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RFARFA

www.sba.gov/advocacy

Office of Advocacy

Implementing the President's Small Business Agenda and Executive Order 13272

May 2012

A Guide for Government Agencies

How to Comply with the Regulatory Flexibility Act

FOREWORD

Economic freedom is the foundation for individual success and prosperity. This freedom is evident in the entrepreneurial small business sector, which creates most of the new jobs and a large share of the innovations in the American economy. When government takes small businesses into consideration in developing regulations, it saves time and money and supports the growth of the nation’s most productive sector.

President Obama’s Executive Order 13563, Improving Regulation and Regulatory Review, his regulatory memoranda, and several laws passed since 2002 have strengthened the RFA and underscored the importance of considering small entity effects early in the regulatory process. Executive Order 13272, signed August 13, 2002, among other provisions, directs the Small Business Administration’s (SBA) Office of Advocacy to provide agencies with training and information on how to comply with the Regulatory Flexibility Act (RFA).

The Office of Advocacy continues to provide training to agency personnel in RFA compliance and welcomes additional opportunities to assist in new phases of training.

This compliance guide, prepared with input from regulatory agencies, is designed to be used by agency rule writers and policy analysts as a step-by-step manual for complying with the RFA. A careful review of the requirements is recommended before policy analysts begin to draft regulations, and then again at each stage of the process.

Thanks to all who contributed by reviewing and commenting on this guide. Further suggestions for improvements are welcome. For more information about the RFA, E.O.

13272, and subsequent developments, visit the Advocacy website at www.sba.gov/advocacy, or call us at (202) 205-6533.

To those charged to carry out the nation’s regulatory flexibility requirements, the Office of Advocacy offers its strong support and encouragement. You have a crucial role in keeping the nation on track for economic growth by ensuring the strength of the resilient small business sector.

Winslow Sargeant, Ph.D.

Chief Counsel for Advocacy http://www.sba.gov/advocacy ii

ACKNOWLEDGMENTS

The Office of Advocacy’s deep appreciation is extended to all reviewers of this guide, including those representing the Department of Labor, the Environmental Protection Agency, the Food and Drug Administration’s Center for Food Safety and Applied Nutrition, the Office of Management and Budget’s Office of Information and Regulatory Affairs, the House Committee on Small Business, and Advocacy staff.

As a tool for effective implementation of the Regulatory Flexibility Act, the guide helps create fairer and more effective regulation for all small entities, especially small businesses.

iii

CONTENTS

Foreword .............................................................................................................................. i

Contents ............................................................................................................................. iii

Introduction: The RFA and related law

Chapter 1 Where do we begin? First steps of RFA analysis

The RFA decision process Does the RFA apply?

RFA exemptions RFA now applies to certain IRS interpretative rules

The RFA threshold analysis: Can we certify?

Organizing the threshold report “Factual basis” requirement for certification What is the definition of a small entity?

Changing a size standard Assessing the impact on small entities Which segment of the economy or industry will be regulated?

How to categorize small entity sectors Determination of “significant impact” Determination of “substantial number” Direct versus indirect impact Adverse versus beneficial impact

What adequate and inadequate certifications look like An example of an adequate certification Examples of inadequate certifications

Certification checklist

Chapter 2 Preparing a proposed rule: The initial regulatory flexibility analysis

The RFA decision process Issues to be addressed in the analysis Elements of an IRFA

Reasons action is being considered Objectives of the proposed rule Description and estimate of the number of small entities Estimating compliance requirements Significant alternatives considered Duplicative, overlapping, and conflicting rules

Using other analyses to satisfy the IRFA requirements When an IRFA may be waived or delayed What an IRFA should look like: A real-life example

Chapter 3 Preparing a final rule: The final regulatory flexibility analysis

The RFA decision process iv

Issues to be addressed in the analysis Additional questions to be addressed in a FRFA

Have all significant issues been assessed?

Has the number of small entities been estimated?

Has the adverse economic impact on small entities been minimized?

Have all significant alternatives been reviewed?

Permissible delays in publication; provision for lapse of final rule What a FRFA should look like: A real-life example

Chapter 4 SBREFA panels

Who must hold SBREFA panels?

How is the decision to hold a SBREFA panel made?

How does a SBREFA panel work?

Suggested SBREFA panel timeline

Chapter 5 RFA litigation: What the courts have said

Where do we begin? First steps of RFA rule analysis Does the RFA apply?

What qualifies as a rulemaking under the APA?

Exemptions under the APA

The certification statement The decision process Size standards The agency must conduct an adequate analysis before certifying Direct versus indirect impact on small entities

The initial regulatory flexibility analysis The final regulatory flexibility analysis

General content Is a FRFA always required?

