I. Substantive Discussion; Addition of New Departmental Component

The Director of OGE (Director) is authorized by 18 U.S.C. 207(h) to designate distinct and separate departmental or agency components in the executive branch for purposes of 18 U.S.C. 207(c), the one-year post-employment conflict of interest restriction for senior employees. Under 18 U.S.C. 207(h)(2), component designations do not apply to persons employed at a rate of pay specified in or fixed according to subchapter II of 5 U.S.C. chapter 53 (the Executive Schedule). Component designations are listed in appendix B to 5 CFR part 2641.

The representational bar of 18 U.S.C. 207(c) usually extends to the whole of any department or agency in which a former senior employee served in any capacity during the year prior to termination from a senior employee position. However, 18 U.S.C. 207(h) provides that whenever the Director determines that an agency or bureau within a department or agency in the executive branch exercises functions which are distinct and separate from the remaining functions of the department or agency and there exists no potential for use of undue influence or unfair advantage based on past Government service, the Director shall by rule designate such agency or bureau as a separate component of that department or agency. As a result, a former senior employee who served in a designated component of a parent department or agency is barred from communicating to or making an appearance before any employee of that component, but is not barred as to any employee of the parent, of another designated component, or of any other agency or bureau of the parent that has not been designated. Likewise, a former senior employee who served in a “parent” department or agency is not barred by 18 U.S.C. 207(c) from making communications to or appearances before any employees of any designated component of that parent, but is barred as to employees of that parent or of other components that have not been separately designated.

The Director regularly reviews the component designations listed in appendix B to part 2641, and in consultation with the department or agency concerned, makes such additions and deletions as are necessary. Specifically, the Director “shall, by rule, make or revoke a component designation after considering the recommendation of the designated agency ethics official.” 5 CFR 2641.302(e)(3). Before designating an agency component as distinct and separate for purposes of 18 U.S.C. 207(c), the Director must find that there exists no potential for use of undue influence or unfair advantage based on past Government service, and that the component is an agency or bureau within a parent agency that exercises functions which are distinct and separate from the functions of the parent agency and from the functions of other components of that parent. 5 CFR 2641.302(c).

Pursuant to the procedures prescribed in 5 CFR 2641.302(e), one agency has forwarded a written request to OGE to amend its listing in appendix B to part 2641. After carefully reviewing the requested change in light of the criteria in 18 U.S.C. 207(h) as implemented in 5 CFR 2641.302(c), OGE is proposing to grant this request and amend appendix B as explained below.

The Department of Defense (DoD) has requested that OGE designate the Defense Advanced Research Projects Agency (DARPA) in appendix B to part 2641 as a separate component of DoD for purposes of 18 U.S.C. 207(c) because it exercises functions that are distinct and separate from the functions of the parent agency and other components. DARPA was created under the statutory authority of the Secretary of Defense in 1958, s ee DoD Directive No. 5105.15 (Feb. 7, 1958), in response to the unforeseen launch of the world's first satellite by the Soviet Union. DARPA “serves as the research and development (R&D) organization in DoD with a primary responsibility of maintaining U.S. technological superiority over our adversaries.” See DoD Directive 5134.10 (May 7, 2013, as amended Sept. 22, 2017) (outlining DARPA's roles and responsibilities). Directive 5134.10 provides independent authority for DARPA to carry out its uniquely-focused mission using its imagination and innovativeness to project what capabilities the military might want in the future, and sponsor high-risk, high payoff research to deliver those capabilities. DARPA has special hiring authorities and separate and distinct contracting authorities that help it exercise this mission.

DARPA is a small component, both in absolute terms and in relative terms as compared to the DoD as a whole. DARPA currently has about 220 employees, while the DoD civilian workforce is approximately 750,000 individuals and the entirety of DoD has almost 3 million individuals. Although the Director of DARPA reports to the DoD Undersecretary of Defense for Research and Engineering, the Director of DARPA is delegated broad authority and responsibility to act independently and with minimal supervision in carrying out the organization's mission and directing its research strategy and execution. Directive 5134.10 delegates to the Director of DARPA the fiscal, contracting, and acquisition authority necessary to carry out the organization's responsibilities, as well as authority to communicate directly with other domestic and foreign entities. See Directive 5134.10, paragraph 7. DARPA has a separate and distinct budget, and conducts its budgeting process independently of the Office of the Secretary of Defense or any DoD component, including decisions regarding which programs to fund that support the development of breakthrough technologies and capabilities for national security. DARPA's budget independence demonstrates that it does not exercise significant responsibilities that cut across organizational lines within DoD.

According to DoD, designating DARPA as a separate component will not create the potential for undue influence or unfair advantage based on past government service. DARPA independently determines what R&D projects to pursue, and those projects are separate and unique from the rest of DoD and do not cut across organizational lines. Other DoD components do not typically get involved in DARPA's R&D work because the component's mission contemplates developing radically new technologies that do not exist at present and are not known to other DoD components. The typical senior employee who departs DARPA has worked on projects that are entirely outside of and beyond the work of the Office of the Secretary of Defense and other DoD components.

OGE is proposing to grant the request of DoD and amend the agency's listing in appendix B to part 2641 to add DARPA as a new component for purposes of 18 U.S.C. 207(c). DARPA is separate and distinct from its parent organization and other DoD components, and given the manner in which DARPA works independently from other component agencies and the general management of the DoD, there exists no potential for the use of undue influence or unfair advantage based on past Government service.

As indicated in 5 CFR 2641.302(f), a designation “shall be effective on the date the rule creating the designation is published in the Federal Register and shall be effective as to individuals who terminated senior service either before, on or after that date.” Initial designations in appendix B to part 2641 were effective as of January 1, 1991. The effective date of subsequent designations is indicated by means of parenthetical entries in appendix B. The new component designation of DARPA made in this proposed rule would be effective on the date the final rule is published in the Federal Register .

As Director of the Office of Government Ethics, I certify under the Regulatory Flexibility Act (5 U.S.C. chapter 6) that this proposed rule will not have a significant economic impact on a substantial number of small entities because it affects only Federal departments and agencies and current and former Federal employees.

The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply to this proposed rule because it does not contain information collection requirements that require the approval of the Office of Management and Budget.

For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. chapter 25, subchapter II), this proposed rule would not significantly or uniquely affect small governments and will not result in increased expenditures by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more (as adjusted for inflation) in any one year.

The proposed rule is not a major rule as defined in 5 U.S.C. chapter 8, Congressional Review of Agency Rulemaking.

Executive Orders 13563 and 12866 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select the regulatory approaches that maximize net benefits (including economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. In promulgating this proposed rule, the Office of Government Ethics has adhered to the regulatory philosophy and the applicable principles of regulation set forth in Executive Orders 12866 and 13563. This proposed rule has not been reviewed by the Office of Management and Budget under Executive Order 12866 because it is not a “significant” regulatory action for the purposes of that order.

As Director of the Office of Government Ethics, I have reviewed this proposed rule in light of section 3 of Executive Order 12988, Civil Justice Reform, and certify that it meets the applicable standards provided therein.

Accordingly, for the reasons set forth in the preamble, the Office of Government Ethics proposes to amend 5 CFR part 2641, as set forth below:

Public Participation

Interested persons are invited to participate in this rulemaking by submitting written data, views, or arguments on the Fee Study. Only comments on the Fee Study will be considered. Comments that will provide the most assistance to CBP will reference a specific portion of the Fee Study, explain the reason for any recommended change, and include data, information, or authority that support such recommended change.

CBP operates several voluntary trusted traveler programs at land, sea and air ports of entry into the United States that allow certain pre-approved travelers dedicated processing into the United States, including the Secure Electronic Network for Travelers Rapid Inspection (SENTRI) program, the Global Entry program, and the NEXUS program. As part of an effort to harmonize the fees and application procedures for these programs, CBP published a notice of proposed rulemaking (NPRM) titled “Harmonization of the Fees and Application Procedures for the Global Entry and SENTRI Programs and Other Changes” in the Federal Register (85 FR 55597) on September 9, 2020. The NPRM proposes to change the Global Entry and SENTRI application fees to a uniform amount, provide a uniform standard regarding the payment of the Global Entry and SENTRI application fees for minors, change the fee payment schedule and certain aspects of the application process for the SENTRI program, and incorporate the SENTRI program into the Department of Homeland Security (DHS) regulations. CBP will be issuing a separate Federal Register notice regarding changes to the NEXUS fee.

As part of the development of the NPRM, CBP performed a fee study entitled CBP Trusted Traveler Programs Fee Study (Fee Study) to determine the amount of the fee that is necessary to recover the costs associated with application processing for the Global Entry, SENTRI, and NEXUS programs. In the NPRM and Fee Study, CBP concluded that a uniform $120 fee is appropriate and necessary to recover a reasonable portion of costs associated with application processing for these three CBP trusted traveler programs. The NPRM summarizes the Fee Study, seeks comments on its conclusion, and states that the full Fee Study can be found in the docket of the rulemaking. However, CBP inadvertently failed to post the Fee Study to the docket at the time the NPRM was published. CBP has now posted the Fee Study to the docket at https://www.regulations.gov under docket number USCBP-2020-0035 and is re-opening the comment period to allow for comments to be submitted on that Fee Study. Comments must be received on or before December 31, 2020. CBP will not accept comments on any topic other than the Fee Study.

In the NPRM document, FR Doc. 2020-16369, beginning on page 55597 in the issue of September 9, 2020 (85 FR 55597), make the following correction in the first column:

Remove in the heading of the document “RIN 1651-AB94” and add in its place “RIN 1651-AB34.”

Title III, Part B  1 of the Energy Policy and Conservation Act, as amended (EPCA or the Act), 2 established the Energy Conservation Program for Consumer Products Other Than Automobiles. (42 U.S.C. 6291-6309) These products include direct heating equipment, the subject of this notification of proposed determination (NOPD). (42 U.S.C. 6292(a)(9))

DOE is issuing this NOPD pursuant to the statutory requirement in EPCA that not later than three years after issuance of a final determination not to amend standards, DOE must publish either a notification of determination that standards for the product do not need to be amended, or a notice of proposed rulemaking (NOPR) including new proposed energy conservation standards (proceeding to a final rule, as appropriate). (42 U.S.C. 6295(m)(3)(B))

“Direct heating equipment” is defined at 10 Code of Federal Regulations (CFR) 430.2 as vented home heating equipment and unvented home heating equipment ( i.e., “vented heaters” and “unvented heaters,” respectively). These latter terms are also defined at 10 CFR 430.2. Federal energy conservation standards at 10 CFR 430.32(i) currently exist for vented home heating equipment, but there are currently no standards for unvented home heating equipment.

For this proposed determination, DOE evaluated whether energy conservation standards should be proposed for unvented heaters. In addition, DOE analyzed vented heaters subject to the standards specified in 10 CFR 430.32(i).

For unvented home heating equipment, DOE has previously determined that unvented heaters have minimal potential for energy savings, as they are installed within a conditioned space and all waste heat will be transferred to the conditioned space. 75 FR 20112, 20130 (April 16, 2010). Further, the test procedure only includes test methods for annual energy consumption for primary electric heaters and rated output for all unvented heaters and does not include a test method or metric for energy efficiency. See 10 CFR part 430 subpart B appendix G.

For vented home heating equipment, DOE analyzed the current vented heater market and compared it to the market during the previous rulemakings. DOE found the market has shrunk since these previous rulemakings but that the available technology options and efficiency levels have not changed significantly. In those earlier rulemakings, DOE found that while some efficiency levels were technologically feasible, they were not economically justified. DOE also examined the energy use of the vented heaters considered in the previous rulemakings.

Based on the results of these analyses, as summarized and explained in section III of this document, DOE has tentatively determined that energy conservation standards for unvented heaters are not warranted due to insignificant potential energy savings. Similarly, DOE has tentatively determined that amended energy conservation standards for vented heaters are not warranted due to insignificant energy savings, and furthermore, depending on the product class, more-stringent standards for vented heaters would not be technologically feasible or economically justified. Consequently, DOE proposes to take no further action vis-à-vis the energy conservation standards for DHE at this time.

The following section briefly discusses the statutory authority underlying this proposed determination, as well as some of the historical background relevant to the establishment of energy conservation standards for unvented home heating equipment and vented home heating equipment.

EPCA, Public Law 94-163 (42 U.S.C. 6291-6317, as codified), among other things, authorizes DOE to regulate the energy efficiency of a number of consumer products and certain industrial equipment. Title III, part B of EPCA established the Energy Conservation Program for Consumer Products Other Than Automobiles, which sets forth a variety of provisions designed to improve energy efficiency. The National Appliance Energy Conservation Act of 1987 (NAECA), Public Law 100-12, amended EPCA to include DHE in the list of covered products and prescribed the initial energy conservation standards for DHE. (42 U.S.C. 6292(a)(9); 42 U.S.C. 6295(e)(3)) NAECA amendments to EPCA also directed DOE to conduct two cycles of rulemakings to determine whether to amend these standards. (42 U.S.C. 6295(e)(4))

Under EPCA, DOE's energy conservation program for covered products consists essentially of four parts: (1) Testing, (2) labeling, (3) Federal energy conservation standards, and (4) certification and enforcement procedures. Relevant provisions of the Act specifically include definitions (42 U.S.C. 6291), test procedures (42 U.S.C. 6293), labeling provisions (42 U.S.C. 6294), energy conservation standards (42 U.S.C. 6295), and the authority to require information and reports from manufacturers (42 U.S.C. 6296).

Subject to certain criteria and conditions, DOE is required to develop test procedures to measure the energy efficiency, energy use, or estimated annual operating cost of each covered product. (42 U.S.C. 6295(o)(3)(A) and 42 U.S.C. 6295(r)) Manufacturers of covered products must use the prescribed DOE test procedure as the basis for certifying to DOE that their products comply with the applicable energy conservation standards adopted under EPCA and when making representations to the public regarding the energy use or efficiency of those products. (42 U.S.C. 6293(c) and 42 U.S.C. 6295(s)) Similarly, DOE must use these test procedures to determine whether the products comply with standards adopted pursuant to EPCA. (42 U.S.C. 6295(s)) The currently applicable DOE test procedures for unvented home heating equipment and vented home heating equipment, subsets of DHE, appear at 10 CFR part 430, subpart B, appendix G (Appendix G) and appendix O (Appendix O), respectively.

Federal energy efficiency requirements for covered products established under EPCA generally supersede State laws and regulations concerning energy conservation testing, labeling, and standards. (42 U.S.C. 6297(a)-(c)) DOE may, however, grant waivers of Federal preemption in limited instances for particular State laws or regulations, in accordance with the procedures set forth under 42 U.S.C. 6297(d).

As noted previously, NAECA amended EPCA to include the initial energy conservation standards for DHE—limited to gas DHE only—which were based on annual fuel utilization efficiency (AFUE). NAECA established separate standards for “wall fan type,” “wall gravity type,” “floor,” and “room” DHE, further divided by input capacity. 3 (42 U.S.C. 6295(e)(3)) The statutory energy conservation standards for gas DHE were incorporated into the CFR in a final rule published on February 7, 1989 (February 1989 final rule) and applied to all gas vented home heating equipment manufactured beginning January 1, 1990. 54 FR 6062, 6077. The initial statutory energy conservation standards published in the February 1989 final rule are presented in Table II.1 of this document.

