I. Background

Section 19 of the Federal Reserve Act (Act)1 authorizes the Board of Governors of the Federal Reserve System (Board) to impose reserve requirements on certain deposits and other liabilities of depository institutions for the purpose of implementing monetary policy. The Board's Regulation D (Reserve Requirements of Depository Institutions, 12 CFR part 204) implements section 19 of the Act. Transaction account balances maintained at each depository institution are subject to reserve requirement ratios of zero, three, or ten percent, depending on the level of transaction accounts at that institution.2 The reserve requirement ratios are set by the Board within the limits mandated by the Act. A depository institution satisfies its reserve requirement by its holdings of vault cash and, if vault cash is insufficient to meet the requirement, by a balance maintained in an account at a Federal Reserve Bank (Reserve Bank). The amount of balances that an institution must maintain if its reserve requirement is not satisfied by vault cash is referred to as the reserve balance requirement. The balance that an institution maintains to satisfy its reserve balance requirement can be maintained either in the institution's own account at a Reserve Bank or in a pass-through correspondent's Reserve Bank account. In 2008, Congress amended the Federal Reserve Act to authorize the Reserve Banks to pay interest on balances of eligible institutions.3 Since then, interest has been paid on balances maintained to satisfy reserve balance requirements at a rate determined by the Board (currently 25 basis points).4

An institution may also maintain a clearing balance to satisfy its contractual clearing balance requirement pursuant to an agreement between the institution and its Reserve Bank. Clearing balances currently generate earning credits, a form of compensation that can be used only to offset service charges an institution incurs through its use of Federal Reserve priced services (earnings credits currently are computed as 80 percent of the rolling 13-week average of the three-month Treasury bill rate). An institution may also maintain excess balances, which are balances held in excess of the balance maintained to satisfy the reserve balance requirement and the contractual clearing balance requirement, in its account at a Reserve Bank. Like balances maintained to satisfy thereserve balance requirement, since 2008, interest has been paid on excess balances at a rate determined by the Board (currently 25 basis points).

The Board is proposing four amendments to Regulation D that would simplify the administration of reserve requirements while maintaining the role of reserve requirements in the implementation of monetary policy. The Board believes that these four simplifications will reduce the administrative and operational costs associated with reserve requirements for depository institutions, Reserve Banks, and the Board:

1. Create a common two-week maintenance period for all depository institutions;

2. Create a penalty-free band around reserve balance requirements in place of using carryover and routine penalty waivers (routine penalty waivers are used to eliminate charges for small or infrequent reserve deficiencies);

3. Discontinue as-of adjustments related to deposit revisions and replace all other as-of adjustments with direct compensation; and

4. Eliminate the contractual clearing balance program.

Upon the Board's adoption of final amendments to Regulation D and the Private Sector Adjustment Factor calculation, related Federal Reserve operating circulars and manuals will be updated accordingly.

As noted above, a depository institution may satisfy its reserve balance requirement by maintaining a balance in its own account at a Reserve Bank or in a pass-through correspondent's Reserve Bank account. A depository institution satisfies its reserve balance requirement on average over a period of time, known as a maintenance period. Maintenance periods provide depository institutions flexibility, allowing them to meet their reserve balance requirements on average over a period of time rather than on a daily basis.

Regulation D currently provides for two types of maintenance periods, a one-week maintenance period and a two-week maintenance period.5 To determine which reserve maintenance period applies to an institution, the Board requires depository institutions to submit deposit reports at different frequencies depending on the amount of their reservable liabilities over the preceding year.6 The Board assigns depository institutions annually to one of four deposit reporting categories (weekly reporters, quarterly reporters, annual reporters, or nonreporters). Depository institutions that have reservable liabilities above the exemption amount7 and therefore have non-zero reserve requirements are required to submit deposit data at a weekly or quarterly frequency. Of these institutions, those with the sum of transaction accounts, savings deposits, and small time deposits above a certain threshold are required to report weekly and those with the sum of transaction accounts, savings deposits, and small time deposits below the threshold are required to report quarterly. Weekly reporters are subject to a two-week maintenance period and quarterly reporters are subject to a one-week maintenance period. Institutions that have reservable liabilities below the exemption amount (and therefore have a zero reserve requirement) either report annually or are not required to report at all. Annual reporters and nonreporters with a contractual clearing balance are subject to a one-week maintenance period and, as explained above, receive earnings credits on their clearing balances rather than interest payments. Institutions that have neither reserve requirements nor clearing balance requirements receive interest payments on their average balances over a one-week period at the excess balance rate.

From one year to another, some depository institutions switch reporting frequency because of changes in the levels of the institution's reservable liabilities. Specifically, some depository institutions may switch from a two-week maintenance period to a one-week maintenance period, or vice versa. In certain instances, depository institutions that become eligible to shift to a quarterly instead of weekly reporting frequency elect to remain at the higher reporting frequency in order to maintain the flexibility of satisfying reserve requirements over a two-week maintenance period instead of a one-week maintenance period.

Under the Board's proposal, all depository institutions would be subject to a two-week maintenance period. This proposal would benefit depository institutions, Reserve Banks, and the Board in several ways. It would (1) Provide greater flexibility to depository institutions that currently satisfy reserve balance requirements over a one-week maintenance period; (2) reduce unnecessary complexity in the existing maintenance period structure; (3) reduce administrative and operational costs for depository institutions that may otherwise have had to change maintenance periods when deposit reporting categories (and therefore length of maintenance period) changed; and (4) reduce the operational and administrative cost for Reserve Banks and the Board by eliminating business processes and controls associated with maintaining two maintenance periods.

The creation of a common two-week maintenance period would not impede the conduct of monetary policy. Indeed, it is likely that the two-week maintenance period would enable those depository institutions currently subject to a one-week maintenance period to accommodate more easily unexpected conditions in the Federal funds market because of the longer period of time over which they would be able to manage their reserve positions.

The Board's proposal would not increase the reporting burden on depository institutions that currently have a two-week maintenance period. In addition, for those depository institutions mentioned above that electto remain weekly reporters to maintain the flexibility of satisfying reserve requirements over a two-week maintenance period instead of a one-week maintenance period, the burden could be reduced, as these institutions could move to a quarterly reporting frequency and still maintain the flexibility of satisfying reserve requirements over a two-week maintenance period. Depository institutions that currently have a one-week maintenance period would have greater flexibility to manage reserve balances over a longer time period; it would not be necessary for such depository institutions to change their internal systems, as they could continue to satisfy their requirement weekly, if desired, within the two-week maintenance period.

For depository institutions that report their deposits weekly, the relationship between the weekly reporting periods and the two-week maintenance period would be maintained. For depository institutions that report their deposits quarterly, the quarterly reporting periods will not change but a new relationship is being proposed to link these quarterly reporting periods to two-week maintenance periods.8 The Board proposes that each quarterly report be used to calculate the reserve requirement for an interval of either six or seven consecutive two-week maintenance periods, depending on when the interval begins and ends. The interval will begin on the fourth Thursday following the end of each quarterly reporting period if that Thursday is the first day of a two-week maintenance period. If the fourth Thursday following the end of a quarterly reporting period is not the first day of a two-week maintenance period, then the interval will begin on the fifth Thursday following the end of the quarterly reporting period. The interval will end on the fourth Wednesday following the end of the subsequent quarterly reporting period if that Wednesday is the last day of a two-week maintenance period. If the fourth Wednesday following the end of the subsequent quarterly reporting period is not the last day of a two-week maintenance period, then the interval will conclude on the fifth Wednesday following the end of the subsequent quarterly reporting period.

The Board seeks comment on the costs and benefits associated with the proposal to create a common two-week maintenance period. The Board also seeks comment on whether there may be a particular benefit to a one-week common maintenance period rather than the proposed two-week common maintenance period. The Board further seeks comment on possible operational difficulties in transitioning to a two-week maintenance period for those depository institutions that currently have a one-week maintenance period.

Currently, Regulation D requires a depository institution to satisfy its reserve balance requirement on average over that depository institution's maintenance period. A depository institution that has a modest deficiency in its balance maintained to satisfy the reserve balance requirement over a given maintenance period (that is, the institution has maintained on average over the maintenance period a balance that is lower than the amount of its reserve balance requirement) is currently allowed to make up that deficiency in the subsequent maintenance period by holding a higher level of balances.9 Similarly, a depository institution that has a modest excess of balances maintained to satisfy its reserve balance requirement over a maintenance period is allowed to use that excess to satisfy its reserve balance requirement in the next maintenance period, thereby permitting it to hold a lower average balance over the next maintenance period. The ability to carry a deficiency or excess from one maintenance period over to the next is referred to as “carryover.”

Carryover was designed to provide depository institutions flexibility in satisfying their reserve balance requirements. Specifically, carryover permits a depository institution to utilize a portion of its excess balances from the current period to satisfy reserve requirements in the subsequent period and thereby avoid having to sell excess funds into the Federal funds market in the event it has more balances than it needs to satisfy its reserve balance requirement. Similarly, within limits, carryover allows a depository institution that does not have sufficient balances to satisfy its reserve balance requirement in the current period to meet a portion of that requirement in the subsequent period and thereby avoid having to increase borrowings in the Federal funds market to avoid a current period deficiency. Either one of these situations could produce sharp swings in market interest rates. Because carryover allows depository institutions to apply one maintenance period's excess or deficiency to the subsequent maintenance period, carryover necessarily links one maintenance period to its successor. As a result, one generally cannot determine for a given maintenance period whether a depository institution has satisfied its reserve balance requirement, or is in an excess or deficient position, until the completion of the subsequent maintenance period. Consequently, Reserve Banks must delay the payment of interest on eligible institutions' balances for at least one maintenance period, in order to calculate the amount and the type of an institution's balances.

