I. Background on the Swap Margin Rule

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) required the OCC, Board, FDIC, FCA, and FHFA (each, an agency, and collectively, the agencies) to jointly adopt rules that establish capital and margin requirements for swap entities that are prudentially regulated by one of the agencies (covered swap entities). 1 These capital and margin requirements apply to swaps that are not cleared by a registered derivatives clearing organization or a registered clearing agency (non-cleared swaps). 2 For the remainder of this preamble, the term “non-cleared swaps” refers to non-cleared swaps and non-cleared security-based swaps unless the context requires otherwise.

The Basel Committee on Banking Supervision (BCBS) and the Board of the International Organization of Securities Commissions (IOSCO) established an international framework for margin requirements on non-cleared derivatives in September 2013 (BCBS/IOSCO framework). 3 Following the establishment of the BCBS/IOSCO framework, on November 30, 2015, the agencies published regulations that require swap dealers and security-based swap dealers under the agencies' respective jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared (Swap Margin Rule or Rule), which includes many of the principles and other aspects of the BCBS/IOSCO framework. 4 In particular, the Swap Margin Rule adopted the implementation schedule set forth in the BCBS/IOSCO framework, including the revised implementation schedule adopted on March 18, 2015. 5

The Swap Margin Rule established an effective date of April 1, 2016, with a phased-in compliance schedule for the initial and variation margin requirements. 6 On or after March 1, 2017, all covered swap entities were required to comply with the variation margin requirements for transactions with other swap entities and financial end user counterparties. The Swap Margin Rule presently requires all covered swap entities to comply with the initial margin requirements for non-cleared swaps with all financial end users with a material swaps exposure and with all swap entities by September 1, 2020.

The Swap Margin Rule's requirements generally apply only to a non-cleared swap entered into on or after the applicable compliance date. 7 A non-cleared swap entered into prior to an entity's applicable compliance date is essentially “grandfathered” by this regulatory provision, in that the non-cleared swap is generally not subject to the margin requirements in the Swap Margin Rule (legacy swap). However, the agencies explained in the preamble of the Swap Margin Rule that a legacy swap that is later amended or novated on or after the applicable compliance date should be subject to the requirements of the Swap Margin Rule, in the interests of preventing evasion of the Rule's margin requirements. 8

The Swap Margin Rule has recently been amended to (1) provide relief to legacy swaps that are amended to achieve compliance with final rules that established restrictions on and requirements for certain non-cleared swaps and certain other qualified financial contracts of U.S. global systemically important banking organizations and their subsidiaries and the U.S. operations of foreign global systemically important banking organizations (QFC Rules)  9 and (2) subject to certain conditions, provide relief for entities located in the United Kingdom to transfer their existing swap portfolios that face counterparties located in the European Union to an affiliate or other related establishment located within the European Union or the United States while maintaining legacy status for such portfolios. 10 This notice of proposed rulemaking would make the following changes to the Swap Margin Rule:

First, the proposal would provide relief by allowing legacy swaps to be amended to replace existing interest rate provisions based on certain interbank offered rates (IBORs) and other interest rates that are reasonably expected to be discontinued or are reasonably determined to have lost their relevance as a reliable benchmark due to a significant impairment, without such swaps losing their legacy status.

Second, the proposal would amend the Swap Margin Rule's requirements for inter-affiliate swaps. The proposal would repeal the requirement for a covered swap entity to collect initial margin from its affiliates, but would retain the requirement that variation margin be exchanged for affiliate transactions.

Third, the proposal would add an additional initial margin compliance period for certain smaller counterparties, and clarify the existing trading documentation requirements in § _.10 of the Rule.

Fourth, the proposal would amend the Swap Margin Rule to permit amendments caused by conducting certain routine life-cycle activities that covered swap entities may conduct for legacy swaps, such as reduction of notional amounts and portfolio compression exercises, without triggering margin requirements.

These aspects of the proposal are each discussed in greater detail below.

The proposed rule would amend the Swap Margin Rule to permit a covered swap entity to amend a legacy swap in order to replace an IBOR with an alternative reference rate or rates, without triggering margin requirements.

An IBOR is a benchmark interest rate that is intended to represent banks' cost of unsecured wholesale borrowing. IBORs  11 have been used as the benchmark interest rate for a large volume and broad range of existing financial products and contracts, including for an estimated $190 trillion US Dollar LIBOR (USD LIBOR) exposure, of which $145 trillion represents over-the-counter derivatives exposure (as of year-end 2016). 12 However, the discovery of, and numerous regulatory actions to seek redress of, market manipulation and false reporting of the many IBORs, together with the post-crisis decline in liquidity in interbank unsecured funding markets, have undermined confidence in the reliability and robustness of IBORs.

As a result, the Financial Stability Board (FSB) and the U.S. Financial Stability Oversight Council (FSOC) requested that government and industry stakeholders undertake implementation of new designs and methodologies for IBORs, and the identification of viable alternative near risk-free rates in their respective currencies (U.S. dollar in the case of the United States) with a focus on the feasibility of new rate methodologies, including identification of suitable administrators and any necessary infrastructure to support these rates. 13

The Federal Reserve Board and Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC)  14 in 2014 to identify an alternative reference rate for USD LIBOR and create an implementation plan to promote the use of the selected alternative on a voluntary basis. In 2017, the ARRC selected the Secured Overnight Funding Rate (SOFR), which is designed to be representative of general funding conditions in the overnight Treasury repo market. The ARRC has noted that use of SOFR is voluntary and that other benchmarks can also be considered as potential alternatives for USD LIBOR. For example, the American Financial Exchange is offering Ameribor as a potential USD LIBOR replacement rate. 15 In addition, benchmarks such as an Overnight Bank Funding Rate were suggested by some market participants as a potential alternative.

In July 2017, the U.K. Financial Conduct Authority (UKFCA), which regulates ICE Benchmark Administration, the administrator of LIBOR, announced that it has sought commitments from LIBOR panel banks to continue to contribute to LIBOR through the end of 2021, but that the UKFCA will not use its powers to compel or persuade contributions beyond that date. The UKFCA has also warned that it may judge LIBOR to no longer be representative of its underlying market should it persist past this date. Thus, it is possible that LIBOR will cease to be published at the end of 2021. Consequently, it is likely that derivatives contracts that reference LIBOR will need to be amended to replace LIBOR.

In consideration of this uncertainty, the International Swaps and Derivatives Association, Inc. (ISDA), which produces standard documentation used by parties to derivatives contracts, indicated that it plans to amend its documentation to “include fallbacks that would apply upon the permanent discontinuation of certain key IBORs.”  16 For new non-cleared swaps, market participants will have an option to amend their documentation via an ISDA benchmark supplement. For non-cleared swaps that are already in place, market participants will have the option to utilize an ISDA protocol that will specify amended definitions, triggers, and other adjustments. 17

Due to the potential discontinuation of LIBOR at the end of 2021, covered swap entities face uncertainty about the way their swap contracts based on LIBOR and other IBORs will operate after the permanent discontinuation date without a reliable benchmark rate. A benchmark rate is a critical term for calculating payments under a swap contract. In many instances, these firms may decide to amend existing swap contracts to replace an IBOR before the IBOR becomes discontinued. Such amendments may also trigger follow-on amendments  18 that the counterparties determine are necessary to maintain the economics of the contract. Absent the proposed revisions to the Swap Margin Rule, one or more of these amendments could affect the legacy status of a non-cleared swap and make it subject to the requirements of the Rule. In order to enable covered swap entities and their counterparties to avoid the risk of future financial instability, the agencies believe it is appropriate to permit covered swap entities to amend the reference rates in a legacy swap contract and to adopt necessary follow-on amendments without converting the legacy swap into a swap subject to the Swap Margin Rule. The conditions of eligibility for the amendments are described in the next section of this SUPPLEMENTARY INFORMATION .

In recognition of the ongoing efforts to transition away from key IBORs due to their potential discontinuation, the agencies are proposing to amend the Swap Margin Rule to remove impediments that would limit the ability of covered swap entities to replace certain rates in their legacy non-cleared swaps. Specifically, the agencies propose to amend § _.1(h) to preserve the legacy status of a non-cleared swap after a covered swap entity replaces certain reference rates. Proposed § _.1(h) recognizes that these replacements could be carried out using a variety of legal mechanisms by permitting amendments accomplished by the parties': Adherence to a protocol; contractual amendment of an agreement or confirmation; or execution of a new contract in replacement of and immediately upon termination of an existing contract ( i.e., tear-up), subject to the limitations discussed below.

The proposed rule is intended to be flexible with respect to the method of amendment. The proposal would permit amendments to be executed with respect to an individual non-cleared swap or on a netting set level, as long as the other proposed criteria are met.

The proposed rule describes the type of rate that can be replaced and the accompanying changes that would be permitted. Proposed section § _.1(h)(3)(i) would permit amendments that are made solely to accommodate the replacement of an IBOR or a replacement of any other non-IBOR interest rate that a covered swap entity reasonably expects to be discontinued or reasonably determines has lost its relevance as a reliable benchmark due to a significant impairment with an alternate reference rate. 19 For example, if a benchmark administrator materially changes the inputs in the benchmark calculation because an input is no longer available, a covered swap entity may determine that the benchmark has lost its relevance as a reliable benchmark due to a significant impairment.

The proposed rule lists the IBORs that could be replaced, including LIBOR, TIBOR, BBSW, SIBOR, CDOR, EURIBOR, and HIBOR. Although the current uncertainty surrounding reference rates is tied to IBORs, the agencies are also proposing a second, more qualitative standard that would be applicable to other categories of reference rates, should the need arise in the future. This forward-looking standard is designed to encourage covered swap entities to resolve critical uncertainties before an interest rate benchmark is discontinued, or loses its market relevance, in order to minimize disturbance to the markets.

The agencies also anticipate that a reference rate may need to be replaced more than one time. For example, an IBOR may first be replaced with fallback provisions at a time when a permanent alternative rate is not yet available or amendment documentation has not yet been developed. Subsequently, fallback provisions may be replaced with permanent alternative rates. If the original rate that is being replaced is an IBOR or any other non-IBOR interest rate benchmark that otherwise meets the requirements of the proposed rule that a covered swap entity reasonably expects it to be discontinued or reasonably determines that it has lost its relevance as a reliable benchmark due to a significant impairment, the non-cleared swap may be amended more than once to accommodate ongoing developments toward a permanent replacement rate. There is no limit to the number of amendments that can take place, as long as the rate that was originally present in the non-cleared swap met the criteria in either § _.1(h)(3)(i)(A) or § _.1(h)(3)(i)(B). The proposed approach of permitting subsequent amendments takes into account that any subsequent changes to the reference rate will be the subject of negotiations among counterparties that are incentivized to agree to a reasonable rate. The proposed rule would not permit subsequent amendments that change rates or other terms of the non-cleared swap for any purpose other than for those purposes explicitly set out in § _.1(h), without triggering application of the margin requirements.

To benefit from the treatment of this new legacy swap provision, a covered swap entity must make the amendments to the non-cleared swap solely to accommodate the replacement of a rate described in the proposed rule. The proposed rule is flexible as to the incoming replacement rate by leaving it up to the counterparties to select a mutually agreeable replacement rate. The agencies expect that any replacement rate, including any subsequent replacement rate, would be agreed upon by the parties after assessing its complexity, safety and soundness, and taking into consideration associated risk management practices. 20

The agencies also acknowledge that replacing a reference rate could require other contractual changes to maintain the economics of the non-cleared swap and to preserve the relative values to the parties after incorporating changes in the reference rate. The proposed rule would permit changes that incorporate spreads and other adjustments that accompany and implement the replacement rate amendment. The rule would also permit other, more administrative and technical changes necessary to operationalize the determination of payments or other exchanges of economic value using the replacement rate, including changes to determination dates, calculation agents, and payment dates. These types of administrative changes may be necessary to adjust computations and operational provisions to reflect the differences between an IBOR and the replacement rate or rates.

The agencies envision that a number of contractual changes could be necessary to maintain the economics of the non-cleared swap, and for this reason, have drafted the proposed rule so it permits these changes. For example, legacy swaps that contain USD LIBOR may be referencing 1-day LIBOR, 1-week LIBOR, 1-month LIBOR, 2-month LIBOR, 3-month LIBOR, 6-month LIBOR or 12-month LIBOR. In these cases, a replacement rate that could be overnight and could be based, for example, on a fully secured funding rate ( e.g., SOFR) may need to incorporate a market risk (term structure) spread to substitute for the market risk component of LIBOR that is of a longer maturity than overnight. Similarly, because LIBOR is unsecured and therefore includes an element of bank credit risk, it is likely that a replacement rate that could be overnight and could be based, for example, on a fully secured funding rate ( e.g., SOFR) would need a credit spread to adjust the new reference rate to a comparable legacy LIBOR rate. This may also be the case for non-USD IBORs that could be replaced by overnight funding rates.

The proposed rule would also permit administrative and technical changes necessary for operational purposes. For example, for an overnight rate, interest on financial instruments that pay periodically ( e.g., quarterly) may be set in arrears by compounding or averaging the daily observations over the relevant period. To offer flexibility in the transition to a new reference rate, the proposed rule would permit the replacement of an IBOR or other discontinued reference rate in the floating leg of a fixed-floating rate swap, and would also permit the interest rate in the fixed leg to be modified in order to maintain the economics of the non-cleared swap.

However, the agencies do not believe that the relief being provided for rate replacement purposes should be expansively applied to encompass all changes to a legacy swap. Accordingly, the proposed rule text clarifies that the proposed safe harbor for legacy swaps would be unavailable if the amendments extend the maturity or increase the total effective notional amount of the non-cleared swap. For example, a one time, lump-sum compensatory payment in lieu of a spread adjustment would not increase the total effective notional amount and would be permitted. On the other hand, extending the maturity date to allow for additional payments to be made under the non-cleared swap would be a change outside the scope of the proposed rule.

The agencies envision that covered swap entities may carry out certain amendments, including those executed by method of termination and replacement, for the purpose of implementing changes that might qualify for more than one exemption provided under § _.1(h). When a legacy swap is replaced with a new contract that reflects more than one exemption, each of the provisions in the replacement contract that differs from the terminated contract must be permitted under the respective subsection of § _.1(h). For example, a covered swap entity and its counterparty may decide to replace an IBOR with a different reference rate and, at the same time, make changes to comply with the QFC Rules. The IBOR-related changes must comply with § _.1(h)(3) and the QFC Rules changes must comply with § _.1(h)(1) for the replacement contract to meet the “solely to comply” standard and, in the case of § _.1(h)(3), the “solely to accommodate” standard.

The proposal would amend the treatment of affiliate transactions in the Swap Margin Rule by creating an exemption from the initial margin requirements for non-cleared swaps between affiliates. 21 The proposal would, however, retain the requirement that affiliates exchange variation margin.

Currently, § _.11 of the Swap Margin Rule establishes special rules for transactions between a covered swap entity and an “affiliate,” generally defined in the Swap Margin Rule as an entity that is consolidated with the dealer on an accounting basis, or consolidated on a common basis by another entity. 22 The rules applicable to transactions with affiliates differ from the rules applicable to transactions with non-affiliates. For example, a covered swap entity is not required to post initial margin to an affiliate or use an independent custodian for most forms of initial margin collected from an affiliate. In addition, the covered swap entity does not need to apply a $50 million initial margin threshold amount to the covered swap entity's affiliates on an aggregate basis, and the covered swap entity is not required to use the ten-day holding period for calculating initial margin using an initial margin model under § _.8(d)(1). 23 Consistent with the requirements for non-cleared swaps between non-affiliated counterparties, current § _.11 requires the exchange of variation margin for affiliate transactions. As discussed in the preamble to the final Swap Margin Rule, the initial and variation margin requirements applicable to affiliate transactions were intended to advance the mandate under the Dodd-Frank Act to “offset the greater risk to swap entities from the use of swaps that are not cleared and help ensure the safety and soundness of the covered swap entity and are appropriate for the risk associated with the non-cleared swap entity.”  24 The agencies noted that the requirement to collect initial margin from, but not post initial margin to, affiliates “should help to protect the safety and soundness of covered swap entities in the event of an affiliated counterparty default.”  25 Furthermore, by requiring that inter-affiliate swaps be margined, the requirement was intended to prevent unmargined swaps from posing a risk to systemic stability. 26

Since the Swap Margin Rule was implemented, supervisory experience has shown that inter-affiliate swaps are used by covered swap entities for internal risk management purposes whereby a banking organization transfers risk to a centralized risk management function, which is considered to be a prudent risk management practice. As more covered swap entities have come into scope, the amount of inter-affiliate initial margin collected by covered swap entities has increased. This has led the affected banking organizations to borrow increasing amounts of cash in the debt markets to fund eligible collateral, placing additional demands on their asset-liability management structure and increasing their liability exposure to depositors and other creditors in the market. The removal of the inter-affiliate initial margin requirement would provide these banking organizations with additional flexibility for internal allocation of collateral. The agencies believe that such risk management practices often improve the safety and soundness of a covered swap entity, and therefore, to encourage such prudent risk management, propose to exempt inter-affiliate swaps from the Rule's initial margin requirements. The proposal does not remove the requirement that covered swap entities must collect and post initial margin with other non-affiliate covered swap entities.

The agencies also note that because other jurisdictions (as well as the U.S. market regulators) do not consistently apply swap margin rules to inter-affiliate swaps, the Rule's imposition of initial margin requirements for inter-affiliate swaps may have provided limited systemic risk benefits and put U.S. banking firms at a competitive disadvantage. For example, many covered swap entities subject to the Swap Margin Rule are banking organizations that are typically internationally active with operations in many jurisdictions that may exempt or not impose initial margin requirements on inter-affiliate transactions. 27 In addition, the imposition of initial margin requirements may depend on the banking organization's home country, presence in the United States, corporate organization, or business strategy. For example, internationally active banking organizations that have a cross-border organizational structure that relies on separate legal entities must currently use inter-affiliate swaps to centralize risk management of the overall banking organization's outward-facing derivatives exposures, whereas other internationally active banks that operate cross-border through branching structures do not have a comparable risk management need for such inter-affiliate swaps. The agencies do not believe this difference in corporate organization justifies different initial margin requirements under the Swap Margin Rule.

The agencies are not proposing to alter the Rule's uniform requirements for covered swap entities to exchange variation margin with their affiliates. The agencies note it has become routine in recent years for covered swap entities to exchange variation margin on non-cleared swaps with their affiliates. As a best practice for risk management, the exchange of variation margin serves to reflect ongoing economic transfers of current exposure for assets and liabilities between the various parts of the banking organization over the life of each non-cleared swap. This in turn contributes to the safety and soundness of the covered swap entity, and the larger banking organization as a whole. The exchange of variation margin will remain a requirement under the general rules of § _.4 and will continue to be applicable to inter-affiliate swaps.

The proposal would also supplement the definition of “affiliate” for purposes of § _.11 to include not only the definition of “affiliate” found in § _.2 of the Swap Margin Rule, focusing on consolidation under applicable accounting rules, but also the established “catch-all” legal standard for affiliation in banking focusing on the direct or indirect exercise of controlling influence over the management or policies of the controlled company. Absent this change, the Swap Margin Rule would, by its general provisions, require covered swap entities to post initial margin to, and collect initial margin from, unconsolidated entities that are treated as affiliates of the covered swap entity for other legal or regulatory purposes.

Finally, the agencies note that certain affiliate transactions are subject to the requirements of sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve's Regulation W, as these requirements continue to apply to affiliate transactions with an insured depository institution. 28 Currently, almost all U.S. covered swap entities are insured depository institutions that would be subject to Sections 23A, 23B, and Regulation W. These provisions are specifically tailored to address risks arising from transactions, including non-cleared swaps, between affiliates. As such, the agencies believe that they are the more effective tools to address risks arising from transactions between affiliates. The Board continues to consider how inter-affiliate non-cleared swaps can be addressed under Regulation W.

The agencies are proposing to give covered swap entities an additional year to implement initial margin requirements for certain smaller counterparties. The implementation of both initial and variation margin requirements started on September 1, 2016. With respect to initial margin requirements, the requirements in the Swap Margin Rule are implemented in five phases from September 1, 2016, through September 1, 2020, depending on the size of the covered swap entity's portfolio of non-cleared swaps and the counterparty's portfolio of non-cleared swaps. Variation margin requirements for all covered swap entities and counterparties were completely phased in by March 1, 2017. This schedule was consistent with BCBS/IOSCO framework when the Swap Margin Rule was adopted in 2015.

The phase-in schedule for initial margin is based on the average daily aggregate notional amount (AANA) of non-cleared swaps held in each party's market-wide portfolio, measured separately from the standpoint of the covered swap entity and the standpoint of the counterparty. 29 With the recent occurrence of the fourth phase of initial margin compliance obligations on September 1, 2019—for covered swap entities and counterparties with an AANA of $750 billion to $1.5 trillion—the group currently scheduled for the fifth phase of compliance in the upcoming year includes all remaining entities within the scope of the initial margin requirements, spanning AANAs from $8 billion up to $750 billion. 30

The industry's implementation work to execute new trading documentation to meet variation margin compliance obligations by 2017 largely excluded any rule-compliant documentation for initial margin, due to the greater operational complexity associated with “T+1” portfolio reconciliation of internally-modeled initial margin amounts and third-party segregation of initial margin collateral. The industry has raised significant concerns about the operational and other difficulties associated with beginning to exchange initial margin with the large number of relatively small counterparties encompassed in the Swap Margin Rule's fifth phase. In recognition of these difficulties, the BCBS/IOSCO framework was recently revised to permit an additional phase for smaller counterparties, and the agencies believe it is appropriate to amend the Swap Margin Rule in a similar manner. 31 Accordingly, the agencies are proposing to amend the compliance schedule to add a sixth phase of compliance for certain smaller entities that are currently subject to the “phase five” compliance deadline. The proposed amendments would require compliance by September 1, 2020, for counterparties with an AANA ranging from $50 billion up to $750 billion, while the compliance date for all other counterparties (with an AANA ranging from a “material swaps exposure” of $8 billion up to $50 billion) would be extended to September 1, 2021.

Complying with initial margin requirements creates regulatory obligations for covered swap entities and implications for their counterparties. 32 Covered swap entities must calculate initial margin to be collected and posted to determine if and when collection or posting of initial margin is required. Under § _.3, a covered swap entity must collect or post initial margin when it calculates an initial margin amount that, after subtracting the initial margin threshold amount (not including any portion of the initial margin threshold amount already applied by the covered swap entity or its affiliates to other non-cleared swaps or non-cleared security-based swaps with the counterparty or its affiliates), exceeds zero. It is only at the time at which the covered swap entity is required to collect or post initial margin pursuant to § _.3 that it is required to have completed the initial margin trading documentation required by § _.10. For the avoidance of doubt, the agencies are proposing to amend § _.10 to expressly state that a covered swap entity is not required to execute initial margin trading documentation with a counterparty prior to the time that it is required to collect or post initial margin pursuant to § _.3. 33

As discussed in the Swap Margin Rule, a covered swap entity must execute trading documentation with each counterparty that falls within the scope of the Rule's definition of a swap entity or a financial end user regarding credit support arrangements unless the swap entity or financial end user is explicitly exempt from the Rule pursuant to § _.1(d). 34 The documentation must provide the covered swap entity the contractual rights and obligations to collect and post initial and variation margin in such amounts, in such form, and under such circumstances as are required by the Rule. The documentation must also specify the methods, procedures, rules, and inputs for determining the value of each non-cleared swap for purposes of calculating variation margin and the procedures by which any disputes concerning the valuation of non-cleared swaps or the valuation of assets collected or posted as initial margin or variation margin may be resolved. Finally, the documentation must also describe the methods, procedures, rules, and inputs used to calculate initial margin for non-cleared swaps entered into between the covered swap entity and the counterparty. 35

The custody agreement requirements in § _.7 of the Swap Margin Rule require such agreements to be in place only after initial margin is required to be collected or posted pursuant to § _.3, or when initial margin is posted by a covered swap entity beyond an amount required by the Rule. The agencies expect that covered swap entities will closely monitor their exposures and take appropriate steps to ensure that trading documentation is in place at such time as initial margin is required to be exchanged pursuant to § _.3. The agencies note that this view is consistent with statements of the BCBS and IOSCO with respect to internationally agreed standards for margin requirements for non-centrally cleared derivatives. 36

The Swap Margin Rule applies to non-cleared swaps entered into on or after the applicable compliance date. As discussed above, the agencies have also expressed concerns about amendments to a swap that was entered into before the applicable compliance date if the amendments would have the effect of allowing covered swap entities and their counterparties to evade or otherwise artificially delay implementation of margin requirements. In particular, the agencies have been concerned whether market participants would amend legacy swaps, rather than entering into new ones and exchanging margin pursuant to the Rule once the legacy swaps expire according to their original terms. The industry has raised concerns whether certain amendments, particularly non-material amendments to non-economic terms, as well as amendments that are made to reduce operational or counterparty risk, such as notional reductions and portfolio compressions, could be executed while still allowing those amended legacy swaps to remain exempt from the Swap Margin Rule.

The agencies are proposing amendments to clarify the agencies' implementation of the legacy swaps provisions of the Swap Margin Rule since its adoption in 2015. These amendments are intended to permit amendments to legacy swaps arising from certain routine industry practices over the life-cycle of a non-cleared swap that are carried out for logistical reasons or risk-management purposes. The proposed amendments are those that do not raise concerns that the covered swap entity is seeking to evade or otherwise delay the application of margin requirements for non-cleared swaps.