Pursuant to the amendments to EPCA contained in the Energy Independence and Security Act of 2007 (EISA 2007), Public Law 110-140, any final rule for new or amended energy conservation standards promulgated after July 1, 2010, is required to address standby mode and off mode energy use. (42 U.S.C. 6295(gg)(3)) Specifically, when DOE adopts a standard for a covered product after that date, it must, if justified by the criteria for adoption of standards under EPCA (42 U.S.C. 6295(o)), incorporate standby mode and off mode energy use into a single standard, or, if that is not feasible, adopt a separate standard for such energy use for that product. (42 U.S.C. 6295(gg)(3)(A)-(B)) In this analysis, DOE considers such energy use in its determination of whether energy conservation standards need to be adopted or amended.

EPCA also requires under 42 U.S.C. 6295(m), that DOE must periodically review its already established energy conservation standards for a covered product no later than six years from the issuance of a final rule establishing or amending a standard for a covered product. This six-year-lookback provision requires that DOE publish either a determination that standards do not need to be amended or a NOPR, including new proposed standards (proceeding to a final rule, as appropriate). (42 U.S.C. 6295(m)(1)) EPCA further provides that, not later than three years after the issuance of a final determination not to amend standards, DOE must publish either a notification of determination that standards for the product do not need to be amended, or a NOPR including new proposed energy conservation standards (proceeding to a final rule, as appropriate). (42 U.S.C. 6295(m)(3)(B)) DOE must make the analysis on which the determination is based publicly available and provide an opportunity for written comment. (42 U.S.C. 6295(m)(2))

A determination that amended standards are not needed must be based on consideration of whether amended standards will result in significant conservation of energy, are technologically feasible, and are cost-effective. (42 U.S.C. 6295(m)(1)(A) and 42 U.S.C. 6295(n)(2)) Additionally, any new or amended energy conservation standard prescribed by the Secretary for any type (or class) of covered product shall be designed to achieve the maximum improvement in energy efficiency which the Secretary determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) Among the factors DOE considers in evaluating whether a proposed standard level is economically justified includes whether the proposed standard at that level is cost-effective, as defined under 42 U.S.C. 6295(o)(2)(B)(i)(II). Under 42 U.S.C. 6295(o)(2)(B)(i)(II), an evaluation of cost-effectiveness requires DOE to consider savings in operating costs throughout the estimated average life of the covered products in the type (or class) compared to any increase in the price, initial charges, or maintenance expenses for the covered products that are likely to result from the standard. (42 U.S.C. 6295(n)(2) and 42 U.S.C. 6295(o)(2)(B)(i)(II))

A NOPR including new proposed standards, must be based on the criteria established under 42 U.S.C. 6295(o). (42 U.S.C. 6295(m)(1)(B)) The criteria in 42 U.S.C. 6295(o) require that standards be designed to achieve the maximum improvement in energy efficiency, which the Secretary determines is technologically feasible and economically justified, and they must result in significant conservation of energy. (42 U.S.C. 6295(o)(2)(A) and 42 U.S.C. 6295(o)(3)(B)) In deciding whether a proposed standard is economically justified, DOE must determine, after receiving public comment, whether the benefits of the standard exceed its burdens. (42 U.S.C. 6295(o)(2)(B)(i)) DOE must make this determination after receiving comments on the proposed standard, and by considering, to the greatest extent practicable, the following seven statutory factors:

(1) The economic impact of the standard on manufacturers and consumers of the products subject to the standard;

(2) The savings in operating costs throughout the estimated average life of the covered products in the type (or class) compared to any increase in the price, initial charges, or maintenance expenses for the covered products that are likely to result from the standard;

(3) The total projected amount of energy (or as applicable, water) savings likely to result directly from the standard;

(4) Any lessening of the utility or the performance of the covered products likely to result from the standard;

(5) The impact of any lessening of competition, as determined in writing by the Attorney General, that is likely to result from the standard;

(6) The need for national energy and water conservation; and

(7) Other factors the Secretary of Energy (Secretary) considers relevant.

DOE is publishing this NOPD in satisfaction of the three-year review requirement in EPCA.

As noted, DOE codified the statutory standards for gas DHE into the CFR in the February 1989 final rule. 54 FR 6062 (Feb. 7, 1989). Pursuant to the requirements in EPCA (42 U.S.C. 6295(e)(4)), DOE conducted two cycles of rulemaking for DHE to determine whether to amend these standards. DOE published a final rule concluding the first round of rulemaking on April 16, 2010 (75 FR 20112 (April 2010 final rule)), and the Department published a final rule concluding the second round on October 17, 2016 (81 FR 71325 (October 2016 final determination)).

In the April 2010 final rule, DOE prescribed the current energy conservation standards for gas vented home heating equipment manufactured on and after April 16, 2013. 75 FR 20112, 20234-20235 (April 16, 2010). These standards consolidated the input rate ranges of all gas wall gravity type vented heaters at or below 27,000 Btu/h, consolidated the input rate ranges of all gas room vented heaters at or below 20,000 Btu/h, and are set forth in DOE's regulations at 10 CFR 430.32(i)(2) and repeated in Table II.2 of this document. There are currently no standards for unvented home heating equipment.

DOE did not adopt standards for unvented heaters in the April 2010 final rule, having determined that a standard would produce little energy savings (largely due to the fact that any heat losses are dissipated directly into the conditioned space) and because of limitations in the applicable DOE test procedure. 75 FR 20112, 20130 (April 16, 2010). The unvented heaters test procedure, Appendix G, includes neither a method for measuring energy efficiency nor a descriptor for representing the efficiency of unvented heaters. Instead, Appendix G provides a method to measure and calculate the rated output for all unvented heaters and annual energy consumption of primary electric unvented heaters.

DOE established the current energy conservation standards for vented heaters in the April 2010 final rule, but the agency determined that standards more stringent than those adopted would not be economically justified. 75 FR 20112, 20217-20219 (April 16, 2010). At the next highest level of stringency, trial standard level (TSL) 3, DOE projected the fraction of consumers experiencing an increased life-cycle cost would be 19 percent for gas wall fan type vented heaters, 33 percent for gas wall gravity type vented heaters, 25 percent for gas floor vented heaters, and 20 percent for gas room vented heaters. Id. at 75 FR 20218. DOE also projected a decrease in the industry net present value (INPV) of 42.4 percent, with total conversion costs (costs for redesigning and retooling product lines not already meeting the amended standards) of roughly half of the industry value. Id. DOE also found that the industry had consolidated significantly over the prior decade due to a steady decline in shipments; the three competitors that account for nearly 100 percent of the market had survived up to that point by consolidating a variety of legacy brands and products and providing them in replacement situations; and thus, each of the three competitors, two of which are small business manufacturers, would face the prospect of significantly upgrading several low-volume product lines. Id. DOE found that for the most part, manufacturers did not have significant volume over which to spread the capital conversion costs required by TSL 3 and all higher TSLs, meaning that margins will likely be pressured unless consumers accept large increases in product price. Id. DOE projected even more harmful impacts for small business ( e.g., the typical small business manufacturer in the industry would require investment equal to 426 percent of its annual earnings before interest and taxes). Id. Concern with the potential impacts on competition and small business were also raised by the U.S. Department of Justice, Antitrust Division based on its review of the evaluated TSLs. Id. at 75 FR 20235-20236.

In the April 2010 final rule, DOE concluded that at the next higher level of stringency over that which was adopted, the benefits of energy savings, emission reductions, and consumer net present value (NPV) benefits would be outweighed by the economic burden on some consumers, the large capital conversion costs that could result in a large reduction in INPV for the manufacturers of vented heaters, and the potential for small business manufacturers of vented heaters to reduce their product offerings or to be forced to exit the market completely, thereby reducing competition in the vented heater market. Id. at 75 FR 20218-20219.

Compliance with the adopted standards ( i.e., those currently at 10 CFR 430.32(i)(2)) was required for all vented home heating equipment manufactured beginning April 16, 2013.

In the October 2016 final determination, DOE concluded that energy conservation standards for unvented heaters would result in negligible energy savings. 81 FR 71325, 71327 (Oct. 17, 2016). DOE also explained that the test procedure for unvented heaters in Appendix G, includes a calculation of annual energy consumption based on a single assignment of active mode hours for unvented heaters that are used as the primary heating source for the home. Id. at 81 FR 71328. For unvented heaters that are not used as the primary heating source for the home, there are no provisions for calculating either the energy efficiency or annual energy consumption. Id. DOE further explained that pursuant to 42 U.S.C. 6295(o)(3), DOE is prohibited from prescribing a new or amended standard for a covered consumer product if a test procedure has not been prescribed for that consumer product, and as such, DOE could not consider standards for these products at that time. Id.

In the October 2016 final determination, DOE found that few changes to the industry and product offerings had occurred since the April 2010 final rule, and, therefore, the conclusions presented in that final rule were still valid. 81 FR 71325, 71327-71328 (Oct. 17, 2016). For the October 2016 final determination, DOE reviewed the vented heater market, including product literature and product listings in the DOE Compliance Certification Management System (CCMS) database and the Air-Conditioning, Heating, and Refrigeration Institute (AHRI) product directory. 4 Id. at 81 FR 71327. DOE found that the number of models offered in each of the vented heater product classes had decreased overall since the April 2010 final rule, and the agency concluded that this finding supported the notion that the vented heater market was shrinking and that product lines were mainly maintained as replacements for existing vented heater units, and that new product lines generally were not being developed. Id.

For the October 2016 final determination DOE also examined available technologies used to improve the efficiency of vented heaters. DOE analyzed products on the market at the time through product teardowns and engaged in manufacturer interviews to obtain further information in support of its analysis. 81 FR 71325, 71327 (Oct. 17, 2016). Most of the technology options on the market and evaluated for the October 2016 final determination ( i.e., improved heat exchanger, induced draft, electronic ignition, and a two-speed blower for gas wall fan type vented heaters) were those considered as part of the vented heater rulemaking analysis for the April 2010 final rule. Id. DOE determined that the technology options available for vented heaters were likely to have limited potential for achieving energy savings. 5 Id. Furthermore, DOE concluded that the costs of technology options would likely be similar or higher than in the previous rulemaking analysis due to reduced shipments and, therefore, reduced purchasing power of vented heater manufacturers. Id. DOE also evaluated condensing technology for gas wall fan type vented heaters, which had become available after the April 2010 final rule, and, therefore, was not evaluated as part of that rulemaking. Id. DOE concluded that this technology option would not be economically justified when analyzed for the Nation as a whole due to the significant increase in initial product cost for products using this technology and the potential for severe manufacturer impacts due to the necessary capital conversion costs if an energy conservation standard were adopted at this level. Id. at 81 FR 71327-71328.

DOE acknowledged that the vented heater industry had seen further consolidation since the April 2010 final rule, with the total number of manufacturers declining from six to four. Id. at 81 FR 71328. Furthermore, according to manufacturers, 6 shipments further decreased since the April 2010 final rule, and, therefore, it would be more difficult for manufacturers to recover capital expenditures resulting from increased standards. Id. DOE acknowledged that vented heater units continue to be produced primarily as replacements and that the market is small, and expected that shipments would continue to decrease and amended standards would likely accelerate the trend of declining shipments. Id. Moreover, DOE anticipated that small business impacts resulting from amended standards could be significant, as two of the four remaining manufacturers subject to vented heater standards were small businesses. Id.

DOE concluded in the October 2016 final determination that due to the lack of advancement in the vented heater industry since the April 2010 final rule in terms of product offerings, available technology options and associated costs, and declining shipment volumes, amending the vented heater energy conservation standards would impose a substantial burden on manufacturers of vented heaters, particularly to small manufacturers. 81 FR 71325, 71328 (Oct. 17, 2016). DOE noted that it had rejected higher TSLs for vented heaters in the April 2010 final rule due to significant impacts on industry profitability, risks of accelerated industry consolidation, and the likelihood that small manufacturers would experience disproportionate impacts that could lead them to discontinue product lines or exit the market altogether, and the Department stated that the market and the manufacturers' circumstances at the time were similar to when DOE evaluated amended energy conservation standards for vented heaters for the April 2010 final rule. Id. at 81 FR 71328-71329. Accordingly, DOE concluded that amended energy conservation standards for vented heaters were not economically justified at any level above the current standard levels because benefits of more-stringent standards would not outweigh the burdens, and the Department determined not to amend the vented heater energy conservation standards. Id. at 81 FR 71329.

In the October 2016 final determination, DOE also considered whether to establish energy conservation standards for standby mode and off mode electrical energy use, noting that fossil fuel energy use in standby mode and off mode is already included in the AFUE metric and that electric standby mode and off mode energy use is small in comparison to fossil fuel energy use. Id. Because the standards for vented heaters were not amended, DOE concluded it was not required under EPCA to adopt amended standards that include standby mode and off mode energy use, and due to the relatively small potential for energy savings, DOE declined to do so. Id.

On February 26, 2019, DOE published a request for information (RFI) (February 2019 RFI) to solicit information from the public to help DOE determine whether amended standards for DHE would result in significant energy savings and whether such standards would be technologically feasible and economically justified. 84 FR 6095.

On February 14, 2020, DOE published in the Federal Register a final rule which updated the procedures, interpretations, and policies that DOE will follow in the consideration and promulgation of new or revised appliance energy conservation standards and test procedures under EPCA. 85 FR 8626; see also 10 CFR part 430, subpart C, appendix A ( i.e., “Process Rule”). The Process Rule requires DOE to conduct an early assessment, which includes publishing a notice in the Federal Register announcing that DOE is considering a rulemaking proceeding and soliciting the submission of related comments, including data and information on whether DOE should proceed with the rulemaking, including whether any new or amended rule would be cost-effective, economically justified, technologically feasible, or would result in a significant savings of energy. Section 6(a)(1) of the Process Rule. Based on the responses received to the early assessment and DOE's own analysis, DOE will then determine whether to proceed with a rulemaking for a new or amended energy conservation standard or an amended test procedure. Id. If DOE determines that a new or amended standard would not satisfy all of the applicable statutory criteria, DOE would engage in a notice and comment rulemaking to issue a determination that a new or amended standard is not warranted. Id. If DOE receives sufficient information suggesting it could justify a new or amended standard or the information received is inconclusive with regard to the statutory criteria, DOE would undertake the preliminary stages of a rulemaking to issue or amend an energy conservation standard. Section 6(a)(2) of the Process Rule. In those instances where the early assessment either suggested that a new or amended energy conservation standard might be justified or in which the information was inconclusive on this, DOE will examine the potential costs and benefits and energy savings potential of a new or amended energy conservation standard. Section 6(a)(3) of the Process Rule.

DOE will first look to the projected energy savings that are likely to result in “significant energy savings,” as required under 42 U.S.C. 6295(o)(3)(B) to ensure that DOE avoids setting a standard that “will not result in significant conservation of energy.”  7 Section 6(b)(1) of the Process Rule. To determine whether energy savings could be significant, the projected energy savings from a potential maximum technologically feasible (max-tech) standard will be evaluated against a threshold of 0.3 quadrillion Btus (quads) of site energy saved over a 30-year period. Section 6(b)(2) of the Process Rule. If the projected max-tech energy savings do not meet or exceed this threshold, those max-tech savings would then be compared to the total energy usage of the covered product to calculate a potential percentage reduction in energy usage. Section 6(b)(3) of the Process Rule. If this comparison does not yield a reduction in site energy use of at least 10 percent over a 30-year period, the analysis will end, and DOE will propose to determine that no significant energy savings would likely result from setting new or amended standards. Section 6(b)(4) of the Process Rule. If either one of the thresholds is reached, DOE will conduct analyses to ascertain whether a standard can be prescribed that produces the maximum improvement in energy efficiency that is both technologically feasible and economically justified and still constitutes significant energy savings at the level determined to be economically justified. Section 6(b)(5) of the Process Rule.

