This rule cannot provide specific ecological performance standards
for use in compensatory mitigation projects. Instead, it must focus on
the general principles for ecological performance standards.
Performance standards must be developed on a project-by-project basis,
to address the objectives of a compensatory mitigation project.
District engineers can develop templates for ecological performance
standards, to provide consistent standards for the types of aquatic
resources found in their areas of responsibility.
    Some commenters noted that the proposed rule emphasizes functional
standards instead of area-based performance standards, and said that it
will be difficult for the Corps to move to a functional approach
because simple functional assessment methods do not exist for many
types of wetlands, and regulators are much more comfortable with
measuring acres and linear feet. A few commenters contended that
nowhere in the rule is compensatory mitigation required to actually
replace the functions of the aquatic habitat destroyed.
    Functional standards are necessary to demonstrate that compensatory
mitigation projects offset losses of aquatic resource functions
resulting from activities authorized by DA permits. Area-based
performance standards tied to functions can also be used, to determine
the functional capacity of a compensatory mitigation project. However,
area or linear measures alone would not constitute ecological
performance standards. Functional or condition assessments should be
used where appropriate and practicable to better describe how
compensatory mitigation projects offset losses of aquatic resource
functions. We are continuing to develop and refine functional
assessment methods and other science-based assessment tools, but where
such tools are not available, the performance standards must still
attempt to describe a successful project in ecological terms that can
be measured (e.g., the project has established an appropriate
hydrologic regime or has an appropriate number of acres of specific
types of plant communities at specified levels of development,
including particular species, etc). The purpose of compensatory
mitigation is discussed in Sec.  332.3(a)(1) [Sec.  230.93(a)(1)]. This
paragraph states that the ``fundamental objective of compensatory
mitigation is to offset unavoidable impacts to waters of the United
States authorized by DA permits.''
    One commenter suggested that the Corps welcome partnerships with
local and state agencies and quickly approve performance standards in
watersheds with extensive wetland inventory and functional data. A few
commenters recommended that the agencies provide detail on aquatic
resource characteristics to be considered (e.g., vegetation, soil and
hydrology), specification of wetland factors that might require
remediation to meet performance standards, and development of a pre-
planning simulation for adaptive management. Several commenters said
that the proposed rule fails to provide guidance as to how proposed
performance-based standards will be interpreted and applied, and that
ecological success criteria are vague and not likely to include
meaningful criteria that will account for all wetland functions.
    District engineers are encouraged to work with federal, state, and
local resource agencies to develop ecological performance standards
that are appropriate for the types of aquatic resources found in their
areas of responsibility. District engineers are responsible for
developing ecological performance standards that are objective and
verifiable. Such performance standards must be clearly written, so that
independent parties can assess whether compensatory mitigation projects
are meeting their performance standards. Ecological performance
standards may be based on specific wetland characteristics. We have
added a new sentence to Sec.  332.5(b) [Sec.  230.95(b)] to clarify
that reference aquatic resources can be used to establish performance
standards that are reasonably achievable, by reflecting the range of
variability exhibited by the regional class of aquatic resources.

R 332.6 and 40 CFR 230.96 Monitoring

    (a) General. Commenters generally supported the emphasis on
compensatory mitigation project site management and monitoring. Several
commenters said that the agencies must strengthen compliance monitoring
and enforcement activities. Three commenters said that Corps guidance
states that monitoring reports are a high priority when ``substantial
mitigation'' is required, but it does not define substantial
mitigation.
    Compliance activities are dependent upon available resources, and
the Corps is placing greater emphasis on compensatory mitigation
project compliance through its performance standards developed under
the Program Assessment Rating Tool for the President's ``Budget and
Performance Integration'' management initiative. The Corps guidance
relating to ``substantial mitigation'' is not part of this rulemaking,
and therefore does not need to be defined. That guidance appeared in
the Corps Regulatory Program's Standard Operating Procedure dated
October 15, 1999, which is in the process of being revised. Under this
final rule, monitoring reports are required for all mitigation project
sites, but the content and level of detail of the reports must be
commensurate with the scale and scope of the mitigation project.
    We have added Sec.  332.6(a)(2) [Sec.  230.96(a)(2)] to clarify
that district engineers may conduct site inspections on a regular basis
during the monitoring period to evaluate the performance of
compensatory mitigation project sites. These site visits will be used
to verify the findings of monitoring reports. We have modified the
language that was in Sec.  332.6(c)(2) [Sec.  230.96(c)(2)] of the
proposed rule, since only the district engineer has the authority to
conduct site visits to assess compliance with the conditions of a DA
authorization. Representatives of federal, tribal, state, or local
resources agencies may be asked to participate in these site visits, at
the invitation of the district engineer and with the express consent of
the landowner.
    (b) Monitoring period. There was no consensus among commenters
regarding the appropriate length for monitoring periods. One commenter
said that compensatory mitigation in coral reef habitats should be
monitored for more than five years. Another commenter suggested that
monitoring be required for seven to ten years. Several commenters
stated that monitoring periods should be flexible and site specific. A
number of commenters supported the proposed five year monitoring
period. One commenter said that longer monitoring periods are needed to
account for the development of certain aquatic resource types, or for
natural events, such as drought or floods, that may affect the
development of plant communities. This commenter also said that longer
monitoring periods are necessary to develop realistic objectives and
performance standards.
    We believe that five years is an appropriate starting point for
determining the required monitoring period. The final rule states that
the mitigation plan must provide for a monitoring period that is
sufficient to demonstrate that the compensatory mitigation project has
met performance standards, but not less than five years, and a longer
monitoring period must be required for aquatic resources with slow

development rates (e.g., forested wetlands, bogs). The rule also allows
the district engineer to reduce or waive remaining monitoring
requirements upon a determination that the compensatory mitigation
project has achieved its performance standards. To reduce or waive the
remaining monitoring requirements before the five year period ends,
there should be at least two consecutive monitoring reports issued
where the success criteria are met. This will help account for
variability in environmental conditions, to ensure that the
compensatory mitigation project is truly meeting its performance
standards. Performance standards should be designed, to the extent
practicable, to account for the ecological characteristics of early
developmental stages of aquatic ecosystems, so that a determination of
ecological success can be made within five years. For aquatic habitat
types where five years is insufficient to determine ecological success
through performance standards that satisfy the criteria at Sec.  332.5
[Sec.  230.95], longer monitoring periods may be required. We have
modified the last sentence of Sec.  332.6(b) [Sec.  230.96(b)] to
include adaptive management as a reason for revising monitoring
requirements.
    (c) Monitoring reports. Many commenters stated that monitoring
reports should be standardized to expedite the Corps review and that
minimum monitoring requirements and performance standards should be
provided in the rule. A number of commenters said that the Corps should
specify the minimum required reporting elements for each habitat type.
Some commenters recommended that monitoring reports include sufficient
detail to facilitate scientific comparison between the functions of
filled wetlands and the functions of mitigation bank credits used to
compensate for those filled wetlands. One commenter stated that the
rule should require inspections and brief progress or status reports
for all compensatory mitigation projects that require monitoring, to
facilitate adaptive management.
    We have modified Sec.  332.6(a)(1) [Sec.  230.96(a)(1)] to clarify
that the content and level of detail for monitoring reports must be
commensurate with the scale and scope of the compensatory mitigation
project, as well as the compensatory mitigation project type. The
information to be included in a monitoring report is at the discretion
of the district engineer, who should take into account the
characteristics of the compensatory mitigation project when determining
those requirements. The content of monitoring reports will also depend
on the ecological performance standards for the compensatory mitigation
project, since the purpose of the monitoring report is to demonstrate
how the project is progressing towards achieving those standards. If
the performance standards require the use of functional assessments to
assess the performance of the compensatory mitigation project, then the
results of those assessments should be provided in the monitoring
reports. We do not believe it is appropriate to require monitoring
reports to include scientific comparisons of wetland functions between
mitigation and impact sites, because the tools necessary to conduct
such comparisons are not available in many areas, or they may not be
practicable for certain types of projects, such as small compensatory
mitigation projects provided for activities authorized by general
permits. Furthermore, the appropriateness of the required mitigation to
replace aquatic functions and services lost at the impact site is
evaluated at the time the mitigation plan is approved, including the
identification of appropriate ecological performance standards for the
mitigation project. After this point, monitoring is needed to ensure
that the mitigation project is developing as planned and progressing
satisfactorily towards meeting the performance standards. District
engineers will determine, on a case-by-case basis, the need for site
inspections to assess compensatory mitigation project sites.
    We have modified Sec.  332.6(c)(1) [Sec.  230.96(c)(1)] to state
that as-built plans may be provided in monitoring reports. We have also
modified Sec.  332.6(c)(1) [Sec.  230.96(c)(1)] to stipulate that
monitoring reports may include the results of condition assessments or
other types of assessments.
    Two commenters stated that Corps guidance does not instruct
district engineers on what actions to take if permittees or third-party
mitigation providers fail to submit required mitigation reports.
Several commenters recommended that mitigation plans and mitigation
banking instruments include built-in, agreed-upon penalties for failure
to submit accurate, timely, and complete monitoring reports that are
required by the permit or instrument.
    We have added Sec.  332.6(c)(2) [Sec.  230.96(c)(2)] to stipulate
that the permittee or sponsor is responsible for submitting monitoring
reports as required by the special conditions of the DA permit or the
terms of the third-party mitigation instrument. If permittees or third-
party mitigation sponsors do not provide the required monitoring
reports, they are not in compliance with the terms and conditions of
their permits or instruments, respectively. In such cases, district
engineers will take appropriate compliance actions in accordance with
the Corps regulations at 33 CFR part 326. Failure to comply with the
conditions of a DA permit issued under section 404 of the Clean Water
Act could result in the assessment of Class I administrative penalties.
Therefore, it is important that monitoring report requirements be
specified as conditions in DA permits.
    Some commenters said that monitoring reports should be made
available to the public, but other commenters indicated that they
should not be made public.
    Since monitoring reports are public information, Sec.  332.6(c)(3)
[Sec.  230.96(c)(3)] has been changed to clarify that monitoring
reports must be provided to interested federal, tribal, state, and
local resource agencies, and the public upon request. District
engineers may establish policies and procedures for how to fulfill
these requests for monitoring reports and other public information,
including establishing time frames for responding to the requests and
recouping nominal costs for filling those requests (e.g., duplication
costs). As discussed above, we have moved the language regarding site
inspections that was in Sec.  332.6(c)(2) [Sec.  230.96(c)(2)] of the
proposed rule to Sec.  332.6(a)(2) [Sec.  230.96(a)(2)], since it is a
general issue relating to monitoring.

33 CFR 332.7 and 40 CFR 230.97 Management

    (a) Site protection. Several commenters supported the flexibility
regarding the use of real estate and legal instruments for long-term
site protection. A number of commenters stated that compensatory
mitigation project sites should be protected in perpetuity through
conservation easements, rather than deed restrictions or other legal
instruments. A few commenters said that conservation easements are an
overly restrictive and unnecessary requirement for stream mitigation.
One commenter said that when a compensatory mitigation project is
located within a right-of-way owned by a public agency, requiring a
real estate instrument is unnecessary. Several commenters said that the
proposed rule ignores the jurisdiction of federal and state regulatory
programs, and compromises private property rights. These commenters
believe that the rule exceeds the authority of the agencies to regulate
activities under section 404 of the Clean Water Act.

