I. Background A. OCC's Retail Foreign Exchange Rulemaking

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). 1 As amended by the Dodd-Frank Act, the Commodity Exchange Act (CEA) provides that a United States financial institution  2 for which there is a Federal regulatory agency  3 shall not enter into, or offer to enter into, a transaction described in section 2(c)(2)(B)(i)(I) of the CEA with a person that is not an eligible contract participant  4 except pursuant to a rule or regulation of a Federal regulatory agency allowing the transaction under such terms and conditions as the Federal regulatory agency shall prescribe  5 (a retail foreign exchange (forex) rule). Transactions described in section 2(c)(2)(B)(i)(I) include foreign currency futures, options on foreign currency futures, and options on foreign currency (other than options executed or traded on a national securities exchange). 6 A Federal regulatory agency's retail forex rule must treat similarly all such futures and options and all agreements, contracts, or transactions that are functionally or economically similar to such futures and options. 7 Retail forex rules must prescribe appropriate requirements with respect to disclosure, recordkeeping, capital and margin, reporting, business conduct, documentation, and such other standards or requirements as the Federal regulatory agency determines to be necessary. 8 The OCC issued a final retail forex rule on July 14, 2011, which became effective on July 15, 2011. 9 On September 12, 2011, the OCC issued an interim final rule applying the retail forex rule to Federal savings associations on the same terms as national banks. 10

The CEA distinguishes retail customers from non-retail customers through the term eligible contract participant (ECP). 11 In many cases, the CEA provides fewer protections to ECPs than retail customers, i.e., non-ECPs. For example, retail forex rules do not apply to transactions with ECPs and ECPs may enter into off-exchange swaps. 12 A person can qualify as an ECP by satisfying the requirements of one of the term's 14 prongs. Two of the prongs are relevant here: the prong for commodity pools and the prong for business entities.

Prior to enactment of the Dodd-Frank Act, a commodity pool  13 was an ECP if it (i) had total assets exceeding $5 million and (ii) was formed and operated by a person subject to regulation under the CEA or by a foreign person performing a similar role or function subject to foreign regulation. 14 The Dodd-Frank Act added a proviso to the second condition, which has become known as the retail forex look-through: for purposes of CEA sections  15 that provide the U.S. Commodity Futures Trading Commission (CFTC) with jurisdiction over certain accounts and pooled investment vehicles trading in retail forex, a commodity pool is not an ECP unless all of its participants are ECPs. 16

Also prior to the Dodd-Frank Act, a corporation, partnership, proprietorship, organization, trust, or other business entity that had total assets exceeding $10 million was an ECP. 17 The Dodd-Frank Act left this provision unmodified. Many private investment vehicles, including certain commodity pools, availed themselves of this provision to be ECPs. 18

On December 21, 2010, the CFTC and the U.S. Securities and Exchange Commission (SEC) jointly proposed a rule, as required by the Dodd-Frank Act, 19 to further define eligible contract participant. 20 The CFTC and SEC proposed to implement the retail forex look-through by excluding, for purposes of CEA section 2(c)(2)(B)(vi) and (C)(vii), a commodity pool with one or more direct or indirect participants that is not an ECP from the definition of eligible contract participant. The CFTC and SEC also proposed to prohibit a commodity pool from qualifying as an ECP as a business entity unless it had total assets exceeding $5 million and was operated by a person subject to regulation under the CEA. 21 The CFTC and SEC reasoned that allowing commodity pools to qualify as ECPs solely by having assets exceeding $10 million (as the test for business entities requires) would frustrate Congress' intent to subject commodity pools to the retail forex look-through. 22

On April 18, 2012, the CFTC and SEC issued a final rule further defining eligible contract participant. 23 The definition took effect on July 23, 2012, except for certain provisions related to commodity pools, which take effect on December 31, 2012. The rule adopted a prohibition on a commodity pool qualifying as an ECP under the business entity prong  24 of the ECP definition solely by having assets exceeding $10 million. 25

The final rule differed from the proposal in three material respects. First, the retail forex look-through generally only applies to a commodity pool that directly enters into a retail forex transaction. A commodity pool is not subject to the retail forex look-through simply because it invests in another commodity pool that enters into retail forex transactions. 26 (However, the retail forex look-through does apply to a commodity pool structured to evade subtitle A of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act by permitting non-ECPs to participate in retail forex transactions. 27 ) For example, in a master/feeder fund structure in which the master fund enters into retail forex transactions, one would look through the master fund to the feeder fund but generally not through the feeder fund to its investors. Second, the final rule provides that, notwithstanding the look-through, a commodity pool is an ECP for retail forex purposes if it (i) is not formed for the purpose of evading regulation under the CFTC's retail forex regime, (ii) has total assets exceeding $10 million, and (iii) is formed and operated by a registered commodity pool operator (CPO)  28 or by a CPO exempt from registration under 17 CFR 4.13(a)(3). 29 Third, the rule applies the retail forex look-through only to the ECP prong for commodity pools and business entities—not to the other prongs. 30

At the meeting adopting the final rule further defining eligible contract participant, the CFTC acknowledged that it was unclear if bank funds were ECPs. 31

A bank fund is a bank-administered trust that holds commingled assets that meet specific criteria established by OCC regulation. 32 The bank acts as a fiduciary for the bank fund and holds legal title to the fund's assets, but the fund's participants are the beneficial owners of the fund's assets. While each participant owns an undivided interest in the aggregate assets of the bank fund, a participant does not directly own any specific asset held by the fund nor does a participant hold any certificate or other document representing an interest in the fund. 33 Insurance company separate accounts share structural features with bank funds: they are not separate legal entities; they are not subject to claims from general creditors of the insurance company; and they divorce legal title to the assets from beneficial ownership. 34

The legal structure of these funds presents interpretive challenges under the eligible contract participant definition. For this reason, the OCC wishes to provide clarity regarding how its retail forex rules will apply to transactions with these funds. The OCC preliminarily believes that treating bank funds as traditional retail customers for purposes of the retail forex rule is not appropriate. It is only bank funds' status as quasi-distinct from the bank that creates this regulatory uncertainty: were bank funds clearly identical to the bank, they would be ECPs as banks; were bank funds separate legal entities, they would be ECPs as bank subsidiaries or affiliates. 35

The definition of eligible contract participant contains a list of entities substantively regulated under the CEA or other regulatory schemes—banks, insurance companies, investment companies, pension plans, registered broker-dealers, and futures commission merchants—suggesting that Congress did not see a need to further regulate already-regulated entities. Bank funds should be treated the same because they too are subject to substantive regulation. 36 Congress did not subject registered investment companies and similarly-regulated foreign entities to the retail forex rules  37 despite the fact that these companies cater to retail investors and are offered publicly, unlike bank funds. 38 Imposing the retail forex rule's requirements on forex transactions between Federal depository institutions and bank funds is inconsistent with the treatment of registered investment companies and similarly regulated foreign entities and creates unwarranted regulatory burden. The disparate treatment creates competitive inequalities that Congress may not have intended. 39

Moreover, the new definition of eligible contract participant creates a paradoxical result: The retail forex rule will apply to transactions with funds that are prudentially regulated—bank funds and insurance company separate accounts—but not to transactions with funds that are not prudentially regulated—hedge funds. Hedge funds will qualify as ECPs under new 17 CFR 1.3(m)(8) because they generally (i) have assets exceeding $10 million and (ii) are operated by registered CPOs or CPOs exempt from registration. CFTC regulations, however, provide that banks and insurance companies are not CPOs when they manage bank funds and separate accounts, respectively. 40 The CPO exclusion comes from the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, which directed the CFTC to exclude from the definition of commodity pool operator banks acting in a fiduciary capacity, ERISA plans and their fiduciaries, registered investment companies, and insurance companies. 41 The rationale was that these entities do not need to be regulated under the CEA as CPOs because they are already regulated under other law. 42 It would be counterintuitive for regulatory relief—namely, the CPO exclusion for banks and insurance companies—to increase regulatory burden on these funds. The CEA requires the OCC to prescribe appropriate requirements in its retail forex rules  43 and affords the OCC with flexibility to tailor the requirements of its retail forex rule for certain classes of transactions. The OCC wrote its retail forex rule with individual consumers in mind and prescribed requirements that it deemed appropriate for retail forex transactions with individual consumers. The further definition of eligible contract participant raises the issue of how the retail forex rule should apply to entities that are materially different from individual consumers but that are, nonetheless, not ECPs.

The OCC preliminarily believes it appropriate to modify the requirements of the retail forex rule for retail forex transactions between Federal depository institutions  44 and bank funds. The OCC proposes to apply to these transactions only the rule's antifraud and general provisions, sections 48.1, 48.2, 48.3(a), and 48.17. The OCC preliminarily believes that the same requirements should apply to retail forex transactions between Federal depository institutions and insurance company separate accounts because the CFTC's CPO exclusions treat them equivalently. See proposed § 48.1(e).

In connection with this proposed modification, the OCC proposes to exclude retail forex transactions with bank funds and insurance company separate accounts from the profitability calculations required by § 48.7(b). That paragraph requires Federal depository institutions to calculate the percentage of retail forex accounts that are profitable and the percentage of retail forex accounts that are not profitable. The OCC is concerned that these ratios would be less informative to individual consumers of the realistic prospects of profitability if they included trades entered into by sophisticated customers like bank funds and insurance company separate accounts.

The OCC proposes to adopt the further definition of eligible contract participant in 17 CFR 1.3(m). 45 One of the OCC's objectives in promulgating its retail forex rule was ensuring regulatory comparability among retail forex counterparties. To that end, the OCC modeled its rule on the CFTC's. The OCC believes that adopting the further definition of eligible contract participant promotes regulatory comparability.

The CFTC and SEC rule further defining eligible contract participant contained two statutory interpretations regarding retail forex. First, the CFTC and SEC interpreted certain foreign funds to be ECPs for purposes of the retail forex rule. 46 Second, the CFTC and SEC explained that retail forex counterparties may rely (if reasonable) on a customer's written representation that it is an ECP. 47

The OCC believes that the considerations that led the CFTC and SEC to consider certain foreign funds to be ECPs for purposes of the retail forex look-through  48 are equally applicable to the OCC's retail forex rule. The OCC therefore proposes to exempt from many of the retail forex rule's requirements retail forex transactions between a Federal depository institution and a foreign fund operated and managed by a foreign person and whose participants are foreign investors. These transactions will remain subject to applicable foreign law. In addition, a Federal depository institution must still obtain a supervisory non-objection to begin a retail forex business, even with foreign funds. See proposed § 48.1(d)(2).