Because this rulemaking was already in progress at the time the revised Process Rule was published, DOE will apply those provisions moving forward ( i.e., rather than reinitiating the entire rulemaking process).

EPCA specifies requirements when promulgating an energy conservation standard for a covered product that has two or more subcategories. DOE must specify a different standard level for a type or class of product that has the same function or intended use, if DOE determines that products within such group: (A) Consume a different kind of energy from that consumed by other covered products within such type (or class); or (B) have a capacity or other performance-related feature which other products within such type (or class) do not have and such feature justifies a higher or lower standard. (42 U.S.C. 6295(q)(1)) In determining whether a performance-related feature justifies a different standard for a group of products, DOE must consider such factors as the utility to the consumer of the feature and other factors DOE deems appropriate. Id. Any rule prescribing such a standard must include an explanation of the basis on which such higher or lower level was established. (42 U.S.C. 6295(q)(2)) Related to the establishment of product classes, EPCA provides that the Secretary may not prescribe an amended or new standard for covered products if the Secretary finds (and publishes such finding) that interested persons have established by a preponderance of the evidence that the standard is likely to result in the unavailability in the United States in any covered product type (or class) of performance characteristics (including reliability), features, sizes, capacities, and volumes that are substantially the same as those generally available in the United States at the time of the Secretary's finding. (42 U.S.C. 6295(o)(4))

On November 1, 2018, DOE published in the Federal Register a notice of petition for rulemaking and request for comment regarding a petition for rulemaking submitted by Spire, Inc., the National Gas Supply Association, the National Propane Gas Association, the American Public Gas Association, and the American Gas Association (Gas Industry Petition). 83 FR 54883. The petition requested that DOE issue an interpretive rule stating that DOE's proposed energy conservation standards for residential furnaces and commercial water heaters would result in the unavailability of “performance characteristics” within the meaning of the EPCA ( i.e., by setting standards which can only be met by condensing combustion technology products/equipment and thereby precluding the distribution in commerce of non-condensing combustion technology products/equipment) and withdraw the proposed energy conservation standards for residential furnaces and commercial water heaters based upon such findings. 83 FR 54883, 54885 (Nov. 1, 2018).

On July 11, 2019, following consideration of the Gas Industry Petition, public comments, and other information received on the petition, DOE published in the Federal Register a notice granting in part and denying in part of the petition for rulemaking, a notice of proposed interpretative rule (NOPIR), and request for comment. 84 FR 33011 (July 2019 NOPIR). The July 2019 NOPIR granted the request for an interpretive rule, but denied the petition to withdraw the proposed rules for residential furnaces and commercial water heaters. Id. at 84 FR 33021. Specifically, the July 2019 NOPIR proposed to revise DOE's interpretation of EPCA's “features” provision in the context of condensing and non-condensing technology used in residential furnaces, commercial water heating equipment, and similarly situated appliances (where permitted by EPCA). Id. at 84 FR 33020. DOE stated that as compared to products that rely on non-condensing technology, products that use condensing technology may result in more complicated/costly installations, require physical changes to a home that impact aesthetics ( e.g., by adding new venting into the living space or decreasing closet or other storage space), and may result in some enhanced level of fuel switching. Id. DOE also acknowledged that although energy efficiency improvements may pay for themselves over time, there is a significant increase in first-cost associated with residential furnaces and commercial water heaters using condensing technology, and for consumers with difficult installation situations ( e.g., inner-city row houses) there would be the added cost of potentially extensive venting modifications. Id.

DOE proposed in the July 2019 NOPIR to interpret the statute to provide that adoption of energy conservation standards that would limit the market to natural gas and/or propane furnaces, water heaters, or similarly situated products/equipment (where permitted by EPCA) that use condensing combustion technology would result in the unavailability of a performance-related feature within the meaning of 42 U.S.C. 6295(o)(4) and 42 U.S.C. 6313(a)(6)(B)(iii)(II)(aa) and 42 U.S.C. 6316(a). 84 FR 33011, 33021 (July 11, 2019).

In the July 2019 NOPIR, DOE initially assumed that if it were to adopt an interpretation consistent with the Gas Industry Petition, it would suffice to set product/equipment classes largely based upon the key distinction of whether an appliance utilizes condensing or non-condensing combustion technology. However, a number of commenters on the proposed interpretive rule suggested that such an approach may not adequately resolve the issue at hand, as presented in the petition. Instead, these commenters suggested that the agency should focus on preservation of Category I venting, or alternatively maintaining compatibility with all types of existing venting ( i.e., Categories I, II, III, and IV). In light of these comments, DOE decided to issue a supplemental notice of proposed interpretive rule (where these comments are presented in further detail), which was published in the Federal Register on September 24, 2020 (the September 2020 SNOPIR). 85 FR 60090. In that document, DOE tentatively determined to consider a more involved class structure which turns on the maintenance of compatibility with existing venting categories, and the Department stated that it seeks further information on the potential feasibility, burdens, and other implications of implementing such a venting-compatibility approach. The comment period on the September 2020 SNOPIR was originally scheduled to end on October 26, 2020.

However, on September 25, 2020, and October 6, 2020, DOE received requests from A.O. Smith and Lennox, respectively, seeking an extension of the comment period on the September 2020 SNOPIR. On September 29, 2020, DOE received a request from the submitters of the Gas Industry Petition seeking prompt action on their petition. Balancing these competing requests, DOE published in the Federal Register on October 22, 2020 a notice extending the public comment period for submitting comments and data on the SNOPIR to November 9, 2020. 85 FR 67312. DOE will analyze the information received in comments on the September 2020 SNOPIR, and it will consider both potential venting-compatibility approaches, as well as its original proposed approach.

DOE plans to consider the comments received on the July 2019 NOPIR and the September 2020 SNOPIR, after which the Department will determine whether and how to proceed with the interpretive rule in response to the Gas Industry Petition. As necessary, DOE would then consider any required changes to its energy conservation standards for DHE, including product class designations.

DOE developed this proposed determination after a review of the DHE market, including product literature and product listings in the DOE CCMS database and the AHRI product directory. DOE also considered written comments, data, and information from interested parties that represent a variety of interests. In response to the February 2019 RFI, DOE received eight substantive comments from interested parties, which are listed in Table III.1. 8 This notice addresses issues raised by these commenters.

A parenthetical reference at the end of a comment quotation or paraphrase provides the location of the item in the public docket. 9

When evaluating and establishing new or amended energy conservation standards, DOE divides covered products into product classes by the type of energy used or by capacity or other performance-related features that justify differing standards. (42 U.S.C. 6295(q)) In making a determination whether a performance-related feature justifies a different standard, DOE must consider such factors as the utility of the feature to the consumer and other factors DOE determines are appropriate. Id. The scope of coverage is discussed in further deal in section III.A.1 of this document. The product classes for this proposed determination are discussed in further detail in section III.A.2 of this document.

This NOPD covers those products that meet the definitions of “direct heating equipment,” which is defined as vented home heating equipment and unvented home heating equipment. 10 CFR 430.2. “Home heating equipment, not including furnaces” likewise means vented home heating equipment and unvented home heating equipment. Id. The existing energy conservation standards at 10 CFR 430.32(i)(2) apply only to product classes of vented home heating equipment. There are no existing energy conservation standards for unvented home heating equipment.

Unvented heaters are those products that meet the definitions for “unvented home heating equipment,” as codified at 10 CFR 430.2. Under that provision, “Unvented home heating equipment” means a class of home heating equipment, not including furnaces, used for the purpose of furnishing heat to a space proximate to such heater directly from the heater and without duct connections and includes electric heaters and unvented gas and oil heaters. DOE further defines the various sub-types of unvented heaters at 10 CFR 430.2 as follows:

(1) “Baseboard electric heater” means an electric heater which is intended to be recessed in or surface mounted on walls at floor level, which is characterized by long, low physical dimensions, and which transfers heat by natural convection and/or radiation.

(2) “Ceiling electric heater” means an electric heater which is intended to be recessed in, surface mounted on, or hung from a ceiling, and which transfers heat by radiation and/or convection (either natural or forced).

(3) “Electric heater” means an electric appliance in which heat is generated from electrical energy and dissipated by convection and radiation and includes baseboard electric heaters, ceiling electric heaters, floor electric heaters, portable electric heaters, and wall electric heaters.

(4) “Floor electric heater” means an electric heater which is intended to be recessed in a floor, and which transfers by radiation and/or convection (either natural or forced).

(5) “Portable electric heater” means an electric heater which is intended to stand unsupported, and can be moved from place to place within a structure. It is connected to electric supply by means of a cord and plug, and transfers heat by radiation and/or convention (either natural or forced).

(6) “Primary heater” means a heating device that is the principal source of heat for a structure and includes baseboard electric heaters, ceiling electric heaters, and wall electric heaters.

(7) “Supplementary heater” means a heating device that provides heat to a space in addition to that which is supplied by a primary heater. Supplementary heaters include portable electric heaters.

(8) “Unvented gas heater” means an unvented, self-contained, free-standing, non-recessed gas-burning appliance which furnishes warm air by gravity or fan circulation.

(9) “Unvented oil heater” means an unvented, self-contained, free-standing, non-recessed oil-burning appliance which furnishes warm air by gravity or fan circulation.

(10) “Wall electric heater” means an electric heater (excluding baseboard electric heaters) which is intended to be recessed in or surface mounted on walls, which transfers heat by radiation and/or convection (either natural or forced) and which includes forced convectors, natural convectors, radiant heaters, high wall or valance heaters.

DOE received no recommended changes to the unvented heater definitions in response to its request in the February 2019 RFI.

Vented heaters are those products that meet the definitions for “vented home heating equipment,” as codified at 10 CFR 430.2. Under that provision, “vented home heating equipment” or “vented heater” means a class of home heating equipment, not including furnaces, designed to furnish warmed air to the living space of a residence, directly from the device, without duct connections (except that boots not to exceed 10 inches beyond the casing may be permitted) and includes: Vented wall furnace, vented floor furnace, and vented room heater. DOE further defines the various sub-types of vented heaters at 10 CFR 430.2 as follows:

(1) “Vented floor furnace” means a self-contained vented heater suspended from the floor of the space being heated, taking air for combustion from outside this space. The vented floor furnace supplies heated air circulated by gravity or by a fan directly into the space to be heated through openings in the casing.

(2) “Vented room heater” means a self-contained, free standing, non-recessed, vented heater for furnishing warmed air to the space in which it is installed. The vented room heater supplies heated air circulated by gravity or by a fan directly into the space to be heated through openings in the casing.

(3) “Vented wall furnace” means a self-contained vented heater complete with grilles or the equivalent, designed for incorporation in, or permanent attachment to, a wall of a residence and furnishing heated air circulated by gravity or by a fan directly into the space to be heated through openings in the casing.

AHRI recommended against revisions or additions to the vented heater definitions, stating that the definitions are appropriate as written and capture the entirety of the market. (AHRI, No. 6 at p. 2) No other comments were received regarding the definitions relevant to vented heaters.

In general, when evaluating and establishing energy conservation standards, DOE divides the covered product into classes by the type of energy used, the capacity, or other performance-related feature that justifies a different standard. (42 U.S.C. 6295(q)) In making a determination whether capacity or another performance-related feature justifies a different standard, DOE must consider such factors as the utility of the feature to the consumer and other factors DOE deems appropriate. Id.

For vented heaters, the current energy conservation standards specified in 10 CFR 430.32(i)(2) are based on 11 product classes divided by equipment type ( i.e., gas wall, gas floor, or gas room), heat circulation type ( i.e., fan type or gravity type), and input capacity. Table III.2 lists the current product classes for vented heaters.

In the February 2019 RFI, DOE requested feedback on whether changes to the current vented heater product classes should be made. AHRI stated that changes to the existing product classes and adding new product classes are not necessary. (AHRI, No. 6 at p. 2) No other comments were received on the DHE product classes.

As stated previously, in determining that amended standards are not needed, DOE must consider whether amended standards would result in significant conservation of energy, are technologically feasible, and are cost-effective as described in 42 U.S.C. 6295(o)(2)(B)(i)(II). (42 U.S.C. 6295(m)(1)(A) and 42 U.S.C. 6295(n)(2)). An evaluation of cost-effectiveness under 42 U.S.C. 6295(o)(2)(B)(i)(II) requires that DOE consider savings in operating costs throughout the estimated average life of the covered products in the type (or class) compared to any increase in the price, initial charges, or maintenance expenses for the covered products that are likely to result from the standard. (42 U.S.C. 6295(n)(2) and 42 U.S.C. 6295(o)(2)(B)(i)(II)) Before potential energy savings and cost-effectiveness of amended standards can be estimated, available and working prototype technologies with the potential to improve energy efficiency must first be evaluated. Accordingly, DOE generally starts with this technology evaluation.

In evaluating potential amendments to energy conservation standards, DOE first conducts a market and technology assessment to survey the products currently available on the market and identify technology options (including prototype technologies) that could improve the efficiency of the products or equipment that are the subject of the rulemaking. DOE then conducts a screening analysis for the technologies identified, and, as a first step, determines which of those means for improving efficiency are technologically feasible. DOE considers technologies incorporated in commercially-available products or in working prototypes to be technologically feasible. 10 CFR part 430, subpart C, appendix A, section 6(c)(3)(i).

After DOE has determined that particular technology options are technologically feasible, it further evaluates each technology option in light of the following additional screening criteria: (1) Practicability to manufacture, install, and service; (2) adverse impacts on product utility or availability; (3) adverse impacts on health or safety, and (4) whether a proprietary technology represents a unique pathway to achieving a certain efficiency level. 10 CFR part 430, subpart C, appendix A, section 6(c)(3)(ii)-(v) The technology options identified for this NOPD are essentially those technologies identified and considered for the October 2016 final determination. See sections III.B.3.b and III.B.3.c of this document for additional discussion.

When DOE proposes to adopt an amended standard for a type or class of covered product, as part of its analysis, it must determine the maximum improvement in energy efficiency or maximum reduction in energy use that is technologically feasible for such a product. (42 U.S.C. 6295(p)(1)) Accordingly, DOE determined the max-tech improvements in energy efficiency for vented heaters, using the design parameters for the most efficient products available on the market or in working prototypes. See section III.B.3.d of this document for further discussion.

In determining whether amended standards are needed, DOE must consider whether potential standards would result in significant conservation of energy. (42 U.S.C. 6295(m)(1)(A) and 42 U.S.C. 6295(n)(2)) Congress did not define the statutory term “significant conservation of energy.” DOE recently defined a significant energy savings threshold in the Process Rule. 85 FR 8626, 8705 (Feb. 14, 2020). Specifically, DOE prescribed a two-step approach that considers both a quad threshold value ( i.e., for site energy savings calculated over a 30-year period) and a percentage threshold value ( i.e., for percentage reduction in energy usage) to ascertain whether a potential standard satisfies the requirement of 42 U.S.C. 6295(o)(3)(B) that DOE may not set a standard that “will not result in significant conservation of energy.” Id.; see also section 6(b) of the Process Rule. As discussed, if neither threshold is met, the analysis will end, and DOE will propose to determine that no significant energy savings would likely result from setting new or amended standards. Section 6(b)(4) of the Process Rule.