    The goal of the rule is to ensure permanent protection of all
compensatory mitigation project sites. Specifically the rule states
that the aquatic habitats, riparian areas, buffers, and uplands that
comprise the overall compensatory mitigation project must be provided
long-term protection through real estate instruments or other available
mechanisms. However, we recognize that the terms of real estate or
legal instruments used to protect compensatory mitigation project sites
will differ, because of the variability in real estate laws among
states and local jurisdictions. For example, in some states perpetual
protection cannot be required, because the real estate or legal
instruments may be in effect for a limited number of years. Therefore,
we cannot require specific terms for real estate instruments in this
rule. The terms for conservation easements, restrictive covenants, and
other mechanisms are more appropriately addressed by district engineers
on a case-by-case basis. However, we have added a provision which
states that, where practicable, a conservation easement or restrictive
covenant should establish in an appropriate third party (e.g.,
governmental or non-profit resource management agency) the right to
enforce site protections and provide the third party the resources
necessary to monitor and enforce these site protections. For stream
compensatory mitigation projects, appropriate means of site protection
will be determined by district engineers, after considering the
characteristics of the compensation activities and the real estate
interests of the project proponent. For example, in-stream
rehabilitation measures may not warrant long-term protection. Specific
requirements for site protection are at the discretion of the district
engineer. There are other examples of situations where it may not be
feasible to require site protection through real estate or legal
instruments for compensatory mitigation projects. One potential
situation is the construction of oyster habitat or the restoration of
sea grass beds in state-owned tidal waters, where the project proponent
does not have a real estate interest, but may obtain authorization to
conduct those environmentally beneficial activities. Another example
may be the restoration of tidal marshes or other coastal resources,
since the long-term sustainability of those projects in the dynamic
coastal environment cannot be assured because of the natural littoral
processes that occur in those areas.
    This rule does not exceed the agencies' authority under the Clean
Water Act. The Corps has the authority to add special conditions to its
permits, when such conditions are necessary to satisfy legal
requirements such as compliance with the 404(b)(1) Guidelines or to
satisfy the public interest (see 33 CFR 325.4(a)). For example,
compensatory mitigation may be required to comply with the 404(b)(1)
Guidelines and to support the objective of the Clean Water Act, which
is to restore and maintain the chemical, physical, and biological
integrity of the Nation's waters. This final rule addresses
compensatory mitigation that may be required for DA permits issued
under the Corps jurisdictional authority under section 404 of the Clean
Water Act and sections 9 and 10 the Rivers and Harbors Act of 1899.
Compensatory mitigation requirements that may be imposed by state
regulatory programs are to be addressed through applicable state
regulations. While compensatory mitigation requirements may affect how
private property is used, such permit conditions do not necessarily
result in a taking of private property.
    If a compensatory mitigation project is located in a right-of-way
owned by a public agency, then alternative mechanisms may be used to
provide site protection. This rule does not compromise private property
rights. Permittees can propose alternative compensatory mitigation
projects in cases where a particular parcel of land is needed for uses
other than compensatory mitigation.
    One commenter asked for clarification as to why there is a
preference for non-profit conservation organizations versus for-profit
conservation organizations. Some commenters requested a definition of
the phrase ``long-term protection.''
    We do not state a preference for non-profit conservation
organizations. Section 332.7(a)(1) [Sec.  230.97(a)(1)] provides
examples of suitable land managers, and does not limit potential land
managers. Long-term protection refers to measures taken to sustain and
preserve the compensatory mitigation project after performance
standards are met and monitoring requirements have been fulfilled.
    Several commenters asserted that in addition to fishing and grazing
rights, compatible uses of compensatory mitigation projects on public
lands should include non-motorized public recreation, including
development of multi-use trails. They said that the agencies should
recognize that any trails or other features or activities that would
impact jurisdictional waters of the United States would require DA
permits and compensatory mitigation. Other commenters recommended
restricting incompatible uses. One commenter stated that a mitigation
bank needs to be preserved in perpetuity and protected from negative
impacts. This commenter said that the phrase ``restrict or'' should be
removed from Sec.  332.7(a) [Sec.  230.97(a)] of the proposed rule,
because incompatible uses must not be allowed.
    To the extent appropriate and practicable, incompatible uses that
might jeopardize the objectives of the compensatory mitigation project
will be prohibited. District engineers will determine which uses are
compatible and incompatible on a case-by-case basis. We have added
mineral extraction to Sec.  332.7(a)(2) [Sec.  230.97(a)(2)] as an
example of an incompatible use. We have removed the phrase ``restrict
or'' from this provision (now designated as Sec.  332.7(a)(2) [Sec.
230.97(a)(2)]).
    To address potential alterations to compensatory mitigation
projects on public lands, including federal facilities, that may result
from changes in statutes, regulations, or agency needs or mission, we
have also added Sec.  332.7(a)(4) [Sec.  230.97(a)(4)]. This provision
requires the public agency authorizing the incompatible use to provide
alternative compensatory mitigation acceptable to the district engineer
for any loss in functions resulting from the incompatible use.
    Several commenters said that in cases where a third party is the
holder of the conservation easement, the easement should contain a
requirement that the regulating agency be notified should there be any
action taken to void the easement (e.g., in legal actions related to
bankruptcy, tax reversion, or similar circumstances). In the event that
a third party holder defaults on an easement or is no longer authorized
to hold an easement, then that easement should revert to the regulating
agency.
    We have added Sec.  332.7(a)(3) [Sec.  230.97(a)(3)] to require
long-term protection mechanisms to include provisions requiring 60-day
advance notification to the district engineer if any action is taken to
void or modify the mechanism. The Corps, however, does not have
authority to hold easements for compensatory mitigation projects.
    (b) Sustainability. A number of commenters agreed that compensatory
mitigation projects should be designed to be self-sustaining once
performance standards have been achieved. One commenter expressed a
preference for self-sustaining mitigation projects to those requiring
on-going human intervention, such as irrigation, but acknowledged that
in arid regions, surface water supplies may be severely limited or
unavailable because of

established water rights. This commenter said that pumped groundwater
may be the only practicable solution.
    This rule requires compensatory mitigation projects to be designed,
to the maximum extent practicable, to be self-sustaining once
performance standards have been achieved. Where use of active
structures such as pumps cannot be avoided, it is permitted, however
the project sponsor should carefully evaluate the project design to
ensure that it is self-sustaining to the maximum extent practicable. At
the end of Sec.  332.7(b) [Sec.  230.97(b)], we have added a provision
requiring the acquisition and protection of water rights where needed.
That provision also requires documentation in the permit conditions or
the third-party mitigation instrument.
    Several commenters stated that monitoring will be required to make
sure that mitigation projects are self-sustaining. One commenter
recommended denying compensatory mitigation credit for projects
requiring active engineering features or excessive management such as
pumps or manipulated impoundments except in exceptional circumstances.
Another commenter said that language supporting active management and
maintenance, as well as adaptive management, should be included.
Commenters also stated that when an existing, human-created wetland is
being impacted, it may be appropriate to develop mitigation features
with shorter life expectancies.
    Determining whether an implemented compensatory mitigation project
is self-sustaining should occur during the original monitoring period.
In general, compensatory mitigation should not require active
engineering features such as pumps, but should be appropriately sited
to ensure that natural hydrology and landscape position will support
long-term sustainability. If this is not possible in some areas,
district engineers may decide that active engineering features or
active management may be necessary for a compensatory mitigation
project to meet its objectives. Adaptive management and long-term
management are addressed in paragraphs (c) and (d) of this section,
respectively. Appropriate compensatory mitigation project design,
objectives, and life expectancies are most appropriately determined by
district engineers on a case-by-case basis.
    (c) Adaptive management. A number of commenters supported the use
of adaptive management to address unforeseen changes in aquatic
resource functions of compensatory mitigation projects. Several
commenters recommended the use of legal instruments to protect
compensatory mitigation sites instead of relying on adaptive management
strategies. One commenter suggested that if a permittee has made a
``good faith effort'' to meet performance standards, no additional
compensatory mitigation requirements should be imposed other than an
extension of the monitoring period. Several commenters said that
requiring adaptive management efforts beyond what is currently required
as remediation or contingency actions will impose additional financial
and resource burdens on mitigation providers. One commenter requested
that the final rule clarify that ``monitoring and adaptive management''
will not be used as a substitute for developing a mitigation site plan.
    We have modified Sec.  332.7(c) [Sec.  230.97(c)] to be consistent
with the changes to the definition of adaptive management made in Sec.
332.2 [Sec.  230.92]. The protection of compensatory mitigation
projects sites through real estate instruments and other mechanisms
will not address poor performance that could be remedied through
adaptive management measures. The focus of adaptive management should
be on taking measures to achieve performance and satisfy the objectives
of the compensatory mitigation project. Extending the monitoring period
may not be an appropriate adaptive management approach to achieve the
desired performance, however, if the district engineer determines that
the project is progressing towards meeting performance standards and
that more time is all that is needed, he may determined that extension
of the monitoring period is an appropriate adaptive management
response. We recognize that there may be additional costs associated
with an adaptive management approach, but we believe that such an
approach is necessary to achieve compensatory mitigation project
objectives, or to provide comparable or superior ecological benefits.
An adaptive management plan is part of a mitigation plan (see Sec.
332.4(c)(12) [Sec.  230.94(c)(12)]), not a substitute for a complete
mitigation plan.
    We have added Sec.  332.7(c)(1) [Sec.  230.97(c)(1)] to require
permittees or third-party mitigation sponsors to notify the district
engineer if a permittee-responsible mitigation project or a mitigation
bank or in-lieu fee project cannot be constructed in accordance with
the approved mitigation plans. Any significant modification of a
compensatory mitigation project requires the approval of the district
engineer, and must comply with the conditions of the permit or the
third-party mitigation instrument. If a change is necessary that does
not comply with the permit or instrument as approved, the permit or
instrument must be modified.
    Several commenters stated that an adaptive management plan should
describe a technical approach to dealing with performance issues such
as invasive species, but should not depend on agency review and
approval of specific management decisions. One commenter said that
requiring applicants to develop up-front adaptive management plans
would allow flexibility and responsiveness on the part of the applicant
while preserving final agency approval or disapproval of the results.
Several commenters recommended allowing responsible parties to
determine remediation actions and report on those actions and the
results to the district engineer. A number of commenters said that the
proposed rule leaves the district engineer too much discretion to
dismiss remediation measures as not being ``appropriate and
practicable.''
    Management decisions that deviate from the approved mitigation
plans require approval from the district engineer. However, a certain
amount of responsiveness to conditions on the ground may be built in to
the mitigation plan itself. In such cases, as long as the project
sponsor is operating in accordance with the approved mitigation plan,
no special notification or additional approval is required, although
monitoring reports should include appropriate information to allow the
district engineer to assess how the project is progressing. In Sec.
332.7(c)(2) [Sec.  230.97(c)(2)] of the final rule, we have modified
this paragraph to require the responsible party to notify the district
engineer as soon as possible if the compensatory mitigation project is
not achieving its performance standards as anticipated. The district
engineer may determine that modification of the approved mitigation
plans is necessary to ensure compliance with the DA permit or third-
party instrument. District engineers will evaluate proposed measures to
determine if they will address deficiencies in the compensatory
mitigation project and/or require modification of the approved
mitigation plans. It is necessary to provide the district engineer with
the authority to determine whether remediation measures are appropriate
and practicable. If the proposed remediation measures do not meet those
two criteria, the district engineer may

determine that it is necessary for the responsible party to provide
alternative compensatory mitigation. In Sec.  332.7(c) [Sec.  230.7(c)]
we have replaced the phrase ``remediation measures'' with ``measures''
since appropriate measures may involve activities other than
remediation.
    One commenter agreed that the performance standards may need to be
revised, but only if performance and conditions at the compensatory
mitigation project site warrant revision of the objectives. Another
commenter stated that Sec.  332.7(c)(3) [Sec.  230.97(c)(3)] of the
proposed rule should be modified to clarify that performance standards
will not be lowered simply because the compensatory mitigation project
has not been able to meet those standards.
    The last sentence of Sec.  332.7(c)(2) [Sec.  230.97(c)(2)] states
that district engineers will consider whether compensatory mitigation
projects are providing comparable ecological benefits to the original
objectives, when determining whether it is necessary to require
adaptive management. This will not result in a lowering of performance
standards. Alternative compensatory mitigation may be required to
offset a shortfall in aquatic resource functions. District engineers
will also consider whether the compensatory mitigation project is
providing ecological benefits that are comparable or superior to the
approved compensatory mitigation project (see Sec.  332.7(c)(4) [Sec.
230.97(c)(4)]).
    Several commenters agreed with statements in the preamble of the
proposed rule indicating that district engineers will not require
additional monitoring or corrective actions for compensatory mitigation
projects that have not developed as intended due to natural
catastrophes. A number of commenters suggested that flooding issues
should be further explained in the final rule, or references to those
issues eliminated. Several commenters said that the final rule should
avoid creating a loophole in those cases where diseased vegetation
results from poor stock or contractor error, and not a natural
catastrophe. A few commenters recognized that, at certain stages of
restoration projects, those activities may not be able to withstand a
natural disaster; in such cases the district engineer should have
discretion to extend deadlines for completion. One commenter stated
that the discussion of natural disasters should be part of the adaptive
management plan. Another commenter asked for guidance on using
financial assurances to address damage caused by a natural disaster.
    In Sec.  332.7(c)(4) [Sec.  230.97(c)(4)], we address adaptive
management as it relates to natural disasters. Except in the case of
natural disasters, this rule does not allow revisions to performance
standards unless they reflect ecological benefits that are comparable
or superior to the originally approved objectives. If a natural
disaster causes deficiencies in a compensatory mitigation project, the
district engineer will evaluate the circumstances and determine whether
it would be appropriate and practicable to require measures to address
those deficiencies. Additional monitoring may be required to assess how
a compensatory mitigation project is responding to a natural disaster.
District engineers will determine on a case-by-case basis whether flood
events warrant taking action to repair compensatory mitigation
projects. In cases where diseased plant stock may have been used at a
compensatory mitigation project site, it may be appropriate either to
require replanting, or to allow natural revegetation. It is appropriate
for adaptive management plans to consider potential natural disasters
that may occur, to the extent that they can be reasonably foreseen.
Financial assurances may be used to provide alternative compensatory
mitigation if the compensatory mitigation project fails as a result of
a natural disaster that occurs before the monitoring period has ended.
    (d) Long-term management. One commenter suggested that Sec.
332.7(d) [Sec.  230.97(d)] conflicts with Sec.  332.7(b) [Sec.
230.97(b)], which states that compensatory mitigation projects should
be designed to be self-sustaining. Many commenters supported the
proposed requirement to identify the party responsible for the long-
term management of the compensatory mitigation project site. Several
commenters agreed that the mitigation bank sponsor should maintain
management responsibilities unless they are formally transferred to
another party. Several commenters stated that funding for the long-term
management of mitigated projects must be arranged prior to the issuance
of any permits.
    Although compensatory mitigation projects should, to the extent it
is practicable to do so, be self-sustaining, active long-term
management and maintenance are often necessary for a compensatory
mitigation project to fulfill its objectives. In such cases, provisions
for long-term management need to be provided as permit conditions or as
stipulations in a mitigation banking or in-lieu fee program instrument.
Such permit conditions or instrument stipulations should identify the
party responsible for long-term management, and if another party agrees
to assume that responsibility at a later date, the permit or instrument
can be modified by the district engineer to transfer that
responsibility. For permittee-responsible mitigation, Sec.  332.7(d)(4)
[Sec.  230.97(d)(4)] has been added to require approval of any required
long-term financing mechanisms before the permitted impacts occur.
    We have added Sec.  332.7(d)(2) [Sec.  230.97(d)(2)], which states
that a long-term management plan should include a description of long-
term management needs for the compensatory mitigation project and
annual cost estimates for those needs, and identify the funding
mechanism that will support the long-term management activities. In
Sec.  332.7(d)(3) [Sec.  230.97(d)(3)], which was Sec.  332.7(d)(2)
[Sec.  230.97(d)(2)] of the proposed rule, we have added a sentence to
allow the district engineer to impose, where appropriate, provisions to
address inflationary adjustments and other contingencies.
    One commenter supported the requirement for a long-term management
plan that identifies the responsible entity and addresses ``long-term
funding mechanisms'' as specified in the proposed Sec.  332.4(c)(11)
[Sec.  230.94(c)(11)], but believed that this requirement conflicts
with the proposed Sec.  332.3(n)(3) [Sec.  230.93(n)(3)], which states
that financial assurances would be phased out once performance
standards have been met. Instead, this commenter suggests that the rule
be clarified by describing the two required types of financial
assurances: (1) Financial assurances for the construction and
establishment of the compensatory mitigation project, which would be
phased out incrementally as performance standards are met, and (2)
funding for long-term management of the compensatory mitigation
project. Several commenters said that the rule should more explicitly
recognize that funding of long-term management can be ``phased-out'' or
reduced over time.
    In this rule, financial assurances are used to provide a high level
of confidence that compensatory mitigation projects will be completed,
whereas long-term management measures are used to help ensure the long-
term sustainability of compensatory mitigation projects. Funding for
financial assurances is handled differently than funding for long-term
management. The final rule clearly differentiates between financial
assurances for construction and establishment of compensatory
mitigation projects and funding

mechanisms for long-term management of those projects. In general,
funding for long-term management should not be phased out over time,
since those activities usually need to be conducted for substantial
periods of time. There may be occasions where long-term management is
no longer necessary because a compensatory mitigation project has
developed to the point where active management measures are no longer
needed to fulfill the objectives of that project. In such cases, the
responsible party should contact the district engineer and request that
the long-term management provisions be modified to release those
obligations.
    Several commenters said that long-term management for compensatory
mitigation projects on public land should not be required, or at the
very least should be privately funded. Several commenters stated that
the proposed rule is ambiguous and could result in different standards
applying to compensatory mitigation sites on public lands versus
private lands because it allows district engineers flexibility in
determining requirements for long-term management on public lands on a
case-specific basis. One commenter said that adequate financing of
long-term stewardship of a compensatory mitigation site should be
demonstrated for the public or private authority accepting stewardship
responsibility, because this will ensure consistency of site
maintenance whether the responsible party is a private or public
entity.
    In cases where compensatory mitigation project sites are owned by
public entities, it may not be necessary to include provisions for the
financing of any required long-term management if, for example, a
formal, documented commitment from a government agency is provided
(i.e., stewardship commitment). For public agencies, identifying
adequate financing at the time of permit issuance may be problematic
since agency funding can vary from year-to-year with budget cycles,
thus underscoring the need for a formal, documented commitment. In
cases of non-governmental organizations or private land managers
accepting responsibility for long-term management of compensatory
mitigation projects, including mitigation bank sites or in-lieu fee
project sites, it will be necessary for those entities to demonstrate
that there will be adequate funds available for the long-term
management activities. It is important to note that many public and
private land managers are no longer accepting the long-term stewardship
responsibilities of compensatory mitigation sites unless an endowment
or other source of long-term funding is provided by the permittee or
sponsor.
    Although not included in the text of the proposed rule, in the
preamble we requested comments on including a provision that would
require that the arrangements for adequate capitalization of long-term
management funds be finalized prior to permit issuance. Several
commenters disagreed with adding such a provision. They said that
finalization of long-term management funds should not be required prior
to permit issuance because it is often difficult to locate and
establish a long-term management entity. These commenters also
indicated it may take substantial time to arrange adequate
capitalization of long-term management funds. However, several other
commenters said that capitalization should take place prior to the
permit issuance in order to ensure that compensatory mitigation project
sites will be maintained in the long-term. An alternative solution
offered by several commenters would be to require mitigation banks to
provide incremental long-term management funding as credits are
released. These commenters also suggested that an endowment fund be
created in order to aid in the establishment of mitigation banks.
    We have added Sec.  332.7(d)(4) [Sec.  230.97(d)(4)] to require
approval of any required long-term financing mechanisms before the
activity authorized by the DA permit is initiated. This does not mean
that the long-term management measures need to be established and fully
funded, but they do need to be described and approved. This provision
applies to permittee-responsible mitigation projects. For third-party
mitigation, provisions necessary for long-term management must be
addressed in the instrument (see Sec.  332.7(d)(3) [Sec.
230.97(d)(3)]). For mitigation banks and in-lieu fee programs, long-
term management is also addressed in Sec.  332.8(u) [Sec.  230.98(u)].
For in-lieu fee programs, costs per unit credit are explicitly required
to take into account long-term management and protection of in-lieu fee
project sites (see Sec.  332.8(o)(5)(ii) [Sec.  230.98(o)(5)(ii)]). For
banks, this will be taken care of by market pricing of credits, since
the bank sponsor is responsible for long-term management and must
ensure that revenues are adequate to cover this responsibility.
    In cases where long-term financing for long-term management of
compensatory mitigation projects is necessary, district engineers
should consider the need to make inflationary adjustments and certain
financial assumptions. For example, district engineers may consider
total return assumptions and capitalization rates in the case of
endowments, or Consumer Price Index adjustments in the case of annual
payments.

33 CFR 332.8 and 40 CFR 230.98 Mitigation Banks and In-Lieu Fee
Programs

    (a) General considerations. Four commenters supported the provision
in the proposed rule that stipulates mitigation banks can be sited on
public or private land. There were several commenters, however, who
opposed locating mitigation banks on public land. One commenter stated
that public lands are to be protected, held in public trust, and
managed for their natural resources, ecosystem services, and the
recreational and aesthetic values. This commenter said that when
private lands are impacted and those impacts are mitigated on public
lands, the public gains nothing and more natural habitat is lost.
Commenters also stated that it is not appropriate for private
developers to profit from compensatory mitigation projects conducted on
lands purchased with public funds. One commenter said that, given the
current demands for management on public lands, that use of public
lands cannot be adequately controlled to assure long-term success of
the mitigation bank. Four commenters noted that the statement that
credits are based solely on aquatic resource functions may be
interpreted as limiting credits to only those activities in wetlands
and other aquatic resources, and not activities in uplands that support
and enhance those functions.
    We have moved Sec.  332.8(a)(2) [Sec.  230.98(a)(2)] of the
proposed rule to Sec.  332.3(a)(3) [Sec.  230.93(a)(3)], since the
principles in this paragraph should apply to all compensatory
mitigation projects, including permittee-responsible mitigation. Public
entities should be allowed to establish mitigation banks or in-lieu fee
projects on their lands. Public entities are often prospective
permittees who may need to provide compensatory mitigation for their
projects. As long as mitigation banks or in-lieu fee projects
established on public lands provide environmental benefits over and
above what normal management activities provide, there should be no
conflict. Credits secured by private developers can provide a source of
income for public entities to conduct aquatic resource restoration,
establishment, enhancement, and/or preservation activities that could
not be done under their current budgets. Credits provided by mitigation
banks and in-lieu fee projects include

environmental benefits resulting from riparian areas, buffers, and
uplands (see Sec.  332.8(o)(7) [Sec.  230.98(o)(7)]).
    Several commenters said that mitigation bank site selection should
be tied to watershed analyses, and should, to the extent possible,
dovetail with existing regional watershed plans, many of which identify
or prioritize regional restoration needs. One commenter noted that the
mitigation bank approval process does not require a watershed
assessment, and said that such an assessment is essential for
determining the ecological functions that the mitigation bank is likely
to achieve.
    The selection of mitigation bank sites should, to the extent
practicable, follow a watershed approach. As stated in Sec.
332.8(b)(3) [Sec.  230.98(b)(3)], the district engineer and the IRT are
to use a watershed approach when evaluating proposed mitigation banks
and in-lieu fee programs. For in-lieu fee programs, the required
compensation planning framework must support a watershed approach to
compensatory mitigation (see Sec.  332.8(c)(1) [Sec.  230.98(c)(1)]).
    We have modified Sec.  332.8(a) [Sec.  230.98(a)] by adding in-lieu
fee programs, since Sec.  332.8 [Sec.  230.98] contains regulations
governing both forms of third-party mitigation: mitigation banks and
in-lieu fee programs. We have divided Sec.  332.8(a)(1) [Sec.
230.98(a)(1) of the proposed rule into two paragraphs. Section
332.8(a)(1) [Sec.  230.98(a)(1)] states that all mitigation banks and
in-lieu fee programs must have an approved instrument signed by the
sponsor and the district engineer before being used to provide
compensatory mitigation for DA permits. This provision facilitates
compliance with terms of a mitigation banking instrument or an in-lieu
fee program instrument. So called ``ad hoc'' third-party mitigation
providers cannot operate as banks or in-lieu fee programs without an
approved instrument. While a permittee-responsible mitigation project
is free to use a third party to provide some or all of the design,
construction and management services required for project
implementation, liability for project success cannot be transferred to
a third party except where there is an approved instrument. Section
332.8(a)(2) [Sec.  230.98(a)(2)] stipulates that mitigation bank sites
and in-lieu fee project sites must be planned and designed to be self-
sustaining, but may also require some active management to ensure their
long-term viability and sustainability.
    (b) Interagency Review Team. Three commenters supported the
establishment of the Interagency Review Team (IRT). Several commenters,
however, stated that the IRT impedes the process. Those commenters
recommended streamlining the review process by eliminating the IRT and
using public notices instead. One commenter said that it is unclear
whether an IRT is a standing committee or whether a new one is formed
for each mitigation bank proposal. One commenter asked who will fund
IRT activities. Several commenters asked for clarification on the role
of the IRT. One commenter said that the team should retain the name
``mitigation bank review team.''
    The participation of the IRT is necessary to provide expertise and
advice to district engineers who are evaluating third-party mitigation
proposals from potential mitigation bank sponsors and in-lieu fee
program sponsors. Because of our experience with the 1995 mitigation
banking guidance, we believe that the IRT review process is more
effective than a simple public notice process for determining the
potential success and usefulness of a proposed mitigation bank. With
this rule, we are extending the IRT review process to all in-lieu fee
programs, with the hope of achieving the same benefits.
    District engineers have the flexibility to establish standing IRTs
in their geographic areas of responsibility, or to establish a new IRT
for each proposed mitigation bank or in-lieu fee program. Participation
in an IRT will be funded through that agency's budget. Since the IRT
concept will be used for both mitigation banks and in-lieu fee
programs, we are retaining ``interagency review team.''
    Many commenters stated that state, local, or tribal entities should
be included in the IRT. Some commenters also recommended that the IRT
have a state co-chair whenever the mitigation bank is being implemented
under both state and federal mitigation banking programs, rather than
allowing the district engineer discretion to make that determination.
Some commenters said that the proposed rule diminishes the advisory
role of state and federal resource agencies. Many commenters stressed
the need for collaboration with state and local agency personnel. One
commenter stated that the rule must establish strong, uniform standards
so as not to undermine states that currently employ more stringent and
protective mitigation standards for aquatic resources. This commenter
also said that the rule should prompt those states with weak programs
to raise their standards, and to ensure that state and local agencies
have a more equal role with their federal counterparts.
    Representatives of the U.S. EPA, National Marine Fisheries Service,
and U.S. Fish and Wildlife Service will automatically be included on
the IRT if they choose to participate. Beyond this, the district
engineer determines the composition of the IRT. Section 332.8(b)(2)
[Sec.  230.98(b)(2)] states that the district engineer will seek to
include in the IRT all public agencies with a substantive interest in
the establishment of a mitigation bank or in-lieu fee program. This
includes state, local, or tribal entities. As stated in Sec.
332.8(b)(1) [Sec.  230.98(b)(1)], other federal, tribal, state, or
local agencies may serve as co-chairs of an IRT, if the mitigation bank
or in-lieu fee program will also be used to satisfy their requirements.
Since this rule is focused on compensatory mitigation for DA permits,
we believe it is appropriate for the district engineer to be the
primary authority to administer these regulations. There are states
that have developed their own regulations governing mitigation banks or
in-lieu fee programs. This rule merely addresses the federal concerns
regarding compensatory mitigation required by DA permits under section
404 of the Clean Water Act and/or sections 9 and 10 of the Rivers and
Harbors Act of 1899. Therefore, it reflects the decision-making
responsibilities of the U.S. Army Corps of Engineers. It does not
affect state or local government aquatic resource regulatory programs.
State or local governments can issue their own regulations governing
compensatory mitigation required under their environmental statutes or
regulations.
    A number of commenters recommended that the district engineer
exercise the ultimate authority for approvals granted under this rule
following due consideration of the IRT recommendations. However,
several commenters said that decisions should not rest solely with
district engineers. Numerous respondents requested the elimination of
the requirement in the rule that the resource agencies be signatories
to the mitigation banking document. One commenter said that the rule
should be expanded to accommodate additional review processes.
    As stated in Sec.  332.8(b)(4) [Sec.  230.98(b)(4)], the district
engineer retains the final authority for approving mitigation banking
instruments or in-lieu fee program instruments, since these third-party
mitigation sources will be used to satisfy compensatory mitigation
requirements for DA permits. If there is a co-chair, that co-chair will
decide whether the proposed mitigation bank or in-lieu fee program can
be used to provide compensatory mitigation

under the other federal, tribal, state, or local program. We believe
that allowing IRT members to sign mitigation banking instruments or in-
lieu fee program instruments is beneficial, and helps demonstrate their
support of approved instruments; however, under today's rule they are
not required to do so and the district engineer may approve an
instrument regardless of whether or not other IRT member agencies sign
it. In Sec.  332.8(b)(3) [Sec.  230.98(b)(3)] we have added a sentence
that allows IRT members the option of submitting letters of
concurrence, instead of signing an instrument. We do not agree that
this rule should be expanded to other review processes. This rule was
promulgated in response to the congressional mandate in section 314 of
the National Defense Authorization Act for Fiscal Year 2004, which only
directed the development of standards and criteria for compensatory
mitigation for CWA section 404 permits. For program efficiency, we have
included requirements for RHA section 9 and 10 permits as well, but we
do not believe it is efficient or appropriate to cover review processes
for requirements under other statutes in these regulations.
    Since the final rule contains in-lieu fee programs, in Sec.
332.8(b)(3) [Sec.  230.98(b)(3)] we have modified the second sentence
to clarify that the IRT will review the prospectus, instrument, and
other appropriate documents and provide comments to the district
engineer. Examples of ``other appropriate documents'' include
mitigation plans for mitigation banks and in-lieu fee project sites, as
well as monitoring reports, proposed adaptive management measures, and
documents supporting proposed credit releases. Also included are the
compensation planning frameworks required of all in-lieu fee programs,
which are included as part of their instruments. At the end of Sec.
332.8(b)(3) [Sec.  230.98(b)(3)], we have added two sentences. One
sentence stipulates that comments from IRT members must be received
within specified time limits, to ensure timely processing of
instruments. The other sentence states that IRT comments received after
specified deadlines will only be considered at the discretion of the
district engineer to the extent doing so does not jeopardize the
deadlines for the district engineer's actions.
    We have also added Sec.  332.8(b)(5) [Sec.  230.98(b)(5)], which
allows district engineers and IRT members to enter into memoranda of
agreement with other agencies to perform some or all of the IRT
functions described in Sec.  332.8 [Sec.  230.98]. This may be
particularly appropriate in states with robust programmatic general
permits for the section 404 program. However, the district engineer
retains sole authority for approving instruments and other
documentation.
    (c) Compensation planning framework for in-lieu fee programs. We
have added this section to the final rule to provide a level of
watershed planning for in-lieu fee programs that goes beyond the
watershed planning typically conducted by mitigation banks. The
compensation planning framework is also intended to help reduce some of
the risk and uncertainty surrounding in-lieu fee programs, since those
programs will be able to sell a limited number of credits before
selecting and implementing compensatory mitigation projects. The
compensation planning framework will be used to select, secure, and
implement aquatic resource restoration, establishment, enhancement,
and/or preservation activities.
    In the proposed rule, the agencies proposed to phase out the use of
in-lieu fee programs within 5 years. We also asked for comment on this
provision, and asked that commenters who supported continued
authorization of in-lieu fee programs as third-party mitigation
providers explain their rationale for allowing two different types of
providers (banks and in-lieu fee programs) to operate under different
requirements. We also asked for comment on how to ensure that in-lieu
fee programs achieve the same level of success and certainty in
providing compensation for permitted impacts as mitigation banks. One
response we received to this request was that many in-lieu fee programs
conduct more extensive and intensive watershed-based resource planning
prior to securing sites and developing mitigation plans for specific
projects. These commenters argued that in-lieu fee programs were better
positioned to identify and provide resources that best meet the needs
of the watershed, even when these resources are not the ``easiest'' to
provide, or appropriate sites are more expensive or difficult to
secure. The agencies have determined that this may be a legitimate
advantage of in-lieu fee programs, and this consideration was part of
the basis for our determination to allow continued authorization of in-
lieu programs in this final rule. To ensure that this benefit is
realized, we have formalized this comprehensive planning process in the
requirement for in-lieu fee programs to include a compensation planning
framework in their instrument.
    The compensation planning framework will include the following
information: One or more geographic service areas; a general
description of the threats to aquatic resources in the service area(s),
including how the in-lieu fee program would help offset impacts
resulting from those threats; an analysis of historic aquatic resource
loss in the service area(s); an analysis of current aquatic resource
conditions in the service area(s), supported by an appropriate level of
field documentation; a statement of aquatic resource goals and
objectives for each service area, including general amounts, types, and
locations of aquatic resources the proposed in-lieu fee program will
seek to provide; a prioritization strategy for selecting and
implementing compensatory mitigation activities; an explanation of any
preservation objectives, including how those preservation activities
would satisfy the criteria at Sec.  332.3(h); a description of any
public or private stakeholder involvement in the development of the
framework; a description of the long-term protection and management
strategies for activities; a strategy for periodic evaluation and
reporting on the in-lieu fee program's progress in achieving its goals
and objectives; and other information determined by the district
engineer to be necessary for effective compensation planning by in-lieu
fee programs.
    The level of detail necessary for the compensation planning
framework is at the discretion of the district engineer, and will take
into account the characteristics of the service area(s) and the scope
of the in-lieu fee program. Once the planning framework is approved as
part of the in-lieu fee program instrument, all specific mitigation
projects developed by the in-lieu fee program to provide compensation
for DA permits must be consistent with it. Any modification to the
framework must be approved as a significant modification to the
instrument by the district engineer, after consultation with the IRT.
    (d)(1) Review process. Many commenters supported the proposed
timeframes for the review of mitigation banking instruments. Several
commenters said that the time frames should be shorter. Several
commenters stated that the proposed time frames are inadequate to allow
all agencies time to receive, review, and comment on proposed
mitigation banks. One commenter stated that setting unrealistic
deadlines will only serve to weaken the process and discourage any
substantive review of third-party mitigation proposals. Some commenters
expressed concern that the proposed time frames may be unachievable due
to

the workloads of the Corps and the IRT. Several commenters said that
the IRT process would result in delays in implementation and increased
costs for mitigation banks, as well as increased risk of failure or
environmental deterioration of mitigation bank sites resulting from
time-consuming modifications of instruments. Two commenters stated that
the Corps should place deadlines on its own actions, such as
establishing a time frame for a district engineer to approve or deny a
final mitigation banking instrument.
    In response to comments, we have modified a number of time frames
in the final rule to provide sufficient time to complete specific
tasks. For instance, we have changed Sec.  332.8(d)(8) [Sec.
230.98(d)(8)] to increase, from 15 days to 30 days, the period by which
the district engineer must notify the IRT whether or not he intends to
approve the instrument or amendment. We have also added time frames to
certain provisions to make the review process more effective. For
example, we have added a requirement for a district engineer to notify
the sponsor within 30 days whether a draft instrument or amendment is
complete (see Sec.  332.8(d)(6)(i) [Sec.  230.98(d)(6)(i)]).
    We believe that the time frames in the final rule will provide
efficiency to the review and approval process for third-party
mitigation, while taking into account the workload of the agencies. We
do not agree that these timeframes would adversely affect an agency's
ability to provide substantive comments. It is important to consider
the savings on time and resources that third-party mitigation can
provide in comparison to permittee-responsible mitigation, where
individual mitigation plans must be reviewed and approved in accordance
with the regulations in this part. We also believe that the time frames
provided in this rule will result in fewer delays for mitigation banks
and in-lieu fee programs, since the 1995 mitigation banking guidance
and the 2000 in-lieu fee guidance did not establish time frames for
review and approval. The reduced delays, as well as the required time
frames for project implementation, will help protect the environment
through timely implementation of compensatory mitigation projects. This
rule imposes appropriate time frames for the Corps to complete its
decisions, to ensure timely responses to requests to approve third-
party mitigation instruments or amendments to previously approved
instruments.
    Several commenters recommended that the rule provide flexibility
for Corps districts to take advantage of state procedures to the extent
practicable to make it easier for sponsors to go through the permit
process and to avoid unnecessary duplication of effort.
    In areas where DA permits are needed to construct mitigation banks
or in-lieu fee projects, and programmatic general permits are available
to authorize such activities, district engineers are encouraged to use
those programmatic general permits to provide the required
authorization. District engineers have the discretion to determine that
use of programmatic general permits may not be appropriate for
authorizing the construction of mitigation banks, to ensure adequate
coordination of instrument approval and any required DA authorization.
District engineers are also free to enter into MOAs with state agencies
administering programmatic general permits to perform some or all of
the review functions associated with mitigation bank and in-lieu fee
program approval; however, the district engineer retains the final
responsibility and authority for ensuring that the requirements of the
CWA and this part are met.
    One commenter noted that the proposed rule does not require that
permits be issued or denied within a fixed amount of time and
mitigation banks should not categorically be accorded a higher priority
than permit decisions.
    The procedures for issuing DA permits are provided at 33 CFR part
325, and are outside the scope of today's rule. The regulations
governing the timing for processing DA permit applications are provided
at 33 CFR 325.2(d).
    Since the final rule includes in-lieu fee programs as a source of
compensatory mitigation for DA permits, we have revised Sec.
332.8(d)(1) [Sec.  230.98(d)(1)] to include in-lieu fee programs. Since
in-lieu fee programs usually cannot secure compensatory mitigation
project sites until a period of time after the in-lieu fee program
instrument is approved and the in-lieu fee program becomes operational,
we have added a provision that stipulates that mitigation plans for in-
lieu fee project sites will be prepared as those sites are identified.
The sentence stating that a mitigation banking instrument must include
the mitigation plan by reference has been moved to Sec.  332.8(l)(2)
[Sec.  230.98(l)(2)] and modified to include in-lieu fee projects.
    (d)(2) Prospectus. A number of commenters requested clarification
on the definition of what constitutes a ``complete'' prospectus, and
who determines whether a prospectus is complete. Other commenters
stated that the proposed time period of 15 days for the district
engineer to notify a potential sponsor whether the prospectus is
complete is too short. One commenter stated that the proposed rule may
force trained scientists to quickly become de facto financiers who are
expected to understand prospectus preparation.
    We have modified Sec.  332.8(d)(2) [Sec.  230.98(d)(2)] to include
in-lieu fee programs. We have also modified this paragraph to clarify
that the review process for a proposed mitigation bank or in-lieu fee
program begins when the sponsor submits a complete prospectus to the
district engineer. We have changed the time period for the district
engineer to notify the sponsor whether the prospectus is complete to 30
days, to allow adequate time for this review to occur. An entity who
wants to develop a mitigation bank or in-lieu fee program must be able
to provide a complete prospectus. We believe that the requirements for
a complete prospectus constitute basic information that is necessary
for district engineers, IRT members, and the public to effectively
evaluate the potential for the proposed mitigation bank or in-lieu fee
program to provide successful and sustainable compensatory mitigation
projects. As with any business venture, knowledge in financial matters
is often a requisite for success.
    For a proposed mitigation bank, a complete prospectus includes the
following information: The objectives of the proposed mitigation bank;
how the mitigation bank will be established and operated; the proposed
service area; the general need for and technical feasibility of the
proposed mitigation bank; the proposed ownership arrangements and long-
term management strategy for the mitigation bank; the qualifications of
the sponsor to successfully complete the type(s) of mitigation
project(s) proposed, including information describing any past such
activities by the sponsor; the ecological suitability of the site to
achieve the objectives of the proposed mitigation bank, including the
physical, chemical, and biological characteristics of the bank site and
how that site will support the planned types of aquatic resources and
functions; and assurance of sufficient water rights to support the
long-term sustainability of the mitigation bank.
    For a proposed in-lieu fee program, a complete prospectus includes
the following information: The objectives of the proposed in-lieu fee
program; how the in-lieu fee program will be established and operated;
the proposed service area(s); the general need for and

technical feasibility of the proposed in-lieu fee program; the proposed
ownership arrangements and long-term management strategy for the in-
lieu fee project sites; the qualifications of the sponsor to
successfully complete the type(s) of mitigation project(s) proposed,
including information describing any past such activities by the
sponsor; the compensation planning framework; and a description of the
in-lieu fee program account.
    To clarify that a sponsor does not need to submit a new prospectus
to request modification of an approved instrument, we have added a
sentence stating that the sponsor needs to submit a written request for
instrument modification, with appropriate documentation. What
constitutes appropriate documentation for an instrument modification is
at the discretion of the district engineer, and is dependent on the
type of modification.
    (d)(3) Preliminary review of prospectus. A few commenters asked why
site visits are not mentioned within the preliminary review process.
    A district engineer may conduct site visits as necessary to provide
feedback on a draft prospectus.
    (d)(4) Public review and comment. Several commenters said that
issuing the public notice when a mitigation bank prospectus is received
is inefficient because the mitigation plan may only be preliminary. A
number of commenters agree with the proposed length of the public
comment period, others suggested extending it to 60 or 90 days. Some
commenters opposed any public comment period, contending that it will
complicate the process. On the other hand, several commenters said that
the public comment period is required by the National Environmental
Policy Act. Several commenters suggested that there be public notice
and comment for draft mitigation banking instruments.
    The public notice is an important means of assisting district
engineers in making informed decisions on proposed mitigation banks and
in-lieu fee programs, as well as modifications of third-party
mitigation instruments. Comments submitted in response to a public
notice can help ensure that a proposed third-party mitigation operation
is in the public interest and complies with applicable laws and
regulations. We have modified Sec.  332.8(d)(4) [Sec.  230.98(d)(4)] to
specify that the public notice will be 30 days, unless the district
engineer determines that more time is necessary to solicit meaningful
comment. We do not believe it would be appropriate to have comment
periods of less than 30 days for third-party mitigation operations. We
have also added a sentence to this paragraph to require, for proposed
modifications of approved instruments, a public notice that includes a
summary of the proposed modification and any appropriate documentation.
We do not believe it is necessary to subject draft mitigation banking
instruments to a public notice and comment process, because these
documents are essentially contractual in nature. The principle aspects
of a proposed mitigation bank or in-lieu fee program that would benefit
from the public notice and comment process are covered by the
prospectus.
    Several commenters said that there should be public notices
announcing final mitigation banking instruments. Some commenters asked
whether the resulting mitigation bank instrument and the alternatives
analysis will be available to the public. A number of commenters said
that the Corps must be required to make mitigation plans, instruments,
and monitoring reports easily accessible to resource agencies and the
public so that they may assist in holding permittees and banks
accountable for mitigation compliance.
    District engineers may announce the approval of a mitigation
banking instrument or an in-lieu fee program instrument by issuing a
public notice. Approved third-party mitigation instruments are public
information that will be provided to interested parties upon request.
Alternatives analyses are not typically conducted for third-party
mitigation activities. If a permit is required to construct a
mitigation bank or in-lieu fee project, and an alternatives analysis
was required to issue that permit, then the documentation of the
alternatives analysis would be in the administrative record for the
permit action. The last sentence of Sec.  332.8(d)(8) [Sec.
230.98(d)(8)] states that final mitigation banking and in-lieu fee
program instruments must be made available to the public upon request.
    (d)(5) Initial evaluation. We have added this provision to the
final rule, to allow district engineers to provide prospective third-
party mitigation sponsors with an initial evaluation of the potential
for the proposed mitigation bank or in-lieu fee program to provide
compensatory mitigation for DA permits. Initial evaluation letters will
be provided to sponsors within 30 days of the end of the public notice
comment period. A sponsor may either submit a draft instrument or
revise the prospectus, depending on the district engineer's initial
evaluation.
    This provision will add efficiency to the review and approval
process, because potentially unsuitable proposals for third-party
mitigation will not proceed to draft instruments that are unlikely to
be approved. This initial evaluation allows for feedback from the
district engineer, so that a sponsor can revise the prospectus to
address any deficiencies. The initial evaluation process does not apply
to modifications of previously approved instruments.
    (d)(6) Draft instrument. In Sec.  332.8(d)(6)(i) [Sec.
230.98(d)(6)(i)] we added a requirement that the district engineer
determine, within 30 days of receipt of a draft instrument, whether
that draft instrument is complete. If the draft instrument is
incomplete, the district engineer will notify the sponsor to request
the information necessary to make the draft instrument complete and
notify the sponsor as soon as he receives the additional information
and determines that the instrument is complete.
    We also added a sentence to Sec.  332.8(d)(6)(i) [Sec.
230.98(d)(6)(i)], which states that in the case of an instrument
modification, the sponsor must prepare a draft amendment and submit it
to the district engineer. This clarifies that, for instrument
modifications, the sponsor is not required to submit a new draft
instrument. A draft amendment may consist of a specific instrument
provision or a new or modified mitigation plan.
    In Sec.  332.8(d)(6)(i) [Sec.  230.98(d)(6)(i)], we also explained
the required content of draft mitigation banking or in-lieu fee program
instruments. For mitigation banks, a draft instrument must include: a
description of the proposed geographic service area of the mitigation
bank; accounting procedures; a provision stating that legal
responsibility for providing the compensatory mitigation lies with the
sponsor once a permittee secures credits from the sponsor; default and
closure provisions; reporting protocols; mitigation plans that include
all applicable items listed in Sec.  332.4(c)(2) through (14); a credit
release schedule; and any other information deemed necessary by the
district engineer.
    For in-lieu fee programs, the draft instrument must include: A
description of the proposed geographic service area(s) of the in-lieu
fee program; accounting procedures; a provision stating that legal
responsibility for providing the compensatory mitigation lies with the
sponsor once a permittee secures credits from the sponsor; default and
closure provisions; reporting protocols; the compensation planning
framework; specification of the initial allocation of advance credits
and a draft fee schedule for these credits, by service area, including
an explanation of the

basis for the allocation and draft fee schedule; a methodology for
determining future project-specific credits and fees; a description of
the in-lieu fee program account required by Sec.  332.8(i); and any
other information deemed necessary by the district engineer.
    Several commenters requested that the rule define ``service area''
more clearly. One commenter supported the increased flexibility in
defining the service areas that can be served by mitigation banks, but
another commenter said that the proposed definition is too restrictive.
A number of commenters stated that service areas should be determined
solely on the basis of its suitability to restore functions for
impacted resources within a watershed, without regard to whether there
are sufficient mitigation needs to support an economically viable bank.
A few commenters agreed with the proposed rule that economic viability
should be included in the determination of mitigation bank service
areas. One commenter said that the service areas of mitigation banks
should be based on watershed plans or, in the absence of a plan, the
service area should be limited to the area and types of wetlands for
which they can reasonably be expected to compensate functionally.
Several commenters supported the provision that the district engineer,
with input from the IRT, will determine a mitigation bank's service
area.
    The criteria for establishing service areas for mitigation banks
and in-lieu fee programs is provided in Sec.  332.8(d)(6)(ii)(A) [Sec.
230.98(d)(6)(ii)(A)] of the final rule. The service area may be based
on watersheds, ecoregions, physiogeographic regions, or other types of
geographic area deemed appropriate by the district engineer, after
consulting with the IRT. The service area must be appropriately sized
to ensure that the aquatic resources provided will effectively
compensate for adverse environmental impacts across the entire service
area. In addition, the economic viability of the bank or in-lieu fee
program may also be considered in determining the size of the service
area. We believe it is necessary to allow economic factors to be taken
into account, so that the environmental benefits of third-party
mitigation discussed in Sec. Sec.  332.3(a) and (b) [Sec. Sec.
230.93(a) and (b)] can be realized. Banks will only be established if
the prospective sponsor believes that there will be enough business to
justify the initial investment of time and financial resources. And in-
lieu fee programs will only be successful if they can collect enough
fees to finance viable mitigation projects. We do not believe it is
practical to require watershed plans prior to establishing service
areas for mitigation banks. There are few watershed plans available
that would provide concrete information for establishing service areas
for mitigation banks. The Corps believes that ecologically-suitable
service area sizes can be established through the review processes
required for mitigation banks even in the absence of a formal watershed
plan, though district engineers must use a watershed approach in making
this determination to the extent practicable. As for in-lieu fee
programs, the compensation planning framework is itself a type of
watershed plan, specifically tailored to the types of information
needed to define an appropriate service area for the in-lieu fee
program and guide site and project selection within that area.
    Several commenters stated that the size of the mitigation bank
service area specified in the proposed rule is too large. One commenter
said that a 6- or 8-digit HUC is too large to guide appropriate
ecological replacement of lost functions. Two commenters argued that
the size of a mitigation bank's service area should be based on the
local watershed area. Several other commenters, however, believed that
the service areas suggested in the proposed rule are too small. Some of
these commenters noted that certain states have over 50 (e.g., North
Dakota) or 100 (e.g., Alaska) 8-digit HUCs, and that developing a
mitigation bank for each HUC would be difficult. One commenter noted
that the size of a service area should be driven by environmental
factors, and that there should not be different sizes for urban areas
versus rural areas. Three commenters agreed that, as proposed in the
preamble, single-user mitigation banks (e.g., those sponsored by state
departments of transportation) should be given additional flexibility
for the size of the service area. Two commenters, however, disagreed
with this provision and argued that the size of the service area should
not be based on the characteristics of the bank sponsor.
    In the final rule, we have retained the examples of service area
based on 8-or 6-digit hydrologic unit codes for urban and rural areas.
It is important to remember that these are examples, and that the
district engineer, in consultation with the IRT, will determine the
appropriate service area(s) for mitigation banks and in-lieu fee
programs. District engineers can take into account the sponsor's needs
and capabilities (as well as relevant statutory or regulatory
authorities if the sponsor is a government agency) when determining
service areas for a third-party mitigation operation.
    Two commenters said that Sec.  332.8(c)(5)(iii) [Sec.
230.98(c)(5)(iii)] of the proposed rule is inconsistent with the
proposed Sec.  332.8(j) [Sec.  230.98(j)]. One commenter stated that
this provision should address that fact that most mitigation banks will
need to sell some initial credits to fund site acquisition and
construction associated with starting a new mitigation bank. Another
commenter suggested that the agencies provide a credit release schedule
template in the final rule.
    The two provisions cited in the previous paragraph are not
inconsistent with each other. The provision concerning the credit
release schedule for a mitigation bank is at Sec.  332.8(d)(6)(iii)(B)
[Sec.  230.98(d)(6)(iii)(B)] of the final rule. This provision requires
the achievement of specific milestones for credit releases to occur.
The initial credit release (initial debiting) for mitigation banks
provided by Sec.  332.8(m) [Sec.  230.98(m)] of the final rule requires
achievement of appropriate milestones, such as approval of the
mitigation banking instrument mitigation plan, securing the mitigation
bank site, and establishing appropriate financial assurances. The
initial debiting allows the mitigation bank sponsor to obtain some
capital that will be used to fund subsequent operations at the
mitigation bank. We do not believe it would be appropriate to provide a
credit release schedule template in the final rule, because credit
release schedules are likely to vary from project to project.
    Two commenters asked whether the requirement to include accounting
procedures in a mitigation banking instrument is linked to the ledger
account in Sec.  332.8(l)(1) [Sec.  230.98(l)(1)] of the proposed rule,
or to the financial assurance requirements of mitigation plans in
general.
    The requirements for a ledger account are stipulated in Sec.
332.8(q)(1) [Sec.  230.98(q)(1)] of the final rule. Ledger reports are
required for both mitigation banks and in-lieu fee programs. The draft
instrument must describe the accounting procedures that will be used
for the mitigation bank or in-lieu fee program. Additional requirements
for mitigation bank or in-lieu fee program accounting procedures are
provided in Sec.  332.8(p) [Sec.  230.98(p)] of the final rule. In
Sec.  332.8(q)(3) [Sec.  230.98(q)(3)] of the final rule, we have added
a requirement for an annual report showing the activities for any
financial assurances accounts and long-term management funding
accounts.

    One commenter said that the agencies should provide more guidance
on mitigation bank closure procedures.
    Default and closure provisions for the mitigation bank or in-lieu
fee program must be described in the instrument (see Sec.
332.8(d)(ii)(D) [Sec.  230.98(d)(ii)(D)]). The instrument must also
describe the site protection and long-term management for the
mitigation bank. For umbrella mitigation bank sites or in-lieu fee
project sites, the site protection and long-term management will
normally be addressed in the approved mitigation plans. Specific
closure procedures for mitigation banks are at the discretion of the
district engineer.
    (d)(7) IRT review. One commenter recommended that the IRT's review
of the draft prospectus and mitigation banking instrument be concurrent
with the Corps review to help streamline the approval process. One
commenter noted that the rule does not provide a funding mechanism for
Corps staff to spend more time in the review of mitigation banking
proposals. Several commenters suggested that the rule establish a
method earlier in the review process for rejecting poor mitigation
banking proposals. One commenter said that the rule should clarify that
the Corps has the authority to reject reviewing agency suggestions that
exceed the Corps' statutory authority, are insufficiently related to
the purposes of the mitigation bank, or are excessive in scope or
scale.
    The preliminary review of a draft prospectus provided in Sec.
332.8(d)(3) [Sec.  230.98(d)(3)] will be conducted concurrently by the
Corps and the IRT. As for the review of draft instruments, we believe
it is more efficient for the district engineer to evaluate whether the
draft instrument is complete before providing copies to the IRT members
for their review. Funding for the Corps review of third-party
mitigation instruments will be provided through Regulatory Program
appropriations. We have added Sec.  332.8(d)(5) [Sec.  230.98(d)(5)] to
provide for an initial evaluation of proposed mitigation banks or in-
lieu fee programs, to allow early notification to sponsors of proposed
third-party mitigation operations that are unlikely to be acceptable
for providing compensatory mitigation for DA permits. As stated in
Sec.  332.8(b)(4) [Sec.  230.98(b)(4)], the district engineer will give
full consideration to any timely comments and advice provided by the
IRT, but the district engineer alone retains final authority for
approval of instruments for mitigation banks or in-lieu fee programs
used to provide compensatory mitigation for DA permits.
    To facilitate IRT review of draft instruments or amendments, Sec.
332.8(d)(7) [Sec.  230.98(d)(7)] of the final rule states that the
sponsor must provide the district engineer with a sufficient number of
copies of those documents. The district engineer will promptly
distribute copies of those documents to the IRT members for a 30-day
comment period, which will begin five days later. The five day waiting
period will ensure that the IRT members will have a full 30 days to
review the draft instrument or amendment. This paragraph was also
changed, where appropriate, to include amendments of approved
instruments.
    We have also modified this paragraph to make it clear that the
district engineer will seek to resolve concerns raised by IRT members
using a consensus based approach, to the extent practicable, but that
this cannot be allowed to jeopardize meeting the time frames in the
rule. The rule provides 90 days from the time the complete draft
instrument is distributed to IRT members for the district engineer to
notify the sponsor whether it is generally acceptable, and if so, what
changes are needed for the final instrument. Alternately, within this
same time frame (90 days), the district engineer must notify the
sponsor if there are significant unresolved concerns that may lead to
disapproval of the final instrument, or to a formal objection by one or
more IRT members. Use of a consensus-based approach does not alter the
responsibility of the district engineer to make a final determination
regarding the draft instrument within the specified time frames.
    (d)(8) Final instrument. Many commenters supported the proposed
process for mitigation bank approval. Two commenters specifically
supported the provision that gives the district engineer the final
authority to approve a mitigation banking instrument. One commenter
said that the final rule should require the sponsor to address any
comments provided as a result of the IRT review process. One commenter
said that if the district engineer does not make a decision on a final
mitigation banking instrument as provided, the instrument should be
considered to be approved by default. Two commenters encouraged the
agencies to establish a process to appeal a district engineer's
decision not to approve a mitigation banking instrument.
    We have modified this paragraph to require the sponsor to submit
supporting documentation with the final instrument. This supporting
documentation must explain how the final instrument addresses the
comments provided by the IRT. As stated in Sec.  332.8(a)(1) [Sec.
230.98(a)(1)], for a mitigation bank or in-lieu fee program to be able
to provide compensatory mitigation for DA permits, it must have an
instrument approved by the district engineer. Allowing approval by
default would be inappropriate as there would be no assurance that
compensatory mitigation provided by the bank or in-lieu fee program
would meet the requirements of the Clean Water Act and this part.
Therefore, this final rule does not include a default approval
provision. We do not believe it is necessary to establish an appeal
process for third-party mitigation instruments. District engineers have
the discretion to determine whether a proposed mitigation bank or in-
lieu fee program will be suitable for providing compensatory mitigation
for DA permits. When the district engineer disapproves an instrument,
he must provide comments to the sponsor indicating the deficiencies
that formed the basis for the disapproval. If a proposed mitigation
bank or in-lieu fee program is not approved, a prospective sponsor can
modify that proposal to correct these deficiencies and resubmit it for
consideration.
    (e) Dispute resolution process. Three commenters supported the
dispute resolution process as outlined in the proposed rule. Two
commenters asserted that the dispute resolution process will slow
mitigation bank development. Two commenters said that resource agency
staff should be granted full involvement in decision-making over the
development of mitigation banking instruments, instead of elevating
their concerns over proposed instruments to headquarters. One commenter
recommended that each district develop a mitigation bank template in
coordination with federal and state agencies, and that the use of this
template will reduce the need to go through a dispute resolution
process. One commenter stated that the higher level review in this
process may only drive it farther away from any perceived watershed or
biologically-based approach.
    We have modified Sec.  332.8(e) [Sec.  230.98(e)] to include
amendments of approved mitigation banking instruments and in-lieu fee
program instruments. We do not agree that the dispute resolution
process will slow the decision-making process for third-party
mitigation instruments. On the contrary, the dispute resolution process
will facilitate decision-making through the involvement of higher level
agency personnel. The decision to approve a mitigation bank or in-lieu
fee program to

provide compensatory mitigation for DA permits lies solely with the
district engineer. As explained in Sec.  332.8(b) [Sec.  230.98(b)],
the role of the IRT is to provide comments and advice on the
establishment and use of mitigation banks and in-lieu fee programs.
Although district engineers are encouraged to develop templates for
mitigation banking and in-lieu fee program instruments, the development
of such templates does not need to be addressed in this rule. The
dispute resolution process is not expected to conflict with a watershed
approach, since it is an administrative process intended to resolve
objections to proposed instruments.
    One commenter said that the milestones and time frames established
in the proposed rule are adequate to move the process along, while
giving time for appropriate comment. One commenter expressed concern
that 15 days for the Interagency Review Team to initiate the dispute
resolution process is too short.
    We have retained the time frames in the dispute resolution process.
We believe that 15 days is sufficient for a member agency of the IRT to
initiate the dispute resolution process. The IRT members will have
already thoroughly reviewed the draft instrument, and had the proposed
final instrument for 30 days before this 15-day time period begins. Any
remaining issues should already have been identified by that time and
evaluated to determine whether they warrant elevation to the agency's
headquarters. In Sec.  332.8(e)(3) [Sec.  230.98(e)(3)], we have added
electronic mail as an acceptable means for notifying district engineers
that an issue has been forwarded to Headquarters for review.
    Two commenters recommended that the dispute resolution process
include procedures to address disputes when they are with a co-chair
from a tribal, state, or local program. One commenter said a mitigation
banking instrument should not be approved over the objections of the
state in which the mitigation bank is located. Another commenter
suggested that the rule should allow for coordination with states that
have separate appeals procedures.
    This process is intended to resolve disputes that are within the
purview of the Corps to address. If there is a co-chair involved in the
approval process, and there is an IRT objection that is solely under
the authority of the tribal, state, or local co-chair to address, then
the co-chair should address those objections. The co-chair also has the
option of not approving the instrument, so that the mitigation bank or
in-lieu fee program cannot be used to provide compensatory mitigation
for tribal, state, or local authorizations. District engineers should
try to address state objections to proposed mitigation banks and in-
lieu fee programs, but final decisions must be based on federal
interests, including applicable federal laws, regulations, and
executive orders. State appeals procedures do not apply to federal
decisions regarding mitigation banks and in-lieu fee programs. A state
can choose not to approve a mitigation bank or in-lieu fee program to
provide compensatory mitigation for its authorizations.
    (f) Extension of deadlines. One commenter said that deadlines
should be established for review and response, but that these deadlines
should have built-in flexibility for extenuating circumstances.
    We have revised this paragraph to account for the potential issues
that may warrant allowing additional time to reach decisions on third-
party mitigation instruments. In Sec.  332.8(f)(1)(i) [Sec.
230.98(f)(1)(i)], we have added consultation under section 7 of the
Endangered Species Act or section 106 of the National Historic
Preservation Act as potential reasons for needing more time to process
mitigation banking or in-lieu fee program instrument proposals. We have
added Sec.  332.8(f)(1)(ii) [Sec.  230.98(f)(1)(ii)] to include
government-to-government consultation with Indian tribes, since it may
be necessary to conduct such consultation if a proposed mitigation bank
or in-lieu fee program may affect an Indian tribe's interests, such as
protected tribal resources, tribal rights, or Indian lands. In Sec.
332.8(f)(1)(ii) [Sec.  230.98(f)(1)(ii)], in-lieu fee programs and
proposed instrument modifications have been added to include these
actions as potentially needed deadline extensions.
    (g) Modification of instruments. Two commenters stated that the
proposed mechanism for modifying mitigation banking instruments is a
fair and effective way of addressing the grandfathering of operational
mitigation banks. Another commenter suggested that the Corps establish
an administrative appeal process for mitigation banking instrument
modifications.
    Since in-lieu fee programs have been added to this rule, we have
included the modification of in-lieu fee program instruments in Sec.
332.8(g) [Sec.  230.98(g)]. We do not believe it is necessary to
establish an administrative appeal process for modifications of third-
party mitigation instruments.
    Several commenters supported the streamlined mitigation bank permit
modification process proposed in the rule. One commenter said that the
process will not sufficiently reduce permitting burdens and time frames
to justify elimination of in-lieu fee programs. One commenter believed
that the time frame for IRT review in this process is too long and has
the potential to delay decision-making for simple changes to an
instrument. One commenter requested that the agencies provide examples
of ``non-significant'' changes that would allow use of the streamlined
review process to modify an instrument.
    We have retained in-lieu fee programs in this final rule, and the
streamlined review process for instrument modifications also applies to
certain actions pertaining to in-lieu fee programs. Examples of such
actions include adaptive management, credit releases, and changes in
credit release schedules. We believe that IRT review of proposed
instrument modifications is necessary, and that the time frames are
sufficient to ensure that substantive comments can be provided in a
timely manner. District engineers have the discretion to determine what
changes that are not listed in Sec.  332.8(g) [Sec.  230.98(g)] warrant
use of the streamlined review process. Examples might include minor
changes to a mitigation project plan that do not substantively change
the character of the project or its ability to provide appropriate
mitigation for DA permits. The addition and approval of umbrella
mitigation bank sites and in-lieu fee project sites, or the expansion
of previously approved mitigation bank or in-lieu fee project sites,
must be evaluated through the full instrument amendment process in
Sec.  332.8(d) [Sec.  230.98(d)].
    (h) Umbrella mitigation banking instruments. Four commenters
supported development of umbrella mitigation banking instruments. One
commenter did not support the authorization of umbrella mitigation
banking instruments, because they usually cover sites that are in
different geographic locations and have different site conditions.
Several commenters suggested that the rule require the entity proposing
an umbrella agreement have at least one site in place, and limit credit
releases to sites that have been reviewed and permitted. Several
commenters opposed the provision in the rule that requires a major
modification to the instrument for additional umbrella mitigation bank
sites. These commenters said that this requirement will impede project

development schedules. One commenter stated that the sponsor of an
umbrella mitigation banking instrument should not be able to sell
credits until the site has been acquired, the mitigation plan approved,
and the financial assurances are in place.
    In this paragraph, we have clarified that adding more mitigation
bank sites to an umbrella mitigation banking instrument requires
following the procedures at Sec.  332.8(g)(1) [Sec.  230.98(g)(1)] for
amending an approved instrument. In response to a proposal to add a new
site to an umbrella mitigation banking instrument, the district
engineer and the IRT will review the proposed mitigation plan. The
district engineer, in consultation with the IRT, will determine whether
the proposed site is acceptable for providing compensatory mitigation
for DA permits within the service area governed by that instrument. The
proposed rule, as well as the final rule, requires a mitigation bank
site to be included in the initial mitigation banking instrument. The
mitigation banking instrument becomes an umbrella instrument when
additional compensatory mitigation project sites are added (see Sec.
332.8(h) [Sec.  230.98(h)]). We have added a sentence to this paragraph
that requires credit withdrawal from umbrella mitigation bank sites to
be consistent with Sec.  332.8(m) [Sec.  230.98(m)]. In particular, any
additional projects must have an approved plan, a secured site, and
appropriate financial assurances in place before any credits can be
sold or transferred. After the initial credit release, further releases
are tied to achievement of milestones and performance standards in
accordance with an approved credit release schedule.
    (i) In-lieu fee project account. We have added this provision to
require in-lieu fee program sponsors to establish program accounts at
financial institutions that are a member of the Federal Deposit
Insurance Corporation (FDIC). The purpose of the program account is to
ensure that the funds collected from permittees by the in-lieu fee
program sponsor are used within a reasonable time period to provide
compensatory mitigation for DA permits, instead of other activities.
Requiring the sponsor to establish the account with a member of the
FDIC is intended to protect those funds from being lost through
default. The interest and other earnings accruing to the account must
remain in the account, to fund in-lieu fee projects. The funds placed
into the in-lieu fee program account may only be used for the
selection, design, acquisition, implementation, and management of in-
lieu fee projects, with a small percentage being allowed for
administrative costs. The percentage that can be used for
administrative costs will be determined by the district engineer, in
consultation with the IRT. If the sponsor conducts activities, such as
educational programs, in addition to aquatic resource restoration,
establishment, enhancement, and/or preservation activities that are
used to provide compensatory mitigation for DA permits, the in-lieu fee
program account must be separate from the accounts that fund those
supplemental activities.
    Section 332.8(i)(2) [Sec.  230.98(i)(2)] requires in-lieu fee
program sponsors to submit proposed in-lieu fee projects to the
district engineer for funding approval. Disbursements from the in-lieu
fee program account can only be made after the district engineer
provides written approval of a proposed in-lieu fee project. The
district engineer's decision will occur after consultation with the
IRT. The district engineer does not need to authorize each individual
disbursement from the account, but must provide written approval for
the project, based on a review of the project mitigation plan, which
will include a description of activities and projected costs. Once the
project is authorized, funds disbursed from the account must be spent
for the project in a manner consistent with the approved project
mitigation plan. The terms of the in-lieu fee program account must
specify that the district engineer has the authority to direct those
funds to alternative compensatory mitigation projects if the sponsor
does not provide the compensatory mitigation in accordance with
required time frames. As with financial assurances, the Corps lacks
statutory authority to accept directly, retain, and draw upon funds
that are in the in-lieu fee program account, because of the
requirements of the Miscellaneous Receipts Statute (31 U.S.C. 3302(b)).
Therefore, the terms of the in-lieu fee program instrument must be
carefully crafted to ensure that the district engineer can direct the
funds deposited in the in-lieu fee program account to be used for
providing compensatory mitigation for DA permits, without the Corps
directly accepting or disbursing the funds.
    The in-lieu fee program sponsor is also required to provide annual
reports to the district engineer and the IRT regarding the in-lieu fee
program account (see Sec.  332.8(i)(3) [Sec.  230.98(i)(3)]). The
district engineer may audit the records for the in-lieu fee program
account, to ensure compliance with this rule.
    (j) In-lieu fee project approval. We added Sec.  332.8(j) [Sec.
230.98(j)] to provide a process for the review and approval of in-lieu
fee projects. The mitigation plans for in-lieu fee projects must
include the information required by Sec.  332.4(c)(2) through (c)(14)
[Sec.  230.94(c)(2) through (c)(14)]. The mitigation plan must also
include a credit release schedule, which is similar to the credit
release schedule required for mitigation banks. The review and approval
of in-lieu fee projects will be conducted as instrument modifications
in accordance with the procedures at Sec.  332.8(g)(1) [Sec.
230.98(g)(1)]. In-lieu fee projects may be conducted by other parties
on behalf of the in-lieu fee program sponsor, but the project must
still be approved by the district engineer and the sponsor remains
responsible for compliance with the terms of the instrument and the
approved mitigation plan.
    Section 332.8(j)(2) [Sec.  230.98(j)(2)] states that if a DA permit
is required for the in-lieu fee project, then the permit should not be
issued until the relevant provisions of the mitigation plan have been
substantively determined. This will help ensure that the special
conditions of the DA permit reflect the provisions of the mitigation
plan, including the ecological performance standards, site protection
mechanisms, and financial assurances.
    (k) Coordination of mitigation banking instruments and DA permit
issuance. Two commenters supported the provision in the rule that
prohibits district engineers from issuing a permit authorizing the
construction of a mitigation bank until all relevant provisions of the
mitigation banking instrument have been substantively determined. One
commenter suggested that this provision be modified so that the section
404 permit process could be concurrent with the review of the
mitigation banking instrument. Another commenter said that delaying
construction of mitigation banks would exacerbate financial problems
that often occur shortly after the mitigation banking instrument is
approved.
    We have revised this paragraph to include the development of new
compensatory mitigation project sites under an umbrella mitigation
banking instrument. We have also modified this paragraph to state that
the DA permit should not be issued until all relevant provisions of the
mitigation plan have been substantively determined, including the
ecological performance standards. District engineers are encouraged to
conduct the evaluation for a DA permit to construct a mitigation

bank concurrently with the review process for the mitigation banking
instrument. Delaying issuance of the DA permit until the content of the
mitigation plan has been determined should help reduce costs by
avoiding the need to modify the permit and its special conditions to
accurately reflect the approved mitigation plan.
    (l) Project implementation. We added a new Sec.  332.8(l)(1) [Sec.
230.98(l)(1)] to clarify that a third-party mitigation sponsor must
have an approved instrument before collecting funds from permittees to
satisfy compensatory mitigation requirements for DA permits.
    Section 332.8(l)(2) [Sec.  230.98(l)(2)] contains the text from the
proposed rule, and it has been modified to include in-lieu fee
programs. We have added Sec.  332.8(l)(3) [Sec.  230.98(l)(3)] to
stipulate that in-lieu fee program sponsors are responsible for the
implementation, long-term management, and any required remediation of
in-lieu fee projects, even in cases where those projects are conducted
by other parties through requests for proposals or other contracting
mechanisms.
    (m) Credit withdrawal from mitigation banks. One commenter said
that the rule should make it clear that for initial debiting of a
percentage of the mitigation bank credits to occur, the mitigation bank
needs to be constructed within a short time frame. Another commenter
stated that if the rule allows mitigation banks to pre-sell credits
with appropriate financial securities in place, the mitigation banks
will be able to produce more environmental benefits. One commenter
recommended adding a provision to limit the number of credits provided
through establishment (creation) to no more than 25 percent of the
total credits that will be produced by the mitigation bank, because
establishment activities are less likely to succeed.
    We have added a provision requiring initial implementation of the
approved mitigation plan no later than the first full growing season
after the date the first credit transaction occurs, to ensure timely
construction of the mitigation bank. A purpose of the initial debiting
is to provide a source of funds for conducting activities that support
the continued development of the mitigation bank. We do not believe it
would be appropriate to place a limit on the percentage of credits that
can be produced through aquatic resource establishment activities. Such
decisions should be made on a case by case basis by the district
engineer, after consulting with the IRT. Likelihood of success is one
of the factors that the district engineer and the IRT will consider in
making such decisions.
    (n) Advance credits for in-lieu fee programs. We have added Sec.
332.8(n) [Sec.  230.98(n)] to provide an analogous standard to the
initial debiting for mitigation banks that is provided by Sec.
332.8(m) [Sec.  230.98(m)]. The limitations in Sec.  332.8(n) [Sec.
230.98(n)] are also intended to reduce risk and uncertainty for in-lieu
fee programs and to ensure timely implementation of in-lieu fee
projects. The goal of the requirements in this paragraph is not to
place an arbitrary limit on the availability of advance credits within
a service area, but rather to ensure that in-lieu fee programs do not
sell more advance credits than they can reasonably deliver in the time
frame specified in Sec.  332.8(n)(4) [Sec.  230.98(n)(4)], generally 3
years.
    This does not mean that the number of advance credits will
necessarily be small. The number of advance credits authorized for an
in-lieu fee program will be limited by service area, and specified in
the in-lieu fee program instrument. District engineers will determine
the number of advance credits allowed per service area, after
consulting with the IRT in accordance with the procedures in Sec.
332.8(d) [Sec.  230.98(d)]. The number of advance credits will be based
on an evaluation of the compensation planning framework; the sponsor's
past performance for implementing aquatic resource restoration,
establishment, enhancement, and/or preservation activities in the
proposed service area or other areas; and the projected financing
necessary to begin planning and implementation of in-lieu fee projects.
For example, in service areas with larger numbers of permitted impacts,
and where a sponsor with demonstrated past successes is likely to
produce a substantial amount of compensatory mitigation within the time
frame specified in Sec.  332.8(n)(4) [Sec.  230.98(n)(4)], district
engineers can authorize a higher number of advance credits. As another
example, if an in-lieu fee program is being established by a sponsor
that does not have a history of successfully implementing aquatic
resource restoration, establishment, enhancement, and/or preservation
projects, the district engineer may authorize a smaller number of
advance credits to address potential risks. If an in-lieu fee program
sells all of its advance credits and it appears likely that it can
fulfill a higher number of advance credits within the required time
frame, it may apply for an instrument modification to increase the
number of available advance credits.
    Section 332.8(n)(2) [Sec.  230.98(n)(2)] allows the district
engineer to require the sponsor to provide confidential supporting
information to determine an appropriate limit for advance credits. Such
confidential supporting information may include locations of potential
in-lieu fee project sites that have been identified by the sponsor. It
may be necessary to keep this information confidential to lessen the
risk of land speculation activities that could drive up the price of
prospective in-lieu fee project sites before the sponsor can collect
sufficient fees to secure those sites.
    Each approved in-lieu fee project will have an approved mitigation
plan, with a credit release schedule. As in-lieu fee projects are
implemented by the in-lieu fee sponsor in accordance with approved
mitigation plans, credits will be released as milestones in the credit
release schedule are achieved. As released credits are produced, these
must first be used to fulfill any advance credits that have been sold
in the service area, after which any remaining released credits may
also be sold. Once advance credits are fulfilled, an equivalent number
of new advance credits will become available, which the sponsor may
sell as advance credits. Therefore, the advance credit account is a
rolling account, and when released credits are produced and previously
sold advance credits are fulfilled, the advance credit account will
have new advance credits available for sale, but not more than the
advance credit limit specified in the instrument (see Sec.  332.8(n)(3)
[Sec.  230.98(n)(3)]).
    Within a particular service area, Sec.  332.8(n)(4) [Sec.
230.98(n)(4)] requires in-lieu fee program sponsors to secure in-lieu
fee project sites and conduct the initial physical and biological
improvements (e.g., grading and planting) by the third full growing
season after the first advance credit for that service area is secured
by a permittee. District engineers have the discretion to allow more
time to plan and initiate in-lieu fee projects. An example of where
this discretion may be appropriate would be a service area where credit
demand is lower than expected, and the in-lieu fee program has not been
able to collect enough funds to secure an in-lieu fee project site and
plan and implement the compensatory mitigation project within the three
growing season time period. The district engineer also has the
discretion to direct the sponsor to use the funds in the in-lieu fee
program account required by Sec.  332.8(i) [Sec.  230.98(i)] to provide
alternative compensatory mitigation to fulfill the

obligations created through the sale or transfer of advance credits. In
rare circumstances, the district engineer may allow an in-lieu fee
program to fulfill advance credits sold in one service area with
released credits from a different service area. This should only occur
in situations where the number of unfulfilled advance credits is small,
the prospects for collecting more fees in the service area are poor,
and the district engineer determines that fulfilling the advance
credits in another service area will provide adequate compensation for
the previously authorized impacts represented by the advance credits.
This may happen in the case of state-wide in-lieu fee programs that
have some remote service areas with very small numbers of authorized
impacts.
    We have added Sec.  332.8(n)(5) [Sec.  230.98(n)(5)] to address
compliance with in-lieu fee program instruments. District engineers
will review the operations of approved in-lieu fee programs, to assess
their performance. If an in-lieu fee program is not complying with the
terms of its instrument, the district engineer may suspend credit sales
or take other appropriate action until the sponsor complies with the
terms of the instrument. This paragraph also makes it clear that
permittees who secure credits from in-lieu fee programs are not
responsible for in-lieu fee program compliance.
    (o) Determining credits. (1) Units of measure. Several commenters
said that credits should not be expressed as acres or linear feet,
because those units do not adequately account for functions and values.
Several commenters suggested that the agencies revise this section to
relate back to the functional approach provided by the definition of
``credit'' in Sec.  332.2 [Sec.  230.92]. Two commenters recommended
that the agencies develop appropriate means for quantifying debits for
stream impacts and compensatory mitigation credits for stream
mitigation. One commenter suggested that the rule establish specific
alternative quantitative measures other than acres or stream length
units, and provide methods for tracking each of the wetland functions
and values that result in credits or debits. Another commenter said
that all mitigation bank credit transactions should be based on the
accrual of functions, not on areal measures. One commenter stated that
all functional assessment studies should be standardized within a
watershed, and preferably across regions, districts, or states.
    It is not always possible to quantify credits by functional or
condition assessments, so there is a need to use other metrics, such as
acres or linear feet. The requirements in Sec.  332.8(o) [Sec.
230.98(o)] are consistent with the definition of credit in Sec.  332.2
[Sec.  230.92]. We have modified Sec.  332.8(o)(1) [Sec.  230.98(o)(1)]
to include ``other suitable metrics'' as potential units for
quantifying credits or debits. Appropriate units for quantifying
credits and debits will be determined by district engineers on a case-
by-case basis. District engineers are encouraged to use science-based
assessment methods for determining aquatic habitat condition, such as
the index of biological integrity, where practicable. District
engineers and other entities, such as scientists, may develop
assessment methods for stream impacts and compensatory mitigation that
could be used to quantify debits and credits. Stream assessment methods
are likely to vary by geographic region, and may be developed locally.
The development of an automated information system to track specific
aquatic resource functions that are lost as a result of permitted
activities, or are produced by compensatory mitigation projects, is
outside the scope of this rule, however the Corps is working to improve
its tracking of permitted impacts and compensatory mitigation. In many
areas of the country, and for certain types of wetlands, there may not
be functional or condition assessment methods available, so other
measures such as acres, may need to be used to quantify credits and
debits. We do not agree that functional assessment methods should be
standardized within watershed, districts, or states. Functional
assessment methods will vary among resource type, and sometimes by
regional categories, such as ecoregion or physiographic region.
    (o)(2) Assessment. Several commenters supported the use of
functional assessments to determine credits. One commenter recommended
that functional assessments should be required for all mitigation
banks. Another commenter said that functional assessments are just one
tool that could be used. Two commenters recommended that the rule
prescribe specific methods for conducting functional assessments. One
commenter supported the use of functional assessments for both credits
and debits. According to one commenter, the agencies have had
considerable difficulty successfully tracking compensatory mitigation
by type and location (e.g., in-kind, on-site), and functional
assessments would greatly increase the complexity of this process. One
commenter stated that the district engineer should incorporate the most
current information on restoration and creation techniques and success
rates, functional assessment, and other relevant factors when
determining the number of credits a mitigation bank will provide.
Another commenter recommended that value or socio-economic services
should be included in mitigation crediting.
    We have modified this paragraph by changing the heading to refer to
``assessment'' since we have amended the rule to include the use of
other suitable metrics, such as condition assessments. The term
``condition'' is defined in Sec.  332.2 [Sec.  230.92]. An index of
biological integrity is an example of another type of assessment method
that can be used to assess and describe the aquatic resource types that
will be restored, established, enhanced, and/or preserved by mitigation
banks or in-lieu fee programs.
    We cannot revise this rule to require the use of functional
assessments for all mitigation banks or in-lieu fee programs. In some
areas of the country, appropriate functional assessments are not
available. Condition assessments or other types of assessment methods
may be more appropriate in some regions. The new automated information
system being used in the Corps Regulatory Program (ORM 2.0) will help
improve the tracking of compensatory mitigation projects by type and
location. This automated information system is a spatially-enabled
system that will allow tracking of the locations of impact sites and
compensatory mitigation sites, as well as the aquatic resource types
that are present at impact sites or are required as compensatory
mitigation. District engineers, in consultation with the IRT, will
evaluate compensatory mitigation proposals for mitigation banks and in-
lieu fee programs, to determine the number of credits that are likely
to be provided. This evaluation should include the type of compensatory
mitigation being conducted (e.g., reestablishment, rehabilitation), the
potential for success, the type of aquatic resource being provided, and
other relevant aspects of the mitigation bank or in-lieu fee project.
Although the services provided by aquatic resource functions are
important to consider when determining the type and location of
compensatory mitigation projects, there are few methods available for
assessing services. Therefore, in most cases consideration of services
will be conducted through best professional judgment. As discussed
elsewhere in this preamble, there are numerous difficulties in
assessing aquatic resource values, and

this rule focuses on functions and services.
    (o)(3) Credit production. We have modified this paragraph to refer
to pre- and post-compensatory mitigation project site conditions, since
this section applies to mitigation banks and in-lieu fee projects. We
have also changed this paragraph to require the use of functional or
condition assessments, or other suitable metrics, to determine the
number of credits produced by a mitigation bank or in-lieu fee project.
In areas where appropriate assessment methods are not available, or
practicable to use, other suitable metrics such as acres or linear feet
may be used. We have removed the last two sentences of the proposed
text of this paragraph, which stated that, for enhancement activities,
the number of credits should only reflect those enhancements produced
by the construction of the mitigation bank. These two sentences are no
longer necessary, because of the other changes to this paragraph.
However, it is still the case that credits for enhancement activities
should only include the ``functional lift'' generated by the activity.
    (o)(4) Credit value. We have not changed this paragraph in the
final rule.
    (o)(5) Credit costs. We added this provision to clarify that the
cost of compensatory mitigation credits provided by a mitigation bank
or an in-lieu fee program shall be determined by the sponsor. Section
332.8(o)(5)(ii) [Sec.  230.98(o)(5)(ii)] requires in-lieu fee programs
to use full cost accounting methods, so that the cost per unit credit
includes the expected costs associated with the restoration,
establishment, enhancement, and/or preservation of aquatic resources in
the service area. This paragraph also states that the cost per unit
credit for in-lieu fee programs should factor in contingency costs, to
address uncertainties in construction and real estate expenses. The
cost per unit credit must also reflect resources needed for long-term
management and protection of the in-lieu fee project site, as well as
any financial assurances that may be necessary to ensure successful
completion of those projects. District engineers can evaluate the fee
structure of an in-lieu fee program to determine whether the sponsor is
complying with this provision. Compliance with these requirements is
necessary to ensure that an in-lieu fee program generates sufficient
funds so that it can select and implement compensatory mitigation
projects in a timely manner. One concern raised about in-lieu fee
programs in the past is that they have sometimes underpriced credits,
with the result that they may not be able to deliver the required
mitigation. This provision is intended to ensure that in-lieu fee
programs develop realistic price schedules, while still leaving
determination of credit prices to the program sponsor, rather than the
Corps.
    (o)(6) Credits provided by preservation. One commenter said that
preservation and/or enhancement should only be considered in
combination with restoration, to ensure no net loss on an acreage
basis. A commenter said that credits associated with preservation
should be released as soon as possible, since functional capacity is
not an issue. One commenter stated that preservation credits should be
sparingly granted and should never allow preservation of landscape
features of a different type than those adversely affected by the
permitted activity.
    The regulations governing the use of preservation as compensatory
mitigation are provided in Sec.  332.3(h) [Sec.  230.93(h)]. The use of
aquatic resource preservation to provide compensatory mitigation will
be determined by the district engineer in accordance with Sec.  332.3
[Sec.  230.93]. When evaluating the Corps Regulatory Program's
contribution to the Administration's wetlands goals, it is important to
consider the compensatory mitigation requirements imposed on
permittees, since the compensatory mitigation requirements for a
specific DA permit may consist of a package of compensation activities.
In other words, a permittee could provide the required compensatory
mitigation through more than one compensation type. When a permittee
proposes to use preservation to provide compensatory mitigation, Sec.
332.3(h)(2) [Sec.  230.98(h)(2)] requires that the preservation be
done, to the extent appropriate and practicable, in conjunction with
aquatic resource restoration, establishment, and/or enhancement