[Federal Register: July 13, 2009 (Volume 74, Number 132)]
[Notices]
[Page 33496-33503]
[DOCID:fr13jy09-141]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60196; File No. SR-DTC-2006-16]

Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Approval of a Proposed Rule Change as Amended Relating
to FAST and DRS Limited Participant Requirements for Transfer Agents

June 30, 2009.

I. Introduction

    On October 12, 2006, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2006-16 pursuant to Section 19(b)(1) of the
Securities Exchange Act

of 1934 (``Act'').\1\ On March 29, 2007, and May 3, 2007, DTC filed
amendments to the proposed rule change. On May 25, 2007, the Commission
published notice of the proposed rule change as amended by Amendment 1
and Amendment 2.\2\ On December 31, 2007, DTC again filed an amendment.
Notice of the amended proposal was published in the Federal Register on
February 20, 2007.\3\ On June 23, 2008, DTC again filed an amendment.
Notice of the amended proposed rule change was published in the Federal
Register on June 19, 2008.\4\ The Commission received 47 comment
letters in total to the proposed rule change.\5\ For the reasons
discussed below, the Commission is granting approval of the proposed
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 55816 (May 25, 2007), 71
FR 30648 (June 1, 2007).
    \3\ Securities Exchange Act Release No. 57362 (February 20,
2008), 73 FR 10849 (February 28, 2008).
    \4\ Securities Exchange Act Release No. 57959 (June 12, 2008),
73 FR 57959 (June 19, 2008).
    \5\ Infra note 22. The comment letters can be found at http://
www.sec.gov/comments/sr-dtc-2006-16/dtc200616shtml.
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II. Description

    Prior to the establishment of DTC's Fast Automated Securities
Transfer program (``FAST''), transfers of securities to or from DTC on
behalf of its participants occurred by sending securities certificates
back and forth between DTC and transfer agents. In the case of
securities being deposited with DTC, DTC sent the certificates received
by its participants to the transfer agent for registration into the
name of DTC's nominee, Cede & Co., and the transfer agent returned the
reregistered certificates to DTC. In the case of securities being
withdrawn from DTC, DTC sent the certificates registered in the name of
Cede & Co. to the transfer agent for reregistration into the name
designated by the withdrawing participant, and the transfer agent
returned a reregistered security certificate to DTC for delivery to the
withdrawing participant or delivered the reregistered security
certificate to another entity as directed and sent a security
certificate to DTC representing the remainder of DTC's position. The
process of physically transporting securities certificates between DTC
and transfer agents exposed DTC, its participants, and the transfer
agents to the risk of loss during transit and resulted in significant
expenses.
    DTC's FAST program was designed to eliminate some of the risks and
costs related to this production and transportation of securities
certificates. Under the FAST program, transfer agents hold FAST
eligible securities in the name of Cede & Co. for the benefit of
DTC.\6\ As additional securities are deposited or withdrawn from DTC,
transfer agents adjust the size of DTC's position as appropriate and
electronically confirm theses changes with DTC. Transfer agents acting
as ``FAST agents'' are holding in custody for DTC those securities that
would otherwise be held at DTC. As such, the FAST program reduces the
movement of certificates between DTC and the transfer agents and
therefore reduces the costs and risks associated with the creation,
movement, and storing of certificates for issuers, transfer agents,
broker-dealers, and DTC.
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    \6\ For a description of DTC's current rules relating to FAST,
refer to Securities Exchange Act Release Nos. 13342 (March 8, 1977)
[File No. SR-DTC-76-3]; 14997 (July 26, 1978) [File No. SR-DTC-78-
11]; 21401 (October 16, 1984) [File No. SR-DTC-84-8]; 31941 (March
3, 1993) [SR-DTC-92-15]; and 46956 (December 6, 2002) [File No. SR-
DTC-2002-15].
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    The FAST program has grown substantially since first being
introduced in 1975.\7\ Recently all the major securities exchanges have
made changes to the listing requirements to require companies to make
their securities eligible to participate in the Direct Registration
System (``DRS'').\8\ Because FAST eligibility is a prerequisite to an
issue being eligible for DRS, DTC expects that the number of FAST
eligible securities will continue to expand.\9\ Furthermore, because
being a FAST agent is a criterion for a transfer agent's eligibility
for participation in DRS, DTC anticipates significant growth in the
number of FAST agents.\10\
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    \7\ DTC introduced the FAST program in 1975 with 400 issues and
10 agents. Currently, there are over 930,000 issues and
approximately 90 agents in FAST.
    \8\ DRS provides an investor with the ability to register her
securities in her own name on the issuer's records and to
efficiently transfer by book-entry movements her securities
positions to her broker-dealer rather than holding a physical
certificate or holding indirectly through a financial intermediary
(e.g., a broker-dealer) in ``street name.'' DRS also allows for the
transfer of a DRS position from the books of the issuer to the
account of a DTC broker-dealer participant and vice versa through
the facilities of DTC using FAST.
    \9\ Securities Exchange Act Release Nos. 54289 (August 8, 2006),
71 FR 47278 (August 16, 2006) [File No. SR-NYSE-2006-29]; 54290
(August 8, 2006), 71 FR 47262 (August 16, 2006) [File No. SR-Amex-
2006-40]; 54288 (August 8, 2006), 71 FR 47276 (August 16, 2006)
[File No. SR-NASDAQ-2006-08]; 54410 (September 7, 2006), 71 FR 54316
(September 14, 2006) [File No. SR-NYSE Arca-2006-31]; 55482 (March
15, 2007), 72 FR 13547 (March 22, 2007) [File No. SR-Phlx-2006-69];
55481 (March 15, 2007), 72 FR 13546 (March 22, 2007) [File No. SR-
CHX-2006-33]; and 55480 (March 15, 2007), 72 FR 13544 (March 22,
2007) [File No. SR-BSE-2006-46].
    \10\ For a description of DTC's rules relating to DRS, see
Securities Exchange Act Release Nos. 37931 (November 7, 1996) [File
No. SR-DTC-96-15]; 41862 (September 10, 1999) [File No. SR-DTC-99-
16]; 42366 (January 28, 2000) [File No. SR-DTC-00-01]; 42704 (April
19, 2000) [File No. SR-DTC-00-04]; 43586 (November 17, 2000) [File
No. SR-DTC-00-09]; 44969 (August 14, 2001) [File No. SR-DTC-2001-
07]; 45232 (January 3, 2002) [SR-DTC-2001-18]; 45430 (February 11,
2002) [File No. SR-DTC-2002-01]; 48885 (December 5, 2003) [File No.
SR-DTC-2002-17]; and 52422 (September 14, 2005) [File No. SR-DTC-
2005-11].
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    As a result of discussions with industry representatives, including
transfer agents, broker-dealers, issuers, insurance companies, and
various industry associations, DTC amended its filing four times in
order to address concerns with the various proposals. The provisions
contained in DTC's proposed rule change, as amended by the four
amendments, are the provisions discussed in this order.

(1) Amendments to DTC's FAST Requirements

    Despite the FAST program's robust past growth and expected future
growth, the transfer agent eligibility requirements for FAST have not
substantially changed since the implementation of FAST in 1975 and do
not: (i) Take into account the increased volume and value of securities
processed by the transfer agents, (ii) reflect improved technology and
currently available safeguards that could enhance the safekeeping of
securities held by the transfer agents on behalf of DTC, and (iii)
require the use of standardized audit reports addressing transfer
agents' processes and controls.
    In light of the FAST program's growth, DTC re-examined the transfer
agent eligibility requirements of the FAST program with a view toward
ensuring that DTC's assets in the custody of transfer agents, which
ultimately belong to DTC's participants and their customers, are
adequately protected. As more fully described below, DTC has identified
aspects of these FAST eligibility requirements that need revising or
additional components. The revisions and additional requirements
include: (i) Insurance requirements that take into account the level of
transaction volumes of securities processed by transfer agents, (ii)
safekeeping requirements to clarify and to enhance security and fire
protection standards and to take into consideration technological
advances that allow for economical security improvements, and (iii)
bookkeeping requirements to ensure compliance with applicable laws and
regulations and

