[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



         IMPROVING THE REGULATORY FLEXIBILITY ACT - H.R. 2345

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                      WASHINGTON, DC, MAY 5, 2004

                               __________

                           Serial No. 108-62

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                                 ______

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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri                 DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia             DANNY DAVIS, Illinois
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               BRAD MILLER, North Carolina
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

                  J. Matthew Szymanski, Chief of Staff

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Terry, Hon. Lee, U.S. Representative (NE-2), U.S. House of 
  Representatives................................................     3
Pence, Hon. Mike, U.S. Representative (IN-6), U.S. House of 
  Representatives................................................     5
Sullivan, Hon. Thomas, Chief Counsel for Advocacy, U.S. Small 
  Business Administration........................................     7
Glover, Mr. Jere W., Of Counsel, Brand & Frulla..................    10
Swain, Mr. Frank, Partner, Baker & Daniels.......................    12
Morrison, Mr. Jim, Ph.D., President, Small Business Exporters 
  Association....................................................    13

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    26
    Velazquez, Hon. Nydia........................................    30
Prepared statements:
    Terry, Hon. Lee, U.S. Representative (NE-2), U.S. House of 
      Representatives............................................    32
    Pence, Hon. Mike, U.S. Representative (IN-6), U.S. House of 
      Representatives............................................    36
    Sullivan, Hon. Thomas, Chief Counsel for Advocacy, U.S. Small 
      Business Administration....................................    40
    Glover, Mr. Jere W., Of Counsel, Brand & Frulla..............    56
    Swain, Mr. Frank, Partner, Baker & Daniels...................    70
    Morrison, Mr. Jim, Ph.D., President, Small Business Exporters 
      Association................................................    76

                                 (iii)

 
          IMPROVING THE REGULATORY FLEXIBILITY ACT - H.R. 2345

                              ----------                              


                         WEDNESDAY, MAY 5, 2004

                   House of Representatives
                                Committee on Small Business
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:32 p.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
presiding.
    Present: Representatives Manzullo, Velazquez, Beauprez, 
Case, Akin, Udall, Bordallo
    Chairman Manzullo. This Committee has held a number of 
hearings during my tenure as chairman in which we examined 
agency compliance with the Regulatory Flexibility Act, or RFA. 
These hearings all reached the same conclusion: The RFA is an 
important law that, if fully complied with in both letter and 
spirit, has the potential to significantly reduce the 
regulatory burdens on small businesses.
    The efforts of the president, Dr. Graham, the head of OIRA, 
and Chief Counsel for Advocacy Tom Sullivan have done admirable 
jobs in improving agency compliance with the RFA. However, 
their efforts continue to be hindered by bureaucrats that seek 
to perform the minimum amount of analysis possible and courts 
that seek to abet them in the process. In short, the efforts to 
obtain compliance are, in part, hampered by the flaws in the 
RFA itself.
    Given the inadequacies of the RFA, I, along with Mr. Pence, 
Mr. Terry, and Mr. Ose, introduced H.R. 2345, the Regulatory 
Flexibility Improvements Act. The bill is designed to 
significantly strengthen the RFA so that agencies, as President 
Bush stated, ``will care that the law is on the books.''
    H.R. 2345 represents a comprehensive fix to current 
weaknesses in the RFA. When it was enacted, opponents said it 
would slow the promulgation of rules. Any examination of the 
size of the Federal Register in 1980 with that today will see 
the RFA has done no such thing. During the debate over the 
amendments to the RFA made by the Small Business Regulatory 
Enforcement Fairness Act, or SBREFA, opponents argued that 
judicial review would create a stampede to the courthouse. This 
Committee is not aware of any such rush by small businesses to 
file lawsuits challenging RFA compliance, and any arguments 
about the horrors of H.R. 2345 that will be raised by opponents 
are also unlikely to come true.
    Ultimately, what is at stake is the ability of small 
businesses to stay in business based not on the whims and 
dictates of federal bureaucrats but on their capacities in the 
marketplace. Better, sounder rules will be beneficial to the 
regulatory objectives of the agencies through increased 
compliance and lower costs to small businesses. No good reason 
exists to oppose those goals and objectives other than 
obstinacy of the status quo. It the status quo needs fixing, so 
be it. I promise to work with the individuals testifying, 
Chairman Sensenbrenner and House leadership, and my colleagues 
on the Small Business Committee to see that necessary changes 
in the RFA are made, to paraphrase the president, so the law is 
on the books, and federal agencies will care that the law is on 
the books.
    I now recognize the Ranking Member, the gentlelady from New 
York, for her opening remarks.
    [Chairman Manzullo's statement may be found in the 
appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman.
    Small businesses today face an array of challenges that 
weigh on them more heavily than their corporate counterparts. 
One of those challenges is federal regulations and the 
disproportionate burden they place on our nation's small firms. 
A recent study showed that for firms with fewer than 20 
employees, the annual regulatory burden is nearly $7,000 per 
employee, almost 60 percent higher than that of firms with 500 
employees or more. This is unfair, and something needs to be 
done about it.
    The Bush administration has acknowledged this unfairness 
and has promised to help, but the truth if President Bush 
actually holds the all-time record for the number of federal 
regulations submitted and issued under any president. A law is 
on the books that does offer some protection to small business, 
the Regulatory Flexibility Act.
    Enacted more than two decades ago, the Reg Flex requires 
federal agencies to consider the impact their regulatory 
proposals have on small entities. But if agencies were actually 
doing their homework, then the SBA Office of Advocacy would not 
have to intervene with them in 50 to 100 cases each year. These 
demonstrate just how reluctant agencies are to fully comply 
with the requirements of the Regulatory Flexibility Act. There 
are loopholes and problems with the Reg Flex that are exploited 
by these agencies.
    The bill before us today, the Regulatory Flexibility 
Improvements Act, seeks to close some of these loopholes and 
hold agencies accountable for their overly burdensome rules. At 
this hearing, we will evaluate H.R. 2345, the changes it 
proposes to the Reg Flex, and what effect this will have on 
small businesses.
    The bill does several things. First, it clearly defines the 
specific economic effects to be examined by agencies and sets 
out requirements for greater precision in performing these 
analyses. It also provides the leverage advocacy will need to 
take on these executive agencies in court. In addition, H.R. 
2345 would apply the panel process to a handful of agencies 
that routinely ignore the Reg Flex--the IRS, CMS, and the FCC--
and compels them to use a more rigorous system of rule 
evaluation.
    As shown by EPA and OSHA, the panel process has gone a long 
way in helping identify and reduce the impact of rules on small 
businesses while still achieving overall health and safety 
goals. As you can see, H.R. 2345 is an ambitious piece of 
legislation. Given this and the limited time we have left in 
the congressional schedule to actually get things done, the 
likelihood of H.R. 2345 reaching the president's desk is slim, 
but I do believe that today is a good start, and I look forward 
to working with the chairman to reduce the regulatory burden on 
our nation's small firms. I would also like to thank the 
chairman for addressing this issue. This is the first hearing 
we have held in quite some time that directly affects 
legislation under our Committee's jurisdiction.
    The burden of federal regulations is a real problem for 
small businesses across the country. Unfortunately, agencies 
tend to use a one-size-fits-all approach that mainly hurts our 
small business owners. Through H.R. 2345, we have the 
opportunity to make the Reg Flex a stronger and better 
enforcement tool, ensuring that federal agencies are held to 
more stringent regulation standards. If small businesses are 
less burdened by government rules, they are in a better 
position to grow our local economies and create jobs, and this 
will give a boost to our economy and provide employment 
opportunities for the millions of Americans still searching for 
work. Thank you, Mr. Chairman.
    [Ranking Member Velazquez's statement may be found in the 
appendix.]
    Chairman Manzullo. Thank you. Our first witness will be 
Congressman Lee Terry, our colleague from the great State of 
Nebraska. Lee, we look forward to your testimony.

