The agencies believe that banking regulators' use of the concept of reputation risk as a basis for supervisory criticisms increases subjectivity in banking supervision without adding material value from a safety and soundness perspective. Although the agencies recognize the importance of a bank's reputation, most activities that could negatively impact an institution's reputation do so through traditional risk channels ( e.g., credit risk, market risk, and operational risk, among others) on which supervisors already focus and already have sufficient authority to address. At the same time, supervising for reputation risk as a standalone risk adds substantial subjectivity to bank supervision and can be abused. It also diverts bank and agency resources from more salient risks without adding material value from a safety and soundness perspective. To improve the efficiency and effectiveness of their supervisory programs, the agencies have removed reputation risk from their supervisory frameworks and are proposing to codify this change in relevant regulations. This change would also respond to concerns expressed in Executive Order 14331, Guaranteeing Fair Banking for All Americans, 1 that the use of reputation risk can be a pretext for restricting law-abiding individuals' and businesses' access to financial services on the basis of political or religious beliefs or lawful business activities.

The agencies' supervisory experience has shown that the use of reputation risk in the supervisory process does not increase the safety and soundness of supervised institutions because supervisors have little ability to predict ex ante whether or how certain activities or customer relationships present reputation risks that could threaten the safety and soundness of an institution. 2 In contrast, risks like credit risk and liquidity risk are more concrete and measurable and allow examiners to more objectively assess a banking institution's financial condition. Assessments of these risks may reflect perceptions of a bank's financial condition consistent with objective principles. Conversely, an independent consideration of reputation risk by examiners has not resulted in consistent or predictable assessments of material financial risk. Instead, by focusing on reputation risk, the agencies have instructed examiners to attempt to map events to public opinion and then public opinion to an institution's condition in ways that have proven nearly impossible to assess or quantify with accuracy. The agencies' attempts to identify reputation risks and their potential effects on institutions have not resulted in increased safety for supervised institutions as supervisors have not been able to accurately predict the public's reaction to business decisions made by institutions.

In other words, there is no clear evidence that interference in banks' activities or relationships in the interest of protecting the banks' reputations has protected banks from losses or improved banks' performances.

In addition to not enhancing safety and soundness, focusing on reputation risk can distract institutions and the agencies from devoting resources to managing core financial risks—such as credit risk, liquidity risk, and interest rate risk—that are quantifiable and have been shown to present significant threats to institutions. Monitoring requires dedicated resources. For example, in order to confront such risks, institutions frequently purchase expensive risk-monitoring models that must be maintained, implement detailed loan review programs, hire expensive outside advisers, and provide time-intensive training for staff. Parallel to these actions by institutions, the agencies have limited resources and a responsibility to use these resources in an efficient and productive manner in furtherance of their statutory responsibilities. In the judgment of the agencies, examining for reputation risk diverts resources that could be better spent on other risks that have been shown to present significant, tangible threats to institutions and that are more easily quantified and addressed through regulatory intervention.

Moreover, the agencies' use of reputation risk in reaching supervisory conclusions introduces subjectivity and unpredictability into the agencies' judgments. Regardless of how much the agencies refine their supervisory approaches to reflect differences among institutions, agency supervision more effectively fosters safe and sound banking when supervised institutions have a reasonable expectation of how the agencies would evaluate an activity. The agencies have not clearly explained how banks should measure the reputation risk from different activities, business partners, or clients, nor have the agencies clearly articulated the criteria for which activities, business partners, or clients are deemed to present reputation risk. Without clear standards, the agencies' supervision for reputation risk has been inconsistent and has at times reflected individual perspectives rather than data-driven conclusions. Different stakeholders may have different perspectives on how such activities or relationships impact an institution's reputation, if at all, which creates unpredictability and inconsistency for regulated entities. Additionally, the subjective nature of supervisory decisions about reputation risk introduces the potential for political or other biases into the supervisory process. Thus, supervisory judgments about reputation risk can create subjective regulatory interference in day-to-day business decisions that are better left to the judgment of the regulated institutions. Given the difficulty of measuring reputation risk in an accurate and precise way, it is inappropriate for the agencies' supervisors to examine supervised institutions against this risk.

More importantly, when a supervised institution alters its behavior to comply with supervisory expectations relating to reputation risk management, such as by closing an account or choosing not to enter into or continue a business relationship with a customer that it would otherwise maintain, it is forgoing an opportunity to maintain or build a profitable business relationship that may otherwise be consistent with sound risk management practice. Accordingly, the agencies' past practice of encouraging supervised institutions to alter their behavior due to reputation risk may have adversely impacted institutions' earnings, capital positions, and safety and soundness. In this way, the agencies' prior focus on reputation risk may have caused supervised institutions to be less safe and sound than had they been permitted to engage in lawful business activities without these limitations resulting from supervisory expectations surrounding reputation risk.

In addition, examining for reputation risk can result in agency examiners implicitly or explicitly encouraging institutions to restrict access to banking services on the basis of examiners' personal views of a group's or individual's political, social, cultural, or religious views or beliefs, constitutionally protected speech, or politically disfavored but lawful business activities. This can result in unfair treatment of different groups and impermissible restrictions on a group's or individual's ability to access financial services. This practice can also result in distortions to industries and the U.S. economy, as the agencies' examiners use reputation risk to choose winners and losers among market participants and industries.

Moreover, even if reputation risk could be quantified, the agencies lack evidence that reputation risk, in the absence of identified financial or operational risks, is a factor that can hurt an institution's safety and soundness. While there are examples of risks like credit risk and liquidity risk being the primary driver of an institution's unsafe or unsound condition, the agencies have not seen evidence that reputation risk can be the primary driver of an institution being in unsafe or unsound condition. When reputational issues are identified as a root cause of harm that has impacted a supervised institution's financial condition, there are typically other more significant factors, such as those relating to the institution's capital, asset quality, liquidity, earnings, or interest rate sensitivity, that are the primary drivers of the institution's weakened financial condition. The OCC's supervision is required by law to focus on the safety and soundness of its institutions and compliance with laws and regulations as well as, as applicable, fair access to financial services and fair treatment of customers. 3 The FDIC is responsible for the supervision and examination of state nonmember banks, including for safety and soundness principles. 4 In furtherance of these objectives, the agencies' supervision should focus on concrete risks and objective criteria directly related to applicable statutory requirements. In the agencies' experience, using reputation risk in its supervisory process does not further this mission.

Based on the above-described supervisory experience and the ineffectiveness of using reputation risk to improve the safety and soundness of supervised institutions, the agencies have removed reputation risk from their supervisory frameworks and are proposing to codify this change in relevant regulations. This proposed rule would be a regulation as defined in section 5 of Executive Order 14192. The proposed rule would be a significant regulatory action for the purposes of Executive Order 12866. The proposed elimination of reputation risk supervision is deregulatory.

Under 12 U.S.C. 1(a), the OCC is charged with assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction. Similarly, the FDIC has statutory authority to administer the affairs of the Corporation, which includes a framework for banking supervision. 5 Further, the FDIC's Board of Directors has the authority to prescribe rules and regulations as it may deem necessary to carry out the provisions of the Federal Deposit Insurance Act, 6 and the OCC is authorized to prescribe rules and regulations to carry out the responsibilities of the office. 7

Based on these authorities, the subjectivity of reputation risk, the inefficacy of reputational risk at identifying risks to safety and soundness or other statutory mandates, and the potential for regulatory overreach and abuse, the agencies have removed reputation risk from their supervisory frameworks and are proposing regulations to codify this change in relevant regulations. The proposed rule would not alter or affect the ability of an institution to make business decisions regarding its customers or third-party arrangements and to manage them effectively, consistent with safety and soundness and compliance with applicable laws.

The proposed rule would prohibit the agencies from criticizing, formally or informally, or taking adverse action against an institution on the basis of reputation risk. In addition, under the proposal, the agencies would be prohibited from requiring, instructing, or encouraging an institution or its employees to refrain from contracting with or to terminate or modify a contract with a third party, including an institution-affiliated party, on the basis of reputation risk. The agencies also could not require, instruct, or encourage an institution or its employees to refrain from doing business with or to terminate or modify a business relationship with a third party, including an institution-affiliated party, on the basis of reputation risk. The proposed rule would also prevent the agencies from requiring, instructing, or encouraging an institution to enter into a contract or business relationship with a third party on the basis of reputation risk. The proposed rule would further prohibit the agencies from requiring, instructing, or encouraging an institution or an employee of an institution to terminate a contract with, discontinue doing business with, or modify the terms under which it will do business with a person or entity on the basis of the person's or entity's political, social, cultural, or religious views or beliefs, constitutionally protected speech, or solely on the basis of the third party's involvement in politically disfavored but lawful business activities perceived to present reputation risk.

This prohibition would not affect requirements intended to prohibit or reject transactions or accounts associated with Office of Foreign Assets Control-sanctioned persons, entities, or jurisdictions. Such prohibitions and rejections would not be based specifically on “the person's or entity's political, social, cultural, or religious views or beliefs, constitutionally protected speech, or politically disfavored but lawful business activities perceived to present reputation risk.” The prohibition also does not affect the agencies' authority to enforce the requirements of the provisions of United States Code title 31, chapter 53, subchapter II regarding reporting on monetary transactions. 8 However, due to the broad nature of Bank Secrecy Act (BSA)  9 and anti-money laundering (AML) supervision, there is a risk that BSA/AML focused supervisory actions could indirectly address reputation risk. The proposal would prohibit supervisors from using BSA and anti-money laundering concerns as a pretext for reputation risk. In addition, although the agencies would continue to consider the statutory factors required with respect to certain applications, 10 the proposal would prohibit supervisors from using these provisions as a pretext for reputation risk, as described in this proposal, in making determinations regarding such applications.

“Adverse action,” as defined by the proposed rule, would include the provision of negative feedback, including feedback in a report of examination, a memorandum of understanding, verbal feedback, or an enforcement action. Furthermore, “action” encompasses any action of any agency employee, including any communication characterized as informal, preliminary, or not approved by agency officials or senior staff. A downgrade (or contribution to a downgrade) of any supervisory rating, including a rating assigned under the Uniform Financial Institutions Rating System or comparable rating system, also would constitute an “adverse action” under the proposed rule. In addition, a downgrade (or contribution to a downgrade) of a rating under the Uniform Interagency Consumer Compliance Rating System or the Uniform Rating System for Information Technology, or any other rating system, would also constitute an “adverse action” under the proposed rule. Further, a denial of a filing or licensing application or an imposition of a capital requirement above the minimum ratios would constitute an “adverse action” under the proposed rule, as would any burdensome requirements placed on an approval, the introduction of additional approval requirements, or any other heightened requirements on an activity or change.

The agencies are also including a general “catch-all” for any other actions that could negatively impact the institution outside of traditional supervisory channels. This catch-all is meant to include actions such as supervisory decisions on applications for waivers outside of the normal licensing or filing channels, applications to engage in certain business activities for which supervisory permission is required, or other regulatory decisions affecting institutions. Intent is the defining characteristic for whether an agency-action would fall into this catch-all provision. As an illustration of agency actions that would be subject to this prohibition, the prohibition would prevent the agencies from, for example: disapproving a proposed member of a board of directors on the basis of an unsubstantiated pretense where the true reason is reputation risk, denying a waiver of bank director citizenship and residency requirements for the purpose of inducing a bank to address perceived reputation risk somewhere in the bank's operations, or disapproving a change of control notice because a bank lacks internal reputation risk controls. Agency actions subject to this prohibition would also include negative feedback that is verbal, a condition attached to an approval, the introduction of new approval requirements, and any other heightened requirements that are intended to force the bank to address perceived reputation risk.

The term “doing business with” in the proposed rule is intended to be construed broadly and to include business relationships both with bank clients and with third-party service providers. It is also intended to include the relationship of a bank with organizations or individuals that the bank is providing with charitable services, including as part of a community benefits agreement or as part of a Community Reinvestment Act plan. This term is intended to include both existing business relationships and prospective business relations.

The term “institution-affiliated party” has the same meaning as in section 3 of the Federal Deposit Insurance Act. 11

The proposed rule would define “reputation risk” as the risk, regardless of how the risk is labeled by the institution or by the agencies, that an action or activity, or combination of actions or activities, or lack of actions or activities, of an institution could negatively impact public perception of the institution for reasons unrelated to the current or future financial condition of the institution. This definition is intended to include not just risks that the agencies or the institution identify as “reputation risks,” but any similar risk based around concerns regarding the public's perception of the institution beyond the scope of other risks in the agencies' supervisory frameworks. This definition is not intended to capture risks posed by public perceptions of the institution's current or future financial condition because such perceptions relate to risks other than reputation risk. For example, public perceptions that a bank has insufficient liquidity and therefore is susceptible to a bank run would not be considered reputation risk.

The prohibitions of the proposed rule would apply to actions taken on the basis of reputation risk; political, social, cultural, or religious views and beliefs; constitutionally protected speech; or solely based on bias against politically disfavored but lawful business activities perceived to present reputation risk. The proposed rule would not prohibit criticism, supervisory feedback, or other actions to address traditional risk channels related to safety and soundness and compliance with applicable laws, including credit risk, market risk, and operational risk (including cybersecurity, information security, and illicit finance), provided that such criticism, supervisory feedback or other actions addressing these other risks is not a pretext by examiners aimed at reputation risk.

Under the proposed rule, the OCC would make seven conforming amendments to the OCC's regulations to eliminate references to reputation risk. These conforming amendments would be made in (1) the list of risks a national bank shall consider, as appropriate, as set out in 12 CFR part 1 of the OCC regulations;  12 and (2) the safety and soundness standards set forth in 12 CFR part 30 of the OCC regulations, including the OCC guidelines. 13 The OCC regulations at 12 CFR part 30 would include six conforming amendments. 14

Regulations codified in 12 CFR part 41 of the OCC regulations and 12 CFR part 334 of the FDIC's regulations refer to reputation risk concerning certain identity theft prevention programs required by the Fair and Accurate Credit Transactions Act of 2003. 15 However, by statute, guidelines and regulations for these programs must occur jointly across certain federal agencies, 16 so no conforming amendment is suggested for 12 CFR part 41 or 12 CFR part 334. The OCC and FDIC are considering making changes to 12 CFR parts 41 and 334, respectively, in a separate, joint rulemaking in the future. Until that separate, joint rulemaking occurs, the agencies expect to exercise their discretion in enforcing 12 CFR parts 41 and 334 by using agency resources to assess compliance without regard to reputation risk.

Under the proposed rule, the FDIC would make one conforming amendment to the FDIC's regulations relating to reputation risk. This amendment would be made in the safety and soundness standards set forth in 12 CFR part 364 of the FDIC's regulations. 17 The proposed rule would eliminate the reference to reputation risk in the regulation.

The agencies seek comment on all aspects of the proposed rule, including the following:

1. Do commenters believe the enumerated prohibitions capture the types of actions that add undue subjectivity to bank supervision? If there are other prohibitions that would be warranted, please identify such prohibitions and explain.

2. Is the definition of “adverse action” in the proposed rule sufficiently clear? Should the definition be broader or narrower? Are there other types of agency actions that should be included in the list of “adverse actions?” Does the catch-all provision at the end of the definition of “adverse action” appropriately capture any agency action that is intended to punish or discourage banks on the basis of perceived reputation risk? Is such catch-all provision sufficiently clear?

3. Are commenters aware of any other uses of reputation risk in supervision or in the agencies' regulations that should be addressed in this rule? If so, please describe such uses and their effects on institutions.

4. Do commenters believe the definition of “reputation risk” should be broadened or narrowed? If so, how should the definition be broadened or narrowed? Please provide the reasoning to support any suggested changes.

5. Do commenters understand what is meant by the phrase “solely on the basis of the third party's involvement in lawful business activities that are perceived to present reputation risk?” Could the agencies word this prohibition more clearly? Should the word “solely” be included? Would it be better to say “solely or partially?”

6. Are there alternatives to the proposed rule that would better achieve the agencies' objective? If so, please describe any such alternatives.

7. Are there changes to the proposed rule that would help restrict the agencies' ability to evade the rule's requirements, including evasion through mislabeling a risk or through using alternative adverse actions? Is there other anti-evasion language that should be included?

8. The proposed definition of “reputation risk” includes risks that could negatively impact public perception of an institution for reasons unrelated to the financial condition of the institution. Should this be broadened to include reasons unrelated to the financial or operational condition of the institution?

9. Should the list of relationships that would constitute “doing business with” include additional types of relationships?

10. Does the removal of reputation risk create any other unintended consequences for the agencies or their supervised institutions?

11. Would the proposed rule have any costs, benefits, or other effects that the agencies have not identified? If so, please describe any such costs, benefits, or other effects.

Additionally, section 722 of the Gramm-Leach-Bliley Act  18 requires the federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies have sought to present the proposed rule in a simple and straightforward manner, and invite comment on the use of plain language. For example:

12. Have the agencies organized the material to suit your needs? If not, how could the agencies present the proposed rule more clearly?

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

14. Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification?

15. Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would achieve that?

16. Would more, but shorter, sections be better? If so, which sections should be changed?

What other changes can the agencies incorporate to make the regulation easier to understand?

OCC:

As previously discussed, to improve the efficiency and effectiveness of their supervisory programs, the agencies are proposing revising their supervisory frameworks to remove reputation risk. The proposed rule would prohibit the OCC from criticizing or taking adverse actions (broadly defined) against an institution on the basis of reputation risk. The proposed rule would define “reputation risk” as the risk, regardless of how the risk is labeled by the institution or by the agencies, that an action or activity, or combination of actions or activities, or lack of actions or activities, of an institution could negatively impact public perception of the institution for reasons unrelated to the financial condition of the institution. The proposed rule would also prohibit the agencies from requiring, instructing, or encouraging an institution or any employee of an institution to terminate a contract with, discontinue doing business with, sign a contract with, initiate doing business with, modify the terms under which it will do business with a person or entity, or take any action or refrain from taking any action on the basis of the person's or entity's political, social, cultural, or religious views or beliefs or solely on the basis of the person's or entity's involvement in lawful business activities perceived to present reputational risk. The proposed rule would not prohibit criticism, supervisory feedback, or other actions to address traditional risk channels related to safety and soundness and compliance with applicable laws, including credit risk, market risk, and operational risk (including cybersecurity, information security, and illicit finance), provided that such criticism, supervisory feedback or other actions addressing these other risks is not a pretext by examiners aimed at reputational risk.

Under the proposed rule, the OCC would make seven conforming amendments to the OCC's regulations relating to reputation risk. These conforming amendments would be made in (1) the list of risks a national bank shall consider, as appropriate, as set out in 12 CFR part 1 of the OCC regulations; and (2) the safety and soundness standards set forth in 12 CFR part 30 of the OCC regulations.

There are two regulatory baselines that may be assessed. Under the first baseline, on March 20, 2025, the OCC issued OCC Bulletin 2025-4 wherein the OCC issued guidance that removed references to banks' reputation risk from its “Comptroller's Handbook” booklets and guidance issuances. In addition, the OCC instructed its examiners that they should no longer examine for reputation risk.

Therefore, under this first legal and regulatory baseline, the OCC already discontinued reputation risk-based supervision since March 2025, and the proposed rule would create a formal legal mandate to remove reputation risk from OCC supervision. Effectively, there would be no additional burden, and therefore no compliance costs since reputation risk would not be examined effective with OCC Bulletin 2025-4. Any cost savings would be de minimis since references to bank's reputation risk were already removed, per OCC Bulletin 2025-4.

Under the second baseline, which considers the scenario absent OCC Bulletin 2025-4, however, the OCC would have continued to supervise institutions for reputation risk.

The OCC currently supervises 1,017 national banks, Federal savings associations, trust companies and Federal branches and agencies of foreign banks (collectively, banks). 19 Because all OCC-regulated banks and institutions were subject to reputation risk assessments, the proposed rule would affect all 1,017 institutions supervised.

Because the proposed rule aims to remove the influence of the agencies' reputation risk assessments on institutions' customer relationships, we conclude that the proposed rule could potentially affect all OCC-regulated institutions' current and future customers.

While the proposed rule does not address regulated institutions' internal practices of how to address reputation risk, the OCC expects that the proposed rule would, nonetheless, result in a decrease in regulated institutions' costs primarily through reduced regulatory compliance burden, relative to the second baseline. The OCC would no longer examine for reputation risk nor issue any related adverse supervisory actions. In turn, institutions would no longer have to engage in reputation risk examinations and respond to any related adverse supervisory actions. The OCC estimates that the cost savings could be significant depending on the level of effort an institution put forth to prepare for reputation risk examinations. Although the OCC is unable to thoroughly quantify cost savings due to decreased regulatory compliance burden, the OCC notes that there is a non-trivial percentage of Matters Requiring Attention (MRAs) that mentioned “reputation risk.” The table below calculates the percentage of MRA-related text summaries that mentioned the word “reputation” from all available summaries. The table  20 shows that 12.42 percent of MRAs mentioned “reputation risk” in 2024. While many of these MRAs were not solely due to reputation risk, given the persistence and increased occurrence of reputation risk in MRAs, one could expect that removing reputation risk would result in significant cost savings for institutions that had to respond to reputation risk-related MRAs.

The impact of the proposed rule on OCC-regulated institutions depends significantly on the extent to which the OCC may have changed regulated institutions' behavior in response to the OCC's expectation in managing reputation risk, relative to the second baseline. On the one hand, the OCC's expectations in managing reputation risk may not have been binding; regulated institutions may internally perceive reputation risk as an important aspect in maintaining or growing their customer base.

On the other hand, the OCC's expectations in managing reputation risk may have caused changes in institutions' behavior in response to reputation risk concerns by encouraging institutions to refrain from and/or terminate existing customer relationships. A consequence of the OCC's actions could have been preventing banks from entering into or continuing profitable business relationships with law-abiding customers that banks would have maintained in the absence of OCC expectations. Indeed, in 2016 the House passed the Financial Institution Customer Protection Act, 21 which was meant to address alleged abuses by Federal banking regulators that pressured financial institutions to terminate services for legal businesses based solely on “reputational risk.”

While Sachdeva et al. 22 show that targeted banks decreased lending to and terminated relationships with affected firms that were deemed controversial, results suggest that the firms substituted credit through nontargeted banks under similar terms. As such, targeted credit rationing did not substantially change the performance of the affected firms. However, even though it did not substantially affect the performance of the affected firms, the affected firms nonetheless had to incur search costs and burden in finding alternatives.

We conclude that the proposed rule should benefit customers by formally eliminating reputation risk related regulatory restrictions and constraints on their business relationships because the proposed rule would decrease the search costs and burden associated with finding alternatives. Additionally, we conclude that the proposed rule should benefit regulated institutions by eliminating constraints on relationships related to reputation risk that would otherwise be profitable.

One additional benefit from the removal of reputation risk is greater consistency and objectivity of supervisory decisions, relative to the second baseline. This in turn, would increase the predictability for regulated institutions to understand and manage regulators' supervisory expectations.

In our analysis, we attempted to quantitatively compare the subjectivity of OCC supervisory text that mentions or does not mention the word “reputation.” In our analysis, we use standard natural language processing algorithms  23 to calculate a subjectivity score for individual OCC supervisory texts. The supervisory text includes descriptions of significant supervisory events and MRA text descriptions that we also utilized in section D.1 of this document. We calculate the subjectivity score for each individual text document, and the scores range from 0 to 1 and scores closer to 1 are indicative of more subjective text.

For the significant supervisory event text data, we calculated an average subjectivity score of 0.41 for text that mentions reputation and an average score of 0.28 for supervisory event text that does not mention reputation. For the MRA text data, we calculated average subjectivity scores of 0.43 and 0.33 from text that mentions and does not mention reputation, respectively.

FDIC:

This analysis utilizes all regulations and guidance applicable to FDIC-supervised insured depository institutions (IDIs), as well as information on the financial condition of IDIs as of the quarter ending March 31, 2025, as the baseline to which the effects of the proposed rule are estimated.

If adopted, the proposed regulations would indirectly benefit FDIC-supervised IDIs or associated persons to the extent they would have been the subject of an adverse action or prohibition against certain business relationships by the agencies on the basis of reputation risk; political, social, cultural, or religious views and beliefs; constitutionally protected speech; or politically disfavored but lawful business activities perceived to present reputation risk. This benefit would occur as the IDI or associated person would avoid any costs associated with such adverse actions or prohibitions. Additionally, the improved efficiency and effectiveness of the FDIC's supervisory programs may also indirectly benefit covered IDIs. Further, IDIs may incur some voluntary costs associated with making changes to their compliance policies and procedures. As of the quarter ending March 31, 2025, the FDIC supervised 2,835 IDIs. 24 The FDIC does not have the information necessary to quantify number of instances, or the associated costs, where an IDI or person was subject to a covered adverse action or prohibition against certain business relationships. Nor does the FDIC have the information necessary to quantify the number of IDIs that might make changes to their compliance policies and procedures. However, the FDIC believes that such instances are very infrequent, based on their supervisory experience. The FDIC believes that the aggregate economic effect of any such indirect benefits or costs is unlikely to be substantive.

The FDIC invites comments on all aspects of this analysis. In particular, would the proposed rule have any costs or benefits that the agencies have not identified?

The Paperwork Reduction Act of 1995  25 (PRA) states that no agency may conduct or sponsor, nor is the respondent required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The agencies have reviewed this proposed rule and determined that it does not create any information collection or revise any existing collection of information. Accordingly, no PRA submissions to OMB will be made with respect to this proposed rule.

OCC:

In general, the Regulatory Flexibility Act (RFA)  26 requires an agency, in connection with a proposed rule, to prepare an initial regulatory flexibility analysis describing the impact of the rule on small entities (defined by the U.S. Small Business Administration (SBA) for purposes of the RFA to include commercial banks and savings institutions with total assets of $850 million or less and trust companies with total assets of $47 million or less). However, under section 605(b) of the RFA, this analysis is not required if an agency certifies that the proposed rule would not have a significant economic impact on a substantial number of small entities and publishes its certification and a short explanatory statement in the Federal Register along with its proposed rule.

The OCC currently supervises approximately 609 small entities, all of which may be impacted by the proposed rule. 27 In general, the OCC classifies the economic impact on an individual small entity as significant if the total estimated impact in one year is greater than 5 percent of the small entity's total annual salaries and benefits or greater than 2.5 percent of the small entity's total non-interest expense. Furthermore, the OCC considers 5 percent or more of OCC-supervised small entities to be a substantial number. Thus, at present, 30 OCC-supervised small entities would constitute a substantial number.

Under the baseline with OCC Bulletin 2025-4, the proposed rule would have a de minimis effect on small entities. Under the baseline absent OCC Bulletin 2025-4, the proposed rule would affect all small OCC-regulated entities and would therefore affect a significant number of small entities. However, because the proposed rule would result in significant cost savings for all OCC-regulated institutions, the OCC expects the proposed rule would not have a significant adverse impact on small entities. Thus, the OCC finds that the proposed rule would not have a significant economic impact on a substantial number of OCC-supervised small entities under either baseline.

FDIC:

The RFA generally requires an agency, in connection with a proposed rule, to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of the proposed rule on small entities. 28 However, an initial regulatory flexibility analysis is not required if the agency certifies that the proposed rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. The SBA has defined “small entities” to include banking organizations with total assets of less than or equal to $850 million. 29 Generally, the FDIC considers a significant economic impact to be a quantified effect in excess of 5 percent of total annual salaries and benefits or 2.5 percent of total noninterest expenses. The FDIC believes that effects in excess of one or more of these thresholds typically represent significant economic impacts for FDIC-supervised institutions. As discussed further below, the FDIC certifies that the proposed rule, if adopted, would not have a significant economic impact on a substantial number of FDIC-supervised small entities.

The proposed rule would, if adopted, apply only to the activities of the FDIC. As such, this rule would not impose any obligations on FDIC-supervised entities, and FDIC-supervised entities would not need to take any action in response to this rule. Therefore, the FDIC certifies that the proposed rule, if adopted, would not have a significant economic impact on a substantial number of FDIC-supervised small entities because proposed rule would not have any direct effect on the public or FDIC-supervised institutions.

The FDIC invites comments on all aspects of the supporting information provided in this RFA section. The FDIC is particularly interested in comments on any significant effects on small entities that the agency has not identified.

The OCC has analyzed the proposed rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA). 30 Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year ($187 million as adjusted annually for inflation). Pursuant to section 202 of the UMRA, 31 if a proposed rule meets this UMRA threshold, the OCC would need to prepare a written statement that includes, among other things, a cost-benefit analysis of the proposal.

The OCC estimates that the proposal would not require additional expenditure from OCC-regulated entities. As noted earlier, there would likely be a decrease in expenditures due to the removal of compliance mandates, resulting in cost savings. The OCC's estimated UMRA cost is $0. Therefore, the OCC finds that the proposed rule does not trigger the UMRA cost threshold. Accordingly, the OCC has not prepared the written statement described in section 202 of the UMRA.

Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA) of 1994, 32 in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, the OCC and FDIC must consider, consistent with principles of safety and soundness and the public interest (1) any administrative burdens that the final rule would place on depository institutions, including small depository institutions and customers of depository institutions and (2) the benefits of the final rule. This rulemaking would not impose any reporting, disclosure, or other requirements on insured depository institutions. Therefore, section 302(a) does not apply to this final rule.

The Providing Accountability Through Transparency Act of 2023  33 requires that a notice of proposed rulemaking include the internet address of a summary of not more than 100 words in length of a proposed rule, in plain language, that shall be posted on the internet website www.regulations.gov.

The OCC and FDIC propose codifying the elimination of the use of reputation risk from their risk-based supervisory frameworks. The proposal would prohibit the agencies from forcing an institution to refrain from contracting or doing business with an individual or entity or to terminate, modify, or initiate a contract or business relationship on the basis of reputation risk. The agencies also could not force an institution to terminate a contract or discontinue or modify a business relationship on the basis of an individual's or entity's political, social, cultural, or religious views or beliefs, constitutionally protected speech, or lawful business activities.

The proposal and required summary can be found for the OCC at https://www.regulations.gov by searching for Docket ID OCC-2025-0142 and https://occ.gov/topics/laws-and-regulations/occ-regulations/proposed-issuances/index-proposed-issuances.html, and for the FDIC at https://www.fdic.gov/resources/regulations/federal-register-publications/index.html#.

Executive Order 12866, titled “Regulatory Planning and Review,” as amended, requires the Office of Information and Regulatory Affairs (OIRA), OMB, to determine whether a proposed rule is a “significant regulatory action” prior to the disclosure of the proposed rule to the public. If OIRA finds the proposed rule to be a “significant regulatory action,” Executive Order 12866 requires the OCC to conduct a cost-benefit analysis of the proposed rule and for OIRA to conduct a review of the proposed rule prior to publication in the Federal Register . Executive Order 12866 defines a “significant regulatory action” to mean a regulatory action that is likely to (1) have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in Executive Order 12866.

OIRA has determined that this proposed rule is a significant regulatory action under section 3(f)(1) of Executive Order 12866 and, therefore, is subject to review under Executive Order 12866. The OCC's analysis conducted in connection with Executive Order 12866 is included above under the “Expected Impacts” section of this document. The FDIC's analysis conducted in connection with Executive Order 12866 is also included above under the “Expected Effects” section of this document.

Executive Order 14192, titled “Unleashing Prosperity Through Deregulation,” requires that an agency, unless prohibited by law, identify at least 10 existing regulations to be repealed when the agency publicly proposes for notice and comment or otherwise promulgates a new regulation with total costs greater than zero. Executive Order 14192 further requires that new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least 10 prior regulations. Under either baselines with OCC Bulletin 2025-4 or absent the OCC Bulletin 2025-4, this proposed rule is a deregulatory action under Executive Order 14192 because it results in potential cost savings for OCC-supervised institutions.

For the reasons set forth in the preamble, the OCC proposes to amend parts 1, 4, and 30 of chapter I of title 12 of the Code of Federal Regulations as follows:

For the reasons set forth in the preamble, the FDIC proposes to amend parts 302 and 364 of chapter III of title 12 of the Code of Federal Regulations as follows:

The OCC and the FDIC (collectively, the agencies) exercise their enforcement and supervision authority to ensure that supervised institutions  1 refrain from engaging in unsafe or unsound practices. To that effect, the agencies believe it is important to promote greater clarity and certainty regarding certain enforcement and supervision standards by defining them by regulation. Moreover, the agencies believe it is critical that examiners and institutions prioritize material financial risks over concerns related to policies, process, documentation, and other nonfinancial risks and that their enforcement and supervision standards further that prioritization.

Specifically, pursuant to the provisions of section 8 of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1818), the agencies are authorized to take enforcement actions against depository institutions  2 and institution-affiliated parties  3 that have engaged in an “unsafe or unsound practice.” As described in section II.A of this SUPPLEMENTARY INFORMATION , the agencies are proposing to define by regulation the term “unsafe or unsound practice” for purposes of section 8 of the FDI Act. The proposed implementation of the definition of “unsafe or unsound practice” would apply to the agencies' supervisory and enforcement activities prospectively only. Moreover, it would not apply to the agencies' rulemaking activities or authority.

In addition, the agencies are proposing to establish uniform standards for purposes of their communication of certain supervisory concerns. The agencies each communicate deficiencies that rise to the level of a matter that requires attention from an institution's board of directors and management, but the agencies have different standards for when the agency may communicate these deficiencies. 4 As described in section II.B of this SUPPLEMENTARY INFORMATION , the agencies are proposing to establish uniform standards for when and how the agencies may communicate matters requiring attention (MRAs) as part of the supervision and examination process, consistent with their underlying statutory authorities. The proposal also clarifies that the agencies may communicate other nonbinding suggestions to institutions orally or in writing to enhance an institution's policies, practices, condition, or operations as long as the communication is not, and is not treated by the agency in a manner similar to, an MRA.

Based on the agencies' supervisory experience and as a matter of policy, the agencies propose implementing a definition of “unsafe or unsound practice” for purposes of section 8 of the FDI Act that would focus on material risks to the financial condition of an institution and would generally require that an imprudent practice, act, or failure to act, if continued, would be likely to materially harm the institution's financial condition. Taking into account statutory text, legislative history, and case law, the agencies believe that the proposed regulatory definition fits within the authority Congress granted to the agencies to take enforcement actions based on unsafe or unsound practices under section 8 of the FDI Act. 5 The agencies believe this change will provide greater consistency for institutions and institution-affiliated parties and appropriately focus supervisory and institution resources on the most critical financial risks to institutions and the financial system.

The term “unsafe or unsound practice” appears in section 8 of the FDI Act for purposes of the agencies' enforcement authority. The statute does not define the term unsafe or unsound practice. An unsafe or unsound practice may serve as a ground for several types of enforcement actions under provisions of section 8 of the FDI Act. These include involuntary termination of deposit insurance by the FDIC, 6 a cease-and-desist order, 7 a temporary cease-and-desist order, 8 the removal and prohibition of an institution-affiliated party, 9 or a Tier 2 or Tier 3 civil money penalty. 10 Most enforcement provisions in section 8 of the FDI Act also include other potential grounds, such as a violation of law or a breach of fiduciary duty, which are not affected by the proposed regulatory definition.

The ordinary meaning of the term “unsafe,” as defined by the dictionaries most commonly used at the time section 8 of the FDI Act was enacted, is a sufficient degree of risk of sufficient harm, injury, or damage to make a situation not safe. 11 They defined the term “unsound” as a sufficient degree of actual harm, injury, or damage to make a thing not sound. 12

In determining what may be considered an unsafe or unsound practice under section 8 of the FDI Act, some courts have looked to a standard articulated by John Horne, then Chairman of the Federal Home Loan Bank Board (FHLBB) (Horne Standard), during congressional hearings related to the Financial Institutions Supervisory Act of 1966 (Act of 1966), which is the source of the agencies cease-and-desist authority in section 8(b) of the FDI Act. 13 Specifically, Chairman Horne stated:

Generally speaking, an “unsafe or unsound practice” embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds. 14

Representative Patman further described the authority added in the Act of 1966 as “aimed specifically at actions impairing the safety or soundness of . . . insured financial institutions” and providing the agencies with “flexible tools [that] relate strictly to the insurance risk and to assure the public . . . sound banking facilities.”  15

Courts reviewing cases brought by the agencies have grappled with the meaning of “unsafe or unsound practice” in section 8 of the FDI Act and have reached different conclusions as to how to apply it. For example, some courts have applied the Horne Standard without further elaboration on what the standard entails. 16 Other courts have explained that section 8 of the FDI Act applies to practices that have a “reasonably direct effect on an [institution]'s financial soundness”  17 or “threaten the financial integrity” of the institution. 18 Other courts have required that unsafe or unsound practices cause “abnormal risk to the financial stability of the . . . institution,”  19 “abnormal risk of financial loss or damage,”  20 or “reasonably foreseeable undue risk.”  21

The lack of a Federal statutory definition for the term “unsafe or unsound practice” has resulted in enforcement actions and supervisory criticisms for concerns not related to material financial risks. The agencies believe that the proposed regulatory definition faithfully reflects the intent of the standard as enacted by Congress and aligns with the interpretations of the term unsafe or unsound practice within section 8 of the FDI Act by most Federal courts. The proposed regulatory definition would also provide a consistent nationwide standard to provide greater clarity for institutions and institution-affiliated parties.

The agencies believe that the proposed definition of the term unsafe or unsound practice is also important to appropriately focus institution and examiner attention on practices that are likely to materially harm an institution's financial condition, providing the institution's board of directors and management additional flexibility to enact day-to-day decisions based on their business judgment and risk tolerance. The proposed definition reflects the agencies' judgment and experience that their supervisory resources are best focused on practices that are likely to materially harm an institution's financial condition, such as risks that are more likely than other risks to lead to material financial losses, bank failures, and instability in the banking system. 22 For the same reasons, the agencies believe that practices that are likely to materially harm the financial condition of an institution are critical for an institution's board of directors and management to address.

In addition, lack of clarity regarding the scope of the term unsafe or unsound practice among examiners could lead to inconsistent application of the terms in communicating supervisory findings. 23 The proposed definition of an unsafe or unsound practice should ensure consistency in identifying practices as unsafe or unsound only where they are likely to materially harm the financial condition of an institution, are likely to present a material risk of loss to the Deposit Insurance Fund (DIF), or have materially harmed the financial condition of the institution. This definition should focus institution and examiner attention on core financial risks facing an institution and otherwise provide the institution's board of directors and management the flexibility to enact decisions based on their business judgment and risk tolerance.

Therefore, as explained further below, in the proposed rule, the agencies would define the term unsafe or unsound practice to mean a practice, act, or failure to act, alone or together with one or more other practices, acts, or failures to act, that (1) is contrary to generally accepted standards of prudent operation; and (2)(i) if continued, is likely to (A) materially harm the financial condition of the institution; or (B) present a material risk of loss to the DIF; or (ii) materially harmed the financial condition of the institution.

Imprudent act. Consistent with the Horne Standard, a practice, act, or failure to act under the proposed definition would have to be contrary to generally accepted standards of prudent operation to be considered an unsafe or unsound practice. 24 The agencies acknowledge that an essential role of institutions is to identify, measure, incur, and manage risk. The agencies do not intend to take enforcement actions under section 8 of the FDI Act for prudent operations that result in risk-taking. A practice, act, or failure to act could only be considered an unsafe or unsound practice if it deviates from generally accepted standards of prudent operation (and otherwise meets the proposed definition).

Likely. To qualify as an unsafe or unsound practice under the proposed definition, it also would have to be likely—as opposed to, for example, merely possible—that the practice, act, or failure to act, if continued, would materially harm the financial condition of the institution or present a material risk of loss to the DIF. The agencies believe that including the term “if continued” is important to allow for identification of an unsafe or unsound act or failure to act before it impacts an institution's financial condition. However, the conduct must be sufficiently proximate to a material harm to an institution's financial condition to meet the proposed definition. 25 The agencies do not intend to identify unsafe or unsound acts or failures to act by extrapolating from deficient conduct that could potentially result in, alone or in combination with other factors or events, material harm to the financial condition of an institution but is not likely to do so. Moreover, the agencies considered, but did not propose, more precisely defining the requisite likelihood under the proposed definition, such as through a minimum percentage ( e.g., 10%, 51%). Instead, the agencies invite comment on whether a minimum percentage likelihood or more precise definition of “likely” is appropriate.

Financial condition. An unsafe or unsound practice would include a practice, act, or failure to act that, if continued, is likely to materially harm the financial condition of an institution. The agencies believe that harm to financial condition includes practices, acts, or failures to act that are likely to directly, clearly and predictably impact an institution's capital, asset quality, earnings, liquidity, or sensitivity to market risk.

Risk of Loss to the Deposit Insurance Fund. An unsafe or unsound practice would also include a practice, act, or failure to act that, if continued, is likely to negatively affect an institution's ability to avoid FDIC receivership and present a material risk of loss to the DIF as a result of the failure. For example, the failure of an institution to implement appropriate contingency funding arrangements might not pose a risk of material harm to the financial condition of the institution, but could impair the institution's liquidity under stress and thus present an increased risk to the DIF. In other words, the proposed definition would capture a practice, act, or failure to act that materially increases the probability that an institution would fail and impose a material risk of loss to the DIF.

Harm. The proposed standard focuses on material harm to financial condition, and the agencies generally interpret harm to refer to financial losses. Therefore, to be an unsafe or unsound practice, a practice, act, or failure to act generally must have either caused actual material losses to the institution or must be likely to cause material loss or other negative financial impacts to the institution. 26 Conversely, that a practice, act, or failure to act caused actual but non-material financial losses to the institution is insufficient to meet the proposed standard. 27

Nonfinancial risks impacting financial condition. The agencies also acknowledge that, in limited circumstances, other practices, acts, or failures to act may be captured because, if continued, they are likely to cause material harm to an institution's financial condition. For example, the term unsafe or unsound practice could include critical infrastructure or cybersecurity deficiencies that are so severe as to, if continued, be likely to result in a material disruption to the institution's core operations that prevent the institution, its counterparties, and its customers from conducting business operations and, in turn, be likely to cause material harm to the financial condition of the institution. The standard would not include risks to the institution's reputation unrelated to financial condition. 28

Material harm. Under the proposed definition, to be considered an unsafe or unsound practice, the likely harm to an institution's financial condition or risk of loss to the DIF must also be material. Risks of minor harm to an institution's financial condition, even if imminent, would not rise to the level of an unsafe or unsound practice. 29 Instead, the agencies will consider the likely harm to an institution's financial condition to be material if it would materially impact the institution's capital, asset quality, liquidity, earnings, or sensitivity to market risk, 30 or would materially impact the risk that an institution fails and causes a loss to the DIF. Going forward, the agencies expect that it would be rare for an institution to exhibit unsafe or unsound practices, as defined in the proposed rule, based solely on the institution's policies, procedures, documentation or internal controls, without significant weaknesses in the institution's financial condition ( i.e., weaknesses that caused material harm to the financial condition of the institution, or were likely to materially harm the financial condition of the institution or likely to present material risk of loss to the DIF). The agencies considered but did not propose to more precisely define the materiality of harm required under the proposed definition, such as through measures of capital or liquidity outflows. Instead, the agencies invite comment on what, if any, more precise measures of material harm are appropriate.

Tailoring required. The proposal also explains that the agencies will tailor their supervisory and enforcement actions under 12 U.S.C. 1818 (as well as their issuance of MRAs, as discussed further below) based on the capital structure, riskiness, complexity, activities, asset size, and any financial risk-related factor that the agencies deem appropriate. This includes tailoring with respect to the requirements or expectations set forth in such actions as well as whether, and the extent to which, such actions are taken. As such, the agencies expect that finding an unsafe or unsound practice would be a much higher bar for a community bank than for a larger institution when considered against the overall operations of the institution. For example, as applied to the threshold for material harm, the agencies would not expect that a particular projected percentage decrease in capital or liquidity that rises to the level of materiality for the largest institutions would necessarily also be material for community banks. The agencies invite comment on whether the agencies should provide additional specificity. Generally, because unsafe or unsound practices by institution-affiliated parties must, if continued, be likely to materially harm the financial condition of an institution, the same tailored standard would, going forward, apply to practices, acts, or failures to act by institution-affiliated parties of the institution.

For these reasons, the agencies propose to define the term unsafe or unsound practice to mean a practice, act, or failure to act, alone or together with other practices, acts, or failures to act, that (1) is contrary to generally accepted standards of prudent operation; and (2)(i) if continued, is likely to (A) materially harm the financial condition of an institution; or (B) present a material risk of loss to the DIF; or (ii) materially harmed the financial condition of the institution.

The agencies are proposing to establish uniform standards for examiners' communication of MRAs. Under the proposed rule, an examiner would be permitted to issue an MRA to address certain risks to the financial condition of an institution and violations of banking or banking-related laws or regulations.

Through various statutory examination and reporting authorities, Congress has conferred upon the agencies the authority to exercise visitorial powers and examination authorities with respect to supervised institutions. 31 The Supreme Court has indicated support for a broad reading of certain visitorial powers. 32 Examination and visitorial powers of the agencies facilitate early identification of supervisory concerns that may not rise to a violation of law, unsafe or unsound practice, or breach of fiduciary duty under section 8 of the FDI Act. These powers provide the agencies with authority to issue MRAs and supervisory ratings. 33

The OCC's current practice is to use MRAs to communicate concerns about an institution's “deficient practices.”  34 A deficient practice is a practice, or lack of practice, that (1) “deviates from sound governance, internal control, or risk management principles and has the potential to adversely affect the bank's condition, including financial performance or risk profile, if not addressed,” or (2) “results in substantive noncompliance with laws or regulations, enforcement actions, or conditions imposed in writing in connection with the approval of any applications or other requests by the [institution].”  35 The purpose of an MRA, unlike other forms of supervisory communications, is to bring a deficient practice to the attention of the institution's board of directors and management to ensure they address the deficiency. An MRA is not intended to serve as a vehicle for examiners to recommend best practices or enhancements to already acceptable standards. When the OCC communicates an MRA to an institution, it includes a corrective action stating what management or the board of directors must do to address the concern and eliminate the cause. 36 An institution is expected to develop an action plan to detail how it intends to correct the root causes of deficiencies rather than symptoms. 37 Although an institution has discretion to develop an adequate action plan as it deems appropriate, the OCC retains the ultimate authority to determine the method and timeframe for corrective action. The actions that an institution's board of directors and management take or agree to take in response to concerns in MRAs are factors in the OCC's decision to pursue an enforcement action and the severity of that action. 38

The OCC tracks an institution's MRAs, including whether they are open, closed, past due, or pending validation. Current OCC policies require that MRAs must remain open until an institution has implemented, and examiners have verified and validated that the institution has consistently adhered to, an effective corrective action. 39 Validation requires the institution to demonstrate the corrective action is effective over a reasonable period, which may vary and is based on the sustainability of the corrected practice, not the institution's condition. 40

For matters that do not warrant an MRA, examiners may offer informal recommendations to the board of directors and management related to potential policy enhancements or best practices. 41 Recommendations do not require specific corrective action or follow-up by examiners, and the OCC does not include recommendations in formal written communications to institutions, such as a report of examination.

The FDIC's current practice is to issue Supervisory Recommendations, including Matters Requiring Board Attention (MRBAs), as part of its supervisory process to communicate weaknesses in a bank's operations, governance, or risk management practices. 42 These supervisory tools are designed to promote timely corrective action and to strengthen institutions' overall safety and soundness.

MRBAs are used to inform an institution of the FDIC's views about changes needed in its practices, operations, or financial condition to help institutions prioritize their efforts to address examiner concerns, identify emerging problems, and correct deficiencies before the institution's condition deteriorates. 43 Boards of directors are expected to oversee management's development and implementation of corrective measures and to ensure timely resolution of the matters. The FDIC reviews the status of MRBAs in subsequent examinations or through offsite monitoring to ensure progress and remediation. The FDIC tracks and categorizes MRBAs to enable the agency to analyze and identify trends related to risk supervision findings.

Other Supervisory Recommendations are issued to highlight deficiencies or weaknesses that warrant management's attention but do not rise to the level of MRBAs. These recommendations are intended to promote sound governance, risk management, and operational practices and, if left unaddressed, may escalate into more significant supervisory concerns. Although these Supervisory Recommendations do not carry the same weight as MRBAs, management is expected to consider and respond to them and to implement corrective action as appropriate.

The agencies each apply their different standards for MRAs and MRBAs (collectively, matters requiring correction) to require institutions to align their conduct with supervisory expectations. But a common denominator of the agencies' current practices for supervisory criticisms is that examiners frequently issue matters requiring correction to communicate deficiencies beyond those that are central to, or in many cases that are directly relevant to, an institution's financial condition. The agencies do not currently require examiners to find that a practice is likely, or reasonably can be expected, to materially harm the financial condition of the institution. In practice, an institution must address the practices described in a matter requiring correction, regardless of whether the institution's board of directors and management consider the examiner's concerns to be accurate or important enough to prioritize. The agencies' expansive definition and application of matters requiring correction has resulted in a proliferation of supervisory criticisms for immaterial procedural, documentation, or other deficiencies that distract management from conducting business and that do not clearly improve the financial condition of institutions. In addition, in the agencies' supervisory experience, failure to correct a deficient practice communicated in a matter requiring correction often eventually results in an enforcement action.

To ensure supervision efforts are appropriately focused on material financial risks and increase consistency in supervisory criticisms, the agencies are issuing this joint proposal regarding their standard for issuing matters requiring correction, which would be in the form of MRAs. 44

The proposed rule would provide that the agencies may only issue an MRA for a practice, act, or failure to act, alone or together with one or more other practices, acts, or failures to act, that (1)(i) is contrary to generally accepted standards of prudent operation; and (ii)(A) if continued, could reasonably be expected to, under current or reasonably foreseeable conditions, ( 1 ) materially harm the financial condition of the institution; or ( 2 ) present a material risk of loss to the DIF; or (B) has already caused material harm to the financial condition of the institution; or (2) is an actual violation of a banking or banking-related law or regulation.

Under the proposed rule, the phrases “materially harm the financial condition of an institution,” “materially harmed the financial condition of an institution,” and “material risk of loss to the Deposit Insurance Fund” would have the same meaning for MRAs as they would have for the proposed definition of unsafe or unsound practice. The proposed MRA standard would accordingly focus supervisory and institution resources on material financial risks. Similar to the proposed definition of an unsafe or unsound practice, practices, acts, or failures to act that are captured by the proposed MRA standard would, in the vast majority of cases, relate directly to risks of material harm to the financial condition of an institution or violations of certain laws and regulations. Material financial risks will, in the vast majority of cases, relate directly, clearly and predictably to an institution's capital, asset quality, earnings, liquidity, or sensitivity to market risk. Additionally, the proposed standard for an MRA, like the proposed definition of an unsafe or unsound practice, would cover a practice, act, or failure to act that, “if continued,” has the potential to materially harm the financial condition of an institution.

As proposed, examiners could communicate an MRA for a practice, act, or failure to act that, if continued, could reasonably be expected to, under current or reasonably foreseeable conditions, (A) materially harm the financial condition of an institution or (B) present a material risk of loss to the DIF. The agencies intend for the “could reasonably be expected to, under current or reasonably foreseeable conditions” element in the proposed MRA standard to present a lower bar than does the “likely” element in the proposed unsafe or unsound practice standard.

To determine whether a practice, act, or failure to act, if continued, could reasonably be expected to, under current or reasonably foreseeable conditions, materially harm the financial condition of an institution, the proposed rule relies on examiners' judgments, based on objective facts and sound reasoning. The proposal would not permit examiners to issue MRAs based on potential future conditions that are possible but not reasonably foreseeable. Nonetheless, “reasonably foreseeable” does not necessarily mean the most likely future outcome and could include a range of possible outcomes. For example, in late 2022, the agencies could have considered it “reasonably foreseeable” that the federal funds rate and other market interest rates would rise considerably, and an institution's vulnerability to a significant rise in interest rates could have been grounds for an MRA. However, the proposal would not permit examiners to issue MRAs that purport to meet the proposed MRA standard as a pretext to force an institution to comply with an examiner's managerial judgment instead of the judgment of the institution's own management, in the absence of a reasonable expectation of material harm to the financial condition of the institution.

Under the proposed MRA standard, violations of banking or banking-related laws and regulations must be actual violations of a discrete set of federal and state law or regulation—those related to banking. This would generally include banking and consumer financial protection laws, but would not include laws and regulations outside of the banking and consumer finance context, such as tax laws. 45 Moreover, the agencies would not issue an MRA solely to address an institution's policies, procedures, or internal controls, unless those policies, procedures, or internal controls otherwise satisfied the regulatory standard for an MRA, even if those policies, procedures, or internal controls could lead to a violation of law or regulation. Accordingly, under the proposed rule, examiners could issue an MRA for a practice, act, or failure to act related to a violation of law or regulation only if (1) the examiner identified actual violations of a banking or banking-related law or regulation (as opposed to, for example, bank policies, procedures, or programs that could lead to violations of such laws or regulations) or (2) the practice, act, or failure to act meets the MRA standard in the proposed rule relating to material financial harm.

As discussed above, the agencies will tailor their issuance of MRAs based on the capital structure, riskiness, complexity, activities, asset size, and any financial risk-related factor that the agencies deem appropriate. This includes tailoring with respect to the requirements or expectations set forth in such actions as well as whether, and the extent to which, such actions are taken.

The agencies also recognize that a more targeted use of MRAs, as proposed in this rule, may benefit from complementary changes to the agencies' MRA verification and validation procedures to ensure MRAs are lifted as soon as practicable after the institution completes corrective actions. The agencies note that, under current practices, MRAs are often kept outstanding for a prolonged period of time after an institution has fully completed its remediation of the underlying practice, act, or failure to act because examiners seek to see demonstrated sustainability of the remediation before an MRA is closed. This practice has the potential to distract an institution's board of directors and management, as well as examiners, by inflating the number of MRAs based on practices, acts, or failures to act that have already been remediated. The agencies invite comment on ways in which the agencies can improve their respective MRA verification and validation policies and procedures.

For concerns that do not rise to the level of an MRA, agency examiners may informally provide non-binding suggestions to enhance an institution's policies, practices, condition, or operations. 46 The OCC refers to these communications as “supervisory observations.” For example, examiners could offer suggestions on ways to enhance an institution's external audit practices, succession planning, or risk management processes. Given that these supervisory communications are not binding, the agencies would not be permitted to require an institution to submit an action plan to incorporate examiners' supervisory observations. Examiners would not be permitted, and the institution would not be required, to track the institution's adoption or implementation of examiner suggestions. Although examiners would be permitted to informally make such supervisory communications to the institution's board of directors, the institution's management would not be required to present the supervisory communications to the institution's board of directors. In addition, the agencies would not be permitted to criticize an institution for declining to remediate a concern or weakness identified by such a supervisory communication or to escalate the communication into an MRA on the sole basis of an institution's lack of adoption of an examiner's suggestion offered in multiple examination cycles. If an institution's condition deteriorates following a supervisory communication, the circumstances underlying the supervisory communication could later be the basis for an MRA or enforcement action, but only if the criteria for an MRA or enforcement action under the proposal are satisfied, and not solely on the basis of failing to respond to the supervisory communication. This framework would allow examiners to share their expertise with management and the board of directors about potential enhancements while leaving decisions regarding the implementation of any enhancements to the institution.

In addition, the agencies would also be permitted to include supervisory communications in a report of examination to explain changes in ratings. For example, if a bank is downgraded from a “1” to a “2” in a particular CAMELS component, the agency may explain this downgrade, and such an explanation would constitute a “supervisory communication.” As noted above, such an explanation would not impose any binding requirement on an institution to remediate any weakness identified, and the agency could not further downgrade the institution solely on the basis of failing to remediate such a weakness.

The agencies believe that the changes to the standards for unsafe or unsound practices and MRAs in the proposed rule are important to prioritize material financial risks and compliance with banking and banking-related laws and regulations. In furtherance of the agencies' goal to prioritize attention on material financial risks and legal compliance, the agencies also expect that any downgrade in an institution's composite supervisory rating to less-than-satisfactory  47 would only occur in circumstances in which the institution receives an MRA that meets the standard outlined in the proposed rule or an enforcement action pursuant to the agencies' enforcement authority, including an enforcement action based on an unsafe or unsound practice as defined in the proposed rule. 48 In the case of an insured depository institution, a composite rating of “3” in the CAMELS rating systems is generally considered “less-than-satisfactory.”  49 A downgrade to a less-than-satisfactory composite supervisory rating can have significant regulatory and statutory consequences for an institution. 50 By connecting the assignment of a less-than-satisfactory composite rating to the issuance of MRAs and enforcement actions, the agencies would generally ensure a less-than-satisfactory composite rating is tied to a potential material harm to the institution's financial condition, potential material risk of loss to the DIF, actual material harm to the institution's financial condition, or actual violations of certain laws and regulations. Although section 8 of the FDI Act provides for grounds for an enforcement action based on a violation of law, the agencies expect that they would not downgrade an institution's composite rating to less-than-satisfactory based only on a violation of law, unless such practice, act, or failure to act that results in the violation of law also is likely to cause material harm to the financial condition of the institution, is likely to present a material risk of loss to the DIF, or has caused material harm to the institution's financial condition, as the agencies propose under the unsafe or unsound practice definition.

The agencies request feedback on all aspects of the proposed rule, including:

Question 1: What effect would the proposed rule have on the agencies' ability to address misconduct by institutions under their enforcement and supervisory authority? What effect would the proposed rule have on the agencies' ability to address misconduct by institution-affiliated parties under their enforcement and supervisory authority?

Question 2: Does the proposed definition of unsafe or unsound practice appropriately capture the types of objectionable practices, acts, or failures to act that should be captured? Please explain.

Question 3: Does the proposed definition of unsafe or unsound practice provide the agencies with adequate authority to proactively address risks that could cause a precipitous decline in an institution's financial condition, such as a liquidity event or a cybersecurity incident?

Question 4: Other than “material,” are there terms that the agencies should consider to specify the magnitude of the risk required for a practice, act, or failure to act, to be considered an unsafe or unsound practice, e.g., “abnormal,” “significant,” or “undue”?

Question 5: Is “likely” the appropriate standard to specify the probability of risk required for a practice, act, or failure to act, to be considered an unsafe or unsound practice? Is another term more appropriate, e.g., “reasonably foreseeable,” “could reasonably,” “imminent,” “abnormal probability”? Should the agencies specify a minimum percentage of likelihood? If so, what would be an appropriate minimum percentage of likelihood? Should the agencies consider a standard that does not imply an assessment of a forward-looking probability?

Question 6: Should the agencies consider specifying one or more quantitative measurements to define or exemplify “material harm” to the financial condition of the institution?

Question 7: Should the agencies define “materially” in the regulation? If so, how?

Question 8: Should the agencies define harm to the financial condition of an institution in the regulation? If so, how? Should this include specific indicators or thresholds, or adverse effects to capital, liquidity, or earnings?

Question 9: Section 8 of the FDI Act uses the term “unsafe or unsound practice” numerous times and in different contexts. Should the proposed definition of unsafe or unsound practice apply to all uses of the term within section 8 of the FDI Act? If not, what provisions should be excluded? Should the agencies have a uniform definition for purposes of section 8, as proposed, or should there be nuances depending on the context?

Question 10: Should the proposed definition of unsafe or unsound practice apply to other uses of the term or references to section 8 of the FDI Act within Title 12 of the CFR? If so, what provisions should be included? What, if any, effect would the proposed definition have on the agencies' ability to engage in rulemaking?

Question 11: Should the proposed definition of unsafe or unsound practice apply to uses of the term beyond section 8 of the FDI Act? If yes, what provisions should be included? For example:

Question 12: Is the agencies' use of the term “generally accepted standards of prudent operations,” as described in this proposal, appropriate for making safety and soundness determinations? Are there are other terms the agencies should consider using instead?

Question 13: Other than “could reasonably be expected,” are there terms that the agencies should consider to specify the probability of risk required for a practice, act, or failure to act, to be communicated as an MRA, e.g., “could possibly,” “could foreseeably,” “would”? Is this standard sufficiently distinct from the likelihood requirement for unsafe or unsound practices so as to convey a lower bar?

Question 14: The proposal would allow the agencies to issue MRAs based on “reasonably foreseeable conditions.” Is “reasonably foreseeable” the right standard? As an example, at what point in Silicon Valley Bank's timeline would an MRA for weaknesses in interest rate risk management have been (1) appropriate and (2) permissible under the proposal? If another standard would be more appropriate, please explain.

Question 15: If the agencies adopt the proposed standard for the issuance of an MRA, how should the agencies determine when to close an MRA? Should the agencies provide additional clarity in a final rule? Are there unique verification and validation concerns associated with the proposed standard that the agencies should consider? Should verification and validation procedures be tailored for different types of institutions, considering factors like the sophistication of an institution and the frequency of examinations? Should there be a limit (e.g., one or two quarters; one examination cycle) to the duration that an MRA may remain open after an institution corrects the practice resulting in the MRA? If an MRA is not remediated for a certain period of time, what steps should the agencies take?

Question 16: Should the proposal provide any clarity around timeframes for remediating MRAs? If so, should small institutions (and those with limited resources) be provided with longer timeframes to address MRAs? Should institutions with more severe vulnerabilities (such as 5-rated institutions) be provided shorter timeframes?

Question 17: Should the proposed standard for issuing MRAs also apply to issuing violations of law? Why or why not? If a different standard should apply, please describe the standard and explain why. If the agencies did not use MRAs for violations of law, how should the agencies approach violations of law?

Question 18: Under the proposal, the agencies could cite violations of banking and banking-regulated laws or regulations as MRAs. Is “banking and banking-related” the right universe? Should the agencies provide additional clarity on what constitutes banking and banking-related laws? If so, what should be included? Should the agencies limit the scope of banking and banking-related laws to federal banking and banking-related law? Why or why not?

Question 19: Should the agencies provide additional clarity on the interplay between MRAs and CAMELS ratings? If so, how?

Question 20: Should the agencies require any downgrade to a CAMELS composite rating of 3 or below to be accompanied by an MRA or enforcement action? Are there instances in which, for example, general economic conditions or idiosyncratic risk factors could cause financial deterioration without evidence of objectionable practices, acts, or failures to act? Could such a provision incentivize issuing more MRAs? Please explain.

Question 21: To what extent should the agencies use MRAs to address banks that are vulnerable to potential economic or other shocks? For example, before the Federal Reserve began raising interest rates in 2022, or shortly after it began raising interest rates, at what point, if any, would it have been appropriate for a banking agency to issue MRAs to institutions that were vulnerable to a rise in interest rates? Does the proposal appropriately allow MRAs in such cases, if applicable? Under the proposal, are there other supervisory tools to address such risks?

Question 22: How should the agencies tailor the framework for community banks? For example, should there be different standards for institutions of different sizes and complexity? Please explain.

Question 23: Should the proposal tie material harm to the financial condition of an institution more specifically to the impact of a practice, act or failure to act on the institution's capital? Should there be a higher standard for large banking organizations compared to all other banking organizations? Should the potential or actual harm to an institution's financial condition be tied to the capital standards in the prompt correction action framework set forth in 12 U.S.C. 1831o?

Question 24: Should the proposed regulation tie material harm to the financial condition of an institution more specifically to the impact of a practice, act or failure to act on the institution's liquidity? Should there be a threshold for a liquidity event, such as an outflow of a hypothetical percentage of an institution's short-term deposits or other short-term liabilities over a defined period?

Question 25: How should the proposed regulation interact with the Interagency Guidelines Establishing Safety and Soundness Standards promulgated under 12 U.S.C. 1831p-1 (e.g., 12 CFR part 30) (Safety and Soundness Standards)? Should the agencies similarly revise the Safety and Soundness Standards in a manner consistent with the proposed regulation? Should a violation of the Safety and Soundness standards be considered a violation of banking or banking-related law or regulation for purposes of the proposed regulation?

Question 26: What additional steps should the agencies consider to reform supervision, consistent with the goals of the proposal? The agencies have an extensive supervisory framework including examination manuals, regulations, guidance, and internal procedures governing how banks are supervised. What modifications to these various documents are warranted? How should the agencies sequence these actions?

As previously discussed, the agencies propose to revise the framework for communicating MRAs to supervised insured depository institutions (IDIs) to focus on practices, acts, or failures to act that, if continued, could reasonably be expected to, under current or reasonably foreseeable conditions, (A) materially harm the financial condition of an institution or (B) present a material risk of loss to the DIF, or violations of a banking or banking-related law or regulation. The proposal would provide a consistent nationwide standard for the issuance of MRAs to promote greater clarity for IDIs and IDI-affiliated parties.

This analysis utilizes all regulations and guidance applicable to IDIs supervised by the agencies, as well as information on the financial condition of supervised IDIs as of the quarter ending June 30, 2025, as the baseline to which the effects of the proposed rule are estimated.

The proposal, if adopted, would not impose any obligations on supervised IDIs, and supervised IDIs would not need to take any action in response to this rule. The proposal, if adopted, would require the agencies to revise their current practices regarding the identification and communication of examination findings. Therefore, the agencies would be the only entities directly affected by the proposal.

The proposal would indirectly affect supervised IDIs through examinations and reports of examination (ROEs) conducted by the agencies. All IDIs subject to examinations by the agencies as of June 30, 2025 could be indirectly affected proposal. Only a subset of IDIs are examined every year, therefore the proposed rule could indirectly affect a subset of supervised IDIs each year.

The following sections discuss qualitatively some indirect benefits and indirect costs of the proposal.

The proposal, if adopted, would pose two types of indirect benefits to supervised IDIs: (1) reductions in, or more efficient use of, costs to comply with findings from ROEs, and (2) possible increases in proceeds from the provision of banking products and services. By raising the standard against which an IDI's action, or inaction, is assessed to be eligible for an MRA, IDIs may experience lower volumes of examination findings, particularly MRAs. Further, by potentially reducing the number of examination findings not related to material risks to the financial condition of the IDI, the proposed rule may enable IDIs that do receive MRAs to more effectively address those risks. Finally, by enacting a consistent definition of conditions that merit the use of MRAs across the agencies, the proposed rule may improve clarity and reduce uncertainty of ROE findings, relative to the baseline. Such reductions in findings and increases in clarity may reduce compliance costs or increase the efficiency with which compliance costs are expended by IDIs to respond to ROE findings. The agencies do not have the information necessary to quantify such potential indirect benefits.

Negative feedback from regulators during the examination process may discourage IDIs from taking part in activity and could result in reduced provision of banking products and services. To the extent that matters requiring the attention of an institution's board of directors and management are currently identified and used in a way that raises potential chilling effects, the proposal could result in fewer such effects relative to the baseline. A reduction in chilling effects could enable IDIs to provide financial products and services to entities that they would not have otherwise. The FDIC does not have the data necessary to quantify this potential benefit.

If adopted the proposed rule may reduce the volume of examination findings communicated to IDIs and this could pose certain indirect costs. To the extent that the proposed rule, if adopted, delayed the identification of material risks to the financial condition of an IDI, such entities could incur higher costs to resolve such issues, associated losses, and in extreme cases, failure. However, as previously discussed, the agencies believe that proposed definition of unsafe or unsound practice better prioritizes the identification and communication of such risks. Therefore, the agencies believe that such costs are unlikely to be substantial. Moreover, it is also possible that under the proposal risks to IDIs and risks of IDI failures could decrease significantly, because under the proposal IDI management and examiners would prioritize the identification and remediation of issues that could result in material financial loss to IDIs.

The agencies considered leaving the current regulatory framework unchanged. However, as previously discussed, the current methods for communicating certain supervisory examination findings can promote confusion or not appropriately focus supervisory and institution resources on the most critical financial risks to institutions and the financial system. Therefore, the agencies believe that the proposal is more appropriate.

The Paperwork Reduction Act of 1995  51 (PRA) states that no agency may conduct or sponsor, nor is the respondent required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The agencies have reviewed this proposed rule and determined that it does not create any information collection or revise any existing collection of information. Accordingly, no PRA submissions to OMB will be made with respect to this proposed rule.

The Regulatory Flexibility Act  52 (RFA) requires an agency to consider the impact of its proposed rules on small entities. In connection with a proposed rule, the RFA generally requires an agency to prepare an Initial Regulatory Flexibility Analysis (IRFA) describing the impact of the rule on small entities, unless the head of the agency certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities and publishes such certification along with a statement providing the factual basis for such certification in the Federal Register . An IRFA must contain: (1) a description of the reasons why action by the agency is being considered; (2) a succinct statement of the objectives of, and legal basis for, the proposed rule; (3) a description of and, where feasible, an estimate of the number of small entities to which the proposed rule will apply; (4) a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed rule, including an estimate of the classes of small entities that will be subject to the requirements and the type of professional skills necessary for preparation of the report or record; (5) an identification, to the extent practicable, of all relevant Federal rules that may duplicate, overlap with, or conflict with the proposed rule; and (6) a description of any significant alternatives to the proposed rule that accomplish its stated objectives.

The OCC currently supervises 1,012 institutions (commercial banks, trust companies, Federal savings associations, and branches or agencies of foreign banks), 53 of which approximately 609 are small entities under the RFA. 54

In general, the OCC classifies the economic impact on an individual small entity as significant if the total estimated impact in one year is greater than 5 percent of the small entity's total annual salaries and benefits or greater than 2.5 percent of the small entity's total non-interest expense. Furthermore, the OCC considers 5 percent or more of OCC-supervised small entities to be a substantial number, and at present, 30 OCC-supervised small entities would constitute a substantial number. Therefore, since the proposed rule would affect all OCC-supervised institutions, a substantial number of OCC-supervised small entities would be impacted.

This proposed rulemaking imposes no new mandates, and thus no direct costs, on affected OCC-supervised institutions. Therefore, the proposed rule would not have a significant economic impact on a substantial number of small entities.

Generally, the FDIC considers a significant economic impact to be a quantified effect in excess of 5 percent of total annual salaries and benefits or 2.5 percent of total noninterest expenses. The FDIC believes that effects in excess of one or more of these thresholds typically represent significant economic impacts for FDIC-insured institutions.

The FDIC believes that the proposed rule will not have a significant economic impact on a substantial number of small entities  55 because the proposed rule will not pose reporting, recordkeeping and other compliance requirements  56 on small, FDIC-supervised IDIs. However, the proposed rule could present significant indirect benefits to small, FDIC-supervised IDIs. Therefore, the FDIC is presenting an Initial Regulatory Flexibility Act Analysis in this section.

The lack of a consistent nationwide standard about the scope of the term unsafe or unsound practice, as interpreted by the courts, has caused uncertainty for institutions and institution-affiliated parties. 57 The proposed regulatory definition would provide a consistent nationwide standard to reduce burden and provide greater clarity for institutions and institution-affiliated parties.

The policy objectives are to promote greater clarity and certainty regarding enforcement and supervision standards so that examiners and IDIs prioritize material financial risks to IDIs and avoid unnecessary regulatory burden.

Pursuant to the provisions of section 8 of the FDI Act (12 U.S.C. 1818), the FDIC is authorized to take enforcement actions against depository institutions, 58 and institution-affiliated parties  59 that have engaged in an “unsafe or unsound practice.” Under this authority, the FDIC is proposing to define by regulation the term “unsafe or unsound practice” for purposes of section 8 of the FDI Act. For a more detailed discussion of the proposed rule's legal basis please refer to section A. Unsafe or Unsound Practices, within Section II of the preamble.

The agencies propose implementing a definition of unsafe or unsound practice for purposes of section 8 of the FDI Act that would focus on material risks to the financial condition of an IDI and require the likelihood that an imprudent practice, act, or omission, if continued, would pose a material risk to the IDI's financial condition. The agencies are also proposing to establish uniform standards for examiners' communication of MRAs. Under the proposed rule, an examiner would be permitted to issue an MRA to address certain risks to the financial condition of an institution. For a more detailed description of the proposal please refer to section A. Unsafe or Unsound Practices, within Section II of the preamble.

The proposal, if adopted, would not impose any obligations on small, FDIC-supervised entities, and supervised entities would not need to take any action in response to this rule. The proposal, if adopted, would require the FDIC to revise their current practices regarding the communication of IDI examination findings. Therefore, the FDIC would be the only entity directly affected by the proposal.

The proposal would indirectly affect small, FDIC-supervised IDIs through examinations and reports of examinations conducted by the agencies. As of the quarter ending June 30, 2025, the FDIC supervised 2,808 IDIs, of which 2,085 are small entities for the purposes of the RFA. 60 Only a subset of small, FDIC-supervised IDIs are examined every year, therefore the proposed rule could indirectly affect a subset of small, FDIC-supervised IDIs each year.

To estimate the expected effects of the proposal, this analysis considers all relevant regulations and guidance applicable to these institutions, as well as information on the financial condition of all IDIs as of the quarter ending June 30, 2025.

The proposal, if adopted, would pose two types of indirect benefits to small, FDIC-supervised IDIs: (1) reductions in, or more efficient use of, costs to comply with findings from ROEs, and (2) possible increases in proceeds from the provision of banking products and services. By raising the standard against which an IDI's action, or inaction, is assessed to be eligible for an MRA, IDIs may experience lower volumes of examination findings, particularly MRAs. Further, by potentially reducing the number of examination findings not related to material risks to the financial condition of the IDI, the proposed rule may enable IDIs that do receive MRAs to more effectively address those risks. Finally, by enacting a consistent definition of conditions that merit the use of MRAs across agencies the proposed rule may improve clarity and reduce uncertainty of ROE findings, relative to the baseline. Such reductions in findings and increases in clarity may reduce compliance costs or increase the efficiency with which compliance costs are expended by IDIs to respond to ROE findings. The agencies do not have the information necessary to quantify such potential indirect benefits.

Negative feedback from regulators during the examination process may discourage IDIs from taking part in activity and could result in reduced provision of banking products and services. To the extent that matters requiring the attention of an institution's board of directors and management are currently identified and used in a way that raises potential chilling effects by, the proposal could result in fewer such effects relative to the baseline. A reduction in chilling effects could enable IDIs to provide financial products and services to entities that they would not have otherwise. The FDIC does not have the data necessary to quantify this potential benefit. Moreover, it is also possible that under the proposal risks to small, FDIC-supervised IDIs and risks of IDI failures could decrease significantly, because under the proposal IDI management and examiners would prioritize the identification and remediation of issues that could result in material financial loss to IDIs.

FDIC cannot quantitatively estimate the indirect effects that small, FDIC-supervised IDIs are likely to incur if the proposed rule were adopted. However, in the four quarters ending June 30th, 2025, 5 percent of total annual salaries and benefits or 2.5 percent of total noninterest expenses amounts to $139,850 and $124,175, respectively, for the median small, FDIC-supervised institution. 61 The indirect benefits that a small, FDIC-supervised institution could realize as a result of the proposed rule would depend on changes in the volume of findings of examination and the compliance costs to address those examination findings, relative to the baseline. The proposed rule would establish a definition of unsafe or unsound practice that would result in issuances of MRAs only where a practice, act, or failure to act that, if continued, could reasonably be expected to, under current or reasonably foreseeable conditions, materially harm the financial condition of an institution. The FDIC believes that it is plausible that the proposed rule, if adopted, could pose indirect benefits to FDIC-supervised IDIs that exceed $139,850 and $124,175 a year for a substantial number of small, FDIC-supervised IDIs.

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

The OCC has analyzed the proposed rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA). 62 Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year ($187 million as adjusted annually for inflation). Pursuant to section 202 of the UMRA, 63 if a proposed rule meets this UMRA threshold, the OCC would need to prepare a written statement that includes, among other things, a cost-benefit analysis of the proposal. The UMRA does not apply to regulations that incorporate requirements specifically set forth in law.

This proposed rulemaking imposes no new mandates—and thus no direct costs—on affected OCC-supervised institutions. The OCC, therefore, concludes that the proposed rule would not result in an expenditure of $187 million or more annually by state, local, and tribal governments, or by the private sector. Accordingly, the OCC has not prepared the written statement described in section 202 of the UMRA.

Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act of 1994, 12 U.S.C. 4802(a), in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, the agencies will consider, consistent with principles of safety and soundness and the public interest: (1) any administrative burdens that the proposed rule would place on depository institutions, including small depository institutions and customers of depository institutions; and (2) the benefits of the proposed rule. The agencies request comment on any administrative burdens that the proposed rule would place on depository institutions, including small depository institutions, and their customers, and the benefits of the proposed rule that the agencies should consider in determining the effective date and administrative compliance requirements for a final rule.

The Providing Accountability Through Transparency Act of 2023, 12 U.S.C. 553(b)(4), requires that a notice of proposed rulemaking include the internet address of a summary of not more than 100 words in length of a proposed rule, in plain language, that shall be posted on the internet website www.regulations.gov.

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation propose to define the term “unsafe or unsound practice” for purposes of 12 U.S.C. 1818 and to revise the supervisory framework for the issuance of Matters Requiring Attention and other supervisory communications.

The proposal and the required summary can be found at https://www.regulations.gov by searching for Docket ID OCC-2025-0174 and https://occ.gov/topics/laws-and-regulations/occ-regulations/proposed-issuances/index-proposed-issuances.html.

Executive Order 12866, titled “Regulatory Planning and Review,” as amended, requires the Office of Information and Regulatory Affairs (OIRA), Office of Management and Budget to determine whether a proposed rule is a “significant regulatory action” prior to the disclosure of the proposed rule to the public. If OIRA finds the proposed rule to be a “significant regulatory action,” Executive Order 12866 requires the agencies to conduct a cost-benefit analysis of the proposed rule. Executive Order 12866 defines “significant regulatory action” to mean a regulatory action that is likely to (1) have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in Executive Order 12866.

OIRA has deemed that this proposed rule is an economically significant regulatory action under Executive Order 12866 and, therefore, is subject to review under Executive Order 12866. The agencies' analysis conducted in connection with Executive Order 12866 is set forth below.

The OCC currently supervises 1,012 national banks, federal savings associations, trust companies and branches and agencies of foreign banks (collectively, banks). This proposed rule would apply to all OCC-supervised institutions. The OCC expects that OCC-supervised institutions would have both direct and indirect benefits as well as indirect costs as a result of this proposal.

Specifically, the proposed rule would result in several direct benefits to OCC-supervised institutions, namely, significant cost and time savings to institutions because they would have fewer MRA issuances and enforcement actions (collectively, issues) to address going forward. Banks can incur significant direct costs arising from issues. For example, some banks hire external consultants, for which hourly rates can range from between $300 and $1,200 an hour for top tier firms  64 65 to $150 to $300 an hour for lower tier firms. And financial advisory firms may charge $250 to $550 per hour. 66 67 To the extent that there may be less need for consultants, banks will directly benefit from consultant cost savings.

In addition to consultant fees, banks incur other direct costs to successfully address issues and pay any associated penalties. These costs may include increased hiring and retention of appropriately qualified employees, training for existing employees, time expenditure of employees (which may include time spent addressing the underlying issue, time by management and the board to review and approve changes made, time spent working with external consultants, time conducting internal audit verification, and time spent in partnership with the OCC in ongoing follow up communications and possibly examinations specific to the issue), updating processes and procedures, and addressing the underlying issue itself. If the issue has to do with bank systems or infrastructure, these costs could include technology costs, which could be very costly expenditures. If banks do not remediate issues in a timely fashion, they may also incur additional fines and penalties on top of the costs to remediate the issue itself. 68 69

While it would be difficult to precisely quantify the overall aggregate annual direct cost savings to OCC supervised institutions, the OCC expects that this proposal would result in an immediate and material cost savings to affected institutions, easily ranging from hundreds of millions to billions of dollars saved annually in aggregate. In addition to the significant direct cost savings from no longer needing to address issues, banks could potentially experience several indirect benefits, including clarity and consistency regarding MRA or enforcement concerns and less staffing turnover.

Regarding direct costs, this proposed rulemaking imposes no new mandates, and thus no direct costs, on affected OCC-supervised institutions. Regarding indirect costs, fewer issues may lead to delayed identification of material risks, which could include higher costs to resolve such issues, associated losses, and in extreme cases, failure. Nevertheless, those risks should be low because the proposed definition endeavors to more effectively prioritize the identification of material financial risks ( i.e., those most likely to cause significant stress) and therefore to lower the risk of bank failure. Accordingly, it is also possible that under the proposal risks to banks and risks of bank failures could decrease significantly, because under the proposal bank management and bank examiners would prioritize the identification and remediation of issues that could result in material financial loss to banks. Ultimately, the net effect will be dependent upon agency policies and oversight and responses by bank management to this proposal.

Overall, the OCC expects that the combined effects of the proposed rule's changes to result in net direct impact of a significant cost savings to all OCC-supervised institutions, easily ranging from hundreds of millions to several billion dollars in aggregate. There are also no explicit mandates in the proposal for affected institutions. How the proposal is executed and bank responses to the execution will ultimately determine the net impact over the longer term.

This analysis utilizes all regulations and guidance applicable to FDIC-supervised IDIs, as well as information on the financial condition of IDIs as of the quarter ending June 30, 2025, as the baseline to which the effects of the proposed rule are estimated.

The proposal, if adopted, would not impose any obligations on FDIC-supervised IDIs, and supervised IDIs would not need to take any action in response to this rule. The proposal, if adopted, would require the FDIC to revise their current practices regarding the identification and communication of examination findings. Therefore, the FDIC would be the only entity directly affected by the proposal.

The proposal would indirectly affect FDIC-supervised IDIs through examinations conducted by the FDIC, and the resulting ROEs. All FDIC-supervised IDIs are subject to examination by the FDIC. As of the quarter ending June 30, 2025, the FDIC supervised 2,808 IDIs. 70 However, only a subset of IDIs are examined every year, therefore the proposed rule could indirectly affect a subset of FDIC-supervised IDIs each year.

The proposal, if adopted, would pose two types of indirect benefits to FDIC-supervised IDIs: (1) reductions in, or more efficient use of, costs to comply with findings from ROEs, and (2) possible increases in proceeds from the provision of banking products and services. By raising the standard against which an FDIC-supervised IDI's action, or inaction, is assessed to be eligible for an MRA, IDIs may experience lower volumes of examination findings, particularly MRAs. Further, by potentially reducing the number of examination findings not related to material risks to the financial condition of the IDI, the proposed rule may enable IDIs that do receive MRAs to more effectively address those risks. Finally, by enacting a consistent definition of conditions that merit the use of MRAs across the agencies, the proposed rule may improve clarity and reduce uncertainty of ROE findings, relative to the baseline. Such reductions in findings and increases in clarity may reduce compliance costs or increase the efficiency with which compliance costs are expended by FDIC-supervised IDIs to respond to ROE findings. The FDIC does not have the information necessary to quantify such potential indirect benefits.

Negative feedback from regulators during the examination process may discourage FDIC-supervised IDIs from taking part in activity and could result in reduced provision of banking products and services. To the extent that matters requiring the attention of an institution's board of directors and management are currently identified and used in a way that raises potential chilling effects, the proposal could result in fewer such effects relative to the baseline. A reduction in chilling effects could enable FDIC-supervised IDIs to provide financial products and services to entities that they would not have otherwise. The FDIC does not have the data necessary to quantify this potential benefit. Moreover, it is also possible that under the proposal risks to IDIs and risks of IDI failures could decrease significantly, because under the proposal IDI management and examiners would prioritize the identification and remediation of issues that could result in material financial loss to IDIs.

If adopted the proposed rule may reduce the volume of examination findings communicated to FDIC-supervised IDIs and this could pose certain indirect costs. To the extent that the proposed rule, if adopted, delayed the identification of material risks to the financial condition of an IDI, such entities could incur higher costs to resolve such issues, associated loses, and in extreme cases, failure. However, as previously discussed, the FDIC believe that the proposed definition of unsafe or unsound better practice prioritizes the identification and communication of such risks. Therefore, the FDIC believes that such costs are unlikely to be substantial.

FDIC cannot quantitatively estimate the indirect effects that FDIC-supervised IDIs are likely to incur if the proposed rule were adopted. However, assuming that all FDIC-supervised IDIs are subject to a bank examination once every 18 months the proposed rule would only need to pose $53,419 in indirect benefits, on average, to FDIC-supervised IDIs to result in an annual economic effect in excess of $100 million. 71 Based on the preceding analysis the FDIC believes that the proposed regulatory action could plausibly result in an annual effect on the economy of $100 million or more. However, the FDIC does not believe that the proposed rule will adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.

The FDIC does not believe the proposed regulatory action would create a serious inconsistency or otherwise interfere with an action taken or planned by another agency. Currently, the FDIC and OCC use distinct terminology to identify and communicate deficiencies that rise to the level of a matter that requires attention from an institution's board of directors and management. The agencies are proposing to jointly revise the terminology and thresholds for the issuance of MRAs in their supervisory programs. Therefore, the FDIC believes that this regulatory action would not create a serious inconsistency or otherwise interfere with an action taken or planned by another agency, but rather would remove existing inconsistencies.

The FDIC does not believe the proposed regulatory action would materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof. The proposed regulatory action does nothing to alter entitlements, grants, user fees, or loan programs or the rights and obligations of the recipients of such programs.

The FDIC does not believe the proposed regulatory action would raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in Executive Order 12866. The FDIC has experience in conducting examinations of the safety and soundness of IDIs and communicating their findings in a variety of ways since its inception. Further, IDIs have an existing mandate to operate in a safe and sound manner. 72 Therefore, this proposed regulatory action does not raise any novel legal or policy issues.

Executive Order 14192, titled “Unleashing Prosperity Through Deregulation,” requires that an agency, unless prohibited by law, identify at least 10 existing regulations to be repealed when the agency publicly proposes for notice and comment or otherwise promulgates a new regulation with total costs greater than zero. Executive Order 14192 further requires that new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least ten prior regulations. The agencies anticipate that the proposed rule will not be a regulatory action for purposes of Executive Order 14192.

For the reasons set out in the preamble, the OCC proposes to amend chapter I of title 12 of the Code of Federal Regulations as follows:

The Department has authority under 49 U.S.C. 41712 (Section 41712) to investigate and decide whether an air carrier, foreign air carrier, or ticket agent has been or is engaged in an unfair or deceptive practice in air transportation or the sale of air transportation. Under Section 41712, after notice and an opportunity for a hearing, the Department has authority to order the air carrier, foreign air carrier, or ticket agent to stop the unfair or deceptive practice. On its face, Section 41712 provides adjudicatory authority to the Department to issue case-by-case orders to stop a particular practice.

The Department can issue regulations to declare a practice to be unfair or deceptive under Section 41712 using rulemaking authority found in 49 U.S.C. 40113 (Section 40113), which states that the Department may take action, including prescribing regulations, it considers necessary to carry out Part A of Subtitle VII of Title 49 of the U.S. Code, which includes Section 41712. The Department's authority to issue regulations under Section 41712 is limited to declaring a practice to be unfair or deceptive after notice and an opportunity for a hearing. The Department's rulemaking authority under Section 41712 does not extend beyond that application. Pursuant to another statute, 49 U.S.C. 46301, the Department has authority to issue civil penalties for violations of Section 41712 or for any regulation or order issued under the authority of Section 41712.

To avoid misapplication of legal authority under Section 41712, the Department offers additional clarification. When Congress has provided the Department with explicit rulemaking authority outside of Section 41712 or Section 40113, then the Department follows that direction. However, when Congress has not provided the Department with explicit rulemaking authority, and the Department seeks to declare a practice to be unfair or deceptive, the following procedures must be followed:

1. Enforcement: The Department may investigate an air carrier, foreign air carrier, or ticket agent to determine whether that individual air carrier, foreign air carrier, or ticket agent is engaged in an unfair or deceptive practice in air transportation or the sale of air transportation. The Department must use the definitions of unfair or deceptive, and the procedures proposed in this rulemaking, to declare the practice to be unfair or deceptive. If, after notice and an opportunity for a hearing, the Department finds the practice to be unfair or deceptive, the Department may order the air carrier, foreign air carrier, or ticket agent to stop the practice. The Department may issue civil penalties, as appropriate.

2. Rulemaking: Trivial or speculative harms are insufficient to initiate a rulemaking. The Department may initiate a rulemaking only if it has evidence to suggest that an unfair or deceptive practice may be occurring. The Department investigates the practice, gathers data, and formulates a body of evidence demonstrating that a problem exists in the market. The Department issues a notice of proposed rulemaking using the definitions and procedures proposed in this rulemaking, to declare the practice to be unfair or deceptive. If, after notice and an opportunity for a hearing, the Department finds that the practice is unfair or deceptive, the Department may issue a final rule declaring what the unfair or deceptive practice is. After the final rule is effective, the Department may take enforcement action against an air carrier, foreign air carrier, or ticket agent for violation of the regulation following the enforcement procedures proposed in this rulemaking.

The Department is analyzing its past use of Section 41712 under the direction of Executive Order 14219, “Ensuring Lawful Governance and Implementing the President's `Department of Government Efficiency' Deregulatory Initiative” (February 19, 2025). This Executive Order instructs the executive branch to direct its enforcement resources to regulations squarely authorized by constitutional Federal statutes, and it requires the Department to review its regulations to identify those that are based on anything other than the best reading of its underlying statutory authority. The Department finds that the best reading of its statutory authorities allows the Department first to investigate and then to declare a practice to be unfair or deceptive following the procedures that would be codified in the regulation proposed today. The Department's rulemaking authority is therefore limited to a declaration of what is unfair or deceptive when supported by evidence after notice and an opportunity for a hearing.

This best reading of the statute is consistent with longstanding principles found in Executive Order 12866, as well as DOT Order 2100.6B, which both contemplate that regulations be supported by statutory authority, and direct the Department to consider whether a specific problem exists that must be addressed through rulemaking. Speculative harms do not support a need to regulate, nor do strained or unduly broad readings of statutory authorities.

On December 20, 2020, the Department published in the Federal Register a final rule titled: “Defining Unfair or Deceptive Practices” (2020 UDP Rule). 1 The 2020 UDP Rule was intended to provide regulated entities and other stakeholders with greater clarity about the Department's enforcement and regulatory processes with respect to aviation consumer protection actions under Section 41712. Among other things, it set forth procedures the Department would use when conducting future discretionary rulemaking actions under the authority of Section 41712. Those procedures were revised meaningfully by a final rule the Department published on February 2, 2022 titled: “Procedures in Regulating Unfair or Deceptive Practices” (2022 UDP Rule). 2 This NPRM proposes to rescind the 2022 UDP Rule and to reinstate the procedures for discretionary rulemaking hearings set forth in the 2020 UDP Rule.

In addition, the 2020 UDP Rule defined the terms “unfair” and “deceptive” for purposes of Section 41712. The definitions were modeled after Federal Trade Commission (FTC) precedent; they also reflect the Department's longstanding interpretation of those terms. Those definitions remain unchanged since DOT published the 2020 UDP Rule, and there are no modifications to them proposed in this NPRM. However, without going through notice and comment, on August 29, 2022, the Department expounded upon these definitions in an unnecessary and potentially confusing interpretative rulemaking titled: “Guidance Regarding Interpretation of Unfair or Deceptive Practices” (Guidance). 3 The Department will rescind the Guidance at a later date.

The Department issued another final rule on June 16, 2023, titled: “Clarification of Formal Enforcement Procedures for Unfair or Deceptive Practices” (Clarification). 4 This final rule was intended to “provide a more complete statement of formal enforcement procedures available under existing DOT authority” than was provided in the 2020 UDP Rule. At that time, the Department determined it was necessary to clarify, when taking enforcement action, that DOT is not limited to initiating a proceeding before an administrative law judge, but also has the option to bring a civil action in a United States District Court. The Department now proposes to rescind the regulations issued in that rulemaking because it was done without notice and comment and because it is unnecessary. The Department's authority to bring an action in the United States District Court to enforce Section 41712 is grounded in statute, settled, and does need to be clarified in regulation.

On April 3, 2025, the Department issued a Request for Information (RFI), titled: “Ensuring Lawful Regulation; Reducing Regulation and Controlling Regulatory Costs.”  5 The Department solicited information to identify regulations, guidance documents, paperwork, and other administrative burdens that can be modified or repealed, consistent with the law. In response to the RFI, Airlines for America, the International Air Transport Association, United Airlines, and the Reason Foundation recommended that the Department take action to reinstate the 2020 UDP hearing procedures, rescind the 2022 UDP Rule, and rescind the 2023 Guidance.

The 2022 UDP Rule made the following six revisions to the hearing procedures used for the Department's discretionary aviation consumer protection rulemakings: (1) changed the standard for when the General Counsel should grant a hearing request to an amorphous “public interest” standard; (2) changed the level of proof necessary for granting a public hearing from “plausible” to “credible and convincing;” (3) added a requirement for the Department to provide a rationale for granting a petition rather than only for denying a petition; (4) eliminated the requirement for a neutral hearing officer, giving the General Counsel discretion to appoint an adjudicator (who need not be neutral) from within or outside the Department, and granted the adjudicator more discretion to decide when and how testimony would be presented at a hearing; (5) eliminated the requirement that the hearing officer issue proposed findings on disputed issues of fact; and (6) changed the closing procedures to include an opportunity for all interested parties to file statements or comments in the docket instead of only the parties that participated in the hearing.

These revisions were promulgated in response to Executive Orders that have since been rescinded and are inconsistent with current Department and Administration policy. In revising the procedures in 2022, the Department found a need to “streamline” these regulations to ensure that consumer protection rulemakings were not “unduly delayed,” noting that “it is important to balance the need for robust public participation with the need for procedures that provide the Department with enough flexibility to ensure important rulemakings are not bogged down by overly prescriptive procedural constraints.” The Department has reconsidered these justifications for the 2022 rulemaking and supports the recodification of the 2020 procedures. The Department finds that any delay associated with following the 2020 procedures for applicable discretionary rulemakings would not only be minimal, based on past practice with these procedures, but also would be outweighed by the Department's development of higher-quality rulemakings and enforcement actions. The Department produces its best work when it is informed by robust public input, the best available data, and sound law and economics, and these procedures increase opportunities to receive those essential building blocks for good governance that would strengthen the overall quality and fairness of the Department's administrative actions.

In addition, the 2022 revisions gave the Department too much discretion and authority for granting and overseeing hearings, imposed too onerous a standard on petitioners requesting a hearing, and did not provide regulated entities and other stakeholders with sufficient clarity, certainty, transparency, or due process in connection with the Department's aviation consumer protection rulemaking actions. This rulemaking, therefore, proposes to reinstate the hearing procedures established by the 2020 UDP Rule and to require the Department to follow those procedures when engaging in discretionary aviation consumer protection rulemakings issued under Section 41712 that are not defined as high-impact or economically significant within the meaning of the Department's regulatory procedures. Any such high-impact or economically significant rulemakings would be subject to special procedures outlined in section 12 of DOT Order 2100.6B. 6 These procedures are proposed to be reinstated in a separate pending rulemaking action. 7 If adopted, these reinstated hearing procedures would increase transparency, provide for more robust public participation, and strengthen the overall quality and fairness of the Department's administrative actions.

Under this proposal, the reinstated UDP hearing procedures would permit any interested party to file a petition for an evidentiary hearing when the Department proposes a new discretionary rule declaring a practice by airlines or ticket agents to be unfair or deceptive. The petition must be directed to the attention of the General Counsel and must be filed before the close of the comment period on the proposed rule.

To obtain a hearing, the requesting party must make a plausible showing that: (1) the proposed rule depends on conclusions concerning one or more specific scientific, technical, economic, or other factual issues that are genuinely in dispute or that may not satisfy the requirements of the Information Quality Act; (2) the ordinary public comment process is unlikely to provide an adequate examination of the issues to permit a fully informed judgment; and (3) the resolution of the disputed factual issues would likely have a material effect on the costs and benefits of the proposed rule. Even if the petitioner establishes these elements, the General Counsel may still deny the petition if the hearing would not advance consideration of the proposed rule. If the General Counsel denies a petition, the denial must be accompanied by a detailed statement of reasons.

The Department notes, in the 2020 UDP Rule, that a petition for a hearing may be denied if the General Counsel determines that a “hearing would unreasonably delay completion of the rulemaking.”  8 The provision was retained in the 2022 UDP Rule. 9 However, the Department now proposes to remove this factor because it is duplicative of the preceding provision that allows the General Counsel to deny a hearing if it would “not advance the consideration of the proposed rule,” which could involve considerations of timing. Nevertheless, the Department seeks comment on the removal of this factor and whether the public finds any value in its retention.

The proposed procedures also provide that the General Counsel must appoint a neutral officer to preside over the hearing and must allow a reasonable opportunity to question the presenters. After the hearing is closed, the neutral officer would place minutes of the meeting in the docket, along with proposed findings of fact on the disputed issues. Interested parties who participated in the hearing would be given the opportunity to file statements of agreement or objection to the proposed findings. After the hearing, the General Counsel would consider the record of the hearing, along with the neutral officer's findings, and determine whether: (1) to terminate the proposed rulemaking; (2) to modify the proposed rule by filing a new or supplemental notice of proposed rulemaking; or (3) to finalize the rule without material changes. Any of these choices must be accompanied by a notice in the Federal Register explaining the basis for the decision.

The Department also proposes to modify the procedures further by adding a provision granting an opportunity to appeal to the Secretary for parties aggrieved by the General Counsel's denial of a petition.

The Department believes these hearing procedures are consistent with Section 41712, which requires the Department to provide notice and an opportunity for a hearing before finding that a regulated entity is engaged in an unfair or deceptive practice. The hearing procedures the Department proposes to reinstate would be helpful in cases where the Department's proposed rulemaking may be premised on complex or disputed issues of fact. Importantly, the traditional notice-and-comment procedures of the Administrative Procedure Act remain the default process. Thus, a hearing may be granted only if an interested party shows that the traditional notice-and-comment process is inadequate to examine the issues to permit a fully informed judgment. While the hearing procedures may add time to the overall rulemaking process in certain circumstances, as written, they would promote fairness, due process, and well-informed rulemaking, without unduly delaying the proceeding itself.

The Department also proposes the rescission of the 2023 Clarification. The Department promulgated the 2023 Clarification without going through formal notice and comment, and the Clarification is also unnecessary. The Department's authority to bring an action in the United States District Court to enforce Section 41712 is grounded in statute, settled, and does not need to be clarified.

Finally, the Department proposes to consolidate the provisions currently found at 14 CFR 399.75(a) and (c). Section 399.75(a) requires the Department to use the definitions of the terms “unfair” and “deceptive” found in section 399.79. Section 399.75(c) requires the Department to articulate the basis for concluding that the practice is unfair or deceptive to consumers using those definitions. For the sake of regulatory efficiency, the Department proposes to consolidate these two sections into one regulation at section 399.75(a), but the requirement is the same: First, the Department must employ the definitions found in section 399.79 when declaring a practice to be unfair or deceptive. Second, the Department also must explain in the rulemaking document that declares a practice to be an unfair or deceptive practice how that practice satisfies the definitional prongs of unfairness and deception found in section 399.79. The Department seeks comment on whether the revised language sufficiently communicates these two requirements.

Under the Administrative Procedure Act, an agency may waive the normal notice and comment procedures if the action is a rule of agency organization, procedure, or practice. See 5 U.S.C. 553(b)(3)(A). The Department did not request comment before publishing the 2022 UDP Rule, stating that the rule “revises only internal processes applicable to the Department's administrative procedures . . . for which notice and comment are not required.”  10 However, because this NPRM seeks to reinstate procedures from the 2020 UDP Rule that confer express rights on regulated parties and other stakeholders, the Department seeks public comment on this proposal. The Department also seeks public comment on rescinding the Clarification.

Before these proposed policies and procedures are adopted as final regulations, consideration will be given to comments that are submitted timely to the Department as prescribed in the preamble under the ADDRESSES section. The Department seeks comment on all aspects of this proposal. Any comments submitted will be made available at https://www.regulations.gov or upon request.

The Office of Management and Budget (OMB) has not designated this rule a significant regulatory action under section 3(f) of Executive Order 12866. Accordingly, OMB has not reviewed it. This proposed rule primarily involves agency procedure and interpretation. Adopting enhanced procedures for future rulemaking activities would help to ensure that the activities are rooted in fairness, due process, and an adequate factual foundation.

Under this proposed rule, future discretionary rulemakings could be subject to a hearing procedure. This proposed rule allows interested parties to request a hearing when the Department proposes a rule to classify a practice as unfair or deceptive; when the issuance of the NPRM raises one or more disputed scientific, technical, economic, or other complex factual issues; or when the NPRM may not satisfy the requirements of the Information Quality Act. Allowing interested parties an opportunity for a hearing ensures that they can test the information upon which discretionary consumer protection regulations rely. However, following this proposal's requirements to provide a sufficient factual basis to support an “unfair” and “deceptive” finding should reduce the need for the Department to hold such hearings.

Nevertheless, requests for hearings are expected to occur occasionally. While the Department lacks data that would allow it to distinguish the costs and time of conducting the hearings from the costs of conducting its normal business operations, the Department believes that any incremental costs and time would be small relative to the baseline scenario in which the Department did not enact the rule. Previous discretionary rulemakings involving unfair or deceptive practices in aviation consumer protection have attracted substantial interest from consumer advocates, airline industry advocates, and the general public. The Department engaged with these interested parties without the benefit of a formal process, and the engagements required investments of time and resources by the Department and interested parties. Because these engagements were informal and with uncertain scopes, they were not as efficient as would be expected under a more formal process for interested parties as would be the case under this proposed rule. Without a formal process, parties tend to overinvest in preparation, incurring unnecessary costs, or underinvest, leading to additional engagements and administrative costs. For future rulemakings, establishing formal hearing procedures may reduce costs and time by increasing certainty about opportunities for engagement.

The Department has experience using hearing procedures to supplement traditional notice-and-comment rulemaking. 11 The hearing procedures would provide consistency in the Department's exercise of its UDP authority by mirroring the statute's hearing requirement to ensure rulemakings enacted under the same authority ensure due process and are grounded in fairness and supported by an adequate factual foundation. The Department believes that its experience with hearings would prevent it from leading to excessive delays in issuing aviation consumer protection rules.

This proposed rule would not impose any more than de minimis regulatory costs. The proposal would provide an additional mechanism for industry to provide input to the Department on its discretionary aviation consumer protection rulemakings. Private industry should not experience more than minimal additional costs relative to the status quo because it already engages in significant information exchange with the Department. Industry has the option of continuing to use historical mechanisms for providing input to discretionary aviation consumer protection and is not required to make use of the alternatives set forth in this rule. The Department should not experience significant additional costs because it has considerable experience conducting analysis in support of aviation consumer protection rules as well as hearings analogous to those in this rule. Such efforts are consistent with the Department's normal business operations, and any additional resources needs could be accommodated through a simple and temporary realignment of internal resources.

This proposed rule has been analyzed in accordance with the principles and criteria contained in Executive Order 14192 (“Unleashing Prosperity Through Deregulation”). This proposed rule is not expected to be an Executive Order 14192 regulatory action because this proposed rule is not significant under Executive Order 12866.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires an agency to review regulations to assess their impact on small entities unless the agency determines that a rule is not expected to have a significant economic impact on a substantial number of small entities. A direct air carrier or foreign air carrier is a small business if it provides air transportation only with small aircraft ( i.e., aircraft with up to 60 seats/18,000-pound payload capacity). See 14 CFR 399.73. The Department has determined that this proposed rule would not have a significant economic impact on a substantial number of small entities. However, the Department invites comment on the potential impact of this rulemaking on small entities.

This proposed rule has been analyzed in accordance with the principles and criteria contained in Executive Order 13132 (“Federalism”). The proposed rule does not include any provision that: (1) has substantial direct effects on the States, the relationship between the national government and the States, or the distribution of power and responsibilities among the various levels of government; (2) imposes substantial direct compliance costs on State and local governments; or (3) preempts State law. States are already preempted from regulating in this area by the Airline Deregulation Act, 49 U.S.C. 41713. Therefore, the consultation and funding requirements of Executive Order 13132 do not apply.

This proposed rule has been analyzed in accordance with the principles and criteria contained in Executive Order 13175 (“Consultation and Coordination with Indian Tribal Governments”). Because this proposed rule does not significantly or uniquely affect the communities of the Indian Tribal governments or impose substantial direct compliance costs on them, the funding and consultation requirements of Executive Order 13175 do not apply.

The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq. ) requires that DOT consider the impact of paperwork and other information collection burdens imposed on the public and, under the provisions of PRA section 3507(d), obtain approval from OMB for each collection of information it conducts, sponsors, or requires through regulations. The DOT has determined there are no new information collection requirements associated with this proposed rule.

The Department has determined the requirements of Title II of the Unfunded Mandates Reform Act of 1995 do not apply to this rulemaking.

The Department has analyzed the environmental impacts of this proposed rule pursuant to the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et seq. ) and has determined it is categorically excluded pursuant to DOT Order 5610.1D, “Procedures for Considering Environmental Impacts” (July 1, 2025). Categorical exclusions (CEs) are categories of actions that the agency has determined normally do not significantly affect the quality of the human environment and therefore do not require either an environmental assessment (EA) or environmental impact statement (EIS). See DOT Order 5610.1D § 9. In analyzing the applicability of a categorical exclusion, the agency must also consider whether extraordinary circumstances are present that would warrant the preparation of an EA or EIS. Id. § 9(b). The Department's Operating Administrations (OAs) may apply CEs established in another OA's procedures. Id. § 9(f). To do so, the Operating Administration “must evaluate the action for extraordinary circumstances identified in the OA procedures in which the CE is established to determine if a normally excluded action may have a significant impact and coordinate with the originating OA to ensure that the CE is being applied correctly.” Id. This rulemaking, which sets procedures for departmental unfair or deceptive practices rulemaking actions, is categorically excluded pursuant to 23 CFR 771.117(c)(20): “Promulgation of rules, regulations, and directives.” The Department does not anticipate any environmental impacts, and there are no extraordinary circumstances present in connection with this rulemaking.

Anyone may search the electronic form of all comments received into any of OST's dockets by the name of the individual submitting the comment or signing the comment if submitted on behalf of an association, business, labor union, or any other entity. You may review DOT's complete Privacy Act Statement published in the Federal Register on April 11, 2000 at 65 FR 19477-8.

This rulemaking is issued under the authority of 49 U.S.C. 40113(a), which grants the Secretary the authority to take action the Secretary considers necessary to carry out 49 U.S.C. Subtitle VII (Aviation Programs), including conducting investigations, prescribing regulations, standards, and procedures, and issuing orders.

A Regulation Identifier Number (RIN) is assigned to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in Spring and Fall of each year. The RIN set forth in the heading of this document can be used to cross-reference this action with the Unified Agenda.

For the reasons set forth in the preamble, the Department of Transportation proposes to amend 14 CFR part 399 as follows:

(f) Formal enforcement proceedings before an administrative law judge .

Throughout this document, the use of “we” and “our” means “the EPA.”

The EPA is proposing to approve the Alaska regional haze plan for the second implementation period as meeting the Regional Haze Rule (RHR) requirements of 40 CFR 51.308(f)(1) through (6), (g)(1) through (5), and (i). The Alaska Department of Environmental Conservation (DEC) submitted the regional haze plan on July 25, 2022, as a State Implementation Plan (SIP) revision, and clarified aspects of the submission on October 6, 2025. In addition, as requested by the Alaska DEC in the submission, we are proposing to approve and incorporate by reference into the Alaska SIP at 40 CFR 52.70(c), two new regulatory provisions of Alaska Administrative Code Title 18 Environmental Conservation, Chapter 50 Air Quality Control (18 AAC 50), specifically, 18 AAC 50.025 and 18 AAC 50.265, State effective August 21, 2022. The EPA is proposing this action pursuant to Clean Air Act (CAA) sections 110 and 169A.

A detailed history and background of the regional haze program is provided in multiple prior EPA proposal actions. 1 For additional background on the 2017 RHR revisions, please refer to section III of this document. Overview of Visibility Protection Statutory Authority, Regulation, and Implementation of “Protection of Visibility: Amendments to Requirements for State Plans” of the 2017 RHR. 2 The following is an abbreviated history and background of the regional haze program and 2017 RHR as it applies to the current action.

In the 1977 CAA Amendments, Congress created a program for protecting visibility in the nation's mandatory Class I Federal areas, which include certain national parks and wilderness areas. See CAA section 169A. The CAA establishes as a national goal the “prevention of any future, and the remedying of any existing, impairment of visibility in mandatory class I Federal areas which impairment results from manmade air pollution.” See CAA section 169A(a)(1).

In CAA section 169A(a)(1), Congress established the national goal of preventing any future and remedying any existing impairment of visibility in mandatory Class I Federal areas that results from manmade (anthropogenic) air pollution. The core component of a regional haze SIP submission for the second implementation period is a strategy that addresses regional haze in each Class I area within the State's borders and each Class I area outside the State that may be affected by emissions originating from within the State, CAA section 169A(b)(2)(B), 40 CFR 51.308(f)(2), and makes “reasonable progress” toward the national goal based on consideration of the four statutory factors in CAA section 169A(g)(1)—the costs of compliance, the time necessary for compliance, the energy and non-air quality environmental impacts of compliance, and the remaining useful life of any potentially affected sources. 3

Regional haze is visibility impairment that is produced by a multitude of anthropogenic sources and activities which are located across a broad geographic area and that emit pollutants that impair visibility. Visibility impairing pollutants include fine and coarse particulate matter (PM) ( e.g., sulfates, nitrates, organic carbon, elemental carbon, and soil dust) and their precursors ( e.g., sulfur dioxide (SO 2 ), nitrogen oxides (NO X ), and, in some cases, volatile organic compounds (VOC) and ammonia (NH 3 )). Fine particle precursors react in the atmosphere to form fine particulate matter (PM 2.5 ), which impairs visibility by scattering and absorbing light. Visibility impairment reduces the perception of clarity and color, as well as visible distance. 4

To address regional haze visibility impairment, the 1999 RHR established an iterative planning process that requires both States in which Class I areas are located and States “the emissions from which may reasonably be anticipated to cause or contribute to any impairment of visibility” in a Class I area to periodically submit SIP revisions to address such impairment. See CAA section 169A(b)(2); see also 40 CFR 51.308(b), (f) (establishing submission dates for iterative regional haze SIP revisions); 64 FR 35714, July 1, 1999, at page 35768.

On January 10, 2017, the EPA promulgated revisions to the RHR that apply for the second and subsequent implementation periods (82 FR 3078, January 10, 2017). The reasonable progress requirements as revised in the 2017 RHR revisions are codified at 40 CFR 51.308(f).

The Western Regional Air Partnership (WRAP)  5 is one of five regional air quality planning organizations across the United States. 6 The WRAP functions as a voluntary partnership of State, Tribe, Federal, and Local air agencies whose purpose is to understand current and evolving air quality issues in the West. There are 15 member States, including Alaska, 28 Tribes, and 30 Local air agency members. 7 Federal partners include the EPA, the National Park Service, the U.S. Fish and Wildlife Service, the Forest Service, and the Bureau of Land Management.

Based on emissions and monitoring data supplied by its membership, the WRAP produced technical tools to support modeling of visibility impacts at Class I areas across the West. 8 The WRAP Technical Support System for the second implementation period or “TSSV2” consolidated air quality monitoring data, meteorological and receptor modeling data analyses, emissions inventories and projections, and gridded air quality/visibility regional modeling results. The TSSV2 is accessible by members and allows for the creation of maps, figures, and tables to export and use in developing regional haze plans and maintains the original source data for verification and further analysis. 9

Under the CAA and the EPA's regulations, all 50 States, the District of Columbia, and the U.S. Virgin Islands were required, by July 31, 2021, to submit regional haze SIP revisions satisfying the applicable requirements for the second implementation period of the regional haze program. Each State's SIP must contain a long-term strategy for making reasonable progress toward meeting the national goal of remedying any existing and preventing any future anthropogenic visibility impairment in Class I areas. CAA section 169A(b)(2)(B). To this end, 40 CFR 51.308(f) lays out the process by which States determine what constitutes their long-term strategies, with the order of the requirements in 40 CFR 51.308(f)(1) through (3) generally mirroring the order of the steps in the reasonable progress analysis  10 and in 40 CFR 51.308(f)(4) through (6) containing additional, related requirements.

Broadly speaking, a State first must identify the Class I areas within the State and determine the Class I areas outside the State in which visibility may be affected by emissions from the State. These are the Class I areas that must be addressed in the State's long-term strategy. See 40 CFR 51.308(f), (f)(2). For each Class I area within its borders, a State must then calculate the baseline (five-year average period of 2000-2004), current, and natural visibility conditions ( i.e., visibility conditions without anthropogenic visibility impairment) for that area, as well as the visibility improvement made to date and the “uniform rate of progress” (URP).

The URP is the linear rate of progress needed to attain natural visibility conditions, assuming a starting point of baseline visibility conditions in 2004 and ending with natural conditions in 2064. This linear interpolation is used as a tracking metric to help States assess the amount of progress they are making towards the national visibility goal over time in each Class I area. See 40 CFR 51.308(f)(1). Each State having a Class I area and/or emissions that may affect visibility in a Class I area must then develop a long-term strategy that includes the enforceable emission limitations, compliance schedules, and other measures that are necessary to make reasonable progress in such areas. A reasonable progress determination is based on applying the four factors in CAA section 169A(g)(1) to sources of visibility impairing pollutants that the State has selected to assess for controls for the second implementation period. Additionally, as further explained below, the RHR at 40 CFR 51.3108(f)(2)(iv) separately provides five “additional factors”  11 that States must consider in developing their long-term strategies. See 40 CFR 51.308(f)(2).

A State evaluates potential emission reduction measures for those selected sources and determines which are necessary to make reasonable progress. Those measures are then incorporated into the State's long-term strategy. After a State has developed its long-term strategy, it then establishes reasonable progress goals (RPGs) for each Class I area within its borders by modeling the visibility impacts of all reasonable progress controls at the end of the second implementation period, i.e., in 2028, as well as the impacts of other requirements of the CAA. The RPGs include reasonable progress controls not only for sources in the State in which the Class I area is located, but also for sources in other States that contribute to visibility impairment in that area. The RPGs are then compared to the baseline visibility conditions and the URP to ensure that progress is being made towards the statutory goal of preventing any future and remedying any existing anthropogenic visibility impairment in Class I areas. 40 CFR 51.308(f)(2) and (3). There are additional requirements in the rule, including (Federal Land Manager) FLM consultation, that apply to all visibility protection SIPs and SIP revisions. See e.g., 40 CFR 51.308(i).

In addition to satisfying the requirements at 40 CFR 51.308(f) related to reasonable progress, the regional haze plan SIP revisions for the second implementation period must address the requirements in 40 CFR 51.308(g)(1) through (5) pertaining to periodic reports describing progress towards the RPGs, 40 CFR 51.308(f)(5), as well as requirements for FLM consultation that apply to all visibility protection SIPs and SIP revisions. See e.g., 40 CFR 51.308(i).

A State must submit its regional haze SIP and subsequent SIP revisions to the EPA according to the requirements applicable to all SIP revisions under the CAA and the EPA's regulations. See CAA section 169A(b)(2); CAA section 110(a). Upon approval by the EPA, a SIP is enforceable by the Agency and the public under the CAA. If the EPA finds that a State fails to make a required SIP revision, or if the EPA finds that a State's SIP is incomplete or if it disapproves the SIP, the Agency must promulgate a Federal implementation plan (FIP) that satisfies the applicable requirements. CAA section 110(c)(1).

The first step in developing a regional haze SIP is for a State to determine which Class I areas, in addition to those within its borders, “may be affected” by emissions from within the State. In the 1999 RHR, the EPA determined that all States contribute to visibility impairment in at least one Class I area and explained that the statute and regulations lay out an “extremely low triggering threshold” for determining “whether States should be required to engage in air quality planning and analysis as a prerequisite to determining the need for control of emissions from sources within their State.” See 64 FR 35714, July 1, 1999, at pages 35720-22.

A State must determine which Class I areas must be addressed by its SIP by evaluating the total emissions of visibility impairing pollutants from all sources within the State. The determination of which Class I areas may be affected by a State's emissions is subject to the requirement in 40 CFR 51.308(f)(2)(iii) to “document the technical basis, including modeling, monitoring, cost, engineering, and emissions information, on which the State is relying to determine the emission reduction measures that are necessary to make reasonable progress in each mandatory Class I Federal area it affects.”

As part of assessing whether a SIP revision for the second implementation period is providing for reasonable progress towards the national visibility goal, the RHR contains requirements in 40 CFR 51.308(f)(1) related to tracking visibility improvement over time. The requirements of this section apply only to States having Class I areas within their borders; the required calculations must be made for each such Class I area. The EPA's 2018 Visibility Tracking Guidance provides recommendations to assist States in satisfying their obligations under 40 CFR 51.308(f)(1); specifically, in developing information on baseline, current, and natural visibility conditions, and in making optional adjustments to the URP to account for the impacts of international anthropogenic emissions and prescribed fires. See 82 FR 3078, January 10, 2017, at pages 3103-05.

The RHR requires tracking of visibility conditions on two sets of days: the clearest and the most impaired days. Visibility conditions for both sets of days are expressed as the average deciview index for the relevant five-year period (the period representing baseline or current visibility conditions). The RHR provides that the relevant sets of days for visibility tracking purposes are the 20% clearest (the 20% of monitored days in a calendar year with the lowest values of the deciview index) and the 20% most impaired days (the 20% of monitored days in a calendar year with the highest amounts of anthropogenic visibility impairment). 40 CFR 51.301. A State must calculate visibility conditions for both the 20% clearest and the 20% most impaired days for the baseline period of 2000-2004 and the most recent five-year period for which visibility monitoring data are available (representing current visibility conditions). 40 CFR 51.308(f)(1)(i) and (iii). States must also calculate natural visibility conditions for the clearest and most impaired days, by estimating the conditions that would exist on those two sets of days absent anthropogenic visibility impairment. 40 CFR 51.308(f)(1)(ii). Using all these data, States must then calculate, for each Class I area, the amount of progress made since the baseline period (2000-2004) and how much improvement is left to achieve to reach natural visibility conditions.

Using the data for the set of most impaired days only, States must plot a line between visibility conditions in the baseline period and natural visibility conditions for each Class I area to determine the URP—the amount of visibility improvement, measured in deciviews, that would need to be achieved during each implementation period to achieve natural visibility conditions by the end of 2064. The URP is used in later steps of the reasonable progress analysis for informational purposes and to provide a non-enforceable benchmark against which to assess a Class I area's rate of visibility improvement. Additionally, in the 2017 RHR, the EPA provided States the option of proposing to adjust the endpoint of the URP to account for impacts of anthropogenic sources outside the United States and/or impacts of certain types of wildland prescribed fires. These adjustments are intended to avoid any perception that States should compensate for impacts from international anthropogenic sources and to give States the flexibility to determine that limiting the use of wildland-prescribed fire is not necessary for reasonable progress. See 82 FR 3078, January 10, 2017, at page 3107, footnote 116.

The EPA's 2018 Visibility Tracking Guidance can be used to help satisfy the 40 CFR 51.308(f)(1) requirements, including in developing information on baseline, current, and natural visibility conditions, and in making optional adjustments to the URP. In addition, the 2020 Data Completeness Memo provides recommendations on the data completeness language referenced in section 51.308(f)(1)(i) and provides updated natural conditions estimates for each Class I area.

The core component of a regional haze SIP revision is a long-term strategy that addresses regional haze in each Class I area within a State's borders and each Class I area outside the State that may be affected by emissions from the State. The long-term strategy “must include the enforceable emissions limitations, compliance schedules, and other measures that are necessary to make reasonable progress, as determined pursuant to (f)(2)(i) through (iv).” 40 CFR 51.308(f)(2). The amount of progress that is “reasonable progress” is based on applying the four statutory factors in CAA section 169A(g)(1) in an evaluation of potential control options for sources of visibility impairing pollutants, which is referred to as a “four-factor” analysis. The outcome of that analysis is the emission reduction measures that a particular source or group of sources needs to implement to make reasonable progress towards the national visibility goal. See 40 CFR 51.308(f)(2)(i). Emission reduction measures that are necessary to make reasonable progress may be either new, additional control measures for a source, or they may be the existing emission reduction measures that a source is already implementing. See 82 FR 3078, January 10, 2017, at pages 3092-93. Such measures must be represented by “enforceable emissions limitations, compliance schedules, and other measures” ( i.e., any additional compliance tools) in a State's long-term strategy in its SIP. 40 CFR 51.308(f)(2).

The regulation at 40 CFR 51.308(f)(2)(i) provides the requirements for the four-factor analysis. The first step of this analysis entails selecting the sources to be evaluated for emission reduction measures; to this end, the RHR requires States to consider “major and minor stationary sources or groups of sources, mobile sources, and area sources” of visibility impairing pollutants for potential four-factor control analysis. 40 CFR 51.308(f)(2)(i). A threshold question at this step is which visibility impairing pollutants will be analyzed.

While States have discretion to choose any source selection methodology that is reasonable, whatever choices they make should be reasonably explained. To this end, 40 CFR 51.308(f)(2)(i) requires that a State's SIP submission include “a description of the criteria it used to determine which sources or groups of sources it evaluated.” The technical basis for source selection, which may include methods for quantifying potential visibility impacts such as emissions divided by distance metrics, trajectory analyses, residence time analyses, and/or photochemical modeling, must also be appropriately documented, as required by 40 CFR 51.308(f)(2)(iii).

Once a State has selected the set of sources, the next step is to determine the emissions reduction measures for those sources that are necessary to make reasonable progress for the second implementation period. 12 This is accomplished by considering the four factors—“the costs of compliance, the time necessary for compliance, and the energy and non-air quality environmental impacts of compliance, and the remaining useful life of any existing source subject to such requirements.” CAA section 169A(g)(1). The EPA has explained that the four-factor analysis is an assessment of potential emission reduction measures ( i.e., control options) for sources: “use of the terms `compliance' and `subject to such requirements' in section 169A(g)(1) strongly indicates that Congress intended the relevant determination to be the requirements with which sources would have to comply to satisfy the CAA's reasonable progress mandate.” 82 FR 3078, January 10, 2017, at page 3091. Thus, for each source it has selected for four-factor analysis, 13 a State must consider a “meaningful set” of technically feasible control options for reducing emissions of visibility impairing pollutants. 82 FR 3078, January 10, 2017, at page 3088.

The EPA has also explained that, in addition to the four statutory factors, States have flexibility under the CAA and RHR to reasonably consider visibility benefits as an additional factor alongside the four statutory factors. Ultimately, while States have discretion to reasonably weigh the factors and to determine what level of control is needed, 40 CFR 51.308(f)(2)(i) provides that a State “must include in its implementation plan a description of . . . how the four factors were taken into consideration in selecting the measure for inclusion in its long-term strategy.”

As explained above, 40 CFR 51.308(f)(2)(i) requires States to determine the emission reduction measures for sources that are necessary to make reasonable progress by considering the four factors. Pursuant to 40 CFR 51.308(f)(2), measures that are necessary to make reasonable progress towards the national visibility goal must be included in a State's long-term strategy and in its SIP. If the outcome of a four-factor analysis is that an emissions reduction measure is necessary to make reasonable progress towards remedying existing or preventing future anthropogenic visibility impairment, that measure must be included in the SIP.

The characterization of information on each of the factors is also subject to the documentation requirement in 40 CFR 51.308(f)(2)(iii). The reasonable progress analysis is a technically complex exercise, and also a flexible one, that provides States with bounded discretion to design and implement approaches appropriate to their circumstances. Given this flexibility, 40 CFR 51.308(f)(2)(iii) plays an important function in requiring a State to document the technical basis for its decision making so that the public and the EPA can comprehend and evaluate the information and analysis the State relied upon to determine what emission reduction measures must be in place to make reasonable progress. The technical documentation must include the modeling, monitoring, cost, engineering, and emissions information on which the State relied to determine the measures necessary to make reasonable progress. Additionally, the RHR at 40 CFR 51.308(f)(2)(iv) separately provides five “additional factors”  14 that States must consider in developing their long-term strategies: (1) emission reductions due to ongoing air pollution control programs, including measures to address reasonably attributable visibility impairment; (2) measures to reduce the impacts of construction activities; (3) source retirement and replacement schedules; (4) basic smoke management practices for prescribed fire used for agricultural and wildland vegetation management purposes and smoke management programs; and (5) the anticipated net effect on visibility due to projected changes in point, area, and mobile source emissions over the period addressed by the long-term strategy.

Because the air pollution that causes regional haze crosses State boundaries, 40 CFR 51.308(f)(2)(ii) requires a State to consult with other States that also have emissions that are reasonably anticipated to contribute to visibility impairment in a given Class I area. If a State, pursuant to consultation, agrees that certain measures ( e.g., a certain emission limitation) are necessary to make reasonable progress at a Class I area, it must include those measures in its SIP. 40 CFR 51.308(f)(2)(ii)(A). Additionally, the RHR requires that States that contribute to visibility impairment at the same Class I area consider the emission reduction measures the other contributing States have identified as being necessary to make reasonable progress for their own sources. 40 CFR 51.308(f)(2)(ii)(B). If a State has been asked to consider or adopt certain emission reduction measures, but ultimately determines those measures are not necessary to make reasonable progress, that State must document in its SIP the actions taken to resolve the disagreement. 40 CFR 51.308(f)(2)(ii)(C). Under all circumstances, a State must document in its SIP revision all substantive consultations with other contributing States. 40 CFR 51.308(f)(2)(ii)(C).

In this proposed action, the EPA notes that it is the Agency's policy, as announced in the EPA's recent approval of the West Virginia Regional Haze SIP, 15 that where the State has considered the four statutory factors, and visibility conditions for a Class I area impacted by a State are projected to be below the URP in 2028, the State has presumptively demonstrated reasonable progress for the second implementation period for that area. The EPA acknowledges that this reflects a change in policy as to how the URP should be used in the evaluation of regional haze second planning period SIPs. However, the EPA finds that this policy aligns with the purpose of the statute and RHR, which is achieving “reasonable” progress, not maximal progress, toward Congress' natural visibility goal.

Reasonable progress goals (RPGs) “measure the progress that is projected to be achieved by the control measures States have determined are necessary to make reasonable progress based on a four-factor analysis.” 82 FR 3078, January 10, 2017, at page 3091. For the second implementation period, the RPGs are set for 2028. RPGs are not enforceable targets, 40 CFR 51.308(f)(3)(iii). While States are not legally obligated to achieve the visibility conditions described in their RPGs, 40 CFR 51.308(f)(3)(i) requires that “[t]he long-term strategy and the reasonable progress goals must provide for an improvement in visibility for the most impaired days since the baseline period and ensure no degradation in visibility for the clearest days since the baseline period.”

RPGs may also serve as a metric for assessing the amount of progress a State is making towards the national visibility goal. To support this approach, the RHR requires States with Class I areas to compare the 2028 RPG for the most impaired days to the corresponding point on the URP line (representing visibility conditions in 2028 if visibility were to improve at a linear rate from conditions in the baseline period of 2000-2004 to natural visibility conditions in 2064). If the most impaired days RPG in 2028 is above the URP ( i.e., if visibility conditions are improving more slowly than the rate described by the URP), each State that contributes to visibility impairment in the Class I area must demonstrate, based on the four-factor analysis required under 40 CFR 51.308(f)(2)(i), that no additional emission reduction measures would be reasonable to include in its long-term strategy. 40 CFR 51.308(f)(3)(ii). To this end, 40 CFR 51.308(f)(3)(ii) requires that each State contributing to visibility impairment in a Class I area that is projected to improve more slowly than the URP provide “a robust demonstration, including documenting the criteria used to determine which sources or groups [of] sources were evaluated and how the four factors required by paragraph (f)(2)(i) were taken into consideration in selecting the measures for inclusion in its long-term strategy.”

Section 51.308(f)(6) requires States to have certain strategies and elements in place for assessing and reporting on visibility. Individual requirements under this section apply either to States with Class I areas within their borders, States with no Class I areas but that are reasonably anticipated to cause or contribute to visibility impairment in any Class I area, or both. Compliance with the monitoring strategy requirement may be met through a State's participation in the Interagency Monitoring of Protected Visual Environments (IMPROVE) monitoring network, which is used to measure visibility impairment caused by air pollution at the 156 Class I areas covered by the visibility program. 40 CFR 51.308(f)(6), (f)(6)(i), and (iv).

All States' SIPs must provide for procedures by which monitoring data and other information are used to determine the contribution of emissions from within the State to regional haze visibility impairment in affected Class I areas, as well as a Statewide inventory documenting such emissions. 40 CFR 51.308(f)(6)(ii), (iii), and (v). All States' SIPs must also provide for any other elements, including reporting, recordkeeping, and other measures, that are necessary for States to assess and report on visibility. 40 CFR 51.308(f)(6)(vi).

Section 51.308(f)(5) requires a State's regional haze SIP revision to address the requirements of 40 CFR 51.308(g)(1) through (5) so that the plan revision due in 2021 will serve also as a progress report addressing the period since submission of the progress report for the first implementation period. The regional haze progress report requirement is designed to inform the public and the EPA about a State's implementation of its existing long-term strategy and whether such implementation is in fact resulting in the expected visibility improvement. See 81 FR 26942, May 4, 2016, at page 26950; see also 82 FR 3078, January 10, 2017, at page 3119. To this end, every State's SIP revision for the second implementation period is required to assess changes in visibility conditions and describe the status of implementation of all measures included in the State's long-term strategy, including Best Available Retrofit Technology (BART) and reasonable progress emission reduction measures from the first implementation period, and the resulting emissions reductions. 40 CFR 51.308(g)(1) and (2).

CAA section 169A(d) requires that before a State holds a public hearing on a proposed regional haze SIP revision, it must consult with the appropriate FLM or FLMs; pursuant to that consultation, the State must include a summary of the FLMs' conclusions and recommendations in the notice to the public. Consistent with this statutory requirement, the RHR also requires that States “provide the [FLM] with an opportunity for consultation, in person and at a point early enough in the State's policy analyses of its long-term strategy emission reduction obligation so that information and recommendations provided by the [FLM] can meaningfully inform the State's decisions on the long-term strategy.” 40 CFR 51.308(i)(2). For the EPA to evaluate whether FLM consultation meeting the requirements of the RHR has occurred, the SIP submission should include documentation of the timing and content of such consultation. The SIP revision submitted to the EPA must also describe how the State addressed any comments provided by the FLMs. 40 CFR 51.308(i)(3). Finally, a SIP revision must provide procedures for continuing consultation between the State and FLMs regarding the State's visibility protection program, including development and review of SIP revisions, five-year progress reports, and the implementation of other programs having the potential to contribute to impairment of visibility in Class I areas. 40 CFR 51.308(i)(4).

On April 4, 2011, Alaska submitted its regional haze plan for the first implementation period (2008 through 2018). The CAA required that first implementation period plans include, among other things, a long-term strategy for making reasonable progress and BART requirements for certain older facilities, where applicable. 16 The EPA approved Alaska's first implementation period plan on February 14, 2013 (78 FR 10546). On March 10, 2016, the State submitted a five-year progress report, that the EPA approved on April 12, 2018 (83 FR 15746). 17

On July 25, 2022, Alaska submitted its regional haze plan for the second implementation period. 18 The Alaska DEC made the plan available for public comment from March 30, 2022, through May 24, 2022, and held a public hearing on May 10, 2022. 19 Alaska received and responded to public comments and included the comments and responses in the regional haze plan submission. 20 We note that, to address certain regional haze requirements, the 2022 regional haze plan submission relied in part on SO 2 best available control technology (BACT) analyses originally conducted and submitted as part of the Fairbanks PM 2.5 serious nonattainment plan in 2020 and 2021. 21 However, Alaska subsequently revised the original SO 2 BACT analyses to address EPA concerns and to account for more recent vendor quotes and fuel prices. 22 These updated SO 2 BACT analyses were later submitted by Alaska to the EPA as part of a December 4, 2024, SIP revision to the Fairbanks PM 2.5 serious area nonattainment plan. 23

To clarify the relationship between the Alaska regional haze plan and the revisions to the Fairbanks PM 2.5 serious area nonattainment plan, Alaska sent a letter to the EPA on October 6, 2025. The letter stated that Alaska was relying on the 2024 updated SO 2 BACT analyses to meet the regional haze four-factor analysis requirements for the second implementation period. Accordingly, the State found no SO 2 controls to be necessary for reasonable progress in the second implementation period. The following sections describe in detail the Alaska regional haze plan submission and clarification letter, including, but not limited to, air quality modeling conducted, source selection, control measure analysis, and visibility improvement progress at Class I areas in Alaska. The following sections also describe the EPA's evaluation of the submission against the requirements of the CAA and RHR for the second implementation period. The submission, clarification letter, and other supporting documents may be found in the docket for this action.

Section 169A(b)(2) of the CAA requires each State in which any Class I area is located or “the emissions from which may reasonably be anticipated to cause or contribute to any impairment of visibility” in a Class I area to have a plan for making reasonable progress toward the national visibility goal. The RHR implements this statutory requirement at 40 CFR 51.308(f), which provides that each State's plan “must address regional haze in each mandatory Class I Federal area located within the State and in each mandatory Class I Federal area located outside the State that may be affected by emissions from within the State,” and (f)(2), which requires each State's plan to include a long-term strategy that addresses regional haze in such Class I areas.

The EPA concluded in the 1999 RHR that “all [s]tates contain sources whose emissions are reasonably anticipated to contribute to regional haze in a Class I area,” 64 FR 35714, July 1, 1999, at page 35721, and this determination was not changed in the 2017 RHR. Critically, the statute and regulation both require that the cause-or-contribute assessment consider all emissions of visibility impairing pollutants from a State, as opposed to emissions of a particular pollutant or emissions from a certain set of sources.

Alaska has four Class I areas: 24 Denali National Park and Preserve (Denali National Park), Tuxedni National Wildlife Refuge/National Wilderness Area (Tuxedni Wilderness Area), Simeonof National Wildlife Refuge/National Wilderness Area (Simeonof Wilderness Area), and the Bering Sea National Wildlife Refuge/National Wilderness Area (Bering Sea Wilderness Area). These areas are described in the following paragraphs.

Denali National Park comprises more than six million acres in the Alaska interior managed by the National Park Service. Mountains are a prominent feature of the park, reaching 20,320 feet elevation. 25 The surrounding tundra and taiga are home to dozens of mammals, including Dall sheep, caribou, grizzly bears, moose, foxes, lynx, and marmots, to name a few. Over 400 flowering plants grow there, and over 100 bird species have been sighted. 26

The Simeonof Wilderness Area is managed by the U.S. Fish and Wildlife Service. 27 It covers 25,855 acres, including the water, shoals, and kelp beds within one mile of Simeonof Island. 28 The wilderness area is home to over 55 species of birds as well as sea otters, hair seals, walruses, and whales. 29 Sandpoint, population 652, is the nearest community, located on an island approximately 60 miles northwest of the wilderness area. 30

The Tuxedni Wilderness Area was established on Chisik and Duck islands at the mouth of Tuxedni Bay. 31 The 5,566-acre wilderness area is managed by the U.S. Fish and Wildlife Service. The remote area is a refuge for seabirds, bald eagles and peregrine falcons. Access is limited to small boats and planes, when the weather allows. 32

The Bering Sea Wilderness Area is the most isolated and remote Class I area in the U.S. 33 It is located on a collection of islands in the Bering Sea, 350 miles southwest of Nome, Alaska. The U.S. Fish and Wildlife Service manages the 81,340 acres, where millions of seabirds congregate, as well as northern sea lions, seals, and walruses. 34

Haze species at Alaska Class I areas are measured and analyzed via the IMPROVE network. 35 Table 1 of this document lists the IMPROVE monitors representing visibility at Alaska Class I areas.

We note that, due to its extremely remote location and lack of reliable power, there is no visibility monitoring at the Bering Sea Wilderness Area. 37 No electricity or other infrastructure exists to support a monitoring effort on the uninhabited islands that make up this wilderness area. A DELTA-DRUM mobile sampler was installed during a field visit in 2002, but due to power supply issues, no viable baseline data were collected. 38 We acknowledge that the RHR contemplates that for areas without onsite monitoring, States should work with the EPA to use other available, representative monitoring data to establish a baseline. 39 However, because this wilderness area is in the middle of the Bering Sea, hundreds of miles from the mainland and any other monitoring locations, data from other sites in Alaska are not considered representative of visibility at the Bering Sea Wilderness Area.

In the regional haze plan for the first implementation period, Alaska evaluated and discussed the potential for future anthropogenic emissions to impact visibility at the Bering Sea Wilderness Area, and concluded that future impacts from any local industrial, commercial, or community developments were highly unlikely. 40 The State acknowledged that visibility in the area would continue to be influenced by international sources beyond Alaska's control, and may also be influenced by future emissions from international commercial shipping and oil and gas development in the Bering Sea. However, these latter source categories are under Federal jurisdiction. With respect to global shipping, the International Marine Organization (IMO) global sulfur limit rule went into effect on January 1, 2020. 41 This rule applies to all commercial shipping and limits fuel sulfur content to 0.5%. 42 This is a seven-fold decrease in fuel sulfur content from the prior IMO limit of 35,000 part per million. While the EPA cannot estimate the exact impact of the sulfur limits on visibility impairment at Bering Sea, this new rule is likely to reduce sulfate formation in the area. 43 Based on this information, the EPA approved Alaska's approach to the Bering Sea Wilderness Area in the first implementation period.

For the second implementation period, Alaska stated in its regional haze plan submission that, due to the logistical challenges associated with monitoring this remote location, there have been no monitoring attempts since 2002, and none are currently planned. 44 Consistent with our action on Alaska's first implementation period regional haze plan, we have determined that Alaska's approach to the Bering Sea Wilderness Area in the second implementation period is reasonable.

In addition, we note that Alaska operates an IMPROVE protocol site south of Denali National Park at Trapper Creek (TRCR1), which is sited to evaluate potential transport of pollution into the park from Anchorage and areas to the south. 45 While data from this protocol site may be compared to data from the DENA1 site, the DENA1 site remains the official IMPROVE site representative of visibility conditions in Denali National Park. 46

As detailed in the submission, Alaska determined there are no Class I areas in other States affected by emissions from Alaska sources. 47 Alaska borders no other State and is geographically distant from all other States. 48 We concur with the State's finding that emissions from Alaska sources do not impact Class I areas outside the State. 49

Section 51.308(f)(1) requires States to determine the following for “each mandatory Class I Federal area located within the State”: baseline visibility conditions for the most impaired and clearest days, natural visibility conditions for the most impaired and clearest days, progress to date for the most impaired and clearest days, the differences between current visibility conditions and natural visibility conditions, and the URP. This section also provides the option for States to propose adjustments to the URP line for a Class I area to account for visibility impacts from anthropogenic sources outside the United States and/or the impacts from wildland prescribed fires that were conducted for certain, specified objectives. 40 CFR 51.308(f)(1)(vi)(B).

The Alaska regional haze plan submission addressed baseline, current, and natural visibility conditions, and the URP for each Class I area—with the exception of Bering Sea Wilderness Area—as required by the RHR and the EPA's technical guidance on tracking visibility progress. 50 Tables 2 and 3 of this document summarize visibility data provided in the Alaska submission, including adjustments by the EPA to the natural conditions endpoint and URP to account for certain international sources of anthropogenic sulfate. 51 We note that, to attempt to further quantify out-of-State and natural sources of sulfate, Alaska worked with the University of Alaska Fairbanks to run GEOS-Chem, a global 3-dimensional chemical transport model, and included the modeling results in the submission, as further discussed in section IV.F. of this document. 52

The data in Tables 2 and 3 of this document suggest that current visibility at DENA1 has improved since the baseline period for both the clearest and most impaired days. 55 In addition, current conditions at DENA1 appear to be within half of a deciview of the EPA-adjusted URP for 2028 and within one deciview of the EPA-adjusted natural conditions for both the clearest and most impaired days. 56

Alaska provided data in the submission showing that ammonium sulfate and organic mass are the dominant haze species at DENA1. 57 Anthropogenic and natural sources of sulfate from inside and outside Alaska are thought to contribute to sulfate at DENA1. 58 The submission highlighted a number of anthropogenic sources of pollution located near DENA1, including Denali National Park Headquarters, Park Road, Alaska Railroad, Usibelli Coal Mine, and the Healy Power Plant. 59 We further discuss sulfur dioxide emissions from the Healy Power Plant in section IV.E. of this document.

Alaska stated in the submission that the organic mass contribution at DENA1 may primarily be explained by wildfires in south central Alaska. 60 The EPA fire emissions inventory and the Alaska fire emissions inventory show variability from year to year. 61 Alaska also noted that 2009 was a significant fire wildfire year when 2.9 million acres burned in interior Alaska. 62 The Redoubt volcano in southcentral Alaska, a source of SO 2 emissions and potential sulfate contributions, erupted that same year. 63

At first glance, the data in Tables 2 and 3 of this document suggest that current visibility at SIME1 may have degraded since the baseline period for both the clearest and most impaired days. However, the EPA reviewed the underlying data used to calculate the average haze indices for SIME1 and found no statistical difference between baseline and current conditions for the clearest and most impaired days at SIME1. The EPA's technical memo documenting the statistical analysis may be found in the docket for this action. 64 In addition, current conditions at SIME1 appear to be within half a deciview of the EPA-adjusted URP for 2028, and within two deciviews of the EPA- adjusted natural conditions for both the clearest and most impaired days.

In the submission, Alaska stated that visibility impairment at SIME1 is primarily due to ammonium sulfate followed by sea salt. 65 Alaska further stated that anthropogenic sources of sulfate are likely to include commercial marine vessel emissions from ships transiting the international shipping lane near the monitor, but that natural sources of sulfate at SIME1 are important. The near-ocean location of SIME1 yields significant sea salt contribution, as reflected in the IMPROVE data. 66 Oceanic dimethyl sulfide, a volatile sulfur compound that is produced by plankton and converted to SO 2 in the marine atmosphere, is also understood to contribute. 67 Alaska estimated that roughly 60 percent of oceanic dimethyl sulfide is converted to SO 2 in the Gulf of Alaska, however, the exact contribution of dimethyl sulfide to sulfate at SIME1 is unknown at this time. 68 In addition, Alaska stated that SIME1 is likely influenced by sulfur degassing from nearby active and semi-active volcanoes. 69

The data in Tables 2 and 3 of this document suggest that current visibility at TUXE1 has improved since the baseline period for both the clearest and most impaired days. 70 In addition, current conditions at TUXE1 appear to be within half a deciview of the EPA-adjusted URP for 2028 and within one deciview of the EPA-adjusted natural conditions for both the clearest and most impaired days.

We note that the TUXE1 monitor was re-located in 2015, from the west side of Cook Inlet to the east side in the Kenai Peninsula Borough (KPBO1) due to monitor access issues. 71 The last year of complete data for TUXE1 was 2014, therefore, Alaska calculated current conditions for TUXE1 using 2012 through 2014 data. The first full year of data for KPBO1 was 2016. The Alaska submission stated that the next regional haze progress report would include a full dataset and analysis for KPBO1. 72 We find this approach to data handling reasonable for the TUXE1 and KPBO1 monitors. Both the TUXE1 and KPBO1 monitors are IMPROVE monitors that are representative of visibility conditions in the Tuxedni Wilderness Area.

For the clearest days, Alaska found that the annual total light extinction at KPBO1 was slightly higher than TUXE1 and appeared to be more evenly distributed among ammonium sulfate, coarse mass, organic mass, and sea salt. 73 On the most impaired days, the annual extinction at TUXE1 was predominantly ammonium sulfate. 74 Because the monitor only began yielding data in 2016, a full dataset was not available to calculate annual extinction at KPBO1 for the most impaired days. The Alaska submission stated that the next regional haze progress report would include a full dataset and analysis for KPBO1. 75

Alaska estimated that the largest categories of anthropogenic impairment at TUXE1 and KPBO1 were most likely to include offshore oil drilling platforms and oil and gas facilities in the Cook Inlet. As part of the source selection process, the State reviewed actual sulfur dioxide emissions at a number of platforms and facilities in the Cook Inlet. Please see section IV.E. of this document for further details.

In conclusion, the EPA proposes to find that the Alaska submission meets the requirements of 40 CFR 51.308(f)(1) to calculate baseline, current, and natural visibility conditions; progress to date; and uniform rate of progress for the second implementation period. For this reason, we propose to approve the portions of the Alaska regional haze plan submission relating to 40 CFR 51.308(f)(1).

The long-term strategy “must include the enforceable emissions limitations, compliance schedules, and other measures that are necessary to make reasonable progress, as determined pursuant to (f)(2)(i) through (iv).” 40 CFR 51.308(f)(2).

The regulation at 40 CFR 51.308(f)(2)(i) provides the requirements for the four-factor analysis. The first step of this analysis entails selecting the sources to be evaluated for emission reduction measures. While States have discretion to choose any source selection methodology that is reasonable, whatever choices they make should be reasonably explained. To this end, 40 CFR 51.308(f)(2)(i) requires that a State's SIP submission include “a description of the criteria it used to determine which sources or groups of sources it evaluated.” The technical basis for source selection, which may include methods for quantifying potential visibility impacts such as emissions divided by distance metrics, trajectory analyses, residence time analyses, and/or photochemical modeling, must also be appropriately documented, as required by 40 CFR 51.308(f)(2)(iii).

Once a State has selected the set of sources, the next step is to determine the emissions reduction measures for those sources that are necessary to make reasonable progress for the second implementation period. 76 This is accomplished by considering the four factors—“the costs of compliance, the time necessary for compliance, and the energy and non-air quality environmental impacts of compliance, and the remaining useful life of any existing source subject to such requirements.” CAA section 169A(g)(1). The EPA has explained that the four-factor analysis is an assessment of potential emission reduction measures ( i.e., control options) for sources; Thus, for each source it has selected for four-factor analysis, a State must consider a “meaningful set” of technically feasible control options for reducing emissions of visibility impairing pollutants. 77

The EPA has also explained that, in addition to the four statutory factors, States have flexibility under the CAA and RHR to reasonably consider visibility benefits as an additional factor alongside the four statutory factors. 78 Ultimately, while States have discretion to reasonably weigh the factors and to determine what level of control is needed, 40 CFR 51.308(f)(2)(i) provides that a State “must include in its implementation plan a description of. . .how the four factors were taken into consideration in selecting the measure for inclusion in its long-term strategy.”

As explained above, 40 CFR 51.308(f)(2)(i) requires States to determine the emission reduction measures for sources that are necessary to make reasonable progress by considering the four factors. Pursuant to 40 CFR 51.308(f)(2), measures that are necessary to make reasonable progress towards the national visibility goal must be included in a State's long-term strategy and in its SIP. If the outcome of a four-factor analysis is that an emissions reduction measure is necessary to make reasonable progress towards remedying existing or preventing future anthropogenic visibility impairment, that measure must be included in the SIP.

The following paragraphs describe how the Alaska regional haze plan submission addresses the requirements of 40 CFR 51.308(f)(2) and summarize the EPA's evaluation.

In the regional haze plan for the first implementation period, Alaska evaluated both NO X and SO 2 potential contributions to haze species at Alaska Class I areas. In the regional haze plan for the second implementation period, Alaska provided data that showed ammonium sulfate is the dominant haze species, comprising approximately 60% of the annual average light extinction composition on the 20% most impaired days. 79 When looking at the most anthropogenically impaired days, Alaska estimated ammonium sulfate comprised over 95% of the annual extinction composition at Alaska Class I areas. 80 Therefore, Alaska focused on SO 2 emissions in the regional haze second implementation period. Based on a review of the submission and a review of IMPROVE data from the FLM Environmental Database, 81 we propose to find that it is reasonable for Alaska to focus on SO 2 emissions in the second implementation period. 82

Alaska employed a two-step source selection process, as detailed in the submission. 83 In step one, Alaska identified the geographic areas in which a variety of sources may have the potential to impact visibility at Alaska Class I areas. The State relied on HYSPLIT modeling  84 to estimate back trajectories for each IMPROVE station for the most impaired days in 2014 to 2018, and used the back trajectories to perform an Area of Influence (AOI) and Weighted Emissions Potential (WEP) analysis. 85 Step one yielded 26 point and area sources, which Alaska then ranked based on 2014 and 2017 SO 2 emissions and WEP sulfate potential. 86

In step two, Alaska followed a Q/d methodology, which is a screening method described in the EPA 2019 guidance, where “Q” is a source's actual sulfur dioxide emissions, primarily based on the 2017 National Emissions Inventory, and “d” is the distance from the source to the nearest Class I area. 87 The sources with SO 2 Q/d values greater than or equal to 1.0 were selected by Alaska for further analysis. 88

We note that, as stated in the clarification letter, the 2022 regional haze plan submission used 2017 emissions inventory data to select the University of Alaska Fairbanks Campus Power Plant as a source for further evaluation, based on a Q/d value of 1.4. However, the submission failed to account for the fact that, in 2019, the original coal-fired boilers at the power plant were replaced with a new, circulating fluidized bed coal-fired boiler equipped with a limestone injection system to control SO 2 emissions. 89 The source's 2020 SO 2 emissions as reported to the 2020 National Emissions Inventory were approximately 20.6 tons, and 2023 emissions were just 7.4 tons. 90 Because the source is estimated to be 117 kilometers from Denali National Park, the updated Q/d values for the University of Alaska Fairbanks Campus Power Plant for both 2020 and 2023 fall below the State's screening threshold of 1.0. 91 Accounting for this update, the final sources selected by Alaska for further analysis are listed in the following Table 4.