On July 29, 2016, Public Law 114-216 amended the Agricultural Marketing Act of 1946 (7 U.S.C. 1621 et seq. ) (amended Act) to require USDA to establish a national, mandatory standard for disclosing any food that is or may be bioengineered. In accordance with the amended Act, USDA published final regulations to implement the Standard on December 21, 2018 (83 FR 65814). The regulations became effective on February 19, 2019, with a mandatory compliance date of January 1, 2022.

Foods that do not contain detectable modified genetic material are not bioengineered foods and do not require disclosure under the Standard. Under the definition of bioengineered food at 7 CFR 66.1, food does not contain modified genetic material if the genetic material is not detectable pursuant to § 66.9. The recordkeeping requirements for detectability at 7 CFR 66.9 specify, among other things, (1) the requirements to validate that a refining process renders modified genetic material in a food undetectable and (2) standards of performance for detectability testing.

A refining process is validated through analytical testing that meets the standards described in paragraph (c) of 7 CFR 66.9. Paragraph (c) requires that analytical testing meet the following standard: (1) Laboratory quality assurance must ensure the validity and reliability of test results; (2) analytical method selection, validation, and verification must ensure that the testing method used is appropriate (fit for purpose) and that the laboratory can successfully perform the testing; (3) the demonstration of testing validity must ensure consistent accurate analytical performance; and (4) method performance specifications must ensure analytical tests are sufficiently sensitive for the purposes of the detectability requirements of Part 66.

In the preamble to the final regulations, USDA indicated that it would provide instructions to the industry to explain how they can ensure (1) acceptable validation of refining processes in accordance with AMS standards and (2) acceptable testing methodology used to satisfy that a food does not contain detectable modified genetic material (83 FR 65843).

On December 17, 2019, AMS published a document in the Federal Register announcing the publication of a draft Instruction to Ensure Acceptable Validation of Refining Processes (84 FR 68816), with a comment period that closed on January 16, 2020. On January 23, 2020, in response to multiple requests for an extension of the comment period, AMS extended the comment period another 15 days (85 FR 3860). The new comment period closed on February 7, 2020.

On February 3, 2020, AMS published a document in the Federal Register announcing publication of Draft Instructions on Testing Methods (85 FR 5927), with a comment period that closed on March 4, 2020.

This document announces the publication of the final guidance to validate a refining process and to select an acceptable testing method. In addition to these two guidance documents, AMS is publishing two corresponding question and answer documents that respond to a number of questions and comments it received during the public comment periods. These four documents are available on the AMS bioengineered food disclosure website at https://www.ams.usda.gov/rules-regulations/be. These final instructions pertain to the requirements of the existing regulations, which can be found at https://www.federalregister.gov/documents/2018/12/21/2018-27283/national-bioengineered-food-disclosure-standard.

This final rule, pursuant to 5 U.S.C. 553, amends regulations issued to carry out a marketing order as defined in 7 CFR 900.2(j). This final rule is issued under Marketing Agreement and Order No. 930, both as amended (7 CFR part 930), regulating the handling of tart cherries produced in the states of Michigan, New York, Pennsylvania, Oregon, Utah, Washington and Wisconsin. Part 930 (referred to as the “Order”) is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.” The Board locally administers the Order and is comprised of producers and handlers of tart cherries operating within the production area, and a public member.

The Department of Agriculture (USDA) is issuing this final rule in conformance with Executive Orders 13563 and 13175. This final rule falls within a category of regulatory action that the Office of Management and Budget (OMB) exempted from Executive Order 12866 review. Additionally, because this rule does not meet the definition of a significant regulatory action, it does not trigger the requirements contained in Executive Order 13771. See OMB's Memorandum titled “Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017, titled `Reducing Regulation and Controlling Regulatory Costs' ” (February 2, 2017).

This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. Under the Order, free and restricted percentages may be established for tart cherries handled during the crop year. This rule establishes free and restricted percentages for tart cherries for the 2019-20 crop year, beginning July 1, 2019, through June 30, 2020.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with the law and request a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.

This final rule establishes the proportion of tart cherries from the 2019-20 crop that may be handled in commercial outlets at 67 percent free and 33 percent restricted. The Secretary of Agriculture (Secretary) has determined that designating free and restricted percentages of tart cherries for the 2019-20 crop year effectuates the declared policy of the Act to stabilize marketing conditions by adjusting supply to meet market demand and help improve grower returns. A correction is also made to § 930.151 to reflect the correct desirable carry-out inventory not to exceed a maximum of 100 million pounds (81 FR 63676). These recommendations were made by the Board at meetings on June 27, 2019, and September 12, 2019.

Section 930.51(a) provides the Secretary authority to regulate volume by designating free and restricted percentages for any tart cherries acquired by handlers in a given crop year. Section 930.50 prescribes procedures for computing an optimum supply based on sales history and for calculating these free and restricted percentages. Free percentage volume may be shipped to any market, while restricted percentage volume must be held by handlers in a primary or secondary reserve, or be diverted or used for exempt purposes as prescribed in §§ 930.159 and 930.162. Exempt purposes include, in part, the development of new products, sales into new markets, the development of export markets, and charitable contributions. Sections 930.55 through 930.57 prescribe procedures for inventory reserve. For cherries held in reserve, handlers would be responsible for storage and would retain title of the tart cherries.

Section 930.52 states that only districts with an annual average production over the prior three years of at least six million pounds are subject to regulation, and any district producing a crop that is less than 50 percent of its annual average of the previous five years is exempt. The regulated districts for the 2019-20 crop year are: District 1—Northern Michigan; District 2—Central Michigan; District 3—Southern Michigan; District 7—Utah; District 8—Washington; and District 9—Wisconsin. Districts 4, 5, and 6 (New York, Oregon and Pennsylvania, respectively) will not be regulated for the 2019-20 season.

Demand for tart cherries and tart cherry products tends to be relatively stable from year to year. Conversely, annual tart cherry production can vary greatly. In addition, tart cherries are processed and can be stored and carried over from crop year to crop year, further impacting supply. As a result, supply and demand for tart cherries are rarely in balance.

Because demand for tart cherries is inelastic, total sales volume is not very responsive to changes in price. However, prices are very sensitive to changes in supply. As such, an oversupply of cherries would have a sharp negative effect on prices, driving down grower returns. Aware of this economic relationship, the Board focuses on using the volume control provisions in the Order to balance supply and demand to stabilize industry returns.

Pursuant to § 930.50, the Board meets on or about July 1, to review sales data, inventory data, current crop forecasts, and market conditions for the upcoming season and, if necessary, to recommend preliminary free and restricted percentages if anticipated supply would exceed demand. After harvest is complete, but no later than September 15, the Board meets again to update its calculations using actual production data, consider any necessary adjustments to the preliminary percentages, and determine if final free and restricted percentages should be recommended to the Secretary.

The Board uses sales history, inventory, and production data to determine whether there is a surplus and, if so, how much volume should be restricted to maintain optimum supply. The optimum supply represents the desirable volume of tart cherries that should be available for sale in the coming crop year. Optimum supply is defined as the average free sales of the prior three years plus desirable carry- out inventory. Desirable carry-out is the amount of fruit needed by the industry to be carried into the succeeding crop year to meet market demand until the new crop is available. In June 2015, after considering market circumstances and needs, the Board recommended a desirable carry-out inventory not to exceed a maximum of up to 100 million pounds beginning with the 2016 crop year. That action was subsequently approved by the Secretary (81 FR 63676). Therefore, a correction will be made to § 930.151 to reflect the correct desirable carry-out inventory not to exceed a maximum of 100 million pounds.

In addition, USDA's “Guidelines for Fruit, Vegetable, and Specialty Crop Marketing Orders” ( https://www.ams.usda.gov/publications/content/1982-guidelines-fruit-vegetable-marketing-orders ) specify that 110 percent of recent years' sales should be made available to primary markets each season before recommendations for volume regulation are approved. This requirement is codified in § 930.50(g), which specifies that in years when restricted percentages are established, the Board shall make available tonnage equivalent to an additional 10 percent of the average sales of the prior three years for market expansion (market growth factor).

After the Board determines optimum supply, desirable carry-out, and market growth factor, it must examine the current year's available volume to determine whether there is an oversupply situation. Available volume includes carry-in inventory (any inventory available at the beginning of the season) along with that season's production. If production is greater than the optimum supply minus carry-in, the difference is considered surplus. This surplus tonnage is divided by the sum of production in the regulated districts to reach a restricted percentage. This percentage must be held in reserve or used for approved diversion activities, such as exports.

The Board met on June 27, 2019, and computed an optimum supply of 313 million pounds for the 2019-20 crop year using the average of free sales for the three previous seasons and desirable carry-out. To determine the carry-out figure, the Board discussed and considered a range of alternatives. One member suggested a carry-out value of 20 million pounds, noting high carry-out puts downward pressure on grower prices. Another member agreed, noting the actual carry-out is often twice what the Board has estimated as desirable. Some members favored a carry-out of 50 million pounds. Other members were concerned that too low of a carry-out may push the restricted percentage too high for the industry to implement and suggested repeating the carry-out of 80 million pounds from the previous season. The Board's executive director noted average sales are about 21 million pounds a month. Using that average, it would take 84 million pounds to supply the industry for four months. After considering the alternatives, the Board determined a carry-out of 85 million pounds would be enough to supply the industry's needs at the beginning of the next season.

The Board subtracted the estimated carry-in of 174 million pounds from the optimum supply to calculate the production quantity needed from the 2019-20 crop to meet optimum supply. This number, 139 million pounds, was subtracted from the Board's estimated 2019-20 total production (from regulated and unregulated districts) of 248.2 million pounds to calculate a surplus of 109.2 million pounds of tart cherries. The Board also complied with the market growth factor requirement by removing 22.8 million pounds (average sales for prior three years of 228 million times 10 percent) from the surplus. The adjusted surplus of 86.4 million pounds was then divided by the expected production in the regulated districts (240 million pounds) to reach a preliminary restricted percentage of 36 percent for the 2019-20 crop year.

The Board then discussed whether this calculation would supply enough cherries to grow sales and fulfil orders that have not yet shipped. Some members reported that there had been excessive rainfall, especially in Michigan, during the growing season. This could lead to poor fruit quality and handlers would need additional available tonnage to meet sales needs. As a result, the Board recommended an additional economic adjustment of 20 million pounds, which is subtracted from the surplus. The Board also anticipated that orchard diversion would be about 50 million pounds, which is subtracted from the expected production. With these modifications, the preliminary restricted percentage was calculated at 35 percent.

The Board met again on September 12, 2019, to consider final volume regulation percentages for the 2019-20 season. The final percentages are based on the Board's reported production figures and the supply and demand information available in September.

The total production for the 2019-20 season was 257.2 million pounds, 9 million pounds above the Board's June estimate. In addition, growers diverted 18.3 million pounds in the orchard, about a third of what had been anticipated. As a result, 238.9 million pounds would be available to market, 230.2 million pounds of which are in the restricted districts. Using the actual production numbers, and accounting for the recommended desirable carry-out and economic adjustment, as well as the market growth factor, the restricted percentage was recalculated.

The Board subtracted the carry-in figure used in June of 174 million pounds, from the optimum supply of 313 million pounds to determine 139 million pounds of 2019-20 production would be necessary to reach optimum supply. The Board subtracted the 139 million pounds from the actual production of 257.2 million pounds, resulting in a surplus of 118.2 million pounds of tart cherries.

The recalculated surplus was reduced by subtracting the revised economic adjustment of 20 million pounds and the market growth factor of 22.8 million pounds, resulting in an adjusted surplus of 75.4 million pounds. The Board then divided this final surplus by the available production of 230.2 million pounds in the regulated districts (248.5 million pounds minus 18.3 million pounds of in-orchard diversion) to calculate a restricted percentage of 33 percent with a corresponding free percentage of 67 percent for the 2019-20 crop year, as outlined in the following table:

The final restriction of 33 percent is lower than the preliminary restriction percentage of 35 percent. The change is due to the increase in production from the June estimate and lower in-orchard diversion volume. The desired carry-out remained the same at 85 million pounds. In discussing the calculation, members indicated the quality concerns that led to the adjustment were accurate. Members did not propose any changes to the adjustment following harvest.

During the preliminary and final discussions, attendees raised concerns about the age of free inventory and the impact of imported tart cherry products. The Board voted to form a committee to develop a proposal for collecting additional data regarding inventory. Regarding the impact of imports, the Board approved a research proposal to gather additional data. The Board anticipates these actions will help provide additional data for future volume regulation discussions.

Establishing free and restricted percentages is an attempt to bring supply and demand into balance. If the primary market is oversupplied with cherries, grower prices decline substantially. Restricted percentages have benefited grower returns and helped stabilize the market as compared to those seasons prior to the implementation of the Order. The Board, based on its discussion of this issue and the result of the above calculations, believes the available information indicates a restricted percentage should be established for the 2019-20 crop year to avoid oversupplying the market with tart cherries.

Consequently, the Board recommended final percentages of 67 percent free and 33 percent restricted by a vote of 15 in favor, and 3 opposed. The Board could meet and recommend the release of additional volume during the crop year if conditions so warranted. The Secretary finds, from the recommendation and supporting information supplied by the Board, that designating final percentages of 67 percent free and 33 percent restricted tends to effectuate the declared policy of the Act, and so designates these percentages.

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), the Agricultural Marketing Service (AMS) has considered the economic impact of this rule on small entities. Accordingly, AMS has prepared this final regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf.

There are approximately 400 producers of tart cherries in the regulated area and approximately 40 handlers of tart cherries who are subject to regulation under the Order. Small agricultural producers are defined by the Small Business Administration (SBA) as those having annual receipts of less than $1,000,000, and small agricultural service firms have been defined as those whose annual receipts are less than $30,000,000 (13 CFR 121.201).

According to the National Agricultural Statistics Service (NASS) and Board data, the average annual grower price for tart cherries utilized for processing during the 2018-19 season was approximately $0.196 per pound. With total utilization at 288.8 million pounds for the 2018-19 season, the total 2018-19 value of the crop utilized for processing is estimated at $56.6 million. Dividing the crop value by the estimated number of producers (400) yields an estimated average receipt per producer of $141,500. This is well below the SBA threshold for small producers.

A free on board (FOB) price of $0.80 per pound for frozen tart cherries was reported by the Food Institute during the 2018-19 season. Based on utilization, this price represents a good estimate of the price for processed cherries. Multiplying this FOB price by total utilization of 288.8 million pounds results in an estimated handler-level tart cherry value of $231 million. Dividing this figure by the number of handlers (40) yields estimated average annual handler receipts of $5.8 million, which is below the SBA threshold for small agricultural service firms. Assuming a normal distribution, the majority of producers and handlers of tart cherries may be classified as small entities.

The tart cherry industry in the United States is characterized by wide annual fluctuations in production. According to NASS, the pounds of utilized tart cherry production for the years 2014 through 2018 were 301 million, 251 million, 319 million, 254 million, and 289 million, respectively. Because of these fluctuations, supply and demand for tart cherries are rarely in balance.

Demand for tart cherries is inelastic, meaning changes in price have a minimal effect on total sales volume. However, prices are very sensitive to changes in supply, and grower prices vary widely in response to the large swings in annual supply. Grower prices per pound for processed utilization have ranged from a low of $0.073 in 1987 to a high of $0.588 per pound in 2012 when a weather event substantially reduced supply.

Because of this relationship between supply and price, oversupplying the market with tart cherries would have a sharp negative effect on prices, driving down grower returns. Aware of this economic relationship, the Board focuses on using the volume control authority in the Order to align supply with demand and stabilize industry returns. This authority allows the industry to set free and restricted percentages as a way to bring supply and demand into balance. Free percentage cherries can be marketed by handlers to any outlet, while restricted percentage volume must be held by handlers in reserve, diverted, or used for exempted purposes.

This rule controls the supply of tart cherries by establishing percentages of 67 percent free and 33 percent restricted for the 2019-20 crop year. These percentages should stabilize marketing conditions by adjusting supply to meet market demand and help improve grower returns. This action regulates tart cherries handled in Michigan, Utah, Washington, and Wisconsin. The authority for this action is provided in §§ 930.50, 930.51(a), and 930.52. The Board recommended this action at a meeting on September 12, 2019.

This rule will result in some fruit being diverted from the primary domestic markets. However, as mentioned earlier, the USDA's “Guidelines for Fruit, Vegetable, and Specialty Crop Marketing Orders” ( https://www.ams.usda.gov/publications/content/1982-guidelines-fruit-vegetable-marketing-orders ) specify that 110 percent of recent years' sales should be made available to primary markets each season before recommendations for volume regulation are approved. The available quantity under this regulation (337.5 million pounds) is 148 percent of the average sales for the last three years (228 million pounds).

In addition, there are secondary uses available for restricted fruit, including the development of new products, sales into new markets, the development of export markets, and being placed in reserve. While these alternatives may provide different levels of return than the sales to primary markets, they play an important role for the industry. The areas of new products, new markets, and the development of export markets utilize restricted fruit to develop and expand the markets for tart cherries. In 2018-19, these activities accounted for over 88 million pounds in sales, a 6-million-pound increase from the previous season.

Placing tart cherries into reserves is also a key part of balancing supply and demand. Although handlers bear the handling and storage costs for fruit in reserve, reserves stored in large crop years are used to supplement supplies in short crop years. The reserves help the industry to mitigate the impact of oversupply in large crop years, while allowing the industry to supply markets in years when production falls below demand. Further, storage and handling costs are more than offset by the increase in price when moving from a large crop to a short crop year.

The Board recommended a carry-out of 85 million pounds and made a demand adjustment of 20 million pounds in order to make the regulation less restrictive to account for fruit quality concerns. With 174 million pounds of carry-in, 8.7 million pounds of production in the unregulated districts, and 154.8 million pounds of free tonnage from the regulated districts, 337.5 million pounds of fruit will be available for the domestic market. This amount is comparable to the 336.9 million pounds made available in the previous season. Even with the recommended restriction, the domestic market will have an ample supply of tart cherries. Further, should marketing conditions change, and market demand exceed existing supplies, the Board could meet and recommend the release of an additional volume of cherries. Consequently, it is not anticipated that this rule will unduly burden growers or handlers.

While this action could result in some additional costs to the industry, these costs are outweighed by the benefits. The purpose of setting restricted percentages is to attempt to bring supply and demand into balance. If the primary market (domestic) is oversupplied with cherries, grower prices decline substantially. Without volume control, the primary market would likely be oversupplied, resulting in lower grower prices.

An econometric model has been developed to assess the impact volume control has on the price growers receive for their product. Based on the model, the use of volume control would have a positive impact on grower returns for this crop year. With volume control, grower prices are estimated to be approximately $0.04 per pound higher than without restrictions. In addition, in the absence of volume control, the industry could start to build large amounts of unwanted inventories. These inventories would have a depressing effect on grower prices.

Retail demand is assumed to be highly inelastic, which indicates that the changes in price do not result in significant changes in the quantity demanded. Consumer prices largely do not reflect fluctuations in cherry supplies. Therefore, this action should have little or no effect on consumer prices and should not result in a reduction in retail sales.

The free and restricted percentages established by this action will provide the market with optimum supply and will apply uniformly to all regulated handlers in the industry, regardless of size. As the restriction represents a percentage of a handler's volume, the costs, when applicable, are proportionate and should not place an extra burden on small entities as compared to large entities.

