[Federal Register Volume 82, Number 37 (Monday, February 27, 2017)]
[Notices]
[Pages 11967-11971]
[FR Doc No: 2017-03729]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80074; File No. SR-Phlx-2016-105]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
of Amendment No. 1 and Order Granting Accelerated Approval of Proposed
Rule Change, as Modified by Amendment No. 1, To Amend Rules 501, 507,
508, 510, and 511 of the Exchange

February 21, 2017.

I. Introduction

    On December 21, 2016, NASDAQ PHLX LLC (``Phlx'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Rule 501 (Specialist Appointment), Rule
507 (Application for Approval as an SQT, RSQT, or RSQTO and Assignment
in Options), Rule 508 (Transfer Application), Rule 510 (SQT and RSQT
Performance Evaluation), and Rule 511 (Specialist Allocation and
Performance Evaluation).\3\ The proposed rule change was published for
comment in the Federal Register on January 9, 2017.\4\ On February 15,
2017, the Exchange filed Amendment No. 1 to the proposed rule change,
which superseded the original filing in its entirety.\5\ The Commission
received no comments on the proposed rule change. The Commission is
publishing this notice to solicit comment on Amendment No. 1 to the
proposed rule change from interested persons, and is approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra notes 6-8 for definitions of Specialist, SQT,
RSQT, and RSQTO.
    \4\ See Securities Exchange Act Release No. 79724 (January 3,
2017), 82 FR 2418 (``Notice'').
    \5\ In Amendment No. 1, the Exchange: (1) Specified that members
of the panel that may be appointed by the Board of Directors to
consider certain appeals may not have been involved at all in the
decision appealed from (rather than not being materially involved)
and must otherwise have no conflict of interest; and (2) clarified
that when selecting members for such panel, the Board of Directors
shall choose individuals whose background, experience, and training
qualify them to consider and make determinations regarding the
subject matter to be presented to the panel (rather than considering
these factors to the extent practicable). To promote transparency of
its proposed amendment, when Phlx filed Amendment No. 1 with the
Commission, it also submitted Amendment No. 1 as a comment letter to
the file, which the Commission posted on its Web site and placed in
the public comment file for SR-Phlx-2016-105 (available at https://www.sec.gov/comments/sr-phlx-2016-105/phlx2016105-1589879-132169.pdf). The Exchange also posted a copy of its Amendment No. 1
on its Web site (http://nasdaqphlx.cchwallstreet.com/NASDAQPHLX/pdf/phlx-filings/2016/SR-Phlx-2016-105_Amendment_1.pdf) when it filed
Amendment No. 1 with the Commission.
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1

    The Exchange proposes to amend certain of its Series 500 Rules
concerning the treatment of Specialists,\6\ SQTs,\7\ and RSQTs.\8\
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    \6\ A ``Specialist'' is an Exchange member who is registered as
an options specialist pursuant to Rule 1020(a). A ``Remote
Specialist'' is an options specialist that does not have a physical
presence on an Exchange floor. See Rule 1020(a)(i) and (ii).
    \7\ An ``ROT'' is a regular member of the Exchange located on
the trading floor who has received permission from the Exchange to
trade in options for his own account. See Rule 1014(b)(i). A
``Streaming Quote Trader'' or ``SQT'' is an ROT who has received
permission from the Exchange to generate and submit option
quotations electronically in options to which such SQT is assigned.
See Rule 1014(b)(ii)(A).
    \8\ A ``Remote Streaming Quote Trader'' or ``RSQT'' is an ROT
that is a member affiliated with a ``Remote Streaming Quote Trader
Organization'' or ``RSQTO'' with no physical trading floor presence
who has received permission from the Exchange to generate and submit
option quotations electronically in options to which such RSQT has
been assigned. See Rule 1014(b)(ii)(B). See also Rule 507(a).

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A. Back-Up Specialist Unit

    The Exchange proposes to amend Rule 501 to remove the concept of a
back-up specialist unit.\9\ Currently, an initial application to become
a specialist unit must include, among other things, information about
the proposed specialist unit's back-up arrangements, to include a back-
up specialist unit and a substitute specialist unit. The back-up
specialist unit provides staffing when necessary and is not associated
with the specialist unit. The substitute specialist unit, which may be
the same as the back-up specialist unit, serves as a substitute in the
event that the specialist unit is unable to perform the duties of a
Specialist.\10\
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    \9\ Specifically, the Exchange proposes to remove references to
back-up specialist units in Rule 501(b) and (f)(ii), and delete a
provision in Rule 501, Commentary .01, concerning treatment under
Rule 748(b), which relates to designation of supervisors by member
organizations of individuals employed by the back-up specialist
unit. See proposed Rule 501(b), (f)(ii), and Commentary .01.
    \10\ See Rule 501(b).
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    The Exchange believes that the function of providing back-up
staffing when needed from one specialist unit on the floor to another
is no longer feasible because multiple specialist units are no longer
present on the floor.\11\ The Exchange notes that the other initial
application requirements in Rule 501 will remain unchanged.\12\
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    \11\ See Notice, supra, note 4, at 2419 n.10.
    \12\ See id. at 2419 (citing Rule 501(a) and (b)).
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B. Approval of SQT and RSQT Applications

    The Exchange proposes to amend Rule 507(a) to replace the role of
the Board of Directors (``Board'') with Exchange staff with respect to
deferring or limiting the approval of SQT and RSQT applications.\13\
Currently, the Board may defer, for a period to be determined in the
Board's discretion, approval of qualifying applications for SQT or RSQT
status pending any action required to address the issue of concern to
the Board based on system constraints, capacity restrictions, or other
factors relevant to the maintenance of a fair and orderly market.
Further, the Board may not defer a determination of the approval of the
application of any SQT or RSQT applicant, or place any limitations on
access to the Exchange's electronic quoting and trading system on any
SQT or RSQT applicant, unless the basis for such limitations or
deferral have been objectively determined by the Board, subject to
Commission approval or effectiveness pursuant to a rule change filing
under Section 19(b) of the Act.\14\ The Exchange proposes to have
Exchange staff perform this role of deferring or limiting approval of
SQT and RSQT applications, subject to the rule's existing
restrictions.\15\ The Exchange believes that this change will help with
the administration and application of Rule 507.\16\
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    \13\ See proposed Rule 507(a) (replacing references to the
``Board'' with ``Exchange'').
    \14\ See Rule 507(a).
    \15\ The Exchange explains that its Membership department, which
currently reviews membership applications for equities and options
members of the Exchange, would review applications for SQTs and
RSQTs. See Notice, supra note 4, at 2419 n.12.
    \16\ See id. at 2419.
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C. Good Standing Requirement for Specialists, SQTs, and RSQTs

    The Exchange proposes to revise Rule 510 to implement a good
standing requirement for Specialists, SQTs, and RSQTs.\17\ Currently,
Rule 510 requires the Exchange to periodically conduct performance
evaluations of member organizations that have SQTs and RSQTs to
determine whether they have fulfilled specified performance standards.
Rule 510 includes procedures the Exchange will follow if an SQT or RSQT
fails to meet minimum performance standards and appeal rights.\18\
Similarly, Rule 511 requires the Exchange to at least annually, and as
frequently as monthly, conduct evaluations of Specialists to determine
whether they have fulfilled specified performance standards. Rule 511
contains procedures for Specialists that fail to meet performance
standards, including appeal rights. Rule 511 also contains provisions
concerning the allocation of new options classes and transfers or
reallocations of existing options classes, which can be based on the
results of performance evaluations, including evaluations conducted
upon special circumstances.\19\ The Exchange proposes to delete
existing Rules 510 and 511 in their entirety and replace them with a
new Rule 510 that will apply to Specialists, SQTs, and RSQTs and
include good standing requirements and procedures if the participants
fail to meet such requirements, including appeal rights.\20\
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    \17\ See proposed Rule 510.
    \18\ See Rule 510.
    \19\ See Rule 511.
    \20\ See proposed Rule 510. Consistent with this change, the
proposal would conform the title of this rule. See id. Additionally,
the proposal would reserve Rule 511. See proposed Rule 511.
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    Under the proposal, to remain in good standing as a Specialist,
SQT, or RSQT, the Specialist, SQT, or RSQT would be required to:
     Continue to meet the requirements established in
Commission Rule 15c3-1(a)(6)(i),\21\ and the requirements set forth in
the Series 500 Rules in the Rules of the Exchange;
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    \21\ See 240 CFR 15c3-1(a)(6)(i) (net capital requirements for
brokers or dealers).
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     continue to satisfy the Specialist, SQT, or RSQT
qualification and market making requirements specified by the Exchange,
as amended from time to time;
     comply with the Rules of the Exchange and the Options
Rules as well as the rules of The Options Clearing Corporation and the
rules of the Federal Reserve Board; and
     pay on a timely basis such member, transaction, and other
fees as the Exchange shall prescribe.\22\
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    \22\ See proposed Rule 510(a).
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    The Exchange believes that in light of the proposed continuous and
extensive good standing requirements and other rule requirements, the
periodic evaluations currently applicable to Specialists, SQTs, and
RSQTs are no longer needed.\23\ The Exchange represents that it will
monitor compliance with good standing requirements across the
Exchange.\24\
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    \23\ See Notice, supra note 4, at 2420 n.22.
    \24\ See id. at 2422 n.36. The Exchange explains that, for
example, membership, listing, and finance groups monitor
applications, allocations, and compliance with fee requirements, and
the surveillance group will continue to monitor compliance with
Exchange rules and pursue disciplinary actions for rule violations,
as necessary (e.g., for failure to comply with continuous two-sided
quoting requirements). See id.
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    The proposal would also provide that the good standing of a
Specialist, SQT, or RSQT may be suspended, terminated, or otherwise
withdrawn if any of the conditions for approval cease to be maintained
or the Specialist, SQT, or RSQT violates any of its agreements with the
Exchange or any of the provisions of the Rules of the Exchange or of
the Options Rules. The Exchange would be required to provide written
notice to a Specialist, SQT, or RSQT of a contemplated action regarding
good standing. Additionally, a Specialist, SQT, or RSQT would be able
to request, and the Exchange might hold, an informal meeting to discuss
the alleged failure to remain in good standing and to explore possible
appropriate remedies. Written notice of the date and time of the
meeting would need to be given to the Specialist, SQT, or RSQT and no
verbatim record would be kept. If the Exchange were to believe that
there were no mitigating circumstances that would demonstrate
substantial improvement of or reasonable