One of these proposed amendments recognizes the legacy status of a non-cleared swap that has been amended to reflect technical changes, such as addresses, the identities of parties for delivery of formal notices, and other administrative or operational provisions of the non-cleared swap that do not alter the non-cleared swap's underlying asset or indicator, such as a security, currency, interest rate, commodity, or price index, the remaining maturity, or the total effective notional amount. The types of technical changes described are necessary to reflect changes in a counterparty's circumstances, but are not associated with a desire by either party to increase or decrease its exposure to market risk factors. While the technical changes listed above would be permitted, a change in the non-cleared swap's underlying index would not be a technical change.

The second proposed amendment recognizes the legacy status of a non-cleared swap that has been amended solely to reduce the notional amount of the non-cleared swap, without altering other terms of the original non-cleared swap. For these purposes, a reduction in notional amount may be achieved through a partial termination of the original non-cleared swap, with the remaining non-terminated non-cleared swap being able to retain its legacy status. A reduction in notional amount could also be achieved by novating a portion of the original non-cleared swap's notional amount to a third party. The original non-cleared swap, with a lower notional amount, would retain legacy status, but the novated portion would not retain legacy status.

The third proposed amendment recognizes the legacy status of non-cleared swaps that have been modified as part of certain portfolio compression exercises used as a risk management tool. In compression, offsetting trades between two or more parties are amended or torn up and replaced, which reduces the size of gross derivatives exposures and generally reduces the number or frequency of payments between parties, thus maintaining or reducing the overall risk profile of the portfolio. In general, these compression exercises make use of third party service providers to assist in the choice of trades to be modified and the risk composition of the resulting portfolios.

In a simple bilateral form of compression between two counterparties, the dealer agrees with another dealer to compress trades so that offsetting positions are cancelled and only the net amount remains, without any change to the overall market exposures. The resulting net position is documented by amending one of the original swaps. This “amended swap” method is the predominant method used in compressions of non-cleared interest rate swaps. Compression can also be done on a multilateral basis among more than two counterparties, and is often even more efficient, as trades across multiple dealers involved in a compression exercise can be offset, reducing the risk in each relationship across the various counterparties involved in the compression. The resulting net position is documented by creating a replacement swap reflecting the net position. This “replacement swap” method is predominantly used in compression exercises for non-cleared credit default swaps, but it can also be used for interest rate swap compression. Compression often results in the cancellation of offsetting positions, but it could also result in new trades being booked into an existing non-cleared portfolio to reflect the netted-down risk of the original portfolio.

One reason that the agencies are permitting amendments resulting from compression exercises is to reduce the operational burden associated with IBOR replacements. While protocols to amend non-cleared swaps that reference an IBOR or another discontinued rate are in development, there is a possibility that counterparties may choose to replace portfolios of IBOR-based non-cleared swaps with replacement swaps generated through compression exercises.

In recognition of the value of risk-reducing compression exercises, the agencies are proposing to amend the Swap Margin Rule to expressly recognize the benefits of amending or replacing non-cleared swaps solely to accomplish risk-reducing or risk-neutral portfolio compression between or among covered swap entities and their counterparties, without converting the legacy swap into a swap subject to the Swap Margin Rule.

Under the proposed rule, amended swaps that reflect the outcome of a compression exercise are treated slightly differently than replacement swaps that are issued as a result of the compression exercise. If a non-cleared swap is amended solely as a result of a compression exercise, the amendments cannot extend the remaining maturity of the amended non-cleared swap or increase the total effective notional amount of the non-cleared swap.

The agencies are also concerned about clarifying the legacy status of swaptions that are entered into before the applicable compliance date but exercised after that compliance date. As a general matter, a swaption is created when a covered swap entity and its counterparty enter into a derivative transaction granting one party an option to, at a later time, call for the transaction to be converted into a non-cleared swap between the two parties, the terms of which are set out in the derivative contract itself. The agencies believe it is not necessary to propose rule text to address the legacy status of swaptions that become non-cleared swaps once exercised. Although the exchange of payments under the non-cleared swap does not commence until after the applicable compliance date, the terms of that non-cleared swap were established and entered into during the original creation of the swaption contract, which was entered into before the applicable compliance date and therefore the resulting non-cleared swap retains legacy status. The exercise of the option under the derivative is not an amendment of the contract, but rather a second phase that operationalizes the original contract.

The proposed rule would delete § _.1(e)(7), which includes an amendment relating to the QFC Rules. The text of § _.1(e)(7), with slight modifications, would be moved to § _.1(h)(1), so that it would reside in the section of the Swap Margin Rule dedicated to legacy swap amendments. The methods of amendment listed in § _.1(h) would apply not only to IBOR replacements, but also to any other contractual modifications permitted under § _.1(h), including amendments relating to the QFC Rules.

The agencies request comment on all aspects of the proposed rule as well as on the following specific questions.

(1) The proposed rule permits amendments to non-cleared swaps by method of adherence to a protocol, contractual amendment of an agreement or confirmation, or execution of a new contract in replacement of and immediately upon termination of an existing contract ( i.e., tear-up). Should the agencies provide additional clarification in the rule as to types of permissible amendments to better reflect established or emerging industry practices? What specifically should be added or clarified, and why?

(2) Does the proposed rule provide sufficient flexibility regarding contract-by-contract, netting set, and compression amendments to the reference rate? What, if any, additional flexibility is needed, and why?

(3) The agencies have listed a number of IBORs as examples of rates that would be permitted to be replaced. To what extent should this list be revised to remove or to include any additional rates, such as the Swap Offer Rate of Singapore?

(4) The relief provided by the proposed rule would apply to the replacement of an IBOR. The agencies are also proposing to allow replacement of other non-IBOR reference rates if the covered swap entity reasonably expects that the rate will be discontinued or reasonably determines has lost its relevance as a reliable benchmark due to a significant impairment. Is there a need to provide relief for replacement of rates under other circumstances? What potential criteria could the agencies impose on non-IBOR interest rate benchmarks in order for such a benchmark to be considered to have lost its relevance as a reliable benchmark due to a significant impairment? If so, please provide a description of the circumstances creating this need and a description of the rates that may need to be replaced, either now or in the future.

(5) The proposed rule anticipates that a reference rate may need to be amended more than once. What types of criteria should the regulation establish for subsequent amendments to reference rates? Please explain how those criteria maintain the robustness of the new reference rate and avoid the problems that plagued LIBOR, such as market manipulation, etc. Should the agencies impose a cap on the number of times a reference rate may be amended and, if so, how should that cap be structured?

(6) The proposed rule does not specify any criteria for a replacement rate, but rather leaves this open to the parties. What types of rates might parties settle on? Should the agencies limit the scope of the replacement rate to specific criteria, such as that the rate must be based on observable, risk-free characteristics? If so, what other criteria might be appropriate, or what specific rates might be appropriate?

(7) The proposed rule intends to be accommodating to accompanying amendments that may be necessary to maintain the relative economics of the non-cleared swap following the replacement of a reference rate. Do the accompanying amendments provide sufficient flexibility to permit the additional modifications that parties plan to make? If not, please explain what changes the agencies should contemplate and why, and explain how they should be permitted under the rule. Alternatively, would the accompanying amendments change the non-cleared swap such that it does not resemble the original legacy contract? If this is a concern, how should the rule address it? For example, should the agencies prohibit an amendment to the currency from being eligible for the safe harbor?

(8) The proposed rule does not specify an end date by which these IBOR-related amendments must be completed. Should the agencies include an end date? Should it be one year, two years, five years, ten years? Are there legacy contracts that would still be in place in ten years such that a ten-year timeframe would be realistic?

(9) As noted above, the agencies propose to permit the replacement of an IBOR in the floating-rate leg of the swap with a new reference rate, and would also permit the fixed-rate leg in a fixed-floating interest rate swap to be modified to maintain the economics of the non-cleared swap. Is this approach appropriate in order for the fixed-floating swap to retain its legacy status, and if not, how should it be modified?

(1) What, if any, additional conditions or limitations should the agencies impose before allowing a covered swap entity to take advantage of the exemption from initial margin requirements for inter-affiliate swaps? For example, the CFTC imposes certain limitations and conditions on its initial margin exemption for inter-affiliate swaps. Discuss why any additional conditions may be appropriate to ensure the safety and soundness of the covered swap entity.

(2) Should the definitions of “affiliate” and “control” in § _.11 be revised to match with the definitions of the Board's Regulation W, Regulation Y, Regulation Q, or any other regulations? Why or why not?

(1) Does the proposed one-year extension of the final implementation timeline to September 1, 2021 substantially address all implementation challenges? Please explain.

(1) What issues are there, if any, related to how parties document transactions in compliance with the Swap Margin Rule that should be considered by the agencies?

(2) Are there any reasons why covered swap entities would not be able to reasonably anticipate the point in time at which they will cross the $50 million initial margin threshold amount such that they can prepare the required documentation in time? Please explain.

(1) What are the methods used by covered swap entities to determine whether portfolio compression exercises would meet the requirements set out in the proposal, including not extending the remaining maturity or increasing the total effective notional amounts?

(2) Should the Rule limit compression exercises to mitigating only certain types of risk and if so, which types of risk?

(3) For a replacement swap that results from a compression exercise, should the agencies consider a different method of restricting either the total effective notional amount or the remaining maturity? Would commenters be supportive of an approach that limits the remaining maturity to an “effective maturity” calculation based on the total effective notional amounts in the exercise? For example, swap 1 has a notional amount of 10 and 3 years remaining maturity and swap 2 has a notional amount of 8 and 5 years remaining maturity. Under the “effective maturity” calculation, the replacement swap could not exceed an effective maturity of 3 years and 10 months, calculated as (3*10 + 5*8)/(10+8). The replacement swap with a 3 year and 10 month maturity would also not be able to exceed a total effective notional amount of 18 (10+8).

(4) How should the Rule be more specific about technical amendments that are permitted? How can the Rule better explain that amending a swap's underlying asset or indicator, such as a security, currency, interest rate, commodity, or price index, is not a technical amendment?

Section 722 of the Gramm-Leach-Bliley Act  38 requires the OCC, Board, and FDIC to use plain language in all proposed and final rules published after January 1, 2000. The OCC, Board, and FDIC have sought to present the proposed rule in a simple and straightforward manner and invite comments on whether the proposal is clearly stated and effectively organized, and how to make this proposal easier to understand. For example:

• Have we organized the material to suit your needs? If not, how could this material be better organized?

• Are the requirements in the proposed rule clearly stated? If not, how could the proposed rule be more clearly stated?

• Does the proposed rule contain language or jargon that is not clear? If so, which language requires clarification?

• Would a different format (grouping and order of sections, use of headings, paragraphing) make the proposed rule easier to understand? If so, what changes to the format would make the proposed rule easier to understand?

• What else could we do to make the proposed rule easier to understand?

Certain provisions of the proposed rulemaking contain “collection of information” requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number.

The agencies reviewed the proposed rulemaking and determined that it revises certain recordkeeping requirements that have been previously cleared under various OMB control numbers. In order to be consistent across the agencies, the agencies are also applying a conforming methodology for calculating the burden estimates. The agencies are proposing to extend for three years, with revision, these information collections. The OCC and FDIC have submitted to OMB for review under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing regulations (5 CFR 1320). The Board has reviewed the information collection under its delegated authority. The OMB control numbers are 1557-0251 (OCC), 3064-0204 (FDIC), and 7100-0364 (Board). The FCA has determined the notice of proposed rulemaking has no PRA implications because Farm Credit System institutions are Federally chartered instrumentalities of the United States and instrumentalities of the United States are specifically excepted from the definition of “collection of information” contained in 44 U.S.C. 3502(3). The FHFA has determined that the notice of proposed rulemaking does not contain any collection of information for which the agency must obtain clearance under the PRA.

Comments are invited on:

a. Whether the collections of information are necessary for the proper performance of the agencies' functions, including whether the information has practical utility;

b. The accuracy or the estimate of the burden of the information collections, including the validity of the methodology and assumptions used;

c. Ways to enhance the quality, utility, and clarity of the information to be collected;

d. Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and

e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information.

All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in the ADDRESSES section of this document. A copy of the comments may also be submitted to the OMB desk officer by mail to U.S. Office of Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503; facsimile to (202) 395-6974; or email to oira_submission@omb.eop.gov, Attention, Federal Banking Agency Desk Officer.

The proposed rulemaking removes the recordkeeping requirement in section _.11(b) that a covered swap entity shall calculate the amount of initial margin that would be required to be posted to an affiliate that is a financial end user with material swaps exposure pursuant to section _.3(b) and provide documentation of such amount to each affiliate on a daily basis.

Title of Information Collection: Reporting and Recordkeeping Requirements Associated with Swaps Margin and Swaps Push-Out.

Frequency: Annual and event generated.

Affected Public: Businesses or other for-profit.

Estimated average hours per response:

Section _.1(d)—1 hour (on average of 1,000 times per year).

Sections _.8(c) and _.8(d)—240 hours.

Section _.8(f)(3)—50 hours.

Section _.9(e)—10 hours (on average of 3 times per year).

Sections 237.22(a)(1) and 237.22(e) ( Board only )—7 hours.

Sections _.2 (definition of “eligible master netting agreement,” item 4), 237.8(g), and 237.10—5 hours.

Section _.5(c)(2)(i)—4 hours.

Section _.7(c)—100 hours.

Sections _.8(e) and 237.8(f)—40 hours.

Section _.8(h)—20 hours.

Section _.1(h)—1 hour.

Respondents: Any national bank or a subsidiary thereof, Federal savings association or a subsidiary thereof, or Federal branch or agency of a foreign bank that is registered as a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant.

Estimated number of respondents: 10.

Proposed revisions only estimated annual burden: -2,500 hours.

Total estimated annual burden: 14,900 hours.

Respondents: Any state member bank (as defined in 12 CFR 208.2(g)), bank holding company (as defined in 12 U.S.C. 1841), savings and loan holding company (as defined in 12 U.S.C. 1467a), foreign banking organization (as defined in 12 CFR 211.21(o)), foreign bank that does not operate an insured branch, state branch or state agency of a foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that is registered as a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant.

Estimated number of respondents: 41.

Proposed revisions only estimated annual burden: -10,209 hours.

Total estimated annual burden: 61,104 hours.

FDIC: Any FDIC-insured state-chartered bank that is not a member of the Federal Reserve System or FDIC-insured state-chartered savings association that is registered as a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant.

Estimated number of respondents: 1. 39

Proposed revisions only estimated annual burden: -249 hours.

Total estimated annual burden: 1,490 hours.

OCC: In general, the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ) requires that in connection with a rulemaking, an agency prepare and make available for public comment a regulatory flexibility analysis that describes the impact of the rule on small entities. Under section 605(b) of the RFA, this analysis is not required if an agency certifies that the rule will not have a significant economic impact on a substantial number of small entities and publishes its certification and a brief explanatory statement in the Federal Register along with its rule.

As part of our analysis, we consider whether, pursuant to the RFA, the proposed rule would have a significant economic impact on a substantial number of small entities. The OCC currently supervises approximately 782 small entities. 40 Among these 782 small entities, 44 could be affected by the proposed rule if one or more of these small entities are a party to a financial contract with a covered swap entity. Because we believe banks will incur de minimis costs, if any, to comply with the proposed rule, we conclude that the proposed rule, if implemented, would not have a significant economic impact on a substantial number of small entities. 41

Board: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), generally requires that an agency prepare and make available for public comment an initial regulatory flexibility analysis in connection with a notice of proposed rulemaking or certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. 42 The Board welcomes comment on all aspects of the initial regulatory flexibility analysis. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period.

As described above, the proposed rule would (i) permit legacy swaps to retain their legacy status in the event that they are amended to replace an IBOR or other discontinued rate, (ii) repeal the inter-affiliate initial margin provisions, introduce an additional compliance date for initial margin requirements, (iii) introduce an additional compliance date for initial margin requirements, (iv) clarify the point in time at which trading documentation must be in place, (v) permit legacy swaps to retain their legacy status in the event that they are amended due to technical amendments, notional reductions, or portfolio compression exercises, and (vi) make technical changes to relocate the provision addressing amendments to legacy swaps that are made to comply with the QFC Rules.

This proposed rule applies to financial institutions that are covered swap entities that are subject to the requirements of the Swap Margin Rule. Under SBA regulations, the finance and insurance sector includes commercial banking, savings institutions, credit unions, other depository credit intermediation and credit card issuing entities (financial institutions). With respect to financial institutions that are covered swap entities under the Swap Margin Rule, a financial institution generally is considered small if it has assets of $600 million or less. 43 Covered swap entities would be considered financial institutions for purposes of the RFA in accordance with SBA regulations. The Board does not expect that any covered swap entity is likely to be a small financial institution, because a small financial institution is unlikely to engage in the level of swap activity that would require it to register as a swap dealer or a major swap participant with the CFTC or a security-based swap dealer or security-based major swap participant with the U.S. Securities and Exchange Commission (SEC). 44 None of the current Board-regulated covered swap entities are small entities.

The Board does not believe the proposed rule will result in any new reporting, recordkeeping or other compliance requirements. In light of the foregoing, the Board does not believe that this proposed rule would have a significant economic impact on a substantial number of small entities and therefore there are no significant alternatives to the proposed rule that would reduce the impact on small entities.

FDIC: The RFA generally requires that, in connection with a proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis describing the impact of the proposed rule on small entities. However, a regulatory flexibility analysis is not required if the agency certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. The SBA has defined “small entities” to include banking organizations with total assets of less than or equal to $600 million that are independently owned and operated or owned by a holding company with less than or equal to $600 million in total assets. 45 Generally, the FDIC considers a significant effect to be a quantified effect in excess of 5 percent of total annual salaries and benefits per institution, or 2.5 percent of total non-interest expenses. The FDIC believes that effects in excess of these thresholds typically represent significant effects for FDIC-supervised institutions. For the reasons described below, the FDIC certifies pursuant to section 605(b) of the RFA that the proposed rule will not have a significant economic impact on a substantial number of small entities.

According to data from recent Consolidated Reports of Income and Condition (Call Report), 46 the FDIC supervised 3,465 institutions. Of those, 2,705 are considered “small,” according to the terms of the RFA. As discussed previously, the proposed rule directly applies to covered swap entities (which includes persons registered with the CFTC as swap dealers or major swap participants pursuant to the Commodity Exchange Act of 1936 and persons registered with the SEC as security-based swap dealers and major security-based swap participants under the Securities Exchange Act of 1934) that are subject to the requirements of the Swap Margin Rule. The FDIC has identified 105 swap dealers and major swap participants that, as of May 22, 2019, have registered as swap entities. 47 None of these institutions are supervised by the FDIC.

As an amendment to the Swap Margin Rule, the proposed rule also affects counterparties to swaps entered into by covered swap entities. However, the Terrorism Risk Insurance Program Reauthorization Act of 2015 excludes non-cleared swaps entered into for hedging purposes by a financial institution with total assets of $10 billion or less from the requirements of the Swap Margin Rule. Given this exclusion, a non-cleared swap between a covered swap entity and a small FDIC-supervised entity that is used to hedge a commercial risk of the small entity will not be subject to the Swap Margin Rule. The FDIC believes that it is unlikely that any small entity it supervises will engage in non-cleared swaps for purposes other than hedging.

Given that no FDIC-supervised small entities are covered swap entities and that it is unlikely that FDIC-supervised small entities enter into non-cleared swaps for purposes other than hedging, this proposed rule is not expected to have a significant economic impact on a substantial number of small entities supervised by the FDIC. For these reasons, the FDIC certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities, within the meaning of those terms as used in the RFA. Accordingly, a regulatory flexibility analysis is not required.

The FDIC invites comments on all aspects of the supporting information provided in this section, and in particular, whether the proposed rule would have any significant effects on small entities that the FDIC has not identified.

FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ), FCA hereby certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. Each of the banks in the Farm Credit System, considered together with its affiliated associations, has assets and annual income in excess of the amounts that would qualify them as small entities; nor does the Federal Agricultural Mortgage Corporation meet the definition of “small entity.” Therefore, Farm Credit System institutions are not “small entities” as defined in the Regulatory Flexibility Act.

FHFA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. FHFA need not undertake such an analysis if the agency has certified the regulation will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the proposed rule under the Regulatory Flexibility Act, and certifies that the proposed rule does not have a significant economic impact on a substantial number of small entities because the proposed rule is applicable only to FHFA's regulated entities, which are not small entities for purposes of the Regulatory Flexibility Act.

Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded Mandates Act) (2 U.S.C. 1532) requires that the OCC prepare a budgetary impact statement before promulgating a rule that includes any Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation, currently $154 million) in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Act also requires the OCC to identify and consider a reasonable number of regulatory alternatives before promulgating a rule.

The OCC analyzed the amendments proposed in this notice of proposed rulemaking, and has determined that they would not result in expenditures by State, local, and Tribal governments, in the aggregate, or by the private sector, of $154 million in any one year. Accordingly, the OCC has not prepared a written statement under sections 202 and 205.

Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act of 1994 (RCDRIA), in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, each Federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. 48 In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations that impose additional reporting, disclosures, or other new requirements on insured depository institutions generally to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form. 49 Each Federal banking agency has determined that the proposed rule would not impose additional reporting, disclosure, or other requirements; therefore the requirements of the RCDRIA do not apply. However, the agencies note that comments on these matters have been solicited in other sections of this Supplementary Information section, and that the requirements of RCDRIA will be considered as part of the overall rulemaking process. In addition, the agencies also invite any other comments that will further inform the agencies' consideration of RCDRIA.

For the reasons set forth in the common preamble and under the authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the Comptroller of the Currency proposes to amend part 45 of Title 12, Code of Federal Regulations, as follows:

The revisions and additions read as follows:

The revisions and additions read as follows:

The revisions and additions read as follows:

The revisions and additions read as follows:

The revisions and additions read as follows:

As discussed below, the Board is: (1) Proposing to re-adopt the presumptive WDLC option consisting of a CSA or an individual, contiguous portion of a CSA, provided that the chosen area, whether it is an entire CSA or a portion of one, is no more than 2.5 million;  1 (2) explaining further, with additional reasoning and factual support, the basis for eliminating the core area service requirement for FCUs that choose a CBSA as a WDLC; and (3) proposing to amend the NCUA's regulations regarding community FOM applications, amendments, and expansions for CSAs and CBSAs to require the applicant to explain why it has selected its FOM and to demonstrate that its selection will serve low- and moderate-income segments of a community. The proposal also would provide express authority for the NCUA to review and evaluate the foregoing explanation and submission regarding low- and moderate-income individuals, and to reject an application if the agency determines that the FCU's selection reflects discrimination. The Board proposes to apply this provision to CSAs and CBSAs because, unlike other community-based FOMs that are based on political jurisdictions or rural districts, there could be a potential to engage in “gerrymandering” or “redlining,” although the Board emphasizes there is a lack of evidence of FCUs engaging in such gerrymandering. The following sections provide background on the relevant legislation, rulemakings, and court decisions that inform this action.

Under the Federal Credit Union Act (Act), seven or more individuals may create a federal credit union (FCU) by presenting a proposed charter to the Board and paying a fee. 2 These individuals, referred to as “subscribers,” must pledge to deposit funds for shares in the FCU and describe the FCU's proposed FOM. 3 An FOM consists of those persons and entities eligible for membership based on an FCU's type of charter. Before granting an FCU charter, the Board must complete an appropriate investigation and determine the character and fitness of the subscribers, the economic advisability of establishing the FCU, and the conformity of the organization certificate (referred to as the charter or chartering document) with the Act. 4 Under the Act, FCUs may choose from two general categories of FOM: Common-bond and community. 5

The NCUA's Chartering and Field of Membership Manual, incorporated as Appendix B to part 701 of the NCUA regulations (Chartering Manual), 6 implements the chartering and FOM requirements that the Act establishes for FCUs. The Chartering Manual provides generally that the NCUA will grant a charter if the FOM requirements are met, the subscribers are of good character and fit to represent the proposed FCU, and the establishment of the FCU is economically advisable. 7 In addition, “[i]n unusual circumstances, the NCUA may examine other factors, such as other federal law or public policy, in deciding if a charter should be approved.”  8

In adopting the Credit Union Membership Access Act of 1998 (CUMAA), which amended the Act, Congress reiterated its longstanding support for credit unions, noting their “specific mission of meeting the credit and savings needs of consumers, especially persons of modest means.”  9 As amended by CUMAA, the Act provides a choice among three charter types: A single group sharing a single occupational or associational common bond;  10 a multiple common bond consisting of groups each of which have a distinct occupational or associational common bond among members of the group;  11 and a community consisting of “persons or organizations within a well-defined local community, neighborhood, or rural district.”  12

Congress has expressly delegated to the Board substantial authority in the Act to define what constitutes a WDLC, neighborhood, or rural district for purposes of “making any determination” regarding a community credit union, 13 and to establish applicable criteria for any such determination. 14 To qualify as a WDLC, neighborhood, or rural district, the Board requires the proposed area to have “specific geographic boundaries,” such as those of “a city, township, county (single or multiple portions of a county) or their political equivalent, school districts or a clearly identifiable neighborhood.”  15 The boundaries themselves may consist of political borders, streets, rivers, railroad tracks, or other static geographical features. 16 The Board continues to emphasize that common interests or interaction among residents within those boundaries are essential features of a local community.

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2019-0863; Product Identifier 2019-NM-157-AD” at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this NPRM. The FAA will consider all comments received by the closing date and may amend this NPRM based on those comments.

The FAA will post all comments received, without change, to https://www.regulations.gov, including any personal information you provide. The FAA will also post a report summarizing each substantive verbal contact received about this NPRM.

