71226 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

2. The transfer and presentment warranties 

for remotely created checks supplement the 

Federal Trade Commission’s Telemarketing 

Sales Rule, which requires telemarketers that 

submit checks for payment to obtain the 

customer’s ‘‘express verifiable authorization’’

(the authorization may be either in writing or 

tape recorded and must be made available 

upon request to the customer’s bank). 16 CFR 

310.3(a)(3). The transfer and presentment 

warranties shift liability to the depositary 

bank only when the remotely created check 

is unauthorized, and would not apply when 

the customer initially authorizes a check but 

then experiences ‘‘buyer’s remorse’’ and 

subsequently tries to revoke the authorization 

by asserting a claim against the paying bank 

under U.C.C. 4–401. If the depositary bank 

suspects ‘‘buyer’s remorse,’’ it may obtain 

from its customer the express verifiable 

authorization of the check by the paying 

bank’s customer, required under the Federal 

Trade Commission’s Telemarketing Sales 

Rule, and use that authorization as a defense 

to the warranty claim. 

3. The scope of the transfer and 

presentment warranties for remotely created 

checks differs from that of the corresponding 

U.C.C. warranty provisions in two respects. 

The U.C.C. warranties differ from the 

§ 229.34(d) warranties in that they are given 

by any person, including a nonbank 

depositor, that transfers a remotely created 

check and not just to a bank, as is the case 

under § 229.34(d). In addition, the U.C.C. 

warranties state that the person on whose 

account the item is drawn authorized the 

issuance of the item in the amount for which 

the item is drawn. The § 229.34(d) warranties 

specifically cover the amount as well as the 

payee stated on the check. Neither the U.C.C. 

warranties, nor the § 229.34(d) warranties 

apply to the date stated on the remotely 

created check. 

4. A bank making the § 229.34(d) 

warranties may defend a claim asserting 

violation of the warranties by proving that 

the customer of the paying bank is precluded 

by U.C.C. 4–406 from making a claim against 

the paying bank. This may be the case, for 

example, if the customer failed to discover 

the unauthorized remotely created check in 

a timely manner. 

5. The transfer and presentment warranties 

for a remotely created check apply to a 

remotely created check that has been 

reconverted to a substitute check. 

* * * * * 

By order of the Board of Governors of the 

Federal Reserve System, November 21, 2005. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 05–23331 Filed 11–25–05; 8:45 am] 

BILLING CODE 6210–01–P 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 363 

RIN 3064–AC91 

Independent Audits and Reporting 

Requirements 

AGENCY: Federal Deposit Insurance 

Corporation (FDIC). 

ACTION: Final rule. 

SUMMARY: The FDIC is amending part 

363 of its regulations concerning annual 

independent audits and reporting 

requirements, which implement section 

36 of the Federal Deposit Insurance Act 

(FDI Act), as proposed, but with 

modifications to the composition of the 

audit committee and the effective date. 

The FDIC’s amendments raise the assetsize threshold from $500 million to $1 

billion for internal control assessments 

by management and external auditors. 

For institutions between $500 million 

and $1 billion in assets, the 

amendments require the majority, rather 

than all, of the members of the audit 

committee, who must be outside 

directors, to be independent of 

management and create a hardship 

exemption. The amendments also make 

certain technical changes to part 363 to 

correct outdated titles, terms, and 

references in the regulation and its 

appendix. As required by section 36, the 

FDIC has consulted with the other 

federal banking agencies. 

EFFECTIVE DATE: The final rule is 

effective December 28, 2005 and applies 

to part 363 annual reports with a filing 

deadline (90 days after the end of an 

institution’s fiscal year) on or after the 

effective date of these amendments. 

FOR FURTHER INFORMATION CONTACT: 

Harrison E. Greene, Jr., Senior Policy 

Analyst (Bank Accounting), Division of 

Supervision and Consumer Protection, 

at hgreene@fdic.gov or (202) 898–8905; 

or Michelle Borzillo, Counsel, 

Supervision and Legislation Section, 

Legal Division, at mborzillo@fdic.gov or 

(202) 898–7400. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 112 of the Federal Deposit 

Insurance Corporation Improvement Act 

of 1991 (FDICIA) added section 36, 

‘‘Early Identification of Needed 

Improvements in Financial 

Management,’’ to the FDI Act (12 U.S.C. 

1831m). Section 36 is generally 

intended to facilitate early identification 

of problems in financial management at 

insured depository institutions above a 

certain asset size threshold (covered 

institutions) through annual 

independent audits, assessments of the 

effectiveness of internal control over 

financial reporting and compliance with 

designated laws and regulations, and 

related requirements. Section 36 also 

includes requirements for audit 

committees at these insured depository 

institutions. Section 36 grants the FDIC 

discretion to set the asset size threshold 

for compliance with these statutory 

requirements, but it states that the 

threshold cannot be less than $150 

million. Sections 36(d) and (f) also 

obligate the FDIC to consult with the 

other Federal banking agencies in 

implementing these sections of the FDI 

Act, and the FDIC has performed that 

consultation requirement. 

Part 363 of the FDIC’s regulations (12 

CFR part 363), which implements 

section 36 of the FDI Act, requires each 

covered institution to submit to the 

FDIC and other appropriate Federal and 

state supervisory agencies an annual 

report that includes audited financial 

statements, a statement of management’s 

responsibilities, assessments by 

management of the effectiveness of 

internal control over financial reporting 

and compliance with designated laws 

and regulations, and an auditor’s 

attestation report on internal control 

over financial reporting. In addition, 

part 363 provides that each covered 

institution must establish an 

independent audit committee of its 

board of directors comprised of outside 

directors who are independent of 

management of the institution. Part 363 

also includes Guidelines and 

Interpretations (Appendix A to part 

363), which are intended to assist 

institutions and independent public 

accountants in understanding and 

complying with section 36 and part 363. 