The OCC also believes that a Federal depository institution should not be deemed in violation of the retail forex rule if it inadvertently violated one of the rule's requirements because it reasonably believed its counterparty was an ECP, bank fund, or insurance company separate account. Proposed § 48.18 provides a safe harbor for this situation. To rely on this safe harbor, a Federal depository institution must: have reasonable policies and procedures to verify the customer's status; follow these policies and procedures; and obtain a written representation from the counterparty that it is an ECP, bank fund, or insurance company separate account. Reliance on that representation must be reasonable. For this purpose, reliance would be reasonable if the representation specifies its status category—e.g., an investment company, a natural person with discretionary investments exceeding $10 million, a bank fund—unless the Federal depository institution has information that would cause a reasonable person to question the representation.

The OCC also proposes to make additional clarifying and conforming changes to the retail forex rule.

First, the OCC proposes to clarify the capital requirements applicable to Federal branches and agencies of foreign banks that offer or enter into retail forex transactions. The current retail forex rule requires these Federal branches and agencies to be well capitalized under 12 CFR part 6. However, part 6 only applies to insured Federal branches and agencies. 49 The OCC proposes to amend the capital requirements in § 48.8 so that all Federal branches and agencies offering or entering into retail forex transactions must satisfy the requirements of 12 CFR 4.7(b)(1)(iii)(A) and (iv). 50 For purposes of determining whether a Federal branch or agency complies with these requirements, the Federal branch or agency would have to calculate capital ratios consistent with 12 CFR part 3. 51 The well capitalized requirement would continue to apply to insured Federal branches.

Second, the OCC proposes to revise the retail forex rule's prohibition on self dealing in 12 CFR 48.3(b) to be consistent with the CFTC's retail forex rule. 52 The CFTC's rule prohibits a person from entering into a retail forex transaction for an account over which it or its affiliate has investment discretion. The OCC's retail forex rule, however, prohibits a national bank or its affiliate from entering into a retail forex transaction with a customer if the national bank (but not its affiliate) has investment discretion over that customer's account. The OCC does not intend to regulate the conduct of national bank affiliates, which are subject to other agencies' retail forex rules. 53 Furthermore, the OCC believes it is inappropriate for a Federal depository institution to act as the counterparty for a retail forex transaction that its affiliate entered into using its investment discretion over a customer's account.

Third, the OCC proposes to clarify that instruments that Congress or the CFTC have excluded from regulation under the CEA  54 are not retail forex transactions. Because these instruments are excluded from regulation under the CEA, section 2(c)(2)(E) of the CEA, which prohibits retail forex transactions except under a retail forex rule, does not apply to them. Because this amendment refers to transactions that are already excluded from regulation under the CEA, it would simply clarify how the OCC's retail forex rule interacts with established law.

Finally, the OCC proposes a technical correction to a citation contained in the definition of retail forex transaction.

On September 12, 2011, the OCC published an interim final rule amending part 48 to allow Federal savings associations to engage in retail forex transactions on the same terms as national banks. 55 The interim final rule requested comment, by November 14, 2011, on the application of the existing rule to Federal savings associations. The OCC received no comments on the interim final rule. The OCC plans to finalize the interim final rule, as published, at the same time as it finalizes the changes proposed in this NPR.

The OCC requests comments on all aspects of this proposed rule, including the following specific questions.

Question 1. Does the alternative treatment proposed for retail forex transactions with bank funds and insurance company separate accounts appropriately address those transactions? If not, please explain why not and describe the additional requirements the OCC should impose on transactions with bank funds and insurance company separate accounts. Please explain why those requirements are appropriate for transactions with bank funds and insurance company separate accounts but not for transactions with commodity pools that are ECPs under the CFTC's further definition. 56

Question 2. Is the proposed definition of bank fund in § 48.2 appropriate? If not, how should it be defined? Do any bank funds not fall within the definition? Are there any bank funds that are not directly or indirectly subject to 12 CFR 9.18, such as a bank fund of a state bank? If so, how are those funds regulated?

Question 3. Is the proposed definition of insurance company separate account in § 48.2 appropriate? If not, how should it be defined?

Question 4. Is the exclusion of transactions with bank funds and insurance company separate accounts from the profitability calculations appropriate? If not, why not? What proportion of Federal depository institutions' forex trading is with bank funds or insurance company separate accounts?

Question 5. Should the OCC's retail forex rule adopt the CFTC's and SEC's further definition of eligible contract participant ? Why or why not? Is the definition of eligible contract participant proposed in section 48.2 appropriate?

Question 6. Should the OCC's retail forex rule adopt the CFTC's and SEC's interpretation regarding how to treat foreign funds under the retail forex look-through? Why or why not? Is proposed § 48.1(d) an appropriate implementation of this interpretation? Why or why not? Does this approach properly construe the extraterritorial reach of CEA section 2(c)(2)(E)? Why or why not?

Question 7. Should the OCC adopt the CFTC's and SEC's approach to verifying ECP status? Why or why not? Is proposed § 48.18 an appropriate implementation of this approach? Why or why not?

Under the Paperwork Reduction Act, 57 the OCC may not conduct or sponsor, and a person is not required to respond to, an information collection unless the information collection displays a valid Office of Management and Budget (OMB) control number. The amendments in this notice of proposed rulemaking do not introduce any new collections of information into the rules, nor do they amend the rules in a way that modifies the collection of information that OMB has previously approved for part 48. 58 Therefore, no Paperwork Reduction Act submission to OMB is required.

Under section 605(b) of the Regulatory Flexibility Act, the regulatory flexibility analysis otherwise required under section 604 of the Regulatory Flexibility Act is not required if an agency certifies that the rule will not have a significant economic impact on a substantial number of small entities and publishes its certification and a short explanatory statement in the Federal Register along with its rule.

The OCC supervises 772 small entities. 59 This proposal could affect approximately two of those small entities. The OCC estimates the cost to those small entities would be de minimis. Therefore, the OCC certifies that the rule will not have a significant economic impact on a substantial number of small entities.

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 104-4 requires that an agency prepare a budgetary impact statement before promulgating a rule that includes a Federal mandate that may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector of $146 million or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Reform Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule.

The OCC has determined that its proposed rule would not result in expenditures by state, local, and tribal governments, or by the private sector, of $146 million or more. Accordingly, the OCC has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered.

For the reasons stated in the preamble, the OCC proposes to amend 12 CFR part 48 as follows:

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2012-1070; Directorate Identifier 2012-NM-099-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

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

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directive 2012-0091, dated May 25, 2012 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:

The FAA has examined the underlying safety issues involved in fuel tank explosions on several large transport airplanes, including the adequacy of existing regulations, the service history of airplanes subject to those regulations, and existing maintenance practices for fuel tank systems. As a result of those findings, we issued a regulation titled “Transport Airplane Fuel Tank System Design Review, Flammability Reduction and Maintenance and Inspection Requirements” (66 FR 23086, May 7, 2001). In addition to new airworthiness standards for transport airplanes and new maintenance requirements, this rule included Special Federal Aviation Regulation No. 88 (“SFAR 88,” Amendment 21-78, and subsequent Amendments 21-82 and 21-83).

Among other actions, SFAR 88 (66 FR 23086, May 7, 2001) requires certain type design (i.e., type certificate (TC) and supplemental type certificate (STC)) holders to substantiate that their fuel tank systems can prevent ignition sources in the fuel tanks. This requirement applies to type design holders for large turbine-powered transport airplanes and for subsequent modifications to those airplanes. It requires them to perform design reviews and to develop design changes and maintenance procedures if their designs do not meet the new fuel tank safety standards. As explained in the preamble to the rule, we intended to adopt airworthiness directives to mandate any changes found necessary to address unsafe conditions identified as a result of these reviews.

In evaluating these design reviews, we have established four criteria intended to define the unsafe conditions associated with fuel tank systems that require corrective actions. The percentage of operating time during which fuel tanks are exposed to flammable conditions is one of these criteria. The other three criteria address the failure types under evaluation: single failures, single failures in combination with a latent condition(s), and in-service failure experience. For all four criteria, the evaluations included consideration of previous actions taken that may mitigate the need for further action.

The Joint Aviation Authorities (JAA) has issued a regulation that is similar to SFAR 88 (66 FR 23086, May 7, 2001). (The JAA is an associated body of the European Civil Aviation Conference (ECAC) representing the civil aviation regulatory authorities of a number of European States who have agreed to co-operate in developing and implementing common safety regulatory standards and procedures.) Under this regulation, the JAA stated that all members of the ECAC that hold type certificates for transport category airplanes are required to conduct a design review against explosion risks.

We have determined that the actions identified in this AD are necessary to reduce the potential of ignition sources inside fuel tanks, which, in combination with flammable fuel vapors, could result in fuel tank explosions and consequent loss of the airplane.

Airbus has issued Mandatory Service Bulletins A300-28-6104 and A310-28-2170, both dated February 28, 2012. The actions described in this service information are intended to correct the unsafe condition identified in the MCAI.

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

Based on the service information, we estimate that this proposed AD would affect about 162 products of U.S. registry. We also estimate that it would take about 6 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $17,680 per product. Where the service information lists required parts costs that are covered under warranty, we have assumed that there will be no charge for these parts. As we do not control warranty coverage for affected parties, some parties may incur costs higher than estimated here. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $2,946,780, or $18,190 per product.

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

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

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

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

1. Is not a “significant regulatory action” under Executive Order 12866;

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

3. Will not affect intrastate aviation in Alaska; and

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

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.

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

The Securities and Exchange Commission is proposing an amendment to temporary rule 206(3)-3T [17 CFR 275.206(3)-3T] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] that would extend the date on which the rule will sunset from December 31, 2012 to December 31, 2014.

On September 24, 2007, we adopted, on an interim final basis, rule 206(3)-3T, a temporary rule under the Investment Advisers Act of 1940 (the “Advisers Act”) that provides an alternative means for investment advisers that are registered with us as broker-dealers to meet the requirements of section 206(3) of the Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. 1 The purpose of the rule was to permit broker-dealers to sell to their advisory clients, in the wake of Financial Planning Association v. SEC (the “FPA Decision”), 2 certain securities held in the proprietary accounts of their firms that might not be available on an agency basis—or might be available on an agency basis only on less attractive terms  3 —while protecting clients from conflicts of interest as a result of such transactions. 4

As initially adopted on an interim final basis, rule 206(3)-3T was set to sunset on December 31, 2009. In December 2009, however, we adopted rule 206(3)-3T as a final rule in the same form in which it was adopted on an interim final basis in 2007, except that we extended the rule's sunset date by one year to December 31, 2010. 5 We deferred final action on rule 206(3)-3T in December 2009 because we needed additional time to understand how, and in what situations, the rule was being used. 6

In December 2010, we further extended the rule's sunset date by two years to December 31, 2012. 7 We deferred final action on rule 206(3)-3T at that time in order to complete a study required by section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)  8 and to consider more broadly the regulatory requirements applicable to broker-dealers and investment advisers, including whether rule 206(3)-3T should be substantively modified, supplanted, or permitted to sunset. 9

The study mandated by section 913 of the Dodd-Frank Act was prepared by the staff and delivered to Congress on January 21, 2011. 10 Since that time, we have considered the findings, conclusions, and recommendations of the 913 Study in order to determine whether to promulgate rules concerning the legal or regulatory standards of care for broker-dealers and investment advisers. In addition, since issuing the 913 Study, Commissioners and the staff have held numerous meetings with interested parties on the study and related matters. 11

We are proposing to amend rule 206(3)-3T only to extend the rule's sunset date by two additional years. 12 Absent further action by the Commission, the rule will sunset on December 31, 2012. We are proposing this extension because we continue to believe that the issues raised by principal trading, including the restrictions in section 206(3) of the Advisers Act and our experiences with, and observations regarding, the operation of rule 206(3)-3T, should be considered as part of our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers in connection with the Dodd-Frank Act. 13

As discussed in the 2010 Extension Release, section 913 of the Dodd-Frank Act authorizes us to promulgate rules concerning, among other things, the legal or regulatory standards of care for broker-dealers, investment advisers, and persons associated with these intermediaries when providing personalized investment advice about securities to retail customers. Since the completion of the 913 Study in 2011, we have been considering the findings, conclusions, and recommendations of the study and the comments we have received from interested parties. 14 In addition, our staff has been working to obtain data and economic analysis related to standards of conduct and enhanced regulatory harmonization of broker-dealers and investment advisers to inform the Commission as it considers any future rulemaking. At this time, our consideration of the regulatory requirements applicable to broker-dealers and investment advisers and the recommendations from the 913 Study is ongoing. We will not complete our consideration of these issues before December 31, 2012, the current sunset date for rule 206(3)-3T.

If we permit rule 206(3)-3T to sunset on December 31, 2012, after that date investment advisers registered with us as broker-dealers that currently rely on rule 206(3)-3T would be required to comply with section 206(3)'s transaction-by-transaction written disclosure and consent requirements without the benefit of the alternative means of complying with these requirements currently provided by rule 206(3)-3T. This could limit the access of non-discretionary advisory clients of advisory firms that are registered with us as broker-dealers to certain securities. 15 In addition, firms may be required to make substantial changes to their disclosure documents, client agreements, procedures, and systems.

We believe that the requirements of rule 206(3)-3T, coupled with regulatory oversight, will adequately protect advisory clients for an additional limited period of time while we consider more broadly the regulatory requirements applicable to broker-dealers and investment advisers. 16 In the 2010 Extension Proposing Release, we discussed certain compliance issues identified by the Office of Compliance, Inspections and Examinations. 17 One matter identified in the staff's review resulted in a settlement of an enforcement proceeding and other matters continue to be reviewed by the staff. 18 Since 2010 and throughout the period of the proposed extension, the staff has and would continue to examine firms that engage in principal transactions and will take appropriate action to help ensure that firms are complying with section 206(3) or rule 206(3)-3T (as applicable), including possible enforcement action.

In light of these considerations, we believe that it would be premature to require firms currently relying on the rule to restructure their operations and client relationships before we complete our consideration of the standards of conduct and regulatory requirements applicable to broker-dealers and investment advisers. To the extent our consideration of these issues leads to new rules concerning principal trading, these firms would be required to restructure their operations and client relationships, potentially at substantial expense.

As part of our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers, we intend to carefully consider principal trading by advisers, including whether rule 206(3)-3T should be substantively modified, supplanted, or permitted to sunset. In making these determinations, we will consider, among other things, the 913 Study, relevant comments received in connection with the 913 Study and any rulemaking that may follow, the results of our staff's evaluation of the operation of rule 206(3)-3T, and comments we receive on rule 206(3)-3T in connection with this proposed extension.

We request comment on our proposal to extend rule 206(3)-3T's sunset date for two additional years.

• Should we allow the rule to sunset?

• If so, what costs would advisers that currently rely on the rule incur? What would be the impact on their clients?

• If we allow the rule to sunset, should we consider requests from investment advisers that are registered with us as broker-dealers for exemptive orders providing an alternative means of compliance with section 206(3)?

• If we extend the rule's sunset date, is two years an appropriate period of time to extend the sunset date? Or should we extend the rule's sunset date for a different period of time? If so, for how long?

• Is it appropriate to extend rule 206(3)-3T's sunset date for a limited period of time in its current form while we complete our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers?

• Should we consider changing the requirements for adviser disclosures to have registered advisers provide more information to us and their clients about whether they are relying on the rule? For example, should we amend Part 1A of Form ADV to require advisers to disclose whether they rely on rule 206(3)-3T for certain principal transactions? Should we amend Part 2A of Form ADV to require advisers who rely on rule 206(3)-3T to provide a description to clients of the policies and procedures they have adopted to ensure compliance with the rule?

• Why do advisers eligible to rely on the temporary rule not rely on it?

Rule 206(3)-3T contains “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995. 19 The Office of Management and Budget (“OMB”) last approved the collection of information with an expiration date of May 31, 2014. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The title for the collection of information is: “Temporary rule for principal trades with certain advisory clients, rule 206(3)-3T” and the OMB control number for the collection of information is 3235-0630.

The amendment to the rule we are proposing today—to extend rule 206(3)-3T's sunset date for two years—does not affect the current annual aggregate estimated hour burden of 378,992 hours. 20 Therefore, we are not revising the Paperwork Reduction Act burden and cost estimates submitted to OMB as a result of this proposed amendment.

We request comment on whether the estimates continue to be reasonable. Have circumstances changed such that these estimates (or the underlying assumptions embedded in these estimates) should be modified or revised? Persons submitting comments should direct the comments to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090, with reference to File No. S7-23-07.

The Commission is sensitive to the costs and benefits of its rules. The discussion below addresses the costs and benefits of extending rule 206(3)-3T's sunset date for two years, as well as the effect of the proposed extension on the promotion of efficiency, competition, and capital formation as required by section 202(c) of the Advisers Act. 21

Rule 206(3)-3T provides an alternative means for investment advisers that are registered with the Commission as broker-dealers to meet the requirements of section 206(3) of the Advisers Act when they act in a principal capacity in transactions with their non-discretionary advisory clients. Other than proposing to extend rule 206(3)-3T's sunset date for two years, we are not otherwise proposing to modify the rule from its current form. We previously considered and discussed the economic analysis of rule 206(3)-3T in its current form in the 2007 Principal Trade Rule Release, the 2009 Extension Release, and the 2010 Extension Release. 22

The baseline for the following analysis of the benefits and costs of the proposed rule is the situation in existence today, in which investment advisers that are registered with us as broker-dealers can choose to use rule 206(3)-3T as an alternative means to comply with section 206(3) of the Advisers Act when engaging in principal transactions with their non-discretionary advisory clients. The proposed amendment, which will extend rule 206(3)-3T's sunset date by an additional two years, will affect investment advisers that are registered with us as broker-dealers and engage in, or may consider engaging in, principal transactions with non-discretionary advisory clients, as well as the non-discretionary advisory clients of these firms that engage in, or may consider engaging in, principal transactions. The extent to which firms currently rely on the rule is unknown. 23 Past comment letters have indicated that since its implementation in 2007, both large and small advisers have relied upon the rule. 24

As stated in previous releases, we believe the principal benefit of rule 206(3)-3T is that it maintains investor choice and protects the interests of investors. Rule 206(3)-3T also provides non-discretionary advisory clients easier access to a wider range of securities by providing a lower cost and more efficient alternative for an adviser that is registered with us as a broker-dealer to comply with the requirements of section 206(3) of the Advisers Act. Non-discretionary advisory clients also benefit from the protections of the sales practice rules of the Exchange Act and the relevant self-regulatory organization(s), and the fiduciary duties and other obligations imposed by the Advisers Act. The rule also may promote a more efficient allocation of capital by increasing access of non-discretionary advisory clients to a wider range of securities. In the long term, the more efficient allocation of capital may lead to an increase in capital formation.

A commenter disagreed with a number of the benefits of rule 206(3)-3T described above in connection with the 2010 extension of the rule, but did not provide any specific data, analysis, or other information in support of its comment. 25 This commenter also argued that rule 206(3)-3T would impede, rather than promote, capital formation because it would lead to “more numerous and more severe violations * * * of the trust placed by individual investors in their trusted investment adviser.”  26 While we understand the view that numerous and severe violations of trust could impede capital formation, we have not seen any evidence that rule 206(3)-3T has caused this result. The staff has not identified instances where an adviser has used the temporary rule to “dump” unmarketable securities or securities that the adviser believes may decline in value into an advisory account, a harm that section 206(3) and the conditions and limitations of rule 206(3)-3T are designed to redress. 27 No commenter provided any substantive or specific evidence to contradict the Commission's previous conclusion that the rule benefits investors, and the Commission continues to believe that the rule provides those benefits. 28

We also received comments on the 2007 Principal Trade Rule Release from commenters who opposed the limitation of the temporary rule to investment advisers that are registered with us as broker-dealers, as well as to accounts that are subject to both the Advisers Act and Exchange Act as providing a competitive advantage to investment advisers that are registered with us as broker-dealers. 29 Based on our experience with the rule to date, and as we noted in previous releases, we have no reason to believe that broker-dealers (or affiliated but separate investment advisers and broker-dealers) are put at a competitive disadvantage to advisers that are themselves also registered as broker-dealers. 30 We intend to continue to evaluate the effects of the rule on efficiency, competition, and capital formation in connection with our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers.

As we discussed in previous releases, there are also several costs associated with rule 206(3)-3T, including the operational costs associated with complying with the rule. 31 In the 2007 Principal Trade Rule Release, we presented estimates of the costs of each of the rule's disclosure elements, including: prospective disclosure and consent; transaction-by-transaction disclosure and consent; transaction-by-transaction confirmations; and the annual report of principal transactions. We also provided estimates for the following related costs of compliance with rule 206(3)-3T: (i) The initial distribution of prospective disclosure and collection of consents; (ii) systems programming costs to ensure that trade confirmations contain all of the information required by the rule; and (iii) systems programming costs to aggregate already-collected information to generate compliant principal transactions reports. We did not receive comments directly addressing with supporting data the cost analysis we presented in the 2007 Principal Trade Rule Release. We do not believe the extension we are proposing today would materially affect the cost estimates associated with the rule. 32 We request comment on whether the proposed extension would impact our previous estimates.

In addition to the benefits of rule 206(3)-3T described above and in previous releases, we believe there are benefits to extending the rule's sunset date for an additional two years. A temporary extension of rule 206(3)-3T would have the benefit of providing the Commission with additional time to consider principal trading as part of the broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers without causing disruption to the firms and clients relying on the rule.

