To prevent the introduction of adulterated or misbranded products into commerce, FSIS implements a prior approval program for labels intended to be used on FSIS-regulated products (9 CFR part 412). Without approved labels, these products may not be sold, offered for sale, or otherwise distributed in commerce.

Certain categories of labels must be submitted to FSIS for review and approval before use on products in commerce. However, FSIS considers certain labels that comply with the Agency's labeling rules to be “generically” approved (9 CFR 412.2). Such labels are not submitted to FSIS, because they are deemed approved if they bear all applicable mandatory labeling features and are not false or misleading, and may be applied to product in commerce, provided that supporting documentation for any information on the label is part of the labeling record. One category of labels currently eligible for generic approval is labels bearing U.S.-origin claims, like “Product of USA.”

FSIS recently conducted a comprehensive review of the Agency's current voluntary “Product of USA” labeling policy to help determine what the “Product of USA” label claim means to consumers. FSIS started this review after receiving several petitions stating that the voluntary label claim “Product of USA” is confusing to consumers. By law, no product may bear any false or misleading label, such as labeling which conveys any false impression or gives any false indication of origin. FSIS' review of the policy included a consumer survey on “Product of USA” labeling on beef and pork products. Based on the consumer survey results, reviews of consumer research, and comments received on the petitions, FSIS is proposing to amend its regulations to define the conditions under which voluntary claims may be used on the labels of meat, poultry, and egg products, as well as voluntarily-inspected products, to indicate that the products are of U.S. origin.

Under this proposed rule, two specific voluntary U.S.-origin label claims, “Product of USA” and “Made in the USA” (the “authorized claims”), would be generically approved for use on single ingredient, FSIS-regulated products derived from animals born, raised, slaughtered, and processed in the United States. The two voluntary authorized label claims “Product of USA” and “Made in the USA” would also be generically approved for use on multi-ingredient FSIS-regulated products if: (1) All FSIS-regulated components of the product are derived from animals born, raised, slaughtered, and processed in the United States; and (2) All additional ingredients, other than spices and flavorings, are of domestic origin ( i.e., all preparation and processing steps of the ingredients are completed in the United States).

This proposed rule would also allow for U.S.-origin label claims other than the two authorized claims “Product of USA” and “Made in the USA.” All U.S.-origin label claims that are not authorized claims are known as “qualified claims.” These qualified claims would need to include a description on the package of all preparation and processing steps (including slaughter) that occurred in the United States upon which the claim is made. 1 These would need to be positioned near the qualified claim and explain how the product compares to the regulatory criteria for use of the two authorized claims “Product of USA” and “Made in the USA.” For example, “Sliced and packaged in the United States using imported pork” could be a qualified claim. As with the two authorized claims “Product of USA” and “Made in the USA,” all qualified claims that meet the proposed regulatory requirements would be eligible for generic approval. The proposed rule would apply to domestic products. 2 For product exported from the United States, FSIS would continue to verify that labeling requirements for the applicable country are met, as shown in the FSIS Export Library. 3

Establishments producing products covered by USDA's Agricultural Marketing Service's (AMS) Country of Origin (COOL) mandatory labeling regulations (see 7 CFR parts 60 and 65) would still need to comply with COOL requirements (see 9 CFR 317.8(b)(40)). AMS' COOL requires retailers, such as full-line grocery stores, supermarkets and club warehouse stores, to notify their customers with information regarding the source of certain foods. 4 Should this rule become final, any FSIS-regulated product that is also a commodity subject to COOL requirements must continue to comply with those requirements.

Section IV below contains an analysis of the proposed rule's expected costs and benefits, an explanation of the assumptions, alternative scenarios, and the expected impact on small businesses. The requirements in this proposed rule, if finalized, are estimated to result in a one-time relabeling cost for industry, annual recordkeeping costs, and one-time market testing costs. Combined and annualized assuming a7-percent discount rate over 10 years, the total estimated industry cost would be $3 million. The proposed regulatory definitions of voluntary U.S.-origin claims align the meaning of those claims with consumers' understandings of the information conveyed by those claims, information that is valued by consumers. The proposed changes to the “Product of USA” voluntary labeling policy are intended to prevent false or misleading U.S.-origin labeling (see 9 CFR 317.8(a), 381.129(b), 590.411(f)(1)). 5 This would reduce the market failures associated with incorrect and asymmetric information. The proposed changes would benefit consumers by matching the voluntary authorized “Product of USA” and “Made in the USA” label claims with the definition that consumers likely expected ( i.e., product derived from animals born, raised, slaughtered, and processed in the United States). If finalized, the proposed changes would allow consumers to make informed purchasing decisions, resulting in an increase in consumer benefits and preventing market failures as shoppers will be better able to choose products according to their preferences.

FSIS is responsible for ensuring that meat, poultry, and egg products are safe, wholesome, and properly labeled and packaged. The Agency administers a regulatory program for meat products under the Federal Meat Inspection Act (FMIA) (21 U.S.C. 601 et seq. ), for poultry products under the Poultry Products Inspection Act (PPIA) (21 U.S.C. 451 et seq. ), and for egg products under the Egg Products Inspection Act (EPIA) (21 U.S.C. 1031 et seq. ). FSIS also provides voluntary reimbursable inspection services under the Agricultural Marketing Act (AMA) (7 U.S.C. 1622 and 1624) for eligible products not requiring mandatory inspection under the FMIA, PPIA, and EPIA. These voluntary reimbursable inspection services include activities related to export certification (9 CFR 350.3(b), 362.2(b), and 592.20(d)); products containing meat and poultry that are not under mandatory FSIS inspection (9 CFR 350.3(c) and 362.2(a)); voluntary inspection of certain non-amenable species (9 CFR part 352, subpart A and 9 CFR part 362); and voluntary inspection of rabbits (9 CFR part 354). The requirements proposed under this rule for the two voluntary authorized claims “Product of USA” and “Made in the USA” and voluntary qualified U.S.-origin claims would apply to all products subject to FSIS' mandatory inspection or that are inspected under the voluntary inspection services provided by FSIS. 6 Establishments would not need to include these claims on the label, but if they chose to include them, they would need to meet the requirements in this proposed rule.

Under the mandates of the FMIA, PPIA, and EPIA, any meat, poultry, or egg product is misbranded if its labeling is false or misleading in any particular (21 U.S.C. 601(n)(1); 21 U.S.C. 453(h)(1); 21 U.S.C. 1036(b)). In particular, no product or any of its wrappers, packaging, or other containers shall bear any false or misleading marking, label, or other labeling and no statement, word, picture, design, or device which conveys any false impression or gives any false indication of origin or quality or is otherwise false or misleading shall appear in any marking or other labeling (9 CFR 317.8(a)), 381.129(b), 590.411(f)(1)). 7

As discussed below, and as explained in the FSIS Food Standards and Labeling Policy Book (“Food Standards and Labeling Policy Book”), 8 FSIS-regulated products that are derived from animals that may have been born, raised, and slaughtered in another country but are minimally processed in the United States may currently be labeled as “Product of USA.” The United States imports live animals, carcasses, and other products that are incorporated into U.S. preparation and marketing of meat products.

However, this policy may be causing false impressions about the origin of FSIS-regulated products in the U.S. marketplace. In July 2021, Secretary Vilsack announced that USDA would comprehensively review the current “Product of USA” labeling policy for products that FSIS regulates. 9 The review was intended to help the Agency determine what the “Product of USA” label means to consumers. To make sure that customers had access to accurate and clear labels, Executive Order 14036, Promoting Competition in the American Economy (86 FR 36987, July, 14, 2021) called for a rulemaking on voluntary “Product of USA” labeling for meat products.

As discussed above, under certain circumstances, FSIS regulations allow product labels that bear all required labeling features and comply with the Agency's labeling regulations to be “generically approved” (9 CFR 412.2(a)(1)). Labels that are generically approved may be used in commerce without prior submission to the Agency for approval. FSIS inspection program personnel (IPP) perform inspection tasks at establishments to verify that generically approved labels comply with labeling requirements. 10 Official establishments, therefore, do not need to submit generically approved labels to FSIS for evaluation. Current FSIS regulations allow all geographic and country of origin claims on labels of FSIS-regulated products, including “Product of USA” and similar U.S.-origin claims (9 CFR 412.2(b)), to be generically approved.

FSIS' regulations require that the immediate container of imported meat, poultry, and eggs products to bear the name of the country of origin, preceded by the words “Product of” (9 CFR 327.14, 381.205, 590.950). If such imported products are intended to be sold at retail, the original packaging with the “product of country” labeling must remain with the product. However, if these products are repackaged or otherwise reprocessed in a federally inspected facility, they are currently deemed and treated as domestic product for both mandatory and voluntary labeling purposes. 11 Therefore, because such products are treated as domestic products for labeling purposes, under current FSIS labeling policy for U.S.-origin claims, they no longer are required to meet FSIS' mandatory origin labeling requirements for imported products (see Food Standards and Labeling Policy Book).

The Food Standards and Labeling Policy Book provides guidance addressed to how manufacturers may prepare meat and poultry product labels that are truthful and not misleading. The Food Standards and Labeling Policy Book guidance for labeling products with “Product of USA” or similar claims currently states that labeling of a meat or poultry product may bear the phrase under one of two conditions, (1) if the country to which the product is exported requires this phrase, and the product is processed in the United States, or (2) the product is processed in the United States. 12 This U.S.-origin labeling guidance applies to “Product of USA” claims made with respect to multi-ingredient FSIS-regulated products, as well as single ingredient FSIS-regulated products. Thus, currently, a product may bear the “Product of USA” claim if the product is processed in the United States, or if the country to which the product is exported requires it and the product is processed in the United States.

In May 2003, a revision to the Food Standards and Labeling Policy Book cancelled an April 1985 FSIS policy memorandum that advised that a label of a FSIS product could include the “Product of USA” claim if it could be demonstrated that all ingredients having a bearing on consumer preference, such as meat, vegetables, fruits, and dairy products, were of domestic origin.

USDA has received three petitions from industry associations regarding the origin of meat products bearing the “Product of USA” label claim, each requesting that FSIS formally revise its Food Standards and Labeling Policy Book guidance for such claims.

In June 2018, FSIS received a petition, submitted on behalf of OCM and AGA, requesting that FSIS amend the Food Standards and Labeling Policy Book to state that meat products may be labeled as “Product of USA” only if ingredients having a bearing on consumer preference, such as meat, vegetables, fruits, and dairy products, are of domestic origin. 13 The petition asserted that the Agency's current policy has resulted in labeling that is misleading to consumers because it allows imported meat that is reprocessed in the United States to be labeled as “Product of USA.” The petition further asserted that when imported meat products that have been further processed in an official U.S. establishment are labeled as “Product of USA,” consumers that prefer domestic meat cannot make an informed choice because the labeling disguises the true origin of the product. Finally, the petition asserted that the current policy also caused financial harm to U.S. family farmers and independent ranchers by giving an unfair market advantage to companies that further process imported meat.

FSIS received 2,593 public comments on the OCM/AGA petition. 14 A majority of the comments expressed support for the petition, stating that the use of “Product of USA” labeling should be limited to products from livestock that were born, raised, and slaughtered in the United States. Most were comments submitted by individual consumers, farmers, and ranchers, as well as trade associations representing these groups, labor unions, and animal welfare advocacy organizations. Several comments stated that the term “Product of USA” implies that the product was derived from livestock that were born, raised, and slaughtered in the United States and, therefore, is misleading when applied to imported products that have been further processed in an official U.S. establishment. Many of the comments stated that the current policy gives certain companies that import foreign grass-fed beef an unfair economic advantage.

Comments from other cattle producer trade associations, meat processor trade associations, Canadian and Mexican livestock producer trade associations, and the Canadian and Mexican governments did not support the petition. These comments stated that FSIS' “Product of USA” labeling policy has never been limited to livestock born, raised, and slaughtered in the United States. Comments from the Canadian and Mexican governments noted that the Canadian and U.S. livestock industries, and the Mexican and U.S. cattle industries, are highly integrated, and that both Canada and Mexico export a significant number of live cattle into the United States each year for feeding, slaughter, and processing. The comments expressed concerns about changes in labeling that could potentially disrupt these integrated livestock supply chains. No other foreign entities submitted comments.

On March 26, 2020, FSIS responded to the OCM/AGA petition, stating that the Agency had decided to initiate rulemaking to define the conditions under which the labeling of meat products would be permitted to bear voluntary claims that indicate that the product is of U.S. origin, such as “Product of USA” or “Made in the USA.”  15 FSIS stated that, after considering the petition and the public comments received on the petition, the Agency concluded that its current labeling policy, which permits meat and poultry products that were derived from animals that may have been born, raised, and slaughtered in another country but processed in the United States to be labeled as “Product of USA,” may be causing confusion in the marketplace, particularly with respect to certain imported meat products, and that the Agency intended to propose that such labeling be limited to meat products derived from livestock that were slaughtered and processed in the United States.

In October 2019, USCA submitted a petition requesting that FSIS amend the Food Standards and Labeling Policy Book to provide that any beef product voluntarily-labeled as “Made in the USA,” “Product of the USA,” “USA Beef” or in any other manner that suggests that the origin is the United States, be derived from cattle that have been born, raised, and slaughtered in the United States. 16 As with the OCM/AGA petition, the USCA petition asserted that FSIS' current policy is misleading because it allows imported meat products processed in the United States to be labeled as “Product of USA.” The petition further asserted that consumers expect beef products labeled as “Product of USA” to be from cattle that were born, raised, and slaughtered in the United States. Finally, the petition referenced several studies that, according to the petition, demonstrated that U.S. consumers are interested in knowing the country of origin of beef products and are willing to pay a premium for meat from animals born, raised, and slaughtered in the United States.

FSIS received 111 public comments on the USCA petition. 17 A majority of the comments expressed support for the petition, stating that the use of “Product of USA” labeling should be limited to products from livestock that were born, raised, and slaughtered in the United States. Most were comments submitted by individual consumers, farmers, and ranchers, as well as trade associations representing these groups. Several comments stated that the term “Product of USA” implies that the product was derived from livestock that were born, raised, and slaughtered in the United States and, therefore, is misleading when applied to imported products that have been further processed in the United States. Comments from some cattle producer trade associations, meat processor trade associations, Canadian and Mexican livestock producer trade associations, and the Canadian and Mexican governments did not support the petition. Similar to the comments on the OCM/AGA petition, these comments stated that FSIS' “Product of USA” labeling policy has never been limited to livestock born, raised, and slaughtered in the United States. Comments from the Canadian and Mexican governments noted again that the Canadian and U.S. livestock industries, and the Mexican and U.S. cattle industries, are highly integrated, and that both Canada and Mexico export a significant number of live cattle into the United States each year for feeding, slaughter, and processing. The comments expressed concerns about measures that could potentially disrupt these integrated livestock supply chains. No other foreign entities submitted comments.

As with FSIS' response to the OCM/ACA petition, on March 26, 2020, FSIS responded to the USCA petition to state that the Agency had decided to initiate rulemaking to define the conditions under which the labeling of meat products would be permitted to bear voluntary claims that indicate that the product is of U.S. origin, such as “Product of USA” or “Made in the USA.”  18 Also, similar to the response to the OCM/ACA petition, FSIS stated the Agency's conclusion that its current labeling policy may be causing confusion in the marketplace, particularly with respect to certain imported meat products, and that the Agency intended to propose that such labeling be limited to meat products derived from livestock that were slaughtered and processed in the United States.

After FSIS considered and responded to the OCM/AGA and USCA petitions in March 2020, NCBA submitted a petition in June 2021 requesting that FSIS initiate rulemaking to amend the Agency's labeling regulations to eliminate the broadly applicable “Product of USA” label claim but to allow for other label claims. 19 Specifically, the petition requested that FSIS initiate rulemaking to amend its regulations to state that single ingredient beef products or ground beef may be labeled as “Processed in the USA,” provided that the label displays all mandatory features and is not otherwise false or misleading. Further, the petition requested that FSIS amend its regulations to state that other claims relating to U.S. origin, production, or processing of meat products are not eligible for generic approval. Similar to the AGA/OCM and USCA petitions, the NCBA petition generally asserted that the Agency's current policy on U.S.-origin labeling furthers consumer confusion as to whether products with U.S.-origin label claims are derived from animals born, raised, and slaughtered in the United States.

FSIS received 261 public comments on the NCBA petition. 20 Most comments did not support the petition, stating that replacing the current “Product of USA” labeling policy with a “Processed in the USA” label would not resolve the issue of consumer confusion about the origin of beef products. Many comments instead suggested that changing the definition of “Product of USA” to require that the beef product be derived from cattle born, raised, and slaughtered in the United States would better resolve consumer confusion. Other comments supported adding a specific “born in the United States” requirement to the Agency's current “Product of USA” labeling requirements for beef products. These comments were mostly submitted by individual consumers, ranchers, and those in communities supported by the cattle industry. Comments expressed concern about consumer choice and some stated an interest in supporting American cattle ranchers. Other comments submitted by trade associations and advocacy groups related to the cattle industry stated that a change to the definition of “Product of USA” would better address the issues raised in the petition. Additionally, the Canadian and Mexican governments each provided public comments that did not support the petition and focused on maintaining integrated livestock supply chains between the United States and their respective cattle markets. Each government specifically noted their interest in cooperation with any change to U.S. labeling practices as to avoid disruptions in the supply chain. No other foreign entities submitted comments.

The publication of this proposed rule serves as the Agency's response to the issues raised by all three related petitions.

To gather additional information as part of FSIS' comprehensive review of the current voluntary “Product of USA” label claim, on February 1, 2022, FSIS requested approval for a new information collection to conduct a consumer web-based survey on “Product of USA” labeling on beef and pork products (87 FR 5455). On June 13, 2022, the U.S. Office of Management and Budget (OMB) approved the survey, and on August 14, 2022, RTI International completed administration of the survey (“RTI survey”). The final report  21 and a copy of the survey itself can be found on FSIS' website at: https://www.fsis.usda.gov/sites/default/files/media_file/documents/Product_of_USA_Consumer_Survey_Final_Report.pdf.

The target population for the survey was the U.S. general population of adults (18 years or older) who speak English or Spanish, were primarily responsible for the grocery shopping in their household, and had purchased beef or pork in the last six months. The survey was administered over the web, 22 using a probability-based panel designed to be representative of the U.S. adult population and whose panel members were recruited using address-based sampling and weighting procedures to provide nationally representative estimates. The use of web-based data collection expedited the timeliness of data collection and allowed the study to reach a more diverse study population. Approximately 4,842 individuals took the survey, including 311 who completed the survey in the Spanish language.

The study used beef and pork products. In addition, the study considered high-cost beef products ( i.e., steak) and lower-cost beef products ( i.e., ground beef) to capture any potential differences in responses for higher- and lower-cost products.

The survey addressed three primary research questions: (1) Do consumers notice the “Product of USA” label claim?; (2) Do consumers understand the current “Product of USA” definition and other “USDA” labeling ( e.g., “USDA Choice”) as it relates to country of origin?; and (3) How much are consumers willing to pay for meat products bearing the “Product of USA” label claim for the current definition and potential revised definitions ( e.g., if the meat were from an animal that was born, raised, slaughtered, and processed in the United States)?

To investigate the first question, respondents completed a limited time exposure (LTE) task to determine whether consumers notice the “Product of USA” label claim ( i.e., to indicate saliency). Respondents were randomly assigned to view one of four mock products and were exposed to a mock product for a limited time (20 seconds), then asked to list what labeling features they recalled (unaided), and then asked to answer a series of recognition questions to indicate whether they saw specific images and phrases, including the “Product of USA” claim ( i.e., aided recognition questions). Results from the LTE's unaided recall questions show that 9 to 31 percent of participants correctly recalled seeing the “Product of USA” claim. Results from aided recognition questions show that 70 to 80 percent of participants correctly recalled seeing the “Product of USA” claim. The range in responses was dependent on the format of the claim. Results from the aided recognition questions also show that participants correctly recalled seeing the “Product of USA” label claim more often than other claims mentioned in the survey ( i.e., “no antibiotics and no added hormones,” an image of the USDA mark of inspection, “100% grass fed,” “sustainably raised,” “eco-friendly,” an image of the USDA organic seal, and “certified humane raised and handled”).

To investigate the second question, respondents answered questions that surveyed their understanding of the meaning of “Product of USA” label claim as it relates to product country of origin ( e.g., born, raised, slaughtered, and processed). The survey asked the question, “To your knowledge, what does the `Product of USA' label claim on meat products mean?” Four options with various combinations of “born,” “raised,” “slaughtered,” and “processed” in the United States were presented to participants. Of the responses, 47 percent of participants believed that the label indicates that the animal was born, raised, slaughtered, and the meat then processed, in the United States. Only 16 percent of participants selected the current meaning of the label claim ( i.e., the meat was processed in the United States.)

To investigate the third question, respondents were asked questions to measure their intrinsic value or willingness to pay (WTP) for products bearing the “Product of USA” label claim for the current definition and potential revised definitions. This approach captures the strength of preference ( i.e., potential price premium) for changes in attributes. Specifically, this approach helps FSIS determine which U.S. preparation and processing steps, if any, are valued by the average consumer. The results suggest that participants were willing to pay more for a product derived from animals when all preparation and processing steps occurred in the United States—born, raised, slaughtered, and processed—than for product when fewer steps occurred in the United States. FSIS has interpreted these results to access the value the average consumer derives from different definitions of “Product of USA.”

The combined survey results suggest that consumers value “Product of USA” label claims, as understood by consumers as indicating U.S. born, raised, slaughtered, and processed, but that the current FSIS “Product of USA” label claim is misleading to a majority of consumers as to the actual origin of FSIS-regulated products. Based on the survey results, adopting the proposed definition of the “Product of USA” claim to mean the product was derived from an animal born, raised, slaughtered, and processed in the United States would enhance consumer purchasing decisions, result in truthful, less misleading “Product of USA” labels, and decrease false impressions about the origin of FSIS-regulated products in the marketplace. In particular, it would allow consumers to better comparison shop between products based on the value that consumers place on products fully raised and processed in the United States. Further discussion of survey results can be found in the benefits section of the Economic Impact Analysis of the proposed rule in Section IV.

In consideration of the petitions, the public comments submitted in response to the petitions, and the results of the Agency's 2022 consumer survey, FSIS has concluded that adherence to the current “Product of USA” labeling policy guidance may be leading to misleading labeling and causing confusion in the marketplace. The evidence reviewed by FSIS demonstrates that the current FSIS “Product of USA” labeling guidance does not conform to consumers' conception of what “Product of USA” claims mean on FSIS-regulated products. Therefore, the Agency is proposing regulatory requirements for when the labeling of FSIS-regulated products may bear voluntary claims indicating that the product, or a component of the product's preparation and processing, is of U.S. origin to ensure such labels do not mislead or confuse consumers. If finalized, the proposed requirements could affect the labeling of products that currently claim to be of U.S. origin but are prepared and processed from imported products shipped to the United States. For example, meat products derived from live animals that are imported into the United States for feeding or for immediate slaughter would no longer be allowed to bear the authorized claims “Product of USA” or “Made in the USA.” Similarly, imported meat products reprocessed in the United States would no longer be allowed to bear the authorized claims “Product of USA” or “Made in the USA”, as currently allowed under the Food Standards and Labeling Policy Book. The proposed requirements would not affect the labeling of products exported to foreign countries. However, these products could still bear a qualified origin label claim, as discussed below, if all FSIS requirements, and foreign country requirements listed in the FSIS Export Library, have been met.

FSIS is proposing to amend its labeling regulations at 9 CFR part 412, Label Approval. Under the proposed provisions, the two authorized claims “Product of USA” and “Made in the USA” may be displayed on labels of FSIS-regulated products only if the product is derived from animals born, raised, slaughtered, and processed in the United States. FSIS is also proposing that claims other than the two authorized claims “Product of USA” and “Made in the USA” may be displayed on labels to indicate the U.S.-origin component of a product's preparation and processing. All U.S.-origin label claims that are not authorized claims are known as “qualified claims.” Qualified claims would need to include a description on the package of how the product compares to the regulatory criteria for the two authorized claims, “Product of USA” and “Made in the USA,” including all preparation and processing steps that occurred in the United States upon which the claim is made. For example, “Sliced and packaged in the United States using imported pork” could be a U.S.-origin qualified claim. FSIS is proposing that companies using a voluntary claim of U.S. origin on labels of FSIS-regulated products must, as with the use of all origin claims, maintain documentation to demonstrate that the product complies with criteria of the proposed regulatory requirements.