When it adopted part 363 in 1993, the 

FDIC stated that it was setting the asset 

size threshold at $500 million rather 

than the $150 million specified in 

section 36 to mitigate the financial 

burden of compliance with section 36 

consistent with safety and soundness. In 

selecting $500 million in total assets as 

the size threshold, the FDIC noted that 

approximately 1,000 of the then nearly 

14,000 FDIC-insured institutions would 

be subject to part 363. These covered 

institutions held approximately 75 

percent of the assets of insured 

institutions at that time. By imposing 

the audit, reporting, and audit 

committee requirements of part 363 on 

institutions with this percentage of the 

industry’s assets, the FDIC intended to 

ensure that the Congress’s objectives for 

achieving sound financial management 

at insured institutions when it enacted 

section 36 would be focused on those 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71227 

1See FDIC Financial Institution Letter (FIL) 86–

94, dated December 23, 1994. FIL–86–94 indicates 

that financial statements prepared for regulatory 

reporting purposes encompass the schedules 

equivalent to the basic financial statements in an 

institution’s appropriate regulatory report, e.g., the 

bank Reports of Condition and Income and the 

Thrift Financial Report. 

institutions posing the greatest potential 

risk to the insurance funds administered 

by the FDIC. Today, due to 

consolidation in the banking and thrift 

industry and the effects of inflation, 

more than 1,150 of the 8,900 insured 

institutions have $500 million or more 

in total assets and are therefore subject 

to part 363. These covered institutions 

hold approximately 90 percent of the 

assets of insured institutions. 

II. Discussion of Proposed Amendments 

On July 19, 2005, the FDIC’s Board 

approved the publication of proposed 

amendments to part 363 of the FDIC’s 

regulations, which were published in 

the Federal Register on August 2, 2005, 

for a 45-day comment period (70 FR 

44293). The comment period closed on 

September 16, 2005. As more fully 

discussed below, the FDIC proposed to 

raise the asset-size threshold in part 363 

from $500 million to $1 billion for 

internal control assessments by 

management and external auditors and 

for the members of the audit committee, 

who must be outside directors, to be 

independent of management. The FDIC 

also proposed to make certain technical 

changes to part 363 to correct outdated 

titles, terms, and references in the 

regulation and its appendix. As 

proposed, the effective date of these 

amendments was to be December 31, 

2005. 

In its proposal, the FDIC also noted 

that it had identified other aspects of 

part 363 that may warrant revision in 

light of changes in the industry and the 

passage of the Sarbanes-Oxley Act of 

2002. However, the FDIC stated that it 

had decided to proceed first with the 

proposed amendments to the asset-size 

threshold in part 363 in order to reduce 

compliance burdens and expenses for 

affected institutions in 2005. These 

further revisions to part 363 are 

expected to be proposed as soon as 

practicable. 

A. Increasing the Asset Size Threshold 

for Internal Control Assessments 

An effective internal control structure 

is critical to the safety and soundness of 

each insured institution. Given its 

importance, internal control is 

evaluated as part of the supervision of 

individual institutions and its adequacy 

is a factor in the management rating 

assigned to an institution. Furthermore, 

in the audit of an institution’s financial 

statements, the external auditor must 

obtain an understanding of internal 

control, including assessing control risk, 

and must report certain matters 

regarding internal control to the 

institution’s audit committee. 

An institution subject to part 363 has 

the added requirement that its 

management perform an assessment of 

the internal control structure and 

procedures for financial reporting and 

that its external auditor examine, attest 

to, and report on management’s 

assertion concerning the institution’s 

internal control over financial reporting. 

For purposes of these internal control 

provisions of part 363, the FDIC has 

advised covered institutions that the 

term ‘‘financial reporting’’ includes both 

financial statements prepared in 

accordance with generally accepted 

accounting principles and those 

prepared for regulatory reporting 

purposes.1 Until year-end 2004, external 

auditors performed their internal 

control assessments in accordance with 

an attestation standard issued by the 

American Institute of Certified Public 

Accountants (AICPA) known as ‘‘AT 

501.’’

The Sarbanes-Oxley Act was enacted 

into law on July 30, 2002. Section 404 

of this Act imposes a requirement for 

internal control assessments by the 

management and external auditors of all 

public companies that is similar to the 

FDICIA requirement. The Securities and 

Exchange Commission’s (SEC) rules 

implementing these requirements took 

effect at year-end 2004 for ‘‘accelerated 

filers,’’ i.e., generally, public companies 

whose common equity has an aggregate 

market value of at least $75 million, but 

they will not take effect until 2007 for 

‘‘non-accelerated filers.’’ For the section 

404 auditor attestations, the Public 

Company Accounting Oversight Board’s 

(PCAOB) Auditing Standard No. 2 (AS 

2) applies. AS 2 replaces the AICPA’s 

AT 501 internal control attestation 

standard for public companies, but AS 

2 does not apply to nonpublic 

companies. The SEC’s section 404 rules 

for management and the provisions of 

AS 2 for section 404 audits of internal 

control establish more robust 

documentation and testing requirements 

than those that have been applied by 

covered institutions and their auditors 

to satisfy the internal control reporting 

requirements in part 363. 

For internal control attestations of 

nonpublic companies, the AICPA is 

currently developing proposed revisions 

to AT 501 that are expected to bring it 

closer into line with the provisions of 

AS 2. The revisions also are likely to 

have the effect of requiring greater 

documentation and testing of internal 

control over financial reporting by an 

institution’s management in order for 

the auditor to perform his or her 

attestation work. 

As the environment has changed and 

continues to change since the enactment 

of the Sarbanes-Oxley Act, the FDIC has 

observed that compliance with the audit 

and reporting requirements of part 363 

has and will continue to become more 

burdensome and costly, particularly for 

smaller nonpublic covered institutions. 

Thus, the FDIC reviewed the current 

asset size threshold for compliance with 

part 363 in light of the discretion 

granted by section 36 that permits the 

FDIC to determine the appropriate size 

threshold (at or above $150 million) at 

which insured institutions should be 

subject to the various provisions of 

section 36. Based on this review, the 

FDIC proposed to amend part 363 to 

increase the asset size threshold for 

internal control assessments by 

management and external auditors from 

$500 million to $1 billion. Raising the 

threshold to $1 billion would achieve 

meaningful burden reduction without 

sacrificing safety and soundness. 

In reaching this decision, the FDIC 

concluded that raising the $500 million 

asset size threshold to $1 billion and 

exempting all institutions below this 

higher size level from all of the 

reporting requirements of part 363 

would not be consistent with the 

objective of the underlying statute, i.e., 

early identification of needed 

improvements in financial management. 

In contrast, the FDIC believes that 

relieving smaller covered institutions 

from the burden of internal control 

assessments, while retaining the 

financial statement audit and other 

reporting requirements for all 

institutions with $500 million or more 

in total assets, strikes an appropriate 

balance in accomplishing this objective. 

By raising the size threshold for internal 

control assessments to $1 billion, about 

600 of the largest insured institutions 

with approximately 86 percent of 

industry assets would continue to be 

covered by the internal control reporting 

requirements of part 363. At the same 

time, the managements of all covered 

institutions would remain responsible 

for establishing and maintaining an 

adequate internal control structure and 

procedures for financial reporting, and 

all institutions with $500 million or 

more in total assets would continue to 

include a statement to that effect in their 

part 363 annual report. 