DOE considered the energy use analysis conducted for the April 2010 final rule, the qualitative evaluation of the potential savings in the October 2016 final determination, and input from stakeholders and other sources to evaluate the current potential for significant energy conservation from amended DHE standards.

Under EPCA's six-year-lookback review provision for existing energy conservation standards at 42 U.S.C. 6295(m)(1), cost-effectiveness of potential amended standards is a relevant consideration both where DOE proposes to adopt such standards, as well as where it does not. In making a determination of whether existing energy conservation standards do not need to be amended, EPCA requires DOE to consider the cost-effectiveness of amended standards in the context of the savings in operating costs throughout the estimated average life of the covered product compared to any increase in the price of, or in the initial charges for, or maintenance expenses of, the covered product that are likely to result from a standard. (42 U.S.C. 6295(m)(1)(A) ( referencing 42 U.S.C. 6295(n)(2))) Additionally, any new or amended energy conservation standard prescribed by the Secretary for any type (or class) of covered product shall be designed to achieve the maximum improvement in energy efficiency which the Secretary determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) Cost-effectiveness is one of the factors that DOE must ultimately consider under 42 U.S.C. 6295(o)(2)(B) to support a finding of economic justification, if it is determined that amended standards are appropriate under the applicable statutory criteria. (42 U.S.C. 6295(o)(2)(B)(i)(II))

In determining cost effectiveness of potential amended standards for DHE, DOE considered the life-cycle cost (LCC) and payback period (PBP) analyses that estimate the costs and benefits to users from standards. The LCC is the sum of the initial price of equipment (including its installation) and the operating expense (including energy, maintenance, and repair expenditures) discounted over the lifetime of the equipment. The LCC analysis requires a variety of inputs, such as equipment prices, equipment energy consumption, energy prices, maintenance and repair costs, equipment lifetime, and discount rates appropriate for consumers. To account for uncertainty and variability in specific inputs ( e.g., equipment lifetime and discount rate), DOE uses a distribution of values, with probabilities attached to each value.

The PBP is the estimated amount of time (in years) it takes consumers to recover the increased purchase cost (including installation) of more-efficient equipment through lower operating costs. DOE calculates the PBP by dividing the change in total installation cost due to a more-stringent standard by the change in annual operating cost for the year that standards are assumed to take effect.

To further inform DOE's consideration of the cost-effectiveness of potential amended standards, DOE may also consider the NPV of total costs and benefits estimated as part of the national impact analysis (NIA). The inputs for determining the NPV of the total costs and benefits experienced by consumers are: (1) Total annual installed cost, (2) total annual operating costs (energy costs and repair and maintenance costs), and (3) a discount factor to calculate the present value of costs and savings.

For the determination proposed in this document, DOE considered the LCC and PBP analyses from the April 2010 final rule, as well as the evaluation in the October 2016 final determination, and information gathered on the current market and technologies.

As stated previously, pursuant to EPCA, if DOE does not issue a notification of determination that energy conservation standards for DHE do not need to be amended, DOE must issue a NOPR that includes new proposed standards. (42 U.S.C. 6295(m)(1)(B)) The new proposed standards in any such NOPR must be based on the criteria established under 42 U.S.C. 6295(o). (42 U.S.C. 6295(m)(1)(B)) The criteria in 42 U.S.C. 6295(o) require that standards be designed to achieve the maximum improvement in energy efficiency, which the Secretary determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) In deciding whether a proposed standard is economically justified, DOE must determine whether the benefits of the standard exceed its burdens. (42 U.S.C. 6295(o)(2)(B)(i)) DOE must make this determination after receiving comments on the proposed standard, and by considering, to the greatest extent practicable, the following seven statutory factors:

(1) The economic impact of the standard on manufacturers and consumers of the products subject to the standard;

(2) The savings in operating costs throughout the estimated average life of the covered products in the type (or class) compared to any increase in the price, initial charges for, or maintenance expenses of the covered products that are likely to result from the standard;

(3) The total projected amount of energy (or as applicable, water) savings likely to result directly from the standard;

(4) Any lessening of the utility or the performance of the covered products likely to result from the standard;

(5) The impact of any lessening of competition, as determined in writing by the Attorney General, that is likely to result from the standard;

(6) The need for national energy and water conservation; and

(7) Other factors the Secretary of Energy (Secretary) considers relevant. (42 U.S.C. 6295(o)(2)(B)(i)(I)-(VII))

As discussed in the October 2016 final determination, DOE found that amended standards for vented heaters would not be economically justified under the considerations of the seven factors prescribed in EPCA. 81 FR 71325, 71328-71329 (Oct. 17, 2016). For the determination proposed in this document, DOE has considered the previous evaluation of amended standards in the October 2016 final determination.

In the February 2019 RFI, DOE specifically sought comment on the definitions for unvented heaters, and generally sought comment on a number of issues related to DHE (which includes both vented and unvented home heaters). 84 FR 6095, 6098 (Feb. 26, 2019).

CA IOUs suggested that electric infrared heating technology be added to the technology options list. (CA IOUs, No. 9 at p. 1) DOE notes that this particular technology option is relevant to unvented heaters (as electric infrared heaters are not vented). However, for unvented heaters, including electric unvented heaters, any heat losses are lost to the living space in which the unit is installed. As a result, these heaters are nearly 100-percent efficient during the heating season, in that all energy consumed is converted to heat that ends up within the living space as useful heat, and as a result, there is negligible opportunity for energy savings. Therefore, DOE has tentatively determined not to analyze unvented electric heaters further. However, DOE seeks additional input on the operation of electric infrared heaters as compared to other types of electric unvented heaters, and on the comparative levels of energy consumption.

Regarding unvented gas heaters and unvented oil heaters, the Joint Advocates commented in response to the RFI that DOE should consider a standard for unvented heaters that addresses off mode energy consumption. The commenters argued that models with standing pilot lights can waste a significant amount of energy in off mode during the non-heating season. (Joint Advocates, No. 7 at p. 2)

The unvented heater test procedure, Appendix G, has provisions to calculate the rated output in Btu/h for gas and oil models. Under Appendix G, measurement of the pilot light input rate is not required for unvented heaters where the pilot light is designed to be turned off by the user when the heater is not in use and that include an instruction to turn off the unit is provided on the heater near the gas control value ( e.g., by label) by the manufacturer. For unvented heaters with a pilot light that is not designed to be turned off when not in use, or that does not include an instruction to do so, the pilot light input rate is required to be measured, but is not used in the calculation of rated output. DOE reviewed the product literature for unvented gas and oil heaters on the market and found that most models that include a standing pilot light instruct the user on how to turn the pilot light off, and, therefore, would not be required to measure the pilot light consumption under the existing test procedure. As a result, most models are not required to measure the pilot light input rate. DOE will further consider whether to propose amended test procedures for unvented home heating equipment in the ongoing evaluation of the test procedure, including whether to address the measurement of the energy consumption and energy efficiency associated with standing pilot lights. 10

In the February 2019 RFI, DOE sought comment on a number of issued related to vented heaters, which are discussed in the subsections within this section. 84 FR 6095, 6098-6106 (Feb, 26, 2019).

DOE has conducted a review of the vented heater market, including product literature and product listings in the CCMS database and AHRI product directory. DOE has tentatively concluded that the number of models offered in each of the vented heater product classes has continued to decrease overall since the October 2016 final determination, as shown in Table III.3 of this document. The model counts presented in Table III.3 of this document are counts of individual model numbers, as opposed to basic model numbers. A basic model can have multiple individual model numbers certified under it. The model counts from previous rulemakings were individual model numbers, so for consistency of comparison, the model counts for 2019 that are presented in Table III.3 of this document are also in terms of individual model number. DOE acknowledges that, although changes in model counts and shipments sometimes correlate, changes to available model counts do not necessarily indicate a change in the number of units sold. For example, a model could be taken off of the market, but more units of another model could be sold, thereby resulting in roughly the same amount of sales as before the first model was taken off the market. Shipments of vented heaters are discussed is section III.B.3.g of this document.

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Because your comment will be placed on the publicly accessible website, https://www.regulations.gov, you are solely responsible for making sure your comment does not include any sensitive or confidential information. In particular, your comment should not include sensitive personal information, such as your or anyone else's Social Security number; date of birth; driver's license number or other state identification number, or foreign country equivalent; passport number; financial account number; or credit or debit card number. You are also solely responsible for making sure your comment does not include any sensitive health information, such as medical records or other individually identifiable health information. In addition, your comment should not include any “trade secret or any commercial or financial information which . . . is privileged or confidential,”—as provided by Section 6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2)—including in particular competitively sensitive information such as costs, sales statistics, inventories, formulas, patterns, devices, manufacturing processes, or customer names.

Comments containing material for which confidential treatment is requested must be filed in paper form, must be clearly labeled “Confidential,” and must comply with FTC Rule 4.9(c). In particular, the written request for confidential treatment that accompanies the comment must include the factual and legal basis for the request, and must identify the specific portions of the comment to be withheld from the public record. See FTC Rule 4.9(c). Your comment will be kept confidential only if the FTC General Counsel grants your request in accordance with the law and the public interest. Once your comment has been posted publicly at www.regulations.gov —as legally required by FTC Rule 4.9(b)—we cannot redact or remove your comment, unless you submit a confidentiality request that meets the requirements for such treatment under FTC Rule 4.9(c), and the General Counsel grants that request.

Visit the FTC website to read this document and the news release describing it. The FTC Act and other laws that the Commission administers permit the collection of public comments to consider and use in this proceeding as appropriate. The Commission will consider all timely and responsive public comments it receives on or before February 1, 2021. For information on the Commission's privacy policy, including routine uses permitted by the Privacy Act, see https://www.ftc.gov/site-information/privacy-policy.

The Act and Rules require the parties to certain mergers and acquisitions to file notifications with the Commission and the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice (“the Assistant Attorney General”) (collectively, “the Agencies”) and to wait a specified period of time before consummating such transactions. The reporting and waiting period requirements are intended to enable the Agencies to determine whether proposed mergers or acquisitions may violate the antitrust laws if consummated and, when appropriate, to seek injunctions in federal court to prohibit anticompetitive transactions prior to consummation.

Section 7A(d)(1) of the Clayton Act, 15 U.S.C. 18a(d)(1), directs the Commission, with the concurrence of the Assistant Attorney General, in accordance with the Administrative Procedure Act, 5 U.S.C. 553, to require that premerger notification be in such form and contain such information and documentary material as may be necessary and appropriate to determine whether the proposed transaction may, if consummated, violate the antitrust laws. In addition, Section 7A(d)(2) of the Clayton Act, 15 U.S.C. 18a(d)(2), grants the Commission, with the concurrence of the Assistant Attorney General, in accordance with 5 U.S.C. 553, the authority to define the terms used in the Act, exempt classes of transactions that are not likely to violate the antitrust laws, and prescribe such other rules as may be necessary and appropriate to carry out the purposes of Section 7A.

Since the enactment of the Act, the Commission has updated and refined the Rules many times. Indeed, the Agencies have a strong interest in making sure the Rules are as current and relevant as possible. Certain rules interpreting and implementing the Act, some of which have not been changed since they were first promulgated in 1978, may need additional updating. In this ANPRM, the Commission proposes to gather information on seven topics to help determine the path for potential future amendments to numerous provisions of Parts 801, 802, and 803 of the Rules under the Act.

Although it regularly reviews the Rules and revises them on a rolling basis, the Commission is issuing this ANPRM to solicit information to support review of the Rules on a more unified basis as part of its systematic review of all FTC rules and guides. The Commission is aware that market and business practices are constantly evolving, and that these changes make it especially important to evaluate whether the Rules are still serving their intended purpose or if they need to be amended, eliminated, or supplemented.

To accomplish this, the Commission is publishing in this ANPRM a number of questions related to seven different topics about which questions frequently arise in discussions of the Rules: Size of Transaction, Real Estate Investment Trusts, Non-Corporate Entities, Acquisitions of Small Amounts of Voting Securities, Influence outside the Scope of Voting Securities, Devices for Avoidance, and Filing Issues. Answers to questions on these topics will provide information that may facilitate drafting of new or revised rules.

The Commission welcomes comments on all of these topics, or on any sub-topic within them. The Commission, however, does not expect that every commenter will address all seven topics, or even every question relating to each topic. The Commission notes that comments it receives in response to this ANPRM may also inform the Notice of Proposed Rulemaking regarding the proposed change in the § 801.1(a)(1) definition of “person” and proposed exemption § 802.15 published in the Federal Register at the same time as this ANPRM.

Section 7A(a)(2) of the Clayton Act mandates an HSR filing when a transaction meets the Size of Transaction (“SOT”) test, subject to other provisions of the Rules, including exemptions. 1 To determine whether a transaction meets the SOT test, filing parties must look to Acquisition Price (“Acquisition Price”) under 16 CFR 801.10 or, in some cases, Fair Market Value (“FMV”) under 16 CFR 801.10(c)(3). As it is the filing parties' responsibility to conduct these calculations, the Commission would benefit from additional information on how filing parties engage in the calculation for both Acquisition Price and FMV.

Under 16 CFR 801.10(c)(2), the Acquisition Price “shall include the value of all consideration for such voting securities, non-corporate interests, or assets to be acquired.”  2 The FTC's Premerger Notification Office (“the PNO”) has long taken the position that, when a transaction has a determined Acquisition Price, debt may be excluded from the Acquisition Price in certain circumstances. For example, if a buyer pays off a target's debt as part of the transaction, the buyer may deduct the amount of the retired debt from the Acquisition Price. This position dates from the earliest days of interpreting the HSR Rules in the late 1970s and early 1980s and is based, in part, on the analysis of a target's balance sheet liabilities in the context of an acquisition of voting securities.

The PNO has also allowed the deduction of certain expenses when calculating the Acquisition Price. For example, where the purchase price in the parties' transaction agreement includes funds earmarked to pay off the seller's transaction expenses, the PNO has permitted the parties to deduct that amount when calculating the Acquisition Price based on the view that such payments do not reflect consideration for the target.

The Commission is aware that these informal PNO staff positions can have a significant impact on the calculation of the Acquisition Price and, in turn, on whether a transaction is reportable under the Act. Given the potential for these positions to affect the structure of a transaction, the Commission believes these informal PNO staff positions may need revision. As a result, the Commission aims to understand the decision-making involved in the deduction of retired debt or other amounts or categories of expenses from the Acquisition Price through responses to the following questions:

1. When negotiating a transaction, does a buyer ever offer to pay off or retire debt as part of the deal? Under what circumstances? How have these circumstances evolved since the late 1970s/early 1980s?

a. Why might a buyer offer to pay off or retire debt as part of the deal now as opposed to in the late 1970s/early 1980s? Have the competitive implications of the deal ever been a factor in this decision?

b. Why might a buyer decline to pay off or retire debt as part of the deal now as opposed to in the late 1970s/early 1980s? Have the competitive implications of the deal ever been a factor in this decision?

c. Does a seller prefer a buyer that is willing to pay off or retire debt as part of the deal? Why or why not? Are seller preferences different now than in the late 1970s/early 1980s?

d. In a multiple bid situation, is a buyer's willingness to pay off or retire debt as part of the deal ever a factor in the seller's selection of the winning bid? Was it a factor in the late 1970s/early 1980s? And if it is evaluated differently today versus the 1970s/early 1980s, why is it evaluated differently?

e. Do sellers ever reject a buyer's offer to pay off or retire debt as part of the deal? Under what circumstances? How have these circumstances evolved since the late 1970s/early 1980s? Have the competitive implications of the deal ever been a factor in this decision?

f. Are there any limitations (legal or otherwise) on a buyer's ability to pay off or retire debt as part of the deal? If so, what are they? How do these limitations differ from limitations in place in the late 1970s/early 1980s?

g. Are buyers more or less likely to pay off or retire debt as part of the deal now than they were in the late 1970s/early 1980s? Why or why not?