Regulation D currently authorizes Reserve Banks to assess charges against depository institutions that fail to satisfy their reserve balance requirements.10 Regulation D also authorizes Reserve Banks to waive the imposition of these charges except when the deficiency “arises out of a depository institution's gross negligence or conduct that is inconsistent with the principles and purposes of reserve requirements.”11 Regulation D further provides that these “routine penalty waivers” are based on “an evaluation of the circumstances in each individual case and the depository institution's reserve maintenance record.”12 Prior to 2008, reserve balance requirements imposed an implicit tax on depository institutions because it forced depository institutions to hold non-interest-bearing balances at Reserve Banks when those funds could have been invested elsewhere for a return. Because of this implicit tax, depository institutions had an incentive to keep the level of the balances in their Reserve Bank accounts as close as possible to their reserve balance requirements. The “routine waiver” provision of Regulation D, permitting Reserve Banks to waive the charge for small or infrequent deficiencies, was designed to avoid punishing depository institutions that generally meet their reserve balance requirements.13

I. Background

Subpart A of Regulation J governs the collection of checks and other items by the Federal Reserve Banks (Reserve Banks), including the types of checks or other items that may be sent to Reserve Banks, the order in which they are deemed to be handled, and the related warranties and indemnities. Subpart B of Regulation J sets forth the terms and conditions under which Reserve Banks receive and deliver payment orders from and to depository institutions over the Reserve Banks' Fedwire® Funds Service (Fedwire).

The Board is proposing amendments to Regulation J that would eliminate references throughout Regulation J to a Reserve Bank's use of “as-of adjustments.”1 These amendments are consistent with the Board's proposed amendments to Regulation D, published elsewhere in theFederal Register, which would simplify reserves administration.2 The Board is also proposing amendments to subpart A of Regulation J to clarify where a check or other item is deemed to be accepted when it is sent to a Reserve Bank. Specifically, these amendments would clarify that when an institution sends a check or other item for collection to a Reserve Bank, the institution's Administrative Reserve Bank is deemed to have accepted deposit of the item even if the item was sent directly to another Reserve Bank.3 In addition, the Board is proposing amendments that would clarify the application of subpart B of Regulation J. Under these amendments, subpart B of Regulation J would continue to apply to a Fedwire funds transfer even if that funds transfer also meets the definition of “remittance transfer” under the recently revised Electronic Fund Transfer Act (“EFTA”).

Regulation J defines “as-of adjustment” for purposes of subpart B of the regulation as “a debit or credit, for reserve- or clearing-balance maintenance purposes only, applied to the reserve or clearing balance of a bank that either sends a payment order to a Federal Reserve Bank, or that receives a payment order from a Federal Reserve Bank, in lieu of an interest charge orpayment.”4 Under Regulation J, a Reserve Bank may use either an as-of adjustment or direct compensation (at the federal funds rate) to compensate for an error in transaction processing or other damages owed in connection with a Fedwire funds transfer. An as-of adjustment corrects the average level of balances maintained by the depository institution to the level that would have resulted had the error not been made. As-of adjustments (and direct compensation) are based on the principle that a depository institution should not gain or lose in its reserve or clearing balance position as a result of a Reserve Bank accounting or administrative error or a Reserve Bank delay in processing transactions. Regulation J also provides in subpart A that a Reserve Bank's operating circulars may include procedures for paying interest in the form of as-of adjustments in relation to the collection of checks and other items.

As noted above, the Board is proposing to amend Regulation D to simplify the rules governing the administration of reserve requirements. The proposed Regulation D amendments include discontinuing as-of adjustments related to deposit reporting revisions and replacing all other as-of adjustments with direct compensation. Direct compensation is either a debit or credit applied to an account to offset the effect of an error. Consistent with the Regulation D proposal, the Board is proposing to amend sections 210.3(a), 210.26(b), and 210.32(b) (along with the corresponding commentary) of Regulation J to eliminate references to as-of adjustments. Under the proposal, a Reserve Bank would continue to be able to pay direct compensation to a depository institution based on the federal funds rate in accordance with section 210.32(b) section 4A-506 of article 4A of the Uniform Commercial Code (UCC), as incorporated into Regulation J.5 The Board requests comment on whether use of the federal funds rate for the calculation of direct compensation is appropriate, and if not, the rate that the Board should use.6 The Board further requests comment on whether the Board should eliminate section 210.32(b)(1) of Regulation J entirely, as the Reserve Banks could simply pay direct compensation based on the provisions of UCC section 4A-506, which is already incorporated into Regulation J.

Section 210.4 of Regulation J governs the sending and handling of checks and other items sent to Reserve Banks. Section 210.4 currently specifies the identity and order of the parties that are deemed to handle an item sent to a Reserve Bank for purposes of determining the rights and liabilities of the parties under Regulation J, Regulation CC (12 CFR part 229), and the UCC.

The Reserve Banks have long permitted institutions to send checks and other items for collection directly to a Reserve Bank other than the institution's Administrative Reserve Bank. These “direct sends” have facilitated a more efficient and less costly check-processing infrastructure for depository institutions as well as for Reserve Banks. Approximately 99.9 percent of checks sent to the Reserve Banks for collection are sent as electronic items. In response to the continued nationwide decline in check usage and institutions' pervasive use of electronic check-clearing methods, the Reserve Banks have eliminated all but one of their paper-check-processing offices and have consolidated electronic check processing in a single location. An institution must send checks to the applicable location (depending on whether the check is deposited in paper or electronic form) even if it is not an office of the institution's Administrative Reserve Bank.

Regulation J currently sets forth the order in which Reserve Banks are deemed to have handled a check or other item, whether it is deposited electronically or in paper form. Specifically, section 210.4 provides that, for an item sent to a Reserve Bank for collection, the following parties are deemed to have handled the item in the following order: (1) The initial sender; (2) the initial sender's Administrative Reserve Bank; (3) the Reserve Bank that receives the item from the initial sender (if different from the initial sender's Administrative Reserve Bank); and (4) another Reserve Bank, if any, that receives the item from a Reserve Bank. The Board is proposing to amend section 210.4(b)(1)(ii) to clarify that the “handling” of an item by the initial sender's Administrative Reserve Bank includes accepting the item for deposit. Thus, for purposes of determining the rights and liabilities of parties that send and handle checks and other items sent to a Reserve Bank, the Administrative Reserve Bank is deemed to have accepted deposit of the item from the initial sender even if the sender sends the item directly to another Reserve Bank. Proposed 210.4(b)(3) would further clarify that, in addition to Regulation J, Regulation CC, and the UCC, the identity and order of the parties in section 210.4(b) also determines the relationships and the rights and liabilities of the parties for purposes of sections 13(1) and 16(13) of the Federal Reserve Act, which govern deposits to Reserve Banks.7

As noted above, Fedwire funds transfers are governed by subpart B of Regulation J. A funds transfer, which is made up of a series of payment orders, may originate outside of the Fedwire system and be carried out only partly over Fedwire.8 Subpart B of Regulation J currently “governs a funds transfer that is sent through Fedwire * * * even though a portion of the funds transfer is governed by the Electronic Fund Transfer Act [EFTA], but the portion of such funds transfer that is governed by the [EFTA] is not governed by” Regulation J.9 This provision is slightly different from (and supersedes) the scope of UCC Article 4A-108, which provides that Article 4A does not apply “to a funds transfer, any part of which is governed by the [EFTA].” Until recently, the exclusion from Regulation J and Article 4A of transactions governed by the EFTA did not create any gaps or overlap, because the EFTA excludes from the definition of “electronic fund transfer” wire transfers over systems that are not designed primarily for consumer transfers.10 The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), however, added a new section 919 to the EFTA. The new section 919 of the EFTA creates new protections for consumers who send remittance transfers to designated recipients located in a foreign country. Section 919 defines “remittance transfer” to include an electronic transfer of funds requested by a U.S. consumer sender through a remittance transfer provider, whether or not theremittance transfer is also an electronic fund transfer as defined in the EFTA. Therefore, a Fedwire funds transfer could potentially be part of a remittance transfer under the new section 919 of the EFTA.11

Consequently, under Regulation J's existing scope provision (section 210.25(b)(3)), Fedwire funds transfers that meet the EFTA's definition of “remittance transfer” could be viewed as “governed by” the EFTA and therefore not governed by Regulation J. The Board believes that this result would lead to legal uncertainty with respect to the rights and liabilities of the parties to a Fedwire funds transfer that is also a “remittance transfer.” Specifically, the EFTA governs disclosures and other rights with respect to the consumer senders of remittance transfers, but does not address the interbank rights and obligations that are established in Regulation J. To avoid a gap in coverage for Fedwire funds transfers, the Board is proposing to amend section 210.25 of Regulation J to clarify that Regulation J continues to apply to “remittance transfers” as defined by the EFTA, to the extent there is not an inconsistency between Regulation J and section 919 of the EFTA (in which case section 919 would prevail). This proposed clarification would ensure that the provisions of Regulation J, and therefore Article 4A of the UCC, apply to all Fedwire funds transfers, except to the extent that section 919 of the EFTA and rules established thereunder apply. The proposal would include clarifications in the commentary to section 210.25 as well.

The Board proposes that the Regulation J amendments that would eliminate references to as-of adjustments be effective on the same date as the corresponding amendments to Regulation D. The Board proposes that these amendments take effect no earlier than the first quarter of 2012. The Board believes that the other proposed amendments to Regulation J would not require institutions to take any action or incur any cost. Therefore, the Board proposes that these amendments take effect 30 days after the Board adopts a final rule. The Board requests comment on whether the proposed effective dates are appropriate.