71228 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

2See Guidelines 27 through 29 of Appendix A to 

part 363. 

3The FDIC received 58 comment letters, which 

included 20 identical letters from individuals at one 

institution and 12 identical letters from individuals 

at another institution. 

B. Composition of the Audit Committee 

Currently, part 363 requires each 

covered institution to establish an 

independent audit committee of its 

board of directors, comprised of outside 

directors who are independent of 

management of the institution. The 

duties of the audit committee include 

reviewing with management and the 

institutions’ independent public 

accountant the basis for the reports 

included in the part 363 annual report 

submitted to the FDIC and other 

appropriate Federal and state 

supervisory agencies. The FDIC’s 

Guidelines to part 363 provide that, at 

least annually, the board of directors of 

a covered institution should determine 

whether all existing and potential audit 

committee members are ‘‘independent 

of management of the institution.’’ The 

guidelines also describe factors to 

consider in making this determination.2

Section 36 provides that an 

appropriate federal banking agency may 

grant a hardship exemption to a covered 

institution that would permit its 

independent audit committee to be 

made up of less than all, but no fewer 

than a majority of, outside directors who 

are independent of management. To 

grant the exemption, the agency must 

find that the institution has encountered 

hardships in retaining and recruiting a 

sufficient number of competent outside 

directors. 

Notwithstanding this exemption 

provision of section 36, the FDIC has 

observed that a number of smaller 

covered institutions, particularly those 

with few shareholders that have 

recently exceeded $500 million in total 

assets and become subject to part 363, 

have encountered difficulty in satisfying 

the independent audit committee 

requirement. To comply with this 

requirement, these institutions must 

identify and attract qualified 

individuals in their communities who 

would be willing to become a director 

and audit committee member and who 

would be independent of management. 

To relieve this burden, but also 

recognizing that the FDIC has long held 

that individuals who serve as directors 

of any insured depository institution 

should be persons of independent 

judgment, the FDIC proposed to amend 

part 363 to increase from $500 million 

to $1 billion the asset size threshold for 

requiring audit committee members to 

be independent of management. 

Conforming changes were also proposed 

to be made to Guidelines 27–29 of 

Appendix A to part 363. Each insured 

depository institution with total assets 

of $500 million or more but less than $1 

billion would continue to be required to 

have an audit committee comprised of 

outside directors. Consistent with 

Guideline 29 of Appendix A to part 363, 

an outside director would be defined as 

an individual who is not, and within the 

preceding year has not been, an officer 

or employee of the institution or any 

affiliate of the institution. 

The proposed amendment to the audit 

committee requirements for institutions 

with between $500 million and $1 

billion in total assets would allow an 

outside director who is, for example, a 

consultant or legal counsel to the 

institution, a relative of an officer or 

employee of the institution or its 

affiliates, or the owner of 10 percent or 

more of the stock of the institution to 

serve as an audit committee member. 

Nevertheless, the FDIC indicated in the 

proposal that it would encourage each 

institution with between $500 million 

and $1 billion in assets to make a 

reasonable good faith effort to establish 

an audit committee of outside directors 

who are independent of management. 

III. Comments Received on Proposed 

Amendments 

In response to its August 2, 2005, 

request for comment on the proposed 

amendments to part 363, the FDIC 

received comment letters from 28 

different respondents 3: 15 banking and 

thrift organizations, 7 bankers’

associations, 3 accountants and 

accounting firms, the Conference of 

State Bank Supervisors (CSBS), the 

FDIC’s Office of Inspector General 

(FDIC–OIG), and one other party. 

Generally, the comment letters 

expressed support for the proposed 

amendments. All but one of the 

respondents favored the proposal to 

increase the asset-size threshold for 

internal control assessments by 

management and external auditors to $1 

billion. As for the proposed increase to 

$1 billion in the asset-size threshold for 

the members of the audit committee, 

who must be outside directors, to be 

independent of management, 24 of the 

28 respondents supported this aspect of 

the proposal, two respondents opposed 

it, and two respondents did not directly 

comment on it. Respondents also raised 

a number of other issues. 

The CSBS commented on the 

proposed change in the audit committee 

provisions of part 363 for institutions 

with $500 million to $1 billion in assets. 

The CSBS, on behalf of state banking 

departments, stated that there is value 

in maintaining a significant level of 

independence when fulfilling the 

important role of an audit committee 

member. Although it saw benefit in 

alleviating some of the burden of a fully 

independent audit committee, for safety 

and soundness considerations, the CSBS 

recommended that the chairman and a 

majority of the audit committee 

members at institutions in the $500 

million to $1 billion asset size range be 

required to be independent of 

management rather than allowing all of 

the outside directors on the audit 

committee not to be independent of 

management. 

Five other commenters concurred 

with the FDIC’s observation that some 

smaller covered institutions have 

encountered difficulty in establishing an 

audit committee, all of whose members 

are independent of management. In this 

regard, the CSBS’s comment letter also 

acknowledged the difficulties in 

attaining and keeping a fully 

independent audit committee, 

especially in smaller rural communities. 

Individuals who serve as directors of 

insured institutions, whether or not they 

serve on the audit committee, are 

expected to be persons of independent 

judgment. In this regard, under the 

Uniform Financial Institutions Rating 

System (62 FR 752, January 6, 1997), a 

factor that the federal banking agencies’

examiners assess when they evaluate 

the capability and performance of an 

institution’s management and board of 

directors for purposes of assigning an 

appropriate Management component 

rating is the extent to which the 

management and board members are 

affected by, or susceptible to, dominant 

influence or concentration of authority. 

Hence, the agencies’ examination staffs 

are cognizant of the heightened level of 

risk presented by the existence of a 

dominant officer, whether or not outside 

directors, including those on the audit 

committee, are independent of 

management. 

After carefully considering the CSBS’s 

recommendation, the FDIC has decided 

to amend the proposal to require that a 

majority of the audit committee 

members of institutions with $500 

million to $1 billion in assets, all of 

whom must be outside directors, be 

independent of management. In 

addition, in recognition of the 

difficulties that some individual 

institutions in this size range may have 

in attaining such an audit committee, 

the final rule will provide an exemption 

under which an appropriate Federal 

banking agency may, by order or 

regulation, permit the audit committee 

of such an institution to be made up of 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71229 

less than a majority of outside directors 

who are independent of management, if 

the agency determines that the 

institution has encountered hardships 

in retaining and recruiting a sufficient 

number of competent outside directors 

to serve on the audit committee of the 

institution. The FDIC believes that this 

change to its proposal strikes an 

appropriate balance of reducing 

regulatory burden without jeopardizing 

safety and soundness. 