2. When negotiating a transaction, does a buyer ever offer to pay other expenses of or within the seller ( e.g., legal or banking fees, change of control payments, etc.) as part of the deal? Under what circumstances? How have these circumstances evolved since the late 1970s/early 1980s?

a. Why might a buyer offer to pay such expenses as part of the deal now as opposed to in the late 1970s/early 1980s? Have the competitive implications of the deal ever been a factor in this decision?

b. Why might a buyer decline to pay such expenses as part of the deal now as opposed to in the late 1970s/early 1980s? Have the competitive implications of the deal ever been a factor in this decision?

c. Does a seller prefer a buyer that is willing to pay such expenses as part of the deal? Why or why not? Are seller preferences different now than in the late 1970s/early 1980s?

d. In a multiple bid situation, is a buyer's willingness to pay such expenses as part of the deal ever a factor in the seller's selection of the winning bid? Was it a factor in the late 1970s/early 1980s? If it is evaluated differently today versus the 1970s/early 1980s, why is it evaluated differently?

e. Do sellers ever reject a buyer's offer to pay such expenses as part of the deal? Under what circumstances? How have these circumstances evolved since the late 1970s/early 1980s? Have the competitive implications of the deal ever been a factor in this decision?

f. Are there any limitations (legal or otherwise) on a buyer's ability to pay such expenses as part of the deal? If so, what are they? Do these limitations differ from limitations in place in the late 1970s/early 1980s? If they differ, how do they differ?

g. Are buyers more or less likely to pay such expenses as part of the deal now than they were in the late 1970s/early 1980s? Why or why not?

3. How do parties currently calculate the Acquisition Price? How has the calculation changed since the late 1970s/early 1980s?

a. Under what conditions is the Acquisition Price different from the purchase price or consideration identified in the transaction agreement? Have these conditions changed since the late 1970s/early 1980s? If they have changed, how have they changed?

b. Do transaction agreements ever lack a firm or certain purchase price? Under what conditions? Have these conditions changed since the late 1970s/early 1980s? If they have changed, how have they changed?

i. Why would parties negotiate a deal without a firm or certain purchase price? What factors have affected such a decision or deal structure? Have these factors evolved since the late 1970s/early 1980s? If they have changed, how have they changed? Have the competitive implications of the deal ever been a factor in this negotiating a deal without a firm or certain purchase price?

ii. What are the limits on the scope of the undetermined payments or deductions? Have these limits changed since the late 1970s/early 1980s? If they have changed, how have they changed?

c. Can an Acquisition Price be subject to undeterminable deductions or deductions of undeterminable value? Under what conditions? Have these conditions evolved since the late 1970s/early 1980s? If they have changed, how have they changed? What are some examples of each kind of deduction and how have they changed since the late 1970s/early 1980s?

d. Are there certain categories of consideration that are commonly deducted or added when calculating the Acquisition Price? Have these categories changed since the late 1970s/early 1980s? If they have changed, how have they changed?

e. Is the ultimate recipient of a payment ever a factor in whether such payment is included when calculating the Acquisition Price? Why or why not? In what circumstances? Has this determination changed since the late 1970s/early 1980s? If it has changed, how has it changed?

f. Is employee compensation ( e.g., bonus payments, retention payments, payments for contingent employee compensation) ever included when calculating the Acquisition Price? Why or why not? In what circumstances? Has this determination changed since the late 1970s/early 1980s? If it has changed, how has it changed?

g. Does the form of employee compensation affect whether it is included in the Acquisition Price? Under what circumstances? Has this determination changed since the late 1970s/early 1980s? If it has changed, how has it changed?

h. Is the value of employee compensation ever deducted from the Acquisition Price? Why or why not? Under what circumstances? Has this determination changed since the late 1970s/early 1980s? If it has changed, how has it changed?

i. Is there a “control premium” associated with the acquisition of control? How does an Acquiring Person determine that “control premium”? Has this determination changed since the late 1970s/early 1980s? If it has changed, how has it changed?

4. When calculating the Acquisition Price, do parties include all consideration paid for the target? How has this approach changed since the late 1970s/early 1980s?

a. How do parties define “consideration?” Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

b. Do parties rely on a standard legal definition for “consideration?” If so, what is it and from what is it derived? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

c. Is consideration defined any differently for the purposes of calculating Acquisition Price than it is for non-HSR purposes? Why or why not? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

d. Are any categories of payments excluded from the above definition of “consideration?” Why or why not? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

e. Is the ultimate recipient of the payment ever a factor in whether such payment is included as consideration? Why or why not? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

5. When calculating the Acquisition Price, how does debt affect the calculation? How has this approach changed since the late 1970s/early 1980s?

a. Does the debt reported on the target's balance sheet affect the calculation of the Acquisition Price? Why or why not? In what circumstances? Should it? Why or why not? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

b. Does the buyer's pay off or retirement of debt affect the calculation of the Acquisition Price? Why or why not? In what circumstances? Should it? Why or why not? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

c. Does the treatment of debt (either reported on a balance sheet or being paid off or retired by the buyer) differ based on whether the acquisition is of (1) voting securities, (2) non-corporate interests, or (3) assets? Why or why not? Should it? Why or why not? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

d. Should the calculation of Acquisition Price focus on the total amount paid by the Acquiring Person (including debt that is paid off or retired) or the net amount received by the Acquired Person (excluding debt that is paid off or retired)? Why? Has this changed since the late 1970s and early 1980s? If it has changed, how has it changed?

6. Where an acquisition is of voting and non-voting securities, how is the Acquisition Price allocated between the voting securities and the non-voting securities? How has this approach changed since the late 1970s/early 1980s?

a. Are the voting securities and non-voting securities separately valued? Why or why not? Has this changed since the late 1970s/early 1980s? If it has changed, how has it changed?

b. Are each of the voting securities and the non-voting securities valued? Why or why not? Has this changed since the late 1970s and early 1980s? If it has changed, how has it changed?

Sometimes a transaction does not have a determined Acquisition Price. This is often due to the fluctuation in stock prices or the inability to calculate the exact amount of contingent future payments. As a result, the Fair Market Value (“FMV”) of the transaction becomes critical to determining reportability under the Act.

Per § 801.10(c)(3), FMV “shall be determined in good faith by the board of directors of the ultimate parent entity included within the Acquiring Person, or, if unincorporated, by officials exercising similar functions; or by an entity delegated that function by such board or officials.” Once the Acquiring Person, or its delegate, has determined the FMV, there is no requirement to share with the Agencies the details of how that FMV was determined. The Commission would like to understand better the determination of FMV through responses to the following questions:

1. When an Acquiring Person is evaluating the potential acquisition of voting securities, non-corporate interests, or assets, what methodologies does that Acquiring Person use to support valuation in the ordinary course of due diligence and negotiation of the acquisition? How have these methodologies changed since the late 1970s/early 1980s?

a. If an acquisition involves the acquisition of non-voting securities, what methodologies does the Acquiring Person use to value the non-voting securities? Have these methodologies changed since the late 1970s/early 1980s? If they have changed, how have they changed?

b. In an acquisition of both voting securities and non-voting securities, does the Acquiring Person ever use one methodology to value the voting securities and a different methodology to value the non-voting securities? Why or why not? Have these methodologies changed since the late 1970s/early 1980s? If they have changed, how have they changed?

c. Where the Acquiring Person receives board appointment or board designation rights (or their non-corporate equivalent) in conjunction with the acquisition of voting (or non-voting) securities, do those rights affect the FMV of the voting (or non-voting) securities acquired? Has this changed since the late 1970s/early 1980s? If this has changed, how has it changed?

2. How does the determination of FMV under 16 CFR 801.10(c)(3) differ from the Acquiring Person's determination of value in the ordinary course of due diligence and negotiation of an acquisition? How has this determination changed since the late 1970s/early 1980s?

a. What factors go into determining FMV? Do these factors vary by industry, type of acquisition (asset, non-corporate interest, intellectual property), size of the target, or for other reasons? Describe each of the ways these factors vary and how each one varies. How have these factors changed since the late 1970s/early 1980s? Are there difficulties involved in performing FMV analyses? If so, what are those difficulties? Have these difficulties changed since the late 1970s/early 1980s? If they have changed, how have they changed? What additional guidance, if any, might the Commission provide to eliminate these difficulties?

b. How often and for what purposes do boards of directors rely on third-party bankers and other appraisers to provide FMV analysis? Do boards of directors evaluate the accuracy of those results compared to their own calculations? If so, how does the board of directors evaluate the accuracy of those results? Has this process changed since the late 1970s/early 1980s? If it has changed, how has it changed?

c. Should the Commission require an independent FMV analysis for some transactions to ensure consistency with standard valuation practices? If so, for what type of transactions should the Commission require independent FMV analysis? If the Commission requires an independent analysis, who should conduct the FMV analysis?

3. When calculating the FMV because the Acquisition Price is not determined as a result of future or uncertain payments, what financial or valuation concepts are used to determine the value of those future or uncertain payments? Have these concepts changed since the late 1970s/early 1980s? If they have changed, how have they changed?

4. How does an Acquiring Person determine the present FMV of assets that are not yet commercialized? For example, how does an Acquiring Person determine the present FMV of intellectual property surrounding a product that currently is under development? Has this determination changed since the late 1970s/early 1980s? If it has changed, how has it changed?

5. In determining the FMV, how does the Acquiring Person account for the value of any assumed liabilities (or liabilities of the Acquired Entity)? What impact do such liabilities have on the FMV? Has this determination changed since the late 1970s/early 1980s? If it has changed, how has it changed?

6. Should the Commission require the Acquiring Person to provide the basis for its FMV determination? If so, why? If not, why not?

Congress created real estate investment trusts (“REITs”) in 1960 to allow for the pooling of funds from many small investors to invest in real estate, and gave REITs preferential tax treatment. The legislative history indicates that REIT status was meant to be limited to “clearly passive income from real estate investments, as contrasted to income from the active operation of businesses involving real estate,” and those real estate trusts engaging in active business operations would not be afforded REIT tax status. 3

As a result, the PNO has long taken the informal staff position that when a REIT acquires real property (and assets incidental to the real property), the acquisition is exempt from HSR reporting under section 7A(c)(1) of the Clayton Act, the statutory ordinary course of business exemption. This position is based on the presumption that REITs are solely buying, owning, leasing, and selling real property, and therefore any acquisition of real property is exempt because it is done in the ordinary course of the REIT's business and is unlikely to violate the antitrust laws.

The Commission is aware that the Internal Revenue Service (“IRS”) subsequently made changes in tax law to remove restrictions on REITs and expand the beneficial tax treatment. As a result, many REITs are no longer solely buying, owning, leasing, and selling real property. 4 In fact, many REITs are now engaged in the active operation of businesses. For instance, REITs operate assisted living and other healthcare businesses, as well as companies that own cell towers and billboards, located on REIT-owned real property. Due to these changes, the Commission believes it is possible that a REIT's acquisition of real property may no longer be suitable for the blanket exemption offered under section 7A(c)(1) of the Act. The Commission would like to understand in more detail the current structure and operation of REITs through responses to the following questions:

1. Have REITs evolved from entities that own only real property to entities that can hold operating companies?

a. If so, what has led to the evolution of REITs becoming entities that can hold operating companies?

b. How have changes in tax laws or regulations influenced this evolution?

2. How does an operating company convert to a REIT?

a. Do REIT structures involve one Ultimate Parent Entity (“UPE”)? Two UPEs? How often is each type used? Why?

b. If a REIT has more than one UPE, what is the relationship between those UPEs?

c. If a REIT has more than one UPE, is there an entity above the UPEs that makes decisions for both of them?

3. Is there a way to distinguish REITs that own only real property from those that hold operating companies? If yes, what are the ways to distinguish REITs that own only real property and those that hold operating companies? For instance, are there differences in how they are structured? How else are they different?

4. Assume the PNO's informal staff position exempting REITs did not exist and REITs had to rely solely on the real property exemptions, §§ 802.2 and 802.5.

a. Are there situations in which REIT transactions would no longer be exempt? If so, what kinds of situations?

b. How often would the §§ 802.2 and 802.5 exemptions come into play?

c. Would it be easy for REITs to apply §§ 802.2 and 802.5 to transactions? If so, why? If not, why not?

The Act applies to acquisitions of voting securities or assets. The rise of non-corporate entities, such as partnerships and limited liability companies, has presented challenges under the Act because the PNO had long taken the position that interests in unincorporated entities were neither voting securities nor assets. Thus, any acquisition of interests in such entities had not been a reportable event unless 100% of the interests was acquired, in which case the acquisition was deemed to be that of all of the underlying assets of the partnership or other unincorporated entity.”  5

At first, this approach did not present significant issues, because non-corporate entities were created as acquisition vehicles and used to effectuate transactions, not to separately hold operating businesses. 6 But the role of non-corporate entities evolved. As the Commission noted in its 2004 Notice of Proposed Rulemaking, “[t]he use of unincorporated entities is expanding, and such entities are increasingly engaging in acquiring interests in other corporate and unincorporated entities. For example, the number of corporate income tax filings increased from 4,630,000 to 5,711,000 (23%) between 1994 and 2002, while the number of partnership returns, including LLCs taxed as partnerships, increased from 1,550,000 to 2,236,000 (44%) during the same period. In addition, a number of states have amended their statutes in recent years to allow limited liability companies to merge with other types of legal entities.”  7 As a result, the Commission determined in its 2005 Final Rule that the acquisition of control, 50% or more of the non-corporate interests (“NCIs”) in a non-corporate entity (“NCE”), would henceforth be reportable. 8

The Commission is aware that NCEs have continued to evolve. For instance, acquisitions of NCIs are often captured in Securities Purchase Agreements, which imply that NCIs are now deemed to be more like voting securities. Thus, the Commission believes that it is appropriate to re-evaluate the nature of NCEs and NCIs to determine whether NCEs are the equivalent of corporate entities and NCIs function more as voting securities. To that end, the Commission would like to understand in more detail the evolution of NCEs and NCIs since its 2005 Final Rule, 9 through responses to the following questions:

1. Have NCEs evolved in form and substance since 2005? If they have evolved, what significant changes have occurred to shape the evolution of NCEs between 2005 and now?

a. Have the distinctions between NCEs and corporate entities evolved since 2005? If they have evolved, what significant changes have occurred to make NCEs and corporate entities more or less distinct between 2005 and now?

b. Have the distinctions between NCIs and voting securities evolved since 2005? If they have evolved, what significant changes have occurred to make NCIs and voting securities more or less distinct between 2005 and now?

c. Are NCIs currently the same as voting securities? If so, how? If not, how are they different? Is this different from 2005? If so, how? What has changed between 2005 and now?

d. Does any category of NCIs currently carry a right equivalent to the right to vote for the election of the board of directors of a corporate entity? Is this different from 2005? If so, how? What has changed between 2005 and now?

e. Should the reporting obligations for the acquisition of an interest in a corporate entity and non-corporate entity differ? Is this different from 2005? If so, how? What has changed between 2005 and now?

