On October 29, 2018, OPM issued proposed regulations at 83 FR 209, as contemplated by E.O. 13833, “Enhancing the Effectiveness of Agency Chief Information Officers.” Section 9 of the E.O. directed OPM to propose regulations pursuant to which OPM could delegate to the heads of certain agencies (other than the Secretary of Defense) authority to determine, under regulations prescribed by OPM, whether a severe shortage of candidates (or, for the U.S. Department of Veterans Affairs (VA) a severe shortage of highly-qualified candidates) or a critical hiring need exists for positions in the Information Technology Management series, general schedule (GS)-2210, for purposes of demonstrating a need for a Direct Hire Authority. The agencies covered by the E.O. are those listed in 31 U.S.C. 901(b), or independent regulatory agencies defined in 44 U.S.C. 3502(5). OPM received seven sets of comments in response to the proposed rule. A discussion of these comments follows.

One individual expressed general support for the proposed rule, and opined that the risk and cost of potential cronyism is an acceptable opportunity cost of a direct hire authority. As a general matter, Congress has determined that in cases where a severe shortage or critical hiring need exists, direct hire authority is justified as a legitimate exception from the normal rules of competitive hiring. The use of the authority is subject to Merit System Principles, which include requirements that selection and advancement be determined solely on the basis of relative ability, knowledge and skills, regardless of the hiring authority used to fill a position. Further, OPM contends that the opportunity cost for cronyism, favoritism, and nepotism is not only the highest cost that a Government can pay, but is fundamentally at odds with Civil Service law. In accordance with statute, OPM's regulations prescribe the criteria that must be met in order to authorize direct hire authority, consistent with Congressional intent. In addition, OPM will take the following steps to help ensure this DHA is used appropriately by Federal agencies: (1) OPM will update its guidance on DHA at https://www.opm.gov/policy-data-oversight/hiring-information/direct-hire-authority/ with an emphasis to hiring managers and human resources personnel that when using DHA agencies are required to employ an objective selection process, such as selecting qualified candidates (including individuals entitled to veterans' preference) as they are found; (2) OPM will provide agencies with interactive sessions on how to use DHA, aimed at hiring managers and human resources personnel, through a variety of media: (3) OPM will review and monitor agencies' use of this authority, including hiring patterns, etc. Furthermore, the proposed regulation requires agencies to notify OPM when an agency head authorizes DHA and to provide to us the justification on which the approval was based. OPM is retaining this requirement in the final rule so that OPM will know which agencies are using this DHA, and can provide oversight to ensure that it is being used appropriately.

Another individual commented on the severity of the wildfire season in 2018. OPM is not addressing this comment as it not within the scope of the proposed regulation.

A representative from an internet-based professional networking service suggested the final rule should encourage agencies to use this hiring flexibility. OPM is not adopting this suggestion. Each agency must decide independently whether its particular circumstances justify the need for a DHA in accordance with the statutory and regulatory criteria required for an approval.

The same individual suggested the internet-based professional networking service could help agencies determine when to implement DHA, based on the presence of competitors for the same skill-sets for which the agency is recruiting. OPM is not accepting this comment both because it is, in part, beyond the scope of this regulation and because it proceeds from a faulty premise as to the applicable standards that govern when a direct hire authority is appropriate. In using this delegation of authority, agencies must apply the provisions of 5 CFR part 337, 5 CFR part 330 subparts F and G. In doing so, agencies may rely upon a variety of data sources to gauge, in part, the availability of skill-sets to determine the presence of a severe shortage of candidates in accordance with 5 CFR 337.204. We also note that agencies must provide public notice of any vacancy to be filled through a direct hire authority, in accordance with 5 U.S.C. 3304(a)(3)(A) and 5 CFR 330.104.

Another individual commented that agencies may find recruitment of skilled IT professionals using this authority difficult if the hiring agency cannot match the level of salary and benefits offered by private sector employers. The commenter also suggested that OPM take steps to encourage agencies to use this authority to their advantage. The first comment is, essentially, an observation and thus does not require a response. OPM is not adopting the second suggestion. As noted above, each agency must decide independently whether its particular circumstances meet the statutory and regulatory criteria and thus justify using this delegation of authority. OPM provides guidance to agencies on DHA at: https://www.opm.gov/policy-data-oversight/hiring-information/direct-hire-authority/.

One commenter expressed concern that this authority will be used by agencies to avoid applying veterans' preference when filling IT jobs. This commenter stated, “Direct hire authority is often nothing more than a work around for statutory veterans' preference rights. At a minimum, there should be an objective and impartial review of the facts supporting a direct hire authority, and having each agency be its own judge and jury, as OPM is proposing, is fraught with problems. In my agency, we get many qualified applicants for IT jobs, so there is no shortage of good candidates. We are going to get a lot of pressure to do direct hire just to avoid having to hire well qualified veterans. This is bad for veterans and bad for civil service. Maybe agencies should have to show their veterans hiring numbers are good before they can use the direct hire.”

Another individual expressed a similar concern about the impact of this authority on veterans' preference and asked that OPM conduct rigorous reviews of agencies who use this authority. This individual commented, “I am writing concerning the proposal to grant agency heads the authority to determine which IT specialties may fall under the direct hire authority. In the last five years that I have been involved in staffing, to include a stint as the chief of our Delegated Examining Unit, it has been my experience that we usually receive large numbers of best qualified candidates for IT Specialist job announcements. When selecting officials in the agency complain about a certificate we issue, the basis for the complaint is that veterans with preference are the only applicants on the certificate. In our agency, approximately 70 percent of the IT workforce are contractors, and usually the selecting official wishes to hire one of his or her contractors that is not within reach because they are not a veteran with preference. My agency has a practice of announcing most positions for five days, yet we still average 50 to 100 or more applicants for each IT Specialist position we advertise. I fear agencies will mis-use the proposed direct hire authority to essentially make the entire IT Specialist, GS-2210 occupation direct hire. OPM will need to institute rigorous review of agencies who use the authority to ensure they do not abuse it; however, personally I think the proposed direct hire authority is an invitation to agencies to circumvent veterans' preference. As I stated above, selecting officials object to certificates with plenty of best-qualified veterans, not because of qualifications, but because of the inability to select contractors currently working in their organization.”

In response to the overall concern regarding veterans' preference, OPM is strongly committed to connecting the brave men and women who serve our Nation with opportunities to continue their service in the Federal workforce. OPM will continue our close coordination with the Department of Labor and Department of Veterans Affairs as required under E.O. 13518, which established the Veterans Employment Initiative. Additionally, OPM will continue our efforts across government to support agencies as they seek to hire veterans.

With respect to the first comment, OPM agrees with the need for an `objective and impartial review of the facts supporting a direct hire authority.' The final rule provides this mechanism by establishing OPM as the impartial reviewer. The rule requires that when using this authority, an agency head must authorize DHA based on justification provided by the agency's Chief Human Capital Officer (or equivalent) in accordance with the provisions and criteria specified in 5 CFR part 337. Further, once an agency head authorizes DHA using this criteria the deciding agency is required to provide the determination and a description of the supporting evidence to OPM. OPM may request access to the underlying documentation at any time, and may require corrective action in accordance with 5 U.S.C. 1104(c) and section 337.206 of the regulation. In accordance with 5 CFR 337.206 OPM will monitor agencies' use of DHA under this authority and may terminate or modify any DHA if OPM finds the basis on which such DHA was granted no longer exists, or when an agency has used an authority improperly. Regarding the commenter's concern that an agency may authorize DHA when a lack of qualified IT applicants exists, 5 CFR 337.206 requires agencies to notify OPM when the agency finds adequate numbers of qualified candidates previously filled under DHA based on a severe shortage of candidates. OPM will make this requirement a point of emphasis in its updated guidance and technical assistance. In addition, OPM will rely on a variety of data sources to monitor how DHA's under this authority are being utilized, to include the availability of qualified applicants as captured through USAJOBS and USASTAFFING data, nationwide labor trends on the availability of IT specialists in the general labor pool, the results of agencies' past attempts to fill IT jobs through other hiring mechanisms, the number of pass over request made for preference-eligible veterans initially deemed to be qualified for these DHA covered IT positions, and the number of selections of qualified preference-eligible veterans hired under this authority. In addition OPM's Merit System Accountability and Compliance reports, which are periodic reviews of agency hiring practices, will also serve provide an objective basis on which to gauge how agencies are using this DHA.

With respect to the second comment, OPM agrees that oversight by OPM is necessary. We believe that current statutory and regulatory authority exists in order for us to do so. In addition to the checks and measures described in the preceding paragraph OPM notes that any delegation of authority provided by OPM under 5 U.S.C. 1104(b)(2) requires a corresponding oversight program for use of the delegation. To facilitate this process OPM will be establishing a unique authority code for this DHA which will assist us in monitoring each agency's use of this authority.

A Federal agency questioned the effectiveness of the time limitations on appointments made under this authority. The agency noted that IT modernization may be a permanent or on-going endeavor and suggested OPM provide for permanent appointments under this authority. OPM is not adopting this suggestion. We are adopting the time limits on appointments as proposed. Our rationale for doing so is to attune these rules with the hiring patterns of the twenty first century, in particular those of the IT workforce. Agencies are making greater use of time-limited employees than in the past and are expected to continue to do so. Likewise, many individuals prefer Federal employment that is characterized by a time-limited or project nature, with movement in and out of public service, rather than the traditional 30-year career model. Agencies with a need to make appointments of IT personnel on a permanent basis in response to a critical hiring need or severe shortage of candidates may continue to request DHA from OPM pursuant to Subpart B of 5 CFR part 337. OPM retains the ability to authorize DHA to agencies, in appropriate circumstances, when presented with a well-justified request for DHA to fill positions on a permanent basis.

OPM is adopting the proposed rule without change.

I certify that this regulation would not have a significant economic impact on a substantial number of small entities because it affects only Federal agencies and employees.

Executive Orders 13563 and 12866 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing benefits, of harmonizing rules, and of promoting flexibility. This final rule is not a “significant regulatory action,” under Executive Order 12866.

This final rule is not an E.O. 13771 (82 FR 9339, February 3, 2017) action because this rule is not significant under E.O. 12866.

This regulation will not have substantial direct effects on the States, on the relationship between the National Government and the States, or on distribution of power and responsibilities among the various levels of government. Therefore, in accordance with Executive Order 13132, it is determined that this rule does not have sufficient federalism implications to warrant preparation of a Federalism Assessment.

This regulation meets the applicable standard set forth in section 3(a) and (b)(2) of Executive Order 12988.

This rule will not result in the expenditure by State, local or tribal governments of more than $100 million annually. Thus, no written assessment of unfunded mandates is required.

This action pertains to agency management, personnel and organization and does not substantially affect the rights or obligations of non-agency parties and, accordingly, is not a “rule” as that term is used by the Congressional Review Act (Subtitle E of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA)). Therefore, the reporting requirement of 5 U.S.C. 801 does not apply.

This final regulatory action will not impose any additional reporting or recordkeeping requirements under the Paperwork Reduction Act.

Accordingly, OPM is revising 5 CFR part 337 of title 5, Code of Federal Regulations, as follows:

I. Background

Appendix H, “Reactor Vessel Material Surveillance Program Requirements” (appendix H), to part 50 of title 10 of the Code of Federal Regulations (10 CFR), “Domestic Licensing of Production and Utilization Facilities,” requires light-water nuclear power reactor licensees to have a reactor vessel (RV) material surveillance program to monitor changes in the fracture toughness properties of the RV materials adjacent to the reactor core. Unless it can be shown that the end of design life neutron fluence is below certain criteria, the NRC requires licensees to implement an RV materials surveillance program that tests irradiated material specimens that are located in surveillance capsules in the RVs. The program evaluates changes in material fracture toughness and thereby assesses the integrity of the RV. For each capsule withdrawal, the test procedures and reporting requirements must meet the requirements of American Society for Testing and Materials International (ASTM) E 185-82, “Standard Recommended Practice for Conducting Surveillance Tests for Light-Water Cooled Reactor Vessels,” to the extent practicable for the configuration of the specimens in the capsule. The design of the surveillance program and the withdrawal schedule must meet the requirements of the edition of ASTM E 185 that is current on the issue date of the ASME Code to which the RV was purchased. Later editions of ASTM E 185, up to and including those editions through 1982, may be used. In sum, the surveillance program must comply with ASTM E 185, as modified by appendix H to 10 CFR part 50. The number, design, and location of these surveillance capsules within the RV are established during the design of the program, before initial plant operation.

Appendix H to 10 CFR part 50 also specifies that each capsule withdrawal and the test results must be the subject of a summary technical report to be submitted within 1 year of the date of capsule withdrawal, unless an extension is granted by the Director, Office of Nuclear Reactor Regulation. The NRC uses the results from the surveillance program to assess licensee submittals related to pressure-temperature limits in accordance with appendix G, “Fracture Toughness Requirements,” to 10 CFR part 50 and to assess pressurized water reactor licensee's compliance with § 50.61, “Fracture toughness requirements for protection against pressurized thermal shock events,” or § 50.61a, “Alternate fracture toughness requirements for protection against pressurized thermal shock events.”

In 2001, the NRC began a rulemaking to revise appendix G to 10 CFR part 50 (RIN 3150-AG98; NRC-2008-0582) to eliminate the pressure-temperature limits related to the metal temperature of the RV closure head flange and vessel flange areas. The NRC expanded the rulemaking scope in 2008 to include revisions to appendix H to 10 CFR part 50, because the fracture toughness analysis required by appendix G to 10 CFR part 50 relies on data obtained from the RV material surveillance program established under appendix H to 10 CFR part 50.

In COMSECY-14-0027, “Rulemaking to Revise Title 10, Code of Federal Regulations, Part 50, Appendix H, `Reactor Vessel Material Surveillance Program Requirements,' ” issued on June 25, 2014 (not publicly available), the NRC staff requested Commission approval to separate the rulemaking activities to revise appendices G and H to 10 CFR part 50, and to proceed immediately with rulemaking for appendix H to 10 CFR part 50.

In staff requirements memorandum (SRM) to COMSECY-14-0027, dated August 8, 2014 (not publicly available), the Commission approved the staff's recommendation to proceed with a separate rulemaking for appendix H to 10 CFR part 50. The SRM to COMSECY-14-0027 directed the NRC staff to begin the appendix H to 10 CFR part 50 rulemaking independent of the completion date or conclusions of the appendix G to 10 CFR part 50 technical basis development activities.

The NRC has prepared a regulatory basis to support a rulemaking that would amend the NRC's testing and reporting requirements in appendix H to 10 CFR part 50. In the regulatory basis, the NRC concluded that it has sufficient justification to proceed with rulemaking to amend appendix H to 10 CFR part 50.

Testing Requirements. Appendix H to 10 CFR part 50 requires RV surveillance programs to include Charpy impact specimens from welds, base metal, and the weld heat-affected zone materials and tensile specimens from welds and base metal materials. The NRC is proposing to conduct a rulemaking to reduce the testing of some specimens and eliminate the testing of other specimens that do not provide meaningful information to assess RV integrity. This decision is based on substantial material data, knowledge, and experience attained through the many years of RV surveillance program implementation. Specifically, the requirements to test weld heat-affected zone specimens and examine thermal monitors would be eliminated. Also, the NRC is proposing to reduce the number of tensile specimens that require testing and specify that testing correlation monitor material is optional. The proposed changes would reduce the burden to licensees for specimen testing, without having an adverse effect on public health and safety and the environment.

Reporting Requirements. Appendix H to 10 CFR part 50 requires licensees to submit test results to the NRC no later than 1 year after capsule withdrawal. As stated in the 1983 rulemaking (48 FR 24008; May 27, 1983), the primary purposes of the requirement are timely reporting of test results and notification of any problems. At the time of the 1983 rulemaking there was a limited amount of data from irradiated materials from which to estimate embrittlement trends of RVs at nuclear power plants; thus, making it crucial for the timely reporting of test results. An extensive amount of embrittlement data now exists, and embrittlement mechanisms are well-understood. The 1-year reporting requirement has become a hardship for some licensees because of the implementation of integrated surveillance programs (which require significant coordination among multiple licensees and hot-cell laboratories) and because capsules with higher neutron fluence levels may need longer periods of radioactive decay before capsule shipping and testing can be performed. As a result, licensees have been requesting an additional 6 months to submit reports. To reduce the burden on licensees to prepare these extension requests and for the NRC to review and approve these requests, the NRC is proposing rulemaking to increase the reporting period from 1 year to 18 months. This change would not have an adverse effect on public health and safety and the environment.

Rulemaking Process. The NRC has evaluated the planned amendments to appendix H to 10 CFR part 50 and has determined that, if implemented, there would not be an adverse effect on public health and safety. In addition, the NRC has analyzed the costs to conduct this rulemaking and has determined that the most efficient approach is to use the direct final rule process. This abbreviated process would minimize the use of agency resources and potentially allow the revised requirements to become effective sooner, thus providing licensees the benefits of the rule change sooner. Although the NRC does not anticipate receiving public comments that are significant and adverse, the NRC's rulemaking process for this action will provide the public an opportunity to comment on the direct final rule. Read more about the direct final rule process on the NRC's public website, at https://www.nrc.gov/about-nrc/regulatory/rulemaking/rulemaking-process/direct-final-rule.html.

As the NRC continues its ongoing rulemaking effort to revise the requirements for an RV materials surveillance program, the NRC is making documents publicly available on the Federal rulemaking website, www.regulations.gov, under Docket ID NRC-2017-0151. The current status of this rulemaking effort, as well as other NRC planned rulemaking activities, can be found on the NRC's public website at https://www.nrc.gov/reading-rm/doc-collections/rulemaking-ruleforum/active/RuleIndex.html.

The NRC may post additional materials relevant to this rulemaking at www.regulations.gov, under Docket ID NRC-2017-0151. Please take the following actions if you wish to receive alerts when changes or additions occur in a docket folder: (1) Navigate to the docket folder (NRC-2017-0151); (2) click the “Email Alert” link; and (3) enter your email address and select how frequently you would like to receive emails (daily, weekly, or monthly).

Discussion

The Federal Office of Civil Aviation (FOCA), which is the aviation authority for Switzerland, has issued AD HB-2019-002, dated January 28, 2019 (referred to after this as “the MCAI”), to correct an unsafe condition for certain serial-numbered Pilatus Aircraft Ltd. Model PC-7 airplanes. The MCAI states:

FOCA advises that although aircraft are manufactured with sufficient clearance between the wiring loom and the components installed below access panel F5, the wiring looms may be moved when components installed in the front instrument panel are removed and re-installed during maintenance. As a result, the wiring looms can come into contact with other equipment, causing chafing damage. You may examine the MCAI on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2019-0205.

Pilatus Aircraft Ltd. has issued Pilatus PC-7 Service Bulletin No. 24-008, Rev. No. 1, dated December 20, 2018. The service information contains procedures for inspecting the wires below access panel F5 for chafing and contact with the casings of the line replacement unit (LRU), panel edges, and environmental control system (ECS) hoses; replacing exposed bare wires; repairing chafed wires by installing a protective sleeve; inspecting the metal clips on the demist hoses to make sure they are not in contact with the wiring looms; and if necessary, adjusting the orientation of the metal clips to put their sharp edges away from the wiring loom. The service information also specifies reporting information to Pilatus Aircraft Ltd. so it can determine if follow-on action will be necessary. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

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 this State of Design Authority, they have notified us of the unsafe condition described in the MCAI and service information referenced above. We are issuing this AD because we evaluated all information provided by the State of Design Authority and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design.

An unsafe condition exists that requires the immediate adoption of this AD. The FAA has found that the risk to the flying public justifies waiving notice and comment prior to adoption of this rule because chafing of electrical cables through the insulation could lead to arching, which may cause smoke or fumes in the cockpit and result in a possible in-flight fire. Therefore, we find good cause that notice and opportunity for prior public comment are impracticable. In addition, for the reason stated above, we find that good cause exists for making this amendment effective in less than 30 days.

This AD is a final rule that involves requirements affecting flight safety, and we did not precede it by notice and opportunity for public comment. We invite you to send any written relevant data, views, or arguments about this AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2019-0205; Product Identifier 2019-CE-001-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this AD. We will consider all comments received by the closing date and may amend this AD because of 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 AD.

We estimate that this AD will affect 18 products of U.S. registry. We also estimate that it would take about 3.5 work-hours per product to comply with the inspection requirement of this AD and 5 minutes to comply with the reporting requirement of this AD. The average labor rate is $85 per work-hour.

Based on these figures, we estimate the cost of the inspection and reporting requirement in this AD on U.S. operators to be $5,481, or $304.50 per product.

In addition, we estimate the labor and parts costs for the follow-on actions as necessary:

• Repairing chafed wires and installing a protective sleeve would take about 1.5 work-hours for a cost of $127.50 per product.

• Replacing burnt or bare wires would take about 4 work-hours and require parts costing approximately $2,000 for a cost of $2,340.

• Adjusting metal clips would take about .5 work-hour for a cost of $42.50.

We have no way of determining the number of products that may need these actions.

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.

This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to small airplanes, gliders, balloons, airships, domestic business jet transport airplanes, and associated appliances to the Director of the Policy and Innovation Division.

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will 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 that this AD:

(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.