standardized audit reports addressing transfer agents' processes and
controls.
    DTC is therefore amending and restating the minimum requirements
for transfer agents' participation in the FAST program in order to
improve the safekeeping of securities that transfer agents hold for DTC
and to provide improved safekeeping requirements as more transfer
agents participate in the immobilization and dematerialization of
securities. DTC's revised minimum requirements are as follows.
    1. The transfer agent must be registered with the Commission or its
appropriate regulatory authority, except where the transfer agent's
participation in the FAST program is limited to acting solely for
municipal issues or unlisted corporate debt issues (transfer agents
must provide DTC with evidence of such limited use), and must follow
all applicable rules under the Exchange Act and all other applicable
Federal and State laws, rules, and regulations applicable to transfer
agents, including OFAC regulations.
    2. The transfer agent must execute and fulfill the requirements of
the appropriate form of ``Balance Certificate Agreement'' \11\ with
DTC.\12\
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    \11\ DTC currently maintains three forms of the Balance
Certificate Agreement: One for transfer agents, one for issuers
acting as their own agent, and one for parties using a processing
agent. DTC is consolidating these forms into a single form, as
attached as Exhibit 2 to its initial filing.
    \12\ DTC notes that these minimum requirements incorporate by
reference the Balance Certificate Agreement between the transfer
agent and DTC.
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    3. The transfer agent must sign and fulfill requirements of the
``Operational Criteria for the FAST Transfer Agent Processing'' \13\
and must comply with all applicable provisions of DTC's ``Operational
Arrangements'' (``OA''),\14\ as amended from time to time.\15\
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    \13\ The ``Operational Criteria for the FAST Transfer Agent
Processing'' is attached as Exhibit 2(b) to DTC's initial filing.
    \14\ For more information relating to DTC's OA, refer to
Securities Exchange Act Release Nos. 45994 (May 29, 2002), 67 FR
39452 [File No. SR-DTC-2002-02]; 24818 (August 19, 1987), 52 FR
31833 [File No. DTC-87-10]; 25948 (July 27, 1988), 53 FR 29294 [File
No. DTC-88-13]; 30625 (April 23, 1992), 57 FR 18534 [File No. DTC-
92-06]; 35649 (April 26, 1995), 60 FR 21576 [File No. DTC-94-19];
and 39894 (April 21, 1998), 63 FR 23310 [File No. DTC-97-23].
    \15\ DTC notes that these minimum requirements incorporate by
reference the ``Operational Criteria for FAST Transfer Agent
Processing'' and all applicable terms in DTC's ``Operational
Arrangements.''
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    4. In order to provide for the operational proficiency and
efficiency of the program, the transfer agent must complete DTC's
training on FAST functionality on being accepted as a FAST transfer
agent.
    5. In order to protect against the risk of loss, the transfer agent
must carry and provide evidence to DTC of a minimum of the following
standard form Financial Institution Bond or a commercial crime policy
providing similar coverage in proportion to transaction volume the
agent processes, as follows:
    a. $10 million for a transfer agent with 25,000 or fewer transfer
transactions per year as reported to the Commission;
    b. $25 million for a transfer agent with over 25,000 transfer
transactions per year as reported to the Commission; and
    c. In addition, the transfer agent must carry and provide evidence
to DTC of a minimum of $1 million in Errors and Omissions insurance.
    In the event that a transfer agent can demonstrate to DTC that its
existing coverage and/or capitalization would provide similar
protections to DTC as the requirements set forth above, it may apply to
DTC for a waiver. DTC shall have sole discretion as to whether or not
to grant any such waiver.
    6. In order to facilitate consistent protection against losses
relating to securities in the transfer agent's control, the transfer
agent must notify DTC as soon as practicable of notice of any actual
lapse in insurance coverage or change in business practices, such as
increasing volumes or other business changes, that would result in the
transfer agent requiring additional insurance coverage as outlined
above. Such notice shall be delivered to:

DTC, Inventory Management--1SL, 55 Water Street, New York, New York
10041.

    A copy of such notice shall also be delivered to:

DTC, General Counsel's Office, 55 Water Street--22nd Floor, New York,
New York 10041.

    7. The transfer agent must provide proof to DTC of any new or
substitute policy with respect to any required insurance within five
(5) days after the entry into force of such new or substitute policy.
    8. The transfer agent must establish and maintain electronic
communications with DTC that enable FAST positions to be balanced on a
daily schedule.
    9. The transfer agent must provide to DTC on an annual basis within
ten (10) business days of filing with the Commission, a copy of the
Annual Study of Evaluation of Internal Accounting Control filed with
the Commission pursuant to Exchange Act Rule 17Ad-13. If a transfer
agent obtains a SAS-70 audit report, the transfer agent shall provide
DTC with a copy of the report within ten (10) business days of the
transfer agent's receipt of the report.
    10. FAST agents must safeguard all the securities assets as
required by Exchange Act Rule 17Ad-12 and with at a minimum the
following additional DTC requirements:
    a. Maintenance of a theft and fire central monitoring alarm system
protecting the entire premises and
    b. Maintenance of all certificates in a vault, safe, or other
secure location, which is accessible only by authorized personnel.
    11. Personnel with access to the vault, safe, or other secure
location and the codes for the centralized monitoring system must
comply with Exchange Act Rule 17f-2, which includes but is not limited
to rules for fingerprinting staff that physically handle certificates.
    12. Unless prohibited by applicable law, the transfer agent when
applying to be a FAST agent must provide DTC with a copy of the two
most recent compliance or deficiency correspondences from the
Commission as well as any follow-up correspondences. In addition,
unless prohibited by applicable law, the transfer agent on an ongoing
basis must provide DTC with notice of any alleged material deficiencies
documented by the Commission that may affect the activities of the
transfer agent as a FAST Agent within five (5) business days of the
transfer agent being notified of such deficiencies.\16\
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    \16\ DTC agrees to establish and maintain any and all such
safeguards as are necessary and appropriate to protect the
confidentiality of any notices, correspondences, or reports from the
Commission to the transfer agent, and any follow-up correspondences,
that the transfer agent provides to DTC. DTC also agrees that any
information obtained from these notices, correspondences, or reports
will not be used for any reason other than the intended purposes as
authorized by this order and will not be shared with any person or
entity outside of DTC. DTC will also notify the Commission if these
documents are required to be remitted by DTC to any other federal or
state authority.
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    13. Unless prohibited by applicable law, during regular business
hours and upon advance notice, DTC reserves the right to visit and
inspect, to the extent such visits and inspections pertain to DTC's
securities position, the transfer agent's facilities, books, and
records. DTC, however, is not obligated to conduct such visits or
inspections.
    14. Existing FAST agents shall have a period of six (6) months from
the date of the Commission's approval of this rule filing to comply
with these requirements, including the submission to DTC of a signed
Balance Certificate Agreement, signed Operational Criteria, and all
supporting documentation referenced herein. If an agent is not
compliant with these requirements upon the expiration of such period,
DTC

shall have the right, using its sole discretion, to terminate or to
continue the transfer agent's status as a FAST agent.
    15. An agent acting on behalf of a transfer agent shall have the
same rights and responsibilities under these requirements as if it were
the transfer agent.

(2) Amended and Restated Eligibility Requirements for DRS Limited
Participants

    DTC is revising the eligibility requirements for DRS Limited
Participants \17\ and the eligibility requirements for DRS issues to
promote consistency with the FAST program requirements as well as to
further ensure the soundness of the DRS system.
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    \17\ DRS Limited Participants are transfer agents that
participate in DRS through DTC. They are bound to certain provisions
of the DTC rules. Securities Exchange Act Release No. 37931
(November 7, 1996) [File No. SR-DTC-96-15].
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    In order to be eligible to be a DRS Limited Participant, a transfer
agent must:
    1. Participate in the FAST program and abide by DTC's requirements
governing participation in the FAST program;
    2. Execute a DTC Limited Participant Account agreement;
    3. Deliver transaction advices directly to investors relating to
DRS Withdrawal-by-Transfer requests and provide DTC with a file
containing the information required by DTC (which must include, among
other things, the transaction delivery date) in a format and using the
functionality as specified by DTC from time to time;
    4. Complete DTC's training program on DRS and Profile Modification
System (``Profile'') functionality;
    5. Participate in the Profile surety or insurance program; \18\
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    \18\ In DRS, instructions to transfer shares are sent by a
broker-dealer that is a DTC participant or by a transfer agent that
is a DRS Limited Participant through Profile. Profile provides
screen based indemnification against false instructions from the
party submitting the instructions through DRS. The indemnity is
supported by either a surety bond or an insurance policy.
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    6. Implement program changes related to DTC internal systems
modifications within a reasonable time upon receiving notification from
DTC of such modifications; and
    7. Implement program changes to support and expand DRS processing
capabilities as agreed to by the DRS Ad Hoc Committee.
    Existing DRS Limited Participants shall have a period of six (6)
months from the date of the Commission's approval of this rule filing
within which they must comply with these requirements. If an agent is
not compliant with these requirements upon the expiration of such
period, DTC shall have the right using its sole discretion to terminate
or to continue the agent's status as a DRS Limited Participant.

 (3) Eligibility Requirements for DRS Issues

    In order for an issue to be eligible as a DRS issue, the issue
must:
    1. Have a transfer agent accepted as a DTC DRS Limited Participant
and
    2. Be included in the FAST program.\19\
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    \19\ An issue may not become a DRS issue if an ``out of
balance'' position exists. An ``out of balance'' position occurs
when DTC's records indicating Cede & Co.'s ownership position do not
match the transfer agent's records indicating Cede & Co.'s ownership
position.
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(4) DTC's Proposed Standard of Care Obligations With Respect to FAST

    DTC is also clarifying the responsibilities and liabilities of FAST
agents with respect to their participation in the FAST program. DTC
believes that historically the Commission has left to user-governed
clearing agencies the question of how to allocate losses associated
with, among other things, clearing agency functions.\20\ In conjunction
with its approval of DTC's rule filing whereby DTC adopted a uniform
standard of responsibility with respect to certain of its services, the
Commission noted that while it had ``called on registered clearing
agencies to undertake, by rule, to deliver all fully paid securities in
their control to, or as directed by, the participant for whom the
securities are held,'' in light of the fact that registered clearing
agencies had demonstrated a high level of responsibility in
safeguarding securities and funds, the Commission did not find that a
standard of care based on a strict standard of liability was required
either with respect to failures of the clearing agency or a sub-
custodian.\21\
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    \20\ Securities Exchange Act Release Nos. 20221 (September 23,
1983) and 22940 (February 24, 1986). In this regard, DTC adopted a
uniform standard with respect to certain of its procedures, or
Service Guides, such that DTC is not liable for any loss incurred by
a participant other than one caused directly by gross negligence or
willful misconduct on the part of DTC. See Securities Exchange Act
Release No. 44719 (August 17, 2001) [File No. SR-DTC-2001-01].
    \21\ Securities Exchange Act Release No. 22940 (February 24,
1986), 51 FR 7169 (order approving a rule change to establish a
comprehensive standard of care and limitation of liability to its
members).
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    DTC notes that securities in the FAST program are held by a
transfer agent and are not within the immediate custody and control of
DTC. As such, DTC is adding a clarifying provision to DTC's Rule 6, a
rule pertaining to DTC's standard of care as it applies to DTC
participants, to make clear that DTC will not be liable to participants
for the acts or omissions of FAST Agents or other third parties
(including, but not limited to, any depository, custodian, sub-
custodian, clearing or settlement system, transfer agent, registrar,
data communication service or delivery service) unless a loss is caused
directly by DTC's gross negligence, willful misconduct, or violation of
federal securities laws for which there is a private right of action.
In addition, DTC is making it clear that under no circumstance shall
DTC be liable for the selection or acceptance of any third party as an
agent of DTC, including a transfer agent participating in the FAST
Program.

