27116 Federal Register / Vol. 72, No. 92 / Monday, May 14, 2007 / Notices 

ENVIRONMENTAL PROTECTION 

AGENCY 

[EPA–HQ–OECA–2007–0291; FRL–8309–2] 

Enhancing Environmental Outcomes 

From Audit Policy Disclosures 

Through Tailored Incentives for New 

Owners; Notice 

AGENCY: Environmental Protection 

Agency. 

ACTION: Notice; request for comment. 

SUMMARY: The Environmental Protection 

Agency (‘‘EPA’’ or ‘‘the Agency’’) 

requests comment on whether and to 

what extent the Agency should consider 

offering tailored incentives to encourage 

new owners of regulated entities to 

discover, disclose, correct, and prevent 

the recurrence of environmental 

violations. The Agency is considering 

whether actively encouraging such 

disclosures has the potential to yield 

significant environmental benefit, since 

new owners may be particularly wellsituated and highly motivated to focus 

on, and invest in, making a clean start 

for their new facilities by addressing 

environmental noncompliance. 

Any tailored incentives for new 

owners would be beyond those offered 

as EPA is currently implementing EPA’s 

April 11, 2000 policy on ‘‘Incentives for 

Self-Policing: Discovery, Disclosure, 

Correction and Prevention of 

Violations,’’ commonly referred to as 

the ‘‘Audit Policy’’ (65 FR 19618). These 

incentives would be designed to 

enhance implementation of the Audit 

Policy and encourage its use in the new 

owner context, but would not constitute 

a change to the Policy overall. 

After the comment period closes, the 

Agency plans to review all comments 

and decide whether to develop a pilot 

program to test the policy of offering 

tailored incentives to encourage new 

owners to self-audit and disclose under 

the Audit Policy. Should the Agency 

decide to proceed, EPA would then 

publish a second Federal Register 

notice to seek comment on a proposed 

pilot program. After a second round of 

public comment, the Agency would 

publish in the Federal Register: The 

final description of the pilot program; 

an announcement of its start date; and 

a description of how its success in 

achieving increased self-auditing and 

disclosure and significant improvement 

to the environment will be evaluated. 

DATES: EPA urges interested parties to 

comment in writing on the issues raised 

in this notice. Comments must be 

received by EPA at the address below no 

later than July 13, 2007. Comments may 

also be communicated orally at two 

public meetings EPA will hold during 

the comment period. The first meeting 

is scheduled for Washington, DC at the 

J.W. Marriott Hotel, 1331 Pennsylvania 

Ave., NW., on June 12, 2007. The 

second one is scheduled for San 

Francisco at the Palace Hotel, 2 New 

Montgomery St., on June 20, 2007. Both 

meetings will begin at 10 a.m. and end 

at 4 p.m. 

ADDRESSES: Submit your comments, 

identified by Docket ID No. EPA–HQ–

OECA–2007–0291, by one of the 

following methods: 

• www.regulations.gov: Follow the 

on-line instructions for submitting 

comments. 

• E-mail: docket.oeca@epa.gov, 

Attention Docket ID No. EPA–HQ–

OECA–2007–0291. 

• Fax: (202) 566–9744, Attention 

Docket ID No. EPA–HQ–OECA–2007–

0291. 

• Mail: Enforcement and Compliance 

Docket Information Center, 

Environmental Protection Agency, 

Mailcode: 2822T, 1200 Pennsylvania 

Ave., NW., Washington, DC 20460, 

Attention Docket ID No. EPA–HQ–

OECA–2007–0291. 

• Hand Delivery: Enforcement and 

Compliance Docket Information Center 

in the EPA Docket Center (EPA/DC), 

EPA West, Room B 3334, 1301 

Constitution Avenue, NW., Washington, 

DC. The EPA Docket Center Public 

Reading Room is open from 8:30 a.m. to 

4:30 p.m., Monday through Friday, 

excluding legal holidays. The telephone 

number for the Reading Room is (202) 

566–1744, and the telephone number for 

the Enforcement and Compliance 

Docket is (202) 566–1927. Such 

deliveries are only accepted during the 

Docket’s normal hours of operation, and 

special arrangements should be made 

for deliveries of boxed information. 

Instructions: Direct your comments to 

Docket ID No. EPA–HQ–OECA–2007–

0291. EPA’s policy is that all comments 

received will be included in the public 

docket without change and may be 

made available online at 

www.regulations.gov, including any 

personal information provided, unless 

the comment includes information 

claimed to be Confidential Business 

Information (CBI) or other information 

whose disclosure is restricted by statute. 

Do not submit information that you 

consider to be CBI or otherwise 

protected through www.regulations.gov. 

The www.regulations.gov Web site is an 

‘‘anonymous access’’ system, which 

means EPA will not know your identity 

or contact information unless you 

provide it in the body of your comment. 

If you send an e-mail comment directly 

to EPA without going through 

www.regulations.gov your e-mail 

address will be automatically captured 

and included as part of the comment 

that is placed in the public docket and 

made available on the Internet. If you 

submit an electronic comment, EPA 

recommends that you include your 

name and other contact information in 

the body of your comment and with any 

disk or CD–ROM you submit. If EPA 

cannot read your comment due to 

technical difficulties and cannot contact 

you for clarification, EPA may not be 

able to consider your comment. 

Electronic files should avoid the use of 

special characters, any form of 

encryption, and be free of any defects or 

viruses. For additional information 

about EPA’s public docket, visit the EPA 

Docket Center homepage at http:// 

www.epa.gov/epahome/dockets.htm. 

Docket: All documents in the docket 

are listed in the www.regulations.gov 

index. Although listed in the index, 

some information is not publicly 

available, e.g., CBI or other information 

whose disclosure is restricted by statute. 