One alternative to the proposed extension of the rule's sunset date would be to let the temporary rule sunset on its current sunset date, and so preclude investment advisers from engaging in principal transactions with their advisory clients unless in compliance with the requirements of section 206(3) of the Advisers Act. As explained in the 2010 Extension Release, if we do not extend rule 206(3)-3T's sunset date, firms currently relying on the rule would be required to restructure their operations and client relationships on or before the rule's current expiration date—potentially only to have to do so again later (first when the rule sunsets or is modified, and again if we adopt a new approach in connection with our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers). 33 On the other hand, if the rule's sunset date is extended for two years, firms relying on the rule would continue to be able to offer clients and prospective clients access to certain securities on a principal basis and would not need to incur the cost of adjusting to a new set of rules or abandoning the systems established to comply with the current rule during this two-year period. An extension of the rule would also permit non-discretionary advisory clients who have had access to certain securities because of their advisers' reliance on the rule to trade on a principal basis to continue to have access to those securities without disruption.

We recognize that if this proposal is adopted, firms relying on the rule would continue to incur the costs associated with complying with the rule for two additional years. We also recognize that a temporary rule, by nature, creates long-term uncertainty, which in turn, may result in a reduced ability of firms to coordinate and plan future business activities. 34 However, we believe that it would be premature to allow the rule to sunset or to adopt the rule on a permanent basis while consideration of the regulatory requirements applicable to broker-dealers and investment advisers is ongoing. The Commission also considered extending the rule's sunset date for a period other than two years. Should our consideration of the fiduciary obligations and other regulatory requirements applicable to broker-dealers and investment advisers extend beyond the proposed sunset date of the temporary rule, a longer period may be appropriate. On balance, however, we believe that the proposed two-year extension of rule 206(3)-3T appropriately addresses the concerns of firms and clients relying on the rule while preserving the Commission's ability to address principal trading as part of its broader-consideration of the standards applicable to investment advisers and broker-dealers. We will continue to assess the rule's operation and impact along with intervening developments during the period of the extension.

We request comment on all aspects of the economic analysis, including the accuracy of the potential costs and benefits identified and assessed in this Release and the prior releases, any other costs or benefits that may result from the proposal, and whether the proposal, if adopted, would promote efficiency, competition, and capital formation. Commenters are requested to provide empirical data to support their views.

The Commission has prepared the following Initial Regulatory Flexibility Analysis (“IRFA”) regarding the proposed amendment to rule 206(3)-3T in accordance with section 3(a) of the Regulatory Flexibility Act. 35

We are proposing to extend rule 206(3)-3T's sunset date for two years because we believe that it would be premature to require firms relying on the rule to restructure their operations and client relationships before we complete our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers.

The objective of the proposed amendment to rule 206(3)-3T, as discussed above, is to permit firms currently relying on rule 206(3)-3T to limit the need to modify their operations and relationships on multiple occasions, both before and potentially after we complete any regulatory actions stemming from the 913 Study.

We are proposing to amend rule 206(3)-3T pursuant to sections 206A and 211(a) of the Advisers Act [15 U.S.C. 80b-6a and 15 U.S.C. 80b-11(a)].

Rule 206(3)-3T is an alternative method of complying with Advisers Act section 206(3) and is available to all investment advisers that: (i) Are registered as broker-dealers under the Exchange Act; and (ii) effect trades with clients directly or indirectly through a broker-dealer controlling, controlled by or under common control with the investment adviser, including small entities. Under Advisers Act rule 0-7, for purposes of the Regulatory Flexibility Act an investment adviser generally is a small entity if it: (i) Has assets under management of less than $25 million; (ii) did not have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year. 36

We estimate that as of August 1, 2012, 547 SEC-registered investment advisers were small entities. 37 As discussed in the 2007 Principal Trade Rule Release, we opted not to make the relief provided by rule 206(3)-3T available to all investment advisers, and instead have restricted it to investment advisers that are registered as broker-dealers under the Exchange Act. 38 We therefore estimate for purposes of this IRFA that 7 of these small entities (those that are both investment advisers and registered broker-dealers) could rely on rule 206(3)-3T. 39

The provisions of rule 206(3)-3T impose certain reporting or recordkeeping requirements, and our proposal, if adopted, would extend the imposition of these requirements for an additional two years. We do not, however, expect that the proposed two-year extension of the rule's sunset date would alter these requirements.

Rule 206(3)-3T is designed to provide an alternative means of compliance with the requirements of section 206(3) of the Advisers Act. Investment advisers taking advantage of the rule with respect to non-discretionary advisory accounts would be required to make certain disclosures to clients on a prospective, transaction-by-transaction and annual basis.

Specifically, rule 206(3)-3T permits an adviser, with respect to a non-discretionary advisory account, to comply with section 206(3) of the Advisers Act by, among other things: (i) Making certain written disclosures; (ii) obtaining written, revocable consent from the client prospectively authorizing the adviser to enter into principal trades; (iii) making oral or written disclosure and obtaining the client's consent orally or in writing prior to the execution of each principal transaction; (iv) sending to the client a confirmation statement for each principal trade that discloses the capacity in which the adviser has acted and indicating that the client consented to the transaction; and (v) delivering to the client an annual report itemizing the principal transactions. Advisers are already required to communicate the content of many of the disclosures pursuant to their fiduciary obligations to clients. Other disclosures are already required by rules applicable to broker-dealers.

Our proposed amendment, if adopted, only would extend the rule's sunset date for two years. Advisers currently relying on the rule already should be making the disclosures described above.

We believe that there are no rules that duplicate or conflict with rule 206(3)-3T, which presents an alternative means of compliance with the procedural requirements of section 206(3) of the Advisers Act that relate to principal transactions.

We note, however, that rule 10b-10 under the Exchange Act is a separate confirmation rule that requires broker-dealers to provide certain information to their customers regarding the transactions they effect, including whether the broker or dealer is acting as an agent or as a principal for its own account in a given transaction. Furthermore, FINRA rule 2232 requires broker-dealers that are members of FINRA to deliver a written notification in conformity with rule 10b-10 under the Exchange Act containing certain information. Rule G-15 of the Municipal Securities Rulemaking Board also contains a separate confirmation rule that governs transactions in municipal securities, and requires brokers, dealers and municipal securities dealers to disclose, among other things, the capacity in which the firm effected a transaction ( i.e., as an agent or principal). In addition, investment advisers that are qualified custodians for purposes of rule 206(4)-2 under the Advisers Act and that maintain custody of their advisory clients' assets must send quarterly account statements to their clients pursuant to rule 206(4)-2(a)(3) under the Advisers Act.

These rules overlap with certain elements of rule 206(3)-3T, but we designed the temporary rule to work efficiently together with existing rules by permitting firms to incorporate the required disclosure into one confirmation statement.

The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish our stated objective, while minimizing any significant adverse impact on small entities. 40 Alternatives in this category would include: (i) Establishing different compliance or reporting standards or timetables that take into account the resources available to small entities; (ii) clarifying, consolidating, or simplifying compliance requirements under the rule for small entities; (iii) using performance rather than design standards; and (iv) exempting small entities from coverage of the rule, or any part of the rule.

We believe that special compliance or reporting requirements or timetables for small entities, or an exemption from coverage for small entities, may create the risk that the investors who are advised by and effect securities transactions through such small entities would not receive adequate disclosure. Moreover, different disclosure requirements could create investor confusion if it creates the impression that small investment advisers have different conflicts of interest with their advisory clients in connection with principal trading than larger investment advisers. We believe, therefore, that it is important for the disclosure protections required by the rule to be provided to advisory clients by all advisers, not just those that are not considered small entities. Further consolidation or simplification of the proposals for investment advisers that are small entities would be inconsistent with the Commission's goals of fostering investor protection.

We have endeavored through rule 206(3)-3T to minimize the regulatory burden on all investment advisers eligible to rely on the rule, including small entities, while meeting our regulatory objectives. It was our goal to ensure that eligible small entities may benefit from the Commission's approach to the rule to the same degree as other eligible advisers. The condition that advisers seeking to rely on the rule must also be registered with us as broker-dealers and that each account with respect to which an adviser seeks to rely on the rule must be a brokerage account subject to the Exchange Act, and the rules thereunder, and the rules of the self-regulatory organization(s) of which the broker-dealer is a member, reflect what we believe is an important element of our balancing between easing regulatory burdens (by affording advisers an alternative means of compliance with section 206(3) of the Act) and meeting our investor protection objectives. 41 Finally, we do not consider using performance rather than design standards to be consistent with our statutory mandate of investor protection in the present context.

We solicit written comments regarding our analysis. We request comment on whether the rule will have any effects that we have not discussed. We request that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of the impact.

Do small investment advisers believe an alternative means of compliance with section 206(3) should be available to more of them?

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,”  42 we must advise OMB whether a proposed regulation constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results in or is likely to result in: (1) An annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers or individual industries; or (3) significant adverse effects on competition, investment or innovation.

We request comment on the potential impact of the proposed amendment on the economy on an annual basis. Commenters are requested to provide empirical data and other factual support for their views to the extent possible.

The Commission is proposing to amend rule 206(3)-3T pursuant to sections 206A and 211(a) of the Advisers Act [15 U.S.C. 80b-6a and 80b-11(a)].

Investment advisers, Reporting and recordkeeping requirements.

For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows.

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

On October 17, 2006, we published revised standards for PM (71 FR 61144). For PM 2.5 , the annual standard of 15 μg/m 3 was retained, and the 24-hour standard was revised to 35 μg/m 3 . For PM 10 the annual standard was revoked, and the 24-hour standard (150 μg/m 3 ) was retained.

Under sections 110(a)(1) and (2) of the Act, states are required to submit SIPs  1 that provide for the implementation, maintenance, and enforcement (the infrastructure) of a new or revised NAAQS within three years following the promulgation of the NAAQS, or within such shorter period as EPA may prescribe. Section 110(a)(2) lists the specific infrastructure elements that must be incorporated into the SIPs, including for example, requirements for air pollution control measures, and monitoring that are designed to assure attainment and maintenance of the NAAQS. A table listing all 14 infrastructure elements is included in subsection B of section I of this proposed rulemaking. Thus states were required to submit such SIPs for the 2006 PM 2.5 NAAQS to EPA no later than September 21, 2009.

On September 25, 2009, we issued “Guidance on SIP Elements Required Under Sections 110(a)(1) and (2) for the 2006 24-Hour Fine Particle (PM 2.5 ) National Ambient Air Quality Standards (NAAQS),” Memorandum also from William T. Harnett, Director, AQPD, OAQPS. Each of these guidance memos addresses the SIP elements found in 110(a)(2). The guidance states that, to the extent that existing SIPs already meet the requirements, states need only certify that fact to us.