Another commenter who addressed 

the audit committee portion of the 

proposal suggested that the FDIC’s 

recommendation that institutions make 

a ‘‘reasonable good faith effort’’ to 

establish an audit committee of outside 

directors who are independent of 

management was vague and should be 

deleted from the proposal. This 

commenter added that, if the 

recommendation were not deleted, the 

FDIC should include a definition of, or 

list of criteria that would constitute, a 

‘‘reasonable good faith effort’’ and 

provide guidance on how an institution 

should document that it has undertaken 

such an effort. While the FDIC 

encourages each institution with 

between $500 million and $1 billion in 

assets to make a reasonable good faith 

effort to establish an audit committee 

comprised entirely of outside directors 

who are independent of management, 

each institution faces a unique set of 

circumstances when it seeks to attract 

competent individuals to be outside 

directors who would be willing to serve 

on its audit committee. Because a list of 

criteria that would constitute evidence 

of a ‘‘reasonable good faith effort’’ could 

not consider all of the situations in 

which institutions engaging in such a 

search might find themselves, the FDIC 

has chosen not to restrict institutions 

and itself to a specific list. 

In its comment letter on the proposal, 

the FDIC–OIG recommended that 

insured institutions with total assets of 

$500 million or more, but less than $1 

billion, that have or receive either a 

composite rating or Management 

component rating of 3, 4, or 5, i.e., 3 or 

lower, under the Uniform Financial 

Institutions Rating System (also known 

as the CAMELS rating system) be 

required to comply with all of the 

requirements of Part 363 rather than 

being provided the proposed relief for 

institutions in this size range. The 

FDIC–OIG indicated that, as of 

September 12, 2005, 16 insured 

institutions with $500 million to $1 

billion in assets had less than a 

satisfactory composite CAMELS rating. 

Specifically, 11 institutions had a 

composite rating of 3 and 5 institutions 

had a 4 rating. The FDIC–OIG also noted 

that, over the last several months, 15 

other insured institutions in this size 

range with a composite rating of 2 had 

a Management component rating of 3. 

The FDIC–OIG indicated that, in 

reviewing past failures of insured 

institutions, it had observed that weak 

corporate governance, including 

financial reporting problems and the 

lack of independence of the board of 

directors from institution management, 

was often a factor in the failure of these 

institutions and contributed to material 

losses ($25 million or more) to the 

deposit insurance funds administered 

by the FDIC. The FDIC–OIG also stated 

that maintaining the full requirements 

of part 363 for less than satisfactory 

institutions would help to address 

potential concerns about deficiencies by 

the board of directors and in internal 

control, internal audit, and external 

audit and thereby mitigate the 

possibility of institution failure. 

As defined in the Uniform Financial 

Institutions Rating System, institutions 

with a composite rating of 2 are 

fundamentally sound. There are no 

material supervisory concerns and, as a 

result, the supervisory response is 

informal and limited. Institutions with a 

composite rating of 3 exhibit some 

degree of supervisory concern in one or 

more of the six component areas 

(Capital Adequacy, Asset Quality, 

Management, Earnings, Liquidity, and 

Sensitivity to Market Risk). These 

financial institutions require more than 

normal supervision, which may include 

formal or informal enforcement actions. 

Failure appears unlikely, however, 

given the overall strength and financial 

capacity of these institutions. 

Institutions with a composite rating of 4 

generally exhibit unsafe and unsound 

practices or conditions. There are 

serious financial or managerial 

deficiencies that result in unsatisfactory 

performance. Failure is a distinct 

possibility if the problems and 

weaknesses are not satisfactorily 

addressed and resolved. Institutions 

with a composite rating of 5 exhibit 

extremely unsafe and unsound practices 

or conditions and a critically deficient 

performance. They are of the greatest 

supervisory concern and ongoing 

supervisory attention is necessary. 

These institutions pose a significant risk 

to the deposit insurance funds and 

failure is highly probable. 

A Management component rating of 3 

indicates management and board 

performance that need improvement or 

risk management practices that are less 

than satisfactory given the nature of the 

institution’s activities. The capabilities 

of management or the board of directors 

may be insufficient for the type, size, or 

condition of the institution. Problems 

and significant risks may be 

inadequately identified, measured, 

monitored, or controlled by 

management. Because management’s 

ability to respond to changing 

circumstances and address risks is an 

important factor in evaluating an 

institution’s overall risk profile and the 

level of supervisory attention that 

should be devoted to an institution, the 

Management component is given special 

consideration when assigning the 

institution’s composite rating. 

Institutions that have a composite 

rating of 3 or lower are already subject 

to increased supervisory scrutiny and 

are normally subject to formal or 

informal supervisory actions (e.g., 

Memorandum of Understanding or 

Cease and Desist Order) to address the 

need for corrective actions for 

weaknesses and deficiencies cited in 

reports of examination or otherwise 

identified through supervisory 

oversight. In reviewing the institutions 

cited in the FDIC–OIG’s comment letter, 

the FDIC notes that all of the 

institutions with a composite rating of 3 

or lower are subject to formal and/or 

informal supervisory actions and all of 

the institutions with a composite rating 

of 2 and a Management component 

rating of 3 or lower are subject to 

supervisory actions. The FDIC further 

notes that approximately half of these 

institutions are public companies or 

subsidiaries of public companies that 

are subject to the filing and reporting 

requirements of the Federal securities 

laws as implemented by the SEC. 

The examination staffs of the FDIC 

and the other Federal banking agencies 

look to the assessments by management 

of internal control over financial 

reporting and the independent auditors’

attestation reports on those assessments 

as one source of information on the 

existence of any significant deficiencies 

and material weaknesses in this internal 

control structure. Nevertheless, the 

agencies’ examiners are expected to 

perform their own evaluation of an 

institution’s internal control 

environment and audit programs when 

determining the condition of the 

institution and the need for and degree 

of any supervisory action. Moreover, the 

examiners’ assessment of the internal 

control environment encompasses not 

only internal control over financial 

reporting, but also internal control as it 

relates to the effectiveness and 

efficiency of the institution’s operations 

and to its compliance with laws and 

regulations. 

