Regulatory Flexibility Act
Clarification of Key Terms Still Needed Gao ID: GAO-02-491T March 6, 2002The Regulatory Flexibility Act of 1980 (RFA) requires agencies to prepare an initial and a final regulatory flexibility analysis. The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) seeks to strengthen RFA protections for small entities, and some of the act's requirements are built on "significant impact." GAO has reviewed the implementation of RFA and SBREFA several times in recent years, with topics ranging from specific provisions in each statute to the overall implementation of RFA. Although both of these reforms have clearly affected how federal agencies regulate, GAO believes that their full promise has not been realized, and key questions about RFA remain unanswered. These questions lie at the heart of RFA and SBREFA, and their answers can have a substantive effect on the amount of regulatory relief provided through those statutes. Because Congress did not answer these questions when the statutes were enacted, agencies have had to develop their own answers, and those answers differ.
GAO-02-491T, Regulatory Flexibility Act: Clarification of Key Terms Still Needed
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United States General Accounting Office:
GAO:
Testimony:
Before the Committee on Small Business, House of Representatives:
For Release on Delivery:
Expected at 10 a.m. EDT:
Wednesday, March 6, 2002:
Regulatory Flexibility Act:
Clarification of Key Terms Still Needed:
Statement of Victor Rezendes:
Managing Director:
Strategic Issues Team:
GAO-02-491T:
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the implementation of the
Regulatory Flexibility Act of 1980 (RFA), as amended, and the Small
Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).
[Footnote 1] As you requested, I will discuss our work on the
implementation of these two statutes in recent years.
The RFA requires federal agencies to examine the impact of their
proposed and final rules on "small entities" (small businesses, small
governmental jurisdictions, and small organizations) and to solicit
the ideas and comments of such entities for this purpose.
Specifically, whenever agencies are required to publish a notice of
proposed rulemaking, the RFA requires agencies to prepare an initial
and a final regulatory flexibility analysis. However, the act also
states that those analytical requirements do not apply if the head of
the agency certifies that the rule will not have a "significant
economic impact on a substantial number of small entities," or what I
will”for the sake of brevity”term a "significant impact." SBREFA was
enacted to strengthen the RFA's protections for small entities, and
some of the act's requirements are built on this "significant impact"
determination. For example, one provision of SBREFA requires that
before publishing a proposed rule that may have a significant impact,
the Environmental Protection Agency (EPA) and the Occupational Safety
and Health Administration must convene a small business advocacy
review panel for the draft rule, and collect the advice and
recommendations of representatives of affected small entities about
the potential impact of the draft rule.[Footnote 2]
We have reviewed the implementation of the RFA and SBREFA several
times during recent years, with topics ranging from specific
provisions in each statute to the overall implementation of the RFA.
Although both of these reform initiatives have clearly affected how
federal agencies regulate, we believe that their full promise has not
been realized. To achieve that promise, Congress may need to clarify
what it expects the agencies to do with regard to the statutes'
requirements. In particular, Congress may need to clearly delineate”or
have some other organization delineate”what is meant by the terms
"significant economic impact" and "substantial number of small
entities." The RFA does not define what Congress meant by these terms
and does not give any entity the authority or responsibility to define
them governmentwide. As a result, agencies have had to construct their
own definitions, and those definitions vary. Over the past decade, we
have recommended several times that Congress provide greater clarity
with regard to these terms, but to date Congress has not acted on our
recommendations.[Footnote 3]
The questions that remain unanswered are numerous and varied. For
example, does Congress believe that the economic impact of a rule
should be measured in terms of compliance costs as a percentage of
businesses' annual revenues or the percentage of work hours available
to the firms? If so, is 3 percent (or 1 percent) of revenues or work
hours an appropriate definition of "significant?" Should agencies take
into account the cumulative impact of their rules on small entities,
even within a particular program area? Should agencies count the
impact of the underlying statutes when determining whether their rules
have a significant impact? What should be considered a "rule" for
purposes of the requirement in the RFA that the agencies review rules
with a significant impact within 10 years of their promulgation?
Should agencies review rules that had a significant impact at the time
they were originally published, or only those that currently have that
effect? Should agencies conduct regulatory flexibility analyses for
rules that have a positive economic impact on small entities, or
only for rules with a negative impact?
These questions are not simply matters of administrative conjecture
within the agencies. They lie at the heart of the RFA and SBREFA, and
the answers to the questions can have a substantive effect on the
amount of regulatory relief provided through those statutes. Because
Congress did not answer these questions when the statutes were
enacted, agencies have had to develop their own answers”and those
answers differ. If Congress does not like the answers that the
agencies have developed, it needs to either amend the underlying
statutes and provide what it believes are the correct answers or give
some other entity the authority to issue guidance on these issues.
EPA‘s Use of RFA Discretion:
The implications of the current lack of clarity with regard to the
term "significant impact" and the discretion that agencies have to
define it were clearly illustrated in a report that we prepared for
the Senate Committee on Small Business 2 years ago.[Footnote 4] One
part of our report focused on a proposed rule that EPA published in
August 1999 that would, upon implementation, lower certain reporting
thresholds for lead and lead compounds under the Toxics Release
Inventory program from as high as 25,000 pounds to 10 pounds.[Footnote
5] At the time, EPA said that the total cost of the rule in the first
year of implementation would be about $116 million. The agency
estimated that approximately 5,600 small businesses would be affected
by the rule, and that the first-year costs of the rule for each of
these small businesses would be from $5,200 to $7,500. However, EPA
certified that the rule would not have a significant impact, and
therefore did not trigger certain analytical and procedural
requirements in the RFA.
EPA' determination that the proposed lead rule would not have a
significant impact on small entities was not unique. Its four major
program offices certified about 78 percent of the substantive proposed
rules that they published in the 2 1/2 years before SBREFA took effect
in 1996, but certified 96 percent of the proposed rules published in
the 2 1/2 years after the act's implementation. In fact, two of the
program offices”the Office of Prevention, Pesticides and Toxic
Substances and the Office of Solid Waste”certified all 47 of their
proposed rules in this post-SBREFA period as not having a significant
impact. The Office of Air and Radiation certified 97 percent of its
proposed rules during this period, and the Office of Water certified
88 percent. EPA officials told us that the increased rate of
certification after SBREFA's implementation was caused by a change in
the agency's RFA guidance on what constituted a significant impact.
Prior to SBREFA, EPA's policy was to prepare a regulatory flexibility
analysis for any rule that the agency expected to have any impact on
any small entities. The officials said that this guidance was changed
because the SBREFA requirement to convene an advocacy review panel for
any proposed rule that was not certified made the continuation of the
agency's more inclusive RFA policy too costly and impractical. In
other words, EPA indicated that SBREFA-”the statute that Congress
enacted to strengthen the RFA--caused the agency to use the discretion
permitted in the RFA and conduct fewer regulatory flexibility analyses.
EPA's current guidance on how the RFA should be implemented includes
numerical guidelines that establish what appears to be a high
threshold for what constitutes a significant impact. Under those
guidelines, an EPA rule could theoretically impose $10,000 in
compliance costs on 10,000 small businesses, but the guidelines
indicate that the agency can presume that the rule does not trigger
the requirements of the RFA as long as those costs do not represent at
least 1 percent of the affected businesses' annual revenues. The
guidance does not take into account the profit margins of the
businesses involved or the cumulative impact of the agency's rules on
small businesses”even within a particular subject area like the Toxics
Release Inventory.
Previous Reports on the RFA and SBREFA:
We have issued several other reports in recent years on the
implementation of the RFA and SBREFA that, in combination, illustrate
both the promise and the problems associated with the statutes. For
example, in 1991, we examined the implementation of the RFA with
regard to small governments and concluded that each of the four
federal agencies that we reviewed had a different interpretation of
key RFA provisions.[Footnote 6] We said that the act allowed agencies
to interpret when they believed their proposed regulations affected
small government, and recommended that Congress consider amending the
RFA to require the Small Business Administration (SBA) to develop
criteria regarding whether and how to conduct the required analyses.
In 1994, we examined 12 years of annual reports prepared by the SBA
Chief Counsel for Advocacy and said the reports indicated variable
compliance with the RFA”a conclusion that the Office of Advocacy also
reached in its 20-year report on the RFA.[Footnote 7] SBA repeatedly
characterized some agencies as satisfying the act's requirements, but
other agencies were consistently viewed as recalcitrant. Other
agencies' performance reportedly varied over time or varied by
subagency. We said that one reason for agencies' lack of compliance
with the RFA's requirements was that the act did not expressly
authorize SBA to interpret key provisions in the statute and did not
require SBA to develop criteria for agencies to follow in reviewing
their rules. We said that if Congress wanted to strengthen the
implementation of the RFA, it should consider amending the act to (1)
provide SBA with authority and responsibility to interpret the RFA's
provisions and (2) require SBA, in consultation with the Office of
Management and Budget (OMB), to develop criteria as to whether and how
federal agencies should conduct RFA analyses.
In our 1998 report on the implementation of the small business
advocacy review panel requirements in SBREFA, we said that the lack of
clarity regarding whether EPA should have convened panels for two of
its proposed rules was traceable to the lack of agreed-upon
governmentwide criteria as to whether a rule has a significant impact.
[Footnote 8] Nevertheless, we said that the panels that had been
convened were generally well received by both the agencies and the
small business representatives. We also said that if Congress wished
to clarify and strengthen the implementation of the RFA and SBREFA, it
should consider (1) providing SBA or another entity with clearer
authority and responsibility to interpret the RFA's provisions and (2)
requiring SBA or some other entity to develop criteria defining a
"significant economic impact on a substantial number of small
entities."
In 1999, we noted a similar lack of clarity regarding the RFA's
requirement that agencies review their existing rules that have a
significant impact within 10 years of their promulgation.[Footnote 9]
We said that if Congress is concerned that this section of the RFA has
been subject to varying interpretations, it may wish to clarify those
provisions. We also recommended that OMB take certain actions to
improve the administration of these review requirements, some of which
have been implemented.
Last year we issued two reports on the implementation of SBREFA. One
report examined section 223 of the act, which required federal
agencies to establish a policy for the reduction and/or waiver of
civil penalties on small entities.[Footnote 10] All of the agencies'
penalty relief policies that we reviewed were within the discretion
that Congress provided, but the policies varied considerably. Some of
the policies covered only a portion of the agencies' civil penalty
enforcement actions, and some provided small entities with no greater
penalty relief than large entities. The agencies also varied in how
key terms such as "small entities" and "penalty reduction" were
defined. We said that if Congress wanted to strengthen section 223 of
SBREFA it should amend the act to require that agencies' policies
cover all of the agencies civil penalty enforcement actions and
provide small entities with more penalty relief than other similarly
situated entities. Also, to facilitate congressional oversight, we
suggested that Congress require agencies to maintain data on their
civil penalty relief efforts.[Footnote 11]
The other report that we issued on SBREFA last year examined the
requirement in section 212 that agencies publish small entity
compliance guides for any rule that requires a final regulatory
flexibility analysis under the RFA.[Footnote 12] We concluded that
section 212 did not have much of an impact on the agencies that we
examined, and its implementation also varied across and sometimes
within the agencies. Some of the section's ineffectiveness and
inconsistency is traceable to the definitional problems in the RFA
that I discussed previously. Therefore, if an agency concluded that a
rule imposing thousands of dollars of costs on thousands of small
entities did not trigger the requirements of the RFA, section 212 did
not require the agency to prepare a compliance guide. Other problems
were traceable to the discretion provided in section 212 itself. Under
the statute, agencies can designate a previously published document as
its small entity compliance guide, or develop and publish a guide with
no input from small entities years after the rule takes effect. We
again recommended that Congress take action to clarify what
constitutes a "significant economic impact" and a "substantial number
of small entities," and also suggested changes to section 212 to make
its implementation more consistent and effective.
Two years ago we convened a meeting at GAO on the rule review
provision of the RFA, focusing on why the required reviews were not
being conducted. Attending that meeting were representatives from 12
agencies that appeared to issue rules with an impact on small
entities, representatives from relevant oversight organizations (e.g.,
OMB and SBA's Office of Advocacy), and congressional staff from the
House and Senate committees on small business. The meeting revealed
significant differences of opinion regarding key terms in the statute.
For example, some agencies did not consider their rules to have a
significant impact because they believed the underlying statutes, not
the agency-developed regulations, caused the effect on small entities.
There was also confusion regarding whether the agencies were supposed
to review rules that had a significant impact on small entities at the
time the rules were first published in the Federal Register or those
that currently have such an impact. It was not even clear what should
be considered a "rule" under the RFA's rule review requirements”the
entire section of the Code of Federal Regulations that was affected by
the rule, or just the part of the existing rule that was being
amended. By the end of the meeting it was clear that, as one
congressional staff member said, "determining compliance with (the
RFA) is less obvious than we believed before."
Mr. Chairman, this concludes my prepared statement. I would be happy
to respond to any questions.
[End of section]
Footnotes:
[1] The RFA is codified at 5 U.S.C. §601-612 and took effect on
January 1, 1981.
[2] This provision of SBREFA is codified at 5 U.S.C. §609 and took
effect on June 29, 1996.
[3] Last year, legislation was introduced in the Senate (S. 849, the
Agency Accountability Act of 2001) that would, in part, require the
Chief Counsel for Advocacy of the Small Business Administration to
promulgate regulations to define the terms "significant economic
impact" and "substantial number of small entities."
[4] U.S. General Accounting Office, Regulatory Flexibility Act:
Implementation in EPA Program Offices and Proposed Lead Rule,
[hyperlink, http://www.gao.gov/products/GAO/GGD-00-193] (Washington,
D.C.: Sept. 20, 2000).
[5] The proposed lead rule was published at 64 Fed. Reg. 42222 (1999).
Toxics Release Inventory reporting is required by section 313 of the
Emergency Planning and Community Right-to-Know Act of 1986 (EPCRA) (42
U.S.C. §11023). Reporting is also required under the Pollution
Prevention Act of 1990 (42 U.S.C. §13106), which added reporting
requirements to EPCRA's reporting requirements in 1991.
[6] U.S. General Accounting Office, Regulatory Flexibility Act:
Inherent Weaknesses May Limit Its Usefulness for Small Governments,
[hyperlink, http://www.gao.gov/products/GAO/HRD-91-61] (Washington,
D.C.: Jan. 11, 1991).
[7] U.S. General Accounting Office, Regulatory Flexibility Act: Status
of Agencies' Compliance, [hyperlink,
http://www.gao.gov/products/GAO/GGD-94-105] (Washington, D.C.: Apr.
27, 1994). The Office of Advocacy's report is entitled 20 Years of the
Regulatory Flexibility Act: Rulemaking in a Dynamic Economy
(Washington, D.C.: 2000).
[8] U.S. General Accounting Office, Regulatory Reform: Implementation
of the Small Business Advocacy Review Panel Requirements, [hyperlink,
http://www.gao.gov/products/GAO/GGD-98-36] (Washington, D.C.: Mar. 18,
1998).
[9] U.S. General Accounting Office, Regulatory Flexibility Act:
Agencies' Interpretations of Review Requirements Vary, [hyperlink,
http://www.gao.gov/products/GAO/GGD-99-55] (Washington, D.C.: Apr. 2,
1999).
[10] U.S. General Accounting Office, Regulatory Reform: Implementation
of Selected Agencies' Civil Penalty Relief Policies for Small
Entities, [hyperlink, http://www.gao.gov/products/GAO-01-280]
(Washington, D.C.: Feb. 20, 2001).
[11] Last year, legislation was introduced in the Senate (S. 1271, the
Small Business Paperwork Relief Act of 2001) that would, in part,
require agencies to report information on civil penalty relief to
certain congressional committees.
[12] Regulatory Reform: Compliance Guide Requirement Has Had Little
Effect on Agency Practices, [hyperlink,
http://www.gao.gov/products/GAO-02-172] (Washington, D.C.: Dec. 28,
2001).
[End of section]
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