Considering alternatives to the final rule Analysis of the economic impact Public comments

Judicial review

Chapter 6 Section 610 review of existing rules

RFA section 610 review Review of rules that were originally certified Scope of the review Timing of the review Outreach to regulated small entities Using other agency reviews to satisfy section 610

Examples of successful retrospective rule reviews Section 610 assistance from the Office of Advocacy

Chapter 7 Additional RFA and SBREFA requirements

Semi-annual regulatory agenda v

Small entity compliance guides Informal compliance assistance Regulatory enforcement fairness Penalty reduction policies Congressional review

Conclusion

Appendix A The Regulatory Flexibility Act Appendix B RFA recent developments Appendix C Small business by the numbers Appendix D Small business statistics for regulatory analysis Appendix E Executive Order 12866 Appendix F Executive Order 13272 Appendix G Executive Order 13563 and Memoranda Appendix H Memorandum on cumulative impacts Appendix I Executive Order 13579 Appendix J Example of a successful IRFA Appendix K Example of a successful FRFA Appendix L Abbreviations used in this guide Appendix M Office of Advocacy staff

Index

Introduction: The RFA and related law

INTRODUCTION: THE RFA AND RELATED LAW

In June 1976, Congress created the Office of Advocacy, headed by a Chief Counsel appointed by the President from the private sector and confirmed by the Senate. Congress concluded that small businesses needed a voice in the councils of government—a voice that was both independent and credible. Congress specifically required the Office of Advocacy to measure the costs and impacts of regulation on small business. The Chief Counsel’s mandate, therefore, is to be an independent voice for small business in policy deliberations—a unique mission in the federal government.

The Regulatory Flexibility Act (RFA),1 enacted in September 1980, requires agencies to consider the impact of their regulatory proposals on small entities, analyze effective alternatives that minimize small entity impacts, and make their analyses available for public comment. The RFA applies to a wide range of small entities, including small businesses, not-for-profit organizations, and small governmental jurisdictions.

The RFA does not seek preferential treatment for small entities, require agencies to adopt regulations that impose the least burden on small entities, or mandate exemptions for small entities. Rather, it requires agencies to examine public policy issues using an analytical process that identifies, among other things, barriers to small business competitiveness and seeks a level playing field for small entities, not an unfair advantage.

The size of the business, government unit, or not-for-profit organization being regulated has a bearing on its ability to comply with federal regulations. For example, the costs of complying with a particular regulation—measured in staff time, recordkeeping, outside expertise, and other direct compliance costs—might be roughly the same for a company with sales of $10 million as for a company with sales of $1 million. In a larger business, however, the costs of compliance can be spread over a larger volume of production. For small entities, a burdensome regulation could affect the ability to set competitive prices, to devise innovations, or even to make a profit.2 In some cases, a small business may be unable to stay in business because of the cost of a regulation. Simply stated, fixed costs have a greater impact on small entities because small entities have fewer options for recovering them. Without the necessary facts, it is possible for an agency to cause serious unintended or unforeseen adverse impacts on small businesses.

In essence, the RFA asks agencies to be aware of the economic structure of the entities they regulate and the effect their regulations may have on small entities. To this end, the RFA requires agencies to analyze the economic impact of proposed regulations when there is likely to be a significant economic impact on a substantial number of small entities, and to consider regulatory alternatives that will achieve the agency’s goal while minimizing the burden on small entities. The concept underlying this analytical

1 Regulatory Flexibility Act, Pub. L. No. 96-354, 94 Stat. 1164 (codified at 5 U.S.C. § 601).

2 See Todd A. Morrison, Economies of Scale in Regulatory Compliance: Evidence of the Differential Impacts of Regulation by Firm Size, report no. PB85-178861, prepared by Jack Faucett Associates, Inc., for the U.S. Small Business Administration, Office of Advocacy (Springfield, Va.: National Technical Information Service, 1985).

2 RFA guide for government agencies requirement is that agencies will revise their decisionmaking processes to take account of small entity concerns in the same manner that agency decisionmaking processes were modified subsequent to the enactment of the National Environmental Policy Act (NEPA).3 The RFA then acts as a statutorily mandated analytical tool to further assist agencies in meeting the rational rulemaking standard set forth in the Administrative Procedure Act (APA), just as NEPA was intended to rationalize decisions concerning major federal actions that would affect the environment.

The Small Business Regulatory Enforcement Fairness Act (SBREFA), enacted in March 1996,4 amended the RFA and provided additional tools to aid small business in the fight for regulatory fairness. The amendments made by SBREFA include:

• Judicial review of agency compliance with some of the RFA’s provisions.

• Requirements for more detailed and substantive regulatory flexibility analyses.

• Expanded participation by small entities in the development of rules by the

Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA).

• Requirements that agencies prepare and publish guides to assist small entities in complying with final rules.