FSIS is proposing to allow two authorized voluntary label claims to indicate that a FSIS-regulated product is of U.S. origin: “Product of USA” and “Made in the USA.” The Agency is proposing to allow the use of these two authorized claims only if the labeled FSIS-regulated product is derived from animals born, raised, slaughtered, and processed in the United States, or, in the case of a multi-ingredient product, if: (1) All FSIS-regulated components of the product are derived from animals born, raised, slaughtered, and processed in the United States; and (2) All additional ingredients of the product, other than spices and flavorings, are of domestic origin ( i.e., all preparation and processing steps of the ingredients are completed in the United States).

Label claims other than “Product of USA” or “Made in the USA” that indicate that a preparation and processing component of a FSIS-regulated product is of U.S. origin would be allowed (“qualified” label claims), but such claims would need to be positioned near a description on the package of how the product compares to the regulatory criteria for the two authorized claims, “Product of USA” and “Made in the USA,” including all preparation and processing steps that occurred in the United States upon which the claim is made. For example, a FSIS-regulated cured pork product package could include the qualified claim “Sliced and packaged in the United States using imported pork.” FSIS notes that in the case of the FSIS-regulated products that are also COOL covered commodities, 23 U.S.-origin label claims must comply with COOL requirements for the identification of country of origin, including production steps occurring in each country for commodities of multiple origins. 24

FSIS requests comments on what criteria the Agency should establish for the use of qualified claims—claims that do not include “Product of USA” and “Made in the USA”—to indicate that a preparation and processing component of a FSIS-regulated product is of U.S. origin.

Under the proposed rule, products labeled with voluntary authorized claims referring to the origin of a U.S. state or region ( e.g., “Made in North Carolina”) would need to meet the proposed regulatory criteria for the two voluntary authorized claims “Product of USA” and “Made in the USA” ( i.e., born, raised, slaughtered, and processed in the state or region). Voluntary qualified claims referring to the state or region origin of a component of a FSIS-regulated product would need to include a description on the package of all preparation and processing steps that occurred in the state or region upon which the claim is made ( e.g., “Packaged in Michigan.”) Currently, state and region claims may be generically approved for use on FSIS-regulated product labels if they are not misleading and they comply with the requirement under 9 CFR 317.8(b)(1) to properly identify the state in which the product was prepared on the product label. Should the proposed rule become final, FSIS will issue revised labeling guidance on the use of voluntary authorized and qualified state and region claims.

Under the proposed rule, both the two authorized claims “Product of USA” and “Made in the USA” and qualified claims of U.S. origin would continue to be eligible for generic approval under 9 CFR 412.2(a)(1). As with all generically approved labels, labels bearing U.S.-origin claims would be subject to routine IPP inspection tasks to verify that the labels comply with the regulatory criteria.

The proposed rule would apply to all products subject to FSIS mandatory inspection or eligible for voluntary inspection services provided by the Agency. FSIS has proposed criteria for both single and multi-ingredient products to ensure that the claim is consistent for all FSIS-regulated products that use the “Product of USA” or “Made in the USA” claims. Single ingredient products bearing the authorized label claims “Product of USA” or “Made in the USA” would need to be derived from animals born, raised, slaughtered, and processed in the United States. Multi-ingredient products would be allowed to bear the authorized label claims “Product of USA” or “Made in the USA” if: (1) All FSIS-regulated components of the product are derived from animals born, raised, slaughtered, and processed in the United States; and (2) All additional ingredients, other than spices and flavorings, are of domestic origin ( i.e., all preparation and processing steps of the ingredients are completed in the United States). This proposed requirement for multi-ingredient products would align with the April 1985 FSIS policy memorandum, discussed above, that “Product of USA” labeling of a product would be misleading unless all the product's ingredients having a bearing on consumer preference are of domestic origin.

FSIS requests comments on whether the Agency should adopt an alternative requirement for multi-ingredient products that bear the authorized claims “Product of USA” or “Made in the USA.”

As discussed above, this proposed rule concerning voluntary U.S.-origin labeling for FSIS-regulated products does not conflict with AMS COOL requirements. Further, the proposed rule would not alter or affect any other federal statute or regulation relating to country of origin labeling requirements. FSIS' current labeling regulations require that a country of origin statement on the label of any meat “covered commodity” as defined in 7 CFR part 65, subpart A, that is to be sold by a “retailer,” as defined in 7 CFR 65.240, must comply with the COOL requirements in 7 CFR 65.300 and 65.400. 25 Should this rule become final, any commodity that is subject to COOL mandatory country of origin labeling must continue to comply with those requirements.

Official establishments and facilities choosing to use an authorized or qualified U.S.-origin claim on labels of FSIS-regulated products would need to maintain documentation to demonstrate that the product complies with criteria of the proposed regulatory requirements, and that the claim is not false or misleading, as the regulations require for the use of all generically approved labels (9 CFR 412.2(a)(1)). FSIS would accept existing documentation to demonstrate compliance with one or more of the proposed regulatory requirements. For example, an establishment or facility seeking to use a voluntary claim of U.S. origin may already maintain supplier sheets from the farm that raised a source animal as part of its labeling recordkeeping pursuant to existing FSIS regulations or participation in another federal program ( e.g., AMS COOL). An establishment or facility may maintain one or more of the following documentation types to support a claim that the product, or a component of the product, is of U.S. origin.

• Labels that bear the voluntary authorized claims “Product of USA” or “Made in the USA” under the proposed new regulatory 9 CFR 412.3(a) and (b) may have:

○ A written description of the controls used in the birthing, raising, slaughter, and processing of the source animals, and for multi-ingredient products the preparation and processing of all additional ingredients other than spices and flavorings, to ensure that each step complies with the proposed regulatory criteria;

○ A written description of the controls used to trace and segregate, from the time of birth or processing through packaging and wholesale or retail distribution, source animals, all additional ingredients other than spices and flavorings, and resulting products that comply with the proposed regulatory criteria from those that do not comply; or

○ A signed and dated document describing how the product is prepared and processed to support that the claim is not false or misleading.

• Labels that bear voluntary, qualified U.S.-origin claims under the proposed new regulatory 9 CFR 412.3(c) may have:

○ A written description of the controls used in each applicable preparation and processing step of source animals, all additional ingredients other than spices and flavorings, and resulting products to ensure that the U.S.-origin claim complies with the proposed regulatory criteria. The described controls may include those used to trace and segregate, during each applicable preparation or processing step, source animals, all additional ingredients other than spices and flavorings, and resulting products that comply with the U.S.-origin claim from those that do not comply; or

○ A signed and dated document describing how the qualified U.S.-origin claim regarding the source of the preparation and processing component is not false or misleading.

The proposed rule does not specify the types of documentation that must be maintained to demonstrate compliance with the proposed regulatory criteria ( e.g., bills of lading, shipping manifests, load sheets, grower records). Should the rule become final, FSIS would issue guidance, as needed, on recommended documentation to maintain compliance with U.S.-origin labeling requirements. 26 FSIS requests comments on whether the Agency should require, or provide guidance on, specific types of documentation that companies using a voluntary label claim of U.S. origin would need to maintain to demonstrate that the product complies with criteria of the proposed regulatory requirements. Further, FSIS requests comments on whether the Agency should allow or require third party certification for the use of authorized and qualified voluntary U.S.-origin label claims.

Generally, FSIS uses a uniform compliance date for new labeling regulations. 27 Should the proposed rule become final, on the applicable compliance date, FSIS would consider as compliant only labels bearing the two authorized claims “Product of USA” and “Made in the USA” for FSIS-regulated products that comply with the proposed codified definition for this claim. Also on the applicable compliance date, FSIS would consider as compliant only labels bearing qualified claims of U.S. origin for FSIS-regulated products that comply with the proposed codified requirements for the use of such claims.

Executive Orders (E.O.) 12866 and 13563 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). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This proposed rule has been designated an “economically significant” regulatory action by the Office of Information and Regulatory Affairs under section 3(f)(1) of E.O. 12866. Accordingly, the proposed rule has been reviewed by the Office of Management and Budget under E.O. 12866.

Under current FSIS policy, products with a “Product of USA” or similar claim must, at a minimum, have been processed in the United States. 28 For instance, currently, the beef in a package of ground beef can come from the U.S., from another country or countries, or from both depending on where each step of the preparation of the beef takes place, and still bear the claim “Product of USA” even if the ground beef is merely processed in the United States. Similarly, currently, cattle born, raised, slaughtered, and processed in another country may be labeled “Product of USA” if the meat was merely further processed in the United States.

This policy may cause false impressions about the origin of FSIS-regulated products in the U.S. marketplace, potentially causing market failures. FSIS has received three petitions from industry associations, each requesting that USDA address this confusion by revising this policy.

The Agency received almost 3,000 public comments in response to these petitions, the majority of which supported altering this policy. FSIS also conducted a consumer web-based survey  29 to gather information on the American consumers' understanding of the meaning of the “Product of USA” claim. Based on the evidence reviewed by FSIS, FSIS has concluded that the current “Product of USA” labeling policy guidance may not reflect consumers' common understanding of what “Product of USA” claims mean on FSIS-regulated products. Therefore, the Agency is proposing regulatory requirements for when the labeling of FSIS-regulated products may bear voluntary claims indicating that the product, or a component of the product's preparation or processing, is of U.S. origin in order to ensure such labels do not mislead or confuse consumers as to the actual origin of FSIS-regulated products.

If finalized, the proposed changes may require businesses voluntarily using U.S.-origin claims on meat, poultry, and egg product labels to update their labels and conduct increased recordkeeping. FSIS requests comments on how such a change may impact an establishment's cost. FSIS used Label Insight  30 to estimate the number of single and multi-ingredient meat, poultry, and egg product retail labels and the number with an associated U.S.-origin claim. 31

FHFA invites comments on all aspects of the proposed rule. Copies of all comments will be posted without change and will include any personal information you provide, such as your name, address, email address, and telephone number, on the FHFA website at https://www.fhfa.gov. In addition, copies of all comments received will be available for examination by the public through the electronic rulemaking docket for this proposed rule also located on the FHFA website.

FHFA is seeking comments on amendments to the ERCF that would enhance, clarify, or otherwise refine various regulatory capital requirements for the Enterprises. The proposed rule would modify provisions in the ERCF related to the following items: guarantees on commingled securities, multifamily mortgage exposures secured by properties with a government subsidy, derivatives and cleared transactions, credit scores for single-family mortgage exposures, guarantee assets, mortgage servicing assets (MSAs), time-based calls for credit risk transfer (CRT) exposures, interest-only (IO) mortgage-backed securities (MBS), the single-family countercyclical adjustment, the stability capital buffer, and the compliance date for the advanced approaches.

The proposed amendments would implement the lessons learned through the continued application of the ERCF and better reflect the risks inherent in the Enterprises' business models. In addition, the proposed rule would clarify certain areas of the ERCF. In doing so, the modifications in this proposed rule would enhance the safety and soundness of the Enterprises and contribute to the furtherance of the Enterprises' missions.

FHFA adopted the ERCF on December 17, 2020, with the purpose of implementing a going-concern regulatory capital standard to ensure that each of Fannie Mae and Freddie Mac operates in a safe and sound manner, and, across the economic cycle is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market. The ERCF satisfied a statutory requirement that FHFA establish by regulation, risk-based capital requirements to safeguard the Enterprises against the risks that arise in the operation and management of their businesses. The ERCF also implemented a new leverage framework that included both a minimum requirement and a leverage buffer. The ERCF became effective on February 16, 2021. FHFA subsequently amended the ERCF three times. The amendments refined the prescribed leverage buffer amount (PLBA or leverage buffer) and the risk-based capital treatment of CRT, implemented a more comprehensive set of public disclosure requirements for the standardized approach, and required the Enterprises to submit capital plans to FHFA on an annual basis. Each of the amendments became effective in 2022.

Since the adoption of the ERCF, the Enterprises have been operating under the capital requirements and buffers outlined in the standardized approach while simultaneously building their capital positions. However, despite their recent progress accumulating capital, the Enterprises remain severely undercapitalized. Since the Enterprises were placed into conservatorships in September 2008, they have been supported by Senior Preferred Stock Purchase Agreements (PSPAs) between the U.S. Department of the Treasury (Treasury) and each Enterprise. 1

As conservator and prudential regulator, FHFA continuously monitors the risk inherent in the Enterprises' business operations and reviews the appropriateness of the ERCF's capital requirements and buffers to mitigate those risks. FHFA has identified several provisions in the ERCF that could be revised to enhance the ERCF. Specifically, the proposed rule would introduce:

• A 5 percent risk weight and 50 percent credit conversion factor for guarantees on commingled securities,

• A risk multiplier of 0.6 for multifamily mortgage exposures secured by properties with certain government subsidies,

• A standardized approach for counterparty credit risk (SA-CCR) as the method for computing risk weights for derivatives and cleared transactions,

• A modified procedure for determining a representative credit score for single-family mortgage exposures,

• A modified credit score assumption for single-family mortgage exposures originated without a representative credit score,

• A 20 percent risk weight for guarantee assets, and

• A timing alignment between the application of single-family countercyclical adjustments and property value adjustments.

FHFA has also identified several aspects of the ERCF where specific language would clarify and enhance the usefulness of the ERCF. The proposed rule would:

• Expand the definition of MSAs to include servicing rights on mortgage loans owned by the Enterprise,

• Explicitly permit eligible time-based call options in the CRT operational criteria,

• Amend the risk weights for IO MBS to 0 percent, 20 percent, and 100 percent, conditional on whether the security was issued by the Enterprise, the other Enterprise, or a non-Enterprise entity, respectively, and

• Clarify the calculation of the stability capital buffer when an increase and a decrease might be applied concurrently.

Finally, the proposed rule would extend the compliance date for the advanced approaches. Each item is discussed below.

The ERCF includes risk-based, leverage, and buffer capital requirements for guarantees on commingled securities—certain resecuritizations guaranteed by a combination of Fannie Mae and Freddie Mac, described more fully below. For risk-based capital, an Enterprise is currently required to apply a 20 percent risk weight on exposures to the other Enterprise in a commingled security. For leverage capital and buffer calculations, an Enterprise is currently required to apply a 100 percent credit conversion factor to these exposures because they are off-balance sheet guarantees. The 20 percent risk weight and 100 percent credit conversion factor for guarantees on commingled securities may not accurately reflect the counterparty risks posed by commingling activities and in certain circumstances may impair the liquidity of the Enterprises' securities, which may adversely affect the nation's housing finance market. The proposed rule would reduce the risk weight and the credit conversion factor for guarantees on commingled securities to 5 percent and 50 percent, respectively.

On February 28, 2019, FHFA issued a final rule on common MBS known as the Uniform Mortgage-Backed Security (UMBS) with the purpose of enhancing liquidity in the MBS marketplace and fostering the efficiency and liquidity of the secondary mortgage market. On June 3, 2019, the Enterprises launched newly issued UMBS. The UMBS are a single-class security issued by either Fannie Mae or Freddie Mac backed by single-family mortgage loans purchased by the issuing Enterprise. For the UMBS market to operate successfully, market participants must continue to accept UMBS as fungible irrespective of the issuing Enterprise. That is, investors generally must agree that a UMBS of a certain coupon, maturity, and loan origination year issued by one Enterprise is roughly equivalent to the corresponding UMBS issued by the other Enterprise. 2

To foster fungibility, each Enterprise may issue “Supers,” which are single-class resecuritizations of UMBS. The securities underlying Supers may be commingled, i.e., Supers may be backed by both securities that are issued and guaranteed by Fannie Mae and securities that are issued and guaranteed by Freddie Mac. The Enterprises may also issue collateralized mortgage obligations, or CMOs, and real estate mortgage investment conduits, or REMICs, which are each a type of structured security in which the collateral can include UMBS. If an Enterprise guarantees a security backed in whole or in part by securities of the other Enterprise, the Enterprise is obligated under its guarantee to fund any shortfall in the event that the other Enterprise fails to make a payment due on its securities. 3 Investors in commingled securities benefit from the original guarantees extended by guarantors of the underlying collateral, as well as the additional guarantees of resecuritizing Enterprise, including on the commingled collateral.

As a result of these multiple guarantees, the current 20 percent risk weight and 100 percent credit conversion factor for commingled securities may not accurately reflect these counterparty risks and, in certain circumstances, may impair the liquidity of the Enterprises' securities. However, despite their current Treasury support under the PSPAs, the Enterprises also remain privately-owned corporations, and their obligations do not have the explicit guarantee of the full faith and credit of the United States. Therefore, the MBS and other obligations of an Enterprise pose some degree of counterparty risk.

The proposed rule would reduce the risk weight for guarantees on commingled securities from 20 percent to 5 percent to better align the capital requirements with the inherent counterparty risk. A lower risk weight should reduce an Enterprise's incentive to only guarantee Supers securities collateralized by its own UMBS, leading to different volumes and investor perceptions of UMBS issued by each Enterprise, and potentially leading to a bifurcation of UMBS pricing and trading. Several commenters on FHFA's 2020 notice of proposed rulemaking on Enterprise capital  4 recommended FHFA implement a similar treatment, while also stating that an Enterprise's exposures to the other Enterprise do not increase aggregate credit risk and the 20 percent risk weight is therefore excessive.

The risk-weight floor assigned to any retained CRT exposure is 5 percent. 5 This risk weight applies to senior tranches of CRT transactions that absorb catastrophic levels of loss only after resources to absorb expected and unexpected losses are exhausted. Similarly, the losses that an Enterprise would experience from commingled securities would likely occur in remote circumstances through sustained catastrophic levels of loss after the other Enterprise has exhausted its loss-absorbing financial resources. Therefore, the proposed 5 percent risk weight for credit exposures arising out of guarantees on commingling activities would align with the risk-weight floor for retained CRT exposures.

The proposed rule would also reduce the credit conversion factor for guarantees on commingled securities from 100 percent to 50 percent. To enhance the liquidity of UMBS and the overall stability of the secondary mortgage market, the leverage and buffer requirements for guarantees on commingled securities would also need to be updated. FHFA proposes to accomplish this by reducing the impact of these guarantees on an Enterprise's adjusted total assets. According to generally accepted accounting principles, an Enterprise's guarantee of commingled collateral is not consolidated on the balance sheet because the Enterprise issuing the guarantee does not have any rights or powers to direct the activities of the underlying commingled resecuritization trust and is not the primary beneficiary of its activities. 6 Under the ERCF, off-balance sheet assets are subject to a range of credit conversion factors to determine adjusted total assets. FHFA's proposal to update the credit conversion factor for guarantees on commingled securities to 50 percent would align with the prevailing regulatory capital treatment for off-balance sheet undrawn commitments with an original maturity of more than one year that are not unconditionally cancelable by the Enterprise.

The proposed changes to the requirements for guarantees on commingled securities would affect both risk-weighted assets and adjusted total assets. FHFA estimates that under the proposed rule, the total common equity tier 1 capital (CET1) required to meet the risk-based capital requirements and buffers for the Enterprises' guarantees on commingled securities as of June 30, 2022 would decline by approximately $5.1 billion.

Question 1: What, if any, other factors should FHFA consider in its determination of a 5 percent risk weight and 50 percent credit conversion factor for guarantees on commingled securities?

Question 2: Is the proposed 5 percent risk weight for guarantees on commingled securities appropriately calibrated?

Question 3: Is the proposed 50 percent credit conversion factor for guarantees on commingled securities appropriately calibrated?

Question 4: Should FHFA adjust the regulatory capital treatment for exposures to MBS guaranteed by the other Enterprise to mitigate any risk of disruption to the UMBS?

Question 5: Should FHFA consider a different risk weight for second-level resecuritizations backed by UMBS?

Question 6: What should be the regulatory capital treatment of any credit risk mitigation effect of any indemnification or similar arrangements between the Enterprises relating to UMBS resecuritizations?

Question 7: Should FHFA adopt different risk weights for MBS guaranteed by an Enterprise and the unsecured debt of an Enterprise?

The methodology for calculating multifamily credit risk weights in the ERCF does not differentiate between multifamily mortgage exposures secured by properties with a government subsidy and by properties without a government subsidy. Two previous FHFA products that together formed much of the basis for the ERCF—the Conservatorship Capital Framework, an internal risk measurement framework established in 2017, and FHFA's 2018 notice of proposed rulemaking on Enterprise Capital Requirements  7 —each contained such a differentiation in the form of a multifamily risk multiplier. FHFA did not include such a multiplier in the ERCF due to calibration challenges caused by the relatively infrequent instances of loss across multifamily loan programs that include a government subsidy. However, several commenters on FHFA's 2020 notice of proposed rulemaking on Enterprise capital  8 recommended that FHFA introduce a risk multiplier to reflect that multifamily mortgage exposures associated with government-subsidized properties are less risky than those associated with unsubsidized properties, all else equal.

Properties with government subsidies represent an important segment of the Enterprises' multifamily business models. FHFA sets a yearly limit or cap on the dollar value of the Enterprises' multifamily acquisitions, ensuring they provide liquidity to the secondary market without crowding out private competition. As part of the annual acquisition limits, FHFA directs the Enterprises to meet specific affordable housing or mission goals by acquiring multifamily loans collateralized by properties that charge rents affordable to certain segments of the population with specified income levels. Affordable property units are available to renters at a rental rate below the typical market rate, leading to generally strong demand for affordable property units and therefore to relatively stable vacancy rates.

Government subsidies of affordable housing are issued either at the Federal or state and local levels, typically in the form of a tax credit, direct subsidy, or voucher reimbursement. The purpose of these subsidies is to compensate property owners for providing below-market rental rates on units within their multifamily properties. Many subsidies last for multiple years and remain in place only if the property owner meets certain program-specific requirements. Although government-subsidized properties typically collect lower gross rents per unit than comparable non-affordable properties and may generate lower net operating income (NOI), property owners compensate for the lower property income through the value of the government-subsidies. Thus, property owners have an incentive to ensure the property follows the contractual subsidy restrictions, including avoiding potential default (60 or more days past due), to retain the government subsidy. The primary subsidy programs include the Low-Income Housing Tax Credit (LIHTC) program, 9 Section 8 Housing Assistance Payment contracts, and diverse state- and local-level programs.

Many government subsidy programs require property owners to make a specified percentage of units affordable to residents at or below a certain percent of area median income (AMI). For example, to qualify for the LIHTC program, a property owner must (in general) make at least 20 percent of the units available to renters at or below 50 percent of AMI, make at least 40 percent of the units available to renters at or below 60 percent of AMI, or make at least 40 percent of the units available to renters with an average income of no more than 60 percent of AMI and no units to renters with an income greater than 80 percent of AMI. In practice, the number of units restricted as affordable at a multifamily property often significantly exceeds the applicable minimum program requirements because the penalties for non-compliance can be quite costly. Minimum affordability criteria aim to ensure that the primary benefits of government subsidy programs accrue to low-income renters rather than to property owners acting in bad faith.

The proposed rule would introduce a risk multiplier equal to 0.6 for any multifamily mortgage exposures secured by one or more properties each with at least one applicable government subsidy, subject to certain affordability criteria. The applicable government subsidies would be limited to the following three primary subsidy programs: (i) LIHTC, (ii) Section 8 project-based rental assistance, and (iii) state and local affordable housing programs that require the provision of affordable housing for the life of the loan. A multifamily mortgage exposure meeting the collateral criteria would qualify for the 0.6 risk multiplier if the Enterprise can verify that each property securing the exposure has at least 20 percent of its units restricted as affordable units, where the affordability restriction means less than or equal to 80 percent of AMI.

For a multifamily mortgage exposure to qualify for the government subsidy multiplier, the properties securing the exposure must have significant, long-term, and continuous government subsidies. LIHTC and project-based Section 8 programs meet these criteria, so to ensure alignment in this regard, the proposed rule would require that qualifying state and local affordable housing programs require affordable housing to be provided for the life of the loan.

The addition of a government subsidy multiplier would affect risk-weighted assets, only. FHFA estimates that under the proposed rule, required CET1 capital for the Enterprises' multifamily mortgage exposures as of June 30, 2022 would decline by approximately $0.4 billion.

Question 8: Is the 0.6 risk multiplier for multifamily mortgage exposures secured by properties with a government subsidy appropriately calibrated?

Question 9: Is the restriction that at least 20 percent of units must be made available at or below 80 percent of AMI appropriately calibrated?

Question 10: Should FHFA consider additional thresholds and/or affordability restrictions for a multifamily mortgage exposure to qualify for a risk multiplier greater than 0.6 but less than 1.0?

Question 11: Do FHFA's proposed categories of applicable government subsidies appropriately capture the population of multifamily government subsidies that are significant, long-term, and continuous?

