The U.S. Department of Energy (DOE) proposed revisions to its existing certification, compliance, and enforcement regulations for certain consumer products and commercial and industrial equipment covered under the Energy Policy and Conservation Act of 1975, as amended (EPCA or the “Act”), in a notice of proposed rulemaking (NOPR) published in the Federal Register on September 16, 2010. 75 FR 56796. These regulations provide for sampling plans used in determining compliance with existing standards, manufacturer submission of compliance statements and certification reports to DOE, maintenance of compliance records by manufacturers, and the availability of enforcement actions for improper certification or noncompliance with an applicable standard. The NOPR informed interested parties that DOE would accept written comments through October 18, 2010.

The Air-Conditioning, Heating, and Refrigeration Institute (AHRI) requested an extension of the time to submit comments. In its request, AHRI stated that the additional time is necessary for AHRI and its members to properly respond to the questions and issues raised in the proposed rule given the potential impact of the proposed rule on the air conditioning, heating and refrigeration industry.

Based on AHRI's request and the number of questions and issues raised during the public meeting, DOE believes that extending the comment period to allow additional time for interested parties to submit comments is appropriate. Therefore, DOE is extending the comment period until October 29, 2010 to provide interested parties additional time to prepare and submit comments. DOE will accept comments received no later than October 29, 2010 and will not consider any further extensions to the comment period.

Prior to the enactment of the Dodd-Frank Act, Public Law 111-203, 12 U.S.C. 5301 et seq., on July 21, 2010, there was no common or adequate statutory scheme for the orderly liquidation of a financial company whose failure could adversely affect the financial stability of the United States. Instead, insured depository institutions were subject to an FDIC-administered receivership under applicable provisions of the Federal Deposit Insurance Act (“FDI Act”), insurance companies were subject to insolvency proceedings under individual State's laws, registered brokers and dealers were subject to the U.S. Bankruptcy Code and proceedings under the Securities Investor Protection Act, and other companies (including the parent holding company of one or more insured depository institutions or other financial companies) were eligible to be a debtor under the U.S. Bankruptcy Code. These disparate insolvency regimes were found to be inadequate to effectively address the actual or potential failure of a financial company that could adversely affect economic conditions or financial stability in the United States. In such a case, financial support for the company sometimes was the only viable option available for the Federal government to avoid or mitigate serious adverse effects on economic conditions and financial stability that could result from the company's failure.

With the enactment of the Dodd-Frank Act, Federal regulators have the tools to resolve a failing financial company that poses a significant risk to the financial stability of the United States. The receivership process established under Title II of the Dodd-Frank Act provides for an orderly liquidation of such a “covered financial company” in a way that addresses the concerns and interests of legitimate creditors while also protecting broader economic and taxpayer interests.

Title II of the Dodd-Frank Act provides a process for the appointment of the FDIC as receiver of a failing financial company that poses significant risk to the financial stability of the United States (a “covered financial company”). Under this process, certain designated Federal regulatory agencies must recommend to the Secretary of the Treasury (the “Secretary”) that the Secretary, after consultation with the President, make a determination that grounds exist to appoint the FDIC as receiver of the company. The Federal Reserve Board and the Securities and Exchange Commission will make the recommendation if the company or its largest U.S. subsidiary is a broker or a dealer; the Federal Reserve Board and the Director of the Federal Insurance Office will make the recommendation if the company or its largest subsidiary is an insurance company; and the Federal Reserve Board and the FDIC will make the recommendation in all other cases. This procedure is similar to that which is applied to systemic risk determinations under section 13 of the FDI Act (12 U.S.C. 1823(c)(4)).

The Dodd-Frank Act requires that recommendations to the Secretary include an evaluation of whether the covered financial company is in default or in danger of default, a description of the effect that the company's default would have on the financial stability of the United States, and an evaluation of why a case under the Bankruptcy Code would not be appropriate. In determining whether the FDIC should be appointed as receiver, the Secretary must make specific findings in support, including: that the company is in default or in danger of default; that the failure of the company and its resolution under otherwise applicable Federal or State law would have serious adverse effects on financial stability in the United States; no viable private sector alternative is available; any effect on the claims or interests of creditors, counterparties, and shareholders is appropriate; any action under the liquidation authority will avoid or mitigate such adverse effects taking into consideration the effectiveness of the action in mitigating the potential adverse effects on the financial system, cost to the general fund of the Treasury, and the potential to increase excessive risk taking; a Federal regulatory agency has ordered the company to convert all of its convertible debt instruments that are subject to regulatory order; and the company satisfies the definition of a financial company under the law.

If the Secretary makes the recommended determination and the board of directors (or similar governing body) of the company acquiesces or consents to the appointment, then the FDIC's appointment as receiver is effective immediately. If the company's governing body does not acquiesce or consent, the Dodd-Frank Act provides for immediate judicial review by the United States District Court for the District of Columbia of whether the Secretary's determinations that the covered financial company is in default or danger of default and that it meets the definition of financial company under Title II are arbitrary and capricious. 1 If the court upholds the Secretary's determination, it will issue an order authorizing the Secretary to appoint the FDIC as receiver. 2 If the court fails to act within twenty-four hours of receiving the petition, then the appointment of the receiver takes effect by operation of law.

Title II of the Dodd-Frank Act (entitled “Orderly Liquidation Authority”) also defines the policy goals of the liquidation proceedings and provides the powers and duties of the FDIC as receiver for a covered financial company. Section 204(a)  3 succinctly summarizes those policy goals as the liquidation of “failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.” The statute goes on to say that “creditors and shareholders will bear the losses of the financial company” and the FDIC is instructed to liquidate the covered financial company in a manner that maximizes the value of the company's assets, minimizes losses, mitigates risk, and minimizes moral hazard. See sections 204(a) and 210(a)(9)(E). Fundamentally, a liquidation under the Dodd-Frank Act is a liquidation of the company that imposes the losses on its creditors and shareholders. Not only is the FDIC prohibited from taking an equity interest in or becoming a shareholder of a covered financial company or any covered subsidiary, but other provisions of the Dodd-Frank Act bar any Federal government bail-out of a covered financial company. See section 210(h)(3)(B). In this way, the statute will prevent any future taxpayer bailout by providing a liquidation process that will prevent a disorderly collapse, while ensuring that taxpayers bear none of the costs.

Similarly, management, directors, and third parties who are responsible for the company's failing financial condition will be held accountable. The FDIC must remove any management and members of the board of directors of the company who are responsible for the failing condition of the covered financial company. See section 206.

While ensuring that creditors bear the losses of the company's failure under a specific claims priority, Title II incorporates procedural and other protections for creditors to ensure that they are treated fairly. For example, creditors can file a claim with the receiver and, if dissatisfied with the decision, may file a case in U.S. district court in which no deference is given to the receiver's decision. See section 210(a)(2)-(4). Once claims are proven, the FDIC has the authority to make interim payments to the creditors, consistent with the priority for payment of their allowed claims, as it does in resolutions of insured depository institutions. This accelerated or advance dividend authority, provided in section 210(a)(7), is a valuable tool to provide payments to creditors and lessen the economic and financial impact of the liquidation. In addition, creditors also are guaranteed that they will receive no less than the amount they would have received if the covered financial company had been liquidated under Chapter 7 of the Bankruptcy Code. See section 210(a)(7)(B) and (d)(2)(B). Shareholders of a covered financial company will not receive payment until after all other claims are fully paid. See section 210(b)(1). This helps ensure that the priority of payments will be enforced.

Parties who are familiar with the liquidation of insured depository institutions under the FDI Act or the liquidation of companies under the Bankruptcy Code will recognize many parallel provisions in Title II. Some provisions are drawn from analogous provisions of the Bankruptcy Code in order to clarify and supplement the authority that the FDIC normally exercises in a bank receivership. The provisions of Title II governing the claims process (including the availability of judicial review of claims disallowed by the receiver), the termination or repudiation of contracts, and the treatment of qualified financial contracts are modeled after the FDI Act, while provisions that empower the FDIC to avoid and recover fraudulent transfers, preferential transfers, and unauthorized transfers of property by the covered financial company are drawn from Bankruptcy Code provisions. The rules of Title II governing the setoff of mutual debt provide equivalent protections to those under the Bankruptcy Code.

The liquidation rules of Title II are designed to create parity in the treatment of creditors with the Bankruptcy Code and other normally applicable insolvency laws. This is reflected in the direct mandate in section 209 of the Dodd-Frank Act to “to seek to harmonize applicable rules and regulations promulgated under this section with the insolvency laws that would otherwise apply to a covered financial company.” One of the goals of the Proposed Rule would be to begin the implementation of this mandate in certain key areas. Of particular significance is § 380.2 of the Proposed Rule, which clarifies that the authority to make additional payments to certain creditors will never be used to provide additional payments, beyond those appropriate under the defined priority of payments, to shareholders, subordinated debt holders, and bondholders. The FDIC, in this Proposed Rule, is proposing that the creditors of the covered financial company will never meet the statutory criteria for receiving such additional payments.

Fundamental to an orderly liquidation of a covered financial company is the ability to continue key operations, services, and transactions that will maximize the value of the firm's assets and avoid a disorderly collapse in the market place. The FDIC has long had authority under the Federal Deposit Insurance Act to continue operations after the closing of failed insured banks if necessary to maximize the value of the assets in order to achieve the “least costly” resolution or to prevent “serious adverse effects on economic conditions or financial stability.” 12 U.S.C. 1821(d) and 1823(c). Under the Dodd-Frank Act, the corresponding ability to continue key operations, services, and transactions is accomplished, in part, through authority for the FDIC to charter a bridge financial company. The bridge financial company is a completely new entity that will not be saddled with the shareholders, debt, senior executives or bad assets and operations that contributed to the failure of the covered financial company or that would impede an orderly liquidation. Shareholders, debt holders, and creditors will receive “haircuts” based on a clear priority of payment set out in section 210(b). As in prior bridge banks used in the resolution of large insured depository institutions, however, the bridge financial company authority will allow the FDIC to stabilize the key operations of the covered financial company by continuing valuable, systemically important operations.

This authority is an important tool for the elimination of “too big to fail” because it provides the FDIC with the authority to prevent a disorderly collapse, while ensuring that bail-outs of failing companies will not occur. However, overly broad application of this authority could lead creditors to assume that they will be protected and impair the needed market discipline. For this reason, it is essential that the FDIC clarify that certain categories of creditors will never receive additional payments under this authority, that all unsecured and under-secured creditors of the failed company should expect that they will incur losses, and that the statutory standards for application of this authority will be rigorously applied in the liquidation of a covered financial company.

To emphasize that all unsecured creditors should expect to absorb losses along with other creditors, the Proposed Rule clarifies the narrow circumstances under which creditors could receive any additional payments or credit amounts under Sections 210(b)(4), (d)(4), or (h)(5)(E). Under the Proposed Rule, such payments or credit amounts could be provided to a creditor only if the FDIC Board of Directors, by a recorded vote, determines that the payments or credits are necessary and meet the requirements of Sections 210(b)(4), (d)(4), or (h)(5)(E), as applicable. The Proposed Rule further provides that the authority of the Board to make this decision cannot be delegated to management or staff of the FDIC. By requiring a vote by the Board, the Proposed Rule will require a decision on the record and ensure that the governing body of the FDIC has made a specific determination that such payments are necessary to the essential operations of the receivership or bridge financial company, to maximize the value of the assets or returns from sale, or to minimize losses.

Assets and operations that are necessary to maximize the value in the liquidation or prevent a disorderly collapse can be continued seamlessly through the bridge financial company. This is supported by the clear statutory provisions that contracts transferred to the bridge financial company cannot be terminated simply because they are assumed by the bridge financial company. See section 210(c)(10). As in the FDI Act, the FDIC has the authority to require contracting parties to continue to perform under their contracts if the contracts are needed to continue operations transferred to the bridge. Under the Dodd-Frank Act, the contracting parties must continue to perform so long as the bridge company continues to perform. In contrast to the Bankruptcy Code, the FDIC under the Dodd-Frank Act can similarly require parties to financial market contracts to continue to perform so long as statutory notice of the transfer is provided within one business day after the FDIC is appointed as receiver. This is an important tool to allow the FDIC to maximize the value of the failed company's assets and operations and to avoid market destabilization. This authority will help preserve the value of the company by allowing continuation of critical business operations. If financial market contracts are transferred to the bridge company, it also can prevent the immediate and disorderly liquidation of collateral during a period of market distress. This cannot be done under the Bankruptcy Code. The absence of funding for continuing valuable contracts and the rights of counterparties under the Bankruptcy Code to immediately terminate those contracts resulted in a loss of billions of dollars in market value to the bankruptcy estate in the Lehman insolvency. 4

The bridge financial company arrangement will provide a timely, efficient, and effective means for preserving value in an orderly liquidation and avoiding a destabilizing and disorderly collapse. While the covered financial company's board of directors and the most senior management responsible for its failure will be replaced, as required by section 204(a)(2), operations would be continued by the covered financial company's employees under the strategic direction of the FDIC and contractors employed by the FDIC to help oversee those operations. Section 380.2 of the Proposed Rule addresses the treatment of these employees.

To achieve these goals, the FDIC is given broad authority under the Dodd-Frank Act to operate or liquidate the business, sell the assets, and resolve the liabilities of a covered financial company immediately after its appointment as receiver or as soon as conditions make this appropriate. This authority will enable the FDIC to act immediately to sell assets of the covered financial company to another entity or, if that is not possible, to an FDIC-created bridge financial company while maintaining critical functions. In receiverships of insured depository institutions, the ability to act quickly and decisively has been found to reduce losses to the deposit insurance funds while maintaining key banking services for depositors and businesses, and it is expected to be equally crucial in resolving non-bank financial firms under the Dodd-Frank Act.

A vital element in a prompt sale to other private sector companies or the continuation of essential operations in the bridge financial company is the availability of funding for those operations. The liquidity available under the Dodd-Frank Act will allow both sales at better value and a more orderly liquidation. The Act provides that the FDIC may borrow funds from the Department of the Treasury to provide liquidity for the operations of the receivership and the bridge financial company. See sections 204(d) and 210(n). The bridge financial company also can access debtor-in-possession financing as needed. Once the new bridge financial company's operations have stabilized as the market recognizes that it has adequate funding and will continue key operations, the FDIC would move as expeditiously as possible to sell operations and assets back into the private sector.

Extensive pre-planning is essential for the effective use of these powers. Advance planning will improve the likelihood that the assets or operations of a failed financial company can be sold immediately or shortly after creation of the bridge financial company to other private sector companies. This should be an expected product of the advance planning mandates of the Dodd-Frank Act. Those mandates will require both regulators and senior management of large, complex financial companies to focus more intently on enhancing the resiliency and resolvability of the companies' operations. This, in turn, will improve the efficiency and speed at which those operations can be transferred to other private companies and both greatly enhance the effectiveness of crisis management and reduce the extent of governmental intervention in the resolution of any future crisis.

Such advance planning, a well-developed resolution plan, and access to the supporting information needed to undertake such planning has been a critical component of the FDIC's ability to smoothly resolve failing banks. This critical issue is addressed in the Dodd-Frank Act in provisions that grant the FDIC back-up examination authority and require the largest companies to submit so-called “living wills” or resolution plans that will facilitate a rapid and orderly resolution of the company under the Bankruptcy Code. See section 165(d). An essential part of such plans will be to describe how this process can be accomplished without posing systemic risk to the public and the financial system. If the company cannot submit a credible resolution plan, the statute permits the FDIC and the Federal Reserve to jointly impose increasingly stringent requirements that, ultimately, can lead to divestiture of assets or operations identified by the FDIC and the Federal Reserve to facilitate an orderly resolution. The FDIC and the Federal Reserve will jointly adopt a rule to implement the resolution plan requirements of the Dodd-Frank Act. The availability of adequate information and the establishment of feasible resolution plans are all the more critical because the largest covered financial companies operate globally and their liquidation will necessarily involve coordination among regulators around the world.

To strengthen the foundation for effective resolutions, the FDIC also will promulgate other rules and provide additional guidance in consultation with the members of the Financial Stability Oversight Council to ensure a credible liquidation process that realizes the goal of ending “too big to fail” while enhancing market discipline.

This highlights another key component of preparedness: the necessity of advance planning with other potentially affected regulators internationally. The Dodd-Frank Act's framework for an orderly liquidation provides the United States with the vital elements to prevent contagion in any future crisis, while closing the firms and making the creditors and shareholders bear the losses. For this process to work most efficiently, however, it is essential that legal and policy reforms are adopted in key foreign jurisdictions so that the cross-border operations of the covered financial company can be liquidated consistently, cooperatively, and in a manner that maximizes their value and minimizes the costs and negative effects on the financial system. The key reforms involve recognition in the foreign legal and regulatory systems where the FDIC would control the company's assets and operations; and that the FDIC would have the authority, subject to appropriate assurances that the FDIC will meet ongoing commitments, to continue the covered financial company's operations to facilitate an orderly wind-down of the company. Through the framework provided by the Dodd-Frank Act, the FDIC is working to facilitate these reforms and is engaged with foreign regulators in the work required to improve cooperation and ensure a much better process is implemented in any future liquidation involving a cross-border company.

Section 209 of the Dodd-Frank Act authorizes the FDIC, in consultation with the Financial Stability Oversight Council, to prescribe such rules and regulations as the FDIC considers necessary or appropriate to implement Title II. Section 209 also provides that, to the extent possible, the FDIC shall seek to harmonize such rules and regulations with the insolvency laws that would otherwise apply to a covered financial company. The purpose of the Proposed Rule is to provide guidance on certain key issues in order to provide clarity and certainty to the financial industry and to ensure that the liquidation process under Title II reflects the Dodd-Frank Act's mandate of transparency in the liquidation of failing systemic financial companies. In this notice of proposed rulemaking, the FDIC also is posing broad and specific questions to solicit public comment on potential additional issues that may require clarification in a broader notice of proposed rulemaking in the future.

The Proposed Rule addresses discrete issues within the following broad areas:

(1) The priority of payment to creditors (by defining categories of creditors who shall not receive any additional payments under section 210(b)(4), (d)(4), and (h)(5)(E));

(2) The authority to continue operations by paying for services provided by employees and others (by clarifying the payment for services rendered under personal services contracts);

(3) The treatment of creditors (by clarifying the measure of damages for contingent claims); and

(4) The application of proceeds from the liquidation of subsidiaries (by reiterating the current treatment under corporate and insolvency law that remaining shareholder value is paid to the shareholders of any subsidiary).

Definitions. Section 380.1 of the Proposed Rule provides that the terms “bridge financial company,” “Corporation,” “covered financial company,” “covered subsidiary,” “insurance company,” and “subsidiary” would have the same meanings as in the Dodd-Frank Act.

Treatment of Similarly Situated Creditors. The Dodd-Frank Act permits the FDIC to pay certain creditors of a receivership more than similarly situated creditors if it is necessary to: (1) “Maximize the value of the assets”; (2) initiate and continue operations “essential to implementation of the receivership and any bridge financial company”; (3) “maximize the present value return from the sale or other disposition of the assets”; or (4) “minimize the amount of any loss” on sale or other disposition. The appropriate comparison for any additional payments received by some, but not all, creditors similarly situated is the amount that the creditors should have received under the priority of expenses and unsecured claims defined in Section 210(b) and other applicable law. In addition, the Dodd-Frank Act requires that all creditors of a class must receive no less than what they would have received in a case under Chapter 7 of the Bankruptcy Code. See section 210(d)(2)(B).

These provisions parallel authority the FDIC has long had under the Federal Deposit Insurance Act to continue operations after the closing of failed insured banks if necessary to maximize the value of the assets in order to achieve the “least costly” resolution or to prevent “serious adverse effects on economic conditions or financial stability.” 12 U.S.C. 1821(d) and 1823(c). As is well illustrated by comparisons with some liquidations under the Bankruptcy Code, the inability to continue potentially valuable business operations can seriously impair the recoveries of creditors and increase the costs of the insolvency. In bank resolutions under the “least costly” requirement of the Federal Deposit Insurance Act, many institutions purchasing failed bank operations have paid a premium to acquire all deposits because of the recognized value attributable to acquiring ongoing depositor relationships. In those cases, the sale of all deposits to the acquiring institutions has maximized recoveries and minimized losses consistent with the “least costly” requirement.

The ability to maintain essential operations under the Dodd-Frank Act would be expected to similarly minimize losses and maximize recoveries in any liquidation, while avoiding a disorderly collapse. Examples of operations that may be essential to the implementation of the receivership or a bridge financial company include the payment of utility and other service contracts and contracts with companies that provide payments processing services. These and other contracts will allow the bridge company to preserve and maximize the value of the bridge financial company's assets and operations to the benefit of creditors, while preventing a disorderly and more costly collapse.

To clarify the application of these provisions and to ensure that certain categories of creditors cannot expect additional payments, § 380.2 of the Proposed Rule would define certain categories of creditors who never satisfy this requirement. Specifically, this section would put creditors of a potential covered financial company on notice that bond holders of such an entity that hold certain unsecured senior debt with a term of more than 360 days will not receive additional payments compared to other general creditors such as general trade creditors or any general or senior liability of the covered financial company, nor will exceptions be made for favorable treatment of holders of subordinated debt, shareholders or other equity holders. The rule focuses on long-term unsecured senior debt ( i.e., debt maturing more than 360 days after issuance) in order to distinguish bondholders from commercial lenders or other providers of financing who have made lines of credit available to the covered financial company that are essential for its continued operation and orderly liquidation.

The treatment of long-term unsecured senior debt under the Proposed Rule is consistent with the existing treatment of such debt in bank receiverships. The FDIC has long had the authority to make additional payments to certain creditors after the closing of an insured bank under the Federal Deposit Insurance Act, 12 U.S.C. 1821(i)(3), where it will maximize recoveries and is consistent with the “least costly” resolution requirement or is necessary to prevent “serious adverse effects on economic conditions or financial stability.” 12 U.S.C. 1821(d) and 1823(c). In applying this authority, the FDIC has not made additional payments to shareholders, subordinated debt, or long-term senior debt holders of banks placed into receivership because such payments would not have helped maximize recoveries or contribute to the orderly liquidation of the failed banks. This experience supports the conclusion that the Proposed Rule appropriately clarifies that shareholders, subordinated debt, or long-term senior debt holders of future non-bank financial institutions resolved under the Dodd-Frank Act should never receive additional payments under the authority of Sections 210(b)(4), (d)(4), or (h)(5)(E).

While the Proposed Rule would distinguish between long-term unsecured senior debt and shorter term unsecured debt, this distinction does not mean that shorter term debt will be provided with additional payments under sections 210(b)(4), (d)(4) or (h)(5)(E) of the Dodd-Frank Act. As general creditors, such debt holders normally will receive the amount established and due under section 210(b)(1), or other priorities of payment specified by law. While they may receive additional payments under the Proposed Rule, this will be evaluated on a case-by-case basis and will only occur when such payments meet all of the statutory requirements.

A major driver of the financial crisis and the panic experienced by the market in 2008 was in part due to an overreliance by many market participants on funding through short-term, secured transactions in the repurchase agreement market using volatile, illiquid collateral, such as mortgage-backed securities. In applying its powers under the Dodd-Frank Act, the FDIC must exercise a great deal of caution in valuing such collateral and will review the transaction to ensure it is not under-collateralized. Under applicable law, if the creditor is under-secured due to a drop in the value of such collateral, the unsecured portion of the claim will be paid as a general creditor claim. In contrast, if the collateral consists of U.S. Treasury securities or other government securities as collateral, the FDIC will value these obligations at par.

This provision must also be considered in concert with the express provisions of section 203(c)(3)(A)(vi). This subsection requires a report to Congress not later than 60 days after appointment of the FDIC as receiver for a covered financial company specifying “the identity of any claimant that is treated in a manner different from other similarly situated claimants,” the amount of any payments and the reason for such action. In addition, the FDIC must post this information on a Web site maintained by the FDIC. These reports must be updated “on a timely basis” and no less frequently than quarterly. This information will provide other creditors with full information about such payments in a timely fashion that will permit them to file a claim asserting any challenges to the payments. The Dodd-Frank Act also includes the power to “claw-back” or recoup some or all of any additional payments made to creditors if the proceeds of the sale of the covered financial company's assets are insufficient to repay any monies drawn by the FDIC from Treasury during the liquidation. 12 U.S.C. 5390(o)(1)(D). This provision underscores the importance of a strict application of the authority provided in sections 210(b)(4), (d)(4), and (h)(5)(E) of the Dodd-Frank Act and will help ensure that if there is any shortfall in proceeds of sale of the assets the institution's creditors will be assessed before the industry as a whole. Most importantly, under no circumstances in a Dodd-Frank liquidation will taxpayers ever be exposed to loss.

The Proposed Rule would expressly distinguish between ongoing credit relationships with lenders who have provided lines of credit that are necessary for maintaining ongoing operations. Under section 210(c)(13)(D) of the Dodd-Frank Act, the FDIC can enforce lines of credit to the covered financial company and agree to repay the lender under the credit agreement. In some cases such lines of credit may be an integral part of key operations and be essential to help the FDIC maximize the value of the failed company's assets and operations. In such cases, it may be more efficient to continue such lines of credit and, if appropriate, reduce the demands for funding from the Orderly Liquidation Fund.