The stabilizing effects of this action benefit all handlers by helping them maintain and expand markets, despite seasonal supply fluctuations. Likewise, price stability positively impacts all growers and handlers by allowing them to better anticipate the revenues that their tart cherries would generate. Growers and handlers, regardless of size, benefit from the stabilizing effects of the volume restriction.

As noted earlier, the Board had extensive discussions on carry-out inventory alternatives. The alternatives ranged from 20 million pounds to 100 million pounds. Some expressed a concern that the relatively low reserves compared to high carry-in signaled that not enough fruit had been put in reserve in previous seasons. Some attendees indicated excess carry-in over the past few seasons has had a negative effect on returns and growers are seeking relief. The Board noted if the carry-out number was too large, it could have a negative impact on grower returns, but enough fruit was needed to supply processors before the new harvest. After consideration of the alternatives, the Board recommended a carry-out of 85 million pounds.

The Board also weighed alternatives when discussing the economic adjustment. Some members suggested making no adjustment to the formula. However, at its June meeting, the Board recommended a 20-million-pound adjustment to account for fruit quality concerns. When fruit is too large or too small, it does not move as efficiently through the pitting process. The Board was concerned excessive rainfall would result in large, soft, fruit that would not process as well as average-sized fruit. As a result, more fruit would be necessary to get the needed final product. Following harvest, Board members confirmed weather had indeed affected the size of fruit, and that the recommended adjustment was accurate and should not be changed.

In discussing the preliminary recommendation, the Board heard a report from a committee that examined import issues. During the discussion there was a suggestion that the Board might consider using the previous year's import numbers to estimate imported volume in the coming year. However, there was no motion to make an adjustment for imports. To better address these issues, the Board allocated funds to a research project to provide additional information on the volume and impact of imported cherry products.

Given the concerns with regulation expressed by Board members and industry members in attendance, the Board also considered recommending no volume regulation. However, the data indicated a high carryover from previous seasons has created a substantial surplus. During this discussion, attendees questioned the age of the products in inventory. While all types of products can be stored for multiple years, their value does diminish over time. Reserve inventory must be under two years old, but there are no restrictions on free inventory. Industry members expressed concern that not all inventory is of equal value and suggested the Board should collect information on the age and quality of free inventory. A vote to recommend no volume regulation failed, but the Board did agree to form a committee to investigate potential reporting requirements to provide the industry better data regarding the available inventory. Thus, the alternatives were rejected.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the Order's information collection requirements have been previously approved by OMB and assigned OMB No. 0581-0177, Tart Cherries Grown in the States of Michigan, New York, Pennsylvania, Oregon, Utah, Washington, and Wisconsin. No changes to those requirements are necessary as a result of this action. Should any changes become necessary, they would be submitted to OMB for approval.

This final rule will not impose any additional reporting or recordkeeping requirements on either small or large tart cherry handlers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies. As noted in the initial regulatory flexibility analysis, USDA has not identified any relevant Federal rules that duplicate, overlap or conflict with this final rule.

AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

The Board's meetings were widely publicized throughout the tart cherry industry, and all interested persons were invited to attend the meetings and participate in Board deliberations on all issues. Like all Board meetings, the June 27, 2019, and September 12, 2019, meetings were public meetings, and all entities, both large and small, were able to express views on this issue.

A proposed rule concerning this action was published in the Federal Register on March 23, 2020 (85 FR 16273). Copies of the proposed rule were sent via email to all Board members and tart cherry handlers. The proposed rule was also made available through the internet by USDA and the Office of the Federal Register. A 30-day comment period was provided to allow interested persons to respond to the proposal.

One comment was received in opposition to the proposal. This comment came from a tart cherry handler who expressed concern that the marketing order does not allow flexibility to serve changing markets. The comment also stated that the handler submitted a request to the Board to release reserves. Finally, the comment also attributed difficulties in meeting changing demands to current food safety regulations and food industry practices.

Regarding the flexibility of supplying different tart cherry products, it is correct that the marketing order does not distinguish between product segments. The marketing order authorizes the Secretary to designate free and restricted percentages that apply to all handlers, regardless of the type of tart cherry product. Thus, the regulation is spread proportionally among handlers. Under any regulation, handlers can move restricted tonnage through approved diversion channels including but not limited to, supplying new markets or making charitable donations.

Regarding a release of reserves, as mentioned earlier in this rule, the Board can meet and recommend a release of reserves at any time. The Board can make such a recommendation, regardless of whether a volume regulation is in place for the current fiscal year. This process is described in § 930.154. The Board may request this action, which releases apportioned volume to handlers based on their total volume handled in the three previous years. In its discussions regarding volume regulation the Board indicated 174 million pounds of carry-in were available; the unregulated districts accounted for 8.7 million pounds of production; and this volume restriction will place 154.8 million pounds of free tonnage from the regulated districts on the market for a total of 337.5 million pounds of fruit available for the domestic market. This is well above the average sales of 228 million pounds.

The Board met multiple times following the volume regulation recommendation, and neither Board members nor public participants offered any evidence that sales had increased to the point of needing a release of reserves. Further, at these meetings, no requests for a release were made, nor were any motions introduced regarding a release. The Board's most recent sales report indicates that as of February 29, 2020, some product category sales reported by handlers were up and others were down. In total, year over year sales were virtually unchanged; down one tenth of a percent, or 146,322 pounds. Given this information, there should be more than adequate fruit available to supply the market following this action.

The concerns expressed regarding the limitations of food safety practices are outside the authorities of the marketing order and therefore not relevant to this action.

Accordingly, based on the comment received, no changes will be made to the rule as proposed.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at: https://www.ams.usda.gov/rules-regulations/moa/small-businesses. Any questions about the compliance guide should be sent to Richard Lower at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

After consideration of all relevant matter presented, including the information and recommendation submitted by the Board, and other available information, it is hereby found that this rule, as hereinafter set forth, will tend to effectuate the declared policy of the Act.

For the reasons set forth in the preamble, amend 7 CFR part 930 as follows:

The European Union Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA AD 2020-0010R2, dated March 4, 2020 (referred to after this as “the MCAI”), to address an unsafe condition for the specified products. The MCAI states:

You may obtain further information by examining the MCAI in the AD docket on the internet at https://www.regulations.gov by searching for and locating Docket No. FAA-2020-0638.

The FAA reviewed Rolls-Royce plc (RR) Alert Non-Modification Service Bulletin (NMSB) Trent 1000 72-AK468, Revision 1, dated March 3, 2020. The Alert NMSB describes compliant and non-compliant engine pairing combinations based on IPC module flight HSN or CSN. 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 reviewed RR NMSB Trent 1000 72-K494, Initial Issue, dated March 3, 2020. The NMSB describes procedures for the inspection, repair, and replacement of specified IPC module components to restore surge margin and recover IPC performance.

This product has been approved by EASA and is approved for operation in the United States. Pursuant to our bilateral agreement with the European Community, EASA has notified us of the unsafe condition described in the MCAI. The FAA is issuing this AD because it evaluated all the relevant information provided by EASA and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This AD requires removing and replacing one or both affected engines, depending on whether the engine pairing combinations are compliant or non-compliant, as described in the Accomplishment Instructions of RR Alert NMSB Trent 1000 72-AK468, Revision 1, dated March 3, 2020.

Section 553(b)(3)(B) of the Administrative Procedure Act (APA) (5 U.S.C.) authorizes agencies to dispense with notice and comment procedures for rules when the agency, for “good cause,” finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under this section, an agency, upon finding good cause, may issue a final rule without seeking comment prior to the rulemaking. Similarly, Section 553(d) of the APA authorizes agencies to make rules effective in less than 30 days, upon a finding of good cause.

The FAA has found the risk to the flying public justifies waiving notice and comment prior to adoption of this rule because no domestic operators use this product. It is unlikely that the FAA will receive any adverse comments or useful information about this AD from U.S. operators. Therefore, the FAA finds good cause that notice and opportunity for prior public comment are unnecessary. In addition, for this same reason, the FAA finds that good cause exists for making this amendment effective in less than 30 days.

This AD is a final rule that involves requirements affecting flight safety and was not preceded by notice and an opportunity for public comment. However, the FAA invites you to send any written data, views, or arguments about this final rule. Send your comments to an address listed under the ADDRESSES section. Include the docket number FAA-2020-0638 and Project Identifier MCAI-2020-00308-E at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this final rule. The FAA will consider all comments received by the closing date and may amend this final rule because of those comments.

Except for Confidential Business Information (CBI) as described in the following paragraph, and other information as described in 14 CFR 11.35, 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 final rule.

Confidential Business Information (CBI) is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (FOIA) (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to this final rule contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to this final rule, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission containing CBI as “PROPIN.” The FAA will treat such marked submissions as confidential under the FOIA, and they will not be placed in the public docket of this final rule. Submissions containing CBI should be sent to Stephen Elwin, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803. Any commentary that the FAA receives which is not specifically designated as CBI will be placed in the public docket for this rulemaking.

The requirements of the Regulatory Flexibility Act (RFA) do not apply when an agency finds good cause pursuant to 5 U.S.C. 553 to adopt a rule without prior notice and comment. Because the FAA has determined that it has good cause to adopt this rule without notice and comment, RFA analysis is not required.

The FAA estimates that this AD affects 0 engines installed on airplanes of U.S. registry.

The FAA estimates the following costs to comply with this AD:

According to the manufacturer, some of the costs of this 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 costs in our 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 AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this AD:

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

(2) Will not affect intrastate aviation in Alaska.

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

The Commission is correcting typographical errors and adding new contact information in the direct final rule, Revisions to Safety Standard for Portable Bed Rails, 16 CFR part 1224, which published in the Federal Register on February 25, 2020. 85 FR 10565. This document corrects typographical errors in § 1224.2, to reference the correct ASTM standard, ASTM F2085-19, and updates the CPSC telephone number to: 301-504-7479. In addition, the document provides another way to view a read-only copy of the standard on the ASTM website at: https://www.astm.org/READINGLIBRARY/, and adds an email address to provide an additional contact option to reach the agency's Secretary: cpsc-os@cpsc.gov. This document does not make any substantive changes to the final rule. We are making these corrections to avoid possible confusion and to provide the public several ways to contact CPSC, even during the COVID-19 pandemic.

Accordingly, 16 CFR part 1224 is corrected by making the following correcting amendments:

The Commission is adding new contact information in the direct final rule, Safety Standard for Hand-Held Infant Carriers, 16 CFR part 1225, published in the Federal Register on May 20, 2020. 85 FR 30605. This document adds an email address in § 1225.2 to provide an additional contact option to reach the agency's Secretary: cpsc-os@cpsc.gov. This document does not make any substantive changes to the final rule. We are making this change to provide the public several ways to contact CPSC, even during the COVID-19 pandemic.

Accordingly, 16 CFR part 1225 is amended by making the following correcting amendment:

The Commission is correcting errors in the direct final rule, Revisions to Safety Standard for Sling Carriers, 16 CFR part 1228, which published in the Federal Register on April 20, 2020. 85 FR 21766. In § 1228.2(a), this document adds an ASTM contact telephone number: 610-832-9585, and corrects the CPSC telephone number to 301-504-7479. This document also adds an email address to provide an additional contact option to reach the agency's Secretary: cpsc-os@cpsc.gov. This document does not make any substantive changes to the final rule. We are making these corrections to avoid possible confusion and to provide the public several ways to contact CPSC, even during the COVID-19 pandemic.

Accordingly, 16 CFR part 1228 is corrected by making the following correcting amendments:

The Commission is correcting an error in the direct final rule, Revisions to Safety Standard for Children's Chairs and Stools, 16 CFR part 1232, which published in the Federal Register on April 1, 2020. 85 FR 18111. In § 1232.2, this document corrects the CPSC telephone number to 301-504-7479 and adds an email address to provide another contact option to reach the agency's Secretary: cpsc-os@cpsc.gov. This document does not make any substantive changes to the final rule. We are making these corrections to avoid possible confusion and to provide the public several ways to contact CPSC, even during the COVID-19 pandemic.

Accordingly, 16 CFR part 1232 is corrected by making the following correcting amendment:

Table of Contents I. Background a. Statutory and Regulatory Background b. The Commission's October 2018 Proposal, Request for Public Comment, and Recent Final Rules II. Final Rules a. Proposed Regulation 4.13(a)(6): A Proposal To Prohibit Statutory Disqualifications in CPOs Claiming Exemption Under Regulation 4.13 b. General Comments c. The Final Rule: New Regulation 4.13(b)(1)(iii) and Responses To Specific Comments i. Prohibition v. Disclosure: Clarifying the Consequences of New Regulation 4.13(b)(1)(iii) ii. Scope of the Final Rule: Which statutory disqualifications will be grounds for prohibiting a claim to a CPO exemption? iii. The Representation Requirement Under New Regulation 4.13(b)(1)(iii) and Retaining One of the Proposed Exceptions iv. Principal Classification and Treatment of RIAs v. Persons with Covered Statutory Disqualifications May Seek Individual Exemptive Letter Relief or Apply for CPO Registration vi. Timeframe for Exempt CPO Compliance With New Regulation 4.13(b)(1)(iii) III. Related Matters a. Regulatory Flexibility Act b. Paperwork Reduction Act c. Cost-Benefit Considerations i. General Costs and Benefits ii. Benefits and Costs of the Final Rule iii. Section 15(a) Considerations 1. Protection of Market Participants and the Public 2. Efficiency, Competitiveness, and Financial Integrity of Markets 3. Price Discovery 4. Sound Risk Management 5. Other Public Interest Considerations d. Anti-Trust Considerations I. Background a. Statutory and Regulatory Background

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)  1 established a statutory framework for the regulation of the swaps market to reduce risk, increase transparency, and promote market integrity within the financial system. As amended by the Dodd-Frank Act, section 1a(11) of the CEA defines the term “commodity pool operator,” as any person  2 engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, with respect to that commodity pool, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests. 3 CEA section 4m(1) generally requires each person who satisfies the CPO definition to register as such with the Commission. 4 Additionally, CEA section 8a generally authorizes the Commission to register intermediaries and their associated persons, including CPOs, and also to refuse, condition, or revoke such registration. 5

CEA section 8a(2) lists the offenses for which the Commission may upon notice, but without a hearing and pursuant to such rules, regulations or orders as the Commission may adopt, refuse to register, to register conditionally, or to suspend or place restrictions upon the registration of, any person, and for which the Commission may revoke the registration of any person with such a hearing as may be appropriate. 6 Commission regulations require all persons applying for registration with the Commission to complete Form 7-R. 7 Each natural person principal of an applicant is also required to complete Form 8-R, to submit fingerprints, and to undergo a criminal background check. 8 One of the purposes of Forms 7-R and 8-R, as well as the fingerprinting requirement, is to determine whether any applicant for registration or any of its principals has in its background one of the enumerated statutory disqualifications in the CEA. 9 If a statutory disqualification enumerated in CEA section 8a(2) is disclosed or otherwise revealed through that process, such applicant is generally refused registration on that basis, and such statutorily disqualified principals will generally not be listed with the Commission. The Commission also has the authority under CEA section 8a(5) to make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate the provisions or to accomplish any of the purposes of the CEA. 10 Finally, CEA section 4(c) provides that the Commission, to promote responsible economic or financial innovation and fair competition, by rule, regulation, or order, after notice and opportunity for hearing, may exempt, among other things, any person or class of persons offering, entering into, rendering advice or rendering other services with respect to commodity interests, from any provision of the CEA. 11 CEA section 4(c) provides a statutory basis for the Commission's promulgation of the various regulatory exemptions available to CPOs.

Part 4 of the Commission's regulations governs, among other things, the operations and activities of CPOs. 12 Those regulations implement the statutory authority provided to the Commission by the CEA and establish multiple registration exemptions and definitional exclusions for CPOs, as discussed above. 13 Part 4 also contains regulations that establish the ongoing compliance obligations applicable to CPOs, whether registered or exempt, as well as to those persons operating in the commodity interest markets pursuant to an exclusion from that definition. These requirements pertain to the commodity pools that CPOs operate and advise, and among other things, dictate matters of customer protection, disclosure, and reporting to a CPO's commodity pool participants.

The Commission has previously promulgated, pursuant to these statutory authorities, the various exemptions from registration as a CPO that are enumerated in Regulation 4.13, 14 and the Commission is today utilizing them to revise the basic eligibility criteria and amend the notice filing required to claim certain exemptions set forth in that regulation. 15 As discussed above, persons seeking registration with the Commission, and their principals, are generally refused registration with the Commission on the basis that they have disclosed or are found to have in their backgrounds one of the statutory disqualifications enumerated in CEA section 8a(2). Conversely, prior to this Final Rule, persons claiming an exemption from CPO registration under Regulation 4.13 were not required to disclose any previous matters that might impact their eligibility or fitness for registration, or to otherwise meet any basic conduct standards beyond the substantive conditions of their claimed exemption. The Final Rule amendment seeks to close that regulatory gap by effectively prohibiting any person who has, or whose principals have, in their backgrounds a statutory disqualification listed in CEA section 8a(2) (Covered Statutory Disqualification, or CSD) from claiming a CPO exemption under Regulation 4.13. As a result of the Final Rule, persons who have a CSD in their background will generally be foreclosed from acting as a CPO, whether in a registered or exempt capacity, subject to limited exceptions discussed further below.

In response to information received from members of the public, as well as CFTC staff's own internal review of its regulatory regime, the Commission published for public comment in the Federal Register on October 18, 2018, a Notice of Proposed Rulemaking (NPRM, or the Proposal), proposing to adopt several regulatory amendments applicable to CPOs and commodity trading advisors. 16 Commission staff had previously become aware of a number of statutorily disqualified CPOs operating commodity pools pursuant to the registration exemption formerly available in Regulation 4.13(a)(4), which the Commission rescinded in 2012. 17 Since the passage of the Dodd-Frank Act, the Commission has proposed and adopted amendments to Regulation 4.13, which have, in general, been designed to identify, accurately and in a timely manner, the exempt CPOs operating in its markets, to incorporate additional registration exemptions where appropriate, and to facilitate customer protection by requiring annual notice filings. The Commission is adopting this Final Rule because it believes that requiring persons to attest to both their and their principals' lack of Covered Statutory Disqualifications through an additional representation in the notice filing required by Regulation 4.13(b)(1) will further enhance the customer protection of exempt pool participants, and more generally, promote the public interest.

