Regulatory Flexibility Act: Congress Should Revisit and Clarify Elements of the Act to Improve Its Effectiveness
Published: 2006-07-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal regulation is one of the basic tools of government used to implement public policy. In 1980, the Regulatory Flexibility Act (RFA) was enacted in response to concerns about the effect that regulations can have on small entities, including small businesses, small governmental jurisdictions, and certain small not-for-profit organizations. Congress amended RFA in 1996, and the President issued Executive Order 13272 in 2002, to strengthen requirements for agencies to consider the impact of their proposed rules on small entities. However, concerns about the regulatory burden on small entities persist, prompting legislative proposals such as H.R. 682, the Regulatory Flexibility Improvements Act, which would amend RFA. At the request of Congress, GAO has prepared many reports and testimonies reviewing the implementation of RFA and related policies. On the basis of that body of work, this testimony (1) provides an overview of the basic purpose and requirements of RFA, (2) highlights the main impediments to the Act's implementation that GAO's reports identified, and (3) suggests elements of RFA that Congress might consider amending to improve the effectiveness of the Act. GAO's prior reports and testimonies contain recommendations to improve the implementation of RFA and related regulatory process requirements.
section_title: What GAO Found
paragraphs: RFA established a principle that agencies should endeavor to fit their regulatory requirements to the scale of small entities. Among other things, RFA requires regulatory agencies to assess the impact of proposed rules on small entities, consider regulatory alternatives that will accomplish the agencies' objectives while minimizing the impacts on small entities, and ensure that small entities have an opportunity to participate in the rulemaking process. Further, RFA requires agencies to review existing rules within 10 years of promulgation that have or will have a significant impact on small entities to determine whether they should be continued without change or amended or rescinded to minimize their impact on small entities. RFA also requires the Chief Counsel for Advocacy of the Small Business Administration (Office of Advocacy) to monitor agencies' compliance. In response to Executive Order 13272, the Office of Advocacy published guidance in 2003 on how to comply with RFA. In response to congressional requests, GAO reviewed agencies' implementation of RFA and related requirements on many occasions, with topics ranging from specific statutory provisions to the overall implementation of RFA. Generally, GAO found that the Act's results and effectiveness have been mixed; its reports illustrated both the promise and the problems associated with RFA. On one hand, RFA and related requirements clearly affected how federal agencies regulate and produced benefits, such as raising expectations regarding the analytical support for proposed rules. However, GAO also found that compliance with RFA varied across agencies, within agencies, and over time. A recurring finding was that uncertainties about RFA's requirements and key terms, and varying interpretations by federal agencies, limited the Act's application and effectiveness. GAO's past work suggests that Congress might wish to review the procedures, definitions, exemptions, and other provisions of RFA to determine whether changes are needed to better achieve the purposes Congress intended. In particular, GAO's reports indicate that the full promise of RFA may never be realized until Congress revisits and clarifies elements of the Act, especially its key terms, or provides an agency or office with the clear authority and responsibility to do so. Attention should also be paid to the domino effect that an agency's initial determination of whether RFA is applicable to a rulemaking has on other statutory requirements, such as preparing compliance guides for small entities and periodically reviewing existing regulations. GAO also believes that Congress should reexamine not just RFA but how all of the various regulatory reform initiatives fit together and influence agencies' regulatory actions. Recent developments, such as the Office of Advocacy's RFA guidance, may help address some of these long-standing issues and merit continued monitoring by Congress

section_title: Letter
paragraphs: I am pleased to be here today to contribute to your review of H.R. 682, the  Regulatory Flexibility Improvements Act, and your continuing general  agenda to review administrative law, process, and procedure issues. In my  statement today, I will summarize findings from our past body of work on  the Regulatory Flexibility Act (RFA), which H.R. 682 would amend, and  related policies. Specifically, I will provide an overview of the basic  purpose and requirements of RFA, highlight the main impediments to the  Act’s implementation that our work identified, and suggest elements of  RFA that Congress might consider amending to improve the effectiveness  of the Act.