          STATEMENT OF THE HONORABLE LEE TERRY (NE-2)

    Mr. Terry. Thank you, Mr. Chairman. I appreciate the 
invitation to speak here today and the invitation to join you 
on this bill.
    Good afternoon, Ranking Member Velazquez, Mr. Beauprez.
    As the chairman mentioned, I represent the Omaha, Nebraska, 
area, which is home to four Fortune 500 companies and their 
corporate headquarters, yet almost 90 percent of the employees, 
my constituents, work for small businesses. Clearly, the 
American economic engine is powered by small businesses, and I 
share your passion in helping to protect these businesses.
    As I meet with our small business owners almost every day 
when I am back home, one of the most frequent complaints from 
small business owners is that federal regulations are onerous, 
make no sense, confusing, costly, and difficult to implement. 
Now, Congress first showed its willingness to address these 
regulatory burdens when it passed the Regulatory Flexibility 
Act in 1980. Under the Regulatory Flexibility Act, many 
agencies proposing rules that would have a ``significant'' 
economic impact on small businesses, small, not-for-profit 
organizations, or small government entities must prepare a 
regulatory flexibility analysis and try to find simpler, less-
burdensome ways for such small organizations to comply.
    Now, certainly, this is extremely helpful if applied to 
small businesses. This act, however, did not require an agency 
to abandon a proposed regulation because it might have a 
``significant'' impact on small entities, only to consider a 
less-burdensome alternative and to explain why it rejected 
those alternatives. If a proposed regulation comes under the 
act, the agency must prepare an initial regulatory flexibility 
analysis, which is published, along with the proposed rule, and 
sent to SBA, who oversees the act's enforcement. After the 
comment period, the agency must prepare a final regulatory 
flexibility analysis, which should respond to any issues raised 
in the public comments and which is published with a final rule 
and made available to the public.
    While the RFA was an important first step in eliminating 
onerous burdens on small businesses, it was not without its 
shortcomings. One of the most important aspects of reform is to 
clarify and expand the rules covered by the RFA. One reform 
contained in Section 3 of H.R. 2345, amends the coverage of RFA 
to regulations from agencies that are not currently covered, an 
important step.
    For example, under the Regulatory Flexibility Act, the 
Federal Communications Commission is not required to make the 
same small business considerations as the EPA or OSHA. When the 
FCC is modifying regulations that affect the operation of the 
telephone network, the agency is not required to examine the 
impact of the proposed change on small business because it has 
been determined that small business users are not directly 
within the regulatory jurisdiction of the FCC, yet almost all 
small businesses have telephone networks or use telephone 
services. Further, small businesses often do not have the time 
or resources to wade through an FCC proposal and relate that 
impact that it would have on its cost of using the telephone 
network. I especially hear this from our small local telephone 
exchanges and rural telephone exchanges that the FCC drafts 
rules and regulations for the big entities that then include 
everybody without taking into consideration the impact on the 
smaller companies.
    In fact, last session, Chairman, I introduced a bill that 
would just simply ask the FCC to take into account this type of 
impact on small telephone companies and exchanges, which you, 
through this philosophy, have adopted in your bill, and I thank 
you.
    Now, Mr. Chairman, another important reform that you have 
included in your bill is a new Section 613 of the RFA which 
mandates that the chief counsel of the Small Business 
Administration issue advisories to agencies that must be 
adhered to during the regulatory writing process. These 
advisories can be used by small businesses in suits to enjoin 
agencies from these onerous, illegal, regulations and greatly 
assist the chief counsel in fighting burdensome regulations on 
behalf of small businesses.
    Mr. Chairman, H.R. 2345 is an important bill for these and 
other reasons. Your leadership on this issue and the effort to 
reduce regulatory red tape by championing this legislation is 
extremely important. At a time when the threat of outsourcing 
and the need to create new jobs is a priority of Congress, the 
Regulatory Flexibility Improvements Act provides a big 
assistance to small business owners.
    Mr. Chairman, thank you for this opportunity to testify, 
and I look forward to working with you in getting H.R. 2345 
enacted into law.
    [Representative Terry's statement may be found in the 
appendix.]
    Chairman Manzullo. Thank you, Congressman Terry.
    Our next witness is Congressman Mike Pence from the great 
State of Indiana, Hoosier Country.

          STATEMENT OF THE HONORABLE MIKE PENCE (IN-6)

    Mr. Pence. That is right. Thank you, Chairman, and thank 
you for the privilege of permitting me to testify and to return 
to the Small Business Committee that I had the privilege of 
serving on during the 107th Congress, and apropos to my 
testimony today, I had the privilege of serving as the chairman 
of the Subcommittee on Regulatory Reform and Oversight.
    It is really with that background and sitting on the other 
side of the table, Mr. Chairman, in many hearings just like 
this on these issues that I was very anxious to support H.R. 
2345, the Regulatory Flexibility Improvements Act.
    As you know, Mr. Chairman, during my tenure as subcommittee 
chairman, I held a number of hearings and one very 
comprehensive roundtable on regulatory burdens facing small 
businesses. Every trade association and group had different 
concerns because of the agencies that regulated their members' 
businesses, yet almost every single witness that came before 
the subcommittee expressed two consistent themes, and I think 
they bear amplification today.
    First, all of the small businesses that I heard from said 
they face problems complying with complex, often arcane, 
federal regulations that they are unaware of until a federal 
inspector comes walking through the door and informs them that 
they are in violation.
    Secondly, the analysis done in support of regulations often 
was inadequate and did not focus on the challenges facing those 
same small businesses. In a word, there was very little 
relationship to what was happening on the shop room floor in 
small businesses that I heard from and what was happening in 
the regulatory state.
    Certainly, much has changed since I served as chairman of 
the Subcommittee on Regulatory Reform. President Bush declared 
it was the policy of his administration that federal agencies 
were no longer to ignore compliance with the Regulatory 
Flexibility Act, and that was progress.
    Dr. John Graham, the head of the Office of Information and 
Regulatory Affairs at OMB, I believe, has done a remarkable job 
with a small staff in revamping review of regulations and 
demanding sound scientific and economic support of regulations. 
Tom Sullivan has been an admirable advocate on behalf of small 
businesses, and even from my rather distant standpoint, I think 
he has worked very closely with Dr. Graham in ensuring that 
federal agencies comply with the RFA.
    So there has been progress, and even during my tenure on 
this Committee, I saw that process work to the benefit, in 
particular, of one area of small business that saw the rules 
applied to them change and be conformed to a greater degree of 
rationale, and it had to do with the reporting of essentially 
minuscule amounts of lead that were left as a residue in the 
printing process.
    Given the success of this administration in imposing a 
significant degree of rationality in the issuance of 
regulations, one might ask, why is it even necessary for us to 
consider H.R. 2345?
    Well, first, Congress continues to enact legislation that 
will require regulations, such as the prescription drug benefit 
for Medicare-eligible individuals.
    Second, administrations come and go, and so do the people 
that staff them. Replacements may not always be as qualified or 
as dedicated as those that I have previously mentioned, or they 
may actually bring different agendas based on a different 
president's policies.
    Third, political appointees obviously, we all know, come 
and go, but most agency personnel remain, and they may not be 
as committed to compliance with the RFA.
    Fourth, court interpretations of the RFA are unchanged by 
the actions of the Executive Branch, and agency personnel will 
use those interpretations to avoid performing the analysis that 
Congress has mandated.
    At the bottom, the United States distinguishes itself, I 
believe, from other nations in that we operate under a rule of 
law in which the actions even of federal agencies are subject 
to significant public scrutiny and challenge in the courts. 
Leaving compliance with the RFA to the whims of federal agency 
personnel and ever-changing administrations undermines the 
basic principle that this country is governed by the rule of 
law and not the rule of man.
    Even if Dr. Graham and Mr. Sullivan do their jobs 
flawlessly, the RFA itself has flaws, the courts have 
identified those flaws, and agencies will exploit those 
loopholes to avoid performing analyses that might undercut the 
rationale for their unprecedented regulatory outcomes, and this 
is not acceptable.
    In evaluating actions that adversely affect the 
environment, federal agencies first study the scope of any 
adverse actions, the consequences of taking an action, and 
alternatives to the proposed actions. Agencies should take the 
same rational approach when promulgating regulations. But even 
putting pen to paper, the agency should determine whether a 
problem exists, the scope of the problem, and potential 
regulatory alternatives. The RFA can, if all of the loopholes 
are closed, play a key role in this rational rule-making 
process, which must be the order of the day in this city.
    The president has said that compliance with the RFA is 
important, and the only way to ensure that compliance really 
occurs under this president and future administrations is to 
make the law tougher. For these reasons, I determined that co-
sponsorship of H.R. 2345 is critical, and I strongly support 
your efforts, Mr. Chairman, to move the bill, enact it into 
law, and protect America's small businesses.
    Again, let me thank you, Mr. Chairman, for the opportunity 
to return to this Subcommittee, and let me also say, inasmuch 
as the Judiciary Committee also shares some jurisdiction of 
this legislation, I look forward to working very closely with 
you and other members of the Small Business Committee to see to 
its completion in regular order and its passage on the House 
floor.
    [Representative Pence's statement may be found in the 
appendix.]
    Chairman Manzullo. Thank you. Do any of our colleagues here 
have any questions to ask of our colleagues?
    [No response.]
    Chairman Manzullo. Okay. Well, that was pretty easy. Thank 
you for your testimony.
    If we could have the next panel come up and keep on moving.
    [Pause.]
    Chairman Manzullo. Okay. I am waiting for Mr. Sullivan to 
be the lead-off batter here.
    Gentlemen, thank you for coming. Our first witness will be 
Tom Sullivan, who has done nothing less than a stellar job at 
the Office of Advocacy and involved in a lot of fights. Tom, I 
look forward to your testimony.

  STATEMENT OF THE HONORABLE THOMAS SULLIVAN, SMALL BUSINESS 
                         ADMINISTRATION

    Mr. Sullivan. Thank you, Mr. Chairman, Congresswoman 
Velazquez, Congressman Case. It is always nice to appear before 
a Committee that is considering legislation to strengthen the 
core mission of the office. It is also nice to be here before a 
panel of other members of Congress who speak so favorably about 
the hard work that goes on in the office. So it is an honor to 
appear before you this afternoon. It is also an honor to 
address how to make the Reg Flex Act work better. Because my 
office is independent, these views are my own and do not 
necessarily reflect the views of the administration or the 
United States Small Business Administration.
    I have prepared a comprehensive, lengthy statement to aid 
the Committee's work in improving the Regulatory Flexibility 
Act. I suspect the Committee would appreciate my summarizing 
instead of reading the document in its entirety.
    The Regulatory Flexibility Act, as amended by the Small 
Business Regulatory Enforcement Fairness Act, has been 
successful. In the past three years, my office estimates cost 
savings of over $31 billion, and I will say that again. We 
estimate cost savings of over $31 billion. Even with the 
additional requirements under SBREFA and the threat of judicial 
review, some agencies were not complying with the requirements 
of the RFA.
    A formalized and closer working relationship with John 
Graham's office at the White House and Executive Order 13272, 
entitled ``Proper Consideration of Small Entities in Agency 
Rulemaking,'' were part of the president's small business 
agenda, and they are making a tremendous difference. The 
executive order enhances my office's RFA mandate by directing 
federal agencies to implement procedures and policies for 
measuring the economic impact of regulatory proposals on small 
entities. It also requires agencies to notify my office of 
draft rules that are expected to have a significant economic 
impact on small entities and to give every appropriate 
consideration to any comments provided by the Office of 
Advocacy, including publishing a response to our comments in 
the Federal Register.
    A recent success for small business highlights how the 
Office of Advocacy and John Graham's Office of Information and 
Regulatory Affairs relationship and the executive order are 
working. The construction and development rule, recently 
announced by the EPA, was something that Small Business and my 
office and John Graham's office worked on for over two years.
    Basically, EPA, recognizing that storm water runoff can 
lead to pollution in rivers and streams, wanted to create a 
whole new federal permitting system that takes permit 
information already required at a state, local, and regional 
level and superimpose that information on a new federal permit 
sent to an office in Washington. Small businesses that are 
required to work and comment through our office and through the 
SBREFA panel told EPA, then under the leadership of Governor 
Whitman, that this was a bad idea. Adding a new paperwork 
requirement would not result in cleaner water.
    So for two years, we have worked to bring that common-sense 
point of view into EPA, and as of one month ago, EPA finally 
agreed and decided not to regulate a whole new system of 
federal permitting requirements on storm water construction and 
development runoff. That is the most recent victory under the 
president's direction and the increased attention of agencies 
to the Reg Flex Act.
    The bill that is before us this afternoon, H.R. 2345, is 
important because even though the last few years have yielded a 
number of successes, there are certain loopholes in the RFA 
that were not addressed through the executive order or SBREFA. 
H.R. 2345 would amend the RFA to address those loopholes.
    Since my office is independent, we have to take our 
direction directly from small business. The way we do that is 
we hold roundtables, we solicit comments, and information from 
our regional advocates, and when we did that on this particular 
bill, the small business representatives, many of whom are 
behind me in the room listening to this hearing this afternoon, 
cited five specific issues of importance. The first is closing 
the loophole of agencies not measuring indirect economic 
impacts; second, inclusion of IRS interpretative rules; third, 
the importance of analyzing cumulative impacts; fourth, the 
importance of analyzing beneficial impacts; and, fifth, the 
expansion of the panel process to more agencies. And with the 
chairman's permission, I am prepared to go fairly close to the 
full 10 minutes.
    The direct versus indirect economic impact. Of all of the 
issues, the most prevalent concern of the small business 
community is the lack of inclusion of indirect impacts in the 
current version of the RFA. Pursuant to Sections 603, 604, and 
605[b] of the RFA, agencies are required to consider the impact 
of an action on small business entities, but they do not 
measure the indirect impact.
    You may recall, Mr. Chairman and Congresswoman Velazquez, 
that there was a hearing we had in this Committee where the INS 
had proposed to cut off stay, legal extensions of stay, from 
foreign visitors in this country in the wake of September 11th. 
We know that that rule, proposed by INS, said that we regulate 
the activity of individuals, not small businesses.
    I think the Committee deserves a lot of credit for 
recognizing the flawed logic in that, in that small businesses 
would be affected. The travel industry, the tourist industry, 
specifically, in the State of Florida, who came to testify also 
before this Committee, identified that, yes, maybe INS does not 
directly affect these small businesses, but their actions have 
a definite impact on the small businesses that are affected by 
their proposals. That is an indirect impact, and that is a 
loophole that INS used not to do the analysis. That loophole 
should be closed, and it is with the passage of H.R. 2345.
    Advocacy also supports the expansion of the SBREFA panel 
process that is in H.R. 2345 to better sensitize CMS, IRS, and 
the Federal Communications Commission to small business 
concerns. We do have a concern about the changes in H.R. 2345 
with regard to the panel process. The panel process described 
in Section 6 of H.R. 2345 provides the Office of Advocacy with 
the responsibility of drafting the panel report.
    The current process that exists between OSHA and EPA 
represents a consensus report negotiated between the offices--
the Office of Advocacy, OMB--and the promulgating agency. This 
process encourages stewardship or a custodian relationship of 
the rule from the agency. It is my office's view that that is 
what actually gets the agencies to do the right thing and 
sensitize their actions to small business.
    If this bill gets signed into law simply telling the Office 
of Advocacy, you write all the reports, it distances the 
agencies from understanding or being involved or having a stake 
in their own regulatory process, to believe that if it is a 
consensus position of how small businesses feel, they are much 
more likely to endorse and adopt the recommendations coming 
from those panels. So our suggestion to amend H.R. 2345 to 
improve an already good bill would be simply to make the panel 
process consistent with the existing panel process that exists 
with EPA and OSHA.
    Section 9 of H.R. 2345 amends the Small Business Act to 
allow the Chief Counsel for Advocacy to specify small business 
size definitions or standards for purposes of any act other 
than the Small Business Act or the Small Business Investment 
Act of 1958. My office is concerned that vesting the authority 
to determine size standards to the chief counsel for advocacy 
may cause confusion over which SBA office determines size 
standards. The SBA's Office of Size Standards has the necessary 
expertise and resources to make appropriate decisions regarding 
industry size determinations, so I do not believe that that 
proposed Section 9 of H.R. 2345 will benefit small entities.
    To conclude, Mr. Chairman, Advocacy believes that H.R. 2345 
makes several needed improvements to the RFA. My office 
supports this legislation. The amendments will further federal 
agency understanding of their obligations under the Regulatory 
Flexibility Act. H.R. 2345 will improve the RFA to allow for a 
more thorough analysis, foster the consideration of 
alternatives that will reduce the regulatory burden on small 
entities, and improve the transparency in the rulemaking 
process.
    Thank you for allowing me to present these views, and I 
would be happy to answer any questions after the panel has 
concluded.
    [Mr. Sullivan's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    Our next witness is Jere Glover. Jere has been involved in 
small businesses. In fact, when I first met Jere, you were in 
the Office of Advocacy, weren't you?
    Mr. Glover. Indeed, I was, sir.
    Chairman Manzullo. And then you retired and wanted to sail 
off on your sailboat, but you never ventured far from 
Washington.
    Mr. Glover. I got down to Miami. That was close enough.
    Chairman Manzullo. We are thankful that you stuck around 
because you have got so much wisdom and look forward to your 
imparting that to us this afternoon.
    Mr. Glover. Well, thank you.
    Chairman Manzullo. How do you like that introduction?
    Mr. Glover. Very nice.
    Chairman Manzullo. Sullivan says, `Why don't you introduce 
me that way?` I said, `When you retire, we will say all kinds 
of things about you, you know.`

          STATEMENT OF JERE W. GLOVER, BRAND & FRULLA

    Mr. Glover. Mr. Chairman, Ranking Member, it is, indeed, an 
honor to be here and testify before you. I am Jere Glover with 
Brand & Frulla, a law firm specializing in litigation and 
regulatory and administrative law.
    Overall, I think it is fair to say that the Regulatory 
Flexibility Act has improved government regulations on how they 
treat small businesses. The regulatory climate for small 
business is clearly much better. Most agencies recognize the 
critical role that small businesses play in the economy, and 
most have recognized that they need to make their regulations 
accommodate small business. However, there are a few, as we 
will talk about later, whose compliance has lagged, and, quite 
frankly, the courts have been reluctant to fully enforce the 
law. This experience indicates that it is time for additional 
modifications to the Regulatory Flexibility Act.
    A brief history of how the Regulatory Flexibility Act has 
come about is important. Prior to 1980, all of the regulations 
in the government were basically one size fits all. Despite a 
presidential order, pending legislation, and efforts by the 
Office of Advocacy to get voluntary compliance with the concept 
of regulatory flexibility, I think we have to admit that that 
effort was a failure. The Reg Flex Act was then passed, and 
agencies immediately began to comply with the law. 
Unfortunately, over time, several critical flaws in the 
Regulatory Flexibility Act became apparent, for example, no 
judicial review, no mandatory small business input, an 
imprecise role for the Office of Advocacy, and the ease with 
which agencies could certify that the regulations did not 
affect a significant number of small businesses. It is unable 
to escape the conclusion that agencies could ignore the 
Regulatory Flexibility Act with impunity.
    In 1996, the Small Business Regulatory Enforcement Fairness 
Act was passed to correct some of these shortcomings. As the 
Committee knows, SBREFA added judicial review provisions to the 
Reg Flex Act to ensure that agencies would do more than simply 
provide lip service to the Regulatory Flexibility Act when 
developing and implementing regulations. While most agencies 
have markedly improved their compliance with the Regulatory 
Flexibility Act after SBREFA, some agencies still only give lip 
service to the Regulatory Flexibility Act and appear to believe 
that compliance with the Regulatory Flexibility Act is still 
voluntary.
    The Federal Communications Commission appears to have the 
worst record of compliance. In my written testimony, I gave a 
number of examples and quotes from letters from various chief 
counsels' reports on compliance with the Regulatory Flexibility 
Act and a number of recent letters in the last three years to 
the FCC. A reasonable view of FCC's compliance is they simply 
choose to comply when they want to and choose to ignore it most 
of the time.
    Other agencies, such as the Internal Revenue Service and 
the Center for Medicare and Medicaid Services, have had a 
similar but somewhat better record but clearly have had 
problems in recognizing it.
    The problem with these recalcitrant agencies is compounded 
by the fact that some court decisions. Unfortunately, some 
courts have begun to narrow the scope of the Regulatory 
Flexibility Act and appear reluctant to enforce the law. True 
judicial review has been rare. Unless Congress strengthens the 
RFA, I fear gains that have been achieved will be lost, and 
agency compliance will deteriorate.
    What needs to be done? First, the Congress needs to give 
the Office of Advocacy independent budget authority. Today, the 
office has, I think, 43 employees. That is a far cry from the 
70-plus employees when the Regulatory Flexibility Act was first 
passed. Unquestionably, no other agency has produced the 
returns on government dollars spent Advocacy has generated: $50 
billion of regulatory savings for small business compared to an 
annual budget of the Office of Advocacy of well under $10 
million a year. Advocacy can take a great deal of pride under 
various chief counsels for the work that it has done and the 
things that it has accomplished.
    Second, the judicial review provisions of the Regulatory 
Flexibility Act need to be strengthened. The RFA should state 
specifically that courts should defer to any review or 
determination by the chief counsel for advocacy. The American 
Trucking case, in this regard, should clearly be reversed.
    Third, amendments to the law requiring more detailed 
analysis to substantiate initial regulatory flexibility 
analysis and final reg flex analysis, as well as ``no impact'' 
certifications, should be required.
    The committee proposes several other provisions for 
strengthening the law. Amendments to the Administrative 
Procedure Act have been rare. Enactment of the Regulatory 
Flexibility Act and SBREFA occurred over fierce opposition. 
Thus, any proposed amendments to strengthen the Reg Flex Act 
will face significant challenges from various Executive Branch 
agencies, independent agencies, and perhaps members of 
Congress, some of whom will raise objections. This should not 
discourage enactment of those provisions deemed most important. 
I think the fight is worth taking.
    In closing, I think it is important to keep in mind that 
those who seek to reform bear the burden of persuading agencies 
and policymakers that it is a national policy to preserve 
competition, and, more importantly, small business is the force 
that ensures competition in the American marketplace. 
Considering whether regulations have an adverse or unnecessary 
impact on small business is not special treatment. Rather, it 
is a commitment to a national policy. Avoiding unnecessary 
regulatory burdens to small businesses is good, sound, public 
policy.
    Thank you for having the opportunity to testify.
    [Mr. Glover's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    The next witness, Frank Swain is an attorney with Baker & 
Daniels. He was chief counsel for advocacy from 1981 to 1989. 
He has a little bit of experience in that office, and, Frank, I 
appreciate your input and look forward to your testimony.

           STATEMENT OF FRANK SWAIN, BAKER & DANIELS

    Mr. Swain. Thank you, Mr. Chairman and Ms. Velazquez. I 
will try to resist the temptation to walk down memory lane too 
much here. I will say that, not counting Tom, the other members 
of the panel, I think you have a very unique panel that all are 
working on the regulatory flexibility bill of 1980.
    I, of course, was a teenager at the time, and I am probably 
in the unusual position of endorsing absolutely every word that 
both Tom and Jere Glover have mentioned so far about the 
history of the act and the impact of the act and the 
deficiencies of a law that was passed under great duress by the 
Congress in 1980, and the duress was not partisan duress. The 
duress was really principally from those people that considered 
themselves the keepers of the Administrative Procedure Act 
covenant and were resenting the fact that anybody would want to 
amend the Administrative Procedure Act that were coming out of 
anything other than a pure, administrative, jurisprudential 
background.
    But as I mention in my statement, 1980 was an era of great 
ferment of regulatory issues, and in 1980, of course, with the 
election of President Reagan there was a sort of renewed 
interest in controlling regulatory agencies, and lots of 
organizations and agencies in the Reagan administration were 
proposing very significant, statutory and regulatory reforms 
and, really, the Regulatory Flexibility Act, in my view, is the 
only time that Congress has passed a law that imposes 
regulatory reform procedures on a whole host of regulations.
    What we have learned over the intervening 20-some years is 
that [a], as was mentioned, enforcement powers were somewhat 
lacking at the outset. The Congress has gone a long way to 
correcting that through SBREFA, and now what we realize, and 
possibly because there are better enforcement powers now, the 
agencies seem to be more interested than ever in avoiding those 
conditions that trigger the regulatory flexibility analyses in 
the first place.
    So, to the extent that this bill is largely, not 
exclusively, but largely focused on what I will call the 
``front end,'' that is, the decision by agencies whether to do 
the required analyses and the ability of the Office of Advocacy 
and others to monitor and correct those decisions when they are 
wrong; that is really an important step, and I hope that, 
although, as was mentioned, it will not be noncontroversial 
with the particular agencies, it is real important to try to go 
forward with that.
    I will briefly mention just a couple of other points which 
I think are very good in the bill. As this Committee and you 
know, Mr. Chairman, I have been working with an issue involving 
the IRS for two years, involving mobile machinery. You were 
kind enough to have a hearing last year at which that issue, 
among others, was discussed as an example, and it continues to 
be an example of a regulatory change that has a very 
significant impact on a very substantial number of small 
businesses, and no analysis was done, and the IRS said, we do 
not have to do an analysis.
    And I mention in my testimony, I actually sort of failed 
the theology course as to why they cannot do the analysis or 
they are not required to do the analysis. It is, in my view, a 
very abstruse set of arguments that they are making involving 
the Paperwork Reduction Act and Reg Flex and so on and so 
forth. But suffice it to say that Congress has got to go back 
and make perfectly clear that the IRS needs to do an analysis 
on most of the decisions that they make that have a regulatory 
impact, whether they designate them as interpretive or 
otherwise.
    Three other quick points. The positive impact. a number of 
agencies say, we are changing things for the good; therefore, 
we do not have to do a small business impact. My response when 
I was chief counsel and now continues to be, well, if you are 
changing it for the good, how do you know you could not change 
it even more if you do not do an analysis? I think that that is 
a necessary change.
    I like the provision that requires agencies to quantify 
what they are doing. You would think that is a no-brainer. How 
can you measure the impacts unless you quantify? We are well 
ahead of where we were 20 years ago when I was chief counsel. 
The ability to do that and what we know about economics and 
what we know about data bases, every agency should be able to 
do that.
    Finally, I will mention this. It has been mentioned before. 
The indirect-impact situation is very important. The direct 
costs of a rule are often minor compared to the indirect costs, 
and agencies need to be required to step up to the plate and 
analyze those costs, too.
    Mr. Chairman and Ms. Velazquez, thank you for the 
opportunity to make this statement. It is a pleasure to 
continue to be able to work on small business regulatory issues 
as I have for some time. In some ways, I am not worried about 
working myself out of a job if this legislation is passed 
because it continues to be an intense set of issues for small 
business, but I do think that enactment of this bill or 
something close to it would be a major step forward, and we 
appreciate very much in the small business community your 
support.
    [Mr. Swain's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    Our next witness is Dr. Jim Morrison, who is president of 
the Small Business Exporters Association, and, Jim, we look 
forward to your testimony.

STATEMENT OF JIM MORRISON, SMALL BUSINESS EXPORTERS ASSOCIATION

    Mr. Morrison. Thank you very much. Thank you also for 
allowing me to appear on a panel with these public servants, 
all of whom I have a great admiration for.
    Chairman Manzullo, Representative Velazquez, members of the 
Committee, thanks for having me appear here today. I am Jim 
Morrison. I serve as the president of a small business 
organization, the Small Business Exporters Association, but I 
am here today primarily as a private citizen. I have been asked 
to comment on H.R. 2345 in the light of my background in 
helping develop the Small Business Regulatory Enforcement Act 
and the Regulatory Flexibility Act, so I will try to do so. I 
hope this information will be helpful as you go forward.
    By way of historical context, the idea for the Reg Flex Act 
was suggested to me in April of 1977 by Mr. Milt Stewart, who 
later became the first chief counsel for advocacy. At the time, 
I was on the staff of Senator Gaylord Nelson of Wisconsin, the 
chairman of the Senate Small Business Committee. Senator Nelson 
also liked the idea, and we drew in Senator John Culver of Iowa 
and others to help us move forward on the bill.
    In my written testimony, I describe in some detail my daily 
work on the RFA from then through the final passage in 1980. In 
the interest of time, I will not repeat all of that here, but I 
do think it is fair to say that I worked with every major 
player on the bill, and I sweated every line and, I think, 
pretty much every word of that bill for three years.
    Although I was not a congressional staffer on SBREFA, I 
again worked very closely on it on a daily basis with those who 
were drafting and negotiating the bill, since I was the head of 
an association coalition at that time in favor of the 
legislation.
    From that historical perspective, let me say a few words 
about your bill. First of all, I think it gets two very 
important points right: the extent to which the Reg Flex Act 
was modeled on the National Environmental Policy Act [NEPA] and 
the key congressional mandate of both RFA and SBREFA, which is 
the need for process change and culture change at the agencies.
    On the first point, both Senators Nelson and Culver were 
noted environmentalists. Each was a principal sponsor of a 
number of important environmental statutes. Several of their 
staff attorneys were deeply steeped in environmental law. We 
had many, many conversations in the late seventies about using 
NEPA as a model for the RFA.
    The consensus view was that NEPA offered a proven approach 
to sensitizing agencies to a set of external considerations and 
that it was an understood quantity by the courts and the 
administrative law bar. We believed that, by paralleling NEPA, 
we could successfully integrate the RFA into established 
administrative law with minimal disruptions.
    Our concern, however, was that litigants might seek to halt 
agency actions before they were finalized. This is called 
``interlocutory review.'' This was allowed under NEPA, and it 
led to enormous abuse. We wanted to avoid that, but there were 
many disagreements about how to do so. This is what led to the 
tortured language about judicial review in the original RFA. It 
did not work. It confused the courts, and it created a pressing 
need for later revisions. That was the key reason we needed 
SBREFA some years later.
    In many other respects, however, the RFA and NEPA are 
strikingly similar. An agency certification of no small 
business impact under Section 605[b] of the RFA is meant to 
mirror the finding of no environmental impact under NEPA. The 
final regulatory flexibility analysis under Section 604 of the 
RFA parallels the environmental impact statement under NEPA, 
and so on.
    Both the RFA and NEPA were designed to alter agency culture 
and agency process without overturning the agencies' statutory 
frameworks. While there has been progress in getting the 
agencies to internalize the small-entity considerations under 
the RFA, to this day, they do not seem to grasp that the RFA is 
every bit as much the law of the land as NEPA and that RFA 
analyses should be just as thorough and careful.
    The courts need some guidance, too, in my opinion. Judicial 
scrutiny of RFA analyses is typically far below that given to 
environmental impact statements. H.R. 2345 commendably tackles 
these concerns.
    In addition to these broad culture and process issues, the 
bill also addresses several specific problems very well. It 
clarifies the lead role of the chief counsel for advocacy in 
administering the RFA. Despite extensive responsibilities that 
Congress gave the chief counsel on both statutes, some court 
decisions have suggested that the views of the chief counsel do 
not need to be treated with deference by the agencies or the 
courts. This completely misreads congressional intent, in my 
opinion, and fundamentally endangers the RFA. The statute 
depends upon the chief counsel being able to stand up for small 
entities that are unaware of agency actions and unable to 
defend themselves from needless harm by the agencies.
    Congress needs to reassert the importance of the chief 
counsel to the RFA. Your bill could simply state that the 
agencies and the courts should give deference to Advocacy's 
views, or it could have the Office of Advocacy write some basic 
rules for agency compliance with the RFA.
    Another good element of H.R. 2345 is its treatment of 
indirect economic impacts of the rules. We tried to solve the 
indirect-effects problem in both the RFA and SBREFA, but we 
could not find the right statutory wording. I wish we had 
thought of the approach that H.R. 2345 uses, paralleling the 
way the Council on Environmental Quality [CEQ] writes rules for 
agencies--a brilliant stroke.
    I also like the bill's approach of defining indirect 
effects as ``indirect economic effects of a rule that an agency 
reasonably could have foreseen.'' Since both of these proposed 
language changes for RFA are based on settled principles of 
environmental law, expanding them into small-entity law should 
not create undue difficulties for the agencies or the 
administrative law bar. I urge the Committee to report the bill 
with both provisions.
    H.R. 2345 also works to bring Treasury IRS rules fully 
within the ambit of RFA, a very worthy cause which I hope will 
come to fruition.
    In my written testimony, I cite several other features of 
the bill which I think are good improvements to the RFA. While 
I would be careful about assigning more responsibilities to 
Advocacy than the office has the staff or budget to handle, 
overall, I think H.R. 2345 is an excellent bill. That completes 
my prepared remarks. Thank you.
    [Mr. Morrison's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much.
    I want to go back to a statement that Tom Sullivan made 
with regard to, I believe, the size standards. Tom, do you want 
to repeat that statement? I think you were analyzing 2345 and 
made a comment on that.
    Mr. Sullivan. The comment that I had made in my oral 
statement was that Section 9 of 2345 amends the Small Business 
Act to allow the Chief Counsel for Advocacy to specify small 
business size definitions or standards for purposes of any act 
other than the Small Business Act or the Small Business 
Investment Act of 1958. I had voiced my concern that vesting 
the authority to determine size standards to the Chief Counsel 
for Advocacy may cause confusion over which SBA office 
determines those size standards. The current SBA Office of Size 
Standards has the necessary expertise and resources to make 
appropriate decisions regarding industry size determinations.
    Chairman Manzullo. One of the reasons it is in there is the 
hope that the Office of Advocacy could redo a size standard a 
lot faster than SBA. We had a terrible situation with several 
of Ms. Velazquez--the travel industry--remember that hearing, 
Ms. Velazquez?----
    Ms. Velazquez. Uh-huh.
    Chairman Manzullo [continuing]  And we had to have both Mr. 
Barreto here and Dr. Graham, and that was the afternoon that I 
said I was going to lock the door here until you guys come up 
with a solution. Mr. Pineles, our Regulatory Counsel whispered, 
I guess that might be a regulation by coercion. The courts 
might be prone to knock it down. It just reached the point 
after months and months and months and months. Nothing was 
happening. Now the SBA is in the process of getting all kinds 
of information. They put up a kite for the purpose of drawing 
information, and obviously that is the appropriate way to deal 
with the different groups that are interested in seeing it 
going. That is one of the reasons it was put in there. Did that 
have any impact on------.
    Mr. Sullivan. Yes, Mr. Chairman. It has a tremendously 
impact on my comment. First of all, you made the comment that 
the committee hearing that you had might have produced a 
beneficial regulation by coercion. Even though I recognize the 
sense of why you characterize it that way, my thoughts are a 
little bit different, and they are extremely complimentary of 
the oversight role of this body. My office would not be able to 
claim the successes of $31 billion cost savings without the 
aggressive oversight of this Committee. It works very well. It 
does not always work perfectly, but it works very well.
    Chairman Manzullo. We make a lot of noise. That is for 
sure.
    Mr. Sullivan. And sometimes we get results. I think there 
are very recent activities that demonstrate those results, one 
being the travel industry and the CRS rules that the Department 
of Transportation was promulgating. I know that their 
representatives are here listening to this testimony today.
    The reason I have concerns with shifting some of the 
responsibilities and authorities from SBA's Size Standards 
Office to my office is consistent with the approach government-
wide. SBA really is no different than any of the other agencies 
that we seek to sensitize to small business with the RFA. In 
order for the Reg Flex Act to work, the agencies must do their 
homework themselves, knowing full well that the Office of 
Advocacy is looking over their shoulder, knowing full well that 
this Committee is looking over their shoulder.
    Chairman Manzullo. With that new memorandum of agreement 
with OIRA, you now have additional powers.
    Mr. Sullivan. We do, and when we are looking over an 
agency's shoulders and seeing things going the wrong direction, 
that MOU does allow for us to get those issues directly before 
John Graham, and he directs his attention immediately to them. 
The reason that I have concerns with that provision in 2345 is 
it almost gives the program office, whether it is at SBA, 
Department of Transportation, or anywhere else, the excuse not 
to do their homework and to simply pawn it off on the Office of 
Advocacy to do their homework for them. I think that that is a 
dangerous movement towards the way that the Reg Flex can 
actually work.
    Chairman Manzullo. We can take a look at that. We had a 
series of hearings, two hearings, when HUD was in the process 
of trying to change that. But the RESPA, finally somebody woke 
up over there and withdrew it because of the angst that was 
caused. That was an $8 billion impact on small business, and 
the scholarship was just horrible. Why is it? Do we have a 
bunch of lazy bureaucrats in the agencies? Doesn't anybody take 
us seriously? Do we have to haul these agencies here one by one 
and say, follow the Regulatory Flexibility Act, threaten 
lawsuits? What is it?
    To the four of you, if you could make any change in the RFA 
to wake these agencies up to the fact that small businesses are 
extremely important, what would you change in it? Jim, let us 
start with you.
    Mr. Glover. I think that some agencies need to lose some 
very important and high-profile lawsuits, and I think that 
would be the most important thing. It is not so much a change 
in the RFA, although strengthening judicial review provisions 
would facilitate that, but it is a change in the environment in 
which people regulate.
    Chairman Manzullo. That is, some good defeats.
    Mr. Glover. Correct.
    Chairman Manzullo. Judicially, we need some good 
impeachments to get these judges to follow the law as opposed 
to being creative. You do not have to comment on that.
    Frank?
    Mr. Swain. Well, Mr. Chairman, I agree with Tom that the 
biggest weapon on Reg Flex is to try the public embarrassment 
of the agency and the agency director, you and the other 
members of this Committee.
    Chairman Manzullo. I can do that.
    Mr. Swain. That really works. It cannot be done on every 
regulation. Ultimately, to use the 50 cent word, the Advocacy 
Office's powers are hortatory. They can stand up and exhort 
people to do different things or do them better, but ultimately 
the decision still has to be made by the agency, and that is a 
tension that there will always be any time you set up a 
regulatory agency to regulate, and somebody else, whether it is 
OMB or Advocacy, to review.
    I agree with Jim that the most significant changes could be 
made if we had some better court decisions that would bring us 
more into the mainstream of giving deference to SBA's 
positions, and that part of the law, I think, is useful, that 
gives Tom some--I am not a smart enough administrative lawyer 
to articulate it, but gives Tom's or the chief counsel's 
opinions a greater level of deference in front of the courts 
such as similar to that that they are supposed to pay to the 
regulating agency. Now, how that would work out, I would be 
happy to talk informally about, but I think that would be very 
important.
    Chairman Manzullo. He does not want to feel like Rodney 
Dangerfield, you know.
    Mr. Swain. That is the dilemma that I think every chief 
counsel for 25 years has tried to deal with.
    Chairman Manzullo. Tom?
    Mr. Sullivan. Mr. Chairman, I think that we do get respect, 
and so in that way we certainly are distinct from Mr. 
Dangerfield.
    The one change, I think, that small businesses consistently 
come to my office and say has to be done with the Reg Flex Act 
and a loophole that needs to be closed is the indirect impacts. 
Small businesses repeatedly come in and say, look, I know that 
I am not being directly regulated, but it is so obvious that my 
business will be devastated if this rule is allowed to go 
forward, and at that point, our office is largely helpless.
    All of these other activities that we talk about; our 
office can raise significant issues on the RFA. Now, we may 
lose those issues, but it will not be for want of trying. When 
it comes to indirect impacts, we cannot even raise those issues 
because the courts say the agencies do not have to do the 
analysis. So for that reason, I believe closing the indirect-
impact loophole is the most important change for H.R. 2345.
    Chairman Manzullo. That is similar to the IRS with its 
interpretive. In fact, several years ago, the IRS decided to 
take a dentist in rural Illinois and put him on the accrual 
system as a pilot program, and once the commissioner found out 
about that, he took care of that.
    Mr. Sullivan. Well, Mr. Chairman, you gave me only one 
choice for a change. If you had given me two, that would have 
been the second.
    Chairman Manzullo. That would be the second one there. But 
the IRS goes, just say it is interpretive, and, therefore, we 
do not have to do any obeisance to the statute. It does not 
make sense.
    Jere, you looked at this for a long time.
    Mr. Glover. I have, and, unfortunately, the cases that have 
been coming down in the last few years have weakened the law, 
and I think unless you get some clear reversals and some agency 
regs thrown out, the agencies, no matter what other change you 
make, will not take the law seriously. And I think that the 
judicial review provisions are critical, and I think deference 
to the chief counsel's opinion is secondary to that but is very 
high ranked because I think that the courts should have 
considered this to be just like NEPA and have not.
    I think all of us involved in passing the law in 1980 and 
in SBREFA when judicial review was provided felt that we really 
put serious teeth into it, and a fair review of the court 
decisions that are coming down indicates the courts will go to 
great lengths to find reasons not to find a violation of the 
Reg Flex Act. In many cases, they simply ignore the law and do 
not discuss it at all while it is briefed. In other cases, they 
find some other excuse not to do it.
    We have had very few clean successes in the courts, and 
unless you change that, the agencies will always do something 
for Reg Flex, but when it comes to something they really want 
to do for some other reason, they are going to ignore it, or 
they are going to give it lip service and move on. Only the 
fear of having all of their work thrown out and having to start 
all over will make them respect the Reg Flex Act.
    Chairman Manzullo. Thank you.
    Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Sullivan, the remarkable savings that your office has 
achieved is something of a double-edged sword. On the one hand, 
you testified that you have achieved a regulatory cost savings 
of $47 billion over the last three years. Those savings do not 
even include scores of items where savings are impossible to 
estimate.
    I know you are proud of this record, but doesn't this level 
of proposed burden indicate that the agencies still have not 
gotten the message? I mean, part of the president's small 
business plan was to order agencies to reduce the burden on 
small businesses, yet the agencies continue to propose more and 
more burdens unless you intervene to stop them. So is the 
president's plan failing?
    Mr. Sullivan. Ms. Velazquez, I do not believe that the 
president's plan is failing. You actually point out a very 
interesting dynamic related to the cost savings. We do 
articulate $31 billion of cost savings over the last three 
years. The irony in that statement, Congresswoman, is that the 
better job we do, the less cost savings will occur. The reason 
that that statement is true is because the whole sense of the 
Reg Flex Act is for agencies to consider small business impact 
before they propose rules, very early on in the process.
    So this may not slow down the level or number of rules that 
appear in the Federal Register, but what it should do is make 
sure that if an agency is adequately considering small business 
impact, preproposal, then what you read in the Federal Register 
would be the least-burdensome set of alternatives left to 
articulating the regulatory direction of laws that are passed 
by Congress. So in that scenario, Congresswoman, we would end 
up documenting less cost savings. We would also end up not 
necessarily articulating fewer rules, but we would have some 
indication that those rules are better sensitized to small 
business impact, better analytically and publicly fleshing out 
the analysis of how they will affect small business than they 
are currently.
    You also stated, isn't there still a tremendous problem? 
And the answer to that is yes, and that is why it is so 
important that legislation like this to amend the RFA gets 
serious consideration. We have a lot of work to do.
    Ms. Velazquez. Sure. It is being shown by the amount of 
cost saving in terms of regulation and the fact that you 
mentioned the $31 billion. When we added the other numbers that 
you included, it totals $37 billion over the last three years. 
So, on the one hand, you have orders coming from the warehouse 
saying to the federal agencies that they have to do cost 
analyses in terms of the impact of those regulations on small 
businesses, but the fact that you have been able to stop them 
from doing so shows that they are not getting the message and 
complying with the president's orders.
    Mr. Sullivan. The Congresswoman points out exactly why the 
RFA needs to be improved or strengthened, because even though 
we do document more and more savings, we are still not there 
yet.
    Ms. Velazquez. I have five minutes. Let me make the other 
question.
    Mr. Sullivan, I was surprised that the new Section 613, 
which directs Advocacy to write government-wide regulations to 
support implementation of the RFA, was not listed among your 
top priorities. In fact, I was more surprised that you do not 
mention it at all in your testimony. Do you support this 
proposed new section, and why didn't you mention it?
    Mr. Sullivan. Congresswoman, there are a number of 
priorities that the small business groups have come in to tell 
us were important in improving the Reg Flex Act, and the 
ability to write rules was not in that laundry list of 
improvements. For the record, and you do, just by asking the 
question, give me the opportunity to bolster the record, my 
office is fully supportive of that provision to give our office 
the authority.
    Ms. Velazquez. Thank you. Do you think it would be 
difficult to write these regulations?
    Mr. Sullivan. Yes. It will be difficult, but certainly we 
will improve the overall framework of regulatory development 
for small business.
    Ms. Velazquez. Do you think it is possible to receive 
deference from the courts for your opinion on compliance with 
the RFA without regulations, as Mr. Glover and Mr. Morrison 
suggest?
    Mr. Sullivan. I believe that the legislative fix to give 
our office deference will likely make the difference. The 
specific legislative authority for our office to write the 
rules will obviously bolster our chances, but I do not know, 
with absolute certainty, how the courts will view that.
    Ms. Velazquez. Thank you.
    Mr. Glover, your testimony includes a cost analysis of the 
panel process using the RFA. The bill we are considering will 
add the IRS, CMS, and the FCC to this costly process. Assuming 
that these will add at least 20 panels per year to Advocacy's 
workload,--IRS, for example, assumes that they will have to do 
10 panels per year--can you walk us through the costs 
associated with that level of effort? How many lawyers, support 
staff, supervisors? Would they need a support contract? Can you 
give us a ball park figure?
    Mr. Glover. I viewed the panel process as one of my most 
important roles once the briefs have passed, and I try to 
attend every panel meeting. We had, generally speaking, two 
staff work on the panel process, one of the professional staff 
and one of the economists. We averaged five to 600 hours per 
panel in terms of workload. The most successful panel that we 
were involved with, we had outside economists, consultants, do 
the analysis. Probably the best money I ever spent in my life 
was the one for the ergonomics rule where we had an outside 
consultant go over OSHA's economics panel.
    You figure about every three panels equals one more person, 
seven people, minimum, to get 20 panels. You are talking about 
two and a half to $3 million.
    Ms. Velazquez. Two and a half to $3 million.
    Mr. Glover. You need the economic background and support 
certainly at the beginning of the process. Once you get down, 
you may not need as much economist time as you do when you 
start, but those first few times, and you are learning a lot 
more about the agencies. I always felt the panel process was 
the highest return on investment that we made in terms of 
resources because we were getting there before the agency had 
publicly locked into a position.
    Ms. Velazquez. Mr. Swain, I know that you have been through 
this process before. Do you agree with those estimates?
    Mr. Swain. Ms. Velazquez, we had something similar to 
panels, but that provision was not available to me when I 
served. I do not have a view as to the numbers, although the 
number of people that Jere suggested strikes me as about right. 
If you have a panel, you cannot do it halfway; you really have 
to have somebody pretty much dedicated to it. So I would not be 
surprised if it were well north of a million and maybe, 
depending on how many times they did it, two or three.
    And the problem that every chief counsel has is that you 
have to make choices as to which rules you get engaged with 
because there are many more rules that arguably impact small 
business than you could possibly deal with, so every time you 
choose to look at an FCC rule, there is somebody over at the 
EPA that you probably should be looking at that you just do not 
have the human power to do it.
    So if this provision of the bill is passed, I think it 
would be necessary to significantly increase the budget of the 
office because I do not think anybody can borrow enough people 
to do the panels and continue to do the regular job.
    Ms. Velazquez. Thank you.
    That brings me to you, Mr. Sullivan. You strongly support 
the expansion of the panel process, and I am sure that you have 
thought long and hard about how much the panel process will 
cost. If we pass this legislation, do you have the resources to 
implement it?
    Mr. Sullivan. I believe that our office does have the 
resources at full staff to abide by the legislation if it is 
signed into law.
    Ms. Velazquez. I am stunned to hear that, sir. Mr. Glover 
and Mr. Swain here; they sat on that chair that you are sitting 
today, and they are saying two and a half million dollars. We 
are bringing them as witnesses here because of their expertise 
and their experience.
    I just cannot accept you sitting there with a straight face 
and telling me that you have the resources. You know you do 
not, the same way the administrator does not have the 
resources, and knowing that the budget that was submitted to us 
was not adequate, and you saw what happened back in January 
when we had to shut down, or they shut down, the 7[a] loan 
program because the administration did not submit an adequate 
budget.
    You know you do not have the resources, and I would ask for 
you to submit to this Committee in writing your informed 
estimate of how much and how many panels per year you have, how 
much was spent on those panels in terms of resources, how many 
panels you will expect if H.R. 2345 is adopted, and your 
analysis of the cost to Advocacy in terms of resources.
    Mr. Sullivan. You certainly will have that analysis, 
Congresswoman. Thank you.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Congresswoman Bordello?
    Ms. Bordallo. Thank you, Mr. Chairman.
    Good afternoon, gentlemen. I think my question would be 
directed to Mr. Sullivan. I see that Section 3 of H.R. 2345 
would require land management plans issued by the United States 
Forest Service and the Bureau of Land Management, that they be 
subject now--this is something new--to the requirements of the 
RFA. What are the implications of this change for all parties 
involved, including private landowners, private small 
businesses, and the respective agencies, as they attempt to 
comply with their new statutory mandates?
    Mr. Sullivan. Congresswoman, the practical effect of the 
language would be to close a loophole from a Supreme Court case 
that dealt the RFA a little bit of a blow, and that was to not 
recognize the land management regulatory system as final 
actions for purposes of the Reg Flex Act, and the listing of 
the Land Management Act provisions just simply closes that 
loophole.
    Ms. Bordallo. I see.
    Mr. Sullivan. The chairman's counsel actually is someone 
that my office relies on when we are stretched for staff 
because we do have very few staff, and we have to rely on 
outside folks, including congressional staff and stakeholders 
and small business groups. Barry Pineles was very astute in 
identifying that the Supreme Court case that dealt with land 
management plans had shut small business out of the process 
from commenting substantively on them, and this provision in 
2345 fixes that problem.
    Ms. Bordallo. Fixes that up. So it was an oversight and 
something we had to correct. Is that correct?
    Mr. Sullivan. That is correct, Congresswoman.
    Ms. Bordallo. Does the RFA currently apply to the Fish and 
Wildlife Service and National Park Service, and if so, what 
sort of impact has it had on small businesses, the agencies 
themselves, or any other interested parties, in your 
experience?
    Mr. Sullivan. In my experience, with regard to the Fish and 
Wildlife Service in the Department of Interior, we have 
definitely gotten their attention. The fisheries management 
plans that are going on, most intensely in my home town of 
Boston, will severely impact small fishermen or small 
businesses that have devoted their lifetime to fishing, and for 
some time the policies in those plans really kind of shut small 
business out of the process. And with the work of my office in 
every part of that system, from the regional management systems 
all the way here to Washington out of the Department of 
Commerce, we have inserted ourselves into that process to the 
point that now they are coming to us for advice on the economic 
impact analysis prior to writing management plans rather than 
afterwards.
    We have got a long way to go with the Fish and Wildlife 
Service, but we are better off now than we were about five 
years ago.
    Ms. Bordallo. Naturally, I am interested in this because I 
represent a territory in the Pacific. Thank you. Thank you, Mr. 
Chairman.
    Chairman Manzullo. Well, thank you very much.
    Something has to be done. There is a law on the books that 
people just do not seem to take seriously, and a major agency 
has put out a proposed regulation, taking just a very shallow 
view of the RFA, should know better, but I think it is just a 
pattern that is out there.
    As I recall, Tom, when the president put out the executive 
order, wasn't there something in there that instructed your 
office to teach these agencies how to comply with the RFA?
    Mr. Sullivan. Yes, Mr. Chairman. Getting the respect of 
agencies is more than simply writing the letters criticizing 
their approach or criticizing their lack of compliance with the 
RFA. That goes to some distance but really not enough. So in 
the president's executive order, he required not only for us to 
remain vigilant in publicly criticizing the agencies' approach 
or lack of compliance with the RFA but also to train the 
agencies with how they are supposed to take into account their 
impact on small business.
    Chairman Manzullo. Tell us your experience there because I 
know you had quite a program. You invested a lot of time and 
energy on that.
    Mr. Sullivan. We actually have a senior counsel, Claudia 
Rayford, who has run that program with tremendous success. I 
will get the specific numbers to the Committee after the 
hearing. We have trained over a dozen agencies where we go in 
for close to a full day with the rule writers and walk them 
through, step by step, this is what it takes to do the 
legitimate outreach, the legitimate economic analysis, the 
legitimate consideration of less-burdensome alternatives in 
order to comply with the Reg Flex Act. Every one of these 
trainings has received compliments from the folks that we are 
ordinarily critical of. It has been a sea change of attitude 
from an adversarial attitude towards a partnership attitude, 
and we have actually taken it a little bit further.
    Knowing that we are not going to be able to shoulder this 
entire burden ourselves, we have opened up this training to all 
stakeholder groups like NFIB, Chambers of Commerce, builders 
and contractors, home builders, and also congressional staff. 
They came in for a training as though they were regulators to 
simply be informed how we are training agencies. We believe 
that that better arms the small business community with the 
knowledge to know what are agencies supposed to be doing.
    And Congresswoman Velazquez points out a significant issue 
of resources. If more agencies have to do the analysis, and, 
hopefully, more agencies do the analysis and come to my office 
first, that means more work, and one of the ways that we are 
hopeful to spread out that work is to better inform and arm all 
of the stakeholder community with what to expect from the 
agencies so that not only is the Office of Advocacy acting as 
an oversight mechanism as the enforcer of the RFA, but the 
Associated Builders and Contractors are, the Chamber of 
Commerce is, NFIB is, the National Small Business Association 
is, similarly to the way Congress and this Committee, in 
particular, also was looking over the shoulders of agencies to 
make sure that they were doing the Reg Flex Act.
    Chairman Manzullo. Have you noticed any positive results? 
Are they listening to you? is my question.
    Mr. Sullivan. Some are, and some are not, and if they all 
were listening and acting, then I would have different 
testimony submitted to this Committee saying, you know, the 
system is not broken; let us not fix it. Some are listening. 
The ones that we get in and train are giving positive response 
and then actually following up with our office to say, look, we 
are working on a few regulatory proposals. Can we work with you 
to make sure that our impact analysis meets the straight-face 
test?
    The classic example is after September 11th when FDA was 
trying to look at rules to protect the nation's food supply. 
When the President signed the executive order, and folks at FDA 
learned about this, they came to our office and said, oh, we 
should probably check with you before we start writing rules 
that are going to affect mom and pop supermarkets and local 
farm stands, and they did, and it is that type of early 
interaction------.
    Chairman Manzullo. Did you notice that the RFA report was 
of quality as a result of the meeting with you? Maybe that is 
not a fair question. Let me ask the question again. Do you feel 
that the fact that they came to you ended up in a report that 
was more responsive than if they had not come to you?
    Mr. Sullivan. It is a better starting point than we have 
had in the past, but we are still not at the point where we can 
simply step back and say, you know, this agency really gets it, 
and we look forward to their final reports and rules because we 
are confident that that is going to reflect an adequate 
analysis of small business impact and alternatives. We are not 
at that point yet; otherwise, we would not need a strengthening 
of the RFA.
    Chairman Manzullo. Well, again, I want to thank you all for 
coming this afternoon. We continue to work on it. We continue 
to work on the bill. I always appreciate your input.
    Ms. Bordallo. Mr. Chairman, can I put in a point?
    Chairman Manzullo. Sure. Absolutely. Go ahead.
    Ms. Bordallo. Mr. Chairman, I am, you know, rather new 
here, a freshman member of Congress, but you mentioned 
something that kind of caught my attention, and that was, is 
there any mechanism in place for agencies that do not pay any 
attention?
    Mr. Sullivan. Congresswoman, right now, the mechanism is 
for my office to file an Amicus action in support of a 
challenge to an agency, so that is a litigation alternative 
that exists. It is the hammer.
    Ms. Bordallo. Is it effective?
    Mr. Sullivan. It is not as effective as it could be, and 
that is one of the things that H.R. 2345 seeks to close as a 
loophole. If the Congresswoman would allow for me to amend a 
response to the Ranking Member as well, I think that, 
Congresswoman, I answered you, I think, a little bit too 
shortly when I said we can handle the resources of the panels. 
I think that in fairness to the Committee and the attention 
that you bring to the Reg Flex Act, yes, I think that we can 
handle it with our resources, but that is not fair to you to 
say that if we cannot, then it is incumbent on me to come to 
this Committee and say, these are the additional resources that 
we need.
    So not only will I get the chairwoman the breakdown of the 
panels, but I also will give this Committee my commitment that 
when we are past the breaking point or close to it, we will 
absolutely come to this Committee first and ask for the 
additional resources we need to make this amendment, this law, 
work. Thank you, Congresswoman Bordallo.
    Chairman Manzullo. Thank you very much. The Committee is 
adjourned.
    [Whereupon, at 3:57 p.m., the Committee was adjourned.]

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