Role of Supervisory Guidance, 18173-18180 [2021-07146]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 86, Number 66 (Thursday, April 8, 2021)]
[Rules and Regulations]
[Pages 18173-18180]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07146]



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Rules and Regulations
                                                Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 

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Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Rules 
and Regulations

[[Page 18173]]



FEDERAL RESERVE SYSTEM

12 CFR Part 262

[Docket No. R-1725]
RIN 7100-AF96


Role of Supervisory Guidance

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

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SUMMARY: The Board is adopting a final rule that codifies the 
Interagency Statement Clarifying the Role of Supervisory Guidance, 
issued by the Board, Office of the Comptroller of the Currency, 
Treasury (OCC), Federal Deposit Insurance Corporation (FDIC), National 
Credit Union Administration (NCUA), and Bureau of Consumer Financial 
Protection (Bureau) (collectively, the agencies) on September 11, 2018 
(2018 Statement). By codifying the 2018 Statement, with amendments, the 
final rule confirms that the Board will continue to follow and respect 
the limits of administrative law in carrying out its supervisory 
responsibilities.

DATES: This final rule is effective on May 10, 2021.

FOR FURTHER INFORMATION CONTACT: Benjamin McDonough, Associate General 
Counsel, (202) 452-2036, Steve Bowne, Senior Counsel, (202) 452-3900, 
Christopher Callanan, Senior Counsel, (202) 452-3594, or Kelley O'Mara, 
Counsel, (202) 973-7497, Legal Division; Juan Climent, Assistant 
Director, (202) 872-7526; David Palmer, Lead Financial Institution and 
Policy Analyst, (202) 452-2904, or Jinai Holmes, Lead Financial 
Institution and Policy Analyst, (202) 452-2834, Division of Supervision 
and Regulation; Nicole Bynum, Deputy Director, (202) 728-5803, Jeremy 
Hochberg, Managing Counsel, (202) 452-6496, or Dana Miller, Senior 
Counsel, (202) 452-2751, Division of Consumer and Community Affairs; 
Board of Governors of the Federal Reserve System, 20th and C Streets 
NW, Washington, DC 20551. For users of Telecommunications Device for 
the Deaf (TDD), (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    There are important distinctions between issuances by Federal 
agencies that serve to implement acts of Congress (known as 
``regulations'' or ``legislative rules'') and non-binding supervisory 
guidance documents.\1\ Regulations create binding legal obligations. 
Supervisory guidance can be used to ``advise the public prospectively 
of the manner in which the agency proposes to exercise a discretionary 
power'' and does not create binding legal obligations.\2\
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    \1\ Regulations are commonly referred to as legislative rules 
because regulations have the ``force and effect of law.'' Perez v. 
Mortgage Bankers Association, 575 U.S. 92, 96 (2015) (citations 
omitted).
    \2\ See Chrysler v. Brown, 441 U.S. 281, 302 (1979) (quoting the 
Attorney General's Manual on the Administrative Procedure Act at 30 
n.3 (1947) (Attorney General's Manual) and discussing the 
distinctions between regulations and general statements of policy, 
of which supervisory guidance is one form).
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    In recognition of the important distinction between rules and 
guidance, on September 11, 2018, the agencies issued the Interagency 
Statement Clarifying the Role of Supervisory Guidance (2018 Statement) 
to explain the role of supervisory guidance and describe the agencies' 
approaches to supervisory guidance.\3\ As noted in the 2018 Statement, 
the agencies issue various types of supervisory guidance to their 
respective supervised institutions, including, but not limited to, 
interagency statements, advisories, bulletins, policy statements, 
questions and answers, and frequently asked questions. Supervisory 
guidance outlines the agencies' supervisory expectations or priorities 
and articulates the agencies' general views regarding practices for a 
given subject area. Supervisory guidance often provides examples of 
practices that mitigate risks, or that the agencies generally consider 
to be consistent with safety-and-soundness standards or other 
applicable laws and regulations, including those designed to protect 
consumers.\4\ The agencies noted in the 2018 Statement that supervised 
institutions at times request supervisory guidance and that guidance is 
important to provide clarity to these institutions, as well as 
supervisory staff, in a transparent way that helps to ensure 
consistency in the supervisory approach.\5\
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    \3\ See https://www.federalreserve.gov/supervisionreg/srletters/sr1805a1.pdf.
    \4\ While supervisory guidance offers guidance to the public on 
the Board's approach to supervision under statutes and regulations 
and safe and sound practices, the issuance of guidance is 
discretionary and is not a prerequisite to the Board's exercise of 
its statutory and regulatory authorities. This point reflects the 
fact that statutes and legislative rules, not statements of policy, 
set legal requirements.
    \5\ The Administrative Conference of the United States (ACUS) 
has recognized the important role of guidance documents and has 
stated that guidance can ``make agency decision-making more 
predictable and uniform and shield regulated parties from unequal 
treatment, unnecessary costs, and unnecessary risk, while promoting 
compliance with the law.'' ACUS, Recommendation 2017-5, Agency 
Guidance Through Policy Statements at 2 (adopted December 14, 2017), 
available at https://www.acus.gov/recommendation/agency-guidance-through-policy-statements. ACUS also suggests that ``policy 
statements are generally better [than legislative rules] for dealing 
with conditions of uncertainty and often for making agency policy 
accessible.'' Id. ACUS's reference to ``policy statements'' refers 
to the statutory text of the APA, which provides that notice and 
comment is not required for ``general statements of policy.'' The 
phrase ``general statements of policy'' has commonly been viewed by 
courts, agencies, and administrative law commentators as including a 
wide range of agency issuances, including guidance documents.
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    The 2018 Statement restated existing law and reaffirmed the 
agencies' understanding that supervisory guidance does not create 
binding, enforceable legal obligations. The 2018 Statement reaffirmed 
that the agencies do not issue supervisory criticisms for 
``violations'' of supervisory guidance and described the appropriate 
use of supervisory guidance by the agencies. In the 2018 Statement, the 
agencies also expressed their intention to (1) limit the use of 
numerical thresholds in guidance; (2) reduce the issuance of multiple 
supervisory guidance documents on the same topic; (3) continue efforts 
to make the role of supervisory guidance clear in communications to 
examiners and supervised institutions; and (4) encourage supervised 
institutions to discuss their concerns about supervisory guidance with 
their agency contact.
    On November 5, 2018, the Board, OCC, FDIC, and Bureau each received 
a petition for a rulemaking (Petition), as permitted under the 
Administrative