In brief, RFA was enacted in response to concerns about the effect that  federal regulations can have on small entities. Among other things, RFA  prompts regulatory agencies to analyze the potential effects of their rules  on small entities, consider alternatives to reduce the burden of those rules,  and ensure that small entities have an opportunity to participate in the  rulemaking process. In response to congressional requests, we have  reviewed RFA’s implementation on many occasions over the years. Our  reports illustrated both the promise and the problems associated with the  Act, with a recurring theme being the varying interpretations of RFA’s  requirements by federal agencies. Although some progress has been made  to address issues we identified, the full promise of RFA may never be  realized until Congress clarifies key terms and definitions in the Act, such  as “a substantial number of small entities,” or provides an agency or office  with the clear authority and responsibility to do so. It is also important to  keep in mind the domino effect that an agency’s initial determination of  whether RFA is applicable to a rulemaking has on other statutory  requirements, such as preparing compliance guides for small entities and  periodically reviewing existing regulations.
subsections: section_title: RFA and Related Requirements Are Intended to Promote Attention to Regulations’ Effects on Small Entities
paragraphs: Federal regulation is one of the basic tools of government. Agencies issue  thousands of rules and regulations each year to implement statutes  enacted by Congress. The public policy goals and benefits of regulations  include, among other things, ensuring that workplaces, air travel, foods,  and drugs are safe; that the nation’s air, water, and land are not polluted;  and that the appropriate amount of tax is collected. The costs of these  regulations are estimated to be in the hundreds of billions of dollars, and  the benefits estimates are much higher. Given the size and impact of  federal regulation, Congresses and Presidents have taken a number of  actions to refine and reform the regulatory process within the past 25  years.
In September 1980, RFA was enacted in response to concerns about the  effect that federal regulations can have on “small entities,” defined by the  Act as including small businesses, small governmental jurisdictions, and  certain small not-for-profit organizations. As we have previously noted,  small businesses are a significant part of the nation’s economy, and small  governments make up the vast majority of local governments in the United  States. However, there have been concerns that these small entities may  be disproportionately affected by federal agencies’ regulatory  requirements. RFA established the principle that agencies should  endeavor, consistent with the objectives of applicable statutes, to fit  regulatory and informational requirements to the scale of these small  entities.
RFA requires regulatory agencies—including the independent regulatory  agencies—to assess the potential impact of their rules on small entities.  Under RFA, an agency must prepare an initial regulatory flexibility  analysis at the time a proposed rule is issued unless the head of the agency  determines that the proposed rule would not have a “significant economic  impact upon a substantial number of small entities.” Further, agencies  must consider alternatives to their proposed rules that will accomplish the  agencies’ objectives while minimizing the impacts on small entities. The  Act also requires agencies to ensure that small entities have an  opportunity to participate in the rulemaking process and requires the  Chief Counsel for Advocacy of the Small Business Administration (Office  of Advocacy) to monitor agencies’ compliance. Among other things, RFA  also requires regulatory agencies to review, within 10 years of  promulgation, existing rules that have or will have a significant impact on  small entities to determine whether they should be continued without  change or amended or rescinded to minimize their impact on small  entities.
Congress amended RFA with the Small Business Regulatory Enforcement  Fairness Act of 1996 (SBREFA).  SBREFA made certain agency actions  under RFA judicially reviewable. Other provisions in SBREFA added new  requirements. For example, SBREFA requires agencies to develop one or  more compliance guides for each final rule or group of related final rules  for which the agency is required to prepare a regulatory flexibility  analysis, and it requires agencies to provide small entities with some form  of relief from civil monetary penalties. SBREFA also requires the  Environmental Protection Agency (EPA) and the Occupational Safety and  Health Administration to convene advocacy review panels before  publishing an initial regulatory flexibility analysis.
More recently, in August 2002, President George W. Bush issued Executive  Order 13272, which requires federal agencies to establish written  procedures and policies on how they would measure the impact of their  regulatory proposals on small entities and to vet those policies with the  Office of Advocacy. The order also requires agencies to notify the Office of  Advocacy before publishing draft rules expected to have a significant  small business impact, to consider its written comments on proposed  rules, and to publish a response with the final rule. The order requires the  Office of Advocacy to provide notification of the requirements of the Act  and training to all agencies on how to comply with RFA. The Office of  Advocacy published guidance on the Act in 2003 and reported training  more than 20 agencies on RFA compliance in fiscal year 2005.
section_title: GAO Reviews Found that Varying Interpretations of RFA Requirements Hampered Effective Implementation of the Act
paragraphs: In response to congressional requests, we have reviewed agencies’  implementation of RFA and related requirements on many occasions over  the years, with topics ranging from specific statutory provisions to the  overall implementation of RFA. Generally, we found that the Act’s overall  results and effectiveness have been mixed. This is not unique to RFA; we  found similar results when reviewing other regulatory reform initiatives,  such as the Unfunded Mandates Reform Act of 1995. Our past reports  illustrated both the promise and the problems associated with RFA. RFA  and related requirements have clearly affected how federal agencies  regulate, and we identified important benefits of these initiatives, such as  increasing attention on the potential impacts of rules and raising  expectations regarding the analytical support for proposed rules.  However, a recurring theme in our findings was that uncertainties about  RFA’s requirements and varying interpretations of those requirements by  federal agencies limited the Act’s application and effectiveness.
Some of the topics we reviewed, and our main findings regarding  impediments to RFA’s implementation, are illustrated in the following  examples:    We examined 12 years of annual reports from the Office of Advocacy  and concluded that the reports indicated variable compliance with RFA  across agencies, within agencies, and over time—a conclusion that the  Office of Advocacy also reached in subsequent reports on  implementation of RFA (on the 20th and 25th anniversaries of RFA’s  enactment). We noted that some agencies had been repeatedly  characterized as satisfying RFA requirements, but other agencies were  consistently viewed as recalcitrant. Agencies’ performance also varied  over time or varied by offices within the agencies. We said that one  reason for agencies’ lack of compliance with RFA requirements was  that the Act did not expressly authorize the Small Business  Administration (SBA) to interpret key provisions and did not require  SBA to develop criteria for agencies to follow in reviewing their rules.
We examined RFA implementation with regard to small governments  and concluded that agencies were not conducting as many regulatory  flexibility analyses for small governments as they might, largely  because of weaknesses in the Act. Specifically, we found that each  agency we reviewed had a different interpretation of key RFA  provisions. We also pointed out that RFA allowed agencies to interpret  whether their proposed rules affected small governments and did not  provide sufficiently specific criteria or definitions to guide agencies in  deciding whether and how to assess the impact of proposed rules on  small governments.
We reviewed implementation of small business advocacy review panel  requirements under SBREFA and found that the panels that had been  convened were generally well received. However, we also said that  implementation was hindered—specifically, that there was uncertainty  over whether panels should have been convened for some proposed  rules—by the lack of agreed-upon governmentwide criteria as to  whether a rule has a significant impact.
We examined other related requirements regarding agencies’ policies  for the reduction and/or waiver of civil penalties on small entities and  the publication of small entity compliance guides. Again, we found  that implementation varied across and within agencies, with some of  the ineffectiveness and inconsistency traceable to definitional  problems in RFA. All of the agencies’ penalty relief policies that we  reviewed were within the discretion that Congress provided, but the  policies varied considerably. Some policies covered only a portion of  agencies’ civil penalty enforcement actions, and some provided small  entities with no greater penalty relief than large entities. The agencies  varied in how key terms were defined. Similarly, we concluded that the  requirement for small entity compliance guides did not have much of  an impact, and its implementation also varied across, and sometimes  within, agencies.
RFA is unique among statutory requirements with general applicability  in having a provision, under section 610, for the periodic review of  existing rules. However, it is not clear that this look-back provision in  RFA has been consistently and effectively implemented. In a series of  reports on agencies’ compliance with section 610, we found that the  required reviews were not being conducted. Meetings with agencies to  identify why compliance was so limited revealed significant differences  of opinion regarding key terms in RFA and confusion about what was  required to determine compliance with RFA. At the request of the  House Committee on Energy and Commerce, we have begun new work  examining the subject of regulatory agencies’ retrospective reviews of  their existing regulations, including those undertaken in response to  Section 610, and will report on the results of this engagement in the  future.
We have not yet examined the effect of Executive Order 13272 and the  Office of Advocacy’s subsequent guidance and training for agencies on  implementing RFA. Therefore, we have not done any evaluations that  would indicate whether or not those developments are helping to address  some of our concerns about the effectiveness of RFA.
section_title: Key Terms and Provisions of RFA Should Be Revisited and Clarified
paragraphs: While RFA has helped to influence how agencies regulate small entities,  we believe that the full promise of the Act has not been realized. The  results from our past work suggest that the Subcommittee might wish to  review the procedures, definitions, exemptions, and other provisions of  RFA, and related statutory requirements, to determine whether changes  are needed to better achieve the purposes Congress intended. The central  theme of our prior findings and recommendations on RFA has been the  need to revisit and clarify elements of the Act, particularly its key terms.  Although more recent developments, such as the Office of Advocacy’s  detailed guidance to agencies on RFA compliance, may help address some  of these long-standing issues, current legislative proposals, such as H.R.  682, make it clear that concerns remain about RFA’s effectiveness—for  example, that agencies are not assessing the impacts of their rules or  identifying less costly regulatory approaches as expected under RFA—and  the impact of federal regulations on small entities.
Unclear terms and definitions can affect the applicability and effectiveness  of regulatory reform requirements. We have frequently cited the need to  clarify the key terms in RFA, particularly “significant economic impact on  a substantial number of small entities.” RFA’s requirements do not apply if  an agency head certifies that a rule will not have a “significant economic  impact on a substantial number of small entities.” However, RFA neither  defines this key phrase nor places clear responsibility on any party to  define it consistently across the government. It is therefore not surprising,  as I mentioned earlier, that we found compliance with RFA varied from  one agency to another and that agencies had different interpretations of  RFA’s requirements.
We have recommended several times that Congress provide greater clarity  concerning the key terms and provisions of RFA and related requirements,  but to date Congress has not acted on many of these recommendations.  The questions that remain unresolved on this topic are numerous and  varied, including:    Does Congress believe that the economic impact of a rule should be  measured in terms of compliance costs as a percentage of businesses’  annual revenues, the percentage of work hours available to the firms,  or other metrics?
If so, what percentage or other measure would be an appropriate  definition of “significant?”
Should agencies take into account the cumulative impact of their rules  on small entities, even within a particular program area?
Should agencies count the impact of the underlying statutes when  determining whether their rules have a significant impact?
What should be considered a “rule” for purposes of the requirement in  RFA that agencies review rules with a significant impact within 10  years of their promulgation?
Should agencies review rules that had a significant impact at the time  they were originally published, or only those that currently have that  effect?
Should agencies conduct regulatory flexibility analyses for rules that  have a positive economic impact on small entities, or only for rules  with a negative impact?
It is worth noting that the Office of Advocacy’s 2003 RFA compliance  guide, while reiterating that RFA does not define certain key terms,  nevertheless provides some suggestions on the subject. Citing parts of  RFA’s legislative history, the guidance indicates that exact standards for  such definitions may not be possible or desirable, and that the definitions  should vary depending on the context of each rule and preliminary  assessments of the rule’s impact. For example, the guidance points out  that “significance” can be seen as relative to the size of a business and its  competitors, among other things. However, the guidance does identify  factors that agencies might want to consider when making RFA  determinations. In some ways, this mirrors other aspects of RFA, such as  section 610, where Congress did not explicitly define a threshold for an  agency to determine whether an existing regulation should be maintained,  amended, or eliminated but rather identified the factors that an agency  must consider in its reviews. We do not yet know whether or to what  extent the guidance and associated training has helped agencies to clarify  some of the long-standing confusion about RFA requirements and terms.  Additional monitoring of RFA compliance may help to answer that  question. Congress might also want to consider whether the factors that  the Office of Advocacy suggested to help agencies define key terms and  requirements are consistent with congressional intent or would benefit  from having a statutory basis.
I also want to point out the potential domino effect of agencies’  determinations of whether or not RFA applies to their rules. This is related  to the lack of clarity on key terms mentioned above, the potential for  agencies to waive or delay analysis under RFA, and the limitation of RFA’s  applicability to only rules for which there was a notice of proposed  rulemaking. The impact of an agency head’s determination that RFA is not  applicable is not only that the initial and final regulatory flexibility  analyses envisioned by the Act would not be done, but also that other  related requirements would not apply. These requirements include, for  example, the need for agencies to prepare small entity compliance guides,  convene SBREFA advocacy panels, and conduct periodic reviews of  certain existing regulations. While we recognize, as provided by the  Administrative Procedure Act, that notices of proposed rulemaking are not  always practical, necessary, or in the public interest, this still raises the  question of whether such exemptions from notice and comment  rulemaking should preclude future opportunities for public participation  and other related procedural and analytical requirements. Our prior work  has shown that substantial numbers of rules, including major rules (for  example, those with an impact of $100 million or more), are promulgated  without going through a notice of proposed rulemaking.
We also believe it is important for Congress to reexamine, not just RFA,  but how all of the various regulatory reform initiatives fit together and  influence agencies’ regulatory actions. As I previously testified before this  Subcommittee, we have found the effectiveness of most regulatory reform  initiatives to be limited and that they merit congressional attention. In  addition, we have stated that this is a particularly timely point to  reexamine the federal regulatory framework, because significant trends  and challenges establish the case for change and the need to reexamine  the base of federal government and all of its existing programs, policies,  functions, and activities.
Our September 2000 report on EPA’s implementation of RFA illustrated  the importance of considering the bigger picture and interrelationships  between regulatory reform initiatives. On the one hand, we reported  about concerns regarding the methodologies EPA used in its analyses and  its conclusions about the impact on small businesses of a proposed rule to  lower certain reporting thresholds for lead and lead compounds. The  bigger picture, though, was our finding that after SBREFA took effect  EPA’s four major program offices certified that almost all (96 percent) of  their proposed rules would not have a significant impact on a substantial  number of small entities. EPA officials told us this was because of a  change in EPA’s RFA guidance prompted by the SBREFA requirement to  convene an advocacy review panel for any proposed rule that was not  certified. Prior to SBREFA, EPA’s policy was to prepare a regulatory  flexibility analysis for any rule that the agency expected to have any  impact on small entities. According to EPA officials, the SBREFA panel  requirement made continuation of the agency’s more inclusive RFA policy  too costly and impractical. In other words, a statute Congress enacted to  strengthen RFA caused the agency to use the discretion permitted in RFA  to conduct fewer regulatory flexibility analyses.
In closing, I would reiterate that we believe Congress should revisit  aspects of RFA and that our prior reports have indicated ample  opportunities to refine the Act. Despite some progress in implementing  RFA and other regulatory reform initiatives since 1980, it is clear from the  introduction of H.R. 682 and related bills that Members of Congress  remain concerned about the impact of regulations on small entities and  the extent to which the rulemaking process encourages agencies to  consider ways to reduce the burdens of new and existing rules, while still  achieving the objectives of the underlying statutes.
Mr. Chairman, this concludes my prepared statement. Once again, I  appreciate the opportunity to testify on these important issues. I would be  pleased to address any questions you or other Members of the  Subcommittee might have at this time.
section_title: Contact and Acknowledgements
paragraphs: If additional information is needed regarding this testimony, please  contact J. Christopher Mihm, Managing Director, Strategic Issues, on (202)  512-6806 or at mihmj@gao.gov. Tim Bober, Jason Dorn, Andrea Levine,  Latesha Love, Joseph Santiago, and Michael Volpe contributed to this  statement.
section_title: Related GAO Products
paragraphs: Federal Rulemaking: Past Reviews and Emerging Trends Suggest Issues  That Merit Congressional Attention. GAO-06-228T. Washington, D.C.:  November 1, 2005.
Regulatory Reform: Prior Reviews of Federal Regulatory Process  Initiatives Reveal Opportunities for Improvements. GAO-05-939T.  Washington, D.C.: July 27, 2005.
Regulatory Flexibility Act: Clarification of Key Terms Still Needed.  GAO-02-491T. Washington, D.C.: March 6, 2002.
Regulatory Reform: Compliance Guide Requirement Has Had Little  Effect on Agency Practices. GAO-02-172. Washington, D.C.: December 28,  2001.
Federal Rulemaking: Procedural and Analytical Requirements at OSHA  and Other Agencies. GAO-01-852T. Washington, D.C.: June 14, 2001.
Regulatory Flexibility Act: Key Terms Still Need to Be Clarified. GAO-01- 669T. Washington, D.C.: April 24, 2001.
Regulatory Reform: Implementation of Selected Agencies’ Civil Penalty  Relief Policies for Small Entities. GAO-01-280. Washington, D.C.:  February 20, 2001.
Regulatory Flexibility Act: Implementation in EPA Program Offices and  Proposed Lead Rule. GAO/GGD-00-193. Washington, D.C.: September 20,  2000.
Regulatory Reform: Procedural and Analytical Requirements in Federal  Rulemaking. GAO/T-GGD/OGC-00-157. Washington, D.C.: June 8, 2000.
Regulatory Flexibility Act: Agencies’ Interpretations of Review  Requirements Vary. GAO/GGD-99-55. Washington, D.C.: April 2, 1999.
Federal Rulemaking: Agencies Often Published Final Actions Without  Proposed Rules. GAO/GGD-98-126. Washington, D.C.: August 31, 1998.
Regulatory Reform: Implementation of the Small Business Advocacy  Review Panel Requirements. GAO/GGD-98-36. Washington, D.C.: March  18, 1998.
Regulatory Reform: Agencies’ Section 610 Review Notices Often Did Not  Meet Statutory Requirements. GAO/T-GGD-98-64. Washington, D.C.:  February 12, 1998.
Regulatory Flexibility Act: Agencies’ Use of the October 1997 Unified  Agenda Often Did Not Satisfy Notification Requirements. GAO/GGD-98- 61R. Washington, D.C.: February 12, 1998.
Regulatory Flexibility Act: Agencies’ Use of the November 1996 Unified  Agenda Did Not Satisfy Notification Requirements. GAO/GGD/OGC-97- 77R. Washington, D.C.: April 22, 1997.
Regulatory Flexibility Act: Status of Agencies’ Compliance. GAO/GGD- 94-105. Washington, D.C.: April 27, 1994.
Regulatory Flexibility Act: Inherent Weaknesses May Limit Its  Usefulness for Small Governments. GAO/HRD-91-16. Washington, D.C.:  January 11, 1991.
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