[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
                REGULATORY FLEXIBILITY IMPROVEMENTS ACT

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

                                H.R. 682

                               __________

                             JULY 20, 2006

                               __________

                           Serial No. 109-134

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov



                                 ______

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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                      CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona                WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio                   CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin                JERROLD NADLER, New York
J. RANDY FORBES, Virginia            DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas

                  Raymond V. Smietanka, Chief Counsel

                        Susan A. Jensen, Counsel

                        Brenda Hankins, Counsel

                   Mike Lenn, Full Committee Counsel

                   Stephanie Moore, Minority Counsel


                            C O N T E N T S

                              ----------                              

                             JULY 20, 2006

                           OPENING STATEMENT

                                                                   Page
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Chairman, Subcommittee on Commercial and 
  Administrative Law.............................................     1

                               WITNESSES

The Honorable Thomas M. Sullivan, Chief Counsel for Advocacy, 
  United States Small Business Administration, Washington, DC
  Oral Testimony.................................................     5
  Prepared Statement.............................................     8
Mr. J. Christopher Mihm, Managing Director for Strategic Issues, 
  United States Government Accountability Office, Washington, DC
  Oral Testimony.................................................    19
  Prepared Statement.............................................    21
Mr. J. Robert Shull, Director of Regulatory Policy, OMB Watch, 
  Washington, DC
  Oral Testimony.................................................    38
  Prepared Statement.............................................    40
David Frulla, Esquire, Kelley Drye Collier Shannon, Washington, 
  DC
  Oral Testimony.................................................    48
  Prepared Statement.............................................    50

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and 
  Chairman, Subcommittee on Commercial and Administrative Law....     3

                                APPENDIX
               Material Submitted for the Hearing Record

Revised Prepared Statement of J. Robert Shull, Director of 
  Regulatory Policy, OMB Watch, Washington, DC...................    69
Prepared Statement of the Honorable Donald A. Manzullo, a 
  Representative in Congress from the State of Illinois, and 
  Chairman, Committee on Small Business..........................    78
Letter from Robert D. Evans, Director, Governmental Affairs 
  Office, American Bar Association (ABA).........................    82
Response to Post-Hearing Questions from the Honorable Thomas M. 
  Sullivan, Chief Counsel for Advocacy, United States Small 
  Business Administration, Washington, DC........................    86
Response to Post-Hearing Questions from J. Christopher Mihm, 
  Managing Director for Strategic Issues, United States 
  Government Accountability Office, Washington, DC...............    91
Response to Post-Hearing Questions from J. Robert Shull, Director 
  of Regulatory Policy, OMB Watch, Washington, DC................    94
Response to Post-Hearing Questions from David Frulla, Esquire, 
  Kelley Drye Collier Shannon, Washington, DC....................   133


                        REGULATORY FLEXIBILITY 
                            IMPROVEMENTS ACT

                              ----------                              


                        THURSDAY, JULY 20, 2006

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 12:19 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Chris 
Cannon (Chairman of the Subcommittee) presiding.
    Mr. Cannon. Now, the Subcommittee will please come to 
order.
    Thank you, all. We apologize for being long on that vote. 
And my understanding is Mr. Watt is on his way and will join us 
momentarily, but we do have Mr. Coble, though, so we will get 
started.
    Mostly, we will avoid boring Mr. Watt by not having to 
listen to my opening statement, which, actually, I think is 
sort of interesting.
    I want to begin with some fairly astounding facts. First, 
according to OMB, no one has ever tabulated the sheer number of 
Federal regulations that have been adopted since the passage of 
the Administrative Procedure Act of 1946.
    Second, and perhaps even more astounding, is the fact that 
OMB states that most of these existing Federal rules have never 
been evaluated to determine whether they have worked as 
intended and what their actual benefits and costs have been. We 
do know their costs have been high.
    Last year, the Office of Advocacy for the Small Business 
Administration issued a report estimating that the annual cost 
to comply with Federal regulations in the United States in 2004 
exceeded $1.1 trillion. It reported if every household received 
a bill for an equal share, each household would have owed 
$10,172, an amount that exceeds what the average American 
household spent on health care in 2004, which was slightly 
under $9,000.
    I think these facts underscore several critical needs. Most 
importantly, we need to get the Administrative Conference of 
the United States up and running. As many of you know, I 
drafted bipartisan legislation that was signed into law in the 
last Congress that reauthorized ACUS. For 25 years, the 
Conference played an invaluable role as the Federal 
Government's in-house adviser on and coordinator of 
administrative procedural reforms.
    I am in fact paraphrasing from a letter that the American 
Bar Association sent earlier this week to the Senate 
Appropriations Committee seeking funding for ACUS. With 
unanimous consent, I would like to submit this letter for 
inclusion to the record, and hearing no objections, so ordered.
    Second, these facts underscore the urgent need for 
continuing and aggressive congressional oversight over the 
regulatory process. To that end, the Subcommittee on Commercial 
and Administrative Law, at the request of the House Judiciary 
Committee Chairman Jim Sensenbrenner, with support of Ranking 
Member John Conyers, is conducting a comprehensive review of 
administrative law, process and procedure.
    This project, which is being guided by the Congressional 
Research Service, will culminate with the issuance of a final 
report and the publication of the results of various studies 
focusing on succinct issues presented by the rule-making 
process. Third, these problems underscore the need for 
legislative redress. H.R. 682, I believe, is a very good start.
    Essentially, this legislation addresses several significant 
shortcomings of the Regulatory Flexibility Act. Enacted in 
1980, the act requires Federal agencies to assess the impact of 
proposed regulations on small entities, which the act defines 
as either a small business, small organization or small 
governmental jurisdiction.
    One of the principal purposes of the act was to reduce 
unnecessary and disproportionately burdensome demands that 
Federal regulatory and reporting requirements placed on small 
entities. For example, the act requires agencies to prepare a 
regulatory flexibility analysis at the time certain proposed 
and final rules are promulgated. Among other things, the 
analysis must describe the reasons why action by the agency is 
necessary and identify any significant alternatives to the 
rule.
    This analysis is not required, however, if the agency 
certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. Since its 
enactment in 1980, however, certain recurring deficiencies with 
the act have been identified. The GAO on numerous occasions has 
cited the act's uneven implementation and lack of clarity. I 
expect Mr. Mihm, who appears today on behalf of the GAO, will 
be able to elaborate on these concerns.
    In response to these problems, Representative Don Manzullo, 
who Chairs the House Committee on Small Business, introduced 
H.R. 682, the Regulatory Flexibility Improvement Act. On 
unanimous consent, I ask that the record include a statement 
from the bill's author, Representative Manzullo.
    Hearing none, so ordered.
    [The prepared statement of Mr. Manzullo is published in the 
Appendix.]
    Mr. Cannon. H.R. 682 consists of a comprehensive set of 
reforms intended to encourage Federal agencies to analyze and 
uncover less costly alternative regulatory approaches and to 
ensure that all effects, including foreseeable indirect 
effects, of proposed and final rules are considered by agencies 
during the rulemaking process.
    The legislation currently has 18 cosponsors, including me, 
and is supported by the United States Chamber of Commerce and 
the National Federation of Independent Business. It is against 
this exceedingly interesting backdrop that we are holding this 
legislative hearing today.
    When Mr. Watt arrives, we will turn to him for any comments 
that he would like to make. Without objection, his entire 
statement and any other Members who wish to submit a statement 
will be placed in the record.
    Hearing no objection, so ordered.
    Without objection, all Members may place--we just did that. 
Without objection, the Chair will be authorized to declare 
recesses at any point of the hearing.
    Hearing no objection, so ordered.
    I ask unanimous consent that Members have 5 legislative 
days to submit written statements for inclusion in today's 
hearing record.
    Hearing no objection, so ordered.
    [The prepared statement of Mr. Cannon follows:]