Certain other material, such as 

copyrighted material, will be publicly 

available only in hard copy. Publicly 

available docket materials are available 

either electronically in 

www.regulations.gov or in hard copy at 

the Enforcement and Compliance 

Docket Information Center in the EPA 

Docket Center (EPA/DC), EPA West, 

Room B 3334, 1301 Constitution 

Avenue, NW., Washington, DC. The 

EPA Docket Center Public Reading 

Room is open from 8:30 a.m. to 4:30 

p.m., Monday through Friday, excluding 

legal holidays. The telephone number 

for the Reading Room is (202) 566–1744, 

and the telephone number for the 

Enforcement and Compliance Docket is 

(202) 566–1927. 

FOR FURTHER INFORMATION CONTACT: For 

further information, contact Caroline 

Makepeace of EPA’s Office of Civil 

Enforcement, Special Litigation and 

Projects Division, at (202) 564–6012 or 

makepeace.caroline@epa.gov. 

SUPPLEMENTARY INFORMATION: 

I. General Information 

A. Introduction 

On April 11, 2000, EPA issued its 

revised final policy on ‘‘Incentives for 

Self-Policing: Discovery, Disclosure, 

Correction and Prevention of 

Violations,’’ commonly referred to as 

the ‘‘Audit Policy’’ (65 FR 19618). The 

purpose of the Audit Policy is to 

enhance protection of human health and 

the environment by encouraging 

regulated entities to voluntarily 

discover, disclose, correct and prevent 


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1Besides the Audit Policy, EPA also implements 

another voluntary disclosure policy: The Small 

Business Compliance Policy (65 FR 19630), 

published April 11, 2000. 

the recurrence of violations of Federal 

environmental law. Benefits available to 

entities that make disclosures under the 

terms of the Audit Policy include 

reductions in the amount of civil 

penalties and a determination not to 

recommend criminal prosecution of 

disclosing entities. 

The Audit Policy program has been a 

successful effort to date, resolving 

disclosed violations with over 3,000 

entities. However, more than half of 

these disclosures have involved 

reporting violations which, while 

important for public information and 

safety purposes, may not produce 

significant reductions in pollutant 

emissions once the violations are 

corrected. Consistent with EPA’s 

strategic plan, the Agency’s goal is to 

increase the number of self-disclosures 

that have the potential to yield 

significant environmental benefits while 

effecting compliance with Federal 

environmental requirements. EPA’s 

recent experience with corporate-wide 

auditing agreements following a 

corporate merger or acquisition has 

heightened the Agency’s interest in 

exploring whether encouraging new 

owners of regulated facilities to 

discover, disclose, correct, and prevent 

the recurrence of environmental 

violations would help EPA meet this 

goal. New owners may be particularly 

well-situated and highly motivated to 

invest in making a ‘‘clean start’’ for their 

new facilities by: Doing thorough selfaudits of their new facilities; disclosing 

any violations found; promptly 

correcting the violations; and making 

the substantial improvements that will 

enhance their ability to remain in 

compliance going forward. 

Nevertheless, certain disincentives may 

stand in the way of new owners that 

may be interested in taking these steps, 

and there may be equitable reasons for 

considering particular incentives to 

encourage self-auditing and disclosure 

at the time a new owner takes control. 

The Agency is interested in developing 

this idea because of its potential to 

enhance EPA’s efforts to effectively 

utilize scarce government resources by 

securing significant environmental 

improvement as quickly as possible. 

The Agency is also interested in 

whether offering tailored incentives in 

the new owner context may have 

unintended adverse consequences with 

respect to, for example, discouraging 

appropriate due diligence, timely 

compliance and a level playing field, or 

other negative effects. The Agency seeks 

comment on the potential for any 

positive or negative results that might 

come from providing such tailored 

incentives. The Agency also requests 

comment on how EPA could most 

efficiently determine who is a bona-fide 

new owner, and how the Agency should 

evaluate whether such incentives are 

successful in securing the prompt 

correction of environmental violations 

and significant improvement to the 

environment. 

While EPA does not intend to amend 

the Audit Policy, the Agency is 

considering ways to enhance its 

implementation and encourage its 

greater use in new owner situations, 

particularly with regard to the 

disclosure and correction of violations 

that may yield significant pollutant 

reductions. Today, EPA issues this 

Notice signaling its intent to consider 

offering tailored incentives to self-report 

under the current Audit Policy for new 

owners of regulated facilities. 

The purpose of this notice is to (1) 

solicit information to be used in helping 

EPA better understand and formulate 

decisions about key issues; and (2) 

provide notification of open meetings at 

which EPA hopes to hear from the 

public on these issues. Copies of the 

Agency’s current Audit Policy may be 

found on the EPA’s Web site at http:// 

www.epa.gov/compliance/incentives/ 

auditing/auditpolicy.html. 

B. Background and History of the Audit 

Policy 

1. Overview of the Audit Policy 

The Audit Policy provides incentives 

for regulated entities to detect, promptly 

disclose, expeditiously correct, and 

prevent the recurrence of violations of 

federal environmental requirements. 