As a matter of policy, the Board subjects all operational and legal changes that could have a substantial effect on payment system participants to a competitive impact analysis.12 Pursuant to this policy, the Board assesses whether such proposed changes “would have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services due to differing legal powers or constraints or because of a dominant market position of the Federal Reserve deriving from such legal differences.” If as a result of this analysis the Board identifies an adverse effect on the ability to compete, the Board then assesses whether the associated benefits—such as improvements to payment system efficiency or integrity—can be achieved while minimizing the adverse effect on competition.

The proposed amendments that eliminate the use of as-of adjustments would require Reserve Banks to pay compensation in the form of explicit interest under UCC Article 4A-506, as is required of private-sector service providers. The proposed amendments to section 210.4, clarifying the status of the administrative Reserve Bank of a sender of a check, would not affect the competitive position of the Reserve Banks vis-à-vis private-sector service providers. The proposed amendments to section 210.25, clarifying the applicability of Regulation J to remittance transfers as defined in the Electronic Fund Transfer Act, do not rely on legal powers unique to the Federal Reserve; private-sector service providers of funds transfer service have the ability to similarly amend their rules. Therefore, the Board does not believe the proposed changes to Regulation J would have any direct and material adverse effect on the ability of other service providers to compete with the Reserve Banks.

Congress enacted the Regulatory Flexibility Act (the “RFA”) (5 U.S.C. 601et seq.) to address concerns related to the effects of agency rules on small entities and the Board is sensitive to the impact its rules may impose on small entities. The RFA requires agencies either to provide an initial regulatory flexibility analysis with a proposed rule or to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. In accordance with section 3(a) of the RFA, the Board has reviewed the proposed regulation. In this case, the proposed rule would apply to all depository institutions. Based on current information, the Board believes that the proposed rule would not have a significant economic impact on a substantial number of small entities (5 U.S.C. 605(b)). Nonetheless, an Initial Regulatory Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603 in order for the Board to solicit comment. The Board will, if necessary, conduct a final regulatory flexibility analysis after consideration of comments received during the public comment period.

The proposed amendments to Regulation J would eliminate references to “as-of adjustments” consistent with the Board's proposed amendments to Regulation D (12 CFR part 204), which simplify reserves administration. The proposed amendments would also clarify that an institution's Administrative Reserve Bank is deemed to have accepted deposit of a check or other item even if the institution sends the item directly to another Federal Reserve Bank. The proposed amendments would further clarify that Regulation J continues to apply to a Fedwire funds transfer even if the funds transfer also meets the definition of “remittance transfer” under the Electronic Fund Transfer Act.

The proposed rule would affect all institutions that use Federal Reserve Bank check or wire transfer services. Pursuant to regulations issued by the Small Business Administration (the “SBA”) (13 CFR 121.201), a “small banking organization” includes a depository institution with $175 million or less in total assets. Based on data reported as of March 31, 2011, the Board believes that there are approximately 10,723 small depository institutions, approximately 2,808 of which have a master account with the Federal Reserve.

The proposed rule would eliminate references to as-of adjustments andreplace the use of as-of adjustments with direct compensation based on the federal funds rate. As noted above, a depository institution should not be harmed by this amendment because the depository institution would continue to be compensated for a transaction error; the payment for the error would simply be in the form of direct compensation instead of an as-of adjustment. The other proposed amendments to Regulation J are clarifications and do not impose new requirements on depository institutions. The Board seeks information and comment on any costs that would arise from the application of the proposed rule.

The Board does not believe that any Federal rules duplicate, overlap, or conflict with the proposed rule. The proposed amendment to subpart B is intended to conform to proposed changes to Regulation D. The Board seeks comment regarding any statutes or regulations that would duplicate, overlap, or conflict with the proposed rule.

The Board is unaware of any significant alternatives to the proposed rule that accomplish the stated objectives of the Board. The Board welcomes comment on any significant alternatives that would minimize the impact of the proposal on small entities.

In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR part 1320 appendix A.1), the Board reviewed the proposed rule under the authority delegated to the Board by the Office of Management and Budget (OMB). No collections of information pursuant to the PRA are contained in the proposed rule.

Comments related to PRA review of this rulemaking should be sent to Cynthia Ayouch, Federal Reserve Board Clearance Officer, Division of Research and Statistics, Mail Stop 95-A, Board of Governors of the Federal Reserve System, Washington, DC 20551, with copies of such comments sent to the Office of Management and Budget, Paperwork Reduction Project (Regulation J), Washington, DC 20503.

For the reasons set forth in the preamble, the Board proposes to amend Regulation J, 12 CFR part 210, as follows:

Section 111 of the Dodd-Frank Act (12 U.S.C. 5321) established the Financial Stability Oversight Council. Among the purposes of the Council under section 112 of the Dodd-Frank Act (12 U.S.C. 5322) are “(A) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) to respond to emerging threats to the stability of the United States financial system.”

In the recent financial crisis, financial distress at certain nonbank financial companies contributed to a broad seizing up of financial markets, stress at other financial firms, and a deep global recession with a considerable drop in employment, the classic symptoms of financial instability. These nonbank financial companies were not subject to the type of regulation and consolidated supervision applied to bank holding companies, nor were there effective mechanisms in place to resolve the largest and most interconnected of these nonbank financial companies without causing further instability. To address any potential risks posed to U.S. financial stability by these companies, the Dodd-Frank Act authorizes the Council to determine that certain nonbank financial companies will be subject to supervision by the Board of Governors and prudential standards. Title I of the Dodd-Frank Act defines a “nonbank financial company” as a domestic or foreign company that is “predominantly engaged in financial activities” in the United States, other than bank holding companies and certain other types of firms.1 The Council intends to interpret the term “company” broadly with respect to nonbank financial companies and other companies in connection with section 113 of the Dodd-Frank Act, to include any corporation, limited liability company, partnership, business trust, association (incorporated or unincorporated), or similar organization. The Dodd-Frank Act provides that a company is “predominantly engaged” in financial activities if either (i) the annual gross revenues derived by the company and all of its subsidiaries from financial activities, as well as from the ownership or control of insured depository institutions, represent 85 percent or more of the consolidated annual gross revenues of the company; or (ii) the consolidated assets of the company and all of its subsidiaries related to financial activities, as well as related to the ownership or control of insured depository institutions, represent 85 percent or more of the consolidated assets of the company. The Dodd-Frank Act requires the Board of Governors to establish the requirements for determining whether a company is “predominantly engaged in financial activities” for this purpose.2

The Council issued an advance notice of proposed rulemaking (the “ANPR”) on October 6, 2010 (75 FR 61653), in which it requested public comment on the statutory factors that the Dodd-Frank Act requires the Council to consider in determining whether a nonbank financial company should be supervised by the Board of Governors and subject to prudential standards. The ANPR posed 15 questions, all of which addressed the application of the statutory considerations that the Council must take into account in the process of determining whether a nonbank financial company should be subject to supervision by the Board of Governors and be subject to prudential standards (the “Determination Process”).

On January 26, 2011, the Council issued a notice of proposed rulemaking (the “NPR”) (76 FR 4555) through which it sought public comment regarding the specific criteria and analytic framework that the Council intends to apply in the Determination Process. The comment period for the NPR closed on February 25, 2011.

In response to comments that the Council received on the NPR, the Council is issuing a second notice of proposed rulemaking (the “Proposed Rule”) and proposed interpretive guidance (the “Proposed Guidance”) to provide (i) additional details regarding the framework that the Council intends to use in the process of assessing whether a nonbank financial company could pose a threat to U.S. financial stability, and (ii) further opportunity for public comment on the Council's proposed approach to the Determination Process.

The Council received 35 comments in response to the NPR, of which 11 were from trade associations or advocacy groups, 10 were from the insurance industry, eight were from entities in the asset management industry, two were from law firms, two were from individuals, one was from a think tank, and one was from a specialty finance company. (Comment letters are available online at:http://www.regulations.gov.) In addition to issuing the ANPR and the NPR for public comment, staff of Council member agencies met with financial industry representatives to discuss the proposals. Meeting participants generally reiterated the views expressed in their comment submissions. Many commenters responding to the NPR referred to comments that they previously had submitted in response to the ANPR. While this preamble describes many of the comments submitted in response to the ANPR andthe NPR, and describes how the Proposed Rule and Proposed Guidance address certain of those comments, the Council expects to provide a more complete discussion of the comments submitted in response to the Proposed Rule and Proposed Guidance after considering the comments received during the comment period on the Proposed Rule and Proposed Guidance.

The comments addressed various aspects of the NPR, but the majority of comments addressed one or more of the following three broad issues: the substantive content of the NPR, the scope of the Council's Constitutional or statutory authority, and the Council's compliance with the Administrative Procedure Act (the “APA”).

The majority of commenters asserted that the NPR lacked the necessary level of specificity and detail needed to provide meaningful guidance regarding the manner in which the Council intends to exercise its determination authority under section 113 of the Dodd-Frank Act.3

Some commenters asserted that the Council should include the proposed six-category framework in the rule text, rather than in the preamble, so as to require the Council to apply the framework in the Determination Process. The majority of commenters requested that the Council issue specific metrics to measure the six categories, and any relative weighting that the Council may assign to one or more of the six categories, for public comment. Other commenters suggested that the Council define the terms “financial stability” and “material financial distress” before establishing any specific metrics, as the Council should consider such definitions when identifying appropriate metrics.