In the NPRM, the Commission included a proposed amendment to Regulation 4.13 that would have required any person claiming an exemption from CPO registration under Regulations 4.13(a)(1)-(a)(5) to represent that neither the person nor any of its principals is subject to any statutory disqualification under section 8a(2) or 8a(3) of the Act, unless such disqualification arises from a matter which was previously disclosed in connection with a previous application, if such registration was granted, or which was disclosed more than thirty days prior to the claim of this exemption (Proposed Regulation 4.13(a)(6)). 18 The Commission noted its belief then that “it poses an undue risk from a customer protection standpoint for its regulations in their current form to permit statutorily disqualified persons or entities to legally operate exempt commodity pools, especially when those same persons would not be permitted to register with the Commission.”  19 Additionally, the Commission solicited comment on that particular proposed amendment, raising several specific questions for the public's consideration. 20 In December 2019, the Commission published final amendments (2019 Final Rules) adopting several aspects of the Proposal with the general intent of simplifying the regulatory landscape for CPOs without reducing the customer protection and other benefits provided by those regulations. 21 In describing the scope of the 2019 Final Rules, the Commission stated that certain aspects of the Proposal, including Proposed Regulation 4.13(a)(6), elicited a significant number of responsive and detailed public comments, and as a result, the Commission found that those proposed amendments required further consideration before they could be finalized. 22

After additional consideration of Proposed Regulation 4.13(a)(6), as well as the ideas, questions, and suggestions received in public comments, the Commission has determined it appropriate to adopt, with specific modifications from the Proposal, the amendment, such that, subject to limited exceptions, persons subject to the Covered Statutory Disqualifications ( i.e., those listed in CEA section 8a(2)) will generally no longer be able to claim CPO exemptions under Regulation 4.13, absent a separate determination by the Commission (or its staff, pursuant to delegated authority) under CEA section 8a(2) or Regulation 4.12(a), as more fully described below. The following sections describe the amendment as presented in the Proposal, respond to the substantive comments received, and finally, explain the amendment in its final form and how the Commission intends it to apply in the future.

In the Proposal, the Commission, for the first time, proposed that CPOs exempt under Regulation 4.13, and principals of the foregoing, who have statutory disqualifications in their backgrounds be subject to conduct standards similar to those of their registered counterparts. The Commission has now determined to exercise its statutory authority to amend the Commission's CPO exemption regime, such that both registered and exempt CPOs will be required to represent that they and their respective principals are not subject to the Covered Statutory Disqualifications listed in the CEA. The Commission continues to believe that “preserving the prohibition on statutory disqualifications . . . and applying it to exemptions under § 4.13 would provide a substantial customer protection benefit by prohibiting statutorily disqualified persons from operating and soliciting participants for investment in exempt commodity pools.”  23

Proposed Regulation 4.13(a)(6) would have required any person who desires to claim an exemption under paragraphs (a)(1), (a)(2), (a)(3), (a)(4), or (a)(5) of the section to represent that neither the person nor any of its principals is subject to any statutory disqualification under section 8a(2) or 8a(3) of the Act, unless such disqualification arises from a matter which was previously disclosed in connection with a previous application, if such registration was granted, or which was disclosed more than thirty days prior to the claim of this exemption. 24 The Commission did not propose to require that representation from CPOs of Family Offices, which it concurrently proposed to exempt from CPO registration, because “such CPOs would be prohibited from soliciting non-family members/clients to participate in their pool(s), necessarily limiting their contact with prospective participants drawn from the general public, and as a result, reducing the Commission's customer protection concerns in that context.”  25 The Commission stated its preliminary belief that this proposed approach “addresses customer protection concerns regarding statutory disqualifications, while preserving flexibility in Commission regulations applicable to CPOs.”  26

The Commission further explained that Proposed Regulation 4.13(a)(6) would “provide additional customer protection because statutorily disqualified, unregisterable persons would no longer be able to claim the CPO exemptions under § [§ ] 4.13 (a)(1) through (a)(5).”  27 With respect to its future application, the Commission stated its intent that CPOs currently claiming an exemption under Regulation 4.13 would comply, “as they renew their claims on an annual basis— i.e., existing claimants would be required to represent that neither they nor their principals are subject to statutory disqualifications under CEA sections 8a(2) or 8a(3), when they annually affirm their continued reliance on a § 4.13 exemption next year.”  28 In contrast, “CPOs filing new claims of a § 4.13 exemption, however, would be required to comply with this prohibition upon filing, if and when the amendments are adopted as proposed, and become effective.”  29

The Commission requested comment generally on all aspects of the Proposal, and also solicited comment through targeted questions about each of the proposed amendments, including Proposed Regulation 4.13(a)(6). 30 In particular, the Commission requested comment on “the impact of adopting this provision on industry participants and currently exempt CPOs, and also, on what, if any, other statutory disqualifications should be permissible for exempt CPOs and their principals.”  31 The Commission also asked the following questions:

(1) What are the concerns and benefits associated with the expansion of the prohibition on statutory disqualifications to the CPO registration exemptions set forth in § [§ ] 4.13(a)(1), (a)(2), (a)(3), and (a)(5), or proposed to be set forth in § 4.13(a)(4)?

(2) Do the limited exceptions that would permit certain statutory disqualifications successfully address any unintended consequences of adding the prohibition to § 4.13, while still providing a base level of customer protection by preventing statutorily disqualified individuals from legally operating exempt commodity pools?

(3) Generally, how should the Commission handle the implementation of the statutory disqualification prohibition?

(4) Specifically, how should the prohibition apply to current claimants under § 4.13? How much time should the Commission allow for filing updated exemption claims subject to the prohibition?

(5) How much time should the Commission allow for an exempt CPO to replace statutorily disqualified principals, in order to maintain eligibility for a § 4.13 exemption?  32

The discussion below outlines the public comments received in response to the Proposal, focusing on the substantive comments received regarding Proposed Regulation 4.13(a)(6). The Commission will also explain how it has taken those comments into consideration, via specific adjustments to the Commission's approach in adopting the new statutory disqualification representation as a condition of receiving exemptive relief under Regulation 4.13.

The Commission received 28 individual comment letters responsive to the NPRM: Six from legal and market professional groups; 13 from law firms; seven from individual family offices; one from a government-sponsored enterprise (GSE) actively involved in the housing industry; and one from the National Futures Association (NFA), a registered futures association, 33 who through delegation by the Commission, assists Commission staff in administering its CPO regulatory program. 34 Additionally, Commission staff participated in multiple ex parte meetings concerning the Proposal. 35 Seven of the comment letters provided comment specifically on Proposed Regulation 4.13(a)(6).

Commenters generally understood the customer protection goals of the Commission, and many supported the amendment; other commenters opposed it and raised several questions regarding its implementation. Dechert, for instance, opposed Proposed Regulation 4.13(a)(6), stating that the Commission should not extend to exempt CPOs a prohibition generally applicable only to registered CPOs. 36 Dechert further commented that the proposed amendment would impose one of the most costly aspects of registration, that of principal classification and screening, on CPOs that are intended to be exempt from registration. 37 SIFMA AMG additionally opposed Proposed Regulation 4.13(a)(6) and expressed the need for the Commission's consumer protection goals to be balanced appropriately with compliance burdens and costs. 38

Commenters also compared the process surrounding Proposed Regulation 4.13(a)(6) to the Commission's registration processes currently outlined in part 3 of its regulations. Dechert and other commenters requested more detail on how the proposed amendment would operate and how exceptions would be considered or accepted. 39 Although the majority of comments indicated that their submitters understood the Commission's intention in proposing the prohibition on statutory disqualifications, Dechert expressed confusion as to whether Proposed Regulation 4.13(a)(6) was intended to require disclosure of such disqualifications, or whether it was actually designed to bar disqualified CPOs from relying on an exemption entirely. 40

Some commenters cited a lack of clarity on process and other significant uncertainties associated with the proposed amendment, and a couple of commenters requested that the Commission reconsider and/or re-propose it. 41 Alternatively, Dechert requested that the Commission develop processes regarding: (a) The identification and screening of principals; (b) disputing a determination by CFTC or NFA to bar a person from claiming exemption under Regulation 4.13; (c) the “disclosure exception;” and (d) the winding down of operations for affected CPOs in a manner that minimizes market disruption and any disadvantages to pool participants. 42 MFA shared this concern, requesting clarity on the timing of disclosure for CPOs already exempt under a Regulation 4.13 exemption and pointing out the lack of procedure specified in the Proposal. 43 MFA further suggested that the Commission consider adopting regulations that would establish a clear process for currently exempt CPOs to update their disclosures of statutory disqualifications to the Commission or NFA, including the disclosure of violations of requirements of other regulators. 44

Several commenters were concerned about the scope of Proposed Regulation 4.13(a)(6), including that offenses enumerated in CEA section 8a(3) would be considered statutory disqualifications. 45 AIMA, for instance, explained that the disqualifications listed under that statutory paragraph, in particular, provide the Commission grounds only for potentially disallowing registration, rather than an automatic bar to registration. 46 Consequently, AIMA requested that any required representation include only offenses under CEA section 8a(2), or that the Commission exclude from consideration offenses listed in CEA section 8a(3)(B) and generally limit the incorporation of offenses in CEA section 8a(3) to those that are no more than ten years old. 47 MFA similarly pointed out that even recordkeeping violations would need to be disclosed pursuant to CEA section 8a(3)(A); MFA also questioned the breadth and meaning of CEA section 8a(3)(M) disqualifications, known only in the statute as “other good cause.”  48

Like AIMA, IAA and SIFMA AMG similarly requested that the representation cover only offenses listed under CEA section 8a(2). 49 SIFMA AMG additionally requested clarification from the Commission that a person would not be “statutorily disqualified” pursuant to a violation under CEA section 8a(3), unless and until the person receives a hearing and the Commission has made the filing with respect to the conduct at issue required by that statutory provision. 50 Dechert requested that the Commission further limit the scope of Proposed Regulation 4.13(a)(6), such that the provision would only effectively prohibit statutory disqualifications involving instances of fraud and similar offenses involving commodities, securities, and other financial instruments, like CEA section 8a(2)(D). 51 Additionally, Dechert requested that the Commission also consider: (a) Applying Proposed Regulation 4.13(a)(6) to only the person itself claiming the CPO exemption, rather than both the claimant and principals, and (b) grandfathering exempt CPOs currently in existence, in conjunction with the proposed amendment's adoption. 52

IAA also requested that the Commission not require compliance with the proposed amendment from registered investment advisers (RIAs) because those entities are already subject to the statutory disqualification regime under the Investment Advisers Act of 1940 (IA Act), which, the IAA argued, Proposed Regulation 4.13(a)(6) would duplicate. 53 SIFMA AMG also supported a carve-out for RIAs, explaining that RIAs are subject to a robust statutory disqualification regime under the IA Act, are required to disclose disciplinary events on their Forms ADV, and are also subject to fiduciary duties to their clients. 54

NFA generally supported Proposed Regulation 4.13(a)(6) and agreed with the Commission's underlying rationale. 55 NFA provided comments specifically regarding the two exceptions the Commission proposed: (a) If the statutory disqualification was previously disclosed in relation to a registration application, which was later granted, or (b) if the statutory disqualification was disclosed within the previous 30 days. 56 NFA stated that the exception for disqualifications disclosed within 30 days would not be practical, and was further inappropriate to apply to CPOs exempt from registration under Regulation 4.13, because such persons, in contrast to registered CPOs, generally have no ongoing obligation to update Commission registration forms if they should become inaccurate. 57 Thus, NFA stated, there is no mechanism requiring this population of exempt CPOs to update the Commission or NFA as to new or recent statutory disqualifications to which they or their principals may be subject. 58 As a result, NFA suggested that the Commission either abandon this exception entirely, or limit its application to persons that are already registered with the Commission and extend the amount of time. 59 SIFMA AMG likewise raised questions about how currently exempt CPOs that are not registered with the Commission would update the Commission or NFA as to new statutory disqualifications, suggesting that the Commission accept updates by RIAs to their Forms ADV as substituted compliance for such disclosures. 60

Still other commenters expressed concern over the timing of compliance with Proposed Regulation 4.13(a)(6). AIMA requested that the Commission allow at least 12 months for persons with such statutory disqualifications to come into compliance, so that the issue of whether those disqualifications should be a bar to claiming a CPO registration exemption could be determined. 61 Similarly, Willkie requested that the Commission provide sufficient time for industry to absorb a significant rule change like this one, suggested that the effectiveness of the provision coincide with the annual update filings typically due in the first quarter of each year, and requested further that the Commission generally clarify the process around the proposed prohibition. 62 IAA also requested that the Commission delay compliance with the proposed prohibition to allow CPOs to adjust their operations, in case of disqualified principals in their entities. 63

After carefully considering Proposed Regulation 4.13(a)(6) as well as all of the public comments received, the Commission has determined it to be an appropriate exercise of its authorities under the CEA to finalize and adopt the proposed amendment with substantive adjustments responsive to those comments. The Commission will additionally provide guidance herein regarding the Final Rule's implementation. The Commission believes that, in conjunction with the substantive and procedural clarifications and the compliance schedule discussed below, the Final Rule will facilitate compliance by exempt CPOs with new Regulation 4.13(b)(1)(iii), while also minimizing costs associated with implementing the amendment. 64

The Final Rule's amendment to Regulation 4.13 prohibits a person who has, or whose principals have, in their backgrounds a Covered Statutory Disqualification from claiming a CPO exemption thereunder, as opposed to requiring the disclosure of such disqualifications. As the Commission has previously stated, there is an undue risk posed to potential customers in the commodity interest markets, when a person can act as a CPO, including soliciting participants and accepting capital contributions in the name of its operated pool, without meeting the basic conduct standards set forth in the CEA. To address that risk, the Commission wishes to eliminate this inconsistent treatment between exempt and registered CPOs (and the principals thereof), in which certain persons may, by claiming an exemption from CPO registration, avoid the CEA's basic conduct requirements established for all persons registering as intermediaries with the Commission. The Commission understands that several commenters were generally opposed to prohibiting statutorily disqualified persons from claiming an exemption from CPO registration under Regulation 4.13. 65 After further consideration of the Proposal, the comments, and regulatory policy goals, the Commission believes that, for the purpose of ensuring its customer protection goals are met, it is important that all persons falling within the CPO definition not be subject to the most serious statutory disqualifications, prior to operating or soliciting participants for participation in their pools. The Commission finds this regulatory outcome of the Final Rule appropriate because, as discussed further below, persons claiming an exemption under Regulation 4.13 are exempt from the various regulatory obligations resulting from operating in a registered capacity.

Dechert commented that with respect to exempt CPOs, “the CFTC has generally determined it does not need to apply as close regulatory oversight . . . as it does for registered CPOs.”  66 The Commission does not consider the Final Rule to be inconsistent with that statement. The Commission notes that, notwithstanding the Final Rule's amendment to Regulation 4.13, exempt CPOs will continue to be exempt from registration, and as a result, from the compliance obligations applicable to CPOs registered or required to be registered, which are primarily set forth in part 4 of the Commission's regulations. Each determination to exempt certain persons from CPO registration is inextricably linked to the eligibility criteria of the regulatory exemption being claimed. The Commission has previously concluded that such eligible persons generally implicate fewer of the Commission's regulatory and oversight interests, which supports the provision of a regulatory exemption from registration under those circumstances. 67 The Commission therefore believes it appropriate to recognize the unique regulatory status of exempt CPOs, but also to ensure that the Final Rule's amendment applies as intended and in a logical fashion.

Dechert further noted that, as an alternative to Proposed Regulation 4.13(a)(6) and to CPO registration generally, the Commission has multiple authorities it might employ and rely upon with respect to CPOs exempt under Regulation 4.13, citing the anti-fraud authority in CEA section 4 o, as well as the recordkeeping and special call authorities in Regulation 4.13(c)(1). 68 Although the Commission agrees that exempt CPOs are subject to these authorities, which the Commission may employ on an as-needed basis, none of them is equivalent to or establishes a basic conduct standard applicable to CPOs exempt under Regulation 4.13. Moreover, each of the cited provisions is most useful to the Commission where a discrete issue has been identified that requires the Commission to act; in contrast, the Commission intends new Regulation 4.13(b)(1)(iii) to apply prophylactically, providing a foundational level of customer protection to exempt pool participants. Therefore, the Commission believes that this approach to remedying the fundamental customer protection risk discussed above is appropriate, notwithstanding the logistical and regulatory concerns asserted by commenters regarding the implementation of new Regulation 4.13(b)(1)(iii). 69

After consideration of the comments received regarding the statutory disqualifications that would be grounds for prohibiting a person from seeking to claim a CPO exemption, the Commission has determined not to include those violations enumerated in CEA section 8a(3) in the Covered Statutory Disqualifications. The Commission finds persuasive commenters' arguments that the offenses listed in CEA section 8a(3), in the context of Regulation 4.13, warrant different treatment than those offenses listed in CEA section 8a(2). 70 The Commission notes that due to their characteristics, CEA section 8a(3) offenses (unlike those enumerated in CEA section 8a(2)) serve as a bar to registration with the Commission, only after a hearing is conducted to formally find both that the disqualification has occurred, and that the disqualification should prevent a person from registering with the Commission. 71 The Commission further believes that limiting the Covered Statutory Disqualifications that would result in a person being unable to rely upon Regulation 4.13 is consistent with the Commission's longstanding view that persons claiming an exemption from CPO registration generally implicate fewer of its regulatory concerns than those persons registered or required to be registered as CPOs.

The Commission notes further that Regulation 4.13 was designed to provide registration relief to CPOs with relatively limited activities in the commodity interest markets. Specifically, exempt CPOs are subject to substantive limitations impacting their exempt pools' commodity interest footprint or trading strategy, the types of pool participants they may solicit for investment in those exempt pools, as well as the exempt pools' overall size and marketing activities. The terms of the regulatory exemptions consequently cause the operations and activities of these exempt CPOs to be more narrowly circumscribed than those of registered CPOs. The Commission believes, as a result, that new Regulation 4.13(b)(1)(iii) should be tailored to the most serious offenses, which can trigger a statutory disqualification without a prior hearing, i.e., those listed in CEA section 8a(2).

Commenters also expressed confusion regarding the procedural implications of including the statutory disqualifications in CEA section 8a(3), particularly the hearing requirement, and how they might be incorporated into a new prohibition process under Regulation 4.13. IAA specifically requested that the Commission adopt a “reasonable person standard,” with respect to a person's knowledge of statutory disqualifications, similar to Rule 506(d) of Regulation D, as adopted by the Securities and Exchange Commission (SEC). 72 The Commission believes, however, that limiting the representation in new Regulation 4.13(b)(1)(iii) to those offenses listed in CEA section 8a(2) will generally allow for effective implementation and will adequately address the Commission's customer protection concerns.

By focusing only on the offenses listed in CEA section 8a(2), the Commission is removing from the representation's purview those disqualifications that do not necessarily serve as a general bar to registration because they require a formal procedural hearing before they can impact a person's registration status with the Commission. By narrowing the scope of Covered Statutory Disqualifications in this manner, the Commission is also recognizing its historical position that the commodity interest activities of exempt CPOs generally implicate fewer of the Commission's regulatory concerns. As a result, the Commission believes that new Regulation 4.13(b)(1)(iii) will appropriately bar persons subject to the CSDs from claiming exemption under Regulation 4.13, without the adoption of additional procedural requirements and without the adoption of a “reasonable person” standard, which may be difficult to apply in this circumstance. As such, the Commission believes that the Final Rule will still ensure that persons with the most egregious and recent offenses are unable to solicit and accept funds for participations in commodity pools, even if they are exempt, thereby strengthening overall confidence in pooled investment vehicles engaged in limited commodity interest trading.