The Audit Policy contains nine 

conditions, and entities that meet all of 

them are eligible for 100% mitigation of 

any gravity-based civil penalties that 

otherwise could be assessed in 

settlement. (‘‘Gravity-based’’ penalty 

refers to that portion of the civil penalty 

over and above the portion that 

represents the entity’s economic gain 

from noncompliance, known as the 

‘‘economic benefit.’’) Regulated entities 

that do not meet the first condition—

systematic discovery of violations—but 

meet the other eight conditions are 

eligible for 75% mitigation of any 

gravity-based penalties. For criminal 

matters, EPA will generally elect not to 

recommend criminal prosecution by the 

Department of Justice (‘‘DOJ’’) or any 

other prosecuting authority for a 

disclosing entity that meets at least 

conditions two through nine (i.e., 

regardless of whether it meets the 

systematic discovery requirement) as 

long as its self-policing, discovery and 

disclosure were conducted in good faith 

and the entity adopts a systematic 

approach to preventing recurrence of 

the violation. The Audit Policy includes 

important safeguards to deter violations 

and protect the environment. For 

example, the Audit Policy requires 

entities to act to prevent recurrence of 

violations and to remedy any 

environmental harm that may have 

occurred. Repeat violations, those that 

result in actual harm to the 

environment, and those that may 

present an imminent and substantial 

endangerment are not eligible for relief 

under the Audit Policy. Entities and 

individuals also remain criminally 

liable for violations that result from 

conscious disregard of or willful 

blindness to their obligations under the 

law. 

The Audit Policy and related 

documents are available on the Internet 

at http://www.epa.gov/compliance/ 

incentives/auditing/auditpolicy.html. 

Additional guidance for implementing 

the Policy in the context of criminal 

violations can be found at http:// 

www.epa.gov/compliance/resources/ 

policies/incentives/auditing/ 

auditcrimvio-mem.PDF. 

2. How EPA Implements its Voluntary 

Disclosure Programs 

EPA’s voluntary disclosure policies 1

are designed to provide major incentives 

for regulated entities that voluntarily 

discover, promptly disclose, and 

expeditiously correct violations, 

rendering formal EPA investigation and 

enforcement action unnecessary in most 

instances. The policies safeguard human 

health and the environment by 

providing incentives for regulated 

entities to come into compliance with 

the federal environmental laws and 

regulations, and enable efficient use of 

scarce government resources. 

Most self-disclosures come into the 

Agency on a single facility basis. 

However, the Agency sometimes enters 

into an audit agreement under which 

the disclosing entity commits to 

undertake a comprehensive multimedia 

audit that will be conducted at a 

number of its facilities over an agreedupon time frame. Corporate auditing 

agreements allow companies to plan a 

corporate-wide audit with advance 

understanding between the company 

and EPA regarding the scope of the 

audit, schedules (audit, reporting, and 

correction of violations), whether 

resolution will be judicial or 

administrative, and any other 


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2Under the regulations governing CAA Title V 

permit applications and annual compliance 

certifications, any application, form, report or 

compliance certification is required to contain a 

certification by a responsible official of the truth, 

accuracy and completeness of information 

contained in such documents. The regulations 

further provide that ‘‘[t]his certification and any 

other certification required under this part shall 

state that, based on information and belief formed 

after reasonable inquiry, the statements and 

information in the document are true, accurate, and 

complete.’’ 40 CFR 70.5(d). 

expectations. Such agreements also offer 

the potential for significant 

environmental benefit while providing 

greater certainty to companies about 

their environmental liabilities. Thus, 

EPA encourages companies with 

multiple facilities to take advantage of 

the Agency’s Audit Policy through use 

of such corporate auditing agreements. 

Once a regulated entity notifies EPA, 

in writing, of potential violations, EPA 

evaluates the discovery, disclosure, and 

correction of the violations against the 

criteria set forth in the Audit Policy, or 

if applicable, the Small Business 

Compliance Policy, and determines the 

appropriate enforcement response. If the 

disclosure does not meet the conditions 

of the applicable policy or the 

disclosing entity does not provide 

sufficient information to EPA to allow 

the Agency to make this determination, 

then the matter is handled under the 

appropriate medium-specific penalty 

policies, which often accommodate 

penalty mitigation for voluntary 

disclosures. The enforcement response 

for the vast majority of voluntary 

disclosures is a Notice of Determination 

(‘‘NOD’’) for cases involving no 

assessment of penalties. EPA retains its 

discretion to assess any economic 

benefit that may have been realized as 

a result of noncompliance. If the 

regulated entity has gained significant 

economic benefit, or if it failed to meet 

all the conditions of the applicable 

policy, then a civil penalty may be 

sought in an administrative or judicial 

action. 

Overall, the Agency’s voluntary 

disclosure programs continue to have 

positive results. The Audit and Small 

Business Compliance Policies have 

encouraged voluntary self-policing 

while preserving fair and effective 

enforcement and their use has been 

widespread. As of October 1, 2006, 

regulated entities and organizations 

have resolved actual or potential 

violations at 9,255 facilities. 

Thus, the solicitation of comments on 

tailored incentives for new owners does 

not signal any intention to shift course 

regarding the Agency’s position on selfpolicing and voluntary disclosures, but 

instead represents an attempt to 

enhance implementation of the Audit 

Policy, and encourage its increased use 

in the new owner context. 

As mentioned in the Introduction, 

EPA’s interest in exploring this 

approach stems in part from recent 

experiences in the Agency’s current 

implementation of the Audit Policy. In 

the last few years, EPA has entered into 

corporate auditing agreements with 

several companies following a merger or 

acquisition valued at over $1 billion. 

These corporate auditing agreements 

provided a unique opportunity for 

companies to use self-disclosures to 

make a ‘‘clean start’’ with regard to 

environmental compliance. The Agency 

recognizes that taking steps to further 

encourage audit agreements in this 

context could offer the potential to 

garner significant environmental 

benefit. 

3. How the Audit Policy Currently 

Applies to New Owners 

On April 30, 2007, EPA issued the 

‘‘Audit Policy: Frequently Asked 

Questions (2007)’’ which recognizes that 

owners of newly acquired facilities are 

uniquely situated to examine and 

improve performance at newly acquired 

facilities. Specifically, the 2007 

Frequently Asked Questions provides 

that: 

• New owners may be eligible for 

penalty mitigation under the Audit 

Policy for violations at newly acquired 

facilities which are discovered as part of 

a compliance examination agreed to be 

undertaken prior to the 1st annual 

certification under Title V of the Clean 

Air Act, or which are disclosed before 

that time. 

Generally, Clean Air Act (CAA) 

violations discovered during activities 

supporting Title V certification 

requirements are not eligible for penalty 

mitigation under the Policy. Condition 2 

of the Audit Policy requires that 

disclosed violations must not be 

discovered through a legally mandated 

monitoring or sampling requirement 

prescribed by statute or regulation; 

therefore, examination of CAA 

compliance accompanying a Title V 

annual certification is not voluntary.2

However, EPA wants to encourage new 

owners to examine facility operations to 

determine compliance, correct 

violations, and upgrade deficient 

equipment and practices. Thus, for new 

owners that in good faith undertake 

such efforts and inform the Agency of 

such actions, either by disclosure in 

writing or entry into an audit agreement 

with EPA prior to submission of the 

facility’s first annual Title V 

certification under new ownership, the 

violations disclosed would be 

considered voluntarily discovered for 

purposes of the Audit Policy. 

The 2007 Frequently Asked Questions 

also provides that: 

• New owners may be eligible for 

penalty mitigation under the Audit 

Policy for violations at newly acquired 

facilities irrespective of the disclosing 

entity’s compliance history at other 

facilities. 

EPA’s primary interest is to encourage 

owners of newly acquired facilities to 

undertake a comprehensive examination 

of and improvements to a facility’s 

environmental compliance and its 

compliance management systems. 

Notwithstanding a new owner’s history 

of violations at its other facilities, if its 

efforts to examine and improve upon an 

acquired facility’s environmental 

operations are thorough and are likely to 

result in improved compliance, EPA’s 

intent is to encourage such 

examinations. The Audit Policy: 

Frequently Asked Questions (2007) can 

be found on the Internet at http:// 

www.epa.gov/compliance/incentives/ 

auditing/auditpolicy.html. 

C. Role of Benefit Recapture in the 

Auditing Context 

The imposition of civil penalties that 

recapture the economic benefit of 

noncompliance is the cornerstone of the 

EPA’s civil penalty program. Benefit 

recapture was adopted in 1984, and it 

has served the Agency and the public 

well. Benefit recapture has also been a 

part of the Audit Policy since it was first 

issued, on the premise that, even in selfaudit and disclosure situations, 

penalties should not be reduced below 

the level necessary to recapture 

economic benefit when a violator has 

achieved an economic advantage over 

its complying competitors. Accordingly, 

the Audit Policy provides that EPA 

reserves the right to assess any 

economic benefit which may have been 

realized as a result of noncompliance, 

even where the entity meets all other 

Audit Policy conditions. The Audit 

Policy further provides that the Agency 

may also waive the economic benefit 

component of the penalty where the 

Agency determines that the economic 

benefit is insignificant (65 FR 19620). 

Violators obtain an economic benefit 

from violating the law by delaying 

compliance, avoiding compliance or 

obtaining an unfair competitive 

advantage. When violators delay 

compliance, they have the use of the 

money that should have been spent on 

compliance to put into profit-making 

investments. Put simply, violators 

‘‘gain’’ the interest on the amount of 

money that should have been invested 

in pollution control equipment. A 


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3This number was generated by the current 

version of the BEN computer model using the 

following assumptions: (1) The violator was in the 

average maximum tax bracket; (2) the violator’s cost 

of money (i.e., the discount/compound rate) was 

7.9%; and (3) inflation was based on the Plant Cost 

Index published in Chemical Engineering magazine. 

The BEN computer model can be found at http:// 

www.epa.gov/compliance/civil/econmodels/ 

index.html. 

4For a more detailed discussion of how economic 

benefit is created, see Federal Register Notice of 

August 25, 2005, entitled ‘‘Calculation of the 

Economic Benefit of Noncompliance in EPA’s Civil 

Penalty Enforcement Cases’’ (70 FR 50326). 

typical example is where a factory 

delays installation of a required waste 

water treatment facility. If the waste 

water treatment facility costs $1,000,000 

to install, and the violator waits three 

years past the required date to comply, 

the violator has saved about $236,000 by 

delaying compliance.3

A second type of economic benefit is 

derived when a violator not only delays 

but avoids the costs it would have 

incurred if it had complied in a timely 

manner. A typical example would be 

where a factory avoids the operation 

and maintenance costs for the abovementioned waste water treatment plant 

for the three years the polluter was out 

of compliance. If the facility’s annual 

operation and maintenance costs are 

$100,000, then the violator probably 

saved about $200,000 by avoiding the 

operation and maintenance costs for 

three years (again assuming the violator 

is in the top tax bracket). 

The third type of economic benefit is 

derived from the violator obtaining an 

unfair competitive advantage. For 

example, where a violator is selling 

banned products (e.g., DDT), any money 

made from the sale of this banned 

pesticide would be illegal.4

D. Why is EPA Currently Considering 

Tailoring Incentives for Audit Policy 

Disclosures for New Owners of 

Regulated Entities? 

As previously stated, one of EPA’s 

main goals is to secure the prompt 

correction of environmental violations 

and achieve significant improvements to 

the environment as expeditiously as 

possible. A number of factors, including 

the Agency’s recent experience with 

corporate auditing agreements following 

large mergers and acquisitions, have 

highlighted the promising opportunity 

presented by encouraging new owners 

of regulated facilities to discover, 

disclose, correct, and prevent the 

recurrence of environmental violations. 