The EASA, which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2019-0197, dated August 14, 2019 (“EASA AD 2019-0197”) (also referred to as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Airbus SAS Model A318-112, A319-111, A319-112, A319-113, A319-114, A319-115, A319-131, A319-132, A319-133, A320-211, A320-212, A320-214, A320-215, A320-216, A320-231, A320-232, A320-233, A320-251N, and A320-271N airplanes. Model A320-215 airplanes are not on the U.S. Register; this AD therefore does not include those airplanes in the applicability.

This proposed AD was prompted by a report of marginal clearance between certain fuel sensor covers on rib 24 and the crown of stringer 15 on both LH and RH wings. A possible contact between the shield and the stringer, and/or possible motion between the stringer and the shield, can make the gap more susceptible to sparking in case of lightning strike. The FAA is proposing this AD to address this condition, which could create a source of ignition in a fuel tank vapor space, possibly resulting in a fire or explosion and consequent loss of the airplane. See the MCAI for additional background information.

EASA AD 2019-0197 describes procedures for the replacement of certain fuel level sensor brackets. This material 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 a bilateral agreement with the State of Design Authority, the FAA has been notified of the unsafe condition described in the MCAI referenced above. The FAA is proposing this AD because the agency evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would require accomplishing the actions specified in EASA AD 2019-0197 described previously, as incorporated by reference, except for any differences identified as exceptions in the regulatory text of this AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA initially worked with Airbus and EASA to develop a process to use certain EASA ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. The FAA has since coordinated with other manufacturers and civil aviation authorities (CAAs) to use this process. As a result, EASA AD 2019-0197 will be incorporated by reference in the FAA final rule. This proposed AD would, therefore, require compliance with EASA AD 2019-0197 in its entirety, through that incorporation, except for any differences identified as exceptions in the regulatory text of this proposed AD. Using common terms that are the same as the heading of a particular section in the EASA AD does not mean that operators need comply only with that section. For example, where the AD requirement refers to “all required actions and compliance times,” compliance with this AD requirement is not limited to the section titled “Required Action(s) and Compliance Time(s)” in the EASA AD. Service information specified in EASA AD 2019-0197 that is required for compliance with EASA AD 2019-0197 will be available on the internet at https://www.regulations.gov by searching for and locating Docket No. FAA-2019-0863 after the FAA final rule is published.

The FAA estimates that this proposed AD affects 776 airplanes of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

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.

The FAA is 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 proposed 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 transport category airplanes and associated appliances to the Director of the System Oversight Division.

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

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

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Will not affect intrastate aviation in Alaska, and

(3) 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 proposes to amend 14 CFR part 39 as follows:

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2019-0016; Product Identifier 2018-NM-168-AD” at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this SNPRM. The FAA will consider all comments received by the closing date and may amend this SNPRM based on those comments.

The FAA will post all comments received, without change, to http://www.regulations.gov, including any personal information you provide. The FAA will also post a report summarizing each substantive verbal contact the agency receives about this SNPRM.

The FAA issued an NPRM to amend 14 CFR part 39 by adding an AD that would apply to all Airbus SAS Model A350-941 and -1041 airplanes. The NPRM published in the Federal Register on February 22, 2019 (84 FR 5611). The NPRM was prompted by reports of loss of retention of the regulator inlet filter retainer on certain crew oxygen cylinder assemblies. The NPRM proposed to require an operational check of the crew oxygen cylinder assembly, replacement of an affected assembly, and eventual replacement of all affected assemblies with redesigned serviceable assemblies.

Since the FAA issued the NPRM, the agency has determined that loose regulator inlet filter retainers also exist on redesigned oxygen cylinders having part number (P/N) 4441227-058-001. In the NPRM, P/N 4441227-058-001 was specified as the replacement part to be installed after an affected part was removed. This SNPRM expands the scope of the NPRM by including oxygen cylinders having P/N 4441227-058-001 as affected parts that need to be inspected and, depending on findings, replaced.

The EASA, which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2019-0168, dated July 16, 2019 (“EASA AD 2019-0168”) (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus SAS Model A350-941 and -1041 airplanes. The FAA is issuing this AD to address loss of retention of the regulator inlet filter retainer on certain crew oxygen cylinder assemblies. This condition could lead to particle ingestion into the regulator during ground handling, possibly resulting in ignition/fire during system ground operational testing following crew oxygen cylinder (re)installation on an airplane. See the MCAI for additional background information.

EASA AD 2019-0168 describes procedures for an inspection of the crew oxygen cylinder assembly for any discrepancy (a loose part making a sound during agitation of the cylinder) and replacement of an affected crew oxygen cylinder assembly with a serviceable part.

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.

The FAA gave the public the opportunity to participate in developing this proposed AD. The FAA considered the comments received. The Air Line Pilots Association, International (ALPA) expressed support for the NPRM.

Delta Air Lines (DAL) requested clarification regarding which actions described in Airbus All Operators Transmission (AOT) A35P010-17, Revision 00, dated December 20, 2017 (“Airbus AOT A35P010-17, Revision 00”), and the associated vendor service bulletins, are required for compliance with the requirements of the proposed AD (in the NPRM). The commenter stated that Airbus AOT A35P010-17, Revision 00, is not written in the traditional service bulletin format, and suggested that the intent of the proposed AD (in the NPRM) is for operators to comply with only section 4.2.2, Inspection Requirements, of Airbus AOT A35P010-17, Revision 00. The commenter reasoned that all other aspects and parts of Airbus AOT A35P010-17, Revision 00, are unrelated to the unsafe condition and are for operator reference and logistics information. Specifically, the commenter requested that paragraph (h) of the proposed AD (in the NPRM) be revised to include a paragraph (h)(3) which would state that “Where the EASA AD states accomplishment of a task `in accordance with the instructions of the AOT”, an operator may use alternative approved procedures. The AOT and Vendor SB can be referred to for accepted procedures to comply with the mandated tasks.” The commenter advised that the proposed AD (in the NPRM) would mandate procedures that are not related to airworthiness, such as returning affected parts to Rockwell Collins and reporting the inspection results to Airbus Customer Service.

The FAA agrees to clarify which actions described in the AOT would be required by this proposed AD. Since the NPRM was published, EASA has issued AD 2019-0168, and the FAA has revised this proposed AD to refer to EASA AD 2019-0168. EASA AD 2019-0168 refers to Airbus AOT A35P010-17, Revision 00; and Airbus AOT A35P010-17, Revision 01, dated April 11, 2019 (“AOT A35P010-17, Revision 01”). The FAA has revised paragraph (h) of this proposed AD to include paragraph (h)(3) to state that the language in paragraph (2) of EASA AD 2019-0168 that states “the instructions of the AOT” should be replaced with “paragraph 4.2.2., Inspection Requirements, of the AOT.”

In regard to the reporting requirement, paragraph (i) of the proposed AD (in the NPRM) states that although EASA AD 2018-0245R1 specifies to submit certain information to the manufacturer that action would not be required. Because EASA AD 2018-0245R1 was superseded by EASA AD 2019-0168, the FAA has revised paragraph (i) of this proposed AD to refer to EASA AD 2019-0168. In addition, the FAA has added paragraph (j) to this proposed AD to clarify that returning affected parts to the manufacturer is not required, and redesignated the subsequent paragraphs accordingly.

The FAA does not agree with the commenter's request to revise paragraph (h) of this proposed AD to allow operators to use alternative approved procedures to comply with the proposed requirements. Any request for an Alternative Method of Compliance (AMOC) must be done in accordance with paragraph (k)(1) of this proposed AD. The FAA has not revised this proposed AD in regard to this issue.

DAL requested that the NPRM be revised to include a reference to Rockwell Collins (formerly B/E Aerospace) Vendor Service Bulletin (VSB) 4441227-35-003, and to allow operators to use the applicable Rockwell Collins VSB for inspection procedures. The commenter noted that there is an error in Rockwell Collins VSB 4441227-35-003, because it refers to a modification Rockwell Collins VSB for instructions on how to replace an affected crew oxygen cylinder assembly, but that service information does not contain replacement instructions.

The FAA does not find it necessary to reference VSB 4441227-35-003 in this proposed AD because it is already referenced in Airbus AOT A35P010-17, Revision 01, for the required inspection. The FAA notes that EASA AD 2019-0168 refers to Airbus AOT A35P010-17, Revision 01, as the primary source of service information for operators to use for procedures to address the unsafe condition. AOT A35P010-17, Revision 01, includes updated inspection procedures that are acceptable for compliance.

The FAA acknowledges the commenter's observation that there is an error in certain revisions of Rockwell Collins VSB 4441227-35-003 regarding certain other Rockwell Collins VSB numbers. Airbus AOT A35P010-17, Revision 01, references Maintenance Planning (MP) Task A350-A-35-11-56-00001-520A-A for removal of affected crew oxygen cylinder assemblies and MP Task A350-A-35-11-56-00001-720A-A for installation of crew oxygen cylinder assemblies. Therefore, the Rockwell Collins VSBs are not required to accomplish actions involving removal and installation of crew oxygen cylinder assemblies. If needed, operators may request an AMOC for the required actions in this proposed AD, using the procedures specified in paragraph (k)(1) of this proposed AD. The FAA has not revised this proposed AD in regard to this issue.

DAL stated that Airbus AOT A35P010-17, Revision 00, did not refer to specific revision levels for the Rockwell Collins VSBs. Therefore, it assumed that any approved version was acceptable for operators to use for inspection procedures.

The FAA infers that the commenter is requesting clarification regarding revision levels of the Rockwell Collins VSBs for inspection procedures. Since AOT A35P010-17, Revision 01, does not specify a revision level for the Rockwell Collins VSBs, any revision is acceptable for compliance with the applicable requirements of this proposed AD. The FAA has not revised this proposed AD in regard to this issue.

DAL requested that the proposed AD (in the NPRM) be revised to state that operators should do an inspection for loose retainer assemblies in the affected crew oxygen cylinder assemblies instead of an operational check. The commenter noted that “operational check” is used in EASA AD 2018-0245R1 (which is the MCAI referred to in the NPRM) but “inspection” is used in Airbus AOT A35P010-17, Revision 00, and the associated Rockwell Collins VSBs.

The FAA agrees to clarify. The referenced terminology has been revised in EASA AD 2019-0168, which refers to an “inspection” instead of an “operational check.” This terminology is now consistent among EASA AD 2019-0168, this proposed AD, Airbus AOT A35P010-17, Revision 01, and the associated Rockwell Collins VSBs. The FAA has revised the “Related Service Information under 1 CFR part 51” section of this proposed AD to clarify this information.

DAL requested that the proposed AD (in the NPRM) be revised to include instructions to operators stating that by removing an affected crew oxygen cylinder assembly an airplane can move from Group 1 to Group 2 for the purposes of compliance with the proposed AD (in the NPRM). The commenter stated that EASA AD 2018-0245R1 (referred to as the MCAI in the NPRM) identified a Group 1 airplane as an airplane that has an affected crew oxygen cylinder assembly installed and that by removing an affected crew oxygen cylinder assembly the airplane would then be identified as a Group 2 airplane. The commenter stated that the only compliance method would be to ensure an affected crew oxygen cylinder assembly is not reinstalled on that airplane so it can remain a Group 2 airplane. The commenter stated that this could create confusion for operators regarding which proposed requirements specified in the proposed AD (in the NPRM) would apply to a given airplane. The commenter also stated that operators could become confused regarding what is required to maintain compliance with the requirements in the proposed AD (in the NPRM) and how to report compliance.

The FAA agrees to clarify. As stated previously, the FAA has revised this proposed AD to refer to EASA AD 2019-0168, which addresses this issue by removing the definitions of the airplane groups and allowing the installation of an affected crew oxygen cylinder assembly on any airplane, provided it is a serviceable part as defined in EASA AD 2019-0168. The FAA has not revised this proposed AD in regard to this issue.

This proposed AD would require accomplishing the actions specified in EASA AD 2019-0168 described previously, as incorporated by reference, except for any differences identified as exceptions in the regulatory text of this AD.

Certain changes described above expand the scope of the NPRM. As a result, the FAA has determined that it is necessary to reopen the comment period to provide additional opportunity for the public to comment on this SNPRM.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA worked with Airbus and EASA to develop a process to use certain EASA ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. As a result, EASA AD 2019-0168 will be incorporated by reference in the FAA final rule. This proposed AD would, therefore, require compliance with the provisions specified in EASA AD 2019-0168, except for any differences identified as exceptions in the regulatory text of this proposed AD. Using common terms that are the same as the heading of a particular section in the EASA AD does not mean that operators need comply only with that section. For example, where the AD requirement refers to “all required actions and compliance times,” compliance with this AD requirement is not limited to the section titled “Required Action(s) and Compliance Time(s)” in the EASA AD. Service information specified in EASA AD 2019-0168 that is required for compliance with EASA AD 2019-0168 will be available on the internet at https://www.regulations.gov by searching for and locating Docket No. FAA-2019-0016 after the FAA final rule is published.

The FAA estimates that this proposed AD affects 13 airplanes of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

The FAA has received no definitive data that would enable the agency to provide cost estimates for the on-condition replacements specified in this proposed AD.

According to the manufacturer, some or all of the costs of this proposed AD may be covered under warranty, thereby reducing the cost impact on affected individuals. The FAA does not control warranty coverage for affected individuals. As a result, the FAA has included all known costs in our cost estimate.

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.

The FAA is 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 proposed 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 transport category airplanes and associated appliances to the Director of the System Oversight Division.

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

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

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Will not affect intrastate aviation in Alaska, and

(3) 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 proposes to amend 14 CFR part 39 as follows:

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2019-0862; Product Identifier 2019-NM-121-AD” at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this NPRM. The FAA will consider all comments received by the closing date and may amend this NPRM because of those comments.

The FAA will post all comments, without change, to https://www.regulations.gov, including any personal information you provide. The FAA will also post a report summarizing each substantive verbal contact the agency receives about this NPRM.

The FAA issued AD 2014-14-04, Amendment 39-17899 (79 FR 44672, August 1, 2014) (“AD 2014-14-04”), for certain The Boeing Company Model 767-200, -300, -300F, and -400ER series airplanes. AD 2014-14-04 requires revising the maintenance program to incorporate airworthiness limitations. AD 2014-14-04 resulted from a re-evaluation of certain doors and flaps based on their fatigue-critical nature. The FAA issued AD 2014-14-04 to address fatigue cracking of the principal structural elements, which could adversely affect the structural integrity of the airplane.

AD 2014-14-04 referred to Subsection B, Airworthiness Limitations—Structural Inspections, of Section 9, Airworthiness Limitations (AWLs) and Certification Maintenance Requirements (CMRs), D622T001-9, Revision July 2011, and Revision February 2014, of the Boeing 767 Maintenance Planning Data Document as the appropriate sources of service information for revising the maintenance program to incorporate airworthiness limitations.

Since the FAA issued AD 2014-14-04, the FAA has received a report indicating that certain inspections were confusing or difficult to accomplish. During a subsequent review of the airworthiness limitations required by AD 2014-14-04, the airworthiness limitations for multiple structurally significant items (SSIs) were found that contain significant errors or omissions, resulting in inadequate damage tolerance rating (DTR) values. The FAA determined the existing maintenance program does not provide adequate probability of detection for foreseeable fatigue cracking of SSIs because there have been multiple improvements to Boeing's damage tolerance methodology since the last significant update of the Boeing Model 767 AWL and DTR documents.

Inadequate AWL and DTR values in the maintenance or inspection program that reduce the probability of detection for foreseeable fatigue cracking of SSIs, if not addressed, could result in the loss of limit load capability of an SSI as well as loss of continued safe flight and landing of the airplane.

This NPRM does not propose to supersede AD 2014-14-04. Rather, we have determined that a stand-alone AD is more appropriate to address the changes in the existing maintenance or inspection program. This proposed AD would require revising the existing maintenance or inspection program, as applicable, to incorporate new or more restrictive airworthiness limitations. Accomplishment of the proposed actions would then terminate all requirements of AD 2014-14-04.

The FAA reviewed Boeing 767-200/300/300F/400ER Airworthiness Limitations (AWLs), D622T001-9-01, dated June 2019. This service information describes airworthiness limitations for structural inspections and structural safe life limits among other limitations.

The FAA also reviewed Boeing 767-200/300/300F/400ER Damage Tolerance Rating (DTR) Check Form Document, D622T001-DTR, dated June 2019. This service information includes the DTR check forms and the procedure for their use.

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.

The FAA is proposing this AD because the FAA evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would require revising the existing maintenance or inspection program, as applicable, to incorporate new or more restrictive airworthiness limitations. This proposed AD also would require sending the inspection results to Boeing Commercial Airplanes.

This proposed AD would require revisions to certain operator maintenance documents to include new actions ( e.g., inspections). Compliance with these actions is required by 14 CFR 91.403(c). For airplanes that have been previously modified, altered, or repaired in the areas addressed by this proposed AD, the operator may not be able to accomplish the actions described in the revisions. In this situation, to comply with 14 CFR 91.403(c), the operator must request approval for an alternative method of compliance according to paragraph (l) of this proposed AD.

Instructions for wing tank sealant removal prior to certain inspections and instructions to ensure sealant location limits are met were added in the July 2018 revision of Boeing 767-200/300/300F/400ER Airworthiness Limitations (AWLs), D622T001-9-01. These actions are to be verified at the time of the threshold specified in the document, however many airplanes will not have wing tank entry inspections for up to 6 years after the release of Boeing 767-200/300/300F/400ER Airworthiness Limitations (AWLs), D622T001-9-01, dated June 2019. The FAA has determined that a grace period should be provided for those instructions to do certain actions; the grace period for these actions to be accomplished is at the next wing tank entry, but not to exceed 6 years from the effective date of the AD. The FAA has included this grace period in paragraph (h)(1) of this proposed AD.

Repairs made to any horizontal stabilizer pivot fitting lug (SSI 55-10-I13A), where the lug bore has been oversized, will require further evaluation to determine the applicable inspection interval to be incorporated, as specified in paragraph (h)(2) of this proposed AD.

Both Boeing 767-200/300/300F/400ER Airworthiness Limitations (AWLs), D622T001-9-01, dated June 2019; and Boeing 767-200/300/300F/400ER Damage Tolerance Rating (DTR) Check Form Document, D622T001-DTR, dated June 2019; state to report to Boeing within 10 days of the finding. For this proposed AD, the FAA will allow 10 days from airplane return to service as specified in paragraph (h)(3) of this proposed AD to submit the report.

These differences have been coordinated with Boeing.

The FAA estimates that this proposed AD affects 615 airplanes of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

The FAA has determined that revising the existing maintenance or inspection program takes an average of 90 work-hours per operator, although the FAA recognizes that this number may vary from operator to operator. In the past, the FAA has estimated that this action takes 1 work-hour per airplane. Since operators incorporate maintenance or inspection program changes for their affected fleet(s), the FAA has determined that a per-operator estimate is more accurate than a per-airplane estimate. Therefore, the FAA estimates the total cost per operator to be $7,650 (90 work-hours × $85 per work-hour).

A federal agency may not conduct or sponsor, and a person is not required to respond to, nor shall a person be subject to penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a current valid OMB control number. The control number for the collection of information required by this proposed AD is 2120-0056. The paperwork cost associated with this proposed AD has been detailed in the Costs of Compliance section of this document and includes time for reviewing instructions, as well as completing and reviewing the collection of information. Therefore, all reporting associated with this proposed AD is mandatory. Comments concerning the accuracy of this burden and suggestions for reducing the burden should be directed to Information Collection Clearance Officer, Federal Aviation Administration, 10101 Hillwood Parkway, Forth Worth, TX 76177-1524.

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.

The FAA is 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 proposed 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 transport category airplanes and associated appliances to the Director of the System Oversight Division.

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

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

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Will not affect intrastate aviation in Alaska, and

(3) 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 proposes to amend 14 CFR part 39 as follows:

On August 9, 2019, the Commission voted to publish an ANPR in the Federal Register , to develop a rule to address the risk of injury and death associated with CO production and leakage from residential gas furnaces and boilers. The ANPR was published on August 19, 2019, with a 60-day comment period that closed on October 18, 2019. 84 FR 42847. The Commission issued the ANPR under the authority of the Consumer Product Safety Act (CPSA). On October 14, 2019, the Air-Conditioning, Heating, & Refrigeration Institute (AHRI) requested an extension of the comment period for an additional 60 days to provide stakeholders adequate time to respond to the ANPR. AHRI states that member companies are currently developing comments to submit on the ANPR. AHRI also notes the CSA/ANSI Cross-Functional Working Group on CO Sensor Detectors report is an agenda item during the upcoming Joint Technical Committee meeting on October 29, 2019, and that AHRI members would like to understand the Joint Technical Committee's decision on the report and proposed actions before finalizing their comments.

The Commission has considered this request and is reopening the comment period for an additional 60 days until January 6, 2020.

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under sections 481 and 1377 of the Internal Revenue Code (Code) and proposed regulations under section 1371 of the Code. Section 13543(a) and (b) of the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054, 2155 (2017) (TCJA), amended the Code to add subsection (d) to section 481, and subsection (f) to section 1371. Both section 481(d) and section 1371(f) are effective as of December 22, 2017.

Generally, a distribution by a C corporation to its shareholders with respect to their stock ownership is treated as a taxable dividend to the extent of the corporation's earnings and profits. See sections 301(c) and 316(a). However, following the termination of an S corporation's election made under section 1362 (S election), section 1371(e) allows shareholders of the resulting C corporation to benefit from the corporation's former status as an S corporation with respect to distributions of money during the corporation's PTTP, which is generally the one-year period after the S election terminates. Specifically, during the PTTP, a distribution of money by the C corporation is characterized as a distribution from the corporation's accumulated adjustments account (AAA), as defined in § 1.1368-2(a)(1). The receipt of such a distribution is tax-free to the extent of the recipient's basis in its stock with respect to which it received the distribution, and is taxed as gain from the sale of property to the extent the distribution exceeds the recipient's basis in that stock. If the corporation exhausts its AAA during the PTTP, then subsequent distributions are subject to treatment under section 301. Without section 1371(e), shareholders of the former S corporation would be precluded from receiving distributions allocable to AAA.

Section 1371(f) extends the period during which the shareholders of a C corporation can benefit from AAA generated during such corporation's former status as an S corporation (ETSC period) by allowing a C corporation's distribution of money to which section 301 would otherwise apply (qualified distribution) to be sourced, in whole or in part, from AAA. Specifically, section 1371(f) provides that (i) the distributing ETSC's AAA is allocated to a qualified distribution, and (ii) the qualified distribution is chargeable to accumulated earnings and profits (AE&P), in the same ratio as the amount of such AAA bears to the amount of such AE&P (clauses (i) and (ii), collectively, ETSC proration). In enacting section 1371(f), Congress determined that “it is important to provide rules to ease the transition from S corporation to C corporation for the affected taxpayers” because, based on TCJA revisions to the Code, “taxpayers that previously elected to be taxed as S corporations may prefer instead to be taxed as C corporations.” H. Rept. 115-409, at 245 115th Cong. 1st Sess., (Nov. 14, 2017) (House Report).

If a C corporation satisfies the ETSC qualification requirements, section 1371(f) provides special treatment for qualified distributions made by an ETSC during the ETSC period, which begins with the expiration of the PTTP and ends when the corporation exhausts its AAA.

In order for section 1371(f) to apply, the distributing corporation must be an ETSC. In conjunction with the enactment of section 1371(f), Congress enacted section 481(d), which includes the definition of an ETSC. Specifically, a C corporation qualifies as an ETSC if the following three requirements are satisfied. First, the corporation was an S corporation on December 21, 2017. Second, during the two-year period beginning on December 22, 2017, the S corporation revoked its S election (revocation requirement). Third, the owners of the stock of the corporation are the same owners (and in identical proportions) on December 22, 2017, and the date that the corporation made a revocation of its S election (shareholder identity requirement).

In contrast to the PTTP, which applies regardless of how an S corporation's election terminates, section 1371(f) applies only if the S election is revoked (section 1362(d)(1)), which, under section 1362(d)(1)(B), requires the consent of shareholders holding more than 50 percent of the corporation's shares in the aggregate. Section 1362(d)(1) and its underlying regulations provide the sole means for an S corporation to revoke its S election. Pursuant to § 1.1362-6(a)(3), a valid revocation requires an S corporation to submit a written statement that the corporation revokes its S election. That revocation statement must set forth the number of shares of stock (including non-voting stock) issued and outstanding at the time of the revocation and must be accompanied by a separate written statement of shareholder consent. See § 1.1362-6(a)(3)(i), (b).

Generally, a revocation made on or before the 15th day of the third month of a taxable year is effective on the first day of that year, and an election made after that date is effective on the first day of the following taxable year. See section 1362(d)(1)(C) and § 1.1362-2(a)(2)(i). However, if the revocation specifies a date for revocation that is on or after the day on which the revocation is made, the revocation becomes effective on that specified date. See section 1362(d)(1)(D) and § 1.1362-2(a)(2)(ii). Therefore, under the proposed regulations, the revocation requirement would be satisfied if the revocation of an S election is validly made during the two-year period beginning on December 22, 2017, even if the effective date for the revocation occurs after the conclusion of that two-period.

For a former S corporation to qualify as an ETSC, the owners of its stock must be the same owners (and in identical proportions) on the following two dates: (1) December 22, 2017, and (2) the date on which the S corporation made a revocation of its S election. However, certain events should not affect the shareholder identity requirement because such events would not change in substance the identity of the subject shareholder. Specifically, these proposed regulations identify five categories of stock transfers that do not result in an ownership change for purposes of section 481(d)(2)(B): (1) Transfers of stock between a shareholder and that shareholder's trust treated as wholly owned by that shareholder under subpart E of subchapter J of chapter 1; (2) transfers of stock between a shareholder and an entity owned by the shareholder that is disregarded as separate from its owner under § 301.7701-2(c)(2)(i) of the Procedure and Administration Regulations; (3) an election by a shareholder trust to be treated as part of a decedent's estate under section 645 or the termination of an election under that section; (4) a change in the status of a shareholder trust from one type of eligible S corporation shareholder trust described in section 1361(c)(2)(A) to another type of eligible S corporation shareholder trust; and (5) a transaction that includes more than one of the events described in (1) through (4).