justification for the failure to meet good standing requirements, the
Exchange could take appropriate action. Nothing in the informal meeting
process would limit the Exchange from bringing disciplinary actions for
violations of these rules.\25\ Finally, the Exchange notes that it will
provide appeal rights from decisions concerning good standing, as
described further below.\26\
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    \25\ See proposed Rule 510(b). The Exchange explains that, for
example, it could pursue a disciplinary process against a member
that commits an egregious market making violation evidenced by a
pattern of repeated failure to make a two-sided market in assigned
options. See Notice, supra note 4, at 2421 n. 32.
    \26\ See Notice, supra note 4, at 2421. See also infra Section
0.
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    With respect to Rule 511, the Exchange believes it is proper to
delete this rule because Specialists will be covered by Rule 510, with
respect to good standing requirements, and will also be covered by
other rules of the Exchange.\27\ The Exchange explains that it adopted
Rule 511, with a process for Specialist evaluations and allocations,
several decades ago for the purpose of dealing with an extensive on-
floor open outcry Specialist system that had multiple competing
specialist units. The Exchange adds that the current system is mainly
electronic and off-floor, and the remaining hybrid options floor does
not have numerous competing Specialists.\28\
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    \27\ See Notice, supra note 4, at 2422.
    \28\ See id. The Exchange states that there is currently one
specialist unit operating on the options floor. See id. The Exchange
believes that even if additional Specialists begin to conduct
business on the options floor, Rule 511 was designed for a very
different, competitive floor environment and will not be needed. See
id. at 2422 n. 38.
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D. Appeal Rights

    The Exchange proposes to amend Rule 507(e) to change the
composition of the deliberative body that will hear an appeal to the
Board, upon request by a member or member organization, from a decision
of the Exchange pursuant to Rule 507, which concerns SQT, RSQT, and
RSQTO applications and options assignments.\29\ Currently, an appeal
from a decision pursuant to Rule 507 is heard by a special committee of
the Board composed of three directors, at least one of whom must be
independent.\30\ Under the proposal, such appeal would be heard by the
full Board or a panel appointed by the Board composed of three members
not involved in the Exchange decision appealed from and who otherwise
have no conflict of interest (``Board Panel''). If the Board appointed
a Board Panel, the Board would select three individuals to serve on the
Board Panel, choosing individuals whose background, experience, and
training qualify them to consider and make determinations regarding the
subject matter to be presented to the Board Panel. Further, the Board
Panel would consist of two members of the Exchange, or general partners
or officers of member organizations, and one other person who would
qualify as a public member as defined in Article I of the Exchange's
By-Laws,\31\ whom the Board considers to be qualified.\32\
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    \29\ See proposed Rule 507(e).
    \30\ See Rule 507(e).
    \31\ Article I of the Exchange's By-Laws defines ``public
member'' as ``a member of any committee appointed by the Board of
Directors who has no material business relationship with a broker or
dealer, the Exchange, or its affiliates.'' See By-Laws, Article
I(hh). The Exchange notes that while at least one member of the
current special committee must be an independent director, the Board
Panel would require the inclusion of one person who would qualify as
a public member, which requirement also provides some measure of
independence. See Notice, supra note 4, at 2419 n. 14.
    \32\ See proposed Rule 507(e). The proposal would make
conforming changes to the remainder of Rule 507(e), which addresses
process requirements for the appeal, to replace references to
``special committee'' with ``Board or Board Panel.'' The existing
provision that there is no appeal to the Board from a decision of
the special committee would be revised to apply to a decision of the
Board Panel. See id.
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    The Exchange proposes to add Rule 510(c) to adopt parallel appeal
rights for an appeal by a Specialist, SQT, or RSQT to the Board, upon
request by a member or member organization interested therein, from a
decision of the Exchange pursuant to Rule 510, which concerns good
standing requirements.\33\ Currently, Rule 511(f) contains appeal
procedures for decisions concerning performance evaluations of
Specialists, which procedures are equivalent to those found in Rule
507(e), while Rule 510(d) provides a right of direct appeal to the
Board from a decision concerning performance evaluations of SQTs and
RSQTs.\34\
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    \33\ See proposed Rule 510(c).
    \34\ See Rules 507(e), 511(f).
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    Under the proposal, a Specialist, SQT, or RSQT could request an
appeal by filing a written notice of appeal with the Secretary of the
Exchange within ten days after the decision being appealed has been
rendered. The appeal would be heard by the Board or a Board Panel,
which would be subject to the same composition requirements discussed
above.\35\ The person requesting review would be permitted to submit a
written statement to and appear before the Board or Board Panel. The
Secretary of the Exchange would certify the record of the proceeding,
if any, and the written decision, and would submit the documents to the
Board or Board Panel. The Board or Board Panel's review of the action
would be based solely on the record, the written decision, and any
statement submitted by the person requesting the review. The Board or
Board Panel would prepare and deliver to such person a written decision
and reasons therefore. If the Board or Board Panel affirmed the action,
the action would become effective ten days from the date of that
decision. There would be no appeal to the Board from any decision of
the Board Panel.\36\
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    \35\ See supra notes 31-32 and accompanying text.
    \36\ See proposed Rule 510(c).
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    The Exchange believes that the proposed appeal rights are
appropriate because they would cover any decision of the Exchange
regarding Rule 510 and any appeal would follow the proposed informal
meeting process. The Exchange adds that the proposed process would
serve as a secondary appeal to individuals not involved in making the
initial decision and stated that it seeks to provide its members due
process when seeking an appeal.\37\
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    \37\ See Notice, supra note 4, at 2421 n. 33.
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E. Additional and Conforming Changes

    The Exchange proposes to amend Rule 508, concerning transfer
applications. First, the proposal would remove a reference to
leasing.\38\ The Exchange explains that leasing is no longer practiced
on the Exchange and it therefore is deleting this obsolete term.\39\
Second, the proposal would remove a reference to Rule 511.\40\ The
Exchange explains that Rule 511 would be deleted by the proposal \41\
and Rule 508 will continue to indicate that failure to provide the
exchange with prior notice of a transfer, in accordance with Rule 508,
or failure to obtain Exchange approval of a transfer, permits the
Exchange to recover the allocated securities and allocate them pursuant
to Rule 506.\42\
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    \38\ See proposed Rule 508.
    \39\ See Notice, supra note 4, at 2420. The Exchange deleted
another reference to leasing in its rules on the same basis. See
Securities Exchange Act Release No. 77121 (February 11, 2016), 81 FR
8308 (February 18, 2016) (SR-Phlx-2016-22).
    \40\ See proposed Rule 508.
    \41\ See supra notes 19-20 and accompanying text.
    \42\ See Notice, supra note 4, at 2420 & n.21.
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    Finally, the Exchange proposes to amend Rule 507(b)(iii)(C) to
reflect the proposed changes to Rule 510 that would implement a good
standing requirement.\43\ Currently, this provision provides that, when
making a decision concerning an application for assignment in an option
when there are more applicants for assignment in a particular option
than there are