Subsequently, several laws have been passed amending and strengthening SBREFA and the RFA:

• The Small Business and Work Opportunity Act of 2007 amended SBREFA to strengthen the requirement that agencies prepare compliance guides for any rule for which they must prepare a final regulatory flexibility analysis. Agencies are required to publish the guides not later than the effective date of the requirements, post them to websites, distribute them to industry contacts, and report annually to Congress.5

• The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Consumer Financial Protection Bureau (CFPB) and required the CFPB to comply with the RFA Section 609 panel process, making it the third such agency, along with the Environmental Protection Agency and the Occupational Safety and Health Administration.6 In addition to the regular requirements of the initial regulatory flexibility analysis (IRFA) found in 5 USC 603, a CFPB IRFA must include “a description of (A) any projected increase in the cost of credit for small entities; (B) any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any increase in the cost of credit for small entities; and (C) advice and

3 See Associated Fisheries of Maine v. Daley, 127 F.3d 104, 114 (1st Cir. 1997) noting parallels between NEPA and the RFA.

4 Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121, 110 Stat. 857 (codified at 5 U.S.C. § 601 et seq.).

5 Pub. Law 110-28 (May 27, 2007), Title 6, subtitle B, § 7005.

6 Pub. Law 111-203 (July 21, 2010).

Introduction: The RFA and related law 3 recommendations of representatives of small entities relating to issues described in subparagraphs (A) and (B) and subsection (b).”7 When the CFPB produces a final regulatory flexibility analysis, it must include “a description of the steps the agency has taken to minimize any additional cost of credit for small entities.”

• The Small Business Jobs Act of 2010 amended several requirements in the final regulatory flexibility analysis (FRFA) section of the RFA.8 (1) It struck the word “succinct” from the requirement for “a succinct statement of the need for, and objectives of, the rule.”9 (2) It replaced the word “summary” with the word “statement” twice in the requirement for “a summary of the significant issues raised by the public comments…, a summary of the assessment of the agency of such issues…,”10 and (3) it codified a requirement of Executive Order 1327211 by adding a paragraph requiring the FRFA to include “the response of the agency to any comments filed by the Chief Counsel for Advocacy of the Small Business Administration in response to the proposed rule, and a detailed statement of any change made to the proposed rule in the final rule as a result of the comments.”12

In addition to legislation strengthening the RFA, presidents have issued a number of executive orders laying out additional requirements.

• Executive Order 13272, “Proper Consideration of Small Entities in Agency Rulemaking,” was signed August 13, 2002, and requires federal agencies to publish how they will comply with the statutory mandates of the RFA.13 The purpose of E.O. 13272 is to ensure that agencies work closely with Advocacy to address small business issues as early as possible in the regulatory process, particularly as they relate to disproportionate regulatory burden. The order sets out a series of responsibilities for both regulating agencies and the Office of Advocacy.

Agencies will establish policies on how to measure their impact on small entities and will work with Advocacy to establish those procedures.

The Office of Advocacy is instructed to train agencies on how to properly account for small entity impact when agencies draft regulations and to continue to work with agencies.

Agencies are to submit proposed rules with significant small entity effects to the Office of Advocacy prior to publication and are required to consider the Office of Advocacy’s comments on the rule.14

7 Title X, § 1100G(b) of the Dodd-Frank Act amending 5 U.S.C. § 603(d)(1)-(2), §604(a)(6) and § 609(d)(2). See Appendix A.

8 Pub. Law 111-240 (September 27, 2010).

9 Id., § 1601(1), amending 5 U.S.C. § 604(a)(1).

10 Id., § 1601(2), amending 5 U.S.C. § 604(a)(2).

11 See the full executive order in Appendix F.

12 Id., § 1601(3), amending 5 U.S.C. § 604(a)(3).

13 Exec. Order No. 13,272, 67 Fed. Reg. 53,461 (Aug. 13, 2002).

14 The Small Business Jobs Act, P.L.111-240, codified this requirement of E.O. 13272 in 5 U.S.C. § 604(a)(3). See earlier discussion in the Introduction to this guide.

4 RFA guide for government agencies

The Office of Advocacy is required to report annually to the Office of Management and Budget (OMB) on whether agencies are complying with this executive order.