 Prepared Statement of the Honorable Chris Cannon, a Representative in 
    Congress from the State of Utah, and Chairman, Subcommittee on 
                   Commercial and Administrative Law

    The Subcommittee will please come to order.
    I want to begin this hearing by noting some fairly astounding 
facts. First, according to OMB, no one has ever tabulated the sheer 
number of federal regulations that have been adopted since passage of 
the Administrative Procedure Act in 1946. Second, and perhaps even more 
astounding, is the fact that OMB states that ``most of these existing 
federal rules have never been evaluated to determine whether they have 
worked as intended and what their actual benefits and costs have 
been.''
    Last year, the Office of Advocacy for the Small Business 
Administration issued a report estimating that the annual cost to 
comply with federal regulations in the United States in 2004 exceeded 
$1.1 trillion. It reported, ``Had every household received a bill for 
an equal share, each would have owed $10,172, an amount that exceeds 
what the average American household spent on health care in 2004 
(slightly under $9,000).''
    I think these facts underscore several critical needs. Most 
importantly, we need to get the Administrative Conference of the United 
States up and running. As many of you know, I drafted bipartisan 
legislation that was signed into law in the last Congress that 
reauthorized ACUS. For 25 years, the Conference played an invaluable 
role as the federal government's in-house advisor on--and coordinator 
of--administrative procedural reform. I'm in fact paraphrasing from a 
letter that the American Bar Association sent earlier this week to the 
Senate Appropriations Committee seeking funding for ACUS. With 
unanimous consent, I would like to submit this letter for inclusion in 
the record. Hearing no objection, so ordered.
    Second, these facts underscore the urgent need for continuing and 
aggressive Congressional oversight of the regulatory process. To that 
end, the Subcommittee on Commercial and Administrative Law--at the 
request of House Judiciary Committee Chairman Jim Sensenbrenner and 
support of Ranking Member John Conyers--is conducting a comprehensive 
review of administrative law, process and procedure. This project, 
which is being guided by the Congressional Research Service, will 
culminate with the issuance of a final report and the publication of 
the results of various studies focusing on succinct issues presented by 
the rulemaking process.
    Third, these problems underscore the need for legislative redress. 
H.R. 682, I believe, is a very good start. Essentially, this 
legislation addresses several significant shortcomings of the 
Regulatory Flexibility Act. Enacted in 1980, the Act requires federal 
agencies to assess the impact of proposed regulations on ``small 
entities,'' which the Act defines as either a small business, small 
organization, or small governmental jurisdiction. One of the principal 
purposes of the Act was to reduce unnecessary and disproportionately 
burdensome demands that federal regulatory and reporting requirements 
place on small entities.
    For example, the Act requires agencies to prepare a regulatory 
flexibility analysis at the time certain proposed and final rules are 
promulgated. Among other things, the analysis must describe the reasons 
why action by the agency is necessary and identify any significant 
alternatives to the rule. This analysis is not required, however, if 
the agency certifies that the rule will not have a ``significant 
economic impact on a substantial number of small entities.''
    Since its enactment in 1980, however, certain recurring 
deficiencies with the Act have been identified. The GAO on numerous 
occasions has cited the Act's uneven implementation and lack of 
clarity. I expect Mr. Mihm, who appears today on behalf of the GAO, 
will be able to elaborate on these concerns.
    In response to these problems, Representative Don Manzullo, who 
chairs the House Committee on Small Business, introduced H.R. 682, the 
Regulatory Flexibility Improvements Act.
    H.R. 682 consists of a comprehensive set of reforms intended to 
encourage federal agencies to analyze and uncover less costly 
alternative regulatory approaches and to ensure that all effects--
including foreseeable indirect effects--of proposed and final rules are 
considered by agencies during the rulemaking process.
    The legislation currently has 18 cosponsors, including myself, and 
is supported by the United States Chamber of Commerce and the National 
Federation of Independent Businesses.
    It is against this exceedingly interesting backdrop that we are 
holding this legislative hearing today.

    I am now pleased to introduce the witnesses for today's 
hearing. Our first witness is Tom Sullivan, who is the Chief 
Counsel for Advocacy at the Small Business Administration. The 
Office for Advocacy was created in 1976 to serve as the 
watchdog for small businesses as they interact with the Federal 
Government.
    Last year, the office helped save America's small 
businesses more than $6.6 billion they would have otherwise had 
to spend in order to comply with Federal regulations, a truly 
commendable accomplishment.
    Prior to assuming his current responsibilities at the 
Office of Advocacy, Mr. Sullivan was the Executive Director of 
the National Federation of Independent Business's Legal 
Foundation, which provides guidance on legal issues to small 
businesses and promotes a pro-small business agenda in the 
Nation's courts. We are now a big Nation of small businesses, 
overwhelmingly.
    Mr. Sullivan received his undergraduate degree in English 
from Boston College and his law degree from Suffolk University 
in Boston.
    Our next witness is Chris Mihm, who is the Managing 
Director of GAO's strategic issues team, which focuses on 
Government-wide issues with the goal of promoting a more 
results-oriented and accountable Federal Government. The 
strategic issues team has examined such matters as Federal 
agency transformations, budgetary aspects of the Nation's long-
term fiscal outlook, and civil service reform.
    As many of you know, Mr. Mihm testified last year before 
our Subcommittee regarding the administrative law, process and 
procedure project that I previously described, and, welcome 
back, Mr. Mihm.
    Mr. Mihm is a fellow of the National Academy of Public 
Administration and he received his undergraduate degree from 
Georgetown University.
    Our next witness is J. Robert Shull, who serves as the 
director of regulatory policy at OMB Watch. OMB Watch is a 
nonprofit research and advocacy organization that seeks to 
promote Government accountability, citizen participation in 
public policy decisions and the use of fiscal and regulatory 
policy to serve the public interest.
    Before joining OMB Watch in 2004, Mr. Shull was a training 
specialist and child advocate. In that capacity, he worked at 
Children's Rights, a nonprofit advocacy organization based in 
New York that represents the interests of abused and neglected 
children. Mr. Shull obtained his undergraduate degree from the 
University of Virginia and his law degree from Stanford Law 
School.
    David Frulla is our final witness. Mr. Frulla is a partner 
with the law firm of Kelley, Drye, Collier, Shannon, where he 
is a member of the firm's litigation, environmental law and 
Government relations and public policy practice groups. Prior 
to joining Kelley Drye, Mr. Frulla was a founding partner and 
principal of Brand and Frulla PC, which specialized in civil, 
criminal and administrative advocacy before Federal and State 
courts and administrative agencies.
    Mr. Frulla also serves as Chair of the Criminal Process 
Committee of the American Bar Association's Administrative Law 
and Regulatory Practice Section. Mr. Frulla received his 
undergraduate degree summa cum laude from Dartmouth College and 
his law degree from University of Virginia Law School.
    I extend to each of you my warm regards and appreciation 
for your willingness to participate in today's hearing. In 
light of the fact that your written statements will be included 
in the record, I request that you limit your oral remarks to 5 
minutes. Accordingly, feel free to summarize and highlight the 
salient points of your testimony.
    You will note that we have a lighting system that starts 
with the green. After 4 minutes, it turns to yellow and then at 
5 minutes turns red. It is my habit to tap the gavel at 5 
minutes. We would appreciate if you would finish up your 
thoughts about that time. We don't want to cut anybody off, and 
I find that it works much better--we are actually not 
overflowing with Members who have questions to ask today--so it 
is not as serious as sometimes it is.
    So, if we could do that, we will have a significant amount 
of time, I think, to discuss your issues during questioning. 
After you present your remarks, the Subcommittee Members, in 
the order that they arrived, will be permitted to ask questions 
of the witnesses, subject to the 5-minute rule, which I will, 
depending upon how many people come, enforce more or less 
strictly.
    Pursuant to the directive of the Chairman of the Judiciary 
Committee, I ask the witnesses to please stand and raise your 
right hand to take the oath.
    Do you swear or affirm under penalty of perjury that the 
testimony you are about to give is true and correct to the best 
of your knowledge, information and belief?
    The record should reflect that all of the witnesses 
answered in the affirmative.
    You may be seated.
    Mr. Watt, would you like to make an opening statement?
    Mr. Watt. No, just welcome the witnesses. Thank you for 
being here.
    Mr. Cannon. Mr. Sullivan, would you proceed with your 
testimony?

 TESTIMONY OF THE HONORABLE THOMAS M. SULLIVAN, CHIEF COUNSEL 
  FOR ADVOCACY, UNITED STATES SMALL BUSINESS ADMINISTRATION, 
                         WASHINGTON, DC

    Mr. Sullivan. Thank you, Mr. Chairman, Ranking Member Mr. 
Watt. I will try to be brief and actually try to go under the 5 
minutes. Thank you for already including my written statement 
in the record.
    The first part of my statement really goes through the 
history of the Regulatory Flexibility Act, and it is, I think, 
an important starting point. Why do we have an act that 
requires agencies to especially consider their impact on small 
business?
    Well, I think that it is no surprise that we are a Nation, 
a big Nation, of small businesses, and those businesses are 
well known for being the job creators, the innovators and the 
community leaders. And there was a realization in 1980 that not 
only is small business the economic engine of the United 
States, but they bear a disproportionate impact when it comes 
to Federal rules and regulations. So shouldn't there be a law 
that tries to level that playing field for small businesses?
    And that law is, in fact, the Regulatory Flexibility Act. 
It was amended in 1996 by the Small Business Regulatory 
Enforcement Fairness Act. In 1996, Congress realized that the 
requirement, or the encouragement, for agencies to do a small 
business impact analysis maybe just isn't enough incentive for 
agencies to do that. And so in 1996, Congress actually amended 
the RFA to include judicial review, so that if agencies do not 
conduct small business impact analysis and consider less 
burdensome alternatives, then they can be taken to court and a 
court will tell them to do so.
    The most recent update to the Regulatory Flexibility Act 
actually came in 2002, when President Bush signed an executive 
order--and, again, that was an affirmation of small businesses' 
importance to this country, and an affirmation or realization 
that small businesses continue to bear a disproportionate 
regulatory impact, and even more work needs to be done to level 
the playing field.
    This executive order really encourages agencies even more 
to do the type of small business impact analysis and work with 
my office than ever before, and it is working. The Regulatory 
Flexibility Act is working, and I certainly don't want anyone 
to proceed in this hearing to think that we are fixing an 
absolutely broken law. That is just not the case.
    My testimony bears out that we are saving billions of 
dollars by filtering out parts of rules and regulations that 
don't make sense for small business, and by filtering them out, 
you are leveling the playing field without compromising 
regulatory protections, while still protecting the environment, 
protecting workplace safety, protecting our Nation's borders.
    While the Reg Flex Act is working, it is not working 
perfectly, and now is the time where you look at the law, much 
like this Committee looks at the Administrative Procedure Act 
and has amended it close to 60 times over the past several 
years. It is time to look at the Regulatory Flexibility Act and 
ask, ``How can it work better?'' And H.R. 682 plugs many, if 
not all, of the loopholes that are contained in the Regulatory 
Flexibility Act.
    My office believes that the biggest loophole that needs to 
be closed is indirect impact. Agencies right now are required 
to examine how their rules will impact those who are directly 
regulated. But that doesn't extend to the logically foreseeable 
secondary impacts, tertiary impacts, and I believe it is the 
Government's responsibility to inform the public before 
finalizing rules and regulations how will this rule work? How 
will it impact consumers? How will it impact the tourist 
industry? How will this rule impact homeowners and community 
leaders?
    Those are the types of secondary and tertiary impacts that 
are sometimes ignored because the Reg Flex Act doesn't require 
it. H.R. 682 plugs that loophole.
    There are other loopholes that exist in the Regulatory 
Flexibility Act. My statement goes in some detail into how H.R. 
682 cures that and I am happy to answer any questions about the 
particulars of 682 or the Committee's curiosity on how my 
office works to enforce the Regulatory Flexibility Act.
    [The prepared statement of Mr. Sullivan follows:]

         Prepared Statement of the Honorable Thomas M. Sullivan




    Mr. Cannon. Thank you, Mr. Sullivan.
    Mr. Mihm?

    TESTIMONY OF J. CHRISTOPHER MIHM, MANAGING DIRECTOR FOR 
   STRATEGIC ISSUES, UNITED STATES GOVERNMENT ACCOUNTABILITY 
                     OFFICE, WASHINGTON, DC

    Mr. Mihm. Thank you, Mr. Chairman, Mr. Watt. It is, again, 
a great honor to appear before you again today and to 
contribute to your review of the Regulatory Flexibility Act and 
your continuing broad examination of administrative law 
processes and procedures.
    My written statement provides an overview of the basic 
purpose and requirements of the RFA, the main impediments to 
the act's implementation and the elements of RFA that Congress 
might consider amending to improve the effectiveness of the 
act. In the interest of brevity, this afternoon I will just hit 
the highlights of those issues.
    As Mr. Sullivan mentioned in his opening statement, RFA was 
enacted in response to concerns about the effect Federal 
regulations can have on small entities. Among other things, RFA 
prompts regulatory agencies to analyze the potential effects of 
the rules on those entities, consider alternatives to reduce 
the burden of those rules and ensure that small entities have 
an opportunity to participate in the rule-making process.
    As you mentioned in your opening statement, Mr. Chairman, 
in response to congressional requests, we have reviewed RFA's 
implementation on many occasions over many years, going back to 
the early 1990's. My bottom line today is that our prior 
reports have illustrated both the promise and the problems 
associated with RFA, with the recurring theme being the varying 
interpretations of RFA's requirements by Federal agencies. 
Although some progress has undoubtedly been made to address 
issues we identified, the full promise of the Regulatory 
Flexibility Act may never be realized until Congress either 
clarifies terms and definitions in the act or provides an 
agency with the clear authority and the responsibility to do 
so.
    It is also important to keep in mind the domino effect that 
an agency's initial determination of whether the Regulatory 
Flexibility Act is applicable to rule-making has on other 
statutory requirements. These other requirements can include, 
for example, preparing compliance guides for small entities and 
periodically reviewing existing regulations.
    More specifically, unclear terms and definitions can affect 
the applicability and effectiveness of regulatory reform 
requirements. We have frequently cited the need to clarify key 
terms in RFA, particularly--and this is the 800-pound gorilla, 
as it were--"the significant economic impact on a substantial 
number of small entities.'' RFA's requirements do not apply, as 
Mr. Sullivan mentioned, if an agency head certifies that a rule 
will not have that significant economic impact on a substantial 
number of small entities.
    However, RFA neither defines this key phrase, nor places 
responsibility on any party to determine it consistently across 
the Government. It is therefore not surprising that compliance 
with RFA has varied from one agency to another and that 
agencies have had different interpretations of the act's 
requirements.
    We have examined 12 years of annual reports from the Office 
of Advocacy, basically Tom's shop, and that these reports 
showed that compliance with RFA varied across agencies, within 
agencies and over time, a conclusion obviously shared by the 
Office of Advocacy in its own reports.
    We noted that some agencies have been repeatedly 
characterized as satisfying the requirements, but other 
agencies have been viewed as less compliant over time.
    One of the reasons for the agencies' lack of compliance 
with the Regulatory Flexibility Act requirements is that the 
act did not expressly authorize the SBA to interpret key 
provisions and did not require SBA to develop criteria for 
agencies to follow in reviewing their rules.
    It is important to note at this point that the Office of 
Advocacy's 2003 RFA compliance guide, while reiterating that 
the RFA does not define certain terms, nevertheless provides 
some suggestions for agencies on the subject.
    While the guidance and the associated training for agencies 
appear to have been very helpful, the key will be the degree to 
which agencies effectively and consistently apply that guidance 
and that training. In that regard, none of us know whether or 
not yet the extent or if the guidance and training has really 
made a substantive improvement in agencies' efforts to clarify 
some of the longstanding confusion about RFA requirements. We 
believe additional scrutiny and congressional monitoring of the 
RFA compliance may help to answer that question.
    Well, let me just conclude there and say once again that I 
appreciate the opportunity to testify on these important issues 
and obviously would be pleased to take any questions you or Mr. 
Watt might have.
    [The prepared statement of Mr. Mihm follows:]