[[Page 18174]]

Procedure Act (APA),\6\ requesting that the agencies codify the 2018 
Statement.\7\ The Petition argued that a rule on guidance is necessary 
to bind future agency leadership and staff to the 2018 Statement's 
terms. The Petition also suggested there are ambiguities in the 2018 
Statement concerning how supervisory guidance is used in connection 
with matters requiring attention, matters requiring immediate attention 
(collectively, MRAs), as well as in connection with other supervisory 
actions that should be clarified through a rulemaking. Finally, the 
Petition called for the rulemaking to implement changes in the 
agencies' standards for issuing MRAs. Specifically, the Petition 
requested that the agencies limit the role of MRAs to addressing 
circumstances in which there is a violation of a statute, regulation, 
or order, or demonstrably unsafe or unsound practices.
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    \6\ 5 U.S.C. 553(e).
    \7\ See Petition for Rulemaking on the Role of Supervisory 
Guidance, available at https://bpi.com/wp-content/uploads/2018/11/BPI_PFR_on_Role_of_Supervisory_Guidance_Federal_Reserve.pdf. The 
Petitioners did not submit a petition to the NCUA, which has no 
supervisory authority over the financial institutions that are 
represented by Petitioners. The NCUA chose to join the Proposed Rule 
on its own initiative. References in the preamble to ``agencies'' 
therefore include the NCUA.
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II. The Proposed Rule and Comments Received

    On November 5, 2020, the agencies issued a proposed rule (Proposed 
Rule or Proposal) that would have codified the 2018 Statement, with 
clarifying changes, as an appendix to proposed rule text.\8\ The 
Proposed Rule would have superseded the 2018 Statement. The rule text 
would have provided that an amended version of the 2018 Statement is 
binding on each respective agency.
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    \8\ 85 FR 70512 (November 5, 2020).
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Clarification of the 2018 Statement

    The Petition expressed support for the 2018 Statement and 
acknowledged that it addresses many issues of concern for the 
Petitioners relating to the use of supervisory guidance. The Petition 
expressed concern, however, that the 2018 Statement's reference to not 
basing ``criticisms'' on violations of supervisory guidance has led to 
confusion about whether MRAs are covered by the 2018 Statement. 
Accordingly, the agencies proposed to clarify in the Proposed Rule that 
the term ``criticize'' includes the issuance of MRAs and other 
supervisory criticisms, including those communicated through matters 
requiring board attention, documents of resolution, and supervisory 
recommendations (collectively, supervisory criticisms).\9\ As such, the 
agencies reiterated that examiners will not base supervisory criticisms 
on a ``violation'' of or ``non-compliance with'' supervisory 
guidance.\10\ The agencies noted that, in some situations, examiners 
may reference (including in writing) supervisory guidance to provide 
examples of safe and sound conduct, appropriate consumer protection and 
risk management practices, and other actions for addressing compliance 
with laws or regulations. The agencies also reiterated that they will 
not issue an enforcement action on the basis of a ``violation'' of or 
``non-compliance'' with supervisory guidance. The Proposed Rule 
reflected these clarifications.\11\
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    \9\ The agencies use different terms to refer to supervisory 
actions that are similar to MRAs and Matters Requiring Immediate 
Attention (MRIAs), including matters requiring board attention, 
documents of re solution, and supervisory recommendations.
    \10\ For the sake of clarification, one source of law among many 
that can serve as a basis for a supervisory criticism is the 
Interagency Guidelines Establishing Standards for Safety and 
Soundness, see 12 CFR part 30, appendix A, 12 CFR part 208, appendix 
D-1, and 12 CFR part 364, appendix A. These Interagency Guidelines 
were issued using notice and comment and pursuant to express 
statutory authority in 12 U.S.C. 1831p-1(d)(1) to adopt safety and 
soundness standards either by ``regulation or guideline.''
    \11\ The 2018 Statement contains the following sentence:
    Examiners will not criticize a supervised financial institution 
for a ``violation'' of supervisory guidance.
    2018 Statement at 2. As revised in the Proposed Rule, this 
sentence read as follows:
    Examiners will not criticize (including through the issuance of 
matters requiring attention, matters requiring immediate attention, 
matters requiring board attention, documents of resolution, and 
supervisory recommendations) a supervised financial institution for, 
and agencies will not issue an enforcement action on the basis of, a 
``violation'' of or ``non-compliance'' with supervisory guidance.
    Proposed Rule (emphasis added). As discussed infra in footnote 
13, the Proposed Rule also removed the sentences in the 2018 
Statement that referred to ``citation,'' which the Petition 
suggested had been confusing. These sentences were also removed to 
clarify that the focus of the Proposed Rule related to the use of 
guidance, not the standards for MRAs.
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    The Petition requested further that these supervisory criticisms 
should not include ``generic'' or ``conclusory'' references to safety 
and soundness. The agencies agreed that supervisory criticisms should 
continue to be specific as to practices, operations, financial 
conditions, or other matters that could have a negative effect on the 
safety and soundness of the financial institution, could cause consumer 
harm, or could cause violations of laws, regulations, final agency 
orders, or other legally enforceable conditions. Accordingly, the 
agencies included language reflecting this practice in the Proposed 
Rule.
    The Petition also suggested that MRAs, as well as memoranda of 
understanding, examination downgrades, and any other formal examination 
mandate or sanction, should be based only on a violation of a statute, 
regulation, or order, including a ``demonstrably unsafe or unsound 
practice.'' \12\ As noted in the Proposed Rule, examiners take steps to 
identify deficient practices before they rise to violations of law or 
regulation or before they constitute unsafe or unsound banking 
practices. The agencies stated that they continue to believe that early 
identification of deficient practices serves the interest of the public 
and of supervised institutions. Early identification protects the 
safety and soundness of banks, promotes consumer protection, and 
reduces the costs and risk of deterioration of financial condition from 
deficient practices resulting in violations of laws or regulations, 
unsafe or unsound conditions, or unsafe or unsound banking practices. 
The Proposed Rule also noted that the agencies have different 
supervisory processes, including for issuing supervisory criticisms. 
For these reasons, the agencies did not propose revisions to their 
respective supervisory practices relating to supervisory criticisms.
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    \12\ The Petition asserted that the federal banking agencies 
rely on 12 U.S.C. 1818(b)(1) when issuing MRAs based on safety-and-
soundness matters. Through statutory examination and reporting 
authorities, Congress has conferred upon the agencies the authority 
to exercise visitorial powers with respect to supervised 
institutions. The Supreme Court has indicated support for a broad 
reading of the agencies' visitorial powers. See, e.g., Cuomo v. 
Clearing House Assn L.L.C., 557 U.S. 519 (2009); United States v. 
Gaubert, 499 U.S. 315 (1991); and United States v. Philadelphia Nat. 
Bank, 374 U.S. 321 (1963). The visitorial powers facilitate early 
identification of supervisory concerns that may not rise to a 
violation of law, unsafe or unsound banking practice, or breach of 
fiduciary duty under 12 U.S.C. 1818.
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    The agencies also noted that the 2018 Statement was intended to 
focus on the appropriate use of supervisory guidance in the supervisory 
process, rather than the standards for supervisory criticisms. To 
address any confusion concerning the scope of the 2018 Statement, the 
Proposed Rule removed two sentences from the 2018 Statement concerning 
grounds for ``citations'' and the handling of deficiencies that do not 
constitute violations of law.\13\
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    \13\ The following sentences from the 2018 Statement were not 
present in the Proposed Rule:
    Rather, any citations will be for violations of law, regulation, 
or non-compliance with enforcement orders or other enforceable 
conditions. During examinations and other supervisory activities, 
examiners may identify unsafe or unsound practices or other 
deficiencies in risk management, including compliance risk 
management, or other areas that do not constitute violations of law 
or regulation.
    2018 Statement at 2. The agencies did not intend these deletions 
to indicate a change in supervisory policy.

