Regulatory Flexibility Act: Clarification of Key Terms Still	 
Needed (06-MAR-02, GAO-02-491T).				 
								 
The Regulatory Flexibility Act of 1980 (RFA) requires agencies to
prepare an initial and a final regulatory flexibility analysis.  
The Small Business Regulatory Enforcement Fairness Act of 1996	 
(SBREFA) was enacted to strengthen the RFA's protections for	 
small entities, and some of the act's requirements are built on  
"significant impact." GAO reviewed the implementation of the RFA 
and SBREFA several times during recent years, with topics ranging
from specific provisions in each statute to the overall 	 
implementation of the RFA. Although both of these reform	 
initiatives have clearly affected how federal agencies regulate, 
GAO believes that their full promise has not been realized, with 
questions regarding the RFA that remain unanswered. These	 
questions lie at the heart of the RFA and SBREFA, and their	 
answers can have a substantive effect on the amount of regulatory
relief provided through those statutes. Because Congress did not 
answer these questions when the statutes were enacted, agencies  
have had to develop their own answers, and those answers differ. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-491T					        
    ACCNO:   A02850						        
  TITLE:     Regulatory Flexibility Act: Clarification of Key Terms   
Still Needed							 
     DATE:   03/06/2002 
  SUBJECT:   Agency proceedings 				 
	     Federal regulations				 
	     Regulatory agencies				 
	     Small business assistance				 
	     Statutory law					 

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GAO-02-491T
     
United States General Accounting Office

GAO Testimony

Before the Committee on Small Business, House of Representatives

For Release on Delivery Expected at 10 a.m. EDT Wednesday, March 6, 2002

REGULATORY FLEXIBILITY ACT

Clarification of Key Terms Still Needed

Statement of Victor Rezendes, Managing Director Strategic Issues Team

                                      a

GAO-02-491T

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the implementation of the
Regulatory Flexibility Act of 1980 (RFA), as amended, and the Small Business
Regulatory Enforcement Fairness Act of 1996 (SBREFA).1 As you requested, I
will discuss our work on the implementation of these two statutes in recent
years.

The RFA requires federal agencies to examine the impact of their proposed
and final rules on "small entities" (small businesses, small governmental
jurisdictions, and small organizations) and to solicit the ideas and
comments of such entities for this purpose. Specifically, whenever agencies
are required to publish a notice of proposed rulemaking, the RFA requires
agencies to prepare an initial and a final regulatory flexibility analysis.
However, the act also states that those analytical requirements do not apply
if the head of the agency certifies that the rule will not have a
"significant economic impact on a substantial number of small entities," or
what I will-for the sake of brevity-term a "significant impact." SBREFA was
enacted to strengthen the RFA's protections for small entities, and some of
the act's requirements are built on this "significant impact" determination.
For example, one provision of SBREFA requires that before publishing a
proposed rule that may have a significant impact, the Environmental
Protection Agency (EPA) and the Occupational Safety and Health
Administration must convene a small business advocacy review panel for the
draft rule, and collect the advice and recommendations of representatives of
affected small entities about the potential impact of the draft rule.2

1The RFA is codified at 5 U.S.C. sect.601-612 and took effect on January 1,
1981. 2This provision of SBREFA is codified at 5 U.S.C. sect.609 and took effect
on June 29, 1996.

We have reviewed the implementation of the RFA and SBREFA several times
during recent years, with topics ranging from specific provisions in each
statute to the overall implementation of the RFA. Although both of these
reform initiatives have clearly affected how federal agencies regulate, we
believe that their full promise has not been realized. To achieve that
promise, Congress may need to clarify what it expects the agencies to do
with regard to the statutes' requirements. In particular, Congress may need
to clearly delineate-or have some other organization delineate-what is meant
by the terms "significant economic impact" and "substantial number of small
entities." The RFA does not define what Congress meant by these terms and
does not give any entity the authority or responsibility to define them
governmentwide. As a result, agencies have had to construct their own
definitions, and those definitions vary. Over the past decade, we have
recommended several times that Congress provide greater clarity with regard
to these terms, but to date Congress has not acted on our recommendations.3

The questions that remain unanswered are numerous and varied. For example,
does Congress believe that the economic impact of a rule should be measured
in terms of compliance costs as a percentage of businesses' annual revenues
or the percentage of work hours available to the firms? If so, is 3 percent
(or 1 percent) of revenues or work hours an appropriate definition of
"significant?" Should agencies take into account the cumulative impact of
their rules on small entities, even within a particular program area? Should
agencies count the impact of the underlying statutes when determining
whether their rules have a significant impact? What should be considered a
"rule" for purposes of the requirement in the RFA that the agencies review
rules with a significant impact within 10 years of their promulgation?
Should agencies review rules that had a significant impact at the time they
were originally published, or only those that currently have that effect?
Should agencies conduct regulatory flexibility analyses for rules that have
a positive economic impact on small entities, or only for rules with a
negative impact?

These questions are not simply matters of administrative conjecture within
the agencies. They lie at the heart of the RFA and SBREFA, and the

3Last year, legislation was introduced in the Senate (S. 849, the Agency
Accountability Act of 2001) that would, in part, require the Chief Counsel
for Advocacy of the Small Business Administration to promulgate regulations
to define the terms "significant economic impact" and "substantial number of
small entities."

answers to the questions can have a substantive effect on the amount of
regulatory relief provided through those statutes. Because Congress did not
answer these questions when the statutes were enacted, agencies have had to
develop their own answers-and those answers differ. If Congress does not
like the answers that the agencies have developed, it needs to either amend
the underlying statutes and provide what it believes are the correct answers
or give some other entity the authority to issue guidance on these issues.

EPA's Use of RFA Discretion

The implications of the current lack of clarity with regard to the term
"significant impact" and the discretion that agencies have to define it were
clearly illustrated in a report that we prepared for the Senate Committee on
Small Business 2 years ago.4 One part of our report focused on a proposed
rule that EPA published in August 1999 that would, upon implementation,
lower certain reporting thresholds for lead and lead compounds under the
Toxics Release Inventory program from as high as 25,000 pounds to 10
pounds.5 At the time, EPA said that the total cost of the rule in the first
year of implementation would be about $116 million. The agency estimated
that approximately 5,600 small businesses would be affected by the rule, and
that the first-year costs of the rule for each of these small businesses
would be from $5,200 to $7,500. However, EPA certified that the rule would
not have a significant impact, and therefore did not trigger certain
analytical and procedural requirements in the RFA.

EPA' determination that the proposed lead rule would not have a significant
impact on small entities was not unique. Its four major program offices
certified about 78 percent of the substantive proposed rules that they
published in the 2 ï¿½ years before SBREFA took effect in 1996, but certified
96 percent of the proposed rules published in the 2 ï¿½ years after the act's
implementation. In fact, two of the program offices-the Office of
Prevention, Pesticides and Toxic Substances and the Office of Solid

4U.S. General Accounting Office, Regulatory Flexibility Act: Implementation
in EPA Program Offices and Proposed Lead Rule, GAO/GGD-00-193 (Washington,
D.C.: Sept. 20, 2000).

5The proposed lead rule was published at 64 Fed. Reg. 42222 (1999). Toxics
Release Inventory reporting is required by section 313 of the Emergency
Planning and Community Right-to-Know Act of 1986 (EPCRA) (42 U.S.C. sect.11023).
Reporting is also required under the Pollution Prevention Act of 1990 (42
U.S.C. sect.13106), which added reporting requirements to EPCRA's reporting
requirements in 1991.

Waste-certified all 47 of their proposed rules in this post-SBREFA period as
not having a significant impact. The Office of Air and Radiation certified
97 percent of its proposed rules during this period, and the Office of Water
certified 88 percent. EPA officials told us that the increased rate of
certification after SBREFA's implementation was caused by a change in the
agency's RFA guidance on what constituted a significant impact. Prior to
SBREFA, EPA's policy was to prepare a regulatory flexibility analysis for
any rule that the agency expected to have any impact on any small entities.
The officials said that this guidance was changed because the SBREFA
requirement to convene an advocacy review panel for any proposed rule that
was not certified made the continuation of the agency's more inclusive RFA
policy too costly and impractical. In other words, EPA indicated that
SBREFA-the statute that Congress enacted to strengthen the RFA- caused the
agency to use the discretion permitted in the RFA and conduct fewer
regulatory flexibility analyses.

EPA's current guidance on how the RFA should be implemented includes
numerical guidelines that establish what appears to be a high threshold for
what constitutes a significant impact. Under those guidelines, an EPA rule
could theoretically impose $10,000 in compliance costs on 10,000 small
businesses, but the guidelines indicate that the agency can presume that the
rule does not trigger the requirements of the RFA as long as those costs do
not represent at least 1 percent of the affected businesses' annual
revenues. The guidance does not take into account the profit margins of the
businesses involved or the cumulative impact of the agency's rules on small
businesses-even within a particular subject area like the Toxics Release
Inventory.

Previous Reports on the RFA and SBREFA

We have issued several other reports in recent years on the implementation
of the RFA and SBREFA that, in combination, illustrate both the promise and
the problems associated with the statutes. For example, in 1991, we examined
the implementation of the RFA with regard to small governments and concluded
that each of the four federal agencies that we reviewed had a different
interpretation of key RFA provisions.6 We said that the act allowed agencies
to interpret when they believed their proposed regulations affected small
government, and recommended that Congress

6U.S. General Accounting Office, Regulatory Flexibility Act: Inherent
Weaknesses May Limit Its Usefulness for Small Governments, GAO/HRD-91-61
(Washington, D.C.: Jan. 11, 1991).

consider amending the RFA to require the Small Business Administration (SBA)
to develop criteria regarding whether and how to conduct the required
analyses.

In 1994, we examined 12 years of annual reports prepared by the SBA Chief
Counsel for Advocacy and said the reports indicated variable compliance with
the RFA-a conclusion that the Office of Advocacy also reached in its 20-year
report on the RFA. 7 SBA repeatedly characterized some agencies as
satisfying the act's requirements, but other agencies were consistently
viewed as recalcitrant. Other agencies' performance reportedly varied over
time or varied by subagency. We said that one reason for agencies' lack of
compliance with the RFA's requirements was that the act did not expressly
authorize SBA to interpret key provisions in the statute and did not require
SBA to develop criteria for agencies to follow in reviewing their rules. We
said that if Congress wanted to strengthen the implementation of the RFA, it
should consider amending the act to (1) provide SBA with authority and
responsibility to interpret the RFA's provisions and (2) require SBA, in
consultation with the Office of Management and Budget (OMB), to develop
criteria as to whether and how federal agencies should conduct RFA analyses.

In our 1998 report on the implementation of the small business advocacy
review panel requirements in SBREFA, we said that the lack of clarity
regarding whether EPA should have convened panels for two of its proposed
rules was traceable to the lack of agreed-upon governmentwide criteria as to
whether a rule has a significant impact.8 Nevertheless, we said that the
panels that had been convened were generally well received by both the
agencies and the small business representatives. We also said that if
Congress wished to clarify and strengthen the implementation of the RFA and
SBREFA, it should consider (1) providing SBA or another entity with clearer
authority and responsibility to interpret the RFA's provisions and (2)
requiring SBA or some other entity to develop criteria defining a
"significant economic impact on a substantial number of small entities."

7U.S. General Accounting Office, Regulatory Flexibility Act: Status of
Agencies' Compliance, GAO/GGD-94-105 (Washington, D.C.: Apr. 27, 1994). The
Office of Advocacy's report is entitled 20 Years of the Regulatory
Flexibility Act: Rulemaking in a Dynamic Economy (Washington, D.C.: 2000).

8U.S. General Accounting Office, Regulatory Reform: Implementation of the
Small Business Advocacy Review Panel Requirements, GAO/GGD-98-36
(Washington, D.C.: Mar. 18, 1998).

In 1999, we noted a similar lack of clarity regarding the RFA's requirement
that agencies review their existing rules that have a significant impact
within 10 years of their promulgation.9 We said that if Congress is
concerned that this section of the RFA has been subject to varying
interpretations, it may wish to clarify those provisions. We also
recommended that OMB take certain actions to improve the administration of
these review requirements, some of which have been implemented.

Last year we issued two reports on the implementation of SBREFA. One report
examined section 223 of the act, which required federal agencies to
establish a policy for the reduction and/or waiver of civil penalties on
small entities.10 All of the agencies' penalty relief policies that we
reviewed were within the discretion that Congress provided, but the policies
varied considerably. Some of the policies covered only a portion of the
agencies' civil penalty enforcement actions, and some provided small
entities with no greater penalty relief than large entities. The agencies
also varied in how key terms such as "small entities" and "penalty
reduction" were defined. We said that if Congress wanted to strengthen
section 223 of SBREFA it should amend the act to require that agencies'
policies cover all of the agencies civil penalty enforcement actions and
provide small entities with more penalty relief than other similarly
situated entities. Also, to facilitate congressional oversight, we suggested
that Congress require agencies to maintain data on their civil penalty
relief efforts.11

The other report that we issued on SBREFA last year examined the requirement
in section 212 that agencies publish small entity compliance guides for any
rule that requires a final regulatory flexibility analysis under the RFA.12
We concluded that section 212 did not have much of an impact on the agencies
that we examined, and its implementation also varied across and sometimes
within the agencies. Some of the section's

9U.S. General Accounting Office, Regulatory Flexibility Act: Agencies'
Interpretations of Review Requirements Vary, GAO/GGD-99-55 (Washington,
D.C.: Apr. 2, 1999).

10U.S. General Accounting Office, Regulatory Reform: Implementation of
Selected Agencies' Civil Penalty Relief Policies for Small Entities,
GAO-01-280 (Washington, D.C.: Feb. 20, 2001).

11Last year, legislation was introduced in the Senate (S. 1271, the Small
Business Paperwork Relief Act of 2001) that would, in part, require agencies
to report information on civil penalty relief to certain congressional
committees.

12Regulatory Reform: Compliance Guide Requirement Has Had Little Effect on
Agency Practices, GAO-02-172 (Washington, D.C.: Dec. 28, 2001).

ineffectiveness and inconsistency is traceable to the definitional problems
in the RFA that I discussed previously. Therefore, if an agency concluded
that a rule imposing thousands of dollars of costs on thousands of small
entities did not trigger the requirements of the RFA, section 212 did not
require the agency to prepare a compliance guide. Other problems were
traceable to the discretion provided in section 212 itself. Under the
statute, agencies can designate a previously published document as its small
entity compliance guide, or develop and publish a guide with no input from
small entities years after the rule takes effect. We again recommended that
Congress take action to clarify what constitutes a "significant economic
impact" and a "substantial number of small entities," and also suggested
changes to section 212 to make its implementation more consistent and
effective.

Two years ago we convened a meeting at GAO on the rule review provision of
the RFA, focusing on why the required reviews were not being conducted.
Attending that meeting were representatives from 12 agencies that appeared
to issue rules with an impact on small entities, representatives from
relevant oversight organizations (e.g., OMB and SBA's Office of Advocacy),
and congressional staff from the House and Senate committees on small
business. The meeting revealed significant differences of opinion regarding
key terms in the statute. For example, some agencies did not consider their
rules to have a significant impact because they believed the underlying
statutes, not the agency-developed regulations, caused the effect on small
entities. There was also confusion regarding whether the agencies were
supposed to review rules that had a significant impact on small entities at
the time the rules were first published in the Federal Register or those
that currently have such an impact. It was not even clear what should be
considered a "rule" under the RFA's rule review requirements-the entire
section of the Code of Federal Regulations that was affected by the rule, or
just the part of the existing rule that was being amended. By the end of the
meeting it was clear that, as one congressional staff member said,
"determining compliance with (the RFA) is less obvious than we believed
before."

Mr.  Chairman, this  concludes my  prepared statement.  I would be  happy to
respond to any questions.

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