It is reasonable to surmise that new 

owners may be particularly wellsituated and highly motivated to focus 

on and invest in making a ‘‘clean start’’

for their new facilities and thus may be 

willing to conduct thorough self-audits 

of their new facilities, disclose any 

violations found, promptly correct the 

violations, and make the significant 

improvements that will enhance 

compliance going forward. If former 

owners were not timely about a facility’s 

compliance obligations, the new owners 

may want to make a clean break with 

the past and get their newly acquired 

facilities into compliance promptly. It is 

possible that new owners may see the 

benefits of quickly assessing and 

working to limit their company’s 

liability, and a firm with a widelyrespected compliance record may want 

to ensure that any new acquisition 

develops a similarly positive record. 

Although some anecdotal accounts 

suggest that, in recent years, new 

owners have often had to make 

purchasing decisions based upon more 

limited information about 

environmental compliance issues than 

may have been available in the past, 

there has likely been at least some 

opportunity for pre-acquisition due 

diligence review. Even somewhat 

limited due diligence findings could 

help trigger a new owner’s interest in 

more comprehensively assessing the 

facility’s environmental status and 

exposure. New facility managers may 

also have access to new infusions of 

capital, which could enable the sort of 

improvements that yield significant 

benefit to the environment. 

The Agency recognizes, however, that 

certain disincentives may stand in the 

way of new owners who are interested 

taking advantage of the Audit Policy. 

New owners may still have to pay 

substantial civil penalties under the 

Audit Policy, as only the gravity portion 

of the penalty can currently be 

mitigated. It stands to reason that new 

owners may be uncomfortable about 

calling EPA’s attention to compliance 

issues at their newly acquired facilities 

when they themselves may not be fully 

aware of all the compliance issues 

presented. Particularly when many and/ 

or complex facilities are involved, it 

may indeed be difficult for new owners 

to have a reasonable idea of the full 

spectrum of compliance issues. 

In addition, the Agency’s experience 

with implementing the Audit Policy, 

especially with regard to corporate 

auditing agreements, suggests that one 

of the major reasons a company may be 

hesitant to self-audit and disclose under 

the Audit Policy is uncertainty about 

how the Agency will treat such selfdisclosures. One of the Agency’s current 

goals is to provide greater overall 

certainty and consistency in the Audit 

Policy’s implementation, and the 

recently-issued Audit Policy: Frequently 

Asked Questions (2007) should help to 

resolve such concerns generally. 

Nevertheless, there is likely still some 

hesitation on the part of new owners to 

self-disclose violations, because they 

worry about exactly how such 

disclosures will be handled by the 

Agency. 

Encouraging new owners with 

tailored incentives that help address 

some of their concerns or alleviate some 

of their costs, in the context of a welldefined program that provides greater 

certainty about the handling of 

disclosures, may make the difference in 

their willingness to come forward and to 

commit to improving their 

environmental compliance and reducing 

their environmental footprint. There is a 

strong equitable argument that a new 

owner should not be penalized for 

economic benefit relating to violations 

that arose when a facility was not under 

the new owner’s control, if that new 

owner is willing to promptly address 

violations and make changes to ensure 

the facility stays in compliance in the 

future. The Agency is also interested in 

exploring the idea of tailored incentives 

because it may present an opportunity 

to enhance EPA’s efforts to effectively 

utilize scarce government resources, by 

securing high quality environmental 

improvements and achieving the most 

significant environmental benefit more 

quickly than might otherwise occur. 

Nevertheless, the Agency is also aware 

that such incentives may have 

unintended adverse consequences with 

respect to, for example, discouraging 

appropriate due diligence, timely 

compliance and a level playing field, or 

other negative effects, and EPA intends 

to consider the potential for such 

negative results as well. 

E. Objectives of Any Potential Pilot 

Program 

If, after review and consideration of 

all comments on this concept and on 

any draft incentive policy, the Agency 

decides it makes sense to test the 

approach of tailoring incentives to 

encourage new owners to utilize the 

Audit Policy, EPA would then develop 

a pilot program. Such a pilot program 

would be evaluated after three years and 

would be designed with four main 

objectives in mind: 

1. The program should increase the 

number of self-audits and disclosures 

that yield significant environmental 

benefits. 

2. The program should be transparent 

and straightforward. There should be 

clarity about the program’s goals and 

how the Agency will handle those firms 

that self-audit and disclose violations, 

and the program should have sufficient 


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safeguards to ensure that only bona-fide 

new owners participate. 

3. The program should be efficient to 

administer. EPA must develop a 

program that can be effective with the 

limited resources available to 

administer it. For instance, EPA does 

not envision analyzing the various 

financial details of each merger or 

acquisition. 

4. The program should also have 

minimal transaction costs for the 

regulated entities participating in the 

program. While the compliance costs for 

the firms participating may be 

substantial, the actual participation in 

the program should be cost-effective. 

II. Issues 

The Agency is seeking comment 

limited to: (1) Whether EPA should offer 

tailored incentives to encourage new 

owners of regulated entities to discover, 

disclose, correct and prevent 

environmental violations; (2) how 

should the Agency determine who is a 

new owner; (3) what incentives should 

the Agency consider offering in order to 

encourage new owners to self-audit and 

disclose; and (4) if such tailored 

incentives are offered, what measures 

should the Agency use in determining 

whether and to what extent self-audits 

and disclosures from new owners are 

achieving significant improvements to 

the environment. 

A. Should the Agency Offer Tailored 

Incentives to Encourage New Owners of 

Regulated Entities to Self-Audit and 

Disclose Violations? 

Are tailored incentives needed and/or 

appropriate to encourage self-audits and 

disclosures by new owners of regulated 

entities? Do the circumstances of new 

ownership warrant special 

consideration or handling, if the new 

owner was not responsible for creating 

a violation and there exists potentially 

significant environmental benefit that 

could result from new owners’

disclosures and correction of violations? 

Or, does the Audit Policy as currently 

implemented already offer sufficient 

incentives to induce new owners to 

undertake self-audits and disclosures? 

1. Due Diligence in Mergers and 

Acquisitions 

Anecdotal accounts suggest that, in 

today’s merger and acquisition market, 

acquiring firms often have to make 

decisions about a target acquisition 

under tight deadlines and with 

relatively minimal information about an 

entity’s environmental compliance 

status or problems. These accounts 

indicate that the traditional paradigm of 

assuming that due diligence review will 

yield full knowledge to the purchaser 

about any potential acquisition may not 

be accurate in many current mergers 

and acquisitions. EPA suspects that the 

amount of environmental compliance 

due diligence varies greatly depending 

on the industrial sector involved, or on 

whether a certain target facility’s or 

company’s environmental compliance is 

likely to present an important or 

material issue (e.g., environmental 

compliance would be more germane to 

the purchase of a chemical company 

than of a financial services firm). EPA 

seeks comment on the extent to which 

pre-acquisition due diligence reviews 

reveal environmental noncompliance 

(as opposed to environmental 

contamination and remedial liability). 

Providing tailored incentives to selfaudit and disclose could potentially 

improve environmental compliance in 

these situations by encouraging in-depth 

auditing after purchase. On the other 

hand, providing such incentives could 

cause sellers to further delay or avoid 

compliance (i.e., a firm might be 

tempted to sell off a unit to another 

business in its noncompliant state rather 

than bring that unit into compliance), or 

could have the unintended effect of 

encouraging buyers to perform 

inadequate due diligence. EPA seeks 

comment on whether it would be 

appropriate to require that new owners 

have performed a certain level of preacquisition due diligence to qualify for 

tailored incentives, and if so, what that 

level should be? The Agency also seeks 

comment on the potential effects on 

environmental compliance and on due 

diligence reviews that might result from 

offering tailored incentives for new 

owners. 

2. Purchase Price Calculation 

If, as the anecdotal reports mentioned 

above would indicate, the due diligence 

that potential buyers perform may have 

substantial gaps with regard to 

information about environmental 

compliance issues, what is the effect on 

acquisition negotiations? If an acquiring 

company had perfect information, 

presumably it would adjust its offered 

purchase price to account for any 

anticipated environmental liabilities 

associated with the target firm. But, 

without good information, the buyer’s 

offer may not reflect adjustments for the 

cost of environmental noncompliance. 

EPA seeks comment on the extent to 

which environmental noncompliance 

liabilities (as distinguished from 

environmental remediation liabilities) 

are reflected in purchase price, and 

whether tailored incentives should take 

this into account. 

3. Indemnification Agreements Between 

Purchaser and Seller 

The Agency is aware that, in 

acquisition situations, sellers may 

indemnify purchasers across a broad 

range of issues, including 

environmental liability. If a selling firm 

has indemnified the purchaser for 

violations which are ultimately 

disclosed by the new owner, are tailored 

incentives to self-report needed at all? 

On the other hand, the mere existence 

of an indemnification agreement does 

not insulate the purchaser from liability. 

Given the Agency’s interest in 

encouraging appropriate accountability 

and buyer/seller agreements on 

environmental compliance issues, how 

should EPA take indemnification 

agreements into account in designing 

any tailored incentives? Should the 

existence or terms of an indemnification 

agreement have any bearing on a new 

owner’s eligibility for tailored 

incentives and, if so, how? The Agency 

seeks comment on all the questions 

above. 

4. Other Requirements for Incentives 

Should the Agency consider other 

eligibility criteria or participation 

requirements if a program to offer 

tailored incentives is developed? 

B. What Constitutes a ‘‘New Owner’’ for 

Purposes of Being Offered Tailored 

Incentives under the Audit Policy? 

If EPA develops a pilot program 

offering incentives to new owners, the 

Agency’s goal would be to ensure that 

only bona-fide new owners can 

participate. There should be no 

possibility that a firm could evade 

significant environmental liabilities by 

making superficial changes designed to 

make it appear as if the regulated entity 

has a new owner. The Agency believes 

that, in the context of eligibility for 

tailored incentives, only ‘‘arm’s length’’

transactions can produce ‘‘new 

owners.’’

However, the Agency does not have 

the resources necessary to delve into 

complex corporate structures and 

histories to make determinations about 

the authenticity of new ownership in 

the context of such Audit Policy selfdisclosures. The Agency seeks comment 

on a clear, straightforward and easily 

administered approach to determining 

‘‘new ownership’’ and eligibility for 

tailored incentives, and on the specific 

questions posed below. 

1. What should a company need to 

provide to demonstrate to the Agency 

that it is a bona-fide ‘‘new owner?’’

What should the standard be, to 

demonstrate ‘‘new ownership’’ in this 


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Federal Register / Vol. 72, No. 92 / Monday, May 14, 2007 / Notices 27121 

context? Should the Agency require 

each company to self-certify to the 

government that it is indeed a bona-fide 

new owner, and eligible for tailored 

incentives? If a self-certification is 

appropriate in this situation, what 

should it contain? Should other proof be 

offered along with the self-certification? 

2. How long after an acquisition is an 

owner still ‘‘new’’ for the purpose of 

being offered tailored incentives? 

The Agency is seeking a clear 

approach to use in making such 

determinations. While EPA wants to 

encourage new owners to avail 

themselves of this process, there must 

be a time limit for the new owners to 

address environmental violations that 

began prior to their assuming 

ownership. Otherwise, the Audit 

Policy’s goal of encouraging regulated 

entities to self-audit and promptly 

correct noncompliance could be 

undermined. 

3. How should the Agency treat 

different acquisition transactions? 

Should the Agency make any 

distinctions between acquisitions and 

mergers? How should EPA handle 

disclosures by reorganized companies 

that emerge from Chapter 11 

bankruptcy? Should companies in 

which the controlling interest is 

purchased by a new firm with no plans 

to participate in management or 

operations be eligible for incentives? 

