USDA established CFAP to assist producers of agricultural commodities marketed in 2020 who face continuing market disruptions, reduced farm-level prices, and increased production and marketing costs due to COVID-19 under authority provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; Pub. L. 116-136) and sections 5(b), (d), and (e) of the Commodity Credit Corporation Charter Act (15 U.S.C. 714c(b), (d), and (e)). USDA implemented CFAP through two rounds of payments (CFAP 1 and CFAP 2). CFAP 1 was implemented through a final rule published in the Federal Register on May 21, 2020 (85 FR 30825-30835), with corrections published in the Federal Register on June 12, 2020 (85 FR 35799-35800), July 10, 2020 (85 FR 41328-41330), August 14, 2020 (85 FR 49593-49594), and September 21, 2020 (85 FR 59174-59175), and documents published in the Federal Register on May 22, 2020 (85 FR 31062- 31065), June 12, 2020 (85 FR 35812), July 10, 2020 (85 FR 41321-41323), and August 14, 2020 (85 FR 49589-49593). USDA implemented CFAP 2 through a final rule published in the Federal Register on September 22, 2020 (85 FR 59380-59388).

The Consolidated Appropriations Act, 2021 (Pub. L. 116-260), signed on December 27, 2020, provided additional funding and made several changes to CFAP. This rule implements a provision of the Consolidated Appropriations Act, 2021, to amend the payment calculation for sales commodities as described below. 1 Other changes to CFAP in this rule are discretionary changes being made in response to ongoing evaluation of CFAP and the need to provide additional assistance.

CFAP is administered by USDA's Farm Service Agency (FSA). FSA accepted CFAP 1 applications from May 26, 2020, through September 11, 2020, 2 and CFAP 2 applications from September 21, 2020, through December 11, 2020. This rule amends the provisions for CFAP 1 and CFAP 2 as described below.

For eligible producers of hogs and pigs, CFAP 1 provided financial assistance in an amount equal to the sum of the following two calculations:

• Unpriced livestock sold between January 15, 2020, to April 15, 2020, multiplied by the applicable Coronavirus Aid, Relief, and Economic Stability Act (CARES Act) payment rate in 7 CFR 9.102; and

• Livestock inventory owned between April 16, 2020, to May 14, 2020, multiplied by the applicable Commodity Credit Corporation (CCC) payment rate in § 9.102.

This rule provides additional CFAP 1 payments for hog and pig inventory owned between April 16, 2020, and May 14, 2020, based on a rate of $17 per head (which results in a total CFAP 1 payment rate of $34 per head for that inventory including the prior $17 per head payment for CFAP 1). For the swine (hog and pig) sector, the inventory payment rates were determined to be insufficient to alleviate ongoing market price losses in the sector.

This additional assistance is also intended to help swine producers who face continuing market disruptions from changes in U.S. meat consumption due to the pandemic. These disruptions are reflected in futures prices. Generic lean hog futures prices at the end of November 2020 were 5.4 percent lower than on January 2, 2020. In contrast, futures prices for commodities such as soybeans and corn have been increasing in the second half of 2020 to levels above those in early January of 2020.

FSA is not reopening the CFAP 1 application period. Only producers who previously applied for CFAP 1 are eligible to receive this additional assistance. Eligible producers do not need to submit a new CFAP 1 application form or take any action to receive the additional payment. Producers are subject to a payment limitation of $250,000 for all CFAP 1 payments, 3 including this additional assistance, as provided in § 9.7(e).

In this final rule, USDA is also including certain producers that raise swine and poultry (including broilers, pullets, layers, chicken eggs, and turkeys) under a production contract that sustained revenue losses due to market disruptions and reduced harvesting facility output resulting from the COVID-19 outbreak. A swine or poultry contract producer is one who produces swine or poultry owned by someone else under a production contract. Not all production contracts operate the same way, so not all contract producers will be eligible. Only those producers who grow or produce an eligible commodity under contract for or on behalf of another person or entity and are not entitled to a share from sales proceeds of the commodity are eligible. For example, a farmer who raises chickens pursuant to a production contract where such chickens are owned by a company that produces chicken products could be an eligible contract grower if such farmer does not receive payment for chickens that die before reaching maturity or when young animals are not supplied to the farmer by the company, or whose income is reduced when fewer young animals than normal are provided by the company.

USDA did not include swine and poultry contract producers in CFAP 1 because the impacts to these producers from COVID-19 was not known at the time the rule was published in the Federal Register on May 21, 2020. The impacts from COVID-19 on contract producers such as delayed delivery of young poultry and hogs to contract producers, decreased housing densities, additional costs for keeping animals longer than typical durations, and damage caused by animals too large for housing, were known when USDA published the rule implementing CFAP 2 in the Federal Register on September 22, 2020. However, those producers could not be included since CFAP 2 payments were issued using funds authorized under CCC Charter Act (15 U.S.C. 714c(b), (d), and (e)) to assist with the transition to a more orderly marketing system, and swine and poultry contract producers do not ordinarily market the animals they raise. CARES funding, as authorized, remains available until expended to support agricultural producers impacted by COVID-19, including producers of specialty crops, producers that supply local food systems (including farmers markets, restaurants, and schools), and livestock producers. This remaining CARES Act funding will assist contract producers facing reduced revenue due to the impacts noted above.

Certain contract producers have been eligible for assistance under the Livestock Indemnity Program (LIP); Emergency Assistance for Livestock, Honeybees, and Farm-Raised Fish Program (ELAP); and the Livestock Forage Disaster Program (LFP) since these permanent supplemental disaster programs were authorized in the 2008 Farm Bill (Pub. L. 110-234; 7 U.S.C. 9081, see also 7 CFR parts 760 and 1416). These programs provide financial assistance to contract producers who are impacted by adverse weather events such as hurricane, flood, blizzard, disease, drought, or extreme cold or heat. Including certain swine and poultry contract producers in CFAP 2 parallels their inclusion in these permanent supplemental disaster programs that provide financial assistance to contract producers due to weather events that are not expected. The impacts of a global pandemic are beyond normal production conditions and have had a negative financial impact on swine and poultry producers including those raising animals under a production contract.

USDA is including this subset of contract producers because the COVID-19 global pandemic not only disrupted protein markets as consumer consumption abruptly shifted from food service to home preparation, but also reduced harvesting facility output because of COVID-19 outbreaks among the workforce and when facilities reduced processing capacity to ensure worker health. Swine and poultry contract producers provided data and other information to USDA to illustrate the impact of these coronavirus disruptions on their operations. The impacts of slowdowns and shutdowns at processing facilities in late spring and early summer are still being felt in the poultry and swine industry. In some instances, companies managed and continue to manage the lack of harvest capacity by reducing or eliminating new production, which means that contract producers had fewer animals to produce under contract per cycle or did not have young animals delivered by the company for some periods. In other situations, companies required some contract producers to keep animals longer than they typically keep them before shipping them to the harvesting facility, which actions increased costs such as producer labor, and for additional wear and tear and water use associated with larger animals. In addition, swine and poultry contract producers cannot use their specialized growing facilities for other purposes to generate revenue as the sector works through the supply chain bottlenecks.

Contract producers are eligible for payments if they produced swine or poultry (including broilers, pullets, layers, chicken eggs, turkeys) under a contract in both the 2019 and 2020 calendar years, suffered a loss in eligible revenue for the period from January 1, 2020, through December 27, 2020, as compared to the period from January 1, 2019, through December 27, 2019, and meet all other requirements for CFAP eligibility. Eligible revenue is the revenue received by a contract producer for contract production of the eligible commodity, as reported on Internal Revenue Service Form 1099. Payments to eligible contract producers will be calculated by subtracting the contract producer's eligible revenue for the period from January 1, 2020, through December 27, 2020, from their eligible revenue for the period from January 1, 2019, through December 27, 2019, and multiplying the result by 80 percent. This calculation is subject to the availability of funds and will be factored, if needed. Contract producers must submit a complete CFAP 2 application between January 19, 2021, and February 26, 2021. Contract producers are subject to a payment limitation of $250,000 for all CFAP 2 payments, 4 including any CFAP 2 payments received for other commodities not grown under a contract, as provided in § 9.7(e).

USDA has determined that producers of pullets, water buffalo, yak, and turfgrass sod face continuing market disruptions, low farm-level prices, and significant marketing costs associated with the COVID-19 outbreak, similar to producers of commodities that were previously determined to be eligible for CFAP 2 assistance. As a result, USDA is amending the definitions of “Other livestock” and “Sales-based commodities” in § 9.201 to include those commodities. USDA will reopen signup specifically for pullets, turfgrass sod, and contract growers on January 19, 2021. through February 26, 2021. The change to accept applications for water buffalo and yak was previously implemented by USDA; therefore, the deadline is not extended for those livestock types. USDA is also amending the definition of “Other livestock” to clarify that reptiles and bees are ineligible.

This rule also amends the definition of “Other livestock” in § 9.201 to clarify that by-products of live animals included as “Other livestock” are eligible for CFAP 2. As provided in § 9.203(i)(1), the payment calculation for sales-based commodities is based on sales of raw commodities; the portion of sales derived from adding value to the commodity, such as processing and packaging, is not included when calculating a payment. For example, sales of alpaca fleece would be included for payment calculation; however, if the alpaca fleece is further processed into alpaca yarn prior to sale, the portion of the sale price derived from that processing is not included. Eligible by-products of other livestock do not include eggs that are sold to be hatched for breeding stock. This change was previously implemented by USDA; therefore, the deadline is not extended for by-products of “Other livestock.”

USDA is amending the payment calculation for sales-based commodities to include the amount of crop insurance indemnities received and payments made under the Noninsured Crop Disaster Assistance Program (NAP) and the Wildfires and Hurricanes Indemnity Program Plus (WHIP+) payments for crop year 2019 in addition to the amount of the producer's 2019 sales, as required by the Consolidated Appropriations Act, 2021. CFAP 2 uses a producer's 2019 sales as an approximation of the amount of what the producer would expect to market in 2020. This change is intended to more accurately represent what a producer would expect to have marketed in 2020 by taking into account commodities that would have been marketed in 2019 if not for losses covered by crop insurance, NAP or WHIP+. For producers who began farming in 2020 and had no sales in 2019, CFAP 2 payments will continue to be based on the farmer's actual 2020 sales, without inclusion of crop insurance indemnities or NAP or WHIP+ payments, since payments are based on the actual crop that incurred marketing costs and was impacted by market disruptions and low farm-level prices. Producers of eligible sales-based commodities who applied for CFAP 2 before the December 11, 2020, application deadline and received crop insurance indemnities or NAP or WHIP+ payments for the 2019 crop year may amend their CFAP 2 applications from January 19, 2021, through February 26, 2021, to include those amounts. This rule is not extending the CFAP 2 deadline for producers of sales-based commodities who did not previously apply for CFAP 2, except for producers of pullets and turfgrass sod as described above.

USDA is also amending the calculation for price-trigger commodities. As published on September 22, 2020, payments are calculated using the 2019 Agriculture Risk Coverage-County Option (ARC-CO) benchmark yield multiplied by 85 percent when FSA is unable to obtain a 2020 actual production history (APH) approved yield. This rule amends the calculation to use 100 percent of the ARC-CO benchmark yield when the applicant:

• Has coverage for the crop under an Area Risk Protection Insurance Plan, Margin Protection Plan, Stacked Income Protection Plan, Supplemental Coverage Option, or Whole-Farm Revenue Protection Plan under the Federal Crop Insurance Act (7 U.S.C. 1501-1524);

• Is a landlord of the applicable acreage and their share of the crop is insured by the tenant under a policy or plan of insurance under the Federal Crop Insurance Act;

• Is a tenant of the applicable acreage and their share of the crop is insured by the landlord under a policy or plan of insurance under the Federal Crop Insurance Act; or

• Is a joint venture and the crop is insured by one of the members under a policy or plan of insurance under the Federal Crop Insurance Act.

In these situations, FSA does not have 2020 APH approved yield for the CFAP 2 applicant because the insurance plan does not require calculation of an APH approved yield or because the record of the APH approved yield would not be associated with the CFAP 2 applicant. However, the crop was insured in these situations and using 100 percent of the ARC-CO benchmark yield is intended to treat producers with crop insurance coverage but without an available 2020 APH approved yield in a more favorable way to other producers who had crop insurance. All applicants affected by this change were previously eligible under the original rule; therefore, this rule is not extending the CFAP 2 deadline for those producers who did not previously apply for CFAP 2. Applicants affected by this change must contact FSA to have their payment recalculated using 100 percent of the ARC-CO benchmark yield.

This document also makes minor corrections to the definitions of “fruits” and “tree nuts” in § 9.201 and to the calculation in § 9.202(c). In § 9.1, it adds the applicable date that livestock must have been physically located in the United States for CFAP 2, which was inadvertently omitted from the previous final rule. These corrections do not affect administration of CFAP 2.

The changes in this document are consistent with our original intent in creating and administering CFAP 2 and are not expected to increase expected costs beyond the original approved amount.

The Administrative Procedure Act (APA, 5 U.S.C. 553(a)(2)) provides that the notice and comment and 30-day delay in the effective date provisions do not apply when the rule involves specified actions, including matters relating to benefits. This rule governs CFAP for payments to certain commodity producers and therefore falls within the benefits exemption.

The Office of Management and Budget (OMB) designated this rule as major under the Congressional Review Act (CRA), as defined by 5 U.S.C. 804(2). Section 808 of the CRA allows an agency to make a major regulation effective immediately if the agency finds there is good cause to do so. The beneficiaries of this rule have been significantly impacted by the COVID-19 outbreak, which has resulted in significant declines in demand and market disruptions. USDA finds that notice and public procedure are contrary to the public interest. Therefore, even though this rule is a major rule for purposes of the Congressional Review Act, USDA is not required to delay the effective date for 60 days from the date of publication to allow for Congressional review. Accordingly, this rule is effective upon publication in the Federal Register .

Executive Order 12866, “Regulatory Planning and Review,” and Executive Order 13563, “Improving Regulation and Regulatory Review,” direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasized the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The requirements in Executive Orders 12866 and 13573 for the analysis of costs and benefits apply to rules that are determined to be significant. Executive Order 13777, “Enforcing the Regulatory Reform Agenda,” established a federal policy to alleviate unnecessary regulatory burdens on the American people.

The Office of Management and Budget (OMB) designated this rule as economically significant under Executive Order 12866 and therefore, OMB has reviewed this rule.

In general response to the requirements of Executive Order 13777, USDA created a Regulatory Reform Task Forces, and USDA agencies were directed to remove barriers, reduce burdens, and provide better customer service both as part of the regulatory reform of existing regulations and as an on-going approach. USDA reviewed this regulation and made changes to provide better customer service. The costs and benefits of this rule are summarized below. The full cost benefit analysis is available on regulations.gov.

CFAP 1 and CFAP 2 assist producers of agricultural commodities marketed in 2020 who face continuing market disruptions, reduced farm-level prices, and increased production and marketing costs due to COVID-19. These additional costs are associated with declines in demand, surplus production, or disruptions to shipping patterns and marketing channels.

As mentioned above, in implementing the CFAP 1 and CFAP 2, FSA received feedback from local office staff and the agricultural industry. As a result, additional CFAP assistance and other changes are being made to provide assistance to additional growers that suffered COVID-related revenue losses, to ensure that calculations most accurately reflect sales, to provide equitable producer treatment, and to clarify certain provisions appearing in CFAP 2.

These changes (referred to as “CFAP Additional Assistance”), along with the associated gross and net estimated outlays, are shown in Table 1 (at the end of this section). Payments for item 1 (the “top up” for swine producers) and item 2 (payments to contract livestock producers) will draw on CARES funding. Payments for items 3, 4, and 5 in Table 1 (all payments referenced as CFAP 2 payments or modified CFAP 2 payments) draw on CCC funding that remains given CFAP 1 and CFAP 2 payments. These payments are authorized by the CCC Charter Act (section 5 (b), (d) and (e)).

Estimated gross outlays for CFAP Additional Assistance are estimated at $3.10 billion (see Table 1). After taking into account payment limitations, net outlays are estimated at $2.28 billion. Payments to contract swine, chicken, egg, and turkey producers account for 87 percent of the total.

FSA, which implemented CFAP 1 and 2, will start accepting CFAP Additional Assistance applications for contract producers and turfgrass sod and pullet producers on January 19, 2021. Producers who did not apply by the CFAP 1 deadline (September 11, 2020) are not eligible for the swine top-up payment.

Net payments represent benefits to producers, which is the government cost of the program. Outlays shown in Table 1 are estimated at expected maximum levels. Some producers must take additional actions under this rule if they are interested in receiving benefits. These producers realize administrative costs associated with participation, which are estimated at $4.15 million.

The Regulatory Flexibility Act (5 U.S.C. 601-612), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), generally requires an agency to prepare a regulatory analysis of any rule whenever an agency is required by APA or any other law to publish a proposed rule, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. This rule is not subject to the Regulatory Flexibility Act because as noted above, this rule is exempt from notice and comment rulemaking requirements of the APA and no other law requires that a proposed rule be published for this rulemaking initiative.

The environmental impacts of this final rule have been considered in a manner consistent with the provisions of the National Environmental Policy Act (NEPA, 42 U.S.C. 4321-4347), the regulations of the Council on Environmental Quality (40 CFR parts 1500-1508), and because USDA will be making the payments to producers the USDA regulations for compliance with NEPA (7 CFR part 1b).

Although OMB has designated this rule as “economically significant” under Executive Order 12866, “. . . economic or social effects are not intended by themselves to require preparation of an environmental impact statement” when not interrelated to natural or physical environmental effects (see 40 CFR 1502.16(b)). CFAP was designed to avoid skewing planting decisions. Producers continue to make their planting and production decisions with the market signals in mind, rather than any expectation of what a new USDA program might look like. The discretionary aspects of CFAP (for example, determining AGI and payment limitations) were designed to be consistent with established USDA and the CCC programs and are not expected to have any impact on the human environment, as CFAP payments will only be made after the commodity has been produced. Accordingly, the following Categorical Exclusion in 7 CFR part 1b applies: § 1b.3(a)(2), which applies to activities that deal solely with the funding of programs, such as program budget proposals, disbursements, and the transfer or reprogramming of funds. As such, the implementation of and participation in CFAP do not constitute major Federal actions that would significantly affect the quality of the human environment. Therefore, an environmental assessment or environmental impact statement for this regulatory action, will not be prepared; this rule serves as documentation of the programmatic environmental compliance decision for this Federal action.

Executive Order 12372, “Intergovernmental Review of Federal Programs,” requires consultation with State and local officials that would be directly affected by proposed Federal financial assistance. The objectives of the Executive order are to foster an intergovernmental partnership and a strengthened federalism, by relying on State and local processes for State and local government coordination and review of proposed Federal financial assistance and direct Federal development. For reasons specified in the final rule related notice regarding 7 CFR part 3015, subpart V (48 FR 29115, June 24, 1983), the programs and activities in this rule are excluded from the scope of Executive Order 12372.

This rule has been reviewed under Executive Order 12988, “Civil Justice Reform.” This rule will not preempt State or local laws, regulations, or policies unless they represent an irreconcilable conflict with this rule. Before any judicial actions may be brought regarding the provisions of this rule, the administrative appeal provisions of 7 CFR parts 11 and 780 are to be exhausted.

This rule has been reviewed under Executive Order 13132, “Federalism.” The policies contained in this rule do not have any substantial direct effect on States, on the relationship between the Federal Government and the States, or on the distribution of power and responsibilities among the various levels of government, except as required by law. Nor does this rule impose substantial direct compliance costs on State and local governments. Therefore, consultation with the States is not required.

This rule has been reviewed in accordance with the requirements of Executive Order 13175, “Consultation and Coordination with Indian Tribal Governments.” Executive Order 13175 requires Federal agencies to consult and coordinate with Tribes on a government-to-government basis on policies that have Tribal implications, including regulations, legislative comments or proposed legislation, and other policy statements or actions that have substantial direct effects on one or more Indian Tribes, on the relationship between the Federal Government and Indian Tribes, or on the distribution of power and responsibilities between the Federal Government and Indian Tribes.

USDA has assessed the impact of this rule on Indian Tribes and determined that this rule does not, to our knowledge, have Tribal implications that required Tribal consultation under Executive Order 13175 at this time. If a Tribe requests consultation, the USDA Office of Tribal Relations (OTR) will ensure meaningful consultation is provided where changes, additions, and modifications are not expressly mandated by law. Outside of Tribal consultation, USDA is working with Tribes to provide information about CFAP additional assistance and other issues.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 104-4) requires Federal agencies to assess the effects of their regulatory actions of State, local, and Tribal governments or the private sector. Agencies generally must prepare a written statement, including cost benefits analysis, for proposed and final rules with Federal mandates that may result in expenditures of $100 million or more in any 1 year for State, local or Tribal governments, in the aggregate, or to the private sector. UMRA generally requires agencies to consider alternatives and adopt the more cost effective or least burdensome alternative that achieves the objectives of the rule. This rule contains no Federal mandates, as defined in Title II of UMRA, for State, local and Tribal governments or the private sector. Therefore, this rule is not subject to the requirements of sections 202 and 205 of UMRA.

The titles and numbers of the Federal Domestic Assistance Programs found in the Catalog of Federal Domestic Assistance to which this rule applies are:

FSA is requesting emergency approval on the additional information collection required for this rule for CFAP to provide assistance for contract producers of chickens, eggs, turkeys, and swine and to provide additional assistance for other commodities as clarified in this rule. The additional assistance for swine producers who previously applied for assistance under 0560-0297 does not require any new information collection. All of the information collection uses forms currently approved under 0560-0297.

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

For the reasons discussed above, this final rule amends 7 CFR part 9 as follows:

DOE published a final rule in the Federal Register on December 16, 2020 (the “December 2020 final rule”), establishing separate product classes for top-loading consumer clothes washers and consumer clothes dryers that offer cycle times for a normal cycle of less than 30 minutes, and for front-loading residential clothes washers that offer cycle times for a normal cycle of less than 45 minutes. 85 FR 81359. This document responds to comments unintentionally omitted from the final rule.

DOE received a submission from the Pacific Gas and Electric Company (“PG&E”), San Diego Gas and Electric (“SDG&E”), and Southern California Edison (“SCE”) (collectively referred to as the “CA IOUs”) in response to the notice of proposed rulemaking to establish separate product classes for consumer clothes washers and consumer clothes dryers, 85 FR 49297 (Aug. 13, 2020). Through an unintentional oversight, DOE did not make specific reference to the CA IOUs comments submitted in response to the notice of proposed rulemaking in the final rule. DOE considered the comments and determined that many of the substantive issues the CA IOUs comment brought to DOE's attention were also raised by the other commenters and addressed by DOE in the final rule.

Like other commenters, CA IOUs opposed the rulemaking and expressed various arguments regarding DOE's determination that cycle time was a performance related feature under the Energy Policy and Conservation Act (“EPCA”), 42 U.S.C. 6295(q), that justified the creation of the new product classes. Like other commenters, the CA IOUs also argued that, if finalized, the product classes would result in illegal backsliding of the applicable energy conservation standards under 42 U.S.C. 6295(o)(1). (No. 0036, pp. 6-8) Commenters, including the CA IOUs, stated that the notice of proposed rulemaking (“NOPR”), 85 FR 68724 (Oct. 30, 2020), failed to provide evidence that the current energy and water conservation standards were precluding the shorter normal cycle products from being made available. (No. 0036, p. 1) Like other commenters, CA IOUs also noted that DOE's data implied that multiple clothes washers on the market already met the proposed requirements for the new product classes while also meeting the current energy and water conservation standards. (No. 0036, at p. 3; see also NEEA, No. 0044, pp. 2-5) Commenters, including the CA IOUs, also challenged DOE's determination regarding the environmental impact of the new product classes and urged DOE to conduct and publicly release the analysis to confirm that the proposed product classes should be granted an A5 Categorical Exclusion under the National Environmental Policy Act (“NEPA”) of 1969. (No. 0036, p. 11) Like other commenters, CA IOUs also opposed establishing the new product classes without accompanying test procedures and standards, explaining that the new product classes introduce potential market uncertainties and distortions. They continue that because cycle time is not a factor recorded in the current test procedure for either product and the NOPR lacked reference to reporting requirements, DOE should delay finalizing the rule until greater clarity is provided. (No. 0036, p. 5)

DOE responded to these concerns in the December 2020 final rule, concluding that cycle time was a performance related feature and that the establishment of the new product classes would not result in a violation of EPCA's anti-backsliding provision, see 85 FR 81359, 81362-81368, 81368-81370. DOE maintains that the concerns raised by commenters regarding the overall applicability of EPCA's anti-backsliding provision to clothes washers is too broad and ignores the limitations that EPCA itself places on the scope of the anti-backsliding provision, 42 U.S.C. 6295(o)(1). 85 FR 81369-81370.

DOE responded to those comments discussing the necessity of the new product classes in the final rule. 85 FR 81359, 81365-81366. DOE concluded that even if products with comparable cycle times were already on the market, products under the new product classes would be distinguishable because they are specifically characterized as offering short normal cycles and would be subject to manufacturer testing.

Additionally, DOE stated in the December 2020 final rule that the rulemaking, once finalized, would only establish new product classes, and would not cause adverse environmental impacts, therefore, leaving the rulemaking within the scope of the A5 Categorical Exclusion. 85 FR 81359, 81370.

DOE explained in the final rule that the product class provision under EPCA, 42 U.S.C. 6295(q)(1)(B), does not require the Department to simultaneously establish energy conservation standards in the same rulemaking as the determination of a new product class. The establishment of a new product class is functionally equivalent to the finalization of a coverage determination where a covered product would then exist without an applicable standard until the Department completes a test procedure rulemaking for that product. 42 U.S.C. 6292(b); 85 FR 81359, 81367.

Here, DOE is not acting inconsistently with past practices by establishing the new product classes without accompanying test procedures or standards. Commenters can look to the Department's 2009 beverage vending machines energy conservations standard rulemaking and the 2007 distribution transformer energy conservation standards rulemaking as examples of prior instances where DOE established a new product class without simultaneously prescribing an associated conservation standard. 81 FR 44914, 44920 (Aug. 31, 2009); 72 FR 58190, 58197 (Oct. 12, 2007). See 85 FR 81359, 81367-81368. DOE intends, as these commenters requested, to conduct the necessary rulemakings to consider and evaluate the energy and water consumption limits for the new product classes and determine the applicable standards that provide the maximum energy efficiency that is technologically feasible and economically justified, and will result in a significant conservation of energy, 42 U.S.C. 6295(o)(2)(A). DOE will conduct these rulemakings following EPCA's requirements and the procedures set out in the Process Rule, 1 which will provide the clarity these commenters requested regarding the implementation of this rulemaking. 85 FR 81359, 81368, 81372.

In addition to these shared concerns, the CA IOUs also raised unique comments that DOE addresses in the following paragraphs.

The CA IOUs, in challenging the validity of the short cycle thresholds, noted that DOE tested the 14 consumer clothes dryers for which data was presented according to the Appendix D2 test procedure, which is the optional test procedure for those products. The CA IOUs argued that Appendix D1, which is available for product certification, allows for shorter cycle times while maintaining compliance with the energy efficiency standard according to data produced through DOE-sponsored research at the Oak Ridge National Laboratory. To support their assertion of the unreasonableness of cycle thresholds proposed, CA IOUs continued that this research demonstrated that five products tested under Appendix D1 already offered a cycle time of less than 30 minutes (high temperature setting) while meeting the current standard, in addition to the one product that also had a cycle time of 30 minutes (high temperature setting) and met the standard when tested under Appendix D2. The CA IOUs also conducted independent testing, using Appendix D1, that showed there were multiple clothes dryers on the market offering a 30 minute or less cycle time (high temperature setting) that also met the current energy conservation standard. (No. 0036, pp. 3-4) These commenters concluded that based on this data, short cycle time was not a feature justifying a different a standard and the proposed product classes were not warranted for clothes washers and clothes dryers. (No. 0036, p. 5)

DOE testing presented in the NOPR was conducted according to the Appendix D2 methodology because, unlike Appendix D1, it produces a cycle time that is representative of an average use cycle (even though cycle time is not currently recorded in either test procedure). The methodology in Appendix D1 will not allow for the measurement of a cycle time that is representative of average use, because the cycle is interrupted before completion. While cycle time measured using Appendix D1 would be shorter than the cycle time measured under Appendix D2, DOE maintains that this is not an accurate representation of how consumers would use these products.

As DOE explained in the December 2020 final rule, even if clothes washers and clothes dryers with short normal cycle times for were available, the product class provision, 42 U.S.C. 6295(q), would still be appropriately applied in this rulemaking. While there are some products on the market that may complete a cycle within the time thresholds, DOE is establishing these short cycle product classes to facilitate the development of products design to complete a normal cycle within the threshold times and be subject to testing by the manufacturer. DOE notes that the impact of this rulemaking is to establish product classes based on short normal wash or dry cycles, therefore incentivizing manufacturers to develop such products that can meet consumer needs. 85 FR 81359, 81367.

The CA IOUs reliance on the Oak Ridge study, and the CA IOUs own data, are also out of place in the context of this rulemaking because these data were generated using the test method set forth in Appendix D1. As DOE explained in the NOPR, Appendix D1 does not provide data that can be used to determine a “cycle time” as experienced by the consumer. This is because Appendix D1 requires manually stopping operation at a specified moisture content, normalizing, and applying a field use factor, therefore, the length of time that a clothes dryer is operated during an Appendix D1 test does not necessarily correspond to the length of time that a consumer would operate the clothes dryers (in contrast to the calculated energy use, which is representative of the energy use experienced by the consumer). 85 FR 49297, 49303. This means that while testing under Appendix D1 may identify products on the market that could dry clothes in 30 minutes, it is not an accurate representation of how consumers would use these products because the cycle is manually stopped at the target remaining moisture content. DOE established these short cycle product classes so that consumers would have access to products that accomplish normal washing or drying within the specified cycle time, not just in control room settings.

The CA IOUs also present their review of 111 products in the Consumer Reports database that showed “no clear relationship between normal cycle time and consumer satisfaction” and requested DOE provide evidence of consumer demand. (No. 0036, p. 7) Comments submitted by the Competitive Enterprise Institute (“CEI”) and the 60 Plus Association demonstrated that consumers want and desire these faster products. CEI shared feedback it received from consumers that expressed a need for faster appliances and identified growing consumer dissatisfaction with the current length of cycles. 85 FR 81359, 81366 referencing No. 0031, pp. 2-3. The 60 Plus Association submitted comments, arguing on behalf of its senior citizen members, that the rulemaking offers a significant benefit to individuals looking to make the most of their time. This commenter noted that the time saved by utilizing future, short normal cycle products would make a noticeable difference in the lives of its underrepresented members. 85 FR 81363, referencing No. 0043, p. 1.

The CA IOUs also worried that some manufacturers may easily modify their current products to meet the requirements of the new product classes at the expense of the consumer. (No. 0036, p. 5) While DOE acknowledges these concerns, DOE has no information to support the contention, and does not anticipate that manufacturers would reengineer products already on the market in response to this rulemaking. Further, it remains the consumer's choice ultimately to decide which product on the market that they will choose to purchase. The creation of the new product classes does not set a mandate that consumers must purchase products from these product classes.

DOE thanks the CA IOUs for their comments and directs them to the responses provided in the December 2020 final rule for the shared issues they raised. After considering the unique comments provided by the CA IOUs, DOE affirms the conclusions reached in the December 2020 final rule.

This document of the Department of Energy was signed on January 11, 2021, by Daniel R. Simmons, Assistant Secretary for Energy Efficiency and Renewable Energy, pursuant to delegated authority from the Secretary of Energy. That document with the original signature and date is maintained by DOE. For administrative purposes only, and in compliance with requirements of the Office of the Federal Register, the undersigned DOE Federal Register Liaison Officer has been authorized to sign and submit the document in electronic format for publication, as an official document of the Department of Energy. This administrative process in no way alters the legal effect of this document upon publication in the Federal Register .

Title III, Part C  1 of the Energy Policy and Conservation Act, as amended (“EPCA”), 2 established the Energy Conservation Program for Certain Industrial Equipment, (42 U.S.C. 6311-6317), which includes small electric motors (“SEMs”), the subject of this final determination.

Pursuant to the EPCA requirement that not later than 6 years after issuance of any final rule establishing or amending an energy conservation standard for covered equipment, DOE must publish either a notice of determination that standards for the equipment do not need to be amended, or a notice of proposed rulemaking (“NOPR”) including new proposed energy conservation standards. (42 U.S.C. 6316(a); 42 U.S.C. 6295(m))

DOE analyzed the SEMs currently subject to the standards found at title 10 of the Code of Federal Regulations (“CFR”) part 431. See 10 CFR 431.446. Of these motors, DOE first analyzed the technological feasibility of more efficient SEMs. For currently available SEMs with efficiencies exceeding the levels of the current energy conservation standards, DOE determined that more stringent standards would be technologically feasible. For these SEMs, DOE evaluated whether more stringent standards would also be cost effective by conducting preliminary life-cycle cost (“LCC”) and payback period (“PBP”) analyses.

Based on these analyses, as summarized in section V of this document, DOE has determined that more stringent energy conservation standards would not be cost effective. Therefore, DOE has determined that the current standards for SEMs do not need to be amended.

The following section briefly discusses the statutory authority underlying this final determination, as well as some of the relevant historical background related to the establishment of standards for SEMs.

EPCA authorizes DOE to regulate the energy efficiency of a number of consumer products and certain industrial equipment. Title III, Part C of EPCA includes the small electric motors that are the subject of this final determination. (42 U.S.C. 6311(13)(G)) As discussed in the following paragraphs, EPCA directed DOE to establish test procedures and prescribe energy conservation standards for SEMs. (42 U.S.C. 6317(b))

The energy conservation program under EPCA 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. 6311), energy conservation standards (42 U.S.C. 6313), test procedures (42 U.S.C. 6314), labeling provisions (42 U.S.C. 6315), and the authority to require information and reports from manufacturers (42 U.S.C. 6316).

EPCA directed DOE to establish a test procedure for those SEMs for which DOE determined that energy conservation standards would (1) be technologically feasible and economically justified and (2) result in significant energy savings. (42 U.S.C. 6317(b)(1)) Manufacturers of covered equipment must use the Federal test procedures as the basis for: (1) Certifying to DOE that their equipment complies with the applicable energy conservation standards adopted pursuant to EPCA (42 U.S.C. 6316(a); 42 U.S.C. 6295(s)), and (2) making representations about the efficiency of that equipment (42 U.S.C. 6314(d)). The DOE test procedures for SEMs appear at 10 CFR part 431, subpart X.

EPCA further directed DOE to prescribe energy conservation standards for those SEMs for which test procedures were established. (42 U.S.C. 6317(b)(2)) Additionally, EPCA prescribed that any such standards shall not apply to any SEM which is a component of a covered product under 42 U.S.C. 6292(a) or covered equipment under 42 U.S.C. 6311 of EPCA. (42 U.S.C. 6317(b)(3)) Federal energy efficiency requirements for covered equipment established under EPCA generally supersede State laws and regulations concerning energy conservation testing, labeling, and standards. (See 42 U.S.C. 6316(a) and (b); 42 U.S.C. 6297(a)-(c)).

EPCA requires that, not later than 6 years after the issuance of any final rule establishing or amending a standard, DOE evaluate the energy conservation standards for each type of covered equipment, including those at issue here, and publish either a notice of determination that the standards do not need to be amended, or a NOPR that includes new proposed energy conservation standards (proceeding to a final rule, as appropriate). (42 U.S.C. 6316(a); 42 U.S.C. 6295(m)(1)). EPCA further provides that, not later than 3 years after the issuance of a final determination not to amend standards, DOE must make a new determination not to amend the standards or issue a NOPR including new proposed energy conservation standards. (42 U.S.C. 6316(a); 42 U.S.C. 6295(m)(3)(B)) DOE must make the analysis on which a determination is based publicly available and provide an opportunity for written comment. (42 U.S.C. 6316(a); 42 U.S.C. 6295(m)(2))

In making a determination that the standards do not need to be amended, DOE must evaluate under the criteria of 42 U.S.C. 6295(n)(2) whether amended standards (1) will result in significant conservation of energy, (2) are technologically feasible, and (3) are cost effective as described under 42 U.S.C. 6295(o)(2)(B)(i)(II). (42 U.S.C. 6316(a); 42 U.S.C. 6295(m)(1)(A) and 42 U.S.C. 6295(n)(2)) 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 product in the type (or class) compared to any increase in the price of, or in the initial charges for, or maintenance expenses of, the covered products which are likely to result from the imposition of the standard.