While specifying transaction categories provides certainty to taxpayers, the Treasury Department and the IRS request comments regarding whether a principle-based rule would be more effective, as well as suggestions as to the rule's proposed operative language.

Section 1371(f) provides that AAA is allocated to a qualified distribution based on the ratio of AAA to AE&P. Thus, if an ETSC has no AAA, section 1371(f) has no application. In addition, as evidenced by the fact that Congress enacted section 1371(f) to ease the transition from S corporation status to C corporation status, the ETSC period is intended to be transitory in nature. Consequently, the Treasury Department and the IRS have determined that such a transition would naturally conclude once the C corporation's AAA balance reaches zero. In other words, an ETSC has an ETSC period only if the ETSC has a AAA balance greater than zero at the end of its PTTP, and the ETSC period ends immediately after the qualified distribution that causes the C corporation's AAA balance to reach zero.

Section 1377(b)(1) provides that a PTTP occurs in the following three circumstances. First, a PTTP may occur during the period starting on the day after the last day of the corporation's last taxable year as an S corporation and ending on the later of (i) the day that is one year later or (ii) the due date for filing the return for such last year as an S corporation (including extensions). Second, a PTTP may occur during the 120-day period beginning on the date of any determination pursuant to an audit of a taxpayer that follows the termination of the corporation's election and adjusts a subchapter S item that arose during the S period (intervening audit PTTP). Third, a PTTP may occur during the 120-day period beginning on the date of a determination that the corporation's election under section 1362(a) had terminated for a previous taxable year.

Section 1371(f) applies to certain distributions “after the post-termination transition period.” The Treasury Department and the IRS received a comment regarding intervening audit PTTPs and, accordingly, considered whether the ETSC period continues following an intervening audit PTTP that occurs during the ETSC period. Based on the overall purpose of these proposed regulations to ease the transition from S corporation status to C corporation status, the Treasury Department and the IRS have determined that the ETSC period should resume immediately following the conclusion of an intervening audit PTTP, if the ETSC continues to have a AAA balance greater than zero.

By its terms, section 1371(f) does not require the recipients of qualified distributions to have been shareholders of the S corporation at the time of revocation, and no part of the House Report indicates a Congressional intent to impose such a limitation (no-newcomer rule) on such distributions. The Treasury Department and the IRS received a comment requesting guidance to clarify which shareholders are eligible to receive distributions from a corporation's AAA during the ETSC period. A no-newcomer rule would be inconsistent with Congressional intent to ease the transition of former S corporations to full C corporation status because such a no-newcomer rule would impede an ETSC's ability to exhaust its AAA. A no-newcomer rule also would impose an administrative burden on ETSCs and create complexity by requiring ETSCs to report distributions disparately depending on the recipient. See House Report at 245. Additionally, a rule allowing newcomers would be more consistent with treating the AAA as a corporate-level account.

In the absence of a no-newcomer rule, shareholders that were shareholders on the date that the corporation's S election revocation was made would continue to receive qualified distributions, whether or not there are new shareholders or changes in the historical S corporation shareholders' proportionate interests on or after such date. Moreover, new shareholders, whether eligible S corporation shareholders or not, that acquire stock of an ETSC on or after the date that the revocation was made may receive qualified distributions, all or a portion of which may be sourced from AAA. Such outcomes would best implement the plain language of section 1371(f) and the policy objective of easing the transition of affected taxpayers from S corporation status to C corporation status. Accordingly, these proposed regulations do not impose a no-newcomer rule with respect to the ETSC period.

As discussed in Part II of the Background, section 1371(f) provides that (i) the distributing ETSC's AAA is allocated to a qualified distribution, and (ii) such qualified distribution is chargeable to the ETSC's AE&P, based on the ETSC proration. These proposed regulations would implement this provision in a manner designed to facilitate the ETSC's prompt distribution of AAA and full transition to C corporation status, and thereby “ease the transition from S corporation to C corporation for the affected taxpayers.” House Report at 245. Grounded in that policy, these proposed regulations (i) specify the time at which amounts of AAA and AE&P are determined for purposes of the ETSC proration, (ii) clarify the AAA and AE&P ratios used to implement the ETSC proration, and (iii) describe in detail the method of characterizing qualified distributions.

The Treasury Department and the IRS considered when to measure the AAA and AE&P for purposes of the ETSC proration. The Treasury Department and the IRS considered a “Snapshot Approach,” under which the amounts of AAA and AE&P would be determined on a specified date (historical AAA and historical AE&P, respectively), resulting in the same ETSC proration being applied to all qualified distributions. The Treasury Department and the IRS also considered a “Dynamic Approach,” under which the amounts of AAA and AE&P would be recalculated before each qualified distribution.

These proposed regulations adopt the Snapshot Approach, with a special additional rule to facilitate distributions of AAA when the ETSC's historical AE&P has been exhausted and the ETSC still has AAA. See Part II.C.1 of this Explanation of Provisions. The Snapshot Approach would provide affected taxpayers with an easier transition to full subchapter C status. Under this approach, ETSCs generally would be required to calculate AAA and AE&P for purposes of the ETSC proration only once, as opposed to numerous times under the Dynamic Approach. Also, the Dynamic Approach could significantly delay shareholder access to the ETSC's AAA. While the amount of an ETSC's AAA could never increase during the ETSC period (other than by reason of a redetermination of AAA), such ETSC's AE&P would increase as the amount of any undistributed current earnings and profits is carried forward to the next taxable year.

For the Snapshot Approach, the Treasury Department and the IRS considered two possible determination dates: (1) The beginning of the day for which the revocation of an election under section 1362(a) is effective pursuant to section 1362(d)(1), and (2) immediately after the end of the PTTP. Under these proposed regulations, the determination date would be the beginning of the day on which the revocation of an election under section 1362(a) is effective. Determining the amount of AAA on this date, which can be readily achieved by referencing the ETSC's final Form 1120S, would avoid the complexity of determining the proper amount of historical AAA in the event of an intervening audit PTTP for distributions made after the initial PTTP and before the intervening audit PTTP. In addition, the ETSC and its shareholders would have greater certainty during the PTTP as to the tax characterization of distributions to be made during the ETSC period under this approach. Reference to this determination date also would facilitate the receipt of AAA by the ETSC's shareholders as quickly as possible by maximizing the amount of AAA factored into the ETSC proration. Since S corporations with no subchapter C history will have no AE&P as of the beginning of the effective date of the revocation, using this determination date also would minimize the AE&P that is factored into the ETSC proration, as compared to determining AE&P immediately after the end of the PTTP. As a result, the use of this determination date would facilitate the corporation's transition to full subchapter C status.

The Treasury Department and the IRS request comments regarding the proposed regulations' adoption of the Snapshot Approach, in particular with respect to the timing of determining an ETSC's historical AAA and historical AE&P amounts, and whether such amounts should be adjusted by certain transactions, as well as any potential alternative approaches for computing the ETSC proration. For example, the Treasury Department and the IRS acknowledge that not all ETSCs may favor the approach with respect to timing that these proposed regulations adopt. In particular, an ETSC that makes no distributions of AAA and operates at a loss during its PTTP may prefer to determine its AAA and AE&P ratios immediately after the end of the PTTP. Determining the ratios on this later date would result in a lower historical AE&P amount, and therefore the percentage of the qualified distribution that could be characterized as a distribution of AAA would be greater when compared to the approach adopted by these proposed regulations.

Section 1371(f) provides that AAA is allocated to a qualified distribution, and such distribution is chargeable to AE&P, in the same ratio as the amount of such AAA bears to the amount of such AE&P. Therefore, section 1371(f) requires an allocation of two distinct pools of an ETSC's historical earnings with respect to a qualified distribution (that is, AAA and AE&P). In order to clarify the calculation of AAA and AE&P allocated to qualified distributions, these proposed regulations provide two ratios for purposes of characterizing the portion of a qualified distribution that is sourced from AAA (AAA ratio) and from AE&P (AE&P ratio).

The numerator and denominator of the AAA ratio and the AE&P ratio are comprised of two factors: The ETSC's historical AAA and its historical AE&P. An ETSC's AAA ratio would be the fraction of which the numerator is its historical AAA, and the denominator is the sum of its historical AAA and its historical AE&P. An ETSC's AE&P ratio would be the fraction of which the numerator is its historical AE&P, and the denominator is the sum of its historical AAA and its historical AE&P. Generally, the amount of a qualified distribution sourced from AAA would be determined by multiplying the amount of the qualified distribution by the ETSC's AAA ratio. A parallel computation would be undertaken to determine the amount that is sourced from AE&P. Part II.C of this Explanation of Provisions describes the rules relating to the application of the ETSC proration to qualified distributions in greater detail.

In constructing the mechanics of the ETSC proration, the Treasury Department and the IRS sought to harmonize the rules set forth in section 1371(f) with the general section 301(c) characterization and section 316 allocation rules that govern distributions by a C corporation with respect to its stock. Generally, a distribution by a C corporation with respect to its stock is characterized as a dividend (as defined in section 316), then as a return of stock basis, and finally any remaining amount as gain from the sale or exchange of property. See sections 301(a) and (c). In defining a dividend, section 316 provides that “every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits.” Section 316(a)(2) (flush language). Section 1.316-2(a) provides that “[i]n determining the source of a distribution, consideration should be given first[] to the earnings and profits of the taxable year . . . .” Section 1.316-2(b) further provides that, if distributions during the taxable year consist only of money and exceed the amount of the C corporation's current earnings and profits (CE&P) for the taxable year, CE&P is allocated proportionately to such distributions, while AE&P is allocated on a “first-come-first-served” basis.

Section 1371(f), however, provides special rules with respect to qualified distributions that depart from the general section 301(c) characterization and section 316 allocation rules. From the perspective of sections 301 and 316, 1371(f) is thus an exception to those provisions. See section 301(a) (providing an exception for provisions contained in chapter 1 of subtitle A of title 26 of the Code); section 316(a) (providing an exception for provisions contained in subtitle A of title 26 of the Code). Specifically, section 1371(f) provides that, instead of characterizing a qualified distribution as a dividend as defined in section 316, first AAA “shall be allocated to such [qualified] distribution, and the [qualified] distribution shall be chargeable to [AE&P], in the same ratio as the amount of such [AAA] bears to the amount of such [AE&P].” The allocation of AAA ahead of CE&P, and the allocation of AE&P to a distribution ahead of CE&P, depart from the general characterization rules of section 301 and the general section 316 allocation rules

The Treasury Department and the IRS are aware that this special AE&P allocation rule could impact the normal allocation of AE&P, as well as CE&P, to non-qualified distributions by an ETSC, if an ETSC makes non-qualified and qualified distributions during the same taxable year. For example, the following could result when an ETSC makes a non-qualified distribution followed by a qualified distribution during its taxable year. First, the non-qualified distribution could be allocated an amount of AE&P less than the amount that otherwise would be required under the general section 316 allocation rules, because section 1371(f) would require that a portion of the ETSC's AE&P be allocated instead to the “later-in-time” qualified distribution. Second, because section 1371(f) would cause the “earlier-in-time” non-qualified distribution to be allocated a reduced amount of AE&P, the non-qualified distribution could be characterized differently than it otherwise would have been characterized absent section 1371(f) (that is, a characterization described in section 301(c)(2) or section 301(c)(3), rather than section 301(c)(1)).

With regard to the predictable impacts on the treatment and characterization of non-qualified distributions that result from Congress' specific inclusion of AE&P in section 1371(f)'s AAA allocation methodology, the Treasury Department and the IRS have determined that the exceptions set forth in sections 301(a) and 316(a) naturally extend to such consequences as well. Based on the language of these Code sections, as well as Congress' objective to ease affected taxpayers' transition from S corporation status to C corporation status, the proposed regulations provide a special sourcing rule (Section 1371(f) Priority Rule) for qualified distributions, as described in detail in Part II.C of this Explanation of Provisions.

The Section 1371(f) Priority Rule essentially provides that, during the ETSC period, the rules of the ETSC proration under section 1371(f) apply before the rules of section 301 and 316. Thus, under the Section 1371(f) Priority rule, the ETSC proration first applies to qualified distributions during the taxable year. Then, the rules of section 301 and 316, as incorporated into the Section 1371(f) Priority Rule, apply to any non-qualified distributions as well as to any qualified distributions or portions thereof that are not fully accounted for by the ETSC proration ( i.e., because the corporation's AAA or AE&P are exhausted during the year).

The Treasury Department and the IRS acknowledge that the application of the Section 1371(f) Priority Rule, as set forth in these proposed regulations, departs from the allocation and characterization rules under sections 301 and 316 with which taxpayers and practitioners are familiar. The departure is greatest when an ETSC has both historical AAA and historical AE&P and makes both qualified and non-qualified distributions during the same taxable year. For ETSCs with historical AAA but no historical AE&P, which the Treasury Department and the IRS believe will be the most common situation, the departure is less significant and is the same as the departure that section 1371(e) requires for distributions of AAA during the PTTP. Immediately following the end of the taxable year in which the ETSC period ends, which occurs when the ETSC's AAA balance is reduced to zero, the normal rules of section 301 and section 316 apply as usual to all distributions. These proposed regulations are expected to generally reduce the length of the ETSC period and thus reduce the time during which the departure from the normal rules of sections 301 and 316 occurs.

The following summary provides a reference to taxpayers and practitioners for applying the Section 1371(f) Priority Rule to qualified and non-qualified distributions made during the taxable years of the ETSC period, including the taxable year in which the ETSC period ends.

The Section 1371(f) Priority Rule applies the ETSC proration to each qualified distribution. To determine the ETSC proration, the AAA ratio and the AE&P ratio must first be calculated. An ETSC's AAA ratio is the fraction of which the numerator is its historical AAA and the denominator is the sum of its historical AAA and historical AE&P. Likewise, an ETSC's AE&P ratio is the fraction of which the numerator is its historical AE&P, and the denominator is the sum of its historical AAA and historical AE&P.

In general, the AAA ratio and the AE&P ratio do not change over the course of the ETSC period. However, if the application of the AE&P ratio to a qualified distribution reduces the ETSC's AE&P to zero, and the ETSC's historical AAA has not been exhausted, then the AAA ratio is one and the AE&P ratio is zero for the remainder of the year and all subsequent taxable years of the ETSC period. Additionally, if the ETSC's AE&P (which includes its historical AE&P) is less than or equal to zero as of the beginning of a taxable year (for example, due to non-qualified distributions or losses incurred during the prior taxable year) and the ETSC's historical AAA has not been exhausted, then the AAA ratio is one and the AE&P ratio is zero for the year and all subsequent taxable years of the ETSC period. These mechanics are responsive to the exhaustion of the ETSC's historical AE&P, and therefore accelerate the distribution of AAA by permitting the entirety of all subsequent qualified distributions to be sourced from the ETSC's AAA.

Application of the Section 1371(f) Priority Rule depends, in part, upon whether a distribution by an ETSC is a qualified or non-qualified distribution. As a result, for each taxable year of an ETSC, each distribution must be characterized as a qualified distribution or a non-qualified distribution before determining the characterization of such distribution under the Section 1371(f) Priority Rule.

For each taxable year of the ETSC period, including the taxable year in which the ETSC period ends, the characterization of each qualified distribution must be determined prior to the characterization of each non-qualified distribution. The portion of a qualified distribution that is sourced from AAA is equal to the lesser of (i) the product of the qualified distribution and the AAA ratio, and (ii) the ETSC's AAA immediately before the qualified distribution. Such AAA-sourced portion of the qualified distribution reduces both the ETSC's AAA and the shareholder's adjusted stock basis, applying the principles of section 301(c)(2). If the amount of that AAA-sourced portion exceeds the shareholder's stock basis, the excess is treated as gain from the sale or exchange of property, regardless of whether the corporation has CE&P or AE&P available. If the amount sourced from AAA equals the balance of the ETSC's AAA before the qualified distribution, all subsequent distributions by the ETSC are treated in the manner provided in section 301(c). If the amount sourced from AAA is less than that balance, then any remaining AAA is available to be allocated to later qualified distributions during the taxable year. If any AAA remains after all qualified distributions for the taxable year have been accounted for, it is carried forward to the next taxable year of the ETSC.

The portion of a qualified distribution that is charged to AE&P is equal to the lesser of (i) the product of the qualified distribution and the AE&P ratio, and (ii) the ETSC's AE&P immediately before the qualified distribution. The ETSC's AE&P is reduced by the charged amount in accordance with section 312(a)(1). The ETSC's AE&P is reduced by the portion of the qualified distribution chargeable to AE&P prior to the application of the rules of sections 301 and 316, as incorporated into the Section 1371(f) Priority Rule, to any non-qualified distribution, regardless of whether the non-qualified distribution occurred prior to the qualified distribution. The amount of the qualified distribution that is charged to the ETSC's AE&P is included in the gross income of the shareholder as a dividend under section 301(c)(1).

Any portion of a qualified distribution that is not initially accounted for by the ETSC proration is referred to as an “excess qualified distribution.” An excess qualified distribution arises when the ETSC no longer has AAA, AE&P, or both after initially applying the ETSC proration. If the initial application of the ETSC proration to a qualified distribution does not fully account for the amount of the distribution and the ETSC continues to have AAA, the Section 1371(f) Priority Rule requires that the ETSC proration be reapplied to the excess qualified distribution as if the excess qualified distribution were a separate qualified distribution using a AAA ratio of one and an AE&P ratio of zero. See Part II.C.1 of this Explanation of Provisions.

The Section 1371(f) Priority Rule requires non-qualified distributions and excess qualified distributions (to the extent not characterized as a distribution of AAA) to be treated in the manner described in section 301(c). The Section 1371(f) Priority Rule requires that such treatment take into account the treatment of each non-qualified distribution and each excess qualified distribution made by the ETSC during the same taxable year.

The Treasury Department and the IRS evaluated several other approaches to implementing section 1371(f) and the rules that would be needed to coordinate those approaches with the rules of sections 301 and 316 before settling on the approach adopted in the Section 1371(f) Priority Rule. The Treasury Department and the IRS request comments regarding the advantages and disadvantages of the Section 1371(f) Priority Rule as well as other proposals that would help ease the transition of S corporation status to C corporation status. The Treasury Department and the IRS also request comments regarding the effect of section 381(a) transactions in which an ETSC is either the transferor or the acquiring corporation (including certain triangular acquisitions) as well as the effect of an ETSC electing to file a consolidated return or joining a consolidated group. The Treasury Department and the IRS further request comments on the effect of subchapter C transactions (including section 302(a) redemptions, section 355 transactions, and section 368 reorganizations) and the effect of a deemed distribution (including forgiveness of shareholder debt) on the ETSC's AAA balance.

Section 316(a) provides that a dividend is a distribution of property made by a corporation to its shareholders out of its CE&P or AE&P, or both. Pursuant to § 1.316-2(a), in determining the source of a distribution under section 316(a), a corporation must first source the distribution from its CE&P before sourcing such distribution from AE&P. If the corporation's CE&P is sufficient to cover “all the distributions” made during the taxable year, then the entirety of each distribution is taxable as a dividend pursuant to the first sentence of § 1.316-2(b). If a corporation's distributions during the taxable year consist “only of money” and exceed CE&P, each distribution is allocated its ratable share of CE&P pursuant to the second sentence of § 1.316-2(b).

The reference to distributions that “consist only of money” has been in the second sentence of § 1.316-2(b) since that regulation was adopted in 1955. Section 1.316-2 was adopted shortly after the enactment of the Internal Revenue Code of 1954 (1954 Code), which contained several provisions relating to distributions of noncash property. A number of these provisions have since changed. In particular, section 311 of the 1954 Code provided that a distributing corporation generally did not recognize any gain or loss on the distribution of noncash property, and section 312 of the 1954 Code provided that the distributing corporation generally reduced its earnings and profits by the adjusted basis of the property distributed. At the same time, section 301(b) of the 1954 Code provided that the amount of a distribution of noncash property to a shareholder depended on the type of shareholder. Individual shareholders were treated as receiving a distribution equal to the fair market value of the property, while corporate shareholders were generally treated as receiving a distribution equal to the lesser of the property's fair market value or the distributing corporation's adjusted basis in the asset distributed. In light of these provisions, the 1955 promulgation of § 1.316-2 illustrated the consequences of the allocation of CE&P in the simplest fact pattern—when the distributions consist only of money.

Under current law, however, a distributing corporation recognizes gain on a section 301 distribution of appreciated noncash property. See section 311. The amount of a distribution of noncash property for purposes of shareholder taxation equals the property's fair market value, irrespective of whether the shareholder is an individual or a corporation. Additionally, section 316(a)(2) makes no distinction between distributions in cash and distributions of other property under section 301. Section 317(a), which section 301 cross-references for purposes of defining property, includes money, securities, and any other property, except a distributing corporation's own stock. Accordingly, the Treasury Department and the IRS do not believe that the language in the second sentence of § 1.316-2(b) should be interpreted as implying that under current law the application of the pro rata allocation rule for CE&P is limited to distributions made only in money. Cf. GCM 36138 (Jan. 15, 1975) (noting that “[section] 316(a)(2) makes no qualitative distinction between distributions in cash and other distributions of property under [section] 301,” and “[t]hus, there is no basis under [section] 316(a)(2) for limiting the application of the rules under [§ ]1.316-2(b) to distributions made solely in money”). Therefore, in order to clarify that the pro rata allocation of CE&P applies to all section 301 distributions made during the taxable year, whether in cash or in kind, the proposed regulations would remove the words “consist only of money and” from the second sentence of paragraph (b).

The last sentence of § 1.1377-2(b) limits the special treatment provided under section 1371(e)(1) (that is, the PTTP) solely to those shareholders who were shareholders of the S corporation at the time of termination or revocation of its S election. Because the rules pertaining to the PTTP and to the ETSC period serve the similar objective of easing the transition from S corporation status to C corporation status, the Treasury Department and the IRS have determined that these rules regarding newcomers should be consistent. Therefore, based on the rationale for rejecting a no-newcomer rule for the ETSC period, as set forth in Part II.A of this Explanation of Provisions, the Treasury Department and the IRS have determined that a no-newcomer rule should also not apply to the PTTP. The Treasury Department and the IRS request comments regarding this determination.

The regulations are proposed to apply to taxable years beginning after the date of publication of the Treasury decision adopting these regulations as final regulations in the Federal Register . However, the proposed regulations provide corporations with the option to apply the final rules in §§ 1.316-2, 1.481-5, 1.1371-1, 1.1371-2, and 1.1377-2 in their entirety, to the extent applicable, to taxable years that began on or before the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register and with respect to which the period described in section 6511(a) has not expired. If the corporation makes the choice described in the previous sentence, all shareholders of the corporation must report consistently.

This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations under sections 481(d), 1371(f), and 1377 of the Code will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act. Notwithstanding this certification, the Treasury Department and the IRS invite comments on the impact that these proposed regulations would have on small entities.

These proposed regulations generally affect corporations, and their shareholders, that convert from being taxed as an S corporation to being taxed as a C corporation. The Treasury Department and the IRS acknowledge that there is a substantial number of small entities that are S corporations that could convert to being taxed as a C corporation. According to the 2013 Corporate Income Tax Returns Complete Report ( https://www.irs.gov/pub/irs-soi/13coccr.pdf ), approximately 83 percent of S corporations had gross receipts under $1,000,000. However, the proposed regulations under section 1371(f) are limited to corporations that:

(i) Revoke their S elections;

(ii) Make their revocations during a specified two-year period beginning on December 22, 2017;

(iii) Have positive AAA at the conclusion of their PTTP; and

(iv) Have the same shareholders (and in identical proportions) on December 22, 2017, and the date the S election revocation is made (shareholder identity requirement).

Because these proposed regulations apply only to those S corporations that satisfy the criteria above, only a small subset of S corporations will be affected.

The U.S. Department of Treasury, Internal Revenue Service, Data Book 2018 (Data Book) ( https://www.irs.gov/pub/irs-soi/18databk.pdf ) reports that the IRS received approximately 5.1 million S corporation income tax returns in 2018. According to the Compliance Data Warehouse (CDW), between January 1, 2018, and December 31, 2018, 4,850 S corporations terminated their S elections. Of the 4,850 terminated S corporations:

(i) 286 corporations had more than $35 million in gross receipts;

(ii) 81 corporations had between $25-$35 million in gross receipts;

(iii) 161 corporations had between $15-$25 million in gross receipts; and

(iv) 3,011 corporations had less than $15 million, but at least $1 in gross receipts.

In addition, of those 4,850 terminated S corporations:

(i) 694 corporations reported no gross receipts; and

(ii) The remaining 617 did not file a final return after terminating their S election.