III. Comment Letters \22\
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    \22\ This order only addresses specific comments that relate to
provisions in DTC's proposed rule change as the proposed rule change
is being approved. It does not address comments on provisions that
were either modified or deleted in response to comments.
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    The Commission received a total of 47 comment letters on DTC's
initial proposal and the subsequent four amendments (published in three
notices for comment).\23\ Specifically, the

Commission received twenty-seven comment letters on DTC's original
proposed rule change, as amended by Amendments 1 and 2.\24\ Twenty-
three of the commenters opposed some or all of the provisions in the
proposed rule change while three commenters supported the proposed rule
change. DTC also submitted a comment letter addressing the concerns and
issues raised by the opposing commenters.
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    \23\ Letters from Loren K. Hanson, Assistant Secretary, Otter
Tail Corporation (June 5, 2007); Steven D. Lucas, Director of
Transfer Agent Compliance, Investors Bank & Trust Company (June 15,
2007); Walter E. Grote, Senior Vice President, Travelers Bond &
Financial Products (June 19, 2007); The Surety & Fidelity
Association of America (June 19, 2007); Thomas L. Montrone,
President and Chief Executive Officer, Registrar and Transfer
Company (June 19, 2007); Salli Marinov, President and Chief
Executive Officer, First American Stock Transfer Company (June 20,
2007); Steve Nelson, President and Chairman of the Board,
Continental Stock Transfer & Trust Company (June 20, 2007); Dennis
Callahan, Chairman, Bank Depository User Group (June 21, 2007);
Kevin Kopaunik, Fidelity Transfer Company (June 21, 2007); Jonathan
Miller, President StockTrans, Inc. (June 21, 2008); Artie Retolatto,
1st Global Stock Transfer, LLC (June 21, 2007); James R. Alden,
President, Shareholder Services Association (June 22, 2007); James
Becker, Zions First National Bank (June 22, 2007); J. Donald Boggus,
Jr., President and Chief Executive Officer, Crescent Banking Company
and Crescent Bank and Trust Company (June 22, 2007); Albert Howell,
Chairman, Regulatory and Clearance Committee, SIFMA Securities
Operations Division, (June 22, 2007); Lennie M. Kaufman, Executive
Vice President, Wells Fargo Shareowner Services (June 22, 2007);
Lawrence Morillo, Chairman, Legal and Regulatory Subcommittee, SIFMA
Operations Committee (June 22, 2007); J. Robert Morris, Managing
Director, Valiant Trust Company (June 22, 2007); Cristeena G. Naser,
Senior Counsel, Center for Securities, Trust & Investments, American
Bankers Association (June 22, 2007); James R. Nielsen, Senior Vice
President, U.S. Bank National Association (June 22, 2007); Charles
V. Rossi, President, The Securities Transfer Association, Inc. (June
22, 2007); Steven Rothbloom, President and Chief Executive Officer,
Computershare North America (June 22, 2007); William Speirs,
President, Securities Transfer Association of Canada (June 26,
2007); Susanne Trimbath, PhD, Chief Executive Officer and Chief
Economist, STP Advisory Services, LLC (June 26, 2007); Thomas M.
Sullivan, Chief Counsel for Advocacy, and Charles A. Maresca,
Director, Interagency Affairs, U.S. Small Business Administration
(June 27, 2007); Gary N. Nazare, Managing Director, Transfer Agency
Services, The Bank of New York (June 29, 2007), Charles Douglas
Bethill, Thacher, Proffitt & Wood LLP (December 28, 2007), Charles
V. Rossi, President, Securities Transfer Association, Inc. (March
17, 2008); William Speirs, President, Securities Transfer
Association of Canada (March 18, 2008); Steven G. Nelson, Chairman
of the Board and President, Continental Stock Transfer & Trust
Company (March 19, 2008); Martin J. McHale Jr., President, US Equity
Services, Computershare (March 20, 2008); Loren Hanson, Assistant
Secretary, Otter Tail Corporation (March 20, 2008); Kevin B. Halter,
Jr., President, Securities Transfer Corporation (March 20, 2008);
Mary C. Fernandez, Standard Registrar and Transfer Agency, Inc.
(March 20, 2008); and Cristeena G. Naser, Senior Counsel, Center for
Securities, Trust & Investments, American Bankers Association (March
20, 2008).
    \24\ Letters from Loren K. Hanson, Assistant Secretary, Otter
Tail Corporation (June 5, 2007); Steven D. Lucas, Director of
Transfer Agent Compliance, Investors Bank & Trust Company (June 15,
2007); Walter E. Grote, Senior Vice President, Travelers Bond &
Financial Products (June 19, 2007); The Surety & Fidelity
Association of America (June 19, 2007); Thomas L. Montrone,
President and Chief Executive Officer, Registrar and Transfer
Company (June 19, 2007); Salli Marinov, President and Chief
Executive Officer, First American Stock Transfer Company (June 20,
2007); Steve Nelson, President and Chairman of the Board,
Continental Stock Transfer & Trust Company (June 20, 2007); Dennis
Callahan, Chairman, Bank Depository User Group (June 21, 2007);
Kevin Kopaunik, Fidelity Transfer Company (June 21, 2007); Jonathan
Miller, President StockTrans, Inc. (June 21, 2008); Artie Retolatto,
1st Global Stock Transfer, LLC (June 21, 2007); James R. Alden,
President, Shareholder Services Association (June 22, 2007); James
Becker, Zions First National Bank (June 22, 2007); J. Donald Boggus,
Jr., President and Chief Executive Officer, Crescent Banking Company
and Crescent Bank and Trust Company (June 22, 2007); Albert Howell,
Chairman, Regulatory and Clearance Committee, SIFMA Securities
Operations Division, (June 22, 2007); Lennie M. Kaufman, Executive
Vice President, Wells Fargo Shareowner Services (June 22, 2007);
Lawrence Morillo, Chairman, Legal and Regulatory Subcommittee, SIFMA
Operations Committee (June 22, 2007); J. Robert Morris, Managing
Director, Valiant Trust Company (June 22, 2007); Cristeena G. Naser,
Senior Counsel, Center for Securities, Trust & Investments, American
Bankers Association (June 22, 2007); James R. Nielsen, Senior Vice
President, U.S. Bank National Association (June 22, 2007); Charles
V. Rossi, President, The Securities Transfer Association, Inc. (June
22, 2007); Steven Rothbloom, President and Chief Executive Officer,
Computershare North America (June 22, 2007); William Speirs,
President, Securities Transfer Association of Canada (June 26,
2007); Susanne Trimbath, PhD, Chief Executive Officer and Chief
Economist, STP Advisory Services, LLC (June 26, 2007); Thomas M.
Sullivan, Chief Counsel for Advocacy, and Charles A. Maresca,
Director, Interagency Affairs, U.S. Small Business Administration
(June 27, 2007); Gary N. Nazare, Managing Director, Transfer Agency
Services, The Bank of New York (June 29, 2007); and Charles Douglas
Bethill, Thacher, Proffitt & Wood LLP (December 28, 2007).
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    In response to commenters' concerns raised by the first two
amendments to DTC's proposed rule change, DTC amended its filing for a
third time. The Commission received ten comment letters to the third
amendment, with eight commenters continuing to oppose the filing \25\
and one commenter requesting clarification as to the application of one
of the requirements of the proposed rule change to issuer transfer
agents.\26\ In response to the concerns raised by these nine
commenters, DTC submitted a comment letter.\27\ The comments set forth
by those opposing the proposed rule change were for the most part the
same concerns as were expressed in the comment letters submitted in
response to the first notice of the first proposed rule change as
amended by Amendments 1 and 2.
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    \25\ Letters from Charles V. Rossi, President, Securities
Transfer Association, Inc. (March 17, 2008); William Speirs,
President, Securities Transfer Association of Canada (March 18,
2008); Steven G. Nelson, Chairman of the Board and President,
Continental Stock Transfer & Trust Company (March 19, 2008); Martin
J. McHale Jr., President, US Equity Services, Computershare (March
20, 2008); Loren Hanson, Assistant Secretary, Otter Tail Corporation
(March 20, 2008); Kevin B. Halter, Jr., President, Securities
Transfer Corporation (March 20, 2008); Mary C. Fernandez, Standard
Registrar and Transfer Agency, Inc. (March 20, 2008); and Cristeena
G. Naser, Senior Counsel, Center for Securities, Trust &
Investments, American Bankers Association (March 20, 2008).
    \26\ Letter from Ray Dunn, Director of Shareholder Services, The
Southern Company (March 20, 2008).
    \27\ Letter from Charles Douglas Bethill, Thacher Proffitt &
Wood, LLP (on behalf of DTC) (April 10, 2008).
---------------------------------------------------------------------------

    After approximately one and a half years of negotiations between
DTC and the transfer agent community, DTC amended the proposed rule
change for a fourth and final time. The Commission received ten comment
letters in response to the proposed rule change as modified by
Amendment 4, with nine commenters opposing some or all of the proposed
rule and DTC again submitting a comment letter addressing the commenter
concerns.\28\ Seven of the nine commenters opposing the proposed rule
change expressed their concerns in response to one or both of the prior
published notices. None of the commenters opposing the proposed rule
change, as amended by the fourth amendment, raised any issues that had
not been raised in their prior comment letters.
---------------------------------------------------------------------------

    \28\ Letters from Martin J. McHale, President, U.S. Equity
Services, Computershare (July 2, 2008); Loren Hanson, Assistant
Secretary, Otter Tail Corporation (July 7, 2008); Charles V. Rossi,
President, The Securities Transfer Association, Inc. (July 9, 2008);
Kevin Kopaunik, Fidelity Transfer Company (July 10, 2008); Dorothy
Miller, Vice President & Trust Officer, Hancock Bank (July 10,
2008); Stephen G. Nelson, President and Chairman of the Board,
Continental Stock Transfer & Trust Company (July 10, 2008); William
Speirs, President, Securities Transfer Association of Canada (July
11, 2008); Barbara J. Trivedi, Shareholder Services Manager,
Crescent Banking Company, Crescent Bank and Trust Company (July 10,
2008); Edward L. Pittman, Thelen Reid Brown Raysman & Steiner LLP
(July 15, 2008); John Petrofsky, Associate Counsel, DTC (July 30,
2008).
---------------------------------------------------------------------------

    The majority of the nine commenters that opposed DTC's proposed
rule change, which were issuers, transfer agents, or industry
associations representing issuers or transfer agents, an insurance
company, an association representing insurance companies, the American
Banking Association (``ABA''), the Office of Advocacy of the Small
Business Administration (``SBA''), and one individual, opposed the
proposed rule change for various reasons. Most of the commenters raised
a number of general policy concerns such as: (1) DTC lacks the
authority to impose rules on transfer agents, and the imposition of
such rules is inappropriate given the commercial relationship between
transfer agents and DTC; (2) the specific requirements are unduly
burdensome, unnecessary, costly (particularly with respect to small
transfer agents), and without sufficient justification; (3) the
proposed rule change appears based on the premise that transfer agents
act as custodian for DTC's securities as recorded on the records of the
issuer--a premise that the transfer agents and banks reject as
erroneous; and (4) many of the provisions proposed by DTC are
inconsistent with the movement to a book-entry form of securities
ownership.
    The remaining commenters, which were predominantly industry
associations representing broker-dealers, supported the proposed rule
change because of their belief that DTC's proposed requirements are
necessary to facilitate the continuing increase in the use of DRS,
which they contend is necessary in order to achieve the industry's
objective of decreasing or eliminating the use of securities
certificates in the U.S. market, and to reduce the risks associated
with the continuing increase in volume and value of DRS transactions.
    The following describes commenters' concerns with the specific
provisions remaining in DTC's proposed rule

change in its final form after all amendments.
    Jurisdiction. Many of the commenters who are transfer agents or
organizations representing transfer agents oppose the proposed rule
change because they contend that the Commission and banking regulators
are statutorily charged with the responsibility of regulating transfer
agents, and DTC is not. They further argue that even though the
transfer agents are ``limited participants'' of DTC with respect to
their participation in DRS, transfer agents do not have the full
procedural safeguards that statutorily exist for DTC participants
pursuant to Section 17A of the Exchange Act.\29\ The transfer agents
are also concerned that the rule change gives DTC ``unfettered''
discretion to decide which transfer agents are eligible to participate
in DRS, to impose significant requirements to change transfer agent
systems and operations, and to terminate transfer agents as FAST agents
and limited participants at DTC's discretion.
---------------------------------------------------------------------------

    \29\ 15 U.S.C 78q-1(a)(3).
---------------------------------------------------------------------------

    Insurance Requirements. Almost all of those opposed to DTC's rule
filing objected to some or all of DTC's proposed insurance requirements
as being too costly and too onerous, particularly the ``excessively''
high minimum coverage levels, ``excessively'' low deductibles, and
opposed the requirement of notifying DTC of changes in their insurance
policies. The STA and several other commenters stated that they believe
DTC and other registered holders have sustained virtually no economic
losses as a result of under-insured transfer agent activity, thereby
making the proposed insurance requirements unnecessary, overly broad,
and without justification.
    Many of the commenters that oppose the rule change contend that for
some smaller transfer agents, the amounts of proposed minimum insurance
coverage would exceed the value of DTC's securities held by the
transfer agent and therefore are not reasonable. One commenter
representing a large number of commercial bank and non-bank transfer
agents noted that it believes that none of its members currently meet
the insurance and deductible requirements.\30\ In addition, this
commenter along with the ABA and several other transfer agents opposed
the requirement for transfer agents to (1) notify DTC at least 30 days
prior to any expiration or change in insurance limits as unrealistic
due to the manner in which policies are renewed, and (2) notify DTC
within five days of any notice of threatened or actual lapse in
coverage as an unreasonable burden on insurance carriers.
---------------------------------------------------------------------------

    \30\ Letter from the Securities Transfer Association (``STA'').
---------------------------------------------------------------------------

    Safekeeping Requirements. Most transfer agents that opposed the
amended proposed rule change took issue with DTC dictating specific
physical security standards with respect to transfer agents'
safeguarding obligations. Many of these commenters suggested that the
Commission's safekeeping rule, Rule 17Ad-12, is sufficient to govern
transfer agent safeguarding obligations.
    DTC maintains that specific physical security standards are
justified in light of transfer agents holding blank securities
certificates, which can and have been fraudulently issued or endorsed.
    Audit Requirements. Almost all the commenters opposing the proposed
rule change objected to some or all of DTC's proposed audit
requirements. Most of the transfer agents and industry associations
representing issuers and agents argued that requiring submission to DTC
of a SAS 70 or SSAE-19 report certifying compliance with DTC
requirements and Commission rules and requiring attesting to the
soundness of the transfer agent's controls is superfluous, unwarranted,
and costly, especially in light of the requirement that an audit report
be filed with the Commission by registered transfer agents pursuant to
Exchange Act Rule 17Ad-13. The transfer agents contended that the
existing Commission regulations should be sufficient to satisfy DTC's
concerns.
    One issuer acting as its own transfer agent stated its belief that
DTC rules have been developed to address large commercial transfer
agent operations without taking into consideration other types of
transfer agents. This commenter noted that pursuant to an exemption
provided to small transfer agents under Commission Rule 17Ad-4, it is
exempted from the Commission's audit requirements. This commenter
stated that small transfer agents pose significantly less risk to the
public than large commercial transfer agents, thereby providing the
basis for the Commission's exemption. This comment also argued that as
a publicly traded company, it has audit requirements, including
internal controls that are audited internally and externally pursuant
to federal regulation. Compliance with DTC's rules, this transfer agent
estimated, would cost in excess of $10,000 per year for the audit when
it conducts less than 1,000 transfers per year.
    Shareholder Statements. Many transfer agents objected to DTC
requiring that for DRS withdrawal-by-transfers, DRS Limited
Participants send a transaction advice to shareholders by mail and to
DTC by electronic file. While the concept of sending such statements
was not objectionable to most of the transfer agents opposing this
requirement, the STA maintains that DTC has no authority to mandate
notifications to shareholders holding positions in DRS.
    Notice of Regulatory Action and On-site Inspection by DTC. The STA
and a number of transfer agents opposed the requirement to provide DTC
with copies of Commission examination reports within five business days
of ``any alleged material deficiencies.'' The transfer agents contend
they do not provide this information to any other registered
securityholder, DTC has failed to demonstrate a need for such
information, and DTC is not entitled to this confidential information
under applicable law or regulation. They also objected to the
requirement that transfer agents allow DTC access to their premises for
on-site inspections.
    System Modifications and Enhanced DRS Processing Capabilities. The
STA and a number of transfer agents objected to DTC requiring transfer
agents to implement program changes and system modifications to support
and expand DRS processing capabilities. The transfer agents contend
that such a requirement fails to address the reasonableness and
necessity of any changes and fails to address the costs that may be
incurred by transfer agents. Transfer agents objected to DTC
unilaterally determining what changes to make to FAST and DRS without
agreement from the transfer agents. They also objected to the use of
the DRS Ad Hoc Committee as the ultimate arbiter of disputes because
they believe the Committee is dominated by DTC and its participants and
because the Committee has no governing by-laws or rules.
    Compensation. The STA objected as commercially unreasonable that
transfer agents provide DRS and FAST services to DTC without
compensation. It argued that transfer agents should be entitled to
refuse to provide DTC services if DTC refuses to pay for services
rendered without the threat that DTC could throw them out of FAST and
DRS.
    Standard of Care. Transfer agents opposed DTC's standard of care
provision because they believe that it would permit DTC to avoid
responsibility for its own errors and would force transfer agents to be
responsible if a third party (i.e., broker-

dealer or registered shareholder) were to suffer a loss caused by an
error at DTC with regard to transactions or transfers involving
transfer agents. They contend that the exculpatory language would force
injured parties to seek recovery from the transfer agent even in the
event the transfer agent were not at fault instead of each party
bearing responsibility for its own processing errors. The transfer
agents state that a unilateral waiver would not be in accordance with
standard industry practice or public policy.
    Regulatory Flexibility Act of 1980. The transfer agents contend
that no evidence of any assessment has been done by DTC to examine the
economic impact on small transfer agents or small issuers to ensure
compliance with the requirements of the Regulatory Flexibility Act of
1980.\31\
---------------------------------------------------------------------------

    \31\ The Commission notes that the Regulatory Flexibility Act of
1980 is not applicable to proposed rule changes filed by self-
regulatory organizations pursuant to Section 19(b) of the Exchange
Act.
---------------------------------------------------------------------------

IV. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible, to
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions, and to remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and in general, to protect investors and the public
interest.\32\ For the reasons described below, the Commission finds
that the rule change as amended is consistent with these provisions of
Section 17A.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In Section 17A of the Act, Congress set forth its finding that the
prompt and accurate clearance and settlement of securities
transactions, including the transfer of record ownership and
safeguarding of securities and funds related to clearance and
settlement activities, is necessary for the protection of investors and
those acting on behalf of investors.\33\ Inefficient clearance and
settlement procedures, Congress found, impose unnecessary costs on
investors and those acting on their behalf.\34\ The Commission's
approval of DTC's registration as a clearing agency constituted an
important step in its efforts to facilitate the development of a
national clearance and settlement system and a significant step in
achieving the goals established by Congress.\35\
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(a)(1)(A).
    \34\ 15 U.S.C. 78q-1(a)(1)(B).
    \35\ Exchange Act Release No. 20221 (September 23, 1983), 48 FR
45167 (October 3, 1983).
---------------------------------------------------------------------------

    Consistent with this directive, the Commission has encouraged the
immobilization and the dematerialization of securities holdings by
supporting the use of alternatives to holding securities in
certificated form in an effort to improve efficiencies and decrease
risks associated with processing securities certificates.\36\ Among
other things, the Commission has approved the rule filings of self-
regulatory organizations that require their members to use the
facilities of a securities depository for the book-entry settlement of
all transactions in depository-eligible securities \37\ and require
that before any security can be listed for trading, it must have been
made depository eligible if possible.\38\ The Commission has also
approved a number of rule filings relating to DTC's FAST program, which
has facilitated significantly more efficient processing of transfers by
eliminating the physical delivery of securities certificates between
transfer agents and DTC.\39\ More recently the Commission has approved
the implementation and expansion of DRS by approving DTC's rules
relating to the administration of DRS facilities used by transfer
agents and broker-dealers.\40\
---------------------------------------------------------------------------

    \36\ The use of certificates often results in significant delays
and expenses in processing securities transactions and raises safety
concerns associated with lost, stolen, and counterfeit certificates.
The concerns associated with lost certificates were dramatically
demonstrated during the September 11, 2001, tragedy when tens of
thousand of certificates maintained in broker-dealers' vaults either
were destroyed or were unavailable for transfer. See Securities
Exchange Act Release No. 49405 (March 11, 2004), 69 FR 12922 (March
18, 2004) [File No. S7-13-04] (Securities Transaction Settlement
Concept Release).
    \37\ Securities Exchange Act Release No. 32455 (June 11, 1993),
58 FR 33679 (June 18, 1993) (order approving rules requiring
members, member organizations, and affiliated members of the New
York Stock Exchange, National Association of Securities Dealers,
American Stock Exchange, Midwest Stock Exchange, Boston Stock
Exchange, Pacific Stock Exchange, and Philadelphia Stock Exchange to
use the facilities of a securities depository for the book-entry
settlement of all transactions in depository-eligible securities
with another financial intermediary).
    \38\ Securities Exchange Act Release No. 35798 (June 1, 1995),
60 FR 30909 (June 12, 1995) (order approving rules setting forth
depository eligibility requirements for issuers seeking to have
their shares listed on the exchange).
    \39\ Securities Exchange Act Release Nos. 13342 (March 8, 1977)
[File No. SR-DTC-76-3]; 14997 (July 26, 1978) [File No. SR-DTC-78-
11]; 21401 (October 16, 1984) [File No. SR-DTC-84-8]; 31941 (March
3, 1993) [SR-DTC-92-15]; and 46956 (December 6, 2002) [File No. SR-
DTC-2002-15].
    \40\ See supra note 10.
---------------------------------------------------------------------------

    DTC's FAST program authorizes transfer agents to hold securities on
behalf of DTC in order to avoid having multiple physical certificates
sent between transfer agents and DTC because of DTC's ever-changing
ownership positions. Eliminating the need to transfer a physical
certificate every time DTC's ownership position changes reduces risk
and costs of processing transfers, which is a benefit to not only DTC,
transfer agents, and issuers but also to the millions of beneficial
owners of the securities holding in street name at DTC.
    Because of the critical role the FAST and DRS programs play in the
clearance and settlement of transactions in securities, which are
legally owned by DTC and beneficially owned by DTC participants and
their customers, the Commission believes that DTC has a legitimate
interest in making sure that FAST agents and DRS Limited Participants
comply with reasonable and appropriate requirements for participation
in these programs in order that DTC can fulfill its statutory
obligation to safeguard securities and funds that are in its custody or
control or for which it is responsible. In response to the comments
submitted in response to the proposed rule changes, DTC amended its
proposal four times in an effort to reduce the cost and operational
burden on transfer agents while still maintaining the appropriate level
of safeguards necessary for DTC to comply with its statutory
obligations. The Commission believes that the requirements, as amended,
are fair and reasonable in light of the vital function the FAST and DRS
programs play in the national clearance and settlement system and
should help further improvements in the interactions between transfer
agents and DTC, which is an essential component of improving the
industry's dematerialization efforts.
    In adopting these new rules, the Commission does not believe that
DTC is attempting to ``regulate'' transfer agents as some commenters
contended. Rather, the Commission believes that DTC is imposing
reasonable obligations necessary for it to comply with its statutory
obligations and only on those transfer agents that choose to
participate in its FAST and DRS programs. Further, as a self-regulatory
organization, DTC is required to file rule changes affecting the FAST
or DRS program, and by extension, those transfer agents participating
in these programs, with the Commission pursuant to Section

19(b) of the Exchange Act. Most of these filings have been and will
continue to be filed with the Commission, published for public comment,
and subject to the review and approval by the Commission. This process
should provide transfer agents, as well as others affected by DTC's
rules, adequate procedural safeguards.
    Some commenters contend that by allowing DTC the authority to
determine which transfer agents may become a FAST transfer agent or DRS
Limited Participant, DTC is also granted by extension the authority to
determine which transfer agents may continue to operate a transfer
agent business. The Commission does not agree. Many transfer agents act
as transfer agent for publicly traded securities and are not FAST
agents or DRS Limited Participants. But if a transfer agent chooses to
act as transfer agent for an issuer of securities that requires it to
become a FAST agent or DRS Limited Participant, then DTC has an
interest and statutory responsibility to ensure that the securities
held on its behalf at the transfer agent are safeguarded and that the
settlement of transactions in those securities, which includes safe and
efficient transfers in ownership, occurs in a prompt and accurate
manner.
    With regards to specific operational requirements required by DTC's
rule, such as insurance requirements, physical security standards,
audit requirements, and system modifications to support or enhance DRS
functionality, the Commission believes that the amended rule contains
standards that are appropriate and reasonably designed to achieve DTC's
goal of protecting the securities held by transfer agents on DTC's
behalf and on behalf of DTC's participants and the participants'
customers. The Commission does not find it compelling to contend that
just because DTC and other registered holders have not sustained
economic losses, DTC's insurance requirements are overly broad or
unjustified. The point of the rule's insurance requirement is to
protect against losses before losses occur. Furthermore, if a transfer
agent can demonstrate that its existing coverage or capitalization
provide similar protections as the insurance required DTC, DTC has the
discretion to grant a waiver from any or all of the requirement. This
flexibility should provide DTC the ability to properly address
situations where the required coverage is too onerous or ineffective
for the type, amount, or dollar value of DTC's securities held by the
transfer agent.
    The Commission also finds little merit in the contention that the
audit reports required by the rule are unwarranted or unnecessarily
costly. The Commission believes that requiring transfer agents to
provide to DTC the Annual Study of Evaluation of Internal Accounting
Controls, conducted pursuant to Rule 17Ad-13, and a SAS-70 audit
report, if the agent has already obtained such a report for other
purposes, are reasonable in light of DTC's statutory obligations to
ensure the safeguarding of its securities. These audit reports provide
DTC with additional information about the adequacy of the transfer
agent's operational capabilities and internal controls for the transfer
of record ownership and the safeguarding of related securities and
funds. This is not only relevant but material information to DTC. In
addition, because DTC's rule requires that transfer agents provide DTC
with documents that have already been produced by the transfer agent
for other purposes and should be in the transfer agent's possession,
the Commission believes that there should be little or no additional
expense and relatively little extra burden on transfer agents in
providing these documents to DTC.
    Similarly, commenters' concerns about requiring transfer agents to
provide DTC with a copy of the two most recent compliance or deficiency
correspondences from the Commission and all notices of alleged material
deficiencies documented by the Commission appear to be misplaced. While
the Commission appreciates the sensitive nature of transfer agent
examination reports and the need to ensure the confidentiality of all
information contained in those reports, the Commission believes
nonetheless that DTC's request for these documents is reasonable.
Information contained in those reports should allow DTC to better
manage any potential risks associated with the transfer agent's ability
to transfer securities, maintain ownership records, or operate its
business in a safe manner.
    Even though some commenters objected to DTC's provision requiring
transfer agents to send DTC a file indicating a transaction advice has
been sent to investors for each DRS withdrawal-by-transfers, the
Commission believes DTC has a valid interest in requiring notice that
investors have obtained a transaction advice from transfer agents. The
file required to be sent to DTC will provide confirmation that the
transaction advice has been sent to the investor so that DTC can close
out its pending transfer position or file (sometimes referred to as an
open transfer record). If that position is not closed, then DTC's
records will show that the transfer remains open and it will become an
outstanding aged transfer. To avoid this, DTC is requiring transfer
agents to send a notice that the transfer has been completed by sending
the investor a transaction advice. This process is similar to that of
the current process when a transfer agent notifies DTC that a
certificate has been mailed to the investor.
    Finally, the Commission believes that commenters' concerns
regarding the rule's clarification of DTC's standard of care provision
are unfounded. The purpose of the rule change is to clarify that DTC
shall not be liable to participants for acts or omissions of any third
party (including without limitation any depository, custodian, sub-
custodian, clearing or settlement system, transfer agent, registrar,
data communication service or delivery service). DTC's Rule 6 applies
to DTC's relationship with its participants, not FAST agents.
Therefore, this particular provision does not have any impact on FAST
Agents that are not also participants. The provision does not shift
liability from DTC to FAST Agents or absolve DTC from liability to FAST
Agents.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposed rule change, as amended, is consistent with the requirements
of the Act and in particular with the requirements of Section 6(b)(5)
of the Act and the rules and regulations thereunder. It is therefore
ordered, pursuant to Section 19(b)(2) of the Act, that the proposed
rule change, as amended, (File No. SR-DTC-2006-16) be and hereby is
approved.\41\
---------------------------------------------------------------------------

    \41\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\42\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-16455 Filed 7-10-09; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 87, Number 34 (Friday, February 18, 2022)]
[Notices]
[Pages 9340-9341]
[FR Doc No: 2022-03574]

-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

Combined Notice of Filings #1

    Take notice that the Commission received the following electric
rate filings:

    Docket Numbers: ER20-2148-005.
    Applicants: Lexington Chenoa Wind Farm LLC.
    Description: Compliance filing: Informational Filing Pursuant to
Schedule 2 of the PJM OATT & Request for Waiver to be effective N/A.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5235.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-411-001.
    Applicants: Southwest Power Pool, Inc.
    Description: Tariff Amendment: Deficiency Response in ER22-411-
Licoln Electric System Formula Rate to be effective 1/1/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5209.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-469-001.
    Applicants: Southwest Power Pool, Inc.
    Description: Tariff Amendment: 1148R31 American Electric Power
NITSA and NOAs to be effective 12/1/2021.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5150.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-928-001.
    Applicants: Pacific Gas and Electric Company.
    Description: Tariff Amendment: Withdraw Appx G from Q4 2021 CCSF
WDT SA (SA 275) to be effective 2/1/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5201.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-1027-000.
    Applicants: Associated Electric Cooperative, Inc.
    Description: Request for Waiver of Tariff Provisions, et al. of
Associated Electric Cooperative, Inc.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5174.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1033-000.
    Applicants: PJM Interconnection, L.L.C.
    Description: Sec.  205(d) Rate Filing: Original CRA, Service
Agreement No. 6359, Non-Queue No. NQ182 to be effective 1/12/2022.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5233.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1034-000.
    Applicants: PJM Interconnection, L.L.C.
    Description: Sec.  205(d) Rate Filing: Original CRA, Service
Agreement No. 6360, Non-Queue No. NQ184 to be effective 1/12/2022.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5242.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1035-000.
    Applicants: RE Gaskell West LLC.
    Description: Tariff Amendment: Notice of Cancellation of Cert of
Concurrence to Shared Facilities Agreement to be effective 2/12/2022.

    Filed Date: 2/11/22.
    Accession Number: 20220211-5245.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1036-000.
    Applicants: PJM Interconnection, L.L.C.
    Description: Sec.  205(d) Rate Filing: Original CRA, Service
Agreement No. 6361, Non-Queue No. NQ186 to be effective 1/12/2022.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5246.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1037-000.
    Applicants: RE Gaskell West 2 LLC.
    Description: Sec.  205(d) Rate Filing: Certificate of Concurrence
to Shared Facilities Agreement to be effective 2/12/2022.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5247.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1038-000.
    Applicants: RE Gaskell West 3 LLC.
    Description: Sec.  205(d) Rate Filing: Certificate of Concurrence
to Shared Facilities Agreement to be effective 2/12/2022.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5248.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1039-000.
    Applicants: New England Power Pool Participants Committee, ISO New
England Inc.
    Description: Sec.  205(d) Rate Filing: New England Power Pool
Participants Committee submits tariff filing per 35.13(a)(2)(iii:
Sunwave Termination Filing to be effective 4/13/2022.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5253.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1040-000.
    Applicants: Pacific Gas and Electric Company.
    Description: Sec.  205(d) Rate Filing: 1st Amendment to SVP TO SA--
revisions to Appx F (SA 343) to be effective 4/12/2022.
    Filed Date: 2/11/22.
    Accession Number: 20220211-5254.
    Comment Date: 5 p.m. ET 3/4/22.

    Docket Numbers: ER22-1041-000.
    Applicants: ISO New England Inc.
    Description: ISO New England Inc. submits Fourth Quarter 2021
Capital Budget Report.
    Filed Date: 2/10/22.
    Accession Number: 20220210-5211.
    Comment Date: 5 p.m. ET 3/3/22.
    Docket Numbers: ER22-1042-000.
    Applicants: ACT Commodities, Inc.
    Description: Tariff Amendment: ACT Commodities Inc. MBR
Cancellation Filing to be effective 2/15/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5071.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-1043-000.
    Applicants: PJM Interconnection, L.L.C.
    Description: Sec.  205(d) Rate Filing: Original WMPA, Service
Agreement No. 6364; Queue No. AG2-374 to be effective 1/17/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5110.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-1044-000.
    Applicants: PJM Interconnection, L.L.C.
    Description: Sec.  205(d) Rate Filing: Original WMPA, Service
Agreement No. 6365; Queue No. AE2-309 to be effective 1/17/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5118.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-1045-000.
    Applicants: Midcontinent Independent System Operator, Inc., Ameren
Illinois Company.
    Description: Sec.  205(d) Rate Filing: Midcontinent Independent
System Operator, Inc. submits tariff filing per 35.13(a)(2)(iii: 2022-
02-14_SA 3028 Ameren IL-Prairie Power Project #36 Windsor to be
effective 4/16/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5177.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-1046-000.
    Applicants: Northern States Power Company, a Minnesota corporation.
    Description: Sec.  205(d) Rate Filing: 2022-02-14-NSP-SCPU-SISA-
672-0.0.0 to be effective 2/15/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5182.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-1047-000.
    Applicants: Alliance For Cooperative Energy Services Power
Marketing LLC.
    Description: Tariff Amendment: Notice of Cancellation of FERC
Electric MBR Tariff, Rate Schedule FERC 1 to be effective 2/15/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5195.
    Comment Date: 5 p.m. ET 3/7/22.

    Docket Numbers: ER22-1048-000.
    Applicants: Hecate Energy Highland LLC.
    Description: Sec.  205(d) Rate Filing: Certificate of Concurrence
to Assignment, Co-Tenancy, and SFA to be effective 2/15/2022.
    Filed Date: 2/14/22.
    Accession Number: 20220214-5218.
    Comment Date: 5 p.m. ET 3/7/22.

    The filings are accessible in the Commission's eLibrary system
(https://elibrary.ferc.gov/idmws/search/fercgensearch.asp) by querying
the docket number.
    Any person desiring to intervene or protest in any of the above
proceedings must file in accordance with Rules 211 and 214 of the
Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00
p.m. Eastern time on the specified comment date. Protests may be
considered, but intervention is necessary to become a party to the
proceeding.
    eFiling is encouraged. More detailed information relating to filing
requirements, interventions, protests, service, and qualifying
facilities filings can be found at: http://www.ferc.gov/docs-filing/efiling/filing-req.pdf. For other information, call<PHONE_NUMBER>
(toll free). For TTY, call<PHONE_NUMBER>.

    Dated: February 14, 2022.
Kimberly D. Bose,
Secretary.
[FR Doc. 2022-03574 Filed 2-17-22; 8:45 am]
BILLING CODE 6717-01-P


Response: There is nothing in our proposed or final rule that would disallow the use of such measures in the way recommended. 159 Comment: One commenter notes that the phrase " attains the level of the 1 hour NAAQS" raises questions concerning EPA's intent. Three years of data are needed to determine whether an area's air quality meets the one hour standard. Part 50, App. H. Thus, mere short term occurrences of air quality at or below " the level" of the standard does not demonstrate air quality meeting the standard. The commenter also notes that, even if an area does have three years of air quality data meeting the one hour standard, EPA lacks authority to jettison the one hour requirements. Those requirements are textually applicable, and also serve an important role in achieving compliance with the eight hour standard. The commenter notes that areas meeting the one hour standard may still have air quality violating the 8 hour standard.

Response: We recognize that three years of data are needed to determine if an area attains the standard, and the proposal was not intended to do otherwise. However, this point is now moot since our final rule uses attainment of the 8 hour standard as the point in time when areas may relegate mandatory control measures to contingency measure status. 160 E. WHAT ASPECTS OF TRANSPORTATION CONFORMITY AND THE 8 HOUR OZONE STANDARD ARE ADDRESSED IN THIS PROPOSAL?

This subject was discussed in section VI. M. of the June 2, 2003, notice ( 68 FR 32841). However, we did not propose any rule on transportation conformity under the 8 hour standard. We did receive comments, however, which are discussed below.

Comment: Several commenters specifically called for, or supported EPA's intention to propose, new conformity regulations. Among the reasons cited were that the rules promulgated after the passage of the Clean Air Act Amendments of 1990 are not adequate to address the problems associated with the implementation of the new ozone and particulate matter standards; and that the proposed new standard imposes a significant burden on planning officials, especially in those areas that are already very close to attaining the standard. One commenter stated " EPA needs to seriously consider new regulations or urge Congress to act through legislation to avoid these senseless mandates." This commenter also stated that EPA needs to address the transition period between the 1 hour and 8 hour standard to help transportation planners avoid having to use the arbitrary build/ no build test to comply with transportation conformity requirements. Other commenters suggested that updates to the conformity tests are necessary, and indicated the regulation needs to provide flexibility as to which conformity tests will be allowed prior to the establishment of the 8 hour ozone budgets in the new SIPs.

Several commenters indicated their desire to comment on the proposed transportation conformity rule, or their willingness to work with EPA in the development of that rule. Commenters committed to identify ways to develop a conformity process that would have the potential to add value, especially in areas under subpart 1, and yet stay focused on the intent of conformity: to ensure consistency with SIPs. One commenter emphasized the importance of clarity and consistency in the conformity rulemaking.

Response: In our November 5, 2003, transportation conformity proposal ( 68 FR 62690), EPA proposed some changes to the transportation conformity regulations to specifically address the new 8 hour ozone and fine particulate matter air quality standards. EPA has endeavored to be both clear and consistent while offering as much flexibility as possible to meet statutory requirements in our November 5, 2003, transportation conformity proposal. This proposal includes options for determining conformity in the transition period between the point when conformity applies and the point when SIP budgets are available for the new standards. We proposed to allow 8 hour areas with 1 hour ozone SIPs to use the budgets from their 1 hour SIPs to determine conformity with the 8 hour standard where appropriate. Please refer to this proposal for additional details; the docket number for this rulemaking is OAR 2003 0049.

EPA developed the transportation conformity proposal with the input and help of transportation planners, air quality planners, and transportation and environmental interest organizations. We appreciate the willingness of these agencies to work with us in developing the rule and recognize the value of their input on the proposed and final regulations. 161 Comment: Some commenters suggested that EPA provide flexibility in transportation conformity for areas that are overwhelmingly affected by transport from other areas, since these areas have limited ability to implement local measures to reduce ozone precursors. Two of these commenters added that conformity flexibility is needed for all subpart 1 areas. Commenters suggested that EPA establish a de minimis provision, reopen the Early Action Compact program or develop something similar, or enable these areas to use pre 1990 conformity procedures, because methods such as these would achieve the goal of attainment without placing an unnecessary burden on federal, state, or local planning agencies.

In addition to the commenters who suggested flexibility for transport areas, two commenters suggested that a de minimis test be developed for all areas that implement transportation conformity, similar to the de minimis test used in the general conformity program. These commenters added that such a test would reduce administrative burden and create parity in conformity requirements between stationary and mobile sources.

Another commenter believed that implementing conformity in new counties for the 8 hour ozone standard requires a different approach than the transition rules put into place when the existing conformity regulation was first promulgated following passage of the Clean Air Act Amendments of 1990. [ OAR 2003 0079 0298, 0209, 0213, 0205, 0161, 0167, 0343]

Response: EPA cannot allow areas affected by transport, or subpart 1 areas, to use pre 1990 conformity procedures. The Clean Air Act is clear that the requirements of section 176( c)   including a determination that emissions expected from implementation of transportation plans and TIP are consistent with estimates of emissions in the SIP   apply to all areas designated nonattainment and areas designated attainment subject to a section 175A maintenance plan.

However, EPA has proposed flexibility in meeting statutory requirements for transportation conformity for all areas, including those areas affected by transport, and those classified in subpart 1, in our November 5, 2003, proposed rulemaking ( 68 FR 62690 62729). Please refer to this proposal for additional details.

EPA does have a type of de minimis provision for the transportation conformity rule. Since EPA promulgated the original conformity rule in 1993, we have not required areas with insignificant motor vehicle emissions to conduct a regional emissions analysis for a pollutant or precursor that EPA has determined is insignificant to an area's air quality problem. In the November 5, 2003, transportation conformity proposal for the new 8 hour ozone and fine particulate matter standards, we have proposed two changes to incorporate our existing insignificance policy in the conformity rule; please refer to the discussion at 68 FR 62715.

Comment: One commenter representing metropolitan planning organizations supported using the motor vehicle emissions inventories for the year 2002 as de facto interim budgets for conformity determinations, before 8 hour areas have SIPs for the 8 hour standard. This commenter also suggested that the motor vehicle emissions inventory could be decreased 3% per year between the 162 base year of 2002 and the attainment year, to represent " reasonable further progress" for the transportation sector.

Response: As these comments relate to transportation conformity tests, EPA will address them in the context of the transportation conformity rule amendments we proposed for the new 8 hour ozone and fine particulate matter standards on November 5, 2003 ( 68 FR 62690). Therefore, EPA will respond to these comments in full in the response to comments document we prepare for the conformity rulemaking. Please refer to docket OAR 2003 0049 for a complete response to these comments.

EPA understands the commenter's point that the 2002 inventory is similar to a budget, but does not agree that the 2002 inventory could be used as a " de facto budget" for every area. The current conformity rule allows marginal and below ozone areas to choose between interim emissions tests, which are the baseline year test and the build/ no build test. We have proposed changes to both of these tests in the November 5, 2003, transportation conformity proposal ( 68 FR 62690); we have proposed that the baseline year for the areas designated under the 8 hour standard would be 2002. For marginal and below areas that choose the baseline year test, the baseline year inventory does serve a similar purpose to that of a budget. However, the current conformity rule requires both the baseline year test and the build/ no build test for moderate and above ozone areas. We proposed several choices for these areas in the November 5, 2003, proposed rule, but at this point, we have not concluded that the baseline year test alone serves the same purpose as a budget for these areas. We will be responding to this issue in the context of the rulemaking on conformity tests for the new standards.

EPA appreciates the commenter's idea to decrease inventories incrementally for the purpose of the baseline year conformity test. However, given that EPA did not propose this idea in the November 5, 2003, transportation conformity proposal, it is unlikely that we will be able to include it in the final rule. EPA will consider this issue in the context of the proposed transportation conformity rule for the new standards.

Comment: Several commenters on both the transportation and air quality planning sides of the conformity process indicated that it is difficult to comment on the implementation proposal without the proposal for updating the transportation conformity regulations. Commenters stated that " we all stand at a distinct disadvantage in making informed decisions on resource allocation and priorities over the coming months and as the 8 hour standard is implemented." These commenters stated that transportation conformity is an essential component of the new standard, and that it is critical for EPA to develop a proposed rule as quickly as possible on how the transportation conformity requirements would apply under the 8 hour ozone standard. A couple of commenters advocated that EPA should have its conformity proposal done by the finalization of the 8 hour ozone designations.

Response: EPA agrees it was necessary to complete rulemaking on the transportation conformity rule revisions as soon as possible; our transportation conformity proposal, which addresses 163 conformity in areas that will be designated for the new 8 hour ozone and the fine particulate matter standards, was published on November 5, 2003 ( 68 FR 62690  62729). EPA is currently planning to take final action on the proposed changes to the conformity rule in the Spring of 2004, in time to implement conformity under the 8 hour standard.

Comment: One commenter was concerned that states were required to submit proposed nonattainment area designations for the 8 hour ozone standard before the 8 hour implementation rule was finalized and before the transportation conformity rule for implementing the 8 hour standard was proposed. The commenter indicated that states needed this regulatory guidance to make fully informed decisions regarding the boundaries and classification of the proposed 8 hour nonattainment areas. EPA should have published this guidance with sufficient lead time for the states to understand and use this information in their nonattainment designation proposals.

Response: EPA acknowledges that the regulatory text for the 8 hour implementation rule and the transportation conformity proposal were not available at the time states made boundary recommendations. The implementation rules, however, are not relevant for determining whether an area is violating the 8 hour ozone NAAQS or is a nearby area contributing to a violation of the 8 hour NAAQS.

EPA notes that EPA believes states had sufficient information to make boundary recommendations. At the point when states had to make boundary recommendations, the 8 hour implementation proposal had been published and EPA had done extensive outreach with states, both to offer opportunity for input and to ensure that the options EPA proposed were communicated. In addition, EPA provided a significant amount of outreach to states and conformity implementers in developing the conformity proposal for the new standards, which occurred prior to states having to make boundary recommendations. Therefore, we believe states had a reasonable sense of what would eventually be in both rules. Furthermore, the conformity regulations have been around for years and the program is familiar for the majority of states that will have 8 hour ozone nonattainment areas.

EPA would also like to acknowledge that states should have based their boundary recommendations on relevant considerations related to air quality and contribution to a violation of the standard as defined by the statute. The nature of the requirements for attainment planning and conformity should not influence the determination of proper boundaries for nonattainment areas.

Comment: The proposal states, " no changes in transportation conformity are proposed." However, the rule proposes to change when conformity would apply, and discusses an option under the New Source Review program ( i. e., a " Clean Air Development Community" ( CADC)) that would affect transportation conformity.

Response: The 8 hour implementation proposal stated " we are not proposing changes to the transportation conformity rule in this proposed rulemaking" ( 68 FR 32841), and we did not. Instead, we discussed how the existing statutory 1 year grace period for conformity in newly 164 designated areas would apply in different areas and the connection between this grace period and the revocation of the 1 hour ozone standard. The proposal also describes an option under the New Source Review program, ( the CADC option), which would affect conformity implementation but would not require a change in the conformity regulations. We specifically included a question and answer in the conformity portion of the preamble to point readers interested in conformity to the description of the CADC option. Currently, EPA does not intend to proceed with this proposed option.

VI. M. 4. When Does Transportation Conformity Apply to 8 hour Ozone Nonattainment Areas Comment: One commenter questioned whether it would be possible to avoid having to do a conformity determination in both 2004 and 2005. This area is scheduled to complete a new conformity determination in early 2004 using the 1 hour budgets. According to the proposed 8 hour implementation rules, this new conformity determination will apply until spring of 2005, when conformity under the 8 hour standard will apply. Given that this area would be using the 1 hour budgets for conformity under the 8 hour standard, could the area move directly to the 8 hour conformity determination to avoid the time and expense of having to determine conformity twice?

Response: In the development of the final transportation conformity rule for the new air quality standards, EPA can consider the question at the heart of this comment: whether an area using 1 hour budgets for 8 hour conformity has to redetermine conformity by the end of the grace period if it has recently completed a conformity determination for the 1 hour standard, and the geographic boundaries of the 8 hour area and the 1 hour area are identical. EPA preliminarily believes that the commenter's concerns can be addressed, and we will address this issue in our final conformity rule for the new standards.

Comment: Several commenters recommended that EPA defer the implementation of mandatory measures, such as new source review and transportation conformity, until 2007 in those areas that will meet the 8 hour ozone standard by that date. This is three years following the implementation of the NOx SIP Call. If the area fails to comply with the 8 hour ozone standard by the close of the 2007 ozone season, these measures would immediately go into effect. If mandates for these areas are unavoidable, we believe that EPA should establish a less stringent form of new source review and transportation conformity.

Response: Clean Air Action section 176( c)( 6) provides a one year grace period before conformity applies for a given pollutant and air quality standard. EPA believes that this statutory language precludes EPA from extending the conformity grace period beyond one year for new 8 hour ozone nonattainment areas. On November 5, 2003, EPA proposed several options for implementing the transportation conformity requirements under the new air quality standards, including several options that would provide additional flexibility in the time period before 8 hour ozone SIPs are submitted. We will be considering comments received on this proposal as we develop the final transportation rule for the new standards. 165 VI. M. 6. How does the 1 year grace period apply in " donut'` areas?

Comment: Several commenters were concerned that EPA was proposing changes for how conformity is to be determined in so called " donut areas." Donut areas are those areas within a nonattainment area's boundary that are outside of the area covered by a metropolitan planning organization ( MPO). The current conformity rule and DOT's metropolitan planning regulations require cooperative planning and analysis between the MPO and the State department of transportation. Commenters were concerned that the preamble indicated that the MPO was solely responsible for the transportation conformity analysis in a donut area. Commenters recommended any change with regard to whom is responsible for conformity in donut areas be removed from this proposed rulemaking.

Response: EPA did not intend to propose any change with regard to the agencies that are responsible for determining conformity in donut areas. We agree with the commenters that the current regulations regarding donut areas are appropriate for 8 hour ozone areas, that is, that consultation processes need to include a process for MPOs and the state departments of transportation or other relevant agencies to determine conformity in donut areas.

Miscellaneous Comment: One commenter requests that EPA retract the memorandum dated April 19, 2000, the National Memorandum of Understanding Between the U. S. Department of Transportation and the U. S. Environmental Protection Agency. Appendix A of this memorandum created the requirements for interim plans and transportation improvement programs ( TIPs). The requirement for interim plans and TIPs was reiterated in the federal Department of Transportation's January 2, 2002, memorandum titled, " Revised Guidance for Implementing the March 1999 Circuit Court Decision Affecting Transportation Conformity," and in the February 7, 2002, Federal Register notice that published this guidance, but public comments were never solicited on this requirement.

Response: EPA has no intention of retracting the memo mentioned by the commenter. This joint memorandum of understanding ( MOU) between EPA and DOT establishes the administrative procedures that EPA and DOT will follow when a conformity lapse is imminent, and ensures the proper implementation of the existing transportation conformity rule's provisions through better and more efficient EPA and DOT consultation.

We do not believe that notice and comment was appropriate for this memo or its attachment. EPA and DOT did not create a new requirement for interim plans and TIPs in the attachment to this memo. Federal law requires that projects be in a plan and TIP to receive title 23 and title 49 funds. The attachment to this memo simply clarified an existing regulation that allows areas that do not have a conforming plan and TIP to proceed with new transportation control measures through a mechanism to facilitate federal implementation of those projects that are not subject to conformity requirements. 166 EPA also notes that this comment regarding the MOU is outside the scope of this rulemaking.

Comment: A coalition of environmental groups requested that EPA and DOT promptly issue long promised additional model guidance and regulations to assure that nonattainment areas properly account for induced land use and traffic effects in conformity analysis and SIP transportation modeling. EPA should also take steps in the 8 hour ozone implementation framework to ensure better analysis tools and assumptions are used by the agency and by DOT to support preparation of SIPs and conformity determinations.

Response: Modeling guidance for conformity implementation was not a topic covered by this rulemaking. In 2001, EPA and DOT issued joint guidance on the appropriate information to use in modeling ( January 18, 2001, Memorandum entitled, " Use of Latest Planning Assumptions in Conformity Determinations"). EPA and DOT remain committed to facilitating information exchange on advancements in modeling, and will work with stakeholders as appropriate to improve the state of the practice of modeling.

Comment: EPA needs to clarify when conformity applies for the 8 hour ozone standard, including the effective date. This commenter recommended that EPA seek legislation to ensure that the 8 hour conformity requirements occur in new nonattainment areas six months after EPA finds 8 hour SIP budgets adequate. Additionally, the commenter recommended that the areas currently in nonattainment for the l hour standard continue conformity requirements for existing nonattainment areas until the new 8 hour conformity requirements take effect.

Response: Since the legislation suggested by the commenter does not exist at this time, EPA is finalizing its proposal to revoke the 1 hour ozone standard one year after the effective date of the 8 hour ozone designations. Conformity applies for the 8 hour ozone standard one year after the effective date of EPA's initial nonattainment designation for a given pollutant and standard, consistent with Clean Air Act section 176( c)( 6) and § 93.102( d) of the conformity regulation. Conformity will continue for the 1 hour standard until the 1 hour standard is revoked one year after the effective date for 8 hour designations ( at which time conformity requirements for the 8 hour standard take effect). EPA does not believe legislation requiring conformity within 6 months of an adequate budget is necessary or appropriate since conformity is required by the statute and under EPA's regulations before any new transportation activity occurs, and within 18 months of an adequate budget. EPA believes that areas need significantly more time than 6 months to complete a conformity determination after a new adequate SIP budget. 167 F. WHAT REQUIREMENTS FOR GENERAL CONFORMITY SHOULD APPLY TO THE 8 HOUR OZONE STANDARD?

This subject was discussed in section VI. N. of the June 2, 2003, notice ( 68 FR 32842). However, we did not propose any rule on transportation conformity under the 8 hour standard. We did receive comments, however, which are discussed below.

VI. N. What requirements for General Conformity should apply to the 8 hour ozone standard?

Comment: One commenter agrees with EPA's explanation of how the General Conformity rule would apply during the transition from the 1 hour to the 8 hour standard, as well as the de minimis levels that would apply to nonattainment areas based on the option 2 classification scheme. Commenter also supports EPA's recommendation that State and local agencies incorporate growth in State Implementation Plan ( SIP) budgets to accommodate future actions at federal facilities.

Response: No response is necessary, as this comment supports the adopted approach.

VI. N. 5. a. What de minimis emission levels will be set for ozone precursors?

Comment: One commenter disagrees with the way in which de minimis levels for VOCs are set. The think that the de minimis levels should be tied to the Maximum Incremental Reactivity of the VOCs emitted, rather than the mass of VOCs emitted. Their disagreement is based upon the findings of the Texas Air Quality Study 2000, which was the largest air quality study ever conducted in Texas. The study was designed to improve understanding of the factors that control the formation and transport of air pollutants along the Gulf Coast of southeastern Texas. During this study, researchers found that ozone formation in Houston is dominated by the reaction of a few highly reactive VOCs, including ethylene, propylene, 1,3 butadiene, and butenes. The findings have been corroborated by TCEQ's analysis of 1996 2002 VOC data from Houston. These compounds have been recognized as highly reactive VOCs, which form more ozone than most other VOCs. Calculation of de minimis based upon mass of VOCs ignores the fact that some VOCs are much more effective at making ozone than others. Therefore, the commenter CEQ recommends that the de minimis levels for VOCs be based on reactivity as opposed to mass, because mass is not a good indicator of ozone production.

Response: The proposal to base the de minimis emission level on the maximum incremental reactivity ( MIR) is an interesting idea. However, the implementation of such an approach is premature. EPA has formed the Reactivity Research Working Group to study the incorporation of reactivity on VOCs into EPA's policies. In addition, EPA has recently issued an advanced notice of proposed rulemaking on the subject. Depending upon the results of those activities, EPA may in the future evaluate the use of MIR in determining de minimis emission levels. 168 VI. N. 5. c. Are there any other impacts on the SIPs related to general conformity based on implementation of the 8 hour standard?

Comment: In the proposed rule EPA encouraged state and local air quality agencies to work with major facilities that are subject to the general conformity regulations to " establish an emission budget for those facilities in order to facilitate future conformity determinations." One commenter was concerned over establishing emissions " budgets" for conformity purposes. A budget implies a cap that restricts growth. The commenter agreed that facilities should work with the state and local air quality agencies to ensure that future emissions projections are included in the applicable SIPs, however, an emissions budget for a facility should not be established.

Response: A facility budget in a SIP would expedite the general conformity process by allowing the facility to identify their emissions in the SIP and by allowing the facility to take actions to reduce its emissions and thus increasing its margin for growth, Under the General Conformity rules, the budget would not be a cap, since the rules allow for growth in emissions if those emissions are offset.

VI. N. 6. How does the 1 year grace period apply to General Conformity determinations?

Comment: This section states that " once the 1 hour ozone standard is revoked in whole or in part, Federal Agencies will be required to conduct conformity determinations for the 8 hour standard if the project/ action is in an area designated nonattainment for that standard." One commenter believed that the general conformity process is an integral part of their ability to attain and maintain ambient air quality standards for ozone. They believe that eliminating the general conformity requirements for areas that are attainment for the 8 hour standard ( but have an existing 1 hour maintenance plan under CAA section 175A) constitutes backsliding. They recommended that EPA reconsider the application of general conformity in maintenance areas to be consistent with EPA's no backsliding objective.

Response: The Conformity Regulations, both general and transportation, are limited by law to nonattainment and maintenance areas. If the 1 hour standard is revoked and the area is attainment for the 8 hour standard, then there is no authority to require a conformity determination.