Personal Services Agreements. Section 380.3 of the Proposed Rule concerns personal services agreements, which would include, without limitation, collective bargaining agreements. Like other contracts with the covered financial company, a personal services agreement would be subject to repudiation by the receiver if the agreement is determined to be burdensome and its repudiation would promote the orderly liquidation of the company. Prior to determining whether to repudiate, however, the FDIC as receiver may need to utilize the services of employees who have a personal services agreement with the covered financial company. The Proposed Rule would provide that if the FDIC accepts services from employees during the receivership or any period where some or all of the operations of the covered financial company are continued by a bridge financial company, those employees would be paid according to the terms and conditions of their personal service agreement and such payments would be treated as an administrative expense of the receiver. The acceptance of services from the employees by the FDIC as receiver (or by a bridge financial company) would not impair the receiver's ability subsequently to repudiate a personal services agreement. 5 The Proposed Rule also would make clear that a personal service agreement would not continue to apply to employees in connection with a sale or transfer of a subsidiary or the transfer of certain operations or assets of the covered financial company unless the acquiring party expressly agrees to assume the personal service agreement. Likewise, the transfer would not be predicated on such assumption. Subparagraph (e) of § 380.3 would make clear that the provision for payment of employees would not apply to senior executives or directors of the covered financial company, 6 nor would it impair the ability of the receiver to recover compensation previously paid to senior executives or directors under section 210(s) of the Dodd-Frank Act. The definition of “senior executive” in this section substantially follows the definition of “executive officer” in Regulation O of the Board of Governors of the Federal Reserve System (12 CFR 215.2). This definition is commonly understood and accepted.

Contingent Obligations. Section 380.4 of the Proposed Rule would recognize that contingent obligations are provable under the Dodd-Frank Act. See section 201(a)(4), defining the term “claim” to include a right of payment that is contingent, and section 210(c)(3)(E), providing for damages for repudiation of a contingent obligation in the form of a guarantee, letter of credit, loan commitment, or similar credit obligation. The Proposed Rule would apply to contingent obligations consisting of a guarantee, letter of credit, loan commitment, or similar credit obligation that becomes due and payable upon the occurrence of a specified future event. For an obligation to be considered contingent, the future event (i) cannot occur by the mere passage of time ( i.e., the arrival of a certain date on the calendar); (ii) cannot be made to occur (or not) by either party; and (iii) cannot have occurred as of the date of the appointment of the receiver. In addition, the FDIC holds the view that an obligation in the form of a guarantee or letter of credit is no longer contingent if the principal obligor ( i.e., the party whose obligation is backed by the guarantee or letter of credit) becomes insolvent or is the subject of insolvency proceedings.

Paragraph (b) of § 380.4 would recognize that contingent claims may be provable against the receiver. Thus, for example, where a guarantee or letter of credit becomes due and payable after the appointment of the receiver, the receiver will not disallow a claim solely because the obligation was contingent as of the date of the appointment of the receiver.

Paragraph (c) of § 380.4 would implement section 210(c)(3)(E), which authorizes the FDIC to promulgate rules and regulations providing that damages for repudiation of a contingent guarantee, letter of credit, loan commitment, or similar credit obligation shall be measured based upon the likelihood that such contingent obligation would become fixed and the probable magnitude of the claim.

Insurance Company Subsidiaries. Section 380.5 of the Proposed Rule would provide that where the FDIC acts as receiver for a direct or indirect subsidiary of an insurance company that is not an insured depository institution or an insurance company itself, the value realized from the liquidation or other resolution of the subsidiary will be distributed according to the priority of expenses and unsecured claims set forth in section 210(b)(1) of the Dodd-Frank Act. In order to clarify that such value will be available to the policyholders of the parent insurance company to the extent required by the applicable State laws and regulations, the Proposed Rule would expressly recognize the requirement that the receiver remit all proceeds due to the parent insurance company in accordance with the order of priority set forth in section 210(b)(1).

Liens on Insurance Company Assets. Section 380.6 of the Proposed Rule would limit the ability of the FDIC to take liens on insurance company assets and assets of the insurance company's covered subsidiaries, under certain circumstances after the FDIC has been appointed receiver. Section 204 of the Dodd-Frank Act permits the FDIC to provide funding for the orderly liquidation of covered financial companies and covered subsidiaries that the FDIC determines, in its discretion, are necessary or appropriate by, among other things, making loans, acquiring debt, purchasing assets or guaranteeing them against loss, assuming or guaranteeing obligations, making payments, or entering into certain transactions. In particular, pursuant to section 204(d)(4), the FDIC is authorized to take liens “on any or all assets of the covered financial company or any covered subsidiary, including a first priority lien on all unencumbered assets of the covered financial company or any covered subsidiary to secure repayment of any transactions conducted under this subsection.”

Section 203(e) provides that, in general, if an insurance company is a covered financial company the liquidation or rehabilitation of such insurance company shall be conducted as provided under the laws and requirements of the State, either by the appropriate State regulatory agency, or by the FDIC if such regulatory agency has not filed the appropriate judicial action in the appropriate State court within sixty (60) days of the date of the determination that such insurance company satisfied the requirements for appointment of a receiver under section 202(a). However, a subsidiary or affiliate (including a parent entity) of an insurance company, where such subsidiary or affiliate is not itself an insurance company, will be subject to orderly liquidation under Title II without regard to State law.

The FDIC recognizes that the orderly liquidation of a covered financial company that is a covered subsidiary of, or an affiliate of, an insurance company should not unnecessarily interfere with the liquidation or rehabilitation of the insurance company under applicable State law, and that the interests of the policy holders in the assets of the insurance company should be respected. Accordingly, the FDIC is proposing that it will avoid taking a lien on some or all of the assets of a covered financial company that is an insurance company or a covered subsidiary or affiliate of an insurance company unless it makes a determination, in its sole discretion, that taking such a lien is necessary for the orderly liquidation of the company (or subsidiary or affiliate) and will not unduly impede or delay the liquidation or rehabilitation of such insurance company, or the recoveries by its policyholders. Subsection (b) of § 380.6 makes clear that no restriction on taking a lien on assets of a covered financial company or any covered subsidiary or affiliate would limit or restrict the ability of the FDIC or the receiver to take a lien on such assets in connection with the sale of such entities or any of their assets on a financed basis to secure any financing being provided in connection with such sale.

The FDIC requests comments on all aspects of the Proposed Rule. All comments and responses to the following questions on the Proposed Rule must be received by the FDIC not later than November 18, 2010. The FDIC specifically requests comments on the following specific questions:

1. Should “long-term senior debt” be defined in reference to a specific term, such as 270 or 360 days or some different term, or should it be defined through a functional definition?

2. Is the description of “partially funded, revolving or other open lines of credit” adequately descriptive? Is there a more effective definition that could be used? If so, what and how is it more effective?

3. Should there be further limits to additional payments or credit amounts that can be provided to shorter term general creditors? Are there further limits that should be applied to ensure that any such payments maximize value, minimize losses, or are to initiate and continue operations essential to the implementation of the receivership or any bridge financial company? If so, what limits should be applied consistent with other applicable provisions of law?

4. Under the Proposed Rule, the FDIC's Board of Directors must determine to make additional payments or credit amounts available to shorter term general creditors only if such payments or credits meet the standards specified in 12 U.S.C. 5390(b)(4), (d)(4), and (h)(5)(E). Should additional requirements be imposed on this decision-making process for the Board? Should a super-majority be required?

5. Under the Dodd-Frank Act, secured creditors will be paid in full up to the extent of the pledged collateral and the proposed rule specifies that direct obligations of, or that are fully guaranteed by, the United States or any agency of the United States shall be valued for such purposes at par value. How should other collateral be valued in determining whether a creditor is fully secured or partially secured?

6. During periods of market disruption, the liquidation value of collateral may decline precipitously. Since creditors are normally held to a duty of commercially reasonable disposition of collateral [Uniform Commercial Code], should the FDIC adopt a rule governing valuation of collateral other than United States or agency collateral? Would a valuation based on a rolling average prices, weighted by the volume of sales during the month preceding the appointment of the receiver, provide more certainty to valuation of other collateral? Would that help reduce the incentives to quickly liquidate collateral in a crisis?

7. Are changes necessary to the provisions of proposed Section 380.3 through 380.6? What other specific issues addressed in these sections should be addressed in the proposed rule or in future proposed rules?

In addition, the FDIC specifically requests responses to the following questions. Written responses to the specific questions posed by the FDIC must be received by the FDIC not later than January 18, 2011.

1. What other specific areas relating to the FDIC's orderly liquidation authority under Title II would benefit from additional rulemaking?

2. Section 209 of the Dodd-Frank Act requires the FDIC, “[t]o the extent possible,” “to harmonize applicable rules and regulations promulgated under this section with the insolvency laws that would otherwise apply to a covered financial company.” What are the key areas of Title II that may require additional rules or regulations in order to harmonize them with otherwise applicable insolvency laws? In your answer, please specify the source of insolvency laws to which you are making reference.

3. With the exception of the special provisions governing the liquidation of covered brokers and dealers ( see section 205), are there different types of covered financial companies that require different rules and regulations in the application of the FDIC's powers and duties?

4. Section 210 specifies the powers and duties of the FDIC acting as receiver under Title II. Are regulations necessary to define how these specific powers should be applied in the liquidation of a covered company?

5. Should the FDIC adopt regulations to define how claims against the covered financial company and the receiver are determined under section 210(a)(2)? What specific elements of this process require clarification?

6. Should the FDIC adopt regulations governing the avoidable transfer provisions of section 210(a)(11)? What are the most important issues to address for the fraudulent transfer provisions? What are the most important issues to address for the preferential transfers provisions? How should these issues be addressed?

7. What are the key issues that should be addressed to clarify the application of the setoff provisions in section 210(a)(12)? How should these issues be addressed?

8. Do the provisions governing the priority of payments of expenses and claims in section 210(b) and other sections require clarification? If so, what are the key issues to clarify in any regulation?

9. Section 210(b)(4), (d)(4), and (h)(5)(E) address potential payments to creditors “similarly situated” that are addressed in this Proposed Rule. Are there additional issues on the application of this provision, or related provisions, that require clarification in a regulation?

10. Section 210(h) provides the FDIC with authority to charter a bridge financial company to facilitate the liquidation of a covered financial company. What issues surrounding the chartering, operation, and termination of a bridge company would benefit from a regulation? How should those issues be addressed?

11. Regarding actual direct compensatory damages for the repudiation of a contingent obligation in the form of a guarantee, letter of credit, loan commitment, or similar credit obligation, should the Proposed Rule be amended to specifically provide a method for determining the estimated value of the claim? In addition to the statutory considerations in valuation, including the likelihood that the contingent claim would become fixed and its probable magnitude, what other factors are appropriate? If so, what methods for determining such estimated value would be appropriate? Should the regulation provide more detail on when a claim is contingent?

12. Are the provisions of the Dodd-Frank Act relating to the classification of claims as administrative expenses of the receiver sufficiently clear, or is additional rulemaking necessary to clarify such classification?

13. Should the Proposed Rule's definition of “long-term senior debt” be clarified or amended?

The Proposed Rule would establish internal rules and procedures for the liquidation of a failed systemically important financial company. It would not involve any new collections of information pursuant to the Paperwork Reduction Act (44 U.S.C. 3501 et seq. ). Consequently, no information collection has been submitted to the Office of Management and Budget for review.

The Regulatory Flexibility Act requires an agency that is issuing a final rule to prepare and make available a regulatory flexibility analysis that describes the impact of the final rule on small entities. (5 U.S.C. 603(a)). The Regulatory Flexibility Act provides that an agency is not required to prepare and publish a regulatory flexibility analysis if the agency certifies that the final rule will not have a significant impact on a substantial number of small entities.

Pursuant to section 605(b) of the Regulatory Flexibility Act, the FDIC certifies that the Proposed Rule will not have a significant impact on a substantial number of small entities. The Proposed Rule would clarify rules and procedures for the liquidation of a failed systemically important financial company, which will provide internal guidance to FDIC personnel performing the liquidation of such a company and will address any uncertainty in the financial system as to how the orderly liquidation of such a company would operate. As such, the Proposed Rule would not impose a regulatory burden on entities of any size and does not significantly impact small entities.

The FDIC has determined that the Proposed Rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, enacted as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 (Pub. L. 105-277, 112 Stat. 2681).

Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 Stat. 1338, 1471), requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The FDIC has sought to present the Proposed Rule in a simple and straightforward manner. The FDIC invites comments on whether the Proposed Rule is clearly stated and effectively organized and how the FDIC might make the final rule on this subject matter easier to understand.

For the reasons stated above, the Board of Directors of the Federal Deposit Insurance Corporation proposes to amend title 12 of the Code of Federal Regulations by adding new part 380 to read as follows:

We are proposing amendments to Item 1111  1 of Regulation AB  2 (a subpart of Regulation S-K). We also are proposing to add Rule 193  3 under the Securities Act of 1933  4 (the “Securities Act”) and Rule 15Ga-2  5 and Form ABS-15G  6 under the Securities Exchange Act of 1934 (the “Exchange Act”). 7

This release is one of several we are required to issue to implement provisions of the Act. 8 This release proposes a new rule and certain amendments to implement Section 7(d) of the Securities Act, 9 which was added by Section 945 of the Act. In addition, we are proposing a new rule and form to implement Section 15E(s)(4)(A) of the Exchange Act, 10 which was added by Section 932 of the Act.

Section 945 of the Act amends Section 7 of the Securities Act to require the Commission to issue rules relating to the registration statement required to be filed by an issuer of ABS. Pursuant to new Section 7(d), the Commission must issue rules to require that an issuer of an ABS perform a review of the assets underlying the ABS, and disclose the nature of such review. 11 Section 7(d) requires that we adopt these rules not later than 180 days after enactment.

Section 932 of the Act adds new Section 15E(s)(4)(A) of the Exchange Act, which also relates to the review of assets underlying an ABS. Section 15E(s)(4)(A) requires an issuer or underwriter of any ABS to make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. 12 Because the substance of new Section 7(d) of the Securities Act is related to new Section 15E(s)(4)(A) of the Exchange Act, we are considering both provisions added by the Act together.

We are proposing new Rule 193 under the Securities Act to require issuers of ABS to perform a review of the assets underlying registered ABS offerings. 13 This rule would implement Securities Act Section 7(d)(1), 14 as added by Section 945 of the Act.

Section 7(d)(1) relates to an asset-backed security, as defined in new Section 3(a)(77) of the Exchange Act. 15 This new statutory definition (“Exchange Act-ABS”) is broader than the definition of “asset-backed security” in Regulation AB  16 and includes securities typically offered and sold in private transactions. Nevertheless, we have concluded that the review requirements mandated by Section 7(d)(1) apply only to registered offerings of ABS because Section 7(d)(1) requires the Commission to issue rules “relating to the registration statement.” Therefore, the rule we are proposing today that would require an ABS issuer to perform a review of the assets applies to issuers of ABS in registered offerings and not issuers of ABS in unregistered offerings.

Rule 193 would require an issuer to perform a review of the assets underlying an ABS in a transaction that will be registered under the Securities Act. Rule 193 would not specify the level or type of review an issuer is required to perform. 17 We expect that the issuer's level and type of review of the assets may vary depending on the circumstances. For example, the level or type of review may vary among different asset classes. While proposed Rule 193 would not require a particular level or type of review, we note that, if adopted, required responsive disclosure would describe the level and type of review. We believe the disclosure requirements below will give investors an ability to evaluate the level and adequacy of the issuer's review of the assets.

Rule 193 would not specify the type or level of review an issuer is required to perform or require that a review be designed in any particular manner, although as set out below, we are requesting comment on whether and, if so, how the Commission should specify the nature of the review. 18 We believe that the nature of review may vary depending on numerous circumstances and factors which could include, for example, the nature of the assets being securitized and the degree of continuing involvement by the sponsor. For example, in offerings of residential mortgage-backed securities (“RMBS”), where the asset pool consists of a large group of loans, it may be appropriate, depending on all the facts, to review a sample of loans large enough to be representative of the pool, and then conduct further review if the initial review indicates that further review is warranted. By contrast, for ABS where a significant portion of the cash flow will be derived from a single obligor or a small group of obligors, such as ABS backed by a small number of commercial loans (“CMBS”), it may be appropriate for the review to include every pool asset. Moreover, in ABS transactions where the asset pool composition turns over rapidly because it contains revolving assets, such as credit card receivables or dealer floorplan receivables, a different type of review may be warranted than in ABS transactions involving term receivables, such as mortgage or auto loans.

While proposed Rule 193 would not specify a particular type or level of review, we note that under our proposal, prospectus disclosure of the nature of review would be required. We believe the disclosure requirements described below will give investors an ability to evaluate the level and adequacy of the issuer's review of the assets. We request comment below on whether disclosure, without mandating the nature of the review to be conducted, is sufficient.

While we are not proposing the nature of the review that would be required, we note that some of the data points proposed in the 2010 ABS Proposing Release describe the type of review items that may be relevant to the review that must be performed to comply with Rule 193. 19 In our proposals requiring enhanced disclosure for an ABS offering, we proposed to require prospectuses for public offerings of ABS and ongoing Exchange Act reports to contain specified asset-level information about each of the assets in the pool. 20 The asset-level information would be provided according to proposed standards and in a tagged data format. 21

Proposed Rule 193 would require that the asset review be conducted by the issuer of the ABS. 22 The issuer, for purposes of this rule, would be the depositor or sponsor of the securitization. A sponsor typically initiates a securitization transaction by selling or pledging to a specially-created issuing entity a group of financial assets that the sponsor either has originated itself or has purchased in the secondary market. 23 In some instances, the transfer of assets is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, the depositor or the issuer, and then the depositor transfers the assets to the issuing entity for the particular asset-backed transaction. The issuing entity is typically a statutory trust. 24 In cases where the originator and sponsor may be different, including in transactions involving a so-called “aggregator,” the review may be performed by the sponsor, but we propose that a review performed by an unaffiliated originator would not satisfy proposed Rule 193. The originator may have different interests in the securitization, especially if the securitization involves many originators where each originator may have contributed a very small part of the assets in the entire pool, and may have differing approaches to the review. 25

If an issuer engages a third party for purposes of reviewing the pool assets, then an issuer may rely on the third-party's review to satisfy its obligations under proposed Rule 193 provided the third party is named in the registration statement and consents to being named as an “expert” in accordance with Section 7 of the Securities Act and Rule 436 under the Securities Act. 26 We are aware that, at least with respect to RMBS, there is a specialized industry of third-party due diligence firms. 27 These firms typically are retained to review, for example, the accuracy of loan level data. 28 Allowing issuers to contract with a third-party due diligence provider  29 is consistent with Section 15E(s)(4) of the Exchange Act which, as discussed further below, requires the issuer or underwriter of an ABS to make publicly available the findings and conclusions of a third-party due diligence report and requires a third-party due diligence provider that is employed by a nationally recognized statistical rating organization (“NRSRO”), an issuer or an underwriter to provide a written certification to the NRSRO that produces a credit rating. Under Section 15E(s)(4) of the Exchange Act, the Commission is required to establish the appropriate format and content for the certifications “to ensure that providers of due diligence services have conducted a thorough review of data, documentation, and other relevant information necessary for a nationally recognized statistical rating organization to provide an accurate rating.” 30 We believe that a “third party engaged for purposes of performing a review” is a broad category that would include any third party on which the issuer relies to review assets in the pool. We believe that the third party engaged by the issuer to perform a review of the assets for purposes of complying with Rule 193 likely would be the same third-party due diligence providers whose reports must be made publicly available by an issuer or underwriter for purposes of Section 15E(s)(4)(A), although we seek comment on whether that is appropriate.

1. Does our proposed rule to require the issuer of ABS in a registered transaction to perform a review of the assets adequately address Section 7(d)(1) of the Securities Act, as added by Section 945 of the Act? Is this proposal, coupled with the proposed disclosure requirements described below, sufficient to carry out the purposes of Section 7(d)(1) of the Act? Can investors evaluate for themselves the sufficiency of the review undertaken by the issuer? Will issuers undertake a meaningful review absent a minimum review standard?

2. Should we instead mandate a minimum level of review that must be performed on the pool of assets? Would requiring a minimum level of review better carry out the mandate of Securities Act Section 7(d)(1), which imposes a new review requirement, separate from the disclosure requirement in Section 7(d)(2)? 31 If so, what level of review would be appropriate? For instance, should we require that the review, at a minimum, provide reasonable assurance that the disclosure in the prospectus regarding the assets is accurate in all material respects? 32 We note that the federal securities laws currently require that disclosure in the prospectus not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements not misleading. 33 Therefore, we would expect that issuers are currently performing some level of review in order to provide them sufficient comfort to believe that the prospectus disclosure is accurate. A reasonable assurance level would be similar to the standard that companies use in designing and maintaining disclosure controls and procedures required under Exchange Act Rule 13a-15. 34 Our rules generally “require an issuer to maintain disclosure controls and procedures to provide reasonable assurance that the issuer is able to record, process, summarize and report the information required in the issuer's Exchange Act reports” within appropriate time frames, and companies have been subject to these requirements for many years. 35

• If we required that the review, at a minimum, provide reasonable assurance that the disclosure in the prospectus regarding the assets is accurate in all material respects, would issuers and their advisers be familiar with this reasonable assurance level and understand how that level would apply in the context of a review of assets underlying ABS? 36

• Would a different level of assurance that the disclosure in the prospectus regarding the assets is accurate in all material respects be appropriate? If so, what level and why?

• Should a minimum standard require that the review be not just designed but also effected to provide reasonable assurance that the disclosure was accurate?

• Is there a minimum level of review that would be more appropriate or useful to investors without imposing impracticable burdens and costs on issuers?

• How, if at all, should any such standard of review affect current law regarding antifraud liability? How, if at all, should any such standard of review affect the due diligence defense against liability under Securities Act Section 11  37 and the reasonable care defense against liability under Securities Act Section 12(a)(2)?  38

• Should the rule further specify the types of matters— e.g., credit—that should be covered by the review?

• In addition, should the rule further specify the level of review? For example, should it set out parameters to determine whether sampling is appropriate?

3. We note that in the 2010 ABS Proposing Release, we proposed requiring that the underlying transaction agreement in a transaction relying on certain Commission safe harbors for an exemption from the Securities Act contain a provision requiring the issuer to provide to any initial purchaser, security holder, and designated prospective purchaser the same information as would be required in a registered transaction. 39 Similar to the approach in the 2010 ABS Proposing Release, should we condition the safe harbors for an exemption from registration provided in Regulation D and Securities Act Rule 144A on a requirement that the underlying transaction agreement for the ABS contain a representation that the issuer performed a review that complies with proposed Rule 193? Alternatively, if we adopt Rule 193 with some minimum standard of review, should we condition the safe harbors for an exemption from registration provided in Regulation D and Securities Act Rule 144A simply on a requirement that the issuer perform a review of the underlying assets? If so, should we also require that the issuer represent in the transaction agreement that it will certify such review or provide disclosure regarding the nature of the issuer's review and findings and conclusions?

4. Should we specify the types of review that should be performed? For example, should we require that the review verify the accuracy of the data entry of loan information into the loan tape, containing data about the loans in the pool ( e.g., loan-to-value ratio, debt-to-income ratio)? Should the rule establish a standard requiring a review sufficient to determine whether the underlying assets meet the underwriting criteria? Should any required review entail reviewing borrowers' income levels to determine borrowers' ability to repay the underlying loans? Should the rule establish a standard for reviewing whether the loans have been originated in compliance with applicable laws, including predatory lending and Truth in Lending statutes? Should we establish standards for a review of the accuracy of the property values reported by the originators for the underlying collateral?  40 Could each such type of review be conducted across all asset classes ( e.g., residential mortgages, commercial mortgages, credit card receivables, resecuritizations)? What standards would be appropriate for each asset class or across all asset classes of asset-backed securities?

5. Should we explore devising review standards for each particular asset class and consider proposing more detailed standards for the nature of review at a later date? If so, how?

6. Should our rules, as proposed, permit issuers to rely on a third party that was hired by the issuer to perform the required review of the assets under Rule 193? Should we, as proposed, condition the ability to rely on a third party for this purpose on the third-party's review satisfying the requirements of Rule 193? When we adopt rules in the future to establish the appropriate format and content for the certifications required pursuant to Exchange Act Section 15E(s)(4)(B), we will be required to do so in a manner “to ensure that providers of due diligence services have conducted a thorough review of data, documentation, and other relevant information necessary for a nationally recognized statistical rating organization to provide an accurate rating.”  41 Should we condition reliance on third parties for purposes of Rule 193 upon satisfaction of that standard? How else could the proposal better effectuate Exchange Act Section 15E(s)(4)?  42

7. If an originator performs a review of the assets and provides the findings and conclusions of its review to the issuer and the originator is not affiliated with the sponsor of the securitization, should we allow an issuer to rely on the originator's review of the assets in order to satisfy the issuer's review requirements? If so, should the information relating to the originator's review be treated similarly to third-party reviews? As described above, under our proposal, an issuer would be permitted to rely on a third party to conduct the Rule 193 review provided the review satisfied the requirements of Rule 193 and the third party is named in the registration statement and consents to being named as an expert in accordance with Section 7 of the Securities Act and Rule 436 under the Securities Act. 43 If we allow such reviews to satisfy Rule 193, should the findings and conclusions of third-party originators who conduct Rule 193 reviews likewise be subject to expert liability?

