Regulatory Flexibility Act: Clarification of Key Terms Still Needed
Published: 2002-03-06T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Regulatory Flexibility Act of 1980 (RFA) requires agencies to prepare an initial and a final regulatory flexibility analysis. The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) seeks to strengthen RFA protections for small entities, and some of the act's requirements are built on "significant impact." GAO has reviewed the implementation of RFA and SBREFA several times in recent years, with topics ranging from specific provisions in each statute to the overall implementation of RFA. Although both of these reforms have clearly affected how federal agencies regulate, GAO believes that their full promise has not been realized, and key questions about RFA remain unanswered. These questions lie at the heart of RFA and SBREFA, and their answers can have a substantive effect on the amount of regulatory relief provided through those statutes. Because Congress did not answer these questions when the statutes were enacted, agencies have had to develop their own answers, and those answers differ.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the implementation of the  Regulatory Flexibility Act of 1980 (RFA), as amended, and the Small  Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). As you  requested, I will discuss our work on the implementation of these two  statutes in recent years.
The RFA requires federal agencies to examine the impact of their proposed  and final rules on “small entities” (small businesses, small governmental  jurisdictions, and small organizations) and to solicit the ideas and  comments of such entities for this purpose. Specifically, whenever agencies  are required to publish a notice of proposed rulemaking, the RFA requires  agencies to prepare an initial and a final regulatory flexibility analysis.  However, the act also states that those analytical requirements do not apply  if the head of the agency certifies that the rule will not have a “significant  economic impact on a substantial number of small entities,” or what I  will—for the sake of brevity—term a “significant impact.”  SBREFA was  enacted to strengthen the RFA’s protections for small entities, and some of  the act’s requirements are built on this “significant impact” determination.  For example, one provision of SBREFA requires that before publishing a  proposed rule that may have a significant impact, the Environmental  Protection Agency (EPA) and the Occupational Safety and Health  Administration must convene a small business advocacy review panel for  the draft rule, and collect the advice and recommendations of  representatives of affected small entities about the potential impact of the  draft rule.
We have reviewed the implementation of the RFA and SBREFA several  times during recent years, with topics ranging from specific provisions in  each statute to the overall implementation of the RFA.  Although both of  these reform initiatives have clearly affected how federal agencies regulate,  we believe that their full promise has not been realized.  To achieve that  promise, Congress may need to clarify what it expects the agencies to do  with regard to the statutes’ requirements.  In particular, Congress may need  to clearly delineate—or have some other organization delineate—what is  meant by the terms “significant economic impact” and “substantial number  of small entities.”  The RFA does not define what Congress meant by these  terms and does not give any entity the authority or responsibility to define  them governmentwide.  As a result, agencies have had to construct their  own definitions, and those definitions vary.  Over the past decade, we have  recommended several times that Congress provide greater clarity with  regard to these terms, but to date Congress has not acted on our  recommendations.
The questions that remain unanswered are numerous and varied.  For  example, does Congress believe that the economic impact of a rule should  be measured in terms of compliance costs as a percentage of businesses’  annual revenues or the percentage of work hours available to the firms?  If  so, is 3 percent (or 1 percent) of revenues or work hours an appropriate  definition of “significant?”  Should agencies take into account the  cumulative impact of their rules on small entities, even within a particular  program area?  Should agencies count the impact of the underlying statutes  when determining whether their rules have a significant impact?  What  should be considered a “rule” for purposes of the requirement in the RFA  that the agencies review rules with a significant impact within 10 years of  their promulgation?  Should agencies review rules that had a significant  impact at the time they were originally published, or only those that  currently have that effect?  Should agencies conduct regulatory flexibility  analyses for rules that have a positive economic impact on small entities, or  only for rules with a negative impact?
These questions are not simply matters of administrative conjecture within  the agencies.  They lie at the heart of the RFA and SBREFA, and the  answers to the questions can have a substantive effect on the amount of  regulatory relief provided through those statutes.  Because Congress did  not answer these questions when the statutes were enacted, agencies have  had to develop their own answers—and those answers differ.  If Congress  does not like the answers that the agencies have developed, it needs to  either amend the underlying statutes and provide what it believes are the  correct answers or give some other entity the authority to issue guidance  on these issues.
subsections: section_title: EPA’s Use of RFA Discretion
paragraphs: The implications of the current lack of clarity with regard to the term  “significant impact” and the discretion that agencies have to define it were  clearly illustrated in a report that we prepared for the Senate Committee on  Small Business 2 years ago. One part of our report focused on a proposed  rule that EPA published in August 1999 that would, upon implementation,  lower certain reporting thresholds for lead and lead compounds under the  Toxics Release Inventory program from as high as 25,000 pounds to 10  pounds. At the time, EPA said that the total cost of the rule in the first year  of implementation would be about $116 million.  The agency estimated that  approximately 5,600 small businesses would be affected by the rule, and  that the first-year costs of the rule for each of these small businesses would  be from $5,200 to $7,500.  However, EPA certified that the rule would not  have a significant impact, and therefore did not trigger certain analytical  and procedural requirements in the RFA.
EPA’ determination that the proposed lead rule would not have a significant  impact on small entities was not unique.  Its four major program offices  certified about 78 percent of the substantive proposed rules that they  published in the 2 ½ years before SBREFA took effect in 1996, but certified  96 percent of the proposed rules published in the 2 ½ years after the act’s  implementation.  In fact, two of the program offices—the Office of  Prevention, Pesticides and Toxic Substances and the Office of Solid  Waste—certified all 47 of their proposed rules in this post-SBREFA period  as not having a significant impact.  The Office of Air and Radiation certified  97 percent of its proposed rules during this period, and the Office of Water  certified 88 percent.  EPA officials told us that the increased rate of  certification after SBREFA’s implementation was caused by a change in the  agency’s RFA guidance on what constituted a significant impact.  Prior to  SBREFA, EPA’s policy was to prepare a regulatory flexibility analysis for  any rule that the agency expected to have any impact on any small entities.  The officials said that this guidance was changed because the SBREFA  requirement to convene an advocacy review panel for any proposed rule  that was not certified made the continuation of the agency’s more inclusive  RFA policy too costly and impractical.  In other words, EPA indicated that  SBREFA—the statute that Congress enacted to strengthen the RFA—  caused the agency to use the discretion permitted in the RFA and conduct  fewer regulatory flexibility analyses.
EPA’s current guidance on how the RFA should be implemented includes  numerical guidelines that establish what appears to be a high threshold for  what constitutes a significant impact.  Under those guidelines, an EPA rule  could theoretically impose $10,000 in compliance costs on 10,000 small  businesses, but the guidelines indicate that the agency can presume that  the rule does not trigger the requirements of the RFA as long as those costs  do not represent at least 1 percent of the affected businesses’ annual  revenues.  The guidance does not take into account the profit margins of  the businesses involved or the cumulative impact of the agency’s rules on  small businesses—even within a particular subject area like the Toxics  Release Inventory.
section_title: Previous Reports on the RFA and SBREFA
paragraphs: We have issued several other reports in recent years on the implementation  of the RFA and SBREFA that, in combination, illustrate both the promise  and the problems associated with the statutes.  For example, in 1991, we  examined the implementation of the RFA with regard to small governments  and concluded that each of the four federal agencies that we reviewed had  a different interpretation of key RFA provisions. We said that the act  allowed agencies to interpret when they believed their proposed  regulations affected small government, and recommended that Congress  consider amending the RFA to require the Small Business Administration  (SBA) to develop criteria regarding whether and how to conduct the  required analyses.
In 1994, we examined 12 years of annual reports prepared by the SBA Chief  Counsel for Advocacy and said the reports indicated variable compliance  with the RFA—a conclusion that the Office of Advocacy also reached in its  20-year report on the RFA.  SBA repeatedly characterized some agencies  as satisfying the act’s requirements, but other agencies were consistently  viewed as recalcitrant.  Other agencies’ performance reportedly varied over  time or varied by subagency.  We said that one reason for agencies’ lack of  compliance with the RFA’s requirements was that the act did not expressly  authorize SBA to interpret key provisions in the statute and did not require  SBA to develop criteria for agencies to follow in reviewing their rules.  We  said that if Congress wanted to strengthen the implementation of the RFA,  it should consider amending the act to (1) provide SBA with authority and  responsibility to interpret the RFA’s provisions and (2) require SBA, in  consultation with the Office of Management and Budget (OMB), to develop  criteria as to whether and how federal agencies should conduct RFA  analyses.
In our 1998 report on the implementation of the small business advocacy  review panel requirements in SBREFA, we said that the lack of clarity  regarding whether EPA should have convened panels for two of its  proposed rules was traceable to the lack of agreed-upon governmentwide  criteria as to whether a rule has a significant impact. Nevertheless, we  said that the panels that had been convened were generally well received  by both the agencies and the small business representatives.  We also said  that if Congress wished to clarify and strengthen the implementation of the  RFA and SBREFA, it should consider (1) providing SBA or another entity  with clearer authority and responsibility to interpret the RFA’s provisions  and (2) requiring SBA or some other entity to develop criteria defining a  “significant economic impact on a substantial number of small entities.”
In 1999, we noted a similar lack of clarity regarding the RFA’s requirement  that agencies review their existing rules that have a significant impact  within 10 years of their promulgation. We said that if Congress is  concerned that this section of the RFA has been subject to varying  interpretations, it may wish to clarify those provisions.  We also  recommended that OMB take certain actions to improve the administration  of these review requirements, some of which have been implemented.
Last year we issued two reports on the implementation of SBREFA.  One  report examined section 223 of the act, which required federal agencies to  establish a policy for the reduction and/or waiver of civil penalties on small  entities. All of the agencies’ penalty relief policies that we reviewed were  within the discretion that Congress provided, but the policies varied  considerably.  Some of the policies covered only a portion of the agencies’  civil penalty enforcement actions, and some provided small entities with no  greater penalty relief than large entities.  The agencies also varied in how  key terms such as “small entities” and “penalty reduction” were defined.  We said that if Congress wanted to strengthen section 223 of SBREFA it  should amend the act to require that agencies’ policies cover all of the  agencies civil penalty enforcement actions and provide small entities with  more penalty relief than other similarly situated entities.  Also, to facilitate  congressional oversight, we suggested that Congress require agencies to  maintain data on their civil penalty relief efforts.
The other report that we issued on SBREFA last year examined the  requirement in section 212 that agencies publish small entity compliance  guides for any rule that requires a final regulatory flexibility analysis under  the RFA. We concluded that section 212 did not have much of an impact  on the agencies that we examined, and its implementation also varied  across and sometimes within the agencies.  Some of the section’s  ineffectiveness and inconsistency is traceable to the definitional problems  in the RFA that I discussed previously.  Therefore, if an agency concluded  that a rule imposing thousands of dollars of costs on thousands of small  entities did not trigger the requirements of the RFA, section 212 did not  require the agency to prepare a compliance guide.  Other problems were  traceable to the discretion provided in section 212 itself.  Under the statute,  agencies can designate a previously published document as its small entity  compliance guide, or develop and publish a guide with no input from small  entities years after the rule takes effect.  We again recommended that  Congress take action to clarify what constitutes a “significant economic  impact” and a “substantial number of small entities,” and also suggested  changes to section 212 to make its implementation more consistent and  effective.
Two years ago we convened a meeting at GAO on the rule review provision  of the RFA, focusing on why the required reviews were not being  conducted.  Attending that meeting were representatives from 12 agencies  that appeared to issue rules with an impact on small entities,  representatives from relevant oversight organizations (e.g., OMB and SBA’s  Office of Advocacy), and congressional staff from the House and Senate  committees on small business.  The meeting revealed significant  differences of opinion regarding key terms in the statute.  For example,  some agencies did not consider their rules to have a significant impact  because they believed the underlying statutes, not the agency-developed  regulations, caused the effect on small entities.  There was also confusion  regarding whether the agencies were supposed to review rules that had a  significant impact on small entities at the time the rules were first  published in the Federal Register or those that currently have such an  impact.  It was not even clear what should be considered a “rule” under the  RFA’s rule review requirements—the entire section of the Code of Federal  Regulations that was affected by the rule, or just the part of the existing  rule that was being amended.  By the end of the meeting it was clear that,  as one congressional staff member said, “determining compliance with (the  RFA) is less obvious than we believed before.”
Mr. Chairman, this concludes my prepared statement.  I would be happy to  respond to any questions.