• Executive Orders 13563 and 12866 lay out additional analytical requirements for agencies when promulgating rules pursuant to delegations from Congress and the overarching mandate of the APA.15 Both of these executive orders establish regulatory goals that can help agencies to which the executive orders apply16 understand the importance of conducting regulatory flexibility analyses. As Executive Order 13563 states:

(b) This order is supplemental to and reaffirms the principles, structures, and definitions governing contemporary regulatory review that were established in Executive Order 1286617 of September 30, 1993. As stated in that Executive Order and to the extent permitted by law, each agency must, among other things: (1) propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify); (2) tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations; (3) select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity); (4) to the extent feasible, specify performance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt;

and (5) identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.18

In addition, Executive Order 12866 specifies 12 principles agencies should use when developing regulations. Of the 12, number 11 has particular relevance to the analysis of small business regulatory alternatives under the RFA:

Concurrent with the issuance of E.O. 13563, President Obama also issued a memorandum titled “Regulatory Flexibility, Small Business, and Job Creation” on January 18, 2011. In the memorandum, the president reaffirmed E.O. 12866 and reiterated the RFA’s provisions for providing regulatory flexibility. The

15 Exec. Order No. 13,563 of January 18, 2011, reaffirms Exec. Order No. 12,866. Two other executive orders, 13,258 and 13,422, that had previously amended Exec. Order No. 12,866, were revoked by Exec.

Order No. 13,497 of January 30, 2009.

16 Exec. Order No. 12,866 does not apply to independent regulatory commissions such as the Federal Election Commission, the Federal Communications Commission, and the Securities and Exchange Commission.

17 Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993).

18 Exec. Order No. 13,563, 76 Fed. Reg. 3821 (January 21, 2011).

Introduction: The RFA and related law 5 memorandum directs that “whenever an executive agency chooses, for reasons other than legal limitations, not to provide such flexibility in a proposed or final rule that is likely to have a significant economic impact on a substantial number of small entities, it should explicitly justify its decision not to do so in the explanation that accompanies that proposed or final rule.”19

• Executive Order 13579, “Regulation and Independent Regulatory Agencies,” signed by President Obama on July 11, 2011, reaffirms the directives of Executive Order 13563 and says that “to the extent permitted by law, independent agencies should comply with these provisions as well.”20

All of these executive orders reinforce executive intent that agencies give serious attention to impacts on small entities and develop a comprehensive set of regulatory alternatives to reduce the regulatory burden on small entities.

The Office of Advocacy’s compliance guide should be utilized by regulatory agencies as a tool for following the requirements of the Regulatory Flexibility Act and related law and executive orders. This revised guide is the product of Advocacy’s decades of experience with the RFA and reflects the spirit of interagency cooperation, as well as the vital importance of small business to the economy. Advocacy hopes the guide will be a useful tool and welcomes comments on ways to improve its usefulness to regulatory agencies.

The guide includes how-to information on determining when the RFA applies to a proposed regulation, performing initial and final regulatory flexibility analyses, and meeting other RFA requirements, including periodic review of existing rules and small business compliance guides. Also included are a section on litigation so that agencies may learn how courts have ruled on RFA compliance and examples of actual agency regulatory analyses. For more assistance, contact the Office of Advocacy at (202) 205- 6533, or one of the Advocacy contacts listed in Appendix M.

19 This language mirrors the RFA language at 5 U.S.C. § 604 (a)(6) for final rules.

20 Exec. Order No. 13,579 § 1(c).

Chapter 1: The first steps of RFA analysis 7

CHAPTER 1 WHERE DO WE BEGIN? FIRST STEPS OF RFA

ANALYSIS

We begin by briefly examining the general purpose of the Regulatory Flexibility Act and its overall requirements. The Regulatory Flexibility Act requires agencies to consider the impact of their rules on small entities.21 When the proposed regulation will impose a significant economic impact on a substantial number of small entities, the agency must evaluate alternatives that would accomplish the objectives of the rule without unduly burdening small entities. Inherent in the RFA is a desire to remove barriers to competition and encourage agencies to consider ways of tailoring regulations to the size of the regulated entities.22

The RFA, like the National Environmental Policy Act, imposes analytical requirements on federal agencies. Both statutes require disclosure of effects and mechanisms to reduce adverse consequences and improve beneficial consequences.23 The RFA does not require that agencies necessarily minimize a rule’s impact on small entities if there are significant legal, policy, factual, or other reasons for not minimizing the impact. The RFA requires only that agencies determine, to the extent practicable, the rule’s economic impact on small entities and explore regulatory alternatives for reducing any significant economic impact on a substantial number of such entities. Once that process is finished, agencies must explain the reasons for their ultimate regulatory choices.

The goal of Congress in creating the RFA was to change the regulatory culture in agencies and mandate that they consider regulatory alternatives that still achieve statutory purposes, while minimizing the impacts on small entities. Regulatory flexibility analyses built into the regulatory development process at the earliest stages will help agency decisionmakers achieve regulatory goals with realistic, cost-effective, and less burdensome regulations.

The following chart shows an overall picture of the RFA decisionmaking process. This chapter focuses on the first steps, highlighted in the chart.