               Prepared Statement of J. Christopher Mihm




    Mr. Cannon. Thank you, Mr. Mihm. We are actually sort of on 
a roll here. We had two people finish before the yellow light.
    Mr. Mihm. We take your guidance, sir.
    Mr. Cannon. I think you did this before, Mr. Mihm. Welcome 
back.
    Mr. Shull, you are recognized for 5 minutes.

 TESTIMONY OF J. ROBERT SHULL, DIRECTOR OF REGULATORY POLICY, 
                   OMB WATCH, WASHINGTON, DC

    Mr. Shull. Thank you very much, and thank you, Mr. Chairman 
and Mr. Watt, for having me before you to talk about this 
really important issue.
    I want to start from the simple proposition that no agency 
is in the business of producing regulations for the sake of 
producing regulations. We ask our agencies to produce 
regulations to protect the public, to protect all of us who are 
breathing the air, drinking the water, all of the men and women 
of America who have to work for a living and go to a job where 
they want to be safe and healthy.
    And small businesses, like all businesses, contribute to 
the hazards that we face, when we are breathing the air, 
drinking the water, going on the job, driving on the highways. 
And it really doesn't matter to all of us, to someone who is 
breathing dirty air or drinking poisoned water, whether the 
hazards that we are suddenly experiencing have been put there 
into our environment by small businesses or large businesses.
    But I also want to start from the proposition that small 
businesses want to be good corporate citizens, and that the 
best intention for helping small businesses and recognizing the 
fact that small businesses do face a different kind of hurdle 
than their larger counterparts when trying to comply with 
regulations, might need some assistance. But that the answer 
isn't to give them a free pass in any way, that the answer 
isn't to burden the agencies whose job it is to protect the 
public, but rather to help small businesses comply.
    We did hear that regulations have produced some costs for 
the economy and for the businesses who have to comply with 
them, but I think we also have to recognize that the benefits 
of regulation have been extraordinary. I mean, you can even 
look and measure in terms of I.Q. points when we took out lead 
from gasoline and now that kids aren't breathing that lead in 
from the air. You can see the measurable benefits, and that is 
one of many, many examples.
    I also want to recognize that, although the Reg Flex 
Improvements Act that we are looking at today has a lot of 
concerns about regulation and whether or not they are hindering 
the competitiveness of American business in the global 
marketplace, that the economics literature out there just 
doesn't support the case that in America our regulations are 
somehow hindering our businesses from competing.
    You can look at evidence of, say, plant location decisions. 
When we have environmental regulations, do plants that 
manufacture goods suddenly move to areas where there are less 
stringent environmental regulations? Or you can look at the 
trade flows: when environmental regulations become more 
stringent, do pollution-intensive goods start coming in from 
developing nations to developed nations? And that link just 
hasn't been shown.
    And because of that concern, we really think that there is 
no basis for the Reg Flex Improvements Act that we are looking 
at today. And I am concerned that it will really hinder the 
agencies from doing the good job that they are doing of 
protecting the people. I am concerned that the analysis itself 
that agencies have to perform under the Reg Flex Act will 
become more burdensome.
    I mean, already, there is a signal in the bill that a 
succinct statement is not enough, that we have to have a very 
detailed explanation. The burden will increase through the 
scope of it. It would no longer apply just to rule makings that 
go through the APA notice and comment process, but now it would 
also apply to guidance documents, general policy statements, 
interpretive rules, and land management plans, that the 
periodic re-reviews of rules under the Reg Flex Act, which were 
for 10-year reviews of rules found to have a SEISNOSE, a 
significant economic impact on a substantial number of small 
entities. Since the Regulatory Flexibility Act went into 
effect, that those now go back to all the rules on the books, 
even the rules that we know, like the ban on lead in gasoline, 
just are incredibly important, proven protections.
    We are also concerned about SBREFA panels now applying not 
just to EPA and OSHA rules, which we think were bad enough--it 
is giving business interests a first bite at the apple for 
those rules, but also applying to a significant number of other 
rules. We are also concerned about the SBA Office of Advocacy 
being put in a compromised position: if it is given regulatory 
authority over implementing the new requirements of the Reg 
Flex Improvements Act, that will compromise their role as an 
independent voice of small business.
    And we think that there is a better way. We have outlined 
some in our prepared statement, and I would like to offer a 
more complete version of that statement for the record after 
this hearing.
    [The prepared statement of Mr. Shull follows:]

                 Prepared Statement of J. Robert Shull




    Mr. Cannon. Thank you. Let us just ask unanimous consent 
that you have 5 additional days to submit that. Would that be 
sufficient?
    Mr. Shull. Thank you very much.
    Mr. Cannon. Without objection, so ordered. And, frankly, we 
understand that you were drawn into this late. That was a 
compelling statement given what apparently was a short time to 
prepare, and we thank you for being here.
    Mr. Frulla, you are recognized for 5 minutes. Thank you.