positions available, the Exchange shall consider the applicant's prior
performance as a Specialist, SQT, or RSQT based on evaluations
conducted pursuant to Rule 510.\44\ The Exchange explains that in light
of the proposed good standing requirement, as discussed above,\45\ it
has proposed to update this provision to state that the Exchange can
consider the applicant's prior performance as a Specialist, SQT, or
RSQT based on good standing pursuant to Rule 510.\46\
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    \43\ See proposed Rule 507(b)(iii)(C).
    \44\ See Rule 507(b)(iii)(C). Other factors for consideration
include the financial and technical resources available to the
applicant and the applicant's experience and expertise in market
making or options trading. See Rule 507(b)(iii)(A), (B).
    \45\ See supra notes 17-20 and 22 and accompanying text.
    \46\ See Notice, supra note 4, at 2419.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\47\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\48\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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    \47\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \48\ 15 U.S.C. 78f(b)(5).
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    The Exchange represents that, because of the development of
liquidity-enhancing electronic market makers on the Exchange that make
markets in the same options issues as Specialists and the diminution of
the role that the Specialist plays in managing the order book on the
Exchange, Specialists no longer need to have both a back-up specialist
unit and a substitute specialist unit.\49\ The Commission notes that a
substitute specialist unit will still be available if the specialist
unit is unable to perform the duties of a Specialist and that the
presence of SQTs and RSQTs, which have continuous quoting obligations,
will serve as an additional source of liquidity for the Exchange if a
specialist unit on the floor experiences a staffing problem.\50\
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    \49\ See Notice, supra note 4, at 2418-19.
    \50\ The Commission notes that currently Remote Specialists are
not required to meet the back-up specialist unit requirement. See
Rule 501(f)(ii). See also Securities Exchange Act Release No. 63717
(January 14, 2011), 76 FR 4141 (January 24, 2011) (SR-Phlx-2010-
145).
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    The Commission notes that the proposal to require Exchange staff,
rather than the Board, to make determinations to defer or limit an
application of an SQT or RSQT is designed to facilitate the
administration and application of Rule 507. The Commission also notes
that any deferral or limitation would be objectively determined by the
Exchange. The proposal would also require the Exchange to provide
written notification to any SQT or RSQT applicant whose application is
the subject of such limitation or deferral, describing the objective
basis for such limitation or deferral. Further, an SQT or RSQT
applicant would have the right to an appeal to the Board or a Board
Panel from any such decision by Exchange staff pursuant to Rule
507(e).\51\
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    \51\ See Notice, supra note 4, at 2419. See also supra Section
II.D.
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    The Commission notes that the proposed good standing requirements
are designed to evaluate compliance by Specialists, SQTs, and RSQTs
with Exchange rules and the rules of the Commission and other
regulators and are consistent with the rules of other options
exchanges.\52\ The Exchange represents that its staff, including its
surveillance group, will monitor compliance with such rules.\53\ The
Commission notes that while Specialist allocation procedures are not
included within proposed Rule 510, Specialists will continue to be
subject to numerous existing rules, some of which address allocation of
options.\54\
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    \52\ See BX Options Rules, Chapter VII, Section 4; Nasdaq
Options Rules, Chapter VII, Section 4.
    \53\ See supra note 24 and accompanying text.
    \54\ See proposed Rule 508; Rules 506, 513. See also Rules 501,
1014, 1022.
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    The Commission believes that the Exchange's use of the Board or a
Board Panel to hear appeals of Exchange decisions pursuant to Rules 507
and 510, as opposed to a special committee of the Board, would retain
an opportunity for the SQT, RSQT, or Specialist to be heard on the
matter before the Exchange takes remedial action. The Commission notes
the requirements that members of the Board Panel will not be involved
in the Exchange decision appealed from, have no conflicts of interest,
and be considered by the Board to be qualified, and that one member
will be a person who would qualify as a public member as defined in
Article I of the By-Laws. The revised appeal procedures for decisions
pursuant to Rule 510 concerning SQTs and RSQTs mirror procedures
already in place in other contexts.
    Finally, the Commission believes that the proposal's minor,
conforming revisions to Rules 507 and 508 are consistent with the Act.

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 to the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-Phlx-2016-105 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-105. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make

available publicly. All submissions should refer to File Number SR-
Phlx-2016-105, and should be submitted on or before March 20, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1

    The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of the notice of Amendment No. 1 in the
Federal Register. As described above, in Amendment No. 1, Phlx updated
its proposal to reflect: (1) That members of the Board Panel may not
have been involved at all in the decision appealed from and must
otherwise have no conflict of interest; and (2) that the Board shall
choose individuals whose background, experience, and training qualify
them to consider and make determinations regarding the subject matter
to be presented to the panel. The Commission believes that Amendment
No. 1 clarifies the criteria for ensuring the independence of the Board
Panel that could hear an appeal pursuant to Rules 507 and 510.
Accordingly, for the reasons noted above, the Commission finds good
cause for approving the proposed rule change, as modified by Amendment
No. 1, on an accelerated basis, pursuant to Section 19(b)(2) of the
Act.\55\
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    \55\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\56\ that the proposed rule change (SR-Phlx-2016-105), as modified
by Amendment No. 1 thereto, be, and hereby is, approved on an
accelerated basis.
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    \56\ Id.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03729 Filed 2-24-17; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 79, Number 132 (Thursday, July 10, 2014)]
[Rules and Regulations]
[Pages 39302-39311]
[FR Doc No: 2014-16153]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Food and Drug Administration

21 CFR Part 1150

[Docket No. FDA-2012-N-0920]
RIN 0910-AG81

Tobacco Products, User Fees, Requirements for the Submission of
Data Needed To Calculate User Fees for Domestic Manufacturers and
Importers of Tobacco Products

AGENCY: Food and Drug Administration, HHS.

ACTION: Final rule.

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SUMMARY: The Food and Drug Administration (FDA or we) is issuing a
final rule that requires domestic tobacco product manufacturers and
importers to submit information needed to calculate the amount of user
fees assessed under the Federal Food, Drug, and Cosmetic Act (the FD&C
Act). The United States Department of Agriculture (USDA) has been
collecting this information and providing FDA with the data FDA needs
to calculate the amount of user fees assessed to tobacco product
manufacturers and importers. USDA intends to cease collecting this
information starting in fiscal year 2015 (October 2014). Consistent
with the requirements of the FD&C Act, the final rule requires the
submission of this information to FDA instead of USDA.

DATES: This rule is effective August 11, 2014.

FOR FURTHER INFORMATION CONTACT: Nancy Boocker or Annette Marthaler,

Food and Drug Administration, Center for Tobacco Products, Document
Control Center, Bldg. 71, Rm. G335, 10903 New Hampshire Ave., Silver
Spring, MD 20993-0002; 1-877-287-1373<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Executive Summary

Purpose of the Final Rule

    The final rule will provide FDA with the information it needs to
calculate the amount of user fees assessed for each domestic
manufacturer and importer of tobacco products subject to chapter IX of
the FD&C Act. The total amount of user fees for each fiscal year is
specified in section 919(b)(1) of the FD&C Act. That total is divided
into four equal quarterly assessments. The FD&C Act provides for the
total quarterly assessment to be allocated among classes of tobacco
products and then, within each class of tobacco products, among
individual domestic manufacturers and importers. In specifying how to
determine each of these two allocations--to a class of tobacco products
and then to a domestic manufacturer or importer within a particular
class of tobacco products--section 919 of the FD&C Act references the
Fair and Equitable Tobacco Reform Act of 2004 (FETRA, Pub. L. 108-357
(7 U.S.C. 518 et seq.)), which is administered by USDA. To date, FDA
has received the information needed to calculate user fees from USDA.
When the USDA program sunsets at the end of fiscal year 2014 (September
30, 2014), FDA, as required by the FD&C Act, will need to provide for
an alternative source of the information necessary to calculate user
fees.

Legal Authority

    This rule is being issued based upon FDA's authority to calculate,
assess, and collect tobacco product user fees pursuant to section 919
of the FD&C Act as well as FDA's rulemaking authority under sections
909(a) and 701(a).

Summary of the Major Provisions

    The final rule applies to domestic manufacturers and importers of
four classes of tobacco products: Cigarettes, snuff, chewing tobacco,
and roll-your-own tobacco. Beginning October 2014, the rule requires
each domestic manufacturer or importer of these four product classes to
submit to FDA specific information regarding units of product removed
\1\ into domestic commerce and Federal excise taxes paid for each class
of tobacco product. The information must be submitted on a monthly
basis, even in months when no tobacco product is removed into domestic
commerce. This final rule specifies that FDA will continue to follow
the current method for allocating the total fees among classes of
tobacco product. We will calculate the appropriate allocation by
multiplying the total units removed (sticks or pounds) for the class by
the 2003 maximum excise tax rate for that class and then calculating
each class' percentage of the total quarterly assessment. The final
rule also specifies that FDA will continue to use the current method of
assessing user fees within each tobacco product class--by multiplying
the total amount assessed to the class times the percentage share of
Federal excise taxes paid by each domestic manufacturer and importer
using information required to be provided to FDA under this final rule.
If additional classes of tobacco products are deemed subject to FDA's
tobacco regulation, FDA will conduct a new rulemaking to subject those
classes to this user fee rule. In addition, the final rule includes
provisions about notification of assessments, payment of assessments,
procedures for disputing an assessment, and penalties for failure to
report required information to FDA or failure to pay tobacco product
user fees.
---------------------------------------------------------------------------

    \1\ Removal is defined at 26 U.S.C. 5702 as ``the removal of
tobacco products or cigarette papers or tubes, or any processed
tobacco, from the factory or from internal revenue bond under
section 5704, as the Secretary [of Treasury] shall by regulation
prescribe, or release from customs custody, and shall also include
the smuggling or other unlawful importation of such articles into
the United States.''
---------------------------------------------------------------------------

Costs and Benefits

    Under our primary baseline, starting in fiscal year 2015, FDA would
obtain the information necessary for collecting user fees directly from
Federal Agencies (other than USDA) that collect such information.
Compared with this baseline, the final rule will impose private costs
on industry to submit data to FDA on a monthly basis, with an
approximately offsetting reduction in government information collection
costs. The net effect may be a small social cost or benefit. This final
rule also allows FDA to be in control of the data needed for
calculating and billing user fees and resolves impediments that may
otherwise exist to FDA's ability to use the data for its intended
purpose.