DOE is publishing this document in accordance with its authority under EPCA, and in satisfaction of its statutory requirement under EPCA.

The current energy conservation standards for SEMs are located in title 10 CFR 431.446, and are presented in Table II-1 and Table II-2.

The information and communications technology and services (ICTS) supply chain is critical to nearly every aspect of U.S. national security. U.S. business and governments at all levels rely heavily on ICTS, which: Underpin our economy; support critical infrastructure and emergency services; and facilitate the Nation's ability to store, process, and transmit vast amounts of data, including sensitive information, that is used for personal, commercial, government, and national security purposes. The ICTS supply chain must be secure to protect our national security, including the economic strength that is an essential element of our national security. Ensuring the resilience of, and trust in, our ICTS supply chain is an issue that touches upon national security, including economic security, and public health and safety.

The purchase, incorporation, and use by U.S. persons of ICTS—such as network management or data storage—produced by any person owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary—can create multiple opportunities for those foreign adversaries to exploit potential vulnerabilities in the ICTS. That, in turn, could cause direct and indirect harm to both the immediate targets of the adverse action and to the United States as a whole. While attacks can originate from remote foreign sources, incorporating certain software, equipment, and products into U.S. domestic ICTS networks, as well as the use of certain cloud, network management, or other services, greatly increases the risk that potential vulnerabilities may be introduced, or that vulnerabilities may be present without being detected. These potential vulnerabilities, if exploited, could undermine the confidentiality, integrity, and availability of U.S. person data including personally identifiable information or other sensitive personal data.

Some foreign adversaries are known to exploit the sale of software and hardware to introduce vulnerabilities that can allow them to steal critical intellectual property, research results ( e.g., health data), or government or financial information from users of the software or hardware. Such vulnerabilities can be introduced in the network, cloud service, or individual product data; allow traffic monitoring or surveillance; and may be resistant to detection by private purchasers or telecommunications carriers. Once detected, such vulnerabilities may be extremely costly or impossible to remediate.

Vulnerabilities to data integrity can be created by including a foreign adversary's hardware and software into U.S. networks and systems. This incorporated hardware and software poses opportunities to add or remove important information, modify files or data streams, slow down, or otherwise modify the normal transmission or availability of data across U.S. networks. Such capabilities could be exercised in areas as diverse as financial market communications, satellite communications or control, or sensitive consumer information.

A foreign adversary could also exploit vulnerabilities provided by the incorporation of hardware and software into U.S. environments by fully or partially closing down critical networks or functions at key times. These types of attacks are known as denial of service attacks. Such attacks could cause widespread problems, such as if they occur during periods of crisis, or they could be used selectively by targeting individual corporations or important infrastructure elements or functions. They could also be masked to make the source of the disruption difficult to attribute and, therefore, difficult to trace and stop.

These risks are not necessarily confined to infrastructure environments. They could, for example, be present in the use of cloud services, as well as in the widespread use of some consumer devices, networked surveillance cameras, drones, or interconnection via the internet of computing devices embedded in everyday objects, enabling them to send and receive data. For example, applications (“apps”), which may be downloaded from app stores or web browsers by a user to a mobile device, may automatically capture vast swaths of sensitive personal data from its users, including internet and other network activity information such as location data and browsing and search histories. This data exfiltration—supported by U.S. web data hosting and storage servers—threatens to allow foreign adversaries to exploit Americans' personal and proprietary information by allowing a foreign adversary to track the locations of Americans, build dossiers of sensitive personal data for blackmail, and conduct corporate espionage from inside the borders of the United States.

Multiple reported cybersecurity incidents in the United States and among major allies in 2020 illustrate the potential risk in permitting unrestricted access to U.S. ICTS supply chains, such as:

Consequently, the President has determined that the unrestricted acquisition or use of ICTS that are designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.

Executive Order 13873 of May 15, 2019, “Securing the Information and Communications Technology and Services Supply Chain” (84 FR 22689) (Executive Order), was issued pursuant to the President's authority under the Constitution and the laws of the United States, including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq. ) (IEEPA), the National Emergencies Act (50 U.S.C. 1601 et seq. ), and section 301 of Title 3, United States Code. IEEPA and the Executive Order grant the Secretary of Commerce (Secretary) the authority to prohibit any acquisition, importation, transfer, installation, dealing in, or use of any ICTS (an “ICTS Transaction”) by any person, or with respect to any property, subject to United States jurisdiction, when such ICTS Transaction involves any property in which a foreign country or national has any interest, and the Secretary, in consultation with other agency heads (the Secretary of the Treasury, the Secretary of State, the Secretary of Defense, the Attorney General, the Secretary of Homeland Security, the United States Trade Representative, the Director of National Intelligence, the Administrator of General Services, the Chairman of the Federal Communications Commission, and the heads of any other executive departments and agencies as the Secretary determines is appropriate) determines that the ICTS Transaction: (1) Involves ICTS designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and (2) poses an undue or unacceptable risk. Executive Order, Section 1(a). The Executive Order further provides the Secretary with the authority to prohibit such an ICTS Transaction or “design or negotiate measures to mitigate concerns” about an ICTS Transaction's impact on national security. Executive Order, Section 1(b).

On November 27, 2019, the Department of Commerce (Department) published a proposed rule to implement the terms of the Executive Order. (84 FR 65316). The proposed rule set forth processes for (1) how the Secretary would evaluate and assess transactions involving ICTS to determine whether they pose an undue risk of sabotage to or subversion of the ICTS supply chain, or an unacceptable risk to the national security of the United States or the security and safety of U.S. persons; (2) how the Secretary would notify parties to transactions under review of the Secretary's decision regarding the ICTS Transaction, including whether the Secretary would prohibit or mitigate the transaction; and (3) how parties to transactions reviewed by the Secretary could comment on the Secretary's preliminary decisions. The proposed rule also provided that the Secretary could act without complying with the proposed procedures where required by national security. Finally, the Secretary would establish penalties for violations of mitigation agreements, the regulations, or the Executive Order.

In addition to seeking general public comment, the Department requested comments from the public on five specific questions: (1) Whether the Secretary should consider categorical exclusions or whether there are classes of persons whose use of ICTS cannot violate the Executive Order; (2) whether there are categories of uses or of risks that are always capable of being reliably and adequately mitigated; (3) how the Secretary should monitor and enforce any mitigation agreements applied to a transaction; (4) how the terms, “transaction,” “dealing in,” and “use of” should be clarified in the rule; and (5) whether the Department should add record-keeping requirements for information related to transactions.

In response to requests for additional time in which to comment on the proposed rule, the Department extended the initial comment period from December 27, 2019, until January 10, 2020. (84 FR 70445). As reflected herein, the Department has carefully considered and addressed the public's comments in promulgating this rule.

Nonetheless, because several commenters requested that the Department provide for an additional round of public comment, and in an effort to continue the Department's work to protect the national security while reducing the regulatory impact on the public, the Department is taking further public comment on the rule. However, mindful of the urgent need of the United States to address national security concerns related to ICTS Transactions, this interim final rule will be effective March 22, 2021. The Department is committed to issuing a subsequent final rule in which the Department will consider and respond to additional comments received. In addition, the Department will implement and publish procedures for a licensing process by May 19, 2021.

During the public comment period on the proposed rule, the Department received a number of written submissions reflecting a wide range of views. All comments received by the end of the comment period are available on the public rulemaking docket at https://www.regulations.gov. Additionally, the Department participated in a number of meetings with foreign governments and industry groups to discuss the proposed rule prior to the comment period ending. Summaries of those meetings are available at https://www.regulations.gov. Below, the Department addresses the comments as they pertain to each relevant provision of the regulation.

Numerous comments addressed the extent to which the Department interacts with other agencies and department heads throughout the process for reviewing ICTS Transactions. Some commenters advocated for the rule to require interagency review of all parts of the investigations and final determinations, while other commenters noted that interagency review should only happen during certain parts of the review process. Other commenters requested that the Secretary notify the heads of relevant agencies when a review is initiated.

Requirements regarding interagency review are already contained within the Executive Order and, thus, are not subject to change.

Nevertheless, for clarification, the Department has replaced the term “identified secretaries” with “appropriate agency heads,” to address the fact that some of the individuals referenced are not Cabinet Secretaries, but rather are heads of agencies. For clarity, the term “appropriate agency heads” refers to the Secretary of the Treasury, the Secretary of State, the Secretary of Defense, the Attorney General, the Secretary of Homeland Security, the United States Trade Representative, the Director of National Intelligence, the Administrator of General Services, the Chairman of the Federal Communications Commission, and the heads of any other executive departments and agencies the Secretary of Commerce determines is appropriate. The Executive Order makes clear the Secretary of Commerce will confer with other agencies and departments as needed.

Although it was not defined in the proposed rule, the Department has added a definition of the term “Department” to clarify that it refers to the United States Department of Commerce, rather than any other Cabinet-level agency.

The rule grants the Secretary the authority to block or mitigate certain ICTS Transactions involving a foreign adversary. Commenters suggested limiting the definition of a “foreign adversary” to entities already identified in legislation. Some commenters recommended changing the concept of “foreign adversary” to focus on entities or persons instead of nation-states. Other commenters suggested that the Department create a list of adversaries and a list of exempt countries and distinguish between government and non-governmental entities. Commenters also recommended narrowing the scope of the term “foreign adversary” to situations where a foreign adversary has controlling interest in the company executing the covered transaction.

The rule makes no changes to the definition of “foreign adversary,” which is consistent with the Executive Order's definition. However, as discussed further below, the rule now includes a provision titled “Determination of foreign adversaries” in section 7.4. This provision sets out the list of foreign governments and foreign non-government persons that the Secretary has determined, solely for the purposes of the Executive Order, this rule, and any subsequent rules, are “foreign adversaries.” It also explains some of the factors that the Secretary considered, and will consider, when making any future determinations of whether a country is a “foreign adversary.” Pursuant to the Secretary's discretion, the list of foreign adversaries will be revised as determined to be necessary. Because the determination of foreign adversaries is subject solely to the Secretary's discretion, such revisions will be effective immediately upon publication in the Federal Register without prior notice or opportunity for public comment.

The list of “foreign adversaries” consists of the following foreign governments and non-government persons: The People's Republic of China, including the Hong Kong Special Administrative Region (China); the Republic of Cuba (Cuba); the Islamic Republic of Iran (Iran); the Democratic People's Republic of Korea (North Korea); the Russian Federation (Russia); and Venezuelan politician Nicolás Maduro (Maduro Regime). The provision clarifies that the Secretary's determination is based on multiple sources, including the National Security Strategy of the United States, the Office of the Director of National Intelligence's 2016-2019 Worldwide Threat Assessments of the U.S. Intelligence Community, and the 2018 National Cyber Strategy of the United States of America, as well as other reports and assessments from the U.S. Intelligence Community, the U.S. Departments of Justice, State and Homeland Security, and other relevant sources. Additionally, the provision notes that the Secretary will periodically review this list in consultation with appropriate agency heads and may add to, subtract from, supplement, or otherwise amend the list.

It is important to note that the list at section 7.4 identifies “foreign adversaries” solely for the purposes of the Executive Order, this rule, and any subsequent rules. It does not reflect a determination by the United States about the nature of such foreign governments or foreign non-government persons for any other purpose.

The proposed rule defined the term “transaction” using terms from the Executive Order, to mean, “any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.” It also noted that the term “transaction” “includes a class of transactions.”

Some commenters requested the Department refine the definition of “transaction” in various ways. For example, some commenters suggested adopting language from the Securities Exchange Act of 1934 to define some of the terms in the definition, such as “dealing in.” Others urged the Department to further clarify the definition “transaction” to define the terms “acquisition,” or “use” in the definition.

The Department acknowledges that the terms “transaction,” “acquisition,” and “use” are broad, and retain their commonly-accepted meanings in the rule. The concerns raised by the commenters are addressed by defining the term “ICTS Transaction” to include (1) “ongoing activities, such as managed services, data transmission, software updates, repairs, or the platforming or data hosting of applications for consumer download;” and (2) “any other transaction, the structure of which is designed or intended to evade or circumvent the application of the Executive Order.” The purpose of these additions is to clarify that the Secretary may review ICTS Transactions, including the provision of services, that occur on or after January 19, 2021, by any person owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary. Providing services, such as software updates, to U.S. persons may provide a foreign adversary an opportunity to engage in the types of activities that may threaten U.S. national security, as described above. Further, the definition of ICTS Transaction clarifies that attempting to structure a transaction in order to circumvent Secretarial review is nonetheless an ICTS Transaction subject to this rule.

Several commenters expressed an interest in the Department further clarifying what entities are covered by the rule. Further, in revising the proposed rule for finalization, the Department used the term “party to a transaction” in several instances and believes it would be beneficial to define that term. Accordingly, the rule adds a definition of “party or parties to a transaction,” to mean a person engaged in an ICTS Transaction, including the person acquiring the ICTS and the person from whom the ICTS is acquired. The term “person” is also defined by the rule and is unchanged from the proposed rule.

“Party or parties to a transaction” include entities designed or intended to evade or circumvent application of the Executive Order. For purposes of this rule, this definition does not include common carriers that transport goods for a fee on behalf of the general public, except to the extent that a common carrier knows, or should have known (as the term “knowledge” is defined in 15 CFR 772.1), it was providing transportation services of ICTS to one or more of the parties to a transaction that has been prohibited in a final written determination made by the Department or permitted subject to mitigation measures.

This addition narrows the scope of the rule by adding clarity regarding which persons are responsible for a reviewable transaction. This also affects which parties will be notified by the Department regarding any potential review of a transaction.

In addition to defining “party or parties to a transaction,” the Department sought to add clarity to the rule by defining the phrase “person owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary,” as many commenters expressed concern that leaving such terms undefined might create confusion about the breadth of the rule's reach. The Department defines “person owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary” to mean “any person, wherever located, who acts as an agent, representative, or employee, or any person who acts in any other capacity at the order, request, or under the direction or control, of a foreign adversary or of a person whose activities are directly or indirectly supervised, directed, controlled, financed, or subsidized in whole or in majority part by a foreign adversary; any person, wherever located, who is a citizen or resident of a nation-state controlled by a foreign adversary; any corporation, partnership, association, or other organization organized under the laws of a nation-state controlled by a foreign adversary; and any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by a foreign adversary.”

Many commenters requested additional clarity about the specific ICTS that is subject to this rule. While it is impossible to identify all of the ICTS that may present undue or unnecessary risks, the Department has defined the term, “sensitive personal data,” to identify, along with the information identified in section 7.3 of the rule, some of types of information or communications that might be involved in an ICTS Transaction reviewed under this rule where a party or parties to a transaction use, possess, or retain, or are expected to use, possess, or retain sensitive personal data.

The term “sensitive personal data” includes: (1) Personally Identifiable Information ( i.e., data that can identify individuals) that is maintained or collected by a U.S. business operating in specific areas, and that is maintained or collected on over one million people over a 12 month period; and (2) results of individual genetic testing.

The categories of identifiable data of concern to the Department are: Financial data that could be used to indicate an individual's financial distress or hardship; the set of data included in consumer reports; the set of data used for health and certain financial insurance applications; data relating to the physical, mental, or psychological health condition of an individual; non-public electronic communication information, such as personal emails; geolocation data used in certain technologies; biometric data; data stored and processed for generating Federal, State, Tribal, Territorial, or other government identification cards; data concerning U.S. Government personnel security clearance status; and data from security clearance or employment applications.

As indicated in section 7.3, Scope, the Department believes that ICTS Transactions involving sensitive personal data could create risks for the U.S. national security and also believes it is important to specifically identify these categories of data to provide the regulated community with additional specificity and certainty as to the scope of the rule's application.

Commenters recommended various alternative uses for and limits on this term. For example, some suggested that the Department identify certain industries or types of transactions that do not pose a risk to national security, and that the Department should exempt certain types of transactions from the rule.

Most of the suggestions could unnecessarily limit the United States' ability to determine its national security interests and, thus, could limit the ability to protect the Nation. However, the Department agrees the term requires definition, and in this rule adopts the definition of “undue or unacceptable risks” as those risks identified in Section 1(a)(ii) of the Executive Order. Section 1(a)(ii) of the Executive Order includes the following risks . . . an undue risk of sabotage to or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of information and communications technology or services in the United States; . . . an undue risk of catastrophic effects on the security or resiliency of United States critical infrastructure or the digital economy of the United States; or . . . an unacceptable risk to the national security of the United States or the security and safety of United States persons.

Many commenters suggested ways the Department could narrow the scope of the rule to provide more guidance for the types of transactions the Department may review. For example, commenters noted the potential impact of the proposed rule on certain types of transactions, such as transportation services of ICTS, and argued the rule would harm commenters' industries. They also argued that the proposed rule was overly broad and that narrowing the scope would bring greater economic certainty to ICTS Transactions and the technology industry as a whole.

Other commenters sought to have the Department identify categorical exemptions for select industries, such as ICTS Transactions involving medical devices or services for air traffic control, while yet others sought to exempt transactions involving companies with their business headquarters in allied nations, such as Japan. Commenters also suggested that, provided appropriate cybersecurity mitigation techniques exist, transactions involving otherwise banned equipment should be exempted from this rule.

The Department concludes that categorical exemptions of specific industries or geographic locations are unwarranted at this time, although the Secretary may consider this possibility in the future. Wholesale exemptions of industries and geographic locations would not serve the rule's intended purpose of securing the ICTS supply chain because such exemptions would contradict the Department's evaluation method for ICTS Transactions. Such exemptions would indicate to foreign adversaries whole classes of ICTS Transactions outside the scope of evaluation under this rule. This would allow foreign adversaries to pinpoint certain types of ICTS Transactions that would more easily escape Departmental oversight and, therefore, threaten U.S. national security. By retaining broad authority across industries, the Department will be better able to mitigate identified risks.

While the rule does not contain categorical exemptions of specific industries or geographic locations, the rule now specifies that ICTS Transactions that involve certain technologies, hardware, or software will be considered to be covered ICTS Transactions. Additionally, the rule does make clear that, as further discussed below, the acquisition of ICTS items by a United States person as a party to a transaction authorized under a U.S. government-industrial security program, is not an ICTS Transaction. Additionally, the Department acknowledges that ICTS Transactions solely involving personal ICTS hardware devices, such as handsets, do not warrant particular scrutiny.

Many commenters requested that the Department identify those technologies or products that the Department considers create the greatest risks to the national security of the United States. The Department understands the desire for additional certainty and broke down the scope of technologies included under the scope of this rule into six main types of ICTS Transactions involving: (1) ICTS that will be used by a party to a transaction in a sector designated as critical infrastructure by Presidential Policy Directive 21—Critical Infrastructure Security and Resilience, including any subsectors or subsequently designated sectors; (2) software, hardware, or any other product or service integral to wireless local area networks, mobile networks, satellite payloads, satellite operations and control, cable access points, wireline access points, core networking systems, or long- and short-haul systems; (3) software, hardware, or any other product or service integral to data hosting or computing services that uses, processes, or retains, or is expected to use, process, or retain, sensitive personal data on greater than one million U.S. persons at any point over the twelve months preceding an ICTS Transaction; (4) certain ICTS products which greater than one million units have been sold to U.S. persons at any point over the twelve months prior to an ICTS Transaction; (5) software designed primarily for connecting with and communicating via the internet that is in use by greater than one million U.S. persons at any point over the twelve months preceding an ICTS Transaction; (6) ICTS integral to artificial intelligence and machine learning, quantum key distribution, quantum computing, drones, autonomous systems, or advanced robotics.

Many commenters requested that the Department establish a process for entities to seek pre-approval of their ICTS Transactions, similar to the process by which entities may inform the Committee on Foreign Investment in the United States (CFIUS) of investments in U.S. businesses, and obtain “safe harbor” for those transactions. Commenters argued that such a process would help ease business uncertainty in specific cases.

To afford parties greater certainty, within 60 days of the publication date of this rule, the Department intends to publish procedures to allow a party or parties to a proposed, pending, or ongoing ICTS Transaction to seek a license, pursuant to Section 2(b) of the Executive Order, in a manner consistent with the national security of the United States. Within 120 days of the publication date of this rule, the Department intends to implement this licensing process. The published procedures will establish criteria by which persons may seek a license to enter into a proposed or pending ICTS Transaction or engage in an ongoing ICTS Transaction. Persons who may seek a license will include any parties to a proposed, pending, or ongoing ICTS Transaction as that term is defined in this rule. License application reviews will be conducted on a fixed timeline, not to exceed 120 days from accepting a license application, to enable qualifying parties to conclude permissible transactions without undue delay. If the Department does not issue a license decision within 120 days from accepting a license application, the application will be deemed granted. In no event, however, would the Department issue a license decision on an ICTS Transaction that would reveal sensitive information to foreign adversaries or others who may seek to undermine U.S. national security. Qualifying parties may voluntarily apply for a license, and a party's decision not to seek a license will not create a negative inference or unfavorable presumption with respect to a transaction.

Regarding the Department's assessment of undue and unacceptable risk, commenters suggested that the Department create risk criticality categories for transactions, such as low, medium, and high, along with different assessment approaches. Other commenters advocated using risk scores or categories to determine the frequency and rigor of monitoring.

The Department agrees that the scope of the rule could be narrowed to indicate more specifically the types of ICTS Transactions that may be reviewed. Accordingly, the Department clarifies that ICTS Transactions include those that involve, among other aspects, a sector designated as critical infrastructure by Presidential Policy Directive 21—Critical Infrastructure Security and Resilience, including any subsectors or subsequently designated sectors. As explained below, the Department has also clarified that transactions involving certain sensitive personal data, regardless of whether they involve a critical infrastructure sector, will be considered ICTS Transactions for the purposes of the rule.

Many commenters sought clarity about the relationship of this rule to the rules relating to CFIUS's review of transactions. In response, the Department is clarifying that this rule does not apply to an ICTS Transaction that CFIUS is actively reviewing, or has reviewed, as a covered transaction or covered real estate transaction or as part of such a transaction under section 721 of the Defense Production Act of 1950, as amended, and its implementing regulations. Note, however, that a transaction involving ICTS that is separate from, and subsequent to, a transaction for which CFIUS has concluded action under section 721 may be subject to review under this rule, if and to the extent that such transactions are separate from the transaction reviewed by CFIUS. Parties should therefore be aware that CFIUS review related to a particular ICTS, by itself, does not present a safe harbor for future transactions involving the same ICTS that may present undue or unnecessary risks as determined by the Department.

Commenters requested categorical exclusions across many sectors, industries, functions, and nations. The Secretary recognizes the need to be judicious and deliberate in deciding what types of ICTS Transactions pose an undue or unacceptable risk. To that end, the rule excludes from the scope of the rule those transactions that involve the acquisition of ICTS items by a United States person as a party to a transaction authorized under a U.S. Government-industrial security program, because they are subject to continuous security oversight by, and contractual obligations to, other Federal agencies.

Some commenters argued that the rule should not apply to transactions that took place prior to May 15, 2019, when the Executive Order was issued. Other commenters advocated for the complete elimination of the proposed rule's retroactivity provisions, and proposed the Department only evaluate potential transactions prospectively. Other commenters proposed grandfathering some ICTS equipment for a predetermined duration, potentially up to 10 years. In reviewing these comments and the proposed rule, the Department determined that the temporal limits of the rule's application could be clarified.

In response to these comments, the Department has clarified, in section 7.3(a)(3), that the rule applies to an ICTS Transactions that is initiated, pending, or completed on or after January 19, 2021. Further, any act or service with respect to an ICTS Transaction, such as execution of any provision of a managed services contract or installation of software updates, is an ICTS Transaction on the date that the service or update is provided. Thus, if a person that is owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary engages in an ICTS Transaction with a person subject to the jurisdiction of the United States on or after January 19, 2021, even if the service was provided pursuant to a contract initially entered into prior to January 19, 2021, that transaction is an ICTS Transaction that may be reviewed under this rule. The service is a new transaction separate from the underlying contract that will be subject to review by the Secretary.

As noted above, many commenters requested the Department identify those countries that it considers to be “foreign adversaries.” Naming these countries, the commenters argued, would facilitate global trade by allowing U.S. businesses to assess the risks of certain types of ICTS Transactions from certain countries. It would also allow companies to adjust their supply chains to avoid the risks in such transactions, including the risk of an ICTS Transaction being reviewed, and possibly prohibited or modified, under this rule. Several commenters also noted that defining “foreign adversaries” would help determine, and possibly reduce, the adverse economic impact the rule may have on businesses through better business planning.

In response to these comments, the Department reconsidered its prior determination not to identify specific “foreign adversaries.” The Department has determined that it is beneficial for the clarity of the rule, as well as for persons with ICTS Transactions that may be subject to the rule, to identify certain foreign governments and foreign non-government persons that are considered, solely for the purposes of the Executive Order, this rule, and any subsequent rules, to be “foreign adversaries.” The list of foreign governments and foreign non-government persons this rule identifies as being “foreign adversaries” are: The People's Republic of China, including the Hong Kong Special Administrative Region (China); the Republic of Cuba (Cuba); the Islamic Republic of Iran (Iran); the Democratic People's Republic of Korea (North Korea); the Russian Federation (Russia); and Venezuelan politician Nicolás Maduro (Maduro Regime). The Secretary identified these foreign adversaries because they have engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons, including taking actions and enacting policies that are inimical to the interests of the United States.

The determination to identify these “foreign adversaries” is based on multiple sources, including threat assessments and reports from the U.S. Intelligence Community, the U.S. Departments of Justice, State, and Homeland Security, and other relevant sources. Additionally, the Secretary will periodically review this list in consultation with appropriate agency heads and may add to, subtract from, supplement, or otherwise amend the list. Accordingly, this list may be revised at any time in the future. Any such changes will be announced in the Federal Register .

It is important to note that the list is solely for the purposes of the Executive Order, this rule, and any subsequent rules and does not reflect a determination by the United States about the nature of such foreign governments and foreign non-government persons for any purposes other than that ICTS Transactions with persons (as defined in this rule) owned by, controlled by, or subject to the jurisdiction or direction of an identified foreign adversary may pose an undue or unacceptable risk. Further, the rule states that any amendment to this list will apply to any ICTS Transaction that is initiated, pending, or completed on or after the date that the list is amended.

Many commenters suggested that this rule should not apply if overlapping and existing U.S. authorities are in force, referencing in particular existing national security regulatory regimes. Specifically, commenters pointed to CFIUS; authorities under various National Defense Authorization Acts; the Export Administration Regulations; the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector ( i.e., Team Telecom); and other programs under the authority of the Federal Communications Commission, the Department of Homeland Security, and the Office of the Director of National Intelligence. Other commenters recommended exempting equipment provided by companies involved in mitigation agreements with the Federal Government.

This rule does not alter or affect any of these existing authorities; it is intended to complement, not supplant, these existing regimes. However, the Department understands the need for regulatory and business certainty, and in the interest of not duplicating efforts by other parts of the U.S. Federal government, the rule states that it does not apply to ICTS Transactions that CFIUS is actively reviewing, or has reviewed, as a covered transaction or covered real estate transaction or as part of such a transaction under section 721 of the Defense Production Act of 1950, as amended, and its implementing regulations. However, this exclusion in no way precludes a review of a subsequent ICTS Transaction if distinct from the previously CFIUS-reviewed transaction or new information is discovered.

Other provisions of the rule provide additional means of ensuring that any action taken by the Secretary neither conflicts with nor frustrates the purposes of other existing laws, regulations or processes. Thus, there are two separate points during the review process at which the Secretary is expressly required to consult with appropriate agency heads: before making an initial determination that the transactions is an ICTS Transaction that poses an undue or unacceptable risk (section 7.104) and before making a final determination (section 7.108). In requiring that the Secretary consult with other agency heads, the rule provides for a coordination mechanism with other agencies and Departments that have potentially overlapping jurisdiction. For example, before making an initial determination concerning a transaction, the review of which might potentially overlap with a review under CFIUS, the Secretary is required to consult with, among others, the Secretary of the Treasury, who serves as the Chairperson of CFIUS, thereby helping to ensure coordination and avoid redundancy.

In addition, section 7.100(a) of the rule provides that the Secretary may consider all relevant information provided by any U.S. Government national security body or other Federal Government agency, department or regulatory body in determining what action may be necessary to ameliorate a threat posed by an ICTS Transaction.

Commenters largely recommended the final rule clarify the review process, requesting the specific criteria by which the Department will use to review transactions. As a whole, Subpart B adds a more detailed review process, as requested by commenters.

Many commenters sought clarity as to the type of information on which the Secretary could base a determination to commence an evaluation of a transaction. In response to these comments, section 7.100(a) identifies sources or information, factors, and other variables related to a transaction that the Secretary may consider when reviewing a transaction. This list is non-exclusive and does not prevent the Secretary from reviewing any available information; the list is intended to provide parties to transactions with greater clarity about the types of materials on which the Secretary may rely when deciding whether to review (and during that review of) a transaction.

The rule states that the Secretary may consider information provided by any U.S. Government national security body or other Federal agencies. In addition, the rule clarifies that the Secretary, when making determinations about specific transactions, may also consider information that includes: (1) Relevant public information; (2) confidential business or proprietary information; (3) classified national security information; (4) information from State, local, tribal, or foreign governments; (5) information from parties to a transaction, including records related to such transaction that any party keeps or uses, or would be expected to keep or use, in their ordinary course of business for such a transaction; (6) information obtained through the authority granted under sections 2(a) and (c) of the Executive Order and IEEPA; and (7) information provided by any other U.S. Government agency, department, or other regulatory body.

The rule further revises section 7.100(a) to specify that information may be obtained through any administrative investigative or enforcement action undertaken pursuant to the authority granted under sections 2(a) and (c) of the Executive Order and IEEPA. The purpose of this clarification is to set out precisely the authorities that grant the Secretary the power to access and collect documents related to investigations and determinations of potentially prohibited transactions.

In order to provide industry with more clarity regarding the determination of whether an ICTS Transaction involves ICTS designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary, the Department added guidance about what information it will consider when making these decisions. These factors include: (1) Whether the party or its component suppliers have headquarters, research, development, manufacturing, test, distribution, or service facilities or other operations in a foreign country, including one controlled by a foreign adversary; (2) personal and professional ties between the party—including its officers, directors or similar officials, employees, consultants, or contractors—and any foreign adversary; (3) laws and regulations of the foreign adversary in which the party is headquartered or conducts operations, including research and development, manufacturing, packaging, and distribution; and (4) any other criteria that the Secretary deems appropriate.

Commenters also requested additional information from the Department about how it will determine whether an ICTS Transaction poses an undue or unacceptable risk. Along with listing factors to help determine the relationship between a foreign party to an ICTS Transaction and a foreign adversary, the Department has provided guidance on some of the information that the Secretary, in consultation with the appropriate agency heads, will consider when determining the impact of an ICTS Transaction on U.S. national security.

Specifically, when determining whether an ICTS Transaction poses an undue or unacceptable risk, the Secretary and the appropriate agency heads will consider factors such as: (1) Threat assessments and reports prepared by the Director of National Intelligence pursuant to section 5(a) of the Executive Order; (2) removal or exclusion orders issued by the Secretary of Homeland Security, the Secretary of Defense, or the Director of National Intelligence (or their designee) pursuant to recommendations of the Federal Acquisition Security Council, under 41 U.S.C. 1323; (3) relevant provisions of the Defense Federal Acquisition Regulation and the Federal Acquisition Regulation, and their respective supplements; (4) entities, hardware, software, and services that present vulnerabilities in the United States as determined by the Secretary of Homeland Security pursuant to section 5(b) of the Executive Order, Department of Homeland Security Cybersecurity and Infrastructure Security Agency, “Information and Communications Technology Supply Chain Risk Management Task Force: Interim Report,” September 18, 2019; (5) actual and potential threats to execution of a “National Critical Function” identified by the Department of Homeland Security Cybersecurity and Infrastructure Security Agency; (6) the nature, degree, and likelihood of consequence to the United States public and private sectors that could occur if ICTS vulnerabilities were to be exploited; and (7) any other source or information that the Secretary deems appropriate.

The Department specifically requested comments on transactions that could present an undue or unacceptable risk, but where that risk could be reliably and adequately mitigated or prevented. Commenters suggested creating national security risk categories for transactions and providing assurance that the Secretary would impose the least intrusive measures to mitigate transactions in each category. Other commenters advocated creating risk categories or bands with different assessment approaches. The Department did not adopt these suggestions. ICTS Transaction reviews are made on a case-by-case basis. Therefore, categorically labeling transactions with pre-determined mitigation requirements would effectively counteract that individualized approach and may result in ICTS Transactions proceeding that otherwise should have been reviewed, and possibly prohibited or mitigated.

In determining whether an ICTS Transaction poses an undue or unacceptable risk, the rule clarifies the risk factors the Secretary, in consultation with the appropriate agency heads, may consider. Specifically, the Secretary may consider: (1) Threat assessments and reports prepared by the Director of National Intelligence pursuant to section 5(a) of the Executive Order; (2) removal or exclusion orders issued by the Secretary of Homeland Security, the Secretary of Defense, or the Director of National Intelligence (or their designee) pursuant to recommendations of the Federal Acquisition Security Council, under 41 U.S.C. 1323; (3) relevant provisions of the Defense Federal Acquisition Regulation and the Federal Acquisition Regulation, and their respective supplements; (4) entities, hardware, software, and services that present vulnerabilities in the United States as determined by the Secretary of Homeland Security pursuant to section 5(b) of the Executive Order, Department of Homeland Security Cybersecurity and Infrastructure Security Agency, “Information and Communications Technology Supply Chain Risk Management Task Force: Interim Report,” September 18, 2019; (5) actual and potential threats to execution of a “National Critical Function” identified by the Department of Homeland Security Cybersecurity and Infrastructure Security Agency; (6) the nature, degree, and likelihood of consequence to the United States public and private sectors that could occur if ICTS vulnerabilities were to be exploited; and (7) any other source or information that the Secretary deems appropriate.

The proposed rule contemplated that individuals might be requested to furnish the Secretary with information related to a transaction under review. Section 7.101 in this rule clarifies that, under the Secretary's authority pursuant to IEEPA, persons may be required to furnish under oath complete information relative to any ICTS Transaction under review. The Secretary may require that such reports include the production of any books, contracts, letters, papers, or other hard copy or electronic documents relating to any such act, transaction, or property, in the custody or control of the persons required to make such reports. Reports may be required either before, during, or after an ICTS Transaction under review. Additionally, under the authorities provided by IEEPA, the Secretary may, through any person or agency, conduct investigations, hold hearings, administer oaths, examine witnesses, receive evidence, take depositions, and require by subpoena the attendance and testimony of witnesses and the production of any books, contracts, letters, papers, and other hard copy or electronic documents relating to any matter under investigation.

The proposed rule requested comments and recommendations from stakeholders on additional recordkeeping requirements for information related to transactions. Most commenters focused on the confidentiality and the public availability of any information received. Commenters strongly advocated that the Department protect confidential or proprietary business information when making or publishing reports. Some commenters advocated for more open publication of these reports, and how each threat was mitigated or eliminated.

To address these concerns and provide additional certainty for entities required to produce documents related to transactions, the rule clarifies the Department's responsibility to preserve the confidentiality of information requested by the Department. Specifically, the rule provides that information or documentary materials that are not otherwise publicly or commercially available, submitted or filed with the Secretary under this part, will not be released publicly except to the extent required by law. However, the Secretary may disclose information or documentary materials, not otherwise publicly or commercially available: (1) Pursuant to any administrative or judicial proceeding; (2) pursuant to an act of Congress; (3) pursuant to a request from any duly authorized committee or subcommittee of Congress; (4) pursuant to a request to any domestic governmental entity, or to any foreign governmental entity of a United States ally or partner, information or documentary materials, not otherwise publicly or commercially available and important to the national security analysis or actions of the Secretary, but only to the extent necessary for national security purposes, and subject to appropriate confidentiality and classification requirements; (5) where the parties or a party to a transaction have consented the information or documentary materials not otherwise publicly or commercially available may be disclosed to third parties; and (6) any other purpose authorized by law. These provisions largely incorporate the record release requirements of the Freedom of Information Act, 5 U.S.C. 552. While the Department will, as always, seek to protect business and other confidential information provided by parties, parties providing such information in response to this rule must clearly mark those documents as business or other confidential.