21 See this chapter’s section titled “What is the definition of a small entity?”

22 See generally, FINDINGS AND PURPOSES, SEC. 2(a)–(b).

23 Nothing in the RFA states that an economic impact must be adverse prior to performing an analysis.

8 RFA guide for government agencies

The RFA decision process

NO

YES

DEFINE THE PROBLEM

AND DESCRIBE THE

REGULATED ENTITIES

BY SIZE AND NUMBER

ESTIMATE ECONOMIC

IMPACTS BY SIZE

CATEGORY

DETERMINE WHICH SIZE

CATEGORIES INCUR

SIGNIFICANT IMPACTS

DO A SUBSTANTIAL NUMBER OF

ENTITIES IN ANY SIZE

CATEGORY INCUR SIGNIFICANT

IMPACTS?

CHAPTER 2—BEGIN

INITIAL REGULATORY

FLEXIBILITY

ANALYSIS

CERTIFY RULE AS

REQUIRING NO FURTHER

RFA ANALYSIS

DECISIONMAKERS OR

REG. NEGOTIATING

PANELS

DISCUSS

REG. ALTERNATIVES

DISTRIBUTE A DRAFT

INITIAL REGULATORY

FLEXIBILITY ANALYSIS

SELECTION OF A

REGULATORY

PROPOSAL

COMPLETE INITIAL

REGULATORY

FLEXIBILITY ANALYSIS

PUBLISH PROPOSAL IN

THE FEDERAL

REGISTER

EXAMINE PUBLIC

COMMENTS

CHAPTER 3—PREPARE

FINAL REGULATORY

FLEXIBILITY ANALYSIS

MAKE FINAL RULE

DECISIONS

PUBLISH FINAL RULE

IN THE FEDERAL

REGISTER

Chapter 1: The first steps of RFA analysis 9

Does the RFA apply?

One of the first decisions to make is whether the Regulatory Flexibility Act applies to the particular regulation. The RFA applies to any rule subject to notice and comment rulemaking under section 553(b) of the Administrative Procedure Act (APA)24 or any other law. This includes any rule of general applicability governing federal grants to state and local governments, for which agency procedures provide opportunity for notice and comment. For instance, some agencies, such as the Rural Utilities Service, have their own administrative rules that require notice and comment even though the agency’s rules may be exempt from the APA notice and comment requirement.25

RFA exemptions

Rules that are exempt from APA notice and comment requirements are also exempt from the RFA requirements when any of the following is involved: (1) a military or foreign affairs function of the United States, or (2) a matter relating to agency management or personnel or to public property, loans, grants, benefits, or contracts.26 In addition, except where notice or hearing is required by statute, the APA does not apply (1) to interpretative rules,27 general statements of policy, or rules of agency organization, procedure or practice; or (2) when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.28 Under any of the circumstances described above, the RFA would not apply.

Interpretative rules generally interpret the intent expressed by Congress. The easiest type of interpretative rule to recognize is one in which an agency does not insert its own judgments in implementing a rule, and simply regurgitates statutory language. One legal treatise on the subject says that interpretative rules are any rules that an agency issues without exercising delegated legislative power to make law through rules.29 The treatise goes on to state that the difference between legislative and interpretative rulemaking is the weight courts give the agency decisions on review.30

In the case of legislative rules, agencies are given the authority to establish requirements not specifically mentioned in the authorizing statute that may be the basis for a rule. An example of this would be setting an ambient air quality standard or regulating in the public interest as set out in the Communications Act of 1934. See Whitman v. American

24 5 U.S.C § 553(b); see also § 601(2).

25 The “other law” requirement includes situations where the agency binds itself by rule to act through rulemaking rather than by a procedure that does not require notice and comment.

26 Id .at § 553(a). There are statutes, such as the Competition in Contracting Act, the Federal Acquisition Streamlining Act, and the Federal Acquisition Reform Act, that mandate that changes to contracting rules be issued pursuant to notice and comment.

27 The exception is certain Internal Revenue Service interpretative rules. See the discussion below.

28 Id. at § 553(b)(A).

29 K. Davis, Administrative Law Treatise, § 7:8 (1958).

30 Davis at §§ 7:8-7:13.

10 RFA guide for government agencies

Trucking Associations for a discussion of what constitutes a standard governing delegation of legislative authority by Congress to the executive branch.31

The RFA presents its own exemptions as well. Section 601(2) states that the RFA does not apply to rules of particular applicability relating to rates, wages, corporate or financial structures, or reorganizations thereof, prices, facilities, appliances, services or allowances therefor, or to valuations, costs or accounting, or practices relating to such rates, wages, structures, appliances, services, or allowances.32 The RFA’s definition of a rule is less inclusive than the definition of a rule under the Administrative Procedure Act, which defines a “rule” as “an agency statement of general or particular applicability.”

The original draft of the APA limited the definition of rules to “statements of general applicability” or “having a general application to members of a broadly identifiable class.”33 This is contrasted with statements of “particular applicability” or applying “only to specific individuals or situations” or “named parties.”34 Therefore, the RFA applies to rules affecting the general public, as opposed to those that affect specific individuals.

RFA now applies to certain IRS interpretative rules

The Small Business Regulatory Enforcement Fairness Act amended the RFA to bring certain interpretative rulemakings of the Internal Revenue Service (IRS) within the scope of the RFA. The law now applies to those IRS rules published in the Federal Register (that would normally be exempt from the RFA as interpretative rules) that impose a “collection of information” requirement on small entities.35 Congress took care to define the term “collection of information” to be identical to the term used in the Paperwork Reduction Act, which means that a collection of information includes any reporting or recordkeeping requirement for more than nine people.36

31 American Trucking Ass’ns v. EPA, 175 F.3d 1027, 1044 (D.C. Cir. 1999); Whitman v. American Trucking Ass’ns, 531 I/S/ 457 (2001).

32 5 U.S.C. § 601(2).

33 Bernard Schwartz, Administrative Law: A Casebook, at 255-262 (2d ed. 1984).

34 Id.

35 Id. at § 603(a).

36 Id. at § 601(7).

(7) The term “collection of information”

(A) means the obtaining, causing to be obtained, soliciting, or requiring the disclosure to third parties or the public, of facts or opinions by or for an agency, regardless of form or format, calling for either—

(i) answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, 10 or more persons, other than agencies, instrumentalities, or employees of the United States; or

(ii) answers to questions posed to agencies, instrumentalities, or employees of the United States which are to be used for general statistical purposes; and

(B) shall not include a collection of information described under section 3518(c)(1) of title 44, United States Code. (8) The term "record-keeping requirement" means a requirement imposed by an agency on persons to maintain specified records.

Chapter 1: The first steps of RFA analysis 11

The RFA threshold analysis: Can we certify?

After an agency begins regulatory development and determines that the RFA applies, it must decide whether to conduct a full regulatory flexibility analysis or to certify that the proposed rule will not “have a significant economic impact on a substantial number of small entities.”37 The record an agency builds to support a decision to certify is subject to judicial review.38

In order to certify a rule under the RFA, an agency should be able to answer the following types of questions:

• Which small entities will be affected?

• Have adequate economic data been obtained?

• What are the economic implications/impacts of the proposal or do the data reveal a significant economic impact on a substantial number of small entities?

If, after conducting an analysis for a proposed or final rule, an agency determines that a rule will not have a significant economic impact on a substantial number of small entities, section 605(b) provides that the head of the agency may so certify. The certification must include a statement providing the factual basis for this determination, and the certification shall be published in the Federal Register at the time the proposed or final rule is published for public comment. The agency is also required to provide such certification and statement to the SBA’s Chief Counsel for Advocacy.39 A certification must include, at a minimum, a description of the affected entities and the impacts that clearly justify the “no impact” certification. The agency’s reasoning and assumptions underlying its certification should be explicit in order to obtain meaningful public comment and thus receive information that would be used to re-evaluate the certification.

Clearly, an agency should identify the scope of the problem and the impact of the solution on affected entities before moving forward with a regulatory proposal. At times, despite a good-faith effort on the part of an agency to obtain data, an agency may still be uncertain about whether to certify. In those instances, an advance notice of proposed rulemaking (ANPRM) may be necessary to solicit data. As a final recourse, the agency should err on the side of caution and perform an initial regulatory flexibility analysis (IRFA) with the available data and information, and solicit comments from small entities regarding impact.40 Then, if appropriate, the agency can certify the final rule. If an

37 5 U.S.C. § 605(b). The decision to certify a rule parallels the finding of no significant impact under NEPA. As with a NEPA determination, the decision to certify, because it is subject to judicial review, should be based on a sound threshold analysis similar to the environmental assessment mandated in Council on Environmental Quality regulations to support a finding of no significant impact or laying the groundwork for a full environmental impact statement.

38 Id. at § 611(a).

39 There are circumstances where it may be appropriate to publish an IRFA for the proposed rule, and based on comments received, publish a certification for the first time in the final rule. See Chapter 3 of this guide for a detailed discussion of final regulatory flexibility analyses.

40 5 U.S.C. § 605(b). The Office of Advocacy would expect this situation to be rare because agency efforts to develop the rule should include a reasonable effort to explore all the effects of the rule, including the

12 RFA guide for government agencies agency lacks sufficient information to make a certification decision, the agency should engage in reasonable outreach efforts.41

Organizing the threshold report

Certification analysis discussed in this chapter does not require the depth of analysis necessary in an initial regulatory flexibility analysis,42 as discussed in Chapter 2 of this guide. Nevertheless, this “threshold” analysis can offer important insights into the nature of regulatory impacts. Although a study of alternatives is not required at this stage, it often leads to the skeleton of regulatory alternatives that can reduce or eliminate any disproportionate impacts on small entities. For this reason, Advocacy encourages certification analysis as early in the rule development process as possible.

Agency certifications of final rules are subject to judicial review43 and courts evaluate them by determining whether the statement of basis and purpose accompanying the rule identifies a “factual basis” to support the certification.44 A helpful threshold report will directly support the elements that must appear in the Federal Register Notice of Proposed Rulemaking preamble. The Office of Advocacy believes the threshold analysis should discuss the following items:45

1) Description of small entities affected A brief economic and technical statement on the regulated community, describing some of the following types of information:46

a) The diversity in size of regulated entities

b) Revenues in each size grouping

c) Profitability in each size grouping

2) Economic impacts on small entities A fair, first estimate of expected cost impacts, or a reasonable basis for assuming costs would be de minimis or insignificant within all economic or size groupings of the “small” regulated community

The rationale for the certification decision, based on the analysis presented

3) Significant economic impact criteria The criteria used to examine whether first-estimate costs are significant

4) Substantial number criteria effects on small entities. For more information on preparing an initial regulatory flexibility analysis, see Chapter 2.

41 Id. at § 609. Outreach is important to obtain information required by the RFA, to obtain relevant input from affected small entities. See Chapters 4 and 7 for a discussion of agency outreach to small entities.

42 An initial regulatory flexibility analysis (IRFA) is a document containing the agency’s data and analysis regarding the potential impact of the proposed rule. A detailed description of the requirements of an IRFA can be found in Chapter 2 of this guide.

43 5 U.S.C. § 611.

44 Id. at § 605(b).

45 For additional detail, see the certification checklist at the end of this chapter.

46 When an agency does not have quantitative data to support its certification, the agency should explain why such data are not available and request comments.

Chapter 1: The first steps of RFA analysis 13

The criteria used to examine whether the entities experiencing significant impacts constitute a substantial number of entities in any of the regulated size groupings

5) Description of assumptions and uncertainties The sources of data used in the economic and technical analysis47 The degree of uncertainty in the cost estimates, when uncertainty is large

6) Certification statement

“Factual basis” requirement for certification

What is a “factual basis”? The Office of Advocacy interprets the “factual basis” requirement to mean that, at a minimum, a certification should contain a description of the number of affected entities and the size of the economic impacts and why either the number of entities or the size of the impacts justifies the certification.

The agency’s reasoning and assumptions underlying its certification should be explicit in order to elicit public comment. Certifications of “no significant economic impact on a substantial number of small entities” have major legal implications for agencies.

Consequently, certifications that simply state that the agency has found that the proposed or final rule will not have a significant economic impact on a substantial number of small entities are not sufficient under section 605(b).

The “more than just a few” standard for determining if a rule will have a significant economic impact on a “substantial number of small entities” is a rigorous test for agencies to follow. However, the Office of Advocacy encourages a conservative approach.48 In other words, if an agency has set its standard for determining “substantial number” too high, the certification may give rise to court challenges that could have been avoidable.49

Prior to the enactment of the SBREFA amendments in 1996, the RFA required only that a certification be supported by a “succinct statement explaining the reasons for the

47 Section 607 of the RFA directs agencies to provide a “quantifiable or numerical description of the effects of the proposed rule or alternatives to the proposed rule” and allows a qualitative approach if “quantification is not practical or reliable.” Thus, agencies are expected to make reasonable efforts to acquire quantitative or other information to support analysis of the rules under sections 603 and 604 of the RFA. Such a standard is not required for section 605 certifications, but some agencies use section 607 as a model for preparing certifications. With regard to certification analyses, EPA advises its rulewriters that “where the information necessary to conduct a quantitative analysis is not reasonably available, it may be appropriate to certify the rule based on the qualitative assessment alone.” Regulatory Management Division, EPA Office of Policy, EPA’s Action Development Process: Final Guidance for EPA Rulewriters:

Regulatory Flexibility Act, as amended by the Small Business Regulatory Enforcement Fairness Act (November 2006), p. 20.

48 Five small firms in an industry with more than 1,000 small firms is not likely to be interpreted as a “substantial number”; on the other hand, the same five small firms in an industry with only 20 firms would be a substantial number. See the discussion of the definitions of “significant” and “substantial” later in this chapter.

49 See Chapter 5 of this guide for information on what the courts have held in these types of cases.

14 RFA guide for government agencies certification,”50 and since such statements were not subject to judicial review, even as part of the record on review, agencies could avoid substantive explanations by using boilerplate certifications. The amended version of the RFA now requires that certifications be supported by a “statement of factual basis.” In amending the RFA, Congress intended that agencies should do more than provide boilerplate and unsubstantiated statements to support their RFA certifications. Courts will overturn an agency’s final certification if it is not adequate.51

What is the definition of a small entity?