On June 12, 2009, the Governor of New Mexico submitted a letter certifying that NMED has evaluated the New Mexico SIP and found that the SIP does satisfy all the requirements of section 110(a)(1) and (2) for the 2006 PM 2.5 NAAQS. The June 12, 2009 submittal included a table with an explanation of how the current New Mexico SIP meets the requirements of section 110(a)(2) for the 2006 PM 2.5 NAAQS. On July 15, 2011, we found that New Mexico's current SIP met all the requirements of section 110(a)(2) for the 1997 8-hour ozone and 1997 PM 2.5 NAAQS (see 76 FR 41698). For detailed information concerning the background for our previous approval, please see Docket I.D. No. EPA-R06-OAR-2009-0647 for that rulemaking.

On July 6, 2011, WildEarth Guardians and Sierra Club filed an amended complaint related to EPA's failure to take action on the SIP submittal related to the “infrastructure” requirements for the 2006 24-hour PM 2.5 NAAQS. On October 20, 2011, EPA entered into a consent decree with WildEarth Guardians and Sierra Club which required EPA, among other things, to complete a Federal Register notice of the Agency's proposed action either approving, disapproving, or approving in part and disapproving in part New Mexico's 2006 24-hour PM 2.5 NAAQS Infrastructure SIP submittal addressing the applicable requirements of sections 110(a)(2)(A)-(H), (J)-(M), and section 110(a)(2)(D)(i) interstate transport requirements, by September 30, 2012.

In today's action, we are proposing to approve New Mexico's 2006 24-hour PM 2.5 NAAQS Infrastructure SIP submittal addressing the applicable requirements of sections 110(a)(2)(A)-(H), (J)-(M), and section 110(a)(2)(D)(i) interstate transport requirements. This action is not approving any specific rule, but rather proposing that New Mexico's already approved SIP, meets certain CAA requirements.

Additional information: This rulemaking will not cover four substantive issues that are not integral to acting on a state's infrastructure SIP submission: (i) Existing provisions related to excess emissions during periods of start-up, shutdown, or malfunction at sources, that may be contrary to the CAA and EPA's policies addressing such excess emissions (“SSM”); (ii) existing provisions related to “director's variance” or “director's discretion” that purport to permit revisions to SIP approved emissions limits with limited public process or without requiring further approval by EPA, that may be contrary to the CAA (“director's discretion”); (iii) existing provisions for minor source NSR programs that may be inconsistent with the requirements of the CAA and EPA's regulations that pertain to such programs (“minor source NSR”); and, (iv) existing provisions for PSD programs that may be inconsistent with current requirements of EPA's “Final NSR Improvement Rule” (67 FR 80186, December 31, 2002), as amended by 72 FR 32526 (June 13, 2007) (“NSR Reform”). Instead, EPA has indicated that it has other authority to address any such existing SIP defects in other rulemakings, as appropriate. A detailed rationale for why these four substantive issues are not part of the scope of infrastructure SIP rulemakings can be found in EPA's July 13, 2011, final rule entitled, “Infrastructure SIP Requirements for the 1997 8-hour Ozone and PM 2.5 National Ambient Air Quality Standards” in the section entitled, “What is the scope of this final rulemaking?” (see 76 FR 41076).

Section 110(a) of the Clean Air Act (Act) requires that each state adopt and submit to EPA, within 3 years (or such shorter time period as the Administrator may prescribe) after the promulgation of a primary or secondary NAAQS or any revision thereof, a SIP that provides for the implementation, maintenance, and enforcement of such NAAQS. EPA refers to these specific submissions as “infrastructure” SIPs because they are intended to address basic structural SIP requirements for new or revised NAAQS.

Pursuant to the September 25, 2009, EPA guidance for addressing the SIP infrastructure elements required under sections 110(a)(1) and (2) for the 2006 PM 2.5 NAAQS, there are 14 essential structural elements that that must be included in the SIP. These are listed in Table 1 below.

On March 12, 2008, EPA issued a revised ozone NAAQS. See 73 FR 16436. The current action, however, is being taken to address requirements under the 1997 8-hour ozone NAAQS. Requirements for the North Carolina portion of the bi-state Charlotte Area under the 2008 ozone NAAQS will be addressed in the future. For additional information see the direct final rule which is published in the Rules Section of this Federal Register . A detailed rationale for the approval of the RFP plan requirements for the 1997 8-hour ozone NAAQS is set forth in the direct final rule. If no adverse comments are received in response to this rule, no further activity is contemplated. If EPA receives adverse comments, the direct final rule will be withdrawn and all public comments received will be addressed in a subsequent final rule based on this proposed rule. EPA will not institute a second comment period on this document. Any parties interested in commenting on the matters being proposed for approval into the North Carolina SIP today should do so at this time.

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

The Act at section 110(a)(2)(C) requires states to develop and submit to EPA for approval into the state SIP, preconstruction review and permitting programs applicable to certain new and modified stationary sources of air pollutants for attainment and nonattainment areas that cover both major and minor new sources and modifications, collectively referred to as the New Source Review (NSR) SIP. The CAA NSR SIP program is composed of three separate programs: PSD, NNSR, and Minor NSR. PSD is established in part C of title I of the CAA and applies in areas that meet the NAAQS— “attainment areas”—as well as areas where there is insufficient information to determine if the area meets the NAAQS—“unclassifiable areas.” The NNSR SIP program is established in part D of title I of the CAA and applies in areas that are not in attainment of the NAAQS—“nonattainment areas.” The Minor NSR SIP program addresses construction or modification activities that do not emit, or have the potential to emit, beyond certain thresholds and thus do not qualify as “major” and applies regardless of the designation of the area in which a source is located. Together, these programs are referred to as the NSR program. EPA regulations governing the criteria that states must satisfy for EPA approval of the NSR programs as part of the SIP are contained in 40 CFR 51.160-51.166; 52.21, 52.24; and part 51, Appendix S.

New Mexico submitted on June 11, 2009, and May 23, 2011, a collection of regulations for approval by EPA into the New Mexico SIP for PSD and NNSR permitting regulations. New Mexico adopted these regulations and submitted them for SIP approval to ensure consistency with the federal PSD and NNSR permitting requirements associated with two recently promulgated NAAQS for 8-hour ozone and PM 2.5 . Specifically, the June 11, 2009, and May 23, 2011, New Mexico SIP submittals address PSD and NNSR permitting requirements promulgated in EPA's Phase 2 8-hour Ozone Implementation Rule (70 FR 71612, November 29, 2005), NSR PM 2.5 Rule (73 FR 28321, May 16, 2008), PM 2.5 PSD Increment—Significant Impact Levels (SILs)—Significant Monitoring Concentration (SMC) Rule (75 FR 64864, October 20, 2010) and Reasonable Possibility in Recordkeeping Rule (72 FR 72607, December 21, 2007). Today's proposed action and the accompanying TSD present our rationale for proposing approval of these regulations as meeting the minimum federal requirements for the adoption and implementation of the PSD and NNSR SIP permitting programs. Because the PSD and NNSR SIP permitting programs are two separate, distinct programs under Title I of the Act, this proposed action and the accompanying TSD will present a review of the submitted New Mexico rules first for consistency with PSD SIP requirements, followed by the NNSR SIP requirements as applicable.

In a letter dated June 11, 2009, Governor Richardson submitted revisions to the New Mexico SIP that were adopted by the New Mexico Environmental Improvement Board (NM EIB) on July 31, 2009, and became effective on August 31, 2009. This SIP submittal included revisions to the following Parts of the New Mexico Air Code (NMAC):

• Revisions to the General Definitions at 20.2.2 NMAC,

• Revisions to the New Mexico PSD Permitting Program at 20.2.74 NMAC, and

• Revisions to the New Mexico NNSR Permitting Program at 20.2.79 NMAC.

Note that EPA SIP-approved the June 11, 2009 revisions to the PSD program at 20.2.74 NMAC on November 26, 2010 (75 FR 72688), effective December 27, 2010. The rulemaking docket for this action is EPA-R06-OAR-2009-0656. EPA has taken no action to date on the June 11, 2009 submitted revisions to 20.2.2 NMAC or 20.2.79 NMAC.

This review will not cover the revisions to the General Definitions for the New Mexico SIP at 20.2.2 NMAC, submitted on June 11, 2009. These provisions are severable from our review of the PSD and NNSR program submittals because each permitting program contains program-specific definitions used in place of the General Definitions. The program-specific definitions for the PSD and NNSR programs are SIP-approved at 20.2.74.7 and 20.2.79.7 NMAC, respectively. The revisions to 20.2.2 NMAC submitted on June 11, 2009, remain before EPA for review and will be addressed in a separate action.

In a letter dated May 23, 2011, Governor Martinez submitted revisions to the New Mexico SIP that were adopted by the NM EIB on May 3, 2011, and became effective on June 3, 2011. This SIP submittal included revisions to the following Parts of the New Mexico Air Code:

• Revisions to the New Mexico PSD Permitting Program at 20.2.74 NMAC, and

• Revisions to the New Mexico NNSR Permitting Program at 20.2.79 NMAC.

EPA's most recent approval to the New Mexico PSD SIP program was on July 20, 2011, at 20.2.74 NMAC, where we updated our approval of the NM PSD SIP to include the revisions adopted by the State on January 1, 2011, for the permitting of greenhouse gas emissions consistent with EPA's Greenhouse Gas Tailoring Rule. See 76 FR 43149. Since that time, the State of New Mexico has adopted and submitted for EPA approval one revision to the PSD program on May 23, 2011, affecting the following sections:

• 20.2.74.7 NMAC—Definitions,

• 20.2.74.300 NMAC—Obligations of Owners or Operators of Sources,

• 20.2.74.303 NMAC—Ambient Impact Requirements,

• 20.2.74.306 NMAC—Monitoring Requirements,

• 20.2.74.403 NMAC—Additional Requirements for Sources Impacting Class I Federal Areas,

• 20.2.74.502 NMAC—Significant Emission Rates,

• 20.2.74.503 NMAC—Significant Monitoring Concentrations,

• 20.2.74.504 NMAC—Allowable PSD Increment, and

• 20.2.74.505 NMAC—Maximum Allowable Increases for Class I Waivers.

This revision has been submitted to adopt and implement the requirements for PM 2.5 PSD SIPs in accordance with EPA's May 16, 2008 and October 20, 2010 final NSR PM 2.5 Rule and PM 2.5 PSD Increments—SILs—SMC Rule and the December 21, 2007 Reasonable Possibility in Recordkeeping Rule. The TSD for this rulemaking includes a detailed analysis of the submitted revision and demonstration of how the submittal addresses the federal requirements. The following is a summary of how EPA proposes to find that the May 23, 2011 submitted revisions to the New Mexico PSD SIP meet the requirements of the specified final rules.