Many commenters addressed the manner in which an ICTS Transaction could be identified to the Secretary as a transaction that should be reviewed. In particular, many commenters sought clarity on the proposed provision that the Secretary could commence evaluations of transactions based on information received from private parties “that the Secretary determines to be credible.” The commenters requested clear guidance on what types of information, or parties, the Secretary would deem credible. Additionally, several commenters noted that such a provision might incentivize parties to engage in anti-competitive behavior that would not necessarily lead to identifying transactions posing risks to national security. In light of these comments and concerns, the rule clarifies that the Secretary may consider any referral for review of a transaction (referral): (1) Upon receipt of any information identified in section 7.100(a); (2) upon written request of an appropriate agency head; or (3) at the Secretary's discretion. Following receipt of a referral, the Secretary will assess whether the referral falls within the scope of § 7.3(a) and involves ICTS designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction of direction of a foreign adversary, and determine whether to: (1) Accept the referral and commence an initial review of the transaction; (2) request additional information, as identified in § 7.100(a), including information from the referring entity regarding the referral; or (3) reject the referral.

Several commenters requested the rule establish clearer procedures for how the Secretary will review ICTS Transactions. Commenters also advocated for differing determination timeframes, deadlines, or milestones based on device nature, threat severity, equipment replacement risks, and other potential harms.

In response to these and other comments, the Department provides that, unless the Secretary determines in writing that additional time is necessary, the Secretary shall issue the final determination within 180 days of accepting a referral and commencing the initial review of the ICTS Transaction. Regarding the procedures for the Secretary's review of ICTS Transactions, the Executive Order provides a careful process for the Secretary's decision-making. The rule further sets out the factors that the Secretary will consider to assist the decision-making process. Specifically, the rule provides that the Secretary shall assess whether the ICTS Transaction: Falls within the scope of § 7.3(a) of the rule; involves ICTS designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and poses an undue or unacceptable risk. The Secretary will evaluate each transaction, on a case-by-case basis, based upon the particular facts and circumstances, including the identity of the parties involved.

The rule also further articulates what the Secretary will consider when determining whether an ICTS Transactions poses an undue or unacceptable risk. The Department has identified ten criteria for such determinations. Along with other factors, when determining if an ICTS Transaction poses an undue or unacceptable risk, the Secretary will consider the nature of the information and communications technology or services at issue in the ICTS Transaction, including technical capabilities, applications, and market share considerations; the nature and degree of the direction or jurisdiction exercised by the foreign adversary over the design, development, manufacture, or supply at issue in the ICTS Transaction; and the statements and actions of the foreign adversary at issue in the ICTS Transaction. Other considerations include whether the ICTS Transaction poses a discrete or persistent threat and the nature of the vulnerability implicated by the ICTS Transaction.

The Department has clarified that the Secretary will consult with the appropriate agency heads after finding that an ICTS Transaction may fall within the scope of the Executive Order.

This rule clarifies that if, after review of an ICTS Transaction and consultation with the appropriate agency heads, the Secretary determines that such ICTS Transaction meets the criteria in section 7.103(c) of the rule, the Secretary shall then issue an initial written determination explaining the finding and whether the Secretary has determined to prohibit or propose mitigation measures to the ICTS Transaction at issue. The initial determination will contain no confidential information, even if such was relied upon to make the initial determination. Notice of this initial determination shall be served upon the parties to the ICTS Transaction known to the Secretary at the time of service. Service may be made by registered U.S. mail, facsimile, electronic transmission, or third-party commercial carrier, to an addressee's last known address or by personal delivery. Service of documents will be considered effective upon the date of postmark, facsimile transmission, delivery to third party commercial carrier, electronic transmission or upon personal delivery. Notice of the initial determination to the parties may also be accomplished by publication in the Federal Register where the Secretary determines that the initial determination concerns or could impact entities beyond the parties to the ICTS Transaction, where one or more of the parties to the ICTS Transaction are unknown to the Secretary, or in any other circumstance at the Secretary's discretion.

The proposed rule requested public comments on whether to require parties to undertake additional recordkeeping for information related to transactions. Some commenters argued that the Department should not impose additional recordkeeping requirements. Additionally, some commenters suggested that the recordkeeping requirement begin upon receipt of a transaction notice, rather than being an ongoing duty for any potentially prohibited ICTS Transaction.

After reviewing these comments, and consistent with IEEPA, the rule provides that, after receiving notification that an ICTS Transaction is under review or that an initial determination concerning an ICTS Transaction has been made, a notified person must immediately take steps to retain any and all records related to such transaction.

Commenters requested that the final rule explain how the Secretary's determinations may be “appealed” and how mitigation agreements will be reached and enforced. Commenters also sought more robust procedures for waivers, appeals, and mitigation. The proposed rule had provided that, within 30 days of a preliminary determination by the Secretary that a transaction was an ICTS Transaction that would pose an undue or unacceptable risk to the U.S. national security, parties to that transaction could submit a response to the decision. The proposed rule also allowed the Secretary to require a transaction be mitigated to reduce the risks the Secretary identified in the preliminary determination.

In response to these comments, the Department has added provisions to enhance and clarify when and how parties to an ICTS Transaction that is the subject of an initial determination may engage with the Secretary about the initial determination. The rule establishes a clear process for responding to an initial determination concerning an ICTS Transaction and provides further guidance on how any identified risks may be mitigated so that an identified ICTS Transaction may proceed. Similar to the proposed rule, within 30 days of being notified of an initial determination, pursuant to section 7.105 of the rule, parties to that transaction may respond to the initial determination or assert that the circumstances leading to the initial determination no longer apply. A party may submit arguments or evidence in support of their response and may also propose remedial steps that the party believes would negate the basis for the Secretary's initial determination. The rule also allows parties to an ICTS Transaction that is subject to an initial determination to request a meeting with the Department, which may be granted at the Secretary's discretion. Additionally, the rule clarifies that if the parties to an ICTS Transaction do not submit a response to the Secretary's initial determination within 30 days following service of the initial determination, that initial determination will become final.

Other commenters recommended the adoption of an appeals process for parties notified of a final determination. The Department has adopted a process for reconsidering an initial determination by the Secretary. However, an administrative appeals process would hinder the Secretary's ability to move swiftly to prevent an undue or unacceptable risk.

Some commenters also requested that the Department establish a maximum life span for imposed mitigations, arguing that such a rule would reduce the inhibiting effects that mitigations would have on ICTS innovation. The Department disagrees with commenters, finding that such a clause would prevent the Department from evaluating the mitigations put in place on ICTS Transactions. Failing to reevaluate would effectively limit mitigation requirements and potentially reopen national security vulnerabilities.

The proposed rule set out the review process that must be followed before the Secretary issues a final determination that constitutes a final agency action. The process involved response periods, as well as possible extensions, given to any party affected by a preliminary determination. Commenters addressed communications regarding initial and final determinations within the context of this process. Some commenters suggested that the Secretary should collaborate with private industry when making determinations, similar to the process within the Department of Homeland Security's Supply Chain Risk Management Task Force. Similar comments were received advocating for the establishment of a mechanism for industry to seek guidance on specific work programs or participants involved.

The Department has declined to add specific provisions relating to collaborating with industry on ICTS Transaction determinations. However, in consideration of these comments there is now a provision explaining what factors and sources the Secretary will take into consideration during the second consultation. Specifically, the Secretary will take into account the views of the appropriate agency heads, through the interagency consultation processes. In providing their views, the appropriate agency heads may consider the perspective of relevant public-private working groups and advisory committees with which they convene or engage. For instance, DHS's views could incorporate input from the Supply Chain Risk Management Task Force. The Department also points out that it maintains a number of advisory committees that provide regular opportunities for industry and the regulated community to provide feedback to the Department on issues impacting their operations. Under the Secure and Trusted Communications Networks Act of 2020, the National Telecommunications and Information Administration is also charged with establishing a program to share supply chain risk information with telecommunication providers and manufacturers.

Commenters also requested that the Department explain whether and how the Secretary's determinations may be appealed or reviewed by another authority. This rule adds a provision that, should any appropriate agency head oppose the Secretary's proposed final determination, the Secretary shall notify the President of the Secretary's proposed final determination and such opposition. After receiving direction from the President regarding the Secretary's proposed final determination and any appropriate agency head's opposition thereto, the Secretary shall issue a final determination pursuant to § 7.109.

Additionally, the Department will implement, within 120 days of publishing this rule, procedures for how parties to a proposed, pending, or ongoing ICTS Transaction may seek a license, pursuant to Section 2(b) of the Executive Order, in a manner consistent with the national security of the United States.

As noted above, after reviewing an ICTS Transaction that the Secretary believes may pose an undue or unacceptable risk, the Secretary will engage in a first interagency consultation with the appropriate agency heads to discuss the ICTS Transaction and the Secretary's concerns. Following that consultation, the Secretary will make an initial determination and, if that decision includes a determination to prohibit an ICTS Transaction, will notify the parties to the transaction of the Secretary's initial determination. After the parties are afforded an opportunity to respond to the initial determination and propose mitigation measures, the Secretary will engage in a second interagency consultation with the appropriate agency heads, to discuss the transaction, the initial determination, and any response. This process will help ensure that all information regarding ICTS Transactions and the views of the appropriate agency head are considered when the Secretary makes a final determination.

As noted above, the Department appreciates the comments requesting additional clarity on the process by which the Secretary will make decisions about ICTS Transactions. The rule now provides a specific step for issuing final determinations on ICTS Transactions. The outcome of a final determination remains unchanged from the proposed rule and will provide that an ICTS Transaction is either: (1) Prohibited; (2) not prohibited; or (3) permitted pursuant to the adoption of agreed-upon mitigation measures. Moreover, the rule clarifies that the written final determinations will include directions on the timing and manner of cessation of a prohibited ICTS Transaction, as applicable, along with the penalties, as authorized by IEEPA, for violations of applicable mitigation terms or other direction or prohibition issued under this rule. The final determination will provide a specific description of the prohibited ICTS Transaction and shall be limited in force to the circumstances described therein. Moreover, if the Secretary determines that an ICTS Transaction is prohibited, the final determination shall direct the least restrictive means that the Secretary, in the Secretary's discretion, determines to be necessary to attenuate or alleviate the undue or unacceptable risk posed by the ICTS Transaction.

Commenters also provided a number of suggestions on how to further ensure the Secretary is held accountable for his or her actions under the authority of this rule. Recommendations include limiting the Secretary's ability to assign a designee with final decision-making authority and deleting the emergency action provision set forth in section 7.100(f) of the proposed rule. These suggestions are intended to ensure that Congress can hold the executive branch accountable for enforcement actions.

In response to these comments, the final rule enhances transparency by requiring final written determinations to be published in the Federal Register , where they are readily accessible to both the Congress and the public. Moreover, the rule now clarifies that the publication shall omit any confidential business information.

Commenters requested the final rule clarify the type and scope of penalties for noncompliance with the Secretary's prohibition or mitigation of a transaction. We agree with commenters that the type and scope of the penalties for noncompliance were unclear, and the section has been revised accordingly. The rule now clarifies that any person who commits a violation of any final determination, direction, or mitigation agreement may be liable to the United States for civil or criminal penalties under IEEPA.

The Department received other comments with which the Department disagrees. The Department responds to those comments below.

First, one commenter requested that the Department expand the meaning of the term “electronic means” within the definition of ICTS. While the Department cannot modify the definition of ICTS contained in the Executive Order, the Department clarifies that “electronic means” includes electromagnetic, magnetic, and photonic means. This change is not intended to widen the scope of the rule, but merely to clarify the means by which ICTS must function in order for the rule to apply.

Second, some commenters requested that the Department provide technical assistance for parties forced to alter ICTS infrastructure. However, the Department is unable to offer technical assistance at this time. Accordingly, the Department declines to implement any provision for technical assistance in the rule, and the parties to the transaction will bear the responsibility and cost of complying with any prohibition or mitigation measure.

Third, one commenter argued that the rule imposes an unfunded mandate on the private sector, within the meaning of the Unfunded Mandates Reform Act of 1995, Public Law 104-4 (UMRA), contrary to the determination made by the Department in the proposed rule. The commenter further argued that UMRA requires that before the rule becomes final, the Department must include in the rule a written statement assessing the costs and benefits of the rule, and estimates of future compliance costs, as required by UMRA. The Department continues to believe that the rule does not constitute a “Federal private sector mandate” as defined by UMRA, in that the rule does not impose “an enforceable duty” upon the private sector. See 2 U.S.C. 658(7). Rather, the rule sets out the processes and procedures that the Secretary of Commerce will use to identify, assess, and address certain transactions, including classes of transactions. However, as the commenter notes, when a rule does constitute a “Federal private sector mandate,” UMRA requires the agency prepare a written statement containing information about the costs and benefits of the mandate, including, where feasible, future compliance costs, 2 U.S.C. 1532, as well as that the agency identify and consider regulatory alternatives and select the least costly, most cost-effective, or least burdensome alternative that achieves the objectives of the rule, 2 U.S.C. 1535. Thus, even in the event that the rule were considered to constitute a federal private sector mandate, the Department has met these requirements in full through the preparation of the accompanying Regulatory Impact Analysis.

Upon consideration of the public comments received, the Department makes several changes, as discussed in detail above, from the proposed rule in order to increase clarity and certainty for the public. First, the rule provides detail on the procedures the Secretary will follow when reviewing ICTS Transactions, including identifying the criteria and information the Secretary will consider. For example, the rule provides clarity as to when the Secretary will consult with the appropriate agency heads as part of the review and determination process. Second, the rule details the requirements for responding to initial determinations. Third, the rule clarifies that parties may respond to an initial determination or seek to negotiate a mitigation agreement with the Secretary. Fourth, the rule now provides that unless the Secretary determines in writing that additional time is necessary, the Secretary shall issue a final determination within 180 days of accepting a referral and commencing the initial review of an ICTS Transaction, eliminating the uncertainty of an open-ended review process. Fifth, the rule ensures transparency by specifically requiring the Secretary to publish the results of final determinations, absent any confidential business information, in the Federal Register . Sixth, the rule now specifies that an ICTS Transactions between parties outside of a sector designated as critical infrastructure must involve a clearly specified technology or service in order to be considered a covered ICTS Transactions.

Additionally, in response to commenters seeking clarity regarding the scope of the rule, including numerous requests for the identification of “foreign adversaries,” the Department defines certain terms. The added definitions help to clarify the scope of the rule by providing guidance on which entities may be subject to the rule, what constitutes an ICTS Transaction, and whether an ICTS Transaction involves a foreign adversary. This additional clarity will assist entities with making appropriate decisions regarding ICTS Transactions that may present risks to the national security, therefore helping to protect the United States' ICTS supply chain.

Pursuant to the procedures established to implement Executive Order 12866, the Office of Management and Budget has determined that this rule is economically significant.

This rule is not subject to the requirements of Executive Order 13771 because the benefit-cost analysis demonstrates that the regulation is anticipated to improve national security as its primary direct benefit.

ICTS has become integral to the daily operations and functionality of U.S. critical infrastructure, as well as much, if not most, of U.S. industry. Moreover, ICTS accounts for a large part of the U.S. economy. Accordingly, if vulnerabilities in the ICTS supply chain—composed of hardware, software, and managed services from third-party vendors, suppliers, service providers, and contractors—are exploited, the consequences can affect all users of that technology or service, potentially causing serious harm to critical infrastructure, U.S. Government operations, and disrupting the United States and the global economy. These harms are already occurring. As noted in Executive Order 13873, “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services, which store and communicate vast amounts of sensitive information, facilitate the digital economy, and support critical infrastructure and vital emergency services.”

U.S. entities purchasing and incorporating ICTS equipment and using ICTS services, such as network management or data storage, provided by foreign adversaries can create multiple opportunities for foreign adversaries to exploit potential vulnerabilities in the ICTS. That, in turn, could cause direct and indirect harm to both the immediate targets of the adverse action and to the United States as a whole. Incorporation of a foreign adversary's software, equipment, and products into domestic ICTS networks, as well as the use of use of foreign cloud, network management, or other services, greatly increases the risk that potential vulnerabilities may be introduced, or that they may be present without being detected. These potential vulnerabilities are often categorized under the general concepts of threats to privacy, data integrity, and denial of service.

Some foreign actors are known to exploit the sale or lease of software and hardware to introduce vulnerabilities that can allow them to steal critical intellectual property, research results ( e.g., health data), or government or financial information from users of the software or hardware. Such vulnerabilities can be introduced at the network, cloud service or individual product data, allow traffic monitoring or surveillance, and may be resistant to detection by private purchasers or telecommunications carriers. Once detected, the existence of such vulnerabilities may be extremely costly or impossible to remediate.

Vulnerabilities to data integrity can be created by including an adversary's hardware and software into U.S. networks and systems. This incorporated hardware and software could then pose opportunities to add or remove important information, modify files or data streams, slow down, or otherwise modify the normal transmission or availability of data across U.S. networks. Such capabilities could be exercised in areas as diverse as financial market communications, satellite communications or control, or other sensitive consumer information. Privileged access to market movement and trends, or other manipulation, could disrupt and harm the operation of major exchanges.

A foreign adversary could also effectively deny access to critical services by exploiting vulnerabilities provided by the incorporation of hardware and software into U.S. environments, fully or partially shutting down critical networks or functions at key times. These types of attacks are known as denial of service attacks. Such attacks could cause widespread problems, such as if they occur during periods of crisis, or they could be used selectively by targeting individual corporations, infrastructure elements, or other important infrastructure functions. They could also be masked to make the source of the disruption difficult to attribute, and therefore be difficult to trace and terminate.

Such risks can be substantially increased by incorporating the software and equipment from unreliable adversaries into the U.S. telecommunications infrastructure. However, these risks are not necessarily confined to infrastructure environments. They could, for example, be present in the use of cloud services, as well as in the widespread use of some consumer devices, networked surveillance cameras, drones, or interconnection via the internet of computing devices embedded in everyday objects, enabling them to send and receive data.

The number of attacks by foreign adversaries on the ICTS supply chain are known to be increasing. The associated costs are borne by the U.S. Government as well as private industry. Given the ubiquity of ICTS in the modern economy and especially in critical infrastructure, the benefits of preventing significant disruptions or harms to the ICTS supply chain that could cause incalculable costs to U.S. firms, consumers, and the U.S. Government, would be very high.

This rule provides a process through which serious disruptions to the United States telecommunications infrastructure can be avoided or ameliorated. The rule provides the means of bringing to bear the information and analytical resources of the U.S. government to address ICTS supply chain issues before they arise, and which may be beyond the means of individual telecommunications carriers or other U.S. ICTS purchasers or users to address on their own. As noted above, the costs associated with the potential attacks, loss of service, or disruption to the ICTS supply chain are not known at this time, and are in actuality unknowable due to the generally clandestine nature of the attacks and the fact that they may or may not occur. However, by deterring, preventing, or mitigating these attacks, this rule will provide the United States with substantial, though unknowable, economic benefits as well as benefits to the national security of the United States.

The Department has examined the economic implications of this final rule on small entities as required by the Regulatory Flexibility Act (RFA). The RFA requires an agency to describe the impact of a rule on small entities by providing a regulatory flexibility analysis. The Department published an initial regulatory flexibility analysis in the proposed rule issued on November 27, 2019 (84 FR 65316) and has posted a final regulatory flexibility analysis (FRFA) as part of the RIA ( see ADDRESSES ). This final rule is likely to have a significant economic impact on a substantial number of small entities. A summary of the FRFA follows.

Many commenters discussed the possibility that this rule could present significant economic costs. For example, one commenter stated that “Commerce's proposed rules would result in an extremely broad and unprecedented increase in regulatory jurisdiction over private ICT transactions. The notice of proposed rulemaking thus marks a watershed regulatory moment for companies in or adjacent to the ICT market—which is to say, virtually every company in United States—given the government's newfound stance that it can determine key terms of what ICT companies can buy, sell, or use. As a result, this proceeding and the rules that result from it inescapably will impose additional costs on ICT companies, such as the increased practical need—even absent a legal requirement—to document supply chain risk management analysis in the event a transaction is investigated, along with related due diligence to consider the as-yet uncertain possibilities for government intervention.” In the RIA, the Department estimated costs associated with developing and implementing a plan to conduct due diligence on potentially covered transactions, including estimating the number of small entities that could be affected by the rule and the economic impact on those small entities.

A description of this final rule, why it is being implemented, the legal basis, and the purpose of this final rule are contained in the SUMMARY and SUPPLEMENTARY INFORMATION sections of this preamble, as well as in the preamble to the Notice of Proposed Rulemaking issued on November 27, 2019 (84 FR 65316), and are not repeated here.

Small Business Administration (SBA) size standards for businesses are based on annual receipts and average employment. For the purpose of this analysis we define a small business as one employing fewer than 500 persons. This definition allows us to use 2017 Census data on firm employment by NAICS industry to estimate the number of affected small entities.

In the RIA, the Department identified 4,533,000 firms that imported significant amounts of goods and services potentially subject to review under the Rule. This formed our upper bound estimate for the total number of affected entities. By replicating this methodology with firm employment data, the Department finds that 4,516,000 of these firms, about 99.6 percent, have less than 500 employees. Assuming the lower bound estimate of 268,000 affected entities is also made up of 99.6 percent small businesses, the Department estimates that between 266,995 and 4,516,000 small businesses will be potentially affected by this rule.

The Department did not identify any Federal rule that duplicates, overlaps, or conflicts with this final rule.

In the Costs section of the RIA, the Department estimates that costs to all affected entities will range between approximately $235 million and $20.2 billion, or about $2,800 to $6,300 per entity. The Department estimated the costs to small entities using the same methodology. All small entity calculations and assumptions can be found in Tables 10 through 14. These tables are analogous to Tables 5 through 9 in the RIA. While most of the assumptions below are identical to those found in the previous estimates, there are 3 important adjustments to assumptions in the small entity cost estimates:

1. Entities potentially impacted by the rule reduced by 0.4 percent to account for our finding that 99.6 percent of all affected entities have less than 500 employees.

2. Small entities are less likely to have the resources to develop and implement a compliance plan. This analysis thus reduces estimates of the share of small firms likely to engage in these activities accordingly.

3. Small entities engage in fewer transactions than large entities. This analysis reduces the estimates of the number of transactions subject to the rule per small firm accordingly.

As a result of these adjustments, the Department estimates that costs to affected small entities will range between approximately $109 million and $10.9 billion, or about $1,800 and $3,900 per small entity.

Small businesses, as opposed to larger firms, may not have the same ability to deal with the burdens, both direct and indirect, associated with the rule. Faced with the various costs associated with compliance, firms will have to absorb those costs and/or pass them along to their consumers in the form of higher prices. Either action will reduce the profits of firms. Due to their lack of market power, and their lower profit margins, small firms may find it difficult to pursue either or both of those responses while remaining viable.

A similar situation will hold with respect to the indirect impacts of the rule. Small firms downstream of impacted industries are likely to face increases in the prices of ICT products they use as inputs and either absorb the increase in cost and/or raise their prices. Given this situation, it is possible that the rule will have a more substantial adverse impact on small firms relative to larger firms.

However, the changes made from the proposed rule benefit small businesses by limiting the scope of transactions subject to the rule. Small entities have fewer suppliers and engage in fewer transactions than large entities. As a result, by identifying specific foreign adversaries and providing guidance on which entities may be subject to the rule as well as additional criteria on what constitutes an ICTS Transaction, small entities will more readily be able to determine whether their transactions are subject to review under the rule—and may in some cases, find that none of their transaction are likely to be within the scope of the rule. Additionally, by specifically requiring the Secretary to publish the results of final determinations in the Federal Register , small businesses will be able to assess whether their transactions are substantially similar to those that have been prohibited. Finally, the rule reduces the potential burdens on small entities by emphasizing that (1) the Secretary will choose the least burdensome restriction that still allows for protection of the national security when deciding whether to prohibit or mitigate an ICTS Transaction, and (2) the Secretary shall issue a final determination within 180 of commencing an initial review.

SBA size standards for businesses are based on annual receipts and average employment. For the purpose of this analysis, the Department defines a small business as one employing fewer than 500 persons. This definition allows the Department to use 2017 Census data on firm employment by NAICS industry to estimate the number of affected small entities. The Department does not have access to sufficiently detailed data on firm employment and receipts to make use of the full set of SBA size standard thresholds.

The Department notes, however, that 84% of SBA employee thresholds are above 500, and 91% of SBA receipt thresholds are above $6 million. Census data show that average receipts for firms employing less than 500 employees are $2.2 million. Thus, using our threshold of 500 employees we estimate that 99.6% of affected entities are small businesses which is likely a slight underestimate.

This rule will allow the Secretary to review ICTS Transactions to determine whether they present an undue or unacceptable risk, a function which is currently not performed by any other private or public entity. As noted above, private industry often lacks the incentive, information, or resources to review their ICTS purchases for malicious suppliers or other potentially bad actors in the ICTS supply chain. The U.S. Government is uniquely situated to determine threats and protect the national security, including economic security.

The Department considered two regulatory alternatives to reduce the burden on small entities: (1) Excluding small entities with 5 or fewer employees, and (2) excluding certain industries and sectors. However, the Department determined that neither of these two alternatives would achieve the goal of protecting the national security, nor would they eliminate the rule's significant economic impact on a substantial number of small entities.

First, the Department considered providing an exemption for small entities that have 5 or fewer employees. (“smallest entities”). According to Census Bureau's most recent dataset of number of firms by employee count, about 61% of all firms have less than 5 employees.

Second, the Department examined the feasibility of eliminating the application of the rule to certain small entities involved in specific industries or sectors by excluding: (a) ICTS Transactions that involve only the acquisition of commercial items as defined by Federal Acquisition Regulation Part 2.101; (b) ICTS Transactions that are used solely for the purpose of cybersecurity mitigation or legitimate cybersecurity research; and (c) ICTS Transactions under which a United States person is subject to a security control agreement, special security agreement, or proxy agreement approved by a cognizant security agency to offset foreign ownership, control, or influence pursuant to the National Industrial Security Program regulations (32 CFR part 2004).

Ultimately, the Department decided against adopting either of these regulatory alternatives. Exempting certain industries or sectors or eliminating the application of the rule to smallest entities could inadvertently allow potentially problematic transactions that are substantially similar to those conducted by non-exempt entities to avoid review, undermining the rule's national security objectives. For example, a company that is headquartered in a foreign adversary country, regardless of its size or main industry sector, may be involved in legitimate cybersecurity research and development initiatives performed under the National Cooperative Research and Production Act, 15 U.S.C. 4301-06, and the foreign company may study foreign equipment to gain insights on new innovations or potential network security risks. However, that same company may also be conducting operations during other ICTS Transactions that could harm U.S. national security interests. By promulgating the chosen alternative for the rule, the Department sought to remove both the possibility for confusion as well as the ability for malicious actors to argue that some legitimate cybersecurity research performed by a company would exempt all cybersecurity research by a company, legitimate or otherwise. Thus, the rule applies to types of ICTS Transactions most affecting U.S. national security as opposed to exempting entire industries, sectors, or regulated smallest entities from review.

Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996 states that, for each rule or group of related rules for which an agency is required to prepare a FRFA, the agency shall publish one or more guides to assist small entities in complying with the rule, and shall designate such publications as “small entity compliance guides.” The agency shall explain the actions a small entity is required to take to comply with a rule or group of rules.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ) (PRA) provides that an agency generally cannot conduct or sponsor a collection of information, and no person is required to respond to nor be subject to a penalty for failure to comply with a collection of information, unless that collection has obtained Office of Management and Budget (OMB) approval and displays a currently valid OMB Control Number. This rulemaking does not contain a collection of information requirement subject to review and approval by OMB under the PRA.

This rule would not produce a Federal mandate (under the regulatory provisions of Title II of the Unfunded Mandates Reform Act of 1995) for State, local, and tribal governments or the private sector.

This rule does not contain policies having federalism implications requiring preparations of a Federalism Summary Impact Statement.

This rule does not contain policies that have unconstitutional takings implications.

The Department has analyzed this proposed rule under Executive Order 13175 and has determined that the action would not have a substantial direct effect on one or more Indian tribes, would not impose substantial direct compliance costs on Indian tribal governments, and would not preempt tribal law.

The Department has reviewed this rulemaking action for the purposes of the National Environmental Policy Act (42 U.S.C. 4321 et seq. ). It has determined that this final rule would not have a significant impact on the quality of the human environment.

This document of the Department of Commerce was signed on January 13, by Wilbur Ross, Secretary of Commerce. That document with the original signature and date is maintained by the Department of Commerce. For administrative purposes only, and in compliance with requirements of the Office of the Federal Register, the undersigned Department of Commerce Federal Register Liaison Officer has been authorized to sign and submit the document in electronic format for publication, as an official document of the Department of Commerce. This administrative process in no way alters the legal effect of this document upon publication in the Federal Register .

Sections 1753, 1754, and 1768 of the Export Control Reform Act of 2018 (ECRA), 50 U.S.C. Sections 4801-4852, provide the legal authority for BIS's AT controls on SSOT destinations. On August 12, 1993, in accordance with Section 6(j) of the Export Administration Act of 1979, then codified at 50 U.S.C. App. 2405(j), the Secretary of State designated Sudan as a SSOT, citing his determination that Sudan, then led by Omar al-Bashir, had repeatedly provided support for acts of international terrorism. See 58 FR 52523 (Oct. 8, 1993). Consistent with this designation, BIS imposed AT controls on Sudan in accordance with the Export Administration Act of 1979, as amended, formerly codified at 50 U.S.C. Sections 4601-4623, the legal authority at the time for BIS's export control regime. 61 FR 12714 (March 25, 1996). Pursuant to § 742.10 (Anti-Terrorism) of the EAR, a license was also required for the export or reexport to Sudan of nearly all items on the Commerce Control List (CCL), Supp. No. 1 to part 774 of the EAR. License applications for such exports and reexports were reviewed under a general policy of denial. Consistent with Sudan's designation as a SSOT, the country was also placed in Country Group E (now Country Group E:1): (terrorist-supporting countries) in Supplement No. 1 to part 740 of the EAR and made subject to a 10 percent de minimis threshold for controlled U.S.-origin content ( see § 734.4 of the EAR). Most license exceptions were also unavailable for exports and reexports of CCL items destined for Sudan due to its status as an “E:1” country.

Notwithstanding the general policy of denial set forth in § 742.10 of the EAR, prior to the publication of this rule, BIS reviewed certain categories of CCL items proposed for export or reexport to Sudan under less stringent review policies. In particular, applications for the export and reexport of medical items to Sudan were subject to case-by-case review. Over time, consistent with U.S. foreign policy initiatives, BIS instituted case-by case review or a general policy of approval for additional categories of items. For example, acting in coordination with the Department of the Treasury's Office of Foreign Assets Control (OFAC), in order to promote the free flow of communications among the Sudanese people, in February 2015, BIS amended § 742.10 to establish a case-by-case review policy for telecommunication equipment and associated items for civil end use, including items useful for the development of civil telecommunications infrastructure. See 80 FR 8520 (Feb. 18, 2015). Two years later, in January 2017, in response to positive developments in the U.S.-Sudan bilateral relationship, BIS amended § 742.10, again in coordination with OFAC, to institute a general policy of approval for certain items, including parts, components, and equipment, that are controlled on the CCL solely for AT reasons and are intended to ensure the safety of civil aviation or the safe operation of fixed-wing commercial passenger aircraft, as well as items controlled on the CCL solely for AT reasons intended for use in the inspection and repair, among other activities, of railroads in Sudan. See 82 FR 4781 (Jan. 17, 2017).

BIS also made changes to license exception eligibility in connection with foreign policy considerations and developments. In February 2005, BIS amended License Exception Temporary imports, exports, reexports, and transfers (in-country) (TMP) to permit temporary exports to Sudan of certain computers, communication devices, and global positioning devices as “tools of trade” by employees and staff of certain organizations engaged in humanitarian work in Sudan. See 70 FR 8257 (Feb. 18, 2005) and 70 FR 9703 (Feb. 28, 2005). In February 2008, BIS amended TMP again in connection with exports and reexports destined for Sudan, including by expanding the number of activities and commodities eligible under the “tools of trade” category, an action taken in part to reflect the changing nature of humanitarian work undertaken in the country by nongovernmental organizations. See 73 FR 10668 (Feb. 28, 2008). In January 2017, as part of the same regulatory action described above that created a more favorable license review policy for certain items for use in civil aviation and railroad infrastructure in Sudan, BIS made License Exception Consumer Communications Devices (CCD) eligible for the export and reexport of certain consumer communications devices to Sudan.

For nearly twenty years, licenses from both BIS and OFAC were required to export and reexport items on the CCL to Sudan as a consequence of broad trade restrictions imposed in November 1997, including restrictions on U.S. persons' exports of U.S.-origin items to Sudan. Pursuant to Executive Order (E.O.) 13067 of November 3, 1997, the U.S. Government imposed a comprehensive trade embargo in response to the Government of Sudan's policies and activities, including its support for terrorism, efforts to destabilize neighboring governments, and the prevalence of human rights violations. Specifically, this E.O. blocked the property of the Government of Sudan subject to U.S. jurisdiction and imposed restrictions on U.S. persons' activities with respect to Sudan. On July 1, 1998, OFAC published the Sudanese Sanctions Regulations, 31 CFR part 538 (SSR), implementing these restrictions. See 63 FR 35809 (July 1, 1998). Notably, as implemented in the SSR, E.O. 13067 required the Department of the Treasury to restrict the export or reexport to Sudan of goods, technology, or services from the U.S. or by a U.S. person, wherever located, or “requiring the issuance of a license by a Federal agency.” See Section 2(b) of E.O. 13067 and 31 CFR 538.205 (2017). This language provided the basis for a dual licensing regime pursuant to which the export and reexport of CCL items to Sudan required authorization by both BIS and OFAC.

On October 13, 2006, President George W. Bush issued E.O. 13412 following the enactment of the Darfur Peace and Accountability Act of 2006, a response to continuing atrocities in Sudan's Darfur Region. This E.O. exempted certain regions in Sudan from several prohibitions established pursuant to E.O. 13067, including those applicable to exports, thereby effectively narrowing the scope of exports and reexports of CCL items subject to dual licensing.

In recognition of positive actions sustained by the Government of Sudan in several areas, including enhanced cooperation with the U.S. on counterterrorism efforts, effective October 12, 2017, President Donald J. Trump revoked Sections 1 and 2 of E.O. 13067, along with E.O. 13412 in its entirety, pursuant to E.O. 13761 of January 13, 2017, as amended by E.O. 13804 of July 11, 2017. Consequently, as of October 12, 2017, U.S. persons were no longer prohibited from engaging in transactions with respect to Sudan, including exports and reexports of items destined for Sudan, or with the Government of Sudan, that had been prohibited by the SSR. These actions generally established BIS as the sole licensing agency for exports and reexports of items subject to the EAR to Sudan. To reflect the revocation of these authorities, OFAC removed the SSR from the Code of Federal Regulations on June 29, 2018. OFAC only retained jurisdiction over certain exports and reexports of agricultural commodities, medicine, and medical devices destined for Sudan pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000, 22 U.S.C. Section 7201 et seq., and authorized the export and reexport of such items through a general license incorporated into Section 596.506 of the Terrorism List Governments Sanctions Regulations, 31 CFR part 596.

Once a country is designated a State Sponsor of Terrorism, the designation remains in effect until it is rescinded in accordance with applicable law. On October 26, 2020, the President submitted to Congress the statutorily-required report justifying the rescission, and certifying that Sudan had not provided any support for acts of international terrorism during the preceding six month period and that Sudan had provided assurances that it would not support acts of international terrorism in the future. Effective December 14, 2020, the Secretary of State rescinded Sudan's designation as a SSOT, in accordance with Sections 1754(c) and 1768(c) of the National Defense Authorization Act for Fiscal Year 2019 (50 U.S.C. 4813(c) and 4826(c)), and in satisfaction of the provisions of Section 620A(c) of the Foreign Assistance Act of 1961 (22. U.S.C. 2371(c)), Section 40(f) of the Arms Export Control Act of 1976 (22 U.S.C. 2708(f)), and, to the extent applicable, section 6(j) of the Export Administration Act of 1979 (50 U.S.C. App. 2405(j)), as continued in effect by Executive Order 13222 of August 17, 2001. BIS is publishing this rule amending the EAR to implement the rescission.

On October 23, 2020, the date that President Trump notified Congress of his intention to rescind the SSOT designation, the White House heralded the development as marking the advancement of the United States' bilateral relationship with Sudan and the ongoing efforts of the civilian-led Sudanese transitional government toward democracy and the achievement of regional peace. See October 23, 2020 Statement of the Press Secretary on Sudan, available at https://www.whitehouse.gov/briefings-statements/statement-press-secretary-sudan/. As noted by Secretary of State Michael R. Pompeo, President's Trump decision “reflect[ed] the . . . transitional government's sustained efforts to make sure there is no support for acts of international terrorism.” See November 2, 2020 State Department Press Statement, “Sudan Making Progress,” available at https://www.state.gov/sudan-making-progress/.