How should the Agency treat companies 

that are purchased by their employees, 

who were employed by the company 

when noncompliance began? 

C. What Incentives Should the Agency 

Consider to Encourage New Owners to 

Self-Disclose? 

EPA is also inviting comment on what 

tailored incentives might be appropriate 

to encourage self-auditing and 

disclosures from new owners. EPA has 

identified three major potential 

incentives: (1) Reducing civil penalties 

beyond what the current Audit Policy 

provides, by reducing any economic 

benefit portion of the penalty; (2) 

allowing Audit Policy consideration of 

violations which would otherwise be 

ineligible, because their discovery is 

legally mandated and thus not 

discovered voluntarily; and (3) 

providing recognition from the Agency 

to new owners who self-audit and 

disclose under the Audit Policy. 

EPA is seeking comment on these 

three possible incentives as well as on 

any alternative approaches that might be 

effective. Commenters suggesting other 

incentives are requested to clearly 

describe those incentives and how they 

would function in the Audit Policy 

context. 

In addition, there are some specific 

questions associated with the three 

potential incentives suggested above on 

which EPA is seeking comment: 

1. How should economic benefit be 

calculated for disclosures by new 

owners? 

a. When should the clock start 

running when calculating economic 

benefit? 

The current practice is to calculate 

economic benefit forward from the date 

a violation first occurred. This method 

can result in benefit calculations so 

large that they serve as a disincentive to 

self-report, especially in the context of 

certain types of statutory violations, 

which may be longstanding and require 

multi-million dollar capital and 

operating cost expenditures to remedy. 

Additionally, most new owners would 

be averse to paying significant economic 

benefit amounts when they were not in 

control of the facility when the 

violations occurred and had little or no 

knowledge of them at the time of 

purchase. An alternative method of 

calculating benefit in the new owner 

context would be to commence 

calculating economic benefit from the 

date the facility was acquired; another 

possibility might be to use the date the 

post-acquisition audit was completed. If 

the latter, how long should a new owner 

be given to complete the audit? Another 

approach might be to give the new 

owner a reasonable time after 

acquisition to put on controls, 

particularly where those controls are 

complex, and to calculate benefits for 

delays beyond the reasonable period. 

b. Should the economic benefit 

calculation take into account whether 

and the extent to which the seller has 

indemnified the buyer? 

As discussed above, in Section 

II.A.3.of this Notice, the Agency is 

aware that, in many acquisition 

situations, the seller has indemnified 

the new owner from liability from a 

whole host of issues, often including 

certain environmental liabilities. The 

Agency seeks comment specifically on 

whether such indemnification 

arrangements should have any bearing 

on the calculation of penalties for 

economic benefit, as a potential 

incentive. 

c. In calculating economic benefit, 

should the Agency allow the new owner 

to offset the cost of the audit? 

Some self-audits can be expensive, 

particularly for large, complex facilities. 

One incentive might be to offset the cost 

of the audit from the economic benefit 

calculation. A fair, objective and 

efficient way of establishing the cost of 

the audit would be critical to this 

approach, especially when an audit has 

been performed by the company itself, 

rather than by an outside third-party 

auditor. 

2. Should EPA allow consideration 

under the Audit Policy of violations 

which might otherwise be excluded, 

when the disclosures come from new 

owners? 

As described in Section I.B.3.of this 

Notice, EPA’s recently issued Audit 

Policy: Frequently Asked Questions 

(2007) makes new owners eligible for 

Audit Policy penalty mitigation for 

violations at newly acquired facilities, 

when the violations are discovered as 

part of a compliance examination agreed 

to be undertaken prior to the first 

annual certification under Title V of the 

Clean Air Act, or are disclosed to EPA 

before that time. An additional 

suggested incentive is to allow 

consideration under the Audit Policy of 

certain other violations (e.g., Risk 

Management Program (RMP) under CAA 

112(r)(7)) which may otherwise be 

ineligible for Audit Policy penalty 

mitigation. As noted above, Condition 2 

of the Audit Policy requires that 

disclosed violations must not be 

discovered through a legally mandated 

monitoring or sampling requirement 

prescribed by statute or regulation. 

Therefore, for example, examination 

pursuant to a RMP Triennial Audit 

would not normally be considered 

voluntary. Since EPA wants to 

encourage new owners to examine 

compliance and operations at their 

newly-acquired facilities, correct 

violations and upgrade deficient 

equipment and practices, should new 

owners that in good faith undertake a 

RMP triennial Audit and inform the 

Agency of violations, which existed 

prior to acquisition and are discovered 

through the audit, be eligible for Audit 

Policy consideration? Are there other 

similar categories of violations disclosed 

by new owners that should be eligible 

for Audit Policy consideration? 

3. Should the Agency provide 

recognition to new owners who selfaudit and disclose under the Audit 

Policy? 

Would positive recognition by the 

Agency, commending a new owner’s 

willingness to voluntarily audit and 

disclose, encourage a company to 

undertake such actions? One suggestion 

has been to create and publicize a list 

that recognizes companies that have 

stepped forward to examine compliance 

and operations at their newly acquired 

facilities, correct violations and upgrade 


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27122 Federal Register / Vol. 72, No. 92 / Monday, May 14, 2007 / Notices 

deficient equipment and practices. What 

sort of recognition, if any, would be 

most desirable? 

D. Measures of Success 

If the Agency decides to develop a 

policy for tailored incentives for new 

owners, EPA intends to develop a threeyear pilot program to test the 

effectiveness of such incentives. In 

order to objectively, effectively and 

promptly evaluate the pilot program and 

this approach, EPA must have already 

identified clearly measurable outcomes 

and efficient assessment methodologies. 

The main goal of this program, and the 

most important measure of success, 

would be to show that compliance with 

environmental laws and regulations has 

improved, and that significant 

environmental benefit has been 

attained. However, there are different 

approaches for determining how well 

these goals have been met. 

What measures of success should the 

Agency adopt for the evaluation of a 

pilot program? Important outcomes to 

consider could be the number of 

disclosures made under the pilot 

program, the significance of the 

violations involved, and the significance 

of the pollutant reductions that can be 

attributed to or associated with these 

disclosures. Transparency of the 

program, efficiency in administration, 

and low transaction costs are also issues 

to be considered in evaluating the 

tailored incentive approach. EPA is 

seeking comment on any potential 

measures, and on the methodologies 

necessary to accurately measure them. 

III. Public Process 

As part of EPA’s effort to obtain input 

on whether to offer tailored incentives 

for new owners self-disclosing under 

the Audit Policy, the Agency is 

planning to hold two public comment 

sessions. At those two meetings, 

interested parties may attend and 

provide oral and written comments on 

the issues. The first meeting is 

scheduled for Washington, DC at the 

J.W. Marriott Hotel, 1331 Pennsylvania 

Ave., NW., on June 12, 2007. The 

second one is scheduled for San 

Francisco at the Palace Hotel, 2 New 

Montgomery St., on June 20, 2007. Both 

meetings will begin at 10 a.m. and end 

at 4 p.m. 

The Agency is especially interested in 

comments relating to the issues 

specified in this Notice. After the 

comment period closes, the Agency 

plans to review and consider all 

comments. If EPA decides to develop a 

pilot program offering tailored 

incentives to new owners beyond those 

currently available under the Audit 

Policy, the Agency would then publish 

a second Federal Register notice to seek 

comment on such a proposed pilot 

program. After a second round of public 

comment, the Agency would publish in 

the Federal Register: The final 

description of the pilot program; an 

announcement of its start date; and a 

description of how its success in 

achieving increased self-auditing and 

disclosure and significant improvement 

to the environment will be evaluated. 

EPA encourages parties of all interests, 

including State and local government, 

industry, not-for-profit organizations, 

municipalities, public interest groups 

and private citizens to comment, so that 

the Agency can hear from as broad a 

spectrum as possible. 

IV. What Should I Consider as I 

Prepare My Comments for EPA? 

1. Submitting CBI. Do not submit this 

information to EPA through 

www.regulations.gov or e-mail. Clearly 

mark the part or all of the information 

that you claim to be CBI. For CBI 

information in a disk or CD ROM that 

you mail to EPA, mark the outside of the 

disk or CD ROM as CBI and then 

identify electronically within the disk or 

CD ROM the specific information that is 

claimed as CBI. In addition to one 

complete version of the comment that 

includes information claimed as CBI, a 

copy of the comment that does not 

contain the information claimed as CBI 

must be submitted for inclusion in the 

public docket. Information so marked 

will not be disclosed except in 

accordance with procedures set forth in 

40 CFR Part 2. 

2. Tips for Preparing Your Comments. 

When submitting comments, remember 

to: 

• Identify the Notice; Request for 

Comments by docket number and other 

identifying information (subject 

heading, Federal Register date and page 

number). 

• Follow directions—The Agency 

may ask you to respond to specific 

questions. 

• Explain why you agree or disagree; 

suggest alternatives and language. 

• Describe any assumptions and 

provide any technical information and/ 

or data that you used. 

• If possible, provide any pertinent 

information about the context for your 

comments (e.g., the size and type of 

acquisition transaction you have in 

mind). 

• If you estimate potential costs or 

burdens, explain how you arrived at 

your estimate in sufficient detail to 

allow for it to be reproduced. 

• Provide specific examples to 

illustrate your concerns, and suggest 

alternatives. 

• Explain your views as clearly as 

possible. 

• Submit your comments on time. 

Dated: April 30, 2007. 

Granta Y. Nakayama, 

Assistant Administrator, Office of 

Enforcement and Compliance Assurance. 

[FR Doc. E7–9197 Filed 5–11–07; 8:45 am] 

BILLING CODE 6560–50–P 

EQUAL EMPLOYMENT OPPORTUNITY 

COMMISSION 

Notice of Sunshine Act Meeting 

AGENCY HOLDING THE MEETING: Equal 

Employment Opportunity Commission. 

FEDERAL REGISTER CITATION OF PREVIOUS

ANNOUNCEMENT: 72 FR 26115, Tuesday, 

May 8, 2007. 

PREVIOUSLY ANNOUNCED DATE AND TIME OF

MEETING: Wednesday, May 16, 2007, 

9:30 a.m. Eastern Time. 

CHANGE IN THE MEETING: 

Open Session: 

Item Nos. 3. Full-Service Publication 

Storage and Distribution Center 

Contract has been removed from the 

Agenda. 

CONTACT PERSON FOR MORE INFORMATION: 

Stephen Llewellyn, Acting Executive 

Officer, on (202) 663–4070. 

Dated: May 10, 2007. 

Stephen Llewellyn, 

Acting Executive Officer, Executive 

Secretariat. 

[FR Doc. 07–2386 Filed 5–10–07; 8:45 am] 

BILLING CODE 6570–01–M 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

Assessment Rate Adjustment 

Guidelines for Large Institutions and 

Insured Foreign Branches in Risk 

Category I 

AGENCY: Federal Deposit Insurance 

Corporation (FDIC). 

ACTION: Final guidelines. 

SUMMARY: The FDIC is publishing the 

guidelines it will use for determining 

how adjustments of up to 0.50 basis 

points would be made to the quarterly 

assessment rates of insured institutions 

defined as large Risk Category I 

institutions, and insured foreign 

branches in Risk Category I, according 

to the Assessments Regulation. These 

guidelines are intended to further clarify 

the analytical processes, and the 


pwalker on PROD1PC71 with NOTICES