The Final Rule will amend the notice requirement in Regulation 4.13 to require a representation that neither the person nor any of its principals has in their backgrounds a Covered Statutory Disqualification, subject to one limited exception discussed below. 73 The Commission intends for this representation to be a threshold requirement for any persons claiming an exemption subject to the notice requirement in Regulation 4.13. If a person cannot truthfully make the required representation regarding the person and its principals, then that person will not qualify for an exemption from CPO registration. As discussed in detail above, the representation in its final form has been narrowed in scope to the CSDs, i.e., those offenses listed in CEA section 8a(2). Additionally, consistent with the Proposal, Family Offices relying on the new exemption in Regulation 4.13(a)(6), which are not subject to the notice filing requirement, will therefore also not be required to make the new representation. The Commission concludes that this is an appropriate regulatory outcome because Family Offices, by definition and by the substantive requirements of that exemption, only serve “family clients,” and thus, generally pose little customer protection risk to the investing public.

Proposed Regulation 4.13(a)(6) contained two exceptions: Unless such disqualification arises from a matter which was previously disclosed in connection with a previous application, if such registration was granted, or which was disclosed more than thirty days prior to the claim of this exemption. 74 As mentioned above, NFA commented that the second exception “appears premised on the idea that the person claiming the exemption would be under an obligation, and have a method, to report an existing statutory disqualification to the Commission or NFA,” and therefore, if the Commission or NFA did not act on it within thirty days, then the statutory disqualification would have no effect on the person. 75 NFA further pointed out that “unlike entities claiming relief under Advisory 18-96 and Regulation 4.7, which are registered and under an affirmative obligation to notify the Commission and NFA by updating their [registration forms] if they become subject to a statutory disqualification after they become registered, the vast majority of persons seeking an exemption under Regulation 4.13 are not [so] registered.”  76

The Commission agrees with NFA's description of how the second proposed exception was intended to apply, and also with NFA's assertion that many persons claiming a Regulation 4.13 exemption are not registered with the Commission in another capacity, meaning they have neither filed, nor have they any ongoing obligation to update, registration forms with the Commission or NFA. After considering these comments, the Commission is therefore not adopting the second proposed exception. As a result, the remaining exception in new Regulation 4.13(b)(1)(iii) adopted by this Final Rule will apply to the Covered Statutory Disqualifications that have been previously disclosed by the person or its principal in prior registration applications that were granted. The Commission believes that this result maintains the strength of the amendment, while permitting flexibility for circumstances where the Commission has affirmatively determined that a CSD in a person's background should not impede that person's ability to register.

The Commission also received other substantive and procedural questions in response to Proposed Regulation 4.13(a)(6). Several commenters, for instance, claimed that it would be very burdensome for persons claiming exemption under Regulation 4.13 to identify, classify, and examine the principals within their business entities, and that requiring them to do so was effectively subjecting exempt CPOs to the most significant costs of intermediary registration with the Commission. 77 Regulation 3.1(a) defines the term “principal,” by providing examples of who would be considered principals in a variety of legal entity structures, e.g., sole proprietorship, limited liability company, limited partnership, or corporation. 78 Consistently though, the “principal” definition is, generally speaking, limited to those individuals and entities within the CPO who have either management authority and responsibilities, or significant power derived from stock ownership or capital contributions. Principals usually include, therefore, managing members, company presidents, corporate executives, chief compliance officers, and any legal person who is a ten percent or more shareholder of the person. 79 Dechert explained that “certain aspects of the [Commission's principal] definition . . . do not create a bright-line test, but rather require a facts-and-circumstances analysis.”  80 Dechert further asserted that “the principal classification and screening process creates the majority of the work necessary to register CPOs and CTAs, and is costly,” requested that the Commission provide guidance “as to how an exempt CPO could conduct such processes,” and also asked that the Commission “establish[ ] a process for disagreement by the CFTC or NFA with an exempt CPO's determination.”  81

The Commission believes that preventing persons who have one or more statutorily disqualified principals from operating as exempt CPOs will generally increase the customer protection provided to participants in exempt pools, particularly because of the decision-making authority such principals may exercise regarding the operations of an exempt CPO and its exempt pool(s). The Commission also notes that several hundred CPOs currently maintain registration simultaneously with one or more CPO exemptions, due to the nature of the various commodity pools they operate. The Commission believes that such exempt CPOs may be slightly advantaged because they will likely spend less time identifying and classifying principals than persons or entities who have no prior contact with commodity interest markets or the Commission, or who only operate pools pursuant to one or more exemptions from registration. Registered CPOs, who may be also claiming a CPO exemption, will have already gone through those processes for purposes of applying for registration with respect to their non-exempt commodity pools. Further, such CPOs would also be much less likely to have to remove and replace principals with Covered Statutory Disqualifications. In the event such an otherwise registered CPO or a principal thereof did have a CSD, it would likely fall under the exception discussed above for CSDs identified by the person and/or principal in a prior approved application for registration, in light of their existing status as a registrant and the obligation to disclose such offenses as they occur.

With respect to persons claiming a CPO exemption under Regulation 4.13 for the first time, and persons who are exempt CPOs and not also registered with the Commission, the Commission understands that such persons will possibly be required to devote time and resources to determining who in their organization is a principal and whether any of them has a Covered Statutory Disqualification in their background. Some classes of principals under the Commission's regulations may involve a factual analysis to determine status. The Commission continues to believe, however, that most persons will be able to determine their principals relatively easily, due to the standard forms of business organization typically used by exempt CPOs and the detailed definitions provided by the Commission in its regulations. 82 In particular, Regulation 3.1 details the roles, titles, ownership, and responsibilities that can give rise to a person being a “principal” of a registrant, which the Commission believes reduces the challenges associated with identifying principals within an organization such as an exempt CPO. As discussed above, the Commission also believes that some persons claiming Regulation 4.13 exemptions may have already been required to identify their principals as part of their registration with the Commission as a CPO with respect to the operation of one or more other pools. The Commission believes that the substantive changes made in this Final Rule address the Commission's concerns about providing some customer protection to participants in pools operated by an exempt CPO, while permitting flexibility and facilitating compliance with Regulation 4.13 through additional compliance time. Therefore, the Commission is adopting new Regulation 4.13(b)(1)(iii), such that the required representation covers both persons claiming the exemption and their principal(s).

The Commission also received several requests for the Commission to exclude RIAs from the proposed amendment, on the basis that such RIAs are already subject to robust conduct requirements in the IA Act, which, commenters argue, the new representation would only serve to duplicate. 83 Though the Commission agrees with commenters that RIAs are subject to conduct requirements under the IA Act, the Commission is declining to exclude RIAs from the scope of new Regulation 4.13(b)(1)(iii). IA Act section 203(e) covers censures, denials, or suspensions of registration for investment advisers and provides the SEC the authority to censure, limit, suspend, or revoke the registration of any investment adviser, if, after notice and opportunity for a hearing, certain statutory disqualifications of the adviser or persons associated with it are proven and such adverse action is in the public interest. 84 The Commission finds that the statutory disqualification regime of the IA Act differs materially from the corresponding provisions in the CEA. Of particular relevance to the Final Rule, the IA Act does not specify any statutory disqualifications that bar investment advisers from registration in a manner similar to the mechanism in CEA section 8a(2), i.e., without a procedural hearing or order.

The Commission notes that preserving its independent authority to determine which persons should be permitted to operate commodity pools in its markets subject to an exemption is consistent with the Commission's independent assessment of RIAs seeking registration with the Commission regarding their commodity interest activities. Under those circumstances, notwithstanding the RIA's registration with the SEC, the Commission assesses the registration application of the RIA under the terms of the CEA and the Commission's regulations promulgated thereunder, which reflect the unique regulatory concerns associated with intermediaries in the commodity interest markets. Although the Commission recognizes that most RIAs would not present any cause for reservation in permitting them to operate in the commodity interest markets, the Commission believes that retaining the ability to engage in an independent assessment regarding an RIA's fitness to act as an exempt CPO best serves its customer protection interests. Therefore, the Commission is not adopting the suggestion to exclude RIAs from the scope of new Regulation 4.13(b)(1)(iii). 85

As explained herein, the Commission believes that the adoption of this representation regarding the Covered Statutory Disqualifications for persons, and their principals, claiming exemption under Regulation 4.13 is generally necessary to protect the participants in exempt commodity pools; however, the Commission recognizes that there may be facts and circumstances, pursuant to which permitting such disqualified CPOs and principals to operate exempt commodity pools may not be inconsistent with the Commission's customer protection concerns. The Commission notes its authority under Regulation 4.12(a) to “exempt any person or any class or classes of persons from any provision of this part 4, if it finds that the exemption is not contrary to the public interest and the purposes of the provisions from which exemption is sought.”  86 The Commission has, by rule, delegated that authority to the Director of DSIO. 87 Pursuant to that delegated authority and Regulation 140.99, those persons who have a Covered Statutory Disqualification, but nonetheless believe that it should not negatively affect their ability to claim a CPO exemption, may seek, on an individual or firm-by-firm basis, exemptive letter relief from the representation adopted by this Final Rule by presenting the facts and legal rationale demonstrating that such exemptive letter relief would be consistent with the public interest and not contrary to the specific purposes of Regulation 4.13(b)(1), i.e., providing some customer protection to exempt pool participants. 88 The Commission notes that it expects the granting of such requests to be infrequent and supported by a strong factual and legal basis, so as to avoid undermining the purposes of the Final Rule.

The Commission further advises that, at any time, even if a CPO is unsuccessful in its request for such exemptive letter relief, persons with CSDs may submit an application for CPO registration, in which any and all statutory disqualifications would be disclosed as required by Forms 7-R and 8-R, and reviewed through the existing registration process. 89 Utilizing this existing process allows for the detailed analysis of each disqualification, and all of the facts related thereto, specifically with respect to the propriety of the Commission permitting such person to register as a CPO, and/or to list a principal with any such disqualifications in its background. This assessment further includes determining whether any conditions or restrictions might sufficiently mitigate the customer protection risks posed by the statutorily disqualified person or principals. 90 Should the determination be made to permit the registration, such persons would be subject to the Commission's ongoing oversight regarding their commodity pool operations, and subject to all statutory and regulatory obligations applicable to registered CPOs and their principals. The Commission believes that these existing procedures for seeking individualized exemptive letter relief under part 4 of the Commission's regulations, as well as the registration process, present appropriate methods for considering alternative outcomes, where appropriate, from the prohibition of Covered Statutory Disqualifications in exempt CPOs adopted herein.

The Commission also received and considered multiple comments regarding the exact timing of the effective and compliance dates regarding Proposed Regulation 4.13(a)(6). As stated above, the Commission anticipates that the changes in approach employed in this Final Rule should reduce the analysis required in order to comply. Nonetheless, the Commission believes it appropriate to facilitate persons claiming an exemption under Regulation 4.13 in transitioning and adjusting to the application of new Regulation 4.13(b)(1)(iii). Although the Final Rule will be effective within 60 days of publication, the Commission has determined not to mandate compliance with the additional representation required by new Regulation 4.13(b)(1)(iii) for CPOs currently relying on an exemption in Regulation 4.13, as of that effective date. The Commission is establishing for these particular CPOs a compliance date of March 1, 2021, which coincides with the deadline for persons filing annual reaffirmation notices under Regulation 4.13(b)(1) in the upcoming 2021 filing cycle.

Although the Commission is declining to “grandfather” existing exempt CPOs with respect to the Final Rule, because it believes doing so may dilute any positive effect on customer protection the amendment would have, persons currently claiming an exemption from CPO registration may continue to do so, while identifying, classifying, and checking the backgrounds of the claiming person and its principals. The additional compliance period will allow currently exempt CPOs to continue operating their exempt pools, while they conduct the necessary inquiries regarding the claimant and principals (if they have not already been required to do so due to being otherwise registered).

On the other hand, persons claiming a Regulation 4.13 exemption for the first time on or after the Final Rule's effective date will not be provided additional compliance time. Publication of the Final Rule serves as notice to such persons that, to successfully claim an exemption from CPO registration, they will be thereafter required to identify their principals, conduct background checks, and represent that neither the person nor its principals are subject to the Covered Statutory Disqualifications, unless such offenses were disclosed in a registration application already approved by the Commission or NFA. The Commission believes this distinction between existing and new claimants under Regulation 4.13 is reasonable because persons establishing a new exempt CPO generally would have the opportunity to identify and check principals as part of the start-up process for the CPO and pool business, and prior to operating an exempt pool for the first time.

The Regulatory Flexibility Act (RFA) requires that Federal agencies, in promulgating regulations, consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities, and if so, to provide a regulatory flexibility analysis regarding the economic impact on those entities. 91 Each Federal agency is required to conduct an initial and final regulatory flexibility analysis for each rule of general applicability for which the agency issues a general notice of proposed rulemaking. The regulatory amendments adopted herein affect only persons registered or required to be registered as CPOs and persons claiming exemptions from registration as such. The Commission previously has determined that a CPO is a small entity for purposes of the RFA, if it meets the criteria for an exemption from registration under Regulation 4.13(a)(2). 92 Such CPOs will generally continue to qualify for the exemption from registration, though the Commission believes that such exempt CPOs claiming Regulation 4.13(a)(2) may incur some costs as a result of the Final Rule. Like most other exempt CPOs, they will also be required to identify their principals and affirm that neither they nor the claiming entity have in their backgrounds a Covered Statutory Disqualification. The Commission notes that this requirement will apply equally to all persons filing a notice of exemption under Regulation 4.13, after the effective date of the Final Rule, and that all CPOs currently claiming an exemption, including those that are small entities for RFA purposes, are subject to the guidance herein, requiring them to comply with new Regulation 4.13(b)(1)(iii) by March 1, 2021. The Commission did not receive any comments on its analysis of the application of the RFA to the Proposal or Proposed Regulation 4.13(a)(6).

The costs of new Regulation 4.13(b)(1)(iii), which are expected to vary depending on the size and complexity of the CPO in question, will generally be incurred once by exempt CPOs: Either at the compliance date required by the Final Rule, or at the formation of a new exempt CPO after the Final Rule is effective. The Commission believes further that, as small entities which are typically less complex organizationally, CPOs exempt under Regulation 4.13(a)(2) may potentially have an easier time identifying, classifying, and verifying the backgrounds of their principals. As such, the Commission believes that such small CPOs will incur, in general, lower costs, especially when compared to other types of exempt CPOs that are more likely to employ complex business structures or have more principals to identify and review. 93 If an exempt CPO or its principal has a Covered Statutory Disqualification in its background, the Commission recognizes that such person could be significantly impacted, as the person would therefore likely be required to replace the disqualified principal to continue operating, or under some circumstances, may be required to even wind up and cease operating their pool(s) as an exempt CPO.

Throughout this Final Rule, the Commission has evaluated and taken into consideration the amendment's impact on small exempt CPOs. Though the Commission lacks sufficient data to predict exactly how many exempt CPOs may ultimately be required to cease pool operations by virtue of the Final Rule, the Commission expects very few CPOs exempt under Regulation 4.13(a)(2) will be required to cease operations as a result. The current number of exempt CPOs that are also small entities is relatively low (approximately 313), and the costs of new Regulation 4.13(b)(1)(iii) are generally limited in occurrence, as discussed above. Finally, the Commission is also providing guidance in the Final Rule that provides additional time for certain affected persons to comply and incur costs resulting from this amendment, as an effort to mitigate disruption to these businesses. Therefore, the Commission concludes that the Final Rule does not create a significant economic impact on a substantial number of small entities.

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

The Paperwork Reduction Act (PRA) imposes certain requirements on Federal agencies in connection with their conducting or sponsoring any collection of information as defined by the PRA. 94 Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number from the Office of Management and Budget (OMB). The Commission believes that as adopted, the Final Rule results in a collection of information within the meaning of the PRA, as discussed below. As such, the publication of a PRA notice soliciting comment regarding the Commission's estimated burden calculation for new Regulation 4.13(b)(1)(iii) will be required.

As discussed in the Proposal, the Commission's proposed regulations would have impacted or amended two collections of information for which the Commission has previously received control numbers from OMB: Collections 3038-0005 and 3038-0023. 95 In the 2019 Final Rules, the Commission adopted amendments to 17 CFR part 4, submitted those final amendments for OMB approval, and amended those information collections to reflect the regulatory changes adopted by that final rulemaking. 96 Significantly, because Proposed Regulation 4.13(a)(6) was initially proposed as a substantive requirement to be applicable to any person who desires to claim an exemption under paragraphs (a)(1), (a)(2), (a)(3), (a)(4), or (a)(5) in this section, the Commission never considered the proposed amendment in the context of the PRA or those collections of information. In the Proposal, the Commission invited the public and other Federal agencies to comment on any aspect of the information collection requirements discussed therein. 97 The Commission did not receive any such comments.

As discussed above, the Final Rule adopts new Regulation 4.13(b)(1)(iii), which requires a person filing a notice of exemption under Regulation 4.13(b)(1) to represent that neither the claimant nor any of its principals has in their backgrounds a Covered Statutory Disqualification that would require disclosure, if the claimant sought registration with the Commission. Because Proposed Regulation 4.13(a)(6) did not require any additional information to be provided as part of the notice filed to claim an exemption under Regulation 4.13, the Commission did not account in the Proposal for any PRA burden associated with an additional representation in the notice filing required under Regulation 4.13(b)(1). Therefore, concurrent with the Final Rule, the Commission is updating the estimated burden associated with Regulation 4.13(b)(1), as amended by this Final Rule, and seeking public comment on those estimates in a PRA notice, separately published in this Federal Register .

Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA. 98 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the CEA section 15(a) considerations.

The baseline for the Commission's consideration of the costs and benefits of the Final Rule is the regulatory status quo, as determined by the CEA and the Commission's existing regulations. The Commission has endeavored to assess the costs and benefits of the Final Rule in quantitative terms wherever possible. Where estimation or quantification is not feasible, however, the Commission has provided its assessment in qualitative terms.

The Commission notes that the consideration of costs and benefits below is based on the understanding that the markets function internationally, with many transactions involving U.S. firms taking place across international boundaries; with some Commission registrants being organized outside of the United States; with leading industry members commonly following substantially similar business practices wherever located. Therefore, the below discussion of costs and benefits refers to the effects of the Final Rule on all activity covered by the amended regulations. Consequently, the Commission notes that some entities affected by the Final Rule are located outside of the United States.

The Final Rule adds new paragraph (b)(1)(iii) to the annual notice filing requirement in Regulation 4.13(b)(1), which will, once effective, require all persons filing a notice of exemption under Regulation 4.13 to represent that neither they nor their principals have in their backgrounds a Covered Statutory Disqualification, unless such disqualification arises from a matter which was disclosed in connection with a previous application for registration, if such registration was granted. The Commission intends for CPOs claiming a notice of exemption as of the Final Rule's effective date to first make this representation in the 2021 reaffirmation of the exemption, i.e., March 1, 2021. The Commission believes that the adjustments to the Final Rule, discussed in detail above, as well as its guidance establishing an extended compliance period for currently exempt CPOs, address the majority of public comments received in response to Proposed Regulation 4.13(a)(6). The Commission concludes therefore that these efforts appropriately balance the Commission's regulatory interests with the costs of compliance to affected persons. New Regulation 4.13(b)(1)(iii) will effectively prohibit Covered Statutory Disqualifications, i.e., those listed in CEA section 8a(2), in persons filing a notice of exemption under Regulation 4.13, as well as in their principals, in a more tailored manner than the proposed amendment. As a result, the Commission believes the Final Rule addresses the Commission's customer protection concerns with respect to the exempt CPO population, while still reducing the regulatory burdens for exempt CPOs and their commodity pools.

