review of information specific to Lolita's genetic heritage (NMFS, 2013). This review and update of our determinations about killer whale taxonomy and identification of a DPS informs our 12-month finding about the petitioned action to include Lolita in the Southern Resident killer whale DPS.

Based on the best information available, we previously concluded, with advice from the 2004 BRT (Krahn et al., 2004), that the Southern Resident killer whale population (J, K, and L pods) met the two criteria of the DPS policy (discreteness and significance) and constituted a DPS of the North Pacific Resident subspecies. A detailed analysis of (1) the reference taxon for consideration under the DPS policy; (2) the discreteness of the Southern Resident population from other populations within that taxon; and (3) the significance of the Southern Resident population to that taxon was included in our 12-month determination that the petition to delist was not warranted (78 FR 47277; August 5, 2013) and is summarized below. Based on our recent status review and in response to a petition to delist the Southern Resident killer whale DPS, we concluded that the best available scientific information indicates that, similar to our 2005 rulemaking when we listed the Southern Resident DPS, the North Pacific Resident subspecies is the appropriate reference taxon for considering whether the Southern Resident killer whale population is discrete and significant. In our 2005 rulemaking we concluded that there was strong evidence that the Southern Resident killer whale population is discrete from other North Pacific Resident killer whale populations as defined by the 1996 DPS policy. The new information subsequent to 2004, such as recent genetic studies, is consistent with and generally strengthens the conclusion that the Southern Resident killer whale population is a discrete population within the North Pacific Resident taxon. As in 2004, all the available information clearly indicates that the Southern Resident population is discrete from other populations in the North Pacific resident subspecies. In addition we concluded that the new information on genetics and behavioral and cultural diversity available since 2004 was consistent with or strengthens the 2004 BRT's conclusion that the Southern Resident killer whale population meets the significance criterion of the DPS policy. In summary, in our 12-month finding that delisting was not warranted we concluded that members of the Southern Resident killer whale population are discrete from other populations within the North Pacific Resident killer whale taxon and significant with respect to the North Pacific Resident killer whale taxon and therefore comprise a valid DPS which remains listed as endangered (78 FR 47277; August 5, 2013).

The petition maintains that Lolita is a member of the Southern Resident killer whale population and states that she must, therefore, be included in the listed DPS. As summarized above, our consideration of the petitioned action focuses on biological information regarding Lolita's genetic heritage and the application of the ESA to captive members of a listed species or DPS. The petitioners contend that Lolita was taken from L pod during captures on August 8, 1970, in Penn Cove, approximately 50 miles (80 km) north of Seattle, Washington, that her mother is believed to be L25, an adult female Southern Resident killer whale who remains in the wild, and that Lolita makes the unique calls of the L25 subpod. In our recent status review update (NMFS, 2013), we cite a new genetic analysis, available since the original 2005 listing, which indicates that Lolita has a genotype consistent with a Southern Resident origin (Hoelzel et al. 2007; Hoelzel, personal communication) and note that Lolita's acoustic calls are typical of L pod (Ford, 1987; Candice Emmons, personal communication). As described above, in support of the DPS determination for Southern Resident killer whales, recent genetic studies all indicate that the Southern Resident population is significantly differentiated and that there is a high degree of reproductive isolation from other resident populations that comprise the North Pacific Resident subspecies. Differences in acoustic behavior between populations of resident killer whales also support the conclusion that Southern Resident killer whales are discrete and significant and, therefore, qualify as a DPS. Lolita shares both genetic and acoustic characteristics with the members of the Southern Resident killer whale DPS found in the wild. Based upon this best available science we confirm that Lolita is a member of the Southern Resident killer whale population and as such she should be included as a member of the Southern Resident Killer Whale DPS.

In addition to the biological information about Lolita's origin and acoustic behavior, the petitioners also provide legal arguments regarding the application of the ESA to captive members of a listed species. While the ESA authorizes the listing, delisting, or reclassification of a species, subspecies, or DPS of a vertebrate species, it does not authorize the exclusion of the members of a subset or portion of a listed species, subspecies, or DPS from a listing decision. In 2001, the U.S. District Court in Eugene, Oregon ( Alsea Valley Alliance v. Evans, 161 F. Supp.2d 1154 (D. Or. 2001)) (Alsea), ruled that once we had identified and listed a DPS (for Oregon Coast coho), the ESA did not allow listing only a subset (that which excluded 10 captive hatchery stocks) of that DPS. NMFS agrees with the reasoning of this case that it cannot exclude Lolita from the listing having found her to be part of the species.