The agencies’ examination staffs 

consider many factors in determining an 

institution’s composite rating and 

71230 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

individual component ratings, including 

the Management component. While 

these factors include the capability and 

performance of management and the 

board of directors (including the board’s 

committees such as the audit 

committee), they also include the 

adequacy of, and conformance with, 

appropriate internal policies and 

controls addressing the operations and 

risks of significant activities; the 

accuracy, timeliness, and effectiveness 

of management information and risk 

monitoring systems; the adequacy of 

audits and internal control, including 

internal control over financial reporting; 

compliance with laws and regulations; 

and the overall performance of the 

institution and its risk profile. 

As a consequence, when an 

institution is assigned a composite 

rating or a Management component 

rating of 3 or lower, its Federal banking 

agency’s supervisory response, which 

may include formal or informal 

enforcement actions, is tailored to the 

specific weaknesses, deficiencies, and 

problems identified by the examination 

staff and seeks appropriate and timely 

corrective action by management and 

the board of directors. The factors 

contributing to such a less than 

satisfactory rating may or may not have 

included ineffective internal control 

over financial reporting and/or 

unacceptable audit committee oversight 

and performance. In this regard, 

although the FDIC–OIG reported in its 

comment letter that 15 institutions with 

$500 million to $1 billion in assets had 

recently been assigned a composite 

rating of 2 and a Management 

component rating of 3, the majority of 

these institutions received this 

Management rating for reasons 

unrelated to deficiencies in internal 

control over financial reporting (e.g., the 

reasons were related to compliance with 

the Bank Secrecy Act). Nevertheless, in 

those cases where examiners detect 

such internal control deficiencies at an 

institution with $500 million to $1 

billion in assets, if it is deemed 

necessary and appropriate for 

addressing these deficiencies, the 

supervisory response by the institution’s 

Federal banking agency could include a 

requirement for management to perform 

an assessment of internal control over 

financial reporting and for the external 

auditor to attest to management’s 

assertion or for the external auditor to 

report directly on internal control over 

financial reporting. 

Given that each institution with $500 

million to $1 billion in assets with a 

composite rating or Management 

component rating of 3 or lower is 

receiving closer than normal 

supervisory attention focused on 

identified problem areas, imposing 

additional requirements for internal 

control assessments by management and 

the external auditor and for the 

replacement of all audit committee 

members who are not independent of 

management would levy burdens on all 

such institutions, regardless of whether 

this burden would address weaknesses 

identified in a given institution. 

However, as previously noted, the FDIC 

believes that, in response to comments 

from the CSBS, amending the proposal 

to require a majority of the audit 

committee members to be independent 

of management strikes an appropriate 

balance between reducing regulatory 

burden and maintaining safety and 

soundness. 

Additionally, as a practical matter, 

CAMELS ratings often change during 

the year as a result of examination 

findings or other supervisory oversight. 

The FDIC–OIG’s recommendation 

would subject institutions to 

uncertainty if the subject provisions of 

part 363 would apply immediately 

during any given year in which an 

institution’s composite or Management 

component rating fell to 3 or lower. If 

applied in the year following receipt of 

the 3 or lower rating, the 

recommendation would often result in 

requiring compliance with the subject 

provisions of part 363 after the 

institution had corrected its problems 

and obtained a higher composite or 

Management rating. The first of these 

approaches would be difficult, at best, 

to plan for and implement on a timely 

basis, while the alternative (lagging) 

approach would often impose burden 

after (the often unrelated) problems had 

been addressed. 

Furthermore, under the proposed 

amendments to part 363, each 

institution with $500 million to $1 

billion in assets must continue to 

undergo an annual audit of its financial 

statements. In a financial statement 

audit, the external auditor must obtain 

an understanding of internal control and 

must report certain matters regarding 

internal control to the institution’s audit 

committee. In this regard, on September 

1, 2005, the AICPA Auditing Standards 

Board issued a proposed Statement on 

Auditing Standards (SAS) on the 

‘‘Communication of Internal Control 

Related Matters Noted in an Audit’’ that 

will supersede its current SAS on this 

topic, which is known as ‘‘SAS 60.’’ The 

comment period for this auditing 

proposal ended on October 31, 2005, 

with the final standard expected in the 

first quarter of 2006. Among other 

things, the proposed SAS requires the 

auditor to communicate, in writing, to 

management and those charged with 

governance (the board of directors and/ 

or the audit committee) significant 

deficiencies and material weaknesses in 

internal control of which the auditor 

becomes aware. Under current SAS 60, 

the auditor should report such 

deficiencies and weaknesses to the audit 

committee, preferably in writing, but 

oral communication of this information 

is also permitted. As proposed, the 

improved communication provisions in 

the SAS would be effective for audits of 

financial statements for periods ending 

on or after December 15, 2006. Part 363 

requires covered institutions, regardless 

of size, to submit copies of reports 

related to their audits that are issued by 

their external auditors, including these 

written reports on significant 

weaknesses and material weaknesses, to 

the FDIC and other appropriate Federal 

and state supervisory agencies. 

After fully considering the FDIC–

OIG’s comment and the agencies’

supervisory tools and processes for 

evaluating the soundness of institutions, 

identifying institutions exhibiting 

financial and operational weaknesses or 

adverse trends, and focusing 

appropriate supervisory attention on 

such institutions, the FDIC has decided 

not to revise its proposed increase in the 

asset-size threshold in the manner 

proposed by the FDIC–OIG and accord 

a different treatment to institutions with 

$500 million to $1 billion in assets that 

have a composite rating or Management 

component rating of 3 or lower. 

However, the FDIC believes that the 

change to the composition of the audit 

committee that it is making in response 

to the comments from the CSBS, which 

will require a majority of the members 

of the audit committee, who must be 

outside directors, to be independent of 

management, will help to address the 

FDIC-OIG’s concerns about deficiencies 

in the performance of the board and 

audit committee of institutions with less 

than satisfactory ratings. 

Six commenters urged the FDIC to 

approve the proposed amendments to 

part 363 as soon as feasible because 

many procedures related to the 

assessment of internal control over 

financial reporting are addressed prior 

to an institution’s fiscal year-end, 

particularly in the fourth fiscal quarter. 

These commenters further 

recommended that the FDIC either 

change the effective date of the 

amendments from December 31, 2005, 

as proposed, to September 30, 2005, or 

grant an institution’s primary Federal 

regulator the authority to waive the 

2005 internal control assessment 

requirements for institutions with total 

assets of $500 million or more but less 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71231 

4Under section 363.4(a), an institution’s filing 

deadline is 90 days after the end of the institution’s 

fiscal year. 

5Footnote 117 in the preamble to the SEC’s 

section 404 final rule releases states that ‘‘[a]n 

insured depository institution subject to both the 

FDIC’s [internal control assessment] requirements 

and our new requirements [i.e., a public depository 

institution] choosing to file a single report to satisfy 

both sets of requirements will file the report with 

its primary Federal regulator under the Exchange 

Act and the FDIC, its primary Federal regulator (if 

other than the FDIC), and any appropriate state 

depository institution supervisor under part 363 of 

the FDIC’s regulations. A [public] holding company 

choosing to prepare a single report to satisfy both 

sets of requirements will file the report with the 

[Securities and Exchange] Commission under the 

Exchange Act and the FDIC, the primary Federal 

regulator of the insured depository institution 

subsidiary subject to the FDIC’s requirements, and 

any appropriate state depository institution 

supervisor under part 363.’’

than $1 billion that have fiscal yearends other than December 31. The FDIC 

concurs with these commenters’

suggestion concerning the effective date 

and, in response, is changing the 

effective date of the amendments to part 

363 from December 31, 2005, to 

December 28, 2005. The final rule will 

apply to part 363 annual reports with a 

filing deadline (90 days after the end of 

an institution’s fiscal year) on or after 

the effective date of these amendments. 

Four commenters recommended that 

the $1 billion asset-size threshold be 

tied to an index that would 

automatically increase the threshold 

annually. For reasons of practicality and 

to provide certainty to institutions 

concerning the size at which full 

compliance with part 363 is required, 

the FDIC has decided not to adopt this 

indexing recommendation. 

The FDIC also received several 

recommendations from commenters that 

are outside the scope of the proposed 

amendments to part 363 and, 

accordingly, the FDIC has decided not 

to implement these recommendations as 

part of the final rule. These comments 

included the following: (1) Increase the 

asset size threshold for applying the 

SEC independence rules to external 

auditors, (2) have the FDIC adopt its 

own independence rules for external 

auditors, (3) enhance the FDIC’s review 

of external audit reports, (4) make the 

standards for performing audits of 

internal control over financial reporting 

the same for both public and non-public 

companies, and (5) establish a fraud 

hotline for both examiners and bank 

employees. 

IV. Final Rule 

The FDIC has considered the 

comments received on its proposed 

amendments to part 363 and is adopting 

the amendments as proposed, but with 

modifications to the composition of the 

audit committee and the effective date. 

This final rule raises the asset-size 

threshold from $500 million to $1 

billion for internal control assessments 

by management and external auditors. 

For institutions between $500 million 

and $1 billion in assets, it also requires 

the majority, rather than all, of the 

members of the audit committee, who 

must be outside directors, to be 

independent of management and creates 

a hardship exemption. In addition, the 

final rule makes certain technical 

changes to part 363 to correct outdated 

titles, terms, and references in the 

regulation and its appendix. 

This final rule takes effect December 

28, 2005, not on December 31, 2005, as 

proposed, and it applies to part 363 

annual reports with a filing deadline 4

on or after the rule’s effective date. For 

example, for insured institutions (both 

public and non-public) with fiscal years 

that ended on September 30, 2005, or 

that will end on December 31, 2005, that 

had $500 million or more in total assets, 

but less than $1 billion in total assets, 

at the beginning of the fiscal year, the 

final rule means that the part 363 

annual report that these institutions 

must submit to the FDIC and other 

appropriate Federal and state 

supervisory agencies within 90 days 

after the end of the fiscal year needs to 

include only audited financial 

statements, statements of management’s 

responsibilities, management’s 

assessment of the institution’s 

compliance with designated laws and 

regulations, and an auditor’s report on 

the financial statements. 

For insured depository institutions 

that are public companies or 

subsidiaries of public companies, 

regardless of size, the FDIC’s 

amendments to part 363 do not relieve 

public companies of their obligation to 

comply with the internal control 

assessment requirements imposed by 

section 404 of the Sarbanes-Oxley Act in 

accordance with the effective dates for 

compliance set forth in the SEC’s 

implementing rules. 

Nevertheless, the FDIC reminds 

insured institutions with $1 billion or 

more in total assets that are public 

companies or subsidiaries of public 

companies that they have considerable 

flexibility in determining how best to 

satisfy the internal control assessment 

requirements in the SEC’s section 404 

rules and the FDIC’s part 363. As 

indicated in the preamble to the SEC’s 

section 404 final rule release, the FDIC 

(and the other Federal banking agencies) 

agreed with the SEC that insured 

depository institutions that are subject 

to both part 363 (as well as holding 

companies permitted under the holding 

company exception in part 363 to file an 

internal control report on behalf of their 

insured depository institution 

subsidiaries) and the SEC’s rules 

implementing section 404 can choose 

either of the following two options: 

• They can prepare two separate 

reports of management on the 

institution’s or the holding company’s 

internal control over financial reporting 

to satisfy the FDIC’s part 363 

requirements and the SEC’s section 404 

requirements; or 

• They can prepare a single report of 

management on internal control over 

financial reporting that satisfies both the 

FDIC’s requirements and the SEC’s 

requirements.5

For more complete information on 

these two options, institutions (and 

holding companies) should refer to 

section II.H.4. of the preamble to the 

SEC’s section 404 final rule release (68 

FR 36648, June 18, 2003). 

Paperwork Reduction Act 

This regulation contains 

modifications to a collection of 

information that have been reviewed 

and approved by the Office of 

Management and Budget under control 

number 3064–0113, pursuant to the 

Paperwork Reduction Act (44 U.S.C. 

3501 et seq.). The primary modification 

increases the asset size threshold for 

compliance with certain reporting 

requirements in part 363. 

The estimated reporting burden for 

the collection of information under part 

363 is 65,612 hours per year. 

Number of Respondents: 5,243. 

Total Annual Responses: 15,684. 

Total Annual Burden Hours: 65,612. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires that each Federal agency either 

certify that a proposed rule would not, 

if adopted in final form, have a 

significant economic impact on a 

substantial number of small entities or 

prepare an initial regulatory flexibility 

analysis of the proposal and publish the 

analysis for comment. See 5 U.S.C. 603, 

605. The Small Business Administration 

(SBA) defines small banks as those with 

less than $150 million in assets. Because 

this rule expressly exempts insured 

depository institutions having assets of 

less than $500 million, it is inapplicable 

to small entities as defined by the SBA. 

Therefore, it is certified that this 

proposed rule would not have a 

significant economic impact on a 

substantial number of small entities. 

71232 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

Small Business Regulatory Enforcement 

Fairness Act 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 

(SBREFA) (Title II, Pub. L. 104–121) 

provides generally for agencies to report 

rules to Congress and the General 

Accounting Office (GAO) for review. 

The reporting requirement is triggered 

when a Federal agency issues a final 

rule. The FDIC will file the appropriate 

reports with Congress and the GAO as 

required by SBREFA. The Office of 

Management and Budget has 

determined that the rule does not 

constitute a ‘‘major rule’’ as defined by 

SBREFA. 

List of Subjects in 12 CFR Part 363 

Accounting, Administrative practice 

and procedure, Banks, Banking, 

Reporting and recording keeping 

requirements. 

■ For the reasons set forth in the 

preamble, the Board of Directors of the 

FDIC hereby amends part 363 of title 12, 

chapter III, of the Code of Federal 

Regulations as follows: 

PART 363—ANNUAL INDEPENDENT 

AUDITS AND REPORTING 

REQUIREMENTS 

■ 1. The authority citation for part 363 

continues to be read as follows: 

Authority: 12 U.S.C. 1831m. 

■ 2. Section 363.1 is amended by 

revising paragraph (b)(2)(ii)(B) to read as 

follows: 

§ 363.1 Scope. 

* * * * * 

(b) * * * 

(2) * * * 

(ii) * * * 

(B) Total assets of $5 billion or more 

and a composite CAMELS rating of 1 or 

2. 

* * * * * 

■ 3. Section 363.2(b) is amended by 

revising paragraph (b)(2) and adding 

paragraph (b)(3) to read as follows: 

§ 363.2 Annual reporting requirements. 

* * * * * 

(b) * * * 

(2) An assessment by management of 

the institution’s compliance with such 

laws and regulations during such fiscal 

year; and 

(3) For an institution with total assets 

of $1 billion or more at the beginning of 

such fiscal year, an assessment by 

management of the effectiveness of such 

internal control structure and 

procedures as of the end of such fiscal 

year. 

■ 4. Section 363.3 is amended by 

revising paragraph (b) to read as follows: 

§ 363.3 Independent public accountant. 

* * * * * 

(b) Additional reports. For each 

insured depository institution with total 

assets of $1 billion or more at the 

beginning of the institution’s fiscal year, 

such independent public accountant 

shall examine, attest to, and report 

separately on, the assertion of 

management concerning the 

institution’s internal control structure 

and procedures for financial reporting. 

The attestation shall be made in 

accordance with generally accepted 

standards for attestation engagements. 

* * * * * 

■ 5. Section 363.5 is amended by 

revising paragraph (a) to read as follows: 

§ 363.5 Audit committees. 

(a) Composition and duties. Each 

insured depository institution shall 

establish an audit committee of its board 

of directors, the composition of which 

complies with paragraphs (a)(1), (2), and 

(3) of this section, and the duties of 

which shall include reviewing with 

management and the independent 

public accountant the basis for the 

reports issued under this part. 

(1) Each insured depository 

institution with total assets of $1 billion 

or more as of the beginning of its fiscal 

year shall establish an independent 

audit committee of its board of 

directors, the members of which shall be 

outside directors who are independent 

of management of the institution. 

(2) Each insured depository 

institution with total assets of $500 

million or more but less than $1 billion 

as of the beginning of its fiscal year shall 

establish an audit committee of its board 

of directors, the members of which shall 

be outside directors, the majority of 

whom shall be independent of 

management of the institution. The 

appropriate Federal banking agency 

may, by order or regulation, permit the 

audit committee of such an insured 

depository institution to be made up of 

less than a majority of outside directors 

who are independent of management, if 

the agency determines that the 

institution has encountered hardships 

in retaining and recruiting a sufficient 

number of competent outside directors 

to serve on the audit committee of the 

institution. 

(3) An outside director is a director 

who is not, and within the preceding 

fiscal year has not been, an officer or 

employee of the institution or any 

affiliate of the institution. 

* * * * * 

■ 6. Appendix A to part 363 is amended 

as follows: 

■ a. Footnote 2, Guideline 10, is 

amended by adding ‘‘Risk Management’’

after ‘‘FDIC’s Division of Supervision 

and Consumer Protection (DSC)’’; 

■ b. Guideline 16 is amended by 

removing ‘‘Registration and Disclosure 

Section’’ and adding in its place 

‘‘Accounting and Securities Disclosure 

Section’’; 

■ c. Guideline 22 is amended by 

revising the first sentence of paragraph 

(a) to read as set forth below; 

■ d. Guideline 27 is amended by 

revising the second sentence to read as 

set forth below; 

■ e. Guideline 28 is amended by 

revising paragraph (a) to read as set 

forth below; 

■ f. Guideline 29 is revised to read as set 

forth below; and 

■ g. The first sentence of Guideline 36 

is revised to read as set forth below. 

The revisions read as follows: 

Appendix A to Part 363—Guidelines 

and Interpretations 

* * * * * 

Filing and Notice Requirements (§ 363.4) 

22. * * * 

(a) FDIC: Appropriate FDIC Regional or 

Area Office (Supervision and Consumer 

Protection), i.e., the FDIC regional or area 

office in the FDIC region or area that is 

responsible for monitoring the institution or, 

in the case of a subsidiary institution of a 

holding company, the consolidated company. 

* * * 

* * * * * 

Audit Committees (§ 363.5) 

27. * * * At least annually, the board of 

an institution with $1 billion or more in total 

assets at the beginning of its fiscal year 

should determine whether all existing and 

potential audit committee members are 

‘‘independent of management of the 

institution’’ and the board of an institution 

with total assets of $500 million or more but 

less than $1 billion as of the beginning of its 

fiscal year should determine whether the 

majority of all existing and potential audit 

committee members are ‘‘independent of 

management of the institution.’’ * * * 

28. * * * 

(a) Has previously been an officer of the 

institution or any affiliate of the institution; 

* * * * * 

29. Lack of independence. An outside 

director should not be considered 

independent of management if such director 

owns or controls, or has owned or controlled 

within the preceding fiscal year, assets 

representing 10 percent or more of any 

outstanding class of voting securities of the 

institution. 

* * * * * 

Other 

36. Modifications of guidelines. The FDIC’s 

Board of Directors has delegated to the 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71233 

Director of the FDIC’s Division of 

Supervision and Consumer Protection (DSC) 

authority to make and publish in the Federal 

Register minor technical amendments to the 

Guidelines in this appendix, in consultation 

with the other appropriate federal banking 

agencies, to reflect the practical experience 

gained from implementation of this 

part.* * * 

* * * * * 

By order of the Board of Directors. 

Dated at Washington, DC, this 8th day of 

November, 2005. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

[FR Doc. 05–23310 Filed 11–25–05; 8:45 am] 

BILLING CODE 6714–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 71 

[Docket No. FAA–2003–15471; Airspace 

Docket No. 03–AWA–6] 

RIN 2120–AA66 

Modification of the Minneapolis Class 

B Airspace Area; MN 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule. 

SUMMARY: This action modifies the 

current Minneapolis, MN, Class B 

airspace area to contain large turbinepowered aircraft during operations to 

the new Runway 17/35 and to address 

an increase in aircraft operations to and 

from the Minneapolis-St. Paul 

International (Wold-Chamberlain) 

Airport (MSP). The FAA is taking this 

action to enhance safety and improve 

the management of aircraft operations in 

the Minneapolis terminal area. Further, 

this action supports the FAA’s national 

airspace redesign goal of optimizing 

terminal and en route airspace areas to 

reduce aircraft delays and improve 

system capacity. 

DATES: Effective Date: 0901 UTC, 

February 16, 2006. 

FOR FURTHER INFORMATION CONTACT: 

Steve Rohring, Airspace and Rules, 

Office of System Operations Airspace 

and AIM, Federal Aviation 

Administration, 800 Independence 

Avenue, SW., Washington, DC 20591; 

telephone: (202) 267–8783. 

SUPPLEMENTARY INFORMATION: 

Background 

On November 24, 2003, the FAA 

published in the Federal Register a 

notice of proposed rulemaking (NPRM) 

to modify the Minneapolis Class B 

airspace area (68 FR 65859). The FAA 

proposed the action due to a significant 

growth in aircraft operations and the 

construction of a new runway (Runway 

17/35) to accommodate the growth. The 

proposed modifications were designed 

to contain large turbine-powered aircraft 

within the MSP Class B airspace area 

and included expanding the lateral 

dimensions of the existing MSP Class B 

airspace area as well as increasing the 

vertical limits from 8,000 feet above 

mean sea level (MSL) to 10,000 feet 

MSL. 

Subsequent to the issuance of the 

NPRM, the FAA’s further analysis of 

airspace requirements revealed that 

additional airspace (beyond and below 

that airspace proposed in the NPRM) 

will be needed to contain large 

turbine’powered aircraft conducting 

approaches to the new Runway 35 

within the MSP Class B airspace area. 

To provide the public an opportunity to 

comment on the additional required 

airspace, the FAA issued a 

supplemental notice of proposed 

rulemaking (SNPRM) that included a 

new area F (70 FR 43803). Area F 

reflects the additional airspace that the 

FAA determined will be needed, as well 

as changes suggested by the Air Line 

Pilots Association, International (ALPA) 

and the National Business Aviation 

Association, Inc. (NBAA) in response to 

the NPRM (see ‘‘Discussion of 

Comment’’ below). 

Discussion of Comments 

In response to the NPRM, the FAA 

received three comments. 

The Aircraft Owners and Pilots 

Association (AOPA) expressed a 

concern that the dimensions of the MSP 

Class B airspace area should conform to 

the unique needs of users rather than 

conform to a national standard. They 

also expressed a concern that raising the 

vertical limits from 8,000 feet MSL to 

10,000 feet MSL would ‘‘pose a serious 

operational limitation to pilots wishing 

to over fly’’ the MSP Class B airspace 

area. AOPA also expressed a desire for 

charted visual flight rules (VFR) flyways 

in the MSP terminal area. 

The FAA has determined that some 

aircraft may have to fly farther or at 

lower or higher altitudes to remain clear 

of the modified MSP Class B airspace 

area; however, this is necessary to 

separate them from large turbinepowered aircraft arriving and departing 

MSP. The management of aircraft 

operations to the new runway will 

require several new arrival vector areas 

between the altitudes of 7,000 feet and 

10,000 feet MSL over the MSP terminal 

area. Specifically, aircraft that currently 

proceed directly to MSP and then enter 

an east/west downwind pattern will be 

vectored to a downwind pattern via 

northbound and southbound paths 

located to the east and west of MSP. 

This change in traffic flow is needed to 

accommodate three arrival streams 

rather than the current practice of using 

two arrival streams. As a result of these 

new procedures, approximately 900 

high-performance aircraft will be 

vectored to join arrival streams as far as 

30 nautical miles (NM) from MSP 

between the altitudes of 7,000 and 

10,000 feet MSL on a daily basis. 

In response to AOPA’s comment 

pertaining to VFR flyways, the FAA 

agrees that charted VFR flyways could 

minimize the impact on aircraft that 

choose to circumnavigate the MSP Class 

B airspace area. However, because VFR 

flyways are not addressed in a Class B 

rulemaking action, the FAA plans to 

develop and institute VFR flyways for 

the MSP terminal area through a 

separate, non-rulemaking process. 

ALPA and the NBAA expressed 

concern that the ‘‘southeast cut-out’’ of 

the proposed Area E would result in 

aircraft not being contained in Class B 

airspace when operating on the 

extended final approach course to the 

new Runway 35. They suggest reducing 

the size of the cut-out by changing the 

western boundary of the proposed cutout from the Gopher 170 radial to the 

Gopher 160 radial. The FAA agrees with 

this comment and has adopted the 

suggested modification. 

The FAA received the following 

comments in response to the SNPRM: 

AOPA again expressed a concern that 

raising the vertical limits of the MSP 

Class B airspace area from 8,000 feet 

MSL to 10,000 feet MSL would ‘‘pose a 

serious operational limitation to those 

pilots wishing to over fly’’ the MSP 

Class B airspace area and reiterated their 

desire for charted VFR flyways. They 

also mentioned that the ad hoc 

committee recommendations did not 

fully address their concerns. The FAA’s 

response to AOPA’s comments remains 

as stated previously in this document. 

The FAA also received comments 

from two pilots in response to the 

SNPRM. They commented that they 

practice aerobatic maneuvers at and 

below 8,000 feet MSL approximately 15 

NM west of the Flying Cloud Airport 

(between the cities of Belle Plaine and 

Cologne). They request that the FAA 

exclude the area that they practice in 

from the MSP Class B airspace area. 

While the FAA acknowledges that 

aerobatic operations in the area may be 

impacted, the FAA is not able to 

accommodate this request because the 

area between Belle Plaine and Cologne