8. Is there any other party that an issuer should be allowed to rely upon in order to satisfy the review required by proposed Rule 193? For example, should an issuer be permitted to rely upon the underwriter of the offering? If so, how should we treat the findings and conclusions of that party? Should that party's findings and conclusions be subject to expert liability? If not, how can we ensure that such parties would take appropriate responsibility for any findings included in the issuer's registration statement?

9. We propose to permit an issuer to rely upon a third party that is engaged for purposes of performing a review of the assets to satisfy Rule 193. Is “third party engaged for purposes of performing a review of the pool assets” an appropriate description? If not, what is a more appropriate description? What entities should be considered a “third party engaged for purposes of performing a review”? Should such third-party reviewers include accountants who, for example, perform reviews and prepare reports pursuant to agreed-upon procedures? Should such third-party reviewers include attorneys who, for example, provide opinions as to the perfection of the security interest in the collateral?  44 Are there policy reasons why a particular type of third-party reviewer should be excluded from this requirement? We note that the issuer would remain responsible for its disclosure under the federal securities laws, including disclosure regarding pool assets, even if it engages a third party to perform the review required by Rule 193. Should the proposed rule be revised to clarify this point?

10. It appears that the scope of third-party due diligence providers is broad enough to include appraisers and engineers for purposes of Section 15E(s)(4). Is there a basis for a different approach? Should this vary among different asset classes? For example, should the requirements differ depending on whether the asset class for the securities is commercial mortgages or residential mortgages? We are aware that for certain types of ABS offerings ( e.g., CMBS offerings) an issuer may receive numerous reports from appraisers and engineers regarding the property underlying the loan.

11. As discussed below, Exchange Act Section 15E(s)(4)(A) requires an issuer or underwriter of ABS to make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. How does new Exchange Act Section 15E(s)(4)(A) impact the analysis here? Should the third parties whose findings and conclusions must be made publicly available under Exchange Act Section 15E(s)(4)(A) be the same group of third parties that are engaged for the review of the assets for purposes of proposed Rule 193? If not, how can we appropriately differentiate between the groups of third-party due diligence providers? In other words, how should the rule describe the nature of the work performed by third parties subject to Section 15E(s)(4)(A) versus the nature of the work performed by third parties employed by an issuer whose findings and conclusions should be required to be disclosed in a registration statement if such parties should be different?

12. We have previously noted the potential conflict of interest arising from the “issuer pays” model for NRSROs in which an NRSRO is paid by the arranger of a structured finance product to rate the product. 45 Are third-party due diligence firms subject to the same type of potential conflicts of interest as credit rating agencies operating under the “issuer pays” model? If so, is there a way to mitigate this potential conflict?

13. Are there other potential conflicts relating to a third-party due diligence provider that we should address? How should we encourage the quality of third-party reviews? Should a third party be required to be independent if the review will be used to satisfy Rule 193? If so, do we need to define “independent”? How should we define it? Should we require disclosure relating to the affiliations of the third party? Item 1119 of Regulation AB  46 requires disclosure of affiliations among participants in the securitization. Should we revise Item 1119 to require disclosure regarding affiliations between a third-party due diligence provider and the parties listed in Item 1119?

Item 1111 of Regulation AB  47 outlines several aspects of the pool that the prospectus disclosure for ABS should cover. We are proposing amendments to Item 1111 to require disclosure regarding the nature of the issuer's review of the assets under proposed Rule 193 and the findings and conclusions of the review. In addition, we are re-proposing amendments from our 2010 ABS Proposing Release to require disclosure regarding the composition of the pool as it relates to assets that do not meet disclosed underwriting standards, as we believe this information would promote a better understanding of the impact of the review on the composition of the pool assets.

We are proposing new Item 1111(a)(7) of Regulation AB to require that an issuer of ABS disclose the nature of the review it conducts to satisfy proposed Rule 193. This would include whether the issuer has hired a third-party firm for the purpose of reviewing the assets. In either case, we expect that this would include a description of the scope of the review, such as whether the issuer or a third party conducted a review of a sample of the assets or what kind of sampling technique was employed ( i.e., random or adverse). This proposed requirement would implement Securities Act Section 7(d)(2), 48 as added by the Act.

In order to harmonize this provision with the language used in Exchange Act Section 15E(s)(4)(A), under proposed Item 1111(a)(7), the issuer would be required to disclose the findings and conclusions of any review performed by the issuer or by a third party engaged for purposes of reviewing the assets. Although Section 7(d) of the Securities Act does not require our rules to mandate that the issuer disclose the findings and conclusions of a review in its registration statement, we believe this information is important for investors to consider along with the information in the registration statement relating to the nature of the issuer's review and the findings and conclusions of third-party due diligence providers, as required to be publicly disclosed by Securities Act Section 7(d) and Exchange Act Section 15E(s)(4)(A). We believe that disclosure of the findings and conclusions of the review would provide investors with a better picture of the assets than only the nature of the review and a better ability to evaluate the review.

As noted above, Section 15E(s)(4)(A) of the Exchange Act requires an issuer or underwriter of any ABS to make publicly available the findings and conclusions of any third-party due diligence report obtained by an issuer or underwriter. Exchange Act Section 15E(s)(4)(A) does not apply to an issuer who itself performs the review of the underlying assets. We believe that it is important to consider these two provisions together to minimize the difference in the required disclosure based merely on whether the issuer performs the review, or instead hires a third party to perform the review. 49 Consequently, as noted above, for registered offerings of ABS, proposed Item 1111(a)(7) would require disclosure of the findings and conclusions of the issuer or a third-party reviewer. We believe this approach would avoid incentives for “regulatory arbitrage” based merely on whether the review of assets was performed internally by the issuer, or whether instead the issuer hired a third party to perform the review. We are concerned that the intent of Exchange Act Section 15E(s)(4)(A) may be frustrated, and investor protection may not be served, if issuers who hired third-party loan review firms to perform a review of the assets were required to make publicly available the findings and conclusions of a review of pool assets, but issuers who performed the review themselves were not, because it could create an incentive for issuers to conduct the review themselves to avoid making publicly available the findings and conclusions of any review of the assets underlying the ABS.

We also are re-proposing additional requirements that we had previously proposed in the 2010 ABS Proposing Release. In the 2010 ABS Proposing Release, we proposed to detail and clarify the type of disclosure that is required to be provided for ABS offerings with respect to deviations from disclosed underwriting standards. We proposed to require that disclosure regarding the inclusion in the pool of assets that deviate from the disclosed underwriting criteria be accompanied by specific data about the amount and characteristics of those assets that did not meet the disclosed standards. We also proposed to require disclosure of what compensating or other factors, if any, were used to determine that the asset should be included in the pool, despite not having met the originator's specified underwriting standards. The commentators that submitted comments on these proposed requirements in the 2010 ABS Proposing Release were generally supportive. 50

We are re-proposing an amendment to Item 1111 in this release to require similar disclosure. 51 As re-proposed, Item 1111(a)(8) of Regulation AB would require issuers to disclose how the assets in the pool deviate from the disclosed underwriting criteria and include data on the amount and characteristics of those assets that did not meet the disclosed standards. Issuers would be required to disclose the entity ( e.g., sponsor, originator, or underwriter) who determined that such assets should be included in the pool, despite not having met the disclosed underwriting standards, and what factors were used to make the determination. For example, this could include compensating factors or a determination that the exception was not material. If compensating or other factors were used, issuers would be required to provide data on the amount of assets in the pool that are represented as meeting each factor and the amount of assets that do not meet those factors. As discussed in the 2010 ABS Proposing Release, we believe that these revisions would further detail and clarify the type of disclosure that is required to be provided for ABS offerings with respect to deviations from disclosed underwriting standards and help elicit important information in areas that became problematic in the recent financial crisis. We also believe that this information would help provide investors with a fuller understanding of the quality and extent of the issuer's review of the assets (through hiring a third-party or otherwise) and how that relates to a determination to either include a loan in the pool or exclude it from the pool.

The requirements proposed here are substantially similar to what we proposed in the 2010 ABS Proposing Release. However, we are proposing an additional requirement, consistent with one commentator's suggestion, that the issuer disclose the entity ( e.g., sponsor, originator or underwriter) who determined that such assets would be included in the pool, despite not having met the disclosed underwriting standards. 52 We believe that this additional requirement would assist investors in understanding the entities along the securitization chain that may be directing decisions to include exception loans in the pool.

As noted above, Section 932 of the Act amends Exchange Act Section 15E by adding, among other things, a new Section 15E(s)(4)(A) which sets forth the requirement that the issuer or underwriter of any ABS make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. Unlike Securities Act Section 7(d), which is expressly limited to registered ABS offerings, we believe that the requirements of Exchange Act Section 15E(s)(4)(A) were intended to apply to issuers and underwriters of both registered and unregistered offerings of ABS. 53 In this regard, we note that Section 941 of the Act amends Section 3(a) of the Exchange Act to add a definition of “asset-backed security” and that this definition includes asset-backed securities typically offered and sold in unregistered transactions. Further, unlike Section 945 of the Act, Section 932 does not refer to Section 7 of the Securities Act or registration statements filed under the Securities Act.

For registered ABS offerings, this disclosure, with respect to reports obtained by issuers, would be required to be provided in the prospectus as described above. In order to implement the disclosure requirement for unregistered offerings we are proposing new Rule 15Ga-2 under the Exchange Act. Proposed Rule 15Ga-2 would require an issuer of Exchange Act-ABS to file a new Form ABS-15G to disclose the findings and conclusions of any third party engaged for purposes of performing a review obtained by an issuer with respect to unregistered transactions. 54 Rule 15Ga-2 also would require an underwriter of Exchange Act-ABS to file Form ABS-15G with the same information for reports obtained by an underwriter in registered and unregistered transactions. Proposed Form ABS-15G would be filed with the Commission on EDGAR.

We are proposing that Form ABS-15G be required to be filed five business days prior to the first sale of the offering. This requirement, if adopted, would allow investors and NRSROs time to consider the disclosure about a third-party's findings and conclusions regarding its review of the pool assets. 55

We recognize that public disclosure of information relating to an unregistered offering could raise concerns regarding an issuer's or underwriter's reliance on the private offering exemptions and safe harbors under the Securities Act. 56 We intend for Form ABS-15G to be used for both registered and unregistered ABS transactions (although as we note below, if the information has already been provided in a prospectus for a registered transaction, it need not be provided again in Form ABS-15G). We are of the view that issuers and underwriters can disclose information required by Rule 15Ga-2 without jeopardizing reliance on those exemptions and safe harbors, provided that the only information made publicly available is that which is required by the proposed rule, and the issuer does not otherwise use Form ABS-15G to offer or sell securities or in a manner that conditions the market for offers or sales of its securities. 57

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under sections 411(a)(13), 411(b)(1), and 411(b)(5) of the Code. Generally, a defined benefit pension plan must satisfy the minimum vesting standards of section 411(a) and the accrual requirements of section 411(b) in order to be qualified under section 401(a) of the Code. Sections 411(a)(13) and 411(b)(5), which modify the minimum vesting standards of section 411(a) and the accrual requirements of section 411(b), were added to the Code by section 701(b) of the Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780 (2006)) (PPA '06). Sections 411(a)(13) and 411(b)(5), as well as certain effective date provisions related to these sections, were subsequently amended by the Worker, Retiree, and Employer Recovery Act of 2008, Public Law 110-458 (122 Stat. 5092 (2008)) (WRERA '08).

Section 411(a)(13)(A) provides that an applicable defined benefit plan (which is defined in section 411(a)(13)(C)) is not treated as failing to meet either (i) the requirements of section 411(a)(2) (subject to a special vesting rule in section 411(a)(13)(B) with respect to benefits derived from employer contributions) or (ii) the requirements of section 411(a)(11), 411(c), or 417(e), with respect to accrued benefits derived from employer contributions, merely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the terms of the plan, equal to the amount expressed as the balance of a hypothetical account or as an accumulated percentage of the participant's final average compensation. Section 411(a)(13)(B) requires an applicable defined benefit plan to provide that an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

Under section 411(a)(13)(C)(i), an applicable defined benefit plan is defined as a defined benefit plan under which the accrued benefit (or any portion thereof) of a participant is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant's final average compensation. Under section 411(a)(13)(C)(ii), the Secretary of the Treasury is to issue regulations which include in the definition of an applicable defined benefit plan any defined benefit plan (or portion of such a plan) which has an effect similar to a plan described in section 411(a)(13)(C)(i).

Section 411(a) requires that a defined benefit plan satisfy the requirements of section 411(b)(1). Section 411(b)(1) provides that a defined benefit plan must satisfy one of the three accrual rules of section 411(b)(1)(A), (B), and (C) with respect to benefits accruing under the plan. The three accrual rules are the 3 percent method of section 411(b)(1)(A), the 133 1/3 percent rule of section 411(b)(1)(B), and the fractional rule of section 411(b)(1)(C).

Section 411(b)(1)(B) provides that a defined benefit plan satisfies the requirements of the 133 1/3 percent rule for a particular plan year if, under the plan, the accrued benefit payable at the normal retirement age is equal to the normal retirement benefit, and the annual rate at which any individual who is or could be a participant can accrue the retirement benefits payable at normal retirement age under the plan for any later plan year is not more than 133 1/3 percent of the annual rate at which the individual can accrue benefits for any plan year beginning on or after such particular plan year and before such later plan year.

For purposes of applying the 133 1/3 percent rule, section 411(b)(1)(B)(i) provides that any amendment to the plan which is in effect for the current year is treated as in effect for all other plan years. Section 411(b)(1)(B)(ii) provides that any change in an accrual rate which does not apply to any individual who is or could be a participant in the current plan year is disregarded. Section 411(b)(1)(B)(iii) provides that the fact that benefits under the plan may be payable to certain participants before normal retirement age is disregarded. Section 411(b)(1)(B)(iv) provides that social security benefits and all other relevant factors used to compute benefits are treated as remaining constant as of the current plan year for all years after the current year.

Section 411(b)(1)(H)(i) provides that a defined benefit plan fails to comply with section 411(b) if, under the plan, an employee's benefit accrual is ceased, or the rate of an employee's benefit accrual is reduced, because of the attainment of any age. Section 411(b)(5), which was added to the Code by section 701(b)(1) of PPA '06, provides additional rules related to section 411(b)(1)(H)(i). Section 411(b)(5)(A) generally provides that a plan is not treated as failing to meet the requirements of section 411(b)(1)(H)(i) if a participant's accrued benefit, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger individual who is or could be a participant. For this purpose, section 411(b)(5)(A)(iv) provides that the accrued benefit may, under the terms of the plan, be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the employee's final average compensation. Section 411(b)(5)(G) provides that, for purposes of section 411(b)(5), any reference to the accrued benefit of a participant refers to the participant's benefit accrued to date.

Section 411(b)(5)(B) imposes certain requirements on an applicable defined benefit plan in order for the plan to satisfy section 411(b)(1)(H). Section 411(b)(5)(B)(i) provides that such a plan is treated as failing to meet the requirements of section 411(b)(1)(H) if the terms of the plan provide for an interest credit (or an equivalent amount) for any plan year at a rate that is greater than a market rate of return. Under section 411(b)(5)(B)(i)(I), a plan is not treated as having an above-market rate merely because the plan provides for a reasonable minimum guaranteed rate of return or for a rate of return that is equal to the greater of a fixed or variable rate of return. Section 411(b)(5)(B)(i)(II) provides that an applicable defined benefit plan is treated as failing to meet the requirements of section 411(b)(1)(H) unless the plan provides that an interest credit (or an equivalent amount) of less than zero can in no event result in the account balance or similar amount being less than the aggregate amount of contributions credited to the account. Section 411(b)(5)(B)(i)(III) authorizes the Secretary of the Treasury to provide by regulation for rules governing the calculation of a market rate of return for purposes of section 411(b)(5)(B)(i)(I) and for permissible methods of crediting interest to the account (including fixed or variable interest rates) resulting in effective rates of return meeting the requirements of section 411(b)(5)(B)(i)(I).

Sections 411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) contain additional requirements that apply if, after June 29, 2005, an applicable plan amendment is adopted. Section 411(b)(5)(B)(v)(I) defines an applicable plan amendment as an amendment to a defined benefit plan which has the effect of converting the plan to an applicable defined benefit plan. Under section 411(b)(5)(B)(ii), if, after June 29, 2005, an applicable plan amendment is adopted, the plan is treated as failing to meet the requirements of section 411(b)(1)(H) unless the requirements of section 411(b)(5)(B)(iii) are met with respect to each individual who was a participant in the plan immediately before the adoption of the amendment. Section 411(b)(5)(B)(iii) specifies that, subject to section 411(b)(5)(B)(iv), the requirements of section 411(b)(5)(B)(iii) are met with respect to any participant if the accrued benefit of the participant under the terms of the plan as in effect after the amendment is not less than the sum of: (I) the participant's accrued benefit for years of service before the effective date of the amendment, determined under the terms of the plan as in effect before the amendment; plus (II) the participant's accrued benefit for years of service after the effective date of the amendment, determined under the terms of the plan as in effect after the amendment. Section 411(b)(5)(B)(iv) provides that, for purposes of section 411(b)(5)(B)(iii)(I), the plan must credit the participant's account or similar amount with the amount of any early retirement benefit or retirement-type subsidy for the plan year in which the participant retires if, as of such time, the participant has met the age, years of service, and other requirements under the plan for entitlement to such benefit or subsidy.

Section 411(b)(5)(B)(v) sets forth certain provisions related to an applicable plan amendment. Section 411(b)(5)(B)(v)(II) provides that if the benefits under two or more defined benefit plans of an employer are coordinated in such a manner as to have the effect of adoption of an applicable plan amendment, the plan sponsor is treated as having adopted an applicable plan amendment as of the date the coordination begins. Section 411(b)(5)(B)(v)(III) directs the Secretary of the Treasury to issue regulations to prevent the avoidance of the purposes of section 411(b)(5)(B) through the use of two or more plan amendments rather than a single amendment.

Section 411(b)(5)(B)(vi) provides special rules for determining benefits upon termination of an applicable defined benefit plan. Under section 411(b)(5)(B)(vi)(I), an applicable defined benefit plan is not treated as satisfying the requirements of section 411(b)(5)(B)(i) (regarding permissible interest crediting rates) unless the plan provides that, upon plan termination, if the interest crediting rate under the plan is a variable rate, the rate of interest used to determine accrued benefits under the plan is equal to the average of the rates of interest used under the plan during the 5-year period ending on the termination date. In addition, under section 411(b)(5)(B)(vi)(II), the plan must provide that, upon plan termination, the interest rate and mortality table used to determine the amount of any benefit under the plan payable in the form of an annuity payable at normal retirement age is the rate and table specified under the plan for this purpose as of the termination date, except that if the interest rate is a variable rate, the rate used is the average of the rates used under the plan during the 5-year period ending on the termination date.

Section 411(b)(5)(C) provides that a plan is not treated as failing to meet the requirements of section 411(b)(1)(H)(i) solely because the plan provides offsets against benefits under the plan to the extent the offsets are otherwise allowable in applying the requirements of section 401(a). Section 411(b)(5)(D) provides that a plan is not treated as failing to meet the requirements of section 411(b)(1)(H) solely because the plan provides a disparity in contributions or benefits with respect to which the requirements of section 401(l) (relating to permitted disparity for Social Security benefits and related matters) are met.

Section 411(b)(5)(E) provides that a plan is not treated as failing to meet the requirements of section 411(b)(1)(H) solely because the plan provides for indexing of accrued benefits under the plan. Under section 411(b)(5)(E)(iii), indexing means the periodic adjustment of the accrued benefit by means of the application of a recognized investment index or methodology. Section 411(b)(5)(E)(ii) requires that, except in the case of a variable annuity, the indexing not result in a smaller benefit than the accrued benefit determined without regard to the indexing.

Section 701(a) of PPA '06 added provisions to the Employee Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)) (ERISA), that are parallel to sections 411(a)(13) and 411(b)(5) of the Code. The guidance provided in these regulations with respect to sections 411(a)(13) and 411(b)(5) of the Code would also apply for purposes of the parallel amendments to ERISA made by section 701(a) of PPA '06, and the guidance provided in these regulations with respect to section 411(b)(1) of the Code would also apply for purposes of section 204(b)(1) of ERISA. 1

Section 701(c) of PPA '06 added provisions to the Age Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 602 (1967)), that are parallel to section 411(b)(5) of the Code. Executive Order 12067 requires all Federal departments and agencies to advise and offer to consult with the Equal Employment Opportunity Commission (EEOC) during the development of any proposed rules, regulations, policies, procedures, or orders concerning equal employment opportunity. The Treasury Department and the IRS have consulted with the EEOC prior to the issuance of these regulations.

Section 701(d) of PPA '06 provides that nothing in the amendments made by section 701 should be construed to create an inference concerning the treatment of applicable defined benefit plans or conversions of plans into applicable defined benefit plans under section 411(b)(1)(H), or concerning the determination of whether an applicable defined benefit plan fails to meet the requirements of section 411(a)(2), 411(c), or 417(e), as in effect before such amendments, solely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the terms of the plan, equal to the amount expressed as the balance of a hypothetical account or as an accumulated percentage of the participant's final average compensation.

Section 701(e) of PPA '06 sets forth the effective date provisions with respect to amendments made by section 701 of PPA '06. Section 701(e)(1) specifies that the amendments made by section 701 generally apply to periods beginning on or after June 29, 2005. Thus, the age discrimination safe harbors under section 411(b)(5)(A) and section 411(b)(5)(E) are effective for periods beginning on or after June 29, 2005. Section 701(e)(2) provides that the special present value rules of section 411(a)(13)(A) are effective for distributions made after August 17, 2006 (the date PPA '06 was enacted).

Under section 701(e) of PPA `06, the 3-year vesting rule under section 411(a)(13)(B) is generally effective for years beginning after December 31, 2007, for a plan in existence on June 29, 2005, while, pursuant to the amendments made by section 107(c) of WRERA '08, the rule is generally effective for plan years ending on or after June 29, 2005, for a plan not in existence on June 29, 2005. The market rate of return limitation under section 411(b)(5)(B)(i) is generally effective for years beginning after December 31, 2007, for a plan in existence on June 29, 2005, while the limitation is generally effective for periods beginning on or after June 29, 2005, for a plan not in existence on June 29, 2005. Section 701(e)(4) of PPA '06 contains special effective date provisions for collectively bargained plans that modify these effective dates.

Under section 701(e)(5) of PPA '06, as amended by WRERA '08, sections 411(b)(5)(B)(ii), (iii), and (iv) apply to a conversion amendment that is adopted on or after, and takes effect on or after, June 29, 2005.

Under section 701(e)(6) of PPA '06, as added by WRERA '08, the 3-year vesting rule under section 411(a)(13)(B) does not apply to a participant who does not have an hour of service after the date the 3-year vesting rule would otherwise be effective.

Section 702 of PPA '06 provides for regulations to be prescribed by August 16, 2007, addressing the application of rules set forth in section 701 of PPA '06 where the conversion of a defined benefit pension plan into an applicable defined benefit plan is made with respect to a group of employees who become employees by reason of a merger, acquisition, or similar transaction.

Under section 1107 of PPA '06, a plan sponsor is permitted to delay adopting a plan amendment pursuant to statutory provisions under PPA '06 (or pursuant to any regulation issued under PPA '06) until the last day of the first plan year beginning on or after January 1, 2009 (January 1, 2011, in the case of governmental plans). As described in Rev. Proc. 2007-44 (2007-28 IRB 54), this amendment deadline applies to both interim and discretionary amendments that are made pursuant to PPA '06 statutory provisions or any regulation issued under PPA `06. See § 601.601(d)(2)(ii)( b ).

Section 1107 of PPA '06 also permits certain amendments to reduce or eliminate section 411(d)(6) protected benefits. Except to the extent permitted under section 1107 of PPA '06 (or under another statutory provision, including section 411(d)(6) and §§ 1.411(d)-3 and 1.411(d)-4), section 411(d)(6) prohibits a plan amendment that decreases a participant's accrued benefits or that has the effect of eliminating or reducing an early retirement benefit or retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment. However, an amendment that eliminates or decreases benefits that have not yet accrued does not violate section 411(d)(6), provided that the amendment is adopted and effective before the benefits accrue. If section 1107 of PPA '06 applies to an amendment of a plan, section 1107 provides that the plan does not fail to meet the requirements of section 411(d)(6) by reason of such amendment, except as provided by the Secretary of the Treasury.

Section 1.411(b)-1(a)(1) of the Treasury Regulations provides that a defined benefit plan is not a qualified plan unless the method provided by the plan for determining accrued benefits satisfies at least one of the alternative methods in § 1.411(b)-1(b) for determining accrued benefits with respect to all active participants under the plan. Section 1.411(b)-1(b)(2)(i) provides that a defined benefit plan satisfies the 133 1/3 percent rule of section 411(b)(1)(B) for a particular plan year if (A) under the plan the accrued benefit payable at the normal retirement age (determined under the plan) is equal to the normal retirement benefit (determined under the plan), and (B) the annual rate at which any individual who is or could be a participant can accrue the retirement benefits payable at normal retirement age under the plan for any later plan year cannot be more than 133 1/3 percent of the annual rate at which the participant can accrue benefits for any plan year beginning on or after such particular plan year and before such later plan year. Section 1.411(b)-1(b)(2)(ii)(A) through (D) sets forth a series of rules that correspond to the rules of section 411(b)(1)(B)(i) through (iv). Section 1.411(b)-1(b)(2)(ii)(D) provides that, for purposes of the 133 1/3 percent rule, for any plan year, social security benefits and all relevant factors used to compute benefits, e.g., consumer price index, are treated as remaining constant as of the beginning of the current plan year for all subsequent plan years.

Proposed regulations (EE-184-86) under sections 411(b)(1)(H) and 411(b)(2) were published by the Treasury Department and the IRS in the Federal Register on April 11, 1988 (53 FR 11876), as part of a package of regulations that also included proposed regulations under sections 410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age for participation, vesting, normal retirement age, and actuarial adjustments after normal retirement age, respectively). 2

Notice 96-8 (1996-1 CB 359), see § 601.601(d)(2)(ii)( b ), described the application of sections 411 and 417(e)(3) to a single-sum distribution under a cash balance plan where interest credits under the plan are frontloaded (that is, where future interest credits to an employee's hypothetical account balance are not conditioned upon future service and thus accrue at the same time that the benefits attributable to a hypothetical allocation to the account accrue). Under the analysis set forth in Notice 96-8, in order to comply with sections 411(a) and 417(e)(3) in calculating the amount of a single-sum distribution under a cash balance plan, the balance of an employee's hypothetical account must be projected to normal retirement age and converted to an annuity under the terms of the plan, and then the employee must be paid at least the present value of the projected annuity, determined in accordance with section 417(e). Under that analysis, where a cash balance plan provides frontloaded interest credits using an interest rate that is higher than the section 417(e) applicable interest rate, payment of a single-sum distribution equal to the current hypothetical account balance as a complete distribution of the employee's accrued benefit may result in a violation of the minimum present value requirements of section 417(e) or a forfeiture in violation of section 411(a). In addition, Notice 96-8 proposed a safe harbor which provided that, if frontloaded interest credits are provided under a plan at a rate no greater than the sum of identified standard indices and associated margins, no violation of section 411(a) or 417(e) would result if the employee's entire accrued benefit were to be distributed in the form of a single-sum distribution equal to the employee's hypothetical account balance, provided the plan uses appropriate annuity conversion factors. Since the issuance of Notice 96-8, four Federal appellate courts have followed the analysis set out in the Notice: Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); West v. AK Steel Corp. Ret. Accumulation Pension Plan, 484 F.3d 395 (6th Cir. 2007), cert. denied, 129 S. Ct. 895 (2009); Berger v. Xerox Corp. Ret. Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003), reh'g and reh'g en banc denied, No. 02-3674, 2003 U.S. App. LEXIS 19374 (7th Cir. Sept. 15, 2003); Lyons v. Georgia-Pacific Salaried Employees Ret. Plan, 221 F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 (2001).

Notice 2007-6 (2007-1 CB 272), see § 601.601(d)(2)(ii)( b ), provides transitional guidance with respect to certain requirements of sections 411(a)(13) and 411(b)(5) and section 701(b) of PPA '06. Notice 2007-6 includes certain special definitions, including: accumulated benefit, which is defined as a participant's benefit accrued to date under a plan; lump sum-based plan, which is defined as a defined benefit plan under the terms of which the accumulated benefit of a participant is expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant's final average compensation; and statutory hybrid plan, which is defined as a lump sum-based plan or a plan which has an effect similar to a lump sum-based plan. Notice 2007-6 provides guidance on a number of issues, including a rule under which a plan that provides for indexed benefits described in section 411(b)(5)(E) is a statutory hybrid plan (because it has an effect similar to a lump sum-based plan), unless the plan either solely provides for post-retirement adjustment of the amounts payable to a participant or is a variable annuity plan under which the assumed interest rate used to determine adjustments is at least 5 percent. Notice 2007-6 provides a safe harbor for applying the rules set forth in section 701 of PPA '06 where the conversion of a defined benefit pension plan into an applicable defined benefit plan is made with respect to a group of employees who become employees by reason of a merger, acquisition, or similar transaction. This transitional guidance, along with the other guidance provided in Part III of Notice 2007-6, applies pending the issuance of further guidance and, thus, does not apply for periods to which the 2010 final regulations (as described later in this preamble) apply.

Proposed regulations (REG-104946-07) under sections 411(a)(13) and 411(b)(5) (2007 proposed regulations) were published by the Treasury Department and the IRS in the Federal Register on December 28, 2007 (72 FR 73680). The Treasury Department and the IRS received written comments on the 2007 proposed regulations and a public hearing was held on June 6, 2008.

Proposed regulations (REG-100464-08) under section 411(b)(1)(B) (2008 proposed backloading regulations) were published by the Treasury Department and the IRS in the Federal Register on June 18, 2008 (73 FR 34665). The 2008 proposed backloading regulations would provide guidance on the application of the accrual rule for defined benefit plans under section 411(b)(1)(B) in cases where plan benefits are determined on the basis of the greatest of two or more separate formulas. The Treasury Department and the IRS received written comments on the 2008 proposed backloading regulations and a public hearing was held on October 15, 2008.

Announcement 2009-82 (2009-48 IRB 720) and Notice 2009-97 (2009-52 IRB 972) announced certain expected relief with respect to the requirements of section 411(b)(5). In particular, Announcement 2009-82 stated that the rules in the regulations specifying permissible market rates of return are not expected to go into effect before the first plan year that begins on or after January 1, 2011. In addition, Notice 2009-97 stated that, once final regulations under sections 411(a)(13) and 411(b)(5) are issued, it is expected that relief from the requirements of section 411(d)(6) will be granted for a plan amendment that eliminates or reduces a section 411(d)(6) protected benefit, provided that the amendment is adopted by the last day of the first plan year that begins on or after January 1, 2010, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of section 411(b)(5). 3 Notice 2009-97 also extended the deadline for amending cash balance and other applicable defined benefit plans, within the meaning of section 411(a)(13)(C), to meet the requirements of section 411(a)(13) (other than section 411(a)(13)(A)) and section 411(b)(5), relating to vesting and other special rules applicable to these plans. Under Notice 2009-97, the deadline for these amendments is the last day of the first plan year that begins on or after January 1, 2010.

Final regulations (2010 final regulations) under sections 411(a)(13) and 411(b)(5) are being issued at the same time as these proposed regulations. The 2010 final regulations adopt most of the provisions of the 2007 proposed regulations, with certain modifications, and also reserve a number of sections relating to issues that are not addressed in those final regulations. These reserved issues relate to the scope of relief provided under section 411(a)(13)(A), a potential alternative method of satisfying the conversion protection requirements, additional rules with respect to the market rate of return requirement, and the application of the special plan termination rules. These proposed regulations generally address these issues, as well as an issue under section 411(b)(1).

In general, these proposed regulations would provide guidance with respect to certain issues under sections 411(a)(13) and 411(b)(5) that are not addressed in the 2010 final regulations, as well as an issue under section 411(b)(1) for hybrid defined benefit plans that adjust benefits using a variable rate.

The 2010 final regulations define a lump sum-based benefit formula as a benefit formula used to determine all or any part of a participant's accumulated benefit under which the accumulated benefit provided under the formula is expressed as the current balance of a hypothetical account maintained for the participant or as the current value of an accumulated percentage of the participant's final average compensation. The 2010 final regulations provide that the relief of section 411(a)(13)(A) applies to the benefits determined under a lump sum-based benefit formula.

The proposed regulations would provide that the relief of section 411(a)(13)(A) does not apply with respect to the benefits determined under a lump sum-based benefit formula unless certain requirements are satisfied. In particular, the proposed regulations would provide that the relief does not apply unless, at all times on or before normal retirement age, the then-current hypothetical account balance or the then-current accumulated percentage of the participant's final average compensation is not less than the present value, determined using reasonable actuarial assumptions, of the portion of the participant's accrued benefit that is determined under the lump sum-based benefit formula. However, the plan would be deemed to satisfy this requirement for periods before normal retirement age if, upon attainment of normal retirement age, the then-current balance of the hypothetical account or the then-current value of the accumulated percentage of the participant's final average compensation is actuarially equivalent (using reasonable actuarial assumptions) to the portion of the participant's accrued benefit that is determined under the lump sum-based benefit formula. Thus, for periods before normal retirement age, a statutory hybrid plan with a lump sum-based benefit formula that meets the requirements of the preceding sentence need not project interest credits to normal retirement age and discount the resulting accrued benefit back in order to apply the relief of section 411(a)(13)(A) with respect to the benefit determined under the lump sum-based benefit formula.

In addition, the proposed regulations would provide that the relief of section 411(a)(13)(A) does not apply unless, as of each annuity starting date after normal retirement age, the then-current balance of the hypothetical account or the then-current value of the accumulated percentage of the participant's final average compensation satisfies the requirements of section 411(a)(2) or would satisfy those requirements but for the fact that the plan suspends benefits in accordance with section 411(a)(3)(B). Thus, for example, a plan that expresses the accumulated benefit as the balance of a hypothetical account and that does not comply with the suspension of benefit rules may have difficulty obtaining the relief of section 411(a)(13)(A) if, after normal retirement age, the plan credits interest at such a low rate that the adjustments provided by the interest credits, together with any principal credits, are insufficient to provide any required actuarial increases.

The proposed regulations would also provide that the relief of section 411(a)(13)(A) does not apply unless the balance of the hypothetical account or the accumulated percentage of the participant's final average compensation may not be reduced except as a result of one of the specified reasons set forth in the regulations. Under the proposed regulations, reductions would only be permissible as a result of: (1) Benefit payments, (2) qualified domestic relations orders under section 414(p), (3) forfeitures that are permitted under section 411(a) (such as charges for providing a qualified preretirement survivor annuity), (4) amendments that are permitted under section 411(d)(6), and (5) adjustments resulting from the application of interest credits (under the rules of § 1.411(b)(5)-1) that are negative for a period, for plans that express the accumulated benefit as the balance of a hypothetical account.

The proposed regulations would provide that the relief under section 411(a)(13)(A) (with respect to the requirements of sections 411(a)(2), 411(c), and 417(e)) extends to certain other forms of benefit under a lump sum-based benefit formula, in addition to a single-sum payment of the entire benefit. In particular, the proposed regulations would clarify that the relief provided under section 411(a)(13)(A) extends to an optional form of benefit that is currently payable with respect to a lump sum-based benefit formula if, under the terms of the plan, the optional form of benefit is determined as of the annuity starting date as the actuarial equivalent, determined using reasonable actuarial assumptions, of the then- current balance of the hypothetical account or the then-current value of an accumulated percentage of the participant's final average compensation.

In addition, the proposed regulations would create a special rule that provides that the relief under section 411(a)(13)(A) also extends to an optional form of benefit that is not subject to the minimum present value requirements of section 417(e) and that is currently payable with respect to a lump sum-based benefit formula if, under the terms of the plan, this optional form of benefit is determined as of the annuity starting date as the actuarial equivalent (using reasonable actuarial assumptions) of the optional form of benefit that: (1) Commences as of the same annuity starting date; (2) is payable in the same generalized optional form (within the meaning of § 1.411(d)-3(g)(8)) as the accrued benefit; and (3) is the actuarial equivalent (using reasonable actuarial assumptions) of the then-current balance of the hypothetical account maintained for the participant or the then-current value of an accumulated percentage of the participant's final average compensation. This special rule would facilitate the payment of an immediate annuity, such as a joint and survivor annuity or life annuity with period certain, that is calculated as the actuarial equivalent of the form of payment of the accrued benefit under the plan, such as an immediately payable straight life annuity.

Finally, the proposed regulations would provide that the relief under section 411(a)(13)(A) applies on a proportionate basis to a payment of a portion of the benefit under a lump sum-based benefit formula that is not paid in the form of an annuity, such as a payment of a specified dollar amount or percentage of the then-current balance of a hypothetical account maintained for the participant or then-current value of an accumulated percentage of the participant's final average compensation. Thus, for example, if a plan that expresses the participant's entire accumulated benefit as the balance of a hypothetical account distributes 40 percent of the participant's then-current hypothetical account balance, the plan is treated as satisfying the requirements of section 411(a) and the minimum present value rules of section 417(e) with respect to 40 percent of the participant's then-current accrued benefit.

The proposed regulations would clarify that the relief provided under section 411(a)(13)(A) does not apply to any portion of the participant's benefit that is determined under a formula that is not a lump sum-based benefit formula. Thus, for example, where the participant's accrued benefit equals the greater of the benefit under a hypothetical account formula and the benefit under a traditional defined benefit formula, a single-sum payment of the participant's entire benefit must equal the greater of the then-current balance of the hypothetical account and the present value, determined in accordance with section 417(e), of the benefit under the traditional defined benefit formula. On the other hand, where the plan provides an accrued benefit equal to the sum of the benefit under a hypothetical account formula plus the excess of the benefit under a traditional defined benefit formula over the benefit under the hypothetical account formula, a single-sum payment of the participant's entire benefit must equal the then-current balance of the hypothetical account plus the excess of the present value, determined in accordance with section 417(e), of the benefit under the traditional defined benefit formula over the present value, determined in accordance with section 417(e), of the benefit under the hypothetical account formula. See the request for comments under the heading “Comments and Public Hearing” on the issue of determining the present value of a benefit determined, in part, based on the benefit under a lump sum-based benefit formula.

The preamble to the 2007 proposed regulations asked for comments on plan formulas that calculate benefits as the current value of an accumulated percentage of the participant's final average compensation (often referred to as “pension equity plans” or “PEPs”). Commenters indicated that some of these plans never credit interest, directly or indirectly, some explicitly credit interest after cessation of PEP accruals, and some do not credit interest explicitly but provide for specific amounts to be payable after cessation of PEP accruals (both immediately and at future dates) based on actuarial equivalence using specified actuarial factors applied upon cessation of PEP accruals.

The 2010 final regulations clarify that a formula is expressed as the balance of a hypothetical account maintained for the participant if it is expressed as a current single-sum dollar amount. Thus, a PEP formula that credits interest after cessation of PEP accruals is considered a formula that is expressed as the balance of a hypothetical account after cessation of PEP accruals. As a result, such a formula is a lump sum-based benefit formula that is subject to the rules of section 411(a)(13)(A) set forth earlier in this preamble, as those rules are applied to PEP formulas during the period of PEP accruals and as those rules are applied to hypothetical account balance formulas after cessation of PEP accruals.

Under these proposed regulations, any other PEP formula (including those that do not credit interest, directly or indirectly, and those that offer actuarially equivalent forms of payment using specified actuarial factors applied after cessation of PEP accruals) would also be subject to the rules of section 411(a)(13)(A), as explained earlier in this preamble. Thus, for example, a PEP that does not explicitly credit interest but, instead, calculates the annuity benefit commencing at future ages as the actuarial equivalent of the PEP value as of cessation of PEP accruals would be eligible for the relief of section 411(a)(13)(A) with respect to the PEP value as of every period before cessation of PEP accruals. In addition, since the accrued benefit is calculated as an annuity commencing at normal retirement age that is actuarially equivalent to the PEP value as of cessation of PEP accruals, the relief described above that applies to annuities that are calculated as the actuarial equivalent of the then-current PEP value would not apply.

Under the regulations with respect to the 133 1/3 percent rule of section 411(b)(1)(B), for any plan year, social security benefits and all relevant factors used to compute benefits, e.g., consumer price index, are treated as remaining constant as of the beginning of the current plan year for all subsequent plan years. A number of commenters on both the 2007 proposed regulations and the 2008 proposed backloading regulations expressed concern that this rule might effectively preclude statutory hybrid plans from using an interest crediting rate that is a variable rate that could potentially be negative in a year, such as an equity-based rate. This is because, if a plan treated an interest crediting rate that was negative as remaining constant in all future years for purposes of the backloading test of section 411(b)(1)(B), a principal credit (such as a pay credit) that accrues in a later year would result in a greater benefit accrual than an otherwise identical principal credit that accrues in an earlier year because the principal credit that accrues later is credited with negative interest credits for fewer years. Thus, these commenters were concerned that a plan that uses a variable rate could fail the backloading rules of section 411(b)(1) even where both the pay crediting and interest crediting formulas do not vary over time.

In response to these comments, the proposed regulations contain a special rule regarding the application of the 133 1/3 ; percent rule of section 411(b)(1)(B) to a statutory hybrid plan that adjusts benefits using a variable interest crediting rate that can potentially be negative in any given year. Under this proposed rule, a plan that determines any portion of the participant's accrued benefit pursuant to a statutory hybrid benefit formula (as defined in § 1.411(a)(13)-1(d)(4)) that utilizes an interest crediting rate described in § 1.411(b)(5)-1(d) that is a variable rate that was less than zero for the prior plan year would not be treated as failing to satisfy the requirements of the 133 1/3 percent rule for the current plan year merely because the section 411(b)(1)(B) backloading calculation is performed assuming that the variable rate is zero for the current plan year and all future plan years.

In accordance with the requirements of section 411(b)(5)(B)(ii), the 2010 final regulations provide that a participant whose benefits are affected by a conversion amendment generally must be provided with a benefit after the conversion that is at least equal to the sum of benefits accrued through the date of conversion and benefits earned after the conversion, with no permitted interaction between the two portions. The 2010 final regulations provide for an alternative method of satisfying the conversion protection requirements where an opening hypothetical account balance or opening accumulated percentage of the participant's final average compensation is established at the time of the conversion and the plan provides for separate calculation of (1) the benefit attributable to the opening hypothetical account balance (including interest credits attributable thereto) or attributable to the opening accumulated percentage of the participant's final average compensation and (2) the benefit attributable to post-conversion service under the post-conversion benefit formula. Under this alternative, the plan must provide that, when a participant commences benefits, the participant's benefit will be increased if the benefit attributable to the opening hypothetical account or opening accumulated percentage that is payable in the particular optional form of benefit selected is less than the benefit accrued under the plan prior to the date of conversion and that was payable in the same generalized optional form of benefit (within the meaning of § 1.411(d)-3(g)(8)) at the same annuity starting date.

The preamble to the 2007 proposed regulations requested comments on another alternative method of satisfying the conversion protection requirements that would not require this comparison at the annuity starting date. In response to favorable comments related to this alternative, these proposed regulations would provide that certain plans may satisfy the conversion protection requirements of sections 411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) by establishing an opening hypothetical account balance without a subsequent comparison of benefits at the annuity starting date. While testing at the annuity starting date would not be required under this method, a number of requirements like those described in the preamble to the 2007 proposed regulations would need to be satisfied in order to ensure that the hypothetical account balance used to replicate the pre-conversion benefit (the opening hypothetical account balance and interest credits on that account balance) is reasonably expected in most, but not necessarily all, cases to provide a benefit at least as large as the pre-conversion benefit for all periods after the conversion amendment.

This alternative method would be limited to situations where an opening hypothetical account balance is established and would not be available where an opening accumulated percentage of the participant's final average compensation is established because these plans would be unable to reliably replicate the pre-conversion benefit. This is because the value of the opening accumulated percentage would only increase as a result of unpredictable increases in compensation for periods after the conversion amendment until cessation of PEP accruals, rather than by application of an annual interest crediting rate.

This alternative would only be available where the participant elects to receive payment in the form of a single-sum distribution equal to the sum of the then-current balance of the hypothetical account used to replicate the pre-conversion benefit and the benefit attributable to post-conversion service under the post-conversion benefit formula. Because of the limited availability of this alternative, plans will still need to separately keep track of the pre-conversion benefit in order to satisfy the conversion protection requirements for all forms of distribution other than a single-sum distribution. See the related request for comments in this preamble under the heading “Comments and Public Hearing.”

Under this alternative, in order to satisfy the requirements of section 411(d)(6), the participant's benefit after the effective date of the conversion amendment must not be less than the participant's section 411(d)(6) protected benefit (as defined in § 1.411(d)-3(g)(14)) with respect to service before the effective date of the conversion amendment (determined under the terms of the plan as in effect immediately before the effective date of the amendment). Also, the plan, as in effect immediately before the effective date of the conversion amendment, either must not have provided a single-sum payment option (for benefits that cannot be immediately distributed under section 411(a)(11)) or must have provided a single-sum payment option that was based solely on the present value of the benefit payable at normal retirement age (or at date of benefit commencement, if later) and which was not based on the present value of the benefit payable commencing at any date prior to normal retirement age. This condition ensures that the hypothetical account balance used to replicate the pre-conversion benefit does not result in a single-sum distribution that is less than would have been available under an early retirement subsidy under the pre-conversion formula.

Under this alternative method of satisfying the conversion protection requirements, the opening hypothetical account balance must be established in accordance with the rules under which this opening balance is not less than the present value, determined in accordance with section 417(e), of the accrued benefit immediately prior to the effective date of the conversion amendment. In addition, under this alternative, the interest crediting rate under the plan as of the effective date of the conversion amendment must be either the rate of interest on long-term investment grade corporate bonds (the third segment rate) or one of several specified safe harbor rates. Also, as of that date, the value of the index used to determine the interest crediting rate under the plan must be at least as great for every participant or beneficiary as the interest rate that was used to determine the opening hypothetical account balance. This requirement is satisfied, for example, if each participant's opening hypothetical account balance is determined using the applicable interest rate and applicable mortality table under section 417(e)(3), the interest crediting rate under the plan is the third segment rate, and, at the effective date of the conversion amendment, the third segment rate is the highest of the three segment rates. If, subsequent to the effective date of the conversion amendment, the interest crediting rate changes (whether by plan amendment or otherwise) with respect to a participant who was a participant at the time of the effective date of the conversion amendment from an interest crediting rate that is either the rate of interest on long-term investment grade corporate bonds or one of the specified safe harbor rates to a different interest crediting rate that is not in all cases at least as great as the prior interest crediting rate under the plan, then the new interest crediting rate does not apply to the existing hypothetical account balance as of the effective date of the change in interest crediting rates (or, if the plan created a subaccount consisting of the opening hypothetical account balance and interest credits on that subaccount, then the new interest crediting rate does not apply to the subaccount).

Finally, either the plan must provide a death benefit after the effective date of the conversion amendment which has a present value that is at all times at least equal to the then-current balance of the hypothetical account used to replicate the pre-conversion benefit or the plan must not have applied a pre-retirement mortality decrement in establishing the opening hypothetical account balance.

The 2010 final regulations provide that a plan that credits interest must specify how the plan determines interest credits and must specify how and when interest credits are credited. In addition, the 2010 final regulations contain certain specific rules regarding the method and timing of interest credits, including a requirement that interest be credited at least annually.

The proposed regulations include a rule that would provide that a plan is not treated as failing to meet the interest crediting requirements merely because the plan does not provide for interest credits on amounts distributed prior to the end of the interest crediting period. Thus, if a plan credits interest at periodic intervals, the plan would not be required to credit interest on amounts that were distributed between the dates on which interest under the plan is credited to the account balance.

Furthermore, the proposed regulations include a rule that would allow plans to credit interest taking into account increases or decreases to the participant's accumulated benefit that occur during the period. In particular, the rule would provide that a plan is not treated as failing to meet the market rate of return limitations merely because the plan calculates increases or decreases to the participant's accumulated benefit by applying a rate of interest or rate of return (including a rate of increase or decrease under an index) to the participant's adjusted accumulated benefit (or portion thereof) for the period. For this purpose, the participant's adjusted accumulated benefit equals the participant's accumulated benefit as of the beginning of the period, adjusted for debits and credits (other than interest credits) made to the accumulated benefit prior to the end of the interest crediting period, with appropriate weighting for those debits and credits based on their timing within the period. For plans that calculate increases or decreases to the participant's accumulated benefit by applying a rate of interest or rate of return to the participant's adjusted accumulated benefit (or portion thereof) for the period, interest credits include these increases and decreases, to the extent provided under the terms of the plan at the beginning of the period and to the extent not conditioned on current service and not made on account of imputed service, and the interest crediting rate with respect to a participant equals the total amount of interest credits for the period divided by the participant's adjusted accumulated benefit for the period.

The proposed regulations would provide that the preservation of capital requirement is applied only at an annuity starting date on which a distribution of the participant's entire benefit as of that date under the plan's statutory hybrid benefit formula commences. The proposed regulations would also provide special rules to ensure that prior distributions are taken into account in determining the guarantee provided by the preservation of capital requirement with respect to a current distribution to which the rule applies.

These proposed regulations would broaden the list of permitted interest crediting rates from those permitted under the 2010 final regulations. A number of commenters on the 2007 proposed regulations requested that the rate of return on plan assets be treated as a market rate of return for all types of statutory hybrid plans, and not just indexed plans. In response to these comments, the proposed regulations would permit the use of the rate of return on plan assets as a market rate of return for statutory hybrid plans generally if the plan's assets are diversified so as to minimize the volatility of returns. Like the 2010 final regulations, the proposed regulations would provide that this requirement that plan assets be diversified so as to minimize the volatility of returns does not require greater diversification than is required under section 404(a)(1)(C) of Title I of the Employee Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)) with respect to defined benefit pension plans.

The preamble to the 2007 proposed regulations asked for comments about the possibility of allowing an interest credit to be determined by reference to a rate of return on a regulated investment company (RIC) described in section 851. The preamble focused on whether such an investment has sufficiently constrained volatility that the existence of the capital preservation rule would not result in an above market rate of return. In response to comments received on the 2007 proposed regulations, these proposed regulations would provide that an interest crediting rate is not in excess of a market rate of return if it is equal to the rate of return on a RIC, as defined in section 851, that is reasonably expected to be not significantly more volatile than the broad United States equities market or a similarly broad international equities market. For example, a RIC that has most of its assets invested in securities of issuers (including other RICs) concentrated in an industry sector or a country other than the United States, that uses leverage, or that has significant investment in derivative financial products, for the purpose of achieving returns that amplify the returns of an unleveraged investment, generally would not meet this requirement. Thus, a RIC that has most of its investments concentrated in the semiconductor industry or that uses leverage in order to provide a rate of return that is twice the rate of return on the Standard & Poor's 500 index (S&P 500) would not meet this requirement. On the other hand, a RIC whose investments track the rate of return on the S&P 500, a broad-based “small-cap” index (such as the Russell 2000 index), or a broad-based international equities index would meet this requirement. The requirement that the RIC's investments not be concentrated in an industry sector or a specific international country is intended to limit the volatility of the returns, as well as the risk inherent in non-diversified investments. Similarly, the requirement that the RIC not provide leveraged returns is intended both to ensure that rates provided by the RIC do not exceed an unleveraged market rate as well as to limit the volatility of the returns provided. Subject to these requirements, the proposed rule is intended to provide plan sponsors with greater flexibility in choosing an equity-based rate than would be provided if the regulations were to list particular equity-based rates that satisfy the market rate of return requirement.

The preamble to the 2007 proposed regulations requested comments as to how to implement a rule that provides that interest credits are determined under the greater of two or more interest crediting rates without violating the market rate of return limitation. In response to such comments, these proposed regulations would provide that in certain limited circumstances a plan can provide interest credits based on the greater of two or more interest crediting rates without exceeding a market rate of return.

The Treasury Department and the IRS have modeled the historical distribution of rates of interest on long-term investment grade corporate bonds and have determined that those rates have only infrequently been lower than 4 percent and, when lower, were generally lower by small amounts and for limited durations. Therefore, the increase in the effective rate of return resulting from adding an annual 4 percent floor to one of these bond rates has historically been small enough that the effective rate of return is not in excess of a market rate of return. As a result, the proposed rules would provide that it is permissible for a plan to utilize an annual floor of 4 percent in conjunction with a permissible bond rate. Specifically, the proposed regulations would provide that a plan does not provide an interest crediting rate that is in excess of a market rate of return merely because the plan provides that the interest crediting rate for an interest crediting period equals the greater of the rate of interest on long-term investment grade corporate bonds (or one of the safe harbor rates that, under the regulations, are deemed not to be in excess of that rate) and an annual interest rate of 4 percent.

This rule permitting a plan to utilize an annual floor of 4 percent in conjunction with a permissible bond-based rate would also permit plans that credit interest more frequently than annually using a permissible bond-based rate to also utilize a periodic floor that is a pro rata portion of an annual 4 percent floor. Thus, plans that credit interest more frequently than annually could provide an effective annual floor that is greater than 4 percent, both due to the effect of compounding because the floor would be applied more frequently than annually and because the floor would be applied in any period that the bond-based rate was below the floor, even if the annual rate exceeded 4 percent for the plan year. However, given the nature of bond-based rates, including the serial correlation of rates from one period to the next, as well as the fact that 4 percent is not expected to exceed a permissible bond-based rate except infrequently, by small amounts, and for limited durations, in most instances a periodic floor that is based on a 4 percent annual floor will not provide a floor that is significantly different than an annual floor of 4 percent.

In contrast, because of the volatility of equity-based rates, adding an annual floor to an equity-based rate often provides a cumulative rate of return that far exceeds the rate of return provided by the equity-based rate without such floor. It should also be noted that commenters on the 2007 proposed regulations generally did not request that such an annual floor be permitted (perhaps in recognition that a minimum guaranteed annual return when applied to equity-based rates could have a significant impact on funding). Accordingly, the proposed regulations would not allow the use of an annual floor in conjunction with the rate of return on plan assets or on a permissible RIC.

On the other hand, if, instead of applying a floor on each year's rate of return, a cumulative floor is applied to an equity-based rate, the effective rate of return is not necessarily substantially greater than the rate of return provided without the floor. Specifically, the Treasury Department and the IRS have determined that, based on the modeling of long-term historical returns, a 3 percent floor that applies cumulatively (in the aggregate from the date of each principal credit until the annuity starting date, without a floor on the rate of return provided in any interim period) could be combined with any permissible rate (including a permissible equity-based rate), without increasing the effective rate of return to such an extent that the effective rate of return would be in excess of a market rate of return. As a result, the proposed rule would provide that a plan that determines interest credits using any particular interest crediting rate that satisfies the market rate of return limitation does not provide an effective interest crediting rate in excess of a market rate of return merely because the plan provides that the participant's benefit, as of the participant's annuity starting date, is equal to the greater of the benefit determined using the interest crediting rate and the benefit determined as if the plan had used a fixed annual interest crediting rate equal to 3 percent (or a rate not in excess of 3 percent) for principal credits in all years. This rule in the proposed regulations that allows for plans to utilize a cumulative floor of up to 3 percent would also allow plans some additional flexibility in design. Thus, for example, a plan that utilizes annual ceilings in conjunction with a permissible rate could also provide a cumulative floor of up to 3 percent.

Similar to the rules with respect to application of the preservation of capital requirement, the proposed regulations would provide that the determination of the guarantee provided by any cumulative floor with respect to the participant's benefit is made only at an annuity starting date on which a distribution of the participant's entire benefit as of that date under the plan's statutory hybrid benefit formula commences. The proposed regulations would also provide special rules to ensure that prior distributions are taken into account in determining whether the guarantee exceeds the benefit otherwise provided under the plan.

In addition to permitting certain fixed floors to be applied to variable rates, the proposed regulations would also permit a standalone fixed rate of interest to be used for interest crediting purposes. While the statutory language at section 411(b)(5)(B)(i)(I) does not explicitly reference a fixed interest crediting rate, the reference to “a reasonable minimum guaranteed rate of return” and the reference to “the greater of a fixed or variable rate of return” necessarily mean that some fixed rate must also be permissible. Further, the statutory language at section 411(b)(5)(B)(i)(III) specifically authorizes the Treasury Department to issue regulations permitting a fixed rate of interest under the rules relating to a market rate of return. However, reconciling a fixed interest crediting rate with the statutory requirement that an interest crediting rate “ for any plan year shall be at a rate which is not greater than a market rate of return” [emphasis added] presents unique challenges because, by definition, fixed rates do not adjust with the market. As a result, the use of any fixed rate will result in an interest crediting rate that is above a then-current market rate of interest during any period in which the current market rate falls below the fixed rate.

In light of this fact, the Treasury Department and the IRS believe that, in order to satisfy the market rate of return requirement, any fixed interest crediting rate allowed under the rules must not be expected to exceed future market rates of interest, except infrequently, by small amounts, and for limited durations. Based on the historical modeling described above, the Treasury Department and the IRS have determined that a 5 percent fixed rate satisfies these criteria and that any higher fixed rate would result in an effective rate of return that is in excess of a market rate of return.

Specifically, the proposed rules would provide that an annual interest crediting rate of a fixed 5 percent is a safe harbor rate deemed to be not in excess of the rate of interest on long-term investment grade corporate bonds. As a result, an interest crediting rate of a fixed 5 percent would satisfy the market rate of return limitation. In addition, the special section 411(d)(6) rule set forth in the 2010 final regulations with respect to certain changes in interest crediting rates would apply to an interest crediting rate of a fixed 5 percent and, as a result, a plan amendment that changes the interest crediting rate under the plan to the third segment rate from a fixed 5 percent is deemed to satisfy the requirements of section 411(d)(6), provided certain requirements are met.

The 2010 final regulations provide that §§ 1.411(b)(5)-1(d)(1)(iii), 1.411(b)(5)-1(d)(1)(vi), and 1.411(b)(5)-1(d)(6), which provide that the regulations set forth the exclusive list of interest crediting rates and combinations of interest crediting rates that satisfy the market rate of return requirement under section 411(b)(5), apply to plan years that begin on or after January 1, 2012. For plan years that begin before January 1, 2012, statutory hybrid plans may utilize a rate that is permissible under the 2010 final regulations or these proposed regulations for purposes of satisfying the statutory market rate of return requirement.

The proposed regulations would provide guidance with respect to the application of the rules of section 411(b)(5)(B)(vi), which require special plan provisions relating to interest crediting rates and annuity conversion rates that apply when the plan is terminated. Under the proposed regulations, a statutory hybrid plan is treated as meeting the market rate of return requirements only if the terms of the plan satisfy the rules in the regulations relating to section 411(b)(5)(B)(vi). Title IV of ERISA also imposes special rules that apply when a single employer pension plan is terminated (including special rules relating to plan amendments). See regulations of the Pension Benefit Guaranty Corporation for additional rules that apply when a pension plan is terminated.

These proposed regulations reflect the statutory requirement that a plan provide that, if the interest crediting rate used to determine a participant's accumulated benefit (or a portion thereof) varied (that is, was not a constant fixed rate) during the 5-year period ending on the plan termination date, then the interest crediting rate used to determine the participant's accumulated benefit under the plan after the date of plan termination is equal to the average of the rates used under the plan during the 5-year period ending on the plan termination date. If the interest crediting rate used to determine a participant's accumulated benefit (or a portion thereof) was instead a single fixed rate for all periods during the 5-year period ending on the plan termination date, then the interest crediting rate used to determine the participant's accumulated benefit after the date of plan termination would be equal to that fixed rate.

Under this rule, the interest crediting rate used after plan termination would be based on the average of the rates that applied under the plan during the 5-year period preceding plan termination, without regard to whether this average rate exceeds then-current market rates of return (but, in determining the average rate, a rate would only be taken into account to the extent that the rate did not exceed a market rate of return when the rate actually applied). For purposes of this calculation, the proposed regulations would provide that, subject to certain other rules described in this preamble, the average of the rates used under the plan during the 5-year period ending on the termination date is determined with respect to a participant as the arithmetic average, expressed as an annual rate, of the applicable interest crediting rates that applied in the 5-year period. In determining this average, each interest crediting period for which the interest crediting date is within the 5-year period ending on the plan termination date would be taken into account, with interest crediting rates for periods that are less than a year in length adjusted and weighted proportionately. However, under this rule, if a period begins on or before the date that is 5 years before the termination date and ends within the 5-year period ending on the plan termination date, the period would be weighted as though the entire period were within the 5-year period ending on the plan termination date.

Section 411(b)(5)(B)(vi) does not explicitly provide rules with respect to plans that determine interest credits based on equity-based rates of return that may involve potential losses. Since the trailing 5-year average of an equity-based rate of return may have little, if any, correlation to the actual future equity-based rate of return, the Treasury Department and the IRS do not believe it is appropriate to provide that the trailing 5-year average of such rate of return be used to determine benefits after plan termination. In such cases, the Treasury Department and the IRS believe that it is appropriate to apply a bond-based rule instead. Thus, the proposed regulations would provide that, with respect to an interest crediting rate used to determine a participant's accumulated benefit for an interest crediting period during the 5-year period ending on the termination date that is not a fixed interest rate or a bond-based rate of interest (or is based on a variable rate that is not permissible under the regulations), the terms of the plan must provide that, for purposes of determining the average upon plan termination, the interest crediting rate for the interest crediting period is deemed to be equal to the third segment rate for the last calendar month ending before the beginning of the interest crediting period, as adjusted for any actual applicable floors and ceilings that applied to the rate of return in the period, but without regard to any reductions that applied to the rate of return in the period. Thus, for example, if the actual interest crediting rate in an interest crediting period was equal to the rate of return on plan assets, but not greater than 5 percent, then for purposes of determining the plan's average interest crediting rate, the interest crediting rate for that interest crediting period would be deemed to equal to the lesser of the applicable third segment rate for the period and 5 percent. However, if the actual interest crediting rate in an interest crediting period was equal to the rate of return on plan assets minus 200 basis points, then for purposes of determining the plan's average interest crediting rate, the interest crediting rate for that interest crediting period would be deemed to equal the third segment rate (not the third segment rate minus 200 basis points). See the request for comments in this preamble under the heading “Comments and Public Hearing” regarding the application of floors, ceilings, and reductions for purposes of the plan termination provisions when the third segment rate is substituted for an equity-based rate.

As provided in section 411(b)(5)(B)(i), the regulations require that the terms of the plan also provide that the interest rate and mortality table (including tabular adjustment factors) used on and after plan termination for purposes of determining the amount of any benefit under the plan payable in the form of an annuity (commencing at or after normal retirement age) be based on the interest rate and mortality table specified under the plan for that purpose as of the termination date, except that if the interest rate is a variable rate, the interest rate is instead based on the rules described in the preceding paragraphs of this preamble using a 5-year average.

A number of special rules apply for purposes of determining the interest crediting rate that applies after plan termination. In particular, for purposes of determining the average rate during the five-year period ending on plan termination, the interest crediting rate that applied for each interest crediting period is generally the ongoing interest crediting rate that was specified under the plan in that period, without regard to any section 411(d)(6) protected benefit using an old interest crediting rate. However, if, at the end of the last interest crediting period prior to plan termination, the participant's accumulated benefit is based on a section 411(d)(6) protected benefit that results from a prior amendment to change the rate of interest crediting applicable under the plan, then, for purposes of determining the average rate, the pre-amendment interest crediting rate is treated as having applied for each interest crediting period after the date of the interest crediting rate change. In addition, the proposed regulations would provide that if the plan determines a participant's interest credits in any interest crediting period by applying different rates to different predetermined portions of the accumulated benefit as permissible under the regulations, then the participant's interest crediting rate for the interest crediting period is assumed for purposes of the plan termination provisions to be the weighted average of the fixed interest rates, determined under the plan termination rules, that apply to each portion of the accumulated benefit.

Furthermore, to reduce the administrative burden and to determine the average rate for each participant based on 5 years of interest crediting data, if the plan provided for interest credits for any interest crediting period in which, pursuant to the terms of the plan, the individual was not eligible to receive interest credits (because the individual was not a participant or beneficiary in the relevant interest crediting period or otherwise), then, for purposes of determining the interest crediting rate that applies after plan termination, the individual is treated as though the individual received interest credits in that period using the interest crediting rate that applied in that period under the terms of the plan to determine the benefit of a similarly situated participant or beneficiary who was eligible to receive interest credits. However, if, under the terms of the plan, the individual was not eligible to receive any interest credits during the entire 5-year period ending on the plan termination date, then the rules fixing the interest crediting rate do not apply to determine the individual's benefit after plan termination.

The proposed regulations include examples to illustrate the application of these plan termination rules, including how these rules would apply where a plan bases its interest crediting rate on a weighted average of more than one rate, how these rules would apply where the plan's ongoing interest crediting rate is an equity-based rate of return, and how these rules would apply to a participant whose benefits are determined where the plan had switched interest crediting rates in the past and where the interest credit prior to termination was determined by applying the old rate to the benefit attributable to principal credits before the applicable amendment date.

An inherent tension exists between the requirement not to reduce a participant's accrued benefit and the requirement that an interest crediting rate not be in excess of a market rate of return that makes changes in interest crediting rates difficult to implement for statutory hybrid plans in many circumstances. This is because, in order to satisfy section 411(d)(6), a participant's benefit can never be less than the pre-amendment benefit increased for periods after the amendment using the pre-amendment interest crediting rate, thereby effectively requiring a minimum interest crediting rate. In light of this tension, the proposed regulations would create a special market rate of return rule that applies in the case of an amendment to change the plan's interest crediting rate.

In particular, the proposed rule would provide that, in the case of an amendment to change a plan's interest crediting rate for periods after the applicable amendment date from one interest crediting rate (the old rate) that is not in excess of a market rate of return to another interest crediting rate (the new rate) that is not in excess of a market rate of return, the plan's effective interest crediting rate is not in excess of a market rate of return merely because the plan provides for the benefit of any participant who is benefiting under the plan on the applicable amendment date to never be less than what it would be if the old rate had continued but without taking into account any principal credits after the applicable amendment date. A pattern of repeated plan amendments each of which provides for a prospective change in the plan's interest crediting rate with respect to the benefit as of the applicable amendment date will be treated as resulting in the ongoing plan terms providing that the interest crediting rate equals the greater of each of the interest crediting rates, so that the special rule in the preceding sentence would not apply. See § 1.411(d)-4, A-1(c)(1). Thus, in such cases the plan will be treated as providing a rate of return that is in excess of a market rate of return, unless the resulting greater-of rate satisfies the market rate of return rules.

In coordination with the rules under section 411(a)(13)(A) (as described in section I of this preamble) that apply with respect to the benefit determined as of each annuity starting date after normal retirement age, the proposed regulations would provide that a statutory hybrid plan is not treated as providing an effective interest crediting rate that is in excess of a market rate of return merely because the plan provides that the participant's benefit, as of each annuity starting date after normal retirement age, is equal to the greater of the benefit determined using an interest crediting rate that is not otherwise in excess of a market rate of return and the benefit that satisfies the requirements of section 411(a)(2). Thus, for example, a cash balance plan would not be treated as providing an effective interest crediting rate in excess of a market rate of return merely because the plan credits interest after normal retirement age at a rate that is sufficient to provide any required actuarial increases.

An amendment to change a plan's interest crediting rate that only applies with respect to benefits that have not yet accrued (such as where the plan establishes a second hypothetical account balance for future principal credits to which a different interest crediting rate is applied) would not result in a reduction in accrued benefits attributable to service before the applicable amendment date and, therefore, such a change would not violate section 411(d)(6). 4 However, except to the extent permitted under section 1107 of PPA '06 or as otherwise described in section IV of this preamble, an amendment to change a plan's future interest crediting rate with respect to benefits that have already accrued (in other words, with respect to an existing account balance) must satisfy section 411(d)(6) if the change could result in interest credits that are smaller as of any date after the applicable amendment date than the interest credits that would be credited without regard to the amendment. 5

Under the 2010 final regulations, a plan is not treated as providing smaller interest credits after the applicable amendment date merely because the amendment changes the plan's future interest crediting rate with respect to benefits that have already accrued to the rate of interest on long-term investment grade corporate bonds (the third segment rate under section 430(h)(2)(C)(iii)) from one of the other bond-based safe harbor rates permitted under the 2010 final regulations (for example, a rate based on Treasury bonds with any of the margins specified in the regulations or an eligible cost-of-living index). However, the change is permitted only if: (1) The effective date of the amendment is at least 30 days after adoption, (2) the new interest crediting rate only applies to interest to be credited after the effective date of the amendment, and (3) on the effective date of the amendment, the new interest crediting rate is not lower than the interest crediting rate that would have applied in the absence of the amendment.

After these proposed regulations under sections 411(a)(13) and 411(b)(5) are issued as final regulations, it is expected that relief from the requirements of section 411(d)(6) will be granted for a plan amendment that eliminates or reduces a section 411(d)(6) protected benefit, provided that the amendment is adopted before those final regulations apply to the plan, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of section 411(b)(5). 6 It is expected that this section 411(d)(6) relief will be available in the case of an amendment that reduces the future interest crediting rate with respect to benefits that have already accrued from a rate that is in excess of a market rate of return under the final market rate of return rules to the extent necessary to constitute a permissible rate under the final market rate of return rules. However, it is expected that this relief would not permit a plan with an interest crediting rate within the list of permitted rates under the final market rate of return rules to change to another permitted rate because the change would not be necessary to enable the plan to satisfy the requirements of section 411(b)(5). Similarly, it is expected that this relief would not permit a plan with an interest crediting rate that is impermissible under the final market rate of return rules to change to a permissible rate using less than the maximum permitted margin for that rate because the reduction would be more than necessary to enable the plan to satisfy the requirements of section 411(b)(5). For purposes of the preceding sentence, a rate without an associated margin is treated as having a maximum permitted margin of zero. See the request for comments, under the heading “Comments and Public Hearing” in this preamble, regarding limitations on the scope of this anticipated relief under § 1.411(d)-4, A-2(b)(2)(i) because the relief must be limited to amendments that change a plan's interest crediting rate only to the extent necessary to enable the plan to satisfy the requirements of section 411(b)(5).

The specific rules that would be implemented under the proposed regulations generally would apply to plan years that begin on or after January 1, 2012. However, as stated in the preamble to the 2010 final regulations, a plan is permitted to rely on the provisions of these proposed regulations, as well as the 2010 final regulations, the 2007 proposed regulations, and Notice 2007-6, for purposes of satisfying the requirements of sections 411(a)(13) and 411(b)(5) for periods before the regulatory effective date.

It has been determined that these proposed regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS specifically request comments on the clarity of the proposed regulations and how they may be made easier to understand.

In addition to comments on issues addressed in these proposed regulations, the Treasury Department and the IRS specifically request comments on the following issues:

• Should a defined benefit plan that expresses a participant's accumulated benefit as a current single-sum dollar amount and that does not provide for interest credits be excluded from the definition of a statutory hybrid plan?

• In the case of a statutory hybrid plan that credits interest using an interest crediting rate equal to the rate of return on a RIC, how does section 411(d)(6) apply if the underlying RIC subsequently ceases to exist?

• The proposed regulations permit certain fixed interest crediting rates (a fixed 5 percent rate for any year, the greater of 4 percent or certain bond-based indices for any year, and a cumulative minimum 3 percent annual rate). Comments regarding these specific proposed rules should take into account how any general legal standard for a market rate of return would be applied in different economic circumstances with variable interest rate markets, as well as the related ability that would generally be available under these proposed regulations at § 1.411(b)(5)-1(e)(3)(iii) for the plan sponsor to change the crediting rate on an existing hypothetical account balance for active participants from one interest crediting rate to another, including the risk that whatever fixed rate is permitted might allow a plan's interest credits to exceed market rates of interest either frequently, by an amount that might be large, or for an extended duration. Commenters recommending any additional types of rates of return than those in these proposed regulations should justify how those rates meet a market rate of return, taking into account the minimum guarantee rules.

• Should a statutory hybrid plan be able to offer participants a menu of hypothetical investment options (including a life-cycle investment option, whereby participants are automatically transitioned incrementally at certain ages from a blended rate that is more heavily equity-weighted to a rate that is more heavily bond-weighted) and, if so, what plan qualification issues ( i.e., forfeiture, section 411(d)(6), market rate of return, and other section 411(b)(5) issues) arise under such a plan design? In particular, do the following events raise issues: (1) A participant elects to switch from one investment option to another; (2) a bond index or RIC underlying one of the investment options ceases to exist; (3) the plan is amended to eliminate an investment option; (4) a participant elects to switch from an investment option with a cumulative minimum to an investment option without a cumulative minimum (or vice versa); or (5) the plan is terminated and, pursuant to the special rules that apply upon plan termination, the interest crediting rate that applies to determine a participant's benefit after plan termination must be fixed?

• How does a statutory hybrid plan that provides benefits under a statutory hybrid benefit formula other than a lump sum-based benefit formula (such as a plan that provides for indexing as described in section 411(b)(5)(E))—a plan to which section 411(a)(13)(A) does not apply—ensure compliance with the minimum present value rules of section 417(e)?

• How does a statutory hybrid plan determine the section 417(e) minimum present value of the participant's benefit where a portion of the benefit is determined based partly on the benefit under a lump sum-based benefit formula, although that portion is not determined under a lump sum-based benefit formula? For example, where a portion of the accrued benefit is equal to the excess of the benefit under a traditional defined benefit formula over the benefit under a hypothetical account formula, how is the present value of that portion of the accrued benefit determined?

• Should the proposed alternative method of satisfying the conversion protection requirements that does not require a comparison of benefits at the annuity starting date be broadened to apply to forms of distribution other than a single-sum distribution? If this rule should be broadened, what rules would ensure that the benefit attributable to the opening hypothetical account balance is not less than the benefit available under the same generalized optional form under the pre-conversion formula (which may include subsidized early retirement benefits and other retirement-type subsidies) consistent with the goal of having a simplified alternative?

• How does a statutory hybrid plan that uses a variable interest crediting rate that may potentially be negative satisfy the fractional rule of section 411(b)(1)(C) if the 133 1/3 percent rule of section 411(b)(1)(B) is not satisfied?

• For purposes of the plan termination rules, should a floor, ceiling, or reduction that applied to an equity-based rate in an interest crediting period be treated as applying in the same manner to the third segment rate or is it appropriate for such an adjustment to be disregarded or otherwise modified for purposes of such rules?

• Under the relief to be provided pursuant to § 1.411(d)-4, A-2(b)(2)(i), which authorizes amendments that reduce a section 411(d)(6) protected benefit only to the extent necessary to satisfy the requirements of section 411(b)(5), should a statutory hybrid plan with an interest crediting rate that is impermissible under the final market rate of return rules be permitted to be amended to change the future interest crediting rate with respect to benefits that have already accrued to any permissible rate using the maximum permitted margin for that rate or should that be dependent upon the reasons that the pre-amendment rate exceeded a market rate of return? Thus, for example, should a plan with an impermissible bond-based rate (without a fixed component) be permitted to switch to any permissible rate, bond-based or otherwise, using the maximum permitted margin for that rate? Should a plan with an impermissibly high standalone fixed rate be permitted to switch to the maximum rate of any type, should it be permitted to switch to the maximum permitted bond-based rate with the maximum permitted floor for that rate (the third segment rate with a fixed 4 percent floor), or must it switch to the maximum permitted standalone fixed rate (a fixed rate of 5 percent)? Should a plan with a permissible bond-based rate but with an impermissibly high fixed floor be permitted to switch to the maximum rate of any type, should it be permitted to retain the pre-amendment bond-based rate while reducing the floor to the maximum permitted floor for that rate (a fixed 4 percent floor), should it be permitted to switch to the maximum permitted standalone fixed rate (a fixed rate of 5 percent), or must it switch to the maximum permitted bond-based rate with the maximum permitted floor for that rate (the third segment rate with a fixed 4 percent floor)?

All comments will be available for public inspection and copying. A public hearing has been scheduled for Wednesday, January 26, 2011, beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by Wednesday, January 12, 2011, and an outline of topics to be discussed and the amount of time to be devoted to each topic (a signed original and eight (8) copies) by Friday, January 14, 2011. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal authors of these regulations are Neil S. Sandhu, Lauson C. Green, and Linda S. F. Marshall, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and the Treasury Department participated in the development of these regulations.

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

This Federal Register document sets out OSHA's proposed interpretation of feasible administrative or engineering controls in 29 CFR 1910.95(b)(1) and 1926.52(b) for the purpose of enforcing compliance with these standards. This document does not address feasibility in any other context. Sections 1910.95(b)(1) and 1926.52(b), which are substantively identical, require that when employees are exposed to sound exceeding the permissible level, feasible administrative or engineering controls must be utilized to reduce the sound to within that level, and if such controls are ineffective, personal protective equipment must be provided and used. Feasibility encompasses both economic and technological considerations, but this document addresses only economic feasibility. Under OSHA's current enforcement policy, the agency issues citations for failure to use engineering and administrative controls only when hearing protectors are ineffective or the costs of such controls are less than the cost of an effective hearing conservation program.

As discussed below, this policy is contrary to the plain meaning of the standard and thwarts the safety and health purposes of the OSH Act by rarely requiring administrative and engineering controls even though these controls are affordable and generally more effective than hearing protectors in reducing noise exposure. Accordingly, OSHA now proposes to consider administrative or engineering controls economically feasible when the cost of implementing such controls will not threaten the employer's ability to remain in business, or if such a threat to viability results from the employer's failure to meet industry safety and health standards.

Section 6(a) of the OSH Act required the Secretary, during the two-year period following the Act's effective date, to promulgate as an OSHA standard any national consensus standard and established Federal standard unless she determined that the promulgation of such a standard would not result in improved safety or health. 29 U.S.C. 655(a). Pursuant to section 6(a), OSHA promulgated the general industry noise standard as an “established federal standard” in 1971. 36 FR 10466, 10518, May 29, 1971 (codified as § 1910.95). Section 1910.95(b)(1) is derived from 41 CFR 50-204.10, an occupational noise exposure standard promulgated under the Walsh-Healey Government Contracts Act, 41 U.S.C. 35-45, which requires that federal government contracts for materials over $10,000 must provide that the work be done under sanitary and safe working conditions, 41 U.S.C. 35(d). The requirements of the Walsh-Healey Act noise standard are the same as those of the OSH Act noise standard. Compare 41 CFR 50-204.10(b) with 29 CFR 1910.95(b)(1).

Section 1910.95(b)(1) states as follows:

OSHA also promulgated the construction noise standard, originally codified at 29 CFR 1518.52, as an “established federal standard” in 1971. 36 FR 10466, 10469, May 29, 1971. Before being adopted unchanged as an OSH Act standard, section 1518.52(b) was issued under the Construction Safety Act, 40 U.S.C. 333 (1969), which requires that federal construction contracts for over $100,000 must provide that the work be done under sanitary and safe working conditions. 40 U.S.C. 3704(a)(1) (formerly cited as 40 U.S.C. 333(a)(1)); 36 FR 7340, 7348, April 17, 1971. At the end of 1971, § 1518.52(b) was redesignated as § 1926.52(b), 36 FR 25232, Dec. 30, 1971, its current codification.

Section 1926.52(b) is almost verbatim identical to § 1910.95(b)(1) and provides:

Engineering controls involve modifications to plant, equipment, processes or materials that reduce the sound intensity at the source, by substituting quieter machines and processes, or by isolating the machine or its operator. See Forging Indus. Ass'n v. Secretary of Labor, 773 F.2d 1436, 1440 n.3 (4th Cir. 1985) ( en banc ); Donovan v. Castle & Cooke Foods, 692 F.2d 641, 643 n.2 (9th Cir. 1982). Administrative controls involve modifications of work assignments to reduce employees' exposure to noise, such as rotating employees so that they work in noisy areas for a short time. Forging Indus., 773 F.2d at 1440 n.3. Personal protective equipment (PPE) includes hearing protectors such as ear plugs and ear muffs fitted to individual employees. Castle & Cooke, 692 F.2d at 643 n.2.

OSHA's early interpretive guidance on 29 CFR 1910.95(b)(1) indicated that feasible engineering or administrative controls must be used to reduce noise to acceptable levels and that PPE must be used as a supplement when such controls are not completely effective in achieving this objective. Letter from Barry J. White, OSHA Assistant Secretary for Regional Programs, to Leslie Anderson (March 19, 1975). In the following decade, OSHA issued citations to employers for failure to use affordable engineering and administrative controls to reduce noise levels. The Occupational Safety and Health Review Commission issued a series of decisions swinging back and forth between a cost-benefit interpretation of economically feasible controls and a broader, plain-meaning definition of the term as “capable of being done.” The Commission ultimately settled on the cost-benefit interpretation. 2 Although OSHA has not changed its interpretation of the standard, its enforcement policy since 1983 has allowed employers to rely on a hearing conservation program based on PPE if such a program reduces noise exposures to acceptable levels and is less costly than administrative and engineering controls. The development of the case law in this area is described below. 3

The Commission first addressed section 1910.95(b)(1) in Continental Can Co., 4 BNA OSHC 1541, 1547 (Nos. 3973, 4397, 4501, 4853, 5327, 7122, 7910 & 7920, 1976). There, the Commission rejected the Secretary's argument that the costs of noise-reducing engineering controls are not relevant unless they would seriously jeopardize the financial health of the company. The Commission held that, in determining whether controls are economically feasible, all the relevant costs and benefit factors must be weighed. Ibid. The Commission refined this cost-benefit interpretation in Castle & Cooke Foods, 5 BNA OSHC 1435, 1438 (No. 10925, 1977), aff'd, 692 F.2d 641 (9th Cir. 1982), holding that engineering controls are economically feasible only if the health benefits to employees from noise reduction justify the cost to the employer. Applying this test, the Commission found that, although engineering controls would reduce ambient noise in Castle & Cooke's plants to within the limits of Table G-16, the hearing loss avoided by such a reduction would not be life-threatening or, in most cases, seriously debilitating. Id. at 1440. Rejecting the Secretary's position that engineering controls were affordable, that the health benefits of such controls would be significant, and that hearing protectors were less effective, the Commission concluded that the health benefits did not justify the cost of implementing engineering controls. Ibid. The Secretary appealed Castle & Cooke to the Ninth Circuit, and while that case was pending, the Supreme Court decided American Textile Mfgs. Institute, Inc. v. Donovan ( ATM ), 452 U.S. 490, 508-11 (1981). In ATMI, the Court held that feasible in section 6(b)(5) of the OSH Act, which requires that the Secretary promulgate standards for toxic substances at the most protective level, “to the extent feasible,” means “capable of being done,” and therefore rules out balancing costs and benefits. ATMI, 452 U.S. at 508-09. The Ninth Circuit rejected the Secretary's argument that the Supreme Court's interpretation of feasible in section 6(b)(5) was controlling as to the meaning of the same term in § 1910.95(b)(1). Believing itself bound to defer to the Commission's expertise in interpreting the standard, the Ninth Circuit distinguished ATMI on the ground that the Court's holding was limited to section 6(b)(5) standards and left open whether the general requirement in section 3(8) of the Act that OSHA standards be “reasonably necessary” might support cost-benefit analysis for standards issued under provisions other than section 6(b)(5). 4 Donovan v. Castle & Cooke Foods, 692 F.2d 641, 648-49 (9th Cir. 1982). On this basis, the Ninth Circuit concluded that the Commission was “free to exercise its authority to interpret the [standard]” and the Commission's cost-benefit interpretation was neither unreasonable nor arbitrary. Id. at 649

In December 1982, a month after the Ninth Circuit affirmed Castle & Cooke, the Commission reinterpreted the word feasible in section 1910.95(b)(1) in light of ATMI. Sun Ship, Inc., 11 BNA OSHC 1028 (No. 16118, 1982). Rejecting the Ninth Circuit's analysis as “divergent,” two Commissioners agreed that the Supreme Court's interpretation of feasible in section 6(b)(5) controls the meaning of the same term in the noise standard, and precludes balancing the health benefits of engineering controls against their costs. Sun Ship, 11 BNA OSHC at 1031-32. Administrative and engineering controls are economically feasible, the Commission held, if their cost does not threaten the cited employer's long-term profitability and competitiveness, or if the employer's inability to afford these controls results from having lagged behind the industry in providing safety or health protection for employees. Id. at 1033. Chairman Rowland dissented, arguing that the fact that the Commission had previously been unable to agree on the meaning of feasible, indicated that § 1910.95(b)(1) lacked ascertainable criteria for its enforcement and was therefore unenforceable as written. Id. at 1037-43.

In 1984, the Commission overruled Sun Ship in a split decision in which the two majority commissioners presented different rationales. Sherwin-Williams Co., 11 BNA OSHC 2105, 2110-11 (No. 14131, 1984). In the majority opinion, Commissioner Buckley resurrected the Ninth Circuit's Castle & Cooke analysis that the majority in Sun Ship had expressly rejected. Citing the Ninth Circuit's holding that the Commission was not required by ATMI to abandon cost-benefit analysis under § 1910.95(b)(1), and the fact that the Secretary had revised her enforcement policy in 1983 to accept a cost-benefit approach, Commissioner Buckley concluded that Sun Ship should be reexamined. Sherwin-Williams Co., 11 BNA OSHC at 2108-09. He also found that it was reasonable to believe that the government contractors bidding on Walsh-Healey Act contracts would have understood “feasible administrative and engineering controls” to mean those controls that were practical and cost-effective. Id. at 2110. For these reasons, Commissioner Buckley concluded that cost-benefit analysis was incorporated into the noise standard upon its adoption under section 6(a) of the OSH Act. Ibid. Under this approach, if the employer produces evidence of the cost of controls, the Secretary must prove that “the benefit of the proposed engineering controls justifies their relative cost in comparison to other abatement methods.” Ibid.

Chairman Rowland concurred in overruling Sun Ship, but for a different reason. Chairman Rowland restated the position he had taken in his dissent in Sun Ship that § 1910.95(b)(1) was unenforceable as written because it provided no ascertainable criteria for determining what administrative and engineering controls were “feasible” and impermissibly delegated authority to the Commission to decide what the standard meant. Sherwin-Williams, 11 BNA OSHC at 2111 (Rowland, Ch., concurring). Chairman Rowland noted, however, that absent agreement by two commissioners on the standard's interpretation, the parties and administrative law judges would have no clear guidance on what principles to apply. Ibid. He concluded that “as between the test set forth in Sun Ship and the cost-benefit approach adopted by Commissioner Buckley, I believe the later test represents the more reasoned result.” Ibid. Thus Chairman Rowland joined in adopting Commissioner Buckley's cost-benefit test for determining the feasibility of engineering controls. Id. at 2112.

Commissioner Cleary dissented, finding no grounds to overrule Sun Ship. Sherwin-Williams, 11 BNA OSHC at 2112-14 (Cleary, C., dissenting). He argued that the Court in ATMI determined that the plain meaning of feasible is “capable of being done,” and that the term therefore cannot be understood to incorporate a cost-benefit analysis. Id. at 2112. The fact that ATMI dealt with section 6(b)(5), rather than section 6(a), of the OSH Act was unimportant, in Commissioner Cleary's view, because there is nothing in the Act to support giving the term feasible in the noise standard anything other than its plain, ordinary meaning. Id. at 2112-13. He also noted that acceptance of the majority's cost-benefit approach would virtually eliminate engineering controls from the noise standard since earplugs or earmuffs will almost always cost less than effective engineering controls. Id. at 2113-14. In Commissioner Cleary's view, the majority's adoption of a cost-benefit test amounted to an unauthorized amendment of the standard. Id. at 2114.

In response to the Ninth Circuit's Castle & Cooke decision, OSHA adopted enforcement guidelines allowing employers to use PPE and a hearing conservation program, rather than engineering or administrative controls, when hearing protectors are less costly than such controls, unless noise levels are especially elevated CPL 2-2.35A, § G (Dec. 19, 1983). A hearing conservation program is one that meets the standard's requirements for protecting employees from the harmful effects of noise at or above 85 decibels. See § 1910.95(c)-(o); Forging Indus., 773 F.2d at 1440. Such a program includes monitoring, periodic audiometric testing, provision of hearing protectors, training and other elements. Forging Indus., 773 F.2d at 1440-41.

OSHA's enforcement policy as set forth in the Field Operations Manual (FOM) authorizes citing employers for failing to use engineering and/or administrative controls only when (1) noise levels are so high—said to border on 100 dBA when the most effective hearing protectors are used—that hearing protectors alone will not reliably reduce noise to acceptable levels; or (2) the costs of such controls are less than the cost of an effective hearing conservation program. FOM, CPL 02-00-148, Chapt. 4 § XI.B.1 (Nov. 9, 2009). Since effective engineering and administrative controls almost always cost more than a hearing conservation program based on hearing protectors, citations are rarely issued for failure to use such controls under OSHA's current policy.

The legal landscape concerning the interpretation of § 1910.95(b)(1) (and therefore of the substantively identical § 1926.52(b)) has dramatically changed since the Ninth Circuit's Castle & Cooke, and the Commission's Sherwin-Williams decisions. In Martin v. OSHRC ( CF & I ), 499 U.S. 144, 150-55 (1991), the Supreme Court established that the Secretary is the administrative actor responsible for issuing authoritative interpretations of OSHA standards, while the Commission's role, as neutral arbiter, is to determine whether the Secretary's interpretation is reasonable. The Commission is not, as the Ninth Circuit believed, free to exercise de novo authority to interpret a standard, and a court of appeals is to defer to the Secretary's interpretation if reasonable, not the Commission's. Although OSHA has for some time acquiesced as a matter of enforcement policy in the Commission's cost-benefit test for determining the economic feasibility of administrative and engineering controls under the noise standards, the agency has decided that this approach is inconsistent with the standards. For the reasons stated below, OSHA has concluded that engaging in cost-benefit analysis under §§ 1910.95(b)(1) and 1926.52(b) is contrary to the plain meaning of feasibility and thwarts the safety and health purposes of the OSH Act and the standard. Therefore, OSHA proposes to consider administrative or engineering controls economically feasible under the noise standards when the cost of these controls will not threaten the cited employer's ability to stay in business or when the threat to viability results from the employer's having lagged behind the industry in providing safety and health protection for employees.

The language of the noise standards frames the analysis. The Supreme Court has held that the word feasible has the plain meaning of “capable of being done” and does not permit cost-benefit analysis. The noise standards require that “feasible administrative or engineering controls” be utilized when noise is excessive. In ATMI, the Supreme Court considered the meaning of the word feasible in the context of section 6(b)(5) of the OSH Act, 29 U.S.C. 655(b)(5), which requires that the Secretary set standards for toxic substances at the level which most adequately assures, “to the extent feasible,” that no employee will suffer material impairment of health. The Court found that the plain meaning of feasible is “capable of being done;” “[t]hus, § 6(b)(5) directs the Secretary to issue the standard that `most adequately assures * * * that no employee will suffer material impairment of health,' limited only by the extent to which this is `capable of being done.' ” ATMI, 452 U.S. at 508-09. The Court further concluded that Congress's use of the word feasible in section 6(b)(5) “defined the basic relationship between costs and benefits, by placing the `benefit' of worker health above all other considerations save those making attainment of this `benefit' unachievable.” Id. at 509. Thus, the feasibility analysis required by section 6(b)(5) necessarily rules out a balancing of costs and benefits. “[C]ost-benefit analysis by OSHA is not required by the statute because feasibility analysis is.” Ibid.

The Court's analysis in ATMI governs the interpretation of §§ 1910.95(b)(1) and 1926.52(b). By requiring feasible administrative or engineering controls to be utilized when noise levels exceed those specified in Table G-16, the standard directs employers to use those controls capable of reducing exposures. The cost of such controls is relevant only to the extent that it is so high as to threaten the employer's ability to stay in business. This construction is supported not only by the plain meaning of feasible, but also by the canon of construction that regulatory language should be given the same meaning as the same language appearing in the statute. See Sun Ship, 11 BNA OSHC at 1032.

The 1984 Sherwin-Williams decision adopting a cost-benefit requirement for the general industry noise standard despite ATMI is plainly wrong and cannot stand. The Commission was unable to agree on a rationale for overruling Sun Ship, in which the majority had held that the Supreme Court's interpretation of feasible in section 6(b)(5) controlled the meaning of same term in § 1910.95(b)(1). Moreover, neither Commissioner Buckley's majority opinion nor Chairman Rowland's separate concurrence is persuasive.

Commissioner Buckley identified two factors which he believed supported rejecting the plain meaning of “feasible” in favor of a cost-benefit approach. The first factor, taken from the Ninth Circuit's Castle & Cooke decision, is that ATMI did not address whether section 3(8) of the OSH Act, which defines an occupational safety or health standard, in part, as one requiring “reasonably necessary” measures, requires a cost-benefit analysis for standards issued under provisions other than section 6(b)(5). The Ninth Circuit inferred from the Court's failure to address this issue that ATMI did not require the Commission to abandon a cost-benefit approach to a noise standard issued under section 6(a). Donovan v. Castle & Cooke Foods, 692 F.2d at 649. The Ninth Circuit's reasoning, however, is seriously flawed.

As a threshold matter, the Secretary has rejected the notion that section 3(8)'s “reasonably necessary” language imposes a requirement for cost-benefit analysis even for standards not subject to section 6(b)(5)'s feasibility constraint. In response to litigation arising under the lockout/tagout standard, the Secretary concluded that section 3(8) does not require a formal cost-benefit analysis—in which all the costs and benefits of a particular action are identified, quantified and compared—for safety standards, which are issued under section 6(b) but are not subject to section 6(b)(5). 58 FR 16612, 16622, Mar. 30, 1993 (Supplemental Statement of Reasons); International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW v. OSHA, 37 F.3d 665, 669-70 (D.C. Cir. 1994). The Secretary's interpretation of section 3(8), as published in her Federal Register supplemental statement, is entitled to deference as long as it is reasonable. United States v. Mead Corp., 553 U.S. 218, 226-27 (2001).

Moreover, cost-benefit analysis is inconsistent with the text of § 1910.95(b)(1). Section 6(a) required the Secretary to promulgate the existing Walsh-Healey noise standard as an OSHA standard unless it would not result in improved safety or health. OSH Act, 29 U.S.C. 655(a). The statutorily mandated standard requires feasible controls to be used to reduce exposure. To read section 3(8) as imposing a requirement that controls be used only if the benefits justify the cost would eviscerate the feasible controls requirement that section 6(a) required the Secretary to promulgate. The standard makes administrative and engineering controls the primary means of compliance; only if such controls are in feasible, i.e., so costly as to imperil the employer's long-term viability, may employers use hearing protectors. Section 1910.95(b)(1); Forging Indus., 773 F.2d at 1440.

Yet the Commission's cost-benefit approach completely reverses this priority; hearing protectors may be used unless they cost more than the engineering controls necessary to achieve an equivalent noise reduction. Castle & Cooke, 5 BNA OSHC at 1441. Under the Commission's interpretation, hearing protectors are presumptively appropriate, even if administrative and engineering controls are affordable and effective. Just as Congress could not have intended the general language of section 3(8) to countermand the specific feasibility requirement of section 6(b)(5), ATMI, 452 U.S. at 513, Congress could not have understood that section 3(8) would eviscerate the specific requirements of the existing federal standards that the Secretary was required by section 6(a) to adopt during the two-year period following the OSH Act's effective date. For § 1910.95(b)(1), no less than standards promulgated under section 6(b)(5), the term “feasible” defines “the basic relationship between costs and benefits by placing the `benefit' of worker health above all other considerations save those making attainment of this `benefit' unachievable * * *. Thus, cost-benefit analysis * * * is not required by the statute because feasibility analysis is.” ATMI, 452 U.S. at 509.

The second factor identified by Commissioner Buckley for departing from the plain meaning of “feasible” in § 1910.95(b)(1) is even less persuasive. Although the Commissioner found no regulatory or adjudicative history indicating how the standard was interpreted under the Walsh-Healey Act, he assumed that government contractors bidding on Walsh-Healey Act contracts would not have construed the term “feasible” in accordance with the dictionary definition, but rather would have understood the term to allow for cost-benefit analysis. Sherwin-Williams, 11 BNA OSHC at 2109-10.

Commissioner Buckley's assumptions about the competitive bidding process under the Walsh-Healey Act are both irrelevant and unfounded. They are irrelevant because § 1910.95(b)(1), was promulgated under § 6(a) of the OSH Act as an “occupational safety and health standard.” 29 U.S.C. 655(a). The Secretary is responsible for issuing authoritative interpretations of OSHA standards, and she is not bound by the perspective of a hypothetical government contractor bidding on a Walsh-Healey contract. CF & I, 499 U.S. at 150-55. The Secretary's interpretation of § 1910.95(b)(1) must be given effect if it is reasonable, “that is, so long as the interpretation sensibly conforms to the purpose and wording of the regulations.” Id. at 150-51. Construing the standard to require that administrative or engineering controls be used as long as they do not threaten the employer's ability to stay in business is consistent with the standard's plain meaning and its purpose of protecting employee health by achieving reductions in noise exposure. It is the Secretary's reasonable construction of the standard, which constitutes an exercise of delegated law-making authority when embodied in an OSHA citation, that is entitled to deference, not the Commission's interpretation. Id. at 150-55. Speculation about how government contractors might have interpreted the standard in bidding on a Walsh-Healey contract is wholly irrelevant.

In any event, Commissioner Buckley's assumption as to how the “feasible” controls requirement would have been interpreted in the federal procurement context is entirely unfounded. First, as the commissioner himself admitted, there is nothing in the regulatory or adjudicatory history of the Walsh-Healey noise standard to support an assumption that feasible was not understood by government contractors to have its plain, ordinary meaning. Commissioner Buckley's interpretation thus violated the fundamental canon of construction that words are to be interpreted in accordance with their normal meaning unless there is specific evidence to the contrary. Furthermore, the notion that prospective contractors would have understood that they should include the costs of engineering controls only if they determined that the benefits outweighed the costs is completely contrary to basic principles of government procurement. Sherwin-Williams, 11 BNA OSHC at 2109-10. The competitive process requires that all prospective contractors bid on the same requirements; the process cannot possibly permit some bidders to decide for themselves whether engineering controls are required, or not required. Thus, feasible controls must have been understood—by both the government and its contractors—in accordance with its plain meaning.

OSHA's current enforcement policy on § 1910.95(b)(1) closely tracks the Commission's cost-benefit approach. Where PPE and a hearing conservation program are cheaper, the current enforcement policy allows employers to rely on them, rather than administrative or engineering controls, unless noise levels are so high that PPE will not reduce noise exposure to acceptable levels. 5 FOM, CPL 02-00-148, § XI.B. The policy provides, moreover, that PPE may be used up to 100 dBA. Ibid. As discussed above, this policy is inconsistent with the noise standards' explicit requirement that feasible administrative and engineering controls be used to reduce noise exposures to the level set by the standard and that PPE be used if administrative and engineering controls are unable to reduce noise to permitted levels. The standards' reliance on feasible engineering and administrative controls as the primary means of reducing noise exposures is consistent with OSHA's traditional adherence to a hierarchy of preferred controls, and is supported by good industrial hygiene practice and OSHA's experience in assuring that workers have a healthy workplace. See, e.g., OSHA, 29 CFR parts 1915, 1917-18 & 1926, “Occupational Exposure to Hexavalent Chromium,” Final Rule, 71 FR 10100, 10345, Feb. 28, 2006 (discussing methods of compliance for reducing exposures to hexavalent chromium). Hearing protectors are less reliable than administrative and engineering controls in reducing noise levels and maintaining such reductions over time. OSHA's current enforcement policy virtually eliminates the requirement to use administrative or engineering controls since such controls almost always cost more than hearing protectors. Furthermore, the current policy thwarts the safety and health purposes of the OSH Act by rarely requiring administrative and engineering controls even though these controls are generally more effective than hearing protectors in reducing noise exposure.

Accordingly, OSHA now proposes to interpret §§ 1910.95(b)(1) and 1926.52(b) in conformity with the plain meaning of these provisions and with the safety and health purposes of the OSH Act. OSHA proposes to interpret the term feasible in these provisions as having the same meaning that the term has in section 6(b)(5) of the Act, i.e., “capable of being done,” or “achievable.” OSHA also proposes to consider administrative or engineering controls economically feasible if they will not threaten the employer's ability to remain in business or if the threat to viability results from the employer's having failed to keep up with industry safety and health standards. OSHA further intends to change its enforcement policy to authorize the issuance of citations requiring the use of administrative or engineering controls when these controls are feasible in accordance with this interpretation. OSHA welcomes comments from interested parties on this proposed interpretation.

Throughout this document, “we”, “us”, and “our” refer to EPA.

Part C, Subpart II, of the Act, establishes a visibility protection program that sets forth “as a national goal the prevention of any future, and the remedying of any existing, impairment of visibility in mandatory class I Federal areas which impairment results from manmade air pollution.” 42 U.S.C. 7491A(a)(1). The terms “impairment of visibility” and “visibility impairment” are defined in the Act to include a reduction in visual range and atmospheric discoloration. Id. 7491A(g)(6). A fundamental requirement of the visibility protection program is for EPA, in consultation with the Secretary of the Interior, to promulgate a list of “mandatory Class I Federal areas” where visibility is an important value. Id. 7491A(a)(2). These areas include national wilderness areas and national parks greater than six thousand acres in size. Id. 7472(a).

On November 30, 1979, EPA identified 156 mandatory Class I Federal areas where visibility is an important value, including for example: Grand Canyon National Park in Arizona (40 CFR 81.403); Mesa Verde National Park and La Garita Wilderness Area in Colorado ( Id. 81.406); Bandelier Wilderness Area in New Mexico ( Id. 81.421); and Arches, Bryce Canyon, Canyonlands and Capitol Reef National Parks in Utah ( Id. 81.430). These mandatory Class I Federal areas are within an approximately 300 km (or 186 mile) radius of FCPP.

On December 2, 1980, EPA promulgated the first phase of the required visibility regulations, codified at 40 CFR 51.300-307. 45 FR 80084. The 1980 regulations deferred regulating regional haze from multiple sources finding that the scientific data were inadequate at that time. Id. at 80086.

Congress added Section 169B to the Act in the 1990 CAA Amendments, requiring EPA to take further action to reduce visibility impairment in broad geographic regions. 42 U.S.C. 7492. In 1993, the National Academy of Sciences released a comprehensive study required by the 1990 Amendments concluding that “current scientific knowledge is adequate and control technologies are available for taking regulatory action to improve and protect visibility.” Protecting Visibility in National Parks and Wilderness Areas, Committee on Haze in National Parks and Wilderness Areas, National Research Council, National Academy Press (1993).

EPA promulgated regulations to address regional haze on April 22, 1999. 64 FR 35765. Consistent with the statutory requirement in 42 U.S.C. 7491(b)(2)(a), EPA's 1999 regional haze regulations include a provision requiring States to require certain major stationary sources “in existence on August 7, 1977, but which ha[ve] not been in operation for more than fifteen years as of such date” which emit pollutants that are reasonably anticipated to cause or contribute to any visibility impairment to procure, install and operate BART. In determining BART, States are required to take into account five factors identified in the CAA and EPA's regulations. 42 U.S.C. 7491(g)(2) and 40 CFR 51.308.

When the Clean Air Act was amended in 1990, Congress included a new provision, Section 301(d), granting EPA authority to treat Tribes in the same manner as States where appropriate. See 40 U.S.C. 7601(d). Congress also recognized, however, that such treatment may not be appropriate for all purposes of the Act and that in some circumstances, it may be inappropriate to treat tribes identically to states. Therefore, Section 301(d)(2) of the Act directed EPA to promulgate regulations “specifying those provisions of [the CAA] for which it is appropriate to treat Indian tribes as States.” Id. 7601(d)(2). In addition, Congress provided that “[i]n any case in which [EPA] determines that the treatment of Indian tribes as identical to States is inappropriate or administratively infeasible, the Administrator may provide, by regulation, other means by which the Administrator will directly administer such provisions so as to achieve the appropriate purpose.” Id. 7601(d)(4).

In 1998, EPA promulgated regulations at 40 CFR part 49 (which have been referred to as the Tribal Authority Rule or TAR) relating to implementation of CAA programs in Indian Country. See 40 CFR part 49; see also 59 FR 43956 (Aug. 25, 1994) (proposed rule); 63 FR 7254 (Feb. 12, 1998) (final rule); Arizona Public Service Company v. EPA, 211 F.3d 1280 (DC Cir. 2000), cert. den., 532 U.S. 970 (2001) (upholding the TAR). The TAR allows EPA to treat eligible Indian Tribes in the same manner as States “with respect to all provisions of the [CAA] and implementing regulations, except for those provisions [listed] in 49.4 and the [EPA] regulations that implement those provisions.” 40 CFR 49.3. EPA recognized that Tribes were in the early stages of developing air planning programs known as Tribal Implementation Plans (TIPs) and that Tribes would need additional time to develop air quality programs. 62 FR 7264-65. Thus, EPA determined that it was not appropriate to treat Tribes in the same manner as States for purposes of those provisions of the CAA imposing air program submittal deadlines. See 59 FR at 43964-65; 63 FR at 7264-65. Similarly, EPA determined that it would be inappropriate to treat Tribes the same as States for purposes of the related CAA provisions establishing sanctions and federal oversight mechanisms where States fail to meet applicable air program submittal deadlines. Id. Thus, one of the CAA provisions that EPA determined was not appropriate to apply to Tribes is Section 110(c)(1). See 40 CFR 49.4(d). In particular, EPA found that it was inappropriate to impose on Tribes the provisions in Section 110(c)(1) for EPA to promulgate a FIP within 2 years after a State fails to make a required plan submission.

Although EPA determined that the requirements of CAA section 110(c)(1) were not applicable to Tribes, EPA also determined that under other provisions of the CAA it has the discretionary authority to promulgate “such federal implementation plan provisions as are necessary or appropriate to protect air quality” when a Tribe has not submitted a TIP. 40 CFR 49.11. EPA determined in promulgating the TAR that it could exercise discretionary authority to promulgate FIPs based on Section 301(a) of the CAA, which authorizes EPA to prescribe such regulations as are necessary to carry out the Act, and Section 301(d)(4), which authorizes EPA to directly administer CAA provisions for which EPA has determined it is inappropriate or infeasible to treat Tribes as identical to States. 40 CFR 49.11. See also 63 FR at 7265. Specifically, 40 CFR 49.11(a) provides that EPA shall promulgate without unreasonable delay such Federal implementation plan provisions as are necessary or appropriate to protect air quality, consistent with the provisions of sections 301(a) and 301(d)(4), if a tribe does not submit a tribal implementation plan or does not receive EPA approval of a submitted tribal implementation plan.

EPA has previously promulgated FIPs under the TAR to regulate air pollutants emitted from the two coal fired electric generating facilities on the Navajo Nation, FCPP and Navajo Generating Station (NGS). In 1991, EPA also revised an existing FIP that applied to Arizona to include a requirement for NGS to substantially reduce its SO 2 emissions by installing scrubbers based on finding that the SO 2 emissions were contributing to visibility impairment at the Grand Canyon National Park. 56 FR 50172 (Oct. 3, 1991); see also Central Arizona Water Conservation District v. United States Environmental Protection Agency, 990 F.2d 1531 (9th Cir. 1993).

In 1999, after several years of negotiations, EPA proposed concurrent but separate FIPs for FCPP and NGS. Those FIPs proposed to fill the regulatory gap that existed because permits and SIP rules by New Mexico (for FCPP) and Arizona (for NGS) were not applicable or enforceable on the Navajo Nation, and the Tribe had not sought approval of a TIP covering the plants. 64 FR 48731 (Sept. 8, 1999).

Before EPA finalized the 1999 FIPs, the operator of FCPP began negotiations to reduce SO 2 emissions from FCPP by making upgrades to improve the efficiency of its SO 2 scrubbers. The negotiations resulted in an agreement for FCPP to increase the SO 2 control from a 72% reduction of the potential SO 2 emissions to an 88% reduction. As a result of this increased scrubber efficiency, FCPP's SO 2 emissions decreased by a total of 57% from the historical levels. The parties to the negotiations requested EPA to make those SO 2 reductions enforceable through a source specific FIP. Therefore, EPA proposed new FIPs for FCPP and NGS in September 2006. 71 FR 53631 (Sept. 12, 2006). In these concurrent but separate FIPs, EPA proposed to make emissions limits contained in State permits or rules that had previously been followed by FCPP and NGS federally enforceable. In addition, for FCPP, EPA proposed to establish a significantly lower SO 2 emissions limit based on the increased scrubber efficiency, resulting in a reduction of approximately 22,000 tons of SO 2 per year. EPA indicated in the final FIP for FCPP that the new SO 2 emissions limits were close to or the equivalent of the emissions reductions that would have been required in a BART determination. 72 FR 25698 (May 7, 2007). The FIP also required FCPP to comply with a 20% opacity limit on both the combustion and fugitive dust emissions coal handling operations. EPA finalized the FIP for FCPP in May 2007. Id.

APS, the operator of FCPP, and the Sierra Club each filed Petitions seeking judicial review of EPA's promulgation of the 2007 FIP for FCPP, on separate grounds. APS argued that EPA did not have authority to promulgate a source-specific FIP for FCPP without its consent. APS also argued that EPA did not have authority to promulgate a 20% opacity standard on the combustion equipment unless we provided an exemption for malfunctions. Finally, APS argued that EPA had not established an adequate basis for requiring a 20% opacity limit on the fugitive dust from the coal handling operations. In contrast, Sierra Club argued that EPA could not promulgate a “gap filling” FIP that did not include modeling and an analysis to show continued attainment of the NAAQS.

The Court of Appeals for the Tenth Circuit rejected both Petitions. With respect to the Sierra Club's arguments, the Court considered the regulatory language in 40 CFR 49.11(a) and concluded that “[t]his language does not impose upon the EPA the duty the Environmentalists propose. It provides the EPA discretion to determine what rulemaking is necessary or appropriate to protect air quality and requires the EPA to promulgate such rulemaking.” Arizona Public Service v. EPA, 562 F.3d 1116, 1125 (10th Cir. 2009). The Court also rejected arguments by APS that EPA could not impose a continuous opacity limitation during operations, provided EPA set forth a reasonable basis for its decision. Id. at 1129 (“That APS does not agree with the EPA's rejection of the substance of its proposed 0.2% allowance is irrelevant; as long as EPA's decision making process may reasonably be discerned, we will not set aside the federal plan on account of a less-than-ideal explanation.” [citation omitted]). The Court agreed with EPA's request for a voluntary remand of the opacity limit for the fugitive dust for the material handling operations and remanded that narrow aspect of the 2007 FIP. Id. at 1131.

The FIP that EPA is proposing today is promulgated under the same authority in 40 CFR 49.11(a). EPA is proposing to find that it is necessary or appropriate to establish BART requirements for NO X and PM emissions from FCPP, and is proposing specific NO X and PM limits as BART. EPA is proposing to establish a 10% opacity limit from Units 1-5 to ensure continuous compliance with the PM emissions limit. EPA is also proposing a 20% opacity limit to apply to FCPP's material handling operations in response to the remand from the 2007 FIP.

When Congress enacted Section 169A of the CAA to protect visibility, it directed EPA to promulgate regulations that, inter alia, would require applicable implementation plans to include a determination of BART for certain major stationary sources. 42 U.S.C. 7491(b)(2)(A) & (g). These major stationary sources are fossil-fuel fired steam electric plants of more than 250 MMBtu/hr heat input, kraft pulp mills, Portland cement plants and other listed industrial sources that came into operation between 1962 and 1977 and are “reasonably anticipated to cause or contribute to any impairment of visibility in any [Class I area].” Id. EPA guidelines must be followed in making BART determinations for fossil fuel fired electric generating plants larger than 750 MW. See 40 CFR Part 51, Appendix Y.

FCPP and NGS are the only eligible BART sources located on the Navajo Nation. See Western Regional Air Partnership, http://www.wrapair.org/forums/ssjf/bart.html, XLS Spreadsheet, Line 184, 185, Column N. An eligible BART source with a predicted impact of 0.5 dv or more of impairment in a Class I area “contributes” to visibility impairment and is subject to BART. 70 FR 39104, 39121 (July 6, 2005). FCPP contributes to impairment at many surrounding Class I areas well in excess of this threshold.

EPA's guidelines for evaluating BART for such sources are set forth in Appendix Y to 40 CFR Part 51. See also 40 CFR 51.308(e)(1)(ii)(A). Consistent with statutory and regulatory requirements, the Guidelines require consideration of “five factors” in making BART determinations. Id. at IV.A. Those factors, from the Act's statutory definition of BART, which are applied to all technically feasible control technologies, are: (1) The costs of compliance, (2) the energy and non-air quality environmental impacts of compliance, (3) any pollution control equipment in use or in existence at the source, (4) the remaining useful life of the source, and (5) the degree of improvement in visibility which may reasonably be anticipated to result from the use of such technology. 40 CFR 51.308(e)(1)(ii)(A).

In this proposed action, EPA has taken into consideration each of the five factors after identifying feasible control technologies for FCPP's NO X and PM emissions.

FCPP is a privately owned and operated coal-fired power plant located on the Navajo Nation Indian Reservation near Farmington, New Mexico. Based on lease agreements signed in 1960, FCPP was constructed and has been operating on real property held in trust by the Federal government for the Navajo Nation. The facility consists of five coal-fired electric utility steam generating units with a total capacity of 2060 megawatts (MW). Units 1, 2, and 3 at FCPP are owned entirely by Arizona Public Service (APS), which serves as the facility operator, and are rated to 170 MW (Units 1 and 2) and 220 MW (Unit 3). Units 4 and 5 are each rated to a capacity of 750 MW, and are co-owned by six entities: Southern California Edison (48%), APS (15%), Public Service Company of New Mexico (13%), Salt River Project (SRP) (10%), El Paso Electric Company (7%), and Tucson Electric Power (7%).

Based on 2009 emissions data from the EPA Clean Air Markets Division, 1 FCPP is the largest source of NO X emissions in the United States (over 40,000 tons per year (tpy) of NO X ). FCPP, located near the Four Corners region of Arizona, New Mexico, Utah, and Colorado, is approximately 300 kilometers (km) from sixteen mandatory Class I Federal areas: Arches National Park (NP), Bandelier National Monument (NM), Black Canyon of the Gunnison Wilderness Area (WA), Canyonlands NP, Capitol Reef NP, Grand Canyon NP, Great Sand Dunes NP, La Garita WA, Maroon Bells-Snowmass WA, Mesa Verde NP, Pecos WA, Petrified Forest NP, San Pedro Parks WA, West Elk WA, Weminuche WA, and Wheeler Park WA.

APS provided information relevant to a BART analysis to EPA on January 29, 2008. The information consisted of a BART engineering and cost analysis conducted by Black and Veatch (B&V) dated December 4, 2007 (Revision 3), a BART visibility modeling protocol prepared by ENSR Corporation (now called AECOM and referred to as AECOM throughout this document) dated January 2008, a BART visibility modeling report prepared by AECOM dated January 2008, and a document titled APS BART Analysis conclusions, dated January 29, 2008. APS provided supplemental information on cost and visibility modeling in correspondence dated May 28, 2008, June 10, 2008, November 2008, March 16, 2009, October 29, 2009, and April 22, 2010. All of these documents are available in the docket for this proposal.

Particulate matter less than 10 microns (millionths of a meter) in size (PM 10 ) interacts with light. The smallest particles in the 0.1 to 1 micron range interact most strongly as they are about the same size as the wavelengths of visible light. The effect of the interaction is to scatter light from its original path. Conversely, for a given line of sight, such as between a mountain scene and an observer, light from many different original paths is scattered into that line. The scattered light appears as whitish haze in the line of sight, obscuring the view.

PM emitted directly into the atmosphere, also called primary PM, is emitted both from the boiler stacks and from material handling. Of primary PM emissions, those in the smaller particle size range, less than 2.5 microns, tend to have the most impact on visibility. PM emissions from the boiler stacks can have varying particle size makeup depending on the PM control technology. PM from material handling, though, tends to be coarse, i.e. around 10 microns, since it is created from the breakup of larger particles of soil and rock.

PM that is formed in the atmosphere from the condensation of gaseous chemical pollutants, also called secondary PM, tends to be fine, i.e. smaller than 1 micron, since it is formed from the buildup of individual molecules. This secondary PM tends to contribute more to visibility impairment than primary PM because it is in the size range where it most effectively interacts with visible light. NO X and SO 2 emissions from coal fired power plants are two examples of gaseous chemical pollutants that react with other compounds in the atmosphere to form secondary PM. Specifically, NO X is a gaseous pollutant that can be oxidized to form nitric acid. In the atmosphere, nitric acid in the presence of ammonia forms particulate ammonium nitrate. The formation of particulate ammonium nitrate is dependent on temperature and relative humidity, and therefore, varies by season. Particulate ammonium nitrate can grow into the size range that effectively interacts with light by coagulating together and by taking on additional pollutants and water. The same principle applies to SO 2 and the formation of particulate ammonium sulfate.

In air quality models, secondary PM is tracked separately from primary PM because the amount of secondary PM formed depends on weather conditions and because it can be six times more effective at impairing visibility. This is reflected in the equation used to calculate visibility impacts from concentrations measured by the Interagency Monitoring of Protected Visual Environments (IMPROVE) monitoring network covering Class I areas. 2

The numerous Class I areas that surround FCPP are sometimes known as the Golden Circle of National Parks. See http://www.nps.gov/history/history/online_books/nava/adhi/adhi4e.htm. Millions of tourists visit these areas, many visiting from other countries to view the unique vistas of the Class I areas in the Four Corners region.

As Congress recognized, visibility is an important value and must be protected in these areas. Yet, air quality and visibility are impaired in the 16 Class I areas surrounding FCPP. The National Park Service noted in 2008 that “[v]isibility is impaired to some degree at all units where it is being measured and remains considerably higher than the target national conditions in many places, particularly on the haziest days.” Air Quality in National Parks, 2008 Annual Performance & Progress Report, National Resource Report NPS/NRPC/ARD/NRR-2009/151, September 2009, p. 30. Mesa Verde, Grand Canyon, Bryce Canyon and Canyonlands are among the areas the Park Service is monitoring. Id. Table 3, p. 19. Although not directly related to visibility, NO X is also a precursor to ozone formation and the National Park Service also determined that ozone concentrations in Mesa Verde appears to be trending upward over the 1994-2007 period and the Park's annual 4th-highest 8-hour ozone concentrations “are approaching the [NAAQS] standard.” Id. at 16. FCPP, which emitted over 42,000 tons of NO X in 2009, 3 was built roughly four decades ago and has not installed any new NO X controls since the 1990's, including modern combustion technology such as post-2000 low-NO X burners (LNB) or separated overfire air.

Based on the importance of visibility as a value in this Golden Circle of National Parks, and the substantial NO X and PM emissions generated by operating FCPP, EPA is proposing to find that BART emission limits are necessary or appropriate.

On August 28, 2009, EPA published an Advanced Notice of Proposed Rulemaking (ANPRM) concerning two of the five factors in the BART analysis: Cost of compliance and anticipated visibility improvement. 74 FR 44314. EPA received numerous comments on the ANPRM, including comments from the Navajo Nation, APS, National Park Service and environmental groups. EPA has considered relevant comments we received on the ANPRM in determining which NO X and PM emission limitations we are proposing today as BART for FCPP.

Based on the available control technologies and the five factors discussed in more detail below, EPA is proposing to require FCPP to meet a NO X emission limit on Units 1-5 of 0.11 lb/MMBtu. EPA is proposing a PM emission limit on Units 1-3 of 0.012 lb/MMBtu and on Units 4 and 5 of 0.015 lb/MMBtu as BART. EPA is taking comment on an alternative PM emissions limit for Units 1-3 described in more detail in Section II.D.

EPA is not proposing to require each unit to achieve the specified NO X emission limit. EPA is proposing to require FCPP to meet a plant-wide heat input weighted 30-day rolling average emission limit of 0.11 lb/MMBtu for NO X for Units 1-5. For PM, we are proposing a BART emission limit of 0.012 lb/MMBtu from Units 1-3 on a 6-hour average basis and 0.015 lb/MMBtu averaged over a 6-hour period for Units 4 and 5, which should be achievable with proper operation of the existing baghouses. EPA is also proposing that Units 1-5 meet a 10% opacity limit which will reasonably assure continuous compliance with the PM emission limits. EPA is taking comment on an alternative PM emission limit for Units 1-3.

The available control technologies and EPA's evaluation of each of the five factors supporting our proposed BART emissions limits for NO X and PM are discussed in more detail below and in EPA's accompanying Technical Support Document (TSD).

APS identified sixteen options as available retrofit technologies to control NO X . Generally, NO X control techniques use: (1) Combustion control to reduce the production of NO X from fuel-bound nitrogen and high temperature combustion; (2) post-combustion add-on control to reduce the amount of NO X emitted in flue gas by converting NO X to diatomic nitrogen (N 2 ); or (3) a combination of combustion and post-combustion controls. EPA approached the five factor analysis using a top-down method. A top-down analysis entails ranking the control options in descending order starting with the most stringent option. The top control option is evaluated and if eliminated based on one of the five factors, the next most stringent option is considered, and so on. The top option for NO X control is a combination of a post-combustion add-on control, i.e., selective catalytic reduction (SCR), and combustion controls, i.e., low-NO X burners plus overfire air (LNB + OFA). SCR without LNB + OFA represents the next most stringent option, and LNB + OFA without SCR represents a low-mid level of control. As described in detail below, EPA believes LNB + OFA are not likely to be effective control technologies at FCPP due to the inherent limitations of the existing boilers on all units. Therefore, EPA started our top-down analysis of the five factors with SCR without combustion controls. More details on the control options are provided in Section 2 of the TSD.

As described in our ANPRM, APS has claimed that combustion controls ( i.e., low-NO X burners (LNB) on Units 1 and 2 and low NO X burners plus overfire air (LNB + OFA) on Units 3-5) would provide NO X reductions sufficient to meet the presumptive limits for NO X identified in the BART Guidelines (40 CFR Part 51 Appendix Y). Table 1 shows the presumptive NO X limits for boilers burning either sub-bituminous or bituminous coal and the emission limits APS considers achievable for Units 1-5. APS submitted NO X emission limits it considers achievable to EPA in January 2008, March 2009, and October 2009. The coal burned at FCPP has historically been classified as sub-bituminous. APS, however, in its BART analysis has claimed that the coal is bituminous.

EPA, however, disagrees with APS's contention that EPA should rely only on presumptive limits for BART for NO X and with APS's claim that LNB and LNB + OFA will be effective at achieving NO X emissions lower than the presumptive BART emissions limits.

Throughout this document “we,” “our,” and “us” refers to EPA.

Texas Senate Bill 7 (SB 7), formed under the 76th Texas State Legislature, 1999, amended the Texas Utilities Code (TUC), Title 2, Public Utility Regulatory Act, Subtitle B, Electric Utilities, and created a new Texas Utilities Code Chapter 39, “Restructuring of Electric Utility Industry.” SB 7 requires the TCEQ to establish a regulatory program implementing the statute's mandatory emissions reductions for “grandfathered facilities” under the Texas Utilities Code section 39.264. A “grandfathered facility” is one that existed at the time the Legislature amended the Texas Clean Air Act (TCAA) in 1971.

These facilities were not required to comply with (i.e., grandfathered from) the then new requirement to obtain permits for construction or modifications of facilities that emit air contaminants. Texas began permitting new and modified sources in 1971, and sources built before Texas' permitting rules became effective were not required to obtain permits for air emissions as long as they were not modified as defined under Texas' New Source Review SIP program.

Section 39.264 of the TUC now requires EGFs that existed on January 1, 1999, to obtain a permit from the Commission even though these sources were not previously required to obtain a permit under the TCAA, section 382.0518(g).

Section 39.264 of the TUC specifically requires owners or operators of grandfathered EGFs to apply for a permit to emit nitrogen oxides (NO X ) and, for coal-fired grandfathered EGFs, sulfur dioxide (SO 2 ) and particulate matter (PM) through opacity limitations. These applications were due on or before September 1, 2000. A grandfathered EGF that does not obtain a permit may not operate after May 1, 2003, unless the Commission finds good cause for an extension. Section 39.264 of the TUC requires that for the 12-month period beginning May 1, 2003, and for each 12-month period following, annual emissions of NO X from grandfathered EGFs not exceed 50% of the NO X emissions reported to the Commission for 1997. Furthermore, it requires that emissions of SO 2 from coal-fired grandfathered EGFs not exceed 75% of the SO 2 emissions reported to the Commission in 1997. In addition, TUC section 39.264(e) requires electric generating facility permits (EGFPs) for coal-fired, grandfathered EGFs to contain appropriate opacity limitations provided by the commission's rules in 30 Texas Administrative Code (TAC) Ch.111.111, “Requirements for Specified Sources.” As described in more detail below, the emission limitations may be satisfied by using control technology or by participating in the banking and trading of allowances under Texas' Emission Banking and Trading of Allowances (EBTA) program.

Overall, SB 7 mandates specific pollution reduction in an area, while allowing individual sources flexibility in how they meet emissions reductions. As participants in the program, EGFs must obtain a permit allocating them a certain level of emissions which they cannot exceed. In each defined region, the total level of emissions is restricted, or capped, to a level consistent with the SB 7 statutory goals. The individual EGF, to meet its allocated emissions level, can either choose to install pollution controls, shut down operations, or purchase allowances from another source that already reduced emission levels below its permitted amount.

To achieve SB 7's mandate, the TCEQ made revisions to 30 TAC Ch.116, “Control of Air Pollution by Permits for New Construction or Modification,” by establishing an allowance and permitting program for regulating grandfathered EGFs under Subchapter I. TCEQ concurrently adopted Chapter 101, Subchapter H, “Emissions Banking and Trading,” that establishes a regional cap and trade system to distribute emission allowances for use by EGFs. The new Division 2, Chapter 101, Subchapter H, concerning EBTA, sets out the allowance system to be used to assist grandfathered and electing EGFs in meeting the emission reduction requirements of TUC, section 39.264. Together, the two rules define categories of EGFs that are eligible to use the trading system. As discussed above, the first category consists of grandfathered facilities. The second category of EGFs consist of currently permitted EGFs that are not subject to the permitting requirements mandated by SB 7, yet elect to participate in the allowance trading system. These are referred to as “electing” EGFs and participation in the permitting program will allow electing EGFs to obtain allowances under the EBTA.

The purpose of the proposed rulemaking by EPA is to partially approve and partially disapprove the TCEQ's permit and emission control requirements for grandfathered and electing EGFs and related permit application, monitoring, reporting and public notice procedures. Specifically, the permit application requirements, methods for monitoring and reporting emissions and public notice procedures for grandfathered and electing EGFs are the subject of this proposal action. Please note that EPA's action on 30 TAC Chapter 101, Subchapter H, Division 2, concerning Emissions Banking and Trading of Allowances, is being proposed in a separate notice and is evaluated in a separate TSD. (RME Docket R06-OAR-2005-TX-0012).

The revisions to TCEQ's 30 TAC, Chapter 116, concerning the permitting of grandfathered EGFs, will achieve the Legislature's SB 7 emissions reductions goals. Compliance with these revisions will cause decreased air emissions of NO X , SO 2 , and PM, due to the shutdown of the source, participation in the EBTA, or installation of pollution controls on grandfathered sources that had previously been exempt from having to use pollution controls. Because the revisions will cause additional emission reductions from these sources, they will better serve to protect the public health and welfare. The revisions will also continue to contribute to improvement of air quality and attainment or maintenance of the federal air quality standards. Overall, these provisions serve to improve the existing SIP.

Lastly, these provisions meet the requirement in 40 CFR 51.160(a) that each plan include legally enforceable procedures to determine whether the construction or modification of a facility, building, structure, or installation, or combination of these will result in (1) A violation of applicable portions of the control strategy; or (2) interference with attainment or maintenance of a national standard in the State in which the proposed source (or modification) is located or in a neighboring State.

We are proposing to partially approve and partially disapprove the revision to Title 30, Chapter 116, of the TAC submitted by the State of Texas on January 3, 2000. We are also proposing to fully approve the revision to Title 30, Chapter 116, of the TAC submitted by the State of Texas on July 31, 2002. The January 3, 2000 submittal concerns Subchapter A: “Definitions,” section 116.18; and Subchapter I: “Electric Generating Facility Permits,” sections 116.910-914, 116.916, 116.920-922, 116.930, and 116.931. We are proposing to fully approve all of this 2000 submittal but for the severable reference in 30 TAC 116.911(a)(2) that, if approved, would allow the use of a Texas PCP SP for the permitting of the CO collateral emissions increases. We are proposing to disapprove this reference in submitted 30 TAC 116.911(a)(2) allowing the use of a PCP SP for the collateral CO emissions. The July 31, 2002 submittal concerns Subchapter A: “Definitions,” sections 116.10 and 116.18; and Subchapter I: “Electric Generating Facility Permits,” sections 116.910, 116.911, 116.913, 116.917, 116.918, 116.921, 116.926, 116.928, and 116.930. The TCEQ adopted these revisions on December 16, 1999, and May 22, 2002, respectively.

Please note that in the July 31, 2002 submittal concerning Subchapter A: “Definitions,” section 116.10 is severable and previously acted on as approvable in a separate rulemaking (see explanation below).

EPA intends to take final action on the submitted SB 7 SIP by December 31, 2010, as provided in the Consent Decree entered on January 21, 2010 in BCCA Appeal Group v. EPA , Case No. 3:08-cv-01491-N (N.D. Tex).

In the January 3, 2000 submittal, TCEQ submitted new rules to Chapter 116, including Subchapter A: “Definitions,” delineating certain definitions of words and terms used in Subchapter I; and Subchapter I: “Electric Generating Facility Permits,” implementing the applicability requirements for grandfathered and electing electric generating facilities. Representative sections of Subchapter I include: 116.911, Electric Generating Facility Permit Application; 116.913, General and Special Conditions; 116.914, Emissions Monitoring and Reporting Requirements; and 116.921, Notice and Comment Hearings for Initial Issuance.

In 116.911, owners or operators of grandfathered or electing EGFs shall submit an application to TCEQ to authorize nitrogen oxides (NO X ) emissions and, if applicable, sulfur dioxide (SO 2 ) and particulate matter (PM) emissions before September 11, 2000. The section requires the application to specify various requirements under 116.911(a)(1)-(4), (b)(1)-(2), (c)-(d). Section 116.911 contains one subsection, 116.911(a)(2), “Control method,” which references section 116.617, Standard Permits for Pollution Control Projects (PCPs). Under 116.911(a)(2), if an EGF permit applicant proposes the use of new control methods  1 in its initial application, then compliance with particular subsections in 116.617 is required and TCEQ may require air dispersion modeling or ambient monitoring. The Texas PCP SP is not part of the Texas NSR SIP. Moreover, EPA has proposed to disapprove it on September 23, 2009. See 74 FR 48467. Final action was signed on August 31, 2010, under the BCCA consent decree. Furthermore, the DC Circuit Court of Appeals issued a court decision, New York v. EPA, No. 02-1387 (June 24, 2005) that addressed the use of PCPs and disapproved their use for Major NSR requirements. In that decision, the court vacated the provisions of the 2002 NSR Reform rule that specifically related to Clean Units and Pollution Control Projects.

In response to the court's decision, EPA filed a Petition for Rehearing or Rehearing En Banc and Request for Clarification on August 8, 2005. In that Petition, EPA requested clarification that the court's ruling on PCP's applies only prospectively. On December 9, 2005, the DC Circuit ordered that “EPA's request for clarification as to any retroactive effect of the ruling on Pollution Control Projects be denied.” The court also stated that because there was no specific retroactive application of this provision before the court, it was premature to rule on this request. Based on TCEQ's Technical Supplement, EPA believes that any collateral emissions increases due to controls installed to limit NO X , SO 2 or PM under the submitted 30 TAC 911(a)(2) are above the significance level for Prevention of Significant Deterioration (PSD) review for CO collateral emissions increases only, and that these collateral CO increases are located at only two PCP SP permitted plants. Therefore, in only two instances were there collateral CO emissions increases that obtained a Texas PCP SP rather than a Major NSR SIP permit. They obtained their PCP SP before the court decision was issued. Furthermore, based upon the Technical Supplement, EPA believes that all of the resultant collateral CO increases across the State of Texas (including those from the two plants) do not interfere with attainment or maintenance of the NAAQS for CO, et al., nor cause or contribute to increase in PSD increments, much less a violation of any NAAQS. Nevertheless, based on the above court decision and the PCP SP not being part of the Texas NSR SIP, the submitted subsection 116.911(a)(2) is not approvable, and therefore we are proposing to disapprove this submitted subsection for collateral increases of CO emissions. Note that the entire State of Texas is currently in attainment for CO.

Section 116.913 contains general conditions applicable to every EGF permit, and allows the TCEQ to include special conditions in individual permits. Under 116.913, an EGF permit authorizes nitrogen oxides (NO X ) emissions from all grandfathered or electing electric generating facilities (EGF); and sulfur dioxide (SO 2 ) emissions and particulate matter emissions, through opacity limitations, for coal-fired grandfathered or electing EGFs. The grandfathered or electing EGF must comply with Chapter 101, Subchapter H, Division 2 of this title, relating to EBTA, including the requirement to maintain allowances in a compliance account. Facilities subject to the EBTA shall quantify and report emissions using the monitoring and reporting requirements of section 116.914. As noted previously, EPA's action on Chapter 101, Subchapter H, Division 2, is being proposed in a separate action (RME Docket R06-OAR-2005-TX-0012).

Section 116.914, specifies the monitoring and reporting requirements for EGFPs. The rule authorizes the use of Continuous Emission Monitoring (CEM) under the Acid Rain Program, which contains monitoring requirements for SO 2 for affected units. Since the acid rain program already requires extensive monitoring, this section authorizes the use of that monitoring for EGF's that are subject to the acid rain program for compliance with Subchapter I. EGFs not subject to the Acid Rain Program would have three choices in monitoring: the EGF may choose to meet either the Part 75 monitoring requirements, or the requirements of Title 40 CFR part 60; or, the EGF may provide an alternative monitoring plan that would be incorporated into the permit conditions. This alternate monitoring plan must meet state and federal requirements for approval. Monitoring and reporting requirements provisions related to the EBTA rule are set forth in section101.336(a), per 30 TAC Chapter 116.914.

Section 116.921 contains the hearing requirements for the initial issuance of EGFPs. If a hearing is requested by a person who may be affected by emissions from the grandfathered or electing EGF, and that request is reasonable, the commission will hold a hearing. The section requires that notice of hearing on a draft EGFP be published in the public notice section of one issue of a newspaper of general circulation in the municipality or the nearest municipality where the EGF is located. The notice must be published at least 30 days prior to a hearing.

The State of Texas submitted the SIP revision to EPA after adequate notice and public hearing on January 3, 2000. The Technical Supplement was submitted on August 5, 2009. See our Technical Support Document, Attachment C, for more details.

In the July 31, 2002 submittal, Texas submitted new and amended rules to Chapter 116, which include Subchapter A: “Definitions,” delineating certain definitions of words and terms used in Subchapter I; Subchapter H: “Permits for Grandfathered Facilities,” Division 1, “General Applicability;” Division 2, “Small Business Stationary Source Permits,” “Pipeline Facilities Permits,” and “Existing Facility Permits;” Division 3, “Existing Facility Flexible Permits;” and Subchapter I: “Electric Generating Facility Permits.” In addition, Texas submitted TAC Chapter 39, “Public Notice,” which includes Subchapter H: “Applicability and General Provisions,” and Subchapter K: “Public Notice of Air Quality Applications.”

EPA is acting only on Subchapter A: “Definitions,” and Subchapter I: “Electric Generating Facility Permits” of Chapter 116 from the July 31, 2002 submittal. The above-referenced provisions contained in the Subchapter H of Ch. 116 and the Subchapter K of Chapter 39 are severable and not part of today's proposal action. Other revisions to Ch.116 establish requirements and procedures in Subchapter H for the permitting of grandfathered facilities in accordance with 5.02-5.04 of House Bill (HB) 2912, 77th Legislature, 2001, and Section 78 of HB 2914, 77th Legislature, 2001, which establishes an incentive program for the reduction of emissions of nitrogen oxides from certain grandfathered reciprocating internal combustion engines associated with pipelines. These severable submittals will be acted on in separate rulemakings.

The submitted amendments to Subchapter A, Section 116.10, “General Definitions,” revise the definition of “grandfathered facility” to be consistent with TCAA, section 382.0518(g). The revised definition clarifies that a grandfathered facility is one that is not a new facility, was constructed prior to August 30, 1971 (or no construction contract was executed on or before August 30, 1971 that specified a beginning construction date on or before February 29, 1972) and has not been modified since August 30, 1971. This definition is severable and previously acted on as approvable in a separate rulemaking ( See 75 FR 19468, April 14, 2010). Therefore, it now is part of the Texas NSR SIP already.

The submitted amendments to Subchapter A, Section 116.18, “Electric Generating Facility Permits Definitions,” add a definition for “natural gas-fired electric generating facility” for consistency only with the EGF permit requirements of HB 2912. HB 2912 provides that a natural gas fired EGF includes a facility that was designed to burn both natural gas and fuel oil. The amendments also include a definition for “normal annual operating schedule,” to establish the normal annual operating schedule at an EGF site.

The submitted amendments to Subchapter I, Electric Generating Facility Permits, implement the portions of TCAA, section 382.0518, which create a new EGF permit. Representative sections of Subchapter I include: 116.911, Electric Generating Facility Permit Application; 116.913, General and Special Conditions; 116.917, Electric Generating Facility Permit Application for Certain Grandfathered Coal-Fired Electric Generating Facilities and Certain Grandfathered Facilities Located at Electric Generating Facility Sites; and 116.918, Additional General and Special Conditions for Grandfathered Coal-Fired Electric Generating Facilities and Certain Grandfathered Facilities Located at Electric Generating Facility Sites.

Under amended section 116.911, Electric Generating Facility Permit Application, a new EGF permit will allow the owners or operators of EGFs who have already applied for a permit required by SB 7 to apply for a permit for: (1) Generators that do not generate electric energy for compensation and are not used more than 10% of the annual operating schedule; and (2) auxiliary fossil-fuel-fired combustion facilities that do not generate electric energy and do not emit more than 100 tpy of any air contaminant. The adopted changes will also allow coal-fired EGFs which were required to apply for a permit under SB 7 to apply for an EGF permit for criteria pollutants other than NO X , SO 2 , and PM as it relates to opacity.

Section 116.913, General and Special Conditions, is amended to update the conditions of any permit issued under Subchapter I, including the pollutants or allowances that may be authorized for each permit, and the requirements of the SB 7 allowance trading program for the additional equipment which may be permitted under Subchapter I. The commission will issue a permit to these facilities.

Section 116.917, Electric Generating Facility Permit Application for Certain Grandfathered Coal-Fired Electric Generating Facilities and Certain Grandfathered Facilities Located at Electric Generating Facility Sites outlines the application requirements for grandfathered coal-fired EGFs which choose to permit their additional criteria pollutants, and the auxiliary generators and the additional combustion equipment which can now be permitted under Subchapter I. To be consistent with the current review process for permits and applicable federal requirements, 116.917 requires the owner or operator of a grandfathered facility applying for an EGF permit to demonstrate that the facility meets applicable federal New Source Performance Standards (NSPS) and National Emission Standard for Hazardous Air Pollutants (NESHAP). If applicable, facilities would be required to comply with PSD and nonattainment review as specified in Chapter 116, Subchapter B, New Source Review Permits.

Section 116.918, Additional General and Special Conditions for Grandfathered Coal-Fired Electric Generating Facilities and Certain Grandfathered Facilities Located at Electric Generating Facility Sites identifies some of the general and special conditions which may be included in any permit issued under the adopted section 116.917. The holders of a permit shall comply with all such conditions. General conditions include: Sampling requirements, equivalency of methods, recordkeeping, maximum allowable emission rates, maintenance of emission control, and compliance with rules. The holders of permits shall also comply with all special conditions contained in the permit document.

The State of Texas submitted the SIP revision to EPA after adequate notice and public hearing on July 31, 2002. See our Technical Support Document, Attachment B, for more details.

Regarding the January 3, 2000 submittal, it is the intent of SB 7 that for the 12-month period beginning May 1, 2003, and for each 12-month period following, annual emissions of NO X from grandfathered EGFs not exceed 50% of the NO X emissions reported to the Commission for 1997. Furthermore, it is the intent of the legislation that emissions of SO 2 from coal-fired EGFs not exceed 75% of the SO 2 emissions reported to the Commission in 1997, and to contain appropriate opacity limitations by way of permitting the emissions of particulate matter. These provisions will cause additional emission reductions and ensure better protection of public health and welfare, and improve the existing SIP. These provisions, with the exception of 116.911(a)(2) discussed above, meet the requirement in 40 CFR 51.160(a) that each plan include legally enforceable procedures to determine whether the construction or modification of a facility, building, structure, or installation, or combination of these will result in (1) A violation of applicable portions of the control strategy; or (2) interference with attainment or maintenance of a national standard in the State in which the proposed source (or modification) is located or in a neighboring State.

The revision also meets 40 CFR 51.160(e) by identifying a type of facility that will be subject to review under 40 CFR 51.160(a). In this case, TCEQ specifically identified grandfathered and electing electric generating facilities. See our Technical Support Document, Attachment A, for more details.

Regarding the July 31, 2002 submittal, this rulemaking allows the owners or operators of previously grandfathered and electing EGFs who have already applied for a permit required by SB 7 to also obtain a permit for all air contaminants, certain generators and auxiliary fossil fuel fired combustion facilities The adopted changes will also allow coal fired EGFs which were required to apply for a permit under SB 7 to apply for an EGF permit for criteria pollutants other than NO X , SO 2 , and PM as it relates to opacity. The permits issued for these facilities are expected to result in reduced emissions of air contaminants and improved compliance with state and federal air pollution control requirements. Further, these permits should achieve better protection of public health and welfare, and improve the existing SIP. These provisions meet the requirement in 40 CFR 51.160(a) that each plan include legally enforceable procedures to determine whether the construction or modification of a facility, building, structure, or installation, or combination of these will result in (1) a violation of applicable portions of the control strategy; or (2) interference with attainment or maintenance of a national standard in the state in which the proposed source (or modification) is located or in a neighboring state.

The revision also meets 40 CFR 51.160(e) by identifying a type of facility that will be subject to review under 40 CFR 51.160(a). In this case, Texas specifically identified grandfathered and electing electric generating facilities. See our Technical Support Document, Attachment B, for more details.

Each revision to an implementation plan submitted by a State under this Act shall be adopted by such State after reasonable notice and public hearing. The Administrator shall not approve a revision of a plan if the revision would interfere with any applicable requirement concerning attainment and reasonable further progress (as defined in section 171), or any other applicable requirement of this Act. EPA is proposing to approve these revisions because they improve the SIP in accordance with Section 110 of the Act. The reductions achieved through the SB7 program are throughout the State of Texas and include reducing precursors to ozone (NOx), SO2 emissions, and PM emissions. The NOx emissions reductions in certain regions of the State were assumed in Texas' ozone attainment demonstration plans and will provide benefits in reducing ozone concentrations in nonattainment areas and near nonattainment areas, as well as attainment areas. There are no SO2 nonattainment areas in Texas. The only PM-10 nonattainment area in Texas is the El Paso geographic area. Any reductions in PM10 emissions due to these revisions should contribute to attainment of the PM10 NAAQS in that area. Further, EPA believes that any collateral emissions increases in carbon dioxide (CO) due to controls installed to limit NOx do not interfere with attainment or maintenance of the NAAQS for CO, nor cause or contribute to increase in any PSD increments. Texas is also currently in attainment for CO. Further, the permitting of grandfathered sources will benefit the public due to reductions of air contaminants emitted from affected EGFs, and present the opportunity for public participation and comment in the permitting procedures for formerly grandfathered EGFs and other participating EGFs. The program establishes requirements, procedures, deadlines and responsibilities for EGF permit applications for facilities formerly exempt from permit requirements.

EPA is proposing to partially approve and partially disapprove revisions to the Texas SIP that include 30 TAC Chapter 116, Subchapter A: “Definitions,” section 116.18; and Subchapter I: “Electric Generating Facility Permits,” sections 116.910-914, 116.916, 116.920-922, 116.930, and 116.931, which Texas submitted on January 3, 2000.

EPA is proposing to approve all of the January 3, 2000, SIP revision submittal as part of the Texas NSR SIP but for 30 TAC 116.911(a)(2). EPA is proposing to disapprove the submitted severable 30 TAC 116.911(a)(2) for collateral emissions increases of CO that are allowed to be permitted under the Texas PCP SP.

Further, EPA is proposing to approve revisions to the Texas SIP that include 30 TAC Chapter 116, Subchapter A: “Definitions,” section 116.18; and Subchapter I: “Electric Generating Facility Permits,” sections 116.910, 116.911, 116.913, 116.917, 116.918, 116.921, 116.926, 116.928, and 116.930, which Texas submitted on July 31, 2002. We are proposing to take no action on Chapter 116, Subchapter H: “Permits for Grandfathered Facilities,” which Texas submitted on July 31, 2002. The State understands that EPA will take future action on Subchapter H because it is independent from Subchapters A and I, and action is not necessary at this time.

The January 3, 2000 and July 31, 2002 submittals address the applicability and permitting requirements for grandfathered and electing electric generating facilities. The revisions will contribute to improvement in overall air quality in Texas. There will be no increase in ozone, SO2, and PM concentration levels because of approving the revisions. We have evaluated the State's submittal, determined that it meets the applicable requirements of the CAA and EPA air quality regulations, and is consistent with EPA policy.

This action is not a “significant regulatory action” under the terms of Executive Order 12866 (58 FR 51735, October 4, 1993) and is therefore not subject to review under the Executive Order.

This action does not impose an information collection burden under the provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. because this proposed SIP disapproval under section 110 and subchapter I, part D of the Clean Air Act will not in-and-of itself create any new information collection burdens but simply disapproves certain State requirements for inclusion into the SIP. Burden is defined at 5 CFR 1320.3(b).

The Regulatory Flexibility Act (RFA) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small not-for-profit enterprises, and small governmental jurisdictions. For purposes of assessing the impacts of today's rule on small entities, small entity is defined as: (1) A small business as defined by the Small Business Administration's (SBA) regulations at 13 CFR 121.201; (2) a small governmental jurisdiction that is a government of a city, county, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.

After considering the economic impacts of today's proposed rule on small entities, I certify that this action will not have a significant impact on a substantial number of small entities. This rule does not impose any requirements or create impacts on small entities. This proposed SIP disapproval under section 110 and subchapter I, part D of the Clean Air Act will not in-and-of itself create any new requirements but simply disapproves certain State requirements for inclusion into the SIP. Accordingly, it affords no opportunity for EPA to fashion for small entities less burdensome compliance or reporting requirements or timetables or exemptions from all or part of the rule. The fact that the Clean Air Act prescribes that various consequences ( e.g., higher offset requirements) may or will flow from this disapproval does not mean that EPA either can or must conduct a regulatory flexibility analysis for this action. Therefore, this action will not have a significant economic impact on a substantial number of small entities.

We continue to be interested in the potential impacts of this proposed rule on small entities and welcome comments on issues related to such impacts.

This action contains no Federal mandates under the provisions of Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1531-1538 “for State, local, or tribal governments or the private sector.” EPA has determined that the proposed disapproval action does not include a Federal mandate that may result in estimated costs of $100 million or more to either State, local, or tribal governments in the aggregate, or to the private sector. This action proposes to disapprove pre-existing requirements under State or local law, and imposes no new requirements. Accordingly, no additional costs to State, local, or tribal governments, or to the private sector, result from this action.

Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.”

This action does not have federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132, because it merely disapproves certain State requirements for inclusion into the SIP and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. Thus, Executive Order 13132 does not apply to this action.

This action does not have tribal implications, as specified in Executive Order 13175 (59 FR 22951, November 9, 2000), because the SIP EPA is proposing to disapprove would not apply in Indian country located in the State, and EPA notes that it will not impose substantial direct costs on tribal governments or preempt tribal law. Thus, Executive Order 13175 does not apply to this action.

EPA interprets Executive Order 13045 (62 FR 19885, April 23, 1997) as applying only to those regulatory actions that concern health or safety risks, such that the analysis required under section 5-501 of the Executive Order has the potential to influence the regulation. This action is not subject to Executive Order 13045 because it is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997). This proposed SIP disapproval under section 110 and subchapter I, part D of the Clean Air Act will not in-and-of itself create any new regulations but simply disapproves certain State requirements for inclusion into the SIP.

This proposed rule is not subject to Executive Order 13211 (66 FR 28355, May 22, 2001) because it is not a significant regulatory action under Executive Order 12866.

Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (“NTTAA”), Public Law 104-113, section 12(d) (15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards ( e.g., materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus standards bodies. NTTAA directs EPA to provide Congress, through OMB, explanations when the Agency decides not to use available and applicable voluntary consensus standards.

The EPA believes that this action is not subject to requirements of Section 12(d) of NTTAA because application of those requirements would be inconsistent with the Clean Air Act.

Executive Order 12898 (59 FR 7629 (Feb. 16, 1994)) establishes federal executive policy on environmental justice. Its main provision directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of their programs, policies, and activities on minority populations and low-income populations in the United States.

EPA lacks the discretionary authority to address environmental justice in this proposed action. In reviewing SIP submissions, EPA's role is to approve or disapprove state choices, based on the criteria of the Clean Air Act. Accordingly, this action merely proposes to disapprove certain State requirements for inclusion into the SIP under section 110 and subchapter I, part D of the Clean Air Act and will not in-and-of itself create any new requirements. Accordingly, it does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898.

For further information, please see the direct final action, of the same title, which is located in the Rules section of this Federal Register . EPA is approving the attainment determination as a direct final rule without prior proposal because EPA views this as a noncontroversial action and anticipates no adverse comments. A detailed rationale for the approval is set forth in the preamble to the direct final rule. If EPA receives no adverse comments, EPA will not take further action on this proposed rule.

If EPA receives adverse comments, EPA will withdraw the direct final rule and it will not take effect. EPA will address all public comments in a subsequent final rule based on this proposed rule. EPA will not institute a second comment period on this action. Any parties interested in commenting on this action should do so at this time. Please note that if we receive adverse comment on an amendment, paragraph, or section of this rule and if that provision may be severed from the remainder of the rule, EPA may adopt as final those provisions of the rule that are not the subject of an adverse comment.