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

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued AD No. 2018-0207-E, dated September 19, 2018 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:

I. Background A. Statutory and Regulatory Background of SRO Oversight of FCMs

FCMs perform critical functions to facilitate the efficient operation of Commission-regulated exchange-traded derivatives markets. 1 In addition to trading for their own accounts and carrying the accounts of their affiliates, FCMs are market intermediaries, standing between customers trading futures and swaps transactions on one side and designated contract markets (“DCMs”), swap execution facilities, and derivatives clearing organizations (“DCOs”) on the other side. As market intermediaries, FCMs carry customer accounts and hold customer funds to margin futures and cleared swap transactions. Additionally, FCMs fulfill daily settlement obligations on behalf of customers by posting sufficient funds to DCOs to support their customers' futures and swap positions, including paying mark-to-market losses associated with such positions. FCMs also are essential to the efficient operation of Commission-regulated markets in that they guarantee each customer's financial performance for futures and swap positions to DCOs by agreeing to use their own financial resources to cover any shortfall resulting from a customer default. 2

The Commodity Exchange Act (“Act”)  3 recognizes the functions performed by FCMs and authorizes the Commission to adopt regulations to help ensure that they maintain the necessary financial resources to properly perform such functions. 4 Consistent with this statutory objective, the Commission has adopted regulations requiring FCMs to maintain a minimum level of regulatory capital, 5 to segregate customer funds from their own funds in specially designated customer accounts, 6 and to maintain appropriate risk management programs to monitor and manage the risks associated with their activities as FCMs. 7 The Commission also has imposed periodic financial reporting requirements on FCMs, which allows Commission staff to monitor their financial condition and compliance with regulatory obligations. The financial reporting requirements include daily statements demonstrating compliance with the segregation of customer funds requirements, 8 monthly unaudited and annual audited financial statements, 9 and regulatory notices upon the occurrence of specified events including failing to meet minimum capital requirements, failing to comply with segregation requirements, and failing to maintain current books and records. 10

The Act also establishes a regulatory oversight structure that imposes an obligation on DCMs and registered futures associations (“RFAs”), 11 as SROs, 12 to perform frontline regulatory oversight of market intermediaries, including FCMs. 13 To further the objective of effective self-regulation of market participants and market professionals, the Act and Commission regulations require RFAs and DCMs to adopt financial and related reporting requirements for member FCMs, and to periodically examine FCMs for compliance with such requirements. In this regard, section 17(p) of the Act requires an RFA to establish and submit for Commission approval rules imposing minimum capital, segregation and other financial requirements applicable to its members for which such requirements are imposed by the Commission. 14 Section 17(p) further provides that the RFA must implement a program to audit and enforce compliance by its members with the RFA's minimum financial requirements. 15

With respect to DCMs, section 5(d)(11)(B) of the Act and Regulation 38.600 require, in relevant part, each DCM to implement rules to ensure the financial integrity of any member FCM and the protection of customer funds. 16 DCMs also are required to monitor an FCM member's compliance with the DCM's minimum financial requirements by reviewing financial information filed with the DCM and by conducting periodic examinations of the FCM. 17

In recognition of SROs as frontline regulators and the importance of FCM oversight, the Commission adopted Regulation 1.52 which establishes minimum standards that all SRO programs must satisfy in conducting FCM financial oversight. Regulation 1.52 requires each SRO (including NFA) to adopt rules prescribing minimum financial and related reporting requirements for member FCMs that are the same as, or more stringent than, the requirements imposed by the Commission. 18 Regulation 1.52 also requires each SRO to maintain a financial surveillance oversight program that includes detailed examinations of member FCMs' books and records to assess their compliance with SRO and Commission minimum financial and related reporting and recordkeeping requirements. 19

Regulation 1.52 also permits two or more SROs to file a plan with the Commission to delegate primary, but not exclusive, responsibility to monitor and to examine the financial condition of an FCM that is a member of two or more SROs to a designated self-regulatory organization (“DSRO”). 20 The participating SROs form a Joint Audit Committee (“JAC”) and submit a Joint Audit Program to the Commission, which may approve such plan after providing an opportunity for public notice and comment. 21

The delegation of an FCM that is a member of two or more SROs to a DSRO under a Joint Audit Program allows for a more efficient use of SRO resources, while also reducing burdens that otherwise would be imposed on an FCM from duplicative supervision, including periodic on-site examinations from multiple SROs. All SROs currently are members of a single JAC and operate pursuant to one Joint Audit Program approved by the Commission. 22

Regulation 1.52 requires each SRO or JAC to establish and operate a supervisory program that includes written policies and procedures concerning the examination of its member registrants (including FCMs). The purpose of the supervisory program is to assess whether each member registrant is in compliance with applicable SRO and Commission regulations governing net capital and related financial requirements, the obligations to segregate customer funds, risk management requirements, financial reporting requirements, recordkeeping requirements, and sales practices and other compliance requirements. 23 The supervisory program is required to address an SRO's or JAC's staffing levels and independence, ongoing surveillance of member registrants, procedures for identifying and monitoring high-risk firms, on-site examinations of registrants, and documentation of surveillance activities. 24

The supervisory program as it relates to FCMs also is required to, at a minimum, incorporate FCM examination standards addressing: (1) The ethics of an examiner; (2) The independence of an examiner; (3) The supervision, review, and quality control of an examiner's work product; (4) The evidence and documentation to be reviewed and retained in connection with an examination; (5) The examination planning process; (6) Materiality assessment; (7) Quality control procedures to ensure that the examinations maintain the level of quality expected; (8) Communications between an examiner and the regulatory oversight committee, or the functional equivalent of the regulatory oversight committee, of the SRO of which the FCM is a member; (9) Communications between an examiner and an FCM's audit committee of the board of directors or similar governing body; (10) Analytical review procedures; (11) Record retention; and (12) Required items for inclusion in the examination report, such as repeat violations, material items, and high risk issues. 25 All aspects of an SRO's supervisory program, including the FCM examination standards, must conform to auditing standards issued by the Public Company Accounting Oversight Board (“PCAOB”) as such standards would apply in the conduct of a non-financial statement audit. 26

Regulation 1.52 also requires an SRO or JAC to engage an “examinations expert” to evaluate its supervisory program prior to its initial use, and to evaluate the SRO's or JAC's application of the supervisory program at least once every three years after its initial use. 27 For each evaluation, the SRO or JAC is required to obtain a written report from the examinations expert on its findings and recommendations. The written report is required to be issued under the consulting services standards of the American Institute of Certified Public Accountants (“AICPA”). The written report must include: (1) A statement that the examinations expert has evaluated the supervisory program (including its design to detect material weaknesses in an FCM's system of internal controls), including any comments and recommendations regarding such evaluation; (2) A statement that the examinations expert has evaluated the application of the supervisory program by the SRO, including any comments and recommendations in connection with such evaluation; and (3) A discussion containing recommendations of any new or best practices as prescribed by industry sources, including the AICPA and PCAOB. 28

An SRO or JAC is required to provide the written report, including responses to any findings, comments, or recommendations made by the examinations expert, to the Commission within 30 days of receipt of the report. The SRO or JAC must commence applying the revised supervisory program, incorporating the examinations expert's findings, comments, and recommendations, once the Commission has advised the SRO or JAC, by written notice, that the Commission has no questions or comments on the written report.

Commission staff initiated an agency-wide internal review of CFTC regulations and practices in March 2017 to identify areas that could be simplified, to make them less burdensome and costly for market participants. 29 The Commission subsequently published in the Federal Register on May 9, 2017, a Request for Information soliciting suggestions from the public regarding how the Commission's existing rules, regulations, or practices could be applied in a simpler, less burdensome, and costly manner ( i.e., “Project KISS”). 30

The CME submitted suggestions on a variety of rules, regulations, and practices, including Regulation 1.52, in response to the Commission's Request for Information. 31 The CME expressed its view that the requirement in Regulation 1.52 for an SRO or JAC to engage an examinations expert at least once every three years does not provide any meaningful regulatory benefit. 32 The CME noted that under the current regulatory framework, Commission staff provides effective oversight of SRO and JAC FCM examination programs through the conduct of its rule enforcement reviews. 33 The CME further noted that it revises its FCM examination programs to incorporate any regulatory changes adopted by the Commission or SROs, and provides the actual FCM examination programs, with the revisions, to Commission staff for review at least once each year. 34 Accordingly, the CME suggested that the Commission eliminate the requirement for an SRO or JAC to engage an examinations expert once every three years to evaluate the SRO's or JAC's supervisory program. 35

On July 3, 2018, the Commission published for public comment a Notice of Proposed Rulemaking (“Proposal”)  36 to amend Regulation 1.52 to revise the scope and frequency of an examinations expert's evaluation of an SRO's or JAC's supervisory program, and to address certain non-substantive revisions to provide greater clarity and organization to the Regulation. The Proposal was initiated in response to both comments received from the Project Kiss initiative and knowledge gained through Commission staff's firsthand experience with the JAC's implementation of its initial FCM supervisory program pursuant to Regulation 1.52. 37

In addition to requesting comment on proposed amendments to Regulation 1.52, the Commission also solicited comments on the impact of the Proposal on small entities, the Commission's cost-benefit considerations, and any anticompetitive effects of the Proposal. The comment period closed on September 4, 2018.

The Commission received comment letters from the JAC, NFA and CME concerning the Proposal. 38 The JAC, NFA and CME were supportive of the Commission's proposed amendments to revise the scope of the examinations expert's evaluation of the SRO or JAC supervisory program and to revise the minimum timeframes between when an SRO or JAC must engage an examinations expert to evaluate the SRO's or JAC's FCM examination standards for consistency with auditing standards issued by the PCAOB. The comments are discussed below.

Regulation 1.52 requires an SRO or JAC to engage an examinations expert to evaluate its supervisory program prior to its initial use and at least once every three years thereafter. 39 The examinations expert's evaluation is required to address the SRO's or JAC's application of its supervisory program, including the sufficiency of the supervisory program's risk-based approach and internal controls testing (including its design to detect material weaknesses in an FCM's internal control environment). The examinations expert is further required to evaluate whether the SRO's or JAC's FCM examination standards are consistent with auditing standards issued by the PCAOB as such standards would be applicable to a non-financial statement audit.

Regulation 1.52 also requires an SRO or JAC to obtain from the examinations expert for each evaluation a written report on findings and recommendations issued under AICPA consulting services standards. The report is required to include a statement that the examinations expert has evaluated the supervisory program, including the sufficiency of its risk-based approach and internal controls testing. The report also is required to include a statement that the examinations expert has evaluated the SRO's or JAC's application of the supervisory program.

The Commission proposed to amend Regulations 1.52(c)(2)(iv) and (d)(2)(ii)(I) to remove from the scope of the examinations expert's evaluation the SRO's or JAC's application of its respective supervisory program during periodic reviews and the analysis of the sufficiency of the supervisory program's risk-based approach, internal controls testing, and design to detect material weaknesses in internal controls during both the initial assessment of the SRO's or JAC's supervisory program and during subsequent periodic evaluations. Therefore, the Proposal limits the scope of the examinations expert's evaluation during both initial and subsequent periodic evaluations to an assessment of whether the SRO's and JAC's FCM examination standards are consistent with PCAOB audit standards as such standards would be applicable to a non-financial statement audit.

The CME, NFA and JAC each expressed strong support to revise the scope of the examinations expert's evaluation and written report during both the initial review and subsequent periodic reviews, to encompass only whether the FCM examination standards are consistent with applicable PCAOB auditing standards as such standards would be applied in a non-financial statement audit. 40 The CME and JAC each stated that with respect to the periodic evaluations, requiring the examinations expert to focus on any new or amended PCAOB auditing standards issued since the examinations expert's prior evaluation may enhance an SRO's or JAC's supervisory program. 41 NFA also stated that an examinations expert has expertise with respect to reviewing PCAOB auditing standards and can provide meaningful input to an SRO or JAC supervisory program regarding the consistency of the FCM examination standards with the PCAOB audit standards. 42

Each of the commenters also stated, however, that an evaluation of the application of an SRO's or JAC's supervisory program was best performed by Commission staff. The JAC stated its belief that Commission staff has subject matter expertise and is best suited to evaluate, comment upon, and make recommendations regarding enhancements to the JAC's supervisory program and to assess its application against the Commission's own regulatory requirements. 43 NFA also stated that it agreed with the Commission's statement in the Proposal that Commission staff has the expertise in the application of CFTC regulations to operations of FCMs, and that Commission staff is appropriately situated to assess whether an SRO or JAC is accurately and properly applying Commission requirements to FCMs in the execution of the examination programs. 44 NFA further stated that it believes that the rule enforcement reviews currently performed by Commission staff of the NFA's financial surveillance program are similar in nature to the examinations expert's review required by Regulation 1.52 and provide effective and meaningful oversight of the NFA's application of its FCM supervisory program. 45 The CME stated that it agreed with the reasoning set forth in the Proposal revising the scope of the examinations expert's evaluation, and noted that the proposed amendment strikes the proper balance between reliance on the Commission's expertise in its oversight of an SRO's examination program and the expertise of an examinations expert in evaluating the consistency of the FCM examination standards with PCAOB audit standards. 46

Regulation 1.52 currently requires an SRO or JAC to engage an examinations expert to evaluate its respective supervisory program prior to the initial implementation of the program, and at least once every three years thereafter. 47 The Commission proposed to amend the timeframes for an SRO or JAC to engage an examinations expert to conduct periodic evaluations subsequent to the initial implementation. 48 Specifically, the Commission proposed to amend Regulation 1.52 to require an SRO or JAC to review any new or amended auditing standards as such standards are issued by the PCAOB, and to revise its FCM examination standards promptly to reflect any changes that are applicable in the context of the SRO's or JAC's examination of FCMs. 49 The Proposal also requires the SRO or JAC to engage an examinations expert to evaluate any material revisions that the SRO or JAC makes to the examination standards to conform such standards with the new or amended PCAOB auditing standards. In addition, the Proposal requires the SRO or JAC to engage an examinations expert to evaluate the FCM examination standards in light of new or amended PCAOB auditing standards if such engagement is directed by the CFTC Director of the Division of Swap Dealer and Intermediary Oversight (“DSIO”). 50 The Commission further proposed to limit the maximum amount of time between an examinations expert's evaluation of an SRO's or JAC's FCM examination standards to no more than five years. 51

At the conclusion of each review, the Proposal requires an SRO or JAC to obtain from the examinations expert a written report on findings and recommendations issued under the AICPA consulting services standards. 52 The SRO or JAC must provide a copy of the report to the DSIO Director, along with any written responses to any of the findings and recommendations in the report, within 30 days of the SRO's or JAC's receipt of the report. The SRO or JAC must commence applying the revised FCM examination standards upon receipt of a written notice from DSIO staff that it has no questions or comments on the revised FCM examination standards or the written report.

The CME, NFA, and JAC supported the proposed amendments to extend the maximum timeframe for an SRO or JAC to engage an examinations expert from three to five years. 53 The JAC and CME, however, requested that the Commission consider a maximum ten-year timeframe between examinations expert's reviews given the infrequency with which the PCAOB issues new or revised auditing standards, particularly auditing standards that apply in the context of a non-financial statement audit. 54 In support of their respective requests, the JAC and CME represented that the SEC has only approved two amendments to PCAOB auditing standards since the Commission adopted the FCM examination standards requirement in 2015, and neither of the two amendments have an impact on FCM examination standards for non-financial statement audits. 55

The JAC, CME and NFA further expressed views that a longer maximum timeframe between required evaluations by an examinations expert was warranted given that the Proposal requires an SRO or JAC to review any new or amended audit standards issued by the PCAOB, to promptly make any necessary revisions to the FCM examinations standards resulting from such new or amended auditing standards, and to engage an examinations expert to evaluate material revisions made to the FCM examination standards. 56 The JAC, CME and NFA further stated that a regulatory provision providing for a maximum five-year timeframe between reviews by an examinations expert is not necessary as the Proposal authorizes the DSIO Director to require an SRO or JAC to engage an examinations expert at any time. 57 The JAC, CME and NFA also requested that if the Commission were to adopt a final rule that includes a requirement for an SRO or JAC to engage an examinations expert no less frequently than once every five years that the Commission also consider amending the Regulation to authorize the Director of DSIO to grant a waiver or otherwise provide relief from the requirement under appropriate circumstances, including situations where there are no new or revised auditing standards issued by the PCAOB during the five-year period since the prior examinations expert's review. 58

Commenters also requested that the Commission confirm or clarify several aspects of the Proposal or existing Regulation 1.52. The JAC and CME requested that the Commission confirm that the proposed maximum five-year timeframe between an examinations expert's evaluation of the FCM examination standards is reset whenever an SRO or JAC engages an examinations expert. 59 The JAC and CME also noted that the regulation requires that all aspects of the supervisory program must conform to auditing standards issued by the PCAOB as such standards would be applicable to a non-financial audit. The JAC and CME requested confirmation that when auditing standards of the PCAOB are referenced in Regulation 1.52, it is the standards that would be applicable to a non-financial statement audit. 60

The Proposal includes several technical amendments to Regulation 1.52 to eliminate redundancies and to simplify the intent of the Regulation. Specifically, the Commission proposed to consolidate the examination standards required to be included in an SRO supervisory program that are currently listed in paragraphs (c)(2)(ii) and (iii) into a single revised paragraph (c)(2)(ii) of Regulation 1.52. The Commission further proposed to amend paragraphs (d)(2)(ii)(F) and (d)(2)(ii)(G) of Regulation 1.52, which sets forth the examination standards required of a JAC supervisory program, to be consistent with, and to incorporate by cross-reference, the SRO examination standards contained in revised paragraph (c)(2)(ii) of Regulation 1.52. The Commission did not receive any comments on the proposed amendments to paragraphs (c)(2)(ii), (d)(2)(ii)(F)-(G) of Regulation 1.52.

The Commission has considered the comments received and is adopting the amendments to Regulation 1.52 as proposed, with minor changes discussed below.

Amended Regulation 1.52 revises the scope of the examinations expert's initial and ongoing evaluations of an SRO's or JAC's supervisory program to encompass only an evaluation of whether the supervisory program's FCM examination standards are consistent with auditing standards issued by the PCAOB as such auditing standards would be applied to a non-financial statement audit. Accordingly, amended Regulation 1.52 will not require an SRO or JAC to engage an examinations expert to evaluate the sufficiency of the supervisory program's risk-based approach or internal controls testing, including the program's design to detect material weaknesses in an FCM's internal control environment. Amended Regulation 1.52 also will not require an SRO or JAC to engage an examinations expert to evaluate the SRO's or JAC's application of the supervisory program.

Amended Regulation 1.52 continues to require an SRO or JAC to obtain from the examinations expert a written report on findings and recommendations issued under AICPA consulting services standards as part of both the initial and periodic, ongoing evaluations of the SRO's or JAC's supervisory program. Consistent with the amendments to the scope of the examinations expert's evaluation, the written report is required to address the consistency of the supervisory program's FCM examination standards with auditing standards issued by the PCAOB, as such standards would be applied in a non-financial statement audit. The written report is no longer required to include statements regarding the examinations expert's evaluation of the sufficiency of the supervisory program's risk-based approach and internal control testing. The written report also is no longer required to include an analysis of the supervisory program's design to detect material weaknesses in an FCM's internal control environment. The written report also is required to be provided to the Director of DSIO. 61

As noted in the Proposal, the Commission initially adopted the requirement for an examinations expert to evaluate an SRO's or JAC's application of its supervisory program, including ongoing assessments of the sufficiency of the SRO's or JAC's internal controls testing, to address concerns that a third-party assessment was necessary due to limited Commission resources and expertise to perform a comparable periodic evaluation. Commission staff subsequently worked closely with both the CME and NFA in the development of their initial supervisory programs and has determined that it has sufficient resources and expertise to effectively oversee the application of SRO and JAC supervisory programs. In this regard, Commission staff ultimately approved the JAC's initial supervisory program in 2015, including the supervisory program's FCM examination standards and detailed examination programs. Commission staff also has performed routine scheduled oversight reviews of both the CME's and NFA's application of their respective supervisory programs since their initial approvals in 2015, including their internal controls testing at member FCMs. Commission staff also routinely reviews the JAC examination programs to assess their sufficiency in examining FCMs' compliance with Commission and SRO financial, reporting, and general operational requirements, as well as their sufficiency in assessing the effectiveness of the internal controls at an FCM. Therefore, although the size of the relevant staff has remained relatively constant since 2015, the Commission believes that it has the appropriate expertise to provide the level of supervision necessary to assess an SRO's or JAC's application of its respective supervisory program.

The Commission is amending Regulation 1.52 to adopt a risk-based approach to determine the required frequency of an examinations expert's evaluation of an SRO's or JAC's supervisory program. Amended Regulation 1.52 requires an SRO or JAC to review new or amended auditing standards as such standards are issued by the PCAOB, and to revise its FCM examination standards promptly to reflect any changes that are applicable in the context of the SRO's or JAC's examination of FCMs. The final amendments also require the SRO or JAC to engage an examinations expert to evaluate any material revisions that the SRO or JAC makes to the examination standards to conform such standards with the new or amended PCAOB auditing standards. In addition, the final amendments require the SRO or JAC to engage an examinations expert to evaluate the FCM examination standards in light of new or amended PCAOB auditing standards whenever such engagement is directed by the Director of DSIO. The Commission also is amending Regulation 1.52 to revise from three to five years the maximum period of time that an SRO or JAC may operate its supervisory program without engaging an examinations expert to evaluate its FCM examination standards for consistency with PCAOB auditing standards as such standards would apply to a non-financial statement audit.

As noted in the Proposal, the Commission believes that the examinations expert's evaluation provides an important oversight mechanism whereby an independent third-party that has expertise in the application of PCAOB auditing standards can assess an SRO's or JAC's FCM examination standards for consistency with such PCAOB auditing standards. The Commission further believes that the FCM examination standards should be reviewed and revised promptly whenever the PCAOB issues new or amended auditing standards, and an SRO or JAC should engage an examinations expert to review any material revisions made to the FCM examination standards instead of waiting for the next scheduled review under a three-year cycle. The provision providing the Director of DSIO with the authority to direct an SRO or JAC to engage an examinations expert to evaluate its FCM examination standards for consistency with PCAOB audit standards is intended to ensure that an independent third-party assessment is performed whenever material revisions are made to the FCM examination standards. Accordingly, the third-party assessment may be initiated either by the SRO/JAC or by the DSIO Director, if necessary. Lastly, the amended regulation provides that an SRO or JAC must engage an examinations expert to evaluate its FCM examination standards if it has not engaged an examinations expert to perform such an evaluation within the last five years.

The Commission considered the comments received in adopting the final amendments. The Commission does not believe that it is appropriate at this time to extend the maximum timeframe between examinations expert's evaluations to once every 10 years as suggested by the JAC and CME. Nor does the Commission believe that the provision granting the Director of DSIO the authority to direct an SRO or JAC to engage an examinations expert supports the elimination of a maximum five-year timeframe from the regulation as suggested by the JAC, CME and NFA.

The requirement that an SRO or JAC engage an examinations expert is a new requirement that was adopted in 2013. While the NFA and CME have engaged an examinations expert to assist them with the development of their initial supervisory programs, including assisting them with developing FCM examinations standards that are consistent with applicable PCAOB auditing standards, neither the NFA nor CME has gone through the process of engaging an examinations expert to perform an evaluation subsequent to the initial approval. As noted above, both the Commission and commenters recognize the benefits that an examinations expert may provide by evaluating the FCM examination standards. The Commission believes that a maximum five-year period of time between evaluations provides a more appropriate balance between the costs of engaging the examinations expert and the benefit provided by the independent evaluation of the FCM examination standards than a 10-year timeframe.

The Commission also acknowledges the infrequent nature by which the PCAOB issues new or amended auditing standards, and the Commission recognizes that the PCAOB has not issued new or amended auditing standards that are applicable to an SRO or JAC examination of an FCM since the NFA and CME supervisory programs were initially adopted. The Commission believes, however, that existing regulations provide an appropriate mechanism for an SRO or JAC to seek regulatory relief from the requirement to engage an examinations expert in situations where the PCAOB has been relatively inactive in issuing new or amended auditing standards during the previous five-year period. In such situations, an SRO or JAC may seek regulatory relief, including requesting a no-action position from Commission staff pursuant to Regulation 140.99. 62

As noted above, the Commission is adopting the amendments to Regulations 1.52(c)(2)(iii) and 1.52(d)(2)(G) setting forth a requirement that an SRO and JAC, respectively, engage an examinations expert at least once every five years as proposed. The Commission also is setting the starting date of the five-year period to coincide with the effective date of the final amendments to Regulation 1.52. In addition, the Commission confirms that the five-year timeframe is restarted whenever an SRO or JAC engages an examinations expert to evaluate its FCM examination standards. 63 The restart date for the running of the five-year period shall be the date on which DSIO staff provides written notice to an SRO pursuant to Regulation 1.52(c)(2)(iii)(C) or a JAC pursuant to Regulation 1.52(d)(2)(ii)(G)( 3 ) that DSIO staff has no further comments or questions on the revised examination standards.

The proposed technical amendments consolidate in Regulation 1.52(c)(2)(ii) the FCM examination standards required to be included in an SRO supervisory program that are currently listed in paragraphs (c)(2)(ii) and (iii) of Regulation 1.52. The technical amendments also revise paragraphs (d)(2)(ii)(F) and (d)(2)(ii)(G) of Regulation 1.52, which sets forth the FCM examination standards required of a JAC supervisory program, to be consistent with, and to incorporate by cross-reference, the SRO examination standards contained in amended paragraph (c)(2)(ii) of Regulation 1.52.

The Commission did not receive any comments regarding the proposed technical amendments. The Commission is adopting the technical amendments as proposed.

The Commission also received several comments that addressed issues in addition to the scope and frequency of the examinations expert's evaluation of FCM examination standards. The CME and JAC noted in their respective comment letters that current Regulation 1.52(d)(2)(iii)(B)( 6 ) provides that JAC members must consider issuing “risk alerts” to both FCMs and DSRO examiners on an as needed basis as issues arise. 64 The CME and JAC stated that the requirement to consider issuing risk alerts to DSRO staff examiners is not necessary and requested that the requirement be eliminated. 65

The CME and JAC also commented that Regulation 1.52(d)(2)(ii)(E) requires a JAC supervisory program to, among other requirements, “address all areas of risk to which an FCM can reasonably be foreseen to be subject to.”  66 The CME and JAC stated that this provision is vague and overly broad, and further noted that such requirements are addressed in Regulation 1.11, which imposes an enterprise risk management requirement on FCMs. The CME and JAC requested that Regulation 1.52 be amended to remove the requirement.

In addition, the CME noted that Regulation 1.52(k) requires an SRO to provide the Commission with notice when an FCM, a registered retail foreign exchange dealer, or a registered introducing broker ceases to be a member in good standing of the SRO. 67 The CME stated that CME members include both clearing members, which are subject to the supervisory procedures specified in Regulation 1.52, and “corporate members”, which may include FCMs, retail foreign exchange dealers, and introducing brokers that are not clearing members and are subject to NFA as their DSRO. The CME requested that Regulation 1.52(k) be amended to clarify that NFA is responsible for providing the notice on the status of such corporate members not being in good standing of the SRO.

Each of the comments above are beyond the scope of the Commission's Proposal and the Commission has determined not to amend Regulation 1.52 to address these issues at this time. The Commission, however, understands that with respect to Regulation 1.52(k), that DSRO responsibilities are allocated amongst SROs pursuant to the Joint Audit Plan, and Regulation 1.52 does not prohibit NFA from being the DSRO of FCMs, retail foreign exchange dealers, or introducing brokers that are corporate members of an SRO that may be a designated contract market. Accordingly, the CME is not obligated to file a notice with the Commission under Regulation 1.52(k) if an FCM, retail foreign exchange dealer, or introducing broker solely terminated its corporate membership in the CME. The Commission would expect, however, that if an SRO is aware of a regulatory issue with a corporate member that may indicate that the corporate member is not complying with Commission or SRO regulations, that the SRO would communicate such concerns to the appropriate DSRO for further review consistent with the terms and intent of the Joint Audit Plan and Regulation 1.52.

The Regulatory Flexibility Act (“RFA”)  68 requires Federal agencies, in promulgating regulations, to consider the impact of those regulations on small entities. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its rules on small entities in accordance with the RFA. 69 The proposed regulations would affect designated contract markets.

The Commission has previously determined that designated contract markets are not small entities for purposes of the RFA, and, thus, the requirements of the RFA do not apply to designated contract markets. 70 Accordingly, the Chairman, on behalf of the Commission, certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations would not have a significant economic impact on a substantial number of small entities.

As the Commission stated in the Proposal, this rulemaking does not impose any new recordkeeping or information collection requirements, or other collections of information that require approval of the Office of Management and Budget under the Paperwork Reduction Act (“PRA”). All recordkeeping or information collection requirements relevant to the subject of this rulemaking, or discussed herein, already exist under current law. The title for this collection of information is Core Principles & Other Requirements for DCMs, OMB control number 3038-0052. The Commission invited public comment on the accuracy of its estimate that no additional recordkeeping or information collection requirements or changes to existing collection requirements would result from the Proposed Amendment. The Commission did not receive any comments that addressed whether additional recordkeeping or information collection requirements or changes to existing collection requirements would result from the adoption of the Proposal. Nevertheless, the Commission notes that the final rule will reduce the current burden estimate of OMB control number 3038-0052. Accordingly, the Commission will, by separate action, publish in the Federal Register a notice and request for comment on the amended PRA burden associated with the final rule, and submit to OMB an information collection request to amend the information collection, in accordance with 44 U.S.C. 3506(c)(2)(A) and 5 CFR 1320.8(d).

The collections contained in this rulemaking are mandatory collections. In formulating burden estimates for the collections in this rulemaking, to avoid double accounting of information collections that already have been assigned control numbers by OMB, or are covered as burden hours in collections of information pending before OMB, the PRA analysis provided in the rulemaking, along with the information collection request (“ICR”) with burden estimates that were incorporated into the rulemaking by reference and submitted to OMB, accounted only burden estimates for collections of information that have not previously been submitted to OMB. As such, the final rules do not impose any new burden or any new information collection requirements in addition to those that already exist.

Section 15(a) of the Act requires the CFTC to consider the costs and benefits of its actions before promulgating a regulation under the Act or issuing certain orders. 71 Section 15(a) of the Act further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The CFTC considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors below.

Where reasonably feasible, the CFTC endeavors to estimate quantifiable costs and benefits. Where quantification is not feasible, the CFTC identifies and describes costs and benefits qualitatively.

The commentators to the CFTC's Proposal gave no negative comments on the costs and benefits associated with the rule amendments. Indeed, commentators were supportive of the CFTC's Proposal, in part due to reduced costs and reduced complexity that the rule changes would introduce.

The CFTC's economic baseline for the rule amendment analysis is the requirements of Regulation 1.52 that currently exist prior to taking into account the final amendments. Specifically, current Regulation 1.52 requires an SRO or a JAC to engage an examinations expert to evaluate its supervisory program prior to its initial use, and to evaluate the SRO's application of the supervisory program at least once every three years after its initial use.

The Commission's rulemaking will not alter the requirement for an SRO or JAC to engage an examinations expert to evaluate its supervisory program prior to the initial use of the supervisory program. The Commission, however, is eliminating the requirement that the examinations expert must review the SRO's or JAC's ongoing application of its supervisory program during periodic reviews and the analysis of the supervisory program's design to detect material weaknesses in internal controls during both periodic reviews and the initial review prior to the program's initial use as such requirement is not necessary due to Commission staff performing comparable reviews on a routine, periodic basis as discussed below. The Commission also is revising the frequency of when an SRO or a JAC must engage an examinations expert, as discussed below.

The Commission's elimination of the requirement that an examinations expert evaluate an SRO's or a JAC's application of its supervisory program and the program's design to detect material weaknesses in internal controls will reduce costs related to conducting such review. However, the rulemaking will not substantially reduce the benefits obtained from an evaluation of the SRO's and JAC's supervisory program, including internal controls, as such reviews are performed by Commission staff on a routine basis. Commission staff evaluates the SRO's or JAC's execution of its supervisory program, including performing detailed reviews of SRO and JAC examination work papers, to assess the adequacy of the scope of the work performed by SRO and JAC staff members and to determine whether the conclusions reached by SRO and JAC staff members are supported by the work performed. Commission staff also reviews at least annually all SRO and JAC examination programs for conducting examinations of FCMs to assess the completeness of such programs and to determine that such programs properly reflect any regulatory updates, including rule amendments, adopted since the Commission staff's previous review of the examination programs. Reviews of execution and completeness of supervisory programs for FCMs occur no less frequently than annually. Furthermore, Commission staff has a particular expertise in assessing and reviewing whether registrants are in compliance with Commission regulatory requirements that makes a third-party review redundant.

The final amendments will continue to require that an examinations expert review the FCM examination standards contained in the supervisory program for consistency with PCAOB auditing standards as such standards apply to a non-financial statement audit. The Commission recognizes that examinations experts have a particular expertise in the application of PCAOB auditing standards and can effectively evaluate whether SRO and JAC FCM examination standards are consistent with such auditing standards. The Commission, however, is revising the timeframe for such reviews. Currently, Regulation 1.52 requires an SRO or JAC to engage an examinations expert at least once every three years to perform such a review. The Commission is amending Regulation 1.52 to require an SRO or JAC to engage an examinations expert whenever the PCAOB issues new or revised auditing standards that are material to the SRO's or JAC's examination of member FCMs.

The examinations expert's review, however, is limited to only the new or revised PCAOB auditing standards that have been issued since the most recent prior review that are applicable to the SRO's or JAC's examination of FCMs. Accordingly, the examinations expert will not have to review all of the SRO's or JAC's FCM examination standards for consistency with PCAOB audit standards. The amendments further require an SRO or JAC to engage an examinations expert at least once every five years even if the SRO or JAC determines that the PCAOB did not issue new or revised auditing standards during the previous five-year period that are material to its examinations of member FCMs. Based on past experience, the Commission anticipates that the adoption of new or revised auditing standards that are material to examination standards applicable to FCMs will be infrequent and, therefore, the triggering of an examinations expert review will also likely be an infrequent event. 72 Finally, the amendments provide that an SRO or JAC must engage an examinations expert if directed to by the Director of the Division of Swap Dealer and Intermediary Oversight. 73

The amendments to Regulation 1.52 are intended to streamline the process under which examinations experts conduct their reviews and the time period between those reviews. The Commission believes that these amendments will make conducting the reviews more efficient and less costly, while also continuing to provide the benefit the Commission and public obtain from an independent assessment that SROs and JACs use appropriate FCM examinations standard in the conduct of the oversight of their member FCMs, which perform critical functions in both the operation of the futures markets and in the protection of customer funds.

The Commission does not anticipate that there will be any significant increase in costs associated with the amendments. By narrowing the intended scope of examination reviews from an evaluation of the supervisory program to an assessment of the examinations standards for conformity with auditing standards established by the PCAOB as they apply to FCM examinations, the Commission is purposely limiting the scope of the examinations expert's review. The Commission anticipates that this limitation, coupled with extending the time period between examinations experts' reviews, will reduce costs associated with engaging and hiring an examinations expert. 74 Nonetheless, the Commission believes that these amendments are appropriately calibrated to ensure the integrity of the SRO and JAC supervisory programs and continued oversight over the minimum financial requirements at FCMs. As noted, Commission staff reviews no less frequently than annually all SRO and JAC examination programs and reviews on a routine and periodic basis the SRO' and JAC's application of their supervisory programs. The Commission anticipates that its staff will continue to perform such reviews as part of its routine oversight of SROs and JACs. These Commission staff reviews will continue to provide the benefits that have been associated with the examinations experts' reviews.

The Commission believes that these amendments maintain the current level of protections of market participants and the public provided by the current regulation. The amendments continue to protect market participants and the public by ensuring that there is sufficient oversight over the minimum financial requirements at FCMs. As noted, the Commission believes that Commission staff is well-equipped to provide reviews that will no longer be provided by outside examinations experts and Commission staff intends to continue to conduct such reviews.

The Commission believes that Regulation 1.52 as amended will continue to help ensure that FCMs can meet their financial and operational obligations to both customers and DCOs, which, along with the Commission's ongoing reviews, will continue to foster the efficiency and financial integrity of markets. The Commission has not identified any effect of Regulation 1.52 on the competitiveness of derivatives markets.

The Commission has not identified any material effect of the amendments on the price discovery process in futures and swap markets.

The Commission believes that Regulation 1.52 as amended, along with the Commission's ongoing reviews, will continue to help ensure that FCMs can meet their financial and operational obligations to both customers and DCOs, which should continue to foster sound risk management practices.

The Commission has not identified any additional public interest considerations associated with the amendments.

The Commission considered several alternative approaches that were specified in the comments. In this regard, the Commission considered the CME's suggestion to fully eliminate the requirement that a third-party examinations expert perform periodic evaluations and assessments of an SRO's program to oversee its member FCMs' compliance with financial and related reporting requirements. 75 The Commission has elected to maintain the requirement for a third-party examinations expert. The Commission, however, has further decided to eliminate the requirement that the examinations expert periodically review the SRO's or JAC's ongoing application of its supervisory program as Commission staff routinely perform such reviews. The Commission further elected to maintain the examinations expert's required reviews of an FCM's examinations standards at a modified interval. As noted previously, FCMs perform significant market functions, including holding customer funds and guaranteeing customers' financial performance to DCOs. The effective operation of these functions is necessary for the efficient operation of the futures markets. The Commission believes that the SRO or JAC examination program is a critical component of the overall process for determining an FCM's compliance with regulatory requirements and the FCM's ability to fulfill its financial obligations. The Commission further believes that examinations experts have a particular expertise in PCAOB auditing standards and can effectively and efficiently evaluate whether SRO or JAC FCM examination standards are consistent with such PCAOB auditing standards, which will help ensure that the SRO and JAC examinations satisfy industry standards for effective FCM audits.

The Commission also considered the CME's and JAC's suggestion that an SRO or JAC should be required to engage an examinations expert at least once every ten years as opposed to the Commission's proposal of once every five years. 76 The Commission further considered the NFA's request that the Commission consider whether a set time period between reviews is even necessary given that the Director of DSIO is authorized to direct an SRO or JAC to engage an examinations expert at any time. 77

As noted immediately above, the Commission believes that there are significant benefits to customers, market participants, clearing organizations, and the futures industry in general from SRO or JAC supervisory programs that assess FCMs' compliance with SRO and CFTC regulatory requirements. Such SRO and JAC reviews help ensure that FCMs have the operational and financial capacity to meet their obligations as market intermediaries, which is necessary for efficient markets. The Commission further believes that such reviews should be performed at least once every five years (and also when there are material and relevant changes in PCAOB auditing standards) as required by the amendments. While, as noted, Commission staff is well-equipped to review the ongoing application of SRO and JAC supervisory programs and intends to continue to do so at least annually, the Commission believes that examinations experts are best equipped to perform evaluations of examination standards for conformity with auditing standards established by the PCAOB as they apply to non-financial statement audits.

The Commission believes that a ten-year time period between examinations experts' reviews is not appropriate at the current time given that an SRO or JAC has not gone through an examinations expert's review since the adoption of the initial requirements in 2013. While the Commission recognizes that the final rule authorizes the director of DSIO to instruct an SRO or JAC to engage an examinations expert any time the PCAOB issues new or amended auditing standards, the Commission believes that it should gain further experience with the operation of the rule and develop a more thorough understanding of both the costs and benefits associated with the examinations experts review before considering amending the rule to expand the maximum period of time between such reviews from five to ten years. The Commission further notes that in the event that there are no changes in PCAOB auditing standards that would materially impact FCM examination standards, SROs and JACs may use existing processes for seeking regulatory relief under Regulation 140.99 if they believe such relief is warranted based upon the facts and circumstances.

The Commission also considered maintaining the current rule, but the Commission anticipates that the amendments will significantly reduce costs to SROs and JACs without materially impacting benefits.

Section 15(b) of the CEA requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA, in issuing any order or adopting any Commission rule or regulation. 78

The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission has considered the amendments to Regulation 1.52 and comments received to determine whether it is anticompetitive and has identified no anticompetitive effects.

Because the Commission has determined that the amendments to Regulation 1.52 are not anticompetitive and have no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the CEA.

Table of Contents I. Introduction A. Existing Requirements 1. Statutory Basis and Regulatory Background 2. Subpart L as Originally Adopted B. Factors Considered by the Commission II. Final Rule, Summary of Comments, and Commission Response A. Regulation 23.700—Definitions B. Regulation 23.701—Notification of Right to Segregation C. Regulation 23.702—Requirements for Segregated Initial Margin D. Regulation 23.703—Investment of Segregated Initial Margin E. Regulation 23.704—Requirements for Non-Segregated Margin III. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act 1. Background 2. Modification of Collection 3038-0075 C. Cost-Benefit Considerations 1. Background 2. Regulations 23.700, 23.701, 23.702, and 23.703—Notification of Right to Initial Margin Segregation D. Antitrust Considerations I. Introduction A. Existing Requirements 1. Statutory Basis and Regulatory Background

Subpart L of part 23 of the Commission's regulations (“Segregation of Assets Held as Collateral in Uncleared Swap Transactions,” consisting of Regulations 23.700 through 23.704) was published in the Federal Register on November 6, 2013 and became effective on January 6, 2014. 1 Subpart L implements the requirements for segregation of initial margin for uncleared swap transactions set forth in section 4s( l ) of the Commodity Exchange Act (“CEA” or the “Act”). 2

CEA section 4s( l ) addresses segregation of initial margin held as collateral in certain uncleared swap transactions. The section applies only where a swap between a counterparty and an SD or MSP is not submitted for clearing to a derivatives clearing organization (“DCO”). It requires that an SD or MSP notify the counterparty of the SD or MSP at the beginning of a swap transaction that the counterparty has the right to require segregation of the funds or other property supplied to margin, guarantee, or secure the obligations of the counterparty. Such funds or property are to be segregated in a separate account from the SD's or MSP's assets. The separate account must be held by an independent third-party custodian and must be designated as a segregated account for the counterparty. CEA section 4s( l ) does not preclude the counterparty and the SD or MSP from agreeing to their own terms regarding investment of initial margin (subject to any regulations adopted by the Commission) or allocation of gains or losses from such investment. If the counterparty elects not to require segregation of margin, the SD or MSP is required to report quarterly to the counterparty that the SD's or MSP's back office procedures relating to margin and collateral are in compliance with the agreement between the counterparty and the SD or MSP.

In November 2015, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively, “Prudential Regulators”) adopted margin requirements for swaps entered into by SDs and MSPs that they regulate (“Prudential Regulator Margin Rules”). 3 In January 2016, the Commission adopted margin requirements for certain uncleared swaps which requirements are applicable to SDs and MSPs for which there is no prudential regulator (“CFTC Margin Rule”). 4 The CFTC Margin Rule and the Prudential Regulator Margin Rules established initial and variation margin requirements for SDs and MSPs. 5

Prior to the CFTC Margin Rule effective date of April 1, 2016, if initial margin  6 was to be exchanged by counterparties to uncleared swaps involving an SD or MSP, the requirements of subpart L applied. The CFTC Margin Rule amended Regulation 23.701 to clarify that from and after the effective date of the CFTC Margin Rule, the requirements of Regulations 23.702 and 23.703 would not apply where segregation is mandatory under the CFTC Margin Rule. 7 As a result, Regulations 23.702 and 23.703 generally apply only when initial margin is to be exchanged between an SD or MSP and either: (1) A nonfinancial end-user, or (2) a financial end-user without “material swaps exposure,” as defined in the CFTC Margin Rule.

Regulation 23.700, as originally adopted, defines certain terms used in subpart L. Regulation 23.701 requires an SD or MSP: (1) To notify each counterparty to a swap that is not submitted for clearing that the counterparty has the right to require that any initial margin it provides be segregated; (2) to identify a creditworthy custodian that is a non-affiliated legal entity, independent of the SD or MSP and the counterparty, to act as depository for segregated margin assets; and (3) to provide information regarding the costs of such segregation. The regulation specifies that the notification is to be made (with receipt confirmed in writing) to an officer of the counterparty responsible for management of collateral (or to specified alternative person(s)), and that it need only be made once in any calendar year. Finally, the regulation provides that a counterparty can change its election to require (or not to require) segregation of initial margin by written notice to the SD or MSP.

Regulation 23.702 reiterates the requirement that the custodian be a legal entity independent of the SD or MSP and the counterparty. It also requires that segregated initial margin be held in a designated account segregated for, and on behalf of, the counterparty. Finally, the regulation specifies that the segregation agreement must provide that: (1) Withdrawals from the segregated account be made pursuant to agreement of both the counterparty and the SD or MSP, with notification to the non-withdrawing party; and (2) the custodian can turn over segregated assets upon presentation of a sworn statement that the presenting party is entitled to control of the assets pursuant to agreement among the parties.

Regulation 23.703 restricts investment of segregated assets to investments permitted under Regulation 1.25 and (subject to that restriction) permits the SD or MSP and the counterparty to agree in writing as to investment of margin and allocation of gains and losses.

Regulation 23.704 requires the SD's or MSP's chief compliance officer (“CCO”) to report quarterly to any counterparty that does not elect to segregate initial margin, whether or not the SD's or MSP's back office procedures regarding margin and collateral requirements were, at any point in the previous calendar quarter, not in compliance with the agreement of the counterparties.

Over the course of more than four years of administering subpart L of part 23, the Commission has observed that the detailed requirements of those regulations have proven difficult for SDs and MSPs to implement and to satisfy in a reasonably efficient manner. These observations were buttressed by suggestions submitted in response to the Commission's “Project KISS” initiative as described herein. In addition, the Commission understands that very few swap counterparties have exercised the right to elect to segregate initial margin collateral pursuant to subpart L during the four years that the regulations have been effective.

Early in the implementation period, in response to multiple inquiries, Commission staff issued CFTC Staff Letter 14-132 (October 31, 2014), 8 which provided interpretative guidance to SDs and MSPs regarding application of certain of the segregated margin requirements. In particular, the letter noted concerns expressed by SDs and MSPs that despite their earnest efforts to obtain confirmation of receipt of notification and election regarding segregation, failure by a counterparty to respond to the SD or MSP could bar any further swap transactions with the counterparty until a response was received. 9 However, notwithstanding the issuance of Staff Letter 14-132, issues regarding compliance with subpart L continue to be raised. 10

On May 9, 2017, the Commission published in the Federal Register a request for information, 11 pursuant to the Commission's “Project KISS” initiative, seeking suggestions from the public for simplifying the Commission's regulations and practices, removing unnecessary burdens, and reducing costs. A number of suggestions the Commission received addressed various provisions of subpart L. In general, those suggestions echoed Commission staff concerns that the requirements in subpart L may be more burdensome than is necessary to achieve the purposes of the statute and may be counterproductive to the extent that they frustrate the decision making process and discourage the use of individual segregation accounts. 12 Persons responding to Project KISS also noted that some requirements cause confusion because they overlap with segregation requirements in the margin regulations recently adopted by the CFTC and Prudential Regulators. 13 Furthermore, responders stated that the requirements in subpart L are overly prescriptive, eliminating the possibility for reasonable bilateral negotiation that takes place in the normal course to determine certain terms, including appropriate collateral arrangements based on the circumstances of the broader counterparty relationship. 14

Responders also asserted that counterparties to uncleared swaps rarely elect to require segregation of margin pursuant to the existing provisions of subpart L. 15 Commission staff likewise has observed evidence of minimal exercise of the election to segregate. 16 In addition, Commission staff has discussed this issue with the National Futures Association (“NFA”) to ascertain NFA's observations from examining a substantial number of SDs in connection with the implementation of subpart L. Based on this experience, it appeared that for nearly every SD examined, fewer than five counterparties elected segregation pursuant to subpart L since registration. For some SDs, not a single counterparty elected to segregate pursuant to subpart L.