2. Have the benefits and drawbacks of becoming an NCE evolved since 2005? If they have evolved, have the incentives to become an NCE changed since 2005? If so, how? If not, why not? What has changed between 2005 and now?

Since the implementation of the HSR program, there has been a significant expansion of the holdings of investment entities, including investment funds and institutional investors, as well as expanded interest and ability of such shareholders to participate in corporate governance. 10 In addition, changes in investment behavior have resulted in some investment entities holding small stakes in a large number of firms, including competitors. This has caused some to raise concerns about the competitive effects of common ownership—that is, the competitive effect of an investor holding small minority positions in issuers that operate competing lines of business. 11

In light of these developments, the Commission is using this ANPRM to take a fresh look at the rules that apply to acquisitions of voting securities by investment entities to determine whether updates may be necessary. The Commission seeks information on the following rules:

Section (c)(9) of the HSR Act exempts from the requirements of the Act “acquisitions, solely for the purpose of investment, of voting securities, if, as a result of such acquisition, the securities acquired or held do not exceed 10 per centum of the outstanding voting securities of the issuer.” To implement this statutory limitation, 16 CFR 802.9 exempts from the requirements of the Act an acquisition of voting securities if made solely for the purpose of investment and if, as a result of the acquisition, the Acquiring Person would hold 10% or less of the outstanding voting securities of the issuer, regardless of the dollar value of the voting securities so acquired or held. Under 16 CFR 801.1(i)(1), “[v]oting securities are held or acquired `solely for the purpose of investment' if the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”  12

In light of changing investor engagement with issuers, the Commission is interested in knowing if it is appropriate to rethink the definition of “solely for the purpose of investment” in 16 CFR 801.1(i)(1) and the exemption in 16 CFR 802.9. To that end, the Commission seeks to understand the incentives involved in applying the exemption in 16 CFR 802.9 through responses to the following questions:

1. The ability to rely on 16 CFR 802.9 depends on whether a potential filing person “has no intention of participating in the formulation, determination, or direction of basic business decisions of the issuer.”  13

a. Are there benefits to this approach? If so, what are the benefits?

b. Are there drawbacks to this approach? If so, what are the drawbacks?

c. How could this approach be changed? How would such a change impact investors and issuers?

d. What are the “basic business decisions” of the issuer?

i. Is it clear what decisions comprise the “basic business decisions” of the issuer?

ii. Are there activities that clearly do not relate to the basic business decisions?

iii. Are there activities that clearly do relate to the basic business decisions?

iv. Is there uncertainty about whether an activity relates to the basic business decisions? If so, why is there uncertainty? To what extent is there uncertainty about whether an activity relates to the basic business decisions?

e. Should the Commission define the “basic business decisions of the issuer” as used in the existing Rule?

i. What should the definition include?

ii. Should specific items be excluded from the definition? Which items?

iii. What are the benefits of providing a definition?

iv. What are the risks of providing a definition?

f. Is it clear what is meant by “no intention of participating” in the formulation, determination, or direction of the basic business decisions?

i. What type of activity related to determining whether to participate in business decisions currently takes one out of the exemption, or at what point in the process of deciding whether to participate in business decisions is one no longer within the exemption?

ii. What type of activity related to determining whether to participate in business decisions should result in the exemption no longer applying, or at what point in the process of deciding whether to participate in business decisions should one no longer be within the exemption?

iii. Should the language be changed to allow reliance on the exemption until the Acquiring Person has made an affirmative decision to participate in the basic business decisions? If so, what would constitute an affirmative decision to participate in the basic business decisions?

2. In general, for HSR purposes, what differentiates the activities of investors who invest solely for the purpose of investment and investors who do not invest solely for the purpose of investment? Have these activities changed since 1978? If so, how?

a. In what activities do investors who invest solely for the purpose of investment engage? Have these activities changed since 1978? If so, how?

b. What categories of interaction with management indicate an investor's intention is not to hold voting securities solely for the purpose of investment? For example, would those categories include things like discussions of governance issues, discussions of executive compensation, or casting proxy votes? Have these categories changed since 1978? If so, how?

c. Does the market capitalization of the issuer affect the determination of whether an investment is solely for the purpose of investment or not solely for the purpose of investment? Has this changed since 1978? If so, how?

3. How does the Commission's interpretation of “solely for the purpose of investment” compare to the Securities and Exchange Commission's (“SEC”) approach to “passive” investors?  14

a. Assuming no change in the SEC approach, could the Commission adopt the SEC approach? If yes, why? If no, why not?

b. What would be the benefits of adopting the SEC approach? Why?

c. What would be the drawbacks of adopting the SEC approach? Why?

d. Does the different role of each agency justify different approaches for investors who hold positions solely for the purpose of investment? If yes, why? If no, why not?

4. How does the Commission's interpretation of “solely for the purpose of investment” compare to the elements that must be disclosed in Item 4 of Schedule 13D filed with the SEC?  15

a. Assuming no change to the SEC rule, could the Commission adopt the SEC elements? If yes, why? If no, why not?

b. What would be the benefits of adopting the SEC elements?

c. What would be the drawbacks of adopting the SEC elements?

d. Does the different role of each agency justify different approaches for investors who hold positions solely for the purpose of investment?

5. How do the activities of investment firms differ from those of operating companies?

a. Should the Commission treat different types of acquirers differently for the purpose of the exemption? If yes, why? If no, why not?

b. Should the Commission treat different types of investment companies differently for the purpose of the exemption (for example, mutual fund companies versus hedge fund companies)? If yes, why? If no, why not?

6. Should the Commission preclude parties from using the exemption only if they have taken certain specified actions? If yes, why? If no, why not?

a. What actions should disqualify an Acquiring Person from being able to use the exemption?

i. Should the actions be limited to actions that facilitate or encourage coordination among competitors?

ii. Should actions that affect competition, even if aimed only at a single competitor, preclude the use of the exemption? If yes, why? If no, why not?

iii. Should actions that change the incentives to compete, even if aimed only at a single competitor, preclude the use of the exemption? If yes, why? If no, why not?

iv. What other actions should preclude utilizing the exemption?

b. Would allowing the Acquiring Person to acquire 9.9% of the voting securities of the Issuer prior to taking the specified action undercut the ability to obtain filings early enough to ascertain potential competitive harm before a transaction is consummated? If yes, why? If no, why not?

c. Would such a conditioning of the loss of the exemption be consistent with the wording of the statute, including “solely” and the “purpose” of the acquisition? If yes, why? If no, why not?

i. Is the acquisition solely for investment if the Acquiring Person is considering taking action inconsistent with the exemption, but has not yet taken the action?

ii. Is the acquisition for the purpose of investment if the Acquiring Person has determined to take action inconsistent with the exemption, but has not yet taken the action?

d. Should the Commission require an HSR filing for past acquisitions once the specified actions have been taken? If yes, why? If no, why not?

i. Would this be consistent with the HSR Act's requirement to make the filing prior to the acquisition? If yes, why? If no, why not?

ii. Would this be consistent with the requirement that the Acquiring Person certify that it has a good faith intent to make an acquisition requiring notification? If yes, why? If no, why not?

Under § 802.64, institutional investors are exempt from HSR reporting when making acquisitions of 15% or less of voting securities in the ordinary course of business and solely for purpose of investment. During the initial HSR rulemaking in 1978, entities were identified as institutional investors because they were viewed as constrained by law ( e.g., non-profits) or fiduciary duty ( e.g., pension trusts, insurance companies, etc.), or generally uninterested in “affecting management of the companies whose stock they buy” ( e.g., broker-dealers). 16 The list identifying what type of entity is considered an institutional investor has never been updated.

It is unclear to the Commission whether this exemption should be maintained and implemented in the same manner in which it was first promulgated in 1978. In light of changes in the investor landscape since that time, the Commission may need to update the list of institutional investors that are presumed to engage in acquisitions solely for the purpose of investment. Thus, the Commission aims to understand the current institutional investor landscape in order to make that determination through responses to the following questions:

1. Given that 16 CFR 802.64 has not changed since 1978, does it need to be updated?

a. Does 16 CFR 802.64 accurately reflect the universe of entities that make investments in the ordinary course of business solely for the purpose of investment? Are there entities currently listed in the exemption that should be removed? If so, why?

b. Are there entities not currently listed that should be treated as institutional investors? If so, why and what are they? Explain the justification for treating the entity as an institutional investor: Does it fit within the paradigm identified by the Commission in first promulgating 16 CFR 802.64 ( i.e., (i) constrained by law; (ii) constrained by fiduciary duty; or (iii) uninterested in affecting management of the companies whose stock they buy)? Are there other reasons the entity should be treated as an institutional investor?

c. Should the Commission provide a list of indicia that an investor must meet to qualify as an institutional investor for purposes of the HSR Act, instead of a list of entities considered to be institutional investors? If yes, why and what should these indicia be? If no, why not?

d. Is the 15% level for the Commission's exemption still consistent with the purpose of the HSR Act? What evidence is there that the level should be higher or lower?

The SEC has also promulgated a definition of “institutional investors” as part of its beneficial ownership disclosure requirements. When a person or group of persons acquires beneficial ownership of more than five percent of a voting class of a company's equity securities registered under the Securities Exchange Act, they are required to file a Schedule 13D with the SEC. 17 Depending upon the facts and circumstances, the person or group of persons may be eligible to file the more abbreviated Schedule 13G in lieu of Schedule 13D. 18 One of the exemptions relates to acquisitions of securities in the ordinary course of business by a “qualified institutional investor” under Rule 13d-1(b). 19

2. How does the Commission's definition of institutional investor compare to the definition used by the SEC in identifying a person able to file a Schedule 13G?

a. Assuming no change in the SEC rule, should the Commission adopt the SEC definition of a person who acquires voting securities in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer? If yes, why? If no, why not?

b. What would be the benefits of adopting the SEC definition?

c. What would be the drawbacks of adopting the SEC definition?

d. Does the different role of each agency justify different definitions for institutional investors?

3. What are the activities of institutional investors and how have they changed since 1978?

a. What activities do institutional investors engage in with the issuers whose shares they hold? Have these activities changed since 1978? If so, how have these activities changed?

i. What is the scope of “shareholder engagement” that institutional investors undertake? Has this changed since 1978? If so, how has it changed?

ii. What topics or issues are the subject of such engagement? Have these topics or issues changed since 1978? If so, how have they changed?

iii. How often does such engagement occur? Has this changed since 1978? If so, how has this changed?

iv. Does the amount, degree, or type of issue discussed vary by issuer, or are there consistent themes of discussion and engagement? Has this changed since 1978? If so, how has this changed?

v. When do institutional investors participate in the formulation, determination, or direction of the basic business decisions of issuers? Has this changed since 1978? If so, how has it changed?

b. How do index funds fit within the portfolios of institutional investors? Have index funds evolved since 1978? If so, how have they evolved?

i. Why do intuitional investors choose to create an index fund, exchange-traded fund, or the like? What are the benefits and drawbacks of creating such a fund?

ii. How does the acquisition of voting securities held by an index fund, exchange-traded fund, or the like occur? Do acquirors use an algorithm or some other automated mechanism to facilitate acquisitions?

iii. Who oversees an index fund, exchange-traded fund, or the like? Is there one person or entity within an investment organization tasked with overseeing such a fund? More than one? How often is it one versus more than one?

4. How do institutional investors manage holdings in the same issuer? How has this changed since 1978?

a. Do institutional investors jointly manage holdings in the same issuer? Do they separately manage holdings in the same issuer? Both? Has this changed since 1978? If so, how has it changed?

b. How do institutional investors make the decision to jointly or separately manage holdings in the same issuer? Has this changed since 1978? If so, how has this changed?

c. Do answers to any of the above questions depend on the type of issuer or the type of institutional investor or other factors? If so, what factors are relevant? How does each factor influence the actions of institutional investors? Have the factors changed since 1978? If so, how have they changed?

5. How do institutional investors apply the concept of solely for the purpose of investment? Has this changed since 1978? If so, how has it changed?

a. Do the entities listed in 16 CFR 802.64 currently hold the voting securities of issuers solely for the purpose of investment? How does this differ from institutional investor behavior in 1978? What significant changes in institutional investor behavior have occurred between 1978 and 2020?

b. What kinds of entities not listed in 16 CFR 802.64 currently hold the voting securities of issuers solely for the purpose of investment? How does the current behavior of these entities differ from their behavior in 1978?

c. If institutional investors make certain acquisitions solely for the purpose of investment and other acquisitions not solely for the purpose of investment, is it appropriate to provide a status exemption for all of their activities? If yes, why? If no, why not?

d. Do institutional investors rely on 16 CFR 802.64 to exempt acquisitions in or by index funds, exchange-traded funds or the like? If so, how?

The HSR Act applies to the acquisition of assets and voting securities. “The term voting securities means any securities which at present or upon conversion entitle the owner or holder thereof to vote for the election of directors of the issuer, or of an entity included within the same person as the issuer.”  20 The acquisition of a voting security carries with it the right to influence the business of a company through the ability to vote for the directors of that company, among other things.

The Commission is aware, however, that there are ways to gain influence over a company without the acquisition of the right to vote for the election of directors inherent in voting securities. For instance, the acquisition of convertible voting securities or the use of board observers could each result in the ability to influence a company's business decisions. Currently, neither the acquisition of convertible voting securities nor rights to be a board observer are reportable events under the Act. The Commission, therefore, needs to ascertain whether the acquisition and exercise of these rights provide opportunities to influence an issuer's business decisions, and thus should be reportable events.

The acquisition of convertible debentures (convertible into common stock), options, warrants, or preferred shares, even with no present right to vote for directors, may result in the ability to influence the business of a company. The Rules capture these kinds of stakes in the concept of a convertible voting security. “The term convertible voting security means a voting security which presently does not entitle its owner or holder to vote for directors of any entity.”  21 Section 802.31 exempts the acquisition of convertible voting securities.

The PNO has taken the informal position that the acquisition of convertible voting securities, when accompanied by the right to designate or appoint individuals to the board of directors of the issuer equal to the percentage of voting securities that would be held upon conversion, is reportable under the Act. The Commission is considering revising § 802.31 to explicitly require compliance with the HSR Act's reporting requirements when the acquisition of convertible voting securities is coincident with the Acquiring Person having or obtaining the right to designate or appoint any individuals to the board of the issuer. The Commission aims to understand the potential benefits and burdens of such a change through responses to the following questions:

1. Is the acquisition of convertible voting securities, when accompanied with the right of appointment or designation of individuals to the issuer's board of directors, equivalent to the acquisition of voting securities with the present right to vote for election of the issuer's board of directors? In what ways are they the same and in what ways are they different? What provisions could accompany the right to appoint that would make the acquisition the most like an acquisition of voting securities? What provisions make them different for competition purposes? Have these provisions changed since 1978? If so, how have they changed?

2. Why would an Acquiring Person choose one alternative over the other? Have the benefits of one alternative over another changed since 1978?

a. Is there a benefit of acquiring convertible voting securities while holding or obtaining the right to appoint or designate individuals to an issuer's board of directors, as compared to the acquisition of securities that have the present right to vote? If so, what is the benefit? Has the benefit changed since 1978? If so, how has it changed?

b. Under what situations does such a benefit arise? Have these situations changed since 1978? If so, how have they changed?