Consistent with the Secretary of State's rescission of Sudan's designation as a SSOT, effective December 14, 2020, this rule removes AT controls on the country and makes conforming changes to various EAR provisions. First, this rule removes Sudan from Country Group E:1 in Supplement No. 1 to part 740, the Country Group placement for terrorist supporting countries. This action raises the de minimis level from 10 percent to 25 percent for most foreign-origin items located abroad that are destined for Sudan. These changes make Sudan potentially eligible for new license exceptions under the EAR. Second, this rule removes EAR § 742.10 (Anti-Terrorism: Sudan) in its entirety. Additionally, it adds Sudan to Country Group B in Supplement No. 1 to part 740. As a general matter, countries in Country Group B are eligible for a greater number of license exceptions, and they are subject to relatively less stringent license review policies. However, pursuant to this rule, two license exceptions, License Exception Shipments to Country Group B countries (GBS) (§ 740.4) and License Exception Technology and software under restriction (TSR) (§ 740.6), will be unavailable for exports and reexports to Sudan. Moreover, Sudan's continued placement in Country Group D:5 (U.S. Arms Embargoed Countries) impacts the availability of certain license exceptions in connection with items controlled under certain Export Control Classification Numbers (ECCNs). Finally, this rule makes conforming amendments to parts 734, 738, 748, 750, 772 and 774 of the EAR, and additional amendments to parts 740 and 742, consistent with the removal of AT controls, the country's removal from Country Group E:1, and addition to Country Group B. Other previously-existing license requirements remain intact.

Conforming changes include the removal of all references to Sudan from Supplement No. 2 to part 742, which specifies contract sanctity dates and related licensing review policies for certain items destined for countries subject to AT controls. This rule also amends License Exceptions GBS and TSR set forth in part 740 (License Exceptions) to state that they are not available for Sudan. Additionally, it amends part 740 to remove references to Sudan from three license exceptions. As detailed below, these license exceptions had authorized exports and reexports of certain CCL items to Sudan notwithstanding the imposition of AT controls and the country's related placement in Country Group E:1.

The EAR apply to foreign-made items located outside the United States that contain more than a de minimis amount of controlled U.S.-origin content by value. For most items, the de minimis level is 10 percent if the destination of the foreign-made item is in Country Group E:1 and 25 percent if the destination is in any other Country Group. The removal of Sudan from Country Group E:1 raises the de minimis level to 25 percent for most items destined for Sudan. Additionally, this 25 percent de minimis level will apply to certain foreign-made encryption items destined for Sudan that meet the criteria specified in § 734.4(b)(1) of the EAR. Foreign-made items destined for Sudan that incorporate U.S.-origin 9x515 or “600 series” paragraphs a. through .x content will continue to be subject to the EAR regardless of the level of U.S.-origin content, i.e., there is no de minimis level for such items when they are destined for Sudan.

Sudan will be subject to licensing requirements that apply to the export and reexport of items on the multilateral export control regime lists (the Wassenaar Arrangement, the Nuclear Suppliers Group, the Australia Group and the Missile Technology Control Regime) and sensitive items controlled unilaterally for Crime Control (CC) or Regional Stability (RS) reasons. These license requirements are set forth in part 742 of the EAR and are reflected in the relevant columns of the Country Chart in Supplement No. 1 to part 738 of the EAR. ( See “Xs” reflecting the applicability of various multilateral and unilateral controls on Sudan.) Other categories of items that are controlled for reasons not included on the Country Chart (e.g., encryption (EI) and Chemical Weapons (CW)) will also require a license for export or reexport to Sudan. End User and End-Use-based controls set forth in part 744 of the EAR will also continue to apply. BIS will review license applications for exports or reexports to Sudan on a case-by-case basis pursuant to applicable licensing policies set forth in parts 742 and 744, or elsewhere in the EAR. Exporters should also be aware that the United States continues to maintain an arms embargo on Sudan, as implemented in Country Group D:5, which also implements the United Nations arms embargo, imposed in 2004, that applies to certain items controlled for United Nations (UN) reasons that are destined for the Darfur region in Sudan, as implemented in § 746.1 of the EAR.

Consistent with the removal of AT controls on Sudan (and the related removal of the country from Country Group E:1), BIS is amending four license exceptions that make specific reference to Sudan or to Sudanese nationals. Through revising three of these license exceptions to reflect policy changes that occurred following Sudan's designation as a SSOT, BIS had authorized certain categories of transactions that were destined for Sudan notwithstanding the imposition of AT controls and the country's related placement in Country Group E:1. BIS also removes restrictions on releases to Sudanese nationals of technology and source code pertaining to computers from a fourth license exception.

Sudan is removed from § 740.7, paragraph (b)(2)(ii), which restricts technology and source code from release to nationals of Country Groups E:1 and E:2. The country is added to paragraph (d)(1) (Computer Tier 3 destinations), which will permit the release of technology and source code to Sudanese nationals up to the prescribed limit.

Paragraph (a)(2) of § 740.9, which referred to tools of the trade (as identified in § 740.19(b)) as exempted from paragraph (a)(1) restrictions on Country Group E:1 when destined for Sudan, is no longer applicable and is deleted.

Paragraph (i) of § 740.16, which authorized certain exports and reexports of Anti-Terrorism controlled items to Sudan, is no longer applicable and is deleted.

Section 740.19 (Consumer Communications Devices) no longer requires any reference to Sudan, as the eligible commodities and software specified therein may now be exported and reexported (barring end-use or end-user restrictions) to Sudan, including to the Sudanese Government. In light of the U.S. Government's “unblocking” of the Government of Sudan effective October 2017, the license exception's reference to restrictions on the Government of Sudan is inapplicable. This rule consequently removes the reference to Sudan in paragraph (a), and in the introductory text to paragraph (b), which identified Sudan as an eligible destination for this license exception. It also removes paragraph (c)(iii), which identified the Government of Sudan as an ineligible end-user for the license exception. Additionally, this rule removes altogether paragraph (b)(18), which permitted the export and reexport of items controlled under Export Control Classification Number 7A994 to Sudan only.

As an E:1 country, Sudan was eligible for only a limited number of license exceptions. Many license exceptions contain restrictions that apply to countries in Country Group E:1 or to nationals of such countries. As a consequence of Sudan's removal from Country Group E:1, Sudan and/or Sudanese nationals are newly eligible for several license exceptions. No changes are required to the text of these license exceptions, as they do not refer specifically to Sudan or to Sudanese nationals. Additionally, as noted above, Sudan's addition to Country Group B by this rule makes the country potentially available for a broader range of license exceptions. However, BIS has determined that exports and reexports to Sudan are not eligible for License Exceptions GBS and TSR. This rule makes conforming changes in part 740 consistent with that policy. Specifically, amendments in §§ 740.4 and 740.6 clearly set forth that License Exceptions GBS and TSR, respectively, are unavailable for Sudan. As with all license exceptions, a specific transaction must meet all enumerated criteria, and persons should ensure that the restrictions set forth in § 740.2 (Restrictions on all license exceptions) do not apply. In particular, persons should be aware of limitations on the availability of license exceptions for exports and reexports to Sudan of items in a 9x515 or “600 series” ECCN as set forth in paragraphs (a)(12) and (13) of § 740.2 that stem from Sudan's placement in Country Group D:5.

The amendments to the EAR made in this final rule do not apply to regulatory requirements administered by other U.S. Government agencies, such as OFAC and the Department of State's Directorate of Defense Trade Controls. In particular, U.S. persons should be aware of restrictions that may apply to transactions involving the Darfur region of Sudan. On October 30, 2020, President Trump continued in effect the national emergency initially declared with respect to the Government of Sudan in E.O. 13067, as expanded by subsequent E.O.s, including E.O. 13400 of April 26, 2006, due to violence in Sudan's Darfur region. See Presidential Notice, 85 FR 69463 (Nov. 2, 2020). OFAC administers sanctions on individuals and entities in connection with the conflict in Darfur based on this national emergency. See Darfur Sanctions Regulations, 31 CFR part 546. OFAC may also designate Sudanese persons under authorities apart from E.O. 13067 and E.O. 13400 and add such persons to the list of Specially Designated Nationals and Blocked Persons (SDN List), available at https://www.treasury.gov/ofac . Additional information regarding OFAC's sanctions programs may be located at https://www.treasury.gov/ofac.

On August 13, 2018, the President signed into law the John S. McCain National Defense Authorization Act for Fiscal Year 2019, which included the Export Control Reform Act of 2018 (ECRA), 50 U.S.C. Sections 4801-4852. ECRA provides the legal basis for BIS's principal authorities and serves as the authority under which BIS issues this rule.

1. Executive Orders 13563 and 12866 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distribute 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. This final rule has been designated a “significant regulatory action” under section 3(f) of Executive Order 12866.

2. This final rule is not subject to the requirements of E.O. 13771 (82 FR 9339 (February 3, 2017)) because it is issued with respect to a national security function of the United States. In particular, this rule implements an important U.S. foreign policy change, the rescission of Sudan's designation as a State Sponsor of Terrorism, that is closely linked with U.S. national security and regional security objectives. The amendments to the EAR made by this rule are consistent with the rescission and therefore serve U.S. foreign policy and national security interests.

3. This rule does not contain policies with Federalism implications as that term is defined under Executive Order 13132.

4. Pursuant to section 1762 of the Export Control Reform Act of 2018 (50 U.S.C. 4821), this action is exempt from the Administrative Procedure Act (5 U.S.C. 553) requirements for notice of proposed rulemaking, opportunity for public participation, and delay in effective date.

5. Because a notice of proposed rulemaking and an opportunity for public comment are not required to be given for this rule by 5 U.S.C. 553, or by any other law, the analytical requirements of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., are not applicable. Accordingly, no regulatory flexibility analysis is required and none has been prepared.

6. Notwithstanding any other provision of law, no person may be required to respond to or be subject to a penalty for failure to comply with a collection of information, subject to the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ) (PRA), unless that collection of information displays a currently valid Office of Management and Budget (OMB) Control Number. This regulation involves a collection currently approved by OMB under control number 0694-0088, Simplified Network Application Processing System. The collection includes, among other things, license applications, and carries a burden estimate of 42.5 minutes for a manual or electronic submission for a total burden estimate of 31,878 hours. BIS expects the burden hour estimates associated with this collection to decrease slightly, as the removal of Anti-terrorism controls on Sudan should result in the submission of fewer license applications. Any comments regarding the collection of information associated with this rule, including suggestions for reducing the burden, should be sent within 30 days of publication of this notice to http://www.reginfo.gov/public/do/PRAMain. Find this particular information collection by selecting “Currently under 30-day Review—Open for Public Comments” or by using the search function.

Accordingly, parts 734, 738, 740, 742, 748, 750, 772, 774 of the Export Administration Regulations (15 CFR parts 730 through 774) are amended as follows:

Located in the northwestern Gulf of Mexico, 70 to 115 nautical miles (130 to 213 kilometers) off the coasts of Texas and Louisiana, FGBNMS encompasses approximately 56 square miles and includes three separate undersea features: East Flower Garden Bank, West Flower Garden Bank, and Stetson Bank. The banks range in depth from 55 feet (17 meters) to nearly 500 feet (152 meters), and are geological formations created by the movement of ancient salt deposits pushed up through overlying sedimentary layers.

The banks provide a wide range of habitat conditions that support several distinct biological communities, including the northernmost coral reefs in the continental United States and mesophotic coral habitats. These and similar formations throughout the northwestern Gulf of Mexico provide the foundation for essential habitat for numerous marine species, including a variety of fish species of commercial and recreational importance, and several endangered or threatened species, including sea turtles and mobula rays. The combination of location and geology makes the sanctuary an extremely productive and diverse ecosystem.

NOAA issued a final rule to implement the designation of FGBNMS on December 5, 1991 (56 FR 63634). Congress subsequently passed a law recognizing the designation on January 17, 1992 (Pub. L. 102-251, Title I, Sec. 101). At that time, the sanctuary consisted of two areas known as East and West Flower Garden Banks (56 FR 63634). Among other things, FGBNMS regulated a narrow range of activities, established permit and certification procedures, and exempted certain U.S. Department of Defense (DOD) activities from the sanctuary's prohibitions (56 FR 63634). Those regulations became effective on January 18, 1994 (58 FR 65664). In 1996, Congress added Stetson Bank to the sanctuary (Pub. L. 104-283). The boundaries of Stetson Bank and West Flower Garden Bank were later amended to improve administrative efficiencies and increase the precision of all boundary coordinates based on new positioning technology (65 FR 81175, Dec. 22, 2000). FGBNMS regulations can be found at 15 CFR part 922, subpart L, and the sanctuary management plan may be found on the FGBNMS website. 1 As a result of this action, FGBNMS is being expanded to a total of 160.4 square miles, with the existing regulations applying to the expansion area.

The NMSA authorizes the Secretary of Commerce (Secretary) to designate and protect, as national marine sanctuaries, areas of the marine environment that are of special national significance due to their conservation, recreational, ecological, historical, scientific, cultural, archeological, educational, or aesthetic qualities. Day-to-day management of national marine sanctuaries is delegated by the Secretary to ONMS. The primary objective of the NMSA is to protect nationally significant marine resources, including biological features such as coral reefs, and cultural resources, such as historic shipwrecks and archaeological sites. The mission of FGBNMS is to identify, protect, conserve, and enhance the natural and cultural resources, values, and qualities of the sanctuary and its regional environment for this and future generations.

This action responds to the need to provide comprehensive and coordinated management of, and additional regulatory protection for, sensitive underwater features and marine habitats associated with continental shelf-edge reefs and banks in the northwestern Gulf of Mexico. The current jurisdictional regime divides authority among several governmental entities that regulate offshore energy exploration (Bureau of Ocean Energy Management (BOEM)), fishing (Gulf of Mexico Fishery Management Council (GMFMC)), and water quality (Environmental Protection Agency (EPA)), but does not provide comprehensive and effective management for the full range of activities that impact the sensitive reefs and banks in the region. For example, BOEM has established No Activity Zones (NAZs) that prohibit anchoring only by vessels engaged in development activities and platform services specific to a particular lease, while anchoring by other vessels remains unregulated. Further, these anchoring regulations in the NAZs apply only on a lease-by-lease basis. Other vessel ground tackle (including anchors, chains, and cables) and marine salvage activities were unregulated and have caused significant injury to sensitive biological communities. Sanctuary designation will allow for additional protection of these reefs and banks from other bottom-disturbing activities, which are otherwise unregulated at this time.

The sanctuary expansion areas are recognized as hotspots of marine biodiversity that provide vital habitat for many important species in the Gulf of Mexico region. They are home to the most significant examples of coral and algal reefs, mesophotic and deepwater coral communities, and other biological assemblages in the Gulf of Mexico. Furthermore, these areas provide important habitat for vulnerable species such as mobula rays, sea turtles, and whale sharks, while serving as nurseries for numerous fish species of commercial and recreational importance. As such, most of these areas have also been identified as nationally significant through their designation as Habitat Areas of Particular Concern (HAPC) by the GMFMC and as NAZs by BOEM. These habitats are vulnerable to a variety of known and potential impacts, including large vessel anchoring, marine salvage operations, fishing techniques that may injure benthic habitat ( e.g., trawling, bottom-tending gear), and certain oil and gas exploration and development activities. These impacts will more effectively be addressed within the expanded areas through the comprehensive habitat conservation and management authorities under the NMSA. The protection of these ecologically significant sites would increase the resilience of marine ecosystems and enhance the sustainability of the region's thriving recreation, tourism, and commercial economies. Ultimately, expanding FGBNMS will help ensure that valuable marine resources remain available for the use and enjoyment of future generations of Americans.

This sanctuary expansion is the outcome of decades of scientific research and growing public recognition of the need for coordinated protection of significant offshore marine places in the northwestern Gulf of Mexico region. Protecting additional habitat in the northwestern Gulf of Mexico emerged as one of the highest priorities identified during a vigorous public review process of FGBNMS management issues. Subsequently, “Sanctuary Expansion” was incorporated as a discrete action plan in the 2012 revision of the sanctuary's management plan. The region is utilized for a variety of recreational, commercial, and industrial purposes, and there are ongoing impacts from bottom-disturbing activities, such as large vessel anchoring and marine salvage, on the sensitive biological resources and geological features associated with many reefs and banks in the area. Therefore, pursuant to the NMSA's purpose to “facilitate to the extent compatible with the primary objective of resource protection, all public and private uses of the resources of these marine areas,” FGBNMS can further resource protection while balancing multiple uses. This action will expand FGBNMS by incorporating portions of selected reefs and banks in the northwestern Gulf of Mexico. In doing so, this action will provide management of and protection for nationally significant areas with biological, ecological, and/or structural links to the existing sanctuary, including vulnerable mesophotic and deep benthic habitat sites, while providing important opportunities for research and recovery of resources from observed impacts. These areas contain the most significant examples of mesophotic coral communities in the United States, including some of the highest known densities (colonies per square meter) and species richness of mesophotic corals (Cairns et al. 2017). In addition, and as noted above, many banks in the expansion area have also been recognized by BOEM and GMFMC as nationally significant and designated as HAPCs and NAZs.

NOAA is required by NMSA Section 304(e) to periodically review sanctuary management plans to ensure that sanctuary management continues to effectively conserve, protect, and enhance the nationally significant living and cultural resources at each site. Management plans generally outline regulatory goals, describe boundaries, identify staffing and budgetary needs, and set priorities and performance measures for resource protection, research, and education programs. Management plans also guide the development of future management activities.

The FGBNMS management plan review process began in 2006 with a series of scoping meetings to obtain information about the public's interests and priorities for FGBNMS management (71 FR 52757; September 7, 2006). Subsequently, NOAA worked with the FGBNMS Advisory Council to prioritize issues and develop appropriate management strategies and activities for the preparation of a draft revised management plan. Protecting additional nationally significant habitat in the northwestern Gulf of Mexico emerged as one of the highest priority issues for the sanctuary during the FGBNMS management plan review process.

In 2007, the FGBNMS Advisory Council, using information developed by its Boundary Expansion Working Group (BEWG), recommended a range of sanctuary boundary expansion alternatives. Based on this input, and information obtained through a subsequent public process, NOAA prepared a revised management plan (77 FR 25060, April 27, 2012) that contained six action plans, including one that specifically addressed sanctuary expansion. The Sanctuary Expansion Action Plan outlined a strategy to expand the protected areas to include additional reefs and banks in the northwestern Gulf of Mexico, and to develop a Draft Environmental Impact Statement (DEIS) to evaluate appropriate expansion alternatives. The recommended expansion alternative, as identified by the FGBNMS Advisory Council in 2007, was included in the Sanctuary Expansion Action Plan. This recommendation included nine additional reefs and banks, encompassing approximately 281 square miles.

On February 3, 2015, NOAA published a Notice of Intent (NOI) to prepare a DEIS for expanding FGBNMS boundaries (80 FR 5699). The NOI solicited public input on the range and significance of issues related to sanctuary expansion, including potential boundary configurations, resources to be protected, other issues NOAA should consider, and any information that should be included in the resource analysis. The public scoping period was open through April 6, 2015, during which time ONMS held three public hearings and interested parties submitted both written and oral comments.

NOAA received approximately 200 comments during the scoping period. Most commenters were strongly supportive of the concept of sanctuary expansion. In addition to broad general support, some comments expressed conditional support while raising user concerns primarily relating to the potential impact of sanctuary expansion on the offshore oil and gas industry and historic fishing practices. Other commenters recommended that NOAA consider a broader geographical area than the Sanctuary Expansion Action Plan identified, especially in light of the 2010 BP/Deepwater Horizon oil spill and new information that became available since the 2007 FGBNMS Advisory Council recommendation. This information was considered during the development of the expansion alternatives in the DEIS.

In accordance with the National Environmental Policy Act (NEPA, 42 U.S.C. 4321 et seq. ) and the NMSA (16 U.S.C. 1434), NOAA prepared and released a DEIS (81 FR 37576, June 10, 2016). The DEIS considered alternatives for the proposed expansion of boundaries at FGBNMS and application of the existing sanctuary regulations and management actions to the expanded area. The DEIS evaluated the environmental consequences of the alternatives and provided an in-depth resource assessment. The action alternatives in the DEIS would expand the network of protected areas within FGBNMS by incorporating selected reefs, banks, and other features throughout the north central Gulf of Mexico.

The DEIS evaluated five alternatives, ranging from “no action” (maintaining the current boundaries) to one that included a total of 45 discrete boundary units and encompassed approximately 935 square miles. The action discussed in this rulemaking falls within the bounds of the DEIS alternatives as discussed below in part II, section 5 of this final rule and in the supplemental information report which is available at the FGBNMS website. 2 NOAA's preferred alternative in the 2016 DEIS (Alternative 3) sought to expand the existing sanctuary from approximately 56 square miles to approximately 383 square miles, including additional important and sensitive marine habitat areas in the northwestern Gulf of Mexico. This alternative would have applied the existing sanctuary regulations and management actions to the expanded area. The 2016 preferred alternative included 15 reefs and banks (in addition to those contained within the existing 3 sanctuary units) encompassed within 11 discrete boundary polygons, including multi-bank complexes. No significant adverse impacts to the human environment were identified under any alternative considered in the DEIS.

In June 2016, NOAA opened a public comment period on the DEIS for sixty-nine (69) days, which closed on August 19, 2016. During this public comment period, NOAA also held five (5) in person public hearings in Galveston, TX; Houston, TX; New Orleans, LA; Lafayette, LA; and Mobile, AL. NOAA received 1,421 separate comments, including three letter campaigns and one petition, each with multiple signatories. All written comments on the DEIS are available at the Regulations.gov website. 3 NOAA's response to the public comments are set forth in Appendix A of the FEIS, which was made available to the public on December 11, 2020 (85 FR 80093).

In response to concerns raised primarily by the oil and gas industry regarding the potential impacts to offshore energy operations arising from the Preferred Alternative presented in the 2016 DEIS, the FGBNMS Advisory Council (Advisory Council) established a new BEWG to review NOAA's expansion proposal and make a recommendation. Between July 2016 and May 2018, the BEWG met 21 times, and considered a variety of topics, including a range of boundary and regulatory issues. The BEWG recommended revised FGBNMS expansion boundaries that tracked the BOEM-designated NAZs. NAZs are areas within which no operations, anchoring, or structures are allowed for oil and gas operations. The NAZs were developed in the 1970-1980's to protect the shallowest portion of the reefs and banks. Based primarily on the May 2018 FGBNMS Advisory Council recommendation, along with input received from public comments and consultation with the GMFMC and various Federal agencies, NOAA revised the preferred alternative.

In the revised preferred alternative, NOAA reduced the size of the expansion areas proposed in the 2016 DEIS preferred alternative to promote compatibility with users and reduce potential economic impacts to the offshore energy and fishing industries. On March 22, 2019, NOAA evaluated changes to the 2016 DEIS preferred alternative in a Supplemental Information Report (SIR). Through this review, NOAA determined that preparing a supplement to the 2016 DEIS is neither required nor necessary under NEPA. The SIR is available on the FGBNMS website. 4 Pursuant to applicable Council on Environmental Quality (CEQ) guidance, NOAA's rationale for the revised preferred alternative is now presented as NOAA's Final Preferred Alternative in the FEIS and part II, section 7 of this final rule and the ROD.

On May 1, 2020, NOAA published a proposed rule which would expand the boundaries of FGBNMS from approximately 56 square miles to 160 square miles (85 FR 25359 May 1, 2020). This action would add 14 banks, for a total of 17 banks, represented in 19 polygons (including 3 banks with multi-polygons), and apply the existing sanctuary regulations and management plan to the expanded sanctuary boundaries. Under the existing sanctuary regulations, only conventional hook and line gear would be permissible in the expanded sanctuary boundaries.

NOAA solicited public comment on the proposed rule from May 1, 2020 to July 3, 2020, including specifically on whether to provide exemptions for spearfishing and pelagic longline in the expanded area. NOAA accepted comments in the form of letters and written comments through electronic submissions to http://regulations.gov, letters submitted by mail, and public hearings. As a result of the Coronavirus global pandemic and restrictions on public gatherings, three virtual public hearings were held via Gotowebinar®.

NOAA received 485 separate comments, including four letter campaigns and four petitions, each with multiple signatories, for a total of 36,111 comments. All written public comments on the proposed expansion are available on the Regulations.gov website. 5 NOAA's responses to the public comments are available in Appendix A of the FEIS, and in section IV of this final rule.

With this final rule, NOAA is revising the FGBNMS regulations at 15 CFR part 922, subpart L, as follows.

NOAA is amending the sanctuary boundary descriptions at 15 CFR part 922, subpart L, and the terms of designation in order to expand the boundaries of FGBNMS to include portions of 14 additional reefs and banks in the sanctuary, adding approximately 104 square miles, bringing the total area to 160.4 square miles and encompassing 17 banks. The boundary changes were selected through a public process to identify and assess marine areas that could more effectively complement current management authorities or enhance natural and cultural resource values. Collectively, these new areas capture a greater diversity of habitats and biological resources than currently protected by FGBNMS. Inclusion of these areas within the sanctuary system will provide additional regulatory protection, additional management actions and initiatives, and improved public awareness of their natural resource values. Detailed maps of these boundary changes are available on the FGBNMS website. 6

Under this action, NOAA is expanding the boundaries of the sanctuary by 104.2 square miles from 56.2 square miles to 160.4 square miles as follows:

NOAA will apply the existing sanctuary regulations (including regulatory prohibitions set forth in § 922.122) and the existing management plan  7 to the expanded sanctuary boundary in order to provide for more comprehensive management and protection of sensitive underwater features and marine habitats associated with continental shelf-edge reefs and banks in the northwestern Gulf of Mexico. Accordingly, 15 CFR 922.122(e) will be updated to reflect the effective date of the sanctuary expansion, and no further amendments of the regulatory text in 15 CFR part 922 are necessary to implement this action.

NOAA's decision to amend the effective date in § 922.122(e) addresses concerns raised by the Department of the Navy (DON) during coordination in development of this final rule. In the final rule, NOAA clarifies that the prohibitions in § 922.122(a)(2) through (11) do not apply to the activities being carried out by the Department of Defense as of the date of sanctuary expansion.

Section 304(a)(4) of the NMSA requires that the terms of designation include the geographic area of the sanctuary; the characteristics of the area that give it conservation, recreational, ecological, historical, research, educational, or aesthetic value; and the types of activities that will be subject to regulation by the Secretary of Commerce to protect these characteristics. Section 304(a)(4) also specifies that the terms of designation may be modified only by the same procedures by which the original designation was made.

The terms of designation for FGBNMS was first published in 1991 (56 FR 63637), and became effective in 1994 (58 FR 65664). The terms of designation were not incorporated into the Code of Federal Regulations, and, whenever there was a proposed regulatory change, NOAA and the general public had to refer to the preamble of the 1991 final rule to understand the nature and scope of the terms of designation. With this final rule, NOAA is making the terms of designation more readily available to the general public by amending the FGBNMS regulations at 15 CFR part 922, subpart L, to incorporate the terms of designation as a new appendix B to the FGBNMS regulations. NOAA is amending Article II. Description of the Area to include Stetson Bank (added by Congress in 1996 pursuant to Pub. L. 104-283) and the additional reefs and banks included in this expansion, add a new section relating to the U.S. Department of Defense (DoD) exemption, and revising the “Consistency with International Law” section of the terms of designation in order to address comments raised by the U.S. Department of State during interagency consultation.

Based on the public comments received on the proposed rule, NOAA has decided not to provide exemptions for spearfishing or pelagic longline fishing. The rationale for the decisions not to provide exemptions for spearfishing or pelagic longline fishing are addressed below in section IV. Responses to Comments.

NOAA received 1,421 individual (8,491 campaigns and petitions) public comments on the DEIS and 485 individual (36,111 including campaigns and petitions) public comments on the proposed rule. The majority of comments expressed general support for sanctuary expansion, others expressed concerns about the reduced size of the boundaries, and few comments were received opposing the expansion of FGBNMS. Of the comments received during this action, approximately one third supported the revised preferred alternative in the proposed rule (which is identified as NOAA's Final Preferred Alternative in the FEIS). Public comments identified specific geographic locations of concern that were not included in the revised preferred alternative. Comments raised concerns about boundary enforcement, essential fish habitat, preservation of biodiversity, connectivity between bank areas, mesophotic/deepwater coral ecosystems, mobula rays, whale sharks, sea turtles, sharks, marine mammals, and commercial and recreationally important fish. Many of the comments supportive of the proposed expansion referred to industrial, environmental, and global impacts.

In response to NOAA's request for public comment on fishery exemptions for pelagic longline fishing and spearfishing with sanctuary expansion, 25,641 comments opposed an exemption for pelagic longline fishing, 23,353 opposed an exemption for spearfishing, 2 comments supported allowing pelagic longline fishing, and 8 comments indicated conditional support for spearfishing. Conditional support for spearfishing included an exemption for breath-hold only spearfishing, establishing an initial limited capacity fishery that could be assessed at a reduced number of banks, and an exemption for lionfish only. NOAA analyzed comments received during this process and considered them in preparation of this FEIS, as well as developed agency responses. NOAA's responses to the public comments are included in Appendix A of the FEIS and in this document (Part IV).

NOAA has consolidated public comments from the DEIS and proposed rule and collectively responds to those comments here and in Appendix A of the FEIS.

1. Comment: NOAA received comments that supported the proposed expansion of the sanctuary and encouraged NOAA to proceed with the expansion process. Comments also supported the Revised Preferred Alternative (NOAA's Final Preferred Alternative).

Response: Comment accepted. NOAA has considered these comments in carrying the Revised Preferred Alternative forward to the Final Environmental Impact Statement (FEIS) and final rule as NOAA's Final Preferred Alternative.

2. Comment: NOAA received comments that opposed the overall sanctuary expansion process citing reasons including: (1) Existing protections for sensitive resources; (2) concern of restricting use/access to the public; (3) safety, budget, and management limitations; and (4) socioeconomic consequences to certain industries.

Response: NOAA determined the proposed action responds to the need to provide additional protection and management of sensitive underwater features and marine habitats associated with continental shelf-edge reefs and banks in the northwestern Gulf of Mexico. The current jurisdictional regime divides authority among several governmental entities that regulate offshore energy exploration (Bureau of Ocean and Energy Management (BOEM)), fishing (Gulf of Mexico Fishery Management Council (GMFMC)), and water quality (Environmental Protection Agency (EPA)). NOAA has determined the current jurisdictional regime does not provide comprehensive and effective management for the full range of activities that impact the sensitive reefs and banks in the region. Chapter 2 of the FEIS and Part I, Section 2 of the preamble to the final rule describe the purpose and need for this proposed expansion. Extending the sanctuary boundary to new reefs and banks in the northwestern Gulf of Mexico promotes ecological conservation and biodiversity, expands sanctuary management efforts in the region, and helps to balance multiple uses.

3. Comment: NOAA received comments that generally supported expansion, but opposed the boundaries in the Revised Preferred Alternative (NOAA's Final Preferred Alternative). These comments indicated that the proposed boundaries of the Revised Preferred Alternative were too small or would exclude some “topographic highs” and reduce migratory corridors, or that NOAA should select a larger boundary alternative. Additionally, comments noted the removal of buffer zones entirely in the Revised Preferred Alternative and that very small areas were created at some banks ( e.g., Elvers, McGrail), which results in fragmented connectivity and diminished ecological and species function. Comments also stated NOAA's Preferred Alternative in the DEIS (Alternative 3) excluded 39 nationally significant areas and 9 nationally significant shipwrecks.

Response: NOAA developed the Final Preferred Alternative in response to public comments and recommendations from the Sanctuary Advisory Council. NOAA's Final Preferred Alternative was based on boundary configurations developed by the Advisory Council's Boundary Expansion Working Group and the Advisory Council's 2018 recommendation. It was also based on research conducted by the Office of National Marine Sanctuaries, consultation with other Federal and state agencies, strong public support and comment during public meetings preceding this proposal, and extensive input from oil and gas, and fishing interests. The Final Preferred Alternative further follows the National Marine Sanctuaries Act's goal of facilitating, to the extent compatible with the primary objective of resource protection, all public and private uses of the resources.

NOAA modified DEIS Alternative 3 to develop the Final Preferred Alternative under which the boundaries were drawn more tightly around the shallowest portions of the geological features identified in Alternative 3. The new boundaries closely follow the BOEM No Activity Zones, which have prohibitions on oil and gas exploration and development, but allow other bottom-disturbing activities that can cause severe negative impacts to the benthic areas. NOAA's Final Preferred Alternative expands the sanctuary by approximately 104 square miles, to include additional important and sensitive marine habitat areas outside the current sanctuary boundary, which will offer additional protection not provided by BOEM's current regulations. NOAA has determined the Final Preferred Alternative minimizes the impact to offshore energy exploration and production while providing substantial protection to sensitive marine habitats of national significance and meeting the expansion objectives as identified in the 2012 FGBNMS management plan and 2016 DEIS. Refer also to FEIS Chapter 3, Section 3.2 for additional details on the development of NOAA's proposed action.

NOAA submits there were more environmentally preferable alternatives assessed in the DEIS; however, ONMS has identified the Final Preferred Alternative as one that, based on strong input from the public and the Sanctuary Advisory Council, provides a significant environmental benefit, can be managed with current FGBNMS operational capacity, and minimizes negative impact to industry activities.

NOAA has determined the Final Preferred Alternative remains within the range of alternatives and impacts analyzed in the 2016 DEIS. Also refer to NOAA's Supplemental Information Report and FEIS Chapter 3, Section 3.2 for additional details on the development of the Final Preferred Alternative.

4. Comment: NOAA received comments requesting additional areas and banks to be considered in the proposed expansion process, including: Coffee Lump, 32 Fathom, Claypile, Applebaum, 29 Fathom, Fishnet, Phleger, Sweet, and Jakkula Banks, Florida Middle Grounds, Madison/Swanson, and Alabama Pinnacles, north central Gulf of Mexico, Ewing Bank (whale shark aggregation), Bryant Bank, more of Bright Bank complex, and the Deep Water Horizon (Deepwater Horizon) rig/well area.

Response: NOAA rejects the requests to add these additional banks and areas for two primary reasons, (1) there was insufficient data to characterize these areas as nationally significant, or (2) they were too far from the existing sanctuary. NOAA considered including 32 Fathom Bank, Applebaum Bank, Coffee Lump Bank, Fishnet Bank, Phleger Bank, Sweet Bank, Diaphus Bank, and Sackett Bank but determined either insufficient data were available to adequately characterize the sites or available data does not indicate sufficiently unique, diverse, productive, or otherwise nationally significant biological communities or geologic features.

Sites in biogeographic regions other than the north central Gulf of Mexico were also eliminated from further consideration; areas to both the east and west of the area roughly defined by the 87th and 95th west meridians reflect geologic/sedimentary and hydrologic/oceanographic settings, as well as biological communities, that are distinctly different from those of the north central Gulf of Mexico and are faced with distinctly different threats or other conservation issues. Features eliminated from further consideration based on this distinction include Big Dunn Bar, Small Dunn Bar, Blackfish Ridge, Mysterious Bank, the South Texas Banks (Dream Bank, Southern Bank, Hospital Bank, North Hospital Bank, Aransas Bank, Baker Bank, and South Baker Bank), Madison-Swanson, the Florida Middle Grounds, and Pulley Ridge. Bryant Bank and more areas of the Bright Bank Complex were primarily excluded from the Final Preferred Alternative because of concerns raised from the oil and gas industry.

Although these additional areas were rejected for consideration in the current FEIS, FGBNMS will consider extending sanctuary protection and management to these additional biogeographic regions and habitat types during the next management plan review.

For more information on how the Final Preferred Alternative was developed and selected, refer to FEIS Chapter 1, Sections 1.5 and Chapter 3, Sections 3.1 and 3.2.

5. Comment: NOAA received a comment that requested the agency identify areas to redraw boundaries to reduce impact on fishing ( i.e., northern boundary of MacNeil, northern boundary of Sonnier, and northeast boundary of Bouma).

Response: NOAA considered this request, and following the DEIS, slightly reduced the boundaries at these banks to more closely align with BOEM designated NAZs. The decrease in proposed expansion area in the Final Preferred Alternative was partly in response to requests, such as this, to reduce impacts to historical fishing activities. Moreover, ONMS has completed consultation with the GMFMC pursuant to NMSA section 304(a)(5) regarding the boundaries and fishing regulations in the Final Preferred Alternative, and GMFMC concurred with this action. See Appendix G of the FEIS for more details on the 304(a)(5) consultation.