Many commenters asserted that the Council provided an insufficient level of detail regarding the Determination Process. Specifically, commenters suggested that the initial notice of consideration should provide a detailed explanation of the basis of the Council's consideration of the nonbank financial company for a proposed determination, including an outline of the specific statutory considerations on which the Council based its decision.

Some commenters, the majority of whom represented the insurance industry, noted that two insurance-related positions on the Council were vacant: (1) An independent insurance expert (to be appointed by the President) and (2) the Director of the Federal Insurance Office (to be appointed by the Secretary of the Treasury). These commenters requested that the Council delay issuing a final rule until those Council positions are filled.4

A majority of commenters addressed various aspects of the proposed six-category framework that the Council set forth in the NPR. Several commenters praised the six framework categories as useful tools to assess a nonbank financial company's potential to pose a threat to U.S. financial stability. One commenter expressed concern that the Council intended to use the six-category framework as a proxy for the 10 specific statutory considerations that the Council is required to consider when determining whether a nonbank financial company could pose a threat to U.S. financial stability.

Commenters also asked for clarification regarding the manner in which the Council intends to assess a nonbank financial company within each category and provided suggestions regarding the manner in which the Council should do so. Some of these comments are described below.

Many commenters expressed the view that interconnectedness with the broader financial system is the most important indicator of a nonbank financial company's potential to pose a threat to U.S. financial stability. Some commenters suggested that the Council should assess whether failure of a nonbank financial company would threaten the financial condition and competitive position of other significant financial companies when evaluating a nonbank financial company under this category. Commenters from the asset management industry and the insurance industry provided comments on how interconnectedness should be measured within those industries.

Many commenters stated that the substitutability of a nonbank financial company's goods or services that are important to the overall financial system is an important factor that the Council should consider in the Determination Process. Commenters from the asset management and insurance industries noted that there is little concentration in the asset management and insurance industries.

Commenters generally noted that size is an important factor that the Council should consider in the Determination Process, but that size alone should not provide a sufficient basis on which to make a determination with respect to a nonbank financial company, absent other considerations, such as the nonbank financial company's interconnectedness or contagion risk. Many commenters expressed concern that the Council had not sufficiently disclosed how it would measure size across different industries.

Some commenters asserted that leverage is an important factor that the Council should consider in the Determination Process, while others suggested that different considerations, such as reliance on debt financing, would provide a more meaningful assessment of the potential of a nonbank financial company to pose a threat to U.S. financial stability. In addition, commenters asked that the Council clarify the manner in which it intends to calculate a nonbank financial company's leverage.

Commenters generally agreed that liquidity risk and maturity mismatch are important criteria for assessing the likelihood that material financial distress at a nonbank financial company could pose a threat to U.S. financial stability, but certain commenters asked the Council to clarify the manner in which it intends to measure this category. Commenters from the asset management industry expressed the view that firms within the asset management industry are not vulnerable to significant liquidity risk or maturity mismatches. Commenters from the insurance industry noted that theinsurance industry has had very little liquidity risk traditionally.

Many commenters stated that an assessment of existing regulatory scrutiny is an important consideration for purposes of determining whether a nonbank financial company could pose a threat to U.S. financial stability. Some commenters suggested that the Council consider not only the degree to which regulatory requirements are already applicable to a particular nonbank financial company, but also any new regulatory requirements to which the nonbank financial company will become subject pursuant to new requirements imposed by the Dodd-Frank Act.

Some commenters asserted that the Council does not have the authority to issue rules and regulations setting forth the process and standards it will follow in fulfilling the Council's statutory functions related to nonbank financial company determinations under section 113 of the Dodd-Frank Act. In particular, commenters noted that while the Dodd-Frank Act authorizes the Council to issue such rules as may be necessary for the conduct of the business of the Council, the Dodd-Frank Act does not specifically authorize the Council to issue rules or regulations regarding matters related to determinations regarding nonbank financial companies.

Commenters stated that the rule is too vague to satisfy the “notice and comment” requirements under the APA, the requirement in Presidential Executive Order 13563, “Improving Regulation and Regulatory Review”5 that the rule contain clear, specific regulatory criteria and a cost/benefit analysis, or the due process requirements of the United States Constitution.

In developing the Proposed Rule, the Council has carefully considered the comments received on the ANPR and the NPR, as well as the language and legislative history of the Dodd-Frank Act. After this review, the Council has determined to propose a rule that has been modified to provide additional details about the processes and procedures through which the Council may make a determination under section 113 of the Dodd-Frank Act, and the manner in which a nonbank financial company may respond to and contest a proposed determination.

In addition, the Council is issuing, with a request for comment, as an appendix to the Proposed Rule, the Proposed Guidance. Among other aspects of the Proposed Guidance, the Council invites interested parties to comment on—

• Key terms and concepts related to the Council's determination authority, including “material financial distress” and “threat to financial stability”;

• The six-category framework that the Council intends to use to determine whether a nonbank financial company could pose a threat to the financial stability of the United States, including examples of quantitative metrics for assessing each category;

• The six uniform quantitative thresholds that the Council intends to use to identify those nonbank financial companies that will be subject to further evaluation by the Council; and

• The process that the Council intends to follow when considering whether to subject a nonbank financial company to supervision by the Board of Governors and prudential standards.

The Council's ultimate determination will be based on an evaluation of each of the statutory considerations taking into account facts and circumstances relevant to each nonbank financial company.

The Proposed Rule and Proposed Guidance, as well as the Council's responses to the comments received, are discussed in greater detail below.

As noted above under “Overview of Comments,” the Council received comments that addressed virtually all aspects of the Council's authority to make a determination with respect to nonbank financial companies under section 113 of the Dodd-Frank Act. The Council is committed to fostering transparency with respect to the Determination Process, and the Proposed Rule and Proposed Guidance are intended to address such concerns by providing a detailed description of: (i) The profile of those nonbank financial companies that the Council likely will evaluate for potential determination so as to minimize the uncertainty to which many commenters referred regarding the Determination Process, and (ii) the metrics that the Council intends to use when analyzing companies at various stages of the Determination Process, including examples of the metrics that the Council intends to use when evaluating a nonbank financial company using the six-category framework.

The Council has numerous authorities and tools to carry out its statutory duty to monitor the financial stability of the United States. In addition to the Council's determination authority under section 113 of the Dodd-Frank Act, the Council has the authority to make recommendations to primary financial regulatory agencies to apply new or heightened standards and safeguards for a financial activity or practice conducted by bank holding companies or nonbank financial companies under the jurisdiction of such agencies if the Council determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of such activity or practice could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, U.S. financial markets, or low-income, minority, or underserved communities.6 In addition, the Council may designate financial market utilities and payment, clearing and settlement activities that the Council determines are, or are likely to become, systemically important.7 The Council expects that its response to any potential threat to financial stability will be based on an assessment of the circumstances.

Pursuant to section 115(a) of the Dodd-Frank Act, the Council may also make recommendations to the Board of Governors concerning the establishment and refinement of prudential standards and reporting and disclosure standards applicable to nonbank financial companies supervised by the Board of Governors pursuant to section 113 of the Dodd-Frank Act. In making such recommendations, the Dodd-Frank Act also authorizes the Council to differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk-related factors that the Council deems appropriate. In addition, section 165 of the Dodd-Frank Act gives the Board of Governors the ability to tailor the application of the prudential standards on its own.

Commenters are encouraged to provide comment on the Proposed Rule and Proposed Guidance. The Council will consider comments received on the Proposed Rule and Proposed Guidance as the Council continues to develop theapproach that the Council intends to take in the Determination Process.

Section 113 of the Dodd-Frank Act authorizes the Council to subject a nonbank financial company to supervision by the Board of Governors and prudential standards if the Council determines that (i) material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States (the “First Determination Standard”), or (ii) the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company could pose a threat to the financial stability of the United States (the “Second Determination Standard”).

Pursuant to the provisions of the Dodd-Frank Act, the Council is required to consider the following statutory considerations when evaluating whether to make this determination with respect to a nonbank financial company:8

(A) The extent of the leverage of the company;

(B) The extent and nature of the off-balance-sheet exposures of the company;

(C) The extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies;

(D) The importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the U.S. financial system;

(E) The importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities;

(F) The extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is diffuse;

(G) The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company;

(H) The degree to which the company is already regulated by one or more primary financial regulatory agencies;

(I) The amount and nature of the financial assets of the company;

(J) The amount and types of the liabilities of the company, including the degree of reliance on short-term funding; and

(K) Any other risk-related factors that the Council deems appropriate.

The Council intends to take into account each of the 10 statutory considerations when determining whether one of the statutory standards for determination has been met. The Council included each of the statutory considerations in the rule text in the NPR and has retained this rule text in the Proposed Rule. The Council has provided additional detail in the Proposed Guidance regarding the manner in which the Council intends to assess nonbank financial companies under the First and Second Determination Standards. The Council has set forth proposed definitions of the terms “material financial distress,” which is relevant to the First Determination Standard, and “threat to U.S. financial stability,” which is relevant to both determination standards. The Proposed Guidance also describes the channels the Council believes are most likely to facilitate the transmission of the negative effects of a nonbank financial company's material financial distress or activities to other firms and markets, thereby posing a threat to U.S. financial stability.

In exercising its anti-evasion authority with respect to a U.S. nonbank financial company or foreign nonbank financial company, the Council must consider the relevant statutory factors applicable to a U.S. or foreign nonbank financial company, respectively. The Proposed Rule retains the process for making anti-evasion determinations that was set forth in the NPR. The Council may make such a determination either on its own initiative or at the request of the Board of Governors.

