Special Supplemental Nutrition Program for Women, Infants and Children (WIC): Discretionary WIC Vendor Provisions in the Child Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265, 544-572 [E8-31063]

Agencies

• DEPARTMENT OF AGRICULTURE
• Food and Nutrition Service

[Federal Register Volume 74, Number 3 (Tuesday, January 6, 2009)]
[Rules and Regulations]
[Pages 544-572]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-31063]



[[Page 543]]

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Part III





Department of Agriculture





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Food and Nutrition Service



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7 CFR Part 246



Special Supplemental Nutrition Program for Women, Infants and Children 
(WIC): Discretionary WIC Vendor Provisions in the Child Nutrition and 
WIC Reauthorization Act of 2004, Public Law 108-265; Final Rule

Federal Register / Vol. 74, No. 3 / Tuesday, January 6, 2009 / Rules 
and Regulations

[[Page 544]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

[FNS-2006-0035]
RIN 0584-AD47


Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC): Discretionary WIC Vendor Provisions in the Child 
Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule amends regulations for the Special 
Supplemental Nutrition Program for Women, Infants and Children (WIC) by 
adding three requirements mandated by the Child Nutrition and WIC 
Reauthorization Act of 2004 in amendments to the Child Nutrition Act of 
1966 (CNA) concerning retail vendors authorized by WIC State agencies 
to provide supplemental food to WIC participants in exchange for WIC 
food instruments. The intent of these provisions is to enhance due 
process for vendors; prevent defective infant formula from being 
consumed by infant WIC participants; and ensure that the WIC Program 
does not pay the cost of incentive items provided by above-50-percent 
vendors in the form of high food prices. Finally, this rule also 
adjusts the vendor civil money penalty (CMP) levels to reflect 
inflation.

DATES: This rule is effective March 9, 2009.

FOR FURTHER INFORMATION CONTACT: Debra Whitford, Chief, Policy and 
Program Development Branch, Supplemental Food Programs Division, Food 
and Nutrition Service, USDA, 3101 Park Center Drive, Room 528, 
Alexandria, Virginia 22302, (703) 305-2746.

SUPPLEMENTARY INFORMATION:

I. Procedural Matters

Executive Order 12866

    This rule has been determined to be significant and was reviewed by 
the Office of Management and Budget (OMB) in conformance with Executive 
Order 12866.

Regulatory Impact Analysis Summary

    The following summarizes the conclusions of the regulatory impact 
analysis. A complete copy of the Impact Analysis appears in the 
appendix to this rule.

Need for Action

    This rule amends the WIC regulations by adding three requirements 
mandated by the CNA concerning WIC-authorized retail vendors, as 
discussed below. This rule also establishes a process for the periodic 
adjustment (at least once every four years) of all vendor civil money 
penalty (CMP) levels to reflect inflation; under the current 
regulations, the CMP levels for some but not all vendor violations have 
been previously adjusted for inflation. Initially, this would have the 
effect of raising the maximum CMP level from $10,000 to $11,000 per 
violation, and raising the CMP level from $40,000 to $44,000 as the 
maximum amount for all violations occurring during a single 
investigation, for those WIC CMP levels which have not previously been 
adjusted for inflation.

Benefits

    The notification of vendors of an initial incidence of a violation, 
one of the new requirements based on the 2004 reauthorization 
legislation, provides the vendor with an opportunity to correct a 
violation. Thus, State agencies may spend less time and resources on 
sanction cases and ultimately program operations would be improved and 
program costs would decrease. Requiring vendors to obtain infant 
formula only from suppliers registered with FDA or licensed under State 
law, another requirement based on the 2004 reauthorization legislation, 
will help to prevent the sale of adulterated stolen infant formula for 
use by infant WIC participants, thus safeguarding their health.
    Requiring above-50-percent vendors to restrict the costs of their 
participant incentive items to nominal value, the last of the 
requirements based on the 2004 reauthorization legislation, would 
protect the WIC Program from paying excess money for WIC foods. Making 
the inflation adjustment consistent for all CMP levels would benefit 
WIC Program administration by making the CMP maximum amounts uniform 
for all violations.

Costs

    Although this final rule has been designated as significant, the 
costs associated with implementing the changes are not expected to 
significantly add to current program costs.
    Little time will be needed to issue a notice of violation to a 
vendor, which presumably will entail a standardized format with space 
for the vendor's name and address and for listing the violation. 
Likewise, little time will be needed to document in the vendor file the 
reason(s) such notice would compromise an investigation and thus would 
not be sent.
    The State agency is required to provide the list of registered or 
licensed infant formula suppliers to vendors on an annual basis, which 
a State agency could satisfy by linking its Web site to the list of 
licensed suppliers on the Web site of the State's licensing agency, or 
by providing vendors with a telephone number or e-mail address to 
inquire about the license status of a supplier.
    Based on Fiscal Year 2006 data, FNS currently estimates that only 
about 1,700 of the approximately 47,000 authorized retail vendors would 
potentially be subject to incentive items restrictions. Little time 
will be needed by the State agency to approve/disapprove incentive 
items, since this process only involves comparison of the vendor's 
price documentation with the less-than-$2 nominal value limit. Indeed, 
the State agency may provide above-50-percent vendors with a list of 
allowable incentive items, and the vendor would indicate on the list 
which of these incentive items it wishes to use and return the list to 
the State agency.
    The final rule's process for the periodic adjustment of WIC vendor 
CMP amounts to reflect inflation would not increase administrative 
costs because the CMP calculation process would be the same for all 
vendor violations. Under the current regulations, the CMP levels for 
some but not all vendor violations have previously been adjusted for 
inflation. Under the final rule's process, all vendor CMP levels would 
be periodically adjusted for inflation. Initially, this would have the 
effect of raising the maximum CMP level from $10,000 to $11,000 per 
violation, and raising the CMP level from $40,000 to $44,000 as the 
maximum amount for all violations occurring during a single 
investigation, for those WIC CMP levels which have not previously been 
adjusted for inflation.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (RFA) of 1980, (5 U.S.C. 601-612). Pursuant 
to that review, Nancy Montanez Johner, Under Secretary, Food, 
Nutrition, and Consumer Services, has certified that this rule would 
not have a significant impact on a substantial number of small 
entities. Although not required by the RFA, FNS has prepared this 
Regulatory Flexibility Analysis describing the impact of the rule on 
small entities and State agencies.

[[Page 545]]

    In accordance with the CNA, as amended, the final rule would 
require that State agencies implement restrictions on the incentive 
items provided at no cost to program participants by above-50-percent 
vendors in order to prevent the cost of the incentive items from 
increasing the food prices charged to the WIC Program by these vendors. 
The final rule permits certain kinds of incentive items which cost the 
vendor less than $2, pursuant to USDA's authority in the CNA to 
establish a nominal monetary amount which would be acceptable for 
incentive items. FNS estimates that about 1,700 of the approximately 
47,000 authorized vendors are above-50-percent vendors, including 1,066 
which serve WIC participants exclusively, and an additional 634 which 
derive more revenue from WIC sales than from non-WIC sales but also 
have a substantial non-WIC customer base.
    The annual receipts of 25 percent of all WIC-authorized vendors 
(11,600) surpass the maximum level of annual receipts used by the Small 
Business Administration (SBA) to define a ``small business concern'' in 
13 CFR 121.201 ($25 million for grocery stores and $6.5 million for 
pharmacies), including 69 of the above-50-percent vendors. Also, the 
634 above-50-percent vendors with a substantial non-WIC customer base 
have not been known to use the sort of incentive items which are 
prohibited by this rule. Thus the rule's incentive item restrictions 
mainly impact 997 of the 35,400 vendors which are small businesses 
according to SBA's regulations, 2.8 percent of the total (1,700 above-
50-percent vendors-69 large business = 1,631; 1,631-634 above-50-
percent vendors with a substantial non-WIC customer base = 997).
    It is unlikely that the incentive item restrictions of this final 
rule will have a significant impact on these 997 vendors which 
exclusively serve WIC participants. In 2005, the Food and Nutrition 
Service (FNS) published a regulation aimed at controlling the costs of 
higher-priced vendors (see, WIC Vendor Cost Containment Interim Rule, 
70 FR 71708, November 29, 2005). The Vendor Cost Containment regulation 
requires that the average WIC redemptions per food instrument type for 
above-50-percent vendors (which includes those vendors that exclusively 
serve WIC participants) not exceed the regular vendor average WIC 
redemptions per food instrument type in each State. The requirements of 
the Vendor Cost Containment regulation have made it increasingly 
difficult to incorporate the cost of incentive items into the cost of 
supplemental foods. Thus, it is likely that the number of vendors 
providing incentive items has decreased significantly since the 
effective date of the Vendor Cost Containment regulation.
    The Department considered nominal amounts slightly higher than $2. 
However, to avoid the possibility of the value of incentive items being 
incorporated into the costs of supplemental foods, the Department chose 
the $2 limit instead of higher amounts in order to preserve WIC funds 
for service to participants.
    FNS also does not expect the other three provisions of the final 
rule to have a significant economic impact on small entities. One of 
these provisions requires State agencies to provide WIC retail vendors 
with a list of State-licensed infant formula wholesalers, distributors, 
retailers, and FDA-registered manufacturers; vendors may obtain infant 
formula for sale to WIC participants only from the suppliers on the 
list. These authorized sources of infant formula include thousands of 
wholesalers, distributors, and retailers nationwide, as well as six 
manufacturers. Thus it is exceedingly doubtful that this requirement 
will harm or inconvenience any vendors.
    Also, State agencies are not included under the definition of 
``small governmental jurisdictions'' in section 601(5) of the RFA, 
which only includes local governmental organizations. Thus the impacts 
of regulations on WIC State agencies, including the requirement for 
this list of infant formula sources, are not subject to RFA 
requirements. Even so, this final rule is sensitive to the 
administrative burden of State agencies, permitting State agencies to 
provide their lists of infant formula sources to vendors on web sites, 
to obtain the lists from other State agencies, and to limit the kinds 
of sources which will be included so that the lists would not be too 
large.
    One of the other provisions requires the State agency to notify a 
vendor of a violation in writing before documenting a subsequent 
violation which could result in sanctions based on a pattern of 
violations, unless such notification would compromise an investigation. 
This provision will help vendors to comply with their responsibilities 
and thus prevent sanctions. FNS estimates that only 5 percent of WIC-
authorized vendors would be impacted by this provision. Moreover, this 
impact would be economically beneficial for these vendors since such 
notification would help them to prevent the loss of business resulting 
from disqualification, or CMP payments imposed in lieu of 
disqualification, and related legal costs.
    The remaining provision would periodically increase the CMP amounts 
to reflect inflation for those CMPs which had not previously been 
adjusted for inflation. FNS estimates that only 3 percent of WIC-
authorized vendors would be impacted by this provision. Moreover, this 
provision would only increase maximum CMP amounts on a periodic basis 
to reflect inflation; the underlying formula for calculating CMP 
amounts, based on a percentage of a vendor's average redemptions and 
the number of violations as set forth in Sec.  246.12(l)(1)(x), would 
not be altered by this provision.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local and tribal 
governments and the private sector. Under Section 202 of the UMRA, the 
Department generally must prepare a written statement, including a cost 
benefit analysis, for proposed and final rules with Federal mandates 
that may result in expenditures by State, local or tribal governments, 
in the aggregate, or the private sector, of $100 million or more in any 
one year. When such a statement is needed for a rule, Section 205 of 
the UMRA generally requires the Department to identify and consider a 
reasonable number of regulatory alternatives and adopt the most cost 
effective or least burdensome alternative that achieves the objectives 
of the rule.
    This final rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, the rule is not subject to the requirements of sections 202 
and 205 of the UMRA.

Executive Order 12372

    The WIC Program is listed in the Catalog of Federal Domestic 
Assistance Programs under 10.557. For the reasons set forth in the 
final rule in 7 CFR part 3015, Subpart V, and related Notice (48 FR 
29115, June 24, 1983), this program is included in the scope of 
Executive Order 12372 which requires intergovernmental consultation 
with State and local officials. (All references to regulatory sections 
in this preamble are references to Title 7 of the CFR unless otherwise 
indicated.)

Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact

[[Page 546]]

of their regulatory actions on State and local governments. Where such 
actions have federalism implications, agencies are directed to provide 
a statement for inclusion in the preamble to the regulations describing 
the agency's considerations in terms of the three categories called for 
under section (6)(b)(2)(B) of Executive Order 13121.

Prior Consultation With State Officials

    Prior to drafting this final rule, FNS received input from State 
agencies regarding issues and concerns with implementation of the three 
legislative provisions contained in this rulemaking. FNS regional 
offices have formal and informal discussions with WIC State agency 
officials on an ongoing basis regarding program and policy issues. In 
December 2004 and April 2005, FNS issued policy guidance to WIC State 
agencies on the implementation of the legislative requirements 
addressed in this final rule. In response, FNS received a number of 
questions which resulted in informal discussions with State agency 
officials and other stakeholders on program implementation. Much of the 
discussion in the preamble of this rule reflects the substance of those 
consultations.

Nature of Concerns and the Need To Issue This Rule

    State agencies are primarily concerned with the potential 
administrative burdens involved with implementing the new legislative 
requirements in this final rule.

Extent to Which Those Concerns Have Been Met

    FNS has considered the impact of this final rule on WIC State and 
local agencies. Through the rulemaking process, FNS has attempted to 
balance the need for State agencies to meet the new requirements 
against the administrative challenges that State agencies are likely to 
encounter in meeting them. These challenges include the commitment of 
adequate resources to compile the list of acceptable entities from 
which infant formula must be purchased; determine when notification of 
violations would compromise an investigation; and, develop and enforce 
the incentive items provisions.
    The final rule allows State agencies discretion to determine if 
providing notification of violations to vendors before documenting 
additional violations would compromise the investigation.
    In addition, under the final rule, State agencies could use their 
Web sites as the primary means for providing their vendors with lists 
of infant formula manufacturers registered with the FDA and infant 
formula wholesalers, distributors, and retailers licensed under State 
law. Indeed, under the term ``other effective means,'' the final rule 
permits State agencies to provide vendors with a telephone number or e-
mail address to inquire about the license status of a supplier, instead 
of providing vendors with a list. FNS will also provide the State 
agencies with the FDA list of manufacturers, and State licensing and 
tax authorities could provide the WIC State agencies with lists or Web 
site links on the other suppliers. Further, State legislation or 
rulemaking could be used to limit the kind of suppliers to be included 
on the lists provided to the vendors.
    The final rule allows State agencies the discretion to determine 
what, if any, incentive items may be provided by above-50-percent 
vendors to participants. If a State agency decides not to permit such 
promotions at all, then there would be no administrative burden to the 
State agency to approve such items to ensure compliance with the 
statutory requirement.
    Finally, State agencies would need to amend their schedules of 
sanctions to reflect the inflation adjustments for CMP levels in this 
final rule and to notify their vendors of this change. FNS does not 
expect this to involve a significant expenditure of resources.

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This final rule is intended to have preemptive 
effect with respect to any State or local laws, regulations or policies 
which conflict with its provisions or which would otherwise impede its 
full and timely implementation. This rule is not intended to have 
retroactive effect unless so specified in the DATES section of this 
rule. Prior to any judicial challenge to the provisions of the final 
rule, all applicable administrative procedures must be exhausted. This 
rule concerns WIC vendors. In the WIC Program, the administrative 
procedures which must be exhausted by WIC vendors are as follows. 
First, State agency hearing procedures pursuant to Sec.  246.18(a)(1) 
must be exhausted for vendors concerning denial of authorization, 
termination of agreement, disqualification, civil money penalty or 
fine, or the State agency's determination of peer group or above-50-
percent status. Second, the State agency process for providing the 
vendor an opportunity to justify or correct the food instrument 
pursuant to Sec.  246.12(k)(3) must be exhausted for vendors concerning 
delaying payment for a food instrument or a claim. Third, 
administrative appeal to the extent required by Sec.  3016.36 must be 
exhausted for vendors concerning procurement decisions of State 
agencies.

Civil Rights Impact Analysis

    FNS has reviewed this final rule in accordance with the Department 
Regulation 4300-4, ``Civil Rights Impact Analysis,'' to identify and 
address any major civil rights impacts the rule might have on 
minorities, women, and persons with disabilities. After a careful 
review of the rule's intent and provisions, FNS has determined that 
there is no way to soften the effect on any of the protected classes 
regarding those provisions of the rule concerning notice of violations 
and restrictions on incentive items. However, the rule explicitly 
forbids discrimination against a protected class recognized by the WIC 
Program (race, color, national origin, age, sex, or disability) 
regarding the inclusion of businesses on the list which State agencies 
must provide to vendors of infant formula manufacturers registered with 
the FDA, and State-licensed infant formula wholesalers, distributors, 
or retailers. All data available to FNS indicate that protected classes 
have the same opportunity to participate in the WIC Program as non-
protected classes. FNS specifically prohibits the State and local 
government agencies that administer the WIC Program from engaging in 
actions that discriminate based on race, color, national origin, age, 
sex, or disability in accordance with Sec.  246.8. Where State agencies 
have options and they choose to implement a certain provision, they 
must implement it in such a way that it complies with the Sec.  246.8.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
part 1320) requires that OMB approve all collections of information by 
a Federal agency from the public before they can be implemented. 
Respondents are not required to respond to any collection of 
information unless it displays a current valid OMB control number. This 
final rule contains information collections that are subject to review 
and approval by OMB; therefore, FNS has submitted an information 
collection under OMB0584-0043 to OMB. This information 
collection contains changes in the burden based on comments on the 
proposed rule Discretionary WIC Vendor Provisions in the Child 
Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265, 71 
FR 43371, August 1, 2006 (proposed rule),

[[Page 547]]

and information not available when the proposed rule was published.
    As previously noted, October 1, 2004 was the effective date of 
Public Law 108-265. Thus in December 2004 and April 2005, FNS issued 
policy and guidance to WIC State agencies on implementation of its 
three requirements noted above. As a result, the comments on the 
information collection burden reflect actual experience. The following 
discussion describes the information collection burden of the proposed 
rule and responds to the comments received on the information 
collection burden:

1. Reporting

Section 246.4(a)(14)(iii)
    Section 246.4(a)(14)(iii), as proposed, would require WIC State 
agencies to set forth policies and procedures in their WIC State Plans 
for notifying a retail vendor in writing when an investigation reveals 
an initial violation for which a pattern of violations must be imposed 
in order to impose a sanction, unless the State agency determines that 
the notice would compromise an investigation. Section 
246.4(a)(14)(iii), as proposed, would also require WIC State agencies 
to set forth policies and procedures in their WIC State Plans for the 
approval of incentive items which above-50-percent vendors may provide 
to participants. FNS estimated that Sec.  246.4(a)(14)(iii) would 
require one burden hour per State agency per year, resulting in 90 
total annual burden hours. There were no comments on the information 
collection burden of this provision. Accordingly, 90 total annual 
burden hours is adopted for this provision.
Section 246.4(a)(14)(xvii)
    Section 246.4(a)(14)(xvii), as proposed, would require WIC State 
agencies to set forth policies and procedures in their WIC State Plans 
for annually compiling and distributing to authorized WIC retail 
vendors a list of infant formula wholesalers, distributors, and 
retailers licensed under State law, and infant formula manufacturers 
registered with the Food and Drug Administration (FDA). FNS estimated 
that this would require one burden hour per State agency per year, 
resulting in 90 total annual burden hours. There were no comments on 
the information collection burden of this provision. Accordingly, 90 
total annual burden hours is adopted for this provision.
Section 246.12(h)(8)
    Section 246.12(h)(8), as proposed, would require WIC State agencies 
to establish a process for approval or disapproval of requests from 
above-50-percent vendors for permission to provide incentive items to 
WIC participants or other customers. The proposed rule did not include 
any burden hours for vendors for this provision. However, given the 
analysis of the recordkeeping information burden for State agencies 
regarding this provision, a reporting information burden for vendors 
also needs to be recognized. Both are discussed below regarding Sec.  
246.12(h)(8).

2. Recordkeeping

Section 246.12(g)(11)
    Section 246.12(g)(10) of the proposed rule (which is designated as 
Sec.  246.12(g)(11) in this final rule due to publication of an 
intervening rule) would require WIC State agencies to provide to 
authorized WIC retail vendors a list, on an annual basis, of infant 
formula wholesalers, distributors, and retailers licensed in the State 
in accordance with State law (including regulations), and infant 
formula manufacturers registered with FDA that provide infant formula. 
FNS has provided the State agencies with the list of the infant formula 
manufacturers registered with FDA. A State agency would contact the 
licensing agency in its State to obtain a list of the other suppliers. 
A State agency could satisfy this requirement by linking its Web site 
to the list of licensed suppliers on the web site of the State's 
licensing agency. FNS estimated that this would require one burden hour 
per State agency per year, resulting in 90 total annual burden hours.
    Two WIC State agencies commented on the information collection 
burden concerning this requirement. One State agency commenter 
estimated that 500 hours would be required annually to maintain the 
list. Another State agency commenter estimated that 120 hours had been 
required for initial compilation and ongoing maintenance of the list. 
The experiences and views of these two State agencies may not be 
representative of the other State agencies. However, to ensure that the 
estimate provided to OMB for this final rule takes into account the 
varied experiences of all State agencies, the estimated burden hours 
per response for the list requirement has been increased from 1 hour to 
50 hours for State agencies. Accordingly, the total annual burden hours 
for the list requirement has been increased from 90 to 4,500 (90 State 
agencies x 50 burden hours = 4,500 total annual burden hours).
    FNS did not estimate any burden hours for vendors regarding this 
requirement. However, one commenter stated that this requirement would 
impose an undue burden on vendors because most vendors deal with dozens 
if not hundreds of suppliers of products within their stores, including 
numerous jobbers, sub-jobbers, and other sales persons; it would be 
impossible, this commenter stated, for the vendor to verify the 
validity of each source of every purchase or to contact the State 
agency to ascertain the status of the supplier.
    The commenter's concerns are unjustified. The source which must be 
identified is only the source from whom the vendor purchased the infant 
formula, not the manufacturer or supplier from whom the vendor's source 
purchased the infant formula. Also, the infant formula list requirement 
only pertains to ``infant formula'' as defined in the WIC regulations, 
which does not include ``exempt infant formula'' (formulas requiring a 
medical prescription), ``WIC-eligible medical foods,'' or any other 
kind of food.
    Further, as recognized by Sec.  246.12(h)(3)(xv), vendors are 
already required to maintain inventory records used for Federal tax 
reporting purposes, which would include invoices for infant formula, 
and to make such records available to the State agency upon request. 
Thus the infant formula list requirement does not impose any new 
reporting or recordkeeping burden on vendors. Moreover, attaching a 
copy of an invoice to a vendor application form, or providing a copy to 
the State agency at some other time, would involve a negligible amount 
of time.
Section 246.12(h)(8)
    Section 246.12(h)(8), as proposed, would require WIC State agencies 
to establish a process for approval or disapproval of requests from 
above-50-percent vendors for permission to provide incentive items to 
WIC participants or other customers. As previously mentioned, FNS 
currently estimates that about 1,700 of the approximately 47,000 
authorized vendors would potentially be subject to incentive items 
restrictions. However, when the proposed rule was issued, FNS estimated 
that about 2,000 of approximately 50,000 authorized vendors would be 
subject to incentive items restrictions. A State agency could decide 
not to allow any incentive items at all, in which case an approval 
process would not be necessary. FNS had received inquiries from several 
WIC State agencies indicating an interest in not allowing such 
incentive items at all.

[[Page 548]]

    As a result, the estimate set forth in the preamble of the proposed 
rule assumed that half of the WIC State agencies would not allow any 
incentive items at all, and that half of the approximately 2,000 above-
50-percent vendors nationwide reside in those States. The estimate also 
assumed that little time would be needed to approve/disapprove a 
request and record it, since this process only involves comparison of 
the vendor's price documentation with the less-than-$2 limit 
established for such items in the rule. Indeed, the State agency could 
have provided above-50-percent vendors with a list of allowable 
incentive items, valued below the less-than-$2 nominal value limit per 
item; the vendor would indicate on the list which of these incentive 
items it wishes to use and return the list to the State agency. Thus 
FNS estimated that State agencies would approve/disapprove incentive 
items for 1,000 above-50-percent vendors, and that each approval/
disapproval would require 0.25 burden hours, resulting in 250 total 
annual burden hours.
    One commenter addressed the burden of the incentive items 
restrictions. This commenter stated that the incentive items 
restrictions were burdensome, requiring complex internal policies and 
regulations, and resulting in additional monitoring and enforcement, as 
well as more training for vendors. The commenter did not address the 
number of burden hours.
    Another commenter stated that it would be burdensome for State 
agencies to maintain invoices or similar documentation of the vendor's 
approved incentive items, showing that the cost of each item is either 
less than the $2 nominal value limit or obtained at no cost, as would 
be required by Sec.  246.12(h)(8)(ii). As indicated in the proposed 
rule at 71 FR 43381, this documentation could include a list of items 
and the related invoices, submitted by the vendor to the State agency 
for approval, or this documentation could include a list of pre-
approved items submitted by the State agency to the vendor for the 
vendor to return to the State agency indicating which of the pre-
approved incentive items have been chosen by the vendor; this latter 
approach is acceptable as intended by the regulatory language that 
refers to ``similar documents.'' Thus, the State agency is required to 
maintain copies of invoices only if the State agency permits vendors to 
request approval for incentive items not included on a list of 
acceptable incentive items provided by the State agency.
    The Department does not view the pre-approved list as involving an 
appreciable information collection burden. If the pre-approved list is 
returned by the vendor at the same time the vendor returns the signed 
vendor agreement during the authorization process, the proposed 
requirement of Sec.  246.12(h)(8)(ii) amounts to little more than 
maintaining the copy of the vendor agreement signed by the vendor, 
which the State agency is already required to do. However, some State 
agencies may not use this approach, preferring instead that vendors 
request approval for incentive items outside of the vendor agreement 
process.
    This commenter also did not state the number of burden hours needed 
to comply with this requirement. However, to ensure that the estimate 
provided to OMB for this final rule takes into account the concerns of 
these two commenters, the estimated burden hours per response for Sec.  
246.12(h)(8) has been increased from 0.25 hours to 1 hour per response 
for State agencies which require approval for incentive items outside 
of the vendor agreement process.
    As pointed out in the section of this preamble concerning the RFA, 
it is likely that the number of vendors providing incentive items has 
decreased significantly since the effective date of the Vendor Cost 
Containment regulation. It is also likely that a significant portion of 
the above-50-percent vendors reside in States where either incentive 
items are not allowed, or, if incentive items are allowed, the 
agreement process is used. Based on data not available when the 
proposed rule was published, FNS now knows that 32 State agencies 
authorized above-50-percent vendors during Fiscal Year 2006. Thus FNS 
estimates that half of the approximately 1,700 above-50-percent vendors 
(850) would have an appreciable reporting information collection burden 
due to the restrictions on incentive items. Accordingly, the estimate 
has been revised to 850 total annual burden hours for the incentive 
items restrictions in this final rule (850 above-50-percent vendors / 
16 State agencies = 53.125 above-50-percent vendors per State agency; 
16 x 53.125 x 1 hour per response = 850 total annual burden hours).
Section 246.12(l)(3)
    Section 246.12(l)(3) of the proposed rule would require the State 
agency to notify a vendor in writing when an investigation reveals an 
initial violation for which a pattern of violations must be established 
in order to impose a sanction before another such violation is 
documented, unless the State agency determines, in its discretion on a 
case-by-case basis, that notifying the vendor would compromise an 
investigation. Prior to imposing a sanction for a pattern of 
violations, the State agency would either provide such notice to the 
vendor, or document in the vendor file the reason(s) for determining 
that such notice would compromise an investigation. Approximately 2,300 
vendors investigated annually commit violations involving a pattern.
    For the proposed rule, FNS assumed that little time would be needed 
to issue the notice, which presumably would entail a standardized 
format with space for the vendor's name and address and for listing the 
violations. FNS also assumed that little time would be needed to 
document in the vendor file the reason(s) such notice would compromise 
an investigation and thus would not be sent. Thus FNS estimated that 
State agencies would either issue such notices or make such entries in 
vendor files 2,300 times, and that issuing each notice or making such 
entries would require 15 minutes each, resulting in 575 total annual 
burden hours (2,300 / 90 = 25.55; 25.55 x 90 x 0.25 = 575).
    There were three comments on the information collection burden of 
this provision. Two of these comments stated that the provision was 
inconsistent with the goal of paperwork reduction, but did not take 
issue with the number of burden hours estimated in the preamble of the 
proposed rule. The other commenter, a State agency, stated that it had 
used approximately 9,180 hours reviewing additional compliance buys and 
generating notice letters as a result of the notice requirement.
    As previously noted, approximately 2,300 vendors investigated 
annually by all WIC State agencies are found to be committing types of 
violations subject to sanctions only if the investigation shows that a 
pattern of such violations had occurred. Thus, applying the commenter's 
estimate of 9,180 hours for one State agency to the 2,300 vendors for 
all State agencies, 4 hours would be required to either issue the 
notification of violation to the vendor or note in the vendor's file 
the reason(s) for not issuing the notification. Since a single State 
agency conducts far fewer than 2,300 such investigations annually, the 
number of hours needed for a single State agency to issue the 
notification or document the reason(s) for not doing so would be 
significantly greater than 4 hours based on the commenter's estimate of 
9,180 hours.

[[Page 549]]

    However, the commenter's estimate indicates that the estimated 
burden hours in the preamble of the proposed rule may have been too 
low. Accordingly, the information collection burden submitted to OMB 
for this activity has been increased from 0.25 hours per response to 1 
hour per response, for an annual total for all 90 State agencies of 
2,350 burden hours (2,300 / 90 = 25.55; 25.55 x 90 x 1 burden hour = 
2,300 burden hours).
Adjustments Unrelated to the Final Rule
    Adjustments have been made to the existing burden hours for the 
entire OMB 0584-0043 information collection burden to reflect 
the adding of a new respondent category for applicants for program 
benefits, and for vendors concerning collections which existed prior to 
the final rule. For applicants for program benefits, 292,983 burden 
hours have been added, to take into account the information provided by 
these applicants during the certification process.
    For vendors, 23,500 burden hours have been added to take into 
account the information provided by vendors during the vendor 
application and agreement processes. Further, there are now 47,000 
vendors, an increase over the previous 45,000 recognized in the 
approved information burden, which impacts the burden hour calculations 
for the application and agreement processes as well as the collection 
of vendor shelf prices and food sales data. However, the number of 
vendors actually required to provide food sales data annually has been 
reduced from the previous number of 45,000 to 5,640 because FNS 
matching of WIC vendor redemptions with redemptions for the same 
vendors in the Supplemental Nutrition Assistance Program (SNAP), 
formerly known as the Food Stamp Program, has made it unnecessary to 
collect shelf price data from 88 percent of the vendors (12 percent of 
47,000 vendors is 5,640).
    Also, numerous categories of State agency information burdens were 
previously based on 89 State agencies. Since the previous approval of 
the OMB 0584-0043 collection burden, an additional State 
agency has been added, so that now there are a total of 90 State 
agencies. All of the aforementioned adjustments together account for 
391,981 hours.
    The following chart shows the estimated annual information burden 
for the final rule. Five of the six burden categories noted in the 
chart pertain to State agencies; the one which pertains to vendors is 
so noted. Decimals are not included in the figures.

                      Estimated Annual Information Collection Burden OMB 0584-0043
----------------------------------------------------------------------------------------------------------------
                                                                                          Average       Annual
          Section of regulations            Annual number of respondents     Annual    burden hours     burden
                                                                           frequency   per response     hours
----------------------------------------------------------------------------------------------------------------
Reporting Burden
Sec.   246.4(a)(14)(iii)..................  90..........................            1           1.0           90
Sec.   246.4(a)(14)(xvii).................  90..........................            1           1.0           90
Sec.   246.12(h)(8)vendors................  850.........................            1           1.0          850
                                           ---------------------------------------------------------------------
    Total Reporting Burden in the Final     180.........................            2  ............        1,030
     Rule.
Recordkeeping Burden
Sec.   246.12(g)(11)......................  90..........................            1          50          4,500
Sec.   246.12(h)(8).......................  16..........................           53           1.0          850
Sec.   246.12(l)(3).......................  90..........................           26           1.0        2,300
                                           ---------------------------------------------------------------------
    Total Recordkeeping Burden in the       196.........................           80  ............        7,650
     Final Rule.
                                           ---------------------------------------------------------------------
    Total Reporting and Recordkeeping       376.........................           82  ............        8,680
     Burden in the Final Rule.
                                           ---------------------------------------------------------------------
    Total Program Changes Burden Hours for  ............................  ...........  ............        8,680
     the Final Rule.
                                           ---------------------------------------------------------------------
    Total Adjustments Burden Hours          ............................  ...........  ............      391,981
     (including other sections of the
     regulations).
                                           ---------------------------------------------------------------------
    Total Program Changes and Adjustments   ............................  ...........  ............      400,661
     Burden Hours.
Total Current WIC Reporting and             15,595,000 (over-count).....  ...........  ............    3,050,545
 Recordkeeping Burden Approved by OMB for
 Information Collection 0584-0043.
Grand Total WIC Reporting and               1,990,457 (as adjusted).....  ...........  ............    3,451,206
 Recordkeeping Burden.
----------------------------------------------------------------------------------------------------------------

E-Government Act Compliance

    FNS is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services, and for other purposes.

II. Background

    The proposed rule entitled Discretionary WIC Vendor Provisions in 
the Child Nutrition and WIC Reauthorization Act of 2004, Public Law 
108-265, was published on August 1, 2006, at 71 FR 43371 (proposed 
rule). FNS received 17 letters or electronic mail messages commenting 
on the proposed rule, including 10 from WIC State agencies; 2 from WIC-
authorized vendors; 2 from vendor advocacy organizations; 1 from a WIC 
local agency association; 1 from a social service advocacy 
organization; and 1 from a company which provides consulting services 
to government agencies.

[[Page 550]]

    As previously noted, this final rule amends the WIC Program 
regulations by adding three requirements mandated by the amended CNA 
concerning retail vendors authorized by WIC State agencies to provide 
supplemental food to WIC participants in exchange for WIC food 
instruments. This rulemaking reflects the statutory requirement that 
WIC State agencies notify WIC-authorized vendors of an initial 
violation in writing for violations requiring a pattern of violative 
incidences in order to impose a sanction before documenting a 
subsequent violation, unless notification would compromise an 
investigation. In addition, the State agency is required to maintain a 
list of State-licensed wholesalers, distributors, and retailers, and 
FDA-registered manufacturers, and WIC-authorized vendors are required 
to purchase infant formula only from sources on the list. Further, 
State agencies are prohibited from authorizing or making payments to 
WIC-authorized vendors that derive more than 50 percent of their annual 
food sales revenue from WIC food instruments (``above-50-percent 
vendors'') and which provide incentive items or other free merchandise, 
except food or merchandise of nominal value, to program participants or 
other customers unless the vendor provides the State agency with proof 
that the vendor obtained the incentive items or merchandise at no cost.
    October 1, 2004 was the effective date of Public Law 108-265 for 
all of these requirements. In December 2004 and April 2005, FNS issued 
policy and guidance to WIC State agencies on implementation of these 
requirements. This final rule reflects the policy and guidance provided 
to State agencies.
    Additionally, this final rule adds a process for periodically 
adjusting the WIC vendor CMP levels for inflation in a manner that is 
consistent for all WIC violations.
    The Department's responses to the comments are set forth below, 
except for the comments on the administrative burden of the proposed 
provisions. The Department's response to the comments on the 
administrative burden of the proposed rule are set forth above in the 
sections of this preamble entitled ``Federalism Summary Impact 
Statement'' and ``Paperwork Reduction Act.''

1. Notice of Violation (Sec. Sec.  246.4(a)(14)(iii), 
246.12(h)(3)(xviii), 246.12(l)(3), and 246.18(a)(1)(iii)(F))

    Section 203(c)(5) of Public Law 108-265 amended Section 17(f) of 
the CNA by adding a new paragraph (26) to require the State agency to 
notify the vendor in writing of the initial violation, for violations 
requiring a pattern of occurrences in order to impose a sanction, prior 
to documenting another violation, unless the State agency determines 
that notifying the vendor would compromise an investigation.
    This requirement was effective for violations committed under 
investigations beginning on or after October 1, 2004, even though the 
current Sec.  246.12(l)(3) provides that the State agency is not 
required to warn a vendor that violations had been detected before 
imposing a sanction. In December 2004, State agencies were advised that 
their vendor agreements and sanction schedules must be reviewed and 
amended as appropriate to reflect this new requirement.
    Nine comments addressed the notification provisions of the proposed 
rule. One commenter stated unconditional support for the notification 
provisions. Five commenters stated conditional support for the proposed 
provision. Three commenters stated their opposition to the proposed 
provision.
The Extent of the State Agency's Discretion (Sec.  246.12(l)(3))
    One commenter objected to the provision for State agency discretion 
in the determination on whether to provide notification in Sec.  
246.12(l)(3) of the proposed rule. The commenter also objected to the 
statement at 71 FR 43377 of the proposed rule that a State agency could 
decide not to use notification on the basis of the severity of the 
initial violation, the compliance history of the vendor, and whether 
the vendor has been determined to be high risk. The commenter viewed 
these examples as well beyond the scope of the statute.
    According to the commenter, the State agency must provide the 
notification unless there is a substantial basis to believe that fraud 
is occurring and such fraud is actively under investigation. Further, 
this commenter stated that the State agency must determine that the 
notice would compromise an investigation, not ``may'' or ``might'' do 
so, in order to decide that notification should not be provided. The 
commenter also stated that the State agency should be required to make 
an affirmative determination that notification would compromise an 
ongoing investigation and document the results of the determination 
before conducting a subsequent inspection. However, another commenter 
stated that the State agency should be permitted to determine that the 
notice ``could,'' ``probably,'' or would ``likely'' compromise an 
investigation, not ``would'' compromise an investigation, which is 
definite and difficult to know. Another commenter stated that, in most 
instances, vendors are unaware of violations because it is not possible 
to monitor all of the WIC food instruments accepted by store staff, 
although notification would not be appropriate when the State agency 
has sound reason to believe that the vendor owner or manager is 
involved in fraud against WIC.
    The Department continues to believe, as stated at 71 FR 43377 of 
the proposed rule, that the statute provides the State agency with the 
discretion to determine whether notifying the vendor will compromise an 
investigation and to use its judgment to determine whether a notice 
should be sent to the vendor. Accordingly, the provision for State 
agency discretion in Sec.  246.12(l)(3) of the proposed rule remains in 
the final rule. Also, the Department disagrees with the commenter's 
objections to the examples of factors cited at 71 FR 43377 which the 
State agency has the discretion to consider in making its 
determination.
    One of the commenters also interpreted a statement at 71 FR 43377 
of the proposed rule to mean that a State agency could decide not to 
provide the notification on the basis that an investigation is covert. 
The commenter stated that this would be contrary to the intention of 
the legislative provision since the need for notification pertained 
only to covert investigations; this provision would be rendered 
meaningless if a State agency could decide not to provide notification 
on the basis that an investigation is covert. The commenter also 
pointed out that this would be inconsistent with the provision in the 
proposed rule which would require a case-by-case determination by the 
State agency on whether to provide notification to the vendor. The 
Department agrees with the commenter. The statement in the preamble of 
the proposed rule was only intended to point out that the notification 
requirement pertains only to covert investigations since notification 
would reveal the existence of an investigation which had been 
previously unknown to the vendor. Thus Sec.  246.12(l)(3) of the final 
rule, unchanged from the proposed rule, does not permit the State 
agency to exclude an investigation from the notification requirement on 
the sole basis that the investigation is covert.
    This commenter further stated that the preamble of the proposed 
rule at 71 FR 43377 should not have stated that a State agency could 
decide not to provide notification on the basis that an

[[Page 551]]

investigation was being conducted on the same vendor by another agency, 
since the coincidental investigation by another agency does not 
necessarily have any bearing on the status of the vendor's compliance 
with WIC Program requirements. The Department does not agree with this 
comment. The statutory provision states that the State agency shall 
notify the vendor unless the State agency determines that notifying the 
vendor would compromise an investigation, not its investigation. Thus 
an investigation being conducted by another agency, such as FNS or the 
USDA Office of Inspector General, is relevant to the State agency's 
determination on whether to provide notification. Accordingly, 
unchanged from the proposed rule, Sec.  246.12(l)(3) of the final rule 
refers to an investigation, not its investigation.
    This commenter also requested clarification regarding a statement 
at 71 FR 43377 that notification would not be needed after a violation 
occurred in a compliance buy visit subsequent to a notification based 
on a different type of violation which had occurred during a previous 
visit. The commenter believes that this may mean that the State agency 
may consider the risk of compromising investigations with notification 
to increase if a violation is observed in subsequent visits.
    Such subsequent violations would need to be violations of a 
different type than the previous violation because a second or 
subsequent notification is not required for a violation of the same 
type for which notification has already been provided. Also, the fact 
that notification was provided regarding a previous violation does not 
mean that the State agency must provide notification for all subsequent 
violations of different types. Thus Sec.  246.12(l)(3) of the final 
rule, unchanged from the proposed rule, allows the State agency to 
determine that notification concerning subsequent violations would 
compromise an investigation even though this determination was not made 
regarding the previous violation, due to facts or circumstances not 
known or not considered at the time of the previous violation.
    Two commenters stated that State agencies should not be required to 
determine whether to provide notification on a case-by-case basis, as 
would be required by Sec.  246.12(l)(3) of the proposed rule, but 
instead should be permitted to make categorical determinations based on 
the nature and seriousness of the violations. These commenters stated 
that serious violations such as overcharging are not inadvertent and 
thus should be subject to categorical exclusions from the notice 
requirement as determined by the State agency. One of these commenters 
also pointed out that the proposed rule categorically excludes 
violations based on WIC redemptions exceeding inventory and violations 
resulting in sanctions based on single violations such as trafficking, 
implying that other categories could also be excluded.
    The Department does not agree. Serious violations may be 
fraudulent, but sometimes are not; overcharging cannot be categorically 
assumed to be fraudulent. Sometimes, overcharging might be inadvertent. 
Thus one compliance buy showing overcharging could not, by that fact 
alone, be sufficient for determining that notification would compromise 
an investigation. However, the severity of that violative incidence 
might be sufficient, if, for example, the overcharge was considerably 
higher than the monetary threshold established by the State agency as 
the basis for establishing that overcharging had occurred. The proposed 
rule would have excluded violations established by a single incidence 
because the statutory provision requires notification following the 
initial incidence of a violation which is established by a pattern of 
violative incidences; trafficking (Sec.  246.12(l)(1)(ii)(A)), illegal 
sales (Sec.  246.12(l)(1)(ii)(B)), and exchange of alcohol or tobacco 
for food instruments (Sec.  246.12(l)(1)(iii)(A)) are violations 
established by one violative incidence. Also, the proposed rule would 
have excluded violations based on WIC redemptions exceeding inventory 
(Sec.  246.12(l)(1)(iii)(B)) since this violation is detected in a 
single inventory audit instead of a pattern of violative incidences, so 
that there is no initial incidence. Accordingly, Sec.  246.12(l)(3) of 
this final rule requires the State agency to determine whether to 
provide notification of violations to vendors on a case-by-case basis, 
as in the proposed rule.
    Finally, one commenter stated that the notification requirement 
would allow a dishonest vendor to commit a violation without 
consequence and continue to do so for an extended period. The 
Department does not agree. A State agency may initiate a claim pursuant 
to Sec.  246.12(k) regarding the food instruments containing the 
violative incidences even though the number of violative incidences 
(i.e., the pattern) needed to impose a sanction has not been 
established. Moreover, claims may be initiated before or after the 
investigation is completed; Sec.  246.12(k)(4) states that the State 
agency must deny payment or initiate claims collection action within 90 
days of either the date of detection of the vendor violation or the 
completion of the review or investigation giving rise to the claim, 
whichever is later.
Compliance Investigation Consisting of One Violative Incidence (Sec.  
246.12(l)(2)(i) and (l)(3)(v))
    One commenter stated that the vendor would be defenseless if the 
State agency defines one compliance buy as an investigation, since the 
vendor owner or manager would only learn about an employee's error when 
the State agency imposes a sanction on the vendor; the rule should 
require that, upon the initial discovery of any violation, the vendor 
must be notified, and this initial discovery must not constitute an 
investigation.
    One violative incidence would constitute a complete investigation 
under the current regulations for only the most serious types of vendor 
violations subject to mandatory sanctions. As set forth in Sec.  
246.12(l)(1)(ii) and (l)(1)(iii), one violative incidence of 
trafficking (buying or selling WIC food instruments for cash) or 
illegal sales (selling firearms, ammunition, explosives, or controlled 
substances in exchange for WIC food instruments) must result in a six-
year disqualification, and one violative incidence of the sale of 
alcoholic beverages or tobacco products in exchange for WIC food 
instruments must result in a three-year disqualification.
    A pattern of violative incidences must be established in order to 
impose any of the other mandatory vendor sanctions. This pertains to 
four violations subject to mandatory three-year disqualifications, 
including overcharging; receiving, transacting, or redeeming food 
instruments outside of authorized channels; charging for supplemental 
food not received by the participant; and providing credit or non-food 
items (other than alcoholic beverages, tobacco products, cash, 
firearms, ammunition, explosives, or controlled substances) in exchange 
for WIC food instruments. A pattern of violative incidences must also 
be established in order to impose a mandatory one-year disqualification 
based on providing unauthorized food items, including for supplemental 
foods provided in excess of those listed on the food instrument.
    By contrast, the current Sec.  246.12(l)(2)(i) does not require 
that a pattern of violative incidences must be established in order for 
a State agency to impose sanctions based on violations which are not 
subject to mandatory

[[Page 552]]

sanctions, referred to as ``State agency vendor sanctions.'' The State 
agency has the discretion to define such violations and the resulting 
sanctions, including the number of violative incidents required. 
However, the resulting disqualifications may not exceed one year 
because the violations addressed by State agency vendor sanctions are 
less serious than those addressed by mandatory sanctions.
    Thus a State agency vendor sanction may be based on only one 
instance of a violation even though the more serious mandatory 
sanctions require a pattern of violative incidences; only the most 
serious mandatory sanctions are imposed based on one violative 
incidence.
    As such, the proposed notification requirement would not apply to 
mandatory or State agency vendor sanctions based on one incidence of a 
violation; for those sanctions, one compliance buy would constitute a 
complete investigation. As a result, a vendor may receive notification 
and an opportunity to correct more serious violations that require a 
pattern of violative incidences, but no such opportunity for less 
serious violations subject to State agency vendor sanctions.
    We believe that this result is inconsistent. Thus the Department 
has concluded that the State agency discretion under the current 
regulations to require only one violative incidence in order to impose 
State agency vendor sanctions is incompatible with the new notification 
requirement.
    Accordingly, Sec.  246.12(l)(2)(i) is revised in this final rule to 
state that a State agency vendor sanction must be based on a pattern of 
violative incidences. Also, the final rule includes a conforming change 
by adding Sec.  246.12(l)(3)(v) to state that a single violative 
incidence visit may only be used to establish a violation for 
trafficking, illegal sales, and exchange of alcohol or tobacco for WIC 
food instruments.
Administrative Review (Sec.  246.18(a)(1)(iii)(F))
    One commenter stated that the State agency's determination against 
providing notification should be subject to administrative review so 
that the vendor could present evidence illustrating that a State 
agency's determination to withhold notification was based on factors 
that a reasonable person could not believe justified the withholding of 
notification. Another commenter stated that the State agency's 
determination should be subject to review because the circumstances 
under which a State agency may avail itself of an exception to the 
notification requirement are narrowly drawn by the statute.
    The Department does not agree. As stated at 71 FR 43382 of the 
proposed rule, administrative review of the absence of such 
notification would be inconsistent with the discretion provided to the 
State agency by the statute. Further, the information used by the State 
agency to make its determination may not be appropriate for public 
disclosure, such as the high-risk determination process, knowledge of 
an investigation conducted by another agency, and evidence obtained 
from a confidential source. Accordingly, Sec.  246.18(a)(1)(iii)(F) of 
the proposed rule remains unchanged in the final rule.

2. List of Infant Formula Manufacturers, Wholesalers, Distributors, and 
Retailers (Sec. Sec.  246.4(a)(14)(xvii), 246.12(g)(3)(i), 
246.12(g)(11), 246.12(h)(3)(ii), 246.12(i)(2), and 
246.18(a)(1)(iii)(D))

    Section 203(e)(8) of Public Law 108-265 amends Section 17(h)(8)(A) 
of the CNA by requiring that each State agency maintain a list of 
infant formula wholesalers, distributors, and retailers licensed in the 
State in accordance with State law (including regulations), and infant 
formula manufacturers registered with FDA that provide infant formula. 
This statute requires authorized vendors to only purchase infant 
formula from sources on the above-described list. In December 2004, 
State agencies were notified of the requirement and when to amend their 
State Plans, vendor agreements, vendor manuals, and vendor training 
plans and materials as appropriate to reflect this new requirement.
    This provision is intended to prevent stolen infant formula from 
being purchased with WIC food instruments. Such formula may constitute 
a health hazard for a variety of reasons, including direct tampering 
with formula before it is sold to unsuspecting retailers, falsification 
of labeling to change expiration dates, counterfeiting, or improper 
storage.
    The Department proposed to add a new Sec.  246.12(g)(10) which 
would require the State agency to provide the above-noted list of 
infant formula sources to the vendors on at least an annual basis, and 
that list must include the addresses as well as the names of the 
businesses; this is intended to make it easier for vendors to locate a 
nearby business and also to avoid inadvertently contacting an 
unlicensed business with a similar name. In addition, in Sec.  
246.12(g)(10)(i), the Department proposed to require a State agency to 
notify vendors that they must purchase infant formula only from the 
sources set forth on the State agency's list, although the State agency 
may, at its option, permit vendors to obtain infant formula from 
sources on another State agency's list. (Section 246.12(g)(10) of the 
proposed rule has become Sec.  246.12(g)(11) in the final rule.) 
Further, Sec. Sec.  246.4(a)(14)(xvii) and 246.12(g)(3)(i) proposed to 
require the State agency to adopt a new vendor selection criterion 
requiring vendors to obtain infant formula from the listed sources as a 
condition of authorization.
    Eleven comments addressed these provisions; two supported the 
provisions unconditionally, one supported the provisions condi