3. What are the reasons the Commission should or should not require a filing whenever the acquirer of convertible non-voting securities receives a right to designate one or more directors prior to conversion?

a. Should issuers that have cumulative voting be subject to the same requirements as issuers that do not have cumulative voting? Why should they be subject to different requirements? Is there a difference in how much influence an acquirer would have based on whether the issuer has cumulative voting? Why? How would the Commission be able to distinguish when it is a problem and when it is not?

4. What would be the burden associated with this possible change?

a. Would the burden fall most on an identifiable class of transactions? How would such a change affect how an identifiable class of transactions is structured?

b. Would such a change introduce significant inefficiencies into the market for corporate control? What would be the effect of that change in the market?

Another potential way to gain influence over a company, beyond the scope of acquiring voting securities, is through board observers. The Commission understands that it is becoming increasingly common for issuers and NCEs to include board observers as part of their governance structure. Issuers and NCEs often grant rights to select and appoint board observers to investors with significant equity, in addition to or in lieu of providing investors with board seats. Even though board observers lack the ability to vote on matters that come before the issuer's board, they may nevertheless have significant influence over the outcome of matters submitted to the board for approval. 22 At the very least, board observers gain insight into an issuer's strategic decision-making, which is not only useful to the investor sponsoring the board observer, but may also be useful to competitors in the market, especially when those board observers also serve as officers or directors of a competitor. 23 Companies likely benefit from interacting with board observers because company management can obtain additional investor insight without having to alter the composition or voting balance on the board.

Given the opportunities that board observers have to interact with corporate officers, directors, and other managers, and to gain access to confidential information related to strategic and operational decisions, the Commission would like to better understand the role of board observers. In particular, the Commission would like to know how investors might use board observers' rights to influence competitive decision-making of issuers and NCEs to ascertain whether the acquisition of rights that provide opportunities to wield this kind of influence should be reportable under the Act. To that end, the Commission seeks responses to the following questions:

1. What types of information are available to an issuer/NCE board observer?

a. With what frequency is a board observer invited to all meetings? Is a board observer always entitled to all info provided to board members? Is a board observer permitted to request additional information beyond what is presented at a board meeting? If so, with what frequency?

b. Are board observers subject to any restrictions on how they can use the information they obtain in their capacity as board observers? Are these restrictions based on contract, bylaws or regulations?

c. Do issuers/NCEs create formal review processes for information scheduled to be sent to a board observer? If so, with what frequency? Are outside counsel involved in monitoring compliance? If so, with what frequency?

d. Is the information scheduled to be sent to a board observer subject to a non-disclosure agreement that limits its dissemination to others, including officers and directors of competitors or investors in competitors?

e. Do issuers/NCEs draft formal guidance for their boards as to what topics should not be discussed in the presence of board observers? If so, with what frequency? Are outside counsel involved in monitoring compliance? If so, with what frequency?

2. What means does an issuer/NCE board observer have to influence board policies or the strategic or operational direction of the firm?

a. Does a board observer ever enjoy any special right of notice or consultation regarding major capital expenditures or strategic decisions?

b. Does a board observer have access, outside of board meetings, to managers in the corporation, to investment committee members in an NCE, or to persons with similar decision-making roles regarding the operations of the business? If so, with what frequency?

c. Do board observers have the ability to request a meeting of the issuer's/NCE's board? If so, with what frequency?

d. Do issuers/NCEs impose restrictions on a board observer's speaking role during board meetings? If so, with what frequency? How common are “silent” board observers?

e. How frequently do board observers move into senior executive roles at issuers/NCEs?

3. What are the parameters of the board observer role?

a. Is a board observer's relationship with the issuer/NCE always explicitly defined in a written agreement between the issuer and the investor? How common are informal board observer arrangements?

b. Are board observers (or those who sponsor their observation of board matters) covered by conflict of interest rules or black-out periods such as those that limit investments by board members?

4. Are there any protocols on selection/approval of board observers and/or processes in place to ensure that observers are not in a position to facilitate sharing of competitively sensitive information among competitors?

5. For all of the questions above, do rules or practices regarding board observer rights to obtain confidential information differ substantially between issuers and NCEs? What factors account for any such differences?

16 CFR 801.90 provides that the Commission must disregard the structure of transactions or devices used by the parties for the purpose of avoiding the HSR Act requirements and review the substance of the transaction as a whole to determine whether an HSR filing is required. The PNO often receives questions about whether specific scenarios would be violations under § 801.90, and the PNO has occasionally offered informal staff positions on § 801.90. For instance, the PNO has an informal staff position that says if a target makes a payout prior to its acquisition in the form of an extraordinary dividend, such a payment would not trigger 16 CFR 801.90 if, as a result of the dividend, the target no longer meets the size of person test. 24 The PNO's informal staff position is based on the idea that if an extraordinary dividend reduces the target's cash on hand, it is unlikely to present a 16 CFR 801.90 issue.

But there are situations where the purpose of such a payout may be more complicated. For instance, if the payout involves more than the distribution of cash on hand, this could present an issue under 16 CFR 801.90. Each issuance of an extraordinary dividend or like payment must be carefully analyzed to make sure that it is not a device for avoidance under § 801.90. The Commission has questions about whether filing parties are engaging in this analysis or, instead, assuming that every extraordinary dividend is not a device for avoidance under § 801.90. In order to determine which are and are not devices for avoidance, the Commission would therefore like to understand the mechanisms by which targets engage in these and other kinds of practices through responses to the following questions:

1. What mechanisms do targets use to pay out extraordinary dividends and what are the reasons for such dividends?

a. Is the focus on the reduction of cash on hand or are there other motivations for issuing such dividends? If so, what are the other motivations?

b. Are there other ways of structuring extraordinary dividends? If so, what are they? If not, why not?

c. How often do targets issue extraordinary dividends in advance of being acquired? What are the reasons that targets issue such dividends?

d. Is the buyer ever involved in the target's decision to issue an extraordinary dividend in advance of an acquisition? Why or why not?

2. Do targets use mechanisms other than extraordinary dividends to reduce cash on hand?

a. If so, what are they and how are they structured? If not, why not?

b. Is the buyer involved? If yes, why and with what frequency? If not, why not?

3. What other actions should the Commission scrutinize as possible devices for avoidance?

The Commission has a strong interest in an HSR filing process and an HSR Form that garners competitively significant information to assist the Agencies in their review of transactions. To that end, the Commission intends to explore amending (a) the 16 CFR 802.21 five-year period during which a party may acquire additional voting securities without refiling, and (b) the requirement in Item 8 of the HSR Form to disclose certain prior acquisitions.

Under 16 CFR 802.21, filing parties have five years from the end of the waiting period to acquire additional voting securities without making another filing, as long as the additional acquisitions do not exceed the next threshold. For instance, Party A files to cross the $100 million threshold (as adjusted) on January 1 and receives early termination on January 20, which ends the waiting period. Party A then has five years from January 20 to continue to acquire voting securities of the same issuer up to the next threshold, in this case $500 million (as adjusted), as long as it crosses the $100 million threshold (as adjusted) within one year.

The time period in proposed § 802.21 was 180 days, but numerous comments persuaded the Commission this time period was too short. 25 In the final rules, the Commission chose a period of five years, both as a result of these comments and because it made sense to correlate the timing of the exemption with the timing of the Census and resulting updated data. 26 Given the changes in worldwide economic activity since 1978, Commission is now concerned that the § 802.21 five-year period may be too long. At the time of the initial filing, the transaction may not present competition concerns, but such concerns could develop as a result of changes in the lines of business of the Acquiring Person and Acquired Person during the five-year period, but those changes would not require a new filing. As a result, the Commission seeks to understand the impact of shortening the § 802.21 five-year period through responses to the following questions:

1. Have there been changes in economic activity significant enough to raise concerns that the Commission may miss important competitive effects if it does not shorten the five-year term?

2. If there are reasons to believe that the § 802.21 five-year period is too long, what period would address concerns that additional acquisitions of the Acquired Entity present competitive concerns because the lines of business of the Acquiring Person and/or Acquired Person have changed? Why would another period be more appropriate?

3. Is there is a class of Acquiring Persons for whom the decrease in the exemption period would cause significant burden? If not, why not? If so, how?

When the Acquiring Person and the Acquired Person report in the same or “overlapping” NAICS revenue code in Item 5 of the HSR Form, the Acquiring Person must report certain prior acquisitions in Item 8: (1) The acquisition of 50% or more of the voting securities of an issuer or 50% or more of non-corporate interests of an unincorporated entity (subject to $10 million limitation) and (2) any acquisition of assets valued at or above the statutory size-of-transaction test at the time of their acquisition. Item 8 limits the Acquiring Person's disclosure to those acquisitions within the overlapping NAICS code over the last five years.

The Commission is concerned that Item 8 does not capture all competitively significant acquisitions. There are several reasons why this might be the case. For instance, the Acquiring Person does not have to disclose prior acquisitions when it and the Acquired Person report revenue in different NAICS codes. Nevertheless, overlapping NAICS codes are imperfect predictors of whether the acquisition presents competitive concerns that need review. For instance, an Acquiring Person is not subject to the disclosure requirement if a prior acquisition involved a potential competitor with no revenue in an overlapping NAICS code at the time of the acquisition. Similarly, an Acquiring Person need not disclose a prior acquisition that involved a vertical relationship when companies at different levels of the distribution chain report in different NAICS codes. As a result, the Commission is considering eliminating the overlapping NAICS code limitation in Item 8 so that the Acquiring Person would have to list all its acquisitions of 50% or more of the voting securities of an issuer or 50% or more of non-corporate interests of an unincorporated entity (subject to the $10 million limitation) and any acquisition of assets valued at or above the statutory size-of-transaction test at the time of their acquisition in the five years prior to filing. The Commission seeks comment on this potential change through responses to the following questions:

1. What would be the benefit or burden associated with this possible change? Are there any classes of transactions for which the benefit or burden would be greater? If there are classes of transactions for which the benefit is greater, why is the benefit greater? If there are classes of transactions for which the burden is greater, why is the burden greater?

2. Is there any way to distinguish prior acquisitions that might have competitive significance from those that do not, such that the Commission would not need to require a list of all prior acquisitions?

In addition to the topics outlined above, commenters are welcome to provide input on any other HSR Rule. As part of that input, identify the changes in investor behavior or competitive dynamics that would justify a change in the Commission's current approach.

You can file a comment online or on paper. For the Commission to consider your comment, we must receive it on or before February 1, 2021. Write “16 CFR parts 801-803: Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules; Project No. P110014” on your comment. Your comment—including your name and your state—will be placed on the public record of this proceeding, including the https://www.regulations.gov website.

Because of the public health emergency in response to the COVID-19 outbreak and the agency's heightened security screening, postal mail addressed to the Commission will be subject to delay. We strongly encourage you to submit your comment online through the https://www.regulations.gov website. To ensure the Commission considers your online comment, please follow the instructions on the web-based form.

If you file your comment on paper, write “16 CFR parts 801-803: Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules; Project No. P110014” on your comment and on the envelope, and mail your comment to the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex J), Washington, DC 20580, or deliver your comment to the following address: Federal Trade Commission, Office of the Secretary, Constitution Center, 400 7th Street SW, 5th Floor, Suite 5610 (Annex J), Washington, DC 20024. If possible, please submit your paper comment to the Commission by courier or overnight service.

Because your comment will be placed on the publicly accessible website, https://www.regulations.gov, you are solely responsible for making sure your comment does not include any sensitive or confidential information. In particular, your comment should not include sensitive personal information, such as your or anyone else's Social Security number; date of birth; driver's license number or other state identification number, or foreign country equivalent; passport number; financial account number; or credit or debit card number. You are also solely responsible for making sure that your comment does not include any sensitive health information, such as medical records or other individually identifiable health information. In addition, your comment should not include any “trade secret or any commercial or financial information which . . . is privileged or confidential,”—as provided by Section 6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2)—including in particular competitively sensitive information such as costs, sales statistics, inventories, formulas, patterns, devices, manufacturing processes, or customer names.

Comments containing material for which confidential treatment is requested must be filed in paper form, must be clearly labeled “Confidential,” and must comply with FTC Rule 4.9(c). In particular, the written request for confidential treatment that accompanies the comment must include the factual and legal basis for the request, and must identify the specific portions of the comment to be withheld from the public record. See FTC Rule 4.9(c). Your comment will be kept confidential only if the FTC General Counsel grants your request in accordance with the law and the public interest. Once your comment has been posted publicly at www.regulations.gov —as legally required by FTC Rule 4.9(b)—we cannot redact or remove your comment, unless you submit a confidentiality request that meets the requirements for such treatment under FTC Rule 4.9(c), and the General Counsel grants that request.

Visit the FTC website to read this NPRM and the news release describing it. The FTC Act and other laws that the Commission administers permit the collection of public comments to consider and use in this proceeding as appropriate. The Commission will consider all timely and responsive public comments it receives on or before February 1, 2021. For information on the Commission's privacy policy, including routine uses permitted by the Privacy Act, see https://www.ftc.gov/site-information/privacy-policy.

The Act and Rules require the parties to certain mergers and acquisitions to file notifications (“HSR Filing”) with the Federal Trade Commission and with the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice (“the Assistant Attorney General”) (collectively, “the Agencies”), and to wait a specified period of time before consummating such transactions. The reporting and waiting period requirements are intended to enable the Agencies to determine whether a proposed merger or acquisition may violate the antitrust laws if consummated and, when appropriate, to seek an injunction in Federal court in order to enjoin anticompetitive mergers prior to consummation.

In this notice of proposed rulemaking (“NPRM”), the Commission proposes amendments to the § 801.1(a)(1) definition of “person” to require certain acquiring persons to disclose additional information about their associates in Items 4 through 8 of the HSR Form and to aggregate acquisitions in the same issuer across their associates when making an HSR filing, as well as a ministerial change to § 801.1(d)(2). The Commission also proposes a new exemption, § 802.15, which would exempt the acquisition of 10% or less of an issuer's voting securities when the acquiring person does not already have a competitively significant relationship with the issuer. Finally, the Commission proposes explanatory and ministerial changes to the Rules, as well as necessary amendments to the HSR Form and Instructions to effect the proposed changes.

Section 7A(d)(1) of the Clayton Act, 15 U.S.C. 18a(d)(1), directs the Commission, with the concurrence of the Assistant Attorney General, in accordance with the Administrative Procedure Act, 5 U.S.C. 553, to require that premerger notification be in such form and contain such information and documentary material as may be necessary and appropriate to determine whether the proposed transaction may, if consummated, violate the antitrust laws. In addition, Section 7A(d)(2) of the Clayton Act, 15 U.S.C. 18a(d)(2), grants the Commission, with the concurrence of the Assistant Attorney General, in accordance with 5 U.S.C. 553, the authority to define the terms used in the Act, exempt classes of transactions that are not likely to violate the antitrust laws, and prescribe such other rules as may be necessary and appropriate to carry out the purposes of Section 7A.

The Commission notes that comments it receives in response to this NPRM may also inform the Advanced Notice of Proposed Rulemaking (ANPRM) published in the Federal Register at the same time as this NPRM.

The HSR premerger notification program enables the Agencies to determine which acquisitions are likely to be anticompetitive and to challenge them before they are consummated when remedial action is most effective. Under the HSR program, the Agencies typically evaluate thousands of transactions every year. Given the large number of HSR filings submitted each year, the Agencies must use their resources effectively to focus on transactions that may harm competition. The Agencies have a strong interest in receiving HSR filings that contain enough information to conduct a preliminary assessment of whether the proposed transaction presents competition concerns, while at the same time not receiving filings related to acquisitions that are very unlikely to raise competition concerns. In the Agencies' experience, two particular categories of filings make it difficult for the Agencies to focus their resources effectively:

• Filings for acquisitions by certain investment entities. First, due to changes in investor structure and behavior since the HSR Act and Rules went into effect, filings from certain investment entities do not capture the complete competitive impact of a transaction. When certain investment entities file as acquiring persons, the Rules and Form do not currently require the disclosure of substantive information concerning both the complete structure of the acquiring person and the complete economic stake being acquired in an issuer.

• Filings for acquisitions of 10% or less of an issuer. At the same time, the Agencies regularly receive filings involving proposed acquisitions, not solely for the purpose of investment, that would result in the acquiring person holding 10% or less of an issuer. In the Agencies' experience, these filings almost never present competition concerns. 1

To help the Agencies use their resources more effectively, the Commission proposes to address both issues in this proposed rulemaking. To obtain more complete filings from investment entities filing as acquiring persons, the Commission proposes amending the definition of person in § 801.1(a)(1) to include “associates,” a term that is already defined in the Rules. This proposed change would require certain acquiring persons to disclose additional information about their associates in Items 4 through 8 of the HSR Form and to aggregate acquisitions in the same issuer across their associates when making an HSR filing. In addition, the Commission proposes a new exemption, § 802.15, which would exempt the acquisition of 10% or less of an issuer's voting securities when the acquiring person does not already have a competitively significant relationship with the issuer. Finally, the Commission proposes explanatory and ministerial changes to the Rules, as well as necessary amendments to the HSR Form and Instructions to effect the proposed changes.

Since the promulgation of the Rules in 1978, the investment landscape has undergone vast changes, including the proliferation of investment entities such as investment funds and master limited partnerships (“MLPs”). Both investment funds and MLPs facilitate investment through structures utilizing limited partnerships and limited liability companies. The Rules define limited partnerships and limited liability companies as “non-corporate entities,” and non-corporate entities are their own Ultimate Parent Entity (“UPE”) under the Rules when no one holds the right to 50% or more of the profits or assets upon dissolution. Thus, although each non-corporate entity exists within an overall structure of a “family” of funds or MLP, each is typically its own UPE under the HSR Rules. For instance, Parent Fund creates Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3, each a non-corporate entity. No one controls these non-corporate entities, so each fund vehicle is its own UPE even though they exist within the same family of funds. The same is true when no one controls non-corporate entities within a MLP structure; although they exist within the same MLP, each non-corporate entity is its own UPE.

Treating these non-corporate entities as separate entities under HSR is often at odds with the realities of how fund families and MLPs are managed. In the fund context, a fund vehicle typically has an entity that manages how that fund vehicle will invest, 2 and this investment manager very often manages the investments of other fund vehicles within the same family of funds. As a result, Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 might well have the same Investment Manager  3 and that Investment Manager can use Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 to make separate investments in different issuers or the same issuer. MLPs, for their part, often have similar structures involving non-corporate entities that are their own UPEs but under common management. 4

When non-corporate entities are their own UPEs but under common management as described above, this creates two scenarios in which it is difficult for the Agencies to assess the competitive impact of a transaction based on the HSR filing. The first involves filings from non-corporate entity UPEs as acquiring persons that do not contain a complete enough picture of the investment fund or MLP. The Commission first addressed this category of filings in 2011 when it created the “associates” concept. 5 Before that time, filings from non-corporate entity UPEs within families of funds and MLPs contained limited substantive information because non-corporate entity UPEs were not required to disclose information on any other entity within the investment structure. For instance, if Fund Vehicle 1 made a filing for a 100% interest in an Issuer, and Fund Vehicle 2, under common investment management with Fund Vehicle 1, held 100% of a competitor of the Issuer, Fund Vehicle 2's holding was not disclosed in the filing because Fund Vehicle 1 was its own UPE. A filing such as the one from Fund Vehicle 1 was of limited use to the Agencies because it did not reveal relevant holdings within the same family of funds. Filings received from newly-formed fund vehicles, which did not yet own anything, were of even less use because these filings were largely blank. Filings from non-corporate entities that were their own UPEs within MLP structures raised the same issues.

In light of these issues, the Commission determined that updates to the HSR Form would allow the Agencies to “receive the information they need to get a complete picture of potential antitrust ramifications of an acquisition.”  6 Accordingly in 2010, 7 the Commission introduced and proposed to define the term “associates” to capture information in the HSR Form from certain entities that are under common management with the acquiring person. The 2011 final rule  8 required certain acquiring persons to disclose in their HSR filings what their associates hold in entities that generate revenue in the same NAICS codes as the target. With this change, any fund vehicle filing as an acquiring person must look to its investment manager to determine what other fund vehicles that investment manager manages. For instance, Fund Vehicle 1's investment manager also manages the investments of Fund Vehicle 2, making Fund Vehicle 1 and Fund Vehicle 2 associates. Fund Vehicle 1 makes an HSR filing for a 100% interest in Issuer Q. Fund Vehicle 2 controls Entity Y and has a minority position in Entity Z, both of which report in the same NAICS code as Issuer Q. Fund Vehicle 1 must therefore disclose in its HSR filing Fund Vehicle 2's controlling interest in Y and minority interest in Z. Non-corporate entity UPEs within MLP structures must disclose the same information about their associates when filing as acquiring persons.

Although this additional information has been helpful in assessing the competitive impact of a transaction, it is too limited to provide the Agencies with a sufficient overview of investment funds and MLPs as acquiring persons. For instance, the information currently required from associates is limited to controlling or minority interests in entities that report in the same NAICS codes as the entity being acquired. In the Agencies' experience, competitors sometimes use different NAICS codes to describe the same line of business, particularly in the case of companies engaged in technology-based businesses. In addition, associates currently are not required to provide any substantive information, such as financials or revenues, about the entities they control, making it difficult for the Agencies to determine whether an entity within an associate might create a competitive concern in a given transaction.

It is also difficult for the Agencies to understand the potential competitive impact of a transaction when a filing does not represent the total economic stake being acquired in the same issuer. For instance, Investment Manager uses Fund Vehicle 1 to acquire 6% of Issuer D and Fund Vehicles 2 and 3 to each acquire 3% of Issuer D. Only Fund Vehicle 1's acquisition of 6% of Issuer D's voting securities is large enough to cross the $50 million (as adjusted) size of transaction threshold. Fund Vehicle 1 makes an HSR filing, but because it is its own UPE, it need not disclose the interests of Fund Vehicles 2 and 3 in Issuer D. As a result, the filing does not reflect the 12% aggregate interest in Issuer D of the fund vehicles under common investment management. Another common example arises when Investment Manager uses Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 to each acquire 2% in Issuer D. If none of these acquisitions of 2% is large enough to cross the $50 million (as adjusted) size of transaction threshold, the Agencies receive no HSR filing, even though the fund vehicles hold an aggregate 6% of Issuer D. Although more rare, both of these scenarios can also play out in the MLP context when non-corporate entity UPEs within the MLP structure make acquisitions in the same issuer.

To help the Agencies accurately assess the potential competitive impact of a pending transaction in these scenarios, the Commission proposes to amend the § 801.1(a)(1) definition of “person” to include associates, such that it would read as follows: “Except as provided in paragraphs (a) and (b) of § 801.12, the term person means (a) an ultimate parent entity and all entities which it controls directly or indirectly; and (b) all associates of the ultimate parent entity.”

This proposed change would require a non-corporate entity UPE filing as an acquiring person to disclose additional information from its associates in Items 4 through 8 of the Form  9 and to aggregate acquisitions in the same issuer across its associates.

Under the proposed rule, a non-corporate entity UPE filing as an acquiring person would be part of a new, larger Acquiring Person. This Acquiring Person would include non-corporate entity UPE, its associates (which would also be UPEs) and the entity that manages non-corporate entity UPE and its associates (the “managing entity”). 10 The managing entity would make the filing on behalf of the Acquiring Person, identifying itself in proposed Item 1(a) of the Form, and identify the relevant UPE making the acquisition in proposed Item 1(c) of the Form. 11 If two UPEs within the same Acquiring Person are making reportable acquisitions in the same issuer, the managing entity can choose which one will be the relevant UPE for purposes of the form. The relevant UPE can also file on behalf of the managing entity, as noted in proposed Item 1(c) of the Form. For example:

As these examples illustrate, the proposed change to § 801.1(a)(1) would require a non-corporate entity UPE filing as an acquiring person to disclose more substantive information about its associates. The additional information required by the Form would be of tremendous value to the Agencies in assessing the potential competitive impact of a pending transaction. Specifically, the proposed changes to Items 4, 5 and 6(a) would give the Agencies a much better picture of what entities are under common management. The proposed changes to Item 6(b) would provide a clearer picture of the ways in which the entities within the acquiring person are connected, both within the investment structure and beyond. Proposed Item 8 would provide more complete information on entities within the acquiring person that have made acquisitions in the same industry as the target. 12 All of this additional information would give the Agencies a much more complete picture of who is making the filing in the case of investment funds and MLPs filing as acquiring persons.

The additional information concerning acquisitions made by a non-corporate entity UPE's associates in the same issuer would also be of great value to the Agencies. The proposed change to § 801.1(a)(1) would give the Agencies a much clearer understanding of the total economic stake being acquired in a single issuer by entities under common management. In some cases, looking across a non-corporate entity UPE's associates for acquisitions in the same issuer will result in a filing when one would not have been required previously. For instance, in a scenario where associates Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 will each acquire 2% of Issuer D for $40 million, the Agencies currently do not receive a filing because none of the three $40 million acquisitions is large enough to cross the $50 million (as adjusted) size of transaction threshold. Under the proposed rule, the Agencies would now receive a filing for the aggregate 6% interest valued at $120 million (assuming an exemption does not apply). 13

The Commission acknowledges that the proposed change to § 801.1(a)(1) would result in more filings and an increased burden for certain acquiring persons. Non-corporate entity UPEs within families of funds and MLPs would have to provide significant additional information on behalf of their associates under the proposed change. These entities are, however, already accustomed to looking into the holdings of those associates for filings where they are acquiring persons because some information about associates' holdings must be provided even under the current Rules. Given that these entities already conduct such inquiries, the Commission believes requiring additional information about entities that have already been identified should be manageable. The breadth of certain items will still be limited, and the burden should lessen after the first inquiry under the new rule. Nevertheless, the Commission acknowledges that there might be other ways to achieve the same result. The Commission invites comments on alternative ways the Agencies could obtain this necessary information that would result in a more limited burden for investment funds and MLPs filing as acquiring persons.

The proposed change to § 801.1(a)(1) would result in fewer filings and a reduced burden for certain other acquiring persons. The proposed rule would streamline the number of filings and fees from families of funds and MLPs. For instance, in the scenario where associates Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 will each acquire 7% of Issuer D for $200 million, each currently must make a filing and pay a separate $125,000 filing fee (assuming no exemptions apply). Under the proposed rule, the Agencies would receive one filing for 21% of Issuer D valued at $600 million and one $125,000 filing fee. In addition, the proposed rule would eliminate the need for a filing in the alternative. If the Investment Manager of associates Fund 1 and Fund 2 has not yet determined which of those funds should be the vehicle for a particular investment, the need to choose one for HSR filing purposes becomes moot under the proposed rule, eliminating the potential need to make two filings with two separate filing fees.

The Commission also proposes an additional reduction in burden for acquired persons. The HSR Form already limits what acquired persons must report in Items 5 through 7 to information on those assets, voting securities, and non-corporate interests being acquired in the transaction at issue. The limitation for acquired persons in these items is an acknowledgment that only what is being sold is relevant to the Agencies' competition analysis. This is also the case for the financial information required in Items 4(a) and 4(b), and the Commission therefore proposes amending the HSR Instructions to create a similar limit for acquired persons with respect to these items. Under the proposed changes, an acquired person would provide relevant CIK numbers in response to Item 4(a) or financials in response to Item 4(b) only for (1) the assets, voting securities and non-corporate interests being acquired in the transaction at issue, and (2) the UPE of those assets, voting securities and non-corporate interests. This proposed amendment to the HSR Instructions would significantly limit what non-corporate entity UPEs within families of funds and MLPs would have to provide as acquired persons in response to Items 4(a) and 4(b) and would not adversely affect the Agencies' competitive analysis.

Finally, the Commission also acknowledges that certain non-corporate entity UPEs within families of funds and MLPs and their associates may be structured as index funds, exchange-traded funds (ETFs) or the like. Since these entities base their investments on an index, it is possible that it is not appropriate to apply the proposed change to § 801.1(a)(1) to these entities. The Commission invites comments on whether index funds, ETFs or the like should be differentiated under the proposed rule.

Along with the proposed change to § 801.1(a)(1), the Commission also proposes conforming changes to the definition of associate in § 801.1(d)(2). Under the current definition, associate is only relevant to Items 6 and 7 of the HSR Form and to acquiring persons. 14 But the proposed change to the § 801.1(a)(1) definition of person would apply the associates concept more broadly in the HSR Form and to both acquiring and acquired persons. The Commission therefore proposes to eliminate the phrase “For purposes of Items 6 and 7” from § 801.1(d)(2), capitalize the subsequent “An” in § 801.1(d)(2) and include “or acquired” in § 801.1 (d)(2), (d)(2)(A) and (B) to reflect this proposed change.

To use their resources as effectively as possible, the Agencies have a strong interest not only in receiving HSR filings that contain sufficient information to assess whether proposed transactions present real competition concerns, but also in eliminating filings for categories of acquisitions that are unlikely to create competitive concerns. In 1996, the Commission acknowledged this concern in issuing final rules exempting certain ordinary course transactions, as well as certain types of acquisitions of realty and carbon-based mineral reserves. 15 The Commission explained, “[t]hese rules are designed to reduce the compliance burden on the business community by eliminating the application of the notification and waiting requirements to a significant number of transactions that are unlikely to violate the antitrust laws. They will also allow the enforcement agencies to focus their resources more effectively on those transactions that present the potential for competitive harm.”  16

Under the same rationale, the Commission has long contemplated the exemption of acquisitions of 10% or less of the voting securities of an issuer. These kinds of acquisitions can take many forms. The most typical is when an entity acquires 10% or less of an issuer in order to provide that issuer with needed capital. Sometimes certain shareholders of the target will acquire less than 10% of the buyer's voting securities as consideration for the transaction (typically called shareholder backside acquisitions). Except for a few instances when a shareholder backside acquisition of 10% or less of an issuer's voting securities was linked to a larger transaction that presented competitive concerns, 17 the Commission has not sought to block any acquisition of 10% or less of an issuer's voting securities.

Recognizing that some acquisitions of 10% or less are less likely than others to raise competitive concerns, the Act already includes an exemption for acquisitions of 10% or less of the voting securities of an issuer made “solely for the purpose of investment.”  18 This exemption is codified in § 802.9, 19 and § 801.1(i)(1) defines the term “solely for the purpose of investment” so that filing parties may determine whether § 802.9 is available. “Voting securities are held or acquired `solely for the purpose of investment' if the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”  20