Some commenters contend that Lolita should not be included in the Southern Resident killer whale DPS, similarly to other wild whales that are members of the North Pacific Resident subspecies (i.e. Northern Resident and Alaska Resident killer whale populations). These commenters fail to recognize the previously discussed best available science defining the genetic and acoustic characteristics that Lolita shares with the Southern Resident killer whale DPS. We find these shared characteristics to be compelling lines of evidence that render Lolita and other members of the Southern Resident killer whale DPS discrete from and significant to the North Pacific Resident subspecies (NMFS, 2013).

Other commenters note that there are other characteristics, such as behavior and habitat use, that Lolita does not share with the other wild members of the Southern Resident killer whales and suggest that NMFS could exercise its discretion to identify a separate captive only DPS. However, legislative history surrounding the 1978 Amendments to the ESA that gave the Services the authority to designate DPSs indicates that Congress intended designation of DPSs to be used for the designation of wild populations, not separation of captive held specimens from wild members of the same taxonomic species (see Endangered Species Act Oversight: Hearing Before Senate Subcommittee on Resource Protection, Senate Committee on Environment and Public Works, 95th Cong. 50 (July 7, 1977). Additionally, these arguments fail to adhere to Congress' directive to the Services that the authority to designate DPSs be exercised “sparingly” (Senate Report 151, 96th Congress, 1st Session). Finally, NMFS decision-making relevant to identifying and designating DPSs is discretionary and not subject to judicial review ( Safari Club International v. Jewell, 2013 WL 4041541 (DDC 2013)).

The ESA does not support the exclusion of captive members from a listing based solely on their status as captive. On its face the ESA does not treat captives differently. Rather, specific language in Section 9 and Section 10 of the ESA presumes their inclusion in the listed entity, and captives are subject to certain exemptions to Section 9. Section 9(a)(1)(A)-(G) of the ESA applies to endangered species regardless of their captive status. However, Section 9(b) provides certain exemptions from the 9(a)(1)(A) and (a)(1)(G) prohibitions for listed animals held in captivity or in a controlled environment as of the date of the species' listing (or enactment of the ESA), provided the holding in captivity and any subsequent use is not in the course of commercial activity. Additionally, Section 9(b)(2) refers to captive raptors and identifies that the prohibitions in 9(a)(1) shall not apply to raptors legally held in captivity. Section 10(a)(1)(A) of the ESA allows issuance of permits to “enhance the propagation or survival” of the species. This demonstrates that Congress recognized the value of captive holding and propagation of listed species held in captivity but intended that such specimens would be protected under the ESA, with these activities generally regulated by permit.

We have specifically identified captive members as part of the listed unit during listing actions, such as for endangered smalltooth sawfish (68 FR 15674; April 1, 2003), and endangered Atlantic sturgeon (77 FR 5914; February 6, 2012), and in the proposed listing of five species of foreign sturgeons (78 FR 65249; October 31, 2013). Further, based upon the purposes of the ESA and its legislative history, the USFWS has recently concluded that the ESA does not allow captive animals to be assigned different legal status from their wild counterparts on the basis of their captive status. Subsequent to the submission of the petition regarding Lolita, USFWS published a proposed rule to amend the listing status of captive chimpanzees, so that all chimpanzees (wild and captive) would be listed as endangered (78 FR 35201; June 12, 2013). USFWS also published a 12-month finding that delisting the captive members of three listed antelope species was not warranted (78 FR 33790; June 5, 2013).

Based on the preceding discussion, the information submitted during the public comment period, and best available science and information, we find that Lolita is a member of the Southern Resident killer whale population and should be included as a member of the listed Southern Resident killer whale DPS. Accordingly, we propose to remove the exclusion for captive whales in the regulatory language describing the Southern Resident killer whale DPS. Our finding is consistent with the recent USFWS conclusions regarding the status of captive animals under the ESA and also with the Marine Mammal Commission recommendation to adopt a policy consistent with the USFWS in the proposed chimpanzee listing rule, and treat all biological members of the Southern Resident killer whales as part of the DPS, regardless of whether those individuals are in the wild or in captivity (Marine Mammal Commission letter, August 13, 2013).

As part of the 2005 ESA listing of the Southern Resident killer whale DPS (70 FR 69903; November 18, 2005), we conducted an analysis of the five ESA section 4(a)(1) factors and concluded that the DPS was in danger of extinction and listed it as endangered. In March 2011, we completed a 5-year review of the ESA status of the Southern Resident killer whale DPS, concluding that no change was needed in its listing status and that the Southern Resident killer whale DPS would remain listed as endangered (NMFS, 2011). The petition includes an analysis of the five ESA section 4(a)(1) factors with respect to Lolita, although petitioners note that the analysis is not required to justify Lolita's inclusion in the DPS and that Lolita's genetic heritage is sufficient to support her inclusion in the listing. We agree that biological information regarding Lolita's origin and consideration of the applicability of the ESA to captive members of endangered species provide a sufficient basis for our determination and, therefore, do not include a review of the 4(a)(1) factors for Lolita or the wild population.

While progress toward recovery has been achieved since the listing, as described in the 5-year review, the status of the DPS remains as endangered. Since the 5-year review was completed, additional actions have been taken to address threats, such as regulations to protect killer whales from vessel impacts (76 FR 20870; April 14, 2011), completion of a scientific review of the effects of salmon fisheries on Southern Resident killer whales (Hilborn, 2012), and ongoing technical working groups with the Environmental Protection Agency to assess contaminant exposure. However, the population growth outlined in the biological recovery criteria and some of the threats criteria have not been met. We have no new information that would change the recommendation in our 5-year review that the Southern Resident killer whale DPS remain classified as endangered (NMFS, 2011). Our proposed rule would amend the language describing the Southern Resident killer whale DPS to remove the exception for captive whales, and, if the proposal is finalized, Lolita would then be included under the endangered classification.

Conservation measures provided for species listed as endangered or threatened under the ESA include concurrent designation of critical habitat if prudent and determinable (16 U.S.C. 1533(a)(3)(A)); recovery plans and actions (16 U.S.C. 1536(f)); Federal agency requirements to consult with NMFS and to ensure that its actions do not jeopardize the species or result in adverse modification or destruction of critical habitat should it be designated (16 U.S.C. 1536); and prohibitions on taking (16 U.S.C. 1538).

Following the listing, we designated critical habitat and completed a recovery plan for the Southern Resident killer whale DPS. We issued a final rule designating critical habitat for the Southern Resident killer whale DPS November 29, 2006 (71 FR 69055). The designation includes three specific areas: (1) The Summer Core Area in Haro Strait and waters around the San Juan Islands; (2) Puget Sound; and (3) the Strait of Juan de Fuca, which together comprise approximately 2,560 square miles (6,630 square km). The designation excludes areas with water less than 20 feet (6.1 m) deep relative to extreme high water. The designated critical habitat will not be affected by removing the exclusion of captive whales from the regulatory language describing the Southern Resident killer whale DPS. As the USFWS identified in its recent chimpanzee rule, there is an “anomaly of identifying the physical and biological features that would be essential to the conservation of a species consisting entirely of captive animals in an artificial environment” (78 FR 35201; June 12, 2013). This observation also holds for a listed entity with only one captive member. In the event that this proposed action is finalized, we do not intend to modify the critical habitat designation to include consideration of Lolita and her captive environment.

After engaging stakeholders and providing multiple drafts for public comment, we announced the Final Recovery Plan for the Southern Resident killer whale DPS on January 24, 2008 (73 FR 4176). Lolita's capture and captivity is mentioned in the recovery plan; however, the recovery actions in the plan are focused on addressing the threats to and the recovery of the wild population. If this proposal is finalized, as the recovery plan is updated in the future, we will consider including an update that Lolita is included in the DPS.

Sections 7(a)(2) of the ESA requires Federal agencies to ensure that activities they authorize, fund, or carry out are not likely to jeopardize the continued existence of a listed species, or to adversely modify critical habitat. In the USFWS proposed rule for chimpanzees (78 FR 35201; June 12, 2013), USFWS identifies that “the section 7 consultation process is not well suited to analysis of adverse impacts posed to a purely captive-held group of specimens given that such specimens are maintained under controlled, artificial conditions.” This observation also holds for a listed entity with only one captive member. Previous guidance on examples of Federal actions that have the potential to impact Southern Resident killer whales was focused on activities that may affect wild whales. If this proposal is finalized, additional considerations of actions that have the potential to affect Southern Resident killer whales, including Lolita, will be considered along with prohibitions on activities that affect the Southern Resident killer whale DPS. Some of these considerations are discussed below.

On July 1, 1994, NMFS and USFWS published a policy (59 FR 34272) that requires us to identify, to the maximum extent practicable at the time a species is listed, those activities that would or would not constitute a violation of section 9 of the ESA. The ESA does not prohibit possession of animals lawfully taken, so a permit is required only if the person possessing the animal intends to engage in an otherwise prohibited act. Prohibited activities for ESA-listed endangered species include, but are not limited to: (1) “Take” of such species, as defined in the ESA (including to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or attempt to engage in any such conduct); (2) delivering, receiving, carrying, transporting, or shipping in interstate or foreign commerce, in the course of a commercial activity, any such species; or (3) selling or offering for sale in interstate or foreign commerce any such species.

Activities that we believe may result in violation of section 9 prohibitions against “take” under section 9, depending on the circumstances, include, but are not limited to, releasing a captive animal into the wild. For example, in the recent proposed listing of five species of sturgeon, we noted that release of a captive animal into the wild has the potential to injure or kill not only the particular animal, but also the wild populations of that same species through introduction of diseases or inappropriate genetic mixing (78 FR 65249; October 31, 2013). Additionally, we consider the following activities, depending on the circumstances, as likely not resulting in a violation of ESA section 9 (and therefore do not require a section 10 permit): (1) Continued possession of captives, and (2) continued provision of Animal Welfare Act-compliant care and maintenance of captives, including handling and manipulation as necessary for care and maintenance, as long as such practices or procedures are not likely to result in injury. We are seeking public comment on these issues as part of this proposed rulemaking.

On July 1, 1994, the NMFS and USFWS published a series of policies regarding listings under the ESA, including a policy for peer review of scientific data (59 FR 34270). The intent of the peer review policy is to ensure that listings are based on the best scientific and commercial data available. Prior to a final listing, NMFS will solicit the expert opinions of three qualified specialists selected from the academic and scientific community, Federal and state agencies, and the private sector on listing recommendations to ensure the best biological and commercial information is being used in the decision-making process, as well as to ensure that reviews by recognized experts are incorporated into the review process of rulemakings developed in accordance with the requirements of the ESA.

To ensure that the final action resulting from this proposal will be as accurate and effective as possible, we solicit comments from the public, governmental agencies, tribes, the scientific community, industry, environmental entities, and any other interested parties concerning the proposal to amend the regulatory language describing the listing of the Southern Resident killer whale DPS by removing the exception for captive whales. We will consider all of the information provided before making a final decision. You may submit your comments and materials concerning this proposal by any one of several methods (see ADDRESSES ). We will review all public comments and any additional information regarding the status of these subspecies and will complete a final determination within 12 months of publication of this proposed rule, as required under the ESA. Final promulgation of the regulation(s) will consider the comments and any additional information we receive, and such communications may lead to a final regulation that differs from this proposal.

If requested by the public within 45 days of publication of this proposed rule, a hearing will be held regarding this proposal to amend the listing of the Southern Resident killer whale DPS by removing the exclusion for captive whales. If a hearing is scheduled, details regarding location(s), date(s), and time(s) will be published in a forthcoming Federal Register notice.

The 1982 amendments to the ESA, in section 4(b)(1)(A), restrict the information that may be considered when assessing species for listing. Based on this limitation of criteria for a listing decision and the opinion in Pacific Legal Foundation v. Andrus, 657 F. 2d 829 (6th Cir. 1981), we have concluded that NEPA does not apply to ESA listing actions. (See NOAA Administrative Order 216-6.)