6. Comment: NOAA received a comment that requested coordinates for all proposed alternatives be included.

Response: NOAA disagrees. NOAA provided the coordinates of NOAA's Final Preferred Alternative in Appendix H of the FEIS. Additionally, the coordinates of NOAA's Final Preferred Alternative are included as appendix A to the final rule which will be codified in 15 CFR part 922, subpart L. NOAA does not believe inclusion of coordinates for all other alternatives is necessary. However, maps of all alternatives can be reviewed in FEIS Chapter 3 and Appendix D.

7. Comment: NOAA received comments requesting an explanation of how the FGBNMS Advisory Council's recommendations were incorporated throughout the expansion process.

Response: The Sanctuary Advisory Council was involved in developing DEIS Alternative 2, reviewing DEIS Alternative 3, and providing recommendations to modify the alternative. Ultimately, NOAAs Final Preferred Alternative was largely developed by recommendations proposed by the Sanctuary Advisory Council. Refer to FEIS Chapter 1, Section 1.5, which provides background information on development of the DEIS alternatives and the process by which NOAA modified DEIS Alternative 3 to develop the Final Preferred Alternative, including information of the Sanctuary Advisory Council's involvement. See response to comment #3 pertaining to the Revised Preferred Alternative.

8. Comment: NOAA received comments that requested a buffer around reefs to enhance connectivity, compliance, and enforcement, as well as to keep out any structure that may act as a vector for invasive species spread.

Response: Buffers were considered during the FGBNMS Advisory Council's Boundary Expansion Working Group meetings and were rejected due to potential impacts to the oil and gas and fisheries industries. The 2018 Sanctuary Advisory Council recommendation for sanctuary expansion did not include buffers. Refer to FEIS Chapter 1, Section 1.5 for details regarding development of the Final Preferred Alternative and associated interagency consultations and coordination.

9. Comment: NOAA received comments suggesting the boundaries proposed in the Revised Preferred Alternative (NOAA's Final Preferred Alternative) were too complicated for enforcement purposes, stating that simpler boundaries make enforcement easier, which results in better compliance of user groups.

Response: Along with input for NOAA's Office of Law Enforcement (OLE), ONMS considered this concern and determined the expansion boundaries are enforceable as proposed in NOAA's Final Preferred Alternative. The boundaries achieve a polygonal configuration, which is recommended by the OLE, and closely follow the existing BOEM designated NAZ boundaries. This polygonal approach uses fewer vertices, simplifying the NAZ boundaries and allowing for heightened enforceability and user compliance.

ONMS believes that vessels visiting the sanctuary are likely to be equipped with onboard mapping technology ( e.g., Global Positioning System) that would inform operators of their vessel's position relative to the expanded sanctuary boundary. In light of the technological capabilities of onboard positioning systems, ONMS decided to continue with the boundary configuration of the Final Preferred Alternative, confident that user compliance and agency enforcement can be achieved.

Please refer to FEIS Chapter 3, Section 3.2 for more details regarding development of the Final Preferred Alternative boundaries.

10. Comment: NOAA received comments related to the influence of the oil and gas industry on the boundary configurations of the proposed expansion of banks and reefs, including a claim that the FGBNMS Advisory Council's Boundary Expansion Working Group was biased (towards the oil and gas industry).

Response: The BEWG included Advisory Council members representing multiple stakeholder groups including the oil and gas industry, commercial and recreational fishing industries, recreational diving, science, and conservation. The BEWG presented its revised FGBNMS expansion boundaries recommendation to the full FGBNMS Advisory Council, representing all user groups, on May 9, 2018, and the recommendation was accepted by the Advisory Council and subsequently by ONMS as proposed. Refer to responses to comments #3 and #7 and FEIS Chapter 3, Section 3.2, which details the Sanctuary Advisory Council's BEWG process for developing the Revised Preferred Alternative.

11. Comment: NOAA received comments suggesting that the purpose and/or need for the proposed expansion was not warranted, citing several reasons including: (1) Need for protection was not demonstrated; (2) expansion would offer no benefit of protection; (3) government overreach; (4) majority of sites are already protected from oil and gas development by the existing BOEM's No Activity Zones; and (5) proposed expansion areas are not nationally significant or unique.

Response: Pursuant to the National Environmental Policy Act (NEPA), NOAA has established a strong purpose and need to expand FGBNMS (See FEIS Chapter 2). Through the management plan review and scoping process, NOAA identified several gaps in management of reefs and banks near the current sanctuary where habitats were experiencing damage from anchoring and fishing gear in addition to potential for further industrial development. NOAA determined that extending sanctuary management to these areas would assist in addressing these gaps in protections by supplementing and complementing existing authorities established by BOEM and the GMFMC. While BOEM-designated NAZ's protect from oil and gas development, without sanctuary management efforts, habitats would remain vulnerable to anchor damage, detrimental fishing impacts, and other threats.

NOAA disagrees with the comment that the expansion demonstrates government overreach. The NMSA provides NOAA with the authority to designate, as marine sanctuaries, areas of the marine environment, which are of special national significance that possess conservation, ecological, and scientific qualities. Through decades of scientific research and exploration, NOAA has determined that the sanctuary expansion areas contain some of the highest reported densities of corals in the U.S. and other unique deepwater habitats that are not found elsewhere in the world, making them nationally significant and worthwhile to protect.

12. Comment: NOAA received comments requesting changes to existing regulations including: (1) Allow anchoring for fishing; (2) a reasonable range of alternative management actions; (3) allow spearfishing; and (4) an exemption for pelagic longline fishing.

Response: NOAA rejected these requests because it was determined that granting them would negate the overall effectiveness of the existing regulations in the expansion areas. Current sanctuary regulations will address gaps in protection of the expansion areas. In the NPRM for sanctuary expansion, NOAA requested public comments on two fishery exemption requests: to allow pelagic longlining and spearfishing. NOAA received very limited support for exempting these activities (see fishing section below) and has determined that extension of existing fishing regulations to the expansion area is appropriate. Refer to FEIS Chapter 3, Section 3.1.2 for alternatives considered but rejected.

13. Comment: NOAA received comments that suggested the agency should provide enforcement policies to enhance the effectiveness of sanctuary expansion.

Response: The FGBNMS management plan details the enforcement policy for the expansion areas. NOAA will continue to work with Federal and state enforcement partners to maintain water and aerial surveillance, update patrol guides and regulatory handbooks, and conduct interpretive/outreach patrols within all of FGBNMS.

14. Comment: NOAA received comments requesting that NOAA evaluate how the sanctuary expansion would affect the climate ( i.e., potential impacts to greenhouse gas emissions within sanctuary expansion areas).

Response: NOAA agrees with the need to evaluate the impacts of sanctuary expansion on the climate and has provided analysis of the potential beneficial effects of the expansion on physical and biological resources, including beneficial impacts derived from prohibiting harmful activities. NOAA also estimates that this action will help offset impacts of climate change (see FEIS Chapter 5, Section 5.3.1).

15. Comment: NOAA received comments requesting an assessment of how climate change affects FGBNMS, how it will affect proposed additions, and methods to reduce greenhouse gases with sanctuary expansion areas. One comment also requested a program-wide evaluation of climate adaption management gaps and needs.

Response: The management plan for FGBNMS contains Conservation Science Action Plans, which include goals to increase knowledge and understanding of the sanctuary's ecosystem, develop new and continue ongoing research and monitoring programs to identify and address specific resource management issues, and encourage information exchange, and cooperation. FGBNMS participated in development of the Ocean Acidification Action Plan  8 for national marine sanctuaries. The plan has numerous research recommendations for studying ocean acidification, a common consequence expected of future climate change. Please also visit NOAA's website  9 for program-wide climate change initiatives, data, observations, and outreach materials. ONMS is standing up a Focus Group on climate, with the goal to develop the ONMS Climate Strategic Plan. FGBNMS is an active participant in this initiative, and the sanctuary, including the expansion areas, will be integrated into the overall plan. Ocean Acidification, specifically, has been integrated into FGBNMS long-term monitoring programs.

16. Comment: NOAA received recommendations that the agency use newer emissions inventory for the analysis on air monitoring and pollutants.

Response: NOAA used the best available data for their environmental analysis of air emissions and pollutants when developing the FEIS. Please refer to FEIS Chapter 4, Section 4.2.1 for detailed information about the data and resources used for air quality and climate change.

17. Comment: NOAA received a comment that suggested the No Action Alternative (Alternative 1) does contribute to climate change over time as it does not prevent climate change from progressing, and requested the agency amend the analysis in DEIS Section 5.3.1.

Response: Since implementation of the No Action Alternative is expected to leave the existing environment unchanged except for continuation of existing impacts, including on-going impacts of climate change, the effect of this alternative is the same as described in Chapter 4. The “No Action” Alternative served as a baseline for the impact analysis to compare all other alternatives. As such, there would be no additional change to climate expected under this alternative. The text has been slightly amended in FEIS Chapter 5, Section 5.2 to offer clarification in response to this comment.

18. Comment: NOAA received comments related to biological resource concerns. Biological comments focused on how sanctuary expansion would protect resources against damages ( e.g., anchoring, invasive species), the benefits sanctuary protection would provide ( e.g., improvements in fish stocks and productivity, preservation of biodiversity, continued discovery of new species), and requests for protection of specific species/groups ( e.g., Mobula rays, sea turtles, sharks, coral).

Response: NOAA concurs with the importance of protecting vulnerable biological resources and believes that this action helps to address many of the remaining gaps that threaten biological resources in the expanded sanctuary. With this action, NOAA is prohibiting the following activities in the sanctuary: Anchoring; drilling into, dredging, or altering the seabed; discharging or depositing of material; any injury to coral, rays, or whale sharks; fishing except for with conventional hook and line gear; and take of marine mammals and turtles except when permitted under the Marine Mammal Protection Act (MMPA) and Endangered Species Act (ESA). Collectively, these prohibitions will help to protect fishes from unsustainable harvest by limiting fishing; help to maintain biodiversity of benthic habitats by protecting the seafloor; and allow further protection of many vulnerable living marine resources including rays, sea turtles and other ESA and MMPA-listed species. Please also refer to FEIS Chapter 5, Section 5.3.6 and 5.3.8 for additional details regarding impacts of sanctuary expansion to biological resources.

19. Comment: NOAA received comments requesting the sanctuary protect resources from negative impacts of fishing. Commenters noted the vulnerability of the expansion area to fishing injury, and urged protection of fish species in order to achieve fishing sustainability. Requests for fishery management included: (1) Limiting fishing locations; (2) prohibiting bottom-dragging gear; and (3) continuing to limit fishing to hook and line only. Some of the comments received in support of expansion were from members of the fishing sector.

Response: NOAA intends to extend the current sanctuary regulations to the proposed expansion areas, which includes restricting fishing activities to conventional hook and line techniques only ( i.e., any fishing apparatus operated aboard a vessel and composed of a single line terminated by a combination of sinkers and hooks or lures and spooled upon a reel that may be hand- or electrically-operated, hand-held or mounted). NOAA prohibits the use of any bottom tending fishing gear to protect delicate corals and important benthic habitat from fishing impacts, which will continue in the expansion areas. A detailed list of the current regulations can be reviewed in Table 1.1, Chapter 1, Section 1.4.

20. Comment: NOAA received a comment requesting projections of ecosystem services ( i.e., estimates for the increase in value of managing protected species and habitats such as hard and soft corals, fish, and mesophotic reefs) be included in the final analysis.

Response: Analysis of ecosystem services is beyond the scope of the environmental analysis necessary for this action, and thus, NOAA rejects this request. Instead, NOAA provided an economic analysis in the FEIS that estimated a passive economic value ( i.e. non-use value) of the sanctuary expansion. For details on the economic analysis, please refer to Chapter 4, Section 4.4.7 of the FEIS or the peer-reviewed publication that resulted from this study, Stefanski and Shimshack (2016).

21. Comment: NOAA received a comment which indicated that the BEWG was informed that higher coral counts had been observed outside of the NAZs, than inside NAZs, and requested an explanation for why this was not considered during the boundary configuration of the Revised Preferred Alternative.

Response: Additional areas containing higher coral colony counts were quantified during remotely operated vehicle (ROV) surveys, and the data was considered during the National Centers for Coastal Ocean Sciences (NCCOS) collaboration with the FGBNMS Advisory Council's BEWG. The BEWG selected smaller boundaries, which closely follow the NAZs, primarily to reduce impacts to the oil and gas industry and to retain access for historical fishing practices. Outside of the expansion process, NOAA will provide the processed data and associated publication to both BOEM and NMFS, for consideration during review of regulations, and for future oil and gas, and fishing activities. While this will not provide blanket protection measures, it will be valuable in protections from potential major impacts.

22. Comment: NOAA received comments requesting an analysis of the impacts sustained to the environment from run-off of toxic and hazardous elements, sewage, pollution, and potential expansion of the Gulf of Mexico hypoxic zone, or `dead zone', into the proposed sanctuary expansion areas.

Response: NOAA used the best available data to evaluate the environmental impacts to the expansion areas as required under NEPA and the Council of Environmental Quality's (CEQ's) 1978 NEPA regulations. NOAA, however, is studying these issues and plans to continue analyzing the impacts in its next management plan review process.

23. Comment: NOAA received comments regarding disturbances (vessel traffic) related to the noise environment, including a request to quantify the additional impact from an increased number of boaters.

Response: NOAA continues to study the issue of noise impacts on sanctuary resources. Sanctuary regulations prohibit the disturbance of marine mammals and turtles except when permitted under the MMPA and ESA. With respect to sonar testing, Section 304(d) of the NMSA provides for consultation with other federal agencies if their actions have the likelihood to injure sanctuary resources. NOAA has previously used this mechanism in consultations to minimize impacts of noise on marine mammals and other species. FGBNMS is actively engaged in a vessel traffic and noise assessment and monitoring program within the sanctuary, which will be expanded to the new areas.

Please refer to FEIS Chapter 4, Section 4.2.2 for detailed information about the noise environment in the current FGBNMS, as well as expansion areas. Additionally, refer to FEIS Chapter 5, Section 5.3.2 for NOAA's analysis of environmental consequences to marine resources with respect to noise disturbances.

24. Comment: NOAA received comments requesting protection for fish spawning aggregations with the expansion.

Response: NOAA concurs with commenters and believes the expansion of the sanctuary will assist in the protection of fish spawning aggregations in the northwestern Gulf of Mexico. With this action, NOAA will extend sanctuary regulations to the expansion areas which limit fishing activities to conventional hook and line techniques, prohibit bottom tending gear, and restrict the use of anchors within sanctuary boundaries. This action will thereby complement protections for fish spawning habitats provided under the Magnuson-Stevens Fishery Conservation and Management Act (MSA). Fish spawning aggregations have been observed and recorded during ROV explorations at reefs and banks included in the expansion areas. Therefore, NOAA determined that sanctuary designation will directly protect habitat where the aggregations occur. NOAA intends to consider further protection of spawning aggregations during the next management plan review.

25. Comment: NOAA received a comment requesting NOAA consider designating areas within the sanctuary as “no take” marine reserves.

Response: NOAA considered this request and does not intend to designate any “no-take” marine reserves within the sanctuary through this action. With this action, NOAA extends the current fishing regulations to the expansion areas which limit fishing activities to conventional hook and line techniques and exclude any bottom tending gear. Anchoring will also be prohibited in the expanded sanctuary, and mooring buoys will be installed so that fishers and vessels (<100 feet long) can safely moor within the sanctuary boundaries.

To evaluate the impact of conventional hook and line fishing to managed fish species in the sanctuary, NOAA conducted an environmental impact analysis on living marine resources, including fish in relation to the different expansion alternatives (see FEIS Chapter 5, Section 5.36). Overall, NOAA determined none of these resources would sustain any significant adverse impacts with sanctuary designation. However, NOAA determined that this action will provide benefit to fish, given the added protection to critical habitat and restrictions to fishing techniques. Mesophotic and deep water reefs have been shown to have low resilience and slow recovery potential, and harbor greater fish biomass than their shallower counterparts, underlining the importance of their protection (Lindfield et al. 2016, Huvenne et al. 2016). By reducing fishing pressure through sanctuary protection, fish size, biomass, and abundance could increase, while also enhancing coral reef resiliency (Reed 2002, 2007, Bozec et al. 2016, Chirico et al. 2017). Impacts to the resources may be reduced due to limitations on fishing that can otherwise alter predator-prey relationships, disturb bottom habitats, and increase loss of fish biomass. The added prohibition of spearfishing further protects fish from direct extraction (Lindfield et al. 2014).

Sanctuary management actions could reduce marine debris and impacts of debris on corals and other organisms, such as entanglement in derelict fishing gear and incidental catch of fish in “ghost” fishing gears. Moreover, extending to the expansion areas the prohibition of bottom-tending fishing gear, limits on anchoring and the discharge of pollutants, removal of marine debris such as derelict fishing gear, and invasive species removal, would all improve habitat for benthic coral communities and fish communities.

Designating areas as a “no take” marine reserve is an important issue and NOAA plans to consider it in the next review of the FGBNMS management plan.

26. Comment: NOAA received a comment requesting that a Gulf Sperm Whale/Pelagic Ecosystem national marine sanctuary be established.

Response: NOAA does not intend to establish a Gulf Sperm Whale/Pelagic Ecosystem National Marine Sanctuary. The request is beyond the scope of this proposed action.

27. Comment: NOAA received a comment on DEIS Section 5.3.2.3—Scenic and Visual Resources requesting that negative impacts to scenic and visual resources that could occur because of an increased number of boaters and/or increased use of fishing line be considered in the analysis.

Response: NOAA evaluated both beneficial and adverse impacts to each resource area and determined there would be no adverse impacts to scenic and visual resources. NOAA predicts beneficial impacts on the scenic and visual resources of the proposed expansion areas by reducing marine debris including derelict fishing gear, vessel traffic, and industrial infrastructure. Refer to FEIS Chapter 5, Section 5.3.3.

28. Comment: NOAA received a comment that requested the agency to analyze recreational fishing activities in the proposed expansion areas.

Response: NOAA addressed the request for this analysis by evaluating the level of recreational fishing activity expected to occur in the proposed expansion areas, using the best available data, to capture the socioeconomic impact to this industry. Ultimately, NOAA determined that there would be no significant adverse impacts to recreational fishers. For analysis of recreational fishing activities, please refer to FEIS Chapter 4, Section 4.4.1.2 for a description of the data used and Chapter 5, Section 5.3.9.2 for the expected environmental impact.

29. Comment: NOAA received a comment that requested the agency clarify benefits of the expansion to commercial fishers and improve the socioeconomic analysis of commercial fishers.

Response: NOAA updated FEIS Chapter 4, Section 4.4.1 to supplement the analysis on commercial fisheries with additional and current VMS data to assess socioeconomic impacts imposed by the expansion on commercial (Section 4.4.1.1) and recreational (Section 4.4.1.2) fishers. Overall, NOAA determined that no significant adverse impacts to fishers would result from the proposed expansion (See Chapter 5, Section 5.3.9.1 and 5.3.9.2). NOAA concluded minor benefits to commercial fishers may occur with the expansion of the sanctuary (see Chapter 5, Section 5.3.9.1) as fish production may increase in general with the decreased fishing pressure and habitat protections of specific locations.

Broadly, it is well documented by the scientific community that coral reef and mesophotic coral communities provide necessary habitat for a significant number of fish species, and the prevention of loss of these habitats will help to maintain and enhance fish populations dependent on these areas. More specifically, higher biomass and abundance of fish are often associated with greater habitat coverage and/or complexity, such that, protecting habitat has an increased likelihood to improve fish stocks (Jones et al. 2004, Coker et al. 2014, Lindfield et al. 2016, Komyakova et al. 2018, Carminatto et al. 2020, Russ et al. 2020). Additionally, reducing fishing pressure could lead to an increased monetary value of commercial fisheries, partly due to the presence of larger individuals (thus more valuable) and higher densities of high-value species (Chirico et al. 2017). Mesophotic reefs have been found to harbor greater biomass of fishery-targeted species than shallower reefs, suggesting these habitats are important to protect for the longevity of commercial harvests (Lindfield et al. 2016). In essence, sanctuary expansion is protecting critical habitat which may result in increased fish biomass (Edgar et al. 2011, Harborne et al. 2008) or abundance (Jeffrey et al. 2012), particularly where fishing pressure is reduced (Edgar et al. 2011, Kramer and Heck 2007), which could benefit commercial fishers.

30. Comment: NOAA received comments regarding spearfishing, with the majority requesting a prohibition on this activity. Some commenters offered conditional support of spearfishing, suggesting allowing the activity: (1) In a limited capacity with access at a limited number of banks and reefs in the expansion area; (2) only for the removal of lionfish, an invasive species present in the current and proposed sanctuary areas; or (3) by breath hold only.

Response: NOAA intends to extend the current sanctuary regulations to the expansion areas proposed in the Final Preferred Alternative. As such, NOAA will not be implementing any additional fishing regulations as part of the final rulemaking. NOAA prohibits spearfishing in the current boundary to protect delicate corals, including threatened species, and important benthic habitat from fishing impacts, which will continue in the expansion areas. Spearfishing for lionfish is not a permissible activity within sanctuary borders. However, spearfishing with pole spears has been performed opportunistically by research staff through permitted long-term monitoring activities at FGBNMS. Additionally, lionfish invitational research cruises have been a permitted activity since 2015 at FGBNMS to remove the invasive species with highly skilled, qualified recreational divers and contribute to a variety of research projects with external academic and agency partners. NOAA intends to continue to permit lionfish removals, with restrictions and obligations to properly train divers in effective removal techniques that prioritize coral and ecosystem health. A detailed description of sanctuary regulations is described in FEIS Table 1.1, Chapter 1, Section 1.4.

31. Comment: NOAA received a comment that suggested the spearfishing community has been excluded from access to the sanctuary.

Response: NOAA solicited public comment to exempt spearfishing in the proposed sanctuary boundary with the release of the NPRM. In response, NOAA received overwhelming support to continue prohibition of this activity. Please see additional information provided in comment #30. This will restrict access to the sanctuary expansion areas for the spearfishing community.

32. Comment: In response to the DEIS, NOAA received a request seeking a pelagic longline exemption from the otherwise applicable sanctuary fishing prohibitions proposed for the expansion areas. NOAA also received a few similar comments in response to the NPRM. However, there were also a significant number of NPRM commenters that opposed this exemption.

Response: NOAA considered the request made during the public review of the DEIS for a pelagic longline exemption to the proposed fishing prohibitions in the expansion area. In response, NOAA solicited public comments pertaining to pelagic longline fishing in the NPRM. Based on strong public support to prohibit this activity, NOAA has rejected the request for an exemption for pelagic longlining and, instead, intends to extend the current sanctuary regulations to the expansion areas. Under existing regulations, fishing will only be allowed with conventional hook and line gear ( i.e., any fishing apparatus operated aboard a vessel and composed of a single line terminated by a combination of sinkers and hooks or lures and spooled upon a reel that may be hand- or electrically operated, hand-held or mounted). NOAA believes the expansion of FGBNMS to additional reefs and banks in the northwestern Gulf of Mexico will add critical protection for fish, marine mammals, threatened and endangered species, as well as their habitat. NOAA determined the existing regulations would best accomplish this protection and fulfill the NMSA obligation to protect nationally significant environmental features.

A detailed description of sanctuary regulations is described in the FEIS Table 1.1, Chapter 1, Section 1.4. NOAA has been in consultation with NMFS and GMFMC throughout the entire scoping process of sanctuary expansion, please refer to FEIS Chapter 1, Section 1.5.4.2, for additional details on these consultations.

33. Comment: NOAA received a comment requesting its fisheries analysis in the DEIS include more types of fishing gear and data to determine what areas were used by fishers and the value of these areas to those fisheries.

Response: NOAA provided a detailed list of the types of commercial vessel and recreation vessels that operate within the proposed sanctuary boundaries in the DEIS. NOAA has added a new table to the FEIS to include gear types used by commercial fishers that were observed in the vicinity of the Final Preferred Alternative. Please review Section 5.3.9.1 and 5.3.9.2 for a description of the commercial and recreational fishing vessels that operate within the proposed sanctuary boundaries based on permit or gear type. This analysis estimates the number of vessels within the vicinity of the boundaries under each alternative.

34. Comment: NOAA received a comment requesting an analysis of the potential impact(s) of weights used in bandit reel gear configurations on the benthic habitat and corals, as well as more information on the types of gear used in this type of fishing configuration.

Response: FGBNMS intends to continue investigating impacts of recreational and commercial fishing in the sanctuary, including bandit reel gear, and will address this in more detail during the next management plan review.

35. Comment: NOAA received a comment requesting a comprehensive commercial endorsement and certification program be developed to allow commercial fishers to continue to operate within the proposed boundaries. Additionally, there was a request to create an exemption for shrimpers in the Royal Red Shrimp industry to continue their historical practices.

Response: NOAA has considered this request, and following consultation with GMFMC pursuant to NMSA section 304(a)(5), decided not to establish a commercial endorsement and certification program or provide an exemption for shrimpers or other fishers in the sanctuary, based on the reduction in size of the new areas. Facilitating commercial fishing in the sanctuary, even through an endorsement and certification process, could make corals and other sensitive bottom habitats vulnerable to injury. NOAA believes that the reduction in boundaries between the 2016 original preferred alternative and the Final Preferred Alternative, in addition to allowing conventional hook and line fishing in the expanded sanctuary, facilitates an appropriate balance between environmental protection and user access dictated as mandated by the NMSA. A detailed description of sanctuary regulations is described in FEIS Table 1.1, Chapter 1, Section 1.4. FEIS Chapter 1, Section 1.5.2 provides additional details on this consultation.

36. Comment: NOAA received a comment that suggested specific language be added for the discharge of natural waste of farmed fish related to open gulf mariculture, stating that fish farming operations outside of sanctuary boundaries may discharge sinking organic material that deposit within the sanctuary with prevailing currents.

Response: NOAA determined this request is outside the scope of this action. While sanctuary regulations do not specifically prohibit aquaculture, some associated activities are prohibited such as discharge of certain material, alteration of the seabed, and injury to sanctuary resources. Furthermore, the suitability of the area for aquaculture is being separately considered under other authorities including E.O. 13921, (October 23, 2020; 85 FR 67519). FGBNMS will further consider aquaculture and its potential impacts during the next management plan review.

37. Comment: A comment related to the Department of the Navy's activities within the proposed sanctuary areas suggested to: (1) Include in the FEIS, Department of Defense (DoD) use of water space in the vicinity of proposed expansion and current sanctuary; (2) provide a map of the Gulf of Mexico warning areas for military use; (3) add military uses to marine-use categories; and (4) add an analysis of the potential impact to military uses.

Response: Homeland security and military uses of the expanded sanctuary are subject to compliance with NEPA and NMSA, in addition to all applicable environmental regulations. DoD would be required to consult with ONMS pursuant to NMSA section 304(d) on any new military activities in the expansion area that are likely to injure sanctuary resources. NOAA believes the existing regulatory framework sufficiently addresses DoD impacts on sanctuary resources. Existing military uses and an analysis of their environmental effects in the expansion area have been added to Chapter 4, Section 4.4.5 and Chapter 5, Section 5.3.9.7 of the FEIS.

38. Comment: NOAA received comments regarding the NEPA process. Commenters requested NOAA conduct a new NEPA analysis because of: (1) The difference in methodologies used to configure the Final Preferred Alternative and Alternative 3 in the DEIS; and (2) new circumstances and/or information available ( e.g., fishing exemptions, removal of buffer zones).

Response: NOAA evaluated the changes made from the 2016 original preferred alternative (Alternative 3) to the Final Preferred Alternative presented in the NPRM and this FEIS. The Final Preferred Alternative revised Alternative 3 boundaries to be more tightly drawn near the shallowest portions of the geological features of interest, largely in response to existing fishing activity and oil and gas activity (see response to comment #3). The new polygons included all of the same reefs and banks, excluding Bryant Bank, which is not included in the Final Preferred Alternative. Ultimately, NOAA determined that the changes reflected in the Final Preferred Alternative were not “substantial changes in the proposed action that are relevant to environmental concerns” (40 CFR 1502.9(c)(1)(i)). NOAA further determined the comments received on the 2016 DEIS did not “constitute significant new circumstances or information relevant to environmental concerns and bearing on the proposed action or its impacts” (40 CFR 1502.9(c)(1)(ii)). As such, NOAA concluded that preparing a supplemental environmental impact statement or new NEPA analysis is neither required nor necessary under NEPA. NOAA has documented the agency's rationale for revising the Final Preferred Alternative (see Chapter 3, Section 3.2) and provided updated information on the affected environment in FEIS Chapter 5, Section 5.3, and related Record of Decision. Please refer to NOAA's Supplemental Information Report that was provided with the release of the NPRM for further information.

39. Comment: NOAA received a comment that requested that the Protected Species analysis in Section 5.3.2.7 of the DEIS be public and open for review/comment.

Response: ONMS conducted an ESA Section 7 consultation with NMFS in conjunction with the development of both the DEIS and NPRM. In the DEIS, ONMS included a list of protected species which may be affected by the proposed action, and the DEIS was subsequently submitted for public comment. Additional species were included in the NPRM consultation. See FEIS Chapter 4, Section 4.3.4 for additional information on protected species with an updated list of protected species and Appendix G for a summary of how ONMS satisfied ESA consultation requirements including ONMS's ESA consultation correspondence.

40. Comment: NOAA received a comment stating that the Notices to Lessees are not simply guidance because they contain requirements for oil and gas.

Response: NOAA disagrees. Please refer to the Bureau of Safety and Environmental Enforcement Notice to Lessees 2009-G39, 10 which provides and consolidates guidance for oil and gas.

41. Comment: NOAA received comments that suggested the expansion of sanctuaries must be conducted through an act of Congress, otherwise it violates Congressional intent found in the NMSA.

Response: NOAA disagrees. NOAA can administratively designate and expand sanctuaries pursuant to Section 303 of the NMSA (16 U.S.C. 1433), using procedures set forth in section 304 (16 U.S.C. 1434). It is also possible for Congress to legislatively designate a sanctuary; Stetson Bank (Pub. L. 104-283) in the current FGBNMS serves as an example of a legislatively designated sanctuary.

42. Comment: NOAA received comments stating the NPRM did not comply with the NMSA and the FGBNMS 2012 management plan to prioritize conservation of surrounding reefs and banks.

Response: The proposed action responds to the need to provide additional protection of sensitive underwater features and marine habitats associated with continental shelf-edge reefs and banks in the northwestern Gulf of Mexico. NOAA adds 14 additional reefs and banks, for a total of 17 features to be protected, expanding the sanctuary by approximately three times its current spatial extent. In addition to prioritizing the conservation of nationally significant biological features, the NMSA section 301 (16 U.S.C. 1431) directs NOAA to facilitate, to the extent compatible with the primary objective of resource protection, all public and private uses of the resources of these marine areas not prohibited pursuant to other authorities. Thus, compliant with the NMSA, NOAA believes the current expansion in this FEIS and final rule, as proposed in the NPRM, maximizes conservation and user group interests to allow for greater protection of these areas.

43. Comment: NOAA received comments from the oil and gas industry in response to the 2016 DEIS alternatives regarding recognition and inclusion of existing oil and gas leases. Commenters expressed concern that sanctuary expansion could be more costly or difficult for oil and gas production, new leases would be precluded, and the loss of oil and gas exploration may lead to reliance on foreign oil. Industry representatives noted their reliance on the 2007 Sanctuary Advisory Council recommendation for expansion (Alternative 2) to inform their investment in resources for the industry's development and growth, or their decision to relinquish certain lease blocks. Industry representatives requested oil and gas access, leasing, produced water discharge requirements, and seismic acquisition should remain as is, with no additional regulations.

Response: To address concerns from the oil and gas industry, the FGBNMS Sanctuary Advisory Council's BEWG underwent an extensive process to evaluate how protecting biologically significant areas may impact the oil and gas industry. They proposed modifying DEIS Alternative 3 to develop the Revised Preferred Alternative (see comment #3). This process also involved input from the Sanctuary Advisory Council, the GMFMC, and coordination within NOAA. The new boundaries closely follow BOEM's NAZs, encompassing the shallowest portions of the banks, which are already protected from oil and gas exploration and development. Furthermore, ONMS consulted with BOEM pursuant to E.O. 13795—Implementing an America-First Offshore Energy Strategy and determined that expanding the sanctuary would not have a significant economic impact on oil and gas exploration and development. BOEM's analysis is summarized in the NPRM and in FEIS Chapter 5, Section 5.3.9.5.

44. Comment: NOAA received a comment requesting an analysis of the inclusion of four oil and gas platforms within the expansion areas for advantages and disadvantages, especially in the context of Sanctuary Expansion Action Plan Objective 6C.

Response: NOAA's Final Preferred Alternative does not include any additional oil and gas platforms within the existing or expanded sanctuary boundaries, thus, the requested analysis is not necessary. NOAA did, however, consider inclusion of certain oil and gas platforms as part of the alternatives considered in the NEPA analysis for this action. See Alternatives 4 and 5 of this FEIS. Please also refer to FEIS Chapter 5, Section 5.3.9.5 for analysis of impacts to offshore energy resources. Finally, NOAA intends to continue analyzing the advantages and disadvantages of oil and gas structure inclusion within FGBNMS as part of its ongoing management plan review process.

45. Comment: NOAA received a comment that requested an economic analysis of: (1) Impacts to oil and gas resources due to directional drilling; (2) affected lease blocks; and (3) a comparison in area between NAZs and proposed sanctuary expansion areas. There was also a request to identify any future management actions/mitigations which may affect oil and gas activities.

Response: BOEM analyzed potential impacts to oil and gas resources pursuant to E.O. 13795, and these results are available on the sanctuary website. 11 BOEM determined that expanding the sanctuary would not have significant economic impacts on the oil and gas industry, and NOAA accepted BOEM's findings. NOAA will continue to coordinate with BOEM to co-manage these resources and mitigate any impacts to oil and gas activities, including the 11 active Outer Continental Shelf (OCS) oil and gas leases that will lie wholly or partially within the boundaries of the expanded FGBNMS. For new leases, approvals or permits, licenses, or other authorizations in existence prior to the date in which the FGBNMS expansion is finalized, lessees or operators will be required to obtain from NOAA a certification to authorize the oil and gas activities within the FGBNMS. The certification will require compliance with the FGBNMFS regulations, as well as the permits or plan approvals issued by BOEM and/or BSEE, and the topographic features stipulation (as applicable) in the lease.

Refer to FEIS Section 5.3.9.5 for additional analysis of the impacts to oil and gas activities.

46. Comment: NOAA received a comment to incorporate BOEM lease sales and stipulations into BOEM's Record of Decision and Final Notice of Sale.

Response: As a non-voting member on the Sanctuary Advisory Council, and a cooperating agency in the preparation of the 2016 DEIS, BOEM has incorporated lease sales and stipulations into BOEM's Record of Decision and Final Notice. FEIS Chapter 5, Section 5.3.9.5 shows that there were 13 active lease blocks, as reported by BOEM in their 2019 report. However, since publication of that report, two leases were relinquished. There are currently 11 active leases in the expansion area, averaging approximately 17% of the lease blocks falling within the Final Preferred Alternative boundaries. Lease sales issued between 1996 and 2001 provided Information for Lessees indicating “Minimizing Oil and Gas Structures near Flower Garden Banks”. Lease sales issued between 2002 through 2014 did not specifically mention FGBNMS, but the lease sales do refer to the Notice to Lessees outlining the topographic and live bottom stipulations. The sanctuary regulations track the operational requirements established by BOEM in those stipulations. Lease sales issued between 2015 to the present provide notice to prospective leaseholders of the proposed expansion. More information regarding BOEM lease sales may be found on BOEM's website. 12

47. Comment: NOAA received a comment that requested the agency develop an appropriate regulatory “firewall” that will set a precedent for other sanctuaries to protect those areas from offshore drilling practices.

Response: NOAA believes this request is beyond the scope of this action but will continue to work toward balancing multiple user interests with the NMSA's primary goal of resource protection.

48. Comment: NOAA received comments related to environmental impacts of the oil and gas industry. Of these, nearly half requested the sanctuary update the regulations to prohibit oil and gas development and to ensure management protects against damages from this industry. Concerns raised included: (1) Oil spills and leaks; (2) extraction practices; (3) encroaching drilling and exploration; and (4) the vulnerability of biological resources to oil and gas activities. Comments also requested that NOAA prohibit fracking and analyze the potential for fracking fluids and directional hydraulic fracturing to impact the area in and near the sanctuary. A few comments related specifically to methane hydrate extraction.