The Commission believes that prohibiting persons who are statutorily disqualified under CEA section 8a(2), or who employ principals so disqualified, from claiming exemptions under Regulation 4.13 will result in several benefits. As discussed in further detail above and in the Proposal, the Commission has concerns that “pool participants may be exposed to risk posed by regulations permitting the operation of an offered [exempt] pool by a person who, generally, would not otherwise be permitted to register with the Commission.”  99 The Commission has noted that, “even if the activities of a CPO do not rise to a level warranting Commission oversight through registration, a prospective participant should be able to be confident that a collective investment vehicle using commodity interests is not operated by a person,” who, for example, has previously been the subject of an injunction relating to fraud or embezzlement. 100

Prior to the Final Rule, persons claiming an exemption from CPO registration under Regulation 4.13 generally were not required to meet any basic conduct standards, in contrast to persons registered or required to register as CPOs with the Commission. 101 The Final Rule remedies that regulatory gap by requiring that a person filing a notice of exemption from CPO registration under Regulation 4.13 meets substantively similar basic conduct standards as a person registered or required to be registered as a CPO. The Commission expects that correcting this regulatory inconsistency will increase overall investor confidence by setting a standard applicable to the vast majority of exempt CPOs operating pooled investment vehicles in the commodity interest markets. The result of the Final Rule will be that persons and/or principals who have a Covered Statutory Disqualification not previously disclosed in a prior approved application for registration will generally be prohibited from operating or soliciting the public for investment in exempt pools, or from serving as a principal of an exempt CPO.

Because the Final Rule will require such CPOs to assess themselves and their principals for any CEA section 8a(2) disqualifications, the Commission believes that once it is fully implemented, new Regulation 4.13(b)(1)(iii) may provide reasonable assurance that persons subject to the Covered Statutory Disqualifications are not soliciting exempt pool participants and/or managing their capital via exempt pools. Moreover, the Commission expects that both prospective and actual participants in pools operated by exempt CPOs will experience enhanced customer protection by removing statutorily disqualified CPOs and/or principals thereof from the commodity interest markets. The Commission believes further that those participants will likely, as a result, also experience improved overall confidence in the exempt commodity pool space.

The Commission understands that the Final Rule could also result in potentially substantial costs to persons filing a notice of exemption under Regulation 4.13(b)(1). In the Proposal, the Commission further identified and described “costs associated with either divesting from commodity interests held within a collective investment vehicle, or in completely winding up a commodity pool's operations,” that could result from Proposed Regulation 4.13(a)(6). 102 In addition to these “wind-up” costs, the Commission understands that principal identification and classification processes will likely result in costs to each affected exempt CPO, and that those costs will vary based on the overall structure of the CPO, the number of principals it employs, and other circumstances unique to its pool operations. Although these potential costs were a point of significant concern for several commenters, and the Commission specifically solicited comment in the Proposal on the “impact of adopting [Proposed Regulation 4.13(a)(6)] on industry participants and currently exempt CPOs,” commenters did not provide specific data or estimates quantifying the actual costs of compliance resulting from the proposed amendment. 103

Despite the lack of information from commenters regarding potential or actual costs to affected persons, the Commission nonetheless considered those public comments, and strove to balance those costs with its regulatory and policy goals in a way that benefits market participants, customers, and the general public interest. By narrowing the scope of the Covered Statutory Disqualifications in new Regulation 4.13(b)(1)(iii) to those listed in CEA section 8a(2), the Commission believes that the Final Rule strikes an appropriate regulatory balance between customer protection concerns and increased regulatory requirements. This adjustment means the required representation will target the most serious offenses warranting the statutory disqualifications listed in the CEA within the general population of exempt CPOs, including their principals. Moreover, the Final Rule further reduces procedural confusion by limiting the CSDs to those disqualifications that would serve as a bar to registration with the Commission, absent an additional hearing or proceeding. Finally, by providing guidance herein that extends the compliance period for persons currently relying upon a claim of exemption under Regulation 4.13(b)(1), the Commission wishes to facilitate compliance with the Final Rule. Specifically, the Commission intends this guidance to mitigate the risk of business interruption by providing affected persons with additional time to assess themselves and their principals, and to identify and address any CSDs that are found. The Commission is employing this tailored and gradual approach for the Final Rule and its implementation to, among other things, generally moderate costs to affected persons caused by new Regulation 4.13(b)(1)(iii).

The Commission considered whether the Final Rule will have any detrimental effect on the customer protections of the Commission's regulatory regime and has concluded that the Final Rule will generally have a positive effect on the protection of market participants and the public. Through new Regulation 4.13(b)(1)(iii), the Commission is remedying an inconsistency, in which a person who may be prohibited by the CEA from conducting activities requiring registration could nonetheless engage in those activities by claiming a CPO registration exemption instead. The Final Rule will ensure that persons filing a notice of exemption under Regulation 4.13(b)(1), as amended, and persons registered or required to be registered as CPOs with the Commission will be treated similarly—in either instance, all such persons must be able to represent that they and their principals are, at a minimum, not disqualified under CEA section 8a(2), prior to soliciting the public for investment in, or otherwise operating a commodity pool. The Commission believes that basic conduct standards applicable to CPOs, regardless of registration status, will improve customer protection within the Commission's CPO regulatory program.

Section 15(a)(2)(B) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of efficiency, competitiveness, and financial integrity considerations. The Commission believes that the Final Rule may positively impact the efficiency, competitiveness, and financial integrity of the commodity interest markets. The Final Rule will require all persons filing a notice under amended Regulation 4.13(b)(1) to represent that neither they nor their principals have in their backgrounds a Covered Statutory Disqualification. To the extent that disqualified persons are prevented from being an exempt CPO or from serving as a principal of an exempt CPO, as a result of new Regulation 4.13(b)(1)(iii), the Commission expects such disqualified persons (and principals) would either exit the commodity interest markets, or at least, discontinue operating in the exempt commodity pool space. Therefore, because it will ultimately cause the removal of entities, persons, and principals disqualified under CEA section 8a(2) from the exempt commodity pool space, the Commission believes that the Final Rule could have a positive impact on the efficiency, competitiveness, and financial integrity of the commodity interest markets overall.

Section 15(a)(2)(C) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of price discovery considerations. For the reasons noted above, the Commission believes that the Final Rule generally results in limited, discrete changes to regulatory processes and filings that will not have a significant impact on price discovery.

Section 15(a)(2)(D) of the CEA requires the Commission to evaluate a regulation in light of sound risk management practices. The Commission believes that the Final Rule will not have a significant impact on the practice of sound risk management because the manner in which various CPOs, pooled investment vehicles, and their respective principals organize, register, or claim an exemption from such registration has only a small influence on how such market participants manage their risks overall.

Section 15(a)(2)(E) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of other public interest considerations. The Commission did not identify any additional public interest considerations not already discussed above.

Section 15(b) of the CEA requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA, in issuing any order or adopting any Commission rule or regulation (including any exemption under CEA section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of the CEA. 104 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission requested comment on whether the Proposal implicated any other specific public interest to be protected by the antitrust laws and received no comments addressing this issue.

The Commission has considered the Final Rule to determine whether it is anticompetitive and has identified no anticompetitive effects. Because the Commission has determined the Final Rule is not anticompetitive and has no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the CEA.

For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR part 4 as follows:

The text of these temporary regulations also serves as the text of part of the proposed regulations set forth in the related notice of proposed rulemaking on this subject (REG-125716-18) in the Proposed Rules section in this issue of the Federal Register .

This Treasury decision amends the Income Tax Regulations (26 CFR part 1) under section 1502 of the Code. Section 1502 authorizes the Secretary of the Treasury or his delegate (Secretary) to prescribe regulations for an affiliated group of corporations that join in filing (or that are required to join in filing) a consolidated return (consolidated group) to reflect clearly the Federal income tax liability of the consolidated group and to prevent avoidance of such tax liability. See § 1.1502-1(h) (defining the term “consolidated group”). For purposes of carrying out those objectives, section 1502 also permits the Secretary to prescribe rules that may be different from the provisions of chapter 1 of the Code that would apply if the corporations composing the consolidated group filed separate returns. Terms used in the consolidated return regulations generally are defined in § 1.1502-1.

The Department of the Treasury (Treasury Department) and the IRS are issuing these temporary regulations to provide guidance to consolidated groups regarding the application of the net operating loss (NOL) carryback rules under section 172(b) of the Code, as amended by (i) section 2303(b) of the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 281 (March 27, 2020) (CARES Act), and (ii) any future statutory amendments to section 172. Specifically, if there is a retroactive statutory extension of the NOL carryback period under section 172, these temporary regulations permit consolidated groups that acquired new members that were members of another consolidated group prior to the statutory change to elect to waive, in a taxable year subsequent to the taxable year of the acquisition, all or part of the pre-acquisition portion of an extended carryback period (as defined in part I of the Explanation of Provisions) under section 172 for consolidated net operating losses (CNOLs) attributable to the acquired members.

For purposes of section 172, an NOL equals the excess of a taxpayer's deductions allowed by chapter 1 of the Code over the taxpayer's gross income, computed with the modifications specified in section 172(d). Section 172(c). For a taxable year beginning before January 1, 2021, section 172(a)(1) allows as a deduction an amount equal to the aggregate of the NOL carryovers and carrybacks to such year. As amended by section 2303(b)(2) of the CARES Act, section 172(b)(1)(A)(i) of the Code provides that an NOL for any taxable year must be an NOL carryback to the extent provided in section 172(b)(1)(B), 172(b)(1)(C)(i), and 172(b)(1)(D).

Prior to enactment of the CARES Act, section 172 was most recently amended by Public Law 115-97, 131 Stat. 2054 (December 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). In relevant part, section 13302(b) of the TCJA amended section 172(b) to generally prohibit the carryback of NOLs arising in taxable years beginning after December 31, 2017 (post-2017 NOLs). The TCJA also provided limited exceptions to the general carryback prohibition by amending sections 172(b)(1)(B) and 172(b)(1)(C)(i) to provide that farming losses (within the meaning of section 172(b)(1)(B)(ii)) and losses incurred by insurance companies (as defined in section 816(a) of the Code) other than life insurance companies (non-life insurance companies), respectively, must be carried back to each of the two taxable years preceding the taxable year of the loss. Therefore, prior to enactment of the CARES Act, taxpayers generally could not carry back post-2017 NOLs to prior taxable years.

Section 2303(b) of the CARES Act added section 172(b)(1)(D) to the Code. This provision contains an additional exception to the general prohibition of NOL carrybacks. Specifically, section 172(b)(1)(D) provides that an NOL arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, must be carried back to each of the five taxable years preceding the taxable year in which that NOL arises (five-year carryback period). Section 172(b)(2) requires taxpayers to carry the entire amount of such NOL back to the earliest taxable year of that five-year carryback period. Section 172(b)(2) also provides that the portion of the NOL that must be carried to each successive taxable year in the five-year carryback period equals the amount, if any, that was not used in the preceding taxable years to which the NOL was carried.

Section 172(b)(1)(D)(i)(II), as added by section 2303(b)(1) of the CARES Act, further provides that the exceptions to the prohibition of NOL carrybacks regarding farming losses and non-life insurance companies do not apply to NOLs that are subject to the five-year carryback period. See sections 172(b)(1)(B)(i) (regarding farming losses) and 172(b)(1)(C)(i) (regarding non-life insurance companies). Therefore, farming losses and losses incurred by non-life insurance companies arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, are carried back five years instead of two years. Section 172(b)(1)(D)(i)(II).

Section 172(b)(3) permits a taxpayer entitled to a carryback period under section 172(b)(1) to make, with respect to an NOL for any taxable year, an irrevocable election to relinquish the carryback period. A taxpayer generally must make this election (i) in such manner as may be prescribed by the Secretary, and (ii) by the due date (including extensions of time) for filing the taxpayer's return for the taxable year of the NOL for which the election is to be in effect. However, solely with regard to NOLs arising in a taxable year beginning in 2018 or 2019, section 172(b)(1)(D)(v)(II), as added by section 2303(b)(1) of the CARES Act, provides a special rule that requires elections to waive the carryback period for such NOLs under section 172(b)(3) to be made no later than the due date (including extensions of time) for filing the taxpayer's Federal income tax return for the first taxable year ending after March 27, 2020. See also Rev. Proc. 2020-24, 2020-18 I.R.B. 750, §§ 4.01(1), 4.03 (providing procedures regarding the time and manner of filing elections for consolidated groups to waive the carryback under section 172(b)(3) for NOLs arising in taxable years beginning in 2018 or 2019).

Section 1.1502-21(a) defines the consolidated net operating loss (that is, a CNOL) deduction for any consolidated return year as “the aggregate of the net operating loss carryovers and carrybacks to the year,” which consist of (i) CNOLs of the consolidated group, and (ii) any NOLs of the group's members arising in separate return years. A “CNOL” is, for a consolidated return year, the excess of a consolidated group's deductions over the group's gross income, as determined under § 1.1502-11(a) (without regard to any CNOL deduction). See § 1.1502-21(e).

The NOL carryovers and carrybacks to a taxable year are determined under the principles of section 172 and § 1.1502-21. Section 1.1502-21(b)(1). Thus, losses permitted to be absorbed in a consolidated return year generally are absorbed in the order of the taxable years in which they arose, and losses carried from taxable years ending on the same date, and which are available to offset consolidated taxable income for the year, generally are absorbed on a pro rata basis. Id. If any percentage of the CNOL that is attributable to a member (determined pursuant to § 1.1502-21(b)(2)(iv)(B)) may be carried to a separate return year of the member, the amount of the CNOL that is attributable to the member is apportioned to the member and carried to the separate return year. Section 1.1502-21(b)(2)(i). If carried back to a separate return year, the apportioned loss may not be carried back to an equivalent, or earlier, consolidated return year of the group. Id.

Section 1.1502-21(b)(3)(i) permits a consolidated group to make an irrevocable election under section 172(b)(3) to relinquish the entire carryback period with respect to a CNOL for any consolidated return year (general waiver election). When making this general waiver election for a consolidated return year, a consolidated group cannot make this election separately for a particular member (whether or not it remains a member). Section 1.1502-21(b)(3)(i). Rather, the consolidated return regulations provide only a narrowly scoped “split-waiver election” (as described in detail in part II.C of this Background) that a consolidated group can make solely with respect to one or more members that previously were members of another group. Id. A general waiver election must be made in a separate statement filed with the group's Federal income tax return for the consolidated return year in which the NOL arises. Id.

A consolidated group (acquiring group) that acquires a new member (acquired member) that was a member of another consolidated group (former group) may make an irrevocable election to relinquish, with respect to all CNOLs of the acquiring group that are attributable to the acquired member, the portion of the carryback period for which the acquired member was a member of a former group (split-waiver election). See § 1.1502-21(b)(3)(ii)(B). If an acquiring group makes a split-waiver election for a consolidated return year, the portion of the acquiring group's CNOL attributable to the acquired member for which the election is made will not be carried back to a former group. Id. Unlike a general waiver election, a split-waiver election is not a yearly election, but rather applies to all CNOLs attributable to an acquired member that otherwise would be subject to a carryback to a taxable year of a former group under section 172. Id.

Eligibility for a split-waiver election is subject to certain conditions and procedures. Importantly, a split-waiver election must be made in a separate statement filed with the acquiring group's original Federal income tax return for the year the corporation became a member. Id. In other words, if a split-waiver election is not made with this particular Federal income tax return, the election cannot later be made by amending this return in a subsequent consolidated return year or by attaching the above-described statement to a Federal income tax return for a later consolidated return year. If any other corporation joining the acquiring group was affiliated with the acquired member immediately before the acquired member joined the acquiring group, that other corporation also must be included in the split-waiver election. Id.

On prior occasions, enacted legislation has amended section 172 to extend the carryback period for NOLs. See Worker, Homeownership, and Business Assistance Act of 2009, Public Law 111-92, 123 Stat. 2984 (November 6, 2009); Job Creation and Worker Assistance Act of 2002, Public Law 107-147, 116 Stat. 21 (March 9, 2002). Most recently, section 2303(b) of the CARES Act added section 172(b)(1)(D) to the Code. As described in part I of the Background, section 172(b)(1)(D) requires (in the absence of a waiver under section 172(b)(3)) a five-year carryback period for an NOL that arises in a taxable year beginning after December 31, 2017, and before January 1, 2021.

Such statutory changes to NOL carryback periods uniquely impact consolidated groups that acquire one or more corporations prior to the statutory extension of the carryback period. During the past two decades, the Treasury Department and the IRS have provided consolidated groups with certain additional elections for waiving carrybacks of losses into other, former groups. See 75 FR 35643 (June 23, 2010) (2010 split-waiver regulations); 67 FR 38000 (May 31, 2002) (2002 split-waiver regulations). These additional elections, while responsive to particular statutory amendments, have reflected common policy objectives of providing affected groups with the ability to waive all or a portion of the statutorily extended NOL carryback period.

The Treasury Department and the IRS have determined that it is appropriate to provide similar rules with regard to amendments to the NOL carryback rules under section 2303(b) of the CARES Act, as well as any similar statutory changes in the future. (For purposes of these regulations, the amended NOL carryback rules implemented by the CARES Act in particular or by future legislation more generally are referred to as the “amended carryback rules.”) Therefore, these temporary regulations provide principle-based rules applicable to CNOLs arising in taxable years to which amended carryback rules become applicable after the acquisition of a member. Under these rules, which are consistent with the 2002 and 2010 split-waiver regulations (although these rules are not limited to a one-time statutory change of the NOL carryback rules), acquiring groups would possess the opportunity to waive, on a taxable-year-by-taxable-year basis, all or a portion of the carryback period with regard to CNOLs attributable to acquired members for pre-acquisition years during which the acquired members were members of a former group.

Therefore, these temporary regulations provide two additional types of split-waiver elections for consolidated groups that (i) include one or more acquired members, and (ii) have CNOLs that, under amended carryback rules, become eligible to be carried back for a greater number of years than under statutory law in effect at the time of the acquisition (default carryback period). See the discussion in parts II through IV of this Explanation of Provisions. A default carryback period may consist of zero years in the case of a complete prohibition on carrybacks. The additional years added under amended carryback rules constitute the “extended carryback period.” The two additional types of split-waiver elections set forth in these temporary regulations provide relief, and are subject to conditions and procedures, consistent with the applicable split-waiver elections set forth in the 2002 and 2010 split-waiver regulations.

These temporary regulations permit an acquiring group to make a special split-waiver election with regard to a CNOL for a consolidated return year in which an acquired member was included in the acquiring group and to which amended carryback rules apply (amended statute split-waiver election). Through this election, an acquiring group can relinquish that part of the extended carryback period during which an acquired member was a member of a former group (for the portion of a CNOL attributable to the acquired member), notwithstanding that the group did not file a split-waiver election for the year in which the acquired member became a member of the acquiring group (as required by § 1.1502-21(b)(3)(ii)(B)). Accordingly, an amended statute split-waiver election applies only to the portion of a CNOL that is attributable to an acquired member for the portion of the carryback period (including the default carryback period and the extended carryback period) during which the acquired member was a member of a former group.