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[[Page 18175]]

Comments on the Proposed Rule

A. Overview
    The five agencies received approximately 30 unique comments 
concerning the Proposed Rule.\14\ The Board discusses below those 
comments that are potentially relevant to the Board.\15\ Commenters 
representing trade associations for banking institutions and other 
businesses, state bankers' associations, individual financial 
institutions, and one member of Congress expressed general support for 
the Proposed Rule. These commenters supported codification of the 2018 
Statement and the reiteration by the agencies that guidance does not 
have the force of law and cannot give rise to binding, enforceable 
legal obligations. One of these commenters stated that the Proposal 
would serve the interests of consumers and competition by clarifying 
the law for institutions and potentially removing ambiguities that 
could deter the development of innovative products that serve consumers 
and business clients, without uncertainty regarding potential 
regulatory consequences. These commenters expressed strong support as 
well for the clarification in the Proposed Rule that the agencies will 
not criticize, including through the issuance of ``matters requiring 
attention,'' a supervised financial institution for a ``violation'' of, 
or ``non-compliance'' with, supervisory guidance.
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    \14\ Of the comments received, some comments were not submitted 
to all agencies, and some comments were identical. Note that this 
total excludes comments that were directed at an unrelated 
rulemaking by the Financial Crimes Enforcement Network of the 
Department of the Treasury (FinCEN).
    \15\ This final rule does not specifically discuss those 
comments that are only potentially relevant to other agencies.
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    One commenter agreed with the agencies that supervisory criticisms 
should not be limited to violation of statutes, regulations, or orders, 
including a ``demonstrable unsafe or unsound practice'' and that 
supervisory guidance remains a beneficial tool to communicate 
supervisory expectations to the industry. The commenter stated that the 
proactive identification of supervisory criticism or deficiencies that 
do not constitute violations of law facilitates forward-looking 
supervision, which helps address problems before they warrant a formal 
enforcement action. The commenter noted as well that supervisory 
guidance provides important insight to the industry and ensures 
consistency in the supervisory approach and that supervised 
institutions frequently request supervisory guidance. The commenter 
observed that the COVID-19 pandemic has amplified the requests for 
supervisory guidance and interpretation, and that it is apparent 
institutions want clarity and guidance from regulators.
    Two commenters, both public interest advocacy groups, opposed the 
proposed rule, suggesting that codifying the 2018 Statement may 
undermine the important role that supervisory guidance can play by 
informing supervisory criticism, rather than merely clarifying that it 
will not serve as the basis for enforcement actions. One commenter 
stated that it is essential for agencies to have the prophylactic 
authority to base criticisms on imprudent bank practices that may not 
yet have ripened into violations of law or significant safety and 
soundness concerns. The commenter stated that this is particularly 
important with respect to large banks, where delay in addressing 
concerns could lead to a broader crisis. One commenter stated that the 
agencies have not explained the benefits that would result from the 
rule or demonstrated how the rule will promote safety and soundness or 
consumer protection. The commenter argued that supervision is different 
from other forms of regulation and requires supervisory discretion, 
which could be constrained by the rule. One of these commenters argued 
that the Proposal would send a signal that banking institutions have 
wider discretion to ignore supervisory guidance.
B. Scope of Rule
    Several industry commenters requested that the Proposed Rule cover 
interpretive rules and clarify that interpretive rules do not have the 
force and effect of law. One commenter stated that the agencies should 
clarify whether they believe that interpretive rules can be binding. 
The commenter argued that, under established legal principles, 
interpretive rules can be binding on the agency that issues them but 
not on the public. Some commenters suggested that the agencies follow 
ACUS recommendations for issuing interpretive rules and that the 
agencies should clarify when particular guidance documents are (or are 
not) interpretive rules and allow the public to petition to change an 
interpretation. A number of commenters requested that the agencies 
expand the statement to address the standards that apply to MRAs and 
other supervisory criticisms, a suggestion made in the Petition.
C. Role of Guidance Documents
    Several commenters recommended that the agencies clarify that the 
practices described in supervisory guidance are merely examples of 
conduct that may be consistent with statutory and regulatory 
compliance, not expectations that may form the basis for supervisory 
criticism. One commenter suggested that the agencies state that when 
agencies offer examples of safe and sound conduct, compliance with 
consumer protection standards, appropriate risk management practices, 
or acceptable practices through supervisory guidance or interpretive 
rules, the agencies will treat adherence to practices outlined in that 
supervisory guidance or interpretive rule as a safe harbor from 
supervisory criticism. One commenter also requested that the agencies 
make clear that guidance that goes through public comment, as well as 
any examples used in guidance, is not binding. The commenter also 
requested that the agencies affirm that they will apply statutory 
factors while processing applications and the Board not use SR Letter 
14-2/CA Letter 14-1, ``Enhancing Transparency in the Federal Reserve's 
Applications Process'' (February 24, 2014) (SR 14-2/CA 14-1) to 
penalize less-than-satisfactory firms. This includes consideration of 
supervisory criticisms when processing applications for expansionary 
activity under SR 14-2/CA 14-1.
    One commenter argued that guidance provides valuable information to 
supervisors about how their discretion should be exercised and 
therefore plays an important role in supervision. As an example, 
according to this commenter, 12 U.S.C. 1831p-1 and 12 U.S.C. 1818 
recognize the discretionary power conferred on the Federal banking 
agencies,\16\ which is separate from the power to issue regulations. 
The commenter noted that, pursuant to these statutes, regulators may 
issue cease and desist orders based on reasonable cause to believe that 