A revocation is one of the three methods by which a corporation may terminate its S election under section 1362(d). Proposed §§ 1.481-5, 1371-1, and 1371-2 apply only to those corporations that revoke their S election. The CDW does not identify how many of the 4,850 terminations were revocations. In the unlikely scenario that all 4,850 terminations were revocations, approximately 0.0951 percent of the 5.1 million S corporations in existence in 2018 may be affected by these proposed regulations. Extrapolating from the first-year data (January 1, 2018, to December 31, 2018) to the second half of the two-year period (January 1, 2019, to December 21, 2019) during which these proposed regulations are effective, it is possible another 4,850 former S corporations could be affected by these proposed regulations. Thus, these proposed regulations might only affect a total of 9,700 corporations. Assuming that the IRS again receives 5.1 million S corporation income tax returns for the 2019 tax year, these proposed regulations may affect approximately 0.1902 percent of all S corporations in existence in 2018 and 2019. The exact number may be lower because not all terminations are revocations, and a revocation only satisfies one of several criteria that cause these proposed regulations to be applicable. For these proposed regulations to be applicable, the corporation must also have a positive AAA balance at the conclusion of its PTTP and satisfy the shareholder identity requirement. Therefore, the number of affected corporations is likely to be lower.

The other proposed regulation in this notice of proposed rulemaking, proposed § 1.1377-2(b), generally applies to a corporation that terminates its S election with a positive AAA balance, regardless of when or how the termination occurs (see section 1362(d)). As a result, the change made by proposed regulation § 1.1377-2(b) to allow newcomer shareholders will affect a greater number of terminating S corporations than proposed regulation §§ 1.481-5, 1.1371-1, and 1.1371-2. Nevertheless, the number of corporations that terminate their S election remains minimal. According to the CDW, there were 2,798 S corporation terminations in 2015; 2,960 in 2016; 3,125 in 2017; and 4,850 in 2018. When comparing the number of terminating S corporations to the number of S corporation income tax returns filed each year, only a small fraction of S corporations will be affected.

In addition, based on published information from the Conference Report accompanying the Act, H.R. Rep. No. 115-446, at 688 (2017), and Bureau of Economic Analysis aggregate data, which were adjusted to reflect the tax burden of small businesses, the projected net tax proceeds from sections 481(d), 1371(f), and 1377 are estimated to affect only a small fraction of the total number of S corporations.

The Treasury Department and the IRS have determined that no additional burden will be associated with these proposed regulations. In particular, the collection of information necessary to comply with these proposed regulations is already required to be collected by previously existing statutory and regulatory requirements. Additionally, these proposed regulations apply only if an S corporation revokes its S election between December 22, 2017 and December 21, 2019, fulfills the shareholder identity requirement, and has a positive AAA balance at the conclusion of its PTTP. The proposed removal of § 1.1377-2(b)'s last sentence would reduce a taxpayer's compliance burden by eliminating the need to track shareholders during the PTTP.

For the reasons explained above, the Treasury Department and the IRS have determined that the final regulations will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f), the notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

These proposed regulations do not require collection of any new or additional information pursuant to the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq. ).

The Treasury Department and the IRS intend that the information necessary to apply these proposed regulations will be collected with the following forms that have been previously reviewed and approved by the Office of Management and Budget (OMB) under the PRA:

(i) Form 1120-S, U.S. Income Tax Return for an S Corporation (OMB Control Number 1545-0123);

(ii) Schedule K-1 (Form 1120-S), Shareholder's Share of Income, Deductions, Credits, etc. (OMB Control Number 1545-0123);

(iii) Form 1120, U.S. Corporation Income Tax Return (OMB Control Number 1545-0123);

(iv) Form 5452, Corporate Report of Nondividend Distributions (OMB Control Number 1545-0123); and

(v) Form 1099-DIV, Dividends and Distributions (OMB Control Number 1545-0110).

Section 1362(e) requires a corporation that revoked or terminated its S election to file a return for its last taxable year as an S corporation on Form 1120-S. This filing requirement includes an eligible terminated S corporation (ETSC). Section 6037(b) and the regulations thereunder require every S corporation to maintain certain information, such as its shareholders' names, addresses, and other identifying information throughout the taxable year, in order to furnish its shareholders with the information necessary to complete their return (in other words, Schedule K-1). Because sections 1366(a) and 1377(a)(1) allocate an S corporation's items of income and loss to shareholders on a per-share, per-day basis, every S corporation effectively tracks its shareholders, and their respective ownership percentages, on a daily basis. The information that every S corporation currently collects to comply with the existing requirements of sections 1366(a), 1377(a)(1), and 6037(b) will be used to determine whether a corporation satisfies the shareholder identity requirement of proposed § 1.481-5(b)(3).

Any corporation that qualifies as an ETSC will refer to Schedule M-2 of its last filed Form 1120-S to calculate each of its AAA and AE&P ratios, within the meaning of proposed § 1.1371-1(a)(2)(vii), to determine its historical AAA and historical AE&P amounts. If an ETSC enters a closing agreement pursuant to a subsequent audit, it will adjust its historical AAA and historical AE&P amounts accordingly.

At the beginning of a corporation's ETSC period, an ETSC will also refer to Schedule M-2 of its last filed Form 1120-S to determine the balance of its accumulated adjustments account (AAA) at the end of its last tax year as an S corporation. If an ETSC makes no cash distributions during its post-termination transition period (PTTP), within the meaning of section 1377(b)(1)(A), then it will start its ETSC period with a AAA balance equal to the amount reported as the AAA balance at the end of the tax year on Schedule M-2 of its last filed Form 1120-S. If an ETSC makes cash distributions during its PTTP, then it will start its ETSC period with a AAA balance equal to the difference between the amount reported as the AAA balance at the end of the tax year on Schedule M-2 of its last filed Form 1120-S and the amount of cash distributions that the ETSC made during its PTTP.

Every domestic C corporation must file an income tax return on Form 1120, and attach Form 5452 if it makes a nondividend distribution to its shareholders. In particular, the instructions for Form 5452 require any corporation that makes a distribution under section 1371(f) to file a Form 5452. In any tax year in which an ETSC makes a qualified distribution, it is required to attach Form 5452 and report its AAA balance, the amount of AE&P at the beginning of the tax year, the amount of CE&P for the current tax year, and the amounts paid during the calendar year from earnings and profits and from “other than earnings and profits.” The information collected through Form 5452 is sufficient for an ETSC to apply these proposed regulations. In particular, the information collected through Form 5452 is sufficient for an ETSC to determine its AAA balance both before and after each qualified distribution, as well as determine the impact that each qualified distribution has on its CE&P and AE&P.

With respect to shareholders of ETSC stock, an ETSC is required (like any C corporation that makes a distribution to its shareholders) to provide a statement to its non-corporate recipient shareholders that reports the amounts characterized as a dividend and nondividend distribution on Form 1099-DIV. Form 1099-DIV will inform an ETSC's shareholders of the amount that constitutes a dividend subject to section 301(c)(1) and the amount that constitutes a nondividend distribution. Distributions allocable to AAA will be reported to recipient shareholders as a nondividend distribution.

The Treasury Department and the IRS do not anticipate modifying the scope of the information gathered on the aforementioned forms.

Modest burden estimate revisions are anticipated for proposed regulations under § 1.1377-2. Specifically, the proposed removal of § 1.1377-2(b)'s last sentence would reduce a taxpayer's collection burden by eliminating the need to track shareholders during the PTTP. Changes to these burden estimates will be made in accordance with the PRA in the annual review procedure for information collections under OMB Control Number 1545-0123.

These proposed regulations are estimated to affect a total of 9,700 corporations, or 0.1902% of all S corporations in existence in 2018 and 2019. Regarding proposed regulations §§ 1.481-5, 1.481-6, 1.1371-2, and 1.1371-3, the exact number might be lower because the 9,700 is extrapolated from data and projections of S corporation terminations, not the subset revocations, and to qualify as an ETSC the corporation must also have a positive AAA balance at the conclusion of its PTTP and satisfy the shareholder identity requirement.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the OMB.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2019, that threshold is approximately $164 million. This rule does not include any mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This rule does not have federalism implications and does not impose substantial, direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed rules, and specifically on the issues identified in Part I.A.3; in Parts II.B.1 and II.C.6; and in Part IV of this Explanations of Provisions section. All comments will be made available at http://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, then notice of the date, time, and place for the public hearing will be published in the Federal Register .

The principal authors of these proposed regulations are Margaret Burow and Michael Gould of the Office of Associate Chief Counsel (Passthroughs and Special Industries), and Aglaia Ovtchinnikova and Kevin M. Jacobs of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in the development of the proposed regulations.

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

I. Table of Abbreviations NPRM Notice of Proposed Rulemaking CFR Code of Federal Regulations COTP Captain of the Port DHS Department of Homeland Security FR Federal Register LA-LB Los Angeles-Long Beach OCMI Officer in Charge of Marine Inspection OMB Office of Management and Budget NTSB National Transportation Safety Board PWSA Ports and Waterways Safety Act RNA Regulated Navigation Area U.S.C. United States Code § Section II. Background, Purpose, and Legal Basis

Since 1998, Captain of the Port (COTP) San Francisco and COTP Los Angeles-Long Beach (LA-LB) have issued various navigation safety advisories and created numerous emergency safety zones to mitigate risk to mariners and vessels transiting the Crescent City Harbor, Humboldt Bay, Noyo River, and Morro Bay Harbor entrances during unsafe conditions. These emergency safety zones included policies and procedures for closing the bar to vessel traffic as well as vessel escort policies and provided parameters and procedures for waiver requests. For example, in October 2017, COTP San Francisco published a temporary final rule to establish temporary safety zones in the navigable waters of the Humboldt Bay Entrance Channel in Eureka, CA; the Noyo River Entrance Channel in Fort Bragg, CA; and the Crescent City Harbor Entrance in Crescent City, CA to enhance navigation safety during unsafe conditions (82 FR 53418). The use of emergency safety zones to accomplish the required risk mitigation does not provide consistency or predictability of Coast Guard actions to mariners. The RNAs proposed here would define the parameters and implementation procedures for restricting access to the applicable areas during unsafe conditions for various types and classes of vessels.

The current mariner rules of the road and use of emergency safety zones governing maritime traffic operating in the vicinity of the Crescent City Harbor, Humboldt Bay, Noyo River, and Morro Bay Harbor bar entrances are insufficient to enhance the safety of mariners and vessels operating in those areas. Bars along the northern California coast experience severe wave, sea, and current conditions that have contributed to numerous marine casualties. Various Coast Guard and National Transportation Safety Board (NTSB) casualty investigations have identified a need for specific regulations to mitigate these risks to enhance the safety of mariners and vessels operating in the vicinity of bars. One example is the NTSB Safety Recommendation M-05-009, available at: https://www.ntsb.gov/investigations/AccidentReports/_layouts/ntsb.recsearch/Recommendation.aspx?Rec=M-05-009 .

On October 17, 2005, in a written response to NTSB Safety Recommendation M-05-009, the Coast Guard articulated its intention to develop written policies for transiting west coast bars and inlets. In July 2010, Coast Guard District Thirteen published a final rule, 74 FR 59098, amended by 75 FR 41988, to mitigate bar transit risks that addressed NTSB Safety Recommendations M-05-009 and M-05-010. Coast Guard District Eleven is proposing a similar rule to streamline safety regulations and provide predictability for local mariners regarding the conditions for the Coast Guard to regulate navigation in the vicinity of Crescent City Harbor, Humboldt Bay, Noyo River, and Morro Bay Harbor bar entrances based on weather, sea, tide, and river conditions.

The Coast Guard solicited public input on the potential establishment of RNAs at these locations through the Federal Register prior to publication of this NPRM (83 FR 5592, Feb. 8, 2018). The comment period closed on March 12, 2018. Coast Guard District Eleven received a request for an extension of the comment period, and after reviewing it, reopened the public comment period to extend to March 30, 2018 (83 FR 11649). In addition to the Federal Register notices, an extensive public outreach plan was completed by Coast Guard COTP LA-LB and COTP San Francisco, and a press release was issued to engage all mariner stakeholders in the local communities. Coast Guard District Eleven recognizes the need to provide ample opportunity for public discussion of bar crossing safety measures and seeks to acquire mariner feedback on the proposed regulatory text.

The Coast Guard is proposing this rulemaking under authority in 46 U.S.C. 70034 (previously 33 U.S.C. 1231) and Department of Homeland Security (DHS) Delegation No. 0170.1(70). This authority has been re-delegated by the Commandant to District Commanders in accordance with 33 CFR 1.05-1(e). In addition, without this rule the COTP can issue COTP Orders under the Ports and Waterways Safety Act (PWSA) 46 U.S.C. 70002 to direct only a specific vessel, facility, or individual in order to: restrict or stop vessel operations; require specific actions to be taken; deny a vessel further entry to port until a deficiency is corrected; or detain a vessel in port. COTP Orders cannot be issued to “all vessels” or a class of vessels, facilities or individuals. Where a group or class of entities is targeted, a safety zone or RNA is more appropriate. Due to this limitation, this rule is being established to restrict all vessels, when the COTP determines that the on scene conditions are unsafe. Authority to activate the proposed RNA at Morro Bay Harbor is delegated from the District Commander to COTP LA-LB. The authority to activate the proposed RNA at Crescent City Harbor, Humboldt Bay, and Noyo River is delegated to COTP San Francisco. The Designated Representative for enforcement of the proposed RNA at Crescent City Harbor, Humboldt Bay, and Noyo River would be designated by COTP San Francisco to Commander, Sector Humboldt Bay.

A total of six comments were received from the published Request for Comments. We considered four comments in drafting this proposed rule; two comments were outside the scope of the notice or appeared to be based on a misunderstanding of the intent of the Request for Comments.

One commenter stated that the Government should not regulate when mariners can navigate a specific area. The Coast Guard has maintained a narrow scope for the enactment of the proposed regulation in order to minimize potential impact on navigation. The Coast Guard's goal is to provide advance notice, consistency, and predictability for local mariners during periods of extreme weather and sea conditions ( i.e., unsafe conditions). The Coast Guard seeks clear communication with local mariners and views this proposed regulation as a tool to improve public safety, predictability, advance notice, and transparency.

One comment questioned the ability of the Coast Guard to determine when the bars are safe for seasoned mariners to transit versus the judgment of professional mariners themselves. The Coast Guard drafted the proposed RNAs as a formalization of existing best-practices already used by prudent mariners at bar entrances along the Pacific Coast during extreme weather and sea conditions. The proposed regulation differentiates between a bar restriction and bar closure based on set environmental conditions as observed by the COTP, who under 33 CFR 6.04-5, retains ultimate authority to restrict entrance to the harbor bars in order to avoid damage or injury to a vessel or waterfront facility. To account for the various levels of mariner knowledge and familiarity with each bar, the draft regulation also proposes progressive standards for recreational and professional mariners. In addition, the proposed regulatory text establishes safety standards for operating in the RNAs during periods of unsafe conditions and provides the opportunity for preapproved bar crossing plans to implement supplemental safety and accessibility measures for mariners. Unsafe conditions in this proposed rule are typically expected to be at least 20-foot breaking seas. The bar should be reopened at the discretion of each COTP, typically when breaking seas are less than 20-foot and when the local Coast Guard station is able to launch the 47-foot motor life boat to respond to search and rescue cases. Finally, the proposed regulation establishes waiver procedures for vessels requiring access to safe harbor during a bar restriction or closure. We welcome further discussion on the proposed text, as the primary focus of this NPRM is to provide an opportunity for public comment to inform potential revisions of the proposed RNA.

One commenter stated that such RNAs would be redundant because the Coast Guard currently closes the entrances to all craft during unsafe periods. The Coast Guard believes the commenter is referring to the use of emergency safety zones. While emergency safety zones reduce the risk for all vessels, they do not provide advance notice, consistency, or predictability of Coast Guard actions affecting mariners, or additional safety requirements, such as implementing bar crossing plans for small passenger and commercial fishing vessels to mitigate risks inherent to transits of the harbor bars. The proposed RNA negates the need to establish emergency safety zones, and defines the parameters and enforcement procedures for restricting access to the applicable areas during unsafe conditions and defines safety requirements for small passenger and commercial fishing vessels operating within the proposed RNAs. This regulation would improve consistency of enforcement and communication with the maritime public.

The Coast Guard received one comment suggesting that the Coast Guard discuss possible penalties or actions the Coast Guard will take for violations of the proposed regulation. The Coast Guard incorporated a reference to 46 U.S.C. 70036, which provides penalties for all persons in violation. Per 46 U.S.C. 70036, the current civil penalty shall not exceed $25,000 per violation. Each day of a continuing violation shall constitute a separate violation.

The Coast Guard utilized the comments received to draft the proposed RNA text to be minimally disruptive to the local community and mariners utilizing Crescent City Harbor, Humboldt Bay, Noyo River, and Morro Bay Harbor bar entrances outlined in this NPRM, while acknowledging the limits of Coast Guard rescue assets and the need for additional safety measures. In the sections below, we outline a comprehensive proposed regulation of RNAs for public comment.

The Coast Guard is proposing to establish RNAs at the harbor bar entrances to Crescent City Harbor, Humboldt Bay, Noyo River, and Morro Bay. The proposed regulation would create additional safety requirements for recreational and small commercial vessels operating in these areas during periods of hazardous conditions, such as high wind or breaking surf, as well as establish clear procedures for restricting and closing these harbor bar entrances in the event of hazardous conditions. The proposed regulation is necessary to enhance mariner and vessel safety when crossing the bars exceeds parameters, typically when breaking seas are projected to be 20-foot or greater. The COTP or a designated representative would determine whether an unsafe condition exists for restricting or closing the bar entrances, meaning that the wave height within an RNA is equal to or greater than the maximum wave height as defined by the formula L/10 + F = W. In the formula “L” is the overall length of a vessel, “F” is the minimum freeboard when measured in feet from the lowest point along the upper strake edge to the surface of the water and “W” is the maximum wave height in feet. The COTP will also utilize their professional maritime experience and knowledge of local environmental conditions in making their determination. Factors that will be considered include, but are not limited to: Size and type of vessel, sea state, winds, wave period, and tidal currents. The proposed rulemaking would also prohibit vessels from entering these areas during hazardous conditions unless authorized by Commander, District Eleven, the local Captain of the Port, or a designated representative.

In the proposed rule, the operation of recreational and uninspected passenger vessels in the RNA is prohibited during bar restrictions and bar closures unless specifically authorized by the COTP or a designated representative. The operator of any recreational or uninspected passenger vessel operating in an activated RNA shall ensure that all persons located in any unenclosed areas of the recreational vessel are wearing lifejackets, and that lifejackets are readily accessible for/to all persons located in any enclosed area of the vessel.

The proposed rule would also prohibit small passenger vessels and commercial fishing vessels from crossing the bars located in the RNAs during a bar closure, unless specifically authorized by the COTP or a designated representative.

The master or operator of any small passenger vessel operating in an activated RNA shall ensure that all persons located in any unenclosed areas of the small passenger vessel are wearing lifejackets and that lifejackets are readily accessible for/to all persons located in any enclosed areas of the vessel. The aforementioned requirement may be waived if the operator of the small passenger vessel pre-establishes a bar crossing plan with the Coast Guard OCMI with responsibility for the bar they intend to cross that will include outlining a communication plan and safety equipment to be set out during the crossing. Operators intending to cross the Crescent City Harbor, Humboldt Bay, and Noyo River bars should contact Coast Guard Sector San Francisco and operators intending to cross the Morro Bay Harbor entrance should contact Coast Guard Sector Los Angeles-Long Beach.

The master or operator of any commercial fishing vessel operating in an activated RNA shall ensure that all persons located in any unenclosed areas of commercial fishing vessel are wearing lifejackets or immersion suits and that lifejackets or immersion suits are readily accessible for/to all persons located in any enclosed spaces of the vessel.

For bars having deep draft vessel access, the COTP will consult with the local pilots association, when practicable, prior to closing the affected bar.

A similar RNA program has been tested and used along the Northern Pacific Coast with limited burden to local mariners while improving vessel safety during unsafe conditions. The Coast Guard believes that implementing a standard protocol along the Pacific Coast will improve our service to the maritime community and minimize the unpredictability of emergency safety zones. Conditions that exceed operating parameters for the Coast Guard's primary rescue asset, the 47-foot motor lifeboat with an operating limit of 20-foot breaking seas, will be the threshold for COTP activation of the proposed RNA. In addition, the proposed RNA will provide predictability of closures, improve vessel transit plans during extreme weather conditions, and strengthen communications between the Coast Guard and the maritime community. The regulatory text we are proposing appears at the end of this document.

We developed this proposed 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 NPRM has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, the NPRM 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 fact that: (1) The proposed regulation does not require vessel operators affected by the regulation to purchase additional equipment; (2) the restriction and/or closure of the bars are temporary and will only occur when necessary due to unsafe conditions; (3) the maritime public will be advised of bar restrictions and/or closures via one or more of the following methods: Broadcast Notice to Mariners, local government partners, bar warning lights and/or publication in the Local Notice to Mariners; and (4) vessels may be allowed to enter the proposed RNA when a bar restriction and/or closure is in place on a case-by-case basis with permission of the COTP or a designated representative.

The Regulatory Flexibility Act of 1980 (RFA), 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 certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities.

This rule may affect the following entities, some of which may be small entities: Owners and operators of waterfront facilities, commercial vessels, and pleasure craft engaged in recreational activities and sightseeing, if these facilities or vessels are in the vicinity of the RNA at times when the RNA has been activated. This rule will not have a significant economic impact on a substantial number of small entities for the following reasons: (1) The proposed regulation does not require vessel operators affected by the regulation to purchase additional equipment; (2) the restriction and/or closure of the bars are temporary and will only occur when necessary due to unsafe conditions; (3) the maritime public will be advised of bar restrictions and/or closures via one or more of the following methods: Broadcast Notice to Mariners, local government partners, bar warning lights and publication in the Local Notice to Mariners; and (4) vessels may be allowed to enter the proposed RNA when a bar restriction or closure is in place on a case-by-case basis with permission of the COTP or a designated representative.

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 proposed rule would 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 proposed 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 proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would 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 proposed 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 proposed rule would not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.

We have analyzed this proposed rule under Department of Homeland Security Directive 023-01 and Environmental Planning COMDTINST 5090.1 (series), which guides the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made a preliminary determination 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 proposed rule involves RNAs that would prohibit the transit of maritime traffic in times of unsafe conditions. Normally such actions are categorically excluded from further review under L60[a] in Table 3- 1 of U.S. Coast Guard Environmental Planning Implementing Procedures. A preliminary Record of Environmental Consideration supporting this determination is available in the docket where indicated under ADDRESSES . We seek any comments or information that may lead to the discovery of a significant environmental impact from this proposed rule.

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.

We view public participation as essential to effective rulemaking and will consider all comments and material received during the comment period. Your comment can help shape the outcome of this rulemaking. If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation.

We encourage you to submit comments through the Federal eRulemaking Portal at http://www.regulations.gov . If your material cannot be submitted using http://www.regulations.gov, contact the person in the FOR FURTHER INFORMATION CONTACT section of this document for alternate instructions.

We accept anonymous comments. All comments received will be posted without change to http://www.regulations.gov and will include any personal information you have provided. For more about privacy and the docket, visit http://www.regulations.gov/privacyNotice .

Documents mentioned in this NPRM as being available in the docket, and all public comments, will be in our online docket at http://www.regulations.gov and can be viewed by following that website's instructions. Additionally, if you go to the online docket and sign up for email alerts, you will be notified when comments are posted or a final rule is published.

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

On October 31, 2019, the Postal Service filed a petition pursuant to 39 CFR 3050.11 requesting that the Commission initiate a rulemaking proceeding to consider changes to analytical principles relating to periodic reports. 1 The Petition identifies the proposed analytical changes filed in this docket as Proposal Nine.

Background. Proposal Nine relates to methodological changes for estimating facility-related costs. Petition, Proposal Nine at 1. The cost models were last presented in Docket No. ACR2018, Library References USPS-FY-18-NP15 and USPS-FY18-NP16, respectively. Id. The Postal Service acknowledges that because the extensive underlying data collection, analysis, and synthesis supporting this proposal ran relatively late into the year, the review is unlikely to be completed in time for FY 2019 Annual Compliance Report (ACR) preparation. Id. However, the Postal Service hopes to be able to incorporate the proposal into the ACR for FY 2020. Id.

The current methodology is based on data from a Facility Space Usage Study (FSUS) conducted in 1999 and presented in Docket No. R2005-1. Id. Since then, the Office of the Inspector General for the Postal Service recommended updating the FSUS. Id. The Postal Service's updated FSUS is the basis for Proposal Nine. Id.

Proposal and rationale. The Postal Service notes that it recognized the need for a new FSUS since many facility changes have occurred since the old study. Id. at 2. In the interim, several types of equipment used to process mail in 1999 no longer exist ( e.g., the multi-line optical character reader input sub system, the mail processing bar code sorter output sub system, among others) while new processing equipment has been introduced ( e.g., the automated flat-sorting machine model 100 and the automated package processing system). Id. Additionally, mail processing operations have been consolidated, bin capacity has increased over time, and network distribution centers have been activated in the meantime. Id.

Not only have extensive changes taken place in the mail processing network since 1999, but the Postal Service's delivery network has changed as well. Id. Due to the deployment of the Flats Sequencing System to some plants, flat mail pieces at some delivery units are sorted into delivery point sequence order. Id. Automated delivery unit sorters have also been deployed to some postal facilities for parcel sortation to the carrier route level. Id. at 2-3.

The Postal Service states that while it has updated its cost analysis annually to reflect the use of facility space, these adjustments were merely approximations. Id. at 3. The new FSUS provides a more comprehensive approach to estimating space proportions. Id.

The FSUS update process began with a data collection phase using sample statistics from 11 mail processing strata and 6 retail facility and delivery strata. Id. The sample statistics were then used to inflate the space data into population estimates using the “combined ratio” estimation. Id. This methodology was used to de-average the total electronic Facility Management System building gross square footage for postal managed buildings into space categories representing each operation and function. Id.

