For these reasons, the Agency is proposing, as its preferred
option, not to allow the use of a financial test under this proposed
rule. The Agency solicits comment on this proposal.
c. Option 2--Financial Test
    Although the Agency's preferred option is to not allow a financial
test under the proposed rule (see Option 1), EPA is proposing a second
option--that is, to make a financial test available for use by hardrock
mining facilities subject to this proposed rule. The Agency is
proposing this option because it recognizes that allowance of a
financial test under this proposed rule could result in significant
savings to those members of the regulated community that could use it
and qualify to self-insure.
    Under the option that would allow a financial test, EPA is
proposing the use of a credit rating--based financial test, developed
specifically for this proposed rule. In developing the proposed
financial test, the Agency attempted to address as many of the concerns
discussed in Option 1 as possible, though the Agency recognizes that it
cannot eliminate all of the concerns identified. EPA analyzed several
financial test options and selected one for proposal that carries with
it a relatively low risk to the Government that firms will pass the
financial test and still default on their obligations. EPA requests
comments on the extent to which its proposed financial test addresses
the concerns outlined in Option 1.
(1) Financial Test Overview
    EPA is proposing the use of a financial test based on the long-term
corporate credit rating of the owner or operator. Under the terms of
the proposed financial test, an owner or operator could assure its
entire financial responsibility obligation by submitting annual
verification that it holds at least one long-term corporate credit
rating equal to or higher than A- as issued by Standard & Poor's (S&P)
or its equivalent by another NRSRO. In addition, for some owners and
operators with lower credit ratings, the proposed test would further
allow an owner or operator to alternatively assure one half of its
obligation by submitting annual verification that it holds at least one
long-term corporate credit rating of BBB+ or BBB from S&P or the
equivalent from another NRSRO.
    In addition, an owner or operator electing to use the financial
test would be required to have: (1) a tangible net worth of at least
six times the amount of environmental obligations, including
guarantees, covered by a financial test or guarantee, including this
financial test and the corporate guarantee proposed in this rule; and
(2) U.S. assets equal to or greater than ninety percent of its total
assets, or six times the amount of environmental obligations covered by
a financial test or guarantee, including this financial test and the
corporate guarantee proposed in this rule.\115\ EPA discusses each of
these components in the sections that follow.
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    \115\ Tangible Net Worth and U.S. Asset thresholds have been
developed and historically utilized in financial responsibility
regulations for the purpose of controlling for the possibility of a
company that may have multiple obligations (both within the U.S.,
and/or abroad). Such scenarios could further limit the company's
ability to self-insure the totality of its obligations. Cases where
multiple obligations exist become very difficult for regulators to
readily identify, and having tangible net worth and U.S. Asset
thresholds already embedded within the financial test requirements
helps to temper this concern.
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(2) Financial Test Components
(a) Credit Rating Thresholds
    The proposed test would allow the owner or operator to self-insure
its entire obligation by submitting annual verification that the owner
or operator holds at least one long-term corporate credit rating equal
to or higher than A- as issued by S&P or its equivalent by another
NRSRO. Credit rating-based thresholds are widely relied upon as a
central feature of many financial tests. For example, this proposed
rating threshold is the same as that used in the NRC's financial test
for self-insurance of the decommissioning costs associated with
byproduct materials licensees (per 10 CFR 30 Appendix C). The Agency
chose this long-term corporate credit rating threshold based on
expected default rates over a three year horizon.\116\ Based on the
NRSROs'

extensive default data, EPA can expect three-year default rates below
0.4 percent for owners or operators meeting this ratings criteria.\117\
Because the probability of default is projected to be well below one
percent for hardrock mining companies thought to be capable of meeting
the requirements of the proposed financial test, the probability that
companies who pass the test will enter into bankruptcy is substantially
reduced. This in turn reduces the risk of defaults and lowers potential
costs for the public, when compared to less stringent tests.
---------------------------------------------------------------------------

    \116\ Bankruptcy data from S&P are available for one, three, and
five-year periods, and it is the three-year horizon that is most
widely accepted for use in the projection of default rates for
purposes of financial assurance analyses. The three-year time
horizon was for example used in the analyses that were conducted
when the Agency's RCRA C financial test were originally promulgated.
The reason for this is that the one-year data would be
unrepresentative since this wouldn't allow sufficient time for the
government to respond to such bankruptcies. Conversely, the five-
year data results reflect an excessive period of time needed by the
government to identify and respond to a bankruptcy, while also
reflecting projected probabilities of default that are unnecessarily
high.
    \117\ See: Default, Transition, and Recovery: 2013 Annual Global
Corporate Default Study and Rating Transitions. Standard and Poor's.
March 19, 2014 Table 26 p. 58; Corporate Default and Recovery Rates,
1920-2013. Moody's Investors Service. Special Comment. February
2014. Exhibit 35, p. 35; Fitch Ratings Global Corporate Finance 2013
Transition and Default Study. Fitch Ratings, March 17, 2014.
Appendix 1, p. 13.
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    The proposed test would further allow for coverage of up to one
half of an owner's or operator's obligation by submitting annual
verification that the owner or operator holds at least one long-term
corporate credit rating of BBB+ or BBB from S&P or the equivalents from
another NRSRO. This long-term corporate credit rating threshold was
also chosen based on expected default rates over a three-year horizon.
The Agency's analysis indicates that the risk of default roughly
doubles for these rating tiers compared to A-rated long-term issuer
credit ratings\118\ and thus EPA proposes to proportionately scale back
the coverage of the test for companies in these ratings tranches.
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    \118\ See: Default, Transition, and Recovery: 2013 Annual Global
Corporate Default Study and Rating Transitions. Standard and Poor's.
March 19, 2014 Table 26 p. 58; Corporate Default and Recovery Rates,
1920-2013. Moody's Investors Service. Special Comment. February
2014. Exhibit 35, p. 35; Fitch Ratings Global Corporate Finance 2013
Transition and Default Study. Fitch Ratings, March 17, 2014.
Appendix 1, p. 13.
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    Finally, under the proposed test EPA would not allow those
companies at the lowest tier of investment grade ratings (BBB- in S&P's
notation and the equivalent rating from other NRSROs) from using a
financial test. EPA determined that, based on the three-year horizon
default history for firms with the lowest tier investment grade
ratings, the risk of default was significantly higher than for firms
with investment grade ratings one tier higher. For example, the risk of
default for firms rated BBB- by S&P is roughly twice that of firms
rated BBB by the same rating agency.\119\
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    \119\ See Default, Transition, and Recovery: 2013 Annual Global
Corporate Default Study and Rating Transitions. Standard and Poor's.
March 19, 2014 Table 26 p. 58.
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    EPA is aware that this demarcation differs from the normal split
between investment grade and speculative grade ratings, and that often
investors distinguish on the basis of whether a particular issuer
carries an investment versus speculative grade rating. However, because
of the significantly higher default rates for the very bottom of
investment grade found in its analysis, the Agency proposes to
eliminate the very bottom notch of investment grade from being allowed
to self-insure under the proposed financial test.
    EPA solicits comment on the credit-rating thresholds the Agency is
proposing for use in the proposed financial test under Option 2.
(b) Tangible Net Worth Requirement
    In this proposal, an owner or operator eligible to use this
financial test for any portion of its CERCLA Sec.  108(b) liabilities
would also be subject to a coverage multiple requiring them to have a
tangible net worth of at least six times the amount of environmental
obligations, including guarantees, covered by a financial test or
guarantee, including this financial test and the corporate guarantee
proposed in this rule. This is an important additional component of the
proposed financial test as it would provide for a common check across
EPA financial responsibility programs that a firm is not assuming too
great a level of future costs that they might unduly strain the firm's
ability to pay for them.
    EPA financial tests typically account for only cost estimates and
obligations covered by an EPA financial test. However, because of the
numerous regulatory agencies that regulate hardrock mines, EPA expects
that an owner or operator subject to this rule may have many of its
financial test demonstrations under other Federal or state programs. To
assure that a company is not using the same assets to self-insure
multiple obligations, EPA believes it is necessary to account for all
environmental obligations covered by a financial test or guarantee, and
not just EPA financial assurance obligations covered by a financial
test or guarantee.
(c) U.S. Asset Requirement
    Owners or operators would also be subject to an additional coverage
multiple, requiring them to submit proof that the company either has
assets located in the United States amounting to at least ninety
percent of total assets or has U.S. assets totaling at least six times
the amount of environmental obligations covered by a financial test or
guarantee, including this financial test and the corporate guarantee
proposed in this rule. This would serve as an additional precautionary
measure to help ensure that U.S. assets would be available for
claimants to proceed against, in the event of a bankruptcy or other
default.
    This proposed requirement would be very similar to that used for
U.S. assets in past financial tests the Agency has created. For
example, the RCRA Subtitle C closure and post-closure financial test
requires assets located in the U.S. amounting to at least ninety
percent of total assets or at least six times the sum of current
closure and post-closure cost estimates and the current plugging and
abandonment cost estimates.\120\ Similar financial test components are
also used in the Underground Injection Controls (UIC) financial
responsibility programs and in the CERCLA model financial test
instrument used to support financial responsibility under CERCLA orders
and settlements. Using a similar ninety percent or six times multiplier
allows for more effective financial responsibility across EPA programs.
---------------------------------------------------------------------------

    \120\ See 40 CFR 264.143(f)(1)(i)(D) and (ii)(D).
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    For those firms without assets in the United States amounting to
ninety percent or more of total assets, the firms would be required to
demonstrate that they have U.S. assets greater than six times the sum
of all financial responsibility obligations covered by a financial
test. This six-times ratio is consistent with Alternative I of a recent
RCRA consent decree that EPA entered into with several phosphoric acid
mining companies, and is similar to other requirements in EPA's UIC
Class VI well regulations and the RCRA Subtitle C regulations. The six
times multiplier is intended to address the possibility that, in the
event of a bankruptcy, funds required to meet other environmental
obligations assured through other financial tests would reduce an owner
or operator's ability to satisfy any CERCLA claims.
(d) Reporting Requirements for Passage of the Financial Test
    The proposed option that would allow a financial test would also
require reporting of information necessary to implement the financial
test. To demonstrate passage of the financial test, owners or operators
would be required to submit the following information annually:

    Chief Financial Officer Letter (CFO Letter): A letter to the
Administrator signed by its chief financial officer (CFO) as worded in
Sec.  320.50. The CFO Letter confirms that the entity satisfies the
financial criteria required under the financial test that makes the
entity eligible to utilize the financial test as financial
responsibility under this regulation.
    The Agency is proposing to require standardized the language in the
CFO Letter from the owner or operator. Such an approach is consistent
with other Agency rules such as the RCRA Subtitle C or the Standardized
Permit Rule and carries with it several benefits to the Agency. First,
a standard CFO Letter will provide for relatively quick Agency review
of financial test submissions and lowers the chances of administrative
error in the review of submissions. Administrative burden, once again,
is a key concern to the Agency as it wishes to preserve the resources
for conducting cleanups. The Agency believes a standardized CFO Letter
offers the additional potential advantage of improving the consistency
and completeness of submissions, thereby limiting delays caused by
human error and omissions.
    (2) Annual Financial Statements: A copy of the owner's or
operator's most recent independently audited annual financial
statements prepared in accordance with U.S. Generally Accepted
Accounting Principles (U.S. GAAP). At present, EPA expects that firms
seeking to self-insure through the use of a financial test will do so
based on financial statements that are audited in accordance with U.S.
GAAP. The Agency recognizes that foreign firms might prepare audited
financial statements in accordance with either GAAP or International
Financial Reporting Standards (IFRS), and that IFRS and U.S. GAAP may
converge into a global set of accounting standards at some point in the
future. Until such time as a unified set of accounting standards is
established, the Agency is proposing to accept only audited financial
statements in accordance with U.S. GAAP for purposes of compliance with
the financial test criteria. However, EPA accepts comment on an
alternative whereby the acceptable accounting standards are linked to
those accepted by the Securities Exchange Commission (SEC) in order to
potentially lower the reporting burden for certain firms seeking to use
the financial test. Presently, such an option would allow foreign firms
that file with the SEC to be able to submit annual financial statements
prepared in accordance with IFRS or GAAP while domestic firms would
submit statements prepared in accordance with GAAP. However, the
underlying fundamentals of IFRS and GAAP differ with respect to the
accounting of liabilities and assets. As such, to accept both IFRS and
GAAP financial statements in support of the financial test would yield
a potentially disproportionate playing field wherein some companies
using IFRS may pass the test where they might otherwise fail under
GAAP, and vice versa. EPA would thus be accepting potentially divergent
levels of assurance.
    (3) Special Audit Report: A special report of procedures and
findings of an audit conducted by a licensed, third-party, independent
certified public accountant (CPA) resulting from an agreed-upon
procedures (AUP) engagement in accordance with applicable Federal laws
governing independence and AUP engagements, or standards set by the
American Institute of Certified Public Accountants, Inc. (AICPA), to
supplement Federal laws or when Federal laws are not applicable. The
report would be required to describe the procedures performed and
related findings as to whether or not there were differences or
discrepancies identified between the financial information in the
owner's or operator's CFO Letter and the owner's or operator's most
recent audited annual financial statements. Where differences or
discrepancies were found in the comparison of the owner's or operator's
CFO Letter and the owner's or operator's most recent audited annual
financial statements, the report of procedures and findings would
reconcile any differences or discrepancies.
    There are advantages to third-party auditing requirements,
particularly with strong auditor competence and independence criteria.
According to the Center for Chemical Process Safety (CCPS), ``Third-
party auditors . . . potentially provide the highest degree of
objectivity,'' \121\ A leading scholar on regulatory third-party
programs also found that a well-designed and implemented ``third-party
verification [program] could furnish more and better data about
regulatory compliance'' while providing additional compliance and
resources savings benefits.\122\ Studies show that auditors are more
likely to provide lenient or biased audit reports that can fail to
accurately identify problems or violations when there are insufficient
safeguards to ensure auditor independence.\123\
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    \121\ See CCPS. March 2007 Guidelines for Risk Based Process
Safety. Available at: http://www.aiche.org/ccps/resources/publications/books/guidelines-risk-based-process-safety.
    \122\ See Regulation by Third-Party Verification, Lesley K.
McAllister. January 2012. 53 B.C. L. Rev. 1, 21-26. Available at:
http://lawdigitalcommons.bc.edu/bclr/vol53/iss1/1/.
    \123\ See, e.g., Truth-Telling By Third-Party Auditors and the
Response of Polluting Firms: Experimental Evidence From India,
Esther Duflo et al., 128 Q. J. of Econ. 4 at pp. 1499-1545, 2013.
---------------------------------------------------------------------------

    In audit engagements, CPAs are required by professional standards
and Federal and State laws to maintain independence (both in fact and
in appearance) from the entity for which they are conducting an
attestation (audit and review) engagement. However, the Public
Certified Accounting Oversight Board (PCAOB) found evidence that many,
if not most, of some types of financial audits are flawed due to
insufficient auditor competence, independence and/or lack of public
transparency. Third-party auditing is a cornerstone of financial
reporting, but the PCAOB found audit deficiencies in portions of
seventy of the ninety audits they reviewed in its third annual report
on audits of broker-dealers registered with the SEC. Independence
problems were found in 21 of the ninety audits where, contrary to SEC
rules, firms helped with the bookkeeping or preparation of the
financial statements they audited.\124\
---------------------------------------------------------------------------

    \124\ See Third Progress Report on PCAOB Inspections of Broker
and Dealer Auditors Shows Continued High Number of Findings. PCAOB.
Aug. 18, 2014. Available at: http://pcaobus.org/Inspections/Documents/BD_Interim_Inspection_Program_2014.pdf.
---------------------------------------------------------------------------

    Therefore, EPA is proposing to require that a CPA performing the
audit required under this proposal be licensed. This requirement is
designed to ensure the auditor has the requisite education and
experience to perform the audit. Each state has its own licensing
board. The proposal would also require that auditors be independent,
follow the independence rules and standards established by the AICPA's
Audit Standards Board (ASB), have passed the Uniform Certified Public
Accountant Examination, be licensed as a CPA, and be current with all
continuing professional education requirements.
    The Agency also is proposing to require that the AUP engagement be
conducted in accordance with the AICPA Statement on Standards for
Attestation Engagement (SSAE) and related attestation interpretations,
AT Section 201--Agreed Upon Procedures Engagements, or any future
superseding standards set by AICPA or any superseding body. This
provides further assurance that the CPA's review was done in accordance
with accepted accounting industry standards. The Agency recognizes that
the AICPA may update its standards, and thus the

Agency is proposing a flexible standard for the CERCLA Sec.  108(b)
regulations that relies upon the method(s) currently accepted, instead
of specifying a particular standard that may need to be updated in the
future. EPA solicits comment on whether, in addition to those set by
the AICPA, applying SEC and/or PCAOB rules and standards would provide
appreciable additional assurances of independence. In this regard, EPA
further believes that some owners and operators who seek to use the
financial test, if available, may already be SEC registrants and
issuers. As such cases, the application of more stringent SEC/PCAOB
independency standards should result in little added burden for owners
and operators already subject to such standards.
    The audited annual financial statements, the CFO Letter, and an AUP
engagement report signed and certified by an independent, licensed CPA
would be submitted annually, within ninety days of the close of the
owner's or operator's fiscal year. In so doing, the Agency receives up-
to-date financial information to ensure the company still meets the
standards of the test. In general, financial reports made directly to
the SEC are completed within ninety days of the company's fiscal year
end. Most small and medium-sized businesses, who are not filing with
the SEC, track their fiscal year end to a calendar-year end. These
companies tend to complete their annual financial reports in support of
tax filings to the Internal Revenue Service, and generally do so within
ninety days of the calendar year end. In either instance, most
companies already prepare annual financial statements, and therefore
the financial reporting requirements of the financial test should not
present too significant of a reporting challenge. The annual reporting
requirement is essential to ensure firms using the financial test
maintain the requisite financial strength and do not pose an undue
risk.
    EPA believes, together, these reporting requirements will foster
accountability, improve compliance, and ensure EPA is receiving an
accurate portrayal of a company's financial ability to meet its
environmental obligations. Thus, if the use of a financial test were to
be allowed in the final rule, this would reduce the risk that the
taxpayer would have to finance cleanup in the future. EPA believes that
third-party reviews will help assist in rule compliance and oversight.
Independence is important to preserve the integrity and objectivity of
these audits, thereby providing reliable compliance information to
EPA.\125\
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    \125\ See The Integrity of Private Third-party Compliance
Monitoring. Short, Jodi L., and Michael W. Toffel. Harvard Kennedy
School Regulatory Policy Program Working Paper, No. RPP-2015-20,
November 2015. (Revised December 2015.)
---------------------------------------------------------------------------

    The Agency believes that requiring an AUP engagement would also
further ease the implementation burden associated with reviewing
financial test submissions, and reduce the prospect for errors. Third-
party, independent audits will also promote cost-effective EPA
prioritization of Superfund resources, and provide benefits to
communities near facilities by assuring that secure financial
responsibility is in place. The AUP would give EPA an independent
third-party expert's opinion and attestation as to whether or not the
financial information provided in the CFO Letter is consistent with
that in the most recent audited financial statements and thus with U.S.
generally accepted accounting practices. EPA believes independent,
licensed CPAs are better suited to review such data and make such
determinations, as EPA is not primarily a financial regulator.
    EPA is asking for comment on these reporting requirements.
Specifically, the public should comment on what other requirements, if
any, should be required to ensure the completeness, reliability, and
accuracy of the information submitted to determine that facilities have
the funds necessary to meet their environmental obligations, thereby
preserving taxpayer money. EPA is also accepting comments on the
application of these laws and standards, whether or not these
requirements are sufficient to ensure compliance with the financial
test, provide EPA with the necessary information to implement the
financial test, or preserve independence in performing under an AUP
engagement, and the ability of the requirements to help EPA respond to
deficiencies in financial test submissions or changes in financial
situations.
(e) Self-Reporting Requirements for Owners or Operators No Longer Able
To Pass the Financial Test
    Additionally, owners or operators would be required to notify the
Administrator in the event of a change in their long-term issuer credit
rating or financial position that would disqualify them from using the
financial test. This requirement also exists in other EPA financial
tests including the RCRA Subtitle C test for hazardous waste
facilities. Such notification is designed to be independent from the
annual reporting requirements associated with the financial test.
Owners or operators would be required to notify the Administrator upon
verifying that a change in their financial status has resulted in their
becoming disqualified from using the financial test. In such
circumstances, owners or operators will be required to send notice to
the Administrator within thirty days, documenting their intent to
establish an alternate financial responsibility instrument to cover the
portion of their obligations for which they can no longer use the
financial test. As such, owners and operators that currently qualify
for self-insurance under the financial test will be responsible for
continually self-monitoring their qualification status whenever they
experience a change in their long-term issuer credit rating, tangible
net worth, or value of U.S. assets. The Agency is proposing this
reporting requirement to allow EPA to respond as quickly as possible to
negative changes in a company's financial position. In the event the
owner or operator no longer passes the financial test, the owner or
operator would have 120 days from the date the owner or operator no
longer qualifies to obtain a replacement instrument for that portion of
its CERCLA Sec.  108(b) financial responsibility requirement previously
covered by the test.
(f) Provisions for Administrator's Discretion
    The proposed regulations would allow the Administrator to request
reports of financial condition at any time from the owner or operator
in addition to those specified in Sec.  320.43(b) in the event that the
Administrator has reason to believe the owner or operator may no longer
meet the financial test requirements. This is similar to a provision in
the RCRA Subtitle C financial test found at 40 CFR 264.143(f)(7), for
example. The Agency has found this provision very helpful in evaluating
compliance with the regulations and proposes to include a similar
provision in these regulations.
    The Administrator would also have the discretion to disallow use of
this test on the basis of qualifications of opinion given in the
independent certified public accountant's report in the AUP engagement
or the audited financial statements. An adverse opinion or disclaimer
of opinion in either report will result in disallowance of the test.
The Administrator will evaluate other qualifications on an individual
basis. An adverse opinion suggests that the financial statements do not
present fairly the financial condition of the firm. A disclaimer of
opinion states that the auditor does not express an opinion on the
financial statements. In both cases,

the Agency believes there is inadequate assurance that the information
presented in the financial statements can be relied upon to evaluate
the credit risk of the firm.
    The owner or operator would be released from the proposed
requirements of demonstrating financial responsibility with the
financial test when: (1) An owner or operator substitutes alternate
financial responsibility as specified in this section; or (2) The
Administrator releases the owner or operator from the requirements of
this section in accordance with Sec.  320 27.
(3) Discussion
    The Option 2 proposed financial test was developed by EPA for use
by hardrock mining facilities under CERCLA Sec.  108(b). The Agency
believes that it is more suited for use by hardrock mining facilities
to demonstrate financial responsibility under CERCLA Sec.  108(b) than
are other financial tests currently implemented by EPA. As discussed
earlier, EPA has also attempted to address to the extent possible, many
of the concerns raised about the use of a financial test for hardrock
mining facilities under proposed Option 1.
    The proposed financial test utilizes long-term corporate credit
ratings, rather than a series of ratios derived from a company's
financial statements, as other tests do. The Agency took this approach,
in part, to ease potential implementation challenges. A test based on
long-term corporate credit ratings is relatively easy to verify and
carries with it the lowest administrative burden of the financial test
options considered. Moreover, the use of long-term corporate credit
ratings is further substantiated by the robust data underpinning the
measures of risk associated with each rating level. For example,
default rate studies are often backed by large samples spanning many
years. The ratings agencies themselves have done extensive studies
demonstrating the efficacy of credit ratings as an indicator of credit
risk.\126\
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    \126\ See for example: Default, Transition, and Recovery: 2013
Annual Global Corporate Default Study and Rating Transitions.
Standard and Poor's. March 19, 2014; Corporate Default and Recovery
Rates, 1920-2013. Moody's Investors Service. Special Comment.
February 2014; Fitch Ratings Global Corporate Finance 2013
Transition and Default Study. Fitch Ratings, March 17, 2014.
---------------------------------------------------------------------------

    The Agency's decision to propose a credit rating-based test also
reflects the EFAB's statements, made in its reporting on the financial
test and corporate guarantee under the RCRA programs, that independent
credit analysis, i.e. credit ratings, can be a cost effective mechanism
for demonstrating financial responsibility.\127\ The use of long-term
corporate credit ratings leverages the expertise of a third party,
relieving the Agency of the primary burden of performing credit
analysis.
---------------------------------------------------------------------------

    \127\ See EFAB Initial Findings Concerning use of the Financial
Test and Corporate Guarantees to Meet Financial Assurance
Requirements under the RCRA programs. Environmental Financial
Advisory Board. January 11, 2006, p. 5.
---------------------------------------------------------------------------

    EPA has used different systems of ratings in other financial tests.
This includes using the rating on the most recent bond issuance in the
RCRA Subtitle C financial test, for example, found in 40 CFR
264.143(f). The use of long-term issuer credit ratings is included in
this proposal as the Agency believes they most accurately reflect a
firm's ability to meet the entirety of its financial obligations over
the long term as opposed to the obligations related to a single debt
issuance (e.g. a bond rating), which is narrower in scope. This view is
based on EPA's review of the credit rating agencies' literature
performed for this proposal.\128\ An additional benefit of using a
credit rating is that a firm does not need to issue bonds or any other
debt instrument to be issued a credit rating, which may increase the
availability on instruments. While this approach allows the Agency to
rely on the evaluation of an outside party, rather than on in-house
financial expertise, this approach is not without concerns. For
example, there is continued criticism that the credit-rating agencies
themselves may not truly be independent from the entities they
rate.\129\ The Agency solicits comment on the use of a credit-rating-
based financial test.
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    \128\ See Guide to Credit Rating Essentials: What are Credit
Ratings and How Do They Work? Standard and Poor's (2010), pp. 11-12;
Moody's Rating Symbols & Definitions. Moody's Investors Service. New
York, NY (2009), p. 11; and Definitions of Ratings and Other Forms
of Opinion. Fitch Ratings (2011) pg 9.
    \129\ See for example, CFR.org Staff, The Credit Rating
Controversy, Council on Foreign Relations, updated February 19,
2015. Available at: http://www.cfr.org/financial-crises/credit-rating-controversy/p22328.
---------------------------------------------------------------------------

    The proposed financial test includes a high credit rating threshold
so an owner or operator with declining financial health will still have
a relatively high credit status when it initially becomes ineligible to
use the financial test. EPA expects that this will help to assure that
owners or operators that no longer qualify for the test will still be
sufficiently viable to obtain an alternate instrument. This is so,
because evidence from agency analyses of past bankruptcies in this
sector suggest that it usually takes many years for a company to enter
bankruptcy after its credit rating drops below BBB.\130\ In addition,
this is also the case given that the proposed financial test has two
tiers of credit rating thresholds. As such, should an owner's or
operator's credit rating drop below A-, the amount that they may self-
insurance for drops from 100 percent to 50 percent of the obligations,
provided that they still retain an investment grade credit rating. The
impact on a company may be more gradual when the owner or operator
experiences a decline in their credit rating. The Agency solicits
comment on the validity of this approach.
---------------------------------------------------------------------------

    \130\ See Draft Background Document for Financial Test Analyses,
Industrial Economics, Inc. (IEc), November 2016.
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    The financial responsibility instruments proposed in this rule are
new and unique and the market's appetite for providing these
instruments is yet to be determined. The Agency expects that allowing a
financial test could potentially help to address market capacity
issues, should they arise.\131\ If there is limited capacity when this
rule becomes final, the availability of a financial test could help to
address that issue. The Agency solicits comment on whether the
financial test could help to address market capacity issues.
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    \131\ Under a no financial test option, limited market capacity
may be burdened by a need for all hardrock mining companies to
obtain third-party financial responsibility instruments. However,
under a financial test option, some companies would be able to self-
insure, possibly freeing up market capacity for companies unable to
do so.
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    Making a financial test available to owners or operators of
hardrock mining facilities under this proposed rule would be consistent
with EPA's approach in other programs. It would not, however, be
consistent with approaches taken by some other Federal agencies.
    According to the CERCLA Sec.  108(b) Regulatory Impact Analysis
(RIA), the estimated annualized compliance cost to industry without a
financial test is $171 million. However, by allowing financial test,
the cost to industry goes down to $111 million, which represents a 35
percent in cost saving to industry.
    With respect to the impacts on government, without the financial
test, the industry would internalize in approximately $527 million in
potential CERCLA liabilities that would otherwise assumed by the
Government (in instances of owner or operator failure) in the baseline
(without the rule). However, by allowing the financial test, the cost
internalized by the industry goes down to approximately $511 million.
Therefore, the increased risks to the Government from unforeseen

defaults of owners and operator allowed to self-insure is $16 million,
which is about three percent of the total potential liability, relative
to the baseline.
    Finally, EPA solicits comment on the potential impacts on small
businesses of allowing a financial test under the proposed CERCLA Sec.
108(b) rule. As noted earlier, concerns exist regarding the potential
inequity of offering a test due to the advantages that it may create
for larger versus smaller owners and operators. This is in part because
the proposed financial test was designed to be highly stringent. As
proposed, only those owners and operators with strong long-term credit
ratings, plus substantial tangible net worth and U.S. assets would pass
the test. Designing the test in this manner greatly lowers the risk of
default by owners and operators that pass the test. Analyses conducted
by EPA of the financial test options considered offers evidence,
however, that fewer small businesses are likely to possess the credit
ratings and net worth necessary to qualify for self-insurance. EPA,
therefore, solicits comment on whether the availability of a financial
test would thus create a competitive disadvantage for small businesses.
    EPA also solicits comment on how allowance of a financial test
under the CERCLA Sec.  108(b) rule could affect the potential
availability of third-party instruments to small businesses. EPA
anticipates that the impact would depend in part on the willingness of
instrument providers to provide instruments to small businesses. If
instrument providers are willing to provide instruments to small
businesses, allowing a financial test could make instruments more
available to small businesses by freeing up overall capacity of such
instruments in the open market. On the other hand, if instrument
providers prove less willing to provide instruments to small
businesses, the capacity freed by allowing the financial test may not
increase the availability of the instruments to those entities. EPA
therefore solicits comment on the likely impact on small businesses of
making a financial test available in the rule, both in terms of
potential disadvantages, and in terms of the availability of the
instruments themselves.
    (4) EPA's Data Analysis: In this section, EPA discusses the data
analysis it performed in connection with developing financial test
options generally for the CERCLA Sec.  108(b) proposed rule, and in
connection with the particular test selected for proposal.
Specifically, EPA conducted several basic analyses to understand the
impacts of the rule and tradeoffs associated both with and without a
financial test. This is discussed in the following section (a). In
section (b), EPA discusses its data analysis of the expected cost
savings and potential costs to the public of alternative financial
tests considered for proposal under Option 2. In section (c), EPA
discusses its analysis of the ability of the alternative tests to
screen out bankruptcies.
(a) Analysis of Rule With and Without a Financial Test Option
    For this proposal, EPA sought to estimate the overall cost to the
public from potential industry defaults that could occur absent the
rule, versus the potential cost to industry under a rule without any
financial test provisions (Option 1). All quantitative analyses
conducted in relation to financial tests are more thoroughly described
within the ``Background Information Document for Financial Test Options
Analysis for Hardrock Mining Industry under CERCLA Sec.  108(b).''
    For purposes of analysis EPA adopted several assumptions. At the
time of these analyses, estimates were not yet available regarding the
amounts of the financial responsibility that individual companies would
be obligated to cover under this rule. Therefore, in order to
facilitate necessary analyses of options for a financial test, EPA
assumed an across-the-board obligation amount for all companies (both
at $50 million, as well as $200 million respectively).\132\ EPA also
assumed there would essentially be full recovery of instruments under
the rule, plus negligible recovery from bankruptcy proceedings.
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    \132\ While this assumption allows for comparison of a company's
cost accrual relative to other financial tests, it does not
correctly scale the obligation amount to the size of the company's
operations. To the extent that this amount overstates actual
obligations, specifically for smaller companies, the $50 million
coverage requirement may affect cost effectiveness determinations if
there is a systematic relationship between company size and
financial test passing rates.
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    The Agency's analyses puts the annualized response costs for public
taxpayers from bankruptcies and defaults at $1.22 billion in the
absence of any CERCLA Sec.  108(b) rule for the hardrock mining
industry. EPA also calculated that in order to eliminate such costs
borne by the public to the maximum extent possible, requiring financial
responsibility (absent a financial test) would result in additional
annualized costs to industry of approximately $488 million.
(b) Analytical Basis for the Proposed Financial Test
    EPA evaluated the No Test and a range of alternative Financial Test
options, incorporating a variety of financial metrics, to assess the
ability of these tests and metrics to predict the likelihood of
bankruptcy and ensure that sufficient funds are available to meet a
company's ongoing environmental commitments. The Agency evaluated all
candidate hardrock mining firms for which financial information was
available against a variety of financial test options, including tests
promulgated under other Federal statutes such as RCRA, and two ratings-
based options designed by EPA (referred to as the Investment Grade and
Higher-than-Investment-Grade Rating Tests).
    The least sensitive of the options considered looked at using a
test based solely on Investment Grade credit ratings. Under this test
option, all companies with a rating of BBB- or better qualify to self-
insure 100 percent of their financial responsibility obligations under
the rule.\133\ Similar, but somewhat more sensitive, is the option of
using the same test as that which is used under RCRA Subtitle C. The
RCRA Subtitle C Financial Test contains two alternative avenues by
which a company may successfully qualify for self-insurance (one with,
and one without a ratings-based threshold). To pass the test under RCRA
Subtitle C a company must either possess an investment grade rating on
its most recent bond issuance from Standard and Poor's or Moody's, or
must otherwise demonstrate that their financial status (including that
of total liabilities, net worth, net income, total assets, current
assets, and current liabilities) all meet certain minimum standards. In
order for companies to self-insure under either of these alternatives,
their tangible net worth must exceed their financial responsibility
obligations by a factor of six at a minimum (and not be less than $10
million), while their U.S. Assets must equal at least ninety percent of
their total assets (or be at least six times that of the financial
responsibility obligations).
---------------------------------------------------------------------------

    \133\ While this section refers to ratings according to the
notation used by S&P, the financial test option considers ratings
from S&P or an equivalent NRSRO for the purposes of assessing a
company's ability to meet the financial test requirements.
---------------------------------------------------------------------------

    EPA also developed a more sensitive ratings-based financial test
(the Higher-than-Investment-Grade Rating Test), which further limits
qualification for self-insurance to only those companies with a BBB or
better rating. Unlike the

other tests considered, companies with ratings of BBB- would not
qualify for any self-insurance under this test. Furthermore, this test
establishes a hybrid hierarchy whereby only companies with ratings of
A- or higher qualify at 100 percent, while those with ratings of BBB or
BBB+ qualify to self-insure no more than fifty percent of their
financial responsibility obligation. Lastly, because tangible net worth
and U.S. Asset requirements are frequently included as an important
feature of financial responsibility regulations, tangible net worth and
U.S. Asset limitations (similar to those stipulated under RCRA Subtitle
C) were added as a further component of the Higher-than-Investment-
Grade Rating Test.
(c) Analysis of Financial Test Options Considered
    EPA first assessed the relative costs borne by industry to maintain
a financial test, or in lieu of doing so, to obtain a third-party
instrument (industry's expected cost). EPA also assessed the costs that
may be borne by the public in the event a company defaults on its
obligations (public's expected default cost).
    Results of these analyses indicated that the estimated costs to
industry consistently increase, as the conditions of the alternative
financial tests become more sensitive and fewer companies qualify to
self-insure. As fewer companies are able to pass the test, they are
required to pay for third party financial responsibility instruments on
the open market, which comes at a cost. Conversely, as alternative
financial tests become more sensitive and fewer companies qualify to
self-insure, the potential for defaults decreases along with the
potential costs to the public associated with such potential defaults.
    Under the Investment Grade Ratings Test, EPA's analysis estimates
the annualized cost savings to industry at approximately $112.5
million. As a result of allowing the test, the public would in turn
experience potential costs in annualized dollars of approximately $19.6
million due to the possibility of a company defaulting in spite of
having passed the test. Similarly, estimates for the RCRA Subtitle C
Test, reveal marginally lower annualized cost savings to industry of
roughly $110.2 million, with the public bearing potential costs from
defaults valued at an annualized cost of $16.4 million.
    Under a Higher-than-Investment-Grade Rating Test (with and without
tangible net worth and U.S. Asset requirements), annualized cost
savings to industry range from $75.2 to $90.8 million, respectively.
Annualized costs to the public from potential defaults is further
diminished to between $10.4 and $12.0 million respectively. By creating
a stricter set of requirements, the Higher-than-Investment-Grade Rating
Test (with tangible net worth and U.S. Asset provisions) makes it more
difficult for companies with border-line investment grade ratings or
insufficient assets to qualify for self-insurance. In so doing, this
test further reduces the chance of defaults and potential costs to the
public precipitated by such defaults, as compared to the other
financial tests considered.
    The Higher-than-Investment-Grade Rating Test is also the only
option designed to carry with it a provision allowing a company to
cover only a portion of its obligations depending on its current
rating. Companies with lower relative ratings (BBB and BBB+) may only
self-insure for up to 50 percent of their financial responsibility
obligation. Such lower rated companies are not only at greater risk of
default, but may also enter into default at a faster pace than
companies rated at A or better, based on probability of default
estimates for companies in different ratings tranches as seen in
historical default studies done by NRSROs. Consequently, this tailored
feature of the Higher-than-Investment-Grade Rating Test helps to
further diminish the potential costs to the public relative to other
financial tests, while still allowing some level of self-insurance in
recognition of the creditworthiness of companies with investment grade
ratings of BBB or higher.
(d) Analysis of Bankruptcy and Predictiveness of Alternative Tests
    The Agency endeavored to craft a test that would be able to predict
bankruptcy in the hardrock mining industry. To assess both the no test
proposal and that of the financial test options in this respect, the
Agency collected as much financial information as possible for each of
3 years proceeding identified bankruptcies that had historically
occurred among hardrock mining companies. This data was matched with
bankruptcies in the industry identified over a 35-year period spanning
1980 to 2015, resulting in a sample of 25 unique occurrences of
bankruptcies in this industry for which data is available. The
financial data for each of these bankruptcies were then used to assess
whether any of these companies would have been capable of passing any
of the alternative tests, in each of the 3 years before entering
bankruptcy. Of the tests considered, it was the Higher-than-Investment-
Grade Rating Test (with Tangible Net Worth and U.S. Asset thresholds)
that performed best in disqualifying companies from passing the test
during the three-year period before they ultimately went bankrupt.
    Indeed, the Agency's analysis shows that of the 25 hardrock mining
bankruptcies for which data were available, the proposed test would
have completely screened out 24 of the 25 companies at least three
years in advance of bankruptcy. However, even in the case of the one
company that the test did not screen out, the Higher-than-Investment-
Grade Rating Test succeeded in restricting the level of self-insurance
for which they qualified to just fifty percent of its financial
responsibility obligations (instead of 100 percent). This resulted from
the hybrid feature of the proposed Higher-than-Investment-Grade Rating
Test. This offers evidence of the effectiveness of the hybrid approach
included in the proposed test in meeting its objective of reducing the
exposure to unfunded costs (by fifty percent) for the subset of
companies with higher expected bankruptcy rates and ratings below that
of an A rating.
    Further, since a BBB rating forms the minimum basis for whether a
company can qualify for any self-insurance of their financial
responsibility obligation, EPA conducted further analyses to evaluate
this ratings threshold more specifically. In particular, the Agency
sought to assess fluctuations in BBB ratings in relation to previous
bankruptcies in the hardrock mining industry. By looking at the
historical record of rating shifts below the BBB threshold, the Agency
sought to obtain perspective on how often BBB-rated companies
experienced ratings downgrades, how susceptible companies were to
receiving speculative-grade ratings after previously having been rated
BBB, and how quickly they may have entered bankruptcy subsequent to
their ratings having dropped to below BBB.
    To assess these questions, EPA collected data on 102 hardrock
mining companies that were rated by S&P at least once between 1984 and
2010. These companies reflected both hardrock mining companies
(targets), and parents of hardrock mining companies (parents) who might
ultimately be in a position to provide a corporate guarantee for their
subsidiaries' obligations. The inclusion of parent companies within the
scope of these analyses furthermore supplemented the Agency's analysis
where hardrock mining target company data were unavailable.
    Based on the data available from the 26-year sample period, the
Agency's

analyses identified only four bankruptcies of companies (out of 36)
that had ever historically been rated at the BBB level.\134\ In the
case of these bankruptcies, only one of these mining companies entered
bankruptcy within one year following a drop in its BBB rating. While
the company had retained BBB or better ratings presumably due to their
strength and longevity, they ultimately succumbed to multimillion-
dollar asbestos claims over a very short period. Of the other three
companies entering bankruptcy within the sample period, two did so
within three years of a downgrade, and the other entered bankruptcy 17
years later.
---------------------------------------------------------------------------

    \134\ One additional bankruptcy occurred by a company who had
never been rated BBB, but had been previously downgraded from BBB+
to BB-.
---------------------------------------------------------------------------

    What these results suggest are that relatively few bankruptcies
were shown to have occurred for companies rated at BBB. The results
also suggest that while ratings fluctuations do occur, such
fluctuations generally do not signal an unfailing decline towards
bankruptcy. Thirdly, they suggest that when a company that has been
rated at investment grade does experience a ratings decline and
ultimately defaults, this process is likely to take one or more years
for such relatively solid enterprises to enter into bankruptcy. In such
instances, the proposed annual Higher-than-Investment Grade Rating Test
(combined with RA notification requirements when a company's
qualification for the financial test ceases) will alert regulators as
to the company's inability to pass the Higher-than-Investment-Grade
Rating Test. Therefore, it appears that establishing the cutoff for
passing the proposed test at a rating of BBB or above is well
justified. Setting the ratings threshold at BBB, prevents companies
with ratings of BBB- or below from passing the Higher-than-Investment-
Grade Rating Test. This is designed to help ensure that there is
sufficient time for the Agency to intercede and enforce the test
requirements should a company's rating begin to decline.
Summary
    EPA is proposing two options--to not allow a financial test (Option
1--preferred option), and to allow a ``Higher-than-Investment-Grade
Rating Test'' (Option 2). EPA believes that not allowing a financial
test would best avoid undue costs to the Government and to the public
from unsecured environmental obligations that companies may be unable
to cover when they go into default or bankruptcy, and that it would
eliminate administrative burden upon the Agency associated with the
review and verification of financial statements and attestations from
financial test submissions.
    Alternatively, the ``Higher-than-Investment-Grade Rating Test'' is
being proposed, as it was the best financial test, from among those
considered, at providing cost savings to industry while limiting the
risks to the Government and the public. The Higher-than-Investment-
Grade Rating Test was selected as the least risky option for the co-
proposal, relative to the other tests considered, because it results in
the lowest expected potential costs that may be borne by the
Government, while offering significant cost savings to industry. In
addition, the Higher-than-Investment-Grade Rating Test performed better
than the other tests at predicting which owners or operators may have a
higher potential for defaulting on their obligations. Finally, the
Higher-than-Investment-Grade Rating Test also takes advantage of
publically available credit analyses conducted by independent ratings
agencies as a way to help lower administrative burdens on both industry
and the Government.
    EPA solicits comment on both proposed options.
5. Corporate Guarantee (Sec.  320.44) (Option 2 Only)
    Under proposed Option 2, which would allow a financial test, EPA
also is proposing to allow owners and operators to demonstrate
financial responsibility by obtaining a written corporate guarantee
from another firm that meets the financial test requirements. The
corporate guarantee serves as a contract through which a related firm
guarantees to third-party CERCLA claimants that it will make payment
for CERCLA response costs, health assessment costs, and/or natural
resource damages as provided in the guarantee.
a. Issuer Eligibility (Sec.  320.44(b) and (c))
    The Agency would allow guarantees from the direct or higher-tier
parent corporation of the owner or operator, a firm owned by the same
parent corporation as the owner or operator, or a firm with a
substantial business relationship with the owner or operator. These
potential guarantors are the same as those allowed to provide
guarantees under the RCRA Subtitle C Closure and Post-closure financial
assurance and third-party liability regulations.
    Initially, under the RCRA Subtitle C financial assurance
requirements for closure and post-closure care, EPA allowed for
guarantees provided only by immediate corporate parents believing that
that relationship between the owner operator and the guarantor would
aid in the enforceability of the guarantee and its strength. Further,
EPA adopted a definition of ``parent corporation'' to ensure the
relationship was close and direct.\135\ EPA is proposing the same
definition of parent corporation as employed in the RCRA Subtitle C
financial assurance program. EPA believes that the definition will be
familiar to the regulated community and EPA implementers which should
ease implementation efforts. Furthermore, because the definition
ensures that the connection between the parent and the subsidiary is
close and direct, the parent will likely have a strong interest in the
financial and environmental performance of the subsidiary and the
facility which the Agency believes strengthens the guarantee. The
proposed definition of parent corporation is ``a corporation that which
directly owns at least fifty percent of the voting stock of the
corporation which is the facility owner or operator; the latter
corporation is deemed a `subsidiary' of the parent corporation.''
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    \135\ See Standards Applicable to Owners and Operators of
Hazardous Waste Treatment, Storage, and Disposal Facilities;
Financial Assurance Requirements, 47 FR 15037 April 7, 1982; and See
Standards Applicable to Owners and Operators of Hazardous Waste
Treatment, Storage, and Disposal Facilities; Financial Assurance
Requirements; Liability Coverage, 51 FR 25350 @253511 July 11, 1986.
---------------------------------------------------------------------------

    However, EPA received several comments on the July 11, 1986 interim
final rule that urged EPA to allow non-parent firms to provide
guarantees. EPA analyzed the validity and enforceability of guarantee
contracts by non-parent firms and decided to authorize the guarantees
provided by ``sibling'' firms (firm whose parent corporation is also
the parent corporation of the owner or operator) and firms with a
substantial business relationship with the owner or operator in the
third party liability regulations provided they were able to provide
certain additional information.\136\ EPA later authorized non-parent
guarantors in the closure and post-closure regulations as well.\137\
EPA has determined that guarantees issued by non-parent corporations
can be valid and enforceable when they are issued in accordance with
the regulations and thus EPA proposes this same suite of potential
guarantors in this proposal provided they supply the same necessary
information to make the guarantee enforceable as required under the
RCRA Subtitle C regulations. Specifically, if the guarantor's parent
corporation is also the parent

corporation of the owner or operator, the letter from the guarantor's
CFO would have to describe the value received in consideration of the
guarantee. If the guarantor is a firm with a ``substantial business
relationship'' with the owner or operator, this letter would be
required to describe this ``substantial business relationship'' and the
value received in consideration of the guarantee. These proposed
descriptions were determined by EPA to be important in ensuring the
ultimate validity and enforceability of the guarantee contract in past
Agency financial responsibility rulemakings. Under fundamental
principles of contract law, contracts must be supported by
``consideration.'' Consideration is generally defined as a legal
detriment that has been bargained for and exchanged for the promise.
The general principle underlying the concept of consideration is that
the law will not enforce gratuitous promises.
---------------------------------------------------------------------------

    \136\ See 53 FR 33941, September 1, 1988.
    \137\ See 57 FR 42833, September 16, 1992.
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    For the demonstration of sufficient consideration for the contract
if the guarantor has a substantial business relationship with the owner
or operator, the guarantor must describe the substantial business
relationship in a way that would meet the proposed definition. EPA is
proposing the same definition of substantial business relationship as
used in the RCRA Subtitle C financial assurance program which
recognizes that no single legal definition exists of what constitutes a
business relationship between two firms that would justify upholding a
guarantee between them and that such a determination would depend upon
the application of the laws of the States of the involved parties. The
proposed definition of substantial business relationship is ``the
extent of a business relationship necessary under applicable State law
to make a guarantee contract issued incident to that relationship valid
and enforceable. A ``substantial business relationship'' must arise
from a pattern of recent or ongoing business transactions, in addition
to the guarantee itself, such that a currently existing business
relationship between the guarantor and the owner or operator is
demonstrated to the satisfaction of the Administrator.''
    In addition, if the guarantor's parent corporation is also the
parent corporation of the owner or operator or if the guarantor is a
firm with a ``substantial business relationship'' with the owner or
operator the letter from the guarantor's CFO would have to describe the
value received in consideration of the guarantee. In some cases,
preexisting business relationships, no matter how substantial, will be
insufficient by themselves to demonstrate consideration because they
will not have been bargained for to induce the promise in the guarantee
contract. For this reason, these guarantors must also describe the
consideration for the contract in the letter from their chief financial
officer. As mentioned earlier, these requirements are the same as under
the RCRA Subtitle C financial assurance closure post-closure and third-
party liability financial assurance programs. These requirements would
be familiar to the regulated community and the regulators familiar with
RCRA financial assurance and were based on analysis to ensure the
enforceability of the contract.
    Furthermore, EPA would allow a guarantee from a non-U.S. guarantor
that meets the financial test requirements outlined in the proposed
regulations provided the guarantor also has identified a registered
agent for service of process in the state in which the facility covered
by the guarantee is located and in the state in which it has its
principal place of business. This requirement is identical to that
required in the RCRA third party liability regulations and was required
to ensure a non-US guarantor be subject to enforcement proceedings in
the U.S. The function of the agents is to accept service of process for
the guarantor corporation for legal actions in a given state.\138\ In
addition, and as described earlier, all guarantors would have to pass
the financial test requirements including a U.S. assets requirement.
The Agency has included U.S. Assets requirements to ensure assets are
available in the United States to be levied against if a judgment is
entered against the guarantor.\139\ EPA believes this situation is
similar and wants similar assurance that there are assets available in
the U.S. should claimants need to recover funds from the guarantor.
---------------------------------------------------------------------------

    \138\ See 52 FR 44317, November 18, 1987.
    \139\ See 52 FR 44317, November 18, 1987
---------------------------------------------------------------------------

    The guarantor would be required to provide the same evidence and
supporting documentation that the guarantor passes the financial test.
In addition, the guarantor would be required to submit a signed copy of
the guarantee and comply with the terms in the guarantee. The wording
in the guarantee would have to be identical to that specified in Sec.
320.50(f).
b. Wording of the Corporate Guarantee (Sec.  320.50(f))
    In developing the proposed corporate guarantee language EPA looked
to the guarantee language used in the RCRA Subtitle C program. Those
guarantees were the product of iterative proposals, responses to
comment and EPA analysis.
    In the proposed CERCLA Sec.  108(b) guarantee, the guarantor would
guarantee payment up to the most current CERCLA Sec.  108(b) financial
responsibility amount required at each facility covered by the
guarantee exclusive of any legal defense costs incurred by the
guarantor in the same three scenarios for which the other instruments
intend to provide financial responsibility (discussed later in this
preamble). The value of the guarantee thus is designed to adjust with
the value of the CERCLA Sec.  108(b) financial responsibility amount.
As evidence that the guarantor passes the financial test, the guarantor
would be required to submit the letter from its CFO that identifies,
for all the facilities for which it is providing a corporate guarantee,
the amount of CERCLA Sec.  108(b) financial responsibility covered by
the guarantee. This would occur annually or as required by a change in
the CERCLA Sec.  108(b) financial responsibility amount. The CERCLA
Sec.  108(b) financial responsibility amounts covered by the guarantee
identified in the CFO letter at each facility would serve as the basis
for the value of the guarantee under the proposed guarantee language.
    A similar arrangement is used in the RCRA Subtitle C closure post-
closure guarantee whereby the value of the guarantee is linked to the
current closure and post-closure cost estimates. The RCRA Subtitle C
closure and post closure guarantee provides that, if the owner or
operator fails to perform closure or post closure care of the
facilities covered by the guarantee in accordance with the closure or
post-closure plans and other permit or interim status requirements
whenever required to do so, ``the guarantor shall do so or establish a
trust fund as specified in subpart H of 40 CFR part 264 or 265, as
applicable, in the name of [owner or operator] in the amount of the
current closure or post-closure cost estimates as specified in subpart
H of 40 CFR parts 264 and 265. In this way the value of the guarantee
adjusts without required amendments or modifications to the guarantee.
EPA is proposing that the value of the guarantee similarly adjust to
the current CERCLA Sec.  108(b) financial responsibility amount.
    To help effectuate this intent, the proposed language of the
corporate guarantee would require the guarantor to agree to comply with
the reporting requirements for guarantors and to report the full amount
of CERCLA Sec.  108(b) financial responsibility for

which it is eligible to cover as determined by the financial test
criteria for each facility covered by the guarantee in the letter from
its CFO. EPA believes it is necessary for the guarantor to report the
full amount of CERCLA Sec.  108(b) financial responsibility for which
it is eligible to cover as determined by the financial test criteria
for each facility covered by the guarantee in the letter from its CFO
as those amounts would form the basis of the guarantor's potential
liability under the guarantee. If the guarantor was able to report an
amount lower than the maximum amount for which the guarantor is allowed
to cover under the financial test criteria, the guarantor could
unilaterally adjust the ``value'' of the guarantee downwards by
reporting some percentage of the maximum amount. Such a provision is
not necessary in the RCRA Subtitle C closure post-closure guarantee as
the owner operator is responsible for preparing the cost estimates and
thus the guarantor could not unilaterally change the ``value'' of the
guarantee.
    An alternative approach would be to include specific dollar values
for each facility in the guarantee itself as the basis of the
guarantor's liability. Under this option, the guarantee would have to
be amended or modified regularly as the amounts of CERCLA Sec.  108(b)
financial responsibility changed and create additional reporting
burdens. Further, EPA anticipates that potential guarantors will
typically seek to provide a guarantee for the maximum amount allowable
under the regulations to realize the maximum cost savings.
Nevertheless, EPA requests comment on the proposed arrangement whereby
the guarantor's liability is linked to the current CERCLA Sec.  108(b)
financial responsibility amount and does not require regular amendment
of the guarantee as well as the alternative whereby the guarantee would
specify specific dollar amount and would require routine amendment.
c. Payment for CERCLA Response Costs, Health Assessment Costs, and/or
Natural Resource Damages From the Guarantee
    The proposed language of the corporate guarantee would allow
claimants to make claims against the guarantor under three scenarios in
addition to the direct action scenario. First, in the event that
payment was not made for CERCLA response costs, health assessment
costs, and/or natural resource damages associated with the facility as
required in a final court judgment from a Federal court against one of
the current owners or operators within thirty days, the guarantor would
do so. Secondly, in the event that payment is not made as required in a
CERCLA settlement associated with the facility between a current owner
or operator and EPA or another Federal government agency, the guarantor
would do so. Third, in the event that performance does not occur as
required at the facility under a CERCLA unilateral administrative order
issued to a current owner or operator by EPA or another Federal agency
and for which the owner or operator provided a written statement
allowing the guarantee to serve as financial responsibility assuring
the work in the order, the guarantor would make payment into a trust
fund established pursuant to the order.
    The payment scenarios in the proposed guarantee are analogous to
those in the other instruments proposed today. Similar documentary
requirements are also required for a claimant to receive payment under
these three scenarios in the proposed guarantee. Specifically, under
the terms of the proposed guarantee, the guarantor would satisfy a
third-party CERCLA claim on receipt of specific documents. Claimants
seeking satisfaction of a valid final court judgment from a Federal
court awarding payment for CERCLA response costs, health assessment
costs, and/or natural resource damages associated with the facility
against any of the current owners or operators at the facility that had
not been satisfied within thirty days would need to submit the final
court judgment itself. In addition, the claimant would need to submit a
signed statement from the claimant certifying that the amounts had not
been recovered or paid from any other source, including, but not
limited to, the owner operator, insurance, judgments, agreements, and
other financial responsibility instruments. These documentary payment
requirements were selected as it removes EPA from the claims
administration process but ensures that a court has determined that
payment is due to the party making the claim under CERCLA and that the
party has not already recovered or been paid the funds from another
source. EPA believes that guarantors will be able to review such
objective documentary submissions and determine whether payment should
occur under the terms of the guarantee. A similar provision requiring
the submission of a valid final court order is required in the RCRA
third party liability guarantee (see 40 CFR 264.151(h)(2)).
    In the payment scenario where payment was not made as required in a
CERCLA settlement associated with the facility between a current owner
or operator and EPA or another Federal government agency, Administrator
or another Federal agency may make a claim by presenting two documents
to the guarantor for payment. The first document would be a written
signed statement from the Administrator or another Federal government
agency requesting payment from the guarantor on the grounds that
payment had not been made as required by a CERCLA settlement associated
with the facility and with any of the current owners or operators. The
second document is the signed statement from the claimant certifying
that these amounts have not been recovered or paid from any other
source, including, but not limited to, the owner operator, insurance,
judgments, agreements, and other financial responsibility instruments.
    In the payment scenario where performance at the facility does not
occur as required under a CERCLA unilateral administrative order issued
to a current owner or operator, the Administrator or another Federal
agency may make a claim by presenting a similar set of two documents as
described earlier in the settlement scenario to the guarantor for
payment. Specifically, the first document required to make a claim in
this scenario under the terms of the proposed guarantee would be a
written signed statement from the Administrator or other Federal
government agency requesting payment from the Guarantor into a trust
fund established pursuant to a CERCLA unilateral administrative order
on the grounds that performance at the facility had not occurred as
required by a CERCLA administrative order issued to a current owner or
operator. The second document that would be required to make a claim
under this scenario would be a signed statement from the claimant
certifying that these amounts have not been recovered or paid from any
other source, including, but not limited to, the owner operator,
insurance, judgments, agreements, and other financial responsibility
instruments.
    EPA believes, similar to the case of the letter of credit issued in
favor of any and all third-party CERCLA claimants, the trust fund and
the surety bond, that in instances where the claimant is a Federal
government agency acting pursuant to delegated CERCLA authority a
simpler set of documentary requirements are appropriate. EPA believes
the relatively simple requirements of signed statements from EPA or
another Federal agency acting pursuant to delegated CERCLA authority
will streamline the claims

process and reduce uncertainty as to whether or not payment should be
made under the terms of the guarantee. EPA requests comment on the
proposed documentary requirements for payment from the guarantee.
    In addition to the three defined payment scenarios, the guarantor
could also be subject to direct action under CERCLA Sec.  108(c)(2).
Specifically, the proposed terms of the guarantee include an explicit
acknowledgement that in the case of a release or threatened release of
(a) hazardous substance(s) from a facility covered by the guarantee,
any claim authorized by Sec.  107 or Sec.  111 of CERCLA may be
asserted directly against the guarantor as provided by CERCLA Sec.
108(c). Further, the proposed terms of the guarantee require that the
guarantor consents to suit with respect to these claims subject to the
limitations in CERCLA Sec.  108(d) and acknowledge that the guarantor
would be entitled to the rights and defenses provided to guarantors by
the statute in Sec.  108(c). Finally, under the proposed language of
the guarantee, the guarantor would agree to provide notice of any
claims and payments resulting from a direct action to the
Administrator. EPA believes this notification requirement is valuable
as the owner operator may not be around to provide such a notice of
claims and payments in a direct action scenario yet EPA wishes to
remain informed of claims against the instrument and of the value of
the financial responsibility.
    The proposed language of the guarantee would also explicitly
specify that the limit of the guarantor's liability under the guarantee
would be exclusive of legal defense costs incurred by the guarantor. A
similar provision is being proposed for insurer and surety liability
today. To the maximum extent possible, EPA would like the value of the
financial responsibility be preserved for the payment of valid third-
party CERCLA claims. EPA requests comment on this proposed provision.
d. Notification Requirements in the Guarantee
    The proposed language of the CERCLA Sec.  108(b) corporate
guarantee also includes several other notification requirements. First,
under the proposed language, the guarantor would agree that if, at any
time before the termination of the guarantee, the guarantor fails to
meet the financial test criteria, guarantor shall send within ninety
days, by certified mail, notice to the Administrator and to the owner
or operator that he intends to provide alternate financial
responsibility as specified in Subpart C of 40 CFR part 320 in the name
of the owner or operator. A similar provision is also employed in the
RCRA Subtitle C closure post closure and third-party liability
guarantee. The provision would provide EPA notice that the guarantee no
longer passes the financial test and an acknowledgment from the
guarantor that he intends to provide alternate financial responsibility
as required under the terms of the guarantee should the owner or
operator fail to do so. EPA believes it is important for the Agency to
receive prompt notice of the guarantor's inability to continue to pass
the financial test as the guarantor's financial strength is
foundational to the efficacy of the guarantee. Further, EPA believes
that it is not just consistent with past precedent but important that
the guarantor be responsible for obtaining alternate financial
responsibility in these instances. The proposed provision helps limit
the risk that, in instances when a guarantor no longer passes the
financial test, the facility will be left without alternate financial
responsibility.
    Likewise, the proposed terms of the guarantee would require the
guarantor to agree that within thirty days after being notified by the
Administrator of a determination that the guarantor no longer meets the
financial test criteria or that he is disallowed from continuing as a
guarantor, the owner or operator would be required to establish
alternate financial responsibility as specified in Subpart C of 40 CFR
part 320, as applicable, in the name of the owner or operator unless
the owner or operator had done so. This provision serves the same
intent as the provision described earlier--that the guarantor be
responsible for obtaining alternate financial responsibility in an
instance where the guarantor notices EPA that it no longer passes the
financial test. The provision helps limit the risk that, in instances
when a guarantor no longer passes the financial test, the facility will
be left without alternate financial responsibility. This would be a
very similar requirement to those used in the RCRA Subtitle C corporate
guarantees so the regulated community should be familiar with the
provision.
    Under the proposed terms of the guarantee the guarantor would also
be required to notify the Administrator by certified mail, of a
voluntary or involuntary proceeding under Title 11 U.S.C. (Bankruptcy),
naming the guarantor as debtor, within ten days after commencement of
the proceeding. This provision is also required in both the RCRA
Subtitle C closure post closure and third-party liability guarantees.
EPA recognizes the value of this notification provision and proposes
its inclusion to the CERCLA Sec.  108(b) guarantee in order for EPA to
be promptly notified of such indicators of the guarantor's financial
distress.
    Finally, under the proposed terms of the guarantee, the guarantor
would need to send a notice by certified mail to the Administrator and
to the owner operator of its intent to terminate the guarantee. The
intent of this provision is to provide notice to the Administrator and
the owner operator that the guarantor wishes to cease providing a
guarantee on behalf of the owner operator. Such a provision helps
ensure continuity of financial responsibility coverage.
e. Provisions in the Guarantee Ensuring Continuity of Coverage
    As described earlier, under the proposed terms of the guarantee,
the guarantor would need to send a notice by certified mail to the
Administrator and to the owner operator of its intent to terminate the
guarantee. The corporate guarantee would remain in force and may not be
terminated unless and until the owner or operator obtains, and the
Administrator approves alternate financial responsibility. If the owner
or operator failed to provide alternate financial responsibility as
specified in the regulations and obtain the written approval of such
alternate financial responsibility from the Administrator within ninety
days after receipt by both the owner or operator and the Administrator
of a notice of termination of the corporate guarantee from the
guarantor, the guarantor would be required, under the terms of the
guarantee, to provide such alternative financial responsibility in the
name of the owner or operator. This provision would ensure the
continuity of financial responsibility and is similar to that required
for the other instruments. However, in the case of the guarantee,
unlike the other instruments, the guarantor would not necessarily need
to fund a trust fund. The guarantor could choose from the range of
acceptable financial responsibility instruments when obtaining a
financial responsibility mechanism on behalf of the owner or operator.
This provision, and the similar provisions for other proposed
instruments, as well as alternatives are discussed in more depth in the
preamble section headed `issuer cancellation provisions.'
f. Requirements for Attorneys General or Insurance Commissioners
written statements (Sec. Sec.  320.44(f) and (g))
    In the case of corporations incorporated in the United States, a
guarantee would only be able to be used

to satisfy the CERCLA Sec.  108(b) financial responsibility
requirements if the Attorneys General or Insurance Commissioners of the
State in which the guarantor is incorporated, and each State in which a
facility covered by the guarantee is located have submitted a written
statement to EPA that a guarantee executed as described in the
regulations at Sec. Sec.  320.44 and 320.50(f) is a legally valid and
enforceable obligation in that State.
    For non-US corporate guarantors a guarantee would be able to be
used to satisfy the CERCLA Sec.  108(b) financial responsibility
requirements only if the Attorney General or Insurance commissioner of
each state in which a facility covered by this guarantee is located and
the state in which the guarantor corporation has its principal place of
business has submitted a written statement to EPA that a guarantee
executed as described in the regulations and Sec. Sec.  320.44 and
320.50(f) is a legally valid and enforceable obligation in that State.
    These requirements for written statements from state Attorneys
General and Insurance Commissioners are similarly used in the RCRA
Subtitle I Underground Storage Tank financial responsibility
regulations and the RCRA Subtitle C third-party liability regulations.
The reason for the requirements is that EPA is concerned that
guarantors may be subject to states insurance laws.\140\ State
insurance regulation and law are by and large the purview of the states
and thus the Agency does not believe it can state with certainty
whether any particular guarantee would subject the guarantor to state
insurance law, and whether it would be valid with respect to such law.
Therefore, the Agency is today proposing that the responsibility would
rest with the owner or operator to obtain the written statement from
the relevant state Attorneys General and Insurance Commissioners
stating that a guarantee as described and worded in the regulations
would be valid and enforceable. EPA invites comments as to whether or
not this requirement would be necessary or on alternative means by
which the owner or operator could provide assurances to the Agency that
the guarantee would be valid and enforceable.
---------------------------------------------------------------------------

    \140\ See, for example, Liability Requirements for Hazardous
Waste Facilities; Corporate Guarantee, 52 FR 44314 @ 44316-44317;
and Standards Applicable to Owners and Operators of Hazardous Waste
Treatment, Storage, and Disposal Facilities; Liability Coverage 53
FR 33938 @ 33942, September 1, 1988.
---------------------------------------------------------------------------

6. Trust Fund (Sec.  320.45)
    An owner or operator would be able to satisfy the proposed CERCLA
Sec.  108(b) financial responsibility requirements by establishing a
trust fund in accordance with the proposed requirements including the
proposed required wording. Funds transferred to the trust fund by the
owners and operators or any letters of credit held by the trust would
be held in the trust for the purpose of paying valid third-party CERCLA
claims in certain circumstances identified in the trust agreement. In
this way, the trust fund acts as a means of self-insurance whereby the
owner and operator set aside funds to pay future claims which otherwise
may not be satisfied at such a future date.
a. Submission of Trust Agreement and Trustee Eligibility (Sec.
320.45(a))
    The owner or operator would be required to submit an originally
signed duplicate of the trust agreement to the Administrator. This is a
similar reporting requirement to those under EPA's RCRA Subtitle C
financial assurance regulations and aids in the evaluation of
compliance. The Agency does not anticipate this to be a significant
burden to owners and operators. The trustee would be required to be an
entity that has the authority to act as a trustee and whose trust
operations are regulated and examined by a Federal or state agency.
This requirement is the same as that under the RCRA Subtitle C
financial assurance program, which EPA required in order to establish a
minimal level of reliability and security for trustee institutions
managing trust funds under the Agency's financial assurance regulations
(see 46 FR 2824, January 12, 1981). EPA considered alternative
qualifications for trust providers but is proposing to utilize those
that EPA has found to work well under the RCRA Subtitle C program. In
making this decision, EPA considered the impact on the potential number
of trustees and the administrative burden on EPA of reviewing
additional qualifications. For more information on the consideration of
alternative provider qualifications, please see the background document
on instrument provider qualifications.
b. Required Wording and Updates to Schedule A of Trust Agreement (Sec.
320.45(b))
    The wording of the trust agreement would be required to be
identical to the wording specified in Sec.  320.50(a)(1), and the trust
agreement would be required to be accompanied by a formal certification
of acknowledgment (for example, see Sec.  320.50(a)(2)). As discussed
in the introduction to Subpart C of the preamble ``Available Financial
Responsibility Instruments'' EPA believes there are significant
benefits to standardized wording. Namely, a standardized trust
agreement reduces the administrative burden of reviewing the wide range
of possible trust agreement wording that may otherwise be employed and
ensures uniform integration with the Superfund program and enforcement
of the CERCLA Sec.  108(b) instruments nationwide. The trust agreement
would be required to be accompanied by a formal certificate of
acknowledgment. The language of the acknowledgment would be expected to
vary by state to accommodate individual state requirements but the
intent would be to ensure the validity and authenticity of the
signatures on the trust agreement. This requirement exists for trust
agreements in other EPA financial responsibility programs,\141\ and
adds to the legal standing and enforceability of the instrument.
---------------------------------------------------------------------------

    \141\ See, for example, 40 CFR 264.151(a)(2) and 280.103(b)(2).
---------------------------------------------------------------------------

    Under the proposed regulations, Schedule A of the trust agreement,
which would identify the facilities covered by the trust agreement and
their EPA Identification Numbers, names, addresses, current owners and
operators, and the current financial responsibility amount, or portions
thereof, for which financial responsibility is being demonstrated by
the trust agreement, would have to be updated within sixty days of a
change in the amount of CERCLA Sec.  108(b) financial responsibility at
a facility covered by the agreement. Maintaining the accuracy of the
information in Schedule A, including the current amount of CERCLA Sec.
108(b) financial responsibility the trust fund is covering at each
facility, would be important to ensure the trustee would have an
accurate accounting of the value of CERCLA Sec.  108(b) financial
responsibility for each facility covered. This amount would serve as an
upper bound for the value of payments made for valid third-party CERCLA
claims associated with any given facility.
c. Payments Into the Trust (Sec.  320.45(c))
    Payments by the owner or operator into the trust fund would be
required so that the value of the trust fund would be at least as great
as the required CERCLA Sec.  108(b) financial responsibility amount.
For existing facilities subject to this proposed rule, these payments
would be made by the owner or operator in accordance with

the compliance schedule for the CERCLA Sec.  108(b) financial
responsibility regulations in proposed Sec.  320.1. The trust fund
would thus need to be fully funded within four years of the owner
operator being subject to the regulations. In addition to payments,
this requirement would also be able to be met by obtaining a letter of
credit that conforms to the requirements of the proposal and is held by
the trust. The four-year implementation window established by the
statute and discussed earlier would thus serve as the trust fund's pay-
in period.
    EPA is aware that four years is shorter than the pay-in period
provided by some EPA financial assurance programs. However, under the
proposed regulations owners and operators would be allowed to use a
combination of instruments to demonstrate the required CERCLA Sec.
108(b) financial responsibility amount. Owners and operators would thus
be able to simulate a longer trust fund pay-in period by combining the
trust fund with another appropriate instrument. The trust fund could be
funded over a longer period of time with the unfunded portion of the
trust provided by a separate instrument. EPA believes this would help
relieve any burdens that may be encountered because of the relatively
short pay-in period required by the statute.
    For new facilities, owners and operators would also be required to
make payments into the trust fund so that the value of the trust fund
is at least as great as the required CERCLA Sec.  108(b) financial
responsibility amount. However, in these cases there would not be a
pay-in period as is provided for existing facilities by the four-year
implementation period in the statute. For this first CERCLA Sec.
108(b) rule, EPA expects that new hardrock mining facilities would
likely have lower financial responsibility amounts as their footprint
would be smaller initially and then grow over time, obviating the need
for a pay-in period. EPA requests comment on the need for a pay in
period for new facilities. EPA is specifically interested in comments
as to the appropriate length of a pay-in period that could be provided
for new facilities.
d. Language of the Trust Agreement (Sec.  320.50(a))
    In developing required trust agreement language for this proposed
rule, EPA first looked to the trust agreement language used in the RCRA
Subtitle C financial assurance program. The basic terms and conditions
of the RCRA Subtitle C trust agreement were defined by EPA in close
consultation with trust experts at the American Banking Association and
legal practitioners in the late 1970s and early 1980s. Additionally,
the trust agreement was published for public comment multiple times.
The required wordings of the RCRA trust agreements have served as
templates adopted by other financial responsibility programs, both
within EPA and across many States. This proposal includes proposed
trust agreement language primarily modified to suit the needs of the
proposed CERCLA Sec.  108(b) financial responsibility program. The most
significant aspects of the proposed trust agreement are discussed in
following sections. Please also see the background document ``Potential
Requirements for Insurance, Surety Bonds, Letters of Credit and Trust
Agreements and Standby Trust Agreements under CERCLA Sec.  108(b)''
that discusses potential instrument specifications and alternatives
considered for more information on the proposed trust agreement
specifications.
e. Specification of Beneficiary of the Trust Agreement
    The proposed trust agreement language specifies that the trust fund
is established for the benefit of any and all parties with valid third-
party CERCLA claims against the grantor or other current owners and
operators arising from the operation of the facilities covered by the
agreement. EPA elected to propose such a beneficiary specification as
the Agency believes it provides adequate flexibility to accommodate the
various payment scenarios envisioned by the trust agreement and the
CERCLA Sec.  108(b) regulations. The RCRA Subtitle C closure post-
closure trust agreement specifies EPA as beneficiary. However, due to
the potential for multiple claimants including, but not limited to,
EPA, the Agency considered such an arrangement sub-optimal. In such an
arrangement, EPA would need to review all claims and assess the merits
of the claims and direct payment from the trust fund accordingly. As
discussed earlier in the letter of credit section, there are several
draw backs to EPA administering the claims process. These draw backs
include the redirection of Superfund resources to claims administration
activities and away from cleanups or other programmatic priorities,
frustrating the intent of the direct action provision and the potential
for EPA to be in the awkward position of administering a claims process
in which it is a potential claimant.
    As a result, EPA elected a variation of the beneficiary
specification employed in the RCRA Subtitle C third-party liability
program that identifies ``any and all third parties injured or damaged
by [sudden and/or non-sudden] accidental occurrences arising from
operation of the facility(ies) covered by'' the trust agreement as
beneficiaries. EPA believes that the proposed beneficiary specification
provides adequate flexibility in that parties that obtain final court
judgments or have other valid third-party CERCLA claims against one of
the current owners or operators for CERCLA response costs, health
assessment costs, or natural resource damages associated with the
facility could make a claim without having to be specifically named in
the trust agreement (see discussion of claims against the trust fund in
following sections). At the same time, EPA intends that the beneficiary
language combined with the payment instructions in the trust agreement
will provide adequate clarity to trustees as to when to make payment
from the trust fund. The EPA requests comments on the proposed
specification of the beneficiary of the CERCLA Sec.  108(b) trust
agreement.
f. Claims Against the Trust Fund
    Claims against the trust fund could be made by parties with valid
third-party claims for CERCLA response costs, health assessment costs,
and/or natural resource damages against one of the current owners or
operators at the facility.
    Under the proposed regulations, the trust would be available to
claimants that obtain a final court judgment from a Federal court
against any of the current owners or operators at the facility awarding
CERCLA response costs, health assessment costs, and/or natural resource
damages associated with the facility should payment not occur as
required by the judgment within thirty days. Under the proposed terms
of the trust, the claimant would need to present the valid final court
judgment to the trustee. The judgment would have to be dated at least
thirty days earlier and be accompanied by an additional signed
statement from the claimant certifying that the amounts had not been
recovered or paid from any other source, including, but not limited to,
the owner operator, insurance, judgments, agreements, and other
financial responsibility instruments. The two proposed documentary
requirements are being proposed with the intent of ensuring that a
court has awarded such payment of CERCLA response costs, health
assessment costs, and/or natural resource damages, the owner operator
had thirty days to make

payment himself and that the claimant is not attempting to be paid
twice for the same claim. Based on discussions with representatives of
trust institutions, EPA believes that a final court judgment would be a
documentary payment condition acceptable to potential trustees. The
representatives expressed comfort in the concept of a court having
ordered payment and a desire for minimal due diligence to be required
on the part of the trustee.
    Under the proposed regulations, the trust would also provide for
payment as required in a CERCLA settlement associated with the facility
between a current owner operator and the EPA or another Federal agency
if payment had not been made. In this scenario, to make a claim, the
Administrator or other Federal agency would have to present two
documents: (1) A written signed statement requesting payment from the
trust fund on the grounds that payment had not been made as required by
a CERCLA settlement associated with the facility and with any of the
current owners or operators; and (2) a signed statement certifying that
the amounts had not been recovered or paid from any other source,
including, but not limited to, the owner operator, insurance,
judgments, agreements, and other financial responsibility instruments.
    Finally, under the proposed regulations, the trust fund would also
be available to pay into a trust fund established pursuant to a CERCLA
unilateral administrative order issued to a current owner or operator
by EPA or another Federal agency in the event performance at the
facility did not occur as required by the order. The Administrator or
other Federal agency would only make such a claim if the owner or
operator had provided written consent for the financial responsibility
instrument to assure the obligations under the administrative order.
    In this scenario, to make a claim, the Administrator or other
Federal agency would have to present two documents: (1) A written
signed statement requesting payment from the trust fund into a trust
fund established pursuant to a CERCLA unilateral administrative order
on the grounds that performance at the facility had not occurred as
required by a CERCLA administrative order issued to a current owner or
operator; and (2) A signed statement certifying that the amounts had
not been recovered or paid from any other source, including, but not
limited to, the owners or operators, insurance, judgments, agreements,
and other financial responsibility instruments.
    EPA selected these straightforward certifications as documentary
payment conditions because EPA believes that in the instances when the
potential claimants are limited to Federal government agencies a more
streamlined payment condition is optimal to limit the administrative
burden on the trustee. This is a similar documentary payment condition
to that proposed for the letter of credit issued in favor of any and
all third-party CERCLA claimants and the surety bond. EPA considered
alternative documentary requirements for the claims scenarios limited
to Federal claimants but did not believe they added additional benefit
and may burden the trustee with additional administrative expenses. For
example, the proposed trust agreement could specify the presentation of
the CERCLA settlement itself as a requirement for making a claim but
the benefits of such a requirement were unclear to EPA. EPA believes
that the requirement of signed statements from the Administrator or
another Federal agency acting pursuant to delegated CERCLA authority is
a clear documentary condition and will require minimal due diligence on
the part of trustees. EPA requests comment on the proposed documentary
requirements for making a claim against a CERCLA Sec.  108(b) trust
fund.
g. Direct Action Claims Against the Trust Fund
    In addition to the three payment scenarios, like all CERCLA Sec.
108(b) financial responsibility instruments, the direct action
provision in CERCLA Sec.  108(c)(2) could come into play at facilities
where a trust fund is the financial responsibility instrument. EPA is
proposing trust agreement language that acknowledges that cause of
action in the trust agreement itself.
    In discussions with representatives of the trust industry,
representatives expressed some concern about the direct action
provision. Specifically, representatives suggested that interpreting
``guarantor'' as defined in CERCLA Sec. Sec.  101(13) and 108(c)(2) to
include a trustee of a CERCLA Sec.  108(b) trust fund would greatly
reduce the willingness of trust institutions to offer such services.
EPA believes that in the CERCLA Sec.  108(b) context, whereby a trust
fund is funded by the owner or operator for the purposes of satisfying
future valid third-party CERCLA claims, such an interpretation would be
inappropriate. The trustee is simply providing administrative and
fiduciary services over the funds set aside by the owner or operator
and is not providing the instrument itself. EPA believes a more
appropriate reading is that the trust fund itself is the guarantor as
it provides for the funds set aside by the owner or operator to be
available to third-parties with valid CERCLA claims.
    As a result, the proposed trust agreement language expressly
provides that in the case of a release or threatened release of (a)
hazardous substance(s) from a facility covered by the agreement, any
claim authorized by Sec. Sec.  107 or 111 of CERCLA could be asserted
directly against the trust fund as provided by CERCLA Sec.  108(c)(2)
subject to the limitations in CERCLA Sec.  108(d). The proposed
language of the agreement goes on to state that the trust fund shall be
entitled to all rights and defenses provided to guarantors by CERCLA
Sec.  108(c) and that the trust fund itself is available for paying and
defending claims in those instances.
    Further, the proposed trust agreement language further clarifies
the intent of the trust agreement with respect to direct action under
section 3 of the agreement that deals with establishment of the fund.
The relevant proposed wording in section 3 states that ``The Grantor
and Trustee do not intend for the Trustee to qualify as a ``guarantor''
as that term is used in CERCLA Sec. Sec.  101(13) and 108(c)(2), and
therefore intend that the Trustee will not be subject to a direct
action by Trustee's agreement to act as Trustee for the Fund. The
Grantor and Trustee intend for the Fund to qualify as a ``guarantor''
as that term is used in CERCLA Sec. Sec.  101(13) and 108(c)(2), and
therefore intend that only the Fund will be subject to any direct
action brought pursuant to CERCLA Sec.  108(c)(2).''
    EPA believes that clearly specifying the Agency's intent that the
trust fund itself, not the trustee, be the subject of any direct
actions is optimal. Such an approach is more consistent with the role
the two entities serve and does not suggest that trust institutions
would be put in the unfamiliar and potentially unwelcome position of
being sued under CERCLA. The downside to this arrangement is that the
trust fund could incur significant legal expenses under a direct action
scenario that may reduce the value of the trust fund available to make
payment for valid third-party CERCLA claims. EPA has proposed to
specify that trust expenses generally be paid by the owner operator
that established the trust fund (the grantor) to reduce the impact of
trustee expenses on the value of the financial responsibility. However,
by its very nature, in a direct action scenario, the owner operator is
unlikely to be available or able to pay such expenses and thus such
expenses may be paid from the trust fund itself. This is a limitation
of the proposed arrangement

that EPA requests comment on. Specifically, EPA is interested in
provisions that could help effectuate the direct action provision in
CERCLA Sec.  108(c)(2) that may ameliorate the concern of trustee
expenses significantly reducing the value of the trust fund.
h. Payment of CERCLA Claims
    The proposed trust agreement language also provides additional
direction to the trustee with respect to when and how claims should be
satisfied from the trust fund. Specifically, the proposed trust
agreement specifies that claims be paid on a first come first serve
basis. Additionally, the proposed trust agreement language also
clarifies that in the event of simultaneous valid claims that exceed
the value of the fund, the trustee would pay the claimants a pro rata
share of their claim determined by the size of each valid claim. This
language was included to reduce the potential uncertainty and ambiguity
a trustee may face in the event multiple claims against the trust fund
occur that exceed the value of the fund. Finally, the proposed language
of the trust agreement specifies that payments for a claim should not
exceed the value of the CERCLA Sec.  108(b) financial responsibility
for that facility provided by the trust fund which would be identified
and updated in schedule A. The language is intended to provide added
clarity that, if the trust agreement covers multiple facilities, claims
against the fund associated with one facility should not exceed the
value of the CERCLA Sec.  108(b) financial responsibility for that
facility provided by the trust fund. EPA believes that such facility-
specific sub-limits are important to the extent multiple facilities are
covered by one trust agreement as other current owners and operators at
the facilities, in addition to the grantor, may have all contributed
funds but may not be owner operators at all the facilities covered by
the agreement.
    Ambiguity in instances where a trustee may have to decide how much
and if to make payment was a concern EPA heard from representatives of
the banking community. EPA intends the proposed trust agreement
language to reduce such uncertainty, but requests comment as to other
language or specifications that might provide added clarity and provide
trustees greater certainty.
i. Provisions Authorizing Trustee To Hold and Draw on Letter of Credit
    As discussed in the letter of credit section of the preamble, this
proposed trust agreement expressly authorizes and anticipates that a
trustee may hold a CERCLA Sec.  108(b) letter of credit for the
purposes of drawing on the letter of credit to make payments to third-
parties with valid CERCLA claims as provided by the trust agreement.
EPA has included language in whereas clauses, section 4 of the trust
dealing with payment from the fund, section 5 dealing with payments
comprising the fund, section 6 dealing with trustee management, section
8 dealing with the express powers of the trustee, and section 10
dealing with annual valuations providing for and accounting for this
possible role of the trustee. The intent of the language is to ensure
that a trustee will be able to hold, account for, and draw upon, as
necessary, a CERCLA Sec.  108(b) letter of credit issued in favor of
the trustee. As discussed in the letter of credit section, EPA believes
this a worthwhile feature to propose based on input from members of the
banking community that suggested a trustee may be better suited to
manage the CERCLA Sec.  108(b) claims process than an institution
issuing a letter of credit. EPA requests comments on other provisions
that could be included in the trust agreement that may provide further
clarity of the trustee's ability to hold and draw on the letter of
credit as provided for in the terms of the trust agreement.
    In addition to the trust providing the trustee the authority to
draw on the letter of credit to satisfy valid third-party CERCLA claims
brought to the trust fund, under the proposed trust agreement, the
trustee would also have the responsibility to draw on the letter of
credit in order to maintain continuity of coverage. Specifically, the
proposed trust agreement language provides that in the event of receipt
of a notice of a decision not to extend the letter of credit from an
institution issuing a letter of credit held by the trust fund, the
trustee shall draw on the letter of credit and deposit any unused
portion of the credit into the trust fund if the Administrator informs
the Trustee that the owner operator did not establish alternate
financial responsibility and obtain written approval of such alternate
financial responsibility from the Administrator within the time frame
provided by the regulations. The trust agreement would specify that
this draw must occur prior to the expiration of the letter of credit.
EPA believes this a necessary provision as in the case of a letter of
credit issued in favor of a CERCLA Sec.  108(b) trust fund trustee, EPA
would not be authorized to draw on the letter of credit. EPA requests
comment on this proposed trust agreement language.
j. Trustee Management
    In specifying the trustee's responsibilities with respect to trust
management, EPA looked to the ``prudent investor'' standard which has
become prevalent in trust law and practice. Specifically, the proposed
language of the trust agreement reads as follows: ``In investing,
reinvesting, exchanging, selling, and managing the Fund, the Trustee
shall discharge its duties with respect to the trust fund with
undivided loyalty and solely in the interest of the beneficiaries and
with the reasonable care, skill, and caution of a prudent investor, in
light of the purposes, terms, distribution requirements, and other
circumstances of the trust.'' However, while EPA is proposing the
prudent investor rule form the basis of the instruction to the trustee,
the Agency is proposing a modified prudent investor standard.
Specifically, the proposed trust agreement language would prohibit the
trustee from acquiring or holding securities or other obligations of
the grantor, or any other current owner or operator of the facilities,
or any of their affiliates as defined in the Investment Company Act of
1940, as amended, Title 15 U.S.C. 80a-2(a) unless they are securities
or other obligations of the Federal or a state government. This
provision is similar to language used in other EPA financial assurance
programs including the RCRA Subtitle C Closure Post-closure and third-
party liability programs. The intent of the modification to the prudent
investor rule is to restrict investments in assets whose performance
may be correlated with the financial performance of the owners and
operators at the facility. A further proposed modification to the
prudent investor standard employed in the proposed trust agreement is
an explicit authorization that the trustee may hold and draw upon
standby letters of credit as specified in 40 CFR 320.40. EPA intends
for the trustee management instructions in the trust agreement be
consistent with current trust practice and requests comment on the
proposed trustee management language in the trust agreement.
k. Refunds to the Grantor
    The proposed language of the trust agreement also includes a
provision that if notified by the Administrator that the trust fund
contains amounts in excess of the required CERCLA 108(b) financial
responsibility amount, the trustee shall refund to the grantor such
amounts in excess of the CERCLA Sec.  108(b) financial

responsibility amount covered by the trust fund. A similar provision
was used in the RCRA Subtitle C Closure and Post-Closure trust
agreement. EPA believes this provision is necessary to allow for excess
funds in the trust agreement to be released back to the owner operator.
EPA envisions that such a scenario could arise either due to growth of
the value of the trust fund, the owner operator substituting alternate
financial responsibility for some portion of the trust fund, or as a
result of a downward adjustment in the required amount of CERCLA Sec.
108(b) financial responsibility. EPA believes that providing for the
possibility of a release of funds from the trust fund that did not
necessitate the termination of the trust agreement was advantageous.
l. Termination of the Trust (Sec.  320.45(i))
    The Administrator would agree to the termination of the trust when
the owner or operator substituted alternate financial assurance as
specified in the regulations or the Administrator released the owner or
operator from the requirements of these regulations in accordance with
the proposed release provisions. As the proposed trust is irrevocable,
\142\ termination of the trust would necessarily require the approval
of the Administrator. The trust agreement itself specifies that the
trust shall be irrevocable and shall continue until terminated at the
written agreement of the trustee, the grantor, and the Administrator or
by the Trustee and the Administrator, if the Grantor ceases to exist.
The irrevocability of trust agreements is a common requirement in
financial responsibility programs and ensures that the trust fund will
not unilaterally be terminated and will be available to satisfy third-
party CERCLA claims when necessary.
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    \142\ An irrevocable trust agreement may not be revoked or
amended without the agreement of key parties to the instrument.
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7. Issuer Cancellation Provisions
    One similar feature across many of the instruments (surety bond,
insurance, letter of credit and corporate guarantee, if allowed) in
this proposal are cancellation provisions that include the potential
requirement for the instrument provider to fund a standby trust (or in
the case of a corporate guarantor, if a corporate guarantee is
ultimately provided for, obtain alternate financial responsibility in
the name of the owner operator). For the specifics related to
cancellation for each instrument please see the instrument specific
preamble discussions earlier in this preamble.
    In each of the scenarios governing insurance, surety bond, letter
of credit and guarantee cancellation, the proposal specifies that the
issuer would be liable for the value of the instrument in the event the
owner or operator failed to obtain alternate financial responsibility
and obtain the Administrator's written approval of the financial
responsibility provided within ninety days after receipt of a notice of
cancellation from the issuer by the relevant parties. In the case of
insurance, letter of credit or surety bond, the issuer would be liable
to fund the accompanying standby trust to the value of the instrument.
In the instance of a guarantee, if allowed, the guarantor would be
required to provide alternate financial responsibility, in accordance
with the regulatory requirements, in the name of the owner or operator.
    Such cancellation provisions are very similar to provisions in
other EPA financial assurance programs for letters of credit, surety
bonds and corporate guarantees. EPA is proposing such cancellation
provisions to ensure continuity of financial responsibility coverage
and provide assurance that funds will be available to EPA and other
third party claimants when necessary to pay for CERCLA response costs,
health assessment costs, and natural resource damages incurred by
claimants while limiting the implementation burden on EPA.
    EPA acknowledges that such a provision may impact providers'
appetite to issue instruments in particular for insurance, where there
is not past precedent in EPA financial assurance programs of a
requirement for the insurer to fund a standby trust. EPA did consider
alternatives that may reduce the likelihood the instrument provider
would need to make payment and thus may provide greater flexibility
but, for the reasons provided in subsequent preamble discussion,
believes this proposed approach is the best option available.
    One possible alternative would be to specify issuer liability to
fund a standby trust only after notice of cancellation by the provider
if the owner or operator does not obtain alternate financial
responsibility and obtain written approval of such alternate financial
responsibility from the Administrator within ninety days after receipt
by both the owner or operator and the Administrator of the notice and
some additional triggering event had occurred. For example, additional
conditions necessary to trigger issuer payment into a trust fund could
include bankruptcy of the owner or operator, abandonment of the
facility, and/or the issuance of a CERCLA notice letter. These are all
indications of potential higher risk at the facility and a potential
more imminent need for the financial responsibility. However, EPA is
concerned that such criteria alone may not provide adequate assurance
funds will be available when necessary to pay valid third-party CERCLA
claims. Facilities owned or operated by non-bankrupt companies and non-
abandoned facilities can present risks and require Superfund actions or
create natural resource damages for which the owner operator may not be
able to pay. Further, EPA was told by potential providers of CERCLA
Sec.  108(b) instruments that the credit profile of the owner or
operator is an important consideration of theirs. If cancellation
occurred when the owner operator was in marked financial decline, the
facility may end up abandoned and the company bankrupt before alternate
financial responsibility could be obtained, highlighting the risk of
allowing cancellation of the financial responsibility instrument in a
wide range of scenarios without a requirement to fund a standby trust.
The inclusion of a CERCLA notice letter as another condition that would
trigger issuer responsibility to fund a standby trust would provide
some added assurance. However, this would potentially require EPA to
perform a preliminary assessment/site investigation to assess the site
which in many cases would not be possible in the 120-day notice of
cancellation period. As EPA is not necessarily the primary regulator or
permitting authority at these facilities, EPA may not have the same
level of understanding of the conditions and risks at the facilities as
it does in other EPA financial assurance programs. Beyond just
practical timing and feasibility concerns, such an approach would raise
serious resource concerns for the Superfund program. Such a provision
may require the Superfund program to shift its resources from its
priority sites to facilities where financial responsibility maintenance
was in question. If EPA did not or could not take action to investigate
the facility's condition to determine whether a notice letter should be
issued, financial responsibility coverage could lapse in a broader
range of circumstances that may ultimately be optimal and financial
responsibility may not be available if a CERCLA action was necessary.
    EPA also considered a notification of a release of a hazardous
substance at the facility to the National Response Center as required
under CERCLA Sec.  103(a) as a

possible additional condition that could be proposed as a trigger for
issuer liability to fund a standby trust in the instances of an issuer
sending notice of cancellation and the owner operator's failure to
obtain replacement financial responsibility. However, such a notice
would be limited to only releases. The proposed CERCLA Sec.  108(b)
financial responsibility program intends to cover CERCLA liabilities as
defined in CERCLA Sec.  107 which is much broader than just costs
associated with responding to releases. For example, response costs may
also be incurred by reacting to a threat of a release which would not
be accounted for in the notice of a release and may almost universally
exist at facilities regulated under CERCLA Sec.  108(b). Further, such
a provision may create a perverse incentive to not report releases in
order to avoid triggering issuer liability and any costs to the owner
operator that may result from payment from the instrument. In light of
these considerations, and with the desire not to skew Superfund
priorities while also providing strong assurance that funds would be
available when necessary to pay valid third-party CERCLA claims, EPA is
not proposing such a nuanced payment requirement into a standby trust.
By proposing that the issuer be liable for the owner operator's
obtaining alternate financial responsibility in all instances, EPA
recognizes that it is erring on the side of caution with the intent of
not creating additional administrative burden on EPA while providing a
high level of assurance that funds would be available when necessary to
pay valid third-party CERCLA claims.
    EPA requests comment, however, on any additional criteria (e.g.
bankruptcy, abandonment of the facility), for requiring the issuer to
fund the standby trust beyond the requirements previously discussed--
the owner operator does not obtain alternate financial responsibility;
and obtain written approval of such alternate financial responsibility
from the Administrator within ninety days after receipt by both the
owner or operator and the Administrator of the notice. EPA is
interested in whether such additional criteria may be optimal for
certain instruments, despite reducing the level of assurance provided
that financial responsibility will be available to pay valid third-
party CERCLA claims. Further, EPA is interested in other objective,
readily identifiable supplemental criteria that EPA could include if
such an option was ultimately pursued.
    Another option EPA considered to address the potential lapse in
coverage that may result from the issuer of a financial responsibility
instrument cancelling the instrument is to specify non-cancellation
triggering events. Under such an option, cancellation of the instrument
could not occur after notice of cancellation by the provider if: (1)
The owner operator does not obtain alternate financial responsibility
and obtain written approval of such alternate financial responsibility
from the Administrator within ninety days after receipt by both the
owner or operator and the Administrator of the notice of cancellation,
and (2) some additional triggering event had occurred. A further
refinement to such an option would be to also restrict the scenarios in
which cancellation can occur. EPA's RCRA Subtitle C closure and post-
closure insurance regulations offer an example. Those regulations do
not require the establishment of a standby trust alongside insurance.
Rather, the provider is only permitted to cancel the policy in
instances where the owner and operator failed to pay the premium and