an institution has engaged, is engaging or is about to engage in an 
unsafe and unsound practice, separately and apart from whether the 
institution has technically violated a law or regulation. The commenter 
added that Congress entrusted the Federal banking agencies with the 
power to determine whether practices are unsafe and unsound and attempt 
to halt such practices through supervision, even if a specific case may

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not constitute a violation of a written law or regulation.
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    \16\ The Federal banking agencies are the OCC, Board, and FDIC. 
12 U.S.C. 1813.
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D. Supervisory Criticisms
    Several commenters addressed supervisory criticisms and how they 
relate to guidance. These commenters suggested that supervisory 
criticisms should be specific as to practices, operations, financial 
conditions, or other matters that could have a negative effect. These 
commenters also suggested that MRAs, memoranda of understanding and any 
other formal written mandates or sanctions should be based only on a 
violation of a statute or regulation. Similarly, these commenters 
argued that there should be no references to guidance in written formal 
actions and that banking institutions should be reassured that they 
will not be criticized or cited for a violation of guidance when no law 
or regulation is cited. One commenter suggested that it would instead 
be appropriate to discuss supervisory guidance privately, rather than 
publicly, potentially during the pre-exam meetings or during 
examination exit meetings. Another commenter suggested that, while 
referencing guidance in supervisory criticism may be useful at times, 
agencies should provide safeguards to prevent such references from 
becoming the de facto basis for supervisory criticisms. One commenter 
stated that examiners also should not criticize community banks in 
their final written examination reports for not complying with ``best 
practices'' unless the criticism involves a violation of bank policy or 
regulation. The commenter added that industry best practices should be 
transparent enough and sufficiently known throughout the industry 
before being cited in an examination report. One commenter requested 
that examiners should not apply large bank practices to community banks 
that have a different, less complex and more conservative business 
model. One commenter asserted that MRAs should not be based on 
``reputational risk,'' but rather on the underlying conduct giving rise 
to concerns and asked the agencies to address this in the final rule.
    Commenters that opposed the Proposal did not support restricting 
supervisory criticism or sanctions to explicit violations of law or 
regulation. One commenter expressed concern that requiring supervisors 
to wait for an explicit violation of law before issuing criticism would 
effectively erase the line between supervision and enforcement. 
According to the commenter, it would eliminate the space for 
supervision as an intermediate practice of oversight and cooperative 
problem-solving between banks and the regulators who support and manage 
the banking system and would also clearly violate the intent of the law 
in 12 U.S.C. 1818(b). One commenter emphasized the importance of bank 
supervisors basing their criticisms on imprudent bank practices that 
may not yet have ripened into violations of laws or rules but which 
could undermine safety and soundness or pose harm to consumers if left 
unaddressed.
    One commenter argued that the agencies should state clearly that 
guidance can and will be used by supervisors to inform their 
assessments of banks' practices; and that it may be cited as, and serve 
as the basis for, criticisms. According to the commenter, even under 
the legal principles described in the Proposal, it is permissible for 
guidance to be used as a set of standards that may indeed inform a 
criticism, provided that application of the guidance is used for 
corrective purposes, if not to support an enforcement action.
    According to one commenter, the Proposal makes fine conceptual 
distinctions between, for example, issuing supervisory criticisms ``on 
the basis of'' guidance and issuing supervisory criticisms that make 
``reference'' to supervisory guidance. The commenter suggested that is 
a distinction that it may be difficult for ``human beings to parse in 
practice.'' According to the commenter, a rule that makes such a 
distinction is likely to have a chilling effect on supervisors 
attempting to implement policy in the field. According to another 
commenter, the language allowing examiners to reference supervisory 
guidance to provide examples is too vague and threatens to marginalize 
the role of guidance and significantly reduce its usefulness in the 
process of issuing criticisms designed to correct deficient bank 
practices.
E. Legal Authority and Visitorial Powers
    One commenter questioned the Federal banking agencies' reference in 
the Proposal to visitorial powers as an additional authority for early 
identification of supervisory concerns that may not rise to a violation 
of law, unsafe or unsound banking practice, or breach of fiduciary duty 
under 12 U.S.C. 1818.
F. Issuance and Management of Supervisory Guidance
    Several commenters made suggestions about how the agencies should 
issue and manage supervisory guidance. Some commenters suggested that 
the agencies should delineate clearly between regulations and 
supervisory guidance. Commenters encouraged the agencies to regularly 
review, update, and potentially rescind outstanding guidance. One 
commenter suggested that the agencies rescind outstanding guidance that 
functions as rule, but has not gone through notice and comment. One 
commenter suggested that the agencies memorialize their intent to 
revisit and potentially rescind existing guidance, as well as limit 
multiple guidance documents on the same topic. Commenters suggested 
that supervisory guidance should be easy to find, readily available, 
online, and in a format that is user-friendly and searchable.
    One commenter encouraged the agencies to issue principles-based 
guidance that avoids the kind of granularity that could be misconstrued 
as binding expectations. According to this commenter, the agencies can 
issue separate frequently asked questions with more detailed 
information, but should clearly identify these as non-binding 
illustrations. This commenter also encouraged the agencies to publish 
proposed guidance for comment when circumstances allow. Another 
commenter requested that the agencies issue all ``rules'' as defined by 
the APA through the notice-and-comment process.
    One commenter expressed concern that the agencies will aim to 
reduce the issuance of multiple supervisory guidance documents and will 
thereby reduce the availability of guidance in circumstances where 
guidance would be valuable.