Response: NOAA determined the Final Preferred Alternative balances protecting vulnerable habitats with multiple uses of the region. See FEIS Chapter 3, Section 3.2 for more details regarding the Final Preferred Alternative. NOAA intends to extend the current FGBNMS regulations to the new expansion areas. Please refer to FEIS Table 1.1 in Chapter 1, Section 1.4 for a list of current sanctuary regulations and management efforts from impacts of oil and gas activities. Additionally, sanctuary regulations prohibit discharge of any kind from oil and gas activities that may be harmful to the benthic environment.

BOEM assessed the potential for offshore energy resources including oil and gas and methane hydrate resources in the proposed expansion areas. BOEM determined that due to the shallow-water depth of the proposed expansion areas, the formation of methane hydrate in the subsurface is unlikely. BOEM's E.O. 13795 report is available on the sanctuary website. 13

The FEIS describes damages related to oil and gas activities observed at banks proposed in the expansion, as well as potential impacts that could be sustained to these resources. Please review Chapter 4, Section 4.4.3 of the FEIS for additional information.

Furthermore, in 2016, the NOAA Office of Response and Restoration Gulf of Mexico Disaster Response Center convened with the Department of Interior and a variety of environmental, regulatory, and resource protection agencies to develop a document outlining “Oil Spill Response Options for FGBNMS.” This document may be found at the University of New Hampshire, Coastal Response Research Center and the Center for Spills and Environmental Hazards website. 14

49. Comment: NOAA received comments related to the prohibition of oil and gas development. Specifically, NOAA was requested to prohibit: (1) New oil and gas directional drilling, infrastructure, and transport; (2) oil and gas leasing within new boundary areas; and (3) directional drilling under new boundary areas.

Response: With this action, NOAA intends to extend existing sanctuary prohibitions, which allow and regulate oil and gas exploration and development to the expansion areas. Directional drilling permits for oil and gas will continue to be considered for surface operations in the expansion areas, given existing prohibitions, outside of the BOEM-designated No Activity Zones. Pursuant to NMSA Section 301(b)(6), NOAA will continue “to facilitate to the extent compatible with the primary objective of resource protection, all public and private uses of the resources of these marine areas not prohibited pursuant to other authorities”. Please also refer to comment #49 and FEIS Table 1.1, Section 1.4 for current sanctuary regulations.

50. Comment: NOAA received comments from oil and gas industry companies in support of this expansion that recognized the balance between conservation, extraction, and user groups achieved through the Sanctuary Advisory Council's process in developing the Revised Preferred Alternative (NOAA's Final Preferred Alternative).

Response: NOAA has carried forward the 2018 BEWG's recommendation, which is now NOAA's Final Preferred Alternative. Please refer above to the Boundaries section and to FEIS Chapter 3, Sections 3.1 and 3.2 for more information regarding the development of alternatives and selection of the Final Preferred Alternative.

51. Comment: NOAA received comments requesting that FGBNMS develop a Resilient Habitat Plan, which seeks to enhance habitat resilience to uncertain and unpredictable effects of future change, such as climate change.

Response: The current FGBNMS management plan serves as a framework for addressing issues facing the sanctuary and lays the foundation for protecting, conserving, and enhancing FGBNMS and its regional environment in the Gulf of Mexico. Following this expansion, NOAA will begin the process to review and update the FGBNMS Management Plan as needed. NOAA acknowledges the growing need to integrate resiliency plans into their habitat management schemes and are beginning to implement sanctuary climate assessment and adaptations plans sitewide. As determined during management plan review, FGBNMS will aim to integrate adaptation and resiliency strategies into their habitat and resource management. Additionally, FGBNMS will begin development of a Condition Report describing the current status of sanctuary resources, including the expansion areas. As described in the FEIS Executive Summary, NOAA will be extending the existing sanctuary management plan and regulations to the newly expanded area.

52. Comment: NOAA received a comment on DEIS Section 5.3.6—Irreversible and Irretrievable Commitments of Resources requesting NOAA include costs of expansion and evaluate potential impacts to conservation and management activities.

Response: NEPA requires an analysis of the extent to which the proposed project's primary and secondary effects would commit nonrenewable resources to uses that future generations would be unable to reverse (42 U.S.C. 4332(C)(v); 40 CFR 1502.16). See FEIS Chapter 5, Section 5.6.4 which describes any impacts, or losses, to resources that cannot be recovered or reversed associated with the proposed action or alternatives. Alternatives 1-3 and the Final Preferred Alternative are within the current operational budget, and NOAA expects field operations to continue at current intensity in the expanded sanctuary. Also refer to the 2012 FGBNMS Management Plan for additional budgetary information.

53. Comment: NOAA received comments requesting the FEIS to clearly describe “best diving practices” in Section 5.3.9.4, how they will be implemented, how they will protect FGBNMS, and how NOAA will enforce their use.

Response: The existing sanctuary regulations (15 CFR 922.122(a)(2)(iii)) require any vessel moored in the sanctuary to exhibit the blue and white International Code flag “A” (“alpha” dive flag) or red and white “sports diver” flag whenever a scuba diver from that vessel is in the water and remove the “alpha” dive flag or “sports diver” flag after all divers exit the water and return on board the vessel, consistent with U.S. Coast Guard guidelines relating to sports diving as contained within “Special Notice to Mariners” (00-2008) for the Gulf of Mexico. This final rule will apply that requirement to the expanded areas and must be followed. The FGBNMS Trip Prep web page  15 provides recreational divers with information to prepare for their trip to the sanctuary, information about the challenging diving conditions that can be experienced at FGBNMS, and how to safely prepare for these visits, and includes information on best diving and boating practices to ensure the safety of visitors. Additionally, the FGBNMS Trip Prep web page includes a link to reef etiquette, which provides information about the best diving practices to ensure the protection of the environment. A link to this reef etiquette web page  16 has been added to Section 5.3.6. NOAA believes when these practices are followed, reefs sustain very minimal, if any, damage. While compliance with the sanctuary regulations is mandatory, some of the best diving practices set forth on the FGBNMS Trip Prep web page are voluntary.

FGBNMS also has regulations prohibiting resources from being taken from the sanctuary ( e.g., shells, coral, invertebrates) and restricting harassment of marine wildlife ( e.g., Mobula rays, whale sharks). A list of the regulations is provided in FEIS Chapter 1, Section 1.4, Table 1.1. The USCG and NOAA's OLE are jointly responsible for enforcing regulations at FGBNMS.

54. Comment: NOAA received comments regarding sharing its coral and habitat information with the GMFMC so the data could be included in the coral portal. Also, FGBNMS was asked to collaborate with NOAA's National Resource Damage Assessment's (NRDA) Trustee Council's Open Ocean Trustee Implementation Group to restore mesophotic and deep benthic communities (MDBC).

Response: NOAA welcomes the opportunity to collaborate with organizations to build community partnerships for education, outreach, research, monitoring, and resource protection. Before, during, and after the release of the DEIS and the NPRM, the FGBNMS Superintendent presented information to the GMFMC on the FGBNMS proposed sanctuary expansion. Additionally, FGBNMS provides benthic ( e.g., coral) data from the current and expanded FGBNMS, as well as other offshore banks and reefs in the northwestern Gulf of Mexico to GMFMC for its publicly accessible coral portal. 17 FGBNMS has been intently involved as an Active Management Project Partner with NRDA's Mesophotic Deepwater Benthic Community's planning projects. Project goals include: (1) Enhancing public awareness and performing active management and protection activities by undertaking education and outreach targeting MDBC resource users and the general public; (2) engaging stakeholders and developing socioeconomic analyses to evaluate potential impacts of management or protection actions; and (3) directly addressing threats to MDBC through management activities.

55. Comment: NOAA received a comment requesting a Critical Habitat Assessment of the banks be included in the proposed expansion as required in the International Finance Corporation (IFC) Performance Standard 6 (Biodiversity Conservation and Sustainable Management of Living Natural Resources).

Response: To develop each alternative, NOAA identified nationally significant coral habitats that are vulnerable to multiple threats as detailed in the FEIS and final rule's Need for Action sections. For more detail regarding how specific habitats were selected in the alternatives, refer to Chapter 3 of the FEIS. In summary, ONMS determined the selected habitats were most in need of protection based on the best available scientific information as well as through public comment and interagency coordination.

56. Comment: NOAA received a comment that requested the agency incorporate and address management of artificial reefs within sanctuary boundaries, specifically decommissioning of oil and gas platforms.

Response: NOAA's Final Preferred Alternative does not include any artificial reef structures. Federal policy on artificial reefs is discussed in the FEIS Appendix G and in the 2012 FGBNMS Management Plan.

57. Comment: NOAA received a comment requesting the use of collaborative, consensus-building, transparent processes for selection and management of sanctuary resources.

Response: ONMS uses several public, stakeholder-driven processes to ensure collaborative, transparent selection and management of resources. National marine sanctuaries have sanctuary advisory councils, composed of voting and non-voting members that represent a variety of government agencies; local user groups; and the general public, that advise sanctuary superintendents on priority issues. Sanctuary advisory councils may choose to establish committees and working groups to further delve into issues; working groups provide an opportunity to involve more stakeholders from the community in developing recommendations for consideration by the full sanctuary advisory councils. Additionally, through NEPA and the federal rulemaking processes, ONMS is required to solicit, consider, and respond to public comments during each stage in an expansion, designation, or regulatory update. All comments received are made available and considered by ONMS.

58. Comment: NOAA received comments requesting the use of British Petroleum (BP) restoration funds to justify expansion to Alternatives 4 and 5. One comment noted specific issues affecting FGBNMS' operational capacity to manage alternatives with greater environmental benefit had changed ( i.e. substantial resources have since been dedicated to managing mesophotic and deep benthic communities in the Gulf of Mexico through the Deepwater Horizon NRDA).

Response: FGBNMS is engaged in collaborative efforts with NOAA Fisheries through the MDBC project funded through NRDA. NOAA has determined, for the purpose of this action, that Alternatives 4 and 5 are beyond the geographic scope that is feasible for the sanctuary to effectively manage (see comment #54 and refer to Chapter 3 of the FEIS).

59. Comment: NOAA received a comment requesting FGBNMS design, develop, and commission a research vessel dedicated to studying marine mammal population growth in the pelagic environment.

Response: FGBNMS currently operates the R/V Manta, a research vessel that can be used as a platform to research marine mammals, and thus rejects this request. NOAA Fisheries conducts marine mammal population studies and their Southeast Fisheries Science Center develops a report every 5 years. Further, the sanctuary collaborates with external organizations and partners to support marine mammal research.

60. Comment: NOAA received a comment requesting the creation of an interpretive center in support of the sanctuary.

Response: NOAA will evaluate opportunities for an interpretive center through the next FGBNMS management plan review process.

61. Comment: NOAA received a comment requesting inclusion of a user education and enforcement program to ensure the public is aware of new boundaries and requirements.

Response: Existing online and print materials created for the proposed action contain select maps and several photographs. When the proposed action becomes final, NOAA will work to update and distribute printed and online materials to reflect the features and boundaries of FGBNMS.

62. Comment: NOAA received comments regarding input from the FGBNMS Sanctuary Advisory Council and other stakeholders. More specifically, commenters asked why the FGBNMS Sanctuary Advisory Council was not informed of new information and proposed boundaries for NOAA's original preferred alternative in the DEIS (Alternative 3) prior to publication, and asked why NOAA selected Alternative 3 instead of the 2007 FGBNMS Advisory Council's recommendation (Alternative 2).

Response: FGBNMS received input from its Sanctuary Advisory Council through a Boundary Expansion Working Group comprised of stakeholders from varied constituent seats. In 2007, the working group presented its recommendation for sanctuary expansion to the full Advisory Council, after which the 2007 Sanctuary Advisory Council recommendation (Alternative 2) was approved, based on the criteria developed by the original BEWG. Their recommendation became the foundation for NOAA's original preferred alternative (Alternative 3), which also included additional research in the northwestern Gulf of Mexico. After the release of the DEIS, a Sanctuary Advisory Council working group reformed. Based on the Sanctuary Advisory Council recommendations in response to the DEIS, NOAA made a number of changes to the boundaries of the polygons surrounding the banks and submerged features. In 2018, the BEWG brought forth its recommendation for sanctuary expansion to the full Advisory Council, which was approved and became NOAA's Revised Preferred Alternative for the NPRM and the Final Preferred Alternative in this FEIS.

NOAA's Final Preferred Alternative represents the collaborative efforts between constituent/stakeholder groups and the sanctuary's multi-use management. Refer to FEIS Chapter 3, Sections 3.2 and 3.5 which details development of the Final Preferred Alternative and provides the rationale for the selection of Alternative 3 as the original preferred alternative in the DEIS, respectively.

63. Comment: NOAA received a comment suggesting FGBNMS form an Advisory Council working group on maritime shipping traffic regarding shipping routes.

Response: NOAA will consider this suggestion in the future.

64. Comment: NOAA received comments claiming science was disregarded during the development of the boundary configuration for the Revised Preferred Alternative presented in the NPRM.

Response: The bank boundaries of the Revised Preferred Alternative presented in the NPRM (NOAA's Final Preferred Alternative) closely follow BOEM's NAZs, which were based on information available in 1970-1980's, and designated to protect active reef building benthic communities, associated with the shallowest portions of the geographic features. NOAA reduced the size of the expansion areas proposed in the 2016 DEIS original preferred alternative to minimize user conflicts and potential economic impacts to the offshore energy industry in accordance with NMSA section 301 (16 U.S.C. 1431), which supports establishing compatible uses with public and private resource users.

65. Comment: NOAA received comments stating that the economic impact analysis in the DEIS was insufficient and requested updates to data pertaining to scuba diving, commercial fishing, air emissions, and oil and gas.

Response: NOAA used the best available scientific information to conduct the economic analysis for the DEIS and incorporated updated data and analysis, if available, in the FEIS (see Chapter 5). Specifically, ONMS updated analyses of impacts to commercial and recreational fishing and impacts to oil and gas resources in the FEIS.

66. Comment: NOAA received comments related to the positive socioeconomic impacts resulting from sanctuary expansion on local tourism/businesses and the recreation industry. Commenters noted some fishing practices were harmful and therefore, fishing restrictions in the expansion areas would benefit the recreational fishing industry, the commercial fishing industry, and fisheries/seafood production.

Response: Potential positive and adverse impacts to socioeconomic resources ( e.g., recreation, fishing) are detailed in FEIS Chapter 5. NOAA does not anticipate any significant adverse impacts to be incurred on the commercial or recreational fishing industry as a result of this expansion. Rather, fishers may find a minor beneficial impact with an increase in fish production with the protection of these important areas. Please review FEIS Chapter 5, Section 5.3.9.1 and 5.3.9.2 for more details on the expected impact to commercial and recreational fishing industries, respectively.

67. Comment: NOAA received comments suggesting that the proposed action removes an asset from public use for both commercial and recreational purposes, restricts recreational diving access, and restricts recreational fishing opportunities. Commenters urged NOAA to allow for multiple use of the sanctuary, with reasonable access regulations and reasonable mitigation measures that directly address threats.

Response: By expanding the sanctuary's boundaries and extending existing regulations to the expansion areas, NOAA is not restricting access to divers or hook and line fishers in any part of the sanctuary as long as users do not injure or possess any sanctuaries resources (see FEIS regulations Table 1.1, Chapter 1, Section 1.4). NOAA determined through the Sanctuary Advisory Council process and through public input that the expansion would allow for multiple uses of the sanctuary while addressing threats to sanctuary resources, as is set forth in NMSA Section 301. For additional details pertaining to impacts to socioeconomic resources such as recreational diving, please refer to FEIS Chapter 5.

68. Comment: NOAA received comments from the diving industry and scuba divers supporting sanctuary expansion. Divers urged NOAA to install mooring buoys in the expansion areas to increase access and to provide better maintenance of the mooring buoys and longlines.

Response: NOAA intends to extend the current management regime to the expansion areas, under which the sanctuary would provide and maintain mooring buoys so that vessels (< 100 feet long) could safely moor in the sanctuary boundaries, as is logistically feasible. See the current FGBNMS Management Plan.

NOAA received eight comments on the Bureau of Ocean Management's (BOEM) analysis (the RIR) (85 FR 74630, November 23, 2020) and collectively responds to those comments here.

69. Comment: NOAA received comments expressing concern about the short length of the period provided for public comment, suggesting (1) it was not long enough to provide substantive feedback; (2) no similar National Marine Sanctuary System has offered a 15-day comment period; and (3) that it was not circulated with other documents prior to this period. NOAA also received a request to provide justification for the legality of the 15-day comment period, and further requested that NOAA extend the comment period for 60 days.

Response: The request to extend the comment period is denied. Prior to soliciting public comment for the RIR, a 60-day comment period was open for the proposed rule, including a fulsome summary of the RIR, which allowed the public to comment on the proposed action in its entirety (85 FR 25359, May 1, 2020). On November 23, 2020, NOAA acknowledged the oversight of not circulating the RIR, and reopened the public comment period (85 FR 74630). Given that NOAA provided 60 days for public comment period on the proposed rule, which contained a summary of the BOEM analysis, the additional comment period is reasonable.

70. Comment: NOAA received comments suggesting that the RIR was outdated and requesting a new analysis, suggesting that a decline in the current value of oil and gas and other hydrocarbon resources leads to mistaken assumptions in the current RIR. Additionally, commenters suggest that the RIR is no longer an accurate portrayal of expected impacts to the oil and gas industry. According to the commenters, lower oil and gas prices reduce the desire to explore and develop resources in the region and, thus, oil and gas resources cannot be considered economically recoverable.

Response: NOAA disagrees with this comment due to the uncertainty in determining future oil prices, and because BOEM's February 2019 report provides the best available economic information. NOAA summarized this analysis in the proposed rule for sanctuary expansion and further evaluated impacts of this action on the oil and gas industry in their Final Environmental Impact Statement (FEIS); see Chapter 5, Section 5.3.9.5.

71. Comment: NOAA received comments requesting the other alternatives be re-evaluated in light of the analysis presented in the RIR.

Response: NOAA updated the analyses of all alternatives in the FEIS; see Chapters 4 and 5. Ultimately, NOAA decided to move forward with the Revised Preferred Alternative, as presented in the proposed rule, as their Final Preferred Alternative.

Section 301(b) of the NMSA (16 U.S.C. 1431) provides authority for comprehensive and coordinated conservation and management of national marine sanctuaries in coordination with other resource management authorities. Section 304(a)(4) of the NMSA (16 U.S.C. 1434) requires that the procedures specified in Section 304 for designating a national marine sanctuary be followed for modifying any term of designation. This action, in addition to expanding the sanctuary, is revising the terms of designation ( e.g., scope of regulations) for the FGBNMS. In accordance with Section 304, the documents relevant to the expansion of Flower Garden Banks are being submitted to the House Resources Committee and the Senate Committee on Commerce, Science, and Transportation. Section 304(a)(5) of the NMSA also requires that NOAA consult with the appropriate Federal fishery management council on any action proposing to regulate fishing in federal waters. Consultation with the Gulf of Mexico Fishery Management Council (GMFMC) is discussed above in part II sections 4 and 5. NOAA solicited comments on potential exemptions for pelagic longline and spearfishing in the expanded area, and based on public comment and coordination with NOAA fisheries, determined to not grant these exemptions and to extend existing fishing regulations into the expansion areas.

In accordance with Section 304(a)(2) of the NMSA (16 U.S.C. 1434(a)(2)), and the provisions of NEPA (42 U.S.C. 4321-4370), NOAA has prepared a FEIS to evaluate the impacts of this action. Because this environmental review began before September 14, 2020, which was the effective date of the amendments to the Council on Environmental Quality (CEQ) regulations implementing NEPA (85 FR 43372 (Jul. 16, 2020)), the FEIS was prepared using the 1978 CEQ NEPA regulations. The Notice of Availability (December 11, 2020, 85 FR 80093) of the FGBNMS FEIS is available on the FGBNMS website. 18 NEPA reviews initiated prior to the effective date of the 2020 revised CEQ regulations may be conducted using the 1978 version of the regulations. NOAA has also prepared a ROD. Copies of the FEIS and ROD are available at the address and website listed in the ADDRESSES section of this final rule.

This final rule has been determined to be “significant” within the meaning of Executive Order 12866. Details on the estimated costs of this rule are discussed in BOEM's E.O. 13795 report, which is available on regulations.gov at docket NOAA-NOS-2019-033, and serves as a substitute for the Regulatory Impact Review (RIR). NOAA inadvertently omitted this report in the public docket for this action when the NPRM was published. NOAA subsequently published a Federal Register notice on November 23, 2020 (85 FR 74630), making the RIR available for public comments. Refer to section V of this rule for comments received on the RIR. Details on the estimated benefits of this action are discussed in Chapter 5, section 5.3 of the FEIS.

NOAA has concluded this regulatory action does not have federalism implications sufficient to warrant preparation of a federalism assessment under Executive Order 13132. The area that is the subject of the final rule is located entirely within federal waters outside of state or local jurisdiction. This rule will not have a substantial or direct effect on states or local governments.

This Executive Order reaffirms the Federal government's commitment to tribal sovereignty, self-determination, and self-government. Its purpose is to ensure that all Executive departments and agencies consult with Indian tribes and respect tribal sovereignty as they develop policies on issues that impact Indian communities. This action is not anticipated to have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibility between the Federal Government and Indian tribes.

Executive Order 13795 directs the Secretary of Commerce to refrain from designating or expanding any national marine sanctuary unless the proposal includes a full accounting from the DOI of any energy or mineral resource potential (including offshore energy from wind, oil, natural gas, methane hydrates, and any other sources that the Secretary of Commerce deems appropriate) within the expansion area, and the potential impact of the expansion on energy or mineral resource potential within the designated area. On February 25, 2019, BOEM provided NOAA with a review of offshore energy and mineral resource potential located within the revised expansion areas in accordance with Executive Order 13795. BOEM's report is available at the Supporting Document section of the docket identified by NOAA-NOS-2019-033, and posted at https://www.regulations.gov/document?D=NOAA-NOS-2019-0033-1630.

This final rule is not a significant energy action under the definition in E.O. 13211. It is not likely to have a significant adverse effect on the supply, distribution, or use of energy. Moreover, the Administrator of OIRA has not otherwise designated this action as a significant energy action. A Statement of Energy Effects, therefore, is not required.

The Regulatory Flexibility Act (RFA) requires Federal agencies to prepare an analysis of a rule's impact on small entities whenever the agency is required to publish a rule, unless the head of the agency can certify, pursuant to 5 U.S.C. 605(b), that the action will not have a significant economic impact on a substantial number of small entities. Under section 605(b) of the RFA, if the head of an agency (or his or her designee) certifies that a rule will not have a significant impact on a substantial number of small entities, then the agency is not required to prepare a regulatory flexibility analysis.

Pursuant to section 605(b), the Chief Counsel for Regulations for the Department of Commerce, through delegation by the head of the agency, certified to the Office of Advocacy of the Small Business Administration during the proposed rule stage that the regulations would not have a significant economic impact on a substantial number of small entities. The factual basis for certification was published in the proposed rule (85 FR 25367). No public comments were received regarding this certification. Therefore, a regulatory flexibility analysis was not required and none was prepared.

The existing FGBNMS regulations contain a collection-of-information requirement subject to the Paperwork Reduction Act (PRA), approved by The Office of Management and Budget (OMB), under control number 0648-0141, for collection-of-information for reporting and recordkeeping requirements under 15 CFR part 922. This final rule would not increase or otherwise revise the existing paperwork burdens.

The public reporting burden for national marine sanctuary general permit applications is estimated to average 1 hour 30 minutes per application, including the time for reviewing the application instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. For special use permits, a collection-of information requirement is necessary to determine whether the activities are consistent with the terms and conditions of special use permits prescribed by the NMSA. The public reporting burden for this collection of information is estimated to average twenty four (24) hours per response (application, annual report, and financial report), including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. This estimate does not include additional time that may be required should the applicant be required to provide information to NOAA for the preparation of documentation that may be required under NEPA (16 U.S.C. 1431 et seq. ).

NOAA determined that this final rule would not appreciably change the average annual number of respondents or the reporting burden for the information requirements supporting special use or research permits because few activities requiring new permits are expected for the new areas. Much of the research is expected to be conducted by the sanctuary, and other uses that require permits are anticipated with very low intensity in the proposed expansion areas. NOAA also determined that these regulations do not necessitate a modification to its information collection approval by the Office of Management and Budget under the Paperwork Reduction Act. Comments on this determination were solicited in the proposed rule, and no public comments were received. Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act, unless that collection of information displays a currently valid OMB control number.

The National Historic Preservation Act (NHPA; 16 U.S.C. 470 et seq. ) is intended to preserve historical and archaeological sites in the United States of America. The act created the National Register of Historic Places, the list of National Historic Landmarks, and the State Historic Preservation Offices. Section 106 of the NHPA requires Federal agencies to take into account the effects of their undertakings on historic properties, and afford the Advisory Council on Historic Preservation (ACHP) a reasonable opportunity to comment. The historic preservation review process mandated by Section 106 is outlined in regulations issued by ACHP (36 CFR part 800). Pursuant to 36 CFR 800.16(l)(1), historic properties include: “any prehistoric or historic district, site, building, structure or object included in, or eligible for inclusion in the National Register of Historic Places maintained by the Secretary of the Interior.” The term includes artifacts, records, and remains that are related to and located within such properties. NOAA did not identify any known historic properties within the boundaries of the Final Preferred Alternative, and received no public comments regarding historic properties in the Final Preferred Alternative boundaries.

Section 307 of the Coastal Zone Management Act (CZMA; 16 U.S.C. 1456) requires Federal agencies carrying out an activity that would affect any land or water use or natural resource of the coastal zone to provide a consistency determination to the relevant state agencies before final approval of the agency action. Copies of the Draft Environmental Impact Statement were provided to five Gulf Coast States (Texas, Louisiana, Alabama, Florida, and Mississippi), soliciting feedback on reasonably foreseeable effects on coastal resources and uses. Responses were received from Mississippi Department of Marine Resources and the Texas General Land Office indicating no objection to the proposed boundary changes or the DEIS. With this information in addition to analysis provided in the FEIS, NOAA determined this action would have no effect on coastal resources. On November 16, 2020, NOAA prepared a consistency determination, which was submitted to the five Gulf Coast States along with the proposed rule. In response to this request, the five Gulf States of Alabama, Florida, Louisiana, Mississippi, and Texas concurred with NOAA's consistency determination.

Accordingly, for the reasons set forth above, NOAA amends part 922, title 15 of the Code of Federal Regulations as follows:

Section 104(b)(1) of the CPSIA requires the Commission to assess the effectiveness of voluntary standards for durable infant or toddler products and adopt mandatory standards for these products. 15 U.S.C. 2056a(b)(1). The mandatory standard must be “substantially the same as” the voluntary standard, or may be “more stringent than” the voluntary standard, if the Commission determines that more stringent requirements would further reduce the risk of injury associated with the product. Id.

Section 104(b)(4)(B) of the CPSIA specifies the process for when a voluntary standards organization revises a standard that the Commission incorporated by reference under section 104(b)(1). First, the voluntary standards organization must notify the Commission of the revision. Once the Commission receives this notification, the Commission may reject or accept the revised standard. The Commission may reject the revised standard by notifying the voluntary standards organization that it has determined that the revised standard does not improve the safety of the consumer product and that it is retaining the existing standard. When rejecting a revision, the Commission must notify the voluntary standards organization of this determination within 90 days of receiving notice of the revision. If the Commission does not take this action to reject the revised standard, the revised voluntary standard will be considered a consumer product safety standard issued under section 9 of the Consumer Product Safety Act (15 U.S.C. 2058), effective 180 days after the Commission received notification of the revision (or a later date specified by the Commission in the Federal Register ). 15 U.S.C. 2056a(b)(4)(B).

Under section 104(b)(1) of the CPSIA, the Commission adopted a mandatory rule for infant swings, codified in 16 CFR part 1223. The rule incorporated by reference ASTM F2088-12a, Standard Consumer Safety Specification for Infant Swings, with modifications to the labeling and test method requirements. 1 77 FR 66703 (Nov. 7, 2012). At the time the Commission published the final rule, ASTM F2088-12a was the current version of the voluntary standard.

In April 2013, ASTM notified CPSC that it had issued a revised standard for infant swings, ASTM F2088-13. In accordance with the procedures set out in section 104(b)(4)(B) of the CPSIA, the revised standard became the new mandatory standard for infant swings. The Commission published a direct final rule to update 16 CFR part 1223, incorporating by reference ASTM F2088-13, without modification. 78 FR 37706 (June 24, 2013). After the Commission issued the revised mandatory standard in 2013, ASTM approved two more revisions: ASTM F2088-15 and ASTM F2088-19. However, ASTM did not officially notify CPSC of these revisions under CPSIA section 104(b)(4)(B). Consequently, these revised standards did not become the mandatory standards by operation of law, and the Commission did not update the mandatory standard to incorporate by reference these revised ASTM standards. Therefore, ASTM F2088-13 remained the mandatory standard.

On October 5, 2020, ASTM notified CPSC that it had revised the voluntary standard for infant swings, approving ASTM F2088-20 on June 15, 2020. 2 As this preamble discusses, based on CPSC staff's review of ASTM F2088-20, 3 the Commission will allow the revised voluntary standard to become the mandatory standard because the revised requirements in the voluntary standard either improve the safety of infant swings, or are safety neutral. Accordingly, by operation of law under section 104(b)(4)(B) of the CPSIA, ASTM F2088-20 will become the mandatory consumer product safety standard for infant swings on April 3, 2021. 15 U.S.C. 2056a(b)(4)(B). This direct final rule updates 16 CFR part 1223 to incorporate by reference the revised voluntary standard, ASTM F2088-20.

The ASTM standard for infant swings includes performance requirements, test methods, and requirements for warning labels and instructional literature, to address hazards to infants associated with infant swings. ASTM has revised the voluntary standard for infant swings three times since ASTM F2088-13, which is the current mandatory standard. This section describes the changes in these three editions of the standard—ASTM F2088-15, ASTM F2088-19, and ASTM F2088-20. The revisions that ASTM included in the 2015 and 2019 versions of the standard are also in the newly revised version, ASTM F2088-20, although some section and figure numbers have changed to accommodate other revisions.

On October 1, 2015, ASTM approved a revised version of the standard, ASTM F2088-15. ASTM did not notify the Commission of this revision. ASTM F2088-15 included one substantive change, several revisions to clarify existing requirements, and editorial revisions that did not alter substantive requirements in the standard or affect safety. The revisions that ASTM included in the 2015 version of the standard are also in the newly revised version, ASTM F2088-20.

Section 6.5.2 of ASTM F2088-15 states: “Swings with a maximum seat back angle greater than 50 degrees from horizontal measured in accordance with 7.13 shall include shoulder straps as part of the restraint system.” This requirement was already in the standard in ASTM F2088-13. However, ASTM F2088-15 added revised procedures for measuring the seat back and bottom angles for seat designs without a defined intersection of the seat bottom and back ( i.e., curved seats), by adding a new figure to indicate how to determine the intersection for curved seats (Figure 11, sections 7.13-7.15). ASTM F2088-15 also added the word “gently” to the direction to “gently place the Hinged Weight Gage—Infant” in this procedure (sections 7.13-7.15).

ASTM F2088-13 did not address how to measure seat angles for curved seat designs. Without a defined method, test laboratories were left to interpret how to place the Hinged Weight Gauge—Infant in the seat, resulting in inconsistent measurements among test laboratories. Inconsistent measurements among test laboratories are problematic because these seat back angle measurements determine whether the product requires shoulder straps. Shoulder straps provide additional safety for infant swings, by preventing infant occupants from slumping forward when the seat back angle is greater than 50 degrees. Therefore, greater consistency in seat back measurements for curved seat designs improves the safety of infant swings, by ensuring that shoulder straps are included for infant swings with larger seat back angles.

ASTM F2088-15 also added information to provide greater clarity to consumers. ASTM F2088-13 already required a warning statement to “discontinue use of swing when infant attempts to climb out.” ASTM F2088-15 added “(approximately 9 months)” to this warning, to provide additional guidance to consumers on when to stop using the product (section 8.3.1.1(3)). ASTM F2088-15 also added minor formatting changes to align with ASTM form and style guidelines ( e.g., changed “in” to “in.”). These revisions are neutral regarding the safety of infant swings because they do not change any substantive requirements.

On November 15, 2019, ASTM approved a revised version of the standard, ASTM F2088-19. ASTM did not notify the Commission of this revision. ASTM F2088-19 included one substantive change, as well as several editorial revisions that did not alter substantive requirements in the standard or affect safety. The revisions that ASTM included in the 2019 version of the standard are also in the newly revised version, ASTM F2088-20.

ASTM F2088-19 added a definition for “tethered strap” (section 3.1.11), a performance requirement (section 6.9), and a test method (section 7.16) to address possible entanglement of non-occupant children in exposed tethered straps that connect the underside of the seat to the product frame or to other straps. The new requirements only apply to tethered straps, and not straps that are loose or hanging from the product ( i.e., not connected to other components). The new requirement limits the length of tethered straps to a maximum of 16 inches, when measured from the back of the seat to the first attachment point ( e.g., another strap or part of the product frame) in accordance with the test method in section 7.16.

ASTM based the 16-inch limit on the approximate perimeter of the small head probe described in ASTM F406-19, Standard Consumer Safety Specification for Non-Full-Size Baby Cribs/Play Yards, which is 16.3 inches (section X1.4). The small head probe represents a 5th percentile 6-month-old child, which is the youngest child with the developmental ability to become entrapped in a tethered strap. 4 The ASTM ballot that lead to these requirements stated that they were intended to prevent a 6-month-old or older child from becoming entangled if exposed tethered straps under the seat of an infant swing formed a loop.

In the Federal Register of December 22, 2020, in FR Doc. 2020-28381—

• On page 83432, in the first column, correct the words “January 21, 2020.” to read, “January 21, 2021.”; and

• On page 83433, in the second column, correct the words “January 21, 2020.” to read, “January 21, 2021.”

In the Federal Register of December 22, 2020, in FR Doc. 2020-28375—

• On page 83433, in the third column, correct the words “January 21, 2020.” to read, “January 21, 2021.”; and

• On page 83434, in the third column, correct the words “January 21, 2020.” to read, “January 21, 2021.”

On March 24, 2020, DHS published notice of the Secretary's decision to temporarily limit the travel of individuals from Mexico into the United States at land ports of entry along the United States-Mexico border to “essential travel,” as further defined in that document. 1 The document described the developing circumstances regarding the COVID-19 pandemic and stated that, given the outbreak and continued transmission and spread of the virus associated with COVID-19 within the United States and globally, the Secretary had determined that the risk of continued transmission and spread of the virus associated with COVID-19 between the United States and Mexico posed a “specific threat to human life or national interests.” The Secretary later published a series of notifications continuing such limitations on travel until 11:59 p.m. EST on January 21, 2021. 2

The Secretary has continued to monitor and respond to the COVID-19 pandemic. As of the week of January 4, there have been over 83.3 million confirmed cases globally, with over 1.8 million confirmed deaths. 3 There have been over 20.7 million confirmed and probable cases within the United States, 4 over 587,000 confirmed cases in Canada, 5 and over 1.4 million confirmed cases in Mexico. 6

Given the outbreak and continued transmission and spread of COVID-19 within the United States and globally, the Secretary has determined that the risk of continued transmission and spread of the virus associated with COVID-19 between the United States and Mexico poses an ongoing “specific threat to human life or national interests.”

U.S. and Mexican officials have mutually determined that non-essential travel between the United States and Mexico poses additional risk of transmission and spread of the virus associated with COVID-19 and places the populace of both nations at increased risk of contracting the virus associated with COVID-19. Moreover, given the sustained human-to-human transmission of the virus, returning to previous levels of travel between the two nations places the personnel staffing land ports of entry between the United States and Mexico, as well as the individuals traveling through these ports of entry, at increased risk of exposure to the virus associated with COVID-19. Accordingly, and consistent with the authority granted in 19 U.S.C. 1318(b)(1)(C) and (b)(2), 7 I have determined that land ports of entry along the U.S.-Mexico border will continue to suspend normal operations and will only allow processing for entry into the United States of those travelers engaged in “essential travel,” as defined below. Given the definition of “essential travel” below, this temporary alteration in land ports of entry operations should not interrupt legitimate trade between the two nations or disrupt critical supply chains that ensure food, fuel, medicine, and other critical materials reach individuals on both sides of the border.