In response to comments requesting more detail regarding the Determination Process, the Proposed Guidance provides a detailed description of the manner in which the Council intends to conduct the Determination Process. For example, the Proposed Guidance provides a description of the manner in which the Council intends to identify nonbank financial companies for further evaluation. The Council intends to evaluate a broad group of nonbank financial companies by applying uniform quantitative thresholds representing the framework categories that are more readily quantified, namely size, interconnectedness, leverage, and liquidity risk and maturity mismatch. A nonbank financial company would be subject to additional review if it meets both the size threshold and any one of the other quantitative thresholds. The Council believes that this set of thresholds will help a nonbank financial company predict whether such company will likely be subject to additional review by the Council.

In addition to a discussion of the analytic framework, the Proposed Guidance describes the manner in which the Council intends to analyze the companies included in each subsequent stage in the Determination Process to determine whether any nonbank financial company initially identified could pose a threat to U.S. financial stability.

The Council expects that the detailed description of the Determination Process contained in the Proposed Guidance, including the discussion of the analytic framework, will mitigate many of the potential negative effects that could result from the perceived uncertainty regarding the Determination Process. However, as discussed in the Proposed Guidance, the Council does not believe that a determination decision can be reduced to a formula. Each determination will be made on a firm-specific basis, taking into account qualitative, as well as quantitative, information that the Council deems relevant to a particular nonbank financial company.

As set forth in the NPR, the Council proposes to use a six-category framework that is designed to incorporate each of the 10 statutory considerations for evaluating whether a nonbank financial company meets one of the two Determination Standards. The Council has incorporated the statutory considerations into the following six factors: (1) Size, (2) interconnectedness, (3) substitutability, (4) leverage, (5) liquidity risk and maturity mismatch, and (6) existing regulatory scrutiny. Three of the six categories seek to assess the potential impact of a nonbank financial company's financial distress on the broader economy: size, substitutability and interconnectedness. The remaining three categories seek to assess the vulnerability of a nonbank financial company to financial distress: leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny of the nonbank financial company. The NPR contained a table that illustrated the relationship between the 10 statutory considerations and the six framework categories. The table is also included in the Proposed Guidance. In response torequests by commenters, the Proposed Guidance provides further detail regarding the Council's rationale for selecting the six framework categories and provides additional clarity regarding the manner in which the six-category analytic framework incorporates each of the statutory considerations. As requested by commenters, the Proposed Guidance also sets forth examples of metrics that the Council intends to use when evaluating a nonbank financial company in each of the six categories. These metrics include several metrics proposed by commenters.

In response to the public comments requesting more transparency and clarity regarding the criteria that will inform the Determination Process, the Council has developed a three-stage process the Council expects to apply for determinations in non-emergency situations. Each stage of the Determination Process would involve an analysis based on an increasing amount of information to determine whether a nonbank financial company meets either Determination Standard. The Proposed Guidance provides a detailed discussion of the proposed three-stage review process.

The first stage of the process (“Stage 1”) is designed to narrow the universe of nonbank financial companies to a smaller set of nonbank financial companies using quantitative thresholds that are broadly applicable across the financial sector. Stage 1 is not intended to indicate a determination by the Council that the nonbank financial companies identified during Stage 1 meet one of the Determination Standards. Rather, Stage 1 is intended to identify those nonbank financial companies that should be subject to further evaluation in subsequent stages of review. In the second stage of the process (“Stage 2”), the Council will conduct a comprehensive analysis of the potential for the identified nonbank financial companies to pose a threat to U.S. financial stability. In general, this analysis will be based on a broad range of quantitative and qualitative information available to the Council through existing public and regulatory sources, including industry- and firm-specific metrics beyond those analyzed in Stage 1, and information obtained from the company voluntarily.

Based on the analysis conducted during Stage 2, the Council intends to contact those nonbank financial companies that the Council believes merit further review in the third stage (“Stage 3”). Stage 3 will build on the Stage 2 analysis using quantitative and qualitative information collected directly from the nonbank financial company by the Office of Financial Research (the “OFR”) or the appropriate regulatory agency in addition to the otherwise available information considered during Stages 1 and 2. The Council will determine whether to subject a nonbank financial company to Board of Governors supervision and prudential standards based on the results of the analyses conducted during each stage of review.

The Council considered several alternative quantitative approaches in developing a method to identify a subset of companies for additional review during Stage 1 and concluded that the thresholds-based approach set forth in the Proposed Guidance is the most appropriate method to identify this subset. In the Council's view, the thresholds-based approach provides the maximum possible transparency to the market, thereby reducing the likelihood that uncertainty about the Determination Process could negatively affect financial markets. Furthermore, the Council selected the particular Stage 1 quantitative thresholds due to their applicability to nonbank financial companies that operate in different types of financial markets and industries, and because the data underlying these thresholds are generally available from existing public and regulatory sources. Thus, nonbank financial companies should be able to reproduce the Council's initial assessments of nonbank financial companies.

The Council recognizes that the quantitative thresholds it has identified for application during Stage 1 may not provide an appropriate means to identify a subset of nonbank financial companies for further review in all cases across all financial industries and firms. While the Council will apply the Stage 1 thresholds to all types of nonbank financial companies, including financial guarantors, asset management companies, private equity firms, and hedge funds, these companies may pose risks that are not well-measured by the quantitative thresholds approach.

With respect to hedge funds and private equity firms in particular, the Council intends to apply the Stage 1 thresholds, but recognizes that less data is generally available about these companies than about certain other types of nonbank financial companies. Beginning in 2012, advisers to hedge funds and private equity firms and commodity pool operators and commodity trading advisors will be required to file Form PF with the Securities and Exchange Commission or the Commodity Futures Trading Commission, as applicable, on which form such companies will make certain financial disclosures. Using these and other data, the Council will consider whether to establish an additional set of metrics or thresholds tailored to evaluate hedge funds and private equity firms and their advisers.

In addition, the Council, its member agencies, and the OFR will analyze the extent to which there are potential threats to U.S. financial stability arising from asset management companies. This analysis will consider what threats exist, if any, and whether such threats can be mitigated by subjecting such companies to Board of Governors supervision and prudential standards, or whether they are better addressed through other regulatory measures. The Council may issue additional guidance for public comment regarding potential additional metrics and thresholds relevant to asset manager determinations.

Generally, as reporting requirements evolve and new data about certain industries and nonbank financial companies become available, the Council expects to review the quantitative thresholds as appropriate based on this new information. For example, the Council's analysis will be informed by credit exposure data proposed to be collected under section 165 of the Dodd-Frank Act by the Federal Deposit Insurance Corporation and the Board of Governors. Similarly, pursuant to reporting and disclosure requirements being implemented under the Dodd-Frank Act, Council members will gain access to additional information through swap data repositories.

The Council recognizes that the proposed Stage 1 threshold to measure a nonbank financial company's derivative liabilities captures only the current exposure, rather than the current and potential future exposure created by the nonbank financial company's outstanding derivatives. The SEC and CFTC have proposed rules to define the terms “major swap participant” (“MSP”) and “major security-based swap participant” (“MSBSP”) that contain a methodology to measure the potential future exposure created by an entity's outstanding derivatives.

Once the final rules establishing the MSP and MSBSP definitions have been adopted, the rules regarding reporting of data on swaps and security-based swaps come into effect, and data have been collected pursuant to those rules, theCouncil intends to establish a new Stage 1 threshold based on factors such as a nonbank financial company's current and potential future exposure from its outstanding derivatives for purposes of determining whether some or all MSPs, MSBSPs, or other firms will be subject to further examination in Stage 2.

In all instances, the Council reserves the right, in its discretion, to subject any nonbank financial company, irrespective of whether such company was identified in Stage 1, to further review, if the Council believes that further analysis of the company is warranted to determine if the company could pose a threat to U.S. financial stability.

After a subset of nonbank financial companies has been identified in Stage 1, the Council intends to conduct a robust analysis of the potential threat that each of those nonbank financial companies could pose to U.S. financial stability based on information available to the Council through existing public and regulatory sources, including information possessed by the company's primary financial regulatory agency or home country supervisor, as appropriate. In contrast to the application of uniform quantitative thresholds to a broad group of nonbank financial companies in Stage 1, the Council intends to evaluate the risk profile and characteristics of each individual nonbank financial company in Stage 2 based on a wide range of quantitative and qualitative industry- and company-specific factors. This analysis will use the six-category analytic framework described in section C above. In addition, the Stage 2 evaluation will include a review, based on available data, of whether the resolution of a nonbank financial company could pose a threat to U.S. financial stability.

Following Stage 2, nonbank financial companies that are selected for additional review will receive notice that they are being considered for a proposed determination and will be subject to further evaluation during Stage 3. As discussed in greater detail in the Proposed Guidance during the Stage 3 review, the Council intends to conduct an in-depth analysis of the nonbank financial company's potential to pose a threat to financial stability based on information obtained directly from the nonbank financial company and the information previously obtained by the Council during prior stages of review. The Council believes that in this stage of the evaluation, the Council likely will consider qualitative factors, including considerations that could mitigate or aggravate the potential of a nonbank financial company to pose a threat to U.S. financial stability, such as the nonbank financial company's resolvability, the opacity of the nonbank financial company's operations, its complexity, and the extent to which the nonbank financial company is subject to existing regulatory scrutiny and the nature of such scrutiny.