The Petition includes an updated facility file version from the FY 2018 ACD (attached as USPS-FY18-8) to the Postal Service's Annual Compliance Review in Docket No. ACR2019. Id. at 4. The proposed new version is presented as Excel file “FACILITY19.PROP9.xlsx” (Facility File Workbook). Id. The Postal Service has modified the Facility File Workbook to remove redundant or outdated worksheets and includes the following 16 worksheets:

• Outputs to CRA Worksheet

• POBox-Caller Service Split Worksheet

• Component Variability Worksheet

Table of Contents for Supplementary Information I. Executive Summary II. Section-by-Section Analysis III. Regulatory Impact and Notices A. Executive Order 12866 and DOT Regulatory Policies and Procedures B. Regulatory Flexibility Determination C. Federalism D. Paperwork Reduction Act E. International Trade Impact Assessment F. Environmental Assessment G. Unfunded Mandates Reform Act of 1995 H. Energy Impact I. Privacy Act I. Executive Summary

This proposed rule would revise FRA's existing regulation on State highway-rail grade crossing action plans (49 CFR 234.11) to require 40 States and the District of Columbia to develop and implement FRA-approved highway-rail grade crossing action plans. The proposed rule would also require the ten States previously required to develop highway-rail grade crossing action plans by the Rail Safety Improvement Act of 2008 (RSIA) and FRA's implementing regulation at 49 CFR 234.11 to update their plans and to submit reports describing the actions they have taken to implement their plans. FRA seeks comment on all aspects of this proposal.

This rulemaking responds to the Fixing America's Surface Transportation Act (Pub. L. 114-94) (FAST Act) mandate that the FRA Administrator promulgate a regulation requiring States to develop, implement (and update, if applicable) State highway-rail grade crossing action plans. See section 11401 of the FAST Act. In the RSIA, Congress directed the Secretary of Transportation to identify the ten States that had the most highway-rail grade crossing collisions, on average, over the previous three years, and require those States to develop grade crossing action plans for the Secretary of Transportation's approval. See section 202 of the RSIA. RSIA required the action plans to “identify specific solutions for improving” grade crossing safety and to “focus on crossings that have experienced multiple accidents or are at high risk” for accidents. Using FRA's database of reported highway-rail grade crossing accidents/incidents that occurred at public and private grade crossings, FRA determined the following ten States had the most reported highway-rail grade crossing accidents/incidents at public and private grade crossings during the three-year period from 2006 through 2008: Alabama, California, Florida, Georgia, Illinois, Indiana, Iowa, Louisiana, Ohio, and Texas. Therefore, on June 28, 2010, FRA issued a final rule (2010 final rule) requiring these ten States to develop highway-rail grade crossing action plans and submit them to FRA for approval (based on the Secretary of Transportation's delegation of authority to the Federal Railroad Administrator in 49 CFR 1.89). See 75 FR 36551 (June 28, 2010) (codified at 49 CFR 234.11).

Section 11401 of the FAST Act tasks the FRA Administrator with promulgating a regulation requiring these ten States to update the highway-rail grade crossing action plans they previously submitted to FRA under 49 CFR 234.11. This statutory mandate also directs FRA to include a regulatory provision that requires each of these ten States to submit reports to FRA describing: (a) What the State did to implement its previous highway-rail grade crossing action plan; and (b) how the State will continue to reduce highway-rail grade crossing safety risks. As for the other 40 States and the District of Columbia, the FAST Act mandate also requires the FRA Administrator to promulgate a regulation requiring them to develop and implement State highway-rail grade crossing action plans. See FAST Act section 11401(b)(1)(B).

The FAST Act mandate contains specific requirements for the contents of the highway-rail grade crossing action plans. As set forth in section 11401(b)(2) of the FAST Act, each highway-rail grade crossing safety plan must identify highway-rail grade crossings that: (a) Have experienced recent highway-rail grade crossing accidents or incidents; (b) have experienced multiple highway-rail grade crossing accidents or incidents; or (c) are at high-risk for accidents or incidents. Section 11401(b)(2) of the FAST Act further provides that each highway-rail grade crossing action plan must identify specific strategies for improving safety at highway-rail grade crossings, including highway-rail grade crossing closures or grade separations. Each State highway-rail grade crossing action plan must also designate a State official responsible for managing implementation of the plan. See FAST Act section 11401(b)(2).

The FAST Act mandate also contains requirements related to FRA's review and approval of State highway-rail grade crossing action plans, as well as requirements related to the publication of FRA-approved plans. For example, when FRA approves a State's highway-rail grade crossing action plan, section 11401(b)(4) of the FAST Act requires FRA to make the approved plan publicly available on an “official internet website.”

If a State submits a highway-rail grade crossing action plan FRA deems incomplete or deficient, section 11401(b)(6) of the FAST Act requires FRA to notify the State of the specific areas in which the plan is deficient. In addition, section 11401(b)(6) requires States to correct any identified deficiencies and resubmit their corrected plans to FRA within 60 days from FRA's notification of the deficiency. If a State fails to meet this 60-day deadline for correcting deficiencies identified by FRA, section 1401(b)(8) of the FAST Act requires FRA to post a notice on an “official internet website” that the State has an incomplete or deficient highway-rail grade crossing action plan.

FRA personnel, including FRA regional grade crossing managers, inspectors, and specialists and experts from FRA's Highway-Rail Crossing and Trespasser Programs Division, will be available to assist States with developing, implementing, and updating their highway-rail grade crossing action plans. For example, as further explained in the Section-by-Section Analysis below, FRA will provide highway-rail grade crossing accident/incident data to States upon request. FRA will also assist State agencies who wish to use FRA's Office of Safety Analysis website to generate customized reports of highway-rail grade crossing accident/incident data.

Under 23 U.S.C 148, to receive certain highway funds, States are required to implement highway safety improvement programs, which implement their (continually updated) strategic highway safety plans, a component of which is “improvements to rail-highway grade crossings” 23 U.S.C. 148(d)(1)(B)(vii). Further, highway funding (23 U.S.C. 130) is available to fund States' development of rail-highway grade crossing plans (FAST Act Sec 11401(b)(5)) and the Secretary may also condition rail improvement grants to States (49 U.S.C. 229) on the existence of the plans.

Section 234.1 Scope

This section discusses the scope of part 234. FRA proposes to revise paragraph (a)(3) to reflect the revised requirements contained in 49 CFR 234.11 as a result of the FAST Act mandate and indicate that these revised requirements are within the scope of this part.

Currently, paragraph (a) indicates the purpose of this section is to reduce “collisions” at highway-rail grade crossings in the ten States that have had the most highway-rail grade crossing collisions from 2006-2008 (the “initial ten States”). FRA proposes to revise paragraph (a) to explain that the purpose of this section is to reduce “accidents” at highway-rail grade crossings “nationwide by requiring States and the District of Columbia to develop or update highway-rail grade crossing action plans and implement them.” (FRA proposes to replace the term, “collisions,” with the term, “accidents,” for consistency with the language of Section 11401(b) of the FAST Act.) As proposed, this paragraph would continue to make clear, as the existing language does, that this section would not restrict any other entity from adopting a highway-rail grade crossing action plan, nor would it restrict any State or the District of Columbia from adopting a highway-rail grade crossing action plan with additional or more stringent requirements not inconsistent with this regulation. For purposes of this section, unless otherwise stated, the term “State” refers to any one of the 50 States in the United States of America or the District of Columbia; at the same time, FRA may also separately identify the District of Columbia for clarity.

Proposed paragraph (b) would require 40 States and the District of Columbia to develop individual State highway-rail grade crossing action plans that address each of the required elements listed in paragraph (e) and to submit their individual plans to FRA for review and approval no later than one year after the final rule effective date.

FRA proposes to require States and the District of Columbia to submit their highway-rail grade crossing action plans electronically through FRA's website in Portable Document Format (PDF). FRA intends to provide a secure document submission site for States and the District of Columbia to use to upload their highway-rail grade crossing action plans for FRA review and approval.

Existing paragraph (c) of this section outlines the requirements for a State highway-rail grade crossing action plan and requires the initial ten States to submit their plans to FRA by August 27, 2011. As noted above, this existing requirement for the initial ten States to develop and submit State highway-rail grade crossing action plans for FRA review and approval on or before August 27, 2011, was derived from the RSIA. In response to the mandate of Section 11401 of the FAST Act, FRA proposes to revise this section to require each of the initial ten States to update its existing State highway-rail grade crossing action plan and to provide a report on the State's efforts to implement its existing plan.

Proposed paragraph (c)(1) would require each of the initial ten States to update its existing State highway-rail grade crossing action plan to address each of the required elements listed in paragraph (e) (the same required elements that new State highway-rail grade crossing action plans would be required to address) no later than one year after the final rule's effective date. This list in paragraph (e) incorporates many of the same elements that the initial ten States were required to address in their existing plans. Paragraph (c)(1) would also require each of the initial ten States to submit its updated highway-rail grade crossing action plan to FRA for review and approval.

Paragraph (c)(2) would also require each of the initial ten States to submit a report to FRA describing how the State implemented the highway-rail grade crossing action plan that it previously submitted to FRA under 49 CFR 234.11. Each of these initial ten States would also be required by paragraph (c)(2) to describe in its report how the State will continue to reduce highway-rail grade crossing safety risks. These proposed requirements are derived from section 11401(b)(1) of the FAST Act. FRA envisions that this report, which should address each proposed initiative/solution contained in the State's highway-rail grade crossing action plan previously submitted to FRA under 49 CFR 234.11, could simply be submitted as an appendix to the State's updated plan. FRA intends to use these implementation reports when preparing the report to Congress required by section 11401(c) of the FAST Act addressing the progress these initial ten States have made in implementing their previously submitted action plans.

In paragraph (d)(1), FRA proposes to require each of the initial ten States to submit its updated highway-rail grade crossing action plan and implementation report electronically in PDF form. FRA intends to provide a secure document submission site for these States to use to upload their updated highway-rail grade crossing action plans and implementation reports for FRA review. Paragraph (d)(2) identifies the ten States that would be required to update their existing State highway-rail grade crossing action plans and submit implementation reports to FRA.

Paragraph (e) contains a proposed list of required elements for new and updated State highway-rail grade crossing action plans. These elements are derived from section 11401(b)(2) of the FAST Act. Section 11401(b)(2) of the FAST Act mandates that each State highway-rail grade crossing action plan “identify highway-rail grade crossings that have experienced recent highway-rail grade crossing accidents or incidents or multiple highway-rail grade crossing accidents or incidents, or are at high-risk for accidents or incidents.” As reflected in paragraph (e)(1), FRA proposes to interpret “recent highway-rail grade crossing accidents or incidents” as highway-rail grade crossing accidents or incidents that have occurred within the previous 3 years. FRA proposes to interpret “multiple highway-rail grade crossing accidents or incidents” as more than one highway-rail grade crossing accident or incident that occurred within the previous 5 years. This five-year timeframe is consistent with the five-year timeframe used by the initial ten States when they prepared their state highway-rail grade crossing action plans pursuant to existing § 234.11. FRA is not, however, proposing to adopt an official definition or interpretation of the phrase “at high-risk for accidents or incidents.” FRA intends to give States the flexibility to define this category of highway-rail grade crossings for themselves. In sum, paragraph (e)(1) would require States to identify highway-rail grade crossings that: Have experienced at least one accident or incident within the previous three years; have experienced more than one accident or incident within the previous five years; or are otherwise “at high-risk for accidents or incidents, as defined by the State or the District of Columbia.” FRA expects that States would explain how they have defined “high risk for accidents or incidents” if they assert in their State action plans that they have one or more highway-rail grade crossings that fall within this category.

Paragraph (e)(2) would require States to identify the data sources used to categorize the highway-rail grade crossings in paragraph (e)(1). To help States identify highway-rail grade crossings that have experienced recent accidents or incidents ( i.e., at least one grade crossing accident or incident within the previous three years), have experienced multiple accidents or incidents ( i.e., more than one accident or incident within the previous five years), or are at high-risk for accidents or incidents, FRA will provide highway-rail grade crossing accident/incident data to States upon request. FRA will also assist State agencies electing to use FRA's Office of Safety Analysis website to generate customized reports of highway-rail grade crossing accident/incident data. However, if the State highway-rail grade crossing action plan identifies highway-rail grade crossings that are at “high-risk for accidents or incidents,” FRA expects that the State will explain the criteria it used to classify highway-rail grade crossings as “high-risk for accidents or incidents,” in addition to discussing the data sources it used to identify this category of crossings.

Paragraph (e)(3) would require States to discuss specific strategies for improving safety at the highway-rail grade crossings identified in paragraph (e)(1) over a five-year period. FRA anticipates States will explain the causal factors that contribute to highway-rail grade crossing safety risks at the grade crossings identified in their action plans, including, if applicable, risks posed by highway-rail grade crossings that are frequently blocked by idling trains. Also, as indicated in the proposed rule text, FRA encourages States to consider crossing closures and grade separations as potential strategies for improving grade crossing safety. Paragraph (e)(4) would require States to provide an implementation timeline for the strategies that will be used to improve safety at the highway-rail grade crossings identified in paragraph (e)(1). Section 11401(b) of the FAST Act did not dictate a specific period of time that State highway-rail grade crossing action plans should cover. However, existing paragraph (c) of this section required the original ten States to develop highway-rail grade crossing action plans that covered a five-year period. Therefore, for the sake of consistency, FRA proposes that the plans for the remaining 40 States and the District of Columbia cover a period of at least five years. Based on FRA's previous experience working with the initial ten States, a period of at least five years seems appropriate because many of the strategies that may be included in these plans ( e.g., crossing closures and grade separations) could take up to five years to implement. However, FRA solicits comment on the time period that should be covered by highway-rail grade crossing plans prepared by the remaining 40 States and the District of Columbia.

Paragraph (e)(5) proposes to require each State and the District of Columbia to designate an official responsible for managing implementation of the State highway-rail grade crossing action plan. FRA is planning to create a secure document submission site that can be used to upload highway-rail grade crossing action plans. The official designated under this paragraph would be given primary user access to the secure document submission site, as well as the authority to grant access to secondary users. Accordingly, FRA envisions that the designated official will need to register with FRA to gain primary user access to the secure document submission site.

As reflected in paragraph (f) of this section, FRA proposes to require States and the District of Columbia to provide the following contact information for their designated officials, so they can be invited to set up primary user accounts: The name and title of the designated State official; the business mailing address for the designated State official; the email address for the designated State official; and the daytime business telephone number for the designated State official. Also, paragraph (f)(2) of this section would require each State and the District of Columbia to notify FRA if a new official is subsequently designated to manage implementation of its highway-rail grade crossing action plan and to provide contact information for the new designated official.

Paragraph (g) sets forth FRA's proposed review and approval process for highway-rail grade crossing action plans. FRA is soliciting comments on the proposed timeframes for each stage of the proposed review and approval process. These proposed timeframes include: (1) The 60-day period that would be allotted for FRA's preliminary review of each State action plan, and (2) the 60-day period that would be allotted for States with action plans deemed incomplete or deficient to correct their plans and submit corrected plans to FRA for review.

In particular, FRA is soliciting comment on the best way to implement these 60-day timeframes, which are specified in sections 11401(b)(6) and (b)(7) of the FAST Act. For instance, FRA is concerned that the proposed 60-day review period may not be adequate in the event most State action plans are submitted to FRA for review at approximately the same time. Accordingly, FRA is soliciting comment on whether the final rule should contain staggered deadlines for the submission of State action plans, and if so, what criteria for staggering should be used.

FRA is proposing a two-stage review process for new, updated, and corrected highway-rail grade crossing action plans. As reflected in paragraph (g)(1), FRA proposes to update its website to reflect receipt of each new, updated, or corrected highway-rail grade crossing action plan.

To avoid delaying implementation of needed grade crossing safety improvements for agency review of each highway-rail grade crossing action plan, FRA proposes in paragraph (g)(2)(A) to conduct a preliminary review of each new, updated, and corrected highway-rail grade crossing action plan within sixty (60) days of receipt. During this preliminary review, FRA would determine if the elements prescribed in paragraph (e) of this section are included in the plan.

As reflected in paragraph (g)(2)(B), each new, updated, or corrected State highway-rail grade crossing action plan would be considered conditionally approved unless FRA notifies the designated official described in paragraph (e)(5) within 60 days of the date of receipt that the plan is incomplete or deficient. However, as reflected in paragraph (g)(2)(C), FRA proposes to reserve the right to conduct a more comprehensive review of each new, updated, or corrected State highway-rail grade crossing action plan during the 120-day period following receipt of the plan to determine if the elements prescribed in paragraph (e) of this section have been sufficiently addressed and discussed in the plan. During this 120-day review period, FRA will provide email notification to the State or District of Columbia's designated official if FRA determines that a new, updated, or corrected State highway-rail grade crossing action plan is incomplete or deficient. FRA requests comment on these proposed approval timelines and procedures and specifically, whether such a two-stage approval process is necessary if staggered submission deadlines were to be adopted.

In response to the FAST Act's mandate to make public each approved plan and certain other information regarding submitted plans, FRA proposes to post a table on its website that would reflect the review/approval status of each highway-rail grade crossing action plan submitted to FRA. In the table, FRA proposes to post information about the date(s) on which it receives an action plan submitted by a State or the District of Columbia, the date of automatic conditional approval (if applicable), the date(s) on which FRA notifies the State or District of Columbia that the plan is deficient or incomplete (if applicable), the date on which the corrected action plan is received by FRA (if applicable), and the date on which FRA notifies the State or District of Columbia that the action plan has been fully approved. This full FRA approval date would be the specific date FRA provides email notification to the State or District of Columbia that FRA has fully approved the action plan.

Paragraph (g)(3) specifically addresses highway-rail grade crossing action plans that FRA determines to be incomplete or deficient. As reflected in paragraph (g)(3)(A), FRA proposes to provide email notification to the State or the District of Columbia's designated official of the specific areas in which the highway-rail grade crossing action plan is incomplete or deficient.

In paragraph (g)(3)(B), FRA proposes to allow States and the District of Columbia to complete, correct, and resubmit within 60 days any highway-rail grade crossing action plan that is deemed incomplete or deficient. This 60-day timeframe is derived from section 11401(b)(7) of the FAST Act, which directs States to complete their grade crossing action plans and correct deficiencies identified within 60 days of the date of FRA notification.

As reflected in paragraph (g)(4)(A), after FRA has completed its review and approves a new, updated, or corrected State highway-rail grade crossing action plan, FRA proposes to notify the State's designated official described in paragraph (e)(5) of this section by email that the highway-rail grade crossing action plan has been fully approved.

Paragraph (g)(4)(B) states that FRA proposes to make each fully-approved highway-rail grade crossing action plan publicly available for online viewing. This provision is intended to comply with section 11401(b)(4) of the FAST Act, which requires the FRA Administrator to make each approved State highway-rail grade crossing action plan publicly available on “an official internet website.” To make fully-approved plans publicly available for online viewing, FRA proposes to post each fully-approved plan on its website. In addition, to avoid confusion, the Federal Highway Administration will remove the original State Action Plans submitted by the initial ten States from its website.

Paragraph (g)(4)(C) would also require each State and the District of Columbia to implement its highway-rail grade crossing action plan upon full approval.

Under 23 U.S.C. 148, to receive certain highway funds, States are required to implement highway safety improvement programs, which implement their (continually updated) strategic highway safety plans, a component of which is “improvements to rail-highway grade crossings” 23 U.S.C. 148(d)(1)(B)(vii). Highway funding (23 U.S.C. 130) is available to fund States' development of highway-rail grade crossing plans under this proposed rule. In addition, as stated in paragraph (h), the Secretary of Transportation may condition the awarding of rail improvement grants to States (49 U.S.C. 229) on the State's or District of Columbia's submission of an FRA-approved State highway-rail grade crossing action plan under this section.

This NPRM is a non-significant regulatory action and has been evaluated in accordance with existing policies and procedures under Executive Order 12866 and DOT Order 2100.6. 44 FR 11034, Feb. 26, 1979; 58 FR 51,735; https://www.transportation.gov/regulations/2018-dot-rulemaking-order .

The purpose of the NPRM is to reduce accidents at highway-rail grade crossings nationwide. The NPRM would require each State and the District of Columbia to submit or re-submit to FRA a highway-rail grade crossing action plan (Plan). The proposed rule would also require each of the 10 States  1 who previously created an FRA-approved Plan to submit a report to FRA that describes how the State implemented its existing Plan and how the State will continue to reduce highway-rail grade crossing safety risks. 2

The NPRM specifically lists the required elements for Plans. 3 To minimize the compliance costs, the NPRM would afford each State the flexibility to develop or update a Plan based upon the individual State's hazard assessment.

Section 11401(a) of the FAST Act required FRA to develop and distribute a model State highway-rail grade crossing action plan (Model Plan). In conjunction with the Federal Highway Administration (FHWA), FRA developed a “ Highway-Railway Grade Crossing Action Plan and Project Prioritization Noteworthy Practices Guide .” FRA shared this guide with States via letters that included the data requirements as discussed in Section 11401 of the Fast Act. The guide is currently available on the Department of Transportation's website. 4 Previous State action plans from the 2010 final rule are also currently available to the public on DOT's website. 5 After issuing a final rule arising from this NPRM, FRA will provide States with assistance in developing their Plans. FRA anticipates that assistance will help to reduce the compliance burden.

Table ES.1 shows the costs associated with the NPRM. The largest costs for the 10 States that have already developed an FRA-approved Plan are: Updating and Submitting a Plan to FRA ($350,000 (PV  6 , 7%) and $364,000 (PV, 3%)) and submitting a report to FRA that describes how each State implemented its previously submitted Plan and how the State will continue to reduce highway-rail grade crossing safety risks ($57,000 (PV, 7%) and $59,000 (PV, 3%)), and resubmitting (if necessary) a Plan should FRA determine the State's updated Plan submission to be incomplete or deficient ($17,000 (PV, 7%) and $18,000 (PV, 3%)). Collectively, the largest costs for the other 40 States and DC are: Developing and submitting a Plan to FRA ($1.0 million (PV, 7%) and $1.1 million (PV, 3%)); and resubmitting (if necessary) a Plan should FRA determine the State's previous Plan submission to be incomplete or deficient ($38,000 (PV, 7%) and $40,000 (PV, 3%)).

As shown in Table ES.1, the NPRM would result in a total cost of $1.5 million (PV, 7%), and $1.6 million (PV, 3%).

FRA assumes that all costs would be incurred in the first year of analysis. The costs that are derived from the analysis do not include the costs of voluntary changes in investments  or operations that States would make after implementing their Plans.

This analysis found that the NPRM would have a positive impact in mitigating highway-rail grade crossing accidents. FRA expects it would take a few years for the States to see benefits associated with the implementing of their Plans. Also, without periodic updates, Plans may lose their effectiveness over time. Therefore, this analysis concluded that Plans would only have a positive impact towards reducing accidents in year 4 to year 8 after States develop their Plans.

The Regulatory Flexibility Act of 1980, 5 U.S.C. 601 et seq., and Executive Order 13272, 67 FR 53461 (Aug. 16, 2002), require agency review of proposed and final rules to assess their impact on small entities. An agency must prepare an initial regulatory flexibility analysis (IRFA) unless it determines and certifies that a rule, if promulgated, would not have a significant impact on a substantial number of small entities. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C. 605(b), the FRA Administrator certifies that this proposed rule would not have a significant economic impact on a substantial number of small entities.

“Small entity” is defined in 5 U.S.C. 601 as including a small business concern that is independently owned and operated, and is not dominant in its field of operation. The U.S. Small Business Administration (SBA) has authority to regulate issues related to small businesses, and stipulates in its size standards that a “small entity” in the railroad industry is a for profit “linehaul railroad” that has fewer than 1,500 employees, a “short line railroad” with fewer than 500 employees, or a “commuter rail system” with annual receipts of less than 15 million dollars. See “Size Eligibility Provisions and Standards,” 13 CFR part 121, subpart A. Additionally, 5 U.S.C. 601(5) defines as “small entities” governments of cities, counties, towns, townships, villages, school districts, or special districts with populations less than 50,000. Federal agencies may adopt their own size standards for small entities, in consultation with SBA and in conjunction with public comment. Pursuant to that authority, FRA has published a final statement of agency policy that formally establishes “small entities” or “small businesses” as being railroads, contractors, and hazardous materials shippers that meet the revenue requirements of a Class III railroad as set forth in 49 CFR 1201.1-1, which is $20 million or less in inflation-adjusted annual revenues, and commuter railroads or small governmental jurisdictions that serve populations of 50,000 or less. See 68 FR 24891 (May 9, 2003), codified at appendix C to 49 CFR part 209. The $20-million limit is based on the Surface Transportation Board's revenue threshold for a Class III railroad. Railroad revenue is adjusted for inflation by applying a revenue deflator formula in accordance with 49 CFR 1201.1-1. FRA is using this definition for this rulemaking.

FRA identified 51 entities (the 50 States and the District of Columbia) that would be affected by this proposed rule. The proposed rule would not impact any other entity—public or private. Each of the 50 States and the District of Columbia have a population greater than 50,000. Therefore, the proposed rule would not directly regulate any small entities. Pursuant to the Regulatory Flexibility Act, 5 U.S.C. 601(b), the FRA Administrator hereby certifies that this proposed rule would not have a significant impact on a substantial number of small entities. FRA requests comments on all aspects of this certification.

Executive Order 13132, “Federalism” (64 FR 43255, Aug. 10, 1999), requires FRA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” are defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” Under Executive Order 13132, the agency may not issue a regulation with federalism implications that imposes substantial direct compliance costs and that is not required by statute, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by State and local governments or the agency consults with State and local governments early in the process of developing the regulation. Where a regulation has federalism implications and preempts State law, the agency seeks to consult with State and local officials in the process of developing the regulation.

FRA has analyzed this proposed rule in accordance with the principles and criteria contained in Executive Order 13132. FRA has determined that the proposed rule will not have substantial direct effects on the States, on the relationship between the Federal government and the States, or on the distribution of power and responsibilities among the various levels of government. In addition, FRA has determined that this proposed rule, which complies with a statutory mandate, will not have federalism implications that impose substantial direct compliance costs on State and local governments. Therefore, the consultation and funding requirements of Executive Order 13132 do not apply, and preparation of a federalism summary impact statement for this proposed rule is not required.

FRA is submitting the information collection requirements in this proposed rule to the Office of Management and Budget (OMB) for approval under the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. The section that contains the new information collection requirements is noted below, and the estimated burden times to fulfill each requirement are as follows:

All estimates include the time for reviewing instructions; searching existing data sources; gathering or maintaining the needed data; and reviewing the information. Under 44 U.S.C. 3506(c)(2)(B), FRA solicits comments concerning: Whether these information collection requirements are necessary for the proper performance of the functions of FRA, including whether the information has practical utility; the accuracy of FRA's estimates of the burden of the information collection requirements; the quality, utility, and clarity of the information to be collected; and whether the burden of collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology, may be minimized.

For information or a copy of the paperwork package submitted to OMB, contact Ms. Hodan Wells, Information Clearance Officer, at 202-493-0440, or Ms. Kimberly Toone, Records Management Officer, Office of Railroad Safety, Federal Railroad Administration, at 202-493-6132.

Organizations and individuals desiring to submit comments on the collection of information requirements should direct them to Ms. Hodan Wells or Ms. Kimberly Toone, Federal Railroad Administration, 1200 New Jersey Avenue SE, 3rd Floor, Washington, DC 20590. Comments may also be submitted via email to Ms. Wells at Hodan.Wells@dot.gov or Ms. Toone at Kim.Toone@dot.gov .

OMB is required to make a decision concerning the collection of information requirements contained in this proposed rule between 30 and 60 days after publication of this document in the Federal Register . Therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. The final rule will respond to any OMB or public comments on the information collection requirements contained in this proposal. FRA will be seeking an OMB reinstatement of a previously approved control number under OMB No. 2130-0589 that was discontinued because all requirements had been fulfilled under an earlier rulemaking.

FRA is not authorized to impose a penalty on persons for violating information collection requirements that do not display a current OMB control number, if required. FRA intends to obtain current OMB control numbers for any new information collection requirements resulting from this rulemaking action prior to the effective date of the final rule. The OMB control number, when assigned, will be announced by separate notice in the Federal Register .

The Trade Agreement Act of 1979 prohibits Federal agencies from engaging in any standards or related activities that create unnecessary obstacles to the foreign commerce of the United States. Legitimate domestic objectives, such as safety, are not considered unnecessary obstacles. The statute also requires consideration of international standards and where appropriate, that they be the basis for U.S. standards. This proposed rule is purely domestic in nature and is not expected to affect trade opportunities for U.S. firms doing business overseas or for foreign firms doing business in the United States.

FRA has evaluated this proposed rule under its “Procedures for Considering Environmental Impacts” (FRA's Procedures) (64 FR 28545, May 26, 1999) as required by the National Environmental Policy Act (42 U.S.C. 4321 et seq. ) other environmental statutes, Executive Orders, and related regulatory requirements. FRA has determined that this proposed rule is not a major FRA action (requiring the preparation of an environmental impact statement or environmental assessment) because it is categorically excluded from detailed environmental review pursuant to section 4(c)(20) of FRA's Procedures. See 64 FR 28547 (May 26, 1999). In accordance with section 4(c) and (e) of FRA's Procedures, the agency has further concluded that no extraordinary circumstances exist with respect to this proposed regulation that might trigger the need for a more detailed environmental review. As a result, FRA finds that this proposed rule is not a major Federal action significantly affecting the quality of the human environment.

Pursuant to Section 201 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4, 2 U.S.C. 1531), each Federal agency shall, unless otherwise prohibited by law, assess the effects of Federal regulatory actions on State, local, and tribal governments, and the private sector (other than to the extent such regulations incorporate requirements specifically set forth in law.) Section 202 of the Act (2 U.S.C. 1532) further requires that before promulgating any general notice of proposed rulemaking that is likely to result in the promulgation of any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year, and before promulgating any final rule for which a general notice of proposed rulemaking was published, the agency shall prepare a written statement detailing the effect on State, local, and tribal governments and the private sector. This proposed rule will not result in the expenditure, in the aggregate, of $100,000,000 or more in any one year and thus preparation of such a statement is not required.

Executive Order 13211 requires Federal agencies to prepare a Statement of Energy Effects for any “significant energy action.” 66 FR 28355 (May 22, 2001). FRA evaluated this proposed rule in accordance with Executive Order 13211 and determined that this regulatory action is not a “significant energy action” within the meaning of the Executive Order.

Executive Order 13783, “Promoting Energy Independence and Economic Growth,” requires Federal agencies to review regulations to determine whether they potentially burden the development or use of domestically produced energy resources, with particular attention to oil, natural gas, coal, and nuclear energy resources. See 82 FR 16093 (Mar. 31, 2017). FRA determined this proposed rule would not burden the development or use of domestically produced energy resources.

In accordance with 5 U.S.C. 553(c), DOT solicits comments from the public to better inform its rulemaking process. DOT posts these comments, without edit, to www.regulations.gov, as described in the system of records notice, DOT/ALL-14 FDMS, accessible through www.dot.gov/privacy . To facilitate comment tracking and response, we encourage commenters to provide their name, or the name of their organization; however, submission of names is completely optional. Whether or not commenters identify themselves, all timely comments will be fully considered. If you wish to provide comments containing proprietary or confidential information, please contact the agency for alternate submission instructions.

For the reasons discussed in the preamble, FRA proposes to amend part 234 of chapter II, subtitle B of title 49, Code of Federal Regulations, as follows:

The United States is a member of both IATTC and WCPFC. NMFS implements decisions of WCPFC under the authority of the WCPFCIA (16 U.S.C. 6901 et seq. ), and decisions of IATTC under the authority of the Tuna Conventions Act (16 U.S.C. 951 et seq. ). The convention areas for the IATTC (IATTC Area) and WCPFC (WCPFC Area) overlap in the Pacific Ocean waters within an area bounded by 50° S latitude, 4° S latitude, 150° W longitude, and 130° W longitude (“overlap area”). Historically, regulations implementing the conservation measures adopted by both IATTC (50 CFR 300, subpart C) and WCPFC (50 CFR 300, subpart O) applied to U.S. vessels fishing for highly migratory species (HMS) in the overlap area. In 2012, IATTC and WCPFC adopted decisions allowing each member belonging to both commissions to decide, for a period of not less than 3 years, whether IATTC or WCPFC conservation and management measures would apply to its vessels when they fish in the overlap area.

In accordance with WCPFC and IATTC decisions regarding the overlap area, 1 NMFS undertook a rulemaking regarding management of the overlap area. After issuing a proposed rule for public review and comment, NMFS issued a final rule on April 26, 2016 (81 FR 24501 (Apr. 26, 2016), effective May 26, 2016; hereafter “2016 final rule”), stating that except for IATTC Regional Vessel Register (RVR) regulations at 50 CFR 300.22(b), all other regulations implementing IATTC decisions at 50 CFR 300, subpart C would no longer apply in the overlap area. The IATTC RVR regulations continued to apply in the overlap area for compliance with U.S. obligations under the Agreement on the International Dolphin Conservation Program (AIDCP). Under the 2016 final rule, regulations implementing WCPFC conservation and management measures applied in the overlap area. In the preamble to the 2016 final rule, NMFS indicated that it may reevaluate the location of fishing effort in the eastern Pacific Ocean (EPO) and western and central Pacific Ocean (WCPO) in three years to consider revising the management regime for the overlap area.

Accordingly, in June 2018, NMFS revisited this decision and published an advance notice of proposed rulemaking (ANPR) (83 FR. 27305; June 12, 2018) seeking public input about whether conservation and management measures adopted by WCPFC or IATTC should apply in the overlap area. NMFS received ten comments in response to the ANPR (all from the U.S. purse seine industry), unanimously supporting application of IATTC measures rather than WCPFC measures in the overlap area. The commenters generally stated there would be more fishing opportunities under IATTC measures than under WCPFC measures, maintaining that WCPFC measures result in more constraining fishery closures than IATTC measures, and that the escalating cost of fishing days in foreign exclusive economic zones (EEZ) in the WCPFC Area, makes high seas within the overlap area an increasingly attractive fishing ground.

NMFS' analyses (EA and RIR) of the comparative economic effects and environmental effects of the application of WCPFC measures or IATTC measures in the overlap area concludes that application of IATTC measures would likely result in greater net benefits to the nation. These greater net benefits arise from more fishing opportunity and greater operational certainty provided by the option of annually choosing one of the IATTC's two 72-day purse seine closure periods instead of the WCPFC purse seine fishing effort limits and fish aggregating device (FAD) closure periods currently applicable to the overlap area under NMFS regulations at 50 CFR 300.223. Under the current WCPFC-derived regulations, FAD fishing is prohibited in the overlap area for five months of the year (one three-month closure in the entire overlap area, and an additional two-month closure on the high seas of the overlap area), and there is uncertainty regarding when the fishing effort limits would be reached, which would result in a fishery closure for the remainder of the year. More fishing opportunity and operational certainty would be particularly beneficial during El Niño events, when tropical tuna are more likely to be found in the EPO. Any potential increase in fishing activity would provide net benefits while continuing to meet IATTC objectives of conserving target stocks and minimizing impacts to protected species and their environments. Accordingly, NMFS is issuing this proposed rule to apply IATTC measures in the overlap area instead of WCPFC measures, except as described herein.

During development of the 2016 final rule, NMFS stated that, rather than applying IATTC measures to an individual vessel or gear type and WCPFC measures to another vessel or gear type, NMFS would apply WCPFC's management measures to the entire U.S. fleet in the overlap area because the WCPFC and the IATTC each separately develop a comprehensive and self-contained package of management measures to address similar conservation objectives. As noted during the development of the 2016 final rule, if one set of management measures were applied to some vessels while another set of management measures were applied to other vessels, overall management efforts would fail to address the conservation objectives of either organization (80 FR 80742; December 28, 2015). This proposed rule would follow the same approach as the 2016 final rule by applying to all vessels, thus maintaining uniformity in management of the overlap area for the U.S. fleet as a whole, rather than applying on an individual vessel-basis, or gear type.

When deciding which regulations to apply in the overlap area, NMFS considered whether all WCPFC-derived regulations should no longer apply in the overlap area, or whether certain WCPFC-regulations should remain in effect. The WCPFC and IATTC decisions addressing the overlap area broadly indicate that a member of both commissions, such as the United States, is to apply the “conservation and management measures” of one commission in the overlap area. Because these decisions do not address specific conservation and management measures, a Contracting Party's decision to implement one commission's conservation and management measures over the other could have compliance implications where legal obligations arise under treaty. In other words, as a Contracting Party to the Convention on the Conservation and Management of Highly Migratory Fish Stocks in the Western and Central Pacific Ocean (WCPF Convention) and the Antigua Convention, the United States is obligated to implement provisions required under both the WCPF Convention and the Antigua Convention. The WCPF Convention and the Antigua Convention created the WCPFC and the IATTC, respectively, and decisions of each commission are subject to their terms.

NMFS believes that while WCPFC and IATTC decisions addressing the overlap area can provide members with discretion to choose which conservation and management decisions to apply, it cannot relieve a Contracting Party of its existing treaty obligations. Accordingly, when deciding to apply IATTC measures to the overlap area, NMFS considered whether all WCPFC measures should no longer apply in the overlap area, or whether certain WCPFC management measures should remain in effect in order for the United States to continue to meet its obligations under that WCPF Convention. NMFS proposes that regulations implementing WCPFC measures for the conservation and management of highly migratory fish stocks, such as purse seine fishing restrictions, longline fishing restrictions, and bycatch mitigation measures would no longer apply in the overlap area, and that WCPFC management measures related to monitoring, control, and surveillance (MCS) would continue to apply, as explained in more detail below. NMFS currently implements, and would continue to implement, the MCS measures pursuant to its obligations under the WCPF Convention.

Historically, U.S. vessels have not frequently fished for HMS in the overlap area, but the two gear types that have fished in the overlap area in recent years are troll vessels that target South Pacific albacore and purse seine vessels that target tropical tuna species. The majority of the South Pacific albacore troll fishery occurs in the WCPFC Area outside the overlap area ( i.e., west of 150° W), and some albacore troll fishing occurs in the overlap area. U.S. purse seine vessel activity in and around the overlap area has increased since the 2016 final rule went into effect. These fisheries are described in more detail in the Classification section.

This proposed rule would change the definition of “IATTC Convention Area” at 50 CFR 300.21 to include the overlap area, so that all regulations at 50 CFR part 300, subpart C would apply in the overlap area. The requirements under the Marine Mammal Protection Act and AIDCP, including observer requirements at 50 CFR 216.24(e), which currently apply in the overlap area, would also continue to apply under the proposed rule. As stated above, pursuant to the requirements of the AIDCP, vessels fishing in the overlap area are currently required to comply with the regulations for inclusion in the IATTC RVR. However, under the regulations at 50 CFR 300.22(b)(1), once per year, a vessel that is permitted and authorized under an alternative international tuna purse seine fisheries management regime in the Pacific Ocean ( e.g., WCPFC) may exercise an option to fish with purse seine gear to target tuna in the IATTC Area without its well volume counting towards the U.S. capacity limit in the IATTC Area for a fishing trip that does not exceed 90 days in duration. A total of 32 such trips are allowed each calendar year. Thus, vessels currently fishing in the overlap area are familiar with and subject to the regulations implementing IATTC decisions when fishing in the IATTC Area. The following regulations at 50 CFR part 300, subpart O, which implement WCPFC conservation and management measures for stock management and bycatch matters, would no longer apply in the overlap area:

• Purse seine fishing effort limits (50 CFR 200.223(a));

• Purse seine FAD restrictions (50 CFR 300.223(b));

• Purse seine catch retention requirements (50 CFR 300.223(d));

• Purse seine sea turtle bycatch mitigation requirements (50 CFR 300.223(f));

• Whale shark bycatch mitigation requirements (50 CFR 300.223(g)-(h));

• Longline bigeye tuna catch limits (50 CFR 300.224(a)); and

• Oceanic whitetip and silky shark interaction mitigation (50 CFR 300.226).

Under this proposed rule, regulations implementing WCPFC decisions for purse seine fishing effort would no longer apply in the overlap area, while regulations implementing IATTC decisions for purse seine fishing effort would go into effect in the overlap area.

Beginning in 2009, NMFS implemented annual limits on purse seine fishing effort on the high seas and in the U.S. EEZ in the WCPFC Area between 20° N latitude and 20° S latitude (50 CFR 300.223(a)). Under this proposed rule, such purse seine fishing effort limits set forth in WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include purse seine effort controls that would henceforth apply in the overlap area (50 CFR 300.25(e)). These regulations specify that any U.S. purse seine vessel must observe a 72-day closure period during each of the calendar years 2019 and 2020.

NMFS has implemented WCPFC FAD management measures ((50 CFR 300.223(b)). These include specific time periods during which purse seine vessels are prohibited from setting on FADs in the WCPFC Area in the area between 20° N latitude and 20° S latitude. Currently, the prohibition periods are from July 1 through September 30 in each calendar year for the entire WCPFC Area and on the high seas from November 1 through December 31 in each calendar year. There is also a limit of 350 drifting active FADs per each U.S. purse seine vessel fishing in the WCPFC Area. Under the proposed rule, these regulations that implement WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include FAD management measures that would apply in the overlap area (50 CFR 300.28). These FAD management measures detailed at 50 CFR 300.28 include the following: (1) FAD identification requirements that require a unique code to be marked on the radio or satellite buoy or the FAD; (2) U.S. vessel owners and operators of purse-seine vessels of well volume 1,200 m 3 or more must not have more than 450 active FADs; (3) U.S. vessel owners and operators of purse-seine vessels for vessels of volume 426-1,199 m 3 must not have more than 300 active FADs; (4) U.S. vessel owners and operators of purse-seine vessels of well volume 13-425 m 3 must not have more than 120 active FADs; (5) U.S. vessel owners and operators of purse-seine vessels of well volume 0-212 m 3 must not have more than 70 active FADs; (6) U.S. vessel owners, operators, and crew of purse seine vessels of class size 4-6 must not deploy a FAD during 15 days prior to the start of the vessel's selected purse seine closure period at 50 CFR 300.25(e)(1); (7) 15-days prior to the start of the vessel's selected closure period at 50 CFR 300.25(e)(1), vessel owners, operators, and crew of purse seine vessels of class size 6 must remove from the water a number of FADs equal to the number of FADs set upon by the vessel during the same 15 day period; (8) if the FAD design includes a raft, and if mesh netting is used as part of the structure, the mesh netting shall have a mesh size less than 7 centimeters and the mesh net must be tightly wrapped such that no netting hangs below the FAD when deployed; and (9) any netting used in the subsurface structure of the FAD must be tightly tied into bundles or have stretched mesh size less than 7 centimeters in a panel that is weighted on the lower end with at least enough weight to keep the netting taut in the water column.

NMFS has implemented tuna catch retention requirements for purse seine vessels in the WCPFC Area. An owner and operator of a fishing vessel of the United States equipped with purse seine gear must ensure the retention on board at all times while at sea any bigeye tuna, yellowfin tuna, or skipjack tuna, except in the following circumstances as follows: Fish that are unfit for human consumption, including but not limited to fish that are spoiled, pulverized, severed, or partially consumed at the time they are brought on board, may be discarded; if at the end of a fishing trip there is insufficient well space to accommodate all the fish captured in a given purse seine set, fish captured in that set may be discarded, provided that no additional purse seine sets are made during the fishing trip; and fish may be discarded if necessitated by the occurrence of a serious malfunction of equipment. Under this proposed rule, the regulations that implement WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include incidental catch and tuna retention requirements for purse seine vessels that would now apply in the overlap area (50 CFR 300.27(a)-(b)). The incidental catch release requirements for non-tuna species would apply to all purse seine vessels. Tuna retention requirements would apply to class size 4-6 purse seine fishing vessels and would require that bigeye, skipjack, and yellowfin tuna caught using purse seine gear be retained on board and landed, except for fish deemed unfit for human consumption for reasons other than size or if there is insufficient well capacity to accommodate the entire catch on the last set of a trip. All purse seine vessels would also be required to release all billfish, ray (not including mobulid ray, as described in more detail below), dorado, and other non-tuna fish species, except those being retained for consumption aboard the vessel, as soon as practicable after being identified on board the vessel during the brailing operation.

NMFS has implemented specific sea turtle handling requirements for U.S. purse seine vessels fishing in the WCPFC Area (50 CFR 300.223(f)). These include possession and use of specific handling gear as well as specific handling requirements. Under this proposed rule, the regulations that implement WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include requirements for purse seine vessel interactions with sea turtles (50 CFR 300.27(c)). The regulations implementing IATTC measures specify special handling and release requirements when a sea turtle is spotted in the purse seine net, entangled in the net, or brought on board the vessel alive.

NMFS has implemented specific requirements to mitigate interactions between U.S. purse seine vessels and whale sharks in the WCPFC Area. These include a prohibition on setting on whale sharks and requirements for when whale sharks are encircled in purse seine nets (50 CFR 300.223(g)-(h)). Under this proposed rule, these regulations to implement WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include requirements to mitigate interactions between purse seine vessels and whale sharks (50 CFR 300.27(g)-(h)). These regulations implementing IATTC measures require owners, operators, and crew to not set or attempt to set a purse seine on or around a whale shark if the animal is sighted prior to the commencement of the set or the attempted set. If a whale shark is encircled in the purse seine net, the crew, operator, and owner would be required to release it as soon as possible, and must ensure that all reasonable steps are taken to ensure its safe release without towing the whale shark out of the purse seine net ( e.g., using towing ropes).

NMFS has implemented a specific bigeye tuna catch limit for U.S. longline vessels fishing in the WCPFC Area. The limit is 3,554 metric tons of bigeye tuna per calendar year (50 CFR 300.224(a)). Under this proposed rule, the regulations implementing these WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include an annual catch limit for longline-caught bigeye tuna that would apply in the overlap area (50 CFR 300.25(a)). The annual limit is 750 metric tons of bigeye tuna for vessels over 24 meters in overall length. The regulations implementing IATTC measures include a number of requirements that are triggered if and when the annual limit is reached, including restrictions on transshipment by longline vessels in the IATTC Area without a valid permit, and restrictions on using longline gear inside and outside of the IATTC Area on the same trip.

NMFS has implemented specific requirements regarding interactions with oceanic whitetip shark for all U.S. commercial fishing vessels fishing for HMS in the WCPFC Area (50 CFR 300.226). These requirements include a prohibition on the retention, transshipment, storage or landing of oceanic whitetip shark, and specific requirements for releasing oceanic whitetip shark that are caught by vessels. Under this proposed rule, these regulations implementing WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include similar requirements for oceanic whitetip shark that would apply in the overlap area (50 CFR 300.27(d)). These regulations implementing IATTC measures prohibit the crew, operator, or owner from retaining on board, transshipping, landing, storing, selling, or offering for sale any part or whole carcass of an oceanic whitetip shark and require the release of all oceanic whitetip shark (unharmed to the extent practicable) when brought alongside the vessel.

NMFS has implemented specific requirements regarding interactions with silky sharks for all U.S. commercial fishing vessels fishing for HMS in the WCPFC Area (50 CFR 300.226). These requirements include a prohibition on the retention, transshipment, storage or landing of silky sharks, and specific requirements for releasing silky sharks that are caught by vessels. Under this proposed rule, these regulations implementing WCPFC conservation and management measures would no longer apply in the overlap area. However, regulations implementing IATTC conservation and management measures include similar requirements for silky sharks that would apply in the overlap area (50 CFR 300 300.27(e)-(f)). These regulations implementing IATTC measures prohibit the crew, operator, and owner of a commercial purse seine fishing vessel from retaining on board, transshipping, storing, or landing any part or whole carcass of a silky shark caught by the vessel. Additionally, longline vessel crews, operators, and owners are required to limit the retained catch of silky shark to a maximum of 20 percent in weight of the total catch during each fishing trip.

Although the WCPFC has adopted a decision for the conservation and management of data buoys, which NMFS may implement through regulations, NMFS regulations regarding fishing on data buoys do not currently apply in the overlap area. Under this proposed rule, regulations implementing IATTC management measures for fishing on data buoys would go into effect in the overlap area (50 CFR 300.25(f)). Except when the fishing vessel is operated as part of a scientific research program, a longline or purse seine fishing vessel may not be used to fish for highly migratory species within one nautical mile of an anchored data buoy in the IATTC Area. A fishing vessel, or any fishing gear, equipment, or watercraft deployed by such a fishing vessel, cannot be used to interact with, or engage in conduct that could impair the function of, a data buoy.

There are currently no regulations implementing WCPFC decisions on Pacific bluefin tuna. Under this proposed rule, NMFS regulations implementing IATTC decisions on Pacific bluefin tuna would go into effect in the overlap area (50 CFR 300.25(g)). These regulations implementing IATTC measures impose biennial, annual and per trip catch limits to the U.S. commercial fishery for Pacific bluefin tuna. These regulations also require a purse seine vessel owner or operator to provide a pre-trip notification to NMFS 24 hours in advance of departing on the fishing trip during specific periods, as notified by NMFS.

There are no NMFS regulations implementing WCPFC decisions on mobulid rays that apply in the overlap area. Under this proposed rule, NMFS regulations implementing IATTC decisions on mobulid rays would go into effect in the overlap area (50 CFR 300.27(i)-(j). These regulations implementing IATTC measures prohibit the crew, operator, and owner of a U.S. commercial fishing vessel from retaining on board, transshipping, storing, landing, selling, or offering for sale any part or whole carcass of a mobulid ray, except in the case of any mobulid ray caught on an observed purse seine vessel if that mobulid ray is not seen during fishing operations and is delivered into the vessel hold. Specific handling and release requirements also apply.

There are no NMFS regulations implementing WCPFC handling and release requirements for sharks other than the regulations on whale shark, oceanic whitetip shark, and silky shark that currently apply in the overlap area and that are described above. Under this proposed rule, regulations implementing IATTC decisions for general shark handling and release requirements would go into effect (50 CFR 300.27(k)) in the overlap area. The crew, operator, and owner of a U.S. commercial purse seine fishing vessel would be required to promptly release any shark (unharmed to the extent practicable, and whether live or dead) caught in the IATTC Area, as soon as it is seen in the net or on the deck, without compromising the safety of any persons. If a shark is live when caught, the crew, operator, or owner must follow release procedures specified in the regulations implementing the IATTC measures. A specific shark line prohibition for longline vessels would also go into effect and would prohibit any U.S. longline vessel used to fish for tuna or swordfish from using any shark line in the overlap area (50 CFR 300.27(l)).

Regulations for reporting and recordkeeping implementing the WCPF Convention and WCPFC decisions and that currently apply in the overlap area would continue to apply under the proposed rule, except for the requirement to report on purse seine interactions with whale sharks—that requirement is connected to the regulations implementing the WCPFC decision on whale sharks that would no longer apply. Regulations for reporting and recordkeeping that implement IATTC decisions would go into effect under the proposed rule and apply in the overlap area. These regulations are described in detail below.

The requirement to report on purse seine interactions with whale sharks implementing a WCPFC decision and specified at 50 CFR 300.218(h), would no longer apply in the overlap area. However, a corresponding whale shark reporting requirement implementing a IATTC decision would apply in the overlap area (50 CFR 300.22(a)(2)).

Reporting and recordkeeping regulations implementing the WCPF Convention and decisions that would continue to apply in the overlap area include catch and effort reporting requirements (50 CFR 300.218(a)), transshipment reporting requirements (50 CFR 300.218(b)), transshipment notification requirements (50 CFR 300.218(c)), reporting requirements for discards of bigeye, yellowfin, or skipjack tuna from purse seine vessels (50 CFR 300.218(e)), reporting requirements for purse seine net sharing (50 CFR 300.218(f)), and reports of daily purse seine fishing effort (50 CFR 300.218(g)). Additional reporting and recordkeeping requirements implementing IATTC decisions would also apply in the overlap area. This includes specific logbook reporting requirements (50 CFR 300.22(a)), reporting FAD-related data from purse seine vessels (50 CFR 300.22(a)(3)(i)) and reporting on active FADs (50 CFR 300.22(a)(3)(ii)).

Requirements implementing the WCPF Convention and WCPFC decisions for inclusion on the WCPFC Record of Fishing Vessels would continue to apply in the overlap area under the proposed rule. These requirements include providing certain information to obtain an endorsement on a permit under the regulations implementing the High Seas Fishing Compliance Act (50 CFR 300, subpart R) and requirements to provide certain information when fishing only in foreign EEZs (50 CFR 300.212 and 50 CFR 300.213). Additionally, as mentioned above, in order to comply with the provisions of the AIDCP, vessels fishing in the overlap area are already required to comply with the IATTC RVR requirements at 50 CFR 300.22(b) and would continue to be subject to those requirements.

Requirements implementing the WCPF Convention and WCPFC decisions for vessel identification would continue to apply in the overlap area. These include specific vessel marking requirements and requirements to obtain International Maritime Organization (IMO) numbers (50 CFR 300.217). Additionally, as mentioned above, in order to comply with the provisions of the AIDCP, vessels fishing in the overlap area are already required to comply with the IMO number requirements as part of the IATTC RVR requirements at 50 CFR 300.22(b) and would continue to be subject to these requirements. The IMO number requirements at 50 CFR 300.217 and 50 CFR 300.22(b) are essentially the same in that they both are applicable to vessels that are 100 gross register tons or greater and have provisions for exemptions.

Requirements implementing the WCPF Convention and WCPFC decisions regarding observers would continue to apply in the overlap area. These requirements include pre-trip notification requirements for vessels that are required to carry observers to monitor at-sea transshipments (50 CFR 300.215(b)), specific provisions for accommodating observers on vessels (50 CFR 300.215(c)), at-sea transshipment observer coverage requirements (50 CFR 300.215(d)), and purse seine observer coverage requirements (50 CFR 300.223(e)). Additionally, as mentioned above, in order to comply with the provisions of the AIDCP, vessels fishing in the overlap area are already required to comply with the observer provisions set forth at 50 CFR 216.24(e), and these provisions would continue to apply under the proposed rule. These requirements include specific provisions for how research and observation duties are to be carried out, specific requirements regarding marine mammals, and specific provisions for accommodating observers. Currently, vessels fishing in the overlap area are required to comply with the observer provisions of regulations implementing the WCPF Convention and decisions and regulations implementing requirements arising under the IATTC and AIDCP. In some cases, this requires a vessel to carry an observer that is designated as a cross-endorsed observer pursuant to a Memorandum of Cooperation between the WCPFC and the IATTC that allows such observers to meet the observer requirements of both organizations, or to carry two separate observers—one to carry out responsibilities arising under the WCPFC and another to carry out responsibilities arising under the IATTC and AIDCP. The existing observer coverage requirements for the overlap area would not change under this proposed rule.

Requirements implementing the WCPF Convention and WCPFC decisions regarding transshipment and net sharing would continue to apply in the overlap area. These include prohibitions on at-sea transshipment and bunkering for purse seine vessels (50 CFR 300.216(b)(1)), requirements for at-sea transshipment observer coverage (50 CFR 300.216(b)(2)), general restrictions on transshipment and bunkering for all vessels engaged in commercial fishing of HMS in the WCPFC Area (50 CFR 300.216(b)(3)), and restrictions regarding net sharing (50 CFR 300.216(c)) that allow net sharing only between purse seine vessels in limited circumstances. Regulations that implement IATTC decisions for transshipment would go into effect under this proposed rule and would also apply in the overlap area. These IATTC regulations include prohibitions on at-sea transshipment for purse seine vessels (50 CFR 300.25(c)). The transshipment regulations implementing IATTC decisions are identical to one component of the transshipment regulations implementing the WCPF Convention and WCPFC decision, and thus application of both the WCPFC and IATTC transshipment prohibition to purse seine vessels operating in the overlap area would not subject these vessels to additional or contradictory requirements.

Requirements implementing the WCPF Convention and WCPFC decisions regarding VMS would continue to apply in the overlap area under this proposed rule (50 CFR 300.219) and would apply to commercial fishing vessels of all sizes. Requirements implementing IATTC decisions regarding VMS would also go into effect under this proposed rule and would apply in the overlap area (50 CFR 300.26). The requirements to implement IATTC decisions apply only to commercial fishing vessels 24 meters or more in overall length. Given that the requirements implementing the WCPF Convention and WCPFC decisions already apply and would continue to apply to vessels of all sizes under this proposed rule, this proposed rule would add no new VMS requirements, and all U.S. commercial fishing vessels fishing for HMS in the overlap area would still be required to continuously operate the VMS at all times, with certain exceptions.

Requirements implementing the WCPF Convention and WCPFC decisions regarding compliance with laws of other nations (50 CFR 300.214) and facilitation of enforcement and inspection (50 CFR 300.221) would continue to apply in the overlap area under this proposed rule. The regulations implementing IATTC decisions do not include specific provisions regarding compliance with laws of other nations or facilitation of enforcement and inspection.

The Assistant Administrator for Fisheries has determined that this proposed rule is consistent with the WCPFCIA, the Tuna Conventions Act, and other applicable laws, subject to further consideration after public comment.

Section 304(b) of the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C. 1801 et seq. ) provides for a 15-day comment period for these types of fishery rules. NMFS finds “good cause” under the Administrative Procedure Act that a longer notice and comment period would be unnecessary and contrary to the public interest. 5 U.S.C. 553(b)(B). Specifically, NMFS issued a temporary rule closing the high seas and U.S. EEZ between the latitudes of 20° N and 20° S in the WCPFC Area to purse seine fishing from October 9, 2019, through the end of the calendar year (84 FR 52035; October 1, 2019), due to reaching the 2019 fishing effort limit specified by the WCPFC and implemented by NMFS at 50 CFR 200.223(a). Thus, U.S. purse seine vessels are currently unable to fish on the high seas in the overlap area. Once the regulatory changes in this proposed rule go into effect, that fishery closure would no longer apply. Providing more than a 15-day comment period on this proposed rule would unnecessarily lengthen the U.S. purse seine fishery closure in the overlap area, and thus, NMFS finds good cause to provide the public with a 15-day comment period on this proposed rule.

NMFS determined that this action is consistent to the maximum extent practicable with the enforceable policies of the approved coastal management program of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and the State of Hawaii. NMFS submitted determinations to Hawaii and each of the Territories on February 7, 2019, for review by the responsible state and territorial agencies under section 307 of the CZMA. The CNMI replied by letter dated March 7, 2019, stating that based on the information provided, it has determined that the action will be undertaken in a manner that is consistent to the maximum extent practicable with the enforceable policies of the CNMI's coastal management program. Hawaii replied by letter dated February 15, 2019, stating that, because the overlap area is outside of the jurisdiction of the Hawaii Coastal Zone Management Program's enforceable policies, it would not be responding to the consistency determination. No responses were received from Guam or American Samoa, and thus, concurrence with the respective consistency determinations is presumed (15 CFR 930.41).

This proposed rule has been determined to be not significant for purposes of Executive Order 12866. This proposed rule is not an Executive Order 13771 regulatory action because this rule is not significant under Executive Order 12866.

An IRFA was prepared, as required by section 603 of the RFA. The IRFA describes the economic impact this proposed rule, if adopted, would have on small entities. A description of the action, why it is being considered as well as its objectives, and the legal basis for this action are contained in the SUMMARY section of the preamble and in other sections of this SUPPLEMENTARY INFORMATION section of the preamble. The analysis follows:

For RFA purposes only, NMFS has established a small business size standard for businesses, including their affiliates, whose primary industry is commercial fishing (50 CFR 200.2). A business primarily engaged in commercial fishing (NAICS code 114111) is classified as a small business if it is independently owned and operated, is not dominant in its field of operation (including its affiliates), and has combined annual receipts not in excess of $11 million for all its affiliated operations worldwide.

The proposed rule would apply to owners and operators of U.S. commercial fishing vessels used to fish for HMS in the overlap area, including longline vessels, albacore troll vessels, and purse seine vessels. The number of such vessels is the number authorized to fish in both the IATTC Area and WCPFC Area. The numbers as of October 2, 2019, as reflected on the IATTC Vessel Register and the WCPFC Record of Fishing Vessels, were 143 longline vessels, 24 albacore troll vessels, and 16 purse seine vessels.

Based on limited financial information about the affected fishing fleets, and using individual vessels as proxies for individual businesses, NMFS believes that all of the affected longline and albacore troll fishing entities, and almost 85% of the purse seine fishing entities, are small entities as defined by the RFA; that is, they are independently owned and operated and not dominant in their fields of operation, and have annual receipts of no more than $11.0 million. Within the purse seine fleet, analysis of the average revenue, by vessel, for the three years of 2016-2018 (most recent data available) reveals that average annual revenue among vessels in the fleet was about $9.0 million, and the three-year annual averages were less than the $11 million threshold for 13 of the 16 vessels on both the RVR and RFV.

The reporting, recordkeeping and other compliance requirements of this proposed rule are described earlier in the preamble. The classes of small entities subject to the proposed requirements and the expected costs of complying with the proposed requirements are described in this proposed rule.

As described in the Paperwork Reduction Act subsection, although there are no new collection-of-information requirements associated with this action that are subject to the Paperwork Reduction Act, existing collection-of-information requirements would apply in the overlap area, under the following Control Numbers: (1) 0648-148, West Coast Region Pacific Tuna Fisheries Logbook and Fish Aggregating Device Data Collection; (2) 0648-0649, Transshipment Requirements under the WCPFC; (3) 0648-0218, South Pacific Tuna Act; (4) 0648-0595, WCPFC Vessel Information Family of Forms; and (5) 0648-0204, West Coast Region Family of Forms.

Fulfillment of the requirements under the proposed rule is not expected to require any professional skills that affected vessel owners and operators do not already possess.

For longline fishing entities, although as previously described there are about 145 such entities that are authorized to be used for fishing in the overlap area, there has been very little fishing activity in the overlap area (and no longline fishing activity at all since 2010), and NMFS has not identified any factors affecting the longline fishing status quo. Consequently, NMFS expects the proposed action to have little or no effect in terms of recordkeeping, reporting, or other compliance requirements for affected longline fishing entities.

For albacore troll fishing entities, NMFS does expect fishing activity in the overlap area, so affected troll fishing entities could experience effects from the proposed rule. Under the proposed rule, two substantive sets of requirements that implement conservation and management measures for HMS would be newly applied to the overlap area: The regulations to implement IATTC conservation and management measures that restrict fishing in proximity to data buoys (50 CFR 300.25(f)), and the regulations to implement IATTC conservation and management measures prohibiting the retention of mobulid rays (with limited exceptions) and requiring that they be handled and released in specified manners (50 CFR 300.27(i)-(j)). The new data buoy requirements could increase operating costs by increasing the time spent at sea in the overlap area. For example, the vessel operator and crew would have to avoid interactions with data buoys, and if the vessel or gear becomes entangled with a data buoy they would need to make sure to disentangle the gear carefully, to cause as little damage to the data buoys as possible. As NMFS found in the analysis in support of the 2011 rulemaking establishing these requirements throughout the IATTC Area, NMFS expects interactions with data buoys to be rare (76 FR 68332; November 4, 2011). Moreover, data from the National Data Buoy Center (NDBC) indicates that only one anchored data buoy is located in the overlap area. Since interactions with data buoys would be unlikely to occur in the overlap area, the compliance costs are expected to be minor or nil. NMFS does not expect the mobulid ray requirements to lead to any compliance costs for albacore troll fishing vessels, because there is very little bycatch in albacore troll fisheries (81 FR 50401; August 1, 2016).

Some of the regulations implementing WCPFC conservation and management measures (at 50 CFR part 300, subpart O) would no longer apply in the overlap area, but they would be replaced with comparable regulations implementing IATTC conservation and management measures (at 50 CFR part 300, subpart C) that will now apply in this area. Specifically, the IATTC prohibition against retaining oceanic whitetip shark, implemented by 50 CFR 300.27(d)), would now apply in the overlap area. The requirements under the regulations implementing WCPFC decisions and IATTC decisions are similar, and NMFS does not expect any substantive change in compliance costs. There would also be new requirements that apply in the overlap area for albacore troll fishing entities under regulations implementing IATTC decisions for MCS measures, including logbook reporting requirements (50 CFR 300.22(a)(1)) and VMS requirements (50 CFR 300.26). However, because the affected albacore troll fishing entities are already required to comply with the requirements regarding the IATTC RVR and to comply with the logbook reporting and VMS requirements when fishing in the IATTC Area, the addition of the regulations that implement IATTC decisions would not require substantial changes in practices and would not be expected to bring any change in compliance costs.

For the purse seine fishing entities, the removal of several regulations that implement WCPFC conservation and management measures from the overlap area would be expected to reduce compliance costs, but those reductions would be somewhat offset by compliance costs associated with the imposition of similar regulations to implement IATTC conservation and management measures in the overlap area. The regulations that would be removed from the overlap area are the annual limits on purse seine fishing effort and the seasonal prohibitions on setting on FADs (50 CFR 300.223(b)). The regulations that would be applied are the seasonal closures on purse seine fishing and purse seine FAD restrictions (50 CFR 300.28). The respective purse seine measures of IATTC and WCPFC are not directly comparable, and NMFS cannot predict their respective potential compliance costs with any precision. Accordingly, only a qualitative comparison of their respective compliance costs is possible. The measures as they would apply on the high seas are what matter for this analysis, since no portion of the U.S. EEZ is within the overlap area, and no U.S. commercial HMS fishing vessels have had a history of fishing in the foreign EEZs in the overlap area. If the IATTC measures were applied in the overlap area in this proposed rule, U.S. purse seine fishing entities would be subject to one of the IATTC's two 72-day prohibitions on purse seine fishing (50 CFR 300.25(e)) in the overlap area each year. If instead the WCPFC measures applied in the overlap area, U.S. purse seine fishing entities would be allowed, collectively, to spend 1,270 fishing days on the high seas in the WCPFC Area each year, with fishing days spent in the overlap area counting against that limit, and they would be subject to 5-month prohibitions on fishing on FADs in the overlap area each year (50 CFR 300.223). Although, the two sets of measures are not directly comparable, the IATTC measures would provide greater fishing opportunities to most or all affected purse seine fishing entities than those of WCPFC, because the IATTC purse seine closure period is shorter than the purse seine closures that have been in effect on the high seas in the WCPO due to the purse seine fishing effort limits specified by the WCPFC (in 2015, closure from June 15 through December 31, 2015; in 2016, closure from September 2 through December 31, 2016; in 2018, closure from September 18 through December 31, 2018; in 2019, closure from October 9 through December 31, 2019) or the WCPFC FAD prohibition periods. Further, the vessels operating under IATTC measures have greater operational certainty (affording logistical and maintenance predictability) because the vessel owner chooses between one of two closure periods rather than being subject to a variable closure date under WCPFC measures. It is not possible to predict the degree to which those opportunities would be taken advantage of, but the greater opportunities and the flexibility they provide indicate that application of IATTC measures in the overlap area would likely reduce compliance costs for the directly affected purse seine fishing entities.

Purse seine fishing entities authorized to fish in the WCPFC Area but not in the overlap area would not be directly affected by the proposed rule, but they could be indirectly affected. The fishing effort limits set forth in WCPFC conservation and management measures would no longer apply in the overlap area, allowing greater fishing effort in the overlap area. Additionally, under the proposed rule, fishing effort in the overlap area would not be counted against WCPFC limits, potentially increasing fishing opportunities for the U.S. purse seine fleet outside the overlap area. This is based on trends in recent years showing increased U.S. purse seine fishing activity in the overlap area. If all of the fishing days in the overlap area no longer count towards the WCPFC-specified fishing effort limits, it is likely that more fishing days would be available to U.S. purse seine vessels on the high seas in the WCPFC Area outside of the overlap area.

In addition to the changes to the purse seine-specific regulations just described, several substantive requirements would apply to purse seine fishing entities in the overlap area under the proposed rule that do not currently apply in that area: The regulations implementing IATTC conservation and management measures on FADs (50 CFR 300.28), the Pacific bluefin tuna catch limit (50 CFR 300.25(g)), restrictions on fishing in proximity to data buoys (50 CFR 300.25(f)), requirements to release non-tuna species (50 CFR 300.27), requirements to release mobulid rays (with limited exceptions) and release them in specified manners (50 CFR 300.27(i)-(j)), and requirements to release sharks and handle them in specified manners (50 CFR 300.27(k)), as explained in more detail below.

The FAD management measures include FAD identification regulations that would require that deployed FADs be physically marked with unique identifiers, as well as limits on the number of active FADs, restrictions on FAD deployments and removals, and FAD design regulations, which would require that all FADs on board or deployed meet certain specifications, particularly with respect to the use of netting. As mentioned above, U.S. purse seine vessels fishing in the overlap area are currently required to comply with the regulations for inclusion on the IATTC RVR. Thus, although this proposed rule would change the area of application of the FAD management regulations at 50 CFR 300.28, all of the affected vessels are currently complying with those regulations when fishing in the EPO. Data from 2014-2018 shows that all current U.S. purse seine vessels that fished in the overlap area also fished in the EPO. For affected entities, the change in area of application of the FAD management regulations probably would only bring a minor increase in costs or no increased costs, as they are already complying with those regulations when fishing in the EPO outside the overlap area. Moreover, there are comparable limits for the number of active FADs currently applicable in the overlap area under the regulations implementing WCPFC decisions at 50 CFR 300.223(b).

The Pacific bluefin tuna catch limit that would go into effect in the overlap area under the proposed rule would not be expected to bring compliance costs to the large U.S. purse seine vessels that fish in the overlap area, as these vessels generally do not target or catch Pacific bluefin tuna.

The data buoy requirements could increase operating costs by increasing the time spent at sea for a given amount of fishing. For example, vessels would not be able to fish within one nautical mile of an anchored data buoy, they would have to avoid interactions with data buoys, and if the vessel or gears becomes entangled with a data buoy, the operator and crew would need to make sure to disentangle the gear carefully to cause as little damage to the data buoys as possible. As NMFS found in the 2011 rulemaking that established these requirements throughout the IATTC Area, NMFS expects interactions with data buoys to be rare (76 FR 68332; November 4, 2011). Moreover, there is a low number of data buoys located in the overlap area. Based on data from the NDBC, only one anchored data buoy is located in the overlap area. Thus, interactions with data buoys would be even more unlikely to occur, so the compliance costs are expected to be minor.

The requirements to release non-tuna species, mobulid rays, and sharks are not expected to substantially affect business revenues, because none of the affected fishing entities target non-tuna species, sharks, or rays. However, the requirements could lead to increased time spent by vessel operators and crew handling and releasing incidentally caught non-tuna species, sharks, and rays in the specified manner, and so could bring modest compliance costs. In addition, these requirements could detrimentally affect revenues if targeted tuna are incidentally released when these species are intentionally released from the brailer to comply with the regulations. However, affected U.S. purse seine vessel owners and operators are already subject to these requirements when fishing in the IATTC Area, and thus the small change in the area of application of these requirements would not be expected to substantially increase compliance costs.

Some regulations implementing WCPFC conservation and management measures for HMS (at 50 CFR part 300, subpart O) would no longer apply in the overlap area. However, comparable regulations that implement IATTC conservation and management measures for HMS (at 50 CFR part 300, subpart C) would now apply in the overlap area. Regulations that would shift in this manner include requirements to retain all catch of bigeye tuna, skipjack tuna, and yellowfin tuna (50 CFR 300.27(a)), not to retain oceanic whitetip shark (50 CFR 300.27(d)), and not to retain silky shark (50 CFR 300.27(e)); requirements regarding sea turtle handling and release (50 CFR 300.27(c)); whale shark restrictions (50 CFR 300.27(g)-(h)); and whale shark encirclement reporting requirements (50 300.22(a)(2)). For these requirements, the two sets of regulations are similar, and NMFS does not expect any substantive change in compliance costs.

There would also be five requirements for purse seine fishing entities under the regulations implementing IATTC conservation and management measures that would go into effect under the proposed rule. These requirements include reporting on FAD interactions (50 CFR 300.22(a)(3)(i)), reporting on active FADs (50 CFR 300.22(a)(3)(ii)), logbook reporting requirements (50 CFR 300.22(a)(1)), transshipment requirements (50 CFR 300.25(c)), and VMS requirements (50 CFR 300.26). The first two requirements (reporting on FAD interactions and reporting on active FADs) would bring substantive new requirements. Regarding the requirement for reporting on FAD interactions, as NMFS found in the 2016 rulemaking that established the requirement throughout the IATTC Area (excepting the overlap area), NMFS expects a minimal additional time burden for owners and operators of large purse seine vessels to record the specified information for FAD interactions activities, and expects minor impacts on business incomes (81 FR 86966; December 2, 2016). Regarding reporting on active FADs, as NMFS found in the 2018 rulemaking establishing the requirement throughout the IATTC Area (excepting the overlap area), NMFS does not expect any increase in compliance costs, because it is likely that vessel operators are already collecting the necessary information (83 FR 15503; April 11, 2018). The latter three requirements (logbook reporting requirements, transshipment requirements, and VMS requirements), are not expected to bring any new compliance costs, because the affected purse seine fishing entities are currently subject to those regulations when fishing in the IATTC Area outside of the overlap area, and the addition of these regulations in the overlap area would not require substantial changes in practices. Moreover, the regulations implementing the IATTC prohibition on at-sea transshipments for purse seine vessels is essentially identical to regulations already in effect in the overlap area implementing the WCPF Convention and WCPFC decisions. Similarly, the regulations implementing the IATTC VMS provisions are essentially identical to regulations already in effect in the overlap area implementing the WCPF Convention and WCPFC decisions, but would just apply to a smaller group of vessels—vessels 24 meters or more in overall length. Given that the requirements implementing the WCPF Convention and WCPFC decisions already apply and would continue to apply under the proposed rule to vessels of all sizes, there would be no new VMS requirements under the proposed rule, and all U.S. commercial fishing vessels fishing for HMS in the overlap area would still be required to continuously operate the VMS at all times, with certain exceptions.

In summary, this proposed rule would be expected to have little or no effect on the compliance costs of any affected entities, except purse seine fishing entities. For purse seine fishing entities, this rule would bring modest increases in compliance costs associated with several requirements that would go into effect in the overlap area. However, these costs would be counteracted by a potentially substantial reduction in compliance costs associated with removal of the regulations to implement WCPFC conservation and management measures for fishing effort limits and FAD prohibition periods from application in the overlap area.

NMFS does not expect any disproportionate economic impacts between small and large entities operating vessels resulting from this rule. Furthermore, NMFS does not expect any disproportionate economic impacts based on vessel size, gear, or homeport.

NMFS has not identified any Federal regulations that conflict with the proposed regulations. NMFS has identified several Federal regulations that duplicate or overlap with the proposed regulations. These include: The proposed logbook reporting requirements at 50 CFR 300.22(a)(1), which overlap with existing regulations at 50 CFR 300.34(b)(1) and 300.218(a), the proposed transshipment requirements at 50 CFR 300.25(c), which overlap with existing regulations at 50 CFR 300.216(b), and the proposed VMS regulations at 50 CFR 300.26, which overlap with existing regulations at 50 CFR 300.45 and 300.219. However, as described above, these regulations impose requirements which are substantially similar to, or in some cases identical to, requirements imposed under regulations currently applicable in the overlap area. Thus, application of these overlapping requirements is not expected to create significant economic burdens on vessel owners and operators.

NMFS has sought to identify alternatives that would minimize the proposed rule's economic impacts on small entities (“significant alternatives”). For most affected entities, the proposed action is likely to have no economic impact or a positive economic impact compared to the no-action alternative. NMFS also considered the alternative of removing application from the overlap area of all regulations derived from WCPFC conservation and management measures and from the WCPF Convention. This alternative would likely result in lower compliance costs than the proposed action for some affected entities, but it would not be consistent with U.S. obligations under the WCPF Convention, since the decisions of the IATTC and WCPFC regarding the overlap area cannot alter existing obligations under the WCPF Convention. Therefore, NMFS does not prefer this alternative.

Although there are no new collection-of-information requirements associated with this action that are subject to the Paperwork Reduction Act, existing collection of information requirements would apply in the overlap area, under the following Control Numbers: (1) 0648-0148, West Coast Region Pacific Tuna Fisheries Logbook and Fish Aggregating Device Data Collection; (2) 0648-0649, Transshipment Requirements under the WCPFC; (3) 0648-0218, South Pacific Tuna Act; (4) 0648-0595, WCPFC Vessel Information Family of Forms; and (5) 0648-0204, West Coast Region Family of Forms.

For the reasons set out in the preamble, 50 CFR part 300 is proposed to be amended as follows: