GAO

United States General Accounting Office

Testimony

Before the Committee on Small Business 

U.S. Senate

For Release on Delivery

Expected at 

9:30 a.m., EDT

on Tuesday

April 24, 2001

REGULATORY 

FLEXIBILITY ACT

Key Terms Still Need to Be 

Clarified 

Statement of Victor Rezendes, Managing Director, Strategic 

Issues Team

GAO-01-669T

Page 1 GAO-01-669T

I am pleased to be here today to discuss the implementation of the 

Regulatory Flexibility Act of 1980 (RFA), as amended, and the Small 

Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).1

 As you 

requested, I will discuss our work on the implementation of these two 

statutes in recent years, with particular emphasis on a report that we 

prepared for this committee last year on the implementation of the acts by 

the Environmental Protection Agency (EPA).

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 RFA 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, EPA and the 

Occupational Safety and Health Administration must convene a small 

business advocacy review panel for the draft rule, and collect the advice 

and recommendations of representatives of affected small entities about 

the potential impact of the draft rule.2

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 

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.
Page 2 GAO-01-669T

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.

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 the 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?

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. 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. 
Page 3 GAO-01-669T

Proposed EPA Lead 

Rule

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 this committee last year.3

 

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.4

 EPA 

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 between $5,200 and $7,500. EPA said that the total 

cost of the rule in the first year of implementation would be about $116 

million. However, EPA certified that the rule would not have a significant 

impact, and therefore did not trigger certain analytical and procedural 

requirements of the RFA. 

Mr. Chairman, last year you asked us to review the methodology that EPA 

used in the economic analysis for the proposed lead rule and describe key 

aspects of that methodology that may have contributed to the agency’s 

conclusion that the rule would not have a significant impact. You also 

asked us to determine whether additional data or analysis could have 

yielded a different conclusion about the rule’s impact on small entities. 

Finally, you also asked us to describe and compare the rates at which EPA’s 

major program offices certified that their substantive proposed rules would 

not have a significant impact. We did not examine whether lead was a 

persistent bioaccumulative toxic or the value of the Toxics Release 

Inventory program in general.

EPA’s current guidance on how the RFA should be implemented gives the 

agency’s program offices substantial discretion with regard to certification 

decisions but also provides numerical guidelines to help define what 

constitutes a significant impact. For example, the guidance indicates that a 

rule should be presumed eligible for certification as not having a significant 

impact if it does not impose annual compliance costs amounting to 1 

3

Regulatory Flexibility Act: Implementation in EPA Program Offices and Proposed Lead 

Rule (GAO/GGD-00-193, Sept. 20, 2000).

4

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.11001-11050, 11023). Reporting is also 

required under the Pollution Prevention Act of 1990 (42 U.S.C. 13101-13109, 13106), which 

added reporting requirements to EPCRA’s reporting requirements in 1991.
Page 4 GAO-01-669T

percent of estimated annual revenues on any number of small entities. 

However, if those compliance costs amount to 3 percent or more of 

revenues on 1,000 or more small entities, the guidance indicates that the 

program office should presume that the rule is ineligible for certification. 

These numerical guidelines establish what appears to be a high threshold 

for what constitutes a significant impact. For example, 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. Therefore, if the profit margin in the affected 

businesses is less than 5 percent, the costs required to implement a rule 

could conceivably take one-fifth of that profit and, under EPA’s guidelines, 

still not be considered to have a significant impact. Neither does the 

guidance take into account the cumulative impact of the agency’s rules on 

small businesses. Therefore, if EPA issued 100 rules, each of which 

imposed compliance costs amounting to one-half of 1 percent of annual 

sales on 10,000 businesses, the agency could certify each of the rules as not 

having a significant impact even though the cumulative impact amounted 

to 50 percent of the affected businesses’ revenues. Consideration of 

cumulative regulatory impact is not even required within a particular area 

like the Toxics Release Inventory program. Each toxic substance added to 

the approximately 600 substances already listed in the program, or each 

change in the reporting threshold for a listed toxin, constitutes a separate 

regulatory action under the RFA. 

An agency’s conclusions about the impact of a rule on small entities can 

also be driven by the agency’s analytical approach. In its original economic 

analysis for the proposed lead rule, EPA made a number of assumptions 

that clearly contributed to its determination that no small entities would 

experience significant economic effects. For example, to estimate the 

annual revenues of companies expected to file new Toxics Release 

Inventory reports for lead, EPA assumed that (1) the new filers would have 

employment and economic characteristics similar to current filers, (2) 

different types of manufacturers would experience similar economic 

effects, and (3) the revenues of the smallest manufacturers covered by the 

proposed rule could be exemplified by the firm at the 25th percentile of the 

agency’s projected revenue distribution for small manufacturers. As a 

result of these and other assumptions, EPA estimated that the smallest 

manufacturers affected by the proposed lead rule had annual revenues of 
Page 5 GAO-01-669T

$4 million. Using that $4 million revenue estimate and other information, 

EPA concluded that none of the 5,600 small businesses would experience 

first- year compliance costs of 1 percent or more of their annual revenues. 

Therefore, EPA certified that the proposed lead rule would not have a 

significant impact.

EPA revised these and other parts of the economic analysis for the 

proposed lead rule before submitting it to the Office of Management and 

Budget (OMB) for final review in July 2000. According to a summary of the 

draft revised economic analysis that we reviewed, EPA changed several 

analytic assumptions and methods, and revised its estimates of the rule’s 

impact on small businesses. Specifically, the agency said that the lead rule 

would affect more than 8,600 small companies (up from about 5,600 in the 

original analysis), and as many as 464 of them would experience first- year 

compliance costs of at least 1 percent of their annual revenues (up from 

zero in the original estimate). Nevertheless, EPA again concluded that the 

rule would not have a significant impact. During our review, we discovered 

that the agency’s revised estimate of the number of small companies that 

would experience a 1 percent economic impact was based on only 36 of the 

69 industries that the agency said could be affected by the rule. EPA 

officials said that the other 33 industries were not included in the agency’s 

estimate because of lack of data. 

We attempted to provide a more complete picture of how the lead rule 

would affect small businesses by estimating how many companies in these 

missing 33 industries could experience a first-year economic impact of at 

least 1 percent of annual revenues. We obtained data from the Bureau of 

the Census for 32 of these 33 industries and estimated that as many as 1,098 

additional small businesses could experience this 1-percent effect. If EPA 

had used this analytic approach in combination with its own studies, it 

would have concluded that as many as 1,500 small businesses would 

experience compliance costs amounting to at least 1 percent of annual 

revenues. Therefore, using its own guidance, EPA could have concluded 

that the rule should not be certified, prepared a regulatory flexibility 

analysis, and convened an advocacy review panel for the rule. However, 

we ultimately concluded that the agency’s initial and revised analyses and 

the conclusions that it based on those studies were within the broad 

discretion that the RFA and the EPA guidance provided in determining 

what constituted a “significant economic impact” on a “substantial number 

of small entities.”
Page 6 GAO-01-669T

In the final lead rule that EPA published in January 2001, EPA set the new 

reporting threshold for lead at 100 pounds—up from 10 pounds in the 

proposed rule.5

 However, just as it did for the proposed rule, EPA 

concluded that the final rule would not have a significant impact. EPA said 

that it reached this conclusion because it did not believe the rule would 

have a significant economic impact (defined as annual costs between 1 and 

3 percent of annual revenues) on more than 250 of the 4,100 small 

businesses expected to be affected by the rule. EPA also illustrated what it 

viewed as nonsignificant impact in terms of work hours. The agency said 

that it would take a first-time filer about 110 hours to fill out the form. 

Because the smallest firm that could be affected by the rule must have at 

least 20,000 labor hours per year (10 employees times 50 weeks per year 

per employee times 40 hours per week), EPA said that the 110 hours 

required to fill out the Toxics Release Inventory form in the first year 

represents only about one-half of 1 percent of the total amount of time the 

firm has available in that year. 

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. 

5

66 Fed. Reg. 4500 (2001). 
Page 7 GAO-01-669T

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 we reviewed had a 

different interpretation of key RFA provisions.6

 We said that the act 

allowed agencies to interpret when they believed their proposed 

regulations affected small government, and recommended that Congress 

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 noted that the RFA required the SBA Chief Counsel for 

Advocacy to monitor agencies’ compliance with the act.7

 However, we also 

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 clearer authority and responsibility to 

interpret the RFA’s provisions, and (2) require SBA, in consultation with 

OMB, to develop criteria as to whether and how federal agencies should 

conduct RFA analyses.

6

Regulatory Flexibility Act: Inherent Weaknesses May Limit Its Usefulness for Small 

Governments (GAO/HRD-91-61, Jan. 11, 1991).

7

Regulatory Flexibility Act: Status of Agencies’ Compliance (GAO/GGD-94-105, Apr. 27, 

1994). 
Page 8 GAO-01-669T

In our 1998 report on the implementation of the small business advocacy 

review requirements in SBREFA, we said that the lack of clarity regarding 

whether EPA should have convened panels for two of its proposed rules 

was traceable to the lack of agreed-upon governmentwide criteria as to 

whether a rule has a significant impact.8

 Nevertheless, we said that the 

panels that had been convened were generally well received by both the 

agencies and the small business representatives. We also said that if 

Congress wished to clarify and strengthen the implementation of the RFA 

and SBREFA, it should consider (1) providing SBA or another entity with 

clearer authority and responsibility to interpret the RFA’s provisions and 

(2) requiring SBA or some other entity to develop criteria defining a 

“significant economic impact on a substantial number of small entities.” In 

1999, we noted a similar lack of clarity regarding the RFA’s requirement that 

agencies review their existing rules that have a significant impact within 10 

years of their promulgation.9

 We said that if Congress is concerned that 

this section of the RFA has been subject to varying interpretations, it may 

wish to clarify those provisions. We also recommended that OMB take 

certain actions to improve the administration of these review requirements, 

some of which have been implemented.

Last year we 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 rule was 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 RFA’s rule review requirements—

the entire section of the Code of Federal Regulations that was affected by 

8

Regulatory Reform: Implementation of the Small Business Advocacy Review Panel 

Requirements (GAO/GGD-98-36, Mar. 18, 1998). 

9

Regulatory Flexibility Act: Agencies’ Interpretations of Review Requirements Vary

(GAO/GGD-99-55, Apr. 2, 1999). 
Page 9 GAO-01-669T

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. 

(450038) Letr
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