For purposes of the temporary alteration in certain designated ports of entry operations authorized under 19 U.S.C. 1318(b)(1)(C) and (b)(2), travel through the land ports of entry and ferry terminals along the United States-Mexico border shall be limited to “essential travel,” which includes, but is not limited to—

• U.S. citizens and lawful permanent residents returning to the United States;

• Individuals traveling for medical purposes ( e.g., to receive medical treatment in the United States);

• Individuals traveling to attend educational institutions;

• Individuals traveling to work in the United States ( e.g., individuals working in the farming or agriculture industry who must travel between the United States and Mexico in furtherance of such work);

• Individuals traveling for emergency response and public health purposes ( e.g., government officials or emergency responders entering the United States to support federal, state, local, tribal, or territorial government efforts to respond to COVID-19 or other emergencies);

• Individuals engaged in lawful cross-border trade ( e.g., truck drivers supporting the movement of cargo between the United States and Mexico);

• Individuals engaged in official government travel or diplomatic travel;

• Members of the U.S. Armed Forces, and the spouses and children of members of the U.S. Armed Forces, returning to the United States; and

• Individuals engaged in military-related travel or operations.

The following travel does not fall within the definition of “essential travel” for purposes of this Notification—

• Individuals traveling for tourism purposes ( e.g., sightseeing, recreation, gambling, or attending cultural events).

At this time, this Notification does not apply to air, freight rail, or sea travel between the United States and Mexico, but does apply to passenger rail, passenger ferry travel, and pleasure boat travel between the United States and Mexico. These restrictions are temporary in nature and shall remain in effect until 11:59 p.m. EST on February 21, 2021. This Notification may be amended or rescinded prior to that time, based on circumstances associated with the specific threat. 8

The Commissioner of U.S. Customs and Border Protection (CBP) is hereby directed to prepare and distribute appropriate guidance to CBP personnel on the continued implementation of the temporary measures set forth in this Notification. The CBP Commissioner may determine that other forms of travel, such as travel in furtherance of economic stability or social order, constitute “essential travel” under this Notification. Further, the CBP Commissioner may, on an individualized basis and for humanitarian reasons or for other purposes in the national interest, permit the processing of travelers to the United States not engaged in “essential travel.”

On March 24, 2020, DHS published notice of the Secretary's decision to temporarily limit the travel of individuals from Canada into the United States at land ports of entry along the United States-Canada border to “essential travel,” as further defined in that document. 1 The document described the developing circumstances regarding the COVID-19 pandemic and stated that, given the outbreak and continued transmission and spread of the virus associated with COVID-19 within the United States and globally, the Secretary had determined that the risk of continued transmission and spread of the virus associated with COVID-19 between the United States and Canada posed a “specific threat to human life or national interests.” The Secretary later published a series of notifications continuing such limitations on travel until 11:59 p.m. EST on January 21, 2021. 2

The Secretary has continued to monitor and respond to the COVID-19 pandemic. As of the week of January 4, there have been over 83.3 million confirmed cases globally, with over 1.8 million confirmed deaths. 3 There have been over 20.7 million confirmed and probable cases within the United States, 4 over 587,000 confirmed cases in Canada, 5 and over 1.4 million confirmed cases in Mexico. 6

Given the outbreak and continued transmission and spread of COVID-19 within the United States and globally, the Secretary has determined that the risk of continued transmission and spread of the virus associated with COVID-19 between the United States and Canada poses an ongoing “specific threat to human life or national interests.”

U.S. and Canadian officials have mutually determined that non-essential travel between the United States and Canada poses additional risk of transmission and spread of the virus associated with COVID-19 and places the populace of both nations at increased risk of contracting the virus associated with COVID-19. Moreover, given the sustained human-to-human transmission of the virus, returning to previous levels of travel between the two nations places the personnel staffing land ports of entry between the United States and Canada, as well as the individuals traveling through these ports of entry, at increased risk of exposure to the virus associated with COVID-19. Accordingly, and consistent with the authority granted in 19 U.S.C. 1318(b)(1)(C) and (b)(2), 7 I have determined that land ports of entry along the U.S.-Canada border will continue to suspend normal operations and will only allow processing for entry into the United States of those travelers engaged in “essential travel,” as defined below. Given the definition of “essential travel” below, this temporary alteration in land ports of entry operations should not interrupt legitimate trade between the two nations or disrupt critical supply chains that ensure food, fuel, medicine, and other critical materials reach individuals on both sides of the border.

For purposes of the temporary alteration in certain designated ports of entry operations authorized under 19 U.S.C. 1318(b)(1)(C) and (b)(2), travel through the land ports of entry and ferry terminals along the United States-Canada border shall be limited to “essential travel,” which includes, but is not limited to—

• U.S. citizens and lawful permanent residents returning to the United States;

• Individuals traveling for medical purposes ( e.g., to receive medical treatment in the United States);

• Individuals traveling to attend educational institutions;

• Individuals traveling to work in the United States ( e.g., individuals working in the farming or agriculture industry who must travel between the United States and Canada in furtherance of such work);

• Individuals traveling for emergency response and public health purposes ( e.g., government officials or emergency responders entering the United States to support federal, state, local, tribal, or territorial government efforts to respond to COVID-19 or other emergencies);

• Individuals engaged in lawful cross-border trade ( e.g., truck drivers supporting the movement of cargo between the United States and Canada);

• Individuals engaged in official government travel or diplomatic travel;

• Members of the U.S. Armed Forces, and the spouses and children of members of the U.S. Armed Forces, returning to the United States; and

• Individuals engaged in military-related travel or operations.

The following travel does not fall within the definition of “essential travel” for purposes of this Notification—

• Individuals traveling for tourism purposes ( e.g., sightseeing, recreation, gambling, or attending cultural events).

At this time, this Notification does not apply to air, freight rail, or sea travel between the United States and Canada, but does apply to passenger rail, passenger ferry travel, and pleasure boat travel between the United States and Canada. These restrictions are temporary in nature and shall remain in effect until 11:59 p.m. EST on February 21, 2021. This Notification may be amended or rescinded prior to that time, based on circumstances associated with the specific threat. 8

The Commissioner of U.S. Customs and Border Protection (CBP) is hereby directed to prepare and distribute appropriate guidance to CBP personnel on the continued implementation of the temporary measures set forth in this Notification. The CBP Commissioner may determine that other forms of travel, such as travel in furtherance of economic stability or social order, constitute “essential travel” under this Notification. Further, the CBP Commissioner may, on an individualized basis and for humanitarian reasons or for other purposes in the national interest, permit the processing of travelers to the United States not engaged in “essential travel.”

Background

Prior to its amendment in 2017, section 162(f) disallowed an ordinary and necessary business expense deduction under section 162(a) for any fine or similar penalty paid to a government for the violation of any law. On February 20, 1975, the Treasury Department and the IRS issued final regulations under the prior version of section 162(f) (TD 7345, 40 FR 7437), which were amended on July 11, 1975 (T.D. 7366, 40 FR 29290) (together the 1975 regulations).

Section 162(f) was amended by section 13306(a) of Public Law 115-97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). Section 6050X was added to the Code by section 13306(b) of the TCJA.

As amended by the TCJA, the general rule of section 162(f)(1) provides that no deduction otherwise allowable under chapter 1 of the Code (chapter 1) shall be allowed for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or governmental entity into the potential violation of any law. Section 162(f)(5) describes certain self-regulating nongovernmental entities that are treated as governmental entities for purposes of section 162(f). As used in this preamble, the term “governmental entities” includes nongovernmental entities treated as governmental entities under section 162(f)(5).

Section 162(f)(2) provides an exception to the general disallowance rule in section 162(f)(1) for certain amounts paid or incurred for restitution, remediation, or to come into compliance with a law. Under section 162(f)(2)(A)(i) and (ii), section 162(f)(1) does not apply to amounts that (i) the taxpayer establishes were paid or incurred as restitution (including remediation of property) or to come into compliance with a law (establishment requirement), and (ii) are identified in a court order (order) or settlement agreement (agreement) as restitution, remediation, or amounts paid or incurred to come into compliance with a law (identification requirement). Section 162(f)(2)(B) provides that amounts paid for restitution, remediation, and to come into compliance with a law do not include any amount paid or incurred as reimbursement to a government or governmental entity for the costs of any investigation or litigation.

Section 162(f)(3) provides an exception to the general rule for amounts paid or incurred related to private party suits and section 162(f)(4) provides an exception for certain taxes due.

Section 6050X(a)(1) and 6050X(a)(2)(A) requires the appropriate official of any government or governmental entity involved in a suit or agreement described in section 6050X(a)(2)(A)(i) to file an information return if the aggregate amount involved in all orders or agreements with respect to the violation, investigation, or inquiry is $600 or more. Section 6050X(a)(2)(B) authorizes the Secretary of the Treasury or his delegate (Secretary) to adjust the threshold amount for filing the information return as necessary to ensure the efficient administration of the internal revenue laws. Pursuant to section 6050X(a)(1), the information return must set forth (1) the amount required to be paid as a result of the order or agreement to which section 162(f)(1) applies; (2) any amount required to be paid as a result of the order or agreement that constitutes restitution or remediation of property; and (3) any amount required to be paid as a result of the order or agreement for the purpose of coming into compliance with a law that was violated or involved in the investigation or inquiry.

Section 6050X(a)(3) provides that the government or governmental entity shall file the information return at the time the agreement is entered into, as determined by the Secretary. Section 6050X(b) requires the government or governmental entity to furnish to each person who is a party to the suit or agreement a written statement, at the time the information return is filed with the IRS, that includes (1) the name of the government or entity and (2) the information submitted to the IRS.

Under section 13306(a)(2) and (b)(3) of the TCJA, the amendments to section 162(f) and new section 6050X apply to amounts paid or incurred on or after December 22, 2017, the date of enactment of the TCJA. However, they do not apply to amounts paid or incurred under any binding order issued or agreement entered into, before December 22, 2017, and, if such order or agreement requires court approval, the required approval is obtained before December 22, 2017.

On May 13, 2020, the Internal Revenue Service published a notice of proposed rulemaking (REG-104591-18) in the Federal Register (85 FR 28524) providing guidance on the deduction disallowance rules in section 162(f) and the associated reporting requirements in section 6050X. No public hearing on the proposed regulations was requested and accordingly no public hearing was held.

The Treasury Department and the IRS received written comments in response to the proposed regulations. All comments were considered and are available at www.regulations.gov or upon request. After full consideration of the comments received on the proposed regulations, this Treasury decision adopts the proposed regulations with modifications in response to such comments as described in the Summary of Comments and Explanation of Revisions.

Most of the comments addressing the proposed regulations are summarized in this Summary of Comments and Explanation of Revisions. However, comments merely summarizing or interpreting the proposed regulations, recommending statutory revisions, or addressing issues that are outside the scope of the final regulations are not discussed.

Part I of this Summary of Comments and Explanation of Revisions addresses § 1.162-21 and Part II addresses § 1.6050X-1.

The proposed regulations revise § 1.162-21 and provide operational and definitional guidance concerning the application of section 162(f), as amended by the TCJA. The proposed regulations provide generally that a taxpayer may not take a deduction under any provision of chapter 1 for amounts (1) paid or incurred by suit, agreement, or otherwise; (2) to, or at the direction of, a government or governmental entity; (3) in relation to the violation, or investigation or inquiry into the potential violation, of any civil or criminal law. The proposed regulations also describe an exception to the general rule, under section 162(f)(2), which allows a deduction for certain amounts identified in the order or agreement as restitution, remediation, or paid or incurred to come into compliance with a law and the taxpayer establishes that the amount was paid or incurred for the purpose identified.

The final regulations provide generally that a taxpayer may not take a deduction under any provision of chapter 1 for amounts (1) paid or incurred by suit, agreement, or otherwise; (2) to, or at the direction of, a government or governmental entity; (3) in relation to the violation, or investigation or inquiry by such government or governmental entity into the potential violation, of any civil or criminal law. This general rule applies whether or not the taxpayer admits guilt or liability or pays the amount imposed for any other reason, including to avoid the expense or uncertain outcome of an investigation or litigation. An admission of guilt or liability is not necessary because section 162(f)(1) contemplates a broader disallowance, as demonstrated by the disallowance of any amount paid or incurred, to, or at the direction of, a government or governmental entity in relation to the “investigation or inquiry” into the “potential violation of any law.”

Under the proposed regulations, suit, agreement, or otherwise includes, but is not limited to, settlement agreements; non-prosecution agreements; deferred prosecution agreements; judicial proceedings; administrative adjudications; decisions issued by officials, committees, commissions, or boards of a government or governmental entity; and any legal actions or hearings in which a liability for the taxpayer is determined or pursuant to which the taxpayer assumes liability.

Commenters asked that the final regulations exclude administrative and certain other categories of proceedings from the definition of suit, agreement, or otherwise. The final regulations do not adopt this recommendation because the statute's use of the phrase “suit, agreement, or otherwise” indicates that Congress intended for section 162(f)(1) to apply broadly to both formal legal proceedings as well as other less formal proceedings.

The preamble to the proposed regulations under section 6050X explains that an order or agreement is treated as binding under applicable law even if all appeals have not been exhausted with respect to the suit, agreement, or otherwise. A commenter recommended that the final regulations provide that the same meaning applies for the term “binding” order or agreement under section 162(f). The final regulations generally adopt this recommendation.

One commenter asked for clarification that, if a deduction is otherwise allowable under chapter 1, section 162(f)(1) does not disallow a deduction for amounts paid for the taxpayer's own legal fees and related expenses incurred in defending a prosecution or other action or proceeding, including an investigation or inquiry into a potential violation of any law. Legal fees and other expenses, such as stenographic and printing charges, paid or incurred in the defense of a prosecution or civil action arising from a violation of any law, or an investigation or inquiry into a potential violation of any law, are not amounts paid or incurred to, or at the direction of, a government or governmental entity. Thus it is clear that section 162(f)(1) does not disallow a deduction for such amounts, and there is no need to clarify this rule in final regulations.

The proposed regulations provide a definition of “government or governmental entity.” The definition in the final regulations has been reorganized to provide a definition of a government in § 1.162-21(e)(1) and to provide a definition of a “governmental entity” in § 1.162-21(e)(2). The definitions are based on the definition in the proposed regulations but clarify that a political subdivision of a government includes a local government unit. No comments were received on the definition of “government or governmental entity” in the proposed regulations.

The proposed regulations define a nongovernmental entity treated as a governmental entity as an entity that exercises self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange, as defined in section 1256(g)(7), or exercises self-regulatory powers, including adopting, administering, or enforcing laws and imposing sanctions, as part of performing an essential governmental function. The final regulations revise the definition to clarify that self-regulatory powers include enforcing rules, not laws. A commenter recommended that the definition of “essential governmental function” under section 115 should apply to section 162(f)(5). The final regulations do not adopt this recommendation because section 115 does not define the term “essential governmental function.” The final regulations clarify that a governmental entity includes a nongovernmental entity treated as a governmental entity.

Commenters asked that the final regulations provide a definition of a “violation of any law.” The final regulations do not adopt this recommendation because they are intended to provide broad rules of general application based on the underlying principles of section 162(f) rather than narrow rules with limited application. The final regulations provide several examples to illustrate the application of section 162(f) to violations of any law.

Commenters also requested clarification that “technical violations” of any law, such as vendor overcharge errors remedied in the ordinary course of business, are not violations of any law. The commenters did not further define what constitutes a “technical violation.” Without a more comprehensive definition, the commenters' requests may be inconsistent with the general rule in the final regulations. Therefore, the final regulations do not adopt this comment.

Commenters recommended that the final regulations clarify that the phrase “in relation to the violation of any law or the investigation or inquiry by such government or [governmental] entity into the potential violation of any law” do not apply to a government or governmental entity enforcing its legal rights, including defending against claims, as a private party. The Treasury Department and the IRS agree that, in general, unless a government contracting or similar statute provides otherwise, a government's recovery of vendor overcharge errors are in the nature of private party recoveries and not payments made to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry in to the potential violation of any law. Similarly, as discussed with respect to private party suits in Part I.B.6 of this Summary of Comments and Explanation of Revisions, a violation of any law does not include any order or agreement in a suit in which a government or governmental entity enforces rights as a private party.

Commenters asked the Treasury Department and the IRS how section 162(f) applies to amounts paid or incurred pursuant to certain statutes that contain provisions that may apply without any finding of a violation of law, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). CERCLA contains cleanup requirements and reimbursement provisions that generally apply even though there has been no violation of law. CERCLA also contains penalty provisions for specific violations of law. Although section 162(f) and the final regulations generally will not apply to CERCLA cleanup requirements and reimbursements required to be paid or incurred by provisions that apply without any violation of law, section 162(f) and the final regulations will apply to penalties required to be paid or incurred for violations of law, including penalties required to be paid or incurred by reason of a violation of specific CERCLA provisions.

The Treasury Department and the IRS received several requests for additional guidance concerning “the investigation or inquiry by [a] government or [governmental] entity into the potential violation of any law.” Commenters requested that the final regulations: (1) Provide that an investigation or inquiry by such government into the potential violation of any law does not include a routine investigation, inquiry, audit, review, or inspection; (2) clarify when a routine investigation, inquiry, audit, review, or inspection ends and a non-routine investigation or inquiry begins; (3) clarify whether payments related to an investigation or inquiry are deductible if the investigation or inquiry ends without a finding of a violation of any law; and (4) provide examples of routine investigations, inquiries, audits, reviews, or inspections that are not non-routine investigations or inquiries. In addition, some of the commenters requested guidance that is unique to an industry or a statute.

The Treasury Department and the IRS agree that, in general, section 162(f)(1) does not disallow a deduction for amounts paid or incurred in connection with investigations or inquiries of regulated businesses or industries conducted in the ordinary course of business if the payment is otherwise deductible as an ordinary and necessary business expense. Accordingly, the final regulations provide, in general, that amounts paid or incurred for routine investigations or inquiries, such as audits or inspections, required to ensure compliance with rules and regulations applicable to the business or industry, which are not related to any evidence of wrongdoing or suspected wrongdoing, are not amounts paid or incurred relating to the potential violation of any law. Therefore, section 162(f)(1) will not apply to disallow an otherwise deductible ordinary and necessary business expense for amounts paid or incurred for these routine investigations or inquiries. Examples to illustrate the application of this rule are provided in the final regulations.

In contrast, section 162(f)(1) explicitly disallows a deduction for amounts paid or incurred for an investigation or inquiry by the government or governmental entity relating to the potential violation of any law. Therefore, the final regulations do not adopt the commenters' recommendation that section 162(f)(1) does not apply to amounts paid or incurred where, at the conclusion of the investigation or inquiry, there is no finding of wrongdoing, because the recommendation is inconsistent with section 162(f)(1).

The final regulations clarify that the investigation or inquiry must be one that is conducted by the government or governmental entity. Examples to illustrate the application of this rule are provided in the final regulations.

The proposed regulations disallow a deduction for payments made, at the taxpayer's election, in lieu of a fine or penalty. No comments were received regarding this provision and it is retained in the final regulations. One commenter asked that the final regulations adopt a definition for “fine or penalty,” and expressly state that both are not deductible. Although the final regulations do not provide a definition of “fine or penalty,” they provide that an amount that is paid or incurred in relation to the violation of any civil or criminal law includes a fine or penalty.

Section 162(f)(2) provides an exception to the general disallowance rule for certain amounts identified in the order or agreement as, and established by the taxpayer to be, paid or incurred for restitution or remediation, or to come into compliance with a law. The final regulations provide definitions and other guidance on the operation of this exception.

The proposed regulations provide that an amount is paid or incurred for restitution or remediation if it restores, in whole or in part, the person, as defined in section 7701(a)(1); the government; the governmental entity; or property harmed by the violation or potential violation of any law. Commenters requested clarification as to what comprises restitution or remediation and requested modifications to the proposed definitions. A commenter recommended that the final regulations distinguish between civil and criminal restitution and disallow the deduction for amounts paid as criminal restitution. The final regulations do not adopt this rule because section 162(f)(2) does not distinguish between civil and criminal restitution and applies to “restitution (including remediation of property) for damage or harm which was or may be caused by the violation of any law or the potential violation of any law.” Emphasis added. Nonetheless, it may be harder for a taxpayer to establish that an amount paid is restitution in the criminal context because of the punitive purpose underlying most criminal liability.

One commenter asked whether the definition of “property” for which restitution or remediation may be provided includes the environment. Another commenter noted that restitution or remediation cannot redress irreparable harms to the environment or natural resources, such as, killing wildlife or destroying a species or an ecosystem caused by the violation of any law. The commenter recommended that the final regulations provide a special restitution and remediation rule to address amounts paid or incurred for irreparable harm to the environment, natural resources, or wildlife. The Treasury Department and the IRS agree, provided the identification and establishment requirements are met and the restitution or remediation has a strong nexus or connection to the harm to the environment, natural resources, or wildlife that the taxpayer has caused or is alleged to have caused. The final regulations revise the definition of “ restitution, remediation of property, and amounts paid to come into compliance with a law” to clarify that, if otherwise deductible under chapter 1, an amount is paid or incurred for restitution or remediation of the environment, wildlife, or natural resources if it is paid or incurred for the purpose of conserving soil, air, or water resources, protecting or restoring the environment or an ecosystem, improving forests, or providing a habitat for fish, wildlife, or plants, and has the requisite nexus with the harm that the taxpayer has caused or is alleged to have caused. Such amounts may include payments described in § 1.162-21(e)(4)(A), to be used exclusively for the restitution or remediation of a harm to the environment, wildlife, or natural resources that the taxpayer has caused or is alleged to have caused or paid to a segregated fund or account established by, or at the direction of, the government or governmental entity for the restitution or remediation of harm to the environment, wildlife, or natural resources that the taxpayer has caused or is alleged to have caused, provided, pursuant to the order or agreement, the amounts are not disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes.

Under the proposed regulations, the section 162(f)(2) exception to the general deduction disallowance rule does not apply to forfeiture or disgorgement. Therefore, the proposed regulations treat any amount paid or incurred as forfeiture or disgorgement as, per se, disallowed under section 162(f)(1). To support excluding disgorgement from the definition of restitution, remediation, or amounts paid to come into compliance with a law, the preamble to the proposed regulations quote Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635, 1643 (2017) (“ `[t]he primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains' ”). In Kokesh, the Supreme Court determined that disgorgement, when imposed as a sanction for violating a Federal securities law, constitutes a penalty under the related five-year statute of limitations because disgorgement is imposed to deter violations of securities laws by depriving violators of their ill-gotten gains and because the funds are dispersed to the United States Treasury to redress a wrong to the public at large caused by the violation. Kokesh, 137 S. Ct. at 1642-44. However, in Kokesh, the Supreme Court recognized that disgorgement may serve a compensatory purpose as well (“wrong sought to be redressed is . . . a wrong to the individual;” “[s]ome disgorged funds are paid to victims”). Id.

To support excluding forfeiture from the definition of restitution, remediation, or amounts paid to come into compliance with a law, the preamble to the proposed regulations quotes Nacchio v. United States, 824 F.3d 1370, 1379 (Fed. Cir. 2016) (“ `[w]hile restitution seeks to make victims whole by reimbursing them for their losses, forfeiture is meant to punish the defendant by transferring his ill-gotten gains to the United States Department of Justice.' ”) In Nacchio, the United States Court of Appeals for the Federal Circuit disallowed the taxpayer's deduction for the amount of mandatory forfeiture pursuant to a criminal conviction for insider trading, even though the government, in its discretion, subsequently used the forfeited funds to compensate victims.

Several commenters asked the Treasury Department and the IRS to reconsider the rule in the proposed regulations, which excludes disgorgement and forfeiture from the definition of “restitution, remediation, and coming into compliance.” One commenter explained the exclusion is contrary to the expressed intent of Congress because the statute provides an exception to the disallowance rule of section 162(f)(1) for restitution and that, in Kokesh, the Supreme Court stated, “[g]enerally, disgorgement is a form of `[r]estitution measured by the defendant's wrongful gain.” Kokesh, 137 S. Ct. at 1640. Commenters noted that, in Liu v. Securities and Exchange Commission, 140 S. Ct. 1936 (2020), which was decided after the publication of the proposed regulations, the Supreme Court recognized that, amounts paid through disgorgement that do not exceed the wrongdoer's net profits and that are awarded to individual victims may constitute an equitable remedy. Commenters also noted that, in Liu, the Supreme Court expressly declined to answer whether under Kokesh disgorgement necessarily constitutes a penalty. Liu, 140 S. Ct. at 1946.

In consideration of the comments submitted with respect to disgorgement and the Supreme Court's decision in Liu, the final regulations will not treat disgorgement of net profits as, per se, nondeductible under section 162(f)(1). Instead, taxpayer's claim for a deduction for amounts paid or incurred through disgorgement will not be disallowed if the amount is otherwise deductible under chapter 1; the order or agreement identifies the payment, not in excess of net profits, as restitution, remediation, or an amount paid to come into compliance with a law; the taxpayer establishes that the amount was paid as restitution, remediation, or an amount paid to come into compliance with a law; and the origin of the taxpayer's liability is restitution, remediation, or an amount paid to come into compliance with a law. However, amounts paid or incurred through disgorgement will be disallowed if, pursuant to the order or agreement, the amounts are disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes. The final regulations provide an example to illustrate the application of section 162(f) to disgorgement.

Commenters also requested that the Treasury Department and the IRS reconsider the rule in the proposed regulations that excludes forfeiture from the definition of “restitution, remediation, and coming into compliance,” but did not address forfeiture independently from their discussion of disgorgement. Virtually all states have some form of asset recovery legislation and the United States Code contains many forfeiture provisions. Because the final regulations cannot provide specific rules about the application of section 162(f) to every asset recovery statute, the final regulations will not treat forfeiture of net profits as, per se, nondeductible under section 162(f)(1). Instead, taxpayer's claim for a deduction for an amount paid or incurred through forfeiture will not be disallowed if the amount is otherwise deductible under chapter 1; the order or agreement identifies the payment, not in excess of net profits, as restitution, remediation, or an amount paid to come into compliance with a law; the taxpayer establishes that the amount was paid as restitution, remediation, or an amount paid to come into compliance with a law; and the origin of the taxpayer's liability is restitution, remediation, or an amount paid to come into compliance with a law. However, amounts paid or incurred through forfeiture will be disallowed if, pursuant to the order or agreement, the amounts are disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes. The final regulations provide an example to illustrate the application of section 162(f) to forfeiture.

Under the proposed regulations, restitution, remediation, and amounts paid to come into compliance with a law do not include any amount paid or incurred to an entity; to a fund, including a restitution, remediation, or other fund; to a group; or to a government or governmental entity, to the extent it was not harmed by the taxpayer's violation or potential violation of a law. Commenters asked that the Treasury Department and the IRS reconsider this rule. In consideration of the comments, the final regulations remove the per se exclusion. However, the final regulations provide that restitution and remediation do not include amounts paid or incurred pursuant to an order or agreement to the general account or treasury of the government or governmental entity for general enforcement efforts or other discretionary purposes or amounts paid or incurred that do not meet the requirements of § 1.162-21(e)(4)(i). In addition, the final regulations provide that if amounts paid or incurred pursuant to an order or agreement to an entity, fund, group, or government or governmental entity are subsequently returned to the taxpayer, the taxpayer will be required to include those amounts in income under the tax benefit rule.

Several commenters noted that restitution funds may not be exhausted if, for example, there are unclaimed amounts or when less than the entire fund is required to be used to make harmed parties whole. One commenter recommended that the final regulations provide an example to illustrate that when unclaimed amounts revert to a government or governmental entity's general account the nature of those amounts does not change as long as it was reasonably expected, at the time the taxpayer made the payment to the fund, that the amount would be used for restitution payments to harmed parties. Although the final regulations do not provide this example, the Treasury Department and the IRS generally agree that, if the order or agreement identifies the payment to a fund, described in § 1.162-21(e)(4)(A) or (e)(4)(B), as restitution or remediation, and the taxpayer establishes that it made the payment to a fund for the purpose identified, for example, by providing the canceled check making the payment to the fund, a deduction will not be disallowed if, after the taxpayer makes the payment, the amount paid to the fund is not used for the purpose identified as long as the amount does not revert to the taxpayer or for the benefit of the taxpayer.

The proposed regulations provide that an amount is paid or incurred to come into compliance with a law by performing specific services, taking a specific corrective action, providing specific property, or a combination thereof. The final regulations also list amounts that will not be treated as paid or incurred to come into compliance with a law. The final regulations clarify that the services performed, actions taken, and the provision of property must be done to come into compliance with the law that has been violated, or potentially violated.

One commenter requested that the final regulations treat amounts paid or incurred pursuant to an order or agreement to upgrade equipment or property to a higher standard than required by law as coming into compliance with a law. The final regulations modify an example in the proposed regulations to clarify that if an order or agreement requires a taxpayer to come into compliance with a law and the taxpayer elects to upgrade equipment or property to a higher than required standard, any amount paid or incurred in excess of the amount paid or incurred to come into compliance with a law will not be disallowed by section 162(f)(1) or the related final regulations because it is not an amount paid or incurred to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry into the potential violation of any law.

Another commenter requested that the final regulations define the class of services and actions that qualify as having been made to come into compliance with a law under section 162(f)(2)(A)(i)(II). The final regulations do not adopt this recommendation because they are intended to provide broad rules of general application based on the underlying principles of section 162(f) rather than narrow rules with limited application that risk excluding certain services or actions. The commenter also suggested that the government or governmental entity not be required to verify the accuracy of the amount expended by a taxpayer to perform the activities to come into compliance. The regulations do not require the government or governmental entity to verify the accuracy of the amount expended by a taxpayer to perform the activities to come into compliance.

Section 162(f)(2)(A)(ii) requires an order or agreement to identify an amount paid or incurred as restitution, remediation, or to come into compliance with a law. Under the proposed regulations, an order or agreement identifies a payment by stating the nature of, or purpose for, each payment each taxpayer is obligated to pay and the amount of each payment identified.

To satisfy the identification requirement, the proposed regulations require the order or agreement to specifically state the amount of the payment and that the payment constitutes restitution, remediation, or an amount paid to come into compliance with a law. The proposed rule provides that the identification requirement may be met if the order or agreement uses a different form of the requisite words, such as “remediate” or “comply with a law.”

The Treasury Department and the IRS received several recommendations and requests for clarification regarding how orders or agreements may meet the identification requirement when the payment amount is not identified. One commenter suggested that, if the total amount to be paid is known at the time the agreement is entered into or the order is issued, the order or agreement must identify separately the amount to be paid as restitution, remediation, or to come into compliance with a law in order to meet the identification requirement. In contrast, several other commenters asked whether the identification requirement may be met if the order or agreement identifies the total payment as restitution, remediation, or paid to come into compliance with a law without allocating the payment amount among “restitution,” “remediation,” and “coming into compliance.” Some commenters expressed the concern that it may not be possible to satisfy the identification requirement in an order or agreement that imposes lump-sum judgments or settlements, involves multiple taxpayers, or multiple damage awards, because the order or agreement may not segregate the amounts to be paid as restitution, remediation, or to come into compliance with a law from the disallowed amounts, or allocate the payments among the multiple taxpayers.

The final regulations do not adopt a rule that a total payment amount must be allocated in an order or agreement among “restitution,” “remediation,” and/or “coming into compliance” in order to meet the identification requirement under section 162(f)(2)(A)(ii) because it could be burdensome on governments and governmental entities and taxpayers and would be difficult for the IRS to administer. Instead, the final regulations modify the proposed rule for payment amounts not identified so that it applies to orders or agreements that impose lump-sum payment judgments for “restitution, remediation, and coming into compliance,” or that involve multiple taxpayers or multiple damage awards. The payment amount not identified rule provides that the identification requirement may be met even if the order or agreement does not allocate the total lump-sum payment amount or multiple damage award among restitution, remediation, or to come into compliance or allocate the total payment among multiple taxpayers. The final regulations also clarify that the identification requirement may be met even if the order or agreement does not provide an estimated payment amount.

Several commenters asked for clarification about how a taxpayer may meet the identification requirement. Consistent with section 162(f)(2)(A)(ii), the final regulations provide that the order or agreement, not the taxpayer, must meet the identification requirement with language specifically stating, or describing, that the amount will be paid or incurred as restitution, remediation, or to come into compliance with a law.

Under the proposed regulations, the identification requirement is presumed to be met if an order or agreement specifically states that the payment, and the amount of the payment, constitutes restitution, remediation, or an amount paid to come into compliance with a law. Commenters requested that the final regulations adopt a more permissive rule pursuant to which the identification requirement is presumed to be met if the order or agreement uses words other than “restitution,” “remediation” or “remediate,” and “come into compliance”, or “comply.” In addition, a commenter also asked for a more permissive rule if an order or agreement is in a foreign language. The final regulations provide that the identification requirement is met, not presumed to be met, if the order or agreement specifically states that the payment constitutes restitution, remediation, or an amount paid to come into compliance with a law. In response to the comments, the final regulations also provide a similar result if the order or agreement uses a different form of the required words, such as, “remediate” or “comply with a law.” An order or agreement in a foreign language may meet the identification requirement if the taxpayer provides a complete and accurate certified English translation of the order or agreement that describes the nature and purpose of the payment using the foreign language equivalent of restitution, remediation, or coming into compliance with the law.

An order or agreement will also meet the identification requirement, despite not using the words “restitution,” “remediation,” “remediate,” “come into compliance”, or “comply,” if the nature and purpose of the payment, as described in the order or agreement, are clearly and unambiguously to restore the injured party or property or to correct the non-compliance. The final regulations provide that an order or agreement will also meet the identification requirement if the order or agreement describes the damage done, harm suffered, or manner of noncompliance with a law, and describes the action required of the taxpayer to (i) restore, in whole or in part, the party, property, environment, wildlife, or natural resources harmed, injured, or damaged by the violation or potential violation of that law or (ii) to perform services, take action, provide property, or doing any combination thereof to come into compliance with that law.

The proposed regulations provide that the IRS may challenge an order or agreement's identification of the payment amount as restitution, remediation, or made to come into compliance with a law for the purposes of meeting the identification requirement. One commenter recommended that a substantive challenge to the characterization of a payment would more appropriately fit under the establishment requirement, rather than under the identification requirement. To address this comment, the identification requirement in the final regulations does not include a rebuttable presumption.

Section 162(f)(2)(A)(i) requires that a taxpayer establish that an amount was paid as restitution or remediation, or that the amount was paid to come into compliance with a law. The proposed regulations provide that the taxpayer may satisfy the establishment requirement by providing documentary evidence (1) that the taxpayer was legally obligated to pay the amount the order or agreement identified as restitution, remediation, or to come into compliance with a law; (2) of the amount paid or incurred; and (3) of the date on which the amount was paid or incurred. A commenter recommended that the final regulations clarify what the taxpayer must prove to meet the establishment requirement. The commenter also advised that it would be more appropriate for the IRS to challenge the characterization of the payment amount as restitution, remediation, or made to come into compliance with a law under the establishment requirement rather than under the identification requirement. The final regulations clarify that the establishment requirement is met if the documentary evidence submitted by the taxpayer proves that the taxpayer was legally obligated to pay the amount identified in the order or agreement as restitution, remediation, or to come into compliance with a law and that it was paid or incurred for the nature and purpose identified.

If the order or agreement identifies a lump sum payment or a multiple damage award that includes some combination of restitution, remediation, and coming into compliance with a law, the taxpayer must establish the exact amount paid or incurred for each purpose. Likewise, if an order or agreement involves multiple taxpayers, each taxpayer must establish the amount that taxpayer paid or incurred as restitution, remediation, or to come into compliance.

The proposed regulations provided a non-exhaustive list of documents that taxpayers may use to satisfy the establishment requirement. Commenters requested that the final regulations include additional examples of such documents. The final regulations expand the list of documentary evidence that may be used to meet the establishment requirement. The taxpayer may be able to use documentary evidence in a foreign language to satisfy the establishment requirement if the taxpayer provides a complete and accurate certified English translation of the documentary evidence.

The proposed regulations provide that reporting of the amount by a government or governmental entity under section 6050X does not satisfy the identification requirement or the establishment requirement. A commenter requested that the final regulations provide that a government or governmental entity's submission of an information return under section 6050X can satisfy the identification requirement under section 162(f)(2)(A)(ii) and/or the establishment requirement under section 162(f)(2)(A)(i). The final regulations do not adopt this recommendation. The reporting requirement imposed by section 6050X is for tax administration purposes and does not serve as documentation that the taxpayer has met the identification requirement or the establishment requirement. Therefore, the taxpayer may not use the information reported on the Form 1098-F to satisfy the identification requirement or the establishment requirement.