Table of Contents

I. Background
II. Overview of the Final Rule
III. Comments on the Proposed Rule
    A. Tobacco Products Not Currently Subject to FDA Regulation
    B. Use of the FETRA Framework
    C. FDA's Implementation
IV. Legal Authority
V. Environmental Impact
VI. Analysis of Impacts
VII. Paperwork Reduction Act of 1995
VIII. Federalism
IX. References

I. Background

    The Family Smoking Prevention and Tobacco Control Act (Tobacco
Control Act) was enacted on June 22, 2009 (Pub. L. 111-31), amending
the FD&C Act and providing FDA with the authority to regulate tobacco
products. Section 101(b) of the Tobacco Control Act amends the FD&C Act
by adding new chapter IX (sections 900-920 (21 U.S.C. 387-387u)).
Chapter IX provides FDA with tools and funds to regulate tobacco
products and imposes certain obligations on domestic tobacco product
manufacturers and importers. Included among FDA's authorities are the
authorities to assess and collect user fees.
    In enacting the Tobacco Control Act, Congress found that tobacco
use is the single most preventable cause of disease, disability, and
death in the United States. Each year, over 400,000 people die
prematurely from smoking or exposure to secondhand smoke. Approximately
8.6 million people in the United States live with a serious illness
caused by smoking. A consensus exists within the scientific and medical
communities that tobacco products are inherently dangerous and cause
cancer, heart disease, and other serious adverse health effects
(section 2(2), (3), and (13) of the Tobacco Control Act).
    The Tobacco Control Act grants FDA the authority to regulate
tobacco products and to protect the public from the harmful effects of
tobacco use. Section 901(b) of the FD&C Act provides that chapter IX
applies to cigarettes, cigarette tobacco, roll-your-own tobacco, and
smokeless tobacco. It also permits FDA to issue a regulation to deem
other tobacco products subject to the FD&C Act.\2\ More specifically,
the Tobacco Control Act gives FDA the authority to, among other things:
---------------------------------------------------------------------------

    \2\ On April 25, 2014, FDA published a notice of proposed
rulemaking to propose that additional tobacco products be deemed
subject to chapter IX of the FD&C Act (79 FR 23142).
---------------------------------------------------------------------------

     Restrict cigarettes and smokeless tobacco retail sales to
youth;
     Require owners and operators of tobacco companies to
register annually and be subject to biennial inspection by FDA (section
905 of the FD&C Act);
     require manufacturers and importers who wish to market a
new tobacco product to obtain a marketing

order from FDA prior to marketing that product (section 910 of the FD&C
Act);
     require each manufacturer or importer to report ``all
constituents, including smoke constituents as applicable, identified by
[FDA] as harmful or potentially harmful to health in each tobacco
product, and as applicable in the smoke of each tobacco product, by
brand and by quantity in each brand and subbrand'' (section 904(a)(3)
of the FD&C Act);
     establish tobacco product standards if FDA finds that it
is appropriate for the protection of the public health (section
907(a)(3) of the FD&C Act);
     conduct compliance check inspections of tobacco product
retailers to determine a retailer's compliance with Federal laws and
regulations;
     establish science and research programs to inform the
development of tobacco product regulations and better understand the
risks associated with tobacco use;
     educate the public about the harmful effects of tobacco
use; and
     in accordance with section 919, assess and collect user
fees from each domestic manufacturer and importer of tobacco products
subject to the tobacco product provisions of the FD&C Act.
    Section 919(c)(2) of the FD&C Act provides that tobacco product
user fees are the sole source of funding for FDA's regulation of
tobacco products. Therefore, FDA considers these fees to be critical to
the Agency's ability to achieve its mission to protect and promote the
public health. User fees provide FDA with a source of stable,
consistent funding that has made possible our implementation of the
Tobacco Control Act. The revenues from these fees fund the Agency's
regulation of tobacco products and the tobacco industry, as described
previously.
    In the Federal Register of May 31, 2013 (78 FR 32581), FDA issued a
notice of proposed rulemaking (NPRM) to add 21 CFR part 1150 to require
domestic tobacco product manufacturers and importers to submit to FDA
information needed to calculate the amount of user fees assessed under
the FD&C Act. This final rule requires domestic tobacco product
manufacturers and importers to submit that information beginning
October 2014.
    The final rule is issued under section 919(a) of the FD&C Act,
which requires FDA, in accordance with that section, to ``assess user
fees on, and collect such fees from, each manufacturer and importer of
tobacco products'' subject to the tobacco product provisions of chapter
IX of the FD&C Act. The total amount of user fees for each fiscal year
is specified in section 919(b)(1) of the FD&C Act, and under section
919(a) we are to assess and collect a proportionate amount each quarter
of the fiscal year. The FD&C Act provides for the total assessment to
be allocated among classes of tobacco products. The class allocation is
based on each tobacco product class' volume of tobacco products removed
into commerce. Within each class of tobacco products, an individual
domestic manufacturer or importer is assessed a user fee based on its
market share for that tobacco product class.
    In specifying how to determine each of these two allocations--to a
class of tobacco products and then to a domestic manufacturer or
importer within a particular class of tobacco products--section 919 of
the FD&C Act references the Fair and Equitable Tobacco Reform Act of
2004 (FETRA, Public Law 108-357 (7 U.S.C. 518 et seq.)). In determining
the user fees to be assessed on each class of tobacco products, section
919(b)(2)(B)(ii) of the FD&C Act provides that the applicable
percentage for each tobacco product class ``shall be the percentage
determined under section 625(c) of [FETRA] for each such class of
product for such fiscal year.'' In determining the user fee to be paid
by each company, section 919(b)(4) of the FD&C Act directs that we use
percentage share information ``determined for purposes of allocations
under subsections (e) through (h) of section 625 of [FETRA].''
    FETRA provides for a Tobacco Transition Payment Program (TTPP),
administered by the USDA, through which eligible former tobacco quota
holders and tobacco producers receive payments in 10 equal installments
in each fiscal year 2005 through 2014. FETRA provides for the
establishment of quarterly assessments on each domestic manufacturer
and importer of tobacco products to fund the 10-year TTPP. The last
assessment under FETRA will be in September 2014, which will encompass
the 39th and 40th quarterly TTPP assessments. The issuance of the 40th,
or last, quarterly assessment will be on September 1, 2014, rather than
on December 1, 2014, in accordance with statutory requirements
specified in section 625(d)(3)(A) of FETRA (see 78 FR 46905, August 2,
2013). Because section 919 refers to FETRA information and calculations
that are currently being made by USDA, FDA has been relying on USDA
information for its tobacco product user fee calculations. In light of
the sunset of the TTPP program, we are issuing this final rule
consistent with section 919(b)(7) of the FD&C Act, which requires that
no later than fiscal year 2015, we ensure we are able to make the
determinations necessary for assessing tobacco product user fees.
    Both USDA's TTPP program and FDA's user fee program follow a two-
step process to calculate quarterly assessments:
     Step A allocates assessments among the six classes of
tobacco products statutorily identified in those programs--cigarettes,
cigars, snuff, chewing tobacco, pipe tobacco, and roll-your-own
tobacco--based on each class' volume of tobacco products removed into
commerce (section 625(c) of FETRA; 7 CFR 1463.4, 1463.5; and section
919(b)(2)(B) of the FD&C Act). To make this allocation, we will use the
same approach and publicly available TTB data that is currently used by
USDA (see 78 FR 32581 at 32585 and 32586; 70 FR 7007 at 7007 and 7008,
February 10, 2005). The volume of tobacco products removed into
domestic commerce for each class is multiplied by the maximum 2003
Federal excise tax rate for that class to generate a dollar figure for
the class of tobacco products. The dollar figures for each of the six
classes of tobacco products are added, and this aggregate dollar figure
is the denominator. The dollar figure for each class of tobacco
products is the numerator, and when divided by the aggregate dollar
figure, the resulting quotient is the percentage attributable to the
class. By using a fixed excise tax rate as a conversion factor, this
calculation bases changes in user fee assessments solely on changes in
volume of tobacco products removed. As discussed in the NPRM, cigars
and pipe tobacco are two classes of products that are not currently
regulated under chapter IX of the FD&C Act; as such, they are not
currently assessed user fees by FDA. Section 919 provides that the
allocation of fees that otherwise would be assessed to unregulated
classes of tobacco products are to be reallocated to the classes of
tobacco products currently subject to chapter IX of the FD&C Act.
Therefore, the total dollar amount of allocations that would be
assessed for cigars and pipe tobacco is reallocated, based on relative
percentages already calculated, to the four classes of currently
regulated tobacco products: Cigarettes, snuff, chewing tobacco, and
roll-your-own tobacco.
     Step B allocates the assessment for each class of tobacco
products among the domestic manufacturers and importers in that class,
so that each domestic manufacturer's or importer's assessment is
proportional to its percentage share within that class (section 625(e)
through (h) of FETRA; 7

CFR 1463.7; and section 919(b)(3) through (b)(5) of the FD&C Act).

II. Overview of the Final Rule

    We considered all of the comments to the NPRM. We are finalizing
portions of the proposed rule with only minor changes. In response to
the comments, we have revised Sec.  1150.15, regarding disputes, to
clarify how initial disputes concerning fees and any subsequent
requests for further Agency review are to be submitted, the date on
which they are due, and that domestic manufacturers and importers are
eligible to dispute an assessment. We also clarify that a dispute and
any subsequent request for further review must be legible and in
English. Although not raised by comments, we have also made minor
clarifying edits to Sec. Sec.  1150.3, 1150.5 and 1150.7. We have also
revised Sec.  1150.7(a)(1) to recognize that cigarettes are divided
into subclasses for excise tax purposes (small and large cigarettes)
and to clarify that our Step A calculations will use the maximum 2003
excise tax rate for small cigarettes for that subclass, rather than
using the maximum 2003 excise tax rate (i.e., the excise tax rate for
large cigarettes) for all cigarettes. This revision applies only for
cigarettes because there are separate excise tax subclasses for
cigarettes, and, therefore does not apply to chewing tobacco, roll-
your-own tobacco, or snuff. We are not finalizing the portions of the
proposed rule relating to the assessment of fees on cigars and pipe
tobacco. As described more fully in section III.A of this document, we
will revise our user fee regulations in the future if FDA deems cigars
or pipe tobacco subject to FDA's authority under chapter IX of the FD&C
Act. In addition, as discussed in section III.A, we may revise our user
fee regulations if FDA deems additional tobacco products, other than
cigars and pipe tobacco, subject to FDA's authority.

III. Comments on the Proposed Rule

    We received 12 comments on the proposed rule. Comments were
received from tobacco product manufacturers, trade associations, and
individuals. To make it easier to identify comments and our responses,
the word ``Comment,'' in parentheses, will appear before each comment,
and the word ``Response,'' in parentheses, will appear before each
response. We have numbered the comments to make it easier to
distinguish between comments; the numbers are for organizational
purposes only and do not reflect the order in which we received the
comments or any value associated with them. We have combined similar
comments under one numbered comment. In addition to the comments
specific to this rulemaking that we address in the following
paragraphs, we received two general comments: One expressing a view
that all cigarettes should be prohibited, and one expressing a view
that too much attention has been focused on the regulation of tobacco
products. These comments express broad policy views and do not address
specific points related to this rulemaking. Therefore, these general
comments do not require a response.

A. Tobacco Products Not Currently Subject to FDA Regulation

    (Comment 1) Multiple comments addressed FDA's authority to assess
and collect user fees from domestic manufacturers and importers of
products that, in the future, may be deemed subject to FDA's
jurisdiction, particularly electronic cigarettes. Some comments stated
that FDA must assess and collect fees because no ``free riders'' are
allowed under section 919(a) of the FD&C Act. These comments relied on
the language in section 919(a) of the FD&C Act that FDA shall ``assess
user fees on, and collect such fees from, each manufacturer and
importer of tobacco products subject to [chapter IX].'' The comments
asserted that, unless deemed products are subject to user fees, ``some
regulated manufacturers and importers would have to pay the cost of
their regulation plus the cost of regulating the nonpaying
manufacturers and importers,'' which would provide the nonpaying
manufacturers and importers a significant competitive advantage in
terms of reduced costs and prices for their products. Several of the
comments claimed that failure to assess user fees on deemed products
would violate the Fifth Amendment. Some comments also contended that
exempting some products from user fees would be unfair to existing
classes, arbitrary and capricious, and violate the Administrative
Procedure Act (5 U.S.C. Subchapter II).
    In contrast, other comments stated that FDA does not have the
authority to assess user fees for any class other than the six classes
named in section 919(b)(2)(B) of the FD&C Act and in FETRA. These
comments noted that section 919(a) provides that fees must be assessed
and collected ``in accordance with this section'' and, therefore, that
FDA can assess fees only on those classes identified in section 919 and
FETRA. One of these comments also noted that the reallocation provision
in section 919(b)(2)(B)(iv) permits reallocation only to regulated
classes of the six FETRA classes. Similarly, another comment stated
that FDA cannot deem electronic cigarette manufacturers to meet the
definition of domestic manufacturer because FDA ``is bound under the
FD&C Act to follow the allocation procedures established under FETRA.''
    Other comments focused on the burden of regulation more generally
to say that their products should be exempt from user fee assessments.
One comment argued that premium cigars should be exempt from FDA
regulation generally and user fees specifically because FDA regulation
would be disproportionately burdensome, as exemplified by the new
product requirements in section 910 of the FD&C Act, which would be
triggered by the often minor variations intended to alter the taste and
aroma of a premium cigar.
    (Response) Because these comments are related to tobacco products
that are not currently subject to FDA's regulation under chapter IX of
the FD&C Act, we do not need to address them at this time. This final
rule applies to only domestic manufacturers and importers of the
classes of tobacco products identified in section 919 that are
currently subject to FDA's regulation under chapter IX of the FD&C Act.
    We are not finalizing the portions of the proposed rule relating to
the assessment of fees on the cigar and pipe tobacco classes. Instead,
we have reserved Sec.  1150.7(a)(2) and Sec.  1150.9(a)(2) should a
user fee assessment be applied to cigars and pipe tobacco and limited
the definition of ``units of product'' in Sec.  1150.3 by removing the
reference to cigars or pipe tobacco. We did not delete cigars and pipe
tobacco from the definition of ``class of tobacco products'' because
that term is used in Sec.  1150.7(b) describing our reallocation of
user fees for any class of tobacco products (such as cigars or pipe
tobacco) that is not deemed by FDA to be subject to regulation under
chapter IX of the FD&C Act. If FDA deems cigars or pipe tobacco, we
will respond to comments regarding these provisions and revise these
user fee regulations.
    We recognize that the issue of whether FDA has authority to assess
user fees on future deemed products, other than cigars and pipe
tobacco, is controversial. FDA intends to further explore issues
related to user fee assessments on tobacco products that may be deemed
subject to chapter IX of the FD&C Act by soliciting public comment. FDA
will make any appropriate changes to the user fee regulations in a new
rulemaking.
    (Comment 2) Other comments raised concerns regarding user fee
calculations

under section 919 in relation to specific products or classes of
products that may be deemed subject to FDA's jurisdiction. For example,
one comment stated that FDA should not adopt USDA's retrospective
calculation method for determining class percentage allocations at Step
A because of concerns that a regulation deeming additional products
subject to FDA regulation could dramatically alter class allocations
from year to year and that class allocation calculations using this
method will not be an accurate reflection of each class's current share
of the market. This comment stated that small businesses may no longer
be able to sell affected products, including dissolvables, electronic
cigarettes, and cigars, but may still have to pay their share of their
respective classes' user fees.
    (Response) As discussed, certain tobacco products (including two
classes--cigars and pipe tobacco--that are listed in section 919), are
not currently subject to FDA's regulation under chapter IX of the FD&C
Act. These comments relate to tobacco products that are not currently
subject to chapter IX of the FD&C Act. Because this final rule is only
addressing tobacco products that are currently subject to FDA's
regulation, we do not address these comments at this time.

B. Use of the FETRA Framework

    (Comment 3) One comment stated that FDA should calculate the
applicable percentages for class and individual manufacturers on the
basis of net domestic volume rather than gross domestic volume. The
comment noted that ``FETRA's reliance on gross domestic volume
overestimates the actual amount of product ultimately removed into
domestic commerce, thereby producing inaccurate user fee assessments at
both the class and individual [m]anufacturer levels.'' The comment
indicated that inaccurate user fee assessments may result in
overpayment by some manufacturers.
    (Response) We disagree with this comment and will continue to rely
on gross domestic volume in our user fee calculations. Section 919 of
the FD&C Act directs us to calculate the applicable percentages of each
class, and of each domestic manufacturer or importer within each class,
by reference to FETRA (section 919(b)(2)(B)(ii) and (b)(4) of the FD&C
Act). FETRA defines and relies on ``gross domestic volume'' to
determine class assessments and allocations to each domestic
manufacturer and importer within each class (7 U.S.C. 518d(a), (c)(2),
and (e)(1)). We note that, while the use of gross rather than net
domestic volume might increase an individual company's numerator, it
would also increase the denominator for the class. We, therefore, do
not think that use of gross domestic volume is likely to significantly
affect an individual domestic manufacturer or importer unless there is
a disproportionately large difference between a company's net domestic
volume and its gross domestic volume as compared to other companies in
the class.
    (Comment 4) One comment stated that FDA should use the current
Federal excise tax rate in Step A, not the 2003 excise tax rate used by
USDA. The comment noted that, at the time the comment was submitted,
this issue was the subject of ongoing litigation, and the comment urged
FDA to make its own determination about which tax rate to use. This and
other comments urged FDA to instead compute each class' percentage of
the user fees based on the actual Federal excise taxes paid by each
class during the relevant fiscal year. One comment supported the
continued use of the 2003 excise tax rate, saying that FDA is bound by
the FD&C Act to use those rates.
    (Response) We disagree with the comments that suggested we use a
method other than the 2003 maximum excise tax rate to determine the
class allocation. Section 919(b)(2)(B)(ii) of the FD&C Act directs us
to use, for the class allocations, the percentage determined under
section 625(c) of FETRA (7 U.S.C. 518d). As discussed in the preamble
to the proposed rule (78 FR 32581 at 32582), USDA determines the
percentages under section 625(c) of FETRA by using the 2003 maximum
Federal excise tax rate to convert the volume of each tobacco product
class measured in different units (sticks and pounds) to a common
metric: Dollar amounts. USDA used 2003 maximum excise tax rates because
it determined that Congress used them as a conversion factor to create
a common unit across all six classes of tobacco products subject to
assessments under FETRA when Congress set the initial class allocations
under FETRA. The 2003 maximum excise tax rate has been used since the
inception of the TTPP to convert the volume of each tobacco product
class to dollar amounts, from which USDA calculates the percentage for
each class. This has been upheld as a reasonable interpretation of
FETRA (Philip Morris USA, Inc. v. Vilsack, 736 F.3d 284 (4th Cir.
2013)).
    Since the inception of FDA's tobacco user fee program, FDA has been
using the class percentages calculated by USDA using this methodology.
In this final rule, FDA is adopting the same approach as USDA for class
allocations. Because section 919 relies on the FETRA class allocation
methodology and provides for class allocation among the same tobacco
product classes, it is reasonable for FDA to continue using the 2003
maximum Federal excise tax rates as a conversion factor (converting
sticks and pounds to dollars). Continuing to use the 2003 rates also
allows FDA, just as it allows USDA, to allocate the total user fees
among the classes based on changes in each class' percentage of gross
domestic volume over time. Because it is a fixed conversion factor, it
will limit changes in user fee assessments to changes in volumes.
Moreover, the changes from the 2003 rates to the 2009 rates were not
proportionate among the classes. Thus, if FDA were to start using the
2009 rates after USDA's program sunsets, this would cause a change in
class allocations that would not be limited to the changes in volume
among the classes.
    (Comment 5) One comment stated that FDA should use the actual units
(e.g., sticks for cigarettes and cigars) removed from bonded storage to
calculate market share within those classes of tobacco products (Step
B) instead of the amount of Federal excise tax paid. The comment noted
that using excise taxes to determine market share favors importers over
domestic manufacturers because importers can sell cigars to
distributors at a lower price than domestic manufacturers due to lower
wages, taxes, and regulatory costs. The comment also noted that using
excise taxes to calculate market share within a class of tobacco
products (Step B) favors companies that do not accurately calculate
excise tax.
    (Response) This issue is relevant primarily for imposing user fees
on cigar manufacturers and importers, which is not addressed in this
final rule. Cigars are currently the only tobacco product for which
variable excise taxes may be based on price of the product rather than
a flat tax based on sticks or weight.\3\ In accordance with FETRA, USDA
calculates the percentage share of a domestic manufacturer or importer
within a class by dividing the volume of tobacco products (in either
sticks or pounds) for the manufacturer or importer by the total volume
of tobacco products (in either sticks or pounds) for

that class. USDA uses excise taxes as a proxy for volume for all
classes except cigars because the tax rate by volume is uniform within
each of those classes. This final rule, in Sec.  1150.9, follows that
approach. For products for which excise taxes do not vary, there should
be no difference in calculating individual assessments using excise
taxes or actual units because a firm's percentage of the total class
will remain the same. In addition, FDA will have information regarding
both excise taxes paid and actual units removed for each domestic
manufacturer and importer from information provided in Form FDA 3852
(Ref. 1). Therefore, FDA could check that excise taxes were calculated
accurately.
---------------------------------------------------------------------------

    \3\ Under section 919(b)(5) of the FD&C Act, if user fee
assessments were to be imposed on cigars, the statute requires that
the percentage share of each domestic manufacturer or importer of
cigars must be based on the excise taxes paid by a domestic
manufacturer or importer over the course of the prior fiscal year
rather than during the prior fiscal quarter.
---------------------------------------------------------------------------

C. FDA's Implementation

    (Comment 6) Several comments urged FDA to consider the impact of
the proposed rule on small manufacturers and importers. These comments
suggested that FDA take steps to recognize ``differences in the scale
and resources of regulated entities.''
    (Response) FDA does recognize that domestic manufacturers and
importers have varying levels of resources available. In an effort to
minimize the need for additional resources and for continuity, the rule
requires that domestic manufacturers and importers submit essentially
the same information to FDA that they are currently submitting to USDA.
In addition, actual user fee assessments are based on relative market
share so that small domestic manufacturers and importers with fewer
products in commerce will pay a relatively smaller share of the total
assessment for the fiscal year.
    (Comment 7) One comment recommended that FDA ``develop a schedule
for periodically reevaluating and adjusting user fee percentage
allocations'' for tobacco product classes as well as manufacturers and
importers to ensure that allocations are fair and equitable.
    (Response) FDA agrees, and our rule provides for adjustments for
percentage allocations for both tobacco product classes and individual
domestic manufacturers and importers. For tobacco product classes,
Sec.  1150.7 provides for yearly class allocations among the regulated
classes of tobacco products. Also, Sec.  1150.9(a) provides for
calculation of assessments within each class on a quarterly basis,
based on information from the prior quarter. In addition, Sec.
1150.9(b) explains that on an annual basis, FDA will make any necessary
adjustments for individual domestic manufacturers and importers if
needed to account for any corrections, such as the addition of one or
more domestic manufacturers or importers that were not included in
relevant calculations under Sec.  1150.9(a).
    (Comment 8) Several comments stated that refunds for overpayment of
user fees should include interest on the amount that was incorrectly
assessed. Some comments indicated that the Internal Revenue Code
provides for interest on overpayments (26 U.S.C. 6611(a)) and that FDA
should adopt this approach or a similar approach to refunds.
    (Response) FDA disagrees with these comments. In order to recover
interest from the United States, there must be an explicit waiver of
sovereign immunity related to interest payments (see, e.g., United
States v. N.Y. Rayon Importing Co., 329 U.S. 654, 659 (1947)). Congress
alone has authority to waive the government's sovereign immunity. The
Internal Revenue Code provision cited by some comments is specific to
the payment of internal revenue tax and provides that interest ``shall
be allowed and paid upon any overpayment in respect of any internal
revenue tax.'' The TTPP also explicitly requires that interest be paid
on refunded amounts (7 U.S.C. 518d(j)). In contrast, the FD&C Act does
not require FDA to pay interest on refunds for overpayment of tobacco
product user fees. Moreover, the FD&C Act does not require FDA to pay
interest on refunds for overpayment in any other user fee context, and
FDA does not pay interest on such refunds.
    (Comment 9) Several comments indicated that FDA should clarify the
process by which manufacturers and importers may appeal a user fee
assessment. One comment detailed the provisions that FDA should include
in an appeals process (e.g., establishing timeframes for such
challenges as well as FDA review and response, putting the disputed fee
in an escrow account pending appeal). This comment also requested that
the rule specifically permit judicial review in U.S. district court of
FDA's decisions regarding disputes. Another comment suggested that FDA
adopt USDA's dispute resolution process for user fees.
    (Response) To address some of the concerns raised by the comments,
FDA has added information to Sec.  1150.15 on how to submit a dispute.
FDA has also revised Sec.  1150.15 to clarify that the dispute must be
received by FDA within 45 days of the date on FDA's invoice. However,
we believe that establishing additional requirements to the appeals
process is unnecessary at this time. To date, FDA has received few
requests for corrections regarding individual user fees. Accordingly,
FDA has provided a framework in Sec.  1150.15 on where, when, and how
to submit a dispute and request for additional review under Sec.
10.75. Should the need arise, FDA may issue additional information
through a guidance document specific to tobacco product user fee
assessment disputes.
    In addition, and of its own initiative, FDA has added the
requirements that disputes be legible (FDA must be able to read the
document) and in English. These requirements will help expedite FDA's
review of the dispute and request for additional review.
    (Comment 10) One comment stated that FDA should clarify the data
verification provisions for user fees. The comment indicated support
for the use of third-party data sources for the purpose of identifying
manufacturers and importers who are not providing FDA with market share
information (nonreporters) or who understate that information
(underreporters). However, the comment noted that third-party data
should be used only to identify nonreporters and underreporters within
the six classes and should not be used to calculate actual market
shares (which must be calculated using excise tax data). This comment
also asked FDA to clarify that third-party data could be used to
calculate market share for tobacco products not within the six classes
if FDA determines there is no better alternative available.
    (Response) FDA agrees that it can use information available to the
Agency to help ensure that domestic manufacturers and importers are
providing the information required under this rule. As stated in Sec.
1150.5(a) FDA will use information submitted to FDA as required under
Sec.  1150.5 and any other available information, as the Agency
determines appropriate, to make user fee assessments. We do not agree
that it is necessary to describe or limit the sources of data that FDA
might use.
    (Comment 11) One comment suggested that FDA obtain data about
product removals directly from the Treasury Department's Alcohol and
Tobacco Tax and Trade Bureau (TTB). The comment stated that monthly
data submissions are unnecessary and unduly burdensome since this
information is already collected by TTB. The comment indicated that FDA
should require manufacturers to execute a release or waiver permitting
TTB to report this information to FDA and that failure to execute such
a release or waiver could be construed as an admission of adulteration
under section 902(4) of the FD&C Act. However, the comment noted that
manufacturers of regulated tobacco products that do not fit within
TTB's excise tax structure

could submit information directly to FDA. Another comment suggested
that FDA seek a legislative amendment to ensure that FDA has access to
excise tax data. In contrast, one comment supported FDA's transition
plan for submitting data and noted that it should not be burdensome
because manufacturers and importers are familiar with the reporting of
this information and the submissions will continue to be made to a
single Federal Agency.
    (Response) We agree with the comment that, because the rule
requires that domestic manufacturers and importers submit to FDA the
same information that they have been submitting to USDA (i.e., a
summary form supported by the relevant tax forms), the impact of this
rule should be minimal and not unduly burdensome. We also note that
there are statutory limitations on the access and use by other Federal
Agencies of the data collected by TTB, and those limitations preclude
us from solely using that data to implement section 919 of the FD&C
Act. The summary form will enable us to efficiently identify the amount
of tobacco product removed and subject to Federal excise tax, and the
supporting tax forms will enable us to verify the accuracy of the
information on the summary form. We believe that submission of
information directly to FDA regarding removals and imports is important
to ensuring that we have the information necessary to efficiently and
accurately calculate the amount of user fees assessed.

IV. Legal Authority

    Section 919(b)(7) of the FD&C Act requires FDA to ensure that we
are able to determine the applicable percentages described in section
919(b)(2) and the percentage shares described in section 919(b)(4).
Section 909(a) of the FD&C Act authorizes FDA to issue regulations
requiring tobacco product manufacturers or importers to make such
reports and provide such information as may be reasonably required to
assure that their tobacco products are not adulterated or misbranded
and to otherwise protect public health. Under section 902(4) of the
FD&C Act, a tobacco product is deemed to be adulterated if the
manufacturer or importer of the tobacco product fails to pay a user fee
assessed to it under section 919. In addition, section 701(a) of the
FD&C Act (21 U.S.C. 371(a)) gives FDA general rulemaking authority to
issue regulations for the efficient enforcement of the FD&C Act.
Consistent with these authorities, FDA is issuing this rule, which is
intended to ensure that we are able to make the determinations required
by section 919 of the FD&C Act and to assess and collect tobacco
product user fees.

V. Environmental Impact

    The Agency has determined under 21 CFR 25.30(h) that this action is
of a type that does not individually or cumulatively have a significant
effect on the human environment. Therefore, neither an environmental
assessment nor an environmental impact statement is required.

VI. Analysis of Impacts

    FDA has examined the impacts of the final rule under Executive
Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5
U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4). Executive Orders 12866 and 13563 direct Agencies to assess all
costs and benefits of available regulatory alternatives and, when
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety, and other advantages; distributive impacts; and
equity). The Agency believes that this final rule is not a significant
regulatory action under Executive Order 12866.
    The Regulatory Flexibility Act requires Agencies to analyze
regulatory options that would minimize any significant impact of a rule
on small entities. The potential impact on small entities is uncertain,
and FDA is unable to rule out the possibility that this final rule may
have a significant economic impact on a substantial number of small
entities.
    Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires
that Agencies prepare a written statement, which includes an assessment
of anticipated costs and benefits, before proposing ``any rule that
includes any Federal mandate that may result in the expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100,000,000 or more (adjusted annually for
inflation) in any one year.'' The current threshold after adjustment
for inflation is $141 million, using the most current (2012) Implicit
Price Deflator for the Gross Domestic Product. FDA does not expect this
final rule to result in any 1-year expenditure that would meet or
exceed this amount.
    Under our primary baseline, starting in fiscal year 2015, FDA would
obtain the information necessary for collecting user fees directly from
Federal Agencies (other than USDA) that collect such information.
Compared with this baseline, this final rule will impose private costs
on industry to submit data to FDA on a monthly basis, with an
approximately offsetting reduction in government information collection
costs. The net effect of this may be a small social cost or benefit.
This final rule also allows FDA to be in control of the data needed for
calculating and billing user fees and resolves impediments that may
otherwise exist to FDA's ability to use the data for its intended
purpose. Compared with other possible baseline scenarios, this final
rule can be expected to eliminate the potential need for additional
legislation and allow the collection of user fees after 2014 to proceed
more smoothly than it could without legislation.
    Compared to the primary baseline, the estimated one-time private
sector transition cost is $159.60 per manufacturer or importer,
including small manufacturers and importers, and the annual compliance
cost is $2,553.60. One option for regulatory relief would be to exempt
firms from reporting in a particular month if they did not introduce
any units of any tobacco products for which user fees are assessed into
domestic commerce. Another option for regulatory relief would be to
require submission of either the FDA form or copies of forms submitted
to other Agencies. The full analysis of economic impacts is available
as Ref. 2 in Docket No. FDA-2012-N-0920 and at http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/EconomicAnalyses/default.htm.

VII. Paperwork Reduction Act of 1995

    This final rule contains information collection provisions that are
subject to review by the Office of Management and Budget (OMB) under
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The title,
description, and respondent description of the information collection
provisions are shown in the following paragraphs with an estimate of
the annual reporting burden. Included in the estimate is the time for
reviewing instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing each
collection of information.
    Title: Tobacco Products, User Fees, Requirements for the Submission
of Data Needed to Calculate User Fees for Domestic Manufacturers and
Importers of Tobacco Products.
    Description: This final rule requires each tobacco product domestic
manufacturer and importer to submit to FDA information needed to
calculate

and assess user fees under the FD&C Act.
    The USDA has been collecting information from manufacturers and
importers to calculate percentage share for its purposes, and providing
FDA with the data FDA needs to determine user fee assessments under the
FD&C Act. USDA will cease collecting this information starting in
fiscal year 2015. Consistent with the requirements of the FD&C Act,
this final rule would continue the submission of this information, but
to FDA rather than USDA, and thus would ensure that FDA continues to
have the information needed to calculate the amount of user fees
assessed to each entity and collect those fees. Section 919 of the FD&C
Act establishes the user fee allocation and collection process, which
references the FETRA framework for determining tobacco product class
allocations and individual domestic manufacturer or importer
allocations. As is now required by USDA under FETRA, in this final rule
FDA requires domestic manufacturers and importers of tobacco products
to submit a form each month with summary information and copies of the
reports or forms that relate to the tobacco products removed into
domestic commerce.
    Description of Respondents: Domestic manufacturers and importers of
tobacco products.

                                 Table 1--Estimated Annual Reporting Burden \1\
----------------------------------------------------------------------------------------------------------------
                                                     Number of
         21 CFR Section              Number of     responses per   Total annual      Hours per      Total hours
                                    respondents     respondent       responses       response
----------------------------------------------------------------------------------------------------------------
1150.5(a), (b)(1), (b)(2), and               200              12           2,400               3           7,200
 FDA Form 3852; General
 identifying information
 provided by manufacturers and
 importers of FDA regulated
 tobacco products and
 identification and removal
 information (monthly)..........
1150.5(b)(3) Certified Copies                200              12           2,400               1           2,400
 (monthly)......................
1150.13 Submission of user fee               100               4             400               1             400
 information with user fee
 payment (identifying
 information, fee amount, etc.)
 (quarterly)....................
1150.15(a) Submission of user                 10               1              10              10             100
 fee dispute (annually).........
1150.15(d) Submission of request               5               1               5              10              50
 for further review of dispute
 of user fee (annually).........
                                 -------------------------------------------------------------------------------
    Total.......................  ..............  ..............  ..............  ..............          10,150
----------------------------------------------------------------------------------------------------------------
 \1\There are no capital costs or operating and maintenance costs associated with this collection of
  information.

    Table 1 describes the annual reporting burden of 10,150 hours as a
result of the provisions set forth in this final rule. Our estimated
number of respondents is based on information we received from USDA on
the number of reports it receives from domestic manufacturers and
importers each month. The estimate of 200 respondents reflects both
reports of no removal into domestic commerce and reports of removal of
tobacco product into domestic commerce. The estimate of 100 respondents
reflects an average number of domestic manufacturers and importers who
may be subject to the payment of fees each fiscal quarter. Although
there were no comments on the number of appeals and requests for
further review, after discussing internally, we increased our estimate
of the number of appeals from 1 to 10, and requests for further review
from 1 to 5 in an abundance of caution in case there is an increase in
requests for review during the transition from USDA to FDA.
    For Sec.  1150.5(a), (b)(1), and (b)(2), FDA estimates that 200
domestic manufacturers and importers will each submit identifying
information (e.g., mailing address, telephone number, email address)
and summarized tax information on a monthly basis (12 submissions
annually) on Form FDA 3852, resulting in a total burden of 7,200 hours.
For Sec.  1150.5(b)(3), FDA estimates that 200 domestic manufacturers
and importers will each submit, on a monthly basis (12 times annually),
certified copies of the returns and forms that relate to the removal of
tobacco products into domestic commerce and the payment of Federal
excise taxes imposed under chapter 52 of the Internal Revenue Code of
1986, resulting in a total burden of 2,400 hours.
    For Sec.  1150.13, FDA estimates that 100 domestic manufacturers
and importers will be submitting user fee payments on a quarterly
basis. Therefore, the number of burden hours for this section is 400
hours. FDA estimates that approximately 10 of those respondents
assessed user fees will dispute the amounts under Sec.  1150.15(a), for
a total amount of 100 hours. FDA also estimates that of those who
dispute their user fees, five will ask for further review by FDA under
Sec.  1150.15(d), for a total amount of 50 hours. Total burden hours
for this rule are 10,150 hours (7,200 + 2,400 + 400 + 100 + 50).
    The information collection provisions in this final rule have been
submitted to OMB for review as required by section 3507(d) of the
Paperwork Reduction Act of 1995. The requirements were approved and
assigned OMB control number 0910-0749. This approval expires on June
30, 2017. An Agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.

VIII. Federalism

    FDA has analyzed this final rule in accordance with the principles
set forth in Executive Order 13132. FDA has determined that the final
rule does not contain policies that have substantial direct effects on
the States, on the relationship between the National Government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Accordingly, the Agency has concluded
that the final rule does not contain policies that have federalism
implications as defined in the Executive order and, consequently, a
federalism summary impact statement is not required.

IX. References

    The following references have been placed on display in the
Division of Dockets Management (see ADDRESSES) and may be seen by
interested persons between 9 a.m. and 4 p.m., Monday through Friday,
and are available electronically at http://www.regulations.gov. (FDA
has verified

the Web site address in this reference section, but FDA is not
responsible for any subsequent changes to the Web site after this
document publishes in the Federal Register.)
    1. Form FDA 3852.
    2. Regulatory Impact Analysis. Available at: http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/EconomicAnalyses/default.htm.

List of Subjects in 21 CFR Part 1150

    Tobacco products, User fees.

0
Therefore, under the Federal Food, Drug, and Cosmetic Act and under
authority delegated to the Commissioner of Food and Drugs, chapter I of
title 21 is amended by adding part 1150 to subchapter K to read as
follows:

PART 1150--USER FEES

Sec.
1150.1 Scope.
1150.3 Definitions.
1150.5 Required information.
1150.7 Yearly class allocation.
1150.9 Domestic manufacturer or importer assessment.
1150.11 Notification of assessments.
1150.13 Payment of assessments.
1150.15 Disputes.
1150.17 Penalties.

    Authority:  21 U.S.C. 371, 387b, 387i, 387s.

Sec.  1150.1  Scope.

    This part establishes requirements related to tobacco product user
fees under section 919 of the Federal Food, Drug, and Cosmetic Act (21
U.S.C. 387s). The total amount of user fees may not exceed the amount
specified for that fiscal year in section 919(b) of the Federal Food,
Drug, and Cosmetic Act. All domestic manufacturers and importers of
tobacco products are required to pay to FDA their percentage share of
the total assessment for a fiscal year.

Sec.  1150.3  Definitions.

    The following definitions are applicable to this part:
    Class of tobacco products means each of the following types of
tobacco products as defined in 26 U.S.C. 5702 and for which taxes are
required to be paid for the removal of such into domestic commerce:
Cigarettes, cigars, snuff, chewing tobacco, pipe tobacco, and roll-
your-own tobacco.
    Domestic manufacturer means a person who is required to obtain a
permit from the Alcohol and Tobacco Tax and Trade Bureau of the
Department of the Treasury with respect to the production of tobacco
products under title 27 of the Code of Federal Regulations.
    Fiscal year quarter means a quarter in a fiscal year (the fiscal
year is October 1 through September 30). The fiscal year quarters are
October 1-December 31, January 1-March 31, April 1-June 30, and July 1-
September 30.
    Importer means a person who is required to obtain a permit from the
Alcohol and Tobacco Tax and Trade Bureau of the Department of the
Treasury with respect to the importation of tobacco products under
title 27 of the Code of Federal Regulations.
    Total assessment means the total amount of user fees (in dollars)
authorized to be assessed and collected for a specific fiscal year
under section 919 of the Federal Food, Drug, and Cosmetic Act.
    Units of product means:
    (1) The number of sticks for cigarettes, or
    (2) The weight (measured in pounds) for snuff, chewing tobacco, and
roll-your-own tobacco.
    Units of product removed and not tax exempt means the units of
product:
    (1) Removed (as defined by 26 U.S.C. 5702), and
    (2) Not exempt from Federal excise tax under chapter 52 of title 26
of the United States Code at the time of their removal under that
chapter or the Harmonized Tariff Schedule of the United States.
    Yearly class allocation means the amount of user fees (in dollars)
assessed for a class of tobacco products for a particular fiscal year.

Sec.  1150.5  Required information.

    (a) General. Each domestic manufacturer and importer of tobacco
products that are part of a class of tobacco products that is subject
to regulation under chapter IX of the Federal Food, Drug, and Cosmetic
Act must submit the information described in this section for such
products each month beginning October 2014, and the information must be
received by FDA no later than the 20th day of each month. The
information must be submitted using the form that FDA provides. The
information must be submitted even if the domestic manufacturer or
importer had no removals subject to tax during the prior month. FDA
will use the information submitted under this section and any other
available information, as FDA determines appropriate, to make tobacco
product user fee assessments.
    (b) Contents. Each domestic manufacturer and importer must submit
the following:
    (1) Identification information. (i) Its name and the mailing
address of its principal place of business;
    (ii) The name and a telephone number including area code of an
office or individual that FDA may contact for further information;
    (iii) The email address and postal address at which it wishes to
receive notifications FDA sends under this part;
    (iv) The Alcohol and Tobacco Tax and Trade Bureau (TTB) Permit
Number(s); and
    (v) The Employer Identification Number(s) (EIN).
    (2) Removal information. The units of product, by class, removed
and not tax exempt for the prior month and the Federal excise tax it
paid, by class, for such removal.
    (i) This information must be reported for each TTB tobacco permit.
    (ii) If the domestic manufacturer or importer did not remove any
amount of tobacco product, it must report that no tobacco product was
removed into domestic commerce.
    (3) Certified copies. Certified copies of the returns and forms
that relate to:
    (i) The removal of tobacco products into domestic commerce (as
defined by section 5702 of the Internal Revenue Code of 1986); and
    (ii) The payment of the Federal excise taxes imposed under chapter
52 of the Internal Revenue Code of 1986.

Sec.  1150.7  Yearly class allocation.

    For each fiscal year, FDA will allocate the total assessment among
the classes of tobacco products.
    (a) Calculation. FDA will calculate the percentage shares for each
class as follows:
    (1) FDA will multiply the units of product removed and not tax
exempt for the most recent full calendar year by the 2003 maximum
Federal excise tax rate for that applicable class or subclass (class
dollar figure).
    (2) [Reserved]
    (3) FDA will total the class dollar figures for all tobacco classes
for the most recent full calendar year (total dollar figure).
    (4) FDA will divide the class dollar figure by the total dollar
figure to determine the percentage share for each class.
    (5) FDA will calculate the allocation for each class of tobacco
products by multiplying the percentage share for each class by the
total assessment.
    (b) Reallocation. For any class of tobacco products that is not
deemed by FDA to be subject to regulation under chapter IX of the
Federal Food, Drug, and Cosmetic Act, the amount of user fees that
would otherwise be assessed to such class of tobacco products will be
reallocated to the classes of tobacco products that are subject to
chapter IX of the Federal Food, Drug, and Cosmetic Act in the same
manner and based on

the same relative percentages otherwise determined under paragraph (a)
of this section.

Sec.  1150.9  Domestic manufacturer or importer assessment.

    Each quarter, FDA will calculate the assessment owed by each
domestic manufacturer or importer for that quarter.
    (a) Calculation. (1) For each class of tobacco products, FDA will
calculate the percentage share for each domestic manufacturer and
importer by dividing the Federal excise taxes that it paid for the
class for the prior quarter by the total excise taxes that all domestic
manufacturers and importers paid for the class for that same quarter.
    (2) [Reserved]
    (3) If the percentage share calculated for a domestic manufacturer
or importer in this section, as applicable, is less than 0.0001
percent, the share is excluded from the assessment for that class of
tobacco products.
    (4) Within each class of tobacco products, the assessment owed by a
domestic manufacturer or importer for the quarter is the yearly class
allocation, determined as described in Sec.  1150.7, divided by four,
multiplied by the domestic manufacturer's or importer's percentage
share, truncated to the fourth decimal place, for that class of tobacco
products.
    (b) Adjustments. Annually, FDA will make any necessary adjustments
to individual domestic manufacturer or importer assessments if needed
to account for any corrections (for example, to include domestic
manufacturers or importers that were not included in a relevant
assessment calculation).

Sec.  1150.11  Notification of assessments.

    (a) Notification. No later than 30 calendar days before the end of
each fiscal year quarter, FDA will notify each domestic manufacturer
and importer of the amount of the quarterly assessment imposed on the
domestic manufacturer or importer.
    (b) Content of notification. The notification under paragraph (a)
of this section will include the following:
    (1) The amount of the quarterly assessment imposed on the domestic
manufacturer or importer and the date that payment of the assessment
must be received by FDA;
    (2) Class assessment information, including each class' initial
percentage share, the reallocation amount (if any) and each class'
percentage share after any such reallocation, and the quarterly
assessment for each class;
    (3) Domestic manufacturer or importer assessment information,
including the domestic manufacturer's or importer's percentage share of
each relevant class of tobacco products and invoice amount;
    (4) Any adjustments FDA has made under Sec.  1150.9(b);
    (5) The manner in which assessments are to be remitted to FDA;
    (6) Information about the accrual of interest if a payment is late;
and
    (7) Information regarding where to send a dispute and when it needs
to be sent.

Sec.  1150.13  Payment of assessments.

    (a) Payment of an assessment must be received by FDA no later than
the last day of each fiscal year quarter.
    (b) Payments must be submitted to FDA in U.S. dollars and in the
manner specified in the notification.
    (c) Except as provided in paragraph (d) of this section, if an
assessment is not received by the last day of the fiscal year quarter,
FDA will begin assessing interest on the unpaid amount in accordance
with 31 U.S.C. 3717.
    (d) If FDA does not send the notification described in Sec.
1150.11(a) 30 calendar days before the end of a quarter, no interest
will be assessed by FDA under paragraph (c) of this section until 30
calendar days have elapsed from the date FDA sent notification of the
amount owed.
    (e) If a domestic manufacturer or importer disputes the amount of
an assessment, it must still pay the assessment in accordance with
paragraphs (a) and (b) of this section.

Sec.  1150.15  Disputes.

    (a) A domestic tobacco manufacturer or importer may dispute an FDA
assessment. The dispute must include the basis for the dispute, and the
dispute must be:
    (1) Submitted in writing;
    (2) Received by FDA no later than 45 days after the date on the
assessment notification;
    (3) Legible and in English; and
    (4) Sent to the address found on our Web site (http://www.fda.gov/tobaccoproducts).
    (b) If FDA determines that there was an error related to the
assessment and the assessment was too high, FDA will refund the amount
assessed in error to the domestic manufacturer or importer.
    (c) FDA will provide a dated, written response, and its response
will provide information about how to submit a request for further
Agency review.
    (d) A request for further Agency review under Sec.  10.75 of this
chapter may be submitted. Such a request must be submitted in writing
by the domestic manufacturer or importer and received by FDA within 30
days from the date on FDA's response. The request for further Agency
review must be legible, in English, and submitted to the address found
on our Web site (http://www.fda.gov/tobaccoproducts).

Sec.  1150.17  Penalties.

    (a) Under section 902(4) of the Federal Food, Drug, and Cosmetic
Act (21 U.S.C. 387b), a tobacco product is deemed adulterated if the
domestic manufacturer or importer of the tobacco product fails to pay a
user fee assessed to such manufacturer or importer by the later of the
date the assessment is due, 30 days from the date FDA sent notification
of the amount owed, or 30 days after final Agency action on a
resolution of any dispute as to the amount of the fee.
    (b) Under section 902(4) of the Federal Food, Drug, and Cosmetic
Act, a tobacco product is deemed adulterated if the domestic
manufacturer or importer of the tobacco product fails to report the
information required by Sec.  1150.5 to calculate assessments under
this part.
    (c) The failure to report the information required by Sec.  1150.5
to calculate assessments under this part is a prohibited act under
section 301(e) of the Federal Food, Drug, and Cosmetic Act.
    (d) Information submitted under Sec.  1150.5 is subject to 18
U.S.C. 1001 and other appropriate civil and criminal statutes.

    Dated: July 7, 2014.
Leslie Kux,
Assistant Commissioner for Policy.
[FR Doc. 2014-16153 Filed 7-9-14; 8:45 am]
BILLING CODE 4164-01-P