Based on the analysis performed in Stages 2 and 3, the Council may consider whether to determine, by vote, to subject any of the nonbank financial companies to a proposed determination. Prior to making a proposed determination, the Council may (i) consult with the nonbank financial company's primary financial regulatory agency or home country supervisor, as appropriate and (ii) consider the views of such entities.9

Following a proposed determination, the Council intends to issue a written notice of the proposed determination to the nonbank financial company that would provide an explanation of the basis of the proposed determination. The nonbank financial company may request a hearing to contest the proposed determination in accordance with section 113(e) of the Dodd-Frank Act and section 1310.21(c) of the Proposed Rule. The Council has provided additional details regarding the hearing process in the Proposed Rule and in the Proposed Guidance.

This section sets forth the authority for and purpose of the Proposed Rule.

This section defines the terms relevant to the Proposed Rule. It retains the majority of the definitions proposed in the NPR, with some technical modifications. For instance, the definition of “predominantly engaged in financial activities” has been incorporated into the definitions of “U.S. nonbank financial company” and “foreign nonbank financial company” to clarify that such definition is relevant for purposes of determining whether an entity meets the definition of U.S. nonbank financial company or foreign nonbank financial company. It also introduces definitions not set forth in the NPR, including definitions of “Federal Insurance Office,” “hearing date,” “nonbank financial company,” and “Office of Financial Research.”

This section sets forth the Council's authority to make proposed and final determinations with respect to nonbank financial companies, pursuant to sections 113(a) and (b) of the Dodd-Frank Act. It sets forth the two standards for determinations the requirements for a Council vote with respect to proposed and final determinations and the Council's ability pursuant to section 112(d)(4) of the Dodd-Frank Act to request that the Board of Governors conduct an examination to determine whether a U.S. nonbank financial company should be supervised by the Board of Governors for purposes of Title I of the Dodd-Frank Act. Certain provisions included in the corresponding section in the NPR have been moved to other sections of the Proposed Rule for organizational purposes.

This section sets forth the considerations that the Council must consider in making a proposed or final determination with respect to a U.S. nonbank financial company or foreign nonbank financial company. These considerations reflect the statutory factors set forth in sections 113(a)(2) and (b)(2) of the Dodd-Frank Act.

This section sets forth the Council's authority to require that the financial activities of a company that is not a nonbank financial company be supervised by the Board of Governors and be subject to prudential standards, if the Council determines that material financial distress related to, or the nature, scope, size, scale, concentration, interconnectedness, or mix of, the financial activities conducted directly or indirectly by a company would pose a threat to the financial stability of the United States, and the company is organized or operates in such a manner as to evade the application of Title I of the Dodd-Frank Act. This section defines “financial activities” as that term is defined in section 113(c)(5) of the Dodd-Frank Act.

This section is intended to clarify the application of subpart C as previously set forth in the NPR. This section provides that, in accordance with section 113(c)(4) of the Dodd-Frank Act, the provisions of subpart C governing information collection (including the confidentiality provisions), consultation, notice and opportunity for an evidentiary hearing, emergency waivers or modifications, and reevaluation and rescission of determinations would apply in the context of the Council's anti-evasion authority. The information-collection authority of the Council with respect to companies in this context derives from the authority of the Council to receive information from the OFR, member agencies, and the Federal Insurance Office, and from the authority of the OFR on behalf of the Council, to require the submission of periodic and other reports from any financial company under sections 112(d)(1) and (2) and 154(b) of the Dodd-Frank Act, respectively.

The provision in the corresponding section in the NPR relating to the establishment of an intermediate holding company was deleted because it related to authority of the Board of Governors rather than of the Council.

This section sets forth the Council's authority to collect information with respect to nonbank financial companies and its responsibilities in consulting and coordinating with regulators and maintaining the confidentiality of submitted information. Paragraph (a) sets forth the Council's ability to collect information from the OFR, member agencies, the Federal Insurance Office, and other Federal and State financial regulatory agencies, and paragraph (b) sets forth the Council's ability to collect information from nonbank financial companies. These two paragraphs implement the provisions of section 112(d) of the Dodd-Frank Act relating to the Council's authority to obtain information and collect financial data. Paragraph (c) provides that the Council will consult with a nonbank financial company's primary financial regulatory agency in a timely manner, in accordance with section 113(g) of the Dodd-Frank Act. Paragraph (d) provides that the Council will consult with appropriate foreign regulatory authorities, to the extent appropriate, in accordance with section 113(i) of the Dodd-Frank Act. The NPR included provisions similar to paragraphs (c) and (d) of the Proposed Rule that were located elsewhere in the NPR. Paragraph (e), which was not included in the NPR, implements the confidentiality requirements provided in section 112(d)(5) of the Dodd-Frank Act.

This section sets forth the procedural rights of a nonbank financial company being considered for a proposed or final determination, the time period within which the Council will act after it notifies the nonbank financial company that it is being considered for a proposed determination, and the nonbank financial company's rights to a hearing after a proposed determination. Paragraph (a) provides that the Council will deliver written notice to a nonbank financial company that it is being considered for a proposed determination and will provide the nonbank financial company an opportunity to submit written materials to contest the proposed determination. Paragraph (a) clarifies that the nonbank financial company may submit any written materials to contest the determination, including materials concerning whether the nonbank financial company meets the standards for a determination. This broadens the scope of materials that may be provided to contest a determination from the version proposed in the NPR. Paragraph (b) provides that the Council will provide a nonbank financial company with written notice of a proposed determination, including an explanation of the basis of the proposed determination. Paragraphs (c), (d), and (e) set forth the procedures for an evidentiary hearing following a proposed determination, pursuant to section 113(e) of the Dodd-Frank Act, and provides the time period within which the Council will make a final determination. These paragraphs also provide that the Council will make public any final determination that it makes.

Paragraph (f) sets forth the time period within which the Council may make a proposed determination with respect to a nonbank financial company that has received a notice of consideration of determination. Under paragraph (a)(3), the Council will notify a nonbank financial company that is being considered for a proposed determination of the date on which the Council deems its evidentiary record regarding that nonbank financial company to be complete. If the Council does not make a proposed determination with respect to that nonbank financial company within 180 days after that date, the Council will not make a proposed determination unless the Council issues a subsequent written notice of consideration of determination under paragraph (a) and thereafter complies with the other procedures set forth in that section. This paragraph was added to the Proposed Rule to provide clarity to a nonbank financial company that is subject to a notice of consideration of determination regarding the timing of any potential subsequent Council action.

This section sets forth the process by which the Council may waive or modify any of the notice or other procedural requirements of the Proposed Rule if the Council determines that the waiver or modification is necessary or appropriate to prevent or mitigate threats posed by the nonbank financial company to the financial stability of the United States, pursuant to section 113(f) of the Dodd-Frank Act. This section provides that a nonbank financial company will receive notice of the waiver or modification and an opportunity for a hearing to contest the waiver or modification, and sets forth the process by which the Council will make and publicly announce its final determination. This section incorporates the statutory requirement that the Council consult with the appropriate home country supervisor, if any, of a foreign nonbank financial company considered for a determination under this section. This section also requires the Council to consult with the primary financial regulatory agency, if any, of a nonbank financial company in making a determination under this section. These consultations will be conducted in such time and manner as the Council may deem appropriate.

This section sets forth the Council's statutory responsibility, pursuant to section 113(d) of the Dodd-Frank Act, to reevaluate currently effective determinations and rescind any determination if the Council determines that the nonbank financial company no longer meets the standards for determination.

The section in the NPR relating to judicial review of the Council's final determinations pursuant to section 113(h) of the Dodd-Frank Act was removed because it did not serve toimplement the Council's authority to make determinations.

It is hereby certified that this rule will not have a significant economic impact on a substantial number of small entities. The economic impact of this rule is not expected to be significant. The rule would apply only to nonbank financial companies that could pose a threat to the financial stability of the United States. Size is an important factor, although not the exclusive factor, in assessing whether a company could pose a threat to financial stability. The Council expects that few, if any, small companies (as defined for purposes of the Small Business Act) could pose a threat to financial stability. Therefore, the Council does not expect the rule to directly affect a substantial number of small entities. Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. 601-612) is not required.

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Financial Stability Oversight Council, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to George A. Sacco, Department of the Treasury, Washington, DC 20220. Comments on the collection of information must be received by December 19, 2011.

Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Council, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collection of information in these proposed regulations are found in § 1310.20 and § 1310.21.

Estimated total annual reporting burden: 1,000 hours.

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

Executive Orders 12866 and 13563 direct certain agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule has been designated a “significant regulatory action” although not economically significant, under section 3(f) of Executive Order 12866. Accordingly, the rule has been reviewed by the Office of Management and Budget.

For the reasons set forth in the preamble, the Financial Stability Oversight Council proposes to add a new part 1310 to chapter XIII of Title 12 of the Code of Federal Regulations, to read as follows:

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under theADDRESSESsection. Include “Docket No. FAA-2007-28059; Directorate Identifier 2007-NE-13-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, tohttp://www.regulations.gov,including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

On August 25, 2008, we issued AD 2008-18-08, Amendment 39-15665 (73 FR 52201, September 9, 2008), for all Rolls-Royce plc RB211-Trent 553-61, 553A2-61, 556-61, 556A2-61, 556B-61, 556B2-61, 560-61, 560A2-61, 768-60, 772-60, 772B-60, 875-17, 877-17, 884-17, 884B-17, 892-17, 892B-17, and 895-17 turbofan engines. That AD requires a onetime eddy current inspection (ECI) of the rear balance land of the IP compressor rotor shaft for cracks. That AD resulted from reports ofcracking on the rear balance land of IP compressor rotor shafts. We issued that AD to detect cracking on the rear balance land of the IP compressor rotor shaft. Cracking on the rear balance land on the IP compressor rotor shaft can lead to failure of the rotor shaft and damage to the engine.