Question 12: Are there data or analyses available that would support a multi-tiered government subsidy risk multiplier that varies with the level of subsidy or by other relevant factors? If so, what data and factors?

An Enterprise with a positive exposure on a derivative contract expects to receive a payment from its counterparty and is subject to the credit risk that the counterparty will default on its obligations and fail to pay the amount owed under the contract. Therefore, the ERCF requires an Enterprise to hold risk-based capital based on the exposure amount of its derivative contracts.

The current rule requires an Enterprise to use the current exposure methodology (CEM) to determine the exposure amount of each derivative contract. The risk-weighted asset amount for the derivative contract is then the product of the exposure amount and the risk weight of the counterparty. The ERCF requires an Enterprise to use CEM to determine the exposure amounts of their over-the-counter (OTC) derivative contacts and cleared derivative contracts, as well as determine the risk-weighted assets amount of their contributions of commitments to mutualized loss sharing agreements with central counterparties ( i.e., default fund contributions).

Under CEM, the exposure amount of a single derivative contract is equal to the sum of its current credit exposure and potential future exposure (PFE). Current credit exposure is equal to the greater of zero and the on-balance sheet fair value of the derivative contract. PFE approximates the Enterprise's potential exposure to its counterparty over the remaining maturity of the derivative contract. PFE equals the product of the notional amount of the derivative contract and a supervisory-provided conversion factor, which reflects the potential volatility in the reference asset of the derivative contract. The ERCF provides the conversion factors in a look-up table that is based on the derivative contract's type and remaining maturity. The potential exposure generally increases with an increase in volatility and the duration of the derivative contract.

CEM was developed before the financial crisis and does not reflect recent market conventions and regulatory requirements that are designed to reduce the risks associated with derivative contracts. This can lead to a significant mismatch between the risks of derivative portfolios and the regulatory capital that the Enterprises must hold against them. Examples of CEM drawbacks include a lack of differentiation between margined and unmargined derivative contracts and inadequate recognition of the risk-reducing benefits of a balanced derivatives portfolio. Furthermore, the supervisory conversion factors provided under CEM were developed prior to the 2007-2008 financial crisis and they have not been recalibrated to reflect the stress volatilities observed in recent years.

For these reasons, the Basel Committee on Banking Supervision (Basel Committee) developed the SA-CCR and published it as a final standard in 2014. 10 The U.S. banking regulators adopted SA-CCR as a replacement for CEM in 2020.

SA-CCR provides important improvements to risk sensitivity and calibration relative to CEM, including differentiation of margin and non-margin trades and recognition of netting agreements, resulting in more appropriate capital requirements for derivative contracts. One of the concerns regarding the current regulatory capital treatment for derivative contracts under CEM is that CEM does not appropriately recognize collateral, including the risk-reducing nature of variation margin, and does not provide sufficient netting for derivative contracts that share similar risk factors. The SA-CCR methodology addresses these concerns.

Compared to CEM, SA-CCR offers a more risk-sensitive approach to determine the replacement cost and PFE for a derivative contract. Specifically, SA-CCR improves collateral recognition by differentiating between margined and unmargined derivative contracts. SA-CCR also better captures recently observed stress volatilities among the primary risk drivers for derivative contracts. SA-CCR is a standardized, non-modelled approach that is relatively straightforward to implement.

The proposed rule would require an Enterprise to calculate the exposure amounts of OTC and cleared derivative contracts using SA-CCR rather than CEM, as well as the risk-weighted asset amounts of default fund contributions. The Enterprises would also be required to use SA-CCR to determine the exposure amount of their derivative contracts for inclusion in adjusted total assets. Use of SA-CCR would allow an Enterprise to recognize the meaningful, risk-reducing relationship between derivative contracts within a balanced derivatives portfolio and to recognize the risk-mitigation effects of guarantees, credit derivatives, and collateral for purposes of its risk-based capital requirements. In addition, the replacement of CEM with SA-CCR would result in better alignment between the ERCF and both the U.S. banking framework and the international standards issued by the Basel Committee. 11

Under the proposed rule and consistent with the U.S. banking framework, the Enterprises would apply SA-CCR in the following ways:

Under SA-CCR, an Enterprise would calculate the exposure amount of its derivative contract at the netting set level. The proposed rule would define a netting set to mean either one derivative contract between an Enterprise and a single counterparty, or a group of derivative contracts between an Enterprise and a single counterparty that are subject to a qualifying master netting agreement (QMNA). The proposed rule would retain the current definition of a QMNA.

For the PFE calculation under SA-CCR, an Enterprise would fully or partially net derivative contracts within the same netting set that share similar risk factors. This approach would recognize that derivative contracts with similar risk factors share economically meaningful relationships with close correlations that make netting appropriate. In contrast, CEM recognizes only a portion of the netting benefits of derivative contracts subject to a QMNA, without accounting for relationships between the underlying risk factors of derivative contracts.

Under SA-CCR, a hedging set means those derivative contracts within the same netting set that share similar risk factors. The proposal would define five types of hedging sets—interest rate, exchange rate, credit, equity, and commodities—and would provide formulas for netting within each hedging set. Each formula would be particular to each hedging set type and would reflect the regulatory correlation assumptions between risk factors in the hedging set.

Similar to CEM, an Enterprise would use an adjusted derivative contract amount for the PFE component calculation under SA-CCR. However, as part of the estimate, SA-CCR would use updated supervisory factors that reflect the stress volatilities observed during the financial crisis. The supervisory factors would reflect the variability of the primary risk factors of the derivative contract over a one-year time horizon. In addition, SA-CCR would apply a separate maturity factor to each derivative contract that would scale down, if necessary, the default one-year risk horizon of the supervisory factor to the risk horizon appropriate for the derivative contract.

Under CEM, an Enterprise recognizes the collateral only after the exposure amount has been determined. Under the proposed rule, SA-CCR would account for collateral directly within the exposure amount calculation. For replacement cost, the proposed rule would recognize collateral on a one-for-one basis. For PFE, SA-CCR would use the concept of a PFE multiplier, which would allow an Enterprise to reduce the PFE amount through recognition of over-collateralization, in the form of both variation margin and independent collateral. It would also account for negative fair value amounts of the derivative contracts within the netting set. In addition, the proposed rule would differentiate between margined and unmargined derivative contracts, such that the netting set subject to variation margin would always have an exposure amount no higher than an equivalent netting set that is not subject to a variation margin agreement.

To accommodate the introduction of the SA-CCR into the ERCF's standardized approach, the proposed rule would make a series of corresponding modifications, including adding appropriate defined terms to ERCF's definitions and updating the calculation of total risk-weighted assets. Notably, the proposed rule would replace the current requirements for cleared transactions (12 CFR 1240.37) and collateralized transactions (12 CFR 1240.39) with modified requirements from the U.S. banking framework's advanced approaches (12 CFR 217.133 and 12 CFR 217.132(b)). As a result, the proposed rule's requirements for cleared transactions would reflect the U.S. banking framework's risk weights on cleared transactions and risk-weighted assets on default fund contributions. The proposal would depart from the U.S. banking framework by omitting exposure calculations related to internal model methodology to reduce reliance on the Enterprises' internal model results.

The proposed rule's requirements for collateralized transactions would maintain the current collateral haircut approach and standard supervisory haircuts, both of which are also included in the U.S. banking framework. However, the proposed rule's requirements for collateralized transactions would remove the current simple approach and add the U.S. banking framework's simple value-at-risk (VaR) methodology to align with the U.S. banking framework's advanced approaches application of collateralized transactions.

The proposed rule would also add credit valuation adjustment (CVA) risk-weighted assets to the calculation of standardized total risk-weighted assets. The CVA is a fair value adjustment that reflects counterparty credit risk in the valuation of OTC derivative contracts. CVA risk-weighted assets cover the risk of incurring mark-to-market losses because of the deterioration in the creditworthiness of an Enterprise's counterparties. The proposed rule would include the U.S. banking framework's formulaic simple CVA approach but not the advanced CVA approach. This departure from the U.S. banking framework would reduce reliance on the Enterprises' internal model results.

The proposed changes to the approaches for derivatives and cleared transactions would affect both risk-weighted assets and adjusted total assets. FHFA estimates that under the proposed rule, the total CET1 capital required to meet the risk-based capital requirements and buffers for the Enterprises' derivatives and cleared transactions as of September 30, 2022 would increase by less than $0.1 billion.

Question 13: In addition to the risk-sensitivity enhancements SA-CCR provides relative to CEM, what, if any, other factors should FHFA consider in its determination to replace CEM with SA-CCR?

Credit scores are a primary risk factor for determining the riskiness of a single-family mortgage exposure due to their strong correlation with the likelihood of a borrower default. Therefore, credit scores are an important input in the ERCF calculation of risk weights for single-family mortgage exposures, both at origination (original credit score) and over time (refreshed credit score). A single-family mortgage exposure is normally associated with multiple credit scores because an exposure can have multiple borrowers and each borrower can have multiple scores. Often, each borrower has three credit reports and, therefore, three credit scores, one from each national consumer reporting agency (repository). To account for multiple credit scores associated with a single-family mortgage exposure, the ERCF includes a procedure to determine a single representative credit score for each single-family mortgage exposure.

The proposed rule would modify the current procedure for selecting a representative credit score to reflect FHFA's announcement  12 in October 2022 that the Enterprises will require two, rather than three, credit reports from the repositories (bi-merge credit report requirement). While the implementation date for the bi-merge credit report requirement has yet to be announced, the proposed rule would position the Enterprises to account for the new requirement upon implementation.

The current ERCF instructs the Enterprises to use a two-step procedure for identifying the representative credit score on a single-family mortgage exposure. In the first step, an Enterprise selects a single score for each borrower on the loan by either selecting the median score if the borrower has scores from three repositories or selecting the lowest score if the borrower has fewer than three scores. In the second step, an Enterprise determines the representative score for the exposure by selecting the lowest single score across all borrowers from step one.

After the adoption of the bi-merge credit score requirement, the current procedure for determining a representative credit score could result in a significant downward shift in representative credit scores for most borrowers. This is because with the bi-merge credit report requirement, there is a higher likelihood that the representative credit score for most borrowers would end up being the lower of two scores rather than the median of three scores.

To mitigate this risk, the proposed rule would replace the first step in determining a single-family mortgage exposure's representative credit score. Rather than using the median or lowest score, the proposed rule would require an Enterprise to calculate the average credit score across repositories for each borrower in step one. This change should mitigate the concern about downward bias, as the average across the two scores is closer to the center of the borrower's credit score distribution than the minimum across scores. To validate this assumption, FHFA analyzed original credit scores from over 39 million borrowers associated with loans acquired between 2010 and 2022 and found that changing the procedure from the minimum of the medians to the minimum of the averages (where for each borrower FHFA selected, at random, two out of three scores) had little aggregate effect on the average representative score. The results of this analysis suggested that under the current rule, the average representative credit score was 750.6, whereas under the proposed rule, the average representative credit score was 750.3 using two borrower scores (selected at random from the set of three) and 750.7 using three borrower scores.

The proposed change to step one would also alleviate concerns about when the bi-merge credit score requirement will be implemented. To examine the effect of the proposed change before the implementation date of the bi-merge credit score requirement, FHFA repeated the previous analysis but analyzed the difference between the use of the median of three scores and the use of the mean of three scores. The results of this analysis again showed little change (750.6 vs. 750.7) in the central tendency of the representative credit score distributions, and it showed there is little difference between the two approaches in aggregate. Under the proposed rule, FHFA expects that for the period before the implementation date of the bi-merge credit score requirement the borrower credit score would typically be based on three scores, and after the implementation date the borrower credit score would typically be based on two scores.

The proposed change to the procedure for selecting a representative credit score would affect risk-weighted assets, only. FHFA estimates that under the proposed rule, the total CET1 capital required to meet the risk-based capital requirements for the Enterprises' single-family mortgage exposures as of June 30, 2022 would decline by less than $0.1 billion.

Question 14: What, if any, changes should FHFA consider to the proposed methodology for determining a representative credit score? For example, should FHFA consider requiring an Enterprise to calculate a representative credit score by averaging credit scores across multiple borrowers in step two rather than by taking the lowest score across those borrowers?

As discussed above, credit scores play an important role in the ERCF calculation of risk weights for single-family mortgage exposures due to their strong correlation with the likelihood of a borrower default. Credit scores are commonly used as a proxy for a borrower's creditworthiness and are therefore a primary input in many lenders' automated underwriting systems. Historically, and in particular prior to the financial crisis, a borrower's lack of credit history and credit score indicated a significant level of risk. Therefore, the current ERCF requires an Enterprise to assign a credit score of 600 to any single-family mortgage exposure where a permissible credit score cannot be determined (unscored). This conservative assignation places single-family mortgage exposures with unscored borrowers in the lowest possible ERCF credit score buckets across the single-family base grids, implying the highest level of risk.

However, advances in financial regulation and improvements in mortgage underwriting and lending standards since the financial crisis suggest that FHFA's initial credit score assignation for single-family mortgage exposures associated with unscored borrowers may not accurately reflect the prevailing level of credit risk in these exposures. Although a missing credit score could be due to a data error, today it is far more likely the loan was either manually underwritten with the establishment of nontraditional credit and strict requirements on property type, loan purpose, and DTI, or the loan was underwritten through an automated system with more stringent requirements than would be necessary if the borrower had an available credit score. 13

To reflect the post-crisis improvements in regulatory, underwriting, and lending standards, as well as the recent inclusions of positive rental payment histories in the Enterprises' automated underwriting systems, the proposed rule would modify the assignation process of an original credit score to a single-family mortgage exposure without a permissible credit score at origination. FHFA analyzed the two-year default performance of single-family mortgage exposures associated with unscored borrowers relative to similar exposures associated with scored borrowers and determined that unscored exposures performed most similarly to scored exposures with original credit scores in the range of 680 to 699. Therefore, subject to Enterprise verification that none of the borrowers have a credit score at one of the repositories, the proposed rule would require an Enterprise to assign an original credit score of 680 to a single-family mortgage exposure without a permissible credit score at origination.

After five months, an Enterprise would continue to assign a refreshed credit score. To reflect the implied default performance in the population of unscored borrowers, the proposed rule would modify the definition of a refreshed credit score to mean the most recently available credit score. For a single-family mortgage exposure without a permissible credit score at origination, the refreshed credit score would be either an updated credit score if one is available at the credit repositories or the original credit score, as determined per the proposed rule, if one is not.

The proposed change to the assignation process of an original credit score to a single-family mortgage exposure without a permissible credit score at origination would affect risk-weighted assets during the period between origination and the later of 5 months and when a borrower's refreshed credit score becomes available. FHFA estimates that under the proposed rule, required CET1 capital for the Enterprises' single-family mortgage exposures as of June 30, 2022 would decline by less than $0.1 billion.

Question 15: What, if any, changes should FHFA consider to the proposed methodology for determining an original credit score for a single-family mortgage exposure without a permissible credit score at origination?

A guarantee asset is an on-balance sheet asset that represents the present value of a future consideration for providing a financial guarantee on a portfolio of mortgage exposures not recognized on the balance sheet. Examples of such off-balance sheet exposures include, but are not limited to, Freddie Mac's multifamily K-deals, Fannie Mae's multifamily bond credit enhancements, and certain single-family guarantee arrangements without securitization. The current ERCF does not include an explicit risk weight for guarantee assets. As an “other asset” not specifically assigned a different risk weight, an Enterprise is required to assign a 100 percent risk weight (§ 1240.32(i)(5)) to guarantee assets.

The proposed rule would introduce a 20 percent risk weight for an Enterprise's guarantee assets. This risk weight would reflect the risk-weight floor for mortgage exposures in the ERCF as well as the minimum risk weight for residential mortgage exposures under the Basel framework. In addition, FHFA's proposal would promote consistency across the financial system by aligning the risk weight for guarantee assets with the risk weight assigned to exposures to an Enterprise in the U.S banking framework.

The specification of a 20 percent risk weight for guarantee assets would affect risk-weighted assets, only. FHFA estimates that under the proposed rule, the total CET1 capital required to meet the risk-based capital requirements for the Enterprises' guarantee assets as of September 30, 2022 would decline by approximately $0.2 billion.

Question 16: What, if any, other factors should FHFA consider in its determination that guarantee assets should be assigned an explicit risk weight?

Question 17: Is the proposed 20 percent risk weight for guarantee assets appropriately calibrated?

Question 18: Should FHFA include guarantee assets in its definition of covered positions subject to market risk capital requirements?

When a lender originates a mortgage loan, the lender may retain in its portfolio or transfer to another party both the loan and the servicing function, or the lender may separate the mortgage servicing rights (MSRs) from the mortgage loan and transfer individually either the loan or the MSR to another party. MSAs are, in general, assets resulting from owning MSRs that are expected to generate future income in exchange for performing the servicing function on one or more mortgage loans.

MSA valuations rely on assessments of future economic variables and are therefore subjective and subject to uncertainty. If interest rates rapidly decline, such as during a stress event, MSA values can also rapidly decline. In addition, adverse financial conditions may cause liquidity strains for firms seeking to sell or transfer their MSAs, further impacting the potential loss absorbing capacity of MSAs. For these and other reasons, the U.S. banking framework requires banks to capitalize MSAs through a combination of capital deductions and a 250 percent risk weight, and the current ERCF requires the Enterprises to do the same.

The ERCF defines an MSA as the contractual right to service for a fee mortgage loans that are owned by others. This definition reflects the traditional practice of acquiring MSRs for mortgage loans not already owned by the acquiring institution. However, it is unlikely that the value of MSRs would be less subjective or subject to less uncertainty if the underlying mortgage loans were already owned by the acquiring institution rather than by others. Therefore, the proposed rule would modify the definition of MSAs to include the contractual right to service any mortgage loans, regardless of the owner of the loan at the time the servicing rights are acquired.

FHFA anticipates that the proposed rule would not affect the total CET1 capital required to meet the Enterprises' stability capital buffers as of June 30, 2022.

Question 19: What, if any, changes should FHFA consider to the proposed definition for MSAs?

Question 20: Does the proposed definition for MSAs include circumstances in which an Enterprise acquires a contractual right to service mortgage loans already owned by the Enterprise?

Question 21: Does the proposed definition for MSAs include circumstances in which an Enterprise acquires a contractual right to service mortgage loans but, for reasons including compliance with generally accepted accounting principles, the servicing rights would not result in the creation of an MSA in the absence of the proposed requirement?

For mortgage exposures that are included in a CRT, an Enterprise has the option to calculate risk weights using the “credit risk transfer approach”  14 only if the CRT satisfies the ERCF's “operational criteria for credit risk transfers.”  15 Under the current rule, these operational criteria include restrictions for clean-up calls. Clean-up calls are contractual provisions that permit an originating Enterprise to redeem securitization exposures before their stated maturity or call date. Time-based calls are contractual provisions that permit an issuing Enterprise to redeem a securitization exposure on one or more prespecified call dates. Time-based calls, which are integral to the Enterprises' credit risk management and are routinely used by the Enterprises to manage CRT economics, are not explicitly included as eligible clean-up calls. This lack of specificity has led to a lack of clarity about the eligibility of CRT transactions with time-based calls under the credit risk transfer approach in the ERCF.

The proposed rule would define an eligible time-based call as a time-based call that:

(i) Is exercisable solely at the discretion of the issuing Enterprise, and with a non-objection letter from FHFA prior to being exercised;

(ii) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide at most de minimis credit protection to the securitization; and

(iii) Is only exercisable five years after the securitization exposure's issuance date.

The proposed changes would clarify that the ERCF permits time-based calls, with restrictions. To ensure a significant length of time before the first prespecified exercise date, the proposed rule would require that the eligible time-based calls have a first exercise call date at least five years after issuance. Further, to ensure safety and soundness, an Enterprise must request FHFA approval before exercising its time-based calls.

To satisfy the proposed operational criteria for CRT, any time-based call associated with a CRT must be an eligible time-based call.

FHFA anticipates that the proposed rule would result in an insignificant change to the total CET1 capital required to meet the risk-based capital requirements for the Enterprises' CRT exposures as of June 30, 2022.

Question 22: What, if any, changes should FHFA consider to the proposed definitions of time-based calls and eligible time-based calls for CRT?

An IO MBS is a financial instrument that receives solely the interest payment stream generated by a pool of mortgages. An Enterprise may securitize the IO income stream from a pool of mortgages to better manage the interest rate risk exposure of the pool, or an Enterprise may buy IO securities of other issuers to hold in its portfolio as investment assets. Through the ownership of these investments, the Enterprises are exposed to both credit and market risk. This discussion pertains to credit risk only, as risk weights for market risk on IO securities are contemplated in subpart F of the ERCF.

Under the current rule, an Enterprise must assign a zero percent risk weight to any MBS guaranteed by the Enterprise (other than any retained CRT exposure). Thus, by implication, IO MBS guaranteed by the securitizing Enterprise should receive a zero percent risk weight. However, the ERCF also states that the risk weight for a non-credit-enhancing IO MBS must not be less than 100 percent. Therefore, there is a need to clarify the risk weight for IO MBS to clarify whether a zero percent or 100 percent risk weight should apply.

An Enterprise could be both the issuer of and investor in an IO MBS. The credit risk on IO MBS issued and guaranteed by an Enterprise is significantly different from that of an IO MBS issued by a non-Enterprise entity and held in the Enterprise's retained portfolio as an investment. 16 Therefore, the proposed rule would require an Enterprise to apply a different risk weight to IO MBS issued and guaranteed by the Enterprise versus an IO MBS issued by a non-Enterprise entity. This bifurcation would better align the capital requirements for IO MBS to the risks inherent in the positions.

For IO MBS issued and guaranteed by an Enterprise, the proposed rule would require the issuing Enterprise to assign a zero percent risk weight to that exposure. The zero percent risk weight reflects that the Enterprise has already capitalized the credit risk on the underlying single-family mortgage exposures and that there is no incremental credit risk due to the securitization process. For IO MBS issued by a non-Enterprise entity, the proposed rule would require the Enterprise to assign a 100 percent risk weight to that exposure. The 100 percent risk weight reflects that there is incremental credit risk accruing to the investing Enterprise through the acquisition of the IO MBS. Therefore, an Enterprise must hold credit risk capital against that asset. For IO MBS issued by the other Enterprise, the ERCF would continue to require an Enterprise to assign a 20 percent risk weight to that exposure.

FHFA anticipates that the proposed rule would not affect the total CET1 capital required to meet the risk-based capital requirements for the Enterprises' IO MBS as of June 30, 2022.

Question 23: Is the 100 percent risk weight assigned to the IO MBS issued by a non-Enterprise entity appropriately calibrated?

Question 24: Is the 20 percent risk weight assigned to the IO MBS issued by the other Enterprise appropriated calibrated?

In the ERCF, the mark-to-market loan-to-value ratio (MTMLTV) of a single-family mortgage exposure is a key input to determining credit risk-weighted assets for these exposures. The rule requires an Enterprise to use the FHFA Purchase-only State-level House Price Index (HPI) to update a property value when calculating an MTMLTV. The MTMLTV is then adjusted up or down by the application of a single-family countercyclical adjustment. This adjustment seeks to reduce the procyclicality of the capital requirements by increasing requirements when house prices are significantly above their long-term trend and reducing requirements when house prices are significantly below their long-term trend.

In calculating an MTMLTV, the ERCF mandates a six-month delay between loan origination and the first property value adjustment to reflect the time lag between loan origination and the publication of the FHFA HPI for the quarter following origination. However, there is no similar delay in the application of the single-family countercyclical adjustment. When house price appreciation is consistently high, such as in 2020 and 2021, this misalignment results in rapid increases to the risk-weighted assets for single-family mortgage exposures for the first six months due to the countercyclical adjustment, followed by a rapid decrease with the application of the first property value adjustment. In 2020 and 2021, this misalignment created a significant challenge for the Enterprises' reinsurance CRT programs. While FHFA has continually encouraged the Enterprises to reduce the time lag between loan origination and when they acquire credit protection, the misalignment created an incentive for the Enterprises to wait seven months before acquiring protection. By waiting until the capital requirement decreased mechanically, the Enterprises were able to reduce the amount of credit protection they acquired and save on premium costs.

The proposed rule would correct this misalignment by requiring an Enterprise to apply the first single-family countercyclical adjustment simultaneously with the first property value adjustment. This modification would reduce the volatility in the capital requirement for a single-family mortgage exposure over the first six months after origination and mitigate the incentive for the Enterprises to delay acquiring credit protection.

FHFA anticipates that adjusting the timing of the first single-family countercyclical adjustment would not affect the total CET1 capital required to meet the risk-based capital requirements for the Enterprises' single-family mortgage exposures as of June 30, 2022.

Question 25: What, if any, changes should FHFA consider to the proposed adjustment to the timing and application of the single-family countercyclical adjustment?

The stability capital buffer is an Enterprise-specific amount of common equity tier 1 capital in excess of an Enterprise's risk-based capital requirements. It is tailored to the risk that an Enterprise's default or other financial distress could have on the liquidity, efficiency, competitiveness, or resiliency of the national housing finance markets. The stability capital buffer is based on an Enterprise's share of the total residential mortgage debt outstanding in the United States and is expressed as a percent of adjusted total assets.

Under the current rule, an Enterprise's share of residential mortgage debt outstanding is assessed annually, and the stability capital buffer is derived from that assessment. Increases in the stability capital buffer are implemented with a two-year delay, while decreases are implemented with a one-year delay. These implementation delays contribute to the overall stability of the capital framework by providing the Enterprises with time to adjust their capital positions in response to changes in the stability capital buffer. However, having increases and decreases implemented with different delays potentially creates a situation where an increase and a decrease in the stability capital buffer are scheduled to become effective at the same time. To address this situation, the proposed rule would clarify that if an increase and decrease in the stability capital buffer are scheduled for the same date, the Enterprise should rely on the more recent data and implement the decrease, disregarding the increase.

FHFA anticipates that the proposed rule would not affect the total CET1 capital required to meet the Enterprises' stability capital buffers as of June 30, 2022.

Question 26: What, if any, changes should FHFA consider to the proposed change to the application of the stability capital buffer?

The ERCF's advanced approaches for determining risk-weighted assets rely on an Enterprise's internal models. These approaches require an Enterprise to maintain its own processes for identifying and assessing credit, market, and operational risk. They are intended to ensure that an Enterprise continues to enhance its risk management and analytical systems and not rely solely on its regulator's views on risk tolerance, risk measurement, and capital allocation. Because of the effort required to develop the governance processes and risk models necessary for effectuating the advanced approaches, the ERCF includes a transition period that delays the compliance date for the advanced approaches until January 1, 2025.

In December 2017, the Basel Committee finalized its Basel III framework. 17 As part of these post-crisis reforms, the Basel Committee sought to reduce excess variability of risk-weighted assets and restore credibility in the calculation of risk-weighted assets, in part by significantly constraining the use of internally-modeled approaches. Much of the finalized Basel III framework became effective in 2022.

U.S. banking regulators have yet to implement many of the reforms outlined in the finalized Basel III framework. However, on September 9, 2022, the U.S. banking regulators formally reaffirmed their commitment to implementing enhanced regulatory capital requirements that align with the finalized Basel III framework. 18 Further, in a recent speech, 19 the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System noted that the last set of comprehensive adjustments to the Basel III framework, now under consideration in the U.S., would “further strengthen capital rules by reducing reliance on internal bank models.”

Because the U.S. banking regulators are currently contemplating the last set of comprehensive adjustments to the Basel III framework, including the reliance on internal models, and given the costly nature of developing suitable internal models and governance processes for the advanced approaches, the proposed rule would further extend the compliance date for an Enterprise's advanced approaches to January 1, 2028. Until that time, the Enterprises will continue to rely on the standardized approach.

Under the rule published on December 17, 2020 establishing the ERCF, an Enterprise will not be subject to any requirement in the ERCF until the compliance date for the requirement as detailed in the ERCF. The effective date for the ERCF was February 16, 2021. The effective date for the ERCF amendments in this proposed rule would be 60 days after the day of publication of the final rule in the Federal Register .

The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq. ) requires that regulations involving the collection of information receive clearance from the Office of Management and Budget (OMB). The proposed rule contains no such collection of information requiring OMB approval under the PRA. Therefore, no information has been submitted to OMB for review.

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

Accordingly, for the reasons stated in the Preamble, under the authority of 12 U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-4612, 4631-36, FHFA proposes to amend part 1240 of title 12 of the Code of Federal Regulations as follows:

The additions and revisions read as follows:

The additions and revision read as follows:

The revisions read as follows:

The additions and revisions read as follows:

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under ADDRESSES . Include “Docket No. FAA-2023-0431; Project Identifier MCAI-2022-01277-T” at the beginning of your comments. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. The FAA will consider all comments received by the closing date and may amend this proposal because of those comments.

Except for Confidential Business Information (CBI) as described in the following paragraph, and other information as described in 14 CFR 11.35, the FAA will post all comments received, without change, to regulations.gov, including any personal information you provide. The agency will also post a report summarizing each substantive verbal contact received about this NPRM.

CBI is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (FOIA) (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to this NPRM contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to this NPRM, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission containing CBI as “PROPIN.” The FAA will treat such marked submissions as confidential under the FOIA, and they will not be placed in the public docket of this NPRM. Submissions containing CBI should be sent to Shahram Daneshmandi, Aerospace Engineer, Large Aircraft Section, International Validation Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone 206-231-3220; email Shahram.Daneshmandi@faa.gov. Any commentary that the FAA receives that is not specifically designated as CBI will be placed in the public docket for this rulemaking.

The FAA issued AD 2022-25-16, Amendment 39-22272 (87 FR 77491, December 19, 2022) (AD 2022-25-16), for all ATR—GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes. AD 2022-25-16 was prompted by an MCAI originated by EASA, which is the Technical Agent for the Member States of the European Union. EASA issued AD 2022-0062, dated April 8, 2022 (EASA AD 2022-0062) (which corresponds to FAA AD 2022-25-16), to correct an unsafe condition.

AD 2022-25-16 retains certain requirements of AD 2020-09-16. AD 2022-25-16 also requires revising the existing maintenance or inspection program, as applicable, to incorporate additional new or more restrictive maintenance requirements and airworthiness limitations, as specified in EASA AD 2022-0062. The FAA issued AD 2022-25-16 to prevent reduced structural integrity of the airplane.

Since the FAA issued AD 2022-25-16, EASA superseded AD 2022-0062 and issued EASA AD 2022-0199, dated September 26, 2022 (EASA AD 2022-0199) (referred to after this as the MCAI), for all ATR—GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes. The MCAI states that new or more restrictive airworthiness limitations have been developed.

The FAA is proposing this AD to prevent reduced structural integrity of the airplane. You may examine the MCAI in the AD docket at regulations.gov under Docket No. FAA-2023-0431.

The FAA reviewed EASA AD 2022-0199. This service information specifies new or more restrictive maintenance tasks and airworthiness limitations for airplane structures and components.

This proposed AD would also require EASA AD 2022-0062, which the Director of the Federal Register approved for incorporation by reference as of January 23, 2023 (87 FR 77491, December 19, 2022).

This material is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in ADDRESSES .

This product has been approved by the aviation authority of another country and is approved for operation in the United States. Pursuant to the FAA's bilateral agreement with the State of Design Authority, it has notified the FAA of the unsafe condition described in the MCAI described above. The FAA is issuing this NPRM after determining that the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would retain certain requirements of AD 2022-25-16. This proposed AD would also require revising the existing maintenance or inspection program, as applicable, to incorporate additional new or more restrictive airworthiness limitations, which are specified in EASA AD 2022-0199 already described, as proposed for incorporation by reference. Any differences with EASA AD 2022-0199 are identified as exceptions in the regulatory text of this AD.

This proposed AD would require revisions to certain operator maintenance documents to include new actions ( e.g., inspections) and Critical Design Configuration Control Limitations (CDCCLs). Compliance with these actions and CDCCLs is required by 14 CFR 91.403(c). For airplanes that have been previously modified, altered, or repaired in the areas addressed by this proposed AD, the operator may not be able to accomplish the actions described in the revisions. In this situation, to comply with 14 CFR 91.403(c), the operator must request approval for an alternative method of compliance (AMOC) according to paragraph (m)(1) of this proposed AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA developed a process to use some civil aviation authority (CAA) ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. The FAA has been coordinating this process with manufacturers and CAAs. As a result, the FAA proposes to retain the IBR of EASA AD 2022-0062 and incorporate EASA AD 2022-0199 by reference in the FAA final rule. This proposed AD would, therefore, require compliance with EASA AD 2022-0199 and EASA AD 2022-0062 through that incorporation, except for any differences identified as exceptions in the regulatory text of this proposed AD. Using common terms that are the same as the heading of a particular section in EASA AD 2022-0199 or EASA AD 2022-0062 does not mean that operators need comply only with that section. For example, where the AD requirement refers to “all required actions and compliance times,” compliance with this AD requirement is not limited to the section titled “Required Action(s) and Compliance Time(s)” in EASA AD 2022-0199 or EASA AD 2022-0062. Service information required by EASA AD 2022-0199 and EASA AD 2022-0062 for compliance will be available at regulations.gov by searching for and locating Docket No. FAA-2023-0431 after the FAA final rule is published.

The FAA's process of incorporating by reference MCAI ADs as the primary source of information for compliance with corresponding FAA ADs has been limited to certain MCAI ADs (primarily those with service bulletins as the primary source of information for accomplishing the actions required by the FAA AD). However, the FAA is now expanding the process to include MCAI ADs that require a change to airworthiness limitation documents, such as airworthiness limitation sections.

For these ADs that incorporate by reference an MCAI AD that changes airworthiness limitations, the FAA requirements are unchanged. Operators must revise the existing maintenance or inspection program, as applicable, to incorporate the information specified in the new airworthiness limitation document. The airworthiness limitations must be followed according to 14 CFR 91.403(c) and 91.409(e).

The previous format of the airworthiness limitation ADs included a paragraph that specified that no alternative actions ( e.g., inspections), intervals, or CDCCLs may be used unless the actions, intervals, and CDCCLs are approved as an AMOC in accordance with the procedures specified in the AMOCs paragraph under “Additional AD Provisions.” This new format includes a “New Provisions for Alternative Actions, Intervals, and CDCCLs” paragraph that does not specifically refer to AMOCs, but operators may still request an AMOC to use an alternative action, interval, or CDCCL.

The FAA estimates that this AD, if adopted as proposed, would affect 26 airplanes of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

The FAA estimates the total cost per operator for the retained actions from AD 2022-25-16 to be $7,650 (90 work-hours × $85 per work-hour).

The FAA has determined that revising the existing maintenance or inspection program takes an average of 90 work- hours per operator, although the agency recognizes that this number may vary from operator to operator. Since operators incorporate maintenance or inspection program changes for their affected fleet(s), the FAA has determined that a per-operator estimate is more accurate than a per-airplane estimate.

The FAA estimates the total cost per operator for the new proposed actions to be $7,650 (90 work-hours × $85 per work-hour).

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.

The FAA is issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: General requirements. Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

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

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

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

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

(3) Would not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

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

Invitation to Comment: We invite you to submit comments regarding the proposed priority and requirements. To ensure that your comments have maximum effect in developing the final priority and requirements, we urge you to clearly identify the specific section of the proposed priority and requirements that each comment addresses.

We invite you to assist us in complying with the specific requirements of Executive Orders 12866 and 13563 and their overall requirement of reducing regulatory burden that might result from the proposed priority and requirements. Please let us know of any further ways we could reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the Department's programs and activities. Please also feel free to offer for our consideration any alternative approaches to the subjects addressed by the proposed priority and requirements.

During and after the comment period, you may inspect all public comments about the proposed priority and requirements by accessing Regulations.gov . You may also inspect the comments in person. Please contact the person listed under FOR FURTHER INFORMATION CONTACT to make arrangements to inspect the comments in person.

Note: The Center is jointly funded under the Individuals with Disabilities Education Act (IDEA) and the Elementary and Secondary Education Act (ESEA). By combining funds from two separate programs, the Department is able to make a more comprehensive investment to address the purpose of the Center. The Department intends to publish a notice inviting applications later this fiscal year and applicants may be expected to address the priorities and requirements under both authorizing statutes. Under the Administrative Procedure Act (APA) (5 U.S.C. 553), the Department generally offers interested parties the opportunity to comment on proposed priorities and requirements. Section 681(d) of IDEA, however, makes the public comment requirements of the APA inapplicable to priorities from allowable activities specified in the statute (see sections 663 and 681(d) of IDEA) that may be included in a notice inviting applications for the Center. Therefore, we are only taking public comment on the proposed priority and requirements described in this document, which are to be funded under the ESEA.

Assistance to Individuals with Disabilities in Reviewing the Rulemaking Record: On request, we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for the proposed priority and requirements. If you want to schedule an appointment for this type of accommodation or auxiliary aid, please contact the person listed under FOR FURTHER INFORMATION CONTACT .

Purpose of Program: The purpose of the Center is to enhance the capacity of States and local educational agencies (LEAs) to implement positive and safe school climates, and effectively support and respond to students' social, emotional, behavioral, and mental health needs to ensure participation and enhance learning, by implementing evidence-based practices within a multi-tiered system of support (MTSS) framework.

Program Authority: Section 4631(a)(1)(B) of the ESEA (20 U.S.C. 7281).

Proposed Priority:

This document contains one proposed priority.

Background:

Many students need additional supports to address social, emotional, and behavioral challenges that impact their full access to and participation in learning (Chafouleas, 2020). These challenges, if not properly addressed, can lead to student responses that are inconsistent with school or program expectations. The COVID-19 global pandemic exacerbated these challenges, accelerating the need to provide school-based social, emotional, behavioral, and mental health supports and leverage the existing evidence base about how to provide nurturing educational environments to meet the needs of our nation's youth.

MTSS frameworks such as positive behavioral interventions and supports (PBIS)  1 have been validated by numerous randomized control trials (Bradshaw et al., 2012; Freeman et al., 2017). When implemented with fidelity, PBIS outcomes include reductions in removals of students from instruction; improved student exposure to and success in academics (grades and completion); improved educator satisfaction and retention; and improved overall ratings of school safety, belonging, and climate.

Despite improved outcomes and knowledge from PBIS implementation efforts over the last two decades, data from the Office for Civil Rights Data Collection suggests students from underserved groups are more likely to experience exclusionary discipline ( e.g., suspensions, expulsions) (U.S. Department of Education, Civil Rights Data Collection SY17-18, Office for Civil Rights, 2021). Disaggregated data shows that disproportionality in discipline grows when considering race, gender, and disability (Civil Rights Data Collection SY17-18, Office for Civil Rights, 2021). Research consistently shows that students of color, particularly Black students, Native students, and Black students with disabilities are significantly more likely than their non-disabled, or white peers to be subjected to exclusionary discipline practices, including office discipline referrals and suspensions ( e.g., Gage et al., 2019; McIntosh et al., 2018; McIntosh et al., 2021; Civil Rights Data Collection SY17-18, Office for Civil Rights, 2021). While disproportionality with respect to Black boys has long been acknowledged, more recent data analysis indicates the disproportionality also exists for Black girls as compared to White girls (Hassan & Carter, 2021). Other studies show disproportionality based on gender, historically demonstrating boys receive suspensions and expulsions at higher rates than girls (Bradshaw et al., 2010). Higher rates of punitive discipline practices also exist for students who identify as LGBTQ and those with disabilities (Himmelstein and Brückner, 2011; Brobbey, 2018). When students are denied access to instruction and participation in school opportunities, they are more likely to experience negative outcomes in school and later in life, including poor academic outcomes, lower graduation rates, incarceration, and employment and relationship challenges (Hemez et al., 2020; Lansford et al., 2016).

One of the most significant barriers to reducing exclusionary and aversive discipline practices for students, including students of color and students with disabilities, is the lack of culturally and linguistically inclusive pre-service and in-service training for teachers and leaders on effective practices for creating positive, safe learning environments to teach and support desired school behaviors and for responding to and mitigating behaviors that are inconsistent with school expectations and interfere with learning. The PBIS framework has provided an effective multi-tiered structure through the implementation and examination of systems, practices, and data to assist LEAs and schools in addressing inequities. When there is fidelity in implementing evidence-based practices (EBPs) to prevent, reduce, and mitigate interfering behaviors within a PBIS framework, studies have found the following statistically significant results: improved perception of school safety; reductions in overall behaviors that are inconsistent with classroom or school expectations and that interfere with learning; and reduction of bullying behaviors, office discipline referrals, chronic absenteeism, and suspensions (Waasdorp et al., 2012). The PBIS framework has solidified the importance of core strategies, including: implementing EBPs; providing the systems needed to support those practices; and data-based decision-making; to create and sustain positive, safe, and predictable learning environments. Fidelity in the implementation of the core strategies has also demonstrated the importance of adult responses, including effectively supporting and responding to student behavior (Horner, et al., 2020).

Although prior Department investments have led to successful implementation of the PBIS framework and positive outcome data in over 27,000 schools, based on persistent needs in the field, the Department has determined that additional and continued technical assistance (TA) is needed to focus on: (1) students with more intensive social, emotional, behavioral, and mental health needs and those most likely to be excluded from the learning environment due to behavior that interferes with learning; (2) pre-service and in-service training on culturally and linguistically inclusive practices that support students from underserved groups; (3) improving implementation fidelity; and (4) addressing other systemic inequities such as access to school funding, experienced educators, and advanced coursework opportunities. In addition, the Department has determined that State educational agencies (SEAs) and LEAs could benefit from further TA to develop, expand, and sustain school-wide frameworks and to build personnel capacity and expertise to promote safe, positive, predictable, and culturally and linguistically inclusive learning environments where students feel a sense of belonging. Such additional TA would be focused on increasing the use of EBPs to more effectively support and respond to student needs, such as teaching school and classroom expectations, building classroom cultures of respect and belonging, and implementing trauma-informed practices. Such additional TA also would be focused on using EBPs to reduce the use of restraints seclusion and corporal punishment; chronic absenteeism; incidents of bullying; the disproportionate application of disciplinary procedures, such as suspension and expulsion, for students, including students of color and those with disabilities; unnecessary referrals of students to law enforcement; and violent and traumatic school incidents.

The Center will support States and LEAs in implementing EBPs within a MTSS/PBIS framework that improves results for children, including children with disabilities. While PBIS is one evidence-based MTSS framework for addressing social, emotional, behavioral and mental health needs, the Department expects that the Center will stay abreast of developing frameworks and identify and incorporate a broad array of EBPs to support and respond to student needs, and tailor technical assistance in the settings established in the priority. This investment is aligned to the Secretary's Supplemental Priorities and Definitions for Discretionary Grant Programs published in the Federal Register on December 10, 2021 (86 FR 70612), in the areas of meeting student social, emotional, and academic needs, and promoting equity in student access to educational resources and opportunities.

Proposed Priority:

The Department proposes the following priority for this program. We may apply this priority in any year in which this program is in effect.

Proposed Priority—Technical Assistance—School Safety National Activities Program—National Technical Assistance Center on Positive Behavioral Interventions and Supports.

The purpose of this priority is to enhance the capacity of SEAs and LEAs to implement positive and safe school environments, and effectively support and respond to students' social, emotional, behavioral, and mental health needs to improve their learning, by implementing evidence- based practices (EBPs)  2 within a Multi-Tiered System of Support (MTSS)/Positive Behavioral Interventions and Supports (PBIS) framework  3 in one or more of the following settings:

(i) Programs or schools serving high percentages of students from low-income families in the following settings:

(1) Early learning programs.

(2) Elementary schools.

(3) Middle schools.

(4) High schools.

(5) Career and technical education programs.

(6) Rural schools.

(ii) Alternative schools and programs.

(iii) Juvenile justice system or correctional facilities.

(iv) Low-performing schools.

(v) Schools with a high student-to-mental health provider ratio.

(vi) Schools with high rates of chronic absenteeism, exclusionary discipline, referrals to the juvenile justice system, bullying/harassment, community and school violence, or substance abuse.

(vii) Schools in which students recently experienced a natural disaster, incident of violence, or traumatic event.

(viii) Schools with high percentages of students with disabilities.

To meet this priority, the applicant must propose to achieve, at a minimum, one or more of the following expected outcomes:

(a) Improved systems and resources at the national, regional, State, and district levels to support, develop, align, and sustain local implementation of MTSS/PBIS efforts to organize EBPs to support positive school climates and respond to student social, emotional, behavioral, and mental health needs to improve access to and engagement in learning.

(b) Improved capacity of SEA and LEA personnel to support the knowledge and skills development of school personnel to implement MTSS/PBIS as a framework to organize EBPs to support and respond to student needs, particularly those from underserved, culturally and linguistically diverse backgrounds, and those whose behaviors may interfere with a student's ability to fully participate in, and benefit from, a high-quality learning environment.

(c) Increased use by SEAs, LEAs, and school-based personnel of reliable and valid tools and processes for enhancing and assessing the fidelity of implementation of a MTSS/PBIS Framework and for measuring intended outcomes, including improvements in school climate; time spent on instruction; well-being and belonging; overall academic achievement; and reductions in absenteeism, discipline referrals, suspensions, expulsions, the use of restraints or seclusion, illegal use of drugs, and referrals to law enforcement.

(d) Improved implementation of a MTSS/PBIS framework, EBPs, and assessment of SEA or LEA recipients of grant programs that focus on improving positive school climates and implementing EBPs to support and respond to students' social, emotional, behavioral, and mental health needs.

(e) Enhanced response and recovery assistance, as requested by and in collaboration with the Department, for violent or traumatic incidents that impact school communities, including intensive individualized support to facilitate recovery of the learning environment.

(f) Increased body of knowledge and evidence to enhance implementation of PBIS and other emerging MTSS frameworks and EBPs to address the social, emotional, behavioral, and mental health needs of students in the settings established in the priority.

Types of Priorities:

When inviting applications for a competition using one or more priorities, we designate the type of each priority as absolute, competitive preference, or invitational through a notice in the Federal Register . The effect of each type of priority follows:

Absolute priority: Under an absolute priority, we consider only applications that meet the priority (34 CFR 75.105(c)(3)).

Competitive preference priority: Under a competitive preference priority, we give competitive preference to an application by (1) awarding additional points, depending on the extent to which the application meets the priority (34 CFR 75.105(c)(2)(i)); or (2) selecting an application that meets the priority over an application of comparable merit that does not meet the priority (34 CFR 75.105(c)(2)(ii)).

Invitational priority: Under an invitational priority we are particularly interested in applications that meet the priority. However, we do not give an application that meets the priority a preference over other applications (34 CFR 75.105(c)(1)).

Proposed Requirements:

The Department proposes the following eligible applicants and application requirements for this program. We may apply one or more of these requirements in any year in which the program is in effect.

Eligible Applicants: SEAs; State lead agencies under Part C of the IDEA; LEAs, including public charter schools that are considered LEAs under State law; institutions of higher education; other public agencies; private nonprofit organizations; freely associated States and outlying areas; Indian Tribes or Tribal organizations; and for-profit organizations.

Proposed Application Requirements:

(a) Demonstrate how the proposed project will—

(1) Improve SEAs' and LEAs' implementation, scaling, and sustaining of EBPs within a MTSS/PBIS framework and policies that are designed to improve school climate and, as needed, provide additional behavioral supports for students whose behavior impacts their ability to fully participate in, and benefit from, a high-quality learning environment, including students with disabilities. To meet this requirement, the applicant must—

(i) Present applicable State, regional, or local data demonstrating SEAs' and LEAs' needs related to (A) implementation of EBPs and policies to improve school climate, student well-being and belonging; and (B) increasing students' ability to fully participate in, and benefit from, a high-quality learning environment;

(ii) Demonstrate knowledge of current education issues and policy initiatives relating to MTSS/PBIS and school climate practices and policies and EBPs to effectively support and respond to student behavior that impacts learning; and

(iii) Present information about the current level of implementation of MTSS/PBIS, EBPs, policies, best practices, and benefits for all students, especially underserved students and those from culturally and linguistically diverse backgrounds; and

(2) Improve the implementation of EBPs within a MTSS/PBIS framework to effectively support and respond to student behaviors that impact access to and participation in learning.

(b) Demonstrate how the proposed project will—

(1) Ensure equal access and treatment for members of groups that have traditionally been underrepresented based on race, color, national origin, gender, age, or disability. To meet this requirement, the applicant must describe how it will—

(i) Identify the TA and information needs of the intended recipients; and

(ii) Ensure that services and products meet the needs of the intended recipients of the TA;

(2) Achieve its goals, objectives, and intended outcomes. To meet this requirement, the applicant must provide—

(i) Measurable intended project outcomes; and

(ii) The logic model  4 by which the proposed project will achieve its intended outcomes that depicts, at a minimum, the goals, activities, outputs, and intended outcomes of the proposed project;

(3) Use a conceptual framework to develop project plans and activities, describing any underlying concepts, assumptions, expectations, beliefs, or theories, as well as the presumed relationships or linkages among these variables, and any empirical support for this framework;

(4) Be based on current research and make use of EBPs. To meet this requirement, the applicant must describe—

(i) The current research on the assessment of the implementation of MTSS/PBIS frameworks and related EBPs;

(ii) The current research about adult learning principles and implementation science that will inform the proposed TA; and

(iii) How the proposed project will incorporate current and emerging research and practices in the development and delivery of its products and services;

(5) Develop products and provide services that are of high quality and sufficient intensity and duration to achieve the intended outcomes of the proposed project. To address this requirement, the applicant must describe—

(i) How it proposes to identify or develop the knowledge base of PBIS;

(ii) Its proposed approach to universal, general TA, 5 which must identify the intended recipients, including the type and number of recipients, that will receive the products and services, a description of the products and services that the Center proposes to make available, and the expected impact of those products and services under this approach;

(iii) Its proposed approach to targeted, specialized TA, 6 which must identify—

In conducting the foreign policy of the United States with respect to international postal services and international delivery services, the Secretary of State must coordinate with applicable government agencies, including the Commission, under 39 U.S.C. 407(b)(2)(A). Such coordination about foreign affairs requires timely, free, and frank flow of information between government agencies. The Secretary of State exercises “primary authority for the conduct of foreign policy with respect to international postal services and international delivery services.” 39 U.S.C. 407(b)(2)(A). In exercising this authority, the Secretary of State “shall coordinate with other agencies as appropriate” and “shall give full consideration to the authority vested by law or Executive order in the Postal Regulatory Commission.” Id. Flowing from this authority, the U.S. Department of State (DOS) coordinates continuous and frequent information sharing among the relevant government agencies. As a routine part of this intragovernmental coordination, the agencies share materials with each other that may contain information that should be accorded non-public treatment.

In other contexts, such exchange of non-public materials might implicate the Commission's existing regulations in 39 CFR part 3011 of this chapter that govern procedures when any submitter provides non-public materials to the Commission and seeks non-public treatment, and when a third party seeks access to or disclosure of such non-public materials. It might also implicate the Commission's existing regulations in 39 CFR part 3006 of this chapter that govern procedures regarding FOIA requests for Commission records.

After experience with its rules, the Commission is concerned that the existing regulations on non-public materials might not set sufficiently clear expectations about those regulations' interaction with Executive Branch policy-making processes. Absent such clarity, Executive Branch stakeholders might be wary of engaging in the free flow of information between relevant parties during the DOS coordination activities under 39 U.S.C. 407(b)(2)(A) aimed at advising on U.S. foreign postal policy in a timely manner. To assure the free flow of information and streamline the Commission regulations that may impact activities under the coordination of the DOS, the Commission proposes to explicitly exempt non-public materials submitted to the Commission in connection with the coordination activities under 39 U.S.C. 407(b)(2)(A) from its rules in 39 CFR part 3011 of this chapter. Relatedly, the Commission also proposes clarifying revisions to its rules in 39 CFR part 3006 of this chapter regarding FOIA requests.

The Commission's authority to regulate certain non-public materials provided by the Postal Service stems from 39 U.S.C. 504(g). Section 504(g) is triggered if the Postal Service determines that any material it provides to the Commission under a subpoena issued under 39 U.S.C. 504(f), or otherwise at the request of the Commission in connection with any proceeding or other purpose under Title 39, contains non-public information. 39 U.S.C. 504(g)(1). After the Postal Service provides such a determination to the Commission, the Commission then has specific authority under 39 U.S.C. 504(g)(3) to regulate the public disclosure of or access to such non-public materials. See 39 U.S.C. 504(g)(3). The scope of 39 U.S.C. 504(g)(1) plainly does not apply to the Commission's receipt of non-public materials provided by government agencies other than the Postal Service in connection with the coordination activities under 39 U.S.C. 407(b)(2)(A). It also does not apply to the Commission's receipt of non-public materials provided by the Postal Service in connection with the coordination activities under 39 U.S.C. 407(b)(2)(A), because the Postal Service would provide such materials voluntarily or at the request of the coordinating authority ( i.e., the DOS) rather than pursuant to a Commission subpoena or otherwise at the request of the Commission in connection with a proceeding. Therefore, it is consistent with 39 U.S.C. 504(g) to exempt non-public materials received by the Commission from any person in connection with the coordination activities under 39 U.S.C. 407(b)(2)(A) from the rules in 39 CFR part 3011 of this chapter.

The Commission's authority to regulate non-public materials provided by the Postal Service outside the context of 39 U.S.C. 504(g) and any materials provided by any other person stems from 39 U.S.C. 503. This provision grants the Commission general authority to take actions, such as issuing rules and regulations, that are “necessary and proper” to carry out its “functions and obligations” under Title 39 of the United States Code. 39 U.S.C. 503. Therefore, the Commission has broad discretion to determine the boundary of its regulations' applicability to materials outside the context of 39 U.S.C. 504(g).

In addition, the Commission's role in the coordination activities as part of the foreign postal policy deliberative process under 39 U.S.C. 407(b)(2)(A) is subordinate to the DOS's leadership and decision-making authority. The Commission's receipt of non-public materials in this context is different from a Commission request for information in a regulatory proceeding over which the Commission presides. To facilitate the swift exchange of information among all agencies involved in the deliberative process and harmonize Commission application of the statute, the Commission deems it reasonable to explicitly provide that non-public materials submitted in this specific context are exempt from the requirements of 39 CFR part 3011 of this chapter.

Proposed § 3006.30(d). Proposed § 3006.30(d) is revised to exempt non-public materials submitted by the Postal Service to the Commission in connection with activities under 39 U.S.C. 407(b)(2)(A) from the applicability of the rules in 39 CFR part 3011 of this chapter.

Proposed § 3006.30(e)(1). Proposed § 3006.30(e)(1) is revised to state that if the Commission receives a FOIA request for records submitted by a person other than the Postal Service, the Commission shall adhere to the applicable procedures of the proposed § 3006.35, and if the Commission does not refer such a FOIA request to another Federal agency pursuant to proposed § 3006.35(b), the Commission shall consider the FOIA request in light of all applicable exemptions, after notifying the submitter of the FOIA request and providing the submitter with an opportunity to respond.

Proposed § 3006.35. Proposed § 3006.35 is added to detail the procedures that the Commission should follow for consultation, referral, and coordination with other Federal agencies with regard to certain FOIA requests, and for FOIA requests that involve classified information. It also provides for the timing of responses to FOIA consultations and referrals received by the Commission, and the Commission's ability to establish agreements with other agencies to eliminate the need for consultations or referrals for particular types of records.

Proposed § 3006.70(a). Proposed § 3006.70(a) is revised to exempt a person other than the Postal Service from following the procedures described in subpart B of 39 CFR part 3011 of this chapter when the person submits non-public materials to the Commission in connection with activities under 39 U.S.C. 407(b)(2)(A).

Proposed § 3011.100(c). Proposed § 3011.100(c) is added to exempt non-public materials submitted by any person to the Commission in connection with activities under 39 U.S.C. 407(b)(2)(A) from the applicability of the rules in 39 CFR part 3011 of this chapter, with three exceptions. First, certain persons shall adhere to the requirements of § 3011.302 regarding the non-dissemination, use, and care of the non-public materials provided to the Commission in connection with activities under 39 U.S.C. 407(b)(2)(A). Second, any person that discovers that non-public materials provided to the Commission in connection with activities under 39 U.S.C. 407(b)(2)(A) have been inadvertently included within materials that are accessible to the public shall follow the procedures of § 3011.205. Third, non-public materials provided to the Commission in connection with activities under 39 U.S.C. 407(b)(2)(A) are construed to exclude each of the following: (i) non-public materials provided by the Postal Service to the Commission pursuant to a subpoena; (ii) non-public materials filed in response to an information request; (iii) non-public materials filed in compliance with any applicable Postal Service reporting required under 39 CFR part 3050 or part 3055 of this chapter; and (iv) non-public materials filed in a Commission docket.

Proposed § 3011.103(a). Proposed § 3011.103(a) is revised to clarify that the inadvertent failure of a submitter to concomitantly provide all documents required by existing § 3011.200(a) does not prevent the Commission from according appropriate confidentiality to non-public information contained with any materials provided to the Commission.

For the reasons stated in the preamble, the Commission proposes to amend chapter III of title 39 of the Code of the Federal Regulations as follows:

I. Executive Summary A. Does this action apply to me?

You may be potentially affected by this action if you work in or employ persons working in crop production agriculture where pesticides are applied. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Agricultural Establishments (NAICS code 111000);

• Nursery and Tree Production (NAICS code 111421);

• Timber Tract Operations (NAICS code 113110);

• Forest Nurseries and Gathering of Forest Products (NAICS code 113210);

• Farm Workers (NAICS codes 11511, 115112, and 115114);

• Pesticide Handling on Farms (NAICS code 115112);

• Farm Labor Contractors and Crew Leaders (NAICS code 115115);

• Pesticide Handling in Forestry (NAICS code 115310);

• Pesticide Manufacturers (NAICS code 325320);

• Farm Worker Support Organizations (NAICS codes 813311, 813312, and 813319);

• Farm Worker Labor Organizations (NAICS code 813930); and

• Crop Advisors (NAICS codes 115112, 541690, 541712).

If you have any questions regarding the applicability of this action to a particular entity, consult the technical person listed under FOR FURTHER INFORMATION CONTACT .

This action is issued under the authority of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), 7 U.S.C. 136 through 136y, particularly sections 136a(d), 136i, and 136w.

EPA is proposing to revise certain AEZ requirements of the WPS that were amended by EPA in a final rule published on October 30, 2020 (85 FR 68760) (“2020 AEZ Rule”) (Ref. 1). As further explained in Unit II.A.4., the effective date of the 2020 AEZ Rule is currently stayed pursuant to a court order; that is, the 2020 AEZ Rule has not yet taken effect. EPA proposes to revise the AEZ requirements by rescinding the following changes outlined in the 2020 AEZ Rule and reinstating the related AEZ requirements as published in a final rule on November 2, 2015 (80 FR 67496) (“2015 WPS”) (Ref. 2).

The 2020 AEZ Rule would have limited the applicability of the AEZ to the agricultural employer's property such that the AEZ would no longer cover bystanders on adjacent properties. As a result, the 2020 AEZ Rule would have solely relied upon the “Do Not Contact” requirement in the WPS (further described in Unit II.A.) as the method of protecting people on adjacent properties had the rule gone into effect. This rule proposes to reinstate the 2015 WPS regulatory text requiring pesticide handlers to suspend applications if any worker or other person, other than appropriately trained and equipped handlers involved in the application, enters an AEZ regardless of whether they are on or off the establishment. See Unit II.B. for the detailed discussion of this proposed revision.

The 2020 AEZ Rule would have created an exception for agricultural employers and handlers from the requirement to suspend pesticide applications due to the presence of an individual not employed by the establishment who is within an AEZ but in an area subject to an easement that prevents the agricultural employer from temporarily excluding those individuals from that area. This rule proposes to reinstate the 2015 WPS regulatory text that requires pesticide handlers to suspend applications if any worker or other person, other than appropriately trained and equipped handlers involved in the application, enters an AEZ regardless of whether they are in an area subject to an easement. See Unit II.C. for the detailed discussion of this proposed revision.

The 2020 AEZ Rule would have reduced AEZ distances from 100 feet to 25 feet for certain ground-based sprays using fine droplet sizes and simplified all ground-based sprays to be 25 feet when sprayed at a height of greater than 12 inches. This rule proposes to reinstate the 2015 WPS regulatory text that specifies a distance of 100 feet for ground-based fine spray applications, a 25-foot AEZ for ground-based applications using medium or larger droplet sizes sprayed above 12 inches, and to reinstate all applicable determination criteria from the 2015 WPS with the exception of the Volume Median Diameter (VMD) droplet size criterion when making distance determinations. EPA proposes to replace VMD by citing standards that more accurately define medium droplet sizes. Additionally, to maintain consistency in the requirements between outdoor production applications and applications associated with enclosed space production, EPA is also proposing to remove VMD as a criterion for entry restriction distances during enclosed space production pesticide applications and instead using the same droplet size standards as those used for outdoor production. See Units II.D. and II.E. for the detailed discussion of these proposed revisions.

EPA is also proposing to maintain certain revisions that were presented in the 2020 AEZ Rule, such as the provision that clarifies that pesticide applications that were suspended due to individuals entering an AEZ may be resumed after those individuals have left the AEZ, and the exemption that allows farm owners and members of their immediate family (as defined in 40 CFR 170.305) to shelter within closed structures within an AEZ during pesticide applications, provided that the owner has instructed the handlers that only the owner's immediate family are inside the closed shelter and that the application should proceed despite their presence. See Unit II.F. for a detailed discussion of these proposals.

EPA has reexamined the 2020 AEZ Rule both in accordance with the Executive Order 13990, Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis (86 FR 7037, January 25, 2021), and in response to an error in the preamble of the 2020 AEZ Rule. As further discussed in Unit II.A.4., EPA discovered a factual error while compiling the administrative record in response to litigation. As a result of our reexamination of the 2020 AEZ Rule, EPA has determined that certain amended AEZ requirements in the 2020 AEZ Rule should be rescinded, with several protections from the 2015 WPS regulatory text being reinstated. EPA has determined that reinstatement of these protections from the 2015 WPS will be more effective at reducing potential exposures from ongoing pesticide applications and to promote public health for all populations and communities near agricultural establishments. In addition, EPA's analyses supporting the 2015 WPS have shown that these protections will better support the Agency's efforts to reduce disproportionate risks associated with agricultural pesticide exposures that currently fall on populations and communities with a history of environmental justice concerns, particularly agricultural employees ( i.e., workers and handlers), the employees' families, and the communities that live near establishments that use pesticides (Ref. 3). These protections are consistent with FIFRA's mandate to protect health and the environment against unreasonable risk to man or the environment, taking into account the economic, social, and environmental costs and benefits. Reinstating the regulatory text for certain AEZ requirements from the 2015 WPS, as described in Unit II.B., II.C., and II.D., will be associated with minimal cost to the regulated community, as described in Unit I.E.

Since the 2020 AEZ Rule has not been implemented due to the court-ordered stay discussed in Unit II.A.4., the 2015 WPS continues to provide the operative regulatory language for the AEZ requirements during the current stay and any future extensions of the stay. Therefore, the Agency has determined that there will be no new impacts from the portions of this proposal seeking to reinstate the 2015 WPS provisions that make the AEZ applicable beyond the boundaries of an agricultural establishment and within easements on the agricultural establishment, as further described in Unit II.B. and II.C.

Additionally, this action proposes to reinstate the 2015 WPS criteria and factors for determining AEZ distances at 40 CFR 170.405(a) for ground spray applications, with the exception of language around a Volume Median Diameter (VMD) as a determining factor, which is further explained in Units II.D. and II.E. The Agency does not anticipate any new costs or impacts due to reinstating this regulatory language since the 2015 WPS remains in effect. However, the proposal to remove VMD from the AEZ criteria and instead use droplet size classifications ( i.e., “medium” as defined by the American National Standards Institute/American Society of Agricultural and Biological Engineers (ANSI/ASABE); see Units II.D. and E.) is expected to provide a clear, practical, and easy approach for determining AEZ and enclosed space distances. EPA anticipates that this revision will improve compliance with other AEZ requirements and make it easier to enforce these provisions by eliminating any need to determine whether an application is over or under the specified VMD of 294 microns, as required by the 2015 WPS.

EPA is also proposing to maintain certain revisions that were presented in the 2020 AEZ Rule, such as the provision that clarifies that pesticide applications that were suspended due to individuals entering an AEZ may be resumed after those individuals have left the AEZ, and the exemption that allows farm owners and members of their immediate family (as defined in 40 CFR 170.305) to shelter within closed structures within an AEZ during pesticide applications, provided that the owner has instructed the handlers that only the owner's immediate family are inside the closed shelter and that the application should proceed despite their presence (further described in Unit II.F.). The revision to the AEZ suspension requirement better clarifies EPA's 2015 intent for how the AEZ provisions should work once there are no longer individuals other than pesticide handlers within an AEZ and does not result in any impacts. The immediate family exemption means that owners and their immediate family members do not have to leave their homes that are within an AEZ if the doors and windows remain closed. By proposing to retain the immediate family exemption, some applications will be simpler and less burdensome than the 2015 WPS since fewer applications would need to be suspended on family farms. The effect is likely small, as the change would only apply to immediate family members of the farm owner who are inside a structure and within the AEZ. The Agency finds that these changes are consistent with the intent of the AEZ in the 2015 WPS and are supported by the administrative record, particularly with regards to the immediate family exemptions that are applicable to other portions of the 2015 WPS. Maintaining these clarifications and flexibilities provide some regulatory relief that was sought after promulgation of the 2015 WPS without increasing exposure risks to workers or bystanders.

The 2020 AEZ Rule was initiated in response to feedback from members of the agricultural community, including the U.S. Department of Agriculture (USDA), state pesticide regulatory agencies, several agricultural interest groups, and from public comments. These comments raised concerns about the complexity and enforceability of the AEZ requirements after the 2015 WPS was promulgated. For the 2020 AEZ rule, EPA qualitatively described the benefit of the rule as a reduction in the complexity of applying a pesticide (Ref. 4). The benefits described were not monetary; revising the requirements would have reduced the complexity of arranging and conducting pesticide applications and enforcing the provisions. The benefits of the 2020 AEZ Rule would have resulted in reduced management complexity both on and off establishment, because there would have been fewer situations where the AEZ would have applied had the rule gone into effect ( i.e., the AEZ would not have been applicable off the establishment or for individuals within an easement on the establishment). EPA did not discuss any costs, or increased risk from pesticide exposure, in the 2020 AEZ Rule's supporting documents due its reliance on the “Do Not Contact” requirement that establishes the responsibility of the applicator to prevent pesticides from contacting people either directly or through drift. This is in part because the “Do Not Contact” provision (further described in Unit II.A.) is applicable in all situations, without limitations on distance or the individual's location respective to the application.

After reevaluating the 2020 AEZ Rule, the Agency has determined that the 2020 changes do not effectively balance the potential social and economic costs associated with limiting the AEZ requirements to areas under the owner's control and simplifying the distance criteria for ground-based spray applications. Based on careful reconsideration of the administrative record regarding the AEZ in the 2015 WPS and 2020 AEZ Rule, EPA has determined that the 2015 requirements regarding individuals off the establishment and within easements are more protective of workers and bystanders when implemented rather than relying on the “Do Not Contact” requirement as the only protective measure when individuals are outside of the owner's control.

Public comments submitted to the docket during the 2015 WPS rulemaking included examples of incidents where workers were exposed to pesticide applications from neighboring establishments as well as from the establishment where they were working. As noted in the 2015 WPS, out of 17 incidents identified in the comments, only one would have been prevented if the AEZ was limited to the boundaries of the agricultural establishment as it would have been established had the 2020 AEZ Rule gone into effect. EPA's analysis at the time indicated that the AEZ would have prevented at least four of the incidents reported in the 2015 comments, and possibly as many as 12, depending on the actual distances between the workers and application equipment. EPA continues to receive reports of incidents like those provided in past comments, despite the “Do Not Contact” requirement and the expectation that applicators and handlers must not spray pesticides in a manner that may result in contact with individuals. While the Agency is unable to quantify the number of new incidents that could be reduced by the AEZ, EPA believes, based on this information, that its original assessment of the AEZ in 2015 is the correct approach. The AEZ requirements serve as an important supplement to the “Do Not Contact” requirements and are expected to reduce the total number of exposures if implemented correctly and consistently. Therefore, EPA believes its proposal to reinstate the 2015 requirements to extend beyond the establishment's boundaries and within easements, better balances social and health-related costs than the 2020 AEZ Rule and outweighs the negligible costs on agricultural establishments to implement AEZs during an application.

In determining that the reinstatement of certain AEZ provisions from the 2015 WPS is warranted, EPA recognizes that an analysis of changes from the 2020 AEZ Rule and this proposed action is necessary. Compared to the 2020 AEZ Rule, the proposed changes in this rulemaking mean that more applications will have AEZs that encompass a greater area and therefore result in more situations where the AEZ will be applicable. Had the 2020 AEZ Rule been implemented, the 2020 AEZ Rule would have applied only in situations where people can be directed by the owner of the establishment, while the proposed changes in this rulemaking would apply in all situations, regardless of whether people may not be under the direction of the owner, such as individuals off the establishment or within easements. To effectively implement the changes in this proposal, owners and handlers may need to communicate more frequently with those nearby the establishment or within easements to ensure that nobody is within the AEZ and may require an application to be suspended or rescheduled. However, the impact of these changes on agricultural establishments is likely to be small compared to the 2020 AEZ Rule. Conversely, having the AEZ be applicable in all directions, regardless of whether an individual is on or off the establishment, may simplify applications in the sense that the handler does not need to apply different requirements to different situations.

In addition, the 2020 AEZ Rule sought to establish a simplified 25-foot AEZ for all ground-based spray applications above 12 inches, regardless of the droplet size. This proposed rule reinstates the 2015 WPS criteria and factors for determining AEZ distances at 40 CFR 170.405(a) for ground spray applications, except for language around a Volume Median Diameter (VMD) as a determining factor as further explained in Unit II.D. If the 2020 AEZ Rule had gone into effect, the changes in this proposed rule may result in more complex application strategies, because the different AEZ distances may come into play more often and owners and handlers will have to consider more carefully the various application and nozzle characteristics. However, restoring the droplet size criteria back to the 2015 WPS language ( i.e., medium droplets as a threshold) results in increased protection from applications using fine sprays that are more susceptible to spray drift compared to the 2020 AEZ Rule. Additionally, EPA's proposal to not reinstate VMD as a criterion and instead rely on the ASABE standard's definition of “medium” droplet size better clarifies how to determine droplet sizes and should make it easier for applicators to understand the original requirements regarding how to achieve specific droplet classifications and how to implement the appropriate AEZ based on that information. As a result, the impact of these changes is expected to be small compared to the 2020 AEZ Rule.

As previously noted, EPA is proposing to retain certain changes made by the 2020 AEZ Rule, such as the provision that clarifies that pesticide applications that were suspended due to individuals entering an AEZ may be resumed after those individuals have left the AEZ, and the exemption that allows farm owners and members of their immediate family (as defined in 40 CFR 170.305) to shelter within closed structures within an AEZ during pesticide applications, provided that the owner has instructed the handlers that only the owner's immediate family are inside the closed shelter and that the application should proceed despite their presence (further described in Unit II.F.). These changes are consistent with the intent of the AEZ in the 2015 WPS and are supported by the administrative record, particularly with regards to the immediate family exemptions that are applicable to other portions of the 2015 WPS. Retaining these clarifications and flexibilities in this proposal provides some regulatory relief that was sought in the 2020 AEZ Rule without increasing exposure risks to workers or bystanders.

EPA implements FIFRA's mandate to limit adverse effects on human health in part through the WPS regulation codified at 40 CFR part 170. The WPS is a uniform set of requirements for workers, handlers, and their employers that are generally applicable to all agricultural pesticides and are incorporated onto agricultural pesticide labels by reference. The WPS is intended to reduce the risk of illness and injury to agricultural workers and pesticide handlers who may be exposed to pesticides while working. The WPS requirements are generally applicable to pesticides used in crop production agriculture and made applicable to certain pesticide products through FIFRA's pesticide product registration process by inclusion of a statement requiring WPS compliance on the product label. The WPS requirements complement the product-specific labeling restrictions and are intended to minimize occupational exposures generally. When a registered pesticide label includes a statement requiring compliance with the WPS, any failure to comply with the WPS when using a pesticide is a violation of FIFRA.

The risk reduction measures of the WPS may be characterized as being one of three types: information, protection, and mitigation. To ensure that employees will be informed about exposure to pesticides, the WPS requires that workers and handlers receive training on general pesticide safety, and that employers provide access to information about the pesticides with which workers and handlers may have contact. To protect workers and handlers from pesticide exposure, the WPS prohibits the application of pesticides in a manner that exposes workers or other persons, generally prohibits workers and other persons from being in areas being treated with pesticides, and generally prohibits workers from entering a treated area while a restricted-entry interval (REI) is in effect (with limited exceptions that require additional protections). In addition, the rule protects workers by requiring employers to notify them about areas on the establishment treated with pesticides through posted and/or oral warnings. The rule protects handlers by ensuring that they understand proper use of and have access to required personal protective equipment (PPE). Finally, the WPS has provisions to mitigate exposures if they do occur by requiring the employer to provide workers and handlers with an ample supply of water, soap, and towels for routine washing and emergency decontamination. The employer must also make transportation available to a medical care facility if a worker or handler may have been poisoned or injured by a pesticide and provide health care providers with information about the pesticide(s) to which the person may have been exposed.

In 2015, EPA promulgated a final rule that comprehensively revised the WPS for the first time since 1992 (Ref. 2). The 2015 WPS added several pesticide-related safety measures and strengthened elements of the existing regulation in areas including training, notification, pesticide safety and hazard communication information, use of PPE, and implemented requirements for providing supplies for routine washing and emergency decontamination.

Under the WPS established in 1992 (57 FR 38101, August 21, 1992 (FRL-3374-6)), the pesticide handler's employer and the pesticide handler were required to ensure that no pesticide is applied in a manner that may contact, either directly or through drift, any agricultural worker or other person, other than an appropriately trained and equipped pesticide handler involved in the application. This prohibition is often referred to as the “Do Not Contact” provision and is applicable in all situations, without limitations on distance or location of the individuals. This particular provision was carried over into the 2015 WPS revisions and has remained unchanged.

Among other changes to improve public health and to build upon the existing protections of the 1992 WPS, the 2015 WPS established AEZ requirements for outdoor production application to reinforce the existing “Do Not Contact” provision and to enhance overall compliance with safe application practices intended to protect agricultural workers and bystanders from pesticide exposure from sprays and drift. The AEZ is an area surrounding the point(s) of pesticide discharge from the application equipment that must generally be free of all persons during pesticide applications, moves with the application equipment while the application is ongoing, and ceases to exist around the equipment once the pesticide application ends. After the application has been completed or the application equipment has moved on to a new area, entry restrictions associated with treated areas go into effect.

The 2015 WPS requirement at 40 CFR 170.505(b) required pesticide handlers (applicators) making a pesticide application to temporarily suspend the application if any worker or other person, other than trained and equipped handlers assisting in the application, was within the AEZ. The 2015 WPS revisions further required a handler to suspend an application if a worker or other person was in any portion of the AEZ—on or off the establishment. These restrictions were intended to bolster the protections afforded by the “Do Not Contact” provision, promote an application approach aimed at reducing incidents in which people in areas adjacent to pesticide applications could be affected by either direct contact or drift, and establish a well-defined area from which people generally must be excluded during ongoing applications. The AEZ requirement was one of the many public health protection tools incorporated into the 2015 WPS rule to emphasize one of the key safety points in both the WPS and on pesticide labels—do not spray people.

As outlined in the 2015 WPS, the size of the AEZ was dependent largely on the application method used. For aerial, air blast, fumigant, smoke, mist, and fog applications, as well as sprays using a spray quality (droplet spectrum) of smaller than medium (volume median diameter of less than 294 microns), the area encompassed 100 feet from the application equipment in all directions. For other applications sprayed from a height of greater than 12 inches from the planting medium using a spray quality (droplet spectrum) of medium or larger (volume median diameter of 294 microns or greater), the area encompassed 25 feet from the application equipment in all directions. For all other applications, there was no AEZ.

On October 30, 2020, EPA finalized updates to the AEZ provisions under the WPS (Ref. 1). The 2020 AEZ Rule modified the AEZ requirements to limit the AEZ to an agricultural employer's property where an agricultural employer can lawfully exercise control over employees or bystanders who may be within the AEZ during an application, and to simplify the criteria for determining the AEZ distances for ground spray applications. In addition, clarifications were made on when applications may resume after being suspended due to someone entering the AEZ, as well as providing an exemption for farm owners and their immediate family from having to leave their homes or another enclosed structure when it is located within an AEZ. The 2020 AEZ Rule revisions did not include any changes to the “Do Not Contact” provision in the WPS, which still prohibited applying pesticides in a manner that may result in contact either directly or through drift. The rule was set to go into effect on December 29, 2020.

As explained in the Federal Register of May 16, 2022 (87 FR 29673; FRL-9803-01-OCSPP), two civil actions were filed in the U.S. District Court for the Southern District of New York (S.D.N.Y.) on December 16, 2020, challenging the 2020 AEZ Rule (now consolidated as case number 1:20-cv-10642). Additionally, two petitions for review were filed in the U.S. Second Circuit Court of Appeals on December 17, 2020 (case numbers 20-4174 and 20-4203), which have been held in abeyance pending the proceedings in the district court.

On December 28, 2020, S.D.N.Y. issued an order granting plaintiffs' request for a temporary restraining order (TRO) and injunctive relief (Ref. 5). The court's order stayed the December 29, 2020, effective date of the 2020 AEZ Rule and enjoined all EPA authorities who would otherwise take action to make the 2020 AEZ Rule effective from doing so. Following the December 2020 Order, S.D.N.Y. has issued several additional orders consented to by both EPA and the plaintiffs, further extending the preliminary injunction and staying all proceedings in the case ( e.g., Ref. 6). As a result, the 2020 AEZ Rule has not gone into effect. In the course of compiling the administrative record for purposes of the litigation, EPA discovered a factual error in the preamble of the 2020 AEZ Rule regarding the scope of existing handler training on the AEZ and how to implement the AEZ when individuals are in areas not under the control of the agriculture establishment's owner. As further discussed in Unit II.A.5., the discovery of this factual error has contributed in part to EPA's reconsideration of the 2020 AEZ Rule.

Concurrent with the ongoing litigation described in Unit II.A.4., the 2020 AEZ Rule was included among several EPA actions identified for review in accordance with E.O. 13990 (Ref. 7). In the course of reviewing both the 2015 WPS and 2020 AEZ Rules in accordance with E.O. 13990, EPA has found that some of the 2020 revisions to the AEZ requirements, specifically, the 2020 AEZ Rule's simplification of AEZ distance requirements (see Unit II.D.) and the limitation of the applicability of the AEZ requirements to the agricultural establishment's boundaries (see Units II.B. and C.), are inconsistent with the objectives of protecting against unreasonable adverse effects on human health and the environment and limiting exposure to dangerous chemicals and pesticides for all populations, including those who may experience disproportionate burden or risks such as workers, handlers, and those who live, work, or play on or near agricultural establishments.

Furthermore, while preparing the administrative record for litigation, EPA discovered a factual error contained in the preamble of the 2020 AEZ Rule regarding the scope of AEZ content within EPA-approved trainings. Specifically, the preamble to the 2020 AEZ Rule states that “EPA-approved trainings since 2018 . . . have also incorporated EPA's 2016 guidance on how to apply pesticides near establishment borders and provide information on various measures applicators or handlers can take to prevent individuals from being contacted by spray or through drift,” and listed examples of such measures (Ref. 1). This assertion in the 2020 AEZ Rule was in error. While all EPA-approved trainings are in compliance with the WPS because they address the minimum requirements of the AEZ (40 CFR 170.501), after reevaluating the rule, EPA has determined that some of the trainings it has approved since 2018 only contained a partial set of the topics provided in guidance (Ref. 8) regarding best pesticide application practices near the borders of an establishment and on potential measures that can be used to prevent contact through drift. Therefore, the reliance on this inaccurate assumption provides further reason to reinstate the 2015 requirements regarding the applicability of AEZs for individuals off the establishment and within easements.

As a result, EPA proposes to make certain modifications to the AEZ requirements established in the 2020 AEZ Rule by reinstating the protections as originally established in the 2015 WPS. The proposed revisions aim to reestablish the level of protections afforded to all who are on an agricultural establishment and may be within the vicinity of an ongoing application, with slight modifications to support compliance and understanding. These revisions would be limited to the following three modifications made in the 2020 AEZ Rule: the limitation of the AEZ requirements to the area within the property's boundaries that are under the agricultural employer's control, the exception to the suspension and exclusion requirements due to the presence of someone within an area subject to an easement when the person has the legal right to access that area, and the reduction of the AEZ distance from 100 feet to 25 feet for certain ground-based sprays. These three provisions would essentially revert to their status under the 2015 WPS revision, although EPA is not proposing to reinstate references to VMD that are no longer current.

Some changes made by the 2020 AEZ Rule would remain in place under this proposal. For example, the 2020 AEZ Rule amendment which states that pesticide applications that have been suspended due to individuals entering an AEZ may be resumed after they have left the AEZ was supported both by the administrative record and public comments, because it provides needed clarity that was previously missing in the 2015 WPS. Additionally, the 2020 AEZ Rule added an exemption that allows farm owners and their immediate family to shelter inside closed structures within an AEZ during pesticide applications, provided that the owner has instructed the handlers that only the owner's immediate family are inside the closed shelter and that the application should proceed despite their presence. The rationale for the immediate family exemption in the 2020 AEZ Rule is consistent with the other immediate family exemptions established under the 2015 WPS (Ref. 1).

EPA proposes to revise the AEZ provision at 40 CFR 170.505(b) that requires handlers to “suspend the application” if a worker or other person is in the AEZ by removing clauses limiting its effect to persons only within the boundaries of the agricultural establishment. EPA also proposes to make conforming revisions to the handler training requirements at 40 CFR 170.501(c)(3)(xi), and the exemptions at 40 CFR 170.601(a)(1)(vi) to reflect the applicability of the AEZ both on and off the establishment.

The AEZ requirements apply to both handlers and agricultural employers, and in the 2015 WPS they applied to each differently, reflecting the different responsibilities and authorities of handlers and agricultural employers. For pesticide handlers, the AEZ requirement at 40 CFR 170.505(b) in the 2015 WPS required handlers making a pesticide application to temporarily suspend the application if any worker or other person (besides trained and equipped handlers assisting in the application) was in the AEZ, the boundaries of which were described in terms of distance from the application equipment per 40 CFR 170.405(a)(1). Thus, the handlers' obligation to suspend applications under the 2015 WPS applied if a worker or other person was in any portion of the AEZ, on or off the establishment, reflecting the handlers' responsibilities under the “Do Not Contact” requirement. In contrast, the agricultural employers' obligation regarding the AEZ in the 2015 WPS was that “the agricultural employer must not allow or direct any worker or other person, other than an appropriately trained and equipped handler involved in the application, to enter or to remain in the treated area or an AEZ that is within the boundaries of the establishment until the application is complete.” 40 CFR 170.405(a)(2) (2015 version). This responsibility reflected the difference in agricultural employers' ability to control the movements of persons and to protect their workers on their property versus persons beyond the property borders where agricultural employers do not have control over their presence.

The difference between handlers' and agricultural employers' AEZ responsibilities under the 2015 WPS was a source of confusion for some stakeholders during the Agency's early outreach efforts after the 2015 WPS. Additionally, the handlers' responsibility to suspend application if a person or passing vehicle was within the AEZ, but not at risk of exposure, was viewed by some as an unreasonable burden, particularly before EPA clarified through guidance (Refs. 8, 9) that such applications could continue once the handlers have evaluated the situation and determined whether the application can resume without contacting anyone with the pesticide. The 2020 AEZ Rule changed 40 CFR 170.505(b) to limit the AEZ to the area within the boundaries of the agricultural establishment, bringing the pesticide handlers' duty to suspend applications into line with the agricultural employers' duty to exclude persons from the AEZ in 40 CFR 170.405(a)(2).

After reconsidering the comments submitted in response to the AEZ proposal in 2019 and reevaluating the information from the administrative record in both the 2015 WPS and 2020 AEZ Rule, EPA has determined that the AEZ provisions from the 2015 WPS provide a valuable complement to the “Do Not Contact” requirements, along with the other protections on pesticide labels, to protect workers and bystanders both on and off the establishment from being contacted by pesticides that are applied. Generally, incident data provided to the Agency lacks critical details to make firm correlations between whether a properly implemented AEZ would have prevented a contact from occurring, and often incidents are underreported or cited only on the basis of a contact occurring, so it is difficult for the Agency to fully assess and quantify the successes and benefits of the AEZ. EPA's best estimates came from comments submitted during the 2015 WPS rulemaking efforts (Ref. 2) citing 17 incidents where workers were exposed to pesticides due to drift. In assessing these incidents during the 2015 WPS rulemaking, only one of those incidents could have potentially been prevented if the AEZ were limited to the boundaries of the agricultural establishment. However, proper implementation of the AEZ requirements for individuals both on and off the establishment may have prevented at least four of the incidents reported in those comments, and potentially as many as 12, depending on the actual distances between the workers and application equipment, which were not specified in the comments at that time.

In the 2015 WPS, EPA determined that the AEZ requirements were a necessary supplement to the existing “Do Not Contact” provision, because they gave the applicator specific criteria for suspending an application when people other than handlers are near ongoing applications and potentially within the AEZ. In addition to providing greater protections for workers and bystanders, the current AEZ requirements are useful to applicators attempting to comply with the existing “Do Not Contact” requirement beyond the boundaries of the agricultural establishment. Having an AEZ in effect in all directions during an application will simplify handler responsibilities, as handlers will only be expected to adhere to one distance for a given application type, instead of two distinct requirements during the application (one within the boundaries of the establishment and one for when the application equipment is near the establishment's boundaries). EPA finds that maintaining a consistent shape and size for an application is likely less confusing to handlers during the application and is easier to convey in handler trainings than having different requirements for on- and off-establishment situations. This approach will also help to promote the “Do Not Contact” requirement to not spray people during applications.

EPA's risk assessments and registration decisions are based on the premise that the label is followed and that the WPS protections effectively prevent people (workers and bystanders) from being contacted by pesticide applications. In other words, incidents where workers or bystanders are sprayed directly result in people being exposed to pesticides in a way that is not typically considered in EPA's risk assessments or registration decisions. While these types of incidents are misuse violations, public commenters to the 2020 AEZ Rule cited several examples of incidents after the 2015 WPS was finalized, showing these types of incidents continue to occur. Therefore, there remains a need to supplement the existing “Do Not Contact” provision to reduce exposures to workers and other persons from being directly sprayed with pesticides, including those who may be off the establishment.

As explained in Unit II.A.4., the 2020 AEZ Rule never went into effect due to a series of court orders staying the effective date of the 2020 AEZ final rule. However, in determining that the reinstatement of certain AEZ provisions from the 2015 WPS is warranted, EPA recognizes that an analysis of changes from the 2020 AEZ Rule and this proposed action is necessary. While the discussion in this section compares the effects of the currently proposed changes to the 2020 AEZ final rule, the AEZ requirements have always extended beyond the boundary of an agricultural establishment since it originally went into effect in 2015. Therefore, given that the 2015 rule has remained in effect since its establishment, there are no new impacts expected with this proposed rule.

Revising the requirement so that applicators must suspend an application for individuals within an AEZ outside the boundary of the agricultural establishment is anticipated to have little effect on the costs of pesticide applications. Although the proposed changes have the potential to increase the number of situations where applications would need to be evaluated and potentially suspended compared to the intent of the 2020 AEZ Rule, the proposed AEZ changes would only apply in the specific instances when people are within the AEZ. In those cases, an applicator must temporarily suspend and may have to reschedule an application to avoid potential contact. This could lead to more complex application strategies or require increased communication with people nearby to get them to move outside the AEZ before resuming an application. However, the proposed AEZ provisions will provide the applicator specific criteria for suspending an application without needing to know the specific boundary of the property, which may make it easier for the applicator to comply with the requirement that applications should be suspended if anyone is within the vicinity of the application.

EPA is unable to quantify how much pesticide exposure will change from no longer restricting the AEZ to the establishment. In addition to the AEZ, the “Do Not Contact” provision, whereby the pesticide handler's employer and the pesticide handler are required to ensure that no pesticide is applied in a manner that may contact, either directly or through drift, any agricultural worker or other person, other than an appropriately trained and equipped pesticide handler involved in the application. This prohibition is applicable in all situations, without limitations on distance or location of the individuals. The AEZ is an additional precaution to limit unintended pesticide exposure and to complement other protections for workers and bystanders both on and off the establishment from being contacted by pesticides. Consistent with the 2015 WPS, EPA believes that reinstating the applicability of the AEZ to off-establishment situations to support the “Do Not Contact” requirements will help reduce the number of exposures of workers and other non-handlers to unintentional contact to pesticide applications. Therefore, the social and economic benefits of these requirements outweigh the negligible costs to implement them.

The Agency is interested in comments regarding the proposal to reestablish the applicability of the AEZ for situations when people may be within an AEZ outside of the establishment's boundaries and its efforts to improve understanding and compliance with this requirement. While this rulemaking is intended to reinstate protections for off-establishment individuals that were reduced in the 2020 AEZ Rule, EPA understands that some of the concerns raised in the 2020 AEZ Rule regarding the implementation and enforcement of off-establishment AEZs will persist without additional guidance or future rulemaking to clarify the Agency's expectations for this particular provision. EPA is interested in comments on how to improve its existing guidance (Ref. 8) on the AEZ implementation for off-establishment individuals and whether the approaches outlined in the existing guidance reflect a reasonable approach to resuming applications for those off the establishment and not under an agricultural employer's control. EPA is also interested in how to improve handler trainings to ensure that AEZs and the “Do Not Contact” provisions are presented in a way that is easily understood, enhances compliance, and ensures that handlers have the information and tools needed to protect those who may be near pesticide applications. Additionally, EPA is interested in feedback on other options or approaches that could help to address the concerns of state enforcement agencies or agricultural stakeholders without diminishing AEZ protections for people in all areas adjacent to ongoing applications.

EPA proposes to remove language from the 2020 AEZ Rule provisions at 40 CFR 170.405(a)(2)(ii) and 170.505(b)(1)(ii) and (b)(2)(ii) that make the AEZ requirements inapplicable in easements within the agricultural establishment.

Portions of agricultural establishments may be subject to easements ( e.g., right-of-way, gas, mineral, utility, wind/solar energy) such that some persons ( e.g., utility workers) may have a legal right to be on parts of an agricultural establishment independent of the agricultural employer's control. In 2015, EPA presumed that all persons on an agricultural establishment would be subject to the control of the owner or agricultural employer, not recognizing the prevalence of easements which deprive the landowner of the ability, in whole or in part, to control the movement of persons within the easement. The 2015 WPS made no exception for such easements. The 2020 AEZ Rule revised the WPS so that agricultural employers are not required to exclude, and handlers are not required to suspend applications for, persons not employed by the establishment who are in the AEZ in an area subject to an easement that prevents the agricultural employer from temporarily excluding those persons from that area.

The purpose of the easement exception was to ensure that the presence of persons who have a legal right to be on parts of an agricultural establishment independent of the agricultural employer's control should not be an insurmountable obstacle to pesticide application, provided the pesticide could be applied without contacting such persons (Ref. 1). This easement exception was based on a determination that the “Do Not Contact” requirement was sufficiently protective of persons in easements within the agricultural establishment. In line with the decision to not limit the AEZ to the boundaries of the agricultural establishment as discussed in Unit II.B., EPA has determined that the AEZ should also not be limited only to those areas where the agricultural employer can exclude people, and thereby should be applicable to easements within the agricultural establishment. Having the AEZ requirements apply in easements within the establishment aligns with the “Do Not Contact” provision and increases the protection for workers and bystanders in all areas of the establishment.

As explained in Unit II.A.4., the 2020 AEZ Rule never went into effect due to court orders staying the effective date of the 2020 AEZ final rule. However, in determining that the reinstatement of certain AEZ provisions from the 2015 WPS is warranted, EPA recognizes that an analysis of changes from the 2020 AEZ Rule and this proposed action is necessary. While the above discussion in this section compares the effects of the currently proposed changes to the 2020 AEZ final rule, the AEZ requirements have always extended to easements on an agricultural establishment since they originally went into effect in 2015. Therefore, given that the 2015 WPS has remained in effect since its establishment, there are no new impacts expected with the revision.

Revising the AEZ requirements so that applicators must suspend applications when people are inside an AEZ while in an area subject to an easement is anticipated to have little effect on the costs of pesticide application. Although this change has the potential to increase the complexity of pesticide applications, this requirement would only apply to specific instances in which people are within an easement that is also within the AEZ. In those cases, an owner or an applicator may have to reschedule an application, temporarily suspend applications, or communicate with people subject to an easement to move them outside of the AEZ, which could in turn lead to more complex application strategies. However, the proposal to reinstate the 2015 AEZ requirements will provide the applicator with specific criteria for suspending applications without needing to consider exceptions for easements and the location of those boundaries, which may make it easier for the applicator since the AEZ will therefore extend from the application in all directions, regardless of easements.

Since EPA is unaware of any pesticide exposure incidents involving individuals on an easement, EPA is unable to quantify how incidents of exposure will be affected by reinstating the 2015 AEZ regulatory text that would, in effect, make the AEZ applicable within easements on an agricultural establishment. As described previously, the “Do Not Contact” provision is applicable in all situations, without limitations on distance or the location of the individuals. The AEZ is an additional precaution to limit unintended pesticide exposure, intended to complement other protections for workers and bystanders. Despite the gap in available information, the Agency anticipates that reinstating the AEZ as finalized in the 2015 WPS will help to reduce potential exposures for those in easements if implemented properly.

The Agency is interested in comments regarding the proposal to reestablish the applicability of the AEZ for people who may be in an area subject to an easement that falls within an AEZ and its efforts to improve understanding and compliance with this requirement. While this rulemaking intends to reinstate protections that were reduced in the 2020 AEZ Rule for individuals within an area subject to an easement, EPA understands that some of the concerns raised in the 2020 AEZ Rule regarding the implementation and enforcement of AEZs will persist without additional guidance or future rulemaking to clarify the Agency's expectations for this particular provision. EPA is interested in comments on how to improve its guidance on the implementation of AEZ protections for those within easements, and whether the approaches outlined in the existing guidance reflect a reasonable approach to resuming applications when those within easements and not under an agricultural employer's control. EPA is also interested in how to improve handler trainings to ensure that AEZs and the “Do Not Contact” provisions are presented in a way that is easily understood, enhance compliance, and ensure protection for those who may be within an easement. Additionally, EPA is interested in feedback on what other options or approaches could help address the concerns of state enforcement agencies or agricultural stakeholders without diminishing AEZ protections for people in areas subject to an easement.

EPA is proposing to reinstate the 2015 WPS criteria and factors for determining AEZ distances at 40 CFR 170.405(a) for ground spray applications, except for language around a Volume Median Diameter (VMD) as a determining factor. The 2020 AEZ Rule sought to simplify the AEZ requirements for ground spray applications by eliminating the language pertaining to spray quality and droplet size and VMD as criteria for determining the appropriate AEZ distance. This had the effect of establishing a single 25-foot AEZ for all ground-based spray applications made from a height greater than 12 inches from the soil surface or planting medium, irrespective of droplet size.

This proposed rule would reinstate language from the 2015 WPS that set AEZ distances based on the spray quality (droplet spectrum) sizes and spray height for certain pesticide application methods. Despite the Agency's efforts in the 2020 AEZ Rule to develop a simplified approach that was easier to understand and implement, EPA has reconsidered several studies cited by commenters (Refs. 10, 11, 12, 13) in response to EPA's 2019 AEZ Proposed Rule (Ref. 14) that show that pesticide applications using sprays with droplets smaller than medium ( i.e., fine or smaller droplet sizes) are prone to drift greater than 25 feet. After reconsidering the comments and the information submitted to the Agency during the 2019 public comment period and reevaluating the information in the administrative record for the 2015 WPS rule, EPA has determined that the 100-foot AEZ for sprays with droplets smaller than medium is needed to provide protection to workers or bystanders near these fine-spray applications. As a result, the Agency is proposing to reestablish AEZ distances of 100 feet for sprays using a spray quality (droplet spectrum) of smaller than medium, and a 25-foot AEZ for ground applications sprayed from a height greater than 12 inches from the soil surface or planting medium using a spray quality (droplet spectrum) of medium or larger.

EPA is proposing, however, to incorporate the droplet size categories of all versions of the American National Standards Institute/American Society of Agricultural and Biological Engineers (ANSI/ASABE) Standard 572 (S572) by reference in § 170.405, including ANSI/ASABE S572.1, ANSI/ASABE S572.2, and ANSI/ASABE S572.3, to give meaning to the “medium” droplet size criterion instead of using the VMD values from the 2015 WPS. Because a similar approach using droplet size classifications was used in 40 CFR 170.405(b) when establishing entry restrictions during enclosed space production under the 2015 WPS, EPA is also proposing to remove VMD as a criterion for enclosed space production and instead rely on these ANSI/ASABE standards to ensure consistency between outdoor production requirements and enclosed space production requirements. The rationale for incorporating these standards by reference is further discussed in Unit II.E.

While EPA proposes to reinstate the 2015 WPS criteria for determining AEZ distances based on the droplet size and spray height, EPA reiterates that the application of a pesticide in a manner inconsistent with its labeling is a violation of FIFRA. Regardless of the droplet size criteria for the AEZ distances presented in 40 CFR 170.405(a) and the entry restriction distances for enclosed space production in 40 CFR 170.405(b), individual product labels may specify different, more protective product-specific restrictions that must be followed during the application. Pesticide users must comply with all the requirements in 40 CFR part 170, except those that are inconsistent with product-specific instructions on the pesticide product labeling.

In this proposal, EPA is changing the determinants of the size of the AEZ. In some cases, such as where the handler is spraying a pesticide product with droplet sizes smaller than medium ( i.e., fine droplets), the size of the AEZ would have been 25 feet under the 2020 AEZ Rule. This proposal would reestablish the 2015 WPS regulatory text that set a distance of 100 feet for these applications. For sprayed applications using medium or larger droplets sprayed above 12 inches, the distance remains 25 feet, which is the same distance for these applications in both the 2015 WPS and the 2020 AEZ Rule.

Reinstating the different AEZ distances from the 2015 WPS for ground-based sprays based on droplet sizes is more complex than the 2020 AEZ for some growers, because handlers will have to assess droplet size and use that information to determine the correct size of the AEZ. However, the change in size only makes a difference for applications using a fine spray in the specific instances when people are between 25 and 100 feet from the application equipment. In those cases, an applicator would have had to reschedule an application or temporarily suspend applications until individuals leave the area. Retaining the droplet size criteria from the 2020 AEZ Rule may have made it simpler for handlers to know or understand the criteria for the AEZ, without having to know the specific characteristics of specific nozzles and applications, but it would also be less protective than the requirements of the 2015 WPS for applications using a fine droplet spray. In determining that the reinstatement of certain AEZ provisions from the 2015 WPS is warranted, EPA recognizes that an analysis of changes from the 2020 AEZ Rule and this proposed action is necessary. However, since the 2020 AEZ Rule has not gone into effect, there are no new impacts expected with the revision, and all costs associated with reinstating the 2015 WPS regulatory language are expected to be negligible.

The Agency is interested in comments regarding the proposal reestablish 25- and 100-foot AEZ for ground-based sprays based on droplet size and spray height criteria. EPA is also interested in comments on the proposal to not reinstate the VMD as a criterion for determining 25- versus 100-foot AEZ distances, and whether the proposal to base AEZ distances on a classification category threshold of medium defined by the ANSI/ASABE standard and spray height still achieves the same protection that was provided in the 2015 WPS. Additionally, EPA is interested in information on whether incorporating the ANSI/ASABE standards by reference into the regulations to better define “medium” droplet sizes is adequate. The Agency is also interested in whether additional guidance for handlers/applicators conveying the value of using nozzle manufacturer guides and manuals to determine droplet sizes that are consistent with the ANSI/ASABE standard's definition of “medium” is needed to provide enough clarity to the regulated community on how to make an AEZ or enclosed space application distance determination for a given application. EPA is interested in feedback on whether incorporating the droplet classification category of medium from ANSI/ASABE is as well understood in the agricultural community as the Agency believes it to be, and whether this promotes a simplification to the requirements without diminishing protections. While this rulemaking is intended to reestablish protections from the 2015 WPS, the Agency is also interested in additional information for future consideration of the AEZ requirements regarding appropriate AEZ distances for different application methods.

EPA identified an applicable voluntary consensus standard for defining droplet size. Instead of fully reinstating the droplet size criteria established in the 2015 WPS, EPA is proposing to incorporate S572.3, Spray Nozzle Classification by Droplet Spectra, and its preceding editions by reference to enhance the Agency's compliance with the National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note ). The NTTAA and Office of Management and Budget (OMB) Circular A-119 require agencies to use voluntary consensus standards in its regulatory, procurement, and program activities in lieu of government-unique standards, unless use of such standards would be inconsistent with applicable law or otherwise impractical.

The American Society of Agricultural and Biological Engineers (ASABE) Standard S572 and updates of that standard were developed by ASABE and approved through the American National Standards Institute (ANSI). The standard defines droplet spectrum categories for the classification of spray nozzles, relative to specified reference fan nozzles discharging spray into static air or so that no stream of air enhances atomization. The purpose of classification is to provide the nozzle user with droplet size information primarily to indicate off-site spray drift potential and secondarily for application efficacy. The standard established a basis for relative nozzle comparisons only based on droplet size. The standard does not address other spray drift and application efficacy factors, such as droplet discharge trajectory, height, and velocity; air bubble inclusion; droplet evaporation; and impaction on target. As discussed in Unit. II.E.2., the ASABE categorization of “medium” droplet sizes is mostly unchanged despite various updates to the standard in recent years. Given the relative stability of the categorization of “medium” droplet sizes, EPA proposes to incorporate by reference the current and all previous versions of S572 to establish the droplet spectrum requirements of § 170.405.

EPA decided to reinstate the distance criteria based on a “medium” droplet size cutoff and height, but not VMD, for several reasons. The description of the droplet size/spectrum in the 2015 WPS language in 40 CFR 170.405(a)(1) and (b)(4) included a numerical value of 294 microns for the VMD. The oldest version of the ASABE standard S572 for which these requirements were originally based on defined the droplet spectrum in six categories and included numerical values for the VMD (Ref. 15). However, the ASABE standard has been revised several times, in 2009, 2018, and 2020 (Refs., 16, 17, 18). The most current standard now defines the droplet sizes into eight classification categories and no longer includes the numerical VMD values that were the basis for the specific criteria in the 2015 WPS requirements at 40 CFR 170.405(a)(1) and (b)(4). The classification categories now include a range of VMDs to define “medium” as opposed to a specific VMD value. The categorization of “medium” droplet sizes throughout the ASABE standards, however, have remained largely the same.

The ASABE classifications and categories are generally well understood by the regulated community and are referenced in several places, including on some EPA pesticide labels as they are revised during EPA's Registration Review process. Additionally, droplet classifications from the ASABE standards are also referenced in nozzle manufacturers' selection guides to assist applicators in determining which nozzles and spray characteristics will produce various droplet sizes that are consistent with the ASABE classifications.

The ASABE classification categories have defined droplet size categories for the classification of spray nozzles relative to the specified reference fan nozzle. The purpose of classification is to provide the nozzle user with droplet size information primarily to indicate off-target spray drift potential and secondarily for application efficacy. Nozzle manufacturers often provide the necessary information in their selection guides to place their nozzle types into a droplet size category (Extremely Fine (XF), Very fine (VF), Fine (F), Medium (M), Coarse (C), Very Coarse (VC), Extremely Coarse (EC), and Ultra Coarse (UC)) based at least on orifice size and pressure. The color code associated with droplet size classification categories in the ASABE standard has become commonly understood and is often the same color code currently used in nozzle manufacturer guides on speed, pressure, and nozzle type. EPA notes, however, that these colors may not always reflect the color of the nozzle itself, so care must be taken by applicators when reviewing these guides to determine the correct droplet size for a particular nozzle or nozzle configuration. EPA believes that AEZ and enclosed space distances using a droplet size of “medium” can be determined quickly and simply when referring to these guides and manuals, which is reflective of how applicators and handlers typically ascertain this information in preparation for applications.

Therefore, simplifying the requirements to be based on droplet size categories alone provides a clear and easy approach for determining an AEZ or enclosed space distance, and makes it easier to enforce the requirements without the complexity of determining whether an application is over or under a VMD of 294 microns as required in 2015 WPS. Additionally, EPA will consider developing additional guidance as needed to specify that the information necessary to achieve the desired droplet size based on ASABE's definition of “medium” can be obtained through the nozzle manufacturers' guides where the characteristics for the particular nozzle are typically provided.

Copies of this standard may be purchased from the ASABE, 2950 Niles Road, St. Joseph, MI 49085, or by calling (269) 429-0300, or at https://www.asabe.org. Additionally, each of these standards are available for inspection at the OPP Docket in the EPA Docket Center (EPA/DC) at Rm. 3334, EPA, West Bldg., 1301 Constitution Ave. NW, Washington, DC. The EPA/DC Public Reading Room hours of operation are 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number of the EPA/DC Public Reading Room and the OPP Docket is (202) 566-1744. For information about the electronic availability of this standard for public review in read-only format during the public comment period, visit https://www.epa.gov/pesticide-worker-safety/worker-protection-standard-application-exclusion-zone. EPA has determined that the standard and its predecessor versions are reasonably available to the class of persons affected by this rulemaking.

If you have a disability and the format of any material on an EPA web page interferes with your ability to access the information, please contact EPA's Rehabilitation Act Section 508 (29 U.S.C. 794d) Program at https://www.epa.gov/accessibility/forms/contact-us-about-section-508-accessibility or via email at section508@epa.gov. To enable us to respond in a manner most helpful to you, please indicate the nature of the accessibility issue, the web address of the requested material, your preferred format in which you want to receive the material (electronic format (ASCII, etc.), standard print, large print, etc.), and your contact information.

EPA is proposing to retain the 2020 AEZ Rule's revisions to clarify when applications that have been suspended due to someone being within the AEZ can be resumed, and the family exemption for owners and their immediate family members to remain within an AEZ provided they are inside a closed house or structure.

In the 2020 AEZ Rule, EPA revised 40 CFR 170.505(b) to clarify that handlers may resume a suspended application provided that no workers or other persons (other than appropriately trained and equipped handlers involved in the application) remain in the AEZ. Commenters in response to the 2019 AEZ Proposed Rule were supportive of this change, because it provided the needed clarity for EPA's intent of the suspension requirement. Therefore, EPA intends to maintain this revision in the 2020 AEZ Rule and will only address the language in 40 CFR 170.505(b) regarding off-establishment individuals and those within easements as discussed in Unit II.B. and C.

EPA also proposes to maintain the immediate family exemption at 40 CFR 170.601, which exempts owners and their immediate family members from having to leave the AEZ when they remain inside closed buildings, housing, or shelters on the establishment during pesticide applications. This exemption also permits handlers the ability to proceed with an application when owners or their immediate family members remain inside closed buildings, housing, and structures, provided that the owner has expressly instructed the handler that only the owner and/or their immediate family members remain inside the closed building and that the application can proceed despite the owner and their immediate family members' presence inside the closed building. Handlers, under this exemption, would have to receive this information from the owner of the establishment prior to application and cannot assume that only the owner's family are inside without that assurance. The Agency believes this approach is consistent with the 1992 and 2015 WPS rationales for providing exemptions to the WPS for family farms because the Agency expects owners of agricultural establishments will take all steps necessary to protect their own immediate family members, and the exemption gives owners flexibility to provide those protections by sheltering immediate family members in enclosed structures within an AEZ.

While EPA intends to retain these provisions from the 2020 AEZ Rule, EPA is interested in any new information that might be available for the Agency to consider ensuring that these provisions are adequately protective while meeting the needs of stakeholders. EPA also seeks input on what the Agency can do to ensure that the expectations of these provisions are clear and enforceable. For example, EPA is interested in feedback on whether any additional guidance or future revision is needed to ensure that the intent of the immediate family exemption from the AEZ requirements is properly implemented. EPA is also interested on the clarity and enforceability of the immediate family exemption, particularly regarding handlers who have been “expressly instructed” by the owner to proceed with an application.

The Agency considered rescinding the 2020 AEZ Rule in its entirety and reinstating the WPS in full as finalized in 2015, but the Agency has determined that certain provisions of the 2020 AEZ Rule have merit and support in the administrative record. The Agency has determined that this rulemaking presents the best opportunity to ensure that protections from the 2015 WPS are expeditiously reinstated into the regulatory text, while preserving the meritorious provisions of the 2020 AEZ Rule ( i.e., clarification of when suspended applications can resume and the immediate family exemption). In addition, the Agency continues to assess the best approaches for improving understanding, compliance, and enforcement the AEZ requirements. The Agency will continue to collect additional information for future consideration on the AEZ requirements.

In addition to the request for comments that are specific to the individual issues discussed in Unit II., EPA also requests comments generally on the proposed changes to the WPS AEZ requirements, its efforts to address potential exposure concerns in connection to the changes made by the 2020 AEZ Rule, and the Agency's intention to retain the 2020 AEZ Rule provisions related to the clarification of when suspended applications can resume and the exemption for owners and their immediate family to remain inside homes or other enclosed buildings or structures that may fall within an AEZ. EPA is also interested in whether the proposed changes may have unanticipated consequences, and whether there are any recommendations or considerations on improving the understanding, compliance, and enforceability of the AEZ provisions. To ensure that EPA can give your comments the fullest consideration, please provide the rationale and data or information that support your position.

The following is a listing of the documents that are specifically referenced in this document. The docket includes these documents and other information considered by EPA, including documents that are referenced within the documents that are included in the docket, even if the referenced document is not itself physically located in the docket. For assistance in locating these other documents, please consult the person listed under FOR FURTHER INFORMATION CONTACT .

In accordance with FIFRA section 25(a), EPA submitted a draft of this proposed rule to the United States Department of Agriculture (USDA) (Ref. 19) and the FIFRA Scientific Advisory Panel (SAP) for review. A draft of the rule was also submitted to the appropriate Congressional Committees.

The FIFRA SAP waived its scientific review of this proposed rule on November 27, 2022. The SAP indicated that the draft proposed rule does not contain scientific issues that warranted review by the Panel.

USDA completed its review on December 28, 2022. USDA expressed its support for the action and provided no comments that warranted a response from EPA.

Additional information about these statutes and Executive orders can be found at https://www.epa.gov/laws-regulations/laws-and-executive-orders.

This action is not a significant regulatory action and was therefore not submitted to OMB for review under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011).

This action does not impose any new or modify information collection requirements that would require additional review or approval by OMB under the PRA, 44 U.S.C. 3501 et seq. OMB has previously approved the information collection activities contained in the existing regulations under OMB control number 2070-0190 and identified by EPA Information Collection Request No. 2491.06. This proposal does not impose an information collection burden because the AEZ requirements are not associated with any of the existing burdens in the approved information collection request.

I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA, 5 U.S.C. 601 et seq. The small entities subject to the requirements of this action are agricultural and handler employers, and commercial pesticide handler employers. The Agency has determined that while reinstating several of the 2015 AEZ requirements could require agricultural employers to direct workers to move away from the edge of treatment areas as the application equipment passes, this would be a very temporary disruption in any worker activity and, as summarized in Unit I.E. and otherwise discussed in Units II.B.2., II.C.2., and II.D.2., would not lead to any quantifiable impacts on agricultural establishments, including small agricultural operations. On the part of the handlers, the requirement to cease an application if someone is in the AEZ clarifies the applicator or handler's responsibility and is unlikely to result in measurable costs.

As explained in Unit II.A.4., the 2020 AEZ Rule never went into effect due to a series of court orders staying the effective date of the 2020 AEZ final rule. While the discussion compares the effects of the currently proposed changes to the 2020 AEZ final rule, the AEZ requirements have always extended beyond the boundary of an agricultural establishment and within easements since it originally went into effect in 2016. Therefore, given that the 2015 rule has remained in effect since its establishment, there are no new impacts expected with this proposed rule.

This action does not contain any unfunded mandate as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. The action imposes no enforceable duty on any State, local, or tribal governments or the private sector.

This action does not have federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

This action does not have tribal implications as specified in Executive Order 13175 (65 FR 67249, November 9, 2000), because it will not have substantial direct effects on tribal governments, on the relationship between the Federal Government and tribal governments, or on the distribution of power and responsibilities between the Federal Government and tribal governments. Thus, Executive Order 13175 does not apply to this action.

This action is not subject to Executive Order 13045 (62 FR 19885, April 23, 1997) because it is not economically significant as defined in Executive Order 12866 (see Unit V.A.), and because the EPA does not believe the environmental health or safety risks addressed by this action present a disproportionate risk to children. EPA interprets Executive Order 13045 (62 FR 19885, April 23, 1997) as applying only to those regulatory actions that concern environmental health or safety risks that the EPA has reason to believe may disproportionately affect children, per the definition of “covered regulatory action” in section 2-202 of the Executive order.

The WPS is intended to apply to myriad agricultural pesticides and the Agency has not developed a health or risk assessment to evaluate impact of the proposed amendments of the AEZ provisions for each pesticide subject to the WPS. Beyond the requirements of Executive Order 13045, EPA's 2021 Policy on Children's Health, dated October 5, 2021 ( https://www.epa.gov/ system/files/documents/2021-10/2021-policy-on-childrens-health.pdf ), requires EPA to consistently and explicitly consider early life exposures and lifelong health in all human health decisions. The Agency finds that it is reasonable to expect that this proposed rule would address existing environmental health or safety risks from agricultural pesticide applications that may have a disproportionate effect on children. Children face the risk of pesticide exposure from work in pesticide-treated areas or near ongoing pesticide application, from the use of pesticides near their homes and schools, and from pesticide residues brought into the home by family members after a day of working with pesticides or being in or near pesticide-treated areas. Children also face the risk of pesticide exposure from drift. The proposed rule is intended to limit these exposures and risks by reinstating AEZ requirements that no longer limit it to the property boundary of an agricultural establishment and expanding the AEZ back to 100 feet for sprayed applications with droplet sizes smaller than medium.

This action is not subject to Executive Order 13211 (66 FR 28355, May 22, 2001), because it is not a significant regulatory action under Executive Order 12866.

This action involves voluntary standards under NTTAA section 12(d), 15 U.S.C. 272 note. EPA is proposing to adopt the use of ANSI/ASABE S572, ANSI/ASABE S572.1, ANSI/ASABE S572.2, and ANSI/ASABE S572.3 to define “medium” droplet sizes. Additional information about these standards, including how to access them, is provided in Unit II.E.

Executive Order 12898 (59 FR 7629, February 16, 1994) directs Federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of their programs, policies, and activities on minority populations (people of color and/or indigenous peoples) and low-income populations.

EPA believes that the human health or environmental conditions that exist prior to this action result in or have the potential to result in disproportionate and adverse human health or environmental effects on people of color, low-income populations and/or indigenous peoples. As noted in past assessments (Ref. 3), affected populations include minority and/or low-income individuals that may have a higher risk of exposure and/or are more vulnerable to the impacts of pesticides due to occupation, economic status, health and obstacles to healthcare access, language barriers, and other sociodemographic characteristics.

EPA believes that this action is likely to reduce existing disproportionate and adverse effects on people of color, low-income populations and/or Indigenous peoples. EPA seeks to limit exposure of agricultural workers, handlers, and communities adjacent to agricultural establishments to pesticides. This action would limit exposures to pesticides, improve public health, and prioritize environmental justice by rescinding certain changes to the AEZ provisions that were reflected in the 2020 AEZ Rule but have not yet taken effect. This action would reinstate, for example, regulatory text requiring agricultural employers to keep workers and other people out of the AEZ during the pesticide application regardless of whether the individuals are outside of establishments' boundaries or within easements. Additionally, these changes will reinstate larger AEZs for those sprays with the highest spray drift potential. As discussed in Unit I.E., reinstating the 2015 WPS requirements for these AEZ provisions better balances social and health-related costs than the 2020 AEZ Rule.

EPA additionally identified and addressed environmental justice concerns by engaging with stakeholders from affected communities extensively in the development of the 2015 WPS rulemaking that originally established the AEZ requirements that the Agency proposes to reinstate. Those efforts were conducted to obtain meaningful involvement of all affected parties. Consistent with those efforts and assessments, EPA believes this rule will better protect the health of agricultural workers and handlers by reinstating the complementary protections of the AEZ that were intended to support the “Do Not Contact” requirements within the WPS.

The information supporting this Executive order review is contained in the section discussing the incremental impacts of this action in Unit I.E. and the Economic Analysis from the 2015 WPS (Ref. 3).

Therefore, for the reasons set forth in the preamble, EPA proposes to amend 40 CFR chapter I as follows:

The Commission is an independent agency of the Federal Government that consists of a 15-member, Presidentially- appointed Commission, and a career civil service staff. The 15-member Commission consists of four (4) private citizen members and 11 other senior-level government employees from various cabinet-level departments of the Government. The Commission administers the AbilityOne Program (AbilityOne or the Program) authorized by the Javits-Wagner-O'Day Act (JWOD Act) and its implementing regulations. 1

The JWOD Act directs the Commission to designate Central Nonprofits Agencies (CNAs) to facilitate, by direct allocation, subcontract, or any other means, the distribution of government orders of commodities  2 and services among NPAs employing individuals who are blind or have significant disabilities. The Commission has designated National Industries for the Blind (NIB), for NPAs that employ individuals who are blind, and SourceAmerica, for NPAs that employ individuals with other significant disabilities, as the national nonprofit organizations that perform the CNA roles and responsibilities. 3 Each CNA has a Cooperative Agreement to govern its relationship with the Commission and to establish measurable performance metrics for each CNA. 4

The JWOD Act authorizes the Commission to determine which commodities or services are suitable for sole-source procurement by the Federal Government and placed on the PL. 41 U.S.C. 8503. Once an item is placed on the PL, only the NPA sources authorized by the Commission may supply the commodity or service to Federal agencies. 41 CFR 51-1.2(a). The significance of being a mandatory source for items on the PL is two-fold. First, Federal agencies do not have to follow normal competitive procedures when acquiring items on the PL. Instead, Federal agencies are required to procure the listed item from the qualified NPAs (and only those NPAs) identified on the PL. Second, a PL addition provides a steady stream of income for NPAs and a catalyst for job creation for individuals who are blind or have other significant disabilities. Currently, the PL generates approximately $4 billion in revenue for about 450 NPAs in the AbilityOne Program, creating or sustaining approximately 40,000 jobs for individuals who are blind or have other significant disabilities.

Section 898 of the Fiscal Year 2017 NDAA  5 directed the Secretary of Defense to establish a panel of senior level representatives from DoD agencies, the Commission, and other Federal agencies and organizations to address the effectiveness and internal controls of the Program related to DoD contracts. 6 The primary mission of the Panel was to identify vulnerabilities and opportunities in DoD contracting with the AbilityOne Program and, at a minimum, to recommend improvements in the oversight, accountability, and integrity of the Program. The Panel established seven subcommittees to fulfill its duties. The Panel was required to provide annual reports to Congress on its activities, starting no later than September 30, 2017, and annually thereafter for the next three years and a final report in 2022. 7 Of specific relevance to the proposed rule, the Panel formed an Acquisition and Procurement and U.S. AbilityOne Contracting Oversight subcommittee (also known as Subcommittee Six) to address procurement-specific concerns.

Before the Panel's sunset in December 2021, Subcommittee Six made eleven recommendations. The Commission implemented several of those recommendations. The following four recommended actions are now being proposed through this notice of proposed rulemaking (NPRM):

• Require CNAs to consider price, technical capability, and past performance when making an NPA allocation decision.

• Establish policy and business rules for competition and re-competition of the PL within the AbilityOne Program.

• Revise 41 CFR part 51 to include information regarding deauthorization of NPAs as the authorized source on the PL.

• Protect, to the maximum extent practicable, the jobs of incumbent employees who are blind or have other significant disabilities if an NPA is deauthorized and its work is reallocated within the AbilityOne.

The Commission found significant utility in the Panel's work and agreed with many of its recommendations. For instance, even though the Panel's efforts were focused on the interplay between AbilityOne and DoD procurements, the Commission recognized that many of the Panel's findings applied to the entire Program. Specifically, the Panel raised numerous concerns about the lack of transparency and perceptions of an unequal playing field in the NPA authorization process. The Commission acknowledges that the process to recommend and authorize an NPA may appear opaque from an outsider perspective. These proposed regulatory changes make affirmative steps toward clarifying the process and modifying the NPA selection process with the goal of best meeting the needs of the Federal customer.

In June 2022, the Commission issued its Strategic Plan for fiscal year (FY) 2022-2026. The document incorporated much of the work of the Panel and serves as a policy road map for the Program over the next five years. The plan is anchored by four Strategic Objectives:

• Expand competitive integrated employment (CIE) for individuals who are blind or have other significant disabilities.

• Identify, publicize, and support the increase of good jobs and optimal jobs in the AbilityOne Program.

• Ensure effective governance across the AbilityOne Program.

• Partner with Federal agencies and AbilityOne stakeholders to increase and improve CIE opportunities for individuals who are blind or have other significant disabilities.

These four objectives represent a deliberate shift to align the Program with contemporary disability policy and modern business practices. 8 Objective III, Outcome Goal 2, describes how the Commission will “support the mission by providing best value through contract performance.” This goal is consistent with the Panel's work and the purpose of the proposed rules described herein.

Every item procured on behalf of the Federal Government originates as a requirement for a Federal agency. Under the Program's current framework, CNAs are responsible for identifying which requirements are “suitable” for the Program and making a recommendation to the Commission for addition to the PL. A suitability recommendation also includes identifying qualified NPAs capable of serving as authorized sources.

In most cases, the CNAs work with Federal agencies to determine which requirements are best suited for a PL addition given the agency's needs, available funding, and time frame. This initial identification can be made by the Federal agency or by the CNA in search of potential opportunities. After the parties agree that a requirement may be suitable for a PL addition, the CNA issues an opportunity notice (ON) to its network of NPAs. The ON acts as a solicitation to the NPA community, which describes, at a minimum, the requirements, necessary NPA qualifications, the period of performance, and any other special consideration established by the CNA or Commission. If multiple NPAs respond to the ON, the responsible CNA will engage in a NPA selection process to determine which NPA can offer the best overall solution to the Federal agency. NPA selection normally consists of an evaluation of each NPA's technical capabilities and past performance information. Price, however, is never a consideration at this pre-selection stage. After the CNA identifies the most qualified NPA, it provides a recommendation to the Commission along with all other information pertaining to the overall suitability of the proposed PL addition and enough supporting data to substantiate an initial FMP. The FMP data is generally the byproduct of bilateral negotiations between the NPA and the Federal agency. The Commission staff will often scrutinize the proposed FMP to determine if it is, in fact, a fair price. The FMP is not the lowest or the highest price that could be paid. Instead, the FMP is a reasonable price based on the needs of the Federal agency, market conditions, and the quality of the goods and/or services being provided by the NPA. If the Commission staff concurs with the FMP, the CNA's recommendation and proposed FMP is forwarded to the Commissioners for a vote. If a majority of the Commissioners concur with the recommendation, the suitability determination is affirmed and the initial FMP is established. The Commission then adds the requirement to the PL and authorizes a single NPA to serve as the mandatory source to receive orders from Federal customers. Once the requirement is on the PL, it will normally remain there until no Federal agency needs the requirement or there is no NPA in the Program capable of providing the commodity or service. If, however, there is an ongoing need, Federal agencies must procure the commodity or service from the NPA authorized by the Commission.

The proposed regulatory changes leave the existing NPA recommendation and allocation framework in place, with three modest modifications. First, § 51-2.7 (fair market price) proposes to clarify the Commission's authority to use price competition as a means of determining, establishing, and changing the initial FMP. Second, § 51-3.4 (distribution of orders) proposes to provide a mechanism for Federal agencies to increase their involvement in the allocation process by requesting a competitive distribution. A request for a competitive distribution means the responsible CNA recommends, and the Commission approves, at least two qualified NPAs to function as authorized sources. After which, an allocation would then be issued on a competitive basis to the NPA that can provide the “best overall solution” to the Federal customer. Lastly, proposed § 51-5.2 (mandatory source requirement) clarifies the Commission's authority to authorize and deauthorize NPAs and adds additional protections to employees when work is transferred between NPAs. 9 These changes are intended to modernize the Program and to better align it with the needs of the Federal customer.

A. Section 51-2.7 (Fair market price). Section 8503(b) of the JWOD Act states that the Commission “shall determine the fair market price of commodities and services contained on the [PL] that are offered for sale to the Federal Government by a qualified nonprofit agency for the blind or a qualified nonprofit agency for other severely disabled.” As noted above, the current process only calls for considering an NPA's Program-specific qualifications, technical rating, and past performance. Price, however, is only considered and negotiated after an NPA has been selected. 41 CFR 51-2.7. This is prudent in many situations, especially when there is sufficient market data to validate the sufficiency of those negotiations. However, in some instances, the complexity, varied market conditions, and/or uniqueness of the requirement make bilateral negotiations less feasible for establishing the FMP. In those instances, using competitive market forces as a factor for establishing the FMP would be more beneficial to the Commission in meeting its statutory obligation.

To test the efficiency of considering price on a competitive basis, the Commission pilot-tested two procurements that included price in the NPA recommendation process. The pilot tests demonstrated that including price as a factor, coupled with a “customer-focused” selection ethos, can provide promising results for the Federal customer and the AbilityOne Program. 10 It also provided the Commission a reliable baseline on which the Commission could rely in establishing the FMP. The inclusion of price as an evaluation factor was not used as an attempt by the Commission to prioritize price over all other factors. Instead, price was subordinate to performance history to emphasize the Federal agency's desire to identify NPAs with a strong performance record, and a commitment to customer satisfaction. Again, a fair market price is not the lowest price or the highest price the market will bear, but rather the fairest price supported by adequate research and market considerations.

Current Regulation: The Commission's current regulations permit bilateral price negotiations between the NPA and contracting agency rather than leveraging competitive market forces. The regulation states, in part, that “other methodologies” (like price competition) can be used, “if agreed to by the negotiating parties.” The regulation also states, in relevant part, that “[p]rices are revised in accordance with changing market conditions which include negotiations between contracting activities and producing nonprofit agencies, assisted by central nonprofit agencies, or the use of economic indices, changes in nonprofit agency costs, or other methodologies permitted under these procedures” (§ 51.2-7(b)) and that “recommendations for initial fair market prices, or changes thereto, shall be submitted jointly by the contracting activities and nonprofit agencies concerned to the appropriate central nonprofit agency” (§ 51-2.7(c)).

Rationale for Proposed Change: The Commission is concerned that the provision “if agreed to by the negotiating parties” in § 51.2-7(a) could be misinterpreted to mean that the Commission cannot consider other methodologies (such as price competition) in establishing the initial FMP unless the NPA and contracting activity also agree. Such a reading is not consistent with the Commission's statutory authority to establish the FMP or the general thrust of the regulation. 11 In fact, a recent decision at the Court of Federal Claims (COFC) held the following:

The COFC found that the price component at issue in this case conflicted with the “collaborative pricing process” contemplated under 41 CFR 51-2.7 (negotiations with the nonprofit contractor, the contracting activity, and the central nonprofit agency). The COFC added that “other methodologies” (aside from negotiations) are permissible, but only if the parties agree to a deviation from this process. § 51-2.7(a). The JWOD Act, however, unambiguously authorizes the Commission to establish the FMP and to revise it “in accordance with changing market conditions.”  13 As such, the Commission believes it has the discretion to use the most appropriate pricing methodology when it initially establishes or changes the FMP and is not limited solely to an agreement of the negotiating parties as interpreted by the Court. The proposed changes to § 51-2.7 are intended to harmonize the statute and regulation to eliminate any ambiguity surrounding the Commission's authority to establish the FMP, by making it clear that an agreement between the parties is not required for the Commission to utilize other pricing methodologies (including price competition) to establish or change the FMP.

Proposed Regulation: The proposed changes to § 51-2.7 eliminate the ambiguity surrounding the Commission's authority to establish the FMP. The proposed regulation amends paragraph (a) by removing “if agreed to by the negotiating parties” and replacing the existing text with “the price can be based on market research, comparing the previous price paid, price competition, or any other methodology specified in Committee policies and procedures.” This change makes clear that agreement by the parties is not required in establishing the FMP and adds examples of other bases upon which FMP can be based. The proposed regulation also amends paragraph (b) to state that the FMP may be revised in accordance with methodologies established by the Committee, which include the addition of price competition. Lastly, the proposed rule removes the language currently at § 51-2.7(c) requiring the initial FMP, or changes thereto, to be submitted jointly by contracting activities and NPAs to the CNA (§ 51-2.7(c)). The contracting activities and NPAs may still submit prices jointly as a matter of Commission policy, but such a requirement would only be applicable if bilateral negotiations is the method the Commission chooses to use to determine the FMP.

B. Section 51-3.4 (Distribution of orders) —CNAs have explicit statutory authority “to facilitate the distribution, by direct allocation, subcontract, or any other means, of orders of the Federal Government for commodities and services on the procurement list among qualified nonprofit agencies for the blind or qualified nonprofit agencies for other severely disabled.” 41 U.S.C. 8503(c). A distribution can only occur, however, after the Commission has authorized at least one NPA to serve as a mandatory source.

Current Regulation: The current regulation states that the CNA “shall distribute orders from the government only to nonprofit agencies which the Committee has approved,” and, “[w]hen the Committee has approved two or more nonprofit agencies to furnish a specific commodity or service,” the CNA shall distribute the order “in a fair and equitable manner.”

Rationale for Proposed Change: Under the current structure, the CNAs typically recommend a single NPA to provide a commodity or service to the Federal customer. The CNAs consider numerous factors before recommending an NPA to the Commission, but the priorities of the Federal customer aren't always effectively articulated throughout the recommendation process. 14 Nevertheless, once that recommendation is made and the Commission authorizes the recommended NPA to serve as a mandatory source, the CNA must distribute orders to that NPA and only that NPA as long as the commodity or service remains on the PL. Since NPAs in the Program vary in sophistication and technical expertise, where two or more NPAs have been approved to provide a service, the competitive distribution option will be limited to only services contracts where the total contract value exceeds $10 million  15 or in instances where bilateral negotiations have failed. The proposed language emphasizes the priorities of the Federal customer for specific allocations and creates a framework for the Federal agency to utilize the competitive distribution option for any service contract with a total contract value exceeding $10 million. This rule proposes to allow the Commission to opt for a competitive allocation for services contracts with a total contract value at or below $10 million due to an impasse in bilateral negotiations regarding price. It is important to emphasize that the competitive distribution option may only be utilized for services contracts, not contracts for commodities. These changes are intended to provide all Federal agencies access to competitive distributions while also allowing the Commission to have the flexibility to approve requests and tailor execution consistent with the Commission's available resources, personnel, and the needs of the Program.

Proposed Regulation: The process for recommending, authorizing, and distributing orders to NPAs will continue to be done in a “fair and equitable manner,” but each allocation will be made to the NPA that provides the “best overall solution” for the Federal customer. This rule proposes to amend § 51-3.4 to impose new requirements as to how a CNA must distribute orders for certain services contracts among two or more approved NPAs. First, this rule proposes to remove the language requiring CNAs to distribute orders to NPAs in a “fair and equitable manner” and replace the existing text with “in a manner that provides the best overall solution for the Federal customer.” This rule also proposes to add new paragraphs (b), (c), (d), and (e), which impose additional requirements for new and existing PL additions. For service requirements that are expected to exceed $10 million in total contract value, the Federal customer may request, subject to the Commission's approval, that the procurement be distributed on a competitive basis among all authorized NPAs (proposed § 51-3.4(b)). For service requirements equal to or less than $10 million in total contract value, the Commission may direct a competitive distribution for an existing PL service requirement in instances where good faith sole source negotiations have failed to produce an agreeable price (proposed § 51-3.4(c)). Finally, this rule also proposes to provide guidance for NPA selection and the Federal customer's obligations in requesting a competitive distribution (§ 51-3.4(d)) and establishes a framework for resolving a dispute arising out of a competitive distribution decision (§ 51-3.4(e)).

C. Section 51-5.2 (Mandatory source requirement) —The Commission is responsible for placing and removing items from the PL and authorizing and deauthorizing qualified NPAs to serve as mandatory sources. 41 CFR 51-2.2(b).

Current Regulation: The current regulation states, in relevant part, that “[n]onprofit agencies designated by the Committee are mandatory sources of supply for all entities of the Government for commodities and services included on the Procurement List” (§ 51-5.2(a)), “[p]urchases of commodities on the Procurement List by entities of the Government shall be made from sources authorized by the Committee” (§ 51-5.2(b)), “[c]ontracting activities shall require other persons providing commodities which are on the Procurement List to entities of the Government by contract to order these commodities from the sources authorized by the Committee” (§ 51-5.2(c)), and “[c]ontracting activities procuring services which have included within them services on the Procurement List shall require their contractors for the larger service requirement to procure the included Procurement List services from nonprofit agencies designated by the Committee” (§ 51-5.2(e)).

Rationale for Proposed Regulation: Before an item is added to the PL, the Commission must find that the commodity or service is “suitable” for addition. 41 CFR 51-2.4. The Commission's regulations require that the suitability of a commodity or service be evaluated on four criteria: (1) employment potential, (2) the qualifications of the proposed NPA(s), (3) the capability of the proposed NPA(s), and (4) the level of impact on the current contractor. 41 CFR 51-2.4(a). Under the Commission's regulations, the suitability determination “approves” a commodity or service for PL addition and “authorizes” at least one NPA to serve as a mandatory source. The current regulation at § 51-5.2 does not explicitly assert the Commission's authority to authorize or deauthorize an NPA. 16 It is also silent on an NPA's responsibilities for the incumbent workforce when work is transferred from one NPA to another. This rule proposes changes to § 51-5.2 to clarify the Commission's authority to authorize and deauthorize NPAs and add additional protections for incumbent employees when work is transferred between NPAs.

Proposed Regulation: The proposed changes clarify the Commission's authority to authorize and deauthorize NPAs to serve as mandatory sources and to transfer work within the Program. The Commission proposes to amend the text of paragraph (a) to state that the Committee may authorize one or more NPAs to provide a requirement on the PL; that NPAs authorized as mandatory sources remain on the PL until the NPA has been deauthorized by the Committee; and that CNAs may allocate to one or more NPAs a commodity or service on the PL. This rule also proposes to amend paragraph (b) to state that the Committee will authorize the most capable NPA as a mandatory source and paragraph (c) to clarify that contracting activities shall require that their contract with others, such as prime vendors, providing commodities already on the PL to the Federal agency, must order these commodities from Committee authorized sources. We also propose to change the language in paragraph (e) to state that contracting activities procuring services must procure included PL commodities in addition to services from the NPA “authorized” in lieu of “designated” by the Committee. Lastly, the proposed changes also include a new paragraph that includes an affirmative requirement to protect and retain employees who are blind or have other significant disabilities when a project is transferred to another NPA within the Program (proposed § 51-5.2(f)).

Executive Orders (E.O.) 12866 and 13563 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). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The Office of Information and Regulatory Affairs in the Office of Management and Budget has determined that this will be a significant regulatory action and, therefore, is subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993.

While the proposed changes are applicable to all NPAs, the Commission estimates that they would have the most impact on approximately 27 percent or 122 of the 450 NPAs currently qualified to participate in the Program. 17 This group of NPAs performs approximately 346 services contracts, which total an annual revenue of roughly $3.07 billion. 18 Half of that amount ($1.63 billion), is concentrated amongst 23 qualified NPAs. 19 In addition, these rule changes would apply equally across all Federal agencies, but the Department of Defense (DoD) would be impacted the most, accounting for approximately 79 percent of the $3.07 billion ($2.41 billion) in AbilityOne service contracts annually.

Lastly, service contracts are typically renewed once every five years. This means that, on average, up to one-fifth of all applicable AbilityOne service contracts (69 per year) would be subject to the proposed changes in any given year. In terms of dollar amount, this would subject approximately $614 million in contract dollars to a possible competitive distribution on an annualized basis. 20 The exact amount for any given year would be based on the number of requests received and approved by the Commission.

Both CNAs already use a competitive approach when recommending NPAs to the Commission to serve as mandatory sources for a vast majority of new PL additions. 22 The largest criticism to current practice is the perceived lack of transparency in the NPA selection process, a perception of NPA complacency after receiving an authorization, and the inability to consider price on a competitive basis when selecting an NPA. 23 The proposed regulatory changes will directly address each concern by providing greater customer involvement in NPA selection, creating a mechanism to incentivize better performance, and encouraging more competitive pricing.

i. Increased Transparency —For PL additions of more than $10 million in total contract value, inclusive of the base period and all options periods, the proposed changes provide Federal agencies the option to request a competitive allocation. A significant component of that request requires the Federal agency to state “whether it will provide resources to support the process.” The Federal agency is not required to provide resources, but the Commission has found great utility in involving the Federal customer in assisting with evaluating NPA technical capabilities, past performance, and pricing. In 2019 and 2021, the Commission conducted competitive NPA selection pilot tests, leveraging the resources of the Federal agency's responsible contracting activity. 24 In both instances, the Federal agency provided an invaluable mix of engagement and expertise throughout the entire process. However, the ultimate decision for selecting the servicing NPA always fell within the purview of the Commission's authority and will remain within the purview of the Commission under the proposed rule.

ii. Incentivize Better Performance —The AbilityOne Program was created to allow Federal agencies to issue orders on a sole-source basis to qualified NPAs. The competitive procedures proposed herein will not change that. In fact, service requirements below the threshold will not be significantly impacted by the proposed changes and commodities are not subject to the changes for competitive distributions. However, NPAs involved in servicing higher dollar requirements will have to be more responsive to market forces and innovative practices to maintain its place as a mandatory source. The Commission believes that the prospects of a competitive allocation every five to ten years is an appropriate motivator.

The proposed rules also provide a CNA a more effective means for replacing a poor performing NPA, without resorting to granting a Federal agency a purchase exception to procure the requirement outside the Program. Instead, the proposed changes will encourage CNAs to identify as many capable NPAs as possible when a PL addition is initially established. If, in the unlikely event, the originally selected NPA falls well short of expectations, the responsible CNA can make a re-allocation amongst the other authorized NPAs.

iii. More Competitive Pricing —The AbilityOne Program has been a trusted source to Federal agencies since 1938. To remain a trusted source, qualified NPAs must deliver high-quality commodities and services in a timely manner at a competitive price. The two test pilots completed in 2019 and 2021 provide a proof of concept to the potential cost savings that might be generated through competition. The first competitive pilot test was conducted for the Ft. Bliss Facilities Support and Operations Services (FSOS) contract, initially valued at $66.7 million per year and resulted in a contract award of $59.5 million per year, an annual savings of $7.2 million ($39.6 million over the entire performance period) or a 12% reduction. 25 The second pilot test for the Ft. Meade Maintenance and Repair Services contract was valued at $19.6 million per year. The new price would have been $16.8 million per year, an annual savings of $2.8 million ($14 million over the entire performance period) or a 17% reduction. 26 These results suggest that price competition at the pre-selection stage, when compared to bilateral negotiations after NPA selection, can have some very tangible benefits to the Federal Government through cost savings.

The Commission believes that the potential costs from implementation of the proposed changes are greatly outweighed by the benefits to the NPA community, the CNAs, and the Federal Government.

i. Cost to NPAs —The Commission believes that the only additional cost that might be attributed to these proposed rules for new PL additions is the cost an NPA would incur if it is required to include pricing information in its response to an ON. For existing requirements, the only meaningful cost might be proposal preparation cost and possible phase-out cost to the incumbent NPAs if they do not receive a re-allocation after a competitive distribution and must transfer the incumbent workforce to the new NPA.

a. New PL Additions Without an Incumbent NPA: When a CNA issues an ON, NPAs are already required to prepare and submit a competitive response. Responses will provide, at a minimum, information regarding the NPA's qualifications, technical capabilities, and past performance information. It does not, however, provide pricing until after the field has been narrowed down to a single NPA. At that stage, the successful NPA will enter bilateral price negotiations with the Federal customer. Under the proposed rule § 51-2.7(a), it is permissible to include price as a factor as part of the ON. If price is used as a factor, responding NPAs might incur some cost if required to include pricing data in the initial response to the ON. However, since each responding NPA is already on notice that pricing information will be needed to ultimately secure a recommendation, this change would only alter when the NPA must submit it and how it is used.

b. Existing PL Services with an Incumbent NPA: For existing service requirements, the only meaningful cost might be proposal preparation cost and possible phase-out expenses to the incumbent NPAs for the approximately 346 service requirements potentially impacted by a competitive distribution. Under current practice, an incumbent NPA will generally only be displaced by another NPA if it cannot meet the Government's requirements in a satisfactory manner. Otherwise, an NPA will continue to serve as a mandatory source for the life of an existing requirement. Under the proposed rule changes, a Federal agency may request a re-allocation on a competitive basis for a service requirement exceeding $10 million in total contract value, inclusive of the base period and all option periods, or the Commission may direct a competitive re-allocation in instances where bilateral negotiations have failed. If the Commission approves the Federal agency's request for a competitive re-allocation, or if the Commission directs competitive re-allocation after an impasse in negotiations, the incumbent may incur cost in preparing a competitive proposal. If it is displaced, it may incur transition costs, but a vast majority of those costs may be reimbursable under the existing Federal contract. A displaced incumbent NPA would also lose the revenue from the lost allocation. However, from a programmatic perspective, the revenue would remain within the Program because the work would continue to be performed by another qualified NPA. Secondly, proposed rule § 51-5.2(f) requires the losing and gaining NPAs to work together to ensure that any adverse impacts on the incumbent workforce are mitigated to the maximum extent practicable.

ii. Cost to CNAs —The most significant cost that the CNAs would incur are the costs for the approximately 346 PL services that might be selected for a price-inclusive competitive allocation. Of that number, all but ten would fall to SourceAmerica, which has reported to the Commission that it would need 14 full-time equivalents (FTEs) in additional staff or $1.5 million annually to handle the potential increase in workload. However, such costs assume that the Commission would approve every eligible PL service for a competitive distribution. As noted above, the discretionary nature of each request and the Commission's discretion under the proposed rule to determine whether a competitive distribution is appropriate provides the Commission the flexibility to control the number of approved requests based on resource availability.

While competitive distributions may be more resource intensive for CNAs than the status quo, the potential additional costs to CNAs may be offset by increased participation by the Federal customer. For instance, during the competitive pilot for Fort Bliss, the Federal customer provided no less than 7 FTEs of general staff and evaluation support ( i.e., technical evaluation, past performance, and pricing). In any event, the Commission recognizes that competitive distributions might be more resource intensive than the status quo, but many of those costs will be offset by increased participation from the Federal customer and improved customer satisfaction. Additionally, a price impasse because of failed bilateral price negotiations could take multiple bridge contracts and hundreds of additional man-hours to establish the price for a follow-on contract. In those instances, a competitive allocation would reduce the administrative burden for both the CNA and Federal customers by allowing market conditions to be a more determinative factor.

iii. Cost to Federal Customers —The Commission anticipates that the cost to the Federal customer will vary depending on how much support it provides to the Commission and the responsible CNA in carrying out a competitive distribution. In most instances, the Federal customer will be expected to provide personnel to assist with the technical evaluation, past performance evaluation, and price analysis. Additionally, each time an existing PL service requirement is re-allocated, there may be some disruption to contract performance and administrative cost associated with replacing an incumbent contractor. However, this cost would only be incurred if the Federal customer determines that a re-allocation is more advantageous to the Federal Government than maintaining the status quo. 28

iv. Cost to the AbilityOne Commission —According to analysis derived from the two pilot tests, the Commission would need to dedicate additional FTEs consisting of a competition lead, additional attorney advisors, a contract specialist, and several price analysts. 29 Absent additional personnel, the Commission would only be able to support a small number of competitive distributions. The agency would need to budget an additional $800,000-$1.2 million annually to account for the personnel needed to support a competitive allocation for each PL addition in excess of $10 million in total contract value. 30 However, the Commission will largely be able to mitigate additional cost in the following ways:

a. Limited Scope: The Section 898 Panel recommended that a competitive process apply to those service requirements with an annual value of $10 million per year. It also recommended that competitive distributions be mandatory. 31 The proposed rule changes allow for competitive distributions on service contracts that are greater than $10 million in total contract value or in instances where bilateral negotiations have failed, and application of a competitive distribution is not mandatory. The discretionary nature of competitive distributions under the proposed rule provides the Commission the flexibility to approve requests and tailor execution consistent with the Commission's available resources, personnel, and the needs of the Program.

b. Leveraging personnel from the Federal customers: By placing a vast majority of the resource burden for conducting competitive distributions on the responsible CNAs and the requesting Federal agency, the Commission can focus on providing better oversight and compliance. For CNAs, the resource burden is only slightly more than the status quo, and for the Federal customer all additional costs are dedicated to supporting NPA evaluations ( i.e., technical experts, pricing analysis, etc.).

D. Regulatory Flexibility Act —The Committee does not expect this proposed rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, at 5 U.S.C. 601, et seq., because it does not include any new reporting, recordkeeping, or other compliance requirements for small entities. The proposed rule only establishes business rules to improve the AbilityOne Program processes. This proposed rule also does not duplicate, overlap, or conflict with any other Federal rules. However, it has not yet been certified as to whether it is subject to the Regulatory Flexibility Act (5 U.S.C. 601).

E. Unfunded Mandate Reform —This proposed rule will not result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more in any one year, and it will not significantly or uniquely affect small governments.

F. Paperwork Reduction Act —This proposed rule does not contain an information collection requirement subject to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

G. Small Business Regulatory Enforcement Fairness Act of 1996 —This proposed rule would not constitute a major rule as defined by section 804 of the Small Business Regulatory Enforcement Fairness Act of 1996. This proposed rule will not result in an annual effect on the economy of $100,000,000 or more; a major increase in costs or prices; or significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of the United States-based companies to compete with foreign based companies in domestic and export markets.

For reasons set forth in the preamble, the Commission proposes to amend 41 CFR parts 51-2, 51-3, and 51-5 as follows:

The revisions read as follows: