Regulatory Flexibility Act: Congress Should Revisit and Clarify  
Elements of the Act to Improve Its Effectiveness (20-JUL-06,	 
GAO-06-998T).							 
                                                                 
Federal regulation is one of the basic tools of government used  
to implement public policy. In 1980, the Regulatory Flexibility  
Act (RFA) was enacted in response to concerns about the effect	 
that regulations can have on small entities, including small	 
businesses, small governmental jurisdictions, and certain small  
not-for-profit organizations. Congress amended RFA in 1996, and  
the President issued Executive Order 13272 in 2002, to strengthen
requirements for agencies to consider the impact of their	 
proposed rules on small entities. However, concerns about the	 
regulatory burden on small entities persist, prompting		 
legislative proposals such as H.R. 682, the Regulatory		 
Flexibility Improvements Act, which would amend RFA. At the	 
request of Congress, GAO has prepared many reports and		 
testimonies reviewing the implementation of RFA and related	 
policies. On the basis of that body of work, this testimony (1)  
provides an overview of the basic purpose and requirements of	 
RFA, (2) highlights the main impediments to the Act's		 
implementation that GAO's reports identified, and (3) suggests	 
elements of RFA that Congress might consider amending to improve 
the effectiveness of the Act. GAO's prior reports and testimonies
contain recommendations to improve the implementation of RFA and 
related regulatory process requirements.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-998T					        
    ACCNO:   A57180						        
  TITLE:     Regulatory Flexibility Act: Congress Should Revisit and  
Clarify Elements of the Act to Improve Its Effectiveness	 
     DATE:   07/20/2006 
  SUBJECT:   Federal agencies					 
	     Federal regulations				 
	     Nonprofit organizations				 
	     Proposed legislation				 
	     Small business					 
	     Legislative interpretation 			 
	     Policies and procedures				 
	     Public policy					 

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GAO-06-998T

     

     * RFA and Related Requirements Are Intended to Promote Attenti
     * GAO Reviews Found that Varying Interpretations of RFA Requir
     * Key Terms and Provisions of RFA Should Be Revisited and Clar
     * Contact and Acknowledgements
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

United States Government Accountability Office

GAO

For Release on Delivery Expected at 11:30 a.m. EDT

Thursday, July 20, 2006

REGULATORY FLEXIBILITY ACT

Congress Should Revisit and Clarify Elements of the Act to Improve Its
Effectiveness

Statement of J. Christopher Mihm Managing Director, Strategic Issues

GAO-06-998T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to contribute to your review of H.R. 682,
the Regulatory Flexibility Improvements Act, and your continuing general
agenda to review administrative law, process, and procedure issues. In my
statement today, I will summarize findings from our past body of work on
the Regulatory Flexibility Act (RFA),1 which H.R. 682 would amend, and
related policies. Specifically, I will provide an overview of the basic
purpose and requirements of RFA, highlight the main impediments to the
Act's implementation that our work identified, and suggest elements of RFA
that Congress might consider amending to improve the effectiveness of the
Act.

In brief, RFA was enacted in response to concerns about the effect that
federal regulations can have on small entities. Among other things, RFA
prompts regulatory agencies to analyze the potential effects of their
rules on small entities, consider alternatives to reduce the burden of
those rules, and ensure that small entities have an opportunity to
participate in the rulemaking process. In response to congressional
requests, we have reviewed RFA's implementation on many occasions over the
years. Our reports illustrated both the promise and the problems
associated with the Act, with a recurring theme being the varying
interpretations of RFA's requirements by federal agencies. Although some
progress has been made to address issues we identified, the full promise
of RFA may never be realized until Congress clarifies key terms and
definitions in the Act, such as "a substantial number of small entities,"
or provides an agency or office with the clear authority and
responsibility to do so. It is also important to keep in mind the domino
effect that an agency's initial determination of whether RFA is applicable
to a rulemaking has on other statutory requirements, such as preparing
compliance guides for small entities and periodically reviewing existing
regulations.

15 U.S.C. S:S: 601-612.

 RFA and Related Requirements Are Intended to Promote Attention to Regulations'
                           Effects on Small Entities

Federal regulation is one of the basic tools of government. Agencies issue
thousands of rules and regulations each year to implement statutes enacted
by Congress. The public policy goals and benefits of regulations include,
among other things, ensuring that workplaces, air travel, foods, and drugs
are safe; that the nation's air, water, and land are not polluted; and
that the appropriate amount of tax is collected. The costs of these
regulations are estimated to be in the hundreds of billions of dollars,
and the benefits estimates are much higher.2 Given the size and impact of
federal regulation, Congresses and Presidents have taken a number of
actions to refine and reform the regulatory process within the past 25
years.3

In September 1980, RFA was enacted in response to concerns about the
effect that federal regulations can have on "small entities," defined by
the Act as including small businesses, small governmental jurisdictions,
and certain small not-for-profit organizations. As we have previously
noted, small businesses are a significant part of the nation's economy,
and small governments make up the vast majority of local governments in
the United States.4 However, there have been concerns that these small
entities may be disproportionately affected by federal agencies'
regulatory requirements. RFA established the principle that agencies
should endeavor, consistent with the objectives of applicable statutes, to
fit regulatory and informational requirements to the scale of these small
entities.

RFA requires regulatory agencies-including the independent regulatory
agencies-to assess the potential impact of their rules on small entities.
Under RFA, an agency must prepare an initial regulatory flexibility
analysis at the time a proposed rule is issued unless the head of the
agency determines that the proposed rule would not have a "significant
economic impact upon a substantial number of small entities."5 Further,
agencies must consider alternatives to their proposed rules that will
accomplish the agencies' objectives while minimizing the impacts on small
entities. The Act also requires agencies to ensure that small entities
have an opportunity to participate in the rulemaking process and requires
the Chief Counsel for Advocacy of the Small Business Administration
(Office of Advocacy) to monitor agencies' compliance. Among other things,
RFA also requires regulatory agencies to review, within 10 years of
promulgation, existing rules that have or will have a significant impact
on small entities to determine whether they should be continued without
change or amended or rescinded to minimize their impact on small entities.

2The Office of Management and Budget reported that the estimated
quantified and monetized annual benefits of the major federal regulations
it reviewed from October 1995 through September 2005 range from $94
billion to $449 billion, while estimated annual costs range from $37
billion to $44 billion. See Office of Management and Budget, Draft 2006
Report to Congress on the Costs and Benefits of Federal Regulations
(Washington, D.C.: April 2006).

3See GAO, Regulatory Reform: Prior Reviews of Federal Regulatory Process
Initiatives Reveal Opportunities for Improvements, GAO-05-939T
(Washington, D.C.: July 27, 2005) for summary descriptions of major
regulatory reform initiatives implemented since 1980.

4GAO, Regulatory Reform: Implementation of the Small Business Advocacy
Review Panel Requirements, GAO/GGD-98-36 (Washington, D.C.: Mar. 18,
1998).

Congress amended RFA with the Small Business Regulatory Enforcement
Fairness Act of 1996 (SBREFA). 6 SBREFA made certain agency actions under
RFA judicially reviewable. Other provisions in SBREFA added new
requirements. For example, SBREFA requires agencies to develop one or more
compliance guides for each final rule or group of related final rules for
which the agency is required to prepare a regulatory flexibility analysis,
and it requires agencies to provide small entities with some form of
relief from civil monetary penalties. SBREFA also requires the
Environmental Protection Agency (EPA) and the Occupational Safety and
Health Administration to convene advocacy review panels before publishing
an initial regulatory flexibility analysis.

More recently, in August 2002, President George W. Bush issued Executive
Order 13272, which requires federal agencies to establish written
procedures and policies on how they would measure the impact of their
regulatory proposals on small entities and to vet those policies with the
Office of Advocacy. The order also requires agencies to notify the Office
of Advocacy before publishing draft rules expected to have a significant
small business impact, to consider its written comments on proposed rules,
and to publish a response with the final rule. The order requires the
Office of Advocacy to provide notification of the requirements of the Act
and training to all agencies on how to comply with RFA. The Office of
Advocacy published guidance on the Act in 2003 and reported training more
than 20 agencies on RFA compliance in fiscal year 2005.7

5RFA generally applies only where notice and comment rulemaking under the
Administrative Procedure Act (APA) is required. When promulgating a final
rule, agencies must also prepare a final regulatory flexibility analysis
unless the agency finds that the rule will not have a significant economic
impact on a substantial number of small entities.