In light of these considerations, the Commission proposed to amend the regulations governing segregation of margin for uncleared swaps (the “Proposal”). 17 The Commission expressed its belief that the proposed amendments would reduce unnecessary burdens on registrants and market participants by simplifying some overly detailed provisions, thereby reducing the intricate and prescriptive requirements. The Commission further opined that the proposed changes would facilitate more efficient swap execution by eliminating complexity and confusion that slows down documentation and negotiation of hedging and other swap transactions. Finally, the Commission asserted that the amendments, by reducing the prescriptive elements of the rules, potentially could encourage more segregation (as was intended by the CEA), 18 by providing flexibility for the parties to establish segregation arrangements that better suit their specific needs.

In the preamble to the Proposal, the Commission also sought comment from the public on the appropriateness of the proposed changes, as well as suggestions for other amendments that could streamline, simplify, and reduce the costs of subpart L without sacrificing the protections called for by CEA section 4s( l ). The comment period for the Proposal closed on September 28, 2018, and four comment letters  19 were received: one from a swap dealer;  20 one from a registered futures association; 21 one from an association of credit risk professionals in the energy industry;  22 and one jointly submitted by a trade organization for participants in over-the-counter derivatives markets and a trade organization for broker-dealers, investment banks, and asset managers. 23

The Commission is adopting changes to Regulations 23.700, 23.701, 23.702, 23.703, and 23.704 as proposed. In Regulation 23.700, the definition of “Margin” is eliminated (and where that term was used elsewhere in subpart L it is replaced with “Initial Margin”). In Regulation 23.701, the following changes are made: (1) The required notification of the right to segregate is to be made at the beginning of the first uncleared swap transaction that provides for exchange of initial margin; (2) the exception to the notification requirement in cases where segregation is required under the CFTC Margin Rule is expanded to include cases where segregation is required under Prudential Regulator Margin Rules; (3) the annual notification requirement is eliminated; (4) the requirement to identify in the notification one or more creditworthy custodians and to provide information regarding the cost for segregation for each named custodian is eliminated; (5) the requirement to provide the notification to a person with specific job title at the counterparty is eliminated; (6) the terms of segregation are to be established by written agreement with the counterparty; and (7) the requirement to obtain from the counterparty and maintain written confirmation of receipt of the notification is eliminated. In Regulation 23.702, specific requirements regarding the withdrawal or turnover of control of initial margin are replaced with a provision that the segregation agreement provide that instructions to withdraw initial margin be in writing and that withdrawal notification be given immediately to the non-withdrawing party. In Regulation 23.703, the restriction on investment of segregated margin to investments permitted under Regulation 1.25 is eliminated. In Regulation 23.704, the requirement that the SD's or MSP's CCO report quarterly to each counterparty that does not elect segregation is replaced by a general requirement that the SD or MSP so report, and that the report must state that the SD's or MSP's back office procedures were in compliance with the agreement of the counterparties.

All of the commenters generally supported the Proposal and the Commission's efforts to simplify and rationalize the existing requirements. Comments that addressed particular provisions of subpart L will be discussed below.

As proposed, the Commission is amending Regulation 23.700 to eliminate the definition of “Margin” and to make conforming changes to subpart L by replacing the term “Margin” with “Initial Margin” in Regulations 23.701, 23.702, and 23.703. As originally adopted, Regulation 23.700 defines “Margin” as “both Initial Margin and Variation Margin.”  24 As amended, subpart L will no longer refer collectively to initial margin and variation margin, because the right to require segregation applies only to initial margin, and not to variation margin. Thus, there is no need for the separate defined term “Margin.”  25

IECA was the only commenter to address this issue and asked the Commission to revise the defined terms to relate more closely to over-the-counter market terms by clarifying whether or not Initial Margin is analogous to a deposit. IECA pointed out that independent amounts are often posted not to secure changes in market position but to protect settlement risk, and that variation margin is an exchange of collateral and not a “payment” in exchange for something. 26 In the adopting release for subpart L, the Commission considered several comments questioning its selection of defined terms and it adopted the “initial margin” definition notwithstanding those comments, noting that “variation margin” is used in the statute and “initial margin” is the obvious complementary term. 27 After review of the comments, the Commission confirms the rationale it articulated for proposing the amendments to Regulation 23.700, and therefore, is adopting the amendments as proposed.

As proposed, the Commission is amending paragraph (a) of Regulation 23.701: (1) To require that the notification to a counterparty be made prior to execution of the first uncleared swap transaction that provides for the exchange of initial margin, and not prior to each transaction; (2) to provide that the notification obligation does not apply where segregation is required under Prudential Regulator Margin Rules; (3) to eliminate the requirement that the notification identify one or more creditworthy, independent custodians; and (4) to eliminate the requirement to provide information regarding the price for segregation for each identified custodian. Paragraph (b) remains unchanged. The Commission is replacing paragraph (c) with a simple statement that if segregation is elected, the terms shall be established by written agreement and eliminating paragraphs (d) and (e) (with existing paragraph (f) redesignated as new paragraph (d)). As discussed below, after review of the comments, the Commission confirms the rationale articulated for proposing the amendments to Regulation 23.701, and therefore, is adopting the amendments as proposed.

As originally adopted, paragraphs (a) and (b) of Regulation 23.701 direct an SD or MSP to notify each counterparty to an uncleared swap of the right to require segregation of initial margin. Paragraph (c) requires the SD or MSP to furnish the required notification to an officer of the counterparty responsible for management of collateral, or, if no such person is identified by the counterparty, then to the chief risk officer, or, if there is no such officer, to the chief executive officer, or if none of the foregoing, the highest-level decision-maker for the counterparty. Paragraph (d) requires the SD or MSP, “prior to confirming the terms of any such swap,” to obtain confirmation of receipt of the notification and the counterparty's election to require or not require segregation of initial margin (such confirmation to be retained in accordance with Regulation 1.31). 28 Paragraph (e) provides that the notification need be made only once in any calendar year. 29 Finally, paragraph (f) provides that the counterparty may change the segregation election at its discretion by providing a written notice to the SD or MSP.

Based on staff's implementation experience and on suggestions received in connection with Project KISS, the Commission expressed in the preamble to the Proposal its belief that these requirements are unnecessarily prescriptive and that they do not reflect the practical realities of how over-the-counter swap transactions are negotiated and managed by the parties. Accordingly, the Commission proposed to modify the notification requirement in paragraph (a) and to remove the requirements in existing paragraphs (c), (d), and (e). The Commission did not propose to amend paragraph (f) except to redesignate it as paragraph (d). 30

The Commission proposed to revise paragraph (a) to require that the notification to a counterparty be made prior to execution of the first uncleared swap transaction that provides for the exchange of initial margin, 31 not prior to each transaction or annually as currently prescribed by paragraphs (a) and (e). 32 CEA section 4s( l )(1)(A) requires notification of the right to segregate “at the beginning of a swap transaction.” The Commission stated that it was interpreting that phrase to mean at the beginning of an SD's or MSP's swap transaction relationship with each counterparty. 33

This interpretation is an extension of the view the Commission expressed when it originally proposed and adopted Regulation 23.701. Specifically, with respect to the statutory requirement that notification be provided “at the beginning of a swap transaction,” the Commission noted that “[w]hile this language could be read to require transaction-by-transaction notification, where the parties have a pre-existing or on-going relationship, such repetitive notification could be redundant, costly, and needlessly burdensome. On the other hand, the importance of the segregation decision, as discussed above, suggests that some periodic reconsideration might be appropriate.”  34 The Commission then noted that the decision to require an annual notice was an attempt to balance the interests of ensuring that counterparties know of their segregation rights against inundating them with redundant information. The Commission, now, based on its experience, has determined that this is not the right balance, and in fact, it has not observed any significant use of segregation. As the Commission noted in 2013, the statute “does not merely grant counterparties the legal right to segregation; it specifically requires that the existence of this right be communicated to them.”  35 These rule amendments adopted herein still ensure that the rights imparted under CEA section 4s( l ) are communicated to SD/MSP counterparties while limiting the burden of providing and receiving superfluous notifications.

When it originally adopted Regulation 23.701(e), the Commission considered comments requesting a loosening of the once-per-year notice requirement and rejected the requests in the belief that requiring notification once each year would balance the burden of providing notices and getting responses with the importance of the right to segregate initial margin. 36 However, on the basis of implementation experience since Regulation 23.701 was originally adopted, the Commission proposed to require notification at the beginning of a swap trading relationship that provides for exchange of initial margin. The importance of the notification informing the counterparty of the right to segregate is paramount at the beginning of the SD/MSP-counterparty relationship. It is at the time the parties initiate the first transaction that the decision to segregate initial margin will typically be made. 37 Subsequent notifications, in addition to the initial notification, risk adding confusion over the duration of the contractual relationship between the parties. 38 In this regard, the Commission stated its understanding that counterparties rarely change their election, once made. Accordingly, in addition to modifying the notification requirement in paragraph (a), the Commission proposed to eliminate paragraph (e)'s annual notification requirement in light of the proposed obligatory notification at the beginning of the first uncleared swap transaction that provides for exchange of initial margin.

The Commission also proposed that paragraph (a) be revised to eliminate the notification requirement where segregation is mandatory under Regulation 23.157 and where it is mandated under applicable rules adopted by a Prudential Regulator under CEA section 4s(e)(3). Additionally, paragraph (a)(2) (the requirement that the notification identify one or more creditworthy, independent custodians) was proposed to be deleted because selection of a custodian can be made when and if the counterparty elects to require segregation. Because very few counterparties elect to require segregation, the Commission stated that it is unnecessarily burdensome to require an SD or MSP to confirm which custodians are available and continually update the SD's or MSP's notification form with the name of the custodian(s) available. Moreover, the Commission further understood that a counterparty's initial decision to consider requiring (or not requiring) segregation is driven principally by the counterparty's concern about protecting its initial margin and the terms of the segregation agreement, and not by the identity of the custodian. 39 Similarly, the Commission proposed to delete paragraph (a)(3) (information regarding the price for segregation for each custodian) because such pricing may vary for each segregation arrangement and would normally be subject to negotiation. To the extent pricing would be a factor in the decision to segregate, counterparties can and do discuss pricing as a term of the custodial arrangement when the counterparty indicates an interest in segregation. 40

Similarly, the Commission proposed to eliminate the requirement in paragraph (c) that the SD or MSP provide the notification to a person at the counterparty with a specific job title. Based on implementation experience, the Commission expressed the view that the regulation as initially adopted is unnecessarily prescriptive in dictating who must receive the notification. For example, in many cases, the person at the counterparty best situated to evaluate the notification and the decision to segregate will be a person directly involved in negotiating the swap, regardless of that person's title. The Commission notes that in removing the specific designation of officers to receive the notification it would not be eliminating the expectation that each registrant will use reasonable judgment in identifying an appropriate person at the counterparty who can evaluate the right to elect segregation (and either act on it or bring it to the attention of someone in a position to act on it). The Commission stated its continued belief that, to be effective, the notification must be made to a person at the counterparty who understands its meaning and, to the extent necessary, can direct it to the appropriate personnel at the counterparty. The proposed change sought to advance the same underlying policy objective as the existing requirement (namely that the notification be given to appropriate personnel at the counterparty), but would recognize that dictating how counterparties communicate the information in question creates unnecessary burdens and potentially hinders the ability of the parties to direct the information to the person(s) best situated to evaluate it. 41

As proposed, new paragraph (c) would simplify requirements in existing Regulation 23.701 by providing that “[i]f the counterparty elects to segregate initial margin, the terms of segregation shall be established by written agreement.”  42

As noted above, the Commission proposed to eliminate the additional requirements in existing paragraph (d), which are more extensive than the notification requirements set forth in CEA section 4s( l ). Subsequent to adoption of subpart L, experience with implementation of the requirements of Regulation 23.701 has made the Commission aware of problems experienced by registrants in complying with these additional requirements. For example, persons seeking guidance have noted that paragraph (d)'s current requirement that the SD not execute a swap with the counterparty until it receives confirmation of the counterparty's receipt of the notification has the potential to block swap trading in some circumstances. 43 Instances of forestalled trading caused by this requirement could be particularly harmful for nonfinancial end-users that have ongoing, dynamic hedging programs (to hedge, for example, commodity price risk or foreign exchange risk). 44

The Commission observed that compliance with the existing segregation notification requirements in the regulation necessitates lengthy explanations and instructions from SDs and MSPs to their counterparties and imposes additional administrative processes requiring counterparties to take steps that are outside of the normal course of transacting in swaps. Some of these steps cause transaction delays and deviations from established business procedures for collateral custodial arrangements and disclosure of counterparty rights generally, and do not advance the counterparty's right to segregate initial margin. For nonfinancial end-user counterparties who tend to use swaps primarily for hedging purposes, these added compliance steps often cause confusion and uncertainty that can inhibit opportune, timely hedging. For counterparties that execute swaps frequently and have determined that they wish to segregate, the additional requirements merely add unnecessary hurdles to the transaction process. Accordingly, the Commission stated that it does not believe that the burdens imposed by these prescriptive requirements provide meaningful regulatory benefits beyond those provided by the provisions in proposed amended Regulation 23.701. 45

Several commenters generally supported the amendments to Regulation 23.701. NFA stated that it supports the Commission's efforts to clarify and simplify these requirements, and that “[b]ased on our experience, we believe that eliminating a segregation notice requirement under these circumstances would help reduce unnecessary correspondence and avoid confusion.”  46 IFCS stated that “the current notification requirements often cause confusion to [their] customers—requiring the Firm to respond with lengthy explanations—rather than providing any meaningful benefit.”  47 Two other commenters supported eliminating the segregation notice requirement where segregation is mandatory under rules of a Prudential Regulator, asserting that this will help reduce unnecessary correspondence and avoid confusion. 48 In response to a question in the Proposal, IECA stated that the Commission's proposed interpretation of the notification requirement in CEA section 4s( l )(1)(A) is reasonable given the commercial realities of uncleared swaps transactions and relationships between SDs and MSPs and their counterparties. 49

Because drafting and exchange of relationship documentation can occur well before the first transaction, ISDA/SIFMA sought confirmation that notification of the right to segregate may be given at any time prior to the first transaction, 50 and further confirmation that trading can continue during any interim period between a counterparty's election to segregate initial margin and the execution of related documentation. 51 The Commission is declining at this time to specify what constitutes the beginning of the first swap transaction or to proscribe when trading may commence because it believes that the counterparties are best able to determine those parameters under their specific circumstances. IECA asked the Commission to provide that the notification can be part of the relationship documentation, noting that the personnel who negotiate, review, and execute relationship documentation are appropriate personnel to understand and act upon such a notification. 52 The Commission notes that although the statute does not specify the manner in which the required notification must be provided, a reasonable interpretation would require that it be sufficiently conspicuous to draw the counterparty's attention.

Three commenters specifically supported elimination of the existing requirement to notify counterparties annually of the right to require segregation. IFCS stated that “customers have indicated that they find little use for receiving a Segregation Notice on an annual basis,” pointing to “the administrative burdens associated with providing the notice on an annual basis coupled with its lack of utility” in supporting elimination of the requirement. 53 NFA added that if the Commission retains the annual notification requirement, it should eliminate it where counterparties have previously elected to require segregation, noting that very few counterparties have, over time, changed their initial election. 54 Because the Commission is eliminating this requirement, NFA's comment is moot. In response to a question in the Proposal, IECA urged that the Commission provide that there is no need for a swap dealer to provide any such notice unless or until there is initial margin in the swap trades between the two parties. 55 In response, the Commission notes that the language of CEA section 4s( l ) does not condition the obligation to notify on the actual tender of initial margin. Additionally, in response to a question, IECA stated that the Commission should not provide that the counterparty may request or opt to continue to receive notification at the beginning of each swap transaction or an annual or some other periodic basis.

IFCS expressly supported elimination of the requirement to include information about the price of custody services in the notification of the right to require segregation, stating that “[c]osts associated with segregation are largely controlled by the third-party custodian and may vary for each segregation agreement, which, together, make it difficult to provide meaningful pricing information in the notification.”  56 All commenters supported elimination of the requirement to provide the required notification to a specified individual, noting that SDs and counterparties are best able to determine an appropriate recipient for the notification. 57 IECA noted that by eliminating the requirement to obtain and keep a confirmation of the counterparty's receipt of the notification of right to require segregation, over-the-counter market participants will save significant costs and avoid risk and confusion. Specifically, IECA stated that “[s]wap trades are documented on `confirmations.' The current rule calls two different things . . . `confirmations' as necessary for swap trades,”  58 and also pointed out that “[t]he notice and `confirmation' mechanisms may also conflict with corporate resolutions, and agreement representations, regarding who is authorized to trade for the counterparty.”  59 IECA also stated that proposed paragraph (d) of Regulation 23.701 should be replaced with language that permits a counterparty to knowingly choose to waive in their master agreement the right to require segregation under CEA section 4s( l )(1)(B), and that also permits the counterparty to waive the right to be notified that it can require segregation. 60 The Commission believes that the amendments it is adopting provide sufficient flexibility ( e.g., eliminating the requirement to provide notification prior to each swap), and observes that including a waiver mechanism would appear to be inconsistent with Congressional intent as expressed in CEA section 4s( l ) ( i.e., that counterparties to uncleared swaps be provided with affirmative notification of the right to elect segregation).

As proposed, the Commission is amending paragraph (c) of Regulation 23.702 to replace the specific requirements in subparagraphs (1) and (2) regarding withdrawal or change in control of margin with a requirement “that any instruction to withdraw Initial Margin shall be in writing and that notification of the withdrawal shall be given immediately to the non-withdrawing party.” As adopted, Regulation 23.702 sets forth requirements for the custody of initial margin segregated pursuant to a counterparty's election under Regulation 23.701. Paragraph (c)(2) of Regulation 23.702 provides specific requirements for the withdrawal and turnover of control of initial margin. In particular, paragraph (c)(2) requires the custodian to turn over control of initial margin upon presentation of a written statement made by an authorized representative under oath or under penalty of perjury as specified in 28 U.S.C. 1746. Such statement must provide that the person presenting it is entitled to assume control of the initial margin pursuant to the parties' agreement. The other party must be immediately notified of the turnover of control. As discussed below, after review of the comments, the Commission confirms the rationale articulated for proposing the amendments to Regulation 23.702, and therefore, is adopting the amendments as proposed.

In the Proposal, the Commission expressed its belief that, while paragraph (c)(2) may generally be consistent with the manner in which custodial arrangements work, the prescriptive requirements of the regulation, including requiring a specific form, the language used, and the certification needed, do not account for change in control arrangements in custodial agreements that are sometimes customized to reflect the unique business facts and circumstances that may exist between any two parties and the custodian. For example, the unique nature of the collateral posted or the specific terms of change in control triggers may warrant different notice procedures than those specified by paragraph (c)(2). Alternative notice procedures may allow for more timely and effective change in control under real-world circumstances and better protect each party's interests. Accordingly, the Commission said it believed that more flexibility is warranted, and that it is more appropriate to leave these matters up to negotiation by the parties. 61

IFCS specifically expressed support for the proposed amendments to Regulation 23.702. 62 IFCS stated that it “believes the current regulations are overly prescriptive and welcomes the opportunity for bilateral negotiations between sophisticated market participants who are, by definition, deemed to be able to protect their own interests.”  63 Another commenter suggested a change to existing paragraph (c)(2). 64 However, because the Commission is eliminating that paragraph, the comment is moot.

In response to a question in the Proposal regarding whether the Commission should adopt in Regulation 23.702(a) more specific financial or affiliation qualifications for the custodian that an SD or MSP uses as a depository for segregated initial margin, IECA stated that it should not, and added that if the Commission wishes to educate counterparties on custodian credit characteristics and risks, it could hold roundtables from time to time and publish the transcripts. 65 The Commission is retaining the requirement that a custodian be a legal entity independent of both the SD or MSP, and the counterparty. It does not believe that a roundtable is necessary at this time. 66

As proposed, the Commission is amending Regulation 23.703 to eliminate the requirement that investment of margin that is segregated pursuant to an election under Regulation 23.701 may only be done in a manner consistent with Regulation 1.25. As originally adopted, Regulation 23.703 requires initial margin segregated pursuant to subpart L to be invested consistent with Regulation 1.25. 67 Paragraph (b) provides that, subject to consistency with Regulation 1.25, the SD or MSP and the counterparty may enter into any commercial arrangement, in writing, regarding the investment of margin and allocation of resulting gains and losses. Regulation 1.25 sets forth standards for investment of customer funds by a futures commission merchant (“FCM”) or DCO in the context of exchange-traded futures and cleared swaps. When originally proposing Regulation 23.703, the Commission expressed its view that Regulation 1.25 “has been designed to permit an appropriate degree of flexibility in making investments with segregated property, while safeguarding such property for the parties who have posted it, and decreasing the credit, market, and liquidity risk exposures of the parties who are relying on that margin.”  68 As discussed below, after review of the comments, the Commission confirms the rationale articulated for proposing the amendments to Regulation 23.703, and therefore, is adopting the amendments as proposed.

A suggestion in response to the Project KISS initiative noted that Regulation 1.25 is designed to protect exchange customers for which margin investment decisions are outside of their control. 69 Regulation 1.25 includes fairly extensive and specific requirements as to the mechanisms for holding and investing margin and the qualitative aspects of the investments held. With respect to initial margin for uncleared swaps that is not held in accordance with Regulation 23.157 or with the Prudential Regulator Margin Rules, the margin investment decisions are typically a matter of contract subject to negotiation between the parties. As such, each counterparty has a voice in how the initial margin may be invested. 70

In addition, the terms of most exchange-traded and cleared products are standardized and the customer's primary relationship with the FCM or DCO centers upon the trading and clearing of those standardized products. Conversely, over-the-counter swaps, by their nature, tend to be more customized and are often part of a broader financial relationship. For example: Interest rate swaps with end-users are often designed to match maturities of loans or bonds, with the rate of the swap tied to the rate on the loan or bond; commodity swaps often hedge the counterparty's physical commodity production or consumption risks that arise from a particular commercial enterprise; and foreign exchange swaps often hedge an entity's exposure to cross-border commercial transactions. In each case, the SD or MSP sometimes plays additional financial roles, such as brokering physical commodity purchases or sales, providing a loan or other credit or liquidity support, or acting as a correspondent bank. Accordingly, each counterparty, particularly nonfinancial end-user counterparties, may find better transactional efficiencies and may be better served and protected in related credit transactions if the types of collateral and the investment procedures and mechanisms used are determined through bilateral negotiation by the parties. 71

In the preamble to the Proposal, the Commission stated that, given the greater breadth and variability, both in the terms and purposes of uncleared swaps and in the nature of the relationship between the counterparty and the SD or MSP, a regulation that provides greater flexibility for the parties to negotiate appropriate initial margin investment terms will, in most cases, better serve the parties' interests. For the same reasons, allowing greater flexibility may also encourage more counterparties to elect to segregate pursuant to subpart L. 72

The Commission also recognized that in some circumstances, nonfinancial end-user counterparties might have less negotiating leverage with a sophisticated SD or MSP. 73 However, the regulations as originally adopted give little or no flexibility for counterparties and SDs or MSPs to negotiate mutually beneficial terms and to consider other factors such as the broader financial relationship between the parties. For nonfinancial end-user counterparties, the segregation of initial margin is at their discretion. If these counterparties have a voice in how segregated initial margin is invested, the returns of which they will often receive, they may be more likely to elect to require segregation. 74

ISDA/SIFMA stated that “[b]y taking steps to remove unnecessary requirements regarding annual notices, disclosures and Rule 1.25 limitations which prevent counterparties from negotiating preferred terms regarding the investment of segregated collateral, among other proposed amendments, the Commission is furthering its goal to streamline overly burdensome rules in a manner more consistent with market practice, while still achieving its regulatory oversight objectives.”  75 IFCS supported the Proposal's “allowance for more flexibility in the requirements for segregated margin and investment of segregated margin,” describing the existing requirements as overly prescriptive and welcoming the opportunity for bilateral negotiations between sophisticated market participants. 76 In response to the Commission's question regarding how the requirement that margin that is segregated pursuant to an election under Regulation 23.701 may only be invested consistent with Regulation 1.25 has impacted counterparties' decisions to make an election under Regulation 23.701, IECA stated that because “the right to require segregation is so rarely exercised, any response to this question would at best be anecdotal.”  77

As proposed, the Commission is amending Regulation 23.704 by placing on the SD or MSP as an entity the obligation to report on a quarterly basis to counterparties that do not elect to require segregation of initial margin (instead of obligating the firm's CCO specifically). A further amendment to paragraph (b) of Regulation 23.704 eliminates the phrase “with respect to each counterparty.” Existing Regulation 23.704(a) requires the CCO of each SD or MSP to report quarterly to each counterparty that does not elect segregation of initial margin on whether or not the SD's or MSP's back office procedures relating to margin and collateral requirements failed at any time during the previous calendar quarter to comply with the agreement of the counterparties. 78 As discussed below, after review of the comments, the Commission confirms the rationale articulated for proposing the amendments to Regulation 23.704, and therefore, is adopting the amendments as proposed.

In the preamble to the Proposal, the Commission expressed its belief that it is unnecessary to specify that the CCO be the individual that makes such reports, so long as the information is provided to counterparties. For many firms, middle or back office staff, not the CCO, implements collateral management pursuant to the terms of each collateral management agreement. Those individuals are therefore better situated to assess compliance with agreements and to provide the quarterly report. 79 Accordingly, there are likely personnel at each SD or MSP other than the CCO who are better situated to more accurately and efficiently provide the report. 80 The Commission therefore proposed to require that the SD or MSP make the reports without specifying any particular person to perform that function. The Commission further proposed to clarify the language regarding timing of the required reports to eliminate uncertainty as to the regulation's meaning. With respect to paragraph (b) of the regulation, the Commission proposed to specify that the reports required under paragraph (a) need be delivered only to counterparties who choose not to require segregation (by removing the phrase “with respect to each counterparty”) consistent with the statutory authority underlying this requirement. 81

IFCS generally supported the changes to Regulation 23.704 while urging the Commission to continue to evaluate the regulation. 82 NFA and IFCS stated their support for eliminating the requirement that an SD's or MSP's CCO be the individual to issue the quarterly report regarding back office compliance. NFA noted that eliminating the requirement will provide greater flexibility, 83 and IFCS stated that eliminating the requirement does not lessen the burden but only shifts it to another corporate department. 84

IFCS and ISDA/SIFMA stated that the quarterly report does not provide the customer protection benefits the Commission intended to achieve, and urged that instead of requiring quarterly reporting, the Commission should require an SD or MSP to report only when issues of non-compliance are present. 85 NFA asked the Commission to clarify the language of proposed Regulation 23.704(a) to indicate whether a quarterly report is required in those instances when an SD or MSP is and is not in compliance with an agreement with a counterparty. 86 The Commission notes that the statute specifically requires an SD or MSP to report quarterly to any counterparty that does not elect segregation of initial margin for uncleared swaps “that the back office procedures of the [SD or MSP] relating to margin and collateral requirements are in compliance with the agreement of the counterparties.”  87 Accordingly, an SD or MSP is required to ensure that its back office procedures are in compliance with the agreement with the counterparty and to report that fact on a quarterly basis, whether or not such procedures are properly carried out on an ongoing basis.

The Regulatory Flexibility Act (“RFA”) requires Federal agencies to consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis respecting the impact. 88 Whenever an agency publishes a general notice of proposed rulemaking for any regulation, pursuant to the notice-and-comment provisions of the Administrative Procedure Act, 89 a regulatory flexibility analysis or certification typically is required. 90 The Commission previously has established certain definitions of “small entities” to be used in evaluating the impact of its regulations on small entities in accordance with the RFA. 91 The Commission has previously established that SDs, and MSPs, and eligible contract participants  92 are not small entities for purposes of the RFA. 93

Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the Proposal will not have a significant economic impact on a substantial number of small entities.

The Paperwork Reduction Act of 1995 (“PRA”)  94 imposes certain requirements on Federal agencies (including the Commission) in connection with their conducting or sponsoring a collection of information as defined by the PRA. The rule amendments adopted today would result in such a collection, as discussed below. A person is not required to respond to a collection of information unless it displays a currently valid control number issued by the Office of Management and Budget (“OMB”). The rule amendments include a collection of information for which the Commission has previously received a control number from OMB. The title for this collection of information is “Disclosure and Retention of Certain Information Relating to Swaps Customer Collateral, OMB control number 3038-0075.”  95 Collection 3038-0075 is currently in force with its control number having been provided by OMB.

The Commission is revising collection 3038-0075 to incorporate changes to reduce the number of notices an SD or MSP must provide to its counterparties with respect to the rights of such counterparties to segregate initial margin for uncleared swaps. The Commission does not believe the rule amendments as adopted impose any other new collections of information that require approval of OMB under the PRA.

The rule amendments adopted today modify collection 3038-0075 by eliminating the requirement that the notification of the right to segregate be provided on an annual basis to a specified officer of the counterparty such that the notice would only need to be provided once to each counterparty at the beginning of the first non-cleared swap transaction that provides for the exchange of initial margin. The Commission originally estimated that each SD and MSP would, on average, provide the segregation notice to approximately 1,300 counterparties each year and that the burden for preparing and furnishing the notice would be 2 hours, for an annual burden of 2,600 hours. 96 The Commission now estimates that each SD and MSP will, on average, have approximately 300 new counterparties each year for a total burden of 600 hours per registrant. The Commission received no comments regarding its discussion of the PRA burden analysis in the preamble to the Proposal. Accordingly, the Commission is revising its overall burden estimate associated with Regulation 23.701 for this collection by reducing the per registrant annual burden by 2,000 hours. The Commission further estimates that there are 103 SD/MSPs and that the aggregate total burden hours associated with Regulation 23.701 is 61,800. The Commission continues to estimate that Regulation 23.704 would require a total of approximately 2,600 disclosures and 798 hours per year per entity. However, the Commission is adjusting its estimate of the total annual responses and burden hours to reflect an increase by one of the number of respondents. The Commission now estimates that approximately 267,800 total annual responses (which is based on 103 SD/MSPs and the 2,600 disclosures per year per entity) would require total annual burden hours of 82,194. 97

Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. 98 CEA section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. With respect to the rule amendments discussed above, the Commission has considered the costs and benefits resulting from its discretionary determinations with respect to the CEA section 15(a) factors, and sought comments from interested persons regarding the nature and extent of such costs and benefits.

The Commission notes that this consideration of costs and benefits is based on the understanding that the swap market functions internationally, with many transactions involving U.S. firms occurring across different international jurisdictions, with some SDs, MSPs, and their counterparties organized outside the U.S., and other entities operating both within and outside the U.S., and commonly following substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the discussion below of the costs and benefits of the regulations being adopted refers to their effects on all subject swaps activity, whether by virtue of the activity's physical location in the United States or by virtue of the activity's connection with or effect on U.S. commerce under CEA section 2(i).

The baseline for these cost and benefit considerations is the status quo, which is existing market conditions and practice in response to the requirements of current Regulations 23.700, 23.701, 23.702, and 23.703. 99 Subpart L: (1) Requires SDs or MSPs to notify counterparties of the right to segregate initial margin; (2) establishes certain procedures regarding the notification; and (3) establishes certain requirements for the initial margin segregation arrangements.

The rule amendments adopted herein are intended to provide a more flexible approach that reduces some regulatory burdens that provide little or no corresponding benefit. The definition of “Margin” is eliminated because it will no longer be needed. The rule amendments would also revise when the segregation notice is required. Additionally, the amendments eliminate the requirements that the SD or MSP: (1) Provide the segregation notice to an officer of the counterparty with specific qualifications, and (2) obtain the counterparty's confirmation of receipt of the segregation notice. Finally, the rule amendments as adopted allow the parties to establish the notice of change of control provisions and the commercial arrangements for investment of segregated collateral by contract instead of imposing specific requirements.

The general purpose of the adopted rule amendments is to reduce burdens and improve the benefits intended by subpart L. The Commission believes that the amendments would not impose any new requirements on registrants and instead would reduce or make the regulations more flexible, allowing market participants to use standard market practices regarding the implementation of the initial margin segregation requirements. The simplification of the notification requirements will likely reduce the time needed to complete the notification process. The simplification of the notification requirements may also facilitate more resource-efficient development and maintenance of customer relationships by reducing the search costs for some of the removed items. The rule amendments will also reduce costs by eliminating the requirements for those swaps that must comply with the Prudential Regulator Margin Rules mandatory margin requirements. In addition, the amendments as adopted will provide benefits to the parties to swaps by allowing the parties to establish by contract the terms for collateral management and for change in control and investment of segregated initial margin in a manner that better suits their business needs. To the extent the parties will be able to negotiate more efficient segregation investment arrangements that generate higher returns that are passed on to the counterparty, as is most often the case for uncleared swaps, the parties will benefit. The Commission believes that the simplification of the requirements and greater flexibility will therefore encourage more counterparties to elect to segregate initial margin.

As noted above, in some circumstances, nonfinancial end-user counterparties might have less negotiating leverage when negotiating the terms of segregation agreements with experienced SDs or MSPs. Reducing the prescriptive requirements in the current rule could therefore reduce protections for the counterparties. However, it is not clear how incentives or disincentives may impact the negotiating choices of SDs and MSPs as well as the counterparties and therefore the extent to which the requirements provide protections. For example, regarding the choice of investments, the SD or MSP may seek to restrict investments to the most liquid investments that could be easily liquidated if the counterparty defaults. Those liquid investments, which would likely be similar to the investments permitted under Regulation 1.25, may in turn generate lower returns passed on to the SD's or MSP's counterparties. Conversely, the current regulations give little or no flexibility for counterparties and SDs or MSPs to negotiate mutually beneficial terms and consider other factors such as the broader financial relationship between the parties. Furthermore, for nonfinancial end-user counterparties, the segregation of initial margin is discretionary. If the counterparties have no voice in how segregated initial margin is invested, there may be less incentive for the counterparty to elect to require segregation. In addition, because the counterparty will no longer receive an annual notice of its right to segregation, this may result in a counterparty not exercising its right, as a result of new or other employees taking over this responsibility; however, as noted above, once a counterparty selects an option, it rarely changes. Lastly, there is less information given to the counterparty ( i.e., custodial prices, including a non-affiliated custodian); however, as noted above, this information is typically not comparable and therefore, may be misleading, as each custodial agreement is privately negotiated.

The Commission believes that the rule amendments to subpart L might lead to reduced costs for registrants, because they will no longer have to comply with some of the more prescriptive requirements imposed by the regulations. The Commission is, however, unable to quantify the potential cost savings because the cost savings depend on numerous factors that are particular to each SD or MSP and each counterparty relationship. For example, the factors affecting the costs involved could include: The size and complexity of an SD's dealing activities, the actual number of swaps that would be affected by this rulemaking, the complexity of the swap transactions, the level of sophistication of each counterparty, the degree to which automated notice technologies may be used to satisfy these requirements, and the nature of the custodial and investment documents in particular segregation arrangements.

Subpart L is intended to provide counterparties to SDs and MSPs with notice of the right to elect to segregate initial margin. The Commission recognizes that the amendments adopted to make the regulations less prescriptive might potentially negatively impact the goal of protecting market participants by removing specific requirements for the segregation agreements. However, the Commission is of the view that the intended purpose and benefits of subpart L remain in place because the rule amendments as adopted continue to implement the statutory requirements. Each counterparty will still receive notification of its right to segregate its initial margin. In addition, the parties and the selected custodian will now have the flexibility to establish requirements for margin segregation through negotiated contracts that meet their respective needs, thereby providing market participants with the flexibility and opportunity to protect themselves better by contract. Finally, the greater flexibility provided by these amendments may increase the voluntary use of initial margin segregation by counterparties, a process that was intended to provide better protection for the counterparty in the event of default by the SD or MSP.

The Commission acknowledges that by eliminating the requirement to reinvest initial margin in Regulation 1.25 liquid securities, it may be lowering protections to SDs or MSPs and their counterparties, which may affect other market participants and the public. The Commission believes that this change provides market participants with the ability to privately negotiate the terms of reinvestment. The private terms of reinvestment allow each party to assess its risk tolerance and enter into a written agreement that reflects this tolerance and possibly earn higher anticipated returns on excess margin than potential returns from Regulation 1.25 liquid securities investments.

Subpart L promotes the financial integrity of markets by providing for the protection of counterparty collateral and by mitigating systemic risk that may result from the loss of access to the collateral in the event of a counterparty default. As discussed above, given that registrants will still be expected to enter into segregation arrangements with counterparties that elect to segregate, and, with adoption of the rule amendments to subpart L, registrants will now be able to develop segregation arrangements tailored to their businesses and swap transactions, the Commission is of the view that the amendments likely will have a positive impact on market integrity.

The Commission believes that the rule amendments will not have a significant impact on the competitiveness or efficiency of markets because this rulemaking affects only how collateral is protected and segregated, and not how market participants elect to trade. In addition, the Commission believes that not requiring SDs or MSPs to provide custodial pricing information to their counterparties may have an impact on the efficiency, competitiveness, and financial integrity of the markets, as discussed above, although the effect of this information might not have a consequential impact on the decisions of swap counterparties.

The Commission believes the rule amendments as adopted will not have a significant effect on price discovery.

Subpart L provides for the management and protection of counterparty collateral and therefore mitigates the risk of loss of access to the collateral, which loss can have an adverse impact on registrants, counterparties and the U.S. financial markets. As discussed, the rule amendments adopted herein remove certain prescriptive requirements, but do not alter the overall principles of the existing requirements of subpart L. Therefore, the Commission is of the view that sound risk management practices will not be adversely impacted by these rule amendments. However, as noted above, the Commission acknowledges that by eliminating the requirement to reinvest initial margin in Regulation 1.25 liquid securities, the rule may be lowering protections to SDs or MSPs and their counterparties, which affects other market participants and the public. On the other hand, the Commission believes that the rule provides market participants with the ability to privately negotiate the terms of reinvestment, thereby allowing each party to assess its risk tolerance and enter into an agreement that reflects this tolerance and to earn higher anticipated returns on excess margin than Regulation 1.25 liquid securities tend to earn.

The Commission has not identified any other public interest considerations for the rule amendments as adopted.

The Commission invited comment on its preliminary consideration of the costs and benefits associated with the proposed changes to subpart L, especially with respect to the five factors the Commission is required to consider under CEA section 15(a). In addressing these areas and any other aspect of the Commission's preliminary cost-benefit considerations, the Commission encouraged commenters to submit any data or other information they may have quantifying and/or qualifying the costs and benefits of the proposal. The Commission also specifically requested comment on the following questions:

• To what extent do the proposed amendments reduce or increase burdens and costs for SDs or MSPs or their counterparties?

Commenters have supported the Commission's assessment that finalizing the rule amendments will eliminate burdens on SDs and MSPs. Specifically, IECA stated that the current rules have been unnecessarily burdensome and asserted that by eliminating, for example, Regulation 23.701(d), market participants will save significant costs and avoid risk and confusion. 100 IFCS stated its belief that many of the requirements under the current regulations create unnecessary operational and administrative burdens on swap dealers that outweigh the intended protections afforded to swap counterparties. 101 ISDA/SIFMA stated that the Proposal will meaningfully reduce unnecessary costs and burdens associated with the rule, without diminishing the Commission's ability to meet its regulatory duties. ISDA/SIFMA added that, based on their members' experience, the current initial margin segregation requirements are overly prescriptive and remove the opportunity for bilateral negotiations between sophisticated market participants. 102

• To what extent do the proposed amendments impact collateral management risk considerations?

The Commission is persuaded further by commenters that it is appropriate to make its rules less prescriptive and allow more bilateral negotiations between swap counterparties. NFA stated that it agrees with the Commission's goal of reducing unnecessary burdens on market participants, facilitating more efficient swap execution and potentially encouraging more segregation of collateral. 103 ISDA/SIFMA stated that, based on their members' experience, the current initial margin segregation requirements are overly prescriptive and remove the opportunity for bilateral negotiations between sophisticated market participants who should be allowed to determine what collateral arrangements are most appropriate for their circumstances. 104

• Are counterparties to SDs or MSPs at a substantial disadvantage when negotiating the terms for segregation arrangements that would no longer be required if the proposed amendments are adopted? Would that disadvantage cause them to receive unfair terms on those segregation arrangements? Are there mitigating factors?

The Commission is sympathetic to comments that swap counterparties do not require any additional protections from the CFTC given their requisite levels of sophistication. IFCS stated its support for increased flexibility on the requirements for segregated margin in Regulation 23.702. IFCS believes the current regulations are overly prescriptive and welcomes the opportunity for bilateral negotiations between sophisticated market participants who are, by definition, deemed to be able to protect their own interests. 105

• Would the elimination of the requirement to list at least one non-affiliated custodian and the cost of the custodial services have an effect on the selection of an independent custodian and the cost of the services to the non-SD/MSP counterparty? If yes, please explain.

The only commenter to address this issue, IFCS, agrees with the Commission's decision to remove this condition. IFCS said that they supported eliminating the requirement, adding that costs associated with segregation are largely controlled by the third-party custodian and may vary for each segregation agreement, which, together, make it difficult to provide meaningful pricing information in the notification. 106

I. Background

The Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act” or the “Act”), 1 established the PCAOB to oversee the audits of companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. 2 The Act vests the Commission with comprehensive oversight and enforcement authority over the PCAOB. It grants the Commission authority to, among other things, appoint and remove the members of the PCAOB, approve PCAOB rules and professional standards, and oversee the PCAOB's exercise of certain assigned powers and duties. 3

Section 105 of the Sarbanes-Oxley Act authorizes the Board to investigate and, if necessary, initiate disciplinary action against registered public accounting firms and their associated persons. 4 Upon initiating such an action, the Board may hold a hearing to determine whether a registered public accounting firm or associated person committed, and should be disciplined for, any violation of the Sarbanes-Oxley Act, the securities laws, the Commission's rules, the Board's rules, or professional standards. 5

The Sarbanes-Oxley Act directs the Board to promulgate rules governing its investigations and adjudications. 6 The Board has done so. As relevant here, those rules provide that once the Board has issued an order instituting proceedings, or after a registration applicant has requested a hearing, a hearing officer will be assigned to preside over the proceeding. 7 The hearing officer is granted “the authority to do all things necessary and appropriate to discharge his or her duties,” including: Issuing accounting board demands; receiving and ruling on the admissibility of evidence; generally “regulating the course of a proceeding and the conduct of the parties and their counsel”; holding pre-hearing and other conferences; ruling on motions; and preparing an initial decision. 8 The role of the PCAOB hearing officer thus closely resembles that of the Commission's administrative law judges (“ALJs”).

On June 21, 2018, the United States Supreme Court in Lucia v. SEC considered a challenge to the method by which the Commission's ALJs were appointed, holding that because the ALJs exercise “significant authority pursuant to the laws of the United States,” they are “Officers of the United States” who must be appointed in the manner prescribed by the Constitution's Appointments Clause—by the President, a court of law, or head of a department, such as the Commission. 9 In so holding, the Court followed its earlier decision in Freytag v. Commissioner, in which it determined that, given the powers they exercise, special trial judges of the United States Tax Court are also constitutional officers. 10

While PCAOB hearing officers are similarly vested with “the authority needed to ensure fair and orderly adversarial hearings,”  11 there are notable differences between the powers they exercise and those exercised by Commission ALJs and Tax Court special trial judges. Unlike the other adjudicators, for example, PCAOB hearing officers are not authorized to administer oaths or punish contemptuous conduct. 12 Moreover, to date, no court has held that PCAOB hearing officers must be appointed as inferior officers under the Appointments Clause. 13 Nevertheless, to remove any doubt about the constitutional status of PCAOB hearing officers, the Commission hereby amends 17 CFR part 202, subpart A (Regulation P) to require that the Commission, acting as head of a department, must approve both the appointment and the removal from office of any PCAOB hearing officer before any such action may take effect. 14

We believe this requirement is consistent with both the Constitution and the oversight and appointment authority Congress has granted the Commission. The Commission has the constitutional authority to both appoint and remove from office the inferior officers under its supervision. 15 Congress has also authorized the Commission to appoint inferior officers “necessary for carrying out its functions under the securities laws,” including those specified in the Sarbanes-Oxley Act. 16 Further, pursuant to the Sarbanes-Oxley Act, Congress has granted the Commission comprehensive oversight and enforcement authority over the PCAOB, and it has specified that the Board's appointment of employees and its delegation of functions to such employees are subject to the Commission's oversight. 17

Pursuant to section 4s(e) of the CEA, 1 the Commission is required to promulgate margin requirements for uncleared swaps applicable to each SD and MSP for which there is no U.S. Prudential Regulator (collectively, “Covered Swap Entities” or “CSEs”). 2 The Commission published final margin requirements for such CSEs in January 2016 (“CFTC Margin Rule”). 3

I. Background

The RESTORE Act makes funds available for the ecological and economic restoration of the Gulf Coast Region, and certain programs with respect to the Gulf of Mexico, through a trust fund in the Treasury of the United States known as the Gulf Coast Restoration Trust Fund (trust fund). The trust fund holds 80 percent of the administrative and civil penalties paid under the Federal Water Pollution Control Act after July 6, 2012, in connection with the Deepwater Horizon Oil Spill.

Treasury administers two of the five components established by the Act, the Direct Component and Centers of Excellence Research Grants Program. The Act also established an independent Federal entity, the Gulf Coast Ecosystem Restoration Council (Council), to administer two components of the Act, the Comprehensive Plan Component and the Spill Impact Component. The National Oceanic and Atmospheric Administration (NOAA) administers one component, the NOAA RESTORE Act Science Program. This final rule only affects grants under the Direct Component, Comprehensive Plan Component, and Spill Impact Component of the Act, which are collectively referred to throughout this notice as the three “components.”

On December 14, 2015, Treasury promulgated final regulations concerning the RESTORE Act, codified at 31 CFR part 34, which became effective on February 12, 2016 (the “regulations”). 80 FR 77239. They contain two relevant limitations on the amount of grant funds that may be used for administrative costs.

First, the regulations subject grants to government-wide cost principles. They define “administrative costs” as “indirect costs for administration” and provide that such “[c]osts must comply with administrative requirements and cost principles in applicable federal laws and policies on grants.” 31 CFR 34.2, 34.200(a)(1). They exclude “indirect costs that are identified specifically with, or readily assignable to, facilities” from the definition of “administrative costs.”

Indirect cost principles are contained in the Office of Management and Budget (OMB) “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards” (the Uniform Guidance) in 2 CFR part 200, which Treasury has adopted. 2 CFR 1000.10. Indirect costs are defined in 2 CFR 200.56 and are allowable subject to Subpart E of 2 CFR part 200 and Appendix VII.

Under Subpart E, a grant recipient's negotiated indirect cost rate agreement (NICRA) with its cognizant agency determines the allowable indirect cost rate for the recipient's grants, taking into account the unique circumstances and cost structure of the recipient. The NICRA, or a de minimis rate if elected, must be used across all of the recipient's federal grants. 1 2 CFR 200.414(c)(1). In accordance with the Uniform Guidance, Appendix VII—State and Local Government and Indian Tribe Indirect Cost Proposals, these allowable indirect costs are computed on each individual Federal award.

The second limitation on the amount of RESTORE Act grant funds that can be used for administrative costs under the three components is a three percent administrative cost cap. The Act provides that “[o]f the amounts received by a Gulf Coast State . . ., not more than 3 percent may be used for administrative costs . . . .” 33 U.S.C. 1321(t)(1)(B)(iii)(I). The Act does not specify the method by which this three percent administrative cost cap is to be applied. Treasury's regulations, however, currently provide that the three percent administrative cost cap is to be applied on a grant-by-grant basis: “The three percent limit is applied to the total amount of funds received by a recipient under each grant.” 31 CFR 34.204(a). In other words, under the current regulations, the administrative costs associated with each particular grant may not exceed three percent of the total amount of that grant.

On June 20, 2018, Treasury published a Notice of Proposed Rulemaking (NPRM) proposing to provide a recipient the option to apply the three percent administrative cost cap, within each component, on either a grant-by-grant basis or on an aggregate basis. 83 FR 28563. The NPRM proposed that the three percent administrative cost cap may be applied, for each component, to a Gulf Coast State, coastal political subdivision, or coastal zone parish's trust fund allocation, i.e., to the aggregate of (1) all grants received by it under that component and (2) the amount in the trust fund for the same component that is allocated to, but not yet received by it. Amounts “allocated to, but not yet received” refer only to funds presently in the trust fund and not to future deposits into the trust fund  2 and include the following amounts with respect to each component: (1) With respect to the Direct Component, amounts made available in equal shares for the Gulf Coast States in accordance with 31 CFR 34.302; (2) with respect to the Comprehensive Plan Component, the estimated aggregate cost of all projects approved for funding included in all approved Funded Priorities Lists; and (3) with respect to the Spill Impact Component, amounts allocated to the Gulf Coast States in accordance with 31 CFR 34.502 and 40 CFR 1800.500.

The Act does not require that Treasury administer the administrative cost cap on a grant-by-grant basis, and because Treasury's regulations allocate precise sums to specific entities based on criteria in the Act, it is possible to administer it on an aggregate basis. In the NPRM, Treasury proposed permitting recipients, if they so choose, to allocate administrative costs by component from their “pool” in the trust fund toward the indirect costs in their grants to recover the maximum amount of indirect costs allowed under the Act, and to more efficiently and effectively oversee and manage projects and programs. Under the proposal, if a recipient's allowable indirect costs for administration for one grant are less than three percent of the total amount of that grant, the difference would be available to cover allowable indirect costs for administration exceeding three percent on other grants. However, at no time would the total amount of administrative costs of a Gulf Coast State, coastal political subdivision, or coastal zone parish be permitted to exceed three percent of the aggregate of (1) all grants received by it under one of the three components, and (2) the amount in the trust fund for the same component that is allocated to, but not yet received by such Gulf Coast State, coastal political subdivision, or coastal zone parish. Also, at no time would a recipient be able to recover more in indirect costs under an individual award than it would receive under its NICRA or its de minimis rate. Treasury will address a recipient's selection of its method for calculating administrative indirect costs during the application submission and review process or in reviewing a request to amend a prior award. At least annually, Treasury will post publicly the amounts available in the administrative cost “pool” by component, simultaneously with its updates to the trust fund allocations.

In § 34.204(a)(1)(ii) of the proposed rule, Treasury also added “recipient and” before “subrecipient” in the last sentence to clarify that Federal grant law and policies apply to recipient costs as well as to subrecipient costs. (As discussed below, this addition is located at section 34.204(a)(2) in the final rule.) Treasury also stated in the proposed rule that it would conduct a retrospective analysis of the aggregate method no later than seven years after the date this final rule becomes effective, to “consider whether the revision ensures that the Gulf Coast states, coastal political subdivisions, and coastal zone parishes have the necessary funding to efficiently and effectively oversee and manage projects and programs for ecological and economic restoration of the Gulf Coast Region while ensuring compliance with the statutory three percent administrative cost cap, and whether it helps them to administer RESTORE Act grant projects effectively and efficiently.” NPRM § 34.204(a)(2). Treasury has removed the second use of “effectively and efficiently” as redundant with the first use of it in the sentence. (As explained below, Treasury has also moved the language in § 34.204(a)(2) of the proposed rule to § 34.204(a)(3) of the final rule.)

The NPRM invited public comments on all aspects of the proposed revision for 30 days. Nine commenters submitted written responses to the NPRM, all of which Treasury has reviewed. The following is a discussion of relevant comments and Treasury's responses. Treasury is adopting the rule as proposed with only two changes, as discussed below.

One commenter asked whether the three percent for administrative costs may be used by a grantee together with the de minimis ten percent for indirect cost limits. 3 Under Treasury's regulations, administrative costs are defined as “indirect costs for administration” ( i.e., not direct costs for administration). If a recipient has a de minimis rate of ten percent of modified total direct costs, the recipient may be reimbursed for indirect costs for administration up to three percent of the total award amount. This calculation currently is applied to each grant. Under this final rule, a recipient eligible to use the de minimis rate may be able to be reimbursed for indirect costs for administration that exceed the three percent cap for a particular grant, up to ten percent of the modified total direct costs, if that recipient has received less than three percent of the total award amount for indirect costs for administration on the total of the aggregate of (1) all grants received by it under that component and (2) the amount in the trust fund for the same component that is allocated to, but not yet received by it.

Three commenters expressed support for the aggregate method because it would allow greater reimbursement for indirect costs incurred. 4 One commenter expressed support for the greater flexibility the proposed rule would provide to recipients in applying the three percent administrative cost cap. 5

Four commenters requested clarification as to whether the proposed rule would apply to previously awarded grants. 6 This final rule does not require that recipients change the method by which they calculate their administrative costs. It provides an alternative to the grant-by-grant method required under Treasury's current regulation. Indirect costs on previously awarded grants under each of the three components may be reimbursed using the aggregate method, up to the amount of the recipient's NICRA or de minimis rate, provided sufficient funds are available in the recipient's administrative cost pool. A Direct Component, Comprehensive Plan Component or Spill Impact Component recipient with sufficient funds available in its administrative cost pool wishing to recover indirect costs in an amount up to its NICRA or de minimis rate on a prior award may request a grant amendment. Treasury and the Council will provide guidance to their respective recipients to assist them in applying the aggregate method to calculate administrative costs and to keep track of the amount available for administrative costs in their administrative cost pool for each component.

Treasury also solicited information from eligible recipients as to how they would manage and track administrative indirect costs under each method. One eligible recipient explained that under the aggregate method, for each component, it will update the calculations of its administrative cost pools at least annually and reconcile its calculations with Treasury's calculations. 7 Treasury and the Council will provide technical assistance to their respective recipients to help ensure that administrative indirect costs are accurately tracked across grants.

Treasury also asked eligible recipients in the NPRM whether there was any additional burden associated with managing the administrative indirect cost cap using the aggregate method. One eligible recipient responded that the use of the aggregate method would impose an “additional burden” under all three components, but added that the additional burden would be less than the burden currently imposed under the grant-by-grant method, so that the net effect would be less of a burden upon recipients. 8

Two commenters suggested that the language in § 34.204(a)(1)(ii) of the proposed rule be reorganized for clarity. 9 Specifically, they pointed out that the final two sentences of § 34.204(a)(1)(ii) of the proposed rule differ in subject matter from the rest of the paragraph and should therefore be in a different paragraph. Treasury agrees and has moved those sentences to § 34.204(a)(2) of the final rule. Treasury also has moved the language in § 34.204(a)(2) of the proposed rule to § 34.204(a)(3) of the final rule.

One commenter requested that Treasury clarify in the preamble that projects under the Comprehensive Plan Component that are under consideration by the Council but not yet approved for funding are not included in the aggregate three percent cost calculation. 10 The clarification has been made to the reference to the Comprehensive Plan Component's Funded Priorities List in Section II. Description of the Proposed Rule above.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) generally requires agencies to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedures Act or any other statute, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities.

Six of the 20 Louisiana parishes and six of the 23 Florida counties eligible to receive grants under the RESTORE Act have fewer than 50,000 residents. (2010 U.S. Census) and thus qualify as small governmental jurisdictions under the Regulatory Flexibility Act. (5 U.S.C. 601(5)). Treasury anticipates that this final rule will have no significant economic impact on these small entities because all recipients have the option to continue applying the three percent administrative cost cap on a grant-by-grant basis. Accordingly, Treasury certifies that this final rule will not have a significant impact upon a substantial number of small entities, and no regulatory flexibility analysis is required.

This final rule affects those entities in the five Gulf Coast States that are eligible to receive funding under the RESTORE Act, and is focused on the environmental restoration and economic recovery of the Gulf Coast Region in the aftermath of the Deepwater Horizon oil spill. The amounts made available from the trust fund will continue efforts that provide for the long-term health of the ecosystems and economy of this region. Because it increases recipients' flexibility in how they apply the statutory three percent administrative cost cap, Treasury believes this final rule is an Executive Order 13771 deregulatory action. In accordance with Executive Order 12866, as supplemented by Executive Order 13563, OMB has designated this rule as a significant regulatory action and has reviewed this final rule. This final rule finalizes without significant change the proposed rule discussed above.

The Congressional Review Act (5 U.S.C. 801 et seq. ) generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. A major rule cannot take effect until 60 days after it is published in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. 804(2) and will become effective 30 days after publication.

The affected program for Treasury is listed in the Catalog of Federal Domestic Assistance under 21.015, Resources and Ecosystems Sustainability, Tourist Opportunities, and Revived Economies of the Gulf Coast States. The affected programs for the Council are listed under 87.051, and 87.052, for its Comprehensive Plan and Spill Impact Components, respectively.

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires federal agencies to assess the effects of their regulatory actions. In particular, the Unfunded Mandates Reform Act addresses actions that may result in the expenditure by a state, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Treasury believes that because this final rule will not result in an aggregate expenditure by a state, local, or tribal government, or by the private sector of $100,000,000 or more, the Unfunded Mandates Reform Act does not require an analysis of this final rule.

For the reasons set forth herein, the Department of the Treasury amends 31 CFR part 34 to read as follows:

It has been determined that publication of this CFR part removal for public comment is impracticable, unnecessary, and contrary to public interest since it is based on removing DoD internal policies and procedures that are publically available on the Department's website.

DoD internal guidance will continue to be published in DoD's Financial Management Regulation, Volume 7A, Chapter 41, available at http://comptroller.defense.gov/Portals/45/documents/fmr/archive/07aarch/07a_41_Dec10.pdf.

Removal of this part does not reduce burden or costs to the public as it will not change how notification is provided under Volume 7A, Chapter 41. This rule is not significant, therefore the requirements of Executive Order 13771, “Reducing Regulation and Controlling Regulatory Costs,” do not apply.

The Coast Guard will enforce the safety zone for the San Francisco Giants Fireworks Display from 11 a.m. on April 12, 2019 until 1 a.m. on April 13, 2019, or as announced via Broadcast Notice to Mariners. This notice is issued under authority of 46 U.S.C. 70034, 70051; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5; Department of Homeland Security Delegation No. 0170.1. In addition to this notice in the Federal Register, the Coast Guard plans to provide the maritime community with extensive advance notification of the safety zone and its enforcement period via the Local Notice to Mariners.

The safety zone will extend to all navigable waters of the San Francisco Bay, from surface to bottom, within a circle formed by connecting all points 100 feet out from the fireworks barge during the loading, transit, and arrival of the fireworks barge from the loading location to the display location and until the start of the fireworks display. From 11 a.m. on April 12, 2019 until 5 p.m. on April 12, 2019, the fireworks barge will be loading pyrotechnics from Pier 50 in San Francisco, CA. The fireworks barge will remain at the loading location until its transit to the display location. From 8:30 p.m. to 9 p.m. on April 12, 2019 the loaded fireworks barge will transit from Pier 50 to the launch site near Pier 48 in approximate position 37° 46′ 36″ N, 122° 22′ 56″ W (NAD 83) where it will remain until the conclusion of the fireworks display. Upon the commencement of the 15 minute fireworks display, scheduled to begin at the conclusion of the baseball game, at approximately 10 p.m. on April 12, 2019, the safety zone will increase in size and encompass all navigable waters of the San Francisco Bay, from surface to bottom, within a circle formed by connecting all points 700 feet out from the fireworks barge near Pier 48 in approximate position 37° 46′ 36″ N, 122° 22′ 56″ W (NAD 83) for the San Francisco Giants Fireworks listed in 33 CFR 165.1191, Table 1, Item number 1. This safety zone will be in effect from 11 a.m. on April 12, 2019 until 1 a.m. on April 13, 2019, or as announced via Broadcast Notice to Mariners.

Under the provisions of 33 CFR 165.1191, unauthorized persons or vessels are prohibited from entering into, transiting through, or anchoring in the safety zone during all applicable effective dates and times, unless authorized to do so by the PATCOM. Additionally, each person who receives notice of a lawful order or direction issued by an official patrol vessel shall obey the order or direction. The PATCOM is empowered to forbid entry into and control the regulated area. The PATCOM shall be designated by the Commander, Coast Guard Sector San Francisco. The PATCOM may, upon request, allow the transit of commercial vessels through regulated areas when it is safe to do so.

If the Captain of the Port determines that the regulated area need not be enforced for the full duration stated in this notice, a Broadcast Notice to Mariners may be used to grant general permission to enter the regulated area.

I. Table of Abbreviations CFR Code of Federal Regulations DHS Department of Homeland Security FR Federal Register NPRM Notice of proposed rulemaking §  Section U.S.C. United States Code COTP Captain of the Port II. Background Information and Regulatory History

On November 14, 2018, the North Carolina State Port Authority notified the Coast Guard that they will be transporting one pre-assembled Neo-Panamax container crane up the Cape Fear River to the North Carolina State Port in Wilmington, North Carolina, and offloading it. Due to crane preconstruction and vessel travel times, the crane arrival time was not set. The transit path will be from the Cape Fear River Entrance Buoy, north through the Cape Fear River to the turning basin, and ending at the North Carolina State Port in Wilmington, North Carolina. The planned offload date is two days after transit, but weather conditions may change the offload date to any day within five days after transit. The Captain of the Port (COTP) North Carolina has determined that potential safety hazards associated with transporting and offloading the container crane would be a concern for anyone transiting the Cape Fear River. In response, on January 31, 2019, the Coast Guard published a notice of proposed rulemaking (NPRM) titled Safety Zone; Cape Fear River, Wilmington, NC (84 FR 619). There, we stated why we issued the NPRM, and invited comments on our proposed regulatory action related to arrival of a new Neo-Panamax container crane. No comments were received during our comment solicitation period which ran through March 4, 2019. During the comment period, the North Carolina State Port Authority requested a new potential vessel arrival period from April 1 through April 30, 2019, instead of March 20 through April 15, 2019, as proposed in the NPRM.

Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the Federal Register . Delaying the effective date of this rule would be impracticable and contrary to the public interest because immediate action is needed protect persons, vessels, and the marine environment on the navigable waters of the Cape Fear River during transport and offload of the container crane.

The Coast Guard is issuing this rule under authority in 46 U.S.C. 70034 (previously 33 U.S.C. 1231). The COTP North Carolina has determined that potential safety hazards associated with the arrival of a new Neo-Panamax container crane would be a safety concern for anyone transiting the Cape Fear River. The purpose of this rule is to protect persons, vessels, and the marine environment on the Cape Fear River during transport and offload of the container crane.

As noted above, we received no comments on our NPRM published January 31, 2019. There is a minor change in the regulatory text of this rule from the proposed rule, shifting the vessel's arrival period. The vessel transporting the container crane will arrive sometime from April 1 through April 30, 2019, instead of March 20 through April 15, 2019, as proposed in the NPRM. In addition, the term Post-Panamax has been changed to Neo-Panamax to accurately describe the type of container crane being delivered.

This rule establishes a safety zone on a portion of the Cape Fear River to be enforced during the transit of a vessel transporting one pre-assembled Neo-Panamax container crane up the Cape Fear River from April 1 through April 30, 2019, and offloading the container within five days after transit. The currently scheduled transit date is April 6, 2019, and the currently scheduled offload date is April 8, 2019. The transport is expected to take between five and seven hours and the offload is expected to take up to five hours. Exact enforcement times will be based on tide schedules, anticipated sea conditions, and weather conditions, therefore the exact enforcement times will be announced by broadcast to mariners at least two days prior to the transit. The safety zone for the transit includes all navigable waters of the Cape Fear River from the International Regulations for Prevention of Collisions at Sea, 1972 (COLREGS, 72) Demarcation Line drawn from Oak Island Light House to Bald Head Island Abandon Light House noted on NOAA chart 11537 and proceeding north up the Cape Fear River from shore to shore to the Cape Fear Memorial Bridge, a length of approximately 26 miles. This portion of the safety zone will be enforced until the vessel transporting the crane has been safely moored at North Carolina State Port in Wilmington, North Carolina. The safety zone for the offload will include all navigable waters of the Cape Fear River within 200 yards of the transport vessel while it is moored. The duration of this zone is intended to protect persons, vessels, and the marine environment on the navigable waters of the Cape Fear River during the transport and offload of the container crane. No vessel or person will be permitted to enter the safety zone unless specifically authorized by the Captain of the Port North Carolina or a designated representative. There will be a pre-designated safety vessel ahead of the transport vessel to monitor the flow of traffic and inform mariners that the container crane transit is in progress. Vessels that are less than 40 feet in height and will not impede the transport vessel may request permission to pass through the safety zone or remain in place as the transport vessel passes. The Fort Fisher and Bald Head ferries will be able to operate on their normal schedule as long as the scheduled transit will not come within one mile of the transport vessel and they receive permission from the Captain of the Port North Carolina or a designated representative. The strict height restriction of 40 feet is required because portions of the transported crane extend over the water on both sides of the transport vessel.

We developed this rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders, and we discuss First Amendment rights of protestors.

Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This rule has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, this rule has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.

This regulatory action determination is based on the size, location, and duration of the safety zone. Vessel traffic will not be allowed to enter or transit portions of the Cape Fear River for 2 non-consecutive days from April 1 through May 5, 2019. Vessel traffic will not be allowed to enter or transit a portion of the Cape Fear River for approximately five to seven hours during the transit of the transport vessel, and for up to five hours during the offload after the transit. The Coast Guard will issue a Local Notice to Mariners and transmit a Broadcast Notice to Mariners via VHF-FM marine channel 16 regarding the safety zone. This portion of the Cape Fear River has been determined to be a high traffic area. This rule allows vessels to request permission to pass through the moving safety zone or remain in place as long as they are under the height restriction of 40 feet.

The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard received 0 comments from the Small Business Administration on this rulemaking. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.

While some owners or operators of vessels intending to transit the safety zone may be small entities, for the reasons stated in section V.A above, this rule will not have a significant economic impact on any vessel owner or operator.

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the FOR FURTHER INFORMATION CONTACT section.

Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.

This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

A rule has implications for federalism under Executive Order 13132, Federalism, if it has 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. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.

Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this rule has implications for federalism or Indian tribes, please contact the person listed in the FOR FURTHER INFORMATION CONTACT section.

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.

We have analyzed this rule under Department of Homeland Security Directive 023-01 and Commandant Instruction M16475.1D, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves a safety zone lasting five to seven hours on all navigable waters of the Cape Fear River from the International Regulations for Prevention of Collisions at Sea, 1972 (COLREGS, 72) Demarcation Line drawn from Oak Island Light House to Bald Head Island Abandon Light House noted on NOAA chart 11537 and proceeding north up the Cape Fear River from shore to shore to the Cape Fear Memorial Bridge, a length of approximately 26 miles, and a safety zone lasting up to five hours that would prohibit entry within 200 yards of a moored vessel. It is categorically excluded from further review under paragraph L60(a) of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 01. A Record of Environmental Consideration supporting this determination is available in the docket where indicated under ADDRESSES .

The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the FOR FURTHER INFORMATION CONTACT section to coordinate protest activities so that your message can be received without jeopardizing the safety or security of people, places or vessels.

For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 165 as follows:

A. What changes to Mississippi's hazardous waste program is EPA authorizing with this action?

On June 1, 2018, Mississippi submitted a complete program revision application seeking authorization of changes to its hazardous waste program in accordance with 40 CFR 271.21. EPA now makes a final decision that Mississippi's hazardous waste program revisions that are being authorized are equivalent to, consistent with, and no less stringent than the Federal program, and therefore satisfy all of the requirements necessary to qualify for final authorization. For a list of State rules being authorized with this Final Authorization, please see the Proposed Rule published in the October 29, 2018 Federal Register at 83 FR 54304.

Codification is the process of placing citations and references to the State's statutes and regulations that comprise the State's authorized hazardous waste program into the Code of Federal Regulations. EPA does this by adding those citations and references to the authorized State rules in 40 CFR part 272. EPA is not codifying the authorization of Mississippi's revisions at this time. However, EPA reserves the ability to amend 40 CFR part 272, subpart Z, for the authorization of Mississippi's program changes at a later date.

This final authorization revises Mississippi's authorized hazardous waste management program pursuant to Section 3006 of RCRA and imposes no requirements other than those currently imposed by State law. For further information on how this authorization complies with applicable executive orders and statutory provisions, please see the Proposed Rule published in the October 29, 2018 Federal Register at 83 FR 54304. The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this document and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication in the Federal Register . A major rule cannot take effect until 60 days after it is published in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. 804(2). This final action will be effective April 3, 2019.

A. What changes to Kentucky's hazardous waste program is EPA authorizing with this action?

On April 13, 2018, Kentucky submitted a final complete program revision application seeking authorization of changes to its hazardous waste program in accordance with 40 CFR 271.21. EPA now makes a final decision that Kentucky's hazardous waste program revisions that are being authorized are equivalent to, consistent with, and no less stringent than the Federal program, and therefore satisfy all of the requirements necessary to qualify for final authorization. For a list of State rules being authorized with this Final Authorization, please see the Proposed Rule published in the September 21, 2018 Federal Register at 83 FR 47858.

EPA received two substantive comments on its September 21, 2018 proposed authorization of Kentucky's hazardous waste program revisions. Specifically, EPA received adverse comments from the Sierra Club (“Commenter”). These comments are provided in the docket for today's final action. See Docket ID No. EPA-R04-RCRA-2018-0527 at www.regulations.gov. A summary of the adverse comments and EPA's responses are provided below.

Comment 1: The Commenter contends that EPA may not approve Kentucky's maximum concentration limit for selenium in groundwater at 401 KAR 39:090, Section 1(1), because it is higher than the Federal level in Table 1 of 40 CFR 264.94(a). Specifically, Kentucky's maximum concentration limit for selenium in groundwater is 0.05 milligrams per liter (mg/l), which is five times higher than the maximum Federal standard listed in 40 CFR 264.94(a), Table 1, which is 0.01 mg/l. The Commenter states that because this standard is “weaker” than the Federal analog, and because EPA has not established an “alternate limit” under the procedures of 40 CFR 264.94, the Kentucky concentration limit should not be approved.

Response 1: As the Commenter correctly notes, Kentucky replaces the federal Table 1 in 40 CFR 264.94(a) with its own Table 1 at 401 KAR 39:090, Section 1(1). In Kentucky's April 13, 2018 program revision application, Kentucky noted its replacement of the Federal Table 1 with its own Table, and also specified that its replacement Table is based on the current Federal Maximum Contaminant Levels (MCLs) for all listed constituents. EPA analyzed these substitute constituent concentrations and confirmed that they are equivalent to the federal MCLs.

In its Proposed Rule, EPA concluded that Kentucky's replacement Table 1 is “functionally equivalent” to the Federal table at 40 CFR 264.94(a). For the reasons set forth below, EPA affirms this determination and will proceed with authorization of Kentucky's State-specific groundwater concentration limit for selenium.

By way of background, the Federal groundwater concentration limits in 40 CFR 264.94(a), Table 1, were promulgated in 1982 and have remained unchanged since that time. See 47 FR 32274, 32350 (July 26, 1982). These groundwater concentration limits serve as a trigger for corrective action for regulated units under post-closure care and were originally based on the health-based concentration limits found in the National Interim Primary Drinking Water Regulations under the Safe Drinking Water Act. See 47 FR at 32285. These National Interim Primary Drinking Water Regulations were later finalized to include the current MCLs, which were subject to notice and comment rulemaking and codified in 40 CFR part 141. EPA finalized the MCL for selenium in 1992 and set it at 0.05 mg/l. See 40 CFR 141.62(b). All MCLs are promulgated under the authority of the Safe Drinking Water Act and are required to be reviewed every six years. See 42 U.S.C. 300g-1(b)(9). The selenium MCL has undergone such review and EPA has determined that the 0.05 mg/l standard continues to be appropriate. See 82 FR 3518 (Jan. 11, 2017).

Although the regulations at 40 CFR 141.62 apply to “community water systems and non-transient, non-community water systems” as the Commenter correctly notes, EPA often relies on MCLs, in conjunction with health-based screening levels and background levels, for purposes of groundwater investigation and cleanup, with the goal of cleaning up groundwater to its maximum beneficial use, which is often as a source of drinking water. For example, Superfund cleanups conducted under the Comprehensive Environmental Response, Compensation and Liability Act utilize the Regional Screening Levels (RSLs) found at https://www.epa.gov/risk/regional-screening-levels-rsls-generic-tables, as well as the primary (health-based) MCLs, for purposes of establishing groundwater screening and cleanup levels. In addition, the Federal Coal Combustion Residuals (CCR) Rule uses the federal MCLs for purposes of setting groundwater protection standards. See 40 CFR 257.95(h). As a result, the Commenter's statement that the selenium MCL is not relevant for purposes of groundwater protection is inaccurate.

Comment 2: The Commenter argues that EPA's proposed authorization of the portions of Kentucky's program that relate to EPA's Checklist 235, which is the Federal regulation creating an exclusion from the definition of hazardous waste for certain coal combustion residuals, is inappropriate given that certain portions of the Federal Subtitle D CCR Rule have been vacated by the Court in Utility Solid Waste Activities Group, et al. v. EPA (D.C. Cir. Aug. 21, 2018).

Response 2: The language of 40 CFR 261.4(b)(4) revised in the 2015 CCR Rule was not challenged nor impacted by the decision in that case. As a result, this comment presents no basis to alter or re-evaluate EPA's decision to proceed with authorization for the portions of Kentucky's program that relate to Checklist 235.

Codification is the process of placing citations and references to the State's statutes and regulations that comprise the State's authorized hazardous waste program into the Code of Federal Regulations. EPA does this by adding those citations and references to the authorized State rules in 40 CFR part 272. EPA is not codifying the authorization of Kentucky's revisions at this time. However, EPA reserves the ability to amend 40 CFR part 272, subpart S, for the authorization of Kentucky's program changes at a later date.

This final authorization revises Kentucky's authorized hazardous waste management program pursuant to Section 3006 of RCRA and imposes no requirements other than those currently imposed by State law. For further information on how this authorization complies with applicable executive orders and statutory provisions, please see the Proposed Rule published in the September 21, 2018 Federal Register at 83 FR 47858. The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this document and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication in the Federal Register . A major rule cannot take effect until 60 days after it is published in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. 804(2). This final action will be effective April 3, 2019.

The NFIP enables property owners to purchase Federal flood insurance that is not otherwise generally available from private insurers. In return, communities agree to adopt and administer local floodplain management measures aimed at protecting lives and new construction from future flooding. Section 1315 of the National Flood Insurance Act of 1968, as amended, 42 U.S.C. 4022, prohibits the sale of NFIP flood insurance unless an appropriate public body adopts adequate floodplain management measures with effective enforcement measures. The communities listed in this document no longer meet that statutory requirement for compliance with program regulations, 44 CFR part 59. Accordingly, the communities will be suspended on the effective date in the third column. As of that date, flood insurance will no longer be available in the community. We recognize that some of these communities may adopt and submit the required documentation of legally enforceable floodplain management measures after this rule is published but prior to the actual suspension date. These communities will not be suspended and will continue to be eligible for the sale of NFIP flood insurance. A notice withdrawing the suspension of such communities will be published in the Federal Register .

In addition, FEMA publishes a Flood Insurance Rate Map (FIRM) that identifies the Special Flood Hazard Areas (SFHAs) in these communities. The date of the FIRM, if one has been published, is indicated in the fourth column of the table. No direct Federal financial assistance (except assistance pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act not in connection with a flood) may be provided for construction or acquisition of buildings in identified SFHAs for communities not participating in the NFIP and identified for more than a year on FEMA's initial FIRM for the community as having flood-prone areas (section 202(a) of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4106(a), as amended). This prohibition against certain types of Federal assistance becomes effective for the communities listed on the date shown in the last column. The Administrator finds that notice and public comment procedures under 5 U.S.C. 553(b), are impracticable and unnecessary because communities listed in this final rule have been adequately notified.

Each community receives 6-month, 90-day, and 30-day notification letters addressed to the Chief Executive Officer stating that the community will be suspended unless the required floodplain management measures are met prior to the effective suspension date. Since these notifications were made, this final rule may take effect within less than 30 days.

National Environmental Policy Act. FEMA has determined that the community suspension(s) included in this rule is a non-discretionary action and therefore the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq. ) does not apply.

Regulatory Flexibility Act. The Administrator has determined that this rule is exempt from the requirements of the Regulatory Flexibility Act because the National Flood Insurance Act of 1968, as amended, Section 1315, 42 U.S.C. 4022, prohibits flood insurance coverage unless an appropriate public body adopts adequate floodplain management measures with effective enforcement measures. The communities listed no longer comply with the statutory requirements, and after the effective date, flood insurance will no longer be available in the communities unless remedial action takes place.

Regulatory Classification. This final rule is not a significant regulatory action under the criteria of section 3(f) of Executive Order 12866 of September 30, 1993, Regulatory Planning and Review, 58 FR 51735.

Executive Order 13132, Federalism. This rule involves no policies that have federalism implications under Executive Order 13132.

Executive Order 12988, Civil Justice Reform. This rule meets the applicable standards of Executive Order 12988.

Paperwork Reduction Act. This rule does not involve any collection of information for purposes of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq.

Accordingly, 44 CFR part 64 is amended as follows:

In April 2017, the Board established its Regulatory Reform Task Force (RRTF) to comply with the spirit of Executive Order 13777. The RRTF's mission is to identify Board rules and practices that are burdensome, unnecessary, or outdated and to recommend how they should be addressed. See Regulatory Reform Task Force, EP 738 (STB served June 20, 2017). In a status report issued in May 2017, the RRTF identified the Board's payment and filing procedures as a potential area for reform and, following stakeholder input, recommended in its November 2017 status report that the Board update procedural and filing rules that are in need of modernization. 1 The Board issued a notice of proposed rulemaking to revise and update its regulations relating to methods of payment, filing procedures, electronic service of Board decisions, and fees for copying, printing, and related services. Payment, Filing, & Serv. Procedures ( NPRM ), EP 747 (STB served Aug. 24, 2018) (83 FR 42852). The Board received comments on the NPRM from the National Association of Reversionary Property Owners (NARPO), Gordon MacDougall, and the Western Coal Traffic League (WCTL).

After considering the comments and reviewing the proposed procedures, the Board is adopting a final rule with modifications to the electronic service (e-service) proposal. The final rule also removes references to “computer diskettes.” The text of the final rule is below.

The proposed rule. The NPRM outlined proposals intended to promote increased use of electronic filing and payment systems, which would result in cost savings to both the Board and the public. 2 These proposals would also increase the accessibility of information relating to proceedings and functions of the Board.

Specifically, the NPRM proposed to revise Board filing fee payment options by adding an electronic payment option. NPRM, EP 747, slip op. at 2-4. The NPRM explained that the Board would implement the electronic payment option through Pay.gov , a website operated by the U.S. Department of the Treasury that allows payment of government fees through bank accounts, credit cards, debit cards with a MasterCard or Visa logo, and digital wallet. Given the availability and efficiency of an electronic payment option, the NPRM proposed to eliminate billing accounts and direct credit card payments to the Board. NPRM, EP 747, slip op. at 3. The NPRM proposed corresponding payment option changes to the regulations governing fees for recordations, water carrier tariffs, and contract summaries.

The NPRM explained that these payment option changes would eliminate the need to require paper filings for initial pleadings and other pleadings with associated fees, thereby allowing expanded use of electronic filing (e-filing). NPRM, EP 747, slip op. at 4-6. The Board proposed to allow all filings (subject to the current limit of 100 megabytes or less)  3 to be e-filed, unless alternative filing procedures are required. The proposed rule would also require that any fees associated with e-filings be paid electronically.

The NPRM also proposed to modify the requirements for paper filers to reduce the burden on those filers. NPRM, EP 747, slip op. at 6-7. The Board proposed to eliminate the requirement to file 10 copies of paper filings in most proceedings and instead require paper filers generally to file only the original paper filing. 4 The proposed changes would also eliminate the requirement that electronic versions of filings that are 20 or more pages in length be submitted on compact discs or 3.5-inch floppy diskettes. Instead, the proposed regulations would require filings that are 20 or more pages in length to be accompanied by electronic versions and would direct filers to the Board's website for information on how to provide those electronic versions. The NPRM also proposed to revise outdated format requirements regarding the submission of evidence or workpapers by directing filers to the Board's website for information on acceptable formats for such evidence.

The Board also proposed e-service of decisions. NPRM, EP 747, slip op. at 7-8. Parties who consent to e-service in a particular proceeding would be emailed decisions in that proceeding, instead of receiving paper service of Board decisions by mail. 5 The NPRM explained that e-filing by a party in a proceeding would constitute that party's consent to e-service. The Board's updated e-filing form would allow users to provide email address(es) to be used for e-service. Id. In addition, the NPRM explained that if a party makes a paper filing and includes an email address(es) on that filing, a letter would be sent informing that filer that such email address(es) would be used on the service list for that proceeding. The letter would explain that the filer may opt out of e-service via written notification to the Board or provide a different email address(es) for e-service. For proceedings that are open at the time these rules become effective, the Board proposed that a party's email address would be added to the e-service list if the party: (1) Utilizes e-filing or (2) does not opt out of e-service after making a paper filing that includes an email address. The proposal provided that paper service would continue for parties who do not consent to e-service in the manners discussed above.

The NPRM proposed to modify the charge for copying and printing tariffs, reports, and other public documents at 49 CFR 1002.1(d) at a rate of $0.25 per letter or legal size exposure, with a minimum charge of $7.50. NPRM, EP 747, slip op. at 8, 11. Also, the NPRM proposed making the first 100 pages of copying or printing under § 1002.1(d) free. Id. at 8. With respect to documents not considered public under the Board's Freedom of Information Act regulations, the NPRM proposed reducing the charge to $0.25 per letter or legal size exposure, with a minimum charge of $7.50 for copying and printing documents. See 49 CFR 1002.1(f)(7) below.

Lastly, the Board proposed minor updates to obsolete language, including addresses and telephone numbers. See 49 CFR 1012.2(a); 1012.3(b)(5); 1132.1; 1312.4.

Comments. As discussed below, the comments generally sought clarification and minor modifications concerning the proposed procedures.

NARPO asks whether electronic payments through Pay.gov include the option of electronic wire transfers. (NARPO Comments 1.) Pay.gov accepts the transfer of funds through bank accounts, which is a similar process to wire transfers. 6

MacDougall notes the Board's goal of increased use of e-filing and states that the Board should not discourage filings made in other forms because filing entities may not be familiar with e-filing and/or email. (MacDougall Comments 2-3.) As proposed in the NPRM, the Board would encourage the use of e-filing but continue to accept paper filings at this time. To assist the public, the Board's website provides guidance regarding filing procedures. In addition, filers can contact Board staff by phone for filing assistance.

Next, MacDougall raises concerns that requiring paper filers to file only an original copy will negatively affect availability of filings to Board staff and the public. ( Id. at 3.) MacDougall's concerns are misplaced. Board staff will continue to ensure that filings, whether e-filed or filed in paper, are promptly and appropriately distributed within the agency. Similarly, elimination of the paper copies requirement will not materially affect the timing of posting of new filings to the Board's website or availability for public examination. The Board strives to efficiently process both paper filings and e-filings, and generally filings are posted to the Board's website within one business day of submission.

Lastly, MacDougall suggests revising the Board's waiver and filing fee rules to include a grace period “for honest mistakes in the submission of an incorrect fee.” ( Id. at 3-4.) The Board concludes that this modification is not necessary. Board staff is available for assistance with determining the correct fee prior to filing, and with correction of any errors discovered after filing. 7

WCTL generally supports the Board's proposal, with certain caveats. Regarding the Board's proposal to remove outdated language at current 49 CFR 1104.3(b) (requiring the submission of workpapers in formats that are not commonly used today), WCTL recognizes that the format for electronic workpaper submission should be fluid, but it expresses concern that the Board has not provided details regarding the submission of electronic workpapers under 100 megabytes and instead has provided a placeholder in the proposed regulations that directs filers to the Board's website. (WCTL Comments 2.) WCTL suggests that the Board provide those details before finalizing changes to the existing rule. ( Id. at 2, 10.) As stated in the NPRM, electronic workpapers under 100 megabytes may be submitted via e-filing and will be accepted by email, compact disc, or USB flash drive. NPRM, EP 747, slip op. at 5, 6 n.15. Guidance regarding acceptable software formats, which will be posted on the Board's website by the effective date of the new rule, will generally reflect current practices, and Board staff will be available to provide assistance. In rate reasonableness proceedings, files are typically submitted via hard drive or flash drive and those formats will continue to be acceptable. 8 The Board will continue to accept common electronic filing formats used by practitioners, and the Board will keep parties updated on improvements to its electronic systems, including updated versions of its word processing, database, and other software programs.

Next, WCTL supports the proposed expansion of e-filing but suggests that the Board should allow e-filings in excess of 100 megabytes by revising its systems or establishing a secondary system. (WCTL Comments 2, 8-9.) At this time, the Board must continue to limit the size of e-filings to 100 megabytes or less due to technical limitations in the agency's current e-filing system, which cannot support uploading larger files. 9 As the Board continues to work to improve its e-filing system, it will keep interested parties apprised of updates to technological capabilities that would allow the Board to accept e-filings larger than 100 megabytes. 10

Lastly, WCTL suggests eliminating the requirement in current 49 CFR 1104.3(a), which states that “[a]ppropriate notes or other indications shall be used so that matters shown in color on the original, but in black and white on the copies, will be accurately identified on all copies.” (WCTL Comments 11.) WCTL states that the need to identify color on the original is unnecessary for almost all applications under the Board's proposal, and that this “hold-over language” ought to be eliminated. ( Id. ) The Board agrees that due to the increase in e-filing and the proposed elimination of paper filing copies in most instances, the need for this requirement may be reduced. However, because the requirement is not burdensome and would remain helpful in those instances where paper copies are filed, the adopted rules will retain that requirement, which will now be in 49 CFR 1104.3(b).

Updates to e-service procedures. The Board is modifying the e-service procedures described in the NPRM where the Board proposed, among other things, to mail letters to certain paper filers notifying them that they would receive e-service and did not propose to include a corresponding regulation. Under both the NPRM's proposed procedure and the new procedure, two groups of filers will be deemed to have consented to e-service: (1) E-filers, and (2) paper filers that include email contact information on their filing and do not opt out of e-service via written notification. 11 With respect to the latter category, and in a departure from the Board's original proposal, the Board will not send such paper filers a letter informing them that the email address(es) on the filing would be used on the service list. The Board is also adopting a new regulation at 49 CFR 1104.12, in which the Board describes these e-service procedures and specifies that paper filers that have not consented to e-service or that have opted out will be served by first-class mail. It is anticipated that the new regulation and procedures will increase participation in e-service and reduce the Board's costs.

The NPRM stated that, for proceedings that are open at the effective date of the rule, a party's email address would be added to the e-service list if the party: (1) Utilizes e-filing or (2) does not opt out of e-service after making a paper filing that includes an email address. Parties wishing to ensure that they receive e-service in open proceedings are encouraged to e-file a single letter listing all the docket(s) in which they would like to receive e-service.

Finally, the Board encourages anyone who anticipates receiving e-service from the Board to add the email addresses eservice@stb.dot.gov and eservice@stb.gov to their email contact information. 12 This will help prevent emails from those addresses being sent to junk mail folders.

Updates to additional regulations. In the NPRM, the Board proposed to no longer require that electronic versions of documents or pleadings be submitted on compact discs or 3.5-inch floppy diskettes. NPRM, slip op. at 6 (describing changes to section 1104.3(b)). For consistency with those changes, the final rule also removes outdated references to diskettes in additional regulations in 49 CFR parts 1150 and 1152, governing transactions that involve the creation of Class I or Class II rail carriers and procedures for abandonments or discontinuances of rail service. Specifically, the final rule eliminates the requirement that a copy of the draft Federal Register notice be submitted “as data contained on a computer diskette.” See 49 CFR 1152.22(i), 1152.60(c). Similarly, the final rule also removes this same language from the procedures governing applications for land-use-exemption permits at 49 CFR 1155.21(e).

Conclusion. The Board will adopt the rule modifications proposed in the NPRM, subject to the refinements noted above. The Board anticipates that the changes in this final rule will, among other things, significantly increase the percentage of electronic filings the agency receives, the use of electronic payment systems, and the efficiency of service of Board decisions. After implementation of this final rule, the Board will endeavor on an ongoing basis to improve its filing and information systems in ways that will add value to the public by monitoring the number of paper filings received, assessing the effectiveness of and participation in electronic service of decisions, and reviewing the technological limitations and functionality of the e-filing system.

As the Board stated in the NPRM, these revisions to the regulations are not subject to the provisions of the Administrative Procedure Act (APA) requiring notice and opportunity for public comment. See 5 U.S.C. 553(b)(3)(A). However, the proposed rules were published for notice and comment because the Board determined that it would be useful to do so. Regardless, because the Board determined that notice and comment were not required under the APA, the requirements of the Regulatory Flexibility Act, as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 601-612, also do not apply.

It is ordered:

1. The Board adopts the final rule as set forth in this decision. Notice of the adopted rule will be published in the Federal Register .

2. This decision is effective on May 10, 2019.

For the reasons set forth in the preamble, the Surface Transportation Board amends parts 1002, 1012, 1104, 1110, 1111, 1113, 1130, 1132, 1150, 1152, 1155, 1182, 1244, 1312, and 1313 of title 49, chapter X, of the Code of Federal Regulations as follows:

We solicit comments or suggestions from the public. To ensure that any action resulting from this interim rule will be as accurate and as effective as possible, we request that you send relevant information for our consideration. The comments that will be most useful and likely to influence our decisions are those that you support by quantitative information or studies and those that include citations to, and analyses of, the applicable laws and regulations. Please make your comments as specific as possible and explain the basis for them. In addition, please include sufficient information with your comments to allow us to authenticate any scientific or commercial data you include.

You must submit your comments and materials concerning this interim rule by one of the methods listed above in ADDRESSES . We will not accept comments sent by email or fax or to an address not listed in ADDRESSES . If you submit a comment via http://www.regulations.gov, your entire comment—including any personal identifying information, such as your address, telephone number, or email address—will be posted on the website. When you submit a comment, the system receives it immediately. However, the comment will not be publicly viewable until we post it, which might not occur until several days after submission.

If you mail or hand-carry a hardcopy comment directly to us that includes personal information, you may request at the top of your document that we withhold this information from public review. However, we cannot guarantee that we will be able to do so. To ensure that the electronic docket for this rulemaking is complete and all comments we receive are publicly available, we will post all hardcopy comments on http://www.regulations.gov.

In addition, comments and materials we receive, as well as supporting documentation used in preparing this interim rule, will be available for public inspection in two ways:

(1) You can view them on http://www.regulations.gov. Search for FWS-R7-MB-2019-0005, which is the docket number for this rulemaking.

(2) You can make an appointment, during normal business hours, to view the comments and materials in person at the Division of Migratory Bird Management, MS: MB, 5275 Leesburg Pike, Falls Church, VA 22041-3803; (703) 358-1714.

As stated above in more detail, before including your address, phone number, email address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.

This rulemaking is necessary because, by law, the migratory bird harvest season is closed unless opened by the Secretary of the Interior, and the regulations governing subsistence harvest of migratory birds in Alaska are subject to public review and annual approval. This rule establishes regulations for the taking of migratory birds for subsistence uses in Alaska during the spring and summer of 2019. This rule also sets forth a list of migratory bird season openings and closures in Alaska by region.

To meet the April 2, 2019, opening season for Alaska subsistence harvest of migratory game birds, we are publishing an interim rule. We were not able to publish a proposed rule in 2019 due to unforeseen time constraints. We have engaged with stakeholders and they are understanding of this circumstance. We are providing an opportunity for public comment (30 days) with this interim rule (see DATES , above). This will help ensure that if we receive any public comments that we could propose those changes in the 2020 spring and summer subsistence harvest rule.

Our February 1, 2018, proposed rule (83 FR 4623) provided the public the opportunity to comment on the provisions in this interim rule. For subpart D of part 92 in title 50 of the Code of Federal Regulations (50 CFR part 92, subpart D), the provisions in this interim rule are the same as those set forth in our March 30, 2018, final rule (83 FR 13684); the amendments in the March 30, 2018, final rule to 50 CFR part 92, subpart C do not need to be readopted here. The March 30, 2018, final rule is the most recent Alaska migratory bird subsistence harvest final rule, and the public is familiar with it, having already commented on it. The public, having commented on the 2018 final rule and other previous final rules, also had an opportunity to comment on the substance of the current interim rule. We also addressed the three relevant comments received in the 2018 final rule. Furthermore, these Alaska subsistence harvest regulations have generally been similar the past several years, and with no significant controversy from the public. We do not intend to use an interim rule again for this purpose, as doing so prevents modifications to the regulations implemented in consultation with the Alaskan communities. We regret any confusion that this deviation from the normal rulemaking process may cause. In future Alaska migratory bird subsistence harvest rulemaking actions, we expect to have a proposed rule earlier in the process to ensure meeting the April 2 opening date for the season.

Again, it would not be possible for us to publish a proposed rule, with a 30-day comment period, and then publish a final rule, by April 2. Therefore, without this interim rule, the subsistence hunting of migratory birds in Alaska during the normal season, which begins on April 2 each year, would be in violation of the Migratory Bird Treaty Act (MBTA; 16 U.S.C. 703-712). To respect the subsistence hunt of many rural Alaskans, either for their cultural or religious exercise, sustenance, and/or materials for cultural use ( e.g., handicrafts), the Department of the Interior finds that it is in the public interest to publish this interim rule. Under 5 U.S.C. 553(b), the Administrative Procedure Act allows an agency to make a rule effective without a proposed rule for good cause if “contrary to the public interest.” We find that the delay associated with public comment on a proposed rule to open the Alaska migratory bird subsistence harvest by April 2 is contrary to the public interest, and therefore the “good cause” exception under 5 U.S.C. 553(b) applies.

In addition, we have good cause to waive the standard 30-day effective date for this interim rule consistent with 5 U.S.C. 553(d)(3) of the Administrative Procedure Act, and this rule will, therefore, take effect on April 2, 2019. This rule relieves a restriction, as just described. Delaying the effective date for 30 days would have detrimental effects on Alaskans seeking to conduct subsistence harvest during the season that begins April 2, 2019, and on the businesses that support this activity.

While we are taking these steps to ensure Alaskan subsistence hunters do not violate the MBTA, we invite public comment as described above in DATES and ADDRESSES . Following our consideration of the comments received, we will respond to public comments, and based on public comments received, may revise this interim rule.

Background information, including past events leading to this rulemaking, accomplishments since the Migratory Bird Treaties with Canada and Mexico were amended, and a history, were originally addressed in the Federal Register on August 16, 2002 (67 FR 53511) and most recently on March 30, 2018 (83 FR 13684).

Recent Federal Register documents and all final rules setting forth the annual harvest regulations are available at http://www.fws.gov/alaska/ambcc/regulations.htm or by contacting the person listed under FOR FURTHER INFORMATION CONTACT .

The U.S. Fish and Wildlife Service is establishing migratory bird subsistence-harvest regulations in Alaska for the 2019 season. These regulations allow for the continuation of customary and traditional subsistence uses of migratory birds in Alaska and prescribe regional information on when and where the harvesting of birds may occur. These regulations were developed under a co-management process involving the Service, the Alaska Department of Fish and Game, and Alaska Native representatives.

The Alaska Migratory Bird Co-management Council (Co-management Council) did not hold its annual spring meeting in 2018 due to budget constraints. The Co-management Council did consider two proposals to administratively correct two aspects of the closed season in the Yukon/Kuskokwim Delta region in the 2019 regulations, and voted to approve these via teleconference and email. These proposals will be included in next year's rulemaking.

This interim rule contains no changes from the final regulation amendments published on March 30, 2018 (83 FR 13684), for 50 CFR part 92, subpart D.

Eligibility to harvest under the regulations established in 2003 was limited to permanent residents, regardless of race, in villages located within the Alaska Peninsula, Kodiak Archipelago, the Aleutian Islands, and in areas north and west of the Alaska Range (50 CFR 92.5). These geographical restrictions opened the initial migratory bird subsistence harvest to about 13 percent of Alaska residents. The most populated portions of Alaska such as Anchorage, the Matanuska-Susitna and Fairbanks North Star boroughs, the Kenai Peninsula roaded area, the Gulf of Alaska roaded area, the town of Kodiak, and Southeast Alaska were excluded from eligible subsistence harvest areas.

In response to petitions requesting inclusion in the harvest in 2004, we added 13 additional communities consistent with the criteria set forth at 50 CFR 92.5(c). These communities were Gulkana, Gakona, Tazlina, Copper Center, Mentasta Lake, Chitina, Chistochina, Tatitlek, Chenega, Port Graham, Nanwalek, Tyonek, and Hoonah, with a combined population of 2,766. In 2005, we added three additional communities for glaucous-winged gull egg gathering only in response to petitions requesting inclusion. These southeastern communities were Craig, Hydaburg, and Yakutat, with a combined population of 2,459, according to the latest census information at that time.

In 2007, we enacted the Alaska Department of Fish and Game's request to expand the Fairbanks North Star Borough excluded area to include the Central Interior area. This action excluded the following communities from participation in this harvest: Big Delta/Fort Greely, Healy, McKinley Park/Village, and Ferry, with a combined population of 2,812.

In 2012, we received a request from the Native Village of Eyak to include Cordova, Alaska, for a limited season that would legalize the traditional gathering of gull eggs and the hunting of waterfowl during spring. This request resulted in a new, limited harvest of spring waterfowl and gull eggs starting in 2014.

We have monitored subsistence harvest for more than 25 years through the use of household surveys in the most heavily used subsistence harvest areas, such as the Yukon-Kuskokwim Delta.

Based on our monitoring of the migratory bird species and populations taken for subsistence, we find that this rule will provide for the preservation and maintenance of migratory bird stocks as required by the MBTA. The MBTA's 16 U.S.C. 712(1) provision states that the Service, “is authorized to issue such regulations as may be necessary to assure that the taking of migratory birds and the collection of their eggs, by the indigenous inhabitants of the State of Alaska, shall be permitted for their own nutritional and other essential needs, as determined by the Secretary of the Interior, during seasons established so as to provide for the preservation and maintenance of stocks of migratory birds.” Communication and coordination between the Service, the Co-management Council, and the Pacific Flyway Council have allowed us to set harvest regulations to ensure the long-term viability of the migratory bird stocks. In addition, Alaska migratory bird subsistence harvest rates have continued to decline since the inception of the subsistence-harvest program, reducing concerns about the program's consistency with the preservation and maintenance of stocks of migratory birds.

As for the ensuring the conservation of species listed under the Endangered Species Act of 1973, as amended (ESA; 16 U.S.C. 1531 et seq. ), spectacled eiders ( Somateria fischeri ) and the Alaska-breeding population of Steller's eiders ( Polysticta stelleri ) are listed as threatened species. Their migration and breeding distribution overlap with areas where the spring and summer subsistence migratory bird hunt is open in Alaska. Both species are closed to hunting, although harvest surveys and Service documentation indicate both species are taken in several regions of Alaska. We have determined that this rule complies with the ESA (see Endangered Species Act Consideration discussion, below).

The Service has dual objectives and responsibilities for authorizing a subsistence harvest while protecting migratory birds and threatened species. Although these objectives continue to be challenging, they are not irreconcilable, provided that: (1) Regulations continue to protect threatened species; (2) measures to address documented threats are implemented; and (3) the subsistence community and other conservation partners commit to working together. With these objectives in mind, the Service, working with North Slope partners, developed measures in 2009 to further reduce the potential for shooting mortality or injury of closed species. These conservation measures included: (1) Increased waterfowl hunter outreach and community awareness through partnering with the North Slope Migratory Bird Task Force; and (2) continued enforcement of the migratory bird regulations that are protective of listed eiders.

This rule continues to focus on the North Slope from Utqiagvik (formerly known as Barrow) to Point Hope because Steller's eiders from the listed Alaska breeding population are known to breed and migrate there, and harvest survey data and direct observations indicate take during subsistence harvest has occurred there. These regulations are designed to address several ongoing eider-management needs by clarifying for subsistence users that (1) Service law enforcement personnel have authority to verify species of birds possessed by hunters, and (2) it is illegal to possess any species of bird closed to harvest. This rule also describes how the Service's existing authority of emergency closure will be implemented, if necessary, to protect Steller's eiders. We are always willing to discuss regulations with our partners on the North Slope to ensure protection of closed species while providing subsistence hunters an opportunity to maintain the culture and traditional migratory bird harvest of the community. These regulations pertaining to bag checks and possession of illegal birds are deemed necessary to monitor take of closed eider species during the subsistence hunt.

In collaboration with North Slope partners, a number of conservation efforts have been implemented to raise awareness and educate hunters in and around Utqiagvik on Steller's eider conservation via the local bird outreach festival, meetings, radio shows, signs, school visits, and one-on-one contacts. Limited intermittent monitoring on the North Slope, focused primarily at Utqiagvik, found no evidence that listed eiders were shot in 2009 through 2012; one Steller's eider and one spectacled eider were found shot during the summer of 2013; one Steller's eider was found shot in 2014; and no listed eiders were found shot in 2015 through 2018. Elsewhere in Alaska, one spectacled eider that appeared to have been shot was found dead on the Yukon-Kuskokwim Delta in 2015.

The Service notes that progress is being made with the other eider conservation measures, including partnering with the North Slope Migratory Bird Task Force, for increased waterfowl-hunter awareness, continued enforcement of the regulations, and in-season verification of the harvest. However, Service staff have documented significant availability of lead shot in waterfowl rounds for sale in communities on the Yukon-Kuskokwim Delta and North Slope. Mortality, sickness, and poisoning from lead exposure have been documented in many waterfowl species, including threatened spectacled and Steller's eiders.

Lead shot has been banned nationally for waterfowl hunting since 1991, and this ban is further supported by local bans proposed by the North Slope Borough Fish and Wildlife Management Committee and the Association of Village Council Presidents—Waterfowl Conservation Committee since 2006 and 2007, respectively. The Service will work with partners and to increase our education, outreach, and enforcement efforts to ensure these bans are effective, and that subsistence waterfowl hunting is conducted using nontoxic shot.

The longstanding general emergency-closure provision at 50 CFR 92.21 specifies that the harvest may be closed or temporarily suspended upon finding that a continuation of the regulation allowing the harvest would pose an imminent threat to the conservation of any migratory bird population. With regard to Steller's eiders, the regulations at 50 CFR 92.32, carried over from the past 8 years, clarify that we would take action under 50 CFR 92.21 as is necessary to prevent further take of Steller's eiders, and that action could include temporary or long-term closures of the harvest in all or a portion of the geographic area open to harvest. When and if mortality of threatened eiders is documented, we would evaluate each mortality event by criteria such as cause, quantity, sex, age, location, and date. We would consult with the Co-management Council when we are considering an emergency closure. If we determine that an emergency closure is necessary, we would design it to minimize its impact on the subsistence harvest.

Section 7 of the Endangered Species Act (16 U.S.C. 1536) requires the Secretary of the Interior to “review other programs administered by him (or her) and utilize such programs in furtherance of the purposes of the Act” and to “insure that any action authorized, funded, or carried out . . . is not likely to jeopardize the continued existence of any endangered species or threatened species or result in the destruction or adverse modification of [critical] habitat. . . . ” We conducted an intra-agency consultation with the Service's Fairbanks Fish and Wildlife Field Office on this interim rule. The consultation was completed with a biological opinion that concluded the interim rule and conservation measures are not likely to jeopardize the continued existence of Steller's and spectacled eiders or result in the destruction or adverse modification of designated critical habitat. Based on comments submitted, we may confirm this finding in our future notice responding to public comments.

We derive our authority to issue these regulations from the Migratory Bird Treaty Act of 1918, at 16 U.S.C. 712(1), which authorizes the Secretary of the Interior, in accordance with the treaties with Canada, Mexico, Japan, and Russia, to “issue such regulations as may be necessary to assure that the taking of migratory birds and the collection of their eggs, by the indigenous inhabitants of the State of Alaska, shall be permitted for their own nutritional and other essential needs, as determined by the Secretary of the Interior, during seasons established so as to provide for the preservation and maintenance of stocks of migratory birds.”

This rule is not subject to the requirements of Executive Order 13771 (82 FR 9339, February 3, 2017) because this rule establishes annual harvest limits related to routine hunting or fishing.

Executive Order 12866 provides that the Office of Information and Regulatory Affairs (OIRA) will review all significant rules. OIRA has determined that this rule is not significant.

Executive Order 13563 reaffirms the principles of E.O. 12866 while calling for improvements in the nation's regulatory system to promote predictability, to reduce uncertainty, and to use the best, most innovative, and least burdensome tools for achieving regulatory ends. The executive order directs agencies to consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public where these approaches are relevant, feasible, and consistent with regulatory objectives. E.O. 13563 emphasizes further that regulations must be based on the best available science and that the rulemaking process must allow for public participation and an open exchange of ideas. We have developed this rule in a manner consistent with these requirements.

The Department of the Interior certifies that this rule will not have a significant economic impact on a substantial number of small entities as defined under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). A regulatory flexibility analysis is not required. Accordingly, a Small Entity Compliance Guide is not required. This rule legalizes a pre-existing subsistence activity, and the resources harvested will be consumed.

This rule is not a major rule under 5 U.S.C. 804(2), the Small Business Regulatory Enforcement Fairness Act. This rule:

(a) Will not have an annual effect on the economy of $100 million or more. It legalizes and regulates a traditional subsistence activity. It will not result in a substantial increase in subsistence harvest or a significant change in harvesting patterns. The commodities that will be regulated under this rule are migratory birds. This rule deals with legalizing the subsistence harvest of migratory birds and, as such, does not involve commodities traded in the marketplace. A small economic benefit from this rule derives from the sale of equipment and ammunition to carry out subsistence hunting. Most, if not all, businesses that sell hunting equipment in rural Alaska qualify as small businesses. We have no reason to believe that this rule will lead to a disproportionate distribution of benefits.

(b) Will not cause a major increase in costs or prices for consumers; individual industries; Federal, State, or local government agencies; or geographic regions. This rule does not deal with traded commodities and, therefore, will not have an impact on prices for consumers.

(c) Will not have significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based enterprises to compete with foreign-based enterprises. This rule deals with the harvesting of wildlife for personal consumption. It will not regulate the marketplace in any way to generate substantial effects on the economy or the ability of businesses to compete.

We have determined and certified under the Unfunded Mandates Reform Act (2 U.S.C. 1501 et seq. ) that this rule will not impose a cost of $100 million or more in any given year on local, State, or tribal governments or private entities. The rule will not have a significant or unique effect on State, local, or tribal governments or the private sector. A statement containing the information required by the Unfunded Mandates Reform Act is not required. Participation on regional management bodies and the Co-management Council requires travel expenses for some Alaska Native organizations and local governments. In addition, they assume some expenses related to coordinating involvement of village councils in the regulatory process. Total coordination and travel expenses for all Alaska Native organizations are estimated to be less than $300,000 per year. In a notice of decision (65 FR 16405; March 28, 2000), we identified 7 to 12 partner organizations (Alaska Native nonprofits and local governments) to administer the regional programs. The Alaska Department of Fish and Game also incurs expenses for travel to Co-management Council and regional management body meetings. In addition, the State of Alaska would be required to provide technical staff support to each of the regional management bodies and to the Co-management Council. Expenses for the State's involvement may exceed $100,000 per year, but should not exceed $150,000 per year. When funding permits, we make annual grant agreements available to the partner organizations and the Alaska Department of Fish and Game to help offset their expenses.

Under the criteria in Executive Order 12630, this rule will not have significant takings implications. This rule is not specific to particular land ownership, but applies to the harvesting of migratory bird resources throughout Alaska. A takings implication assessment is not required.

Under the criteria in Executive Order 13132, this rule does not have sufficient federalism implications to warrant the preparation of a federalism summary impact statement. We discuss effects of this rule on the State of Alaska in the Unfunded Mandates Reform Act section, above. We worked with the State of Alaska to develop these regulations. Therefore, a federalism summary impact statement is not required.

The Department, in promulgating this rule, has determined that it will not unduly burden the judicial system and that it meets the requirements of sections 3(a) and 3(b)(2) of Executive Order 12988.

We implemented the amended treaty with Canada with a focus on local involvement. The treaty calls for the creation of management bodies to ensure an effective and meaningful role for Alaska's indigenous inhabitants in the conservation of migratory birds. According to the Letter of Submittal, management bodies are to include Alaska Native, Federal, and State of Alaska representatives as equals. They develop recommendations for, among other things: Seasons and bag limits, methods and means of take, law enforcement policies, population and harvest monitoring, education programs, research and use of traditional knowledge, and habitat protection. The management bodies involve village councils to the maximum extent possible in all aspects of management. To ensure maximum input at the village level, we required each of the 11 participating regions to create regional management bodies consisting of at least one representative from the participating villages. The regional management bodies meet twice annually to review and/or submit proposals to the Statewide body.

In accordance with the President's memorandum of April 29, 1994, “Government-to-Government Relations with Native American Tribal Governments” (59 FR 22951), E.O. 13175, and 512 DM 2, we are evaluating possible effects on Federally recognized Indian tribes. The provisions in this Interim Rule are the same as those set forth in last year's final Rule, where we consulted with the tribes. This rule-making process is collaborative with the Tribes, and we will continue to consult with the Tribes as we affirm the Interim Rule.

This rule does not contain any new collections of information that require Office of Management and Budget (OMB) approval under the PRA (44 U.S.C. 3501 et seq. ). OMB has previously approved the information collection requirements associated with voluntary annual household surveys used to determine levels of subsistence take and assigned OMB Control No. 1018-0124 (expires 10/31/2019). You may view the information collection requirements at http://www.reginfo.gov/public/do/PRAMain. We may not conduct or sponsor and you are not required to respond to a collection of information unless it displays a currently valid OMB control number.

The annual regulations and options are considered in an October 2018 environmental assessment, “Managing Migratory Bird Subsistence Hunting in Alaska: Hunting Regulations for the 2019 Spring/Summer Harvest.” Copies are available from the person listed under FOR FURTHER INFORMATION CONTACT or at http://www.regulations.gov.

Executive Order 13211 requires agencies to prepare Statements of Energy Effects when undertaking certain actions. This is not a significant regulatory action under this Executive Order; it allows only for traditional subsistence harvest and improves conservation of migratory birds by allowing effective regulation of this harvest. Further, this rule is not expected to significantly affect energy supplies, distribution, or use. Therefore, this action is not a significant energy action under Executive Order 13211, and a Statement of Energy Effects is not required.

For the reasons set out in the preamble, we amend title 50, chapter I, subchapter G, of the Code of Federal Regulations as follows:

NMFS manages the groundfish fishery in the GOA exclusive economic zone according to the Fishery Management Plan for Groundfish of the Gulf of Alaska (FMP) prepared by the North Pacific Fishery Management Council under authority of the Magnuson-Stevens Fishery Conservation and Management Act. Regulations governing fishing by U.S. vessels in accordance with the FMP appear at subpart H of 50 CFR part 600 and 50 CFR part 679.

The B season allowance of the 2019 total allowable catch (TAC) of pollock in Statistical Area 610 of the GOA is 848 metric tons (mt) as established by the final 2019 and 2020 harvest specifications for groundfish in the GOA (84 FR 9416, March 14, 2019). In accordance with § 679.20(a)(5)(iv)(B), the Regional Administrator hereby increases the B seasonal apportionment for Statistical Area 610 by 54 mt to account for the underharvest of the TAC in Statistical Area 630 in the A season. This increase is in proportion to the estimated pollock biomass and is not greater than 20 percent of the B seasonal apportionment of the TAC in Statistical Area 610. Therefore, the revised B seasonal apportionment of pollock TAC in Statistical Area 610 is 902 mt (848 mt plus 54 mt).

In accordance with § 679.20(d)(1)(i), the Regional Administrator has determined that the B season allowance of the 2019 TAC of pollock in Statistical Area 610 of the GOA will soon be reached. Therefore, the Regional Administrator is establishing a directed fishing allowance of 802 mt and is setting aside the remaining 100 mt as bycatch to support other anticipated groundfish fisheries. In accordance with § 679.20(d)(1)(iii), the Regional Administrator finds that this directed fishing allowance has been reached. Consequently, NMFS is prohibiting directed fishing for pollock in Statistical Area 610 of the GOA.

While this closure is effective, the maximum retainable amounts at § 679.20(e) and (f) apply at any time during a trip.

This action responds to the best available information recently obtained from the fishery. The Assistant Administrator for Fisheries, NOAA (AA), finds good cause to waive the requirement to provide prior notice and opportunity for public comment pursuant to the authority set forth at 5 U.S.C. 553(b)(B) as such requirement is impracticable and contrary to the public interest. This requirement is impracticable and contrary to the public interest as it would prevent NMFS from responding to the most recent fisheries data in a timely fashion and would delay the closure of directed fishing for pollock in Statistical Area 610 of the GOA. NMFS was unable to publish a notice providing time for public comment because the most recent, relevant data only became available as of March 28, 2019.

The AA also finds good cause to waive the 30-day delay in the effective date of this action under 5 U.S.C. 553(d)(3). This finding is based upon the reasons provided above for waiver of prior notice and opportunity for public comment.

This action is required by § 679.20 and is exempt from review under Executive Order 12866.