Since we issued AD 2008-18-08, (73 FR 52201, September 9, 2008), RR reports that they have introduced an optional terminating action to the repetitive inspections required by that AD. RR also reported that for those operators not adopting the optional terminating action, improved inspection methods for the RB211-Trent 700 and RB211-Trent 800 turbofan engines are necessary. Also, EASA issued AD 2010-0266, dated December 21, 2010, and AD 2010-0266R1, dated January 6, 2011, to require repetitive on-wing and in-shop ECIs on RB211-Trent 700 and RB211-Trent 800 engines and repetitive in-shop visual inspections on the RB211-Trent 500, RB211-Trent 700, and RB211-Trent 800 engines. EASA issued their ADs because RR had reported finding additional cracks on the IP compressor rotor shaft of two in-service RB211-Trent 800 engines and on one in-service RB211-Trent 700 engine. The cracking had initiated from frettage marks caused by balance weights. RR reports that stress analysis has shown that the cracking presents a possible threat to the rotor integrity. We evaluated the data supplied by EASA and RR, and concur that the improved inspections for cracks on the balance land of the IP compressor rotor shaft are required. We have evaluated the optional terminating action and determined it to be effective.

These cracks, if present, could result in an unsafe condition leading to IP compressor rotor shaft failure and damage to the engine.

We reviewed RR Alert Service Bulletins (ASB) No. RB.211-72-AF260, Revision 5, dated July 7, 2011, ASB No. RB.211-72-AG085, Revision 2, dated July 7, 2011, ASB No. RB.211-72-AG264, Revision 5, dated March 21, 2011, ASB No. RB.211-72-AG270, Revision 4, dated March 21, 2011, and Service Bulletin No. RB.211-72-G448, Revision 3, dated July 7, 2011 which provide information for the inspections required by this AD.

We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of these same type designs.

This proposed AD would require:

• For the RB211-Trent 700 and RB211-Trent 800 engines, on wing initial and repetitive borescope inspections and when in the shop, repetitive ECIs for cracks on the rear balance land; and

• For the RB211-Trent 500 engines, initial and repetitive in-shop visual inspections or ECIs for cracks on the rear balance land.

This proposed AD would also add an optional terminating action to the repetitive inspection requirements for the RB211-Trent 700 and RB211-Trent 800 engines.

We estimate that this proposed AD would affect about 136 engines installed on airplanes of U.S. registry. We also estimate that it would take about 6 work-hours per engine to perform the proposed inspections and that the average labor rate is $85 per work-hour. Based on these figures, we estimate the total cost of the proposed AD to U.S. operators to be $69,360.

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

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

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

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

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

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

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

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

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under theADDRESSESsection. Include “Docket No. FAA-2009-0948; Directorate Identifier 2009-NE-30-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

We will post all comments we receive, without change, tohttp://www.regulations.gov,including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of the Web site, anyone can find and read the comments in any of our dockets, including, if provided, the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review the DOT's complete Privacy Act Statement in theFederal Registerpublished on April 11, 2000 (65 FR 19477-78).

On March 8, 2010, the FAA issued AD 2010-06-12, (75 FR 12439, March 16, 2010). That AD requires initial and repetitive replacements of the rail pressure control valve.

Since we issued AD 2010-06-12, (75 FR 12439, March 16, 2010), EASA, which is the Technical Agent for the Member States of the European Community, informed us that our AD is more restrictive than their EASA AD 2008-0128, dated July 9, 2009. Specifically, our paragraph (e)(3), which currently states:

“For TAE 125-01 reciprocating engines, within 100 flight hours after the effective date of this AD, replace the existing rail pressure control valve with a rail pressure control valve, P/N 02-7320-04100R3” should state:

“For TAE 125-01 reciprocating engines, before 600 flight hours time-since-new, or within 100 flight hours after the effective date of this AD, whichever occurs later, replace the existing rail pressure control valve with a rail pressure control valve, P/N 02-7320-04100R3.”

We agree. We made the suggested change in this proposed AD. We also deleted the AD Differences paragraph (f)(2), which stated: “For the TAE 125-01 reciprocating engines, we changed initial compliance time from within the next 3 months to within 100 flight hours after the effective date of this AD.” The remainder of this proposed AD is unchanged.

This product has been approved by the aviation authority of Germany and is approved for operation in the United States. Pursuant to our bilateral agreement with the European Community, EASA has notified us of the unsafe condition described in the MCAI. We are proposing this AD because we evaluated all information provided by EASA and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design. This proposed AD would require initial and repetitive replacements of the rail pressure control valve.

We have reviewed the MCAIs and related service information and, in general, agree with their substance. But we have found it necessary to reduce the initial compliance time for TAE 125-02-99 engines from within 110 flight hours to within 100 flight hours. We also have found it necessary to specify the repetitive replacement compliance time for the rail pressure control valve of within every 600 flight hours for both models of engines. The MCAIs instruct the operators to follow Thielert Maintenance Manual, Chapter 5, Airworthiness Limitations, for the repetitive compliance time, which requires replacement of the rail pressure control valve within every 600 flight hours. In making these changes, we do not intend to differ substantively from the information provided in the MCAI and related service information.

Based on the service information, we estimate that this proposed AD would affect about 370 TAE 125-01 and TAE 125-02-99 reciprocating engines installed on products of U.S. registry. We also estimate that it would take about 1.5 work-hours per engine to comply with this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $500 per engine. Based on these figures, we estimate the cost of the proposed AD for initial replacement, on U.S. operators to be $232,175.

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

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

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

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

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

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

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.

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

We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under theADDRESSESsection. Include “Docket No. FAA-2011-0599; Directorate Identifier 2011-NE-19-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, tohttp://www.regulations.gov,including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

We received a report of wear found on the seating surface of the CVD support ring and on the inside diameter of the fan drive shaft, where the two parts are in contact with each other. The wear was caused by relative motion between the CVD support assembly and the fan drive shaft during engine operation. The relative motion resulted from CVD support assemblies with improper sleeve thread lengths. This nonconformance was caused during manufacture, and the affected parts were released into service. A subpopulation of engines has been identified by engine S/N, that could have the same quality escape. Once removed, the CVD support assembly (consisting of self-locking nut, part number (P/N) 2226M57G03, threaded sleeve, P/N 2226M55P03, and support ring, P/N 2226M56P01) will be inspected for evidence of wear, and then never used again. This condition, if not corrected, could result in low-cycle-fatigue failure of the fan drive shaft, leading to engine failure.

We are proposing this AD because we evaluated all the relevant information and determined the condition described previously is unsafe and is likely to exist or develop in other products of the same type design.

This proposed AD would require:

• First inspecting the seating surface of the CVD support ring for wear, and then inspecting the fan drive shaft inside diameter for wear, where the two parts come in contact with each other;

• If wear is found on either the CVD support ring seating surface or the corresponding contact area inside the fan drive shaft, then removing the fan drive shaft from service; and

• Removing from service all of the CVD support assemblies from the affected S/N engines identified in the proposed AD.

We estimate that this proposed AD would affect 71 GE CF34-10E series turbofan engines installed on airplanes of U.S. registry. We also estimate that it would take about 8 work-hours per engine to perform a replacement of the CVD support assembly and visual inspections, and that the average labor rate is $85 per work-hour. A replacement CVD support assembly costs about $3,080. We estimate that two fan drive shafts would fail inspection and require replacement. A replacement fan drive shaft costs about $126,900. We estimate that no additional labor costs would be incurred to perform the required part replacements as the replacements are done at time of scheduled engine shop visit. Based on these figures, we estimate the total cost of the AD to U.S. operators to be $520,760.

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

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

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

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

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

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

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

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

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under theADDRESSESsection. Include “Docket No. FAA-2011-0956; Directorate Identifier 2011-NE-23-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

We will post all comments we receive, without change, tohttp://www.regulations.gov,including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of the Web site, anyone can find and read the comments in any of our dockets, including, if provided, the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union,etc.). You may review the DOT's complete Privacy Act Statement in theFederal Registerpublished on April 11, 2000 (65 FR 19477-78).

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA AD 2011-0087-E, dated May 12, 2011 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:

We are proposing this AD to require replacement of affected friction disks, which would resolve the unsafe condition described above. You may obtain further information by examining the MCAI in the AD docket.

This product has been approved by the aviation authority of Germany, and is approved for operation in the United States. Pursuant to our bilateral agreement with the European Community, EASA notified us of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all information provided by EASA and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design. This proposed AD would require on all TAE 125-02-99 and TAE 125-02-114 reciprocating engines, replacing the friction disk, P/N 05-7211-K010201.

Based on the service information, we estimate that this proposed AD would affect about 206 TAE 125-02-99 and TAE 125-02-114 reciprocating engines installed on airplanes of U.S. registry. We also estimate that it would take about 3 work-hours per engine to comply with this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $1,500 per engine. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $361,530. Our cost estimate is exclusive of possible warranty coverage.

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

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

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

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

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

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

We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.

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

We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under theADDRESSESsection. Include “Docket No. FAA-2011-0982; Directorate Identifier 2011-NE-09-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, tohttp://www.regulations.gov,including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

We received a report that a supplier shipped a batch of nonconforming No. 3 bearing packings, part number (P/N) 1292M70P04, with undersized cooling holes. The No. 3 bearing packing design did not feature permanent part markings and parts could be confused when being installed. After GE changed the design to introduce part marking on all new-made parts and added secondary inspections to the CF6-80C2 engine manual section 72-23-00 Fan Frame Assembly, customers reported several nonconforming No. 3 bearing packings, various P/Ns, found installed on engines in-service outside of the known population of engines affected by the quality escape. The nonconformance of No. 3 bearing packings will result in incorrect HPC and LPT rotor bore cooling and, if not corrected, could result in a reduced parts life of the life-limited HPC rotor stage 10-through-stage 14 spool, the HPC rotor stage 11-through-stage 14 spool, the LPT rotor stage 3 disk, and the LPT rotor stage 4 disk. Because the problem exists beyond the known population of engines affected by the quality escape and the consequences represent an unsafe condition in all affected engines in service, it is necessary to inspect the No. 3 bearing packing configuration of the entire fleet. This condition, if not corrected, could result in failure of the HPC rotor or the LPT rotor or both, which could cause uncontained engine failure and damage to the airplane.

We reviewed GE Service Bulletin (SB) CF6-80C2 S/B 72-1405, dated June 30, 2011. The SB describes procedures for inspecting and removing the nonconforming No. 3 bearing packing, and determining the effect of nonconforming packing on the HPC and LPT rotor bore cooling.

We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would require:

• A one-time inspection of the No. 3 bearing packing at the next engine shop visit, but not later than 5,500 cycles-in-service (CIS) since the last engine shop visit where the fan was removed from the core.

• Removing the No. 3 bearing packing if it is found to be nonconforming within the above specified times.

• Removing certain rotating parts if they have operated more than 5,500 CIS with the wrong packing configuration.

This proposed AD includes CF6 engine models CF6-80C2B1F1, CF6-80C2B1F2, CF6-80C2B3F, and CF6-C2B7F1 in the Applicability paragraph (c). The GE service information does not include these engine models.

We estimate that this proposed AD would affect 688 engines installed on airplanes of U.S. registry. We also estimate that it would take about 1 work-hour per engine to perform the inspection and 1 work-hour to replace the No. 3 bearing packing, if found nonconforming. The average labor rate is $85 per work-hour. Required parts would cost about $488 per engine to replace an anticipated quantity of 21 No. 3 bearing packings. Based on these figures, we estimate the total cost of this proposed AD to U.S. operators to be $70,513. GE has informed us that they may cover these costs under warranty.

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

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

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

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

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

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

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

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

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under theADDRESSESsection. Include “Docket No. FAA-2011-0946; Directorate Identifier 2011-NE-02-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, tohttp://www.regulations.gov,including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

We received a report that CFM International conducted a normal quality sampling on fan blades, P/N 338-002-114-0, from a supplier. That quality investigation isolated a production batch of 706 blades that did not conform to the engineering drawings for the fan blades. The supplier had performed a hand-polishing operation that reduced the contact surface on adjacent blades. The reduced surface contact will likely create greater contact forces on the adjacent blades during a FOD or bird strike event. The increased forces would cause the upper panel of the fan blade to be liberated following FOD or bird strike and likely result in an IFSD.

We reviewed CFM International Service Bulletin (SB) CFM56-5B S/B 72-0777, Revision 1, dated April 11, 2011. The SB describes procedures for replacing the suspect fan blades and contains an appendix that lists suspect fan blades, P/N 338-002-114-0, by blade S/N and known engine S/N.

We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would require removing from service within 5,000 flight hours (FHs) after the effective date of this proposed AD, any fan blade, P/N 338-002-114-0, that has an S/N listed in CFM International SB CFM56-5B S/B 72-0777, Revision 1, dated April 11, 2011. After the effective date of this proposed AD, it would also prohibit installing any fan blade, P/N 338-002-114-0, that has an S/N listed in Appendix A of CFM International SB CFM56-5B S/B 72-0777, Revision 1, dated April 11, 2011.

CFM International SB CFM56-5B S/B 72-0777, Revision 1, dated April 11, 2011, requires replacing suspect fan blades within 1,600 FHs on airplanes with suspected blades on both engines and within 5,000 FHs on airplanes with suspected blades on one engine. This proposed AD would require removing from service suspect blades on any engine within 5,000 FHs based on risk analysis.

We estimate that this proposed AD would affect 16 engines installed on airplanes of U.S. registry. We also estimate that it would take about 6 work-hours per engine to perform the required actions and that the average labor rate is $85 per work-hour. Required parts would cost about $47,830 per engine. Based on these figures, we estimate the total cost of this proposed AD to U.S. operators to be $773,440.

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

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

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

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

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

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

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

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

Interested persons are invited to comment on this rule by submitting such written data, views, or arguments, as they may desire. Comments that provide the factual basis supporting the views and suggestions presented are particularly helpful in developing reasoned regulatory decisions on the proposal. Comments are specifically invited on the overall regulatory, aeronautical, economic, environmental, and energy-related aspects of the proposal.

Communications should identify both docket numbers (FAA Docket No. FAA-2011-1057; Airspace Docket No. 11-AEA-21) and be submitted in triplicate to the Docket Management System (seeADDRESSESsection for address and phone number). You may also submit comments through the Internet athttp://www.regulations.gov.

Persons wishing the FAA to acknowledge receipt of their comments on this action must submit with those comments a self-addressed stamped postcard on which the following statement is made: “Comments to Docket No. FAA-2011-1057; Airspace Docket No. 11-AEA-21.” The postcard will be date/time stamped and returned to the commenter.

All communications received before the specified closing date for comments will be considered before taking action on the proposed rule. The proposal contained in this notice may be changed in light of the comments received. A report summarizing each substantive public contact with FAA personnel concerned with this rulemaking will be filed in the docket.

An electronic copy of this document may be downloaded from and comments submitted throughhttp://www.regulations.gov.Recently published rulemaking documents can also be accessed through the FAA's Web page athttp://www.faa.gov/airports_airtraffic/air_traffic/publications/airspace_amendments/.

You may review the public docket containing the proposal, any comments received, and any final disposition in person in the Dockets Office (see theADDRESSESsection for address and phone number) between 9 a.m. and 5 p.m., Monday through Friday, except Federal Holidays. An informal docket may also be examined during normal business hours at the office of the Eastern Service Center, Federal AviationAdministration, room 350, 1701 Columbia Avenue, College Park, Georgia 30337.

Persons interested in being placed on a mailing list for future NPRMs should contact the FAA's Office of Rulemaking, (202) 267-9677, to request a copy of Advisory circular No. 11-2A, Notice of Proposed Rulemaking distribution System, which describes the application procedure.

The FAA is considering an amendment to Title 14, Code of Federal Regulations (14 CFR) part 71 to amend Class E airspace extending upward from 700 feet above the surface to support new Standard Instrument Approach Procedures developed at Tri-State/Milton J Ferguson Field Airport, Huntington, WV. Airspace reconfiguration is necessary due to the decommissioning of the Huntt NDB and cancellation of the NDB approach, and for continued safety and management of IFR operations at the airport. The geographic coordinates of the airport also would be adjusted to coincide with the FAAs aeronautical database.

Class E airspace designations are published in Paragraph 6005 of FAA Order 7400.9V, dated August 9, 2011, and effective September 15, 2011, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designation listed in this document will be published subsequently in the Order.

The FAA has determined that this proposed regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. It, therefore, (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a Regulatory Evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this proposed rule, when promulgated, would not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the United States Code. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This proposed rulemaking is promulgated under the authority described in Subtitle VII, Part, A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This proposed regulation is within the scope of that authority as it would amend Class E airspace at Tri-State/Milton J Ferguson Field Airport, Huntington, WV.

In consideration of the foregoing, the Federal Aviation Administration proposes to amend 14 CFR part 71 as follows:

This document proposes to take action on the date by which farms as defined in 40 CFR part 112 must prepare or amend, and implement their Spill Prevention, Control, and Countermeasure (SPCC) Plans. We have published a direct final rule to amend that date to May 10, 2013 in the “Rules and Regulations” section of thisFederal Registerbecause we view this as a noncontroversial action and anticipate no adverse comment. We have explained our reasons for this action in the preamble to the direct final rule.

If we receive no adverse comment, we will not take further action on this proposed rule. If we receive adverse comment, we will withdraw the direct final rule and it will not take effect. We would address all public comments in any subsequent final rule based on this proposed rule.

We do not intend to institute a second comment period on this action. Any parties interested in commenting must do so at this time. For further information, please see the information provided in theADDRESSESsection of this document.

This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This table lists the types of entities that EPA is now aware could potentially be regulated by this action. Other types of entities not listed in the table could also be regulated. If you have questions regarding the applicability of this action to a particular entity, consult the person listed in the precedingFOR FURTHER INFORMATION CONTACTsection.

This proposed rule amends the date by which farms as defined in 40 CFR part 112 must prepare or amend, and implement their Spill Prevention, Control, and Countermeasure (SPCC) Plans to May 10, 2013.

On June 19, 2009 (74 FR 29136), EPA issued a final rule in theFederal Registerthat amended the dates by which facilities must prepare or amend their SPCC Plans, and implement those Plans to November 10, 2010. Then on October 14, 2010 (75 FR 63093), EPA issued a final rule in theFederal Registerwith a new compliance date of November 10, 2011, by which certain facilities must prepare or amend and implement their SPCC Plans, providing an additional year for the remaining facilities. This action further extends the compliance date to May 10, 2013 for farms as defined in 40 CFR 112.2. EPA is not extending the compliance date for any other facilities. The Agency recognizes that some facilities excluded from the extension of the compliance date may still require additional time to amend or prepare their SPCC Plans as a result of either non-availability of qualified personnel, or delays in construction or equipment delivery beyond the control and without the fault of the owner or operator. If so, the owner or operator of the facility may submit a written request for additional time to amend or prepare a SPCC Plan to the Regional Administrator in accordance with § 112.3(f).

For a complete discussion of all of the administrative requirements applicable to this action, see the direct final rule in the Rules and Regulations section of thisFederal Register.