Responses to Comments

    As stated in the Proposed Rule, the 2018 Statement was intended to 
focus on the appropriate use of supervisory guidance in the supervisory 
process, rather than the standards for supervisory criticisms. The 
standards for issuing MRAs or other supervisory actions were, 
therefore, outside the scope of this rulemaking. For this reason, and 
for reasons discussed earlier, the final rule does not address the 
standards for MRAs and other supervisory actions. Similarly, because 
the Board is not addressing its approach to supervisory criticism in 
the final rule, including any criticism related to reputation risk, the 
final rule does not address supervisory criticisms relating to 
``reputation risk.''
    With respect to the comments on coverage of interpretive rules, 
interpretive rules do not, alone, ``have the force and effect of law'' 
and must be rooted in, and derived from, a statute or

[[Page 18177]]

regulation.\17\ While interpretive rules and supervisory guidance are 
similar interpretive rules and supervisory guidance are distinct under 
the APA and its jurisprudence and are generally issued for different 
purposes.\18\ Interpretive rules are typically issued by an agency to 
advise the public of the agency's construction of the statutes and 
rules that it administers,\19\ whereas general statements of policy, 
such as supervisory guidance, advise the public of how an agency 
intends to exercise its discretionary powers.\20\ To this end, guidance 
generally reflects an agency's policy views, for example, on safe and 
sound risk management practices. On the other hand, interpretive rules 
generally resolve ambiguities regarding requirements imposed by 
statutes and regulations. Because supervisory guidance and interpretive 
rules have different characteristics and serve different purposes, the 
final rule will continue to cover supervisory guidance only.
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    \17\ See Mortgage Bankers Association, 575 U.S. at 96.
    \18\ Questions concerning the legal and supervisory nature of 
interpretive rules are case-specific and have engendered debate 
among courts and administrative law commentators. The Board takes no 
position in this rulemaking on those specific debates. See, e.g., R. 
Levin, Rulemaking and the Guidance Exemption, 70 Admin. L. Rev. 263 
(2018) (discussing the doctrinal differences concerning the status 
of interpretive rules under the APA); see also Nicholas R. Parillo, 
Federal Agency Guidance and the Powder to Bind: An Empirical Study 
of Agencies and Industries, 36 Yale J. Reg 165, 168 n.6 (2019) 
(``[w]hether interpretive rules are supposed to be nonbinding is a 
question subject to much confusion that is not fully settled''); see 
also ACUS, Recommendation 2019-1, Agency Guidance Through 
Interpretive Rules (Adopted June 13, 2019), available at https://www.acus.gov/recommendation/agency-guidance-through-interpretive-rules (noting that courts and commentators have different views on 
whether interpretive rules bind an agency and effectively bind the 
public through the deference given to agencies' interpretations of 
their own rules under Auer v. Robbins, 519 U.S. 452 (1997)).
    \19\ Mortgage Bankers Association, 575 U.S. at 97 (citing 
Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 99 (1995)); 
accord Attorney General's Manual at 30 n.3.
    \20\ See Chrysler v. Brown, 441 U.S. at 302 n.31 (quoting 
Attorney General's Manual at 30 n.3); see also, e.g., American 
Mining Congress v. Mine Safety & Health Administration, 995 F.2d 
1106, 1112 (D.C. Cir. 1993) (outlining tests in the D.C. Circuit for 
assessing whether an agency issuance is an interpretive rule).
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    With respect to the question of whether to adopt ACUS's procedures 
for allowing the public to request reconsideration or revision of an 
interpretive rule, this rulemaking, again, does not address 
interpretive rules. As such, the Board is not adding procedures for 
challenges to interpretive rules through this rulemaking.
    In response to the comment that the agencies treat examples in 
guidance as ``safe harbors'' from supervisory criticism, the Board 
agrees that examples offered in supervisory guidance can provide 
insight about practices that, in general, may lead to safe and sound 
operation and compliance with regulations and statutes. The examples in 
guidance, however, are generalized. When an institution implements 
examples, examiners must consider the facts and circumstances of that 
institution in assessing the application of those examples. In 
addition, the underlying legal principle of supervisory guidance is 
that it does not create binding legal obligation for either the public 
or an agency. As such, the Board does not deem examples used in 
supervisory guidance to categorically establish safe harbors from 
supervisory criticism.
    Although some commenters argued that the Proposal may undermine the 
important role that supervisory guidance can play in informing 
supervisory criticism and by serving to address conditions before those 
conditions lead to enforcement actions, the appropriate use of 
supervisory guidance can generate a more collaborative and constructive 
regulatory process that supports the safety and soundness and 
compliance of institutions, thereby diminishing the need for 
enforcement actions. As noted by ACUS, guidance can make agency 
decision-making more predictable and uniform and can promote compliance 
with the law. The final rule does not weaken the role of guidance in 
the supervisory process and the Board will continue to use guidance in 
a robust way to support the safety and soundness of banks and promote 
compliance.
    Further, the Board does not agree with one commenter's assertion 
that the Proposal made an unclear distinction between, on the one hand, 
inappropriate supervisory criticism for a ``violation'' of or ``non-
compliance'' with supervisory guidance, and, on the other hand, Board 
examiners' entirely appropriate use of supervisory guidance to 
reference examples of safe and sound conduct, appropriate consumer 
protection and risk management practices, and other actions for 
addressing compliance with laws or regulations. This approach 
appropriately implements the principle that institutions are not 
required to follow supervisory guidance in itself, but may find such 
guidance useful.
    With respect to the comment that visitorial powers do not provide 
the Federal banking agencies with authority to issue MRAs or other 
supervisory criticisms, the Board disagrees. The Board's visitorial 
powers are well-established and rooted in its statutory examination and 
reporting mandates. The Supreme Court's decision in Cuomo v. Clearing 
House Assn L.L.C. explained that the visitation included the ``exercise 
of supervisory power.'' \21\ The Court ruled, in accordance with its 
precedent on visitation, that the ``power to enforce the law exists 
separate and apart from the power of visitation.'' \22\ While the Cuomo 
decision involved the question of which powers may be exercised by 
state governments with respect to national banks (and ruled that states 
could exercise law enforcement powers but could not exercise visitorial 
powers with respect to national banks), the decision did not dispute 
that the Federal banking agencies possess both these powers. The Court 
in Cuomo explained that visitorial powers entailed ``oversight'' and 
``supervision,'' and quoted the Court's earlier decision in Watters v. 
Wachovia Bank, N.A., explaining that visitorial powers entailed 
``general supervision and control.'' \23\ Accordingly, visitorial 
powers include the power to issue supervisory criticisms independent of 
the agencies' authority to enforce applicable laws or ensure safety and 
soundness. For these reasons, the Board reaffirms the statement in the 
preamble to the Proposed Rule that such visitorial powers have been 
conferred through statutory examination and reporting authorities, 
which facilitate the Board's identification of supervisory concerns 
that may not rise to a violation of law, unsafe or unsound practice, or 
breach of fiduciary duty under 12 U.S.C. 1818. The Board's statutory 
examination and reporting authorities pre-existed 12 U.S.C. 1818, which 
neither superseded nor replaced such authorities. The Board has been 
vested with various statutory examination and reporting authorities 
with respect to institutions under its supervision.\24\
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    \21\ Cuomo v. Clearing House Assn. L.L.C., 557 U.S. 519, 536 
(2009).
    \22\ Id. at 526-529 and 533.
    \23\ Id. at 528 (citing Watters v. Wachovia Bank, N.A., 550 U.S. 
1, 127 (2007)).
    \24\ The commenter's reading of the Federal banking agencies' 
examination and reporting authorities would assert that the Federal 
banking agencies may examine supervised institutions and require 
reports, but not make findings based on such examinations and 
reporting, unless the finding is sufficient to warrant a formal 
enforcement action under the standard set out in 12 U.S.C. 1818. 
This reading is inconsistent with the history of federal banking 
supervision, including as described in the cases cited in the 
Proposed Rule.
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    In response to comments regarding the role of public comment for 
supervisory guidance, the Board notes that it has made clear through 
the 2018 Statement and in this final rule that

[[Page 18178]]

supervisory guidance (including guidance that goes through public 
comment) does not create binding, enforceable legal obligations. 
Rather, the Board in some instances issues supervisory guidance for 
comment in order to improve its understanding of an issue, gather 
information, or seek ways to achieve a supervisory objective most 
effectively. Similarly, examples that are included in supervisory 
guidance (including guidance that goes through public comment) are not 
binding on institutions. Rather, these examples are intended to be 
illustrative of ways a supervised institution may implement safe and 
sound practices, appropriate consumer protection, prudent risk 
management, or other actions in furtherance of compliance with laws or 
regulations. Relatedly, the Board does not agree with one comment that 
it should use notice-and-comment procedures, without exception, to 
issue all ``rules'' as defined by the APA, which would include 
supervisory guidance. Congress has established longstanding exceptions 
in the APA from the notice-and-comment process for certain rules, 
including for general statements of policy like supervisory guidance 
and for interpretive rules. As one court has explained, Congress 
intended to ``accommodate situations where the policies promoted by 
public participation in rulemaking are outweighed by the countervailing 
considerations of effectiveness, efficiency, expedition and reduction 
in expense.'' \25\
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    \25\ Am. Hosp. Ass'n v. Bowen, 834 F.2d 1037, 1045 (D.C. Cir. 
1987). The specific contours of these exceptions are the subject of 
an extensive body of case law.
---------------------------------------------------------------------------

    With respect to the commenter's request that the agencies affirm 
that they will apply statutory factors while processing applications, 
the Board affirms that the agency will continue to consider and apply 
all applicable statutory factors when processing applications. With 
respect to the commenter's request that the Board not use SR 14-2/CA 
14-1 when processing applications, the Board notes that SR 14-2/CA 14-1 
is intended to provide transparency into the Board's practices. Like 
all guidance documents, SR 14-2/CA 14-1 does not create binding 
obligations on the Board or external parties, and the Board evaluates 
each application individually on its merits based on the applicable 
statutory factors.
    In response to the question raised by some commenters concerning 
potential confusion between supervisory guidance and interpretive 
rules, the Board notes that interpretive rules are outside the scope of 
the rulemaking. In addition, as stated earlier, interpretive rules do 
not, alone, ``have the force and effect of law'' and must be rooted in, 
and derived from, a statute or regulation. While interpretive rules and 
supervisory guidance are similar in lacking the force and effect of 
law, interpretive rules and supervisory guidance are distinct under the 
APA and its jurisprudence and are generally issued for different 
purposes. When the Board issues an interpretive rule, the fact that it 
is an interpretive rule is generally clear. In addition, these comments 
relate to clarity in drafting, rather than a matter that seems suitable 
for rulemaking.
    In response to the two commenters opposing the Proposal, this final 
rule does not undermine any of the Board's safety and soundness or 
other authorities. Indeed, the final rule is designed to support the 
Board's ability to supervise institutions effectively. In addition, the 
question of the role of guidance has been one of interest to regulated 
parties and other stakeholders over the past few years. The Petition 
and the number of comments on the Proposal are a sign of this interest. 
As such, it will serve the public interest to reaffirm the appropriate 
role of supervisory guidance. There are inherent benefits to the 
supervisory process whenever institutions and examiners have a clear 
understanding of their roles, including how supervisory guidance can be 
used effectively within legal limits. Therefore, the Board is 
proceeding with the rule as proposed.
    In response to the commenter expressing concern that language in 
the Statement on reducing multiple supervisory guidance documents on 
the same topic will limit the Board's ability to provide valuable 
guidance, the Board assures the commenter that this language will not 
inhibit the Board from issuing new supervisory guidance when 
appropriate.
    Finally, the other comments related to other aspects of guidance or 
the supervisory process are not best addressed in this rulemaking.

III. The Final Rule

    For the reasons discussed above, the final rule adopts the Proposed 
Rule without substantive changes. The final rule is specifically 
addressed to the Board and Board-supervised institutions. Although many 
of the comments were applicable to all of the agencies, some comments 
were specific to particular agencies or to groups of agencies. Having 
separate final rules has enabled agencies to better focus on explaining 
any agency-specific issues to their respective audiences of supervised 
institutions and agency employees.

IV. Administrative Law Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 \26\ (PRA) states that no 
agency may conduct or sponsor, nor is the respondent required to 
respond to, an information collection unless it displays a currently 
valid Office of Management and Budget (OMB) control number. The Board 
has reviewed this final rule and determined that it does not contain 
any information collection requirements subject to the PRA. 
Accordingly, no submissions to OMB will be made with respect to this 
final rule.
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    \26\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act \27\ (RFA) generally requires that 
in connection with a final rulemaking, an agency prepare and make 
available for public comment a regulatory flexibility analysis 
describing the impact of the final rule on small entities. Under 
section 605(b) of the RFA, this analysis is not required if an agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities and publishes its certification 
and a brief explanatory statement in the Federal Register along with 
its rule.
---------------------------------------------------------------------------

    \27\ 5 U.S.C. 601, et seq.
---------------------------------------------------------------------------

    The RFA generally requires an agency to conduct an initial 
regulatory flexibility analysis (IRFA) and a final regulatory 
flexibility analysis (FRFA) of any rule subject to notice-and-comment 
rulemaking requirements, unless the head of the agency certifies that 
the rule will not, if promulgated, have a significant economic impact 
on a substantial number of small entities.\28\ This final rule would 
apply to all Board-regulated entities, including bank holding 
companies, savings and loan holding companies, and state member 
banks.\29\ This final rule would not

[[Page 18179]]

impose any obligations on Board-regulated entities, and regulated 
entities would not need to take any action in response to this final 
rule. The Board certifies that the rule will not have a significant 
economic impact on a substantial number of small entities.\30\
---------------------------------------------------------------------------

    \28\ 5 U.S.C. 601-612.
    \29\ The Small Business Administration (SBA) has defined ``small 
entities'' to include banking organizations with total assets of 
$600 million or less that are independently owned or operated or 
owned by a holding company with less than or equal to $600 million 
in total assets. See 13 CFR 121.201. Effective August 19, 2019, the 
SBA revised the size standards for certain banking organizations to 
$600 million in total assets from $550 million in total assets. As 
of February 8, 2021, date, there were approximately 2,762 bank 
holding companies, 112 savings and loan holding companies, and 455 
state member banks that would fit the SBA's current definition of 
small entity for purposes of the RFA. Consistent with the General 
Principles of Affiliation in 13 CFR 121.103, the Board counts the 
assets of all domestic and foreign affiliates when determining if 
the Board should classify a Board-supervised institution as a small 
entity.
    \30\ 5 U.S.C. 605(b).
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C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \31\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The Board has sought to present the 
final rule in a simple and straightforward manner and did not receive 
any comments on the use of plain language in the Proposed Rule.
---------------------------------------------------------------------------

    \31\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999), 12 U.S.C. 4809.
---------------------------------------------------------------------------

D. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\32\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions (IDIs), each Federal banking agency 
must consider, consistent with principles of safety and soundness and 
the public interest, any administrative burdens that such regulations 
would place on depository institutions, including small depository 
institutions, and customers of depository institutions, as well as the 
benefits of such regulations. In addition, section 302(b) of RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on IDIs 
generally to take effect on the first day of a calendar quarter that 
begins on or after the date on which the regulations are published in 
final form.\33\ The Board has determined that the final rule will not 
impose additional reporting, disclosure, or other requirements on IDIs; 
therefore, the requirements of the RCDRIA do not apply.
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 4802(a).
    \33\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 262

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System.

Authority and Issuance

    For the reasons set forth in the preamble, the Board of Governors 
of the Federal Reserve System amends part 262 to 12 CFR chapter II as 
follows:

PART 262--RULES OF PROCEDURE

0
1. The authority citation for part 262 is revised to read as follows:

    Authority:  5 U.S.C. 552; 12 U.S.C. 248, 321, 325, 326, 483, 
602, 611a, 625, 1467a, 1828(c), 1842, 1844, 1850a, 1867, 3105, 3106, 
3108, 5361, 5368, 5467, and 5469.


0
2. Section 262.7 is added to read as follows:


Sec.  262.7  Use of supervisory guidance.

    (a) Purpose. The Board issues regulations and guidance as part of 
its supervisory function. This section reiterates the distinctions 
between regulations and guidance, as stated in the Statement Clarifying 
the Role of Supervisory Guidance (appendix A to this part) (Statement).
    (b) Implementation of the Statement Clarifying the Role of 
Supervisory Guidance. The Statement describes the official policy of 
the Board with respect to the use of supervisory guidance in the 
supervisory process. The Statement is binding on the Board.
    (c) Rule of construction. This section does not alter the legal 
status of guidelines authorized by statute, including but not limited 
to, 12 U.S.C. 1831p-1, to create binding legal obligations.

0
3. Appendix A is added to read follows:

Appendix A to Part 262--Statement Clarifying the Role of Supervisory 
Guidance Statement Clarifying the Role of Supervisory Guidance

    The Board is issuing this statement to explain the role of 
supervisory guidance and to describe the Board's approach to 
supervisory guidance.

Difference Between Supervisory Guidance and Laws or Regulations

    The Board issues various types of supervisory guidance, 
including interagency statements, advisories, letters, policy 
statements, questions and answers, and frequently asked questions, 
to its supervised institutions. A law or regulation has the force 
and effect of law.\1\ Unlike a law or regulation, supervisory 
guidance does not have the force and effect of law, and the Board 
does not take enforcement actions based on supervisory guidance. 
Rather, supervisory guidance outlines the Board's supervisory 
expectations or priorities and articulates the Board's general views 
regarding appropriate practices for a given subject area. 
Supervisory guidance often provides examples of practices that the 
Board generally considers consistent with safety-and-soundness 
standards or other applicable laws and regulations, including those 
designed to protect consumers. Supervised institutions at times 
request supervisory guidance, and such guidance is important to 
provide insight to industry, as well as supervisory staff, in a 
transparent way that helps to ensure consistency in the supervisory 
approach.
---------------------------------------------------------------------------

    \1\ Government agencies issue regulations that generally have 
the force and effect of law. Such regulations generally take effect 
only after the agency proposes the regulation to the public and 
responds to comments on the proposal in a final rulemaking document.
---------------------------------------------------------------------------

Ongoing Efforts To Clarify the Role of Supervisory Guidance

    The Board is clarifying the following policies and practices 
related to supervisory guidance:
     The Board intends to limit the use of numerical 
thresholds or other ``bright-lines'' in describing expectations in 
supervisory guidance. Where numerical thresholds are used, the Board 
intends to clarify that the thresholds are exemplary only and not 
suggestive of requirements. The Board will continue to use numerical 
thresholds to tailor, and otherwise make clear, the applicability of 
supervisory guidance or programs to supervised institutions, and as 
required by statute.
     Examiners will not criticize (through the issuance of 
matters requiring attention), a supervised financial institution 
for, and the Board will not issue an enforcement action on the basis 
of, a ``violation'' of or ``non-compliance'' with supervisory 
guidance. In some situations, examiners may reference (including in 
writing) supervisory guidance to provide examples of safe and sound 
conduct, appropriate consumer protection and risk management 
practices, and other actions for addressing compliance with laws or 
regulations.
     Supervisory criticisms should continue to be specific 
as to practices, operations, financial conditions, or other matters 
that could have a negative effect on the safety and soundness of the 
financial institution, could cause consumer harm, or could cause 
violations of laws, regulations, final agency orders, or other 
legally enforceable conditions.
     The Board has at times sought, and may continue to 
seek, public comment on supervisory guidance. Seeking public comment 
on supervisory guidance does not mean that the guidance is intended 
to be a regulation or have the force and effect of law. The comment 
process helps the Board to improve its understanding of an issue, to 
gather information on institutions' risk management practices, or to 
seek ways to achieve a supervisory objective most effectively and 
with the least burden on institutions.
     The Board will aim to reduce the issuance of multiple 
supervisory guidance documents on the same topic and will generally 
limit such multiple issuances going forward.
     The Board will continue efforts to make the role of 
supervisory guidance clear in communications to examiners and to

[[Page 18180]]

supervised financial institutions and encourage supervised 
institutions with questions about this statement or any applicable 
supervisory guidance to discuss the questions with their appropriate 
agency contact.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann Misback,
Secretary of the Board.
[FR Doc. 2021-07146 Filed 4-7-21; 8:45 am]
BILLING CODE 6210-01-P