Under section 162(f)(3), the general rule that disallows a deduction does not apply to any amount paid or incurred pursuant to an order in a suit in which no government or governmental entity is a party. Like the proposed regulations, the final regulations clarify that section 162(f)(1) does not apply to any amount paid or incurred by reason of any order or agreement in a suit in which no government or governmental entity is a party. A commenter asked for clarification in the final regulations that section 162(f)(1) does not apply to any amount paid or incurred by reason of any order or agreement in a suit in which a government or governmental entity enforces rights as a private party. For example, payments pursuant to contract disputes that are not due to fraud or other potentially illegal activity wherein the government or governmental entity enforces its rights as a private party contracting for goods and/or services, and not in its enforcement, regulatory, or administrative capacity, generally are not payments made at the direction of a government or governmental entity. The final regulations generally adopt this recommendation. An example has been provided in the final regulations to illustrate the application of this rule.

A commenter asked for clarification about the application of section 162(f) to qui tam cases brought by private citizens on behalf of a government or governmental entity. The final regulations do not adopt a single rule concerning qui tam cases, but certain principles apply to determine whether a deduction for the amounts paid or incurred will be allowed. In general, a government or governmental entity is the real party in interest in the suit and receives any funds paid pursuant to the order or agreement, including any share ultimately paid by the government or governmental entity to the relator, whether or not the government or governmental entity intervenes in the suit. Accordingly, any amount paid or incurred to a government or governmental entity as a result of the suit will likely be disallowed unless an exception to section 162(f)(1) applies.

A commenter asked whether section 162(f)(1) disallows a deduction for prejudgment and postjudgment interest. Section 162(f)(1) applies to prejudgment interest paid or incurred to, or at the direction of, a government or governmental entity for the violation of any law or for the investigation or inquiry into a violation or potential violation of any law. However, a deduction for prejudgment interest will not be disallowed if the prejudgment interest is identified as a component of the total amount identified in the order or agreement as restitution and the taxpayer establishes that it was paid for this purpose. In general, section 162(f)(1) applies to postjudgment interest on amounts to be paid or incurred to, or at the direction of, a government or governmental entity for the violation of any law or investigation or inquiry into a potential violation of any law. However, if postjudgment interest is paid on an amount to which an exception under section 162(f)(2) applies, the exception also applies to that postjudgment interest.

The proposed regulations provide that section 162(f)(1) does not apply to amounts paid or incurred as otherwise deductible taxes or related interest. In accordance with section 162(f)(2)(A)(iii), the final regulations provide that, in the case of any amount paid or incurred as restitution for failure to pay any tax imposed under Title 26, section 162(f)(1) does not disallow a deduction for an amount equal to or less than the amount otherwise allowed under chapter 1 if the tax had been timely paid. For example, section 162(f)(1) does not disallow a deduction of an amount paid or incurred as restitution for failure to pay a tax imposed under Title 26 of the Code, such as certain excise or employment taxes otherwise deductible under chapter 1. However, a deduction for amounts paid or incurred as restitution for failure to pay a Federal income tax is disallowed because Federal income taxes are not otherwise deductible under chapter 1. See section 275(a)(1).

The Treasury Department and the IRS received several comments about the application of section 162(f) to federal, state and local taxes, and any related interest and penalties. Under the proposed regulations, if penalties are imposed with respect to otherwise deductible taxes, a taxpayer may not deduct the interest paid with respect to such penalties. A commenter requested clarification that the taxpayer also may not deduct the penalties. The Treasury Department and the IRS agree and the final regulations are revised accordingly to provide that if penalties are imposed with respect to otherwise deductible taxes, a taxpayer may not deduct the penalties or the interest paid with respect to such penalties.

The proposed regulations contained a material change rule under which some orders issued, or agreements entered, before December 22, 2017, were subject to section 162(f)(1) as amended by the TCJA. Several commenters considered the definition of “material change” in the proposed regulations as “overly broad,” and suggested it could cause unnecessary administrative disputes and discourage taxpayers from negotiating with governments or governmental entities to clarify the terms of an order or agreement, resulting in increased litigation and burdening taxpayers, governments and governmental entities, and courts. One commenter argued that section 13306(a)(2) of the TCJA (the transition rule for section 162(f)) precludes adopting a material change rule for any binding orders issued or agreements entered into before December 22, 2017. The commenter recommended that the final regulations provide that the amendment to section 162(f) applies only to orders issued or agreements entered into after December 22, 2017.

In response to this comment, the Treasury Department and the IRS have determined that section 162(f), as amended by TCJA, does not apply to any pre-December 22, 2017 binding order or agreement even if modified on or after December 22, 2017. In addition, material changes to an order or agreement will generally result in a new order or agreement subject to section 162(f). For these reasons, the final regulations do not include the material change rule included in the proposed regulations.

The purpose of the regulations under section 6050X is to provide appropriate officials of governments or governmental entities the operational, administrative, and definitional rules for complying with the statutory information reporting requirements for suits or agreements to which section 6050X(a)(1) applies.

In general, under the final regulations, if the aggregate amount a payor is required to pay pursuant to an order or agreement for a violation, investigation, or inquiry to which section 6050X(a)(1) and (a)(2) applies equals or exceeds the threshold amount, the appropriate official of a government or governmental entity that is a party to the order or agreement must file an information return with the IRS regarding certain amounts paid or incurred pursuant to the order or agreement, the payor's taxpayer identification number (TIN), and other information required by the information return and the related instructions. The appropriate official of a government or governmental entity that is a party to the order or agreement must also furnish a written statement with the same information to the payor.

The proposed regulations provided a definition of “government or governmental entity.” No comments were received on the definition of “government or governmental entity” in the proposed regulations. The definition in the final regulations has been reorganized to provide a definition of a government in § 1.6050X-(f)(2) and to provide a definition of a “governmental entity” in § 1.162-21(f)(3). The definitions are based on the definition in the proposed regulations but clarify that a political subdivision of a government includes a local government unit. The final regulations also clarify that a governmental entity includes a nongovernmental entity treated as a governmental entity.

The proposed regulations under section 6050X incorporate the definition of a “nongovernmental entity” in the proposed regulations under section 162(f). The final regulations clarify that, for purposes of the information reporting requirements in section 6050X, a nongovernmental entity treated as a governmental entity does not include a nongovernmental entity of a territory of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, a foreign country, or an Indian tribe.

The proposed regulations provided that the information reporting is required for a “suit, agreement, or otherwise” pursuant to section 162(f)(1). A commenter noted that this rule is inconsistent with the statutory language of section 6050X, which only concerns a “suit or agreement.” The final regulations clarify that a government or governmental entity involved in a suit or agreement to which section 6050X(a)(2) applies must file an information return for payment amounts described in section 6050X(a)(1).

Another commenter recommended that the final regulations clarify that a suit or agreement is treated as binding under applicable law even if all appeals have not been exhausted. The final regulations generally adopt this recommendation.

The final regulations define “payor” as the person, as defined in section 7701(a)(1), which, pursuant to an order or agreement, has paid or incurred, or is liable to pay or incur, an amount to, or at the direction of, the government or governmental entity in relation to the violation or potential violation of any law. In general, the payor will be the person to which section 162(f) and § 1.162-21 apply.

One commenter recommended that the final regulations provide that governments and governmental entities do not have a reporting requirement, and do not need to furnish a written statement, pursuant to section 6050X for the amounts described in section 6050X(a)(1) that tax-exempt, non-profit payors are required to pay. Another commenter recommended that the final regulations provide that the information reporting requirement should apply only for civil, not criminal, cases. A third commenter recommended that the final regulations provide that the information reporting requirement applies only to payors involved in a trade or business and not to individual payors.

The final regulations do not adopt these recommendations because they are inconsistent with section 6050X. Section 6050X does not carve out an exception for criminal cases, individuals, including those not in a trade or business, and tax-exempt organizations.

The final regulations require the appropriate official to include the TIN of the payor on the information return filed regarding the payor. Commenters asked how the appropriate official of a government or governmental entity may secure a payor's TIN. If the appropriate official does not already have the payor's TIN, the appropriate official must request the TIN. The TIN may be requested in any manner. The appropriate official must notify the payor that the law requires the payor to furnish a TIN for inclusion on the information return and that failure to furnish the TIN may subject the payor to a penalty under section 6723. The payor may provide the TIN in any manner including orally, in writing, or electronically. If the payor furnishes the TIN in writing, no particular form is required.

Section 6050X(a)(2)(B) provides the Secretary with the authority to adjust the statutory reporting threshold of $600 as necessary to ensure the efficient administration of the internal revenue laws. Based on comments received prior to the publication of the proposed regulations from governments and governmental entities concerned about the burden of information reporting and to ensure the efficient administration of the internal revenue laws, the Treasury Department and the IRS determined that a threshold higher than $600 was appropriate to address these concerns. The proposed regulations provided that reporting is required if the aggregate amount of all orders and agreements for the violation, investigation, or inquiry equals or exceeds $50,000 (threshold amount). Anticipating possible compliance burdens on filers, the Treasury Department and the IRS requested comments about the proposed $50,000 threshold. In particular, the Treasury Department and the IRS requested data on the annual number of relevant orders issued, or agreements entered, by governments or governmental entities and the financial, time, and administrative burdens associated with different threshold amounts. After publication of the proposed regulations, the Treasury Department and the IRS received several requests from governments and governmental entities to raise the proposed $50,000 threshold amount, but none of the comments provided data to support those requests. As a result, the final regulations maintain the proposed threshold amount and provide that reporting is required for payment amounts equal to or in excess of $50,000.

Commenters described several situations in which the government or governmental entity may be uncertain about its reporting obligation because it is not clear that the suit or agreement requires the payor to make payments described in section 6050X(a)(1) that equal or exceed the threshold amount. In one situation, the order or agreement described in section 6050X(a)(1) requires the payor to make several payments for a violation, investigation, or inquiry, each described in section 6050X(a)(2) and each for less than the threshold amount, but the aggregate amount of all payments pursuant to the order or agreement equals or exceeds the threshold amount. In another situation, an order or agreement involving more than one violation, investigation, or inquiry, each described in section 6050X(a)(2), requires the payor to make several payments, each described in section 6050X(a)(1), and each for less than the threshold amount, but the aggregate amount of all payments pursuant to the order or agreement equals or exceeds the threshold amount.

The commenter recommended that, in these two situations, the final regulations should treat each payment amount separately to determine if the aggregate amount involved in the order or agreement equals or exceeds the threshold amount. The final regulations do not provide rules for every circumstance to which section 6050X(a)(2)(A)(ii) could apply. Form 1098-F and its instructions will contain additional guidance regarding the threshold amount.

Another commenter described a situation in which, pursuant to separate orders or agreements, the payor is required to pay separate amounts, all less than the threshold amount, for multiple acts or omissions in violation of the same law but the aggregate amount of the payments to be made pursuant to all orders and agreements equals or exceeds the threshold amount. The commenter requested that, in this situation, the final regulations treat each order and agreement separately. This situation is addressed by section 6050X(a)(2)(A)(ii), which provides that the government or governmental entity must file an information return for a suit or agreement if “the aggregate amount involved in all court orders and agreements with respect to the violation, investigation, or inquiry” equals or exceeds the threshold amount. Therefore, the final regulations do not adopt the rule proposed by the commenter. The final regulations also provide that in this situation, the appropriate official must file only one information return for all amounts the payor is required to pay pursuant to these orders or agreements.

The appropriate official of a government or governmental entity must comply with the information reporting requirements of section 6050X and the related regulations by filing Form 1098-F, Fines, Penalties, and Other Amounts, or any successor form, as provided by the instructions, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before the annual due date as provided in the final regulations. Under the final regulations, the information return filed by the government or governmental entity with the IRS must provide the amount a payor is required to pay, pursuant to section 6050X(a)(1)(A) and § 1.6050X-1(b)(1)(i), as a result of the order or agreement, the separate amounts required to be paid as restitution, remediation, or to come into compliance with a law, pursuant to section 6050X(a)(1)(B) and (a)(1)(C) and § 1.6050X-1(b)(1)(ii), as a result of the order or agreement, the payor's TIN, and any additional information required by the information return and the related instructions.

The Treasury Department and the IRS received comments requesting that the final rules require information reporting only for amounts paid directly to a government or governmental entity. A commenter also requested final rules pursuant to which the government or governmental entity could provide the reporting information to the payor and require the payor to file the information return. None of these suggestions were adopted in the final regulations because they are inconsistent with the explicit language of section 6050X.

A commenter inquired whether the government or governmental entity reports the payment amount identified in the order or agreement, or only the amount the payor ultimately pays. Another commenter recommended that the reporting requirement apply only to payment amounts described in sections 162(f)(1) and 6050X(a)(1)(A) that are actually collected by governments and governmental entities. Section 6050X(a)(1) mandates reporting for “the amount required to be paid as a result of the suit or agreement” for a violation of any law, or an investigation or inquiry into the potential violation of any law, as well as for restitution, remediation, and to come into compliance with a law. Therefore, the final regulations do not adopt the commenter's recommendation. Instead, the final regulations clarify that governments and governmental entities have a reporting obligation for the amounts, described in section 6050X(a)(1) and § 1.6050X-1(b)(1)(i) and (ii), required to be paid pursuant to the order or agreement.

A commenter inquired whether the IRS would consider using website reporting instead of requiring reporting on a form. Section 6050X prescribes reporting that is more suitable on a form. Furthermore, section 6050X(b) also requires governments and governmental entities to furnish written statements to payors. Thus, even if the final regulations permitted governments and governmental entities to report information to the IRS via a website, they would still need to provide a written statement to payors, which could not be accomplished by a website. To minimize the burden on governments or governmental entities, the final regulations permit the appropriate official to comply with the requirements to furnish written statements to payors via the Form 1098-F or another document that contains the required information if the document conforms to applicable guidance relating to substitute statements.

A commenter expressed concerns about the information reporting requirements resulting from an order or agreement, pursuant to which payments are made over the course of several years. To minimize the burden on governments and governmental entities and to ensure the efficient administration of the internal revenue laws, the final regulations do not require an appropriate official to file information returns for each taxable year in which a payor makes a payment pursuant to a single order or agreement. Instead, the appropriate official must file only one information return to report the amounts required by section 6050X(a)(1).

Some commenters inquired about the application of the reporting obligation to governments and governmental entities for specific types of administrative and certain other categories of proceedings. The final regulations do not address the application of the reporting obligation to specific statutes or types of proceedings because the final regulations are intended to provide broad rules of general application based on the underlying principles of sections 162(f) and 6050X rather than narrow rules with limited application that risk excluding a certain “violation of any law or the investigation or inquiry . . . into the potential violation of any law.”

One commenter observed that the payors and the governments and governmental entities may have incentives to enter into an agreement concerning the filing of information returns such that payors may improperly attempt to claim deductions to which they are not entitled and governments and governmental entities do not have to incur the burden of filing information returns and furnishing written statements. The commenter recommended that the final regulations treat any agreements between payors and governments or governmental entities not to file information returns as invalid and unenforceable. The final regulations do not adopt this recommendation because section 162(f) applies to the taxpayer regardless of whether the appropriate official files an information return with the IRS and furnishes a written statement to the payor.

Section 6050X(a)(3) provides that the information return shall be filed at the time the agreement is entered into, as determined by the Secretary, not at the time of payment, as recommended by a commenter. Further, section 6050X(b) requires the written statement to be furnished to the payor at the same time the information return is filed with the IRS. Under the proposed regulations, the information return was required to be filed on or before January 31 of the year following the calendar year in which the order or agreement, becomes binding under applicable law.

A commenter requested that appropriate officials of governments and governmental entities be given more time to comply with the requirement. As requested, the final regulations provide, pursuant to section 6071(a), that information returns filed with the IRS on paper are due on or before February 28 of the year following the calendar year in which the order or agreement, becomes binding under applicable law. In accordance with section 6071(b), information returns filed electronically are due on or before March 31 of such year. However, to increase the likelihood that payors have the information necessary to timely prepare their income tax returns and to avoid burdening governments and governmental entities with having to determine the tax year of each payor, the final regulations require the appropriate official to furnish the written statement on or before January 31 of such year.

The final regulations describe the application of the information reporting requirements if, pursuant to the order or agreement, the aggregate amount multiple payors are required to pay, or the costs to provide the property or the service, equals or exceeds the threshold amount. If, pursuant to the order or agreement, more than one payor is individually liable for some or all of the payment amount, the final regulations require the appropriate official to file an information return for the separate amount that each individually liable payor is required to pay, even if a payor's payment liability is less than the threshold amount, and to furnish a written statement containing this information to each payor. If more than one person, as defined in section 7701(a)(1), is a party to an order or agreement, there is no information reporting requirement, or requirement to furnish a written statement, with respect to any person who does not have a payment obligation or obligation for costs to provide services or to provide property.

The final regulations provide that, if an order or agreement, identifies multiple jointly and severally liable payors, the appropriate official must file an information return for each payor to report the information required by § 1.6050X-1(b)(1)(i) and (ii) on the amount to be paid by all jointly and severally liable payors. The appropriate official must furnish a written statement containing this information to each of those payors, regardless of which payor makes the payment.

A commenter wrote that the rules requiring reporting would be challenging to implement when multiple payors are required to make payments. However, under section 6050X(a)(1)(3), the appropriate official has an obligation to file an information return when an order or agreement becomes binding, not when the payments are made, so there is no need for governments or governmental entities to track the receipt of payments in order to comply with section 6050X or the related final regulations.

Another commenter recommended that the payment obligation of each payor be examined separately to determine whether the amount each payor is required to pay, or the costs to provide the property or the service, equals or exceeds the threshold amount. However, in the case of joint and several liability, each payor is responsible for the entire amount, which requires reporting of, and furnishing a statement to, each payor. In the case where a payor is individually liable for an amount below the threshold amount, the payor may still attempt to deduct some or all of the payment amount all of the payors are required to pay, so filing an information return for each of the payors' liabilities is useful for tax administration.

One commenter asked for clarification that the government or governmental entity is not obligated to file an information return with the IRS if, after an order or agreement has become binding under applicable law, the payor pursues another party for contribution. Because any payment the payor receives from another party in a subsequent proceeding will not be subject to section 162(f), the government or governmental entity will not have an obligation to file an information return for any payment made by the other party.

Commenters expressed concern that it is difficult for governments and governmental entities to estimate the payment amount pursuant to the order or agreement, and whether the aggregate amount equals or exceeds the information reporting threshold, when the order or agreement does not specify an amount. The Treasury Department and the IRS agree, which is why the regulations do not require governments or governmental entities to estimate payment amounts. Accordingly, if some or all of the payment amount is not identified in the order or agreement, the regulations direct governments and governmental entities to the instructions to Form 1098-F, or any successor form.

Some orders or agreements may identify a payment described in section 6050X(a)(1)(A) and identify a payment or an obligation to provide property or to provide services, as restitution, remediation, or an amount paid to come into compliance with a law, as described in section 6050X(a)(1)(B), but not identify some or all of the payment amounts the payor must pay, or some or all of the cost to provide property or services. The final regulations provide that, if the government or governmental entity reasonably expects that the aggregate amount the payor must pay, and the costs the payor will pay or incur to provide services or to provide property, pursuant to the order or agreement, will equal or exceed the threshold amount, the appropriate official of such government or governmental entity must file an information return on Form 1098-F, or any successor form, as provided in the instructions to the Form 1098-F, and furnish a written statement to the payor with the information supplied to the IRS on Form 1098-F.

Similarly, a commenter noted that some orders or agreements may require a payor to make payments described in section 6050X(a)(1) for which reporting is required and other payments for which reporting is not required under section 6050X. The commenter recommended that if it is not clear for which payment amount the government or governmental entity has a reporting requirement, the rule under the proposed regulations for a payment amount not identified should apply. The Treasury Department and the IRS generally agree with this recommendation. Therefore, if, under the circumstances described by the commenter, the government or governmental entity reasonably expects that the aggregate amount the payor must pay, and the costs the payor must pay to provide services or to provide property, will equal or exceed the threshold amount, the appropriate official of such government or governmental entity must file an information return.

Under the proposed regulations, if there was a material change to the terms of an order or agreement for which an appropriate official of a government or governmental entity filed an information return, the appropriate official had to file a corrected information return with the IRS and furnish an amended written statement to the payor. The Treasury Department and the IRS have concluded that material changes to an order or agreement will generally result in a new order or agreement subject to the rules under section 6050X and § 1.6050X-1. For this reason, and because the final regulations under § 1.162-21 do not include a material change rule, the final regulations have removed the material change rule from § 1.6050X-1.

The rules of § 1.162-21 apply to taxable years beginning on or after the date of publication of this Treasury decision in the Federal Register , except that such rules do not apply to amounts paid or incurred under any order or agreement, pursuant to a suit, agreement, or otherwise, that became binding under applicable law before such date, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. The rules of § 1.6050X-1 apply only to orders and agreements, pursuant to suits and agreements, that become binding under applicable law on or after January 1, 2022, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired.

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

The regulations have been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and by the Office of Management and Budget (OMB) regarding review of tax regulations.

Prior to the Tax Cuts and Jobs Act (TCJA), section 162(f) of the Code disallowed a deduction for any fine or similar penalty paid to a government for the violation of any law. This provision, enacted in 1969, codified existing case law that denied business deductions for fines or similar penalties. The general rule of section 162(f)(1), as amended by section 13306(a) of the TCJA, disallows any deduction for amounts paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity or certain nongovernmental entities treated as governmental entities, in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Section 13306(a) also provides certain exceptions to this disallowance. Section 162(f)(2)(A)(i) and (ii) does not disallow deduction for amounts that (1) the taxpayer establishes were paid or incurred as restitution (including remediation of property) or to come into compliance with a law, and (2) are identified in the court order or settlement agreement as restitution, remediation, or to come into compliance with a law.

In addition, under prior law, the Treasury Department and the IRS did not receive information returns from governments or governmental entities that received fines or penalties. Section 6050X of the Code, enacted by section 13306(b) of the TCJA, requires appropriate officials to file an information return if the aggregate amount involved in all orders or agreements relating to the violation, investigation, or inquiry is $600 or more. The information return must include (1) the amount required to be paid as a result of the order or agreement; (2) any amount that constitutes restitution or remediation of property; and (3) any amount required to be paid for the purpose of coming into compliance with a law that was violated or involved in the investigation or inquiry. Section 6050X provides the Secretary with the authority to adjust the $600 reporting threshold in order to ensure efficient tax administration.

Proposed regulations regarding these provisions were previously issued on May 13, 2020 (REG-104591-18) (proposed regulations).

Following the passage of the TCJA, the Treasury Department and the IRS received several questions and comments from Federal, state, local, and tribal governments, as well as the public, regarding the meaning of various provisions in each section and issues not explicitly addressed in the statute. The Treasury Department and the IRS have determined that such comments warrant the issuance of further guidance.

In addition, the Treasury Department and the IRS have determined that increasing the reporting threshold to reduce the reporting burden and to enhance the efficiency of tax administration is appropriate.

The regulations provide guidance regarding sections 162(f) and 6050X. The following analysis provides further detail regarding the anticipated impacts of the regulations. Part I.D specifies the baseline for the economic analysis. Part I.E.1. summarizes the economic effects of the rulemaking, relative to this baseline. Part I.E.2. describes the economic effects of specific provisions covering (1) the reporting threshold, (2) the timing of information reporting, and (3) information reporting requirements when payment amounts are not identified.

In this analysis, the Treasury Department and the IRS assess the benefits and costs of the final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations.

The regulations under section 162(f) provide definitions for restitution, remediation, and amounts paid to come into compliance with the law. These definitions clarify for taxpayers which amounts paid or incurred may be deductible under the statute. The regulations also clarify (1) how the taxpayer meets the establishment requirement; and (2) how the order or agreement meets the identification requirement.

The Treasury Department and the IRS have determined that the burden reduction associated with the regulations for section 162(f) is modest. In addition, while the regulations reduce uncertainty for taxpayers, they are unlikely to affect economic decision-making because most of the amounts to be paid or incurred which are subject to section 162(f) are non-discretionary.

The regulations under section 6050X provide certainty and consistency for affected governments and governmental entities by defining and clarifying the statute's terms and rules. Further, the regulations use the authority provided by the statute to the Secretary to set information reporting requirements to minimize the burden on governments and governmental entities and to ensure the efficient administration of the internal revenue laws. Most importantly, the regulations increase the reporting threshold from $600 to $50,000, thereby eliminating information reporting requirements for approximately 1 to 5 million orders or agreements. Using the midpoint of this range (3 million), the estimated burden reduction from this exercise of regulatory discretion is $74 million (2018 dollars) per year relative to the no-action baseline.

This reduction in compliance burden is the only meaningful economic effect of the regulations. The regulations do not have meaningful effects on the tax liability of taxpayers, the deductibility of amounts paid to, or at the directions of, governments and governmental entities, or the incentive for individuals or businesses to engage in violations of the law.

Section 6050X requires governments and governmental entities which enter orders or agreements to which section 162(f) applies to file an information return if the aggregate amount paid or incurred in all orders or agreements relating to the violation, investigation, or inquiry is equal to or exceeds a threshold of $600. Section 6050X also provides the Secretary with the authority to adjust the statutory reporting threshold as necessary to ensure efficient tax administration. In response to multiple comments received prior to the issuance of the proposed regulations from governments and governmental entities concerned about the burden of information reporting for smaller payments amounts pursuant to orders or agreements, the regulations raise the reporting threshold to $50,000. In the proposed regulations, the Treasury Department and the IRS solicited data on the annual number of orders or agreements by governments or governmental entities that could inform the determination of the appropriate threshold amount. The Treasury Department and the IRS did not receive any such data.

The Treasury Department and the IRS considered a range of alternative thresholds including the statutory threshold of $600, along with much higher thresholds suggested by some commenters. Upon consideration of both the enforcement needs of the IRS and the reporting burden on governments and governmental entities, the Treasury Department and the IRS exercised the authority provided to the Secretary by the statute to set the reporting threshold amount at $50,000.

The Treasury Department and the IRS do not know of any data on the number of orders or agreements requiring taxpayers to pay amounts to, or at the direction of, governments or governmental entities, or the distribution of these amounts, such as the number that are above or below $600. Based on communications with stakeholders, the Treasury Department and the IRS estimate that the increase in reporting threshold from $600 to $50,000 will reduce the number of required information returns by approximately 1 to 5 million. The Treasury Department and the IRS further estimate that the average time to complete the information return is between 0.387 and 0.687 hours. Using the midpoint of each of these ranges (3 million information returns and .537 hours) and a labor cost of $46 per hour, 1 the Treasury Department and the IRS estimate that increasing the reporting threshold will reduce annual compliance burdens by $74 million dollars (2018 dollars) per year. It should be noted that many of the lower level fines and penalties are likely to be assessed on non-businesses that are not able to deduct business expenses so they would be unaffected by the extent to which governments or governmental entities are subject to reporting requirements.

Increasing the reporting threshold from $600 to $50,000 is unlikely to have a significant effect on revenues because fines over $50,000 likely account for the vast majority of fines and penalties in terms of dollar values. Based on financial reporting values disclosed on tax returns of C corporations, S corporations and partnerships, firms with over $50,000 in total fines and penalties account for 99 percent of all fines and penalties. However, these data should be interpreted with caution. Financial reporting of fines and penalties includes both international and domestic fines, and all fines and penalties are aggregated into yearly totals. Furthermore, firms with less than $10 million in assets are not required to provide financial reporting values with their tax returns.

Section 6050X provides that the government or governmental entity shall file the information return at the time the order is issued or the agreement is entered into, as determined by the Secretary. The Treasury Department and the IRS received comments from governments and governmental entities prior to the issuance of the proposed regulations observing that it would be burdensome and inefficient for them to file information returns each time an order or agreement becomes binding under applicable law. Several commenters suggested that annual filing of information returns would meaningfully reduce this reporting burden. The Treasury Department and the IRS agree with this comment and have adopted it in the regulations. The Treasury Department and the IRS have not estimated the difference in compliance burden between these two alternatives because they do not have suitable data or models to do so.

Several commenters also expressed uncertainty and concern about the information reporting requirements for an order or agreement pursuant to which payments are made over the course of several years. To reduce uncertainty, and to minimize the burden on governments and governmental entities, the regulations clarify that information reporting is required only for the year in which the order or agreement becomes binding under applicable law, and not required for each taxable year in which a payor makes a payment.

The Treasury Department and the IRS considered requiring information reporting at the time the order is issued or the agreement is entered. The Treasury Department and the IRS also considered requiring information reporting in each year in which an amount is paid or incurred pursuant to the order or agreement. However, both alternative approaches were determined to impose unnecessary burden for governments and governmental entities without creating accompanying benefits for tax administration or for taxpayers.

Under the proposed regulations, the information return was required to be filed with the IRS, and a written statement furnished to the payor, on or before January 31 of the year following the calendar year in which the order or agreement becomes binding under applicable law, even if all appeals have not been exhausted for the suit or agreement. In response to the proposed regulations, a commenter requested that governments and governmental entities be given more time to comply with the requirements. As requested, the final regulations are revised to provide that information returns filed with the IRS on paper are due on or before February 28 of the year following the calendar year in which the order or agreement becomes binding under applicable law and information returns filed electronically are due on or before March 31 of such year. However, to increase the likelihood that payors have the information necessary to timely prepare their income tax returns, the final regulations still require governments and governmental entities to furnish the written statements to payors on or before January 31 of such year.

When the expected amount paid or incurred pursuant to an order or agreement equals or exceeds the threshold amount, section 6050X requires governments or governmental entities to file an information return including: (1) The amount required to be paid as a result of the order or agreement; (2) any amount that constitutes restitution or remediation of property; and (3) any amount required to be paid for the purpose of coming into compliance with a law that was violated or involved in the investigation or inquiry. However, some orders or agreements may involve uncertain payments or costs to provide property or services without identifying some or all of the aggregate amount the payor must pay, or some or all of the aggregate cost to provide property or services. The Treasury Department and the IRS received comments expressing concern that amounts paid or incurred are often difficult to assess, and strict valuation requirements would impose undue burden on governments and governmental entities. For situations in which the amount is not identified, the regulations direct governments and governmental entities to the instructions to Form 1098-F. To address commenters' concerns, these instructions will permit governments and governmental entities to report the threshold amount of $50,000 when the amount is unknown but expected to equal or exceed $50,000. This rule is necessary to improve taxpayer compliance.

The Treasury Department and the IRS considered requiring governments and governmental entities to provide an estimate of each amount to be paid or incurred; however this approach was rejected because it would impose significant burden on governments and governmental entities. The Treasury Department and the IRS did not estimate the difference in compliance burden between the final regulation and this alternative approach because they do not have suitable data or models to do so.

In general, the collection of information in the regulations is required under section 6050X of the Code. The collection of information in these regulations is set forth in § 1.6050X-1. The IRS intends that the collection of information pursuant to section 6050X will be conducted by way of Form 1098-F, Fines, Penalties, and Other Amounts. Form 1098-F will be used by all governments, governmental entities, and nongovernmental entities treated as governmental entities with a reporting requirement. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the regulations. In addition, when available, drafts of IRS forms are posted for comment at www.irs.gov/draftforms.

The current status of the PRA submissions related to section 6050X are provided in the following table.

A reasonable burden estimate for the average time to complete Form 1098-F is between 0.387 and 0.687 hours (approximately 23 to 41 minutes). This estimate is based on survey data collected from similar information return filers. In addition, the increase in the reporting threshold under section 6050X will lead to a decrease in the number of information returns filed by approximately 1 million to 5 million returns. Using the midpoint of these ranges, or 3 million and 0.537 hours, the estimated burden reduction is $74 million per year.

Estimated average time per form: .537 hours.

Estimated number of respondents: 90,100.

Estimated total annual burden hours: 48,383.70.

Estimated change in number of information returns resulting from increased reporting threshold: (3,000,000).

Estimated change in burden (hours): (1,611,150).

Estimated change in burden (Dollars): ($74,161,235).

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

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires agencies to “prepare and make available for public comment an initial regulatory flexibility analysis,” which will “describe the impact of the rule on small entities.” 5 U.S.C. 603(a). Section 605(b) of the RFA allows an agency to certify a rule if the rulemaking is not expected to have a significant economic impact on a substantial number of small entities.

Pursuant to the RFA, the Secretary of the Treasury hereby certifies that these regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the RFA.

The RFA generally applies to regulations that affect small businesses, small organizations, and small governmental jurisdictions. For purposes of the RFA, small governmental jurisdictions are governments of cities, counties, towns, townships, villages, school districts, or special districts with a population of less than 50,000. This rule would affect States, as well as local governments, some of which may meet the definition of small governmental jurisdiction. Approximately 90,100 governments, governmental entities, and nongovernmental entities treated as governmental entities may be subject to the reporting requirements of section 6050X. Of those governments and governmental entities, approximately 85,500 (or 95%) are small governmental jurisdictions.

Although the regulations may affect a substantial number of small governmental jurisdictions, the economic impact of the regulations is not expected to be significant. The regulations set a reporting threshold that is higher than the minimum required by statute and also provide for governments and governmental entities to file annual returns. Both of these provisions reduce the potential burden on small governmental jurisdictions. In particular, the increase in the reporting threshold will lead to a decrease in the number of information returns filed by approximately 1 million to 5 million returns. Using the midpoint of this range, or 3 million, the estimated burden reduction is $74 million per year (2018 dollars). It is estimated that after reading and learning about the requirements of the regulations, the burden associated with filing the annual form is approximately 23 to 41 minutes and the average cost per information return is approximately $24.72, which would not result in a significant economic impact on small entities.

Pursuant to section 7805(f) of the Code, the proposed rule preceding this rulemaking was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small entities and no comments were received.

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

Executive Order 13132 (entitled Federalism ) prohibits an agency from publishing any rule that has Federalism implications if the rule either imposes substantial direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These rules do not have Federalism implications, and do not impose substantial direct compliance costs on state and local governments or preempt state law, within the meaning of the Executive Order. The compliance costs, if any, are imposed on state and local governments by section 6050X, as enacted by the TCJA. Notwithstanding, the Treasury Department and the IRS consulted with the National League of Cities and the National Governors Association prior to the issuance of the proposed regulations. Pursuant to the requirements set forth in section 8(a) of Executive Order 13132, the Treasury Department and the IRS certify that they have complied with the requirements of Executive Order 13132.

The Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget has determined that this is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq. ) (CRA)). Under 5 U.S.C. 801(3), a major rule takes effect 60 days after the rule is published in the Federal Register .

Notwithstanding this requirement, 5 U.S.C. 808(2) allows agencies to dispense with the requirements of 5 U.S.C. 801 when the agency for good cause finds that such procedure would be impracticable, unnecessary, or contrary to the public interest and the rule shall take effect at such time as the agency promulgating the rule determines. Pursuant to 5 U.S.C. 808(2), the Treasury Department and the IRS find, for good cause, that a 60-day delay in the effective date is unnecessary and contrary to the public interest.

Following the amendments to section 162(f) and enactment of section 6050X by the TCJA, the Treasury Department and the IRS published IRS published Notice 2018-23, 2018-15 I.R.B. 474, to provide transitional guidance on the identification requirement of section 162(f) and the information reporting requirement under section 6050X and to solicit comments from the public and affected governments and governmental entities on issues related to the implementation of section 162(f) and section 6050X. Subsequently, on May 13, 2020, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-104591-18) in the Federal Register (85 FR 28524) providing additional guidance for taxpayers and governments and governmental entities on the deduction disallowance rules in section 162(f) and the associated reporting requirements in section 6050X. However, as demonstrated by the wide variety of public comments in response to the proposed regulations received, taxpayers and governments and governmental entities continue to express uncertainty regarding the proper application of the relevant statutory rules under section 162(f) and section 6050X. These final regulations provide crucial guidance for taxpayers and governments and governmental entities on how to apply the relevant statutory rules. In certain cases, failure to comprehend the proper application of the requirements of section 162(f) can prevent taxpayers from claiming appropriate deductions, resulting in them paying potentially higher taxes than required during a time of economic difficulty. 2 In addition, governments and governmental entities will require several months to update or develop data collection and reporting systems to comply with the rules under section 6050X. However, governments and governmental entities will need to know that the final regulations are effective before incurring necessary costs to timely comply with the final regulations. Accordingly, the Treasury Department and the IRS have determined that the rules in this Treasury decision will take effect on the date of filing for public inspection in the Federal Register .

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

The principal author of these regulations is Sharon Y. Horn of Associate Chief Counsel (Income Tax and Accounting), IRS. However, other personnel from the Treasury Department and the IRS participated in their development.

Accordingly, 26 CFR part 1 is amended as follows: