Interim Approach to Applying the Audit Policy to New Owners, 44991-45006 [E8-17715]

Agencies

• ENVIRONMENTAL PROTECTION AGENCY

[Federal Register Volume 73, Number 149 (Friday, August 1, 2008)]
[Notices]
[Pages 44991-45006]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-17715]


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ENVIRONMENTAL PROTECTION AGENCY

[EPA-HQ-OECA-2007-0291; FRL-8700-2]


Interim Approach to Applying the Audit Policy to New Owners

AGENCY: Environmental Protection Agency.

ACTION: Notice; request for comment.

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SUMMARY: The Environmental Protection Agency (``EPA'' or ``the 
Agency'') announces and requests comment on its Interim Approach to 
Applying the Audit Policy to New Owners (``Interim Approach''). (EPA's 
April 11, 2000 policy on ``Incentives for Self-Policing: Discovery, 
Disclosure, Correction and Prevention of Violations,'' is commonly 
referred to as the ``Audit Policy'' (65 FR 19618).) This Interim 
Approach offers a detailed description of how EPA will apply its Audit 
Policy to new owners of regulated facilities. Under the Interim 
Approach, EPA will offer certain incentives specifically tailored to 
new owners that want to make a ``clean start'' at their newly acquired 
facilities by addressing environmental noncompliance that began prior 
to acquisition. This Interim Approach is designed to motivate new 
owners to audit newly acquired facilities and use the Audit Policy to 
disclose, correct, and prevent the recurrence of violations. It is also 
designed to encourage self-disclosures of violations that will, once 
corrected, yield significant pollutant reductions and benefits to the 
environment. The incentives tailored for new owners include penalty 
mitigation

[[Page 44992]]

beyond what is provided in the Audit Policy, as well as the 
modification of certain Audit Policy conditions. Through applying a 
clear, transparent, and easily administered Interim Approach to 
resolving disclosures from new owners, the Agency seeks to use the 
Audit Policy to leverage its ability to make effective use of scarce 
government resources. If procedural and transaction costs can be 
minimized for regulators and self-disclosing new owners, EPA 
anticipates that the opportunity to work with new owners as they make 
clean starts at their new facilities can help secure higher quality 
environmental improvements more quickly and effectively than might 
otherwise occur.
    On May 14, 2007, EPA published a Federal Register Notice entitled 
``Enhancing Environmental Outcomes From Audit Policy Disclosures 
Through Tailored Incentives for New Owners'' (72 FR 27116) (``First 
Notice'') seeking public comment on whether and to what extent the 
Agency should consider offering tailored incentives to encourage new 
owners of regulated entities to discover, disclose, correct, and 
prevent the recurrence of environmental violations pursuant to the 
Audit Policy. The Agency received public comment supportive of the idea 
of offering tailored incentives to new owners, and decided to develop 
an approach to applying the Audit Policy to new owners. The Agency 
believes the most efficient way to effectively test this strategy, and 
learn from practical experience, is to implement it on an interim 
basis. Accordingly, the Agency has decided to begin applying the 
Interim Approach, effective upon publication of this Notice. EPA is 
concurrently seeking public comment on the Interim Approach for a 
period of 90 days. EPA will be reviewing public comment as it is 
received and will continue its dialogue with stakeholders on whether 
refinements to the Interim Approach are needed. In addition, the Agency 
will place into the public docket copies of agreements resolving 
violations disclosed by new owners under the Interim Approach. In any 
event, EPA intends to assess the effectiveness of the Interim Approach 
on a continual basis. Based on public comment and after the Agency has 
gained sufficient experience in implementing the Interim Approach, EPA 
will decide to finalize, revise or discontinue these tailored 
incentives for new owners.

DATES: The Interim Approach is effective upon publication of this 
Notice. EPA urges interested parties to comment on the Interim Approach 
in writing. Comments must be received by EPA no later than October 30, 
2008.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-HQ-
OECA-2007-0291, by one of the following methods:
     https://www.regulations.gov: Follow the on-line 
instructions for submitting comments.
     E-mail: docket.oeca@epa.gov, Attention Docket ID No. EPA-
HQ-OECA-2007-0291.
     Fax: (202) 566-9744, Attention Docket ID No. EPA-HQ-OECA-
2007-0291.
     Mail: Enforcement and Compliance Docket Information 
Center, Environmental Protection Agency, Mailcode: 2822T, 1200 
Pennsylvania Ave., NW., Washington, DC, 20460, Attention Docket ID No. 
EPA-HQ-OECA-2007-0291.
     Hand Delivery: Enforcement and Compliance Docket 
Information Center in the EPA Docket Center (EPA/DC), EPA West, Room B 
3334, 1301 Constitution Avenue, NW., Washington, DC. The EPA Docket 
Center Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday 
through Friday, excluding legal holidays. The telephone number for the 
Reading Room is (202) 566-1744, and the telephone number for the 
Enforcement and Compliance Docket is (202) 566-1927. Such deliveries 
are only accepted during the Docket's normal hours of operation, and 
special arrangements should be made for deliveries of boxed 
information.
    Instructions: Direct your comments to Docket ID No. EPA-HQ-OECA-
2007-0291. EPA's policy is that all comments received will be included 
in the public docket without change and may be made available online at 
https://www.regulations.gov, including any personal information 
provided, unless the comment includes information claimed to be 
Confidential Business Information (CBI) or other information whose 
disclosure is restricted by statute. Do not submit information that you 
consider to be CBI or otherwise protected through https://
www.regulations.gov. The https://www.regulations.gov Web site is an 
``anonymous access'' system, which means EPA will not know your 
identity or contact information unless you provide it in the body of 
your comment. If you send an e-mail comment directly to EPA without 
going through https://www.regulations.gov, your e-mail address will be 
automatically captured and included as part of the comment that is 
placed in the public docket and made available on the Internet. If you 
submit an electronic comment, EPA recommends that you include your name 
and other contact information in the body of your comment and with any 
disk or CD-ROM you submit. If EPA cannot read your comment due to 
technical difficulties and cannot contact you for clarification, EPA 
may not be able to consider your comment. Electronic files should avoid 
the use of special characters, any form of encryption, and be free of 
any defects or viruses. For additional information about EPA's public 
docket, visit the EPA Docket Center homepage at https://www.epa.gov/
epahome/dockets.htm.
    Docket: All documents in the docket are listed in the https://
www.regulations.gov index. Although listed in the index, some 
information is not publicly available, e.g., CBI or other information 
whose disclosure is restricted by statute. Certain other material, such 
as copyrighted material, will be publicly available only in hard copy. 
Publicly available docket materials are available either electronically 
at https://www.regulations.gov or in hard copy at the Enforcement and 
Compliance Docket Information Center in the EPA Docket Center (EPA/DC), 
EPA West, Room B 3334, 1301 Constitution Avenue, NW., Washington, DC. 
The EPA Docket Center Public Reading Room is open from 8:30 a.m. to 
4:30 p.m., Monday through Friday, excluding legal holidays. The 
telephone number for the Reading Room is (202) 566-1744, and the 
telephone number for the Enforcement and Compliance Docket is (202) 
566-1927.

FOR FURTHER INFORMATION CONTACT: For further information, contact 
Caroline Makepeace of EPA's Office of Enforcement and Compliance 
Assurance, Office of Civil Enforcement, Special Litigation and Projects 
Division at makepeace.caroline@epa.gov or (202) 564-6012.

SUPPLEMENTARY INFORMATION:

I. Background and Goals

A. Background on EPA's Exploration of Tailored Incentives for New 
Owners

1. Overview of the Audit Policy
    On April 11, 2000, EPA issued its revised final Audit Policy, or 
``2000 Audit Policy'' (65 FR 19618). The purpose of the Audit Policy is 
to enhance protection of human health and the environment by 
encouraging regulated entities to voluntarily discover, promptly 
disclose, expeditiously correct and prevent the recurrence of 
violations of federal environmental law. Benefits available to

[[Page 44993]]

entities that make disclosures under the terms of the Audit Policy 
include reductions in and, in some cases, the elimination of civil 
penalties and an EPA determination not to recommend criminal 
prosecution of disclosing entities (ultimate prosecutorial discretion 
resides with the U.S. Department of Justice).
    The Audit Policy contains nine conditions, and entities that meet 
all of them are eligible for 100 percent mitigation of any gravity-
based civil penalties that otherwise could be assessed in settlement of 
the disclosed violations. (``Gravity-based'' penalty refers to that 
portion of the civil penalty over and above the portion that represents 
the entity's economic gain from noncompliance, known as the ``economic 
benefit.'') Regulated entities that do not meet the first condition--
systematic discovery of violations--but meet the other eight conditions 
are eligible for 75 percent mitigation of any gravity-based penalties. 
The Audit Policy includes important safeguards to deter violations and 
protect the environment. For example, the Audit Policy requires 
entities to act to prevent recurrence of violations and to remedy any 
environmental harm that may have occurred. Repeat violations, those 
that resulted in serious actual harm to the environment, and those that 
may have presented an imminent and substantial endangerment are not 
eligible for relief under the Audit Policy. Entities and individuals 
also remain criminally liable for violations that result from conscious 
disregard of, or willful blindness to, their obligations under the law.
    Once a regulated entity discloses violations in writing to EPA, EPA 
evaluates the violations against the criteria set forth in the Audit 
Policy, and determines the appropriate enforcement response. For cases 
involving no assessment of penalties, the enforcement response for 
voluntary disclosures is usually a Notice of Determination (``NOD''). 
Audit Policy disclosures may also be resolved through an administrative 
consent agreement and final order, or a civil judicial consent decree. 
If the disclosure does not meet the conditions of the applicable 
policy, the matter is handled under the appropriate media-specific 
penalty policies, which often include penalty mitigation for voluntary 
disclosures.
    The Audit Policy and related documents are available on the 
Internet at https://www.epa.gov/compliance/incentives/auditing/
auditpolicy.html. Additional guidance for implementing the Policy in 
the context of criminal violations can be found at https://www.epa.gov/
compliance/resources/policies/incentives/auditing/auditcrimvio-mem.PDF. 
The Small Business Compliance Policy (65 FR 19630), published April 11, 
2000, is an additional voluntary disclosure policy that provides 
incentives for small businesses (of 100 or fewer employees) that 
voluntarily discover, promptly disclose and expeditiously correct 
environmental violations. More information on the Small Business 
Compliance Policy is available at https://www.epa.gov/compliance/
incentives/smallbusiness/.
2. How the Audit Policy Has Been Applied to New Owners
    Historically, EPA has recognized that additional flexibility in 
Audit Policy implementation may be appropriate for new owners. The 2000 
Audit Policy addressed new owners and repeat violations, focusing on 
pre-acquisition violations at the newly acquired facility: ``[i]f a 
facility has been newly acquired, the existence of a violation prior to 
acquisition does not trigger the repeat violations exclusion'' as to 
the new owner (65 FR at 19623). In addition, the Audit Policy states 
that, in the acquisitions context, EPA will consider extending the 
prompt disclosure period on a case-by-case basis. It also states that 
the 21-day disclosure period will begin on the date of discovery by the 
acquiring entity, but in no case will the period begin earlier than the 
date of acquisition. See 65 FR at 19622.
    EPA's primary interest is to encourage owners of newly acquired 
facilities to undertake a comprehensive examination of and improvements 
to a facility's environmental compliance and its compliance management 
systems. Notwithstanding a new owner's history of violations at its 
other facilities, if its efforts to examine and improve upon an 
acquired facility's environmental operations are thorough and are 
likely to result in improved compliance, EPA's intent is to encourage 
such examinations.
    On April 30, 2007, EPA issued the ``Audit Policy: Frequently Asked 
Questions (2007)'' document (``Frequently Asked Questions'') which 
recognizes that new owners are uniquely situated to examine and improve 
performance at newly acquired facilities.\1\ Specifically, EPA's Answer 
to Question 2 of the 2007 Frequently Asked Questions document provides 
that:
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    \1\ The 2007 Frequently Asked Questions document can be found on 
the Internet at https://www.epa.gov/compliance/incentives/auditing/
2007-faqs.pdf.
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     For new owners that in good faith undertake a compliance 
evaluation and inform the Agency of such actions, either by disclosure 
in writing or entry into an Audit Agreement, prior to submission of its 
first annual Title V certification, the violations disclosed would be 
considered voluntarily discovered for purposes of the Audit Policy.
    Generally, Clean Air Act (CAA) violations discovered during 
activities supporting Title V certification requirements are not 
eligible for penalty mitigation under the Policy. Condition 2 of the 
Audit Policy requires that disclosed violations must not be discovered 
through a legally mandated monitoring or sampling requirement 
prescribed by statute or regulation; therefore, examination of CAA 
compliance accompanying a Title V annual certification is not 
voluntary.\2\ However, EPA wants to encourage new owners to examine 
facility operations to determine compliance, correct violations, and 
upgrade deficient equipment and practices. Thus, for new owners that in 
good faith undertake such efforts and inform the Agency of such 
actions, either by disclosure in writing or entry into an audit 
agreement with EPA prior to submission of the facility's first annual 
Title V certification under new ownership, the violations disclosed 
would be considered voluntarily discovered for purposes of the Audit 
Policy.
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    \2\ Under the regulations governing CAA Title V permit 
applications and annual compliance certifications, any application, 
form, report or compliance certification is required to contain a 
certification by a responsible official of the truth, accuracy and 
completeness of information contained in such documents. The 
regulations further provide that ``[t]his certification and any 
other certification required under this part shall state that, based 
on information and belief formed after reasonable inquiry, the 
statements and information in the document are true, accurate, and 
complete.'' 40 CFR 70.5(d).
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    EPA's Answer to Question 5 of the 2007 Frequently Asked Questions 
document also provides that:
     New owners may be eligible for penalty mitigation under 
the Audit Policy for violations at newly acquired facilities 
irrespective of the disclosing entity's compliance history at other 
facilities.
3. First Federal Register Notice and Public Comment Process on This 
Topic
    EPA's First Notice was issued to solicit public input and 
information to be used in helping EPA better understand and formulate 
decisions about issues associated with offering