    TESTIMONY OF DAVID FRULLA, ESQUIRE, KELLEY DRYE COLLIER 
                    SHANNON, WASHINGTON, DC

    Mr. Frulla. Thank you, Mr. Chairman, Mr. Ranking Member.
    My perspective on the Regulatory Flexibility Act is as a 
10-year litigant. I have had over a dozen cases regarding six 
different agencies, rule-making proceedings, and we have 
prevailed about half the time. And we have gotten some 
substantive results. These aren't always things that are high 
profile, above-the-radar issues. In one case, we ended up with 
a settlement that involved a scientific re-review of a 67 
percent reduction in a quota for sharks that were caught in the 
Gulf and Atlantic.
    That review showed there was no scientific basis for that 
quota cut. Again, not every regulation is lead in gasoline. 
There is a lot that the Government does. Sometimes it goes 
awry. There needs to be checks and balances there. The 
Regulatory Flexibility Act is an important tool.
    And I would also note that a Regulatory Flexibility Act 
victory is only a first step. It is often a long haul to get an 
agency to change course. And I also have to tell you, and it is 
probably not a news flash to anybody here, that Federal 
agencies don't always listen to Federal judges.
    So SBREFA was a step in the right direction and this new 
legislation, H.R. 682, and equally importantly, the 
congressional attention that is being paid to the RFA, are 
right on point. Litigation does impose discipline. We get to 
see after 10 years weaknesses in the law that litigation shows 
in the same way as cross examination, but on the legal side.
    I would like to applaud especially H.R. 682's efforts to 
clarify jurisdictional issues and timing issues. We lay this 
out extensively in my written testimony. To address the 
foreseeable indirect effects, let me give you one example. A 
couple of years ago, I think it was, Congress wanted to impose 
cost-containment standards on what they call WIC-only vendors 
in the Women, Infant and Children Food and Nutrition Program.
    And it was clear that there were to be stores that are WIC-
only vendors, that essentially service that community, that 
were to be regulated and were to have their costs contained. 
However, the States regulated that level and the directive was 
for the States to make these changes.
    That is outside the Regulatory Flexibility Act as it 
currently stands, even though these small businesses were 
clearly the target, and the intended target. We also think it 
is going to be important to crystallize the Office of 
Advocacy's role in establishing how other agencies do reg-flex 
analyses. We had a case with the EPA at one point, and the 
EPA's reg flex guidance asks the question in terms of 
determining economic impact as what the impact of the 
regulation is on a business's gross revenues.
    They say, we don't need to look at profitability, and they 
said, well, you know, a 1 percent hit on gross revenues, that 
is not much. Well, it is a lot if you only have a 4 percent 
profit margin. But the court said the EPA had the discretion to 
use its own standards. That is something else that needs to be 
looked at, and that is something that the SBA has issued 
guidance on.
    Other issues we note, the standard of review. Normally, 
there is essentially what they call a good-faith standard. It 
is kind of backing up from an arbitrary and capricious 
standard. That is starting to get pretty toothless in many 
cases.
    I have addressed that in the testimony, some good results 
and some bad results. We submit that the arbitrary and 
capricious standard ought to apply to the no significant impact 
determinations. Clearly in the law, it is in the legislative 
history, and the same when the final regulatory flexibility 
analyses are reviewed.
    It also should be stated that application of the Reg Flex 
Act to a particular rule ought to be handled under the de novo 
standard, as should the question of whether an agency has 
flexibility under a given law. Another case we had, one page of 
law ended up with 47 pages of regulations and the agency said 
that they had no flexibility, and it was all required. That 
doesn't seem to make sense.
    Three other points I would like to mention quickly, 
expedition. Questions of whether the Regulatory Flexibility Act 
applies should be expedited. We are waiting 6 years for a final 
decision, when we know the answer from the D.C. circuit that 
the Reg Flex Act applies to nationwide permitting under the 
Clean Water Act. Attorneys' fees, got to put a plug in for 
that. If a small business prevails, they should be able to be 
awarded attorneys' fees. A victory on reg flex is only the 
start, and it shouldn't be a war of attrition. And, finally, 
make sure the Office of Advocacy has the resources they need.
    Thank you very much.
    [The prepared statement of Mr. Frulla follows:]

                 Prepared Statement of David E. Frulla




    Mr. Cannon. Thank you, Mr. Frulla.
    I appreciate all your testimony, and I recognize myself for 
5 minutes to ask some questions.
    It sounds like there is consensus that there are some 
improvements we can make and we need to try and achieve that in 
addressing this bill.
    Mr. Shull, recognizing you didn't have time to prepare, and 
you have heard what the other witnesses have said, I don't want 
to put you on the spot in this regard, but do you either have 
things that you would like to propose that we do better in the 
Regulatory Flexibility Act, or things that you have heard 
today--do things come to mind that you would oppose as you 
consider what has been said today?
    Mr. Shull. Yes, sir. I actually think that if the goal is 
to serve small businesses, that there are better ways other 
than the Reg Flex to go about serving that need. And, actually, 
something that would be in the jurisdiction of this Committee--
and that would serve not just small businesses but really all 
of us--might be to look at the petitions for rule-making under 
the APA.
    Because it can take a really long time for either public 
interest groups who have identified a need for new protections 
or more increased protections, or for business groups that have 
identified a standard that is out of date and they have a new 
way, a better way, of going about it.
    With the petition for rule-making process, what we can do 
is bring to the agencies a specific rule that needs to be 
improved and call for specific improvements. But the agencies 
can take a really long time to respond to the petitions or to 
do anything about it once they have recognized the need for 
improvement. I mean, it took over 10 years, and I don't know 
how many court battles, to get OSHA, after it recognized the 
need for improving the standard on hexavalent chromium, to 
actually get about the work of doing it, of protecting workers.
    So I think that that would be a better approach, something 
that is evenhanded that applies to business groups and public 
interest groups as well, and anybody else out there who sees a 
need for improvement, and it is more targeted. It doesn't drain 
the agencies' resources into going back and reopening the case 
for rules that we already know need to stay on the books and 
for just really sort of this meat ax approach, a clumsy 
approach, as opposed to a focused, targeted approach, where 
small businesses can bring up the rules they think need to be 
fixed, other groups can pull up needs that need to be met.
    I mean, there are other approaches as well, and there I 
think things outside of this Committee's jurisdiction that 
might also be very helpful for small businesses, that would 
help businesses comply without burdening agencies or without 
giving them a free pass from regulatory compliance. And one of 
them would be compliance assistance and making sure that there 
are compliance assistance offices in every congressional 
district, that can go about the work of helping small 
businesses understand what regulations they need to comply with 
and to help them figure out how to go about doing it.
    Plain language in regulation--if it is easier for 
businesses or anybody else to read the regulations and 
understand them. There was a bipartisan bill that Mrs. Miller 
and Mr. Lynch over on the Government Reform Committee proposed 
that would not do a thing about weakening regulatory standards, 
but just change the language in which they are written so that 
they are easier to comply with.
    I think that is another way for reducing cost without 
reducing the level of protection. And there are other ideas--
for example, the small business gateway I have heard proposed--
basically, informational resources, helping small businesses 
get the information they need in order to go about the work of 
being a good corporate citizen, which I think that we all agree 
they want to be.
    Mr. Cannon. Thank you. Have you been involved at all with 
our APA review process?
    Mr. Shull. Actually, I haven't, but I have followed it from 
afar and I look forward to getting more involved.
    Mr. Cannon. It has been a little bit arcane in the sense of 
hidden away, boxed up in an ark with some very, very smart 
people working on it. I am hoping that we can move that at some 
phase into a Wikipedia format so that it is online and people 
can contribute. I think that might be an easy way for you to 
get engaged and see what academics and others are looking at 
and bring it down to the real world of advocacy that you are 
thinking of.
    And we would invite you and you may want to talk to staff 
about how you can be engaged prior to that if you are 
interested. We appreciate your ideas.
    Mr. Shull. I appreciate that.
    Mr. Cannon. I don't know if you know, we have a hearing 
next week on the 60th anniversary of the APA.
    Mr. Shull. I will be here.
    Mr. Cannon. An arcane area of the law, but really actually, 
in the end, the most important. Thank you. My time has expired.
    Mr. Watt, you are recognized for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman, and I thank the 
witnesses for being here, apologize for being a little late.
    At the end of the day, I guess this is about a bill that is 
before us and whether it is supportable as written. I think I 
heard Mr. Shull's opinion on that. I am not sure I heard 
anybody else's.
    Mr. Sullivan, do you support H.R. 682 as written, or, if 
not, is there another, better bill? I understand there is a 
bill pending on the Senate side, S. 1388. Which one of those is 
better?
    Mr. Sullivan. Both bills improve the Regulatory Flexibility 
Act. A little bit of a dilemma in H.R. 682, if it were passed 
into law tomorrow or next week, my office does not have the 
resources to implement it effectively.
    The Senate bill that you refer to is a more targeted 
approach and contains many of the needed reforms of 682.
    Mr. Watt. Mr. Mihm, does the Administration support this 
682? Can you speak for the Administration?
    Mr. Mihm. GAO, the Government Accountability Office. I was 
actually hoping Mr. Sullivan would take the whole 5 minutes, 
but since he didn't, I will have to answer your question.
    As a congressional support agency, we don't typically 
support legislation----
    Mr. Watt. I am sorry, and I am not trying to put you on the 
spot.
    Mr. Mihm. But I will say, sir, that many of the types of 
concerns that our work has identified in the past about the 
lack of standardization and clarity in the RFA are, is what the 
bill is designed to address. In that sense, those types of 
legislative actions would be a step forward.
    Mr. Watt. Mr. Sullivan, you have mentioned secondary and 
tertiary indirect impacts on small business. I was kind of 
shuddering to think if the current law requires an assessment 
of direct impact, I can't even think of anything that wouldn't 
have some secondary, tertiary, indirect impact on small 
business and whether we are setting Government agencies up to 
spend all their time evaluating secondary, tertiary, indirect 
impacts. It seems to me burdensome enough to require them, 
expect them to do an assessment of what is foreseeable, not an 
academic exercise of what may be some possible impact.
    Talk to me about the cost of secondary, tertiary, indirect 
impact analysis, if you would.
    Mr. Sullivan. Thank you, Congressman Watt. H.R. 682 
actually balances that very question that you asked, and it 
does so by, I believe, expecting or mandating agencies to do 
impact analysis on those impacts that are reasonably 
foreseeable.
    Let me use an actual case example of how this works, 
because the words secondary and tertiary I think do----
    Mr. Watt. And that compares with what is the current 
standard?
    Mr. Sullivan. Currently, when an agency regulates, they 
look at who must comply directly with a regulation. After 
September 11th, when the then-referenced agency, INS, decided 