An acquiring group makes an amended statute split-waiver election on a year-by-year basis, consistent with the 2002 and 2010 split-waiver regulations. Consequently, an acquiring group may make this election for the portion of a CNOL attributable to an acquired member that arises in any particular taxable year to which an amended carryback rule applies (amended carryback CNOL), regardless of whether the acquiring group makes such an election for CNOLs arising in other consolidated return years. However, also consistent with the 2002 and 2010 split-waiver regulations, an acquiring group can make an amended statute split-waiver election with respect to an amended carryback CNOL only if any carryback to a taxable year included in the extended carryback period is not claimed on a return or other filing by a former group that is filed on or before the date this election is filed by the acquiring group. Also consistent with the 2002 and 2010 split-waiver regulations, an acquiring group can make an amended statute split-waiver election with respect to an acquired member only if the acquiring group did not file (i) a valid split-waiver election with respect to that acquired member on or before the effective date of the relevant amended carryback rules, or (ii) a general waiver election with respect to a CNOL of the acquiring group from which the amended carryback CNOL is attributed to the acquired member.

The amended statute split-waiver election generally must be made by attaching a statement to the acquiring group's timely filed tax return (including extensions) with regard to the consolidated return year during which the amended carryback CNOL was incurred. In certain circumstances, the statement may be attached to an amended return, but that return must be filed no later than 150 days after the effective date of the relevant amended carryback rules. These regulations also include rules specific to the amendments to section 172 made by section 2303(b) of the CARES Act, which provide an additional option under which the statement may be attached to an amended return filed no later than November 30, 2020 (a date that is 150 days after the date of filing of these temporary regulations). These filing requirements incorporate the principles of the filing requirements set forth in the 2002 and 2010 split-waiver regulations, which were tailored to specific enacted legislation.

To provide acquiring groups with additional flexibility for making split-waiver elections, these temporary regulations provide a second, alternative split-waiver election (extended split-waiver election) that applies solely to the extended carryback period (that is, the additional carryback years provided under amended carryback rules). Through an extended split-waiver election, an acquiring group can ensure that amended carryback CNOLs are carried back to taxable years of former groups only to the extent those losses would have been carried back under prior law (that is, the default carryback period). In other words, this election affects only the extended carryback period for an acquired member's attributed loss.

The extended split-waiver election and the amended statute split-waiver election are subject to the same conditions and procedures, and provide the same relief, except that the extended split-waiver election waives only the extended carryback period. Therefore, any CNOL carryback to default carryback years would be unaffected by an extended split-waiver election. For example, if the default carryback period were two years and a change in law extended the carryback period to five years, an acquiring group could make an extended split-waiver election to waive the carryback to a former group of only the three additional carryback years with respect to the amended carryback CNOL. Accordingly, the extended split-waiver election is available if losses attributable to the acquired member have been carried back solely to taxable years of a former group in the default carryback period, but not in the extended carryback period.

These temporary regulations apply to any CNOLs arising in a taxable year ending after July 2, 2020. However, consistent with the applicability date for the amendments to section 172(b) pursuant to section 2303(b) of the CARES Act, and pursuant to section 7805(b)(2), taxpayers may apply these temporary regulations to any CNOLs arising in a taxable year beginning after December 31, 2017. The applicability of these temporary regulations will expire on July 3, 2023.

The Treasury Department and the IRS are issuing these temporary regulations without prior notice and the opportunity for public comment pursuant to section 553(b)(B) of the Administrative Procedure Act (APA), which provides that advance notice and the opportunity for public comment are not required with respect to a rulemaking when an agency “for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” Under the “public interest” prong of 5 U.S.C. 553(b)(B), the good cause exception appropriately applies where notice and comment would harm, defeat, or frustrate the public interest, rather than serving it.

These temporary regulations, which solely provide certain acquiring groups with elective relief, are necessary to permit certain acquiring groups to elect to waive all or a portion of the carryback period for certain losses attributable to acquired members for pre-acquisition years during which the acquired members were members of a former group. The amended carryback rules enacted by section 2303(b) of the CARES Act apply for NOLs arising in a taxable year beginning after December 31, 2017, and before January 1, 2021. Consequently, good cause arises from the fact that these temporary regulations will affect taxable years of certain acquiring groups for which tax returns already are due or may become due during a period of comment and delayed effectiveness. Deferring the effectiveness of the temporary regulations until after such a period could prevent taxpayers from immediately electing to obtain the intended benefits of section 2303(b) of the CARES Act and increase taxpayer compliance costs and uncertainty because of delay of the time before which relevant acquiring groups could make the elections permitted by the regulations with certainty.

Executive Orders 13771, 13563, and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

These regulations are 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.

The collections of information in these temporary regulations are in § 1.1502-21T(b)(3)(ii)(C)( 5 )( i ) and § 1.1502-21T(b)(3)(ii)(C)( 5 )( ii ). The information is required to inform the IRS on whether, and to what extent, an acquiring group makes either of the elections described in these temporary regulations.

The collection of information provided by these temporary regulations has been approved by the Office of Management and Budget (OMB) under control number 1545-0123. For purposes of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. (PRA), the reporting burden associated with the collection of information in Form 1120 (U.S. Corporation Income Tax Return) will be reflected in the PRA Submission associated with OMB control number 1545-0123.

In general, if the acquiring group makes an election under § 1.1502-21T(b)(3)(ii)(C), the acquiring group is required to attach a separate statement to its Form 1120 as provided in § 1.1502-21T(b)(3)(ii)(C)( 5 )( i ) and § 1.1502-21T(b)(3)(ii)(C)( 5 )( ii ), respectively. This statement must be filed as provided in § 1.1502-21T(b)(3)(ii)(C)( 6 ).

The following table displays the number of respondents estimated to be required to report on Form 1120 with respect to the collections of information required by these temporary regulations. Due to the absence of historical tax data, direct estimates of the number of respondents required to attach a statement to other types of tax returns, as applicable, are not available.

The numbers of respondents in the table were estimated by the Research, Applied Analytics and Statistics Division (RAAS) of the IRS from the Compliance Data Warehouse (CDW). Data for Form 1120 represents estimates of the total number of taxpayers that may attach an election statement to their Form 1120 to make the elections in § 1.1502-21T(b)(3)(ii)(C)( 5 )( i ) and § 1.1502-21T(b)(3)(ii)(C)( 5 )( ii ).

It is estimated that 17,500 consolidated entities will be required to attach a statement under these temporary regulations. The burden associated with the information collections in these temporary regulations are included in aggregated burden estimates for the OMB control number 1545-0123. The burden estimates provided in the OMB control numbers in the following table are aggregate amounts that relate to the entire package of forms associated with the OMB control number, and will in the future include, but not isolate, the estimated burden of those information collections associated with these temporary regulations. To guard against over-counting the burden that consolidated tax provisions imposed prior to § 1.1502-21T, the Treasury Department and the IRS urge readers to recognize that these burden estimates have also been cited by regulations that rely on the applicable OMB control numbers in order to collect information from the applicable types of filers.

These temporary regulations do not impose a collection of information on small entities. Further, pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these temporary regulations would not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these temporary regulations apply only to corporations that file consolidated Federal income tax returns, and that such corporations tend to be larger businesses. Therefore, these temporary regulations would not create additional obligations for, or impose an economic impact on, small entities.

Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

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 2020, that threshold is approximately $156 million. This rule does not include any Federal 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. These temporary regulations do not have federalism implications, do not impose substantial direct compliance costs on state and local governments, and do not preempt state law within the meaning of the Executive Order.

IRS Revenue Procedures, Revenue Rulings, and Notices cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

The principal author of these regulations is Jonathan R. Neuville of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development.

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

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

The Coast Guard is issuing this temporary rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for not publishing a notice of proposed rulemaking (NPRM) with respect to this rule because it is inpracticable. Due to shifting dates and delays resulting from the COVID-19 pandemic, the Coast Guard did not received a specific date and time for the transit of the VB-10,000 work barge.The barge is expected to arrive at Nassau Termainal in Fernandina Beach, FL on July 3, 2020. It is impracticable to publish an NPRM because we must establish this safety zone prior to the barge getting underway and entering the COTP Jacksonville zone.

Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the Federal Register . Delaying the effective date of this rule would be impracticable because action is needed to respond to the potential safety and navigational hazards associated with a large work barge transiting the channel.

The Coast Guard is issuing this rule under authority in 46 U.S.C. 70034. The Captain of the Port (COTP) Jacksonville has determined that potential hazards associated with the VB-10,000 work barge will be a safety concern for anyone within a 500-yard radius of the barge while in transit and within a 100-yard radius of the barge while moored at the Nassau Terminal in Fernandina Beach, FL. This rule is needed to protect personnel, vessels, and the marine environment in the navigable waters within the safety zone while the barge is transiting through the COTP Jacksonville Zone and moored at Nassau Terminal.

This rule establishes a safety zone around the VB-10,000 work barge. The safety zone will cover all navigable waters within 500 yards of the barge while in transit and all navigable waters within 100 yards of the barge while moored at the Nassau Terminal in Fernandina Beach, FL. The duration of the zone is intended to protect personnel, vessels, and the marine environment in these navigable waters while the barge is present. No vessel or person will be permitted to enter the safety zone without obtaining permission from the COTP or a designated representative.

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

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

This regulatory action determination is based on the time and duration the VB-10,000 work barge will be in the Sector Jacksonville Captain of the Port Zone. Vessel traffic will be able to safely transit around the 500 yard radius safety zone which will be reduced to a 100-yard radius while the barge is moored at the Nassau Terminanl in Fernandina Beach, FL. Moreover, the Coast Guard will issue a Broadcast Notice to Mariners via VHF-FM marine channel 16 about the zone, and the rule would allow vessels unable to pass safely to seek permission to enter the zone.

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

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

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

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

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

A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.

Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

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

We have analyzed this rule under Department of Homeland Security Directive 023-01, Rev. 1, associated implementing instructions, and Environmental Planning COMDTINST 5090.1 (series), which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves a safety zone that will prohibit entry within navigable waters outlined in the Discussion of the Rule above. It is categorically excluded from further review under paragraph L60(a) of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 1. A Record of Environmental Consideration supporting this determination is available in the docket. For instructions on locating the docket, see the ADDRESSES section of this preamble.

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

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

In FR Doc. 2020-06967 published April 30, 2020, make the following corrections:

1. On pages 25091-25098, tables VII-144 through VII-147 are corrected to read as follows:

2. On page 25268, in the first and second columns, the words of issuance for EPA are corrected to read as follows: “For the reasons set forth in the preamble, the Environmental Protection Agency is amending parts 86 and 600 of title 40, chapter I of the Code of Federal Regulations as follows:”

Table of Contents I. Introduction II. NPL Deletion Criteria III. Deletion Procedures IV. Basis for Site Deletion V. Deletion Action I. Introduction

EPA Region 5 is publishing this direct final Notice of Deletion of the DuPage County Landfill Site, from the NPL. The NPL constitutes Appendix B of 40 CFR part 300, which is the NCP, which EPA promulgated pursuant to Section 105 of CERCLA of 1980, as amended. EPA maintains the NPL as the list of sites that appear to present a significant risk to public health, welfare, or the environment. Sites on the NPL may be the subject of remedial actions financed by the Hazardous Substance Superfund (Fund). As described in 40 CFR 300.425(e)(3) of the NCP, sites deleted from the NPL remain eligible for Fund-financed remedial actions if future conditions warrant such actions.

Section II of this document explains the criteria for deleting sites from the NPL. Section III of this document discusses the procedures that EPA is using for this action. Section IV of this document discusses where to access and review information that demonstrates how the deletion criteria have been met at the DuPage County Landfill Site. Section V of this document discusses EPA's action to delete the DuPage County Landfill Site from the NPL unless adverse comments are received during the public comment period.

The NCP establishes the criteria that EPA uses to delete sites from the NPL. In accordance with 40 CFR 300.425(e), sites may be deleted from the NPL where no further response is appropriate. In making such a determination pursuant to 40 CFR 300.425(e), EPA will consider, in consultation with the State, whether any of the following criteria have been met:

i. Responsible parties or other persons have implemented all appropriate response actions required;

ii. All appropriate Fund-financed response under CERCLA has been implemented, and no further response action by responsible parties is appropriate; or

iii. The remedial investigation has shown that the release poses no significant threat to public health or the environment and, therefore, the taking of remedial measures is not appropriate.

Pursuant to CERCLA Section 121(c) and the NCP, EPA conducts five-year reviews to ensure the continued protectiveness of remedial actions where hazardous substances, pollutants, or contaminants remain at a site above levels that allow for unlimited use and unrestricted exposure. EPA conducts such five-year reviews even if a site is deleted from the NPL. EPA may initiate further action to ensure continued protectiveness at a deleted site if new information becomes available that indicates it is appropriate. Whenever there is a significant release from a site deleted from the NPL, the deleted site may be restored to the NPL without application of the hazard ranking system.

The following procedures apply to deletion of the DuPage County Landfill Site:

(1) EPA consulted with the State of Illinois prior to developing this direct final Notice of Deletion and the Notice of Intent to Delete co-published today in the “Proposed Rules” section of the Federal Register .

(2) EPA has provided the State thirty (30) working days for review of this action and the parallel Notice of Intent to Delete prior to their publication today, and the State, through the IEPA, concurred with the deletion of the DuPage County Landfill Site from the NPL on May 19, 2020.

(3) Concurrently with the publication of this direct final Notice of Deletion, an announcement of the availability of the parallel Notice of Intent to Delete is being published in a major local newspaper, the Chicago suburban Daily Herald. The newspaper notice announces the 30-day public comment period concerning the Notice of Intent to Delete the DuPage County Landfill Site from the NPL.

(4) EPA placed copies of documents supporting the proposed deletion in the deletion docket and made these items available for public inspection and copying at https://www.regulations.gov, Docket ID No. EPA-HQ-SFUND-1990-0010 and at https://www.epa.gov/superfund/dupage-county-landfill.

(5) If adverse comments are received within the 30-day public comment period on this deletion action, EPA will publish a timely notice of withdrawal of this direct final Notice of Deletion in the Federal Register before its effective date and will prepare a response to comments and continue with the deletion process on the basis of the Notice of Intent to Delete and the comments already received.

Deletion of a site from the NPL does not itself create, alter, or revoke any individual's rights or obligations. Deletion of a site from the NPL does not in any way alter EPA's right to take enforcement actions, as appropriate. The NPL is designed primarily for informational purposes and to assist EPA management. Section 300.425(e)(3) of the NCP states that the deletion of a site from the NPL does not preclude eligibility for future response actions, should future conditions warrant such actions.

The EPA placed a copy of its Final Close Out Report for the Site and other documents supporting the proposed deletion in the deletion docket. The material provides explanation of EPA's rationale for the deletion and demonstrates how it meets the deletion criteria. This information is made available for public inspection in the deletion docket available at https://www.regulations.gov, Docket ID No. EPA-HQ-SFUND-1990-0010 and at https://www.epa.gov/superfund/dupage-county-landfill.

EPA, with concurrence of the State of Illinois through the IEPA, has determined that all appropriate response actions under CERCLA, other than operation and maintenance, monitoring and five-year reviews have been completed at the DuPage County Landfill Site. Therefore, EPA is deleting the DuPage County Landfill Site from the NPL.

Because EPA considers this action to be noncontroversial and routine, EPA is taking it without prior publication. This action will be effective September 8, 2020 unless EPA receives adverse comments by August 7, 2020. If adverse comments are received within the 30-day public comment period, EPA will publish a timely withdrawal of this direct final Notice of Deletion before its effective date and the deletion will not take effect. EPA will prepare a response to comments and continue with the deletion process on the basis of the Notice of Intent to Delete and the comments already received. There will be no additional opportunity to comment.

For the reasons set out in this document, 40 CFR part 300 is amended as follows:

This is a summary of the Commission's Order on Reconsideration (Order) in WC Docket No. 18-155, adopted June 11, 2020 and released June 11, 2020. The full text of this document is available on the Commission's website at https://docs.fcc.gov/public/attachments/FCC-20-79A1.pdf.

1. In the 2019 Access Arbitrage Order (84 FR 57629, Oct. 28, 2019), we tackled, once again, the troublesome use of “free” conference calling, chat lines, and certain other services operated out of rural areas to take advantage of inefficiently high access charges allowed under the existing intercarrier compensation regime. As we explained, access stimulation schemes adapted to shrinking end office termination charges by taking advantage of access charges that had not transitioned or were not transitioning to bill-and-keep. As such, these schemes were structured to ensure that interexchange carriers (IXCs) would pay high tandem switching and tandem switched transport charges to access-stimulating local exchange carriers (LECs) and to the intermediate access providers chosen by those access-stimulating LECs. We also found that the vast majority of access-stimulation traffic was bound for LECs that subtended two centralized equal access (CEA) providers, Iowa Network Services d/b/a Aureon Network Services (Aureon) in Iowa and South Dakota Network, LLC (SDN) in South Dakota.

2. To eliminate the financial incentives to engage in access arbitrage, we adopted rules making access-stimulating LECs—rather than IXCs—financially responsible for the tandem switching and transport service access charges associated with the delivery of traffic from an IXC to the access-stimulating LEC end office or its functional equivalent. To facilitate the implementation of the rules in Iowa and South Dakota, we also modified the section 214 authorizations for Aureon and SDN to permit traffic terminating at access-stimulating LECs that subtend those CEA providers' tandems to bypass the CEA tandems.

3. Now Aureon seeks reconsideration of the Access Arbitrage Order. In its Petition, Aureon reiterates several of the arguments it made on the record in the Access Arbitrage proceeding. In particular, Aureon objects to our decision to adopt rules making access-stimulating LECs responsible for paying for tandem switching and transport services, and argues that we should instead have adopted one of its proposals—either to ban access stimulation or to require consumers placing calls to access-stimulating LECs to pay their IXCs an additional charge for each such call. Aureon also objects to our decision to modify its section 214 authorization, and it argues that we should have addressed its cost and rate complaints that are at issue in other Commission proceedings. Upon review of the record, we dismiss Aureon's Petition as procedurally defective, and independently, and in the alternative, deny it on substantive grounds.

4. The Commission has been combating access stimulation for more than a decade. Traditionally, access-stimulating LECs relied on the existence of high end office terminating switched access rates in rural areas that allowed them to increase their revenue by inflating their terminating call volumes through arrangements with entities that offer high-volume calling services. Because LECs entering traffic-inflating revenue-sharing agreements were not required to reduce their access rates to reflect their increased volume of minutes, access stimulation increased access minutes-of-use and access payments (at constant, per-minute-of-use rates that exceed the actual average per-minute cost of providing access). As a result, IXCs and their customers had to pay those inflated intercarrier compensation charges.

5. In the 2011 USF/ICC Transformation Order (76 FR 73830, Nov. 29, 2011), the Commission found that access-stimulating LECs were “realiz[ing] significant revenue increases and thus inflated profits that almost uniformly [made] their interstate switched access rates unjust and unreasonable.” The record showed that the “total cost of access stimulation to IXCs [had] been more than $2.3 billion over the [preceding] five years” and that “Verizon estimate[d] the overall costs to IXCs to be between $330 and $440 million per year.” The Commission explained that all long distance customers “bear these costs, even though many of them do not use the access stimulator's services, and, in essence, ultimately support businesses designed to take advantage of today's above-cost intercarrier compensation rates.” The Commission also found that “[a]ccess stimulation imposes undue costs on consumers, inefficiently diverting capital away from more productive uses such as broadband deployment,” and that it “harms competition by giving companies that offer a `free' calling service a competitive advantage over companies that charge their customers for the service.”