The definition of “small entity” is important because it is the starting point for determining the degree of impact a regulation will have on small entities. Three types of small entities are defined in the RFA: 52

Small business. Section 601(3) of the RFA defines a “small business” as having the same meaning as “small business concern” under section 3 of the Small Business Act.

This includes any firm that is “independently owned and operated” and is “not dominant in its field of operation.”53 The Small Business Administration (SBA) has developed size standards to carry out the purposes of the Small Business Act and those size standards can be found in 13 C.F.R., section 121.201. The Small Business Act prohibits an agency from adopting a different definition of small business when promulgating regulations to carry out a delegation of authority from Congress unless the agency follows the procedures set forth in SBA’s regulations.54 In addition, an agency may feel that the classification used by the Administrator for a particular sector is inappropriate in doing the analysis required by the RFA. The agency is then authorized to use a different definition, solely for purposes of complying with the RFA, after consultation with the Chief Counsel. That consultation does not obviate the need for the agency to comply with section 3 of the Small Business Act should the agency be interested in promulgating a regulation that utilizes a different definition of small business than that developed by the Administrator.55

Small organization. Section 601(4) defines a small organization as any not-for-profit enterprise that is independently owned and operated and not dominant in its field (for example, private hospitals and educational institutions). Agencies may develop one or more alternative definitions of “small organization” for purposes of this chapter, provided that they: (1) give an opportunity for public comment and (2) publish the final definition in the Federal Register. However, an agency that decides a different definition is appropriate for purposes of complying with the RFA is required to follow the procedures set forth in section 601(4).

50 See Lehigh Valley Farmers, Inc., v. Block, 640 F. Supp. (E.D. Pa. 1986), aff’d on other grounds, 828 F.2d.

51 See North Carolina Fisheries Association v. Daley, 27 F. Supp. 2d 650 (E.D. Va. 1998).

52 Appendix D lists data sources that may be helpful in drawing distinctions between large and small entities.

53 15 U.S.C. § 632.

54 13 C.F.R. § 121.902(b).

55 Northwest Mining Ass’n v. Babbitt, 5 F. Supp. 2d 9 (D.D.C. 1998).

Chapter 1: The first steps of RFA analysis 15

Small governmental jurisdiction. Section 601(5) defines small governmental jurisdictions as governments of cities, counties, towns, townships, villages, school districts, or special districts with a population of less than 50,000. Agencies may develop one or more alternative definitions for this term provided that they: (1) give opportunity for public comment, (2) base definitions on factors such as low population density and limited revenues, and (3) publish final definitions in the Federal Register. The alternative definition developed under this section applies only to the agency’s compliance with the RFA. The agency may develop different size standards for small governmental jurisdictions in the development of its regulations. Any agency size standard determination that differs from the SBA’s size standard is subject to judicial review.56

Changing a size standard

It is important to draw a distinction when it comes to determining appropriate size standards. If an agency chooses to change a size standard after a determination that SBA’s size standard is inadequate, the agency must either consult with the Office of Advocacy or seek approval of SBA’s Administrator, depending on the circumstances.

For RFA analysis purposes, if an agency wants to use a different size standard, the agency can do so only after consultation with the Office of Advocacy and after an opportunity for public comment. In addition, that new size standard must be published in the Federal Register.

On the other hand, if an agency seeks to change the definition of a small business for rulemaking purposes, that is, for purposes of determining how to apply a regulation to a business of a certain size, the agency must seek approval from the SBA’s Administrator.57

Assessing the impact on small entities

Determining a rule’s impact on small entities is an important part of the rulemaking process. The RFA requires agencies to conduct sufficient analyses to measure and consider the regulatory impacts of the rule to determine whether there will be a significant economic impact on a substantial number of small entities. No single definition can apply to all rules, given the dynamics of the economy and changes that are constantly occurring in the structure of small-entity sectors.

Every rule is different. The level, scope, and complexity of analysis may vary significantly depending on the characteristics and composition of the industry or small-

56 5 U.S.C. § 611(a); see also Chapter 5 of this guide for a discussion of how the courts have handled this issue.

57 Section 3(a)(2)(C)(i)-(ii) of the Small Business Act and SBA’s regulations found in 13 CFR 121.902(b) essentially outline the information an agency needs to submit in order for SBA’s Administrator to approve a new size standard, as well as when in the rulemaking process an agency needs to obtain that approval.

16 RFA guide for government agencies entity sectors to be regulated. This is why it is important that agencies make every effort to conduct a sufficient and meaningful analysis when promulgating rules.