[Federal Register Volume 68, Number 210 (Thursday, October 30, 2003)]
[Proposed Rules]
[Pages 61786-61788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27464]


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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 67 and 68

[USCG 2001-10048]


Vessel Documentation: ``Sold Foreign''

AGENCY: Coast Guard, DHS.

ACTION: Proposed rule; withdrawal.

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SUMMARY: The Coast Guard withdraws the proposed rule published on 
September 12, 2001, in which we sought comments on our interpretation 
of the term ``sold foreign,'' which may disqualify certain vessels 
whose ownership has become ``foreign'' in technical ways from 
eligibility for coastwise trade. While some affected parties claimed 
that this interpretation imposes a harsh penalty for slight, often 
unintended involvement, others feel that it just preserves the 
privilege of coastwise trade for the domestic fleet.

DATES: The proposed rule is withdrawn as of October 30, 2003.

FOR FURTHER INFORMATION CONTACT: Mr. Thomas Willis, Director, National 
Vessel Documentation Center, telephone 304-271-2506.

SUPPLEMENTARY INFORMATION:

Background

    On September 12, 2001, we published a request for comments notice 
in the Federal Register (66 FR 47431), inviting comments on how to 
interpret the term ``sold foreign''. We received ten comments. After 
review of these comments, we decided not to take any further action.

Discussion of Comments

    The request for comments posed several specific questions:
    1. Should the Coast Guard issue a formal letter-ruling addressing 
the proposed reorganization of a business entity before the entity 
undertakes the reorganization?
    2. a. If a qualified owner sells a vessel to an owner unqualified 
because foreign, should the unqualified owner be able to cure the 
defect through its own reorganization?
    b. Should the Coast Guard count as accomplishing a ``sale'' the 
reorganization of an owner that, until the reorganization, qualified to 
document vessels in accordance with 46 U.S.C. 12102? If so, should the 
owner be able to cure the defect through a second reorganization?
    c. If a business entity can reorganize to satisfy 46 U.S.C. 12102, 
so as to avoid a permanent loss of the privilege of coastwise trade, 
should a vessel sold to a natural person other than a citizen be able 
to regain the privilege upon the naturalization of that person?
    3. Should there be a time by which the reorganization posited in 
paragraph 2.a, the second reorganization posited in paragraph 2.b, or 
the naturalization posited in paragraph 2.c must either start or 
finish?
    We received six comments from maritime-industry associations 
representing a large number of U.S. owners and operators, three 
comments from vessel owners, and one joint comment from two law firms. 
All six associations opposed any change in the Coast Guard's current 
rule. They also opposed allowing reorganizations to cure defects after 
the fact, pointing out that affected vessel owners may seek legislative 
redress in a process that allows a public venue to evaluate the 
appropriate action to take. Two of the vessel owners, both eligible to 
own and operate coastwise-qualified vessels, affirmed their support for 
the associations; the third, which qualifies to document vessels, 
though not for purposes of coastwise trade, proposed an unrestricted 
right of cure when there is no accompanying transfer of flag.
    The joint comment from the two law firms opposes the current Coast 
Guard interpretation and petitions for rulemaking. The Coast Guard 
notes, however, that that comment in part mischaracterizes its rules. 
For example, the comment states that these rules permanently bar a 
vessel from coastwise privileges if sold to an owner that is not ``both 
a U.S. citizen and a person permitted to document vessels pursuant to 
46 CFR 68.'' In fact, the rules provide for loss of coastwise 
privileges under two circumstances: (1) the vessel is being sold to a 
person who is not a U.S. citizen eligible for full coastwise privileges 
(or, if the more limited coastwise privileges for a vessel operating 
under the Bowaters amendment or as an oil spill response vessel, to a 
person who is not qualified under the applicable statutes); or (2) the 
vessel is being sold to a person not permitted to document vessels 
pursuant to 46 U.S.C. 12102, and 46 CFR part 68. However, permanent 
loss of coastwise privileges results only if the vessel is sold to a 
person not eligible to document vessels. The comment also states that 
these rules fail to include vessels financed under 46 U.S.C. 12106(e) 
as vessels which would not be deemed sold foreign. Because vessels 
financed under 46 U.S.C. 12106(e) must be owned by persons eligible to 
document vessels under 46 U.S.C. 12102, the Coast Guard does not 
understand the comment.
    The joint comment also petitions for a rulemaking on the grounds 
that 46 CFR 67.19(d) directly contradicts the plain language of the 
Bowaters amendment in 46 U.S.C. app. 883-1, creating a limited 
privilege to engage in coastwise trade. The Coast Guard disagrees that 
46 CFR 67.19(d) contradicts the Bowaters privilege. The comment in this 
regard appears to assume that 46 CFR 67.19(d) requires U.S. 
``citizenship'' (by which it apparently means that the vessel must also 
be fully coastwise-qualified) and that it be qualified pursuant to the 
Bowaters amendment. However, this is not true. The Coast Guard holds 
that the vessel must (1) be eligible for documentation, that is, the 
corporation owning it must be qualified as a U.S. documentation citizen 
pursuant to 46 U.S.C. 12102, as implemented by 46 CFR 67.39(a), and (2) 
either meet the requirements of the Bowaters amendment pursuant to a 
certificate's so stating and having been filed with the Coast Guard 
pursuant to 46 CFR 67.39(d) (in which case it will qualify for a 
Bowaters coastwise endorsement), or meet the requirements specified in 
46 CFR Subpart 68.05 (in which case it will qualify for a limited 
coastwise endorsement to engage in oil-spill cleanup and training). By 
confusing these two separate and distinct requirements, this comment 
has misstated the Coast Guard's position. It cites Conoco v. Skinner, 
970 F.2d 1206 (DC Cir. 1992), in support of its position. However, a 
close reading of that case reveals that it does not support that 
position. Rather, the case (1) upholds the Coast Guard rules at issue 
as reasonable exercises of discretion committed to agencies (here, the 
Coast Guard and the Maritime