6. The Commission sought to eliminate the detrimental effect of access stimulation on all American consumers by requiring LECs to refile their interstate switched access tariffs at lower rates if: (1) The LEC has a revenue-sharing agreement; and (2) the LEC either has (a) a 3:1 ratio of terminating-to-originating traffic in any month or (b) has more than a 100% increase in traffic volume in any month measured against the same month during the previous year. These rules were “narrowly tailored to address harmful practices while avoiding burdens on entities not engaging in access stimulation.” The LECs that were thereby identified as being engaged in access stimulation were, for the most part, required to change their tariffs for end office access charges. A rate-of-return LEC was required to file its own cost-based tariff under section 61.38 of the Commission's rules and could not file based on historical costs under section 61.39 of the Commission's rules or participate in the NECA traffic-sensitive tariff. A competitive LEC was required to benchmark its tariffed end office access rates to the rates of the price cap LEC with the lowest interstate switched access rates in the state.

7. In the USF/ICC Transformation Order, the Commission transitioned end office terminating access charges to bill-and-keep. The Commission found that the transition to bill-and-keep would help reduce access stimulation by reducing “competitive distortions inherent in the intercarrier compensation system and eliminating carriers' ability to shift network costs to competitors and their customers.” At the same time, the Commission transitioned tandem switching and transport charges to bill-and-keep for price cap carriers when the terminating price cap carrier owns the tandem in the serving area, 47 CFR 51.907. For rate-of-return carriers, the Commission capped terminating interstate and intrastate transport charges at interstate levels.

8. In September 2017, in light of developments that had occurred in the relevant markets since the USF/ICC Transformation Order, the Wireline Competition Bureau (Bureau) sought to refresh the record on several issues, including the transition of the remaining tandem switching and transport charges to bill-and-keep. The comments that the Bureau received suggested that, in response to the reforms adopted in the USF/ICC Transformation Order, access stimulation schemes had adapted to shrinking end office termination charges and sought to take advantage of access charges that have not yet transitioned or are not transitioning to bill-and-keep. It appeared that access stimulation schemes had restructured to take advantage of the tandem switching and tandem switched transport charges that IXCs pay to access-stimulating LECs. The access stimulation schemes often involved carriers that billed “excessive transport charges, including lengthy per-mile, per-minute charges to remote areas on large volumes of stimulated” traffic.

9. In 2018, the Commission adopted a Notice of Proposed Rulemaking ( Access Arbitrage Notice ) (83 FR 30628, June 29, 2018) proposing to eliminate the financial incentive to engage in access arbitrage by giving access-stimulating LECs two alternatives for connecting to IXCs. First, the access-stimulating LEC could choose to be financially responsible for calls delivered to its network; in this situation, IXCs would no longer pay for the delivery of calls to the access-stimulating LEC's end office or the functional equivalent. Second, instead of accepting this financial responsibility, the access-stimulating LEC could choose to accept direct connections either from the IXC or an intermediate access provider of the IXC's choice; this alternative would permit IXCs to bypass intermediate access providers selected by the access-stimulating LEC. The Commission also sought comment on revising the access stimulation definition, on moving all traffic bound for an access-stimulating LEC to bill-and-keep, and on additional arbitrage schemes and ways to eradicate them.

10. The Commission also sought comment on whether it should modify the section 214 authorizations of Aureon and SDN, which were granted almost 30 years ago. When the then-Common Carrier Bureau adopted the section 214 authorizations which formed the regulatory foundation for the CEA providers, it included a mandatory use provision for Aureon, and an apparent mandatory use provision for SDN. These mandatory use provisions required IXCs delivering terminating traffic to a LEC subtending one of these CEA tandems to deliver the traffic to the CEA tandem rather than indirectly through another intermediate access provider or directly to the subtending LEC. In the Access Arbitrage Notice, the Commission proposed to eliminate the mandatory use requirement as it pertains to traffic terminating at access-stimulating LECs because, among other things, delivery of such high volumes of traffic was not the reason that CEA providers were authorized.

11. The Commission received over 140 formal comments and ex parte communications, and over 2,500 “express” comments in response to the Access Arbitrage Notice. In the Access Arbitrage Order, we found that the rules adopted in the USF/ICC Transformation Order resulted in a dramatic reduction in costs to IXCs—from approximately $330 million to $440 million annually reported in 2010 to between $60 million and $80 million annually reported in 2019—and “effectively discouraged rate-of-return LEC access stimulation activity.” We also found that since terminating end office access rates had transitioned to bill-and-keep they were no longer driving access stimulation. Instead, we found that access arbitrage schemes were taking advantage of terminating tandem switching and transport service access charges which, unlike end office switching charges, had not yet transitioned or are not transitioning to bill-and-keep. We also found that access stimulators typically operate in those areas of the country where tandem switching and transport charges remain high and are causing intermediate access providers, including CEA providers, to be included in the call path. We further explained that the tariffed tandem and transport access charges of CEA providers with mandatory use requirements served as a price umbrella for similar services offered by intermediate access providers pursuant to commercial agreement, thus inviting access arbitrage. The intermediate access provider would attract traffic to its facilities by offering a small discount from the applicable tariffed CEA rate.

12. In the Access Arbitrage Order, we adopted three key rule modifications of relevance here. First, to reduce the use of the access charge system to subsidize high-volume calling services, we adopted rules making access-stimulating LECs—rather than IXCs—financially responsible for the tandem switching and tandem switched transport access charges for the delivery of terminating traffic from IXCs to the access-stimulating LECs' end offices or their functional equivalents. Second, we modified the definition of access stimulation to include two new alternative triggers without a revenue-sharing component. Third, to facilitate our new rules, we modified the Aureon and SDN section 214 authorizations to eliminate the mandatory use requirements insofar as they apply to traffic being delivered to access-stimulating LECs. We therefore enabled “IXCs to use whatever intermediate access provider an access-stimulating LEC that otherwise subtends Aureon or SDN chooses.” We reasoned that our action would “allow IXCs to directly connect to access-stimulating LECs where such connections are mutually negotiated and where doing so would be more efficient and cost-effective.”

13. In November 2019, Aureon filed its Petition seeking reconsideration of the Access Arbitrage Order. Aureon requests that we: (a) Reconsider our rules requiring access-stimulating LECs to pay tandem switching and transport charges and instead either ban access stimulation or, in the alternative, require callers to high-volume calling services to pay for additional fees to cover the costs of the IXCs' access charges; (b) retain the mandatory use provisions of the section 214 authorizations for Aureon and SDN; and (c) reconsider what Aureon characterizes as additional financial burdens on CEA providers created by our reforms.

14. We released a Public Notice announcing the filing of the Petition and established deadlines for Oppositions and Replies to the Petition. We received Oppositions from AT&T, Verizon and Sprint, and a Reply from Aureon.

15. Any interested party may file a petition for reconsideration of a final action in a rulemaking proceeding, 47 CFR 1.429(a). Reconsideration “may be appropriate when the petitioner demonstrates that the original order contains a material error or omission, or raises additional facts that were not known or did not exist until after the petitioner's last opportunity to present such matters,” 47 CFR 1.429(b). Petitions for reconsideration that do not warrant consideration by the Commission include those that: “[f]ail to identify any material error, omission, or reason warranting reconsideration; [r]ely on facts or arguments which have not been previously presented to the Commission; [r]ely on arguments that have been fully considered and rejected by the Commission within the same proceeding;” or “[r]elate to matters outside the scope of the order for which reconsideration is sought,” 47 CFR 1.429(l)(1)-(3), (5). The Commission may consider facts or arguments not previously presented if: (1) They “relate to events which have occurred or circumstances which have changed since the last opportunity to present such matters to the Commission”, 47 CFR 1.429(b)(1); (2) they were “unknown to petitioner until after [their] last opportunity to present them to the Commission, and . . . could not through the exercise of ordinary diligence have learned of the facts or arguments in question prior to such opportunity,” 47 CFR 1.429(b)(2); or (3) “[t]he Commission determines that consideration of the facts or arguments relied on is required in the public interest,” 47 CFR 1.429(b)(3).

16. We consider and dismiss Aureon's Petition as procedurally deficient. Separately, we deny the Petition on the merits. In the discussion below, we address the Petition's procedural defects and then turn to the shortcomings of Aureon's substantive arguments.

17. Aureon fails to meet the standard to justify reconsideration. It does not identify any material error or omission in the Access Arbitrage Order; raise facts that were not known or did not exist before Aureon's last opportunity to present such matters in the underlying rulemaking; or demonstrate that reconsideration would be in the public interest. Instead, Aureon's Petition suffers from numerous procedural flaws—repeating arguments that Aureon previously raised and to which we responded, raising “new” arguments that it could have made in the underlying proceeding, and presenting arguments that are beyond the scope of this proceeding—that warrant dismissal, 47 CFR 1.429(l).

18. The Commission Need Not Address Petitions that Repeat Previous Arguments. Our rules and precedent are clear that we need not consider petitions for reconsideration, such as Aureon's, that “merely repeat arguments we previously . . . rejected” in the underlying order. Nonetheless, Aureon focuses its Petition on arguments it already made. Most notably, notwithstanding Aureon's claim to the contrary, in the Access Arbitrage Order, we fully considered and rejected its recommendations to ban access stimulation or to allow IXCs to charge users of access-stimulating services for the access costs associated with those services.

19. We recognize that we are required to “ `consider responsible alternatives to [our] chosen policy and to give a reasoned explanation for [our] rejection of such alternatives.' ” At the same time, while “an agency ordinarily must consider less restrictive alternatives and should explain its reasons for failing to adopt such alternatives,” we are required only to provide an explanation of our decision to reject any particular proposal.

20. With respect to Aureon's proposal to ban access stimulation, in the Access Arbitrage Order, we recognized Aureon's proposal and found, as the Commission concluded in the USF/ICC Transformation Order, that a ban would be an overbroad solution. As we explained, we therefore opted to “prescribe narrowly focused conditions for providers engaged in access stimulation” that strike an “appropriate balance between addressing access stimulation and the use of intermediate access providers while not affecting those LECs that are not engaged in access stimulation.” Thus, we fully considered and rejected Aureon's proposal.

21. With respect to Aureon's proposal to require IXCs to charge access-stimulation service customers the cost of related access charges, we explicitly addressed Aureon's previous, more specific proposal that we allow IXCs to charge a penny a minute to their customers making calls to access-stimulating LECs. We gave two reasons for rejecting Aureon's proposal on the merits, explaining that: (1) There was no evidence to suggest that access-stimulation calls cost a penny per minute, “so the proposal would simply trade one form of inefficiency for another;” and (2) “such an overbroad proposal . . . would confuse consumers and unnecessarily spill into, and potentially affect, the operation of the more-competitive wireless marketplace.” Aureon now claims that it never intended to propose charging customers “a specific price for the call, such as a penny” and insists that its intent was simply to suggest charging customers “something other than zero for a call that has been falsely represented in the past as being `free.'” Putting aside Aureon's attempt to recast its proposal, Aureon fails to persuade us that our consideration of the concept of IXCs charging end users for placing calls to access-stimulating LECs was insufficient.

22. We also fully considered and rejected another request that Aureon now repeats: That we not modify its section 214 certification. As we explained when we rejected this request, Aureon provided no supporting detail for its claim that modifying its section 214 authorization would negatively affect its ability to provide services in rural areas and to maintain its network. We further explained that “[o]ur decision to permit traffic being delivered to an access-stimulating LEC to be routed around a CEA tandem does not affect traffic being delivered to non-access-stimulating LECs that remain on the CEA network, and will not impact Aureon's ability to serve rural areas, contrary to Aureon's concern.” As these arguments have been “fully considered and rejected by the Commission,” they are procedurally improper here.

23. Aureon also repeats various other arguments that we addressed in the Access Arbitrage Order. For example, Aureon again claims that our access arbitrage rules shift costs to “a few thousand rural customers paying for access stimulation services that they never use, as the LECs recover their costs from their rural end users.” The claim is incorrect. As we explained in the Access Arbitrage Order, our new rules “shift the recovery of costs associated with the delivery of traffic to an access-stimulating LEC's end office from IXCs to the LEC.” And, under our new rules, carriers may respond to the shifting financial responsibilities “in a number of ways—including in combination—such as by changing end-user rates,” selecting less costly intermediate access providers or traffic routes, or seeking out other revenue sources, such as “through an advertising-supported approach to offering free services or services provided at less than cost.”

24. Aureon also rehashes its previous argument that under the new rules, large IXCs “could engage in arbitrage with respect to wholesale IXC transport and transit service.” In the Access Arbitrage Order, we found “no merit” to these same arguments because Aureon failed to explain how IXCs would accomplish such arbitrage. As we explained, our new rules did not shift arbitrage opportunities to IXCs or to any other providers.

25. Aureon also repeats the argument that our new rules could lead to call completion problems. In the Access Arbitrage Order, we concluded that an intermediate access provider may consider its call completion duties satisfied “once it has delivered the call to the tandem designated by the access-stimulating LEC.” Finally, Aureon again raises concerns about the “demise” of its network without access-stimulating LECs (one that it does not attempt to square with its request to outlaw access stimulation). Aureon raised these concerns during the rulemaking proceeding and we dismissed them because Aureon provided no data to support its claims.

26. Apparently recognizing this weakness in its Petition, Aureon contends that we should exercise our discretion and consider its Petition even though it repeats arguments we have already rejected. Yet, to support this contention, Aureon relies on three Commission orders denying other petitions for reconsideration. We find none of the proffered orders persuasive. The first order is simply inapposite—it does not even discuss review of repetitious petitions for reconsideration. The second order denies the petitions at issue in part because they were repetitive. In the third order, the Commission considers a repetitious petition for reconsideration, as Aureon would have us do here, but ultimately denies the petition because the petitioner failed to demonstrate any material error or omission or to raise any new facts, and found that the new arguments were unpersuasive. Thus, the orders Aureon cites do little to advance its cause. Certainly nothing in those orders requires us to review, much less grant, Aureon's Petition to the extent it merely repeats arguments it made in the underlying proceeding.

27. The New Arguments That Aureon Now Makes Should Have Been Known to It. Aureon complains for the first time about possible costs it may incur related to compliance with the switch in financial responsibility for tandem switching and transport services provided to access arbitrage customers, claiming that it would be an “administrative nightmare” if LECs change their status from access-stimulating LECs to non-access-stimulating LECs—which it contends incorrectly could take place monthly, 47 CFR 61.3(bbb)(2)-(3). Aureon also predicts an increase in billing disputes related to the Order. Aureon failed to raise these challenges in its various filings in the underlying proceeding, and it has provided no explanation why it could not have raised these issues before the Access Arbitrage Order was adopted.

28. Also for the first time, Aureon provides data purporting to illustrate that “Aureon would be prevented from charging a cost-based rate above the competitive LEC benchmark rate if access stimulation traffic were removed from the CEA network.” Certainly, Aureon should have been able to provide such illustrative data during the rulemaking proceeding. The application of the competitive LEC benchmark rule is not new, and Aureon was on notice of our proposed course of action with respect to access stimulation. Aureon has provided no explanation as to why it could not have provided this financial data during the rulemaking proceeding (nor, again, how its argument here squares with its request to outlaw access arbitrage), 47 CFR 1.429(l); 47 U.S.C. 405.

29. Aureon Seeks Reconsideration Based on Issues Beyond the Scope of This Proceeding. We also find that Aureon's Petition is procedurally deficient and subject to dismissal insofar as it requests that on reconsideration we address the rates that Aureon can charge as a CEA provider. Aureon complains about “rate differentials,” the Commission's “accounting directive” for CEA service, and the rate caps that have applied to Aureon since before the Access Arbitrage Order. Aureon also asserts that the reforms adopted in the Access Arbitrage Order will prevent it from recovering its costs—because of the preexisting cap on its rates—and complains that those same reforms “do[ ] not allow Aureon to earn the authorized rate of return or to charge just and reasonable rates.” We dismiss these arguments because they are outside the scope of the proceeding. As we explained in the Access Arbitrage Order, the rules we adopted in that Order “do not affect the rates charged for tandem switching and transport.” Likewise, nothing in the Access Arbitrage Order affects the method that Aureon must use to calculate its rates. Indeed, the issue of Aureon's rates and the proper method of calculating those rates are the subject of two entirely separate proceedings.

30. Although Aureon's Petition warrants dismissal on procedural grounds alone, we also find that the Petition fails on the merits. This failure provides an alternative and independent basis for rejecting the Petition. Contrary to Aureon's claims, the rules we adopted in the Access Arbitrage Order accomplish our goal of removing the financial incentives to engage in access arbitrage and reducing the use of intercarrier compensation to provide implicit subsidies to services offered by access-stimulating LECs. It was also reasonable for us to find that the rules we adopted are more targeted and more effective than a blanket ban on access stimulation or a rule allowing IXCs to charge consumers more for calls to access-stimulation services. Finally, our decision to modify Aureon's section 214 authorization was supported by the record and furthers our goal of shifting financial responsibility for access stimulation to the access-stimulating LEC.

31. Our Action Removes Financial Incentives to Engage in Access Arbitrage. In both the Access Arbitrage Notice and the Access Arbitrage Order, the Commission was clear that the fundamental goal in this proceeding was to remove financial incentives to engage in access arbitrage. In the USF/ICC Transformation Order, the Commission successfully sought to reduce the cost of access arbitrage by defining access stimulation and by capping the terminating end office rates charged by access-stimulating competitive LECs. The Commission also recognized that the transition of all terminating end office charges to bill-and-keep would further reduce the cost of access arbitrage to IXCs and their customers. In the Access Arbitrage Order, we found that the Commission's existing rules worked well and reduced the annual cost of access arbitrage to IXCs, and by extension their customers, from between $330 million to $440 million annually to between $60 million to $80 million annually. We explained that, as terminating end office rates fell, those charges no longer drove access-stimulation schemes. Despite this history, Aureon seeks to attack our decisions in the Access Arbitrage Order, first by arguing that “years of experience have shown that [reforming] the intercarrier compensation approach simply does not work” to curb access arbitrage. This argument ignores the evidence presented in the Access Arbitrage Order demonstrating that the rules adopted in the USF/ICC Transformation Order substantially reduced access arbitrage.

32. Aureon also ignores the very real benefit of the rules we adopted in the Access Arbitrage Order. By making access-stimulating LECs financially responsible for the rates charged to terminate traffic to their end offices or functional equivalents, we now prevent access-stimulating LECs from passing the costs of their services—or the services of their high-volume calling provider partners—on to IXCs and, by extension, the public at large. This may, in turn, cause “users to cease using those services, and cause access-stimulating LECs or their [high-volume calling provider partners] to terminate the calling services altogether.” This outcome is more than just hypothetical. While most of the rules have only been in effect since November 2019, we have already received letters from several entities stating that they are exiting the access stimulation business. Aureon neither acknowledges these developments nor provides any new evidence demonstrating that IXCs are, or even could, engage in the type of hypothetical arbitrage it theorizes about. Aureon argues that our new rules are ineffective at reducing access stimulation, citing the behavior of two companies that Aureon believes are taking steps to evade our new rules. We stand ready to address and prevent any efforts to circumvent our new rules. Indeed, the Wireline Competition Bureau has already initiated one such investigation. However, efforts to circumvent our rules do not undermine our reasonable predictive judgment that the rules adopted in the Access Arbitrage Order will help eliminate “the financial incentives to engage in access arbitrage,” a prediction confirmed by the number of companies that have notified us that they have left the access stimulation business. In sum, Aureon's Petition does not support its claim that our new rules work at cross-purposes with our goal.