65 U.S.C. S: 601 note.

  GAO Reviews Found that Varying Interpretations of RFA Requirements Hampered
                      Effective Implementation of the Act

In response to congressional requests, we have reviewed agencies'
implementation of RFA and related requirements on many occasions over the
years, with topics ranging from specific statutory provisions to the
overall implementation of RFA.8 Generally, we found that the Act's overall
results and effectiveness have been mixed. This is not unique to RFA; we
found similar results when reviewing other regulatory reform initiatives,
such as the Unfunded Mandates Reform Act of 1995.9 Our past reports
illustrated both the promise and the problems associated with RFA. RFA and
related requirements have clearly affected how federal agencies regulate,
and we identified important benefits of these initiatives, such as
increasing attention on the potential impacts of rules and raising
expectations regarding the analytical support for proposed rules. However,
a recurring theme in our findings was that uncertainties about RFA's
requirements and varying interpretations of those requirements by federal
agencies limited the Act's application and effectiveness.

Some of the topics we reviewed, and our main findings regarding
impediments to RFA's implementation, are illustrated in the following
examples:

           o  We examined 12 years of annual reports from the Office of
           Advocacy and concluded that the reports indicated variable
           compliance with RFA across agencies, within agencies, and over
           time-a conclusion that the Office of Advocacy also reached in
           subsequent reports on implementation of RFA (on the 20th and 25th
           anniversaries of RFA's enactment).10 We noted that some agencies
           had been repeatedly characterized as satisfying RFA requirements,
           but other agencies were consistently viewed as recalcitrant.
           Agencies' performance also varied over time or varied by offices
           within the agencies. We said that one reason for agencies' lack of
           compliance with RFA requirements was that the Act did not
           expressly authorize the Small Business Administration (SBA) to
           interpret key provisions and did not require SBA to develop
           criteria for agencies to follow in reviewing their rules.
           o  We examined RFA implementation with regard to small governments
           and concluded that agencies were not conducting as many regulatory
           flexibility analyses for small governments as they might, largely
           because of weaknesses in the Act.11 Specifically, we found that
           each agency we reviewed had a different interpretation of key RFA
           provisions. We also pointed out that RFA allowed agencies to
           interpret whether their proposed rules affected small governments
           and did not provide sufficiently specific criteria or definitions
           to guide agencies in deciding whether and how to assess the impact
           of proposed rules on small governments.
           o  We reviewed implementation of small business advocacy review
           panel requirements under SBREFA and found that the panels that had
           been convened were generally well received.12 However, we also
           said that implementation was hindered-specifically, that there was
           uncertainty over whether panels should have been convened for some
           proposed rules-by the lack of agreed-upon governmentwide criteria
           as to whether a rule has a significant impact.
           o  We examined other related requirements regarding agencies'
           policies for the reduction and/or waiver of civil penalties on
           small entities and the publication of small entity compliance
           guides.13 Again, we found that implementation varied across and
           within agencies, with some of the ineffectiveness and
           inconsistency traceable to definitional problems in RFA. All of
           the agencies' penalty relief policies that we reviewed were within
           the discretion that Congress provided, but the policies varied
           considerably. Some policies covered only a portion of agencies'
           civil penalty enforcement actions, and some provided small
           entities with no greater penalty relief than large entities. The
           agencies varied in how key terms were defined. Similarly, we
           concluded that the requirement for small entity compliance guides
           did not have much of an impact, and its implementation also varied
           across, and sometimes within, agencies.
           o  RFA is unique among statutory requirements with general
           applicability in having a provision, under section 610, for the
           periodic review of existing rules. However, it is not clear that
           this look-back provision in RFA has been consistently and
           effectively implemented. In a series of reports on agencies'
           compliance with section 610, we found that the required reviews
           were not being conducted.14 Meetings with agencies to identify why
           compliance was so limited revealed significant differences of
           opinion regarding key terms in RFA and confusion about what was
           required to determine compliance with RFA. At the request of the
           House Committee on Energy and Commerce, we have begun new work
           examining the subject of regulatory agencies' retrospective
           reviews of their existing regulations, including those undertaken
           in response to Section 610, and will report on the results of this
           engagement in the future.