[[Page 44994]]

tailored Audit Policy incentives to new owners. The Agency identified 
for comment a series of questions: (1) Should EPA offer tailored 
incentives to encourage new owners of regulated entities to discover, 
disclose, correct, and prevent environmental violations; (2) how should 
the Agency determine who is a new owner; (3) what incentives should the 
Agency consider offering in order to encourage new owners to self-audit 
and disclose; and (4) if such tailored incentives are offered, what 
measures should the Agency use in determining whether and to what 
extent self-audits by and disclosures from new owners are achieving 
significant improvements to the environment. Formal notice and comment 
on such policy matters are not required, but the Agency thought it 
prudent to invite public input, given the significant objectives EPA 
hopes to achieve and its desire to develop any incentives in a 
transparent and inclusive way.
    EPA set up an electronic docket to facilitate the comment process 
for the First Notice and to make all the comments readily available to 
the public. The Agency also held two public meetings, in Washington, DC 
and San Francisco, California to facilitate oral comments. In addition, 
the day after each public meeting, the Agency invited a diverse and 
balanced group of industry, government, academic and interest group 
participants to smaller working sessions to discuss the same questions 
and issues that were posed in the First Notice. The working sessions 
were designed to give the Agency an opportunity to hear the views of a 
variety of individuals with different perspectives and experiences in a 
relatively informal and frank atmosphere, where remarks would be 
summarized but not attributed to individual participants. No consensus 
of opinion was sought or presented.
    The written comments, transcripts of the public meetings and 
summaries of the comments made during the working sessions, as well as 
the Notice itself are available in the docket at https://
www.regulations.gov, Docket ID No. EPA-HQ-OECA-2007-0291, or at the EPA 
Docket Center for which the physical address is listed above.
    EPA received thoughtful and informative comments in response to the 
First Notice that helped the Agency as it considered whether to proceed 
in developing an approach to applying the Audit Policy to new owners, 
and how to structure such an approach to meet the goals described below 
in section I.B.

B. EPA's Development of an Interim Approach to Applying the Audit 
Policy in the New Owner Context

    While EPA's Audit Policy program has been a successful effort to 
date, resolving disclosed violations involving over 3,500 entities and 
nearly 10,000 facilities, its potential as a tool to promote 
compliance, and in particular to produce significant pollutant 
reductions, has still not been fully realized. More than half of these 
Audit Policy disclosures have involved reporting violations which, 
while important for public information and safety purposes, may not 
produce significant reductions in pollutant emissions once the 
violations are corrected. Consistent with EPA's strategic plan, the 
Agency is seeking ways to increase the number of Audit Policy self-
disclosures that have the potential to yield significant environmental 
benefits while effecting compliance with federal environmental 
requirements. In developing and implementing an approach to applying 
the Audit Policy to new owners, the Agency has two primary goals: (1) 
To secure the prompt correction of environmental violations, and (2) to 
achieve significant pollutant reductions and improvements to the 
environment as efficiently and expeditiously as possible.
    Based in part on its recent experience with corporate auditing 
agreements and disclosures following acquisitions, the Agency believes 
that encouraging the new owners of regulated facilities to assess, 
disclose, and address environmental compliance at their newly acquired 
facilities presents a promising opportunity to achieve significant 
improvements to the environment in an expeditious and efficient way. 
EPA believes that when a new owner takes control of a facility, a host 
of factors may make it feasible and attractive for a new owner to focus 
on, and invest in, assessing and addressing environmental compliance 
issues. New owners may be well-situated to make an environmental 
``clean start'' because they may already be auditing and assessing 
their new facilities, may have funding available to fix problems, and 
have an opportunity to manage and reduce risk by addressing and 
disclosing noncompliance.
    Although EPA believes there are compelling reasons that new owners 
may be motivated to address noncompliance at their facilities, the 
Agency recognizes that there may be factors that new owners otherwise 
interested in using the Audit Policy perceive as disincentives. New 
owners may still have to pay substantial civil penalties under the 
Audit Policy, unless the economic benefit portion of the penalty is 
insignificant. Therefore, new owners may be reluctant to call EPA's 
attention to compliance issues at their newly acquired facilities when 
they themselves may not be fully aware of all the compliance issues 
presented. Particularly when many and/or complex facilities are 
involved, it may be difficult for new owners to have a reasonable idea 
of the full spectrum of compliance issues.
    In addition, the Agency's experience with implementing the Audit 
Policy, especially with regard to corporate auditing agreements, 
suggests that one of the major reasons a company may be hesitant to 
self-audit and disclose under the Audit Policy is uncertainty about how 
the Agency will treat such self-disclosures. EPA is currently making an 
effort to provide greater overall certainty and consistency in the 
Audit Policy's implementation, and the recently-issued 2007 Frequently 
Asked Questions document should help provide greater certainty about 
how the Agency will apply the Audit Policy to a particular set of 
facts. Nevertheless, there is likely still some hesitation on the part 
of new owners to self-disclose violations, because of concerns about 
exactly how such disclosures will be handled by the Agency.
    In the Interim Approach to applying the Audit Policy to new owners, 
described in this Notice, EPA is offering certain incentives to further 
encourage new owners to discover, disclose, correct and prevent the 
recurrence of violations that began prior to their acquisition. The 
incentives include penalty mitigation beyond what the Audit Policy 
generally provides and the clearly-stated modification of certain Audit 
Policy conditions. The Agency recognizes that there are equitable and 
policy arguments that a new owner should not be penalized for the full 
economic benefit relating to violations that arose before a facility 
was under its control, if that new owner is willing to promptly address 
such violations and make changes to ensure that the facility stays in 
compliance in the future. EPA anticipates that such incentives may make 
the difference in the willingness of new owners to come forward and 
commit to improving environmental compliance and reduce impacts on the 
environment.
    Through implementing a clear, transparent, and easily administered 
approach to resolving disclosures from new owners, the Agency seeks to 
use the Audit Policy to leverage its ability to make effective use of 
scarce

[[Page 44995]]

government resources. If procedural and transaction costs can be 
minimized for regulators and self-disclosing new owners, EPA expects 
that the opportunity to work with new owners as they make clean starts 
at their new facilities can help secure higher quality environmental 
improvements more quickly and effectively than might otherwise occur.
    The Agency intends to assess, on an ongoing basis, whether this is 
in fact a useful approach, yielding worthwhile results, and to consider 
whether such incentives produce any unintended adverse results, such as 
discouraging appropriate due diligence, timely compliance and/or the 
achievement and maintenance of a fair and level playing field. The 
approach will be implemented on an interim basis, with opportunity for 
changes or discontinuation, if warranted.

II. Interim Approach To Applying the Audit Policy To New Owners

    To further the goals described above in section I.B., EPA has 
developed an Interim Approach to applying the Audit Policy to new 
owners, which is described in this section. Comments that the Agency 
received from the public in response to the First Notice on this topic 
were supportive of developing tailored Audit Policy incentives for new 
owners. Many comments did include caveats that any successful approach 
would need to be reasonable, simple, certain and clear, with a 
predictable and streamlined resolution process that still allowed 
flexibility, where appropriate. The Agency decided that the most 
efficient way to effectively test and refine the approach would be to 
implement it on an interim basis, and reap the benefit of practical 
experience. Accordingly, with this Notice, EPA is announcing that the 
Agency will implement the Interim Approach, effective immediately. In 
addition, EPA is concurrently seeking comment on the overall design and 
specific elements of the Interim Approach, as well as on any relevant 
issues or considerations which may not appear to be reflected. In some 
sections, certain issues are specifically raised for comment.
    The Agency is now calling the initial phase of this project an 
Interim Approach rather than a pilot program. As EPA reviewed public 
comments, it appeared that certain misunderstandings arose from the 
concept of a ``program.'' Many commenters incorrectly perceived that 
the Agency was considering some sort of award or special status program 
which would bestow benefits on accepted members once they had 
``applied'' and met eligibility requirements. To others, the term 
``pilot'' appeared to imply, again incorrectly, that the use of this 
settlement approach would be a limited experiment, open only to a 
select group of new owners. Thus, EPA is now describing the first phase 
of applying of the Audit Policy to new owners as an Interim Approach. 
However defined, EPA intends to test the approach, and decide to 
continue, change, or abandon it, once the Agency has sufficient 
information and feedback to evaluate its effectiveness.

A. Definition of ``New Owner''

    EPA has developed a set of criteria defining which entities are 
eligible to be considered new owners under the Interim Approach.
1. Interim Approach to Defining ``New Owner''
    For purposes of the application of this tailored Interim Approach, 
an entity will be considered a ``new owner'' where it certifies to the 
following criteria:
    a. Prior to the transaction, the new owner was not responsible for 
environmental compliance at the facility which is the subject of the 
disclosure, did not cause the violations being disclosed and could not 
have prevented their occurrence;
    b. The violation which is the subject of the disclosure originated 
with the prior owner; and
    c. Prior to the transaction, neither the buyer nor the seller had 
the largest ownership share of the other entity, and they did not have 
a common corporate parent.
2. Discussion of the ``New Owner'' Definition
    In its First Notice, EPA sought comment on what should constitute a 
``new owner'' for purposes of being offered tailored incentives under 
the Audit Policy. Commenters on the First Notice generally urged EPA to 
define a ``new owner'' broadly and to consider that a wide range of 
transactions might potentially produce a qualifying new owner. While 
most commenters recommended that the Agency make no distinctions 
between asset, stock, or merger transactions, most did not believe that 
either new entities created in corporate ``spin-offs'' or owners who 
had prior control over the facility should qualify as new owners.
    The Agency intends that this Interim Approach apply only to new 
owners that did not control operations at the facility before the 
transaction, and only to violations that the new owner did not 
initiate. The first criterion of the definition of ``new owner'' asks 
the new owner to confirm the history of its relationship to the 
facility at issue, and to the violations being disclosed. EPA intends 
that this criterion be interpreted broadly, and in a common sense 
manner. For purposes of interpreting this criterion, the Agency's focus 
will be on ownership, or managerial, or operational control of the 
environmental operations at the facility. EPA will assume, for purposes 
of interpreting this criterion, that responsibility for environmental 
compliance or for any violations may be shared by corporate entities, 
controlling stockholders and operators and does not, for example, lie 
solely with individual employees or contractors at the facility.
    The second criterion specifies that the ``new owner'' approach will 
only be applied to violations that did not originate with the new 
owner, as opposed to violations that are wholly new and began after the 
transaction. For example, if the new owner were to install a new oil 
storage tank and fail to provide for required secondary containment 
pursuant to 40 CFR 112, such action would trigger a wholly new 
violation. If the new owner disclosed this violation to EPA, the Agency 
would not apply the new owner approach to resolve the disclosure, but 
would treat it as a regular Audit Policy matter. New owners should bear 
in mind that even if such violations would not qualify for new owner 
penalty mitigation and benefits, they may nonetheless be eligible for 
Audit Policy consideration.
    The third criterion serves several functions. Notwithstanding that 
a new owner might be willing and able to certify under the first 
criterion that it lacked actual control of operations at the facility, 
the Agency is proposing to exclude all new owners that had the largest 
pre-transaction ownership interest in the facility. Drawing this clear 
line at ``largest ownership share'' is intended to help ensure that the 
Agency is faced with fewer scenarios that raise questions about the 
extent of influence that the new and previous owners may have had over 
each other. Such questions might necessitate just the sort of analysis 
of corporate history and the terms of the transaction the Agency seeks 
to avoid because of efficiency and ambiguity concerns, and would raise 
transaction costs for all parties involved. This criterion excludes 
corporate spin-offs, because it excludes situations where a seller had 
the largest pre-transaction ownership share of the new owner entity, or 
was the new owner's corporate parent. The third criterion would allow 
participation by a

[[Page 44996]]

new owner which, prior to the transaction, was a silent or inactive 
partner in a joint venture, and then purchased the rest of the business 
and became the active owner, so long as its prior share was less than 
the largest, and the new owner can certify to the first criterion. It 
would also allow participation by a new owner which is the product of a 
merger, so long as neither party had previously held the greatest 
ownership share of the entity with which it merged. In the case of 
stock transactions, EPA intends that ``largest ownership share'' be 
interpreted to mean ownership of the largest number either of shares of 
stock or of voting rights. The third criterion also bars situations 
where the buyer and the seller had a common corporate parent. EPA 
assumes, for purposes of interpreting this criterion, that the 
corporate parent was in control of the prior owner, the ``new'' owner, 
and facility operations. Accordingly, where two companies have a common 
corporate parent and one subsidiary buys another, the acquiring entity 
is not sufficiently ``new'' to warrant this tailored application of the 
Audit Policy.
    The Agency's intent is to minimize the resources necessary to apply 
the Audit Policy to new owners, and sought a simple and direct way to 
identify owners who want to make a clean start for their newly acquired 
operations. EPA considered and preliminarily concluded that the 
expenditure of resources necessary to research and analyze corporate 
transactions would be so great as to be unworkable, and would detract 
from efficient and effective resolution of violations. Thus, the Agency 
decided, as a policy matter, to rely generally on a self-certification 
from the new owner that it meets the criteria in section II.A.1. New 
owners should be aware that this certification will be required as a 
condition to resolving disclosed violations.
    Most public comments about the certification issue advised that any 
required certifications not be so burdensome or complex as to chill new 
owners' interest in coming forward to the government. The eligibility 
criteria above are clear and straightforward, and the certification 
will simply be included along with the certifications made by the self-
disclosing entity that all Audit Policy conditions, as applied to new 
owners, have been met. This approach is designed to be sufficiently 
uncomplicated and manageable, while seeking to ensure that only 
appropriate new owners benefit from the Agency's Interim Approach.
    Commenters did suggest that the Agency might adopt a range of pre-
existing methods for defining ``new owner,'' which included: (1) Using 
the ``no affiliation'' or ``bona fide prospective purchaser'' 
definitions found in the Comprehensive Environmental Response, 
Compensation, and Liability Act (CERCLA), as amended by the Small 
Business Liability Relief and Brownfields Revitalization Act (Pub. L. 
107-118, 115 Stat. 2356, ``the Brownfields Amendments''); (2) requiring 
that the transaction occurred at ``at arms'' length;'' (3) adopting the 
change of ownership standards used for various federal environmental 
statutes; (4) relying on verification of ownership change by other 
regulatory agencies such as the Internal Revenue Service or Securities 
and Exchange Commission; (5) seeking assurance from the new owner that 
the transaction was not conducted to avoid penalties; (6) applying a 
``management test;'' and (7) using the definitions with which the State 
of New Jersey implements its Industrial Site Recovery Act (N.J.S.A. 
13:1K-6 and N.J.A.C. 7:26B).
    Consideration of all of these approaches was instructive and useful 
in developing the criteria. However, for a variety of reasons, EPA 
found that none of them seemed appropriate to adopt wholesale in the 
new owners context. Given the different scenarios to which the 
suggested definitions were meant to apply, and EPA's desire to provide 
clarity and certainty to the public, the Agency decided to adopt a 
bright-line approach that is easily understood and applied by regulator 
and regulated alike.
    The Agency hopes to be inclusive enough to maximize the number of 
facilities brought into compliance under the Audit Policy, and to 
ensure sufficient opportunities to fully test the Interim Approach. 
This definition of new owner is solely intended to apply to the 
application of the Audit Policy in the context of the Interim Approach. 
However, since the Agency is concerned that only appropriate new owners 
be eligible for the benefits of this approach, EPA specifically invites 
comment on the criteria for defining ``new ownership'' and whether the 
standard above is appropriate.

B. Timing for Availability of New Owner Incentives: For How Long Is an 
Owner ``New?''

1. Two Scenarios: Audit Agreement or Prompt Disclosure Within Nine 
Months of Closing
    Under this Interim Approach, EPA will consider an owner ``new,'' 
and eligible for ``new owner'' treatment and benefits, for nine months 
after the date of the transaction closing. For nine months after the 
date of the transaction closing, the new owner can choose to make 
disclosures in two different contexts, which are described in detail in 
sections a. and b. below. The new owner can choose to enter into an 
audit agreement which will specify the facility or facilities to be 
audited, the scope of regulatory programs covered, dates for completion 
of audits and disclosure of violations. Alternatively, the new owner 
can choose to make disclosures individually, as violations are 
discovered, but each disclosure would have to be made promptly, within 
21 days of discovery, or within 45 days of the closing, whichever is 
longer. See section II.E.3., ``Prompt Disclosure Condition,'' below. A 
new owner could also elect to make separate individual disclosures as 
described below in section II.B.1.b., and then decide to enter into an 
audit agreement and make further disclosures under that agreement. Of 
course, such an audit agreement would need to be entered into within 
nine months of the closing date for the transaction.
    a. New Owner Enters into an Audit Agreement with EPA, within Nine 
Months of the Closing, and Receives ``New Owner'' Audit Policy 
Consideration, for Violations Disclosed Pursuant to that Agreement.
    An audit agreement provides the opportunity to tailor timeframes 
and expectations to the new owner's unique situation. While the audit 
agreement approach is optional, it is highly recommended if the 
circumstances or complexity of facilities would likely require more 
time to audit or if a new owner expects to be making more than one 
disclosure to EPA. An audit agreement also reduces uncertainty, for 
both the new owner and EPA, as it specifies the timeframes for 
completing the audit, the facilities covered, the environmental 
requirements to be evaluated, and when the discovered violations will 
be disclosed.
    Most importantly, and consistent with EPA practice, an audit 
agreement ``stops the clock'' with regard to the Prompt Disclosure 
condition, for violations discovered and disclosed pursuant to the 
agreement. An audit agreement also ``stops the clock'' with regard to 
the disclosure of violations that involve required monitoring, sampling 
or auditing, if the new owner enters into an audit agreement prior to 
the first instance when such action is required. See section II.E.2., 
``Voluntary Discovery Condition,'' below.
    ``Entering into an audit agreement'' means that (1) the new owner 
has

[[Page 44997]]

committed in writing to audit a specific newly acquired facility or 
facilities, (2) the new owner has specified the scope of regulatory 
programs to be covered, dates for completion of the audits and dates 
for the disclosure of violations found, and (3) EPA has accepted those 
terms. EPA reserves its right to negotiate with the new owner about the 
scope, timing and sequence of the audits and disclosures. An audit 
agreement may be entered via a formal bilateral agreement or through an 
exchange of letters, provided the letters reflect a meeting of the 
minds and contain the appropriate information and commitments.
    EPA does not intend that entering into an audit agreement be a 
lengthy or resource-intensive process for either new owners or the 
Agency. While the Agency will not disqualify a new owner whose audit 
agreement was not finalized before the end of the nine-month period 
because of delay on the part of EPA, new owners seeking an agreement 
should approach the Agency as early as possible, sufficient to allow a 
reasonable time to finalize an audit agreement with EPA.
    b. New Owner Audit Policy Treatment Will Be Available for 
Violations Disclosed Within Nine Months After the Transaction Closing, 
as Long as the New Owner Discloses and Corrects Each Violation 
Promptly, and Meets All Other Conditions of the Audit Policy.
    If a new owner prefers not to commit to performing audits and 
making disclosures within particular timeframes, it need not choose the 
audit agreement option, and can make individual disclosures as they are 
found, during the nine months following acquisition. This option may 
give a new owner more control over, and privacy concerning, its 
auditing, but to be eligible for new owner Audit Policy incentives, 
each violation found must be disclosed and corrected promptly, as 
described below in sections II.E.3. ``Prompt Disclosure Condition,'' 
and II.E.5. ``Correction and Remediation Condition.'' This option also 
requires that the new owner disclose any violations that involve 
required monitoring, sampling or auditing prior to the first instance 
when such action is required, in order to meet the Voluntary Discovery 
condition, and be eligible for Audit Policy consideration, as described 
in section II.E.2. ``Voluntary Discovery Condition.'' Of course, each 
disclosure would also have to meet the other six Audit Policy 
conditions, as applied to new owners.
2. Discussion of Timing
    In the First Notice, EPA asked for comment on the issue of how long 
after acquisition an owner should be considered ``new'' for purposes of 
being eligible for new owner Audit Policy benefits. While some 
commenters suggested six months, the majority recommended one year or 
more, up to three years. Commenters described the challenges of making 
decisions about auditing and disclosing when, after an acquisition, 
there are many immediate and competing priorities.
    The Agency recognizes that post-transaction demands may make it 
difficult to focus corporate attention on an immediate evaluation of 
environmental compliance issues, especially when the company would have 
to make a potentially expensive commitment to conduct audits and 
address noncompliance. The Agency believes that requiring such 
potentially high-stakes decision-making too quickly after the 
transaction, before the new owner has had the chance to operate its 
facility, would mean that fewer new owners would come forward, 
notwithstanding that, given more time for consideration and analysis of 
the situation, some would have indeed used the Audit Policy. Since 
EPA's intent is to encourage new owners to audit and disclose, and work 
with the Agency to correct problems, it seems advisable to provide 
sufficient time for decision-making.
    However, the Agency is concerned that compliance may be unduly 
delayed if new owner benefits are offered for a year or more. The 
longer the Agency allows for the new owner to decide to make 
disclosures, or to enter into an audit agreement, the longer it may be 
before violations are identified, disclosed, and corrected. The 
potential for an audit agreement schedule to allow time frames for 
auditing and disclosures well beyond nine months, depending on the 
scope and nature of the overall auditing plan, could only exacerbate 
this potential issue. Notwithstanding that such extended timeframes may 
be approved only if the new owner is making a significant commitment to 
audit and fix many and/or complex facilities, there is potential for a 
significant passage of time before the disclosed violations are fully 
corrected. On the other hand, the longer a new owner delays coming 
forward, the more likely it is that certain violations which would have 
been eligible if disclosed earlier, because the new owner was coming 
forward before the first instance when ``otherwise required'' 
monitoring, sampling or auditing was due, could no longer be given 
Audit Policy consideration. See Section II.E.2. ``Voluntary Discovery 
Condition.'' In addition, as discussed below in Section II.D., the 
Agency would assess penalties for the economic benefit of costs saved 
from not having to operate or maintain controls and equipment, from the 
date of acquisition until the corrections are complete. Thus, the 
longer new owners take to undertake and complete an audit, and to 
disclose and correct violations found, the higher the penalty 
associated with avoided operation and maintenance costs would be.
    Because of the above considerations, although the majority of 
commenters asked that new owners be considered ``new'' for at least a 
year after the transaction, EPA decided to give ``new owners'' a nine-
month window of time to come forward to the Agency, and benefit from 
the new owner approach to penalty mitigation and application of the 
Audit Policy conditions. If a new owner makes disclosures after the 
nine-month window has passed, and has not entered into an audit 
agreement which extends the disclosure schedule, the disclosure may 
still be eligible for regular Audit Policy treatment, although the 
``new owner'' benefits will not be available. EPA requests comment on 
whether more or less time would be advisable.
3. Flexibility Regarding Approach and Commitment to Auditing and 
Disclosures
    On a related issue, commenters also asked for flexibility in the 
level of commitment to auditing and disclosure that a new owner need 
make when it comes forward to EPA, including when and how that 
commitment would be required. Some commenters suggested a tiering 
approach based on the level and complexity of the expected disclosures. 
Other commenters reflected the misapprehension that the Agency was 
envisioning a ``program'' to which a new owner would first need to 
apply, and be credentialed as a new owner, separate from any firm 
intention or commitment to actually audit or make disclosures. Since 
the Agency's focus is on the actual disclosure of violations and 
commitment to audit and correct violations, EPA believes that designing 
any precursory or ``place-holding'' steps, such as self-identifying as 
a new owner or merely indicating potential interest in auditing, would 
be unnecessary and a waste of effort for both EPA and the new owner.

[[Page 44998]]

C. Interim Approach to the Calculation and Assessment of Penalties

    EPA's Interim Approach to implementation of the Audit Policy is 
designed to address the fact that new owners may still have to pay 
substantial civil penalties under the Audit Policy. Although 100 
percent of the gravity portion of the penalty may be mitigated under 
the Audit Policy, the economic benefit portion may still be 
significant. The Agency recognizes that there are equitable and policy 
arguments that a new owner should not be penalized for the full 
economic benefit relating to violations that arose before a facility 
was under its control, if that new owner is willing to promptly address 
such violations and make changes to ensure that the facility stays in 
compliance in the future.
    The uncertainties associated with the calculation and assessment of 
economic benefit may be factors that new owners otherwise interested in 
using the Audit Policy perceive as disincentives. In this section, EPA 
discusses an approach to calculating and assessing economic benefit in 
the new owner context.
1. Interim Approach to the Calculation and Assessment of Penalties
    a. No penalties for economic benefit or gravity will be assessed 
against the new owner for the period before the date of acquisition.
    b. Penalties for economic benefit associated with avoided operation 
and maintenance costs will be assessed against the new owner from the 
date of acquisition.
    c. Penalties for economic benefit associated with delayed capital 
expenditures or with unfair competitive advantage will not be assessed 
against the new owner if violations are corrected in accordance with 
the Audit Policy (i.e., within 60 days of the date of discovery or 
another reasonable timeframe to which EPA has agreed).
2. Background of Economic Benefit Recapture
    The imposition of civil penalties that recapture the economic 
benefit of noncompliance is a cornerstone of the EPA's civil penalty 
program. Benefit recapture has been a part of the Audit Policy since it 
was first issued on the premise that, even in self-audit and disclosure 
situations, penalties should not be reduced below the level necessary 
to recapture economic benefit when a violator has achieved an unfair 
economic advantage over its complying competitors. Accordingly, the 
Audit Policy provides that EPA reserves the right to assess any 
economic benefit which may have been realized as a result of 
noncompliance, even where the entity meets all Audit Policy conditions. 
The Audit Policy further provides that the Agency may waive the 
economic benefit component of the penalty where the Agency determines 
that the economic benefit is insignificant.
    Violators obtain an economic benefit from violating the law by 
delaying compliance, avoiding compliance, or obtaining an unfair 
competitive advantage. When violators delay compliance, they have the 
use of the money that should have been spent on compliance to put into 
profit-making investments. Simply put, violators ``gain'' the returns 
on the amount of money that should have been invested in pollution 
control equipment. A typical example is where a factory delays 
installation of a required wastewater treatment facility. If the 
wastewater treatment facility costs $1,000,000 to install, and the 
violator waits three years past the required date to comply, the 
violator has saved over $200,000 by delaying compliance.\3\
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    \3\ The specific amount is $209,530 and was generated by the 
current version of the Agency's BEN computer model using the 
following assumptions: (1) The violator was in the average maximum 
tax bracket of 40%; (2) the violator's cost of money (i.e., the 
discount/compound rate) was the current BEN default value of 9.4%; 
and (3) inflation was based on the Plant Cost Index published in 
Chemical Engineering magazine. The BEN computer model can be found 
at https://www.epa.gov/compliance/civil/econmodels/.
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    A second type of economic benefit is derived when a violator avoids 
the annual costs it would have incurred had it complied in a timely 
manner. A typical example would be where a factory avoids the operation 
and maintenance costs for the above-mentioned wastewater treatment 
plant for the three years the polluter was out of compliance.
    The third type of economic benefit is derived from the violator 
obtaining an unfair competitive advantage. Economic benefit associated 
with unfair competitive advantage might arise in a number of new owner 
scenarios. An example could involve a newly acquired facility with 
permit limits on its hours of operation and/or throughput. The new 
owner may discover that its facility is operating two hours beyond its 
permit limit each day in order to achieve more output. The funds made 
from that extra output would also constitute unfair competitive 
advantage economic benefit.
3. Discussion of Calculation and Assessment of Penalties
    In the First Notice, the Agency asked for comment on the issue of 
how economic benefit should be calculated for disclosures by new 
owners. Many commenters addressed the issue of penalties to recapture 
economic benefit, and the issue of whether they should be eliminated or 
reduced in the new owner situation. Some commenters posited that the 
new owner does not actually receive any economic benefit from the 
previous owner's delayed or avoided compliance. On the other hand, it 
is possible that benefit does accrue; for example, it may be reflected 
in the purchase price. Notwithstanding arguments over whether economic 
benefit could inure to a new owner, it is difficult to accurately 
determine the amount of any such benefit. There are also equitable and 
policy arguments that a new owner should not be penalized for economic 
benefits relating to violations that originated when a facility was not 
in its control, and the new owner is willing to self-disclose and 
expeditiously correct the violations, and make changes to ensure future 
compliance. The Agency has speculated that one of the reasons that 
there have been relatively few Audit Policy disclosures of violations 
requiring the installation of significant environmental controls may 
relate to the potential size of penalties to recapture economic 
benefit. There may be significant economic benefit associated with 
corrections requiring expensive environmental controls, and companies 
may well consider it prudent to quietly fix their problems, without 
advising EPA (or the state) or seeking input from regulators. However, 
new owners investing tens of millions of dollars to correct violations 
that began prior to their ownership may want to involve EPA and receive 
a covenant not to sue \4\ for those violations as part of a settlement. 
As a matter of course, EPA settlements typically release and covenant 
not to sue for the alleged violations resolved under the settlement 
agreement.
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    \4\ A release and covenant not to sue is a legal mechanism under 
which EPA agrees to relinquish any potential claims to initiate a 
lawsuit against a party for any of the violations settled under the 
agreement, where that party complies with all of the terms of the 
settlement agreement.
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    By providing certainty to the economic benefit assessment, EPA's 
intent is to increase the number of disclosures of significant 
violations, which will allow the Agency to participate in developing 
the approach to correcting such violations and

[[Page 44999]]

securing appropriate environmental benefit. To further this goal, and 
because of the equities of the new owner situation, the Agency believes 
it is appropriate to modify its approach to calculating and assessing 
economic benefit with respect to disclosures from new owners.
    One issue raised in the First Notice was whether EPA should take 
into account possible purchase price adjustments attributable to 
environmental compliance liabilities in designing the Agency's approach 
to new owners. Such consideration of adjustments to purchase price 
could potentially factor into the Agency's approach to calculating and 
assessing penalties in the new owner context. However, no commenters 
recommended that EPA try to incorporate a consideration of possible 
purchase price adjustments into the approach to new owners. Some 
commenters asserted that purchase price is often set at the outset of 
negotiations and that, especially in larger transactions, environmental 
compliance costs or savings are immaterial to the pricing of the 
transaction. Commenters pointed out that, even in the event that there 
were negotiations to adjust pricing, confidentiality issues may 
preclude its consideration by the Agency, and inquiries into if and how 
price may have been adjusted may chill participation in this Interim 
Approach. The Agency is also concerned that it would be prohibitively 
costly and difficult, if not impossible, for EPA to accurately and 
effectively analyze whether a price adjustment attributable to 
environmental issues occurred, or to conclusively determine how large 
it was. Incurring such time-intensive transaction costs, which would 
likely still yield inconclusive results, would detract from EPA's goals 
of leveraging its resources to secure higher quality environmental 
improvements more quickly and effectively than might otherwise occur. 
Accordingly, under this Interim Approach, EPA does not intend to 
consider adjustments to purchase price.
    Commenters offered various suggestions for ways to approach the 
issue of penalties for economic benefit including: Waiving any pre-
closing penalties; calculating penalties from the date the audit is 
complete; beginning the calculation of penalties only after a 
reasonable period for achieving compliance; calculating penalties 
starting a year after the end of the audit; and offsetting penalties by 
the cost of the audit, or by the cost of corrective measures. EPA has 
considered a variety of options and the Interim Approach focuses on two 
elements. First, for the reasons stated above, EPA will not seek 
penalties for economic benefit associated with capital expenditures, 
assuming the violations are promptly corrected. Second, because the new 
owner does clearly benefit from not having to operate and maintain 
controls and equipment before they are installed and functioning, the 
Agency will assess penalties for economic benefit associated with those 
savings, starting from the date the facility was acquired until the 
corrections are complete. EPA considers this a fair approach, and, 
because such penalties for avoided costs will rise the longer it takes 
to complete auditing, disclosures, and correction, one that may help 
motivate new owners to avoid delays. EPA does not intend to offset the 
cost of performing audits from any penalties for economic benefit 
since, especially for newly acquired facilities, auditing is generally 
a means by which to assess and assure compliance, and a cost of doing 
business in a responsible manner. In addition, there are situations 
where auditing may be required as a matter of compliance (e.g., Risk 
Management Plans under Clean Air Act 112(r)(7)), and where EPA 
considers it inappropriate to credit the cost of the audit against 
assessed penalties.
    As is the case in the settlement of any violation, EPA may provide 
additional flexibility in assessing economic benefit on a case-by-case 
basis, if the Agency believes it is warranted and appropriate given the 
facts in a particular situation. As EPA has already stated in its 
Answer to Question 9 of the 2007 Frequently Asked Questions document, 
the Agency intends to consider all factors of settlement in assessing 
economic benefit in Audit Policy cases, and fairness is the central 
guiding principle underlying Agency decisions regarding the assessment 
of economic benefit.

D. Interim Approach to Application of Certain Audit Policy Conditions 
to New Owners

    This section describes EPA's Interim Approach to applying the nine 
conditions of the Audit Policy to new owners. The Agency is proposing 
to apply five conditions differently in the new owner context 
(Condition D.1. Systematic Discovery; Condition D.2. Voluntary 
Discovery; Condition D.3. Prompt Disclosure; Condition D.8. Other 
Violations Excluded; and Condition D.9. Cooperation). For the sake of 
clarity and completeness, this section discusses the Agency's usual 
approach to applying the remaining Audit Policy conditions (Condition 
D.4. Independent Discovery; Condition D.5. Correction and Remediation; 
Condition D.6. Prevent Recurrence; and Condition D.7. No Repeat 
Violations), as described in the 2000 Audit Policy, the 2007 Frequently 
Asked Questions document and/or the Audit Policy Interpretive Guidance 
(``1997 Interpretive Guidance''),\5\ although the Agency does not 
intend to alter the approach it has taken to their application or 
interpretation in the new owners context.
---------------------------------------------------------------------------

    \5\ The ``Audit Policy Interpretive Guidance,'' issued on 
January 15, 1997, can be found at https://www.epa.gov/compliance/
resources/policies/civil/rcra/audpolintepgui-mem.pdf. The 1997 
Interpretive Guidance was developed to answer frequently asked 
questions regarding the implementation of the original Audit Policy 
issued in 1995 (60 FR 66,706 (December 22, 1995)). The 2007 
Frequently Asked Questions document describes the differences 
between the original Audit Policy and the 2000 Policy and is 
intended to supplement the 1997 Interpretive Guidance.
---------------------------------------------------------------------------

    In order for the Agency to offer the incentives of this Interim 
Approach to applying the Audit Policy, the new owner would have to meet 
all nine of the following conditions, as tailored for new owners, as 
well as certify to the criteria of the new owner definition.
1. Systematic Discovery Condition (Condition D.1.)
    The Systematic Discovery condition of the Audit Policy provides 
that violations be discovered through either an environmental audit or 
a compliance management system (CMS), if disclosing entities are to 
receive 100 percent mitigation of gravity-based penalties (if a 
violation is discovered outside such a review, and meets all the other 
Audit Policy conditions, 75 percent mitigation is available). The Audit 
Policy definition of ``Environmental Audit'' is a systematic, 
documented, periodic and objective review by regulated entities of 
facility operations and practices related to meeting environmental 
requirements. A ``Compliance Management System'' encompasses the 
regulated entity's documented systematic efforts, appropriate to the 
size and nature of its business to prevent, detect, and correct 
violations. For the full definitions of ``Environmental Audit'' and 
``CMS,'' see section II.B. of the Audit Policy at 65 FR 19625.
a. Interim Approach to Systematic Discovery Condition in the New Owner 
Context
    In the new owner context, EPA recognizes that pre-closing due 
diligence may meet all the elements of the Audit Policy definition of 
``Environmental Audit,'' with the exception of the periodic review 
element. EPA recognizes that a new owner's pre-closing due diligence

[[Page 45000]]

review is by its nature a one-time event, and will waive the element of 
the Systematic Discovery condition that calls for that review to be 
``periodic.'' In all other aspects, for new owner disclosures, EPA will 
apply the Systematic Discovery condition and standards in the usual 
manner.
b. Discussion of Systematic Discovery
    In the First Notice, EPA asked for comment on whether the Agency 
should require that new owners have performed a certain level of pre-
transaction due diligence to qualify for new owner benefits. Public 
comments on this issue reflected the fact that mergers and acquisitions 
vary widely in size, type and circumstance. Many commenters asserted 
that the level of environmental due diligence review a prospective 
buyer can perform is largely determined by the size, scope, speed and 
circumstances of negotiations, and can range from in-depth inquiries to 
scenarios where very little information can be gathered. Commenters 
indicated that a buyer's pre-purchase information on regulatory 
compliance is often imperfect and incomplete. Commenters asserted that 
any pre-condition from EPA that a certain level of due diligence must 
have been performed to make disclosures as a new owner would simply 
inhibit such disclosures from buyers, rather than encourage more due 
diligence. In addition, commenters posited that, aside from the fact 
that some buyers may simply be unable to perform the requisite due 
diligence, many would be concerned about how EPA might interpret the 
sufficiency of their efforts, and thus dissuaded from making 
disclosures. Some commenters recommended requiring the CERCLA ``all 
appropriate inquiry'' standard for prospective purchasers. However, 
that standard, with its emphasis on identifying contamination, was 
developed for a different situation.
    EPA does not see a compelling reason to layer more or different 
review conditions onto the Audit Policy standards that currently exist. 
The Agency has concerns about the resources that