As noted in the Conference Report on the 1982 amendments to the ESA, economic impacts cannot be considered when assessing the status of a species. Therefore, the economic analysis requirements of the Regulatory Flexibility Act are not applicable to the listing process. In addition, this proposed rule is exempt from review under Executive Order 12866. This proposed rule does not contain a collection-of-information requirement for the purposes of the Paperwork Reduction Act.

In accordance with E.O. 13132, we determined that this proposed rule does not have significant Federalism effects and that a Federalism assessment is not required. In keeping with the intent of the Administration and Congress to provide continuing and meaningful dialogue on issues of mutual state and Federal interest, this proposed rule will be shared with the relevant state agencies in each state in which the species is believed to occur, and those states will be invited to comment on this proposal. As we proceed, we intend to continue engaging in informal and formal contacts with the states, and other affected local or regional entities, giving careful consideration to all written and oral comments received.

The complete citations for the references used in this document can be obtained by contacting NMFS (See ADDRESSES and FOR FURTHER INFORMATION CONTACT ) or on our Web page at: http://www.westcoast.fisheries.noaa.gov/protected_species/marine_mammals/killer_whale/lolita_petition.html

For the reasons set out in the preamble, 50 CFR part 224 is proposed to be amended as follows:

The American Lobster Fishery Management Plan is implemented by the NMFS under the framework of the Atlantic States Marine Fisheries Commission's (Commission) Interstate Fishery Management Plan for American Lobster (ISFMP). Through the ISFMP, the Commission adopts fishery conservation and management strategies for the American lobster resource and coordinates the efforts of the states and NMFS to implement these strategies. The ISFMP establishes seven Lobster Conservation Management Areas (Areas), from Maine to North Carolina, including state waters, which extend from the coast to 3 nautical miles (5.56 km) from shore, and the Exclusive Economic Zone (EEZ), which extends from 3-200 nautical miles (5.56-370.4 km). Within each Area, the states appoint members of the lobster industry to serves on a Lobster Conservation Management Team who advises the Commission on management programs for each Area. The lobster fishery is a year-round fishery in the United States, including the summer and fall months when the lobsters are molting. Most lobsters are taken in lobster traps, while a small amount are taken incidentally in gillnets and trawls.

With the advent of the Commission's Trap Transferability Program, members of the lobster industry, as well as the Commission, became concerned about fishing power becoming consolidated in Area 3 among relatively few permit holders who could then purchase trap allocation, increase fishing power, and reshape the fishery in a way that would be detrimental to existing and historical fishing patterns. Area 3 is the largest of all the Lobster Conservation Management Areas, occurs exclusively in the EEZ, and extends from Maine to Cape Hatteras, North Carolina. Industry and the Commission were concerned that previously latent effort could be cheaply purchased and activated, which would create additional pressure on the lobster stock, as well as the fishing businesses currently existing in the area. Accordingly, the Commission approved Addendum XXII in October 2013, which recommended that the states and NMFS limit the number of traps that any one individual or entity may own.

On November 18, 2013, the Commission requested that NMFS publish this control date to discourage permit consolidation and speculative activation of previously unused effort or capacity in the American lobster fishery during the time that alternative management regimes to control capacity or latent effort are discussed and potentially developed and implemented. This action communicates to fishermen that participation after the control date may not be treated the same as participation before the control date. This control date may also be considered for future management decisions and rulemaking for any of the Lobster Conservation Management Areas. NMFS may also choose to take no further action to control entry or access to the American lobster fishery.

This notification establishes January 27, 2014 as the new control date for potential use in determining historical or traditional participation in Area 3 of the American lobster fishery. Establishing a control date does not commit NMFS to develop any particular management regime or criteria for participation in these fisheries. In the future, NMFS may choose a different control date or a management program that does not make use of any control date. Any future action by NMFS will be taken pursuant to the Atlantic Coastal Fisheries Cooperative Management Act and the Magnuson-Stevens Fishery Conservation and Management Act.

This notification also gives the public notice that interested participants should locate and preserve records that substantiate and verify their participation in the American lobster fishery.

This notification and control date do not impose any legal obligations, requirements, or expectation.