7See U.S. Small Business Administration, Office of Advocacy, A Guide for
Government Agencies: How to Comply with the Regulatory Flexibility Act
(Washington, D.C.: May 2003).

8A list of related GAO products appears at the end of this statement.

92 U.S.C. S:S: 658-658(g), 1501-1571. See GAO, Federal Rulemaking: Past
Reviews and Emerging Trends Suggest Issues That Merit Congressional
Attention, GAO-06-228T (Washington, D.C.: Nov. 1, 2005) and GAO-05-939T .

10See GAO, Regulatory Flexibility Act: Status of Agencies' Compliance,
GAO/GGD-94-105 (Washington, D.C.: Apr. 27, 1994).

11See GAO, Regulatory Flexibility Act: Inherent Weaknesses May Limit Its
Usefulness for Small Governments, GAO/HRD-91-16 (Washington, D.C.: Jan.
11, 1991).

12See GAO, Regulatory Reform: Implementation of the Small Business
Advocacy Review Panel Requirements, GAO/GGD-98-36 (Washington, D.C.: Mar.
18, 1998).

13See GAO, Regulatory Reform: Implementation of Selected Agencies' Civil
Penalty Relief Policies for Small Entities, GAO-01-280 (Washington, D.C.:
Feb. 20, 2001), and Regulatory Reform: Compliance Guide Requirement Has
Had Little Effect on Agency Practices, GAO-02-172 (Washington, D.C.: Dec.
28, 2001).

We have not yet examined the effect of Executive Order 13272 and the
Office of Advocacy's subsequent guidance and training for agencies on
implementing RFA. Therefore, we have not done any evaluations that would
indicate whether or not those developments are helping to address some of
our concerns about the effectiveness of RFA.

       Key Terms and Provisions of RFA Should Be Revisited and Clarified

While RFA has helped to influence how agencies regulate small entities, we
believe that the full promise of the Act has not been realized. The
results from our past work suggest that the Subcommittee might wish to
review the procedures, definitions, exemptions, and other provisions of
RFA, and related statutory requirements, to determine whether changes are
needed to better achieve the purposes Congress intended. The central theme
of our prior findings and recommendations on RFA has been the need to
revisit and clarify elements of the Act, particularly its key terms.
Although more recent developments, such as the Office of Advocacy's
detailed guidance to agencies on RFA compliance, may help address some of
these long-standing issues, current legislative proposals, such as H.R.
682, make it clear that concerns remain about RFA's effectiveness-for
example, that agencies are not assessing the impacts of their rules or
identifying less costly regulatory approaches as expected under RFA-and
the impact of federal regulations on small entities.

14 See, for example, GAO, Regulatory Flexibility Act: Agencies'
Interpretations of Review Requirements Vary, GAO/GGD-99-55 (Washington,
D.C.: Apr. 2, 1999).

Unclear terms and definitions can affect the applicability and
effectiveness of regulatory reform requirements. We have frequently cited
the need to clarify the key terms in RFA, particularly "significant
economic impact on a substantial number of small entities." RFA's
requirements do not apply if an agency head certifies that a rule will not
have a "significant economic impact on a substantial number of small
entities." However, RFA neither defines this key phrase nor places clear
responsibility on any party to define it consistently across the
government. It is therefore not surprising, as I mentioned earlier, that
we found compliance with RFA varied from one agency to another and that
agencies had different interpretations of RFA's requirements.

We have recommended several times that Congress provide greater clarity
concerning the key terms and provisions of RFA and related requirements,
but to date Congress has not acted on many of these recommendations. The
questions that remain unresolved on this topic are numerous and varied,
including:

           o  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, the percentage of work hours
           available to the firms, or other metrics?
           o  If so, what percentage or other measure would be an appropriate
           definition of "significant?"
           o  Should agencies take into account the cumulative impact of
           their rules on small entities, even within a particular program
           area?
           o  Should agencies count the impact of the underlying statutes
           when determining whether their rules have a significant impact?
           o  What should be considered a "rule" for purposes of the
           requirement in RFA that agencies review rules with a significant
           impact within 10 years of their promulgation?
           o  Should agencies review rules that had a significant impact at
           the time they were originally published, or only those that
           currently have that effect?
           o  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?

It is worth noting that the Office of Advocacy's 2003 RFA compliance
guide, while reiterating that RFA does not define certain key terms,
nevertheless provides some suggestions on the subject. Citing parts of
RFA's legislative history, the guidance indicates that exact standards for
such definitions may not be possible or desirable, and that the
definitions should vary depending on the context of each rule and
preliminary assessments of the rule's impact. For example, the guidance
points out that "significance" can be seen as relative to the size of a
business and its competitors, among other things. However, the guidance
does identify factors that agencies might want to consider when making RFA
determinations. In some ways, this mirrors other aspects of RFA, such as
section 610, where Congress did not explicitly define a threshold for an
agency to determine whether an existing regulation should be maintained,
amended, or eliminated but rather identified the factors that an agency
must consider in its reviews.15 We do not yet know whether or to what
extent the guidance and associated training has helped agencies to clarify
some of the long-standing confusion about RFA requirements and terms.
Additional monitoring of RFA compliance may help to answer that question.
Congress might also want to consider whether the factors that the Office
of Advocacy suggested to help agencies define key terms and requirements
are consistent with congressional intent or would benefit from having a
statutory basis.

I also want to point out the potential domino effect of agencies'
determinations of whether or not RFA applies to their rules. This is
related to the lack of clarity on key terms mentioned above, the potential
for agencies to waive or delay analysis under RFA, and the limitation of
RFA's applicability to only rules for which there was a notice of proposed
rulemaking. The impact of an agency head's determination that RFA is not
applicable is not only that the initial and final regulatory flexibility
analyses envisioned by the Act would not be done, but also that other
related requirements would not apply. These requirements include, for
example, the need for agencies to prepare small entity compliance guides,
convene SBREFA advocacy panels, and conduct periodic reviews of certain
existing regulations. While we recognize, as provided by the
Administrative Procedure Act, that notices of proposed rulemaking are not
always practical, necessary, or in the public interest, this still raises
the question of whether such exemptions from notice and comment rulemaking
should preclude future opportunities for public participation and other
related procedural and analytical requirements. Our prior work has shown
that substantial numbers of rules, including major rules (for example,
those with an impact of $100 million or more), are promulgated without
going through a notice of proposed rulemaking.16

15In conducting their reviews of existing rules under section 610,
agencies are to consider the following factors: (1) the continuing need
for the rule; (2) the nature of complaints or comments received concerning
the rule from the public; (3) the complexity of the rule; (4) the extent
to which the rule overlaps, duplicates, or conflicts with other federal
rules and, to the extent feasible, with state and local government rules;
and (5) the length of time since the rule has been evaluated or the degree
to which technology, economic conditions, or other factors have changed
since adoption of the rule.

We also believe it is important for Congress to reexamine, not just RFA,
but how all of the various regulatory reform initiatives fit together and
influence agencies' regulatory actions. As I previously testified before
this Subcommittee, we have found the effectiveness of most regulatory
reform initiatives to be limited and that they merit congressional
attention.17 In addition, we have stated that this is a particularly
timely point to reexamine the federal regulatory framework, because
significant trends and challenges establish the case for change and the
need to reexamine the base of federal government and all of its existing
programs, policies, functions, and activities.18

Our September 2000 report on EPA's implementation of RFA illustrated the
importance of considering the bigger picture and interrelationships
between regulatory reform initiatives.19 On the one hand, we reported
about concerns regarding the methodologies EPA used in its analyses and
its conclusions about the impact on small businesses of a proposed rule to
lower certain reporting thresholds for lead and lead compounds.20 The
bigger picture, though, was our finding that after SBREFA took effect
EPA's four major program offices certified that almost all (96 percent) of
their proposed rules would not have a significant impact on a substantial
number of small entities. EPA officials told us this was because of a
change in EPA's RFA guidance prompted by the SBREFA requirement to convene
an advocacy review panel for any proposed rule that was not certified.
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 small
entities. According to EPA officials, the SBREFA panel requirement made
continuation of the agency's more inclusive RFA policy too costly and
impractical. In other words, a statute Congress enacted to strengthen RFA
caused the agency to use the discretion permitted in RFA to conduct fewer
regulatory flexibility analyses.21

16See, for example, GAO, Federal Rulemaking: Agencies Often Published
Final Actions Without Proposed Rules, GAO/GGD-98-126 (Washington, D.C.:
Aug. 31, 1998).

17 GAO-06-228T .

18See GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005) and GAO-05-939T
.

19See GAO, Regulatory Flexibility Act: Implementation in EPA Program
Offices and Proposed Lead Rule, GAO/GGD-00-193 (Washington, D.C.: Sept.
20, 2000).

In closing, I would reiterate that we believe Congress should revisit
aspects of RFA and that our prior reports have indicated ample
opportunities to refine the Act. Despite some progress in implementing RFA
and other regulatory reform initiatives since 1980, it is clear from the
introduction of H.R. 682 and related bills that Members of Congress remain
concerned about the impact of regulations on small entities and the extent
to which the rulemaking process encourages agencies to consider ways to
reduce the burdens of new and existing rules, while still achieving the
objectives of the underlying statutes.

Mr. Chairman, this concludes my prepared statement. Once again, I
appreciate the opportunity to testify on these important issues. I would
be pleased to address any questions you or other Members of the
Subcommittee might have at this time.

20EPA had certified that the proposed rule would not have a significant
impact and, therefore, did not trigger RFA's analytical and procedural
requirements. Although we raised questions, we concluded that the analytic
methods that EPA's program office used in its original and revised
economic analysis, as well as the conclusions the office drew as a result
of those analyses, were within the discretion provided by both RFA and EPA
guidance.

21We made no new recommendations in GAO/GGD-00-193 , but we referred to
our prior recommendations, noting that clarifying what Congress intends
the term "significant economic impact on a substantial number of small
entities" to mean would make the implementation of RFA more consistent and
help to prevent concerns about how agencies are implementing the Act.

                          Contact and Acknowledgements

If additional information is needed regarding this testimony, please
contact J. Christopher Mihm, Managing Director, Strategic Issues, on (202)
512-6806 or at [email protected] . Tim Bober, Jason Dorn, Andrea Levine,
Latesha Love, Joseph Santiago, and Michael Volpe contributed to this
statement.

Related GAO Products

Federal Rulemaking: Past Reviews and Emerging Trends Suggest Issues That
Merit Congressional Attention. GAO-06-228T . Washington, D.C.: November 1,
2005.

Regulatory Reform: Prior Reviews of Federal Regulatory Process Initiatives
Reveal Opportunities for Improvements. GAO-05-939T . Washington, D.C.:
July 27, 2005.

Regulatory Flexibility Act: Clarification of Key Terms Still Needed.
GAO-02-491T . Washington, D.C.: March 6, 2002.

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

Federal Rulemaking: Procedural and Analytical Requirements at OSHA and
Other Agencies. GAO-01-852T . Washington, D.C.: June 14, 2001.

Regulatory Flexibility Act: Key Terms Still Need to Be Clarified.
GAO-01-669T . Washington, D.C.: April 24, 2001.

Regulatory Reform: Implementation of Selected Agencies' Civil Penalty
Relief Policies for Small Entities. GAO-01-280 . Washington, D.C.:
February 20, 2001.

Regulatory Flexibility Act: Implementation in EPA Program Offices and
Proposed Lead Rule. GAO/GGD-00-193 . Washington, D.C.: September 20, 2000.

Regulatory Reform: Procedural and Analytical Requirements in Federal
Rulemaking. GAO/T-GGD/OGC-00-157 . Washington, D.C.: June 8, 2000.

Regulatory Flexibility Act: Agencies' Interpretations of Review
Requirements Vary. GAO/GGD-99-55 . Washington, D.C.: April 2, 1999.

Federal Rulemaking: Agencies Often Published Final Actions Without
Proposed Rules. GAO/GGD-98-126 . Washington, D.C.: August 31, 1998.

Regulatory Reform: Implementation of the Small Business Advocacy Review
Panel Requirements. GAO/GGD-98-36 . Washington, D.C.: March 18, 1998.

Regulatory Reform: Agencies' Section 610 Review Notices Often Did Not Meet
Statutory Requirements. GAO/T-GGD-98-64 . Washington, D.C.: February 12,
1998.

Regulatory Flexibility Act: Agencies' Use of the October 1997 Unified
Agenda Often Did Not Satisfy Notification Requirements. GAO/GGD-98-61R .
Washington, D.C.: February 12, 1998.

Regulatory Flexibility Act: Agencies' Use of the November 1996 Unified
Agenda Did Not Satisfy Notification Requirements. GAO/GGD/OGC-97-77R .
Washington, D.C.: April 22, 1997.

Regulatory Flexibility Act: Status of Agencies' Compliance. GAO/GGD-94-105
. Washington, D.C.: April 27, 1994.

Regulatory Flexibility Act: Inherent Weaknesses May Limit Its Usefulness
for Small Governments. GAO/HRD-91-16 . Washington, D.C.: January 11, 1991.

(450518)

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www.gao.gov/cgi-bin/getrpt? GAO-06-998T .

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Highlights of GAO-06-998T , a testimony before the Subcommittee on
Commercial and Administrative Law, Committee on the Judiciary, House of
Representatives

July 20, 2006

REGULATORY FLEXIBILITY ACT

Congress Should Revisit and Clarify Elements of the Act to Improve Its
Effectiveness

Federal regulation is one of the basic tools of government used to
implement public policy. In 1980, the Regulatory Flexibility Act (RFA) was
enacted in response to concerns about the effect that regulations can have
on small entities, including small businesses, small governmental
jurisdictions, and certain small not-for-profit organizations. Congress
amended RFA in 1996, and the President issued Executive Order 13272 in
2002, to strengthen requirements for agencies to consider the impact of
their proposed rules on small entities. However, concerns about the
regulatory burden on small entities persist, prompting legislative
proposals such as H.R. 682, the Regulatory Flexibility Improvements Act,
which would amend RFA.

At the request of Congress, GAO has prepared many reports and testimonies
reviewing the implementation of RFA and related policies. On the basis of
that body of work, this testimony (1) provides an overview of the basic
purpose and requirements of RFA, (2) highlights the main impediments to
the Act's implementation that GAO's reports identified, and (3) suggests
elements of RFA that Congress might consider amending to improve the
effectiveness of the Act. GAO's prior reports and testimonies contain
recommendations to improve the implementation of RFA and related
regulatory process requirements.

RFA established a principle that agencies should endeavor to fit their
regulatory requirements to the scale of small entities. Among other
things, RFA requires regulatory agencies to assess the impact of proposed
rules on small entities, consider regulatory alternatives that will
accomplish the agencies' objectives while minimizing the impacts on small
entities, and ensure that small entities have an opportunity to
participate in the rulemaking process. Further, RFA requires agencies to
review existing rules within 10 years of promulgation that have or will
have a significant impact on small entities to determine whether they
should be continued without change or amended or rescinded to minimize
their impact on small entities. RFA also requires the Chief Counsel for
Advocacy of the Small Business Administration (Office of Advocacy) to
monitor agencies' compliance. In response to Executive Order 13272, the
Office of Advocacy published guidance in 2003 on how to comply with RFA.

In response to congressional requests, GAO reviewed agencies'
implementation of RFA and related requirements on many occasions, with
topics ranging from specific statutory provisions to the overall
implementation of RFA. Generally, GAO found that the Act's results and
effectiveness have been mixed; its reports illustrated both the promise
and the problems associated with RFA. On one hand, RFA and related
requirements clearly affected how federal agencies regulate and produced
benefits, such as raising expectations regarding the analytical support
for proposed rules. However, GAO also found that compliance with RFA
varied across agencies, within agencies, and over time. A recurring
finding was that uncertainties about RFA's requirements and key terms, and
varying interpretations by federal agencies, limited the Act's application
and effectiveness.

GAO's past work suggests that Congress might wish to review the
procedures, definitions, exemptions, and other provisions of RFA to
determine whether changes are needed to better achieve the purposes
Congress intended. In particular, GAO's reports indicate that the full
promise of RFA may never be realized until Congress revisits and clarifies
elements of the Act, especially its key terms, or provides an agency or
office with the clear authority and responsibility to do so. Attention
should also be paid to the domino effect that an agency's initial
determination of whether RFA is applicable to a rulemaking has on other
statutory requirements, such as preparing compliance guides for small
entities and periodically reviewing existing regulations. GAO also
believes that Congress should reexamine not just RFA but how all of the
various regulatory reform initiatives fit together and influence agencies'
regulatory actions. Recent developments, such as the Office of Advocacy's
RFA guidance, may help address some of these long-standing issues and
merit continued monitoring by Congress.
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