[[Page 61787]]

Administration), by Congress, and (2), more importantly, in the context 
of the issue at hand, does not deem invalid the regulatory requirement 
to qualify, that the corporate citizen must be a fully qualified 
documentation citizen as well as possess one of the two attributes 
(qualify pursuant to the Bowaters amendment or ownership by U.S. 
citizens of a minimum of 75 percent at every level in the entire chain 
of corporate ownership).
    The joint comment also contends that 46 CFR 67.19(d) should be 
revised to ``return to the original intent and to permit the correction 
of technical defects in citizenship.'' It asserts that the requirement 
that a U.S. citizen be chairman of the board or hold an equivalent 
position is such a ``technical defect'', relying, in part, on an 
Opinion Memo 16713 of the Coast Guard dated 8 April 1980 (``the G-LMI 
memo''). Of course, whether to change some 35 years of policy strictly 
applying the literal terms of the statute in respect of the 
requirements of the ``sold foreign'' provision in Section 27 of the 
Shipping Act of 1916 was, indeed, the purpose of the request for 
comments that preceded this notice. But the Coast Guard disagreed in 
1980 when the G-LMI memo was issued, and it disagrees today, that the 
law required the Coast Guard to change its policy. Rather, the Coast 
Guard believes now, just as it did then, that it has the discretion, 
notwithstanding the conclusions in the G-LMI memo, to apply the law 
strictly (as it had up to the point of publishing the request for 
comments on a possible change to that policy). It may be helpful in 
explaining this position to recount some of the legislative history of 
the Jones Act and some of the cabotage principles on which that law is 
based.
    Congress entrusted the Coast Guard with the responsibility, under 
46 U.S.C. Chapter 121, to administer the vessel documentation laws 
consistently with the Jones Act, 46 U.S.C. app. 802, 808, and 883 and 
46 U.S.C. 12106. The Coast Guard has held this responsibility 
continuously since 1967. We have historically implemented those laws 
with due regard to the important cabotage principles embodied in the 
Jones Act. We have endeavored in the past, as we do now, to carry out 
those principles as expressed by Congress in the Act itself and its 
legislative history, as well as in the lease-financing amendment and 
its legislative history.
    We are aware of the Congressional purpose of that Act, as explained 
on the floor of the House at the time of discussions on who could be a 
U.S. citizen for purposes of owning and operating a vessel in the U.S. 
coastwise trade. That purpose was expressed by Congressman Saunders, as 
follows:
    The amendment [to Section 2 of the Shipping Act] intends to make it 
impossible for any arrangement to be effected by which such a 
corporation, partnership or association shall be a citizen of the 
United States when the real control of same is in the hands of aliens. 
We have sought to make the language so sweeping and comprehensive that 
no lawyer, however ingenious, would be able to work out any device 
under this section to keep the letter, while breaking the spirit of the 
law. [See 56 Cong. Rec. 8029 (June 19, 1918).]
    None of the comments suggests that the Coast Guard lacks authority 
to amend its rules to adopt a more relaxed interpretation of the term 
``sold foreign'' so as to allow a vessel purchaser to cure the so-
called ``technical defects'' specified in the G-LMI memo, or to 
overcome those defects by reorganizing. Indeed, the Coast Guard has 
never doubted that Congress vested it with discretion to adopt a more 
liberal definition of that term.
    Congress has apparently acceded to the Coast Guard's approach of 
strictly applying the requirements of the statute in interpreting the 
term ``sold foreign''. It has, on several occasions, granted limited 
legislative relief from what it perceived as the harsh results of the 
Coast Guard's strict interpretation in the case of individual vessels. 
It is noteworthy, in this regard, that rather than change the 