to limit visitor visas, they were limiting foreign visitors who 
come to the United States the time allowed to stay in the 
United States. Those were the direct impact of an INS-proposed 
rule.
    Now, how it should work, and what H.R. 682 would require 
INS to do, is to say, all right, is border security important? 
Yes. Let us look at how long we know visitors in the United 
States, foreign visitors, are legally in the United States, do 
the analysis.
    Now, who is impacted by limiting that length of stay? 
Tourism, high-end vacation homes, pouring millions of dollars 
into many destination spots, millions of dollars for Canadians 
crossing the border and going to destination spots in the 
United States. That type of analysis, the analysis of looking, 
well, if we limit their stay to 15 days, this is the economic 
impact, if we limit their stay to 30 days, here is the economic 
impact--that type of analysis, which actually is not very 
difficult, is all secondary impact analysis.
    And my office----
    Mr. Watt. So you are talking about foreseeable under this--
--
    Mr. Sullivan. Reasonably.
    Mr. Watt. Reasonably foreseeable under this bill. What is 
the language in the current----
    Mr. Sullivan. The language is silent on that, and, in fact, 
the courts have interpreted it only to require direct impact. 
So INS did not violate the letter of the law as it has been 
interpreted in courts, and David Frulla's testimony mentions 
those court decisions, as well as my testimony.
    But, when you step back, you have got to think, shouldn't 
INS have informed the public through the notice and comment 
process that you are more familiar with your understanding of 
the Administrative Procedure Act to say, we are thinking of 
limiting visitor stay. And we are thinking of limiting those 
foreign visitors for about 15 days, as opposed to the current 
30-day period. This is how we believe it will impact travel 
agencies, tourist destinations, white water rafting and 
outfitting companies, and we want you, the public, to comment 
on that type of analysis.
    That does not happen now under the Reg Flex Act, but it 
should happen, because it informs the regulatory process, and 
it informs agencies like INS on how to have a better, more 
well-informed regulation that is finalized. That is the need 
for the secondary impact analysis.
    Mr. Watt. There is nothing in the bill that really requires 
a tertiary impact? You are just talking about reasonably 
foreseeable?
    Mr. Sullivan. Reasonably foreseeable. And, again, it gets 
at what should agencies be doing that is responsible to inform 
the rule-making process? All over the country, we have States 
who are left in the position through delegated laws, whether 
that be environmental laws, safety and health laws, that passed 
these enormous mandates by the Federal Government that says 
protect the environment and you figure it out. Comply with the 
Clean Air Act standards, but you figure out how you regulate 
your own State.
    And these folks don't have chief counsels for advocacy. 
They don't have reams of chief economists. They need help in 
the Federal Government to actually lay out, here is how it may 
impact when you choose these different decisions. So there is a 
responsibility, I think, to help the State regulators figure 
out what should they be doing that is both cost effective and 
protective through the regulatory regimen that they are faced 
with.
    Mr. Watt. I am way out of time, but if the Chairman will 
indulge me, and I would like to get----
    Mr. Cannon. I can't see the red light.
    Mr. Watt. Mr. Mihm said he doesn't want to comment on which 
one of these bills is better. I did want to get Mr. Frulla on 
the record about whether he prefers the Senate bill or this 
bill, and even in light of Mr. Shull's disposition not to be 
doing any of this, I guess, even in that context, whether just 
kind of a straightforward one or two sentences on which one of 
these bills you would prefer. Just for the record.
    Mr. Frulla. I will be intensely practical. I think that the 
Senate bill is a little more targeted. This is obviously a 
little more thoroughgoing a bill. The most important thing is 
for folks to start to get to the business of reconciling these 
bills so that we can get the law fixed in a constructive way 
that everybody can agree on and work together on.
    I think the bills ought to come together, same place as Mr. 
Sullivan, essentially, and I think it is an important thing to 
do. And I don't want a little bit of disagreement on the 
margins to be something that holds this up because this is 
important to a lot of small businesses.
    Mr. Watt. Mr. Shull?
    Mr. Shull. I think maybe the way I can say it is by saying 
that although we object to the core elements that are there in 
both bills, it is worth noting that the Senate version of this 
bill does not have the sections that would give new regulatory 
authorities to the SBA Office of Advocacy, which we find a 
particularly additional problematic element of the bill. 
Because the voice of small business, we think, shouldn't be in 
the business of telling agencies how to comply with the law.
    Mr. Watt. Rather than telling them what is too burdensome.
    Mr. Shull. Right.
    Mr. Watt. Okay, thank you, Mr. Chairman.
    I thank the witnesses. That was very informative.
    Mr. Cannon. The gentleman yields back.
    Let me also thank the witnesses.
    I ask unanimous consent that the record be left open for 10 
days for follow-up questions by Members of the panel. Without 
objection, so ordered.
    Thank you for coming. This has been actually quite 
insightful, very interesting.
    And I know, Mr. Shull in particular, the idea of speedy 
decisions, we are plagued today with a number of cases where 
agencies are just not deciding, and that is in some cases bad 
for business. Often, it is bad for consumers, and so we look 
forward to your suggestions if we ever get to a public forum 
with our APA review, which I think would be helpful.
    Because I that, I think, is really the key to business. 
Industry moves so quickly, things happen so quickly in America 
today, a danger that didn't exist yesterday is here today and 
devastating.
    Perhaps tomorrow, the opportunity for business to 
significantly improve the quality of their products by having 
standards like the FDA's good manufacturing practices for 
nutritional supplements, we are just waiting for them. It 
doesn't really matter much what they are. They just need to be 
there and then consumers will have an idea of what they are 
getting, what the quality is of what they are getting.
    So the opportunity to improve how we regulate ourselves I 
think is significant. So we thank you for being here today.
    And, with that, we will adjourn.
    [Whereupon, at 1:06 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

 Revised Prepared Statement of J. Robert Shull, Director of Regulatory 
                   Policy, OMB Watch, Washington, DC




       Prepared Statement of the Honorable Donald A. Manzullo, a 
 Representative in Congress from the State of Illinois, and Chairman, 
                      Committee on Small Business



  Letter from Robert D. Evans, Director, Governmental Affairs Office, 
                     American Bar Association (ABA)



    Response to Post-Hearing Questions from the Honorable Thomas M. 
  Sullivan, Chief Counsel for Advocacy, United States Small Business 
                     Administration, Washington, DC



 Response to Post-Hearing Questions from J. Christopher Mihm, Managing 
Director for Strategic Issues, United States Government Accountability 
                         Office, Washington, DC



 Response to Post-Hearing Questions from J. Robert Shull, Director of 
              Regulatory Policy, OMB Watch, Washington, DC




 Response to Post-Hearing Questions from David Frulla, Esquire, Kelley 
                  Drye Collier Shannon, Washington, DC




                                 
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