33. Our Actions Address the Use of Intercarrier Compensation to Provide Implicit Subsidies to Services Offered by Access-Stimulating LECs. As we explained in the Access Arbitrage Order and Aureon has now acknowledged, prior to the Access Arbitrage Order, “it was the IXCs' customers that subsidized the access costs incurred for a small subset of customers to use an access stimulating service.” Under our new rules, a significant benefit of requiring access-stimulating LECs to pay for tandem switching and transport is that doing so ends the use of intercarrier compensation to implicitly subsidize access stimulation services. Yet, Aureon claims that our access arbitrage rules shift costs to “a few thousand rural customers paying for access stimulation services that they never use, as the LECs recover their costs from their rural end users.” This argument makes a number of unsupported assumptions. First, it assumes that access-stimulation schemes will continue to operate out of rural areas, despite the loss of the financial incentives in the form of intercarrier compensation revenue that led them there in the first place. Second, it assumes that access-stimulating LECs have customers not engaged in access-stimulation schemes and that those customers would remain customers should they face higher prices. Finally, it assumes that access-stimulating LECs are charging or will charge their non-access-stimulation customers more to cover their new costs and fails to consider the possibility that access-stimulating LECs will instead pass tandem switching and transport charges through to the high-volume calling service providers that cause the LECs to incur those costs. The latter possibility properly aligns financial incentives by shifting costs to the cost causers, which is what we set out to accomplish. And, despite significant evidence that access-stimulating LECs have already exited the access-stimulation business, we have no evidence that our rules have led to an increase in rural rates and we have no evidence that future departures from the access-stimulation business will cause such increases.

34. There Is No Reason to Think that the Access Arbitrage Order Will Have a Negative Impact on the Commission's Goal of Fostering Competition in Rural Areas. Aureon further argues that amending its section 214 authorization to exempt traffic delivered to access-stimulating LECs from the mandatory use provision of that authorization is inconsistent with a goal of that section 214 authorization: Encouraging long distance competition in rural areas. Aureon does not explain how modification of its section 214 authorization to eliminate the mandatory use requirement for traffic delivered to access-stimulating LECs will decrease IXC competition. Rather, Aureon suggests that loss of access-stimulation traffic will lead to the “demise” of its network, which it argues will have a deleterious impact on competition in rural areas. Yet, in its Petition, Aureon does not explain why it thinks the loss of access-stimulation traffic will lead to its demise, nor does it attempt to reconcile the inconsistency between its advocacy for an order on reconsideration that prohibits access stimulation and its apparent claim that loss of access-stimulation traffic will cause the Aureon network to collapse and eliminate long distance competition in rural Iowa. Furthermore, there is no evidence that access-stimulation traffic existed when Aureon received its section 214 authorization. Indeed, the section 214 authorization was granted based on the Commission's understanding that the CEA network would be supported primarily by intrastate traffic, not interstate traffic. Aureon also fails to acknowledge that another CEA provider, Minnesota Independent Equal Access Corporation, does not have a mandatory use requirement in its authorization and that SDN has not challenged the modification of its section 214 certification in the Access Arbitrage Order. Both facts suggest that the mandatory use requirement is not necessary for the successful operation of a CEA network.

35. We continue to find no merit to Aureon's position that either its proposed ban on access stimulation or its proposal to allow IXCs to charge end users for some of the access costs required to complete a call to a high-volume calling service would be better than the more nuanced approach we took in the Access Arbitrage Order .

36. In its Petition, Aureon argues that by failing to ban access stimulation, the new rules will require it to “maintain large and potentially unused capacity to accommodate potential `whipsawing' of traffic between networks.” Aureon fails to explain, however, how these issues stem from our access arbitrage rules and in its Petition provides no data—such as forecasted capacity requirements or the cost to Aureon of engineering its network to accommodate the alleged capacity requirements—to support its claims. We fail to see how Aureon's allegations about its capacity issues are attributable to the new access arbitrage rules. If anything, the issue of capacity on Aureon's network likely predates the Access Arbitrage Order .

37. We are also unpersuaded by Aureon's argument that banning access stimulation would be preferable to our current rules because under the new rules, rural end users will pay for access stimulation services, even if those consumers don't use the services. We disagree with Aureon's conclusion. Aureon does not attempt to square these unsupported assertions with the fundamental premise of the rules adopted in the Access Arbitrage Order: To make the access-stimulating LEC—not rural end users—financially responsible for the rates charged for stimulated traffic terminated to the LEC's end office or functional equivalent. We agree with AT&T that, contrary to Aureon's assertions, “the bulk of the access termination costs will be borne by access stimulation LECs, the [free calling partners] or their customers—not by rural customers who do not use the services.”

38. Moreover, we agree with AT&T and Sprint that Aureon's proposed “ban” would be unlikely to be effective. Aureon proposed to define “High Call Volume Service” as a high call volume operation marketed as free to the end user and to ban services that met that definition. Aureon also proposed a blanket prohibition on carrying traffic associated with a high-volume calling operation “with a rebuttable trigger of 100,000 minutes per month to a single telephone number whereby calls to that number would be prohibited.” Aureon does not explain how we would effectively monitor whether a high-volume calling service is marketed as free to end users, however. Nor does Aureon explain how we would enforce a prohibition on calls to a single number that exceed 100,000 minutes in a given month. If the Commission could not effectively identify whether a carrier is providing service to a “high call volume operation,” it would not be able to enforce the proposed prohibition against carrying traffic for such providers. In addition, carriers could circumvent Aureon's proposed minutes-of-use trigger by operating enough telephone numbers for a particular access stimulation scheme to keep the call volumes for a single telephone number below the 100,000-minute threshold, and if they did so, it appears that Aureon would have the same issue with managing capacity requirements and call completion. Aureon did not grapple with these issues in its comments during the rulemaking proceeding and makes no effort to do so in its Petition or its Reply.

39. Relatedly, Aureon fails to provide any explanation as to how or why a ban would be less restrictive than the narrowly focused rules we adopted. Confusingly, Aureon asserts that “[a]ll evidence points to Aureon's proposed [ban] as satisfying both the FCC's existing policy . . . and being less restrictive and burdensome because no sea-change would be required with regard to how . . . the telecommunications industry operated” prior to the adoption of our new access arbitrage rules. But, surely a complete ban on access stimulation (if it were successful) would result in less traffic being delivered from IXCs to CEA providers, not “higher traffic volumes” as Aureon suggests. Aureon likewise provides no information about the alleged “sea-change” wrought by our new rules beyond saying that it has always been the norm for IXCs to pay access charges. Simply because “it has always been done that way” does not mean that the Commission cannot change course. And a change in course was warranted here to reduce the LECs' incentives to engage in access stimulation.

40. Aureon also fails to substantively support its claim that our new rules create an “administrative nightmare.” Aureon complains that it will incur billing costs because LECs could become access stimulators one month and then cease to be access stimulators the next, resulting in the potential for billing disputes. Aureon provides no data to support its concerns about billing costs. Nor does it provide any data about how many LECs would change their status monthly, or even how many access-stimulating LECs currently subtend its network. Moreover, Aureon fails to address the fact that our rules prevent access-stimulating LECs not engaged in revenue sharing from changing their status more than once every six months, 47 CFR 61.3(bbb)(2)-(3). In addition, Aureon does not explain why the reforms adopted in the Access Arbitrage Order would lead to increased billing disputes.

41. Aureon claims that the rules requiring access-stimulating LECs to pay Aureon for all terminating CEA services are “overly broad” because the CEA traffic will be “some mix of traditional traffic and access stimulation traffic.” Aureon's concerns are misplaced. We clearly and intentionally made sure that our rules covered both “traditional” and access-stimulation traffic, shifting “financial responsibility for all tandem switching and transport services to access-stimulating LECs.” As a result, it should make no difference to Aureon whether the traffic it delivers to an access-stimulating LEC consists entirely of access-stimulation traffic, non-access stimulation traffic, or a mix of both.

42. Finally, Aureon argues that the Commission has, “in analogous contexts, determined that it was not overly broad to prohibit certain types of behaviors.” This argument falls far short of justifying Aureon's requested reconsideration. Simply because the Commission has chosen to ban certain unrelated practices in unrelated proceedings does not mean that we were bound to ban a particular practice in this particular proceeding.

43. Aureon's proposal that we allow IXCs to pass through the costs of access stimulation to customers calling access-stimulating LECs also fails on the merits. Aureon argues that allowing pass-through charges to the users of high-volume calling services sends the correct pricing signals whereas, as Aureon implies, the rules adopted in the Access Arbitrage Order do not. But Aureon still does not provide any data about what the pass-through cost could or should be, it does not explain why it provided no such data in the underlying proceeding, nor does it explain how we could reach a decision about what would be an appropriate charge without such data. Our approach, which places financial responsibility on the access-stimulating LECs, is simpler to administer and avoids the difficulty of attempting to calculate a pass-through charge absent relevant data, which, as we recognized in the Access Arbitrage Order, is lacking.

44. In any event, contrary to Aureon's assertion, consumers are “provided with more-accurate pricing signals for high-volume calling services” under our new rules. In the Access Arbitrage Order, we moved the cost of terminating access charges for stimulated traffic from IXCs to access-stimulating LECs, thereby aligning the cost of using high-volume calling services closer to the actual users of those services. As AT&T aptly explains, access-stimulating LECs and high-volume calling service providers now “have a choice to either absorb the terminating access cost themselves, or pass them along to the users of free calling services.” If access-stimulating LECs decide to pass those costs through to the users of those calling services, those services will no longer be free. But, in either case, end users will receive more accurate indications of the price of the services they use. Our approach is also more consistent with cost causation principles because it aligns the “costs associated with traffic destined for `free' conference call services to the carrier directly serving the free conference call company rather than to all the carriers that deliver conference call traffic that originates all over the world.” We agree with Sprint that “[a]ligning costs this way . . . requir[es] the final carrier—the cost causer access stimulating LEC (and ultimately its customers, the conference call company)—to bear the costs of decisions they make as to where to place the switch that is serving the conference call company.” Thus, we agree with commenters that Aureon has not shown that requiring IXCs to pass through costs to end users would be more effective at eliminating access arbitrage than our chosen approach. We also reaffirm our conclusion that the rules we adopted in the Access Arbitrage Order provide customers with more accurate pricing signals than they had before our Order .

45. We also deny on the merits Aureon's request that we reconsider the modifications to Aureon's and SDN's section 214 authorizations that now explicitly permit IXCs terminating traffic at an access-stimulating LEC that subtends either of their CEA tandems to use routes other than those CEA tandems to reach the access-stimulating LEC. Aureon raises several objections, but none have merit.

46. To begin with, the reforms adopted in the Order do not prohibit any access-stimulating LEC from choosing Aureon or SDN as its intermediate carrier and paying them to provide service. Second, Aureon argues that we did not consider how changing the mandatory use policy would affect competition for long distance services. Although it is not clear, Aureon's argument seems to be based on a prediction that a reduction of access-stimulation traffic on the Aureon and SDN networks as a result of the Access Arbitrage Order will lead to Aureon's demise. Relatedly, Aureon complains that it will be harmed because it relied on the grant of its section 214 authorization in building and maintaining its network. These arguments make little sense for a number of reasons. First, the Order does not eliminate the mandatory use requirements as they may apply to traffic terminating at non-access-stimulating LECs. The mandatory use requirements continue to apply to IXCs delivering traffic to dozens of non-access-stimulating LECs that subtend Aureon's and SDN's tandems. Third, although we previously dismissed Aureon's concerns about the financial impact on Aureon in the Arbitrage Order because Aureon provided no data to support its claims, Aureon once again failed to provide data supporting its concerns in the Petition.

47. Aureon raised concerns about the “demise” of its network in the underlying rulemaking, and we dismissed those concerns because Aureon provided no data to support its concerns. AT&T points out that merely repeating those arguments without “put[ting] forward any supporting data” does not provide a basis for reconsideration. While Aureon did provide some data in its Reply, it uses the data to spin a tale about the hypothetical removal of access-stimulation traffic. Such speculation cannot justify Aureon's request for reconsideration. Aureon provides three tables showing select information from its most recent tariff filing. It manipulates these tables to show revenue shortfalls if access-stimulation traffic were to leave its network. However, there is evidence in the record that a significant amount of traffic already bypasses Aureon's CEA tandem. In addition, Aureon bases its calculations on data provided by AT&T in a different proceeding, using AT&T's data to calculate the percentage of revenues Aureon may lose in its hypothetical. But Aureon never confirms whether AT&T's data is correct. So it is difficult to determine, on the basis of the data submitted, the actual, verifiable effect of the Access Arbitrage Order on Aureon's network. Furthermore, while Aureon appears to claim that the Access Arbitrage Order may lead to its demise by taking access-stimulation traffic off its network, Aureon does not even attempt to square that claim with its argument that access stimulation should be banned. If Aureon's proposed ban were successful, Aureon would also stop carrying access stimulation traffic, which would have the same financial impact that Aureon alleges the Access Arbitrage Order will have. As Verizon points out, banning access stimulation “would likely cause the same, or even greater, reduction in traffic on CEA providers' networks” as the section 214 modifications.

48. Next, Aureon claims that the Commission “authorized the mandatory use policy to . . . bring advanced services to rural areas” and therefore its mandatory use authority should not be replaced. Aureon is not able to offer support for this claim because the Aureon Section 214 Order says nothing about advanced services, which was not a commonly used term when the then-Common Carrier Bureau adopted that Order in the 1980s. Instead, the Common Carrier Bureau found that the mandatory use policy was justified by the revenues that would be generated by requiring Northwestern Bell to use the CEA network for intrastate, intraLATA toll calls in Iowa. And the Iowa Supreme Court relied on the same justification when it upheld the Iowa Utilities Board's authorization for the CEA network. We also reject as a reason for reconsideration Aureon's assertion that our modification to the mandatory use policy is contrary to the Commission's original intent in establishing the mandatory use policy—to ensure that tariffed CEA rates would remain affordable for AT&T's smaller IXC competitors. To the contrary, IXCs carrying terminating access-stimulation traffic should be paying less now because they will not be paying tandem switching and transport charges for access-stimulation traffic. Moreover, Aureon also fails to acknowledge that CEAs were created to facilitate rural customers' ability to originate calls through the long-distance carrier of their choice. Our changes to Aureon's section 214 authorization should not have any effect on its ability to provide centralized equal access service.

49. Aureon goes on to claim that we erred in modifying its section 214 authorization because the mandatory use provisions were in the public interest. While we acknowledge that the then-Common Carrier Bureau determined that those provisions were in the public interest in 1988, we also recognize that, at the time, the Common Carrier Bureau and others envisioned that the majority of the traffic traversing the CEA network would be intrastate . As we explained in the Access Arbitrage Order, however, “[a]ccess stimulation has upended the original projected interstate-to-intrastate traffic ratios carried by the CEA networks.” SDN and Aureon ended up acting as a price umbrella that allowed access-stimulating LECs and the intermediate access providers with which they partnered to overcharge for transport, as long as they offered a rate that was slightly under the CEA rate. And, “because the Commission's rules disrupt[ed] accurate price signals, tandem switching and transport providers for access stimulation [had] no economic incentives to meaningfully compete on price.” The result was that “ ‘AT&T and other carriers routinely discover that carriers located in remote areas with long transport distances and high transport rates enter into arrangements with high volume service providers . . . for the sole purpose of extracting inflated intercarrier compensation rates due to the distance and volume of traffic.’ ” Based on these changed circumstances, we find that we properly determined “that the public interest will be served by changing any mandatory use requirement for traffic bound to access-stimulating LECs to be voluntary usage” and “that access stimulation presents a reasonable circumstance for departing from the mandatory use policy.” Thus, although the mandatory use policy requiring IXCs to use SDN and Aureon for traffic terminating at participating telephone companies may have been in the public interest in 1988, it is not in the public interest today with respect to traffic terminating at access-stimulating LECs.

50. Aureon also claims that the Commission should have used a “less restrictive and less burdensome” measure when it modified the section 214 authorizations. We disagree. Rather than eliminating the mandatory use provisions altogether, an option that we considered, we modified them only with respect to traffic terminating at access-stimulating LECs and only because doing so was necessary to effectuate our other access stimulation rules. As such, we adopted an approach that is narrowly tailored and well suited to the problem of the price umbrellas created by mandatory use that access-stimulating intermediate providers and their partners were using to their benefit. In the Access Arbitrage Order . we found that the “vast majority” of access-stimulation traffic was routed to LECs that subtend Aureon and SDN. Given that finding, we decided to modify Aureon's and SDN's section 214 authorizations to enable IXCs to use whatever intermediate access provider an access-stimulating LEC that otherwise subtends Aureon or SDN chooses. We reasoned that doing so will allow IXCs to choose more efficient and cost-effective routing options—such as direct connections—to reach access-stimulating LECs. We do not see—and Aureon has not suggested—a “less restrictive” mechanism for achieving our goal.

51. Finally, Aureon's assertions regarding the importance of the mandatory use provision are belied by information in the record indicating that traffic often bypasses its network. Thus, we find no merit in Aureon's request that we reconsider our decision to modify its section 214 authorization.

52. Paperwork Reduction Act Analysis. This Order on Reconsideration does not contain any new or modified information collection requirements subject to the Paperwork Reduction Act of 1995, Public Law 104-13. Thus, it does not contain any new or modified information collection burden for small business concerns with fewer than 25 employees, pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4).

53. Congressional Review Act. The Commission will not send a copy of this Order on Reconsideration to Congress and the Government Accountability Office pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A), because no rule was adopted or amended.

54. Regulatory Flexibility Act Analysis. In the Access Arbitrage Order, the Commission provided a Final Regulatory Flexibility Analysis pursuant to the Regulatory Flexibility Act of 1980, as amended (RFA). We received no petitions for reconsideration of that Final Regulatory Flexibility Analysis. In this present Order on Reconsideration, the Commission promulgates no additional final rules. Our present action is, therefore, not an RFA matter.

55. Accordingly, it is ordered that, pursuant to sections 1, 2, 4(i), 4(j), 201, 214, 218-220, 251, 252, 403 and 405 of the Communications Act of 1934, as amended, 47 U.S.C. 151, 152, 154(i), 154(j), 201, 214, 218-220, 251, 252, 403, 405, and §§ 1.47(h), 1.429, 63.10 and 64.1195 of the Commission's rules, 47 CFR 1.47(h), 1.429, 63.10 and 64.1195, this Order on Reconsideration is adopted .

56. It is further ordered that the Petition for Reconsideration filed by Iowa Network Services, Inc. d/b/a Aureon Network Services, is dismissed and, on alternate and independent grounds, it is denied .

57. It is further ordered that, pursuant to § 1.103 of the Commission's rules, 47 CFR 1.103, this Order on Reconsideration shall be effective upon release.