legislative scheme generally, or instructing the Coast Guard to adopt a 
more liberal approach, it has chosen to act only in the cases of 
individual vessels when it thought relief was warranted. Pub. L. 105-
383, Section 403, is one example of such relief. In that law, Congress 
granted Bowaters coastwise privileges to vessels acquired by a company 
before it applied for, and was granted, a Bowaters certificate. 
Congress recognized that the vessels did not qualify under the Coast 
Guard's strict interpretation. They had not been acquired after the 
company obtained the necessary Bowaters certificate. Nevertheless, 
Congress granted Bowaters privileges to the vessels individually; but, 
significantly, it neither changed the underlying statute nor directed 
that the Coast Guard cease applying the statute strictly.
    The joint comment argues that qualification for Bowaters privileges 
exists irrespective of the filing of an application together with its 
attestation that the applicant qualifies. According to the comment, the 
filing of the application together with its attestation is a mere 
formality or ``technicality'' that is not a necessary pre-requisite to 
the qualification for Bowaters privileges. The issue is important 
because, if this view prevailed, a corporation could qualify its 
existing owned vessels, when it got around to filing the application 
together with its attestation--not just qualify newly acquired vessels 
after the application and the issuance of the qualification 
certificate. After considering all comments, and notwithstanding the G-
LMI memo, the Coast Guard believes that the problems of administering a 
documentation regime that allows persons who are not documentation 
citizens to ``correct'' their citizenship defects, and thereby ``cure'' 
those defects so as to be able to own and operate coastwise-qualified 
vessels, could act only on ad hoc, or case-by-case, determinations of 
what factual patterns would qualify. Such a regime does not lend itself 
to a statement of objective criteria in advance that would govern all 
such determinations.
    Such a regime would, in turn, inevitably lead to inconsistent 
results, to an increasingly burdensome and resource intensive-process, 
and ultimately to an administrative quagmire that would be worse than 
whatever perceived problems the current strict interpretation presents. 
Even the comments that support a more ``flexible'' or liberal policy 
and advocate revising the rules to incorporate such a policy 
acknowledge that it would result in corporate citizens' being treated 
differently in this respect from natural persons. Thus, they admit that 
a foreign natural person's vessel could never qualify for coastwise 
privileges, including the limited Bowaters privileges, because of 
Section 27. If that same person became a naturalized citizen, the 
vessel, owned by that person while an alien, could never qualify for 
coastwise privileges (even Bowaters exception privileges), whereas once 
that alien becomes a naturalized citizen any U.S.-built, coastwise-
qualified vessel (s)he acquired after the naturalization would continue 
to be fully coastwise-qualified.

Termination

    After review of all of the comments, the Coast Guard has concluded 
that it is inappropriate to change its current interpretation of the 
term ``sold foreign'' and has decided to terminate this project. The 
Coast Guard agrees with industry representatives that adopting 
procedures allowing entities to cure citizenship problems after the 
sales would contravene the cabotage principles upon which the Jones Act 
rests, and that owners of affected vessels

[[Page 61788]]

should seek redress through the legislative process. The Coast Guard 
believes that this approach best effectuates the intent of Congress and 
the expectations and needs of maritime commerce.

    Dated: October 27, 2003.
L. L. Hereth,
Acting Assistant Commandant for Marine Safety, Security and 
Environmental Protection.
[FR Doc. 03-27464 Filed 10-28-03;1:07 pm]
BILLING CODE 4910-15-P