On May 16, 2008, EPA finalized the NSR PM 2.5 Rule to implement the PM 2.5 NAAQS. See 73 FR 28321. As a result of EPA's final NSR PM 2.5 Rule, states were required to submit applicable SIP revisions to EPA no later than May 16, 2011, to address this Rule's PSD and NNSR SIP requirements. With respect to PSD permitting, the SIP revision submittals are required to meet the following PSD SIP requirements to implement the PM 2.5 NAAQS: (1) Require PSD permits to address directly emitted PM 2.5 and precursor pollutants; (2) establish significant emission rates for direct PM 2.5 and precursor pollutants (including sulfur dioxide (SO 2 ) and NO X ); and (3) account for gases that condense to form particles (condensables) in PM 2.5 and PM 10 emission limits in PSD permits.

New Mexico's May 23, 2011, SIP revision submittal establishes that the State's existing NSR permitting program requirements for PSD apply to the PM 2.5 NAAQS and its precursors. Specifically, the SIP revision submittal adopts and submits for EPA approval the following NSR PM 2.5 Rule PSD provisions: (1) the requirement for NSR permits to address directly emitted PM 2.5 and precursor pollutants; (2) significant emission rates for direct PM 2.5 and precursor pollutants (SO 2 and NO X ) and (3) the requirement that condensable PM be addressed in enforceable PM, PM 10 and PM 2.5 emission limits included in PSD permits. EPA proposes to find that New Mexico's May 23, 2011 SIP revision submittal meets the NSR PM 2.5 Rule for PSD and section 110 and part C of the CAA.

In the NSR PM 2.5 Rule, EPA revised the definition of “regulated NSR pollutant” for PSD SIP purposes to add a paragraph providing that “particulate matter (PM) emissions, PM 2.5 emissions and PM 10 emissions” shall include gaseous emissions from a source or activity which condense to form particulate matter at ambient temperatures and that on or after January 1, 2011, such condensable particulate matter shall be accounted for in applicability determinations and in establishing emissions limitations for PM, PM 2.5 and PM 10 in permits. See 40 CFR 51.166(b)(49)(vi), 52.21(b)(50)(vi) and “Emissions Offset Interpretative Ruling” (40 CFR part 51, Appendix S). A similar paragraph was added to the NNSR SIP provisions of the NSR PM 2.5 Rule but does not include “particulate matter (PM) emissions.” See 40 CFR 51.165(a)(1)(xxxvii)(D).

On March 16, 2012, EPA proposed a rulemaking to amend the definition of “regulated NSR pollutant” promulgated in the NSR PM 2.5 Rule regarding the PM condensable provision at 40 CFR 51.166(b)(49)(vi), 52.21(b)(50)(i), and EPA's Emissions Offset Interpretative Ruling. 1 See 77 FR 15656. The rulemaking proposes to remove the inadvertent requirement in the NSR PM 2.5 Rule that the measurement of condensable “particulate matter emissions” be included as part of the measurement and regulation of “particulate matter emissions.” The term “particulate matter emissions” includes particles that are larger than PM 2.5 and PM 10 and is an indicator measured under various New Source Performance Standards (NSPS) (40 CFR part 60). 2

New Mexico's May 23, 2011 SIP submittal revision includes EPA's definition for regulated NSR pollutant for condensables (at 40 CFR 51.166(b)(49)(vi)), including the term “particulate matter emissions,” as inadvertently promulgated in the NSR PM 2.5 Rule. EPA is, however, proposing to approve into the New Mexico SIP 20.2.74.7(AS)(6) NMAC, the requirement that condensable PM be accounted for in applicability determinations and in establishing emissions limitations for PM 2.5 and PM 10 . Upon final approval of this proposal, New Mexico's condensable provision will be consistent with the federal rule until EPA finalizes its March 16, 2012, rulemaking. Once EPA finalizes the March 16, 2012 rulemaking, the NMED can choose to initiate further rulemaking to ensure consistency with federal requirements.

EPA finalized the PM 2.5 PSD Increment—SILs—SMC Rule to provide additional regulatory requirements under the PSD SIP program regarding the implementation of the PM 2.5 NAAQS for NSR. See 75 FR 64864. As a result, the PM 2.5 PSD Increment—SILs—SMC Rule required states to submit SIP revisions to adopt the required PSD increments by July 20, 2012. Specifically, the SIP rule requires a state's submitted PSD SIP revision to adopt and submit for EPA approval the PM 2.5 increments pursuant to section 166(a) of the CAA to prevent significant deterioration of air quality in areas meeting the NAAQS. States could also discretionarily choose to adopt and submit for EPA approval SILs used as a screening tool (by a major source subject to PSD) to evaluate the impact a proposed major source or modification may have on the NAAQS or PSD increment and a SMC, (also a screening tool) used by a major source subject to PSD to determine the subsequent level of data gathering required for a PSD permit application for emissions of PM 2.5. More detail on the PM 2.5 PSD Increment—SILs—SMC Rule can be found in EPA's October 20, 2010 final rule. See 75 FR 64864.

Under section 165(a)(3) of the CAA, a PSD permit applicant must demonstrate that emissions from the proposed construction and operation of a facility “will not cause, or contribute to, air pollution in excess of any maximum allowable increase or allowable concentration for any pollutant.” In other words, when a source applies for a PSD SIP permit to emit a regulated pollutant in an attainment or unclassifiable area, the permitting authority implementing the PSD SIP must determine if emissions of the regulated pollutant from the source will cause significant deterioration in air quality. Significant deterioration occurs when the amount of the new pollution exceeds the applicable PSD increment, which is the “maximum allowable increase” of an air pollutant allowed to occur above the applicable baseline concentration  3 for that pollutant. PSD increments prevent air quality in attainment and unclassifiable areas from deteriorating to the level set by the NAAQS. Therefore an increment is the mechanism used to estimate “significant deterioration” of air quality for a pollutant in an area.

For PSD baseline purposes, a baseline area for a particular pollutant emitted from a source includes the attainment or unclassifiable/attainment area in which the source is located as well as any other attainment or unclassifiable/attainment area in which the source's emissions of that pollutant are projected (by air quality modeling) to result in an ambient pollutant increase of at least 1 μg/m 3 (annual average). See 40 CFR 51.166(b)(15)(i) and (ii). Under EPA's existing regulations, the establishment of a baseline area for any PSD increment results from the submission of the first complete PSD permit application and is based on the location of the proposed source and its emissions impact on the area. Once the baseline area is established, subsequent PSD sources locating in that area need to consider that a portion of the available increment may have already been consumed by previous emissions increases. In general, the submittal date of the first complete PSD permit application in a particular area is the operative “baseline date.”  4 On or before the date of the first complete PSD application, emissions generally are considered to be part of the baseline concentration, except for certain emissions from major stationary sources. Most emissions increases that occur after the baseline date will be counted toward the amount of increment consumed. Similarly, emissions decreases after the baseline date restore or expand the amount of increment that is available. See 75 FR 64864. As described in the PM 2.5 PSD Increment—SILs—SMC Rule, pursuant to the authority under section 166(a) of the CAA EPA promulgated numerical increments for PM 2.5 as a new pollutant  5 for which the NAAQS were established after August 7, 1977, 6 and derived 24-hour and annual PM 2.5 increments for the three area classifications (Class I, II and III) using the “contingent safe harbor” approach. See 75 FR 64864 at 64869 and table at 40 CFR 51.166(c)(1).

In addition to PSD increments for the PM 2.5 NAAQS, the PM 2.5 PSD Increment—SILs—SMC Rule amended the definition at 40 CFR 51.166 and 52.21 for “major source baseline date” and “minor source baseline date” to establish the PM 2.5 NAAQS specific dates (including trigger dates) associated with the implementation of PM 2.5 PSD increments. See 75 FR 64864. In accordance with section 166(b) of the CAA, EPA required the states to submit revised implementation plans adopting the PM 2.5 PSD increments to EPA for approval within 21 months from promulgation of the final rule (by July 20, 2012). Each state was responsible for determining how increment consumption and the setting of the minor source baseline date for PM 2.5 would occur under its own PSD program. Regardless of when a state begins to require PM 2.5 increment analysis and how it chooses to set the PM 2.5 minor source baseline date, the emissions from sources subject to PSD for PM 2.5 for which construction commenced after October 20, 2010, (major source baseline date) consume the PM 2.5 increment and therefore should be included in the increment analyses occurring after the minor source baseline date is established for an area under the state's revised PSD SIP program. New Mexico's May 23, 2011, submitted SIP revision adopts the PM 2.5 increment permitting requirements promulgated in the PM 2.5 PSD Increment—SILs—SMC Rule.

EPA's PM 2.5 PSD Increment—SILs—SMC Rule also established SILs and SMC for the PM 2.5 NAAQS to address air quality modeling and monitoring provisions for fine particle pollution in areas protected by the PSD program. The SILs and SMC are numerical values that represent thresholds of insignificant, i.e., de minimis, modeled source impacts or monitored (ambient) concentrations, respectively. The de minimis principle is grounded in a decision described by the court case Alabama Power Co. v. Costle, 636 F.2d 323, 360 (D.C. Cir. 1980). In this case reviewing EPA's 1978 PSD regulations, the court recognized that “there is likely a basis for an implication of de minimis authority to provide exemption when the burdens of regulation yield a gain of trivial or no value.” 636 F.2d at 360. EPA established such values for PM 2.5 in the PM 2.5 PSD Increment—SILs—SMC rule to be used as screening tools by a major source subject to PSD to determine the subsequent level of analysis and data gathering required for a PSD permit application for emissions of PM 2.5 . See 75 FR 64864. As part of the response to comments in the PM 2.5 PSD Increment—SILs—SMC Rule final rulemaking, EPA explained that the agency considers that the SILs and SMC used as de minimis thresholds for the various pollutants are useful tools that enable permitting authorities and PSD applicants to screen out “insignificant” activities; however, the fact remains that these values are not required by the Act as part of an approvable SIP program. EPA believes that most states are likely to discretionarily adopt the SILs and SMC because of the useful purpose they serve regardless of our position that the values are not mandatory as a part of the PSD SIP. Alternatively, states may develop and submit more stringent values for EPA approval into the SIP if they desire to do so or not develop SILs/SMC altogether. In any case, states are not under any statutory SIP-related deadline for revising their PSD programs to add these screening tools. See 75 FR 64864, 64900.

SILs are numeric values derived by EPA that may be used to evaluate the impact a proposed major source or modification may have on the NAAQS or PSD increment. The primary purpose of the SILs is to identify a level of ambient impact that is sufficiently low relative to the NAAQS or increments that such impact can be considered insignificant or de minimis. Although EPA has not previously incorporated every application of the SILs into the PSD regulations, EPA historically since 1980 has supported the use of the SILs as de minimis thresholds to determine whether the predicted ambient impact resulting from the emissions increase at a proposed major new stationary source or modification is considered to cause or contribute to a violation of the NAAQS. Numerous EPA statements and practices have also recognized the use of SILs under the PSD program to determine: (1) When a proposed source's ambient impacts warrants a comprehensive (cumulative) source impact analysis  7 and; (2) the size of the impact area within which the air quality analysis is completed. See 75 FR 64864.

In the PM 2.5 PSD Increment—SILs—SMC Rule, EPA established the SILs threshold which reflects the degree of ambient impact on PM 2.5 concentrations that can be considered de minimis and would justify no further analysis or modeling of the air quality impact of a source in combination with other sources in the area because the source would not cause or contribute to an exceedance of the PM 2.5 NAAQS or the PM 2.5 increments. See 75 FR 64864. The PM 2.5 PSD Increment—SILs—SMC Rule established SILs to evaluate the impact that a proposed new source or modification may have on the PM 2.5 NAAQS or increment. When a proposed major new source or major modification of PM 2.5 projects, through air quality modeling, an impact less than the PM 2.5 SILs, the proposed construction or modification is considered to not have a significant air quality impact and would not need to complete a cumulative impact analysis involving an analysis of other sources in the area. Additionally, a source with a de minimis ambient impact would not be considered to cause or contribute to a violation of the PM 2.5 NAAQS or increments.

The PM 2.5 PSD Increment—SILs—SMC Rule established the PM 2.5 SILs at EPA's existing NNSR SIP regulations at 40 CFR 51.165(b) and the PSD SIP regulations at 40 CFR 51.166(k)(2), 52.21(k)(2) and part 51, Appendix S as optional screening tools. Prior to the PM 2.5 PSD Increment—SILs—SMC Rule, the concept of a SIL was not previously incorporated into the PSD SIP regulations but was present in the NNSR SIP regulations. The regulations in 40 CFR 51.165(b)  8 establish the minimum requirements for NNSR programs in SIPs but apply specifically to major stationary sources and major modifications located in attainment or unclassifiable/attainment areas. Where a PSD source located in such areas may have an impact on an adjacent nonattainment area, the PSD source must still demonstrate that it will not cause or contribute to a violation of the NAAQS in the adjacent nonattainment area. Where emissions from a proposed PSD source or modification would have an ambient impact in a nonattainment area that would exceed the SILs, the source is considered to cause or contribute to a violation of the NAAQS and may not be issued a PSD permit without obtaining emissions reductions to compensate for its impact. See 40 CFR 51.165(b)(2)-(3). New Mexico's May 23, 2011 SIP submittal addresses the PM 2.5 SILS thresholds and provisions promulgated in the PM 2.5 PSD Increment—SILs—SMC Rule at 40 CFR 51.165(b)(2) and 51.166(k)(2).

Under the CAA and EPA SIP regulations, an applicant for a PSD permit is required to gather preconstruction monitoring data in certain circumstances. Section 165(a)(7) of the Act calls for “such monitoring as may be necessary to determine the effect which emissions from any such facility may have, or is having, on air quality in any areas which may be affected by emissions from such source.” In addition, section 165(e) requires an analysis of the air quality in areas affected by a proposed major facility or major modification and calls for gathering one year of monitoring data unless the reviewing authority determines that a complete and adequate analysis may be accomplished in a shorter period. These requirements are codified in EPA's PSD SIP regulations at 40 CFR 51.166(m) and PSD Federal Implementation Plan regulations at 40 CFR 52.21(m). In accordance with EPA's Guideline for Air Quality Modeling (40 CFR part 51, Appendix W), the preconstruction monitoring data is primarily used to determine background concentrations in modeling conducted to demonstrate that the proposed source or modification will not cause or contribute to a violation of the NAAQS. SMC are numerical values that represent thresholds of insignificant, i.e., de minimis, monitored (ambient) impacts on pollutant concentrations. In EPA's PM 2.5 PSD Increment—SILs—SMC Rule, EPA established a SMC of 4 µg/m 3 for PM 2.5 to be used as a screening tool by a major source subject to PSD to determine the subsequent level of data gathering required for a PSD permit application for emissions of PM 2.5 .

Using the SMC as a screening tool, sources may be able to demonstrate that the modeled air quality impact of emissions from the new source or modification, or the existing air quality level in the area where the source would construct, is less than the SMC, i.e., de minimis, and may be allowed to forego the preconstruction monitoring requirement for a particular pollutant at the discretion of the reviewing authority. See 75 FR 64864, 40 CFR 51.166(i)(5) and 52.21(i)(5). As mentioned above, SMCs are not minimum required elements of an approvable SIP under the CAA. This de minimis value is widely considered to be a useful component for implementing the PSD program, but is not statutorily required for EPA approval of a state's PSD SIP revision submittal. States can satisfy the statutory requirements for an approvable PSD SIP program by requiring each PSD applicant to submit air quality monitoring data for PM 2.5 without using de minimis thresholds to exempt certain sources from such requirements. States with EPA-approved PSD SIP programs that adopt and submit for EPA approval the SMC for PM 2.5 may use the SMC, once it is part of an approved SIP, to determine when it may be appropriate to exempt a particular major stationary source or major modification from the monitoring requirements under its PSD SIP program. New Mexico's May 23, 2011 submitted SIP revision adopts the SMC threshold.

EPA's authority to promulgate the SILs and SMC for PSD purposes has been challenged by the Sierra Club. See Sierra Club v. EPA, Case No. 10-1413 (D.C. Circuit Court). 9 Specifically, Sierra Club claims that the SILs and SMC screening tools adopted in the October 20, 2010, rule are inconsistent with the CAA and EPA's de minimis authority. 10 EPA responded to Sierra Club's claims in a Brief dated April 6, 2012, which described the Agency's authority to develop and promulgate SILs and SMC. 11 A copy of EPA's April 6, 2012 Brief can be found in the docket for today's proposed action.

New Mexico's May 23, 2011 SIP revision submittal adopts the following PSD provisions in the PM 2.5 PSD Increment—SILs—SMC Rule: (1) PSD increments for PM 2.5 annual and 24-hour NAAQS pursuant to section 166(a) of the CAA; (2) SILs to be used as a screening tool to evaluate the impact a proposed major source or modification may have on the NAAQS or PSD increment; and (3) SMC, also used as a screening tool, to determine the level of data gathering required of a major source in support of its PSD permit application for PM 2.5 emissions.

Specifically, regarding the PSD increments, the submitted SIP revision changes include: 1) the PM 2.5 increments as promulgated in at 40 CFR 51.166(c)(1) and (p)(4) (for Class I Variances) and 2) amendments to the terms “major source baseline date” (at 40 CFR 51.166(b)(14)(i)(c)) and 52.21(b)(14)(i)(c)), “minor source baseline date”(including establishment of the “trigger date”) and “baseline area” (as amended at 40 CFR 51.166(b)(15)(i) and (ii) and 52.21(b)(15)(i)). These changes provide for the implementation of the PM 2.5 PSD increments for the PM 2.5 NAAQS in the state's PSD program. In today's action, EPA is proposing to approve New Mexico's May 23, 2011 submitted SIP revision provisions to address the PM 2.5 PSD increment provisions promulgated in the PM 2.5 PSD Increments SILs-SMC Rule.

Regarding the SILs and SMC established in the PM 2.5 PSD Increment—SILs—SMC Rule, the Sierra Club has challenged EPA's authority to promulgate SILs and SMC. In a brief filed in the D.C. Circuit on April 6, 2012, EPA described the Agency's authority under the CAA to promulgate and implement the SMC and SILs de minimis thresholds. With respect to the SMC, New Mexico's SIP revision submittal includes the SMC of 4 μg/m 3 for PM 2.5 NAAQS at rule 20.2.74.503 NMAC that was added to the existing monitoring SIP exemption at 40 CFR 51.166(i)(5)(i)(c). EPA is proposing to approve the PM 2.5 SMC into the New Mexico PSD SIP as EPA believes the use of the SMC is a valid exercise of the Agency's de minimis authority. Furthermore, New Mexico's May 23, 2011 submitted SIP revision is consistent with EPA's current promulgated provisions in the PM 2.5 PSD Increment—SILs—SMC Rule. However, EPA notes that future court action may require the adoption and submittal of subsequent rule revisions and SIP revisions from New Mexico.

New Mexico's SIP revision submittal, adopting the new PSD SIP requirements for PM 2.5 pursuant to the PM 2.5 PSD Increment—SILs—SMC Rule also includes new regulatory text matching that at 40 CFR 51.166(k)(2), concerning the implementation of SILs for PM 2.5 . EPA stated in the preamble to the PM 2.5 PSD Increment—SILs—SMC Rule that we do not consider the SILs to be a mandatory SIP element, but regard them as discretionary on the part of regulating authority for use in the PSD SIP permitting process. Nevertheless, as mentioned previously, the PM 2.5 SILs are currently the subject of litigation before the U.S. Court of Appeals. ( Sierra Club v. EPA, Case No 10-1413, D.C. Circuit). In response to that litigation, EPA has requested that the court remand and vacate the regulatory text in the EPA's PSD regulations at paragraph (k)(2) so that EPA can make necessary rulemaking revisions to that text. In light of EPA's request for remand and vacatur and the agency's acknowledgement of the need to revise the regulatory text presently contained at paragraph (k)(2) of sections 40 CFR 51.166 and 52.21, EPA does not believe that it is appropriate at this time to act upon that portion of the State's SIP revision submittal that contains the affected regulatory text in the New Mexico PSD regulations, at 20.2.74.303(A) NMAC. Instead, EPA is severing and taking no action at this time with regard to these specific provisions contained in the submitted SIP revision. By severing, we mean that the submitted portions of the SIP revision that address New Mexico's NSR permitting program we are proposing action on in this notice can be implemented independently of the portions of the submittal relating to SILs. EPA anticipates taking action on the PM 2.5 SILs portion of New Mexico's May 23, 2011 PSD SIP revision in a separate rulemaking once the court case regarding the SILs issue has been resolved.

The aforementioned proposed amendments to New Mexico's SIP provide the framework for implementation of PM 2.5 NAAQS in the state's PSD permitting. Based on review and consideration of New Mexico's May 23, 2011 SIP revision submittal, EPA is finding that the New Mexico SIP revision submittals meet the aforementioned PSD permitting provisions promulgated in the NSR PM 2.5 Rule and PM 2.5 PSD Increment—SILs—SMC Rule. Consequently, EPA has made the preliminary determination to approve the SIP revisions submittals into the New Mexico SIP to implement the PSD NSR program for the PM 2.5 NAAQS.

EPA finalized the Reasonable Possibility in Recordkeeping Rule for PSD and NNSR SIPs on December 21, 2007. See 72 FR 72607. As a result, SIP revisions meeting the rule were due to EPA on December 21, 2010. The final rule clarifies the “reasonable possibility” standard promulgated as part of EPA's 2002 NSR Reform rule. The “reasonable possibility” standard identifies for sources and reviewing authorities the criteria under which an owner or operator of a major stationary source undergoing a physical change or change in the method of operation that does not trigger major NSR permitting requirements must keep records. The standard also specifies the recordkeeping and reporting requirements on such sources. This final rule is in response to the decision by the U.S. Court of Appeals for the D.C. Circuit in New York v. EPA, 413 F.3d 3 (D.C. Cir. 2005) in which the “reasonable possibility” standard was remanded for further clarification.

New Mexico's May 23, 2011 SIP revision submittal adopts new provisions at 20.2.74.300(E) and (E)(6) NMAC to implement the clarifications to the “reasonable possibility” standard promulgated by EPA on December 21, 2007. The revisions submitted by New Mexico are consistent with federal PSD SIP requirements at 40 CFR 51.166(r)(6), (r)(6)(vi)(a) and (b). See 72 FR 72607, 72616. EPA therefore proposes full approval of these submitted new provisions.

EPA's most recent approval of the New Mexico NNSR SIP program was on September 5, 2007, where we updated our approval of the NM NNSR SIP program to include the revisions to address NSR Reform as adopted by the State on December 6, 2005. See 72 FR 50879. Since that time, the State of New Mexico has adopted and submitted revisions on June 11, 2009, and May 23, 2011, to the NNSR SIP program, affecting the following sections:

• 20.2.79.7 NMAC—Definitions (both June 11, 2009 and May 23, 2011)

• 20.2.79.109 NMAC—Applicability (both June 11, 2009 and May 23, 2011)

• 20.2.79.115 NMAC—Emission Offsets (June 11, 2009)

• 20.2.79.119 NMAC—Tables, Significant Ambient Concentrations (May 23, 2011)

These revisions have been submitted for approval by EPA to the NNSR SIP to adopt and implement the requirements in the November 29, 2005 Phase 2 8-hour Ozone Implementation Rule, the May 16, 2008 NSR PM 2.5 Rule, the October 20, 2010 PM 2.5 PSD Increments—SILs—SMC Rule, and the December 21, 2007 Reasonable Possibility in Recordkeeping Rule. The TSD for this rulemaking includes a detailed analysis of the submitted revisions and demonstration of how each revision addresses the federal requirements. The following is a summary of how EPA proposes to find the June 11, 2009 and May 23, 2011 revisions to the New Mexico NNSR program implement the requirements of the specified final rules.

As a result of the Phase 2 8-Hour Ozone Implementation Rule, states were required to submit applicable SIP revisions to EPA no later than June 15, 2007, to address this Rule's SIP requirements for both the PSD and NNSR programs. See 70 FR 71612, 71683. The SIP revision submittals were required by this Rule to revise the major source thresholds, significant emission rates, and offset ratios for ozone such that nitrogen oxides (NO X ) are recognized as an ozone precursor. New Mexico's June 11, 2009 SIP submittal included revisions to the PSD and NNSR programs to address these 8-hour ozone permitting requirements. EPA previously approved the June 11, 2009 submitted revisions to the PSD program addressing Phase 2 8-hour ozone implementation as part of the New Mexico PSD SIP. 12 Consequently, our action today only addresses the NNSR submitted program revisions that address the SIP requirements of this Phase 2 8-Hour Ozone Implementation Rule.

New Mexico's June 11, 2009 SIP submission includes new provisions to implement the NNSR SIP requirements of the Phase 2 8-hour Ozone Implementation Rule as promulgated by EPA on November 29, 2005. Specifically, New Mexico adopted revisions to the definitions of “major stationary source” and “significant”, added new provisions to the source applicability requirements, and added new provisions to the emission offset requirements. These revisions serve to incorporate the major stationary source thresholds, significant emission rates and offset ratios pursuant to part D of title I of the CAA for the 8-hour ozone NAAQS, the CO NAAQS, and the PM 10 NAAQS. New Mexico also adopted revisions to the requirements for emission reductions achieved through curtailments or shutdowns consistent with federal requirements. Based on our review and analysis available in the TSD for this action, we are proposing approval of the June 11, 2009 revisions to the New Mexico SIP that implement the NNSR SIP requirements of the Phase 2 8-hour ozone rule consistent with requirements at 40 CFR 51.165.

On May 16, 2008, EPA finalized the NSR PM 2.5 Rule to implement the PM 2.5 NAAQS. See 73 FR 28321. As a result of EPA's final NSR PM 2.5 Rule, states were required to submit applicable SIP revisions to EPA no later than May 16, 2011, to address this Rule's PSD and NNSR SIP requirements. Specifically, the SIP revision submittals are required to meet the following NNSR SIP requirements to implement the PM 2.5 NAAQS: (1) Require NNSR permits to address directly emitted PM 2.5 and precursor pollutants; (2) establish significant emission rates for direct PM 2.5 and precursor pollutants (including sulfur dioxide (SO 2 ) and NO X ); (3) establish PM 2.5 emission offsets; and (4) account for gases that condense to form particles (condensables) in PM 2.5 and PM 10 emission limits in NNSR permits. Additionally, the NSR PM 2.5 Rule authorized states to adopt and submit provisions in their NNSR rules that would allow interpollutant offset trading.

New Mexico's May 23, 2011 submission includes new provisions to implement the NNSR SIP requirements of the NSR PM 2.5 Rule, as promulgated by EPA on May 16, 2008. Specifically, New Mexico adopted revisions to the definitions of “regulated NSR pollutant” and “significant”, added new provisions to the source applicability requirements, and added new provisions for emission offset requirements. These submitted revisions (1) Require NNSR permits to address directly emitted PM 2.5 and precursor pollutants; (2) establish significant emission rates for direct PM 2.5 and precursor pollutants (including sulfur dioxide (SO 2 ) and nitrogen oxides (NO X )); (3) establish PM 2.5 emission offsets; (4) account for gases that condense to form particles (condensables) in PM 2.5 and PM 10 emission limits in NNSR permits; and (5) provide for interprecursor offsetting of direct PM 2.5 emissions with emissions of identified PM 2.5 precursors based on an approved interprecursor trading hierarchy and ratio in the approved plan for a particular nonattainment area. Note that the language adopted and submitted by the State of New Mexico providing for interprecursor offsetting establishes the generic framework only. EPA is proposing to approve the generic framework as part of the New Mexico SIP. Sources proposing to construct/modify in nonattainment areas, however, will be unable to use interprecursor offsetting unless and until New Mexico adopts and submits said hierarchies and ratios for EPA review and they are subsequently approved by EPA into the New Mexico SIP.

The PM 2.5 PSD Increment—SILs—SMC Rule established the PM 2.5 SILs at EPA's existing NNSR SIP regulations at 40 CFR 51.165(b). The regulations in 40 CFR 51.165(b)  13 establish the minimum requirements for NNSR programs in SIPs but apply specifically to major stationary sources and major modifications located in attainment or unclassifiable/attainment areas. Where a PSD source located in such areas may have an impact on an adjacent nonattainment area, the PSD source must still demonstrate that it will not cause or contribute to a violation of the NAAQS in the adjacent nonattainment area. Where emissions from a proposed PSD source or modification would have an ambient impact in a nonattainment area that would exceed the SILs, the source is considered to cause or contribute to a violation of the NAAQS and may not be issued a PSD permit without obtaining emissions reductions to compensate for its impact. See 40 CFR 51.165(b)(2)-(3).

The reef fish fishery of the Gulf is managed under the FMP. The FMP was prepared by the Council and implemented through regulations at 50 CFR part 622 under the authority of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act).

Accountability measures were established for gag and red grouper in 2009 through Amendment 30B to the FMP (74 FR 17603, April 16, 2009). These AMs included the following provision: if the recreational sector annual catch limit (ACL) for gag or red grouper is exceeded in the current year, the recreational season for all SWG is shortened the following year to ensure that the gag or red grouper recreational ACL is not exceeded again. Regulations implemented through Amendment 32 to the FMP (77 FR 6988, February 10, 2012) added more AMs, including in-season closures for gag and red grouper, and overage adjustments for gag and red grouper if they are overfished. Amendment 38 would modify the post-season AMs for gag and red grouper so that the shortening of the season following a season with an ACL overage applies only to the species with landings that exceeded the ACL the prior year. Modifying the AMs would improve the likelihood of achieving optimum yield for red grouper and avoid unnecessary closures of all SWG species ( i.e., gag, red grouper, black grouper, scamp, yellowfin grouper, and yellowmouth grouper).

The current method for determining if post-season AMs have been triggered for red grouper or gag is to compute a one to 3-year moving average of recreational landings, and to compare that moving average of landings to the ACL. However, the use of a moving average has not been practicable due to the frequent changes that have occurred in the ACLs. In addition, the use of moving averages could potentially delay the implementation of AMs by unduly masking sizeable harvest overages and potentially slowing down the recovery of stocks under rebuilding. Amendment 38 would remove the 3-year moving average, allowing AMs to be based on comparison of the ACL to the current year's landings. A simple comparison of the current year's landings to the ACL could provide greater protection to the gag and red grouper stocks, be easier for fishermen to understand, and be less burdensome to administer.

Amendment 38 would revise the list of management measures that may be established or modified by the framework procedure specified in the FMP. Specifically, Amendment 38 would add a list of the AMs that may be revised through the Gulf reef fish framework process. Typically, framework actions take less than a year to implement and are effective until amended. Changes to AMs through the framework may result in faster implementation of measures beneficial to fish stocks and fishery participants. Additionally, Amendment 38 would update the language in the framework procedure related to Council advisory panels and committees. More general language in reference to Council committees and advisory panels would replace specific references that are no longer accurate.

A proposed rule that would implement measures outlined in Amendment 38 has been drafted. In accordance with the Magnuson-Stevens Act, NMFS is evaluating the proposed rule to determine whether it is consistent with the FMP, the Magnuson-Stevens Act, and other applicable law. If that determination is affirmative, NMFS will publish the proposed rule in the Federal Register for public review and comment.

The Council submitted Amendment 38 for Secretarial review, approval, and implementation on September 10, 2012. NMFS' decision to approve, partially approve, or disapprove Amendment 38 will be based, in part, on consideration of comments, recommendations, and information received during the comment period on this notice of availability.

Public comments received on or before December 11, 2012, will be considered by NMFS in its decision to approve, partially approve, or disapprove Amendment 38. All comments received by NMFS on Amendment 38 or the proposed rule for Amendment 38 during their respective comment periods will be addressed in a final rule.