Regulatory Flexibility Act
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) of 1980 is a law designed to make government agencies review all regulations that they impose to ensure that they do not place a disproportionate economic burden on small business owners and other small entities. The Regulatory Flexibility Act was intended to extend protection to three different types of small entities in the United States: small businesses (as defined by the Small Business Administration); small organizations (nonprofit establishments that are independently owned and operated and not dominant in their field); and small governmental jurisdictions (defined as governments of cities, counties, towns, townships, villages, school districts, and other districts with populations of less than 50,000).
In the years following the enactment of the RFA, however, many small business owners contended that agencies too often ignored the law. Periodic attempts to revise the RFA failed until March 1996, when the Small Business Regulatory Enforcement Fairness Act (SBREFA) became law. This new legislation cast the Regulatory Flexibility Act in an entirely new light, for it amended the 1980 law to allow for judicial review of government agencies' compliance with it.
Before the 1996 law was passed, small business owners had had no legal recourse when faced with regulations that they felt were unfair to smaller companies. "There was no statutory requirement that forces an agency to do an analysis," explained one spokesman for the Senate Committee on Small Business in Nation's Restaurant News. With the passage of the Small Business Regulatory Enforcement Fairness Act, however, "a small entity, including businesses—if an agency rule seems unfair—can challenge it in court. And if they prevail, they can modify it or strike it to reduce the impact on that entity."
LEGISLATIVE HISTORY OF THE RFA
Prior to 1980, American small businesses were forced to adhere to the same regulations as far larger companies, even though they did not have nearly the same resources to bring to bear. Entrepreneurs and directors of nonprofits repeatedly charged that when regulations put forth by the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), and other agencies were applied evenly, without regard to the size of the enterprises affected, they sometimes did serious damage to smaller organizations. Such regulations had to do with taxes, workplace safety, and the environment, among other issues.
As the Small Business Administration noted in its Guide to the Regulatory Flexibility Act, "the costs of complying with a particular regulation … may be manageable for a business with 500 or more employees, or revenue in the millions of dollars. On the other hand, a smaller company may not have the ability to absorb the expenses as easily, to set competitive prices, to devise innovations or even to continue as a viable entity." The Guide added that as more businesspeople and politicians investigated the situation, "evidence indicated that uniform application of federal regulatory requirements imposed increases in the economies of scale and affected small entities' ability to compete effectively. Reports … cited these disproportionate economic burdens on small business as contributing to declines in productivity, competition, innovation, and the relative market shares of small business."
The passage of the RFA in 1980, then, was meant to blunt much of the burden that regulatory changes were laying on the shoulders of small businesses. According to the RFA, each agency was supposed to analyze how its regulations affected the ability of small businesses to compete. In addition, the RFA directed agencies to balance the needs of small business with the benefits of the regulation being considered. The law called for agencies to propose regulatory alternatives for smaller companies that would be unduly hurt if forced to adhere to the original regulations. The Regulatory Flexibility Act still allowed agencies to put together needed regulatory measures in such realms as workplace safety and environmental protection, but it meant to give a greater voice to small businesses by encouraging agencies to listen to small business concerns and study ways in which regulations could be adjusted for them.
During the 1980s, however, many entrepreneurs and other members of the business community came to feel that the RFA was an unacceptably weak law. The law—which actually went into effect on January 1, 1981—included no legal penalties that could be imposed on agencies that did not follow the Act's guidelines, so some agencies paid little attention to the RFA. Observers felt that some agencies were simply recalcitrant, while others, burdened by inadequate budgets, did not have the resources to satisfactorily address the issues laid out in the RFA. Most observers granted that the Regulatory Flexibility Act was valuable in certain cases, but by the early 1990s there was a growing clamor in the small business community and Congress for an amended RFA.
In September 1993 President Clinton signed Executive Order 12866, which highlighted the responsibilities of government agencies to adhere to the principles of RFA. That same year, the Clinton administration's National Performance Review task force formally recommended that agency compliance with the RFA be subject to judicial review. Less than three years later, in March 1996, a number of major amendments to the RFA—including provisions adding judicial review—became law with the passage of the Small Business Regulatory Enforcement Fairness Act.
SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT
The 1996 act included several components that drew praise from small business owners. While the addition of judicial review of agency compliance with the RFA received the bulk of attention, the amendments also gave agencies additional responsibilities in the areas of policy review and outreach, and gave non-agency entities (small businesses, Congress) more influence in the regulatory process.
The Small Business Regulatory Enforcement Fairness Act amended the RFA so that small businesses finally had legal recourse when confronted with regulations that they felt did not adhere to the RFA. It created a complaint process whereby small businesses can seek review of the rule in court. Under the 1996 amendments, noted the SBA, "the court may review the final regulatory flexibility analysis, the agency's certification that the rule has no impact on small entities, and the agency's compliance with periodic reviews of current rules. Under the amendment, judicial review also applies to interpretative rulemakings promulgated by the IRS [Internal Revenue Service]." (Prior to the 1996 legislation, interpretative rulemakings of the IRS had been exempt from the RFA because of provisions of the Administrative Procedure Act.) In addition, the RFA now includes a provision that reimburses small business operators for legal fees incurred if they successfully challenge a regulation as overly harsh.
SBREFA reinforced RFA review guidelines for government agencies. Under the amended RFA, agencies are required to review all existing regulations to see if they have a significant economic impact on meaningful numbers of small entities (businesses, nonprofits, small government bodies). In situations where a "significant" impact is found, the agency in question is directed to review the regulations and determine whether they should remain in place, be revised, or be rescinded. Factors to be evaluated include: continued need for the regulation; impact of industry and economic trends on the regulation; public comments on the regulation's strengths and weaknesses; complexity of the regulation; and extent to which the regulation overlaps, duplicates, or conflicts with already existing federal, state, or local laws.
RFA now requires both OSHA and EPA to put together small business advocacy review panels every time they propose a regulation that is likely to have a big economic impact on a large number of small businesses. This information-gathering step is designed to solicit small business input on both the likely compliance costs of the regulations and possible mutually acceptable regulatory alternatives. A report reflecting the results of the review panel meetings is then prepared.
In addition, federal agencies are directed under RFA to publish a listing of all proposed or final regulations expected to be implemented during the following year. This requirement, say proponents, provides small business owners with more time to study the regulations and their likely impact on their establishments. Finally, the RFA now requires agencies to prepare easily understandable guide books to help businesses comply with regulations.
Expanded Authority for Chief Counsel for Advocacy
The 1996 amendments to the RFA expanded the authority of the SBA's chief counsel for advocacy. The RFA now allows the chief counsel—who has been formally designated to monitor agency compliance with the law—to file amicus briefs in situations where regulations are being reviewed in court.
A provision of the 1996 legislation established a 60-day review period during which Congress will be able to reject any new regulations that are held to be unnecessary.
Despite these changes, however, some critics contend that SBREFA has not lived up to expectations in its initial years of existence. Detractors argued that Congress showed little inclination to exercise its increased powers of legislative review, and they claimed that other review panels called for in SBREFA have been slow to take shape. Others have criticized the law for giving Congress little-noticed powers to override federal regulations.
For further information on the Regulatory Enforcement Act, contact the Office of Advocacy of the Small Business Administration at 409 Third St., SW, Washington, DC 20416.
Allen, Robin Lee. "Regulatory Bill Lets Small Operators Flex Muscles." Nation's Restaurant News. 22 April 1996.
Nierenberg, Danielle. "Little-Noticed Law Lurks Over Environmental Protections." World Watch. May 2001.
Warner, David. "Putting the Brakes on Federal Rules." Nation's Business. March 1995.
U.S. Small Business Administration. Guide to the Regulatory Flexibility Act. Available from http://www.sec.gov/divisions/corpfin/forms/regd.htm. Retrieved on 16 May 2006.
Hillstrom, Northern Lights
updated by Magee, ECDI
Regulatory Flexibility Act (1980)
Regulatory Flexibility Act (1980)
Jeffrey S. Lubbers
Excerpt from the Regulatory Flexibility Act
b. Each initial regulatory flexibility analysis ... shall contain—
- a description of the reasons why action by the agency is being considered;
- a succinct statement of the objectives of, and legal basis for, the proposed rule;
- a description of and, where feasible, an estimate of the number of small entities to which the proposed rule will apply;
- a description of the projected reporting, recordkeeping and other compliance requirements of the proposed rule ... ;
- an identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap or conflict with the proposed rule.
The Regulatory Flexibility Act (P.L. 96-354, 94 Stat. 1164-1170) requires agencies to consider the special needs and concerns of small entities (small businesses, organizations, and governmental jurisdictions) whenever they engage in rule making that is subject to the notice-and-comment requirements of the Administrative Procedure Act (APA) or other laws. (Rule making is the process by which government agencies formulate and issue rules or statements designed to implement, interpret, or prescribe law or policy. Notice-and-comment requires that these rules be published in proposed form, giving the public an opportunity to comment on them.) The act also covers interpretive rules set forth by the Internal Revenue Service (IRS) that contain information collection requirements that affect small entities.
GENERAL STRUCTURE OF THE ACT
Each time an agency publishes a notice-and-comment rule (or the IRS publishes an interpretive rule) in the Federal Register, it must prepare and publish an initial regulatory flexibility analysis (RFA) describing the impact of the proposed rule on small entities. An exception to this procedure is made when the agency head certifies that the proposed rule will not "have a significant economic impact on a substantial number of small entities."
The initial RFA is subject to public comment. The agency is encouraged to facilitate participation by small entities by providing actual notice of the proceeding to affected small entities, holding conferences and public hearings on the proposed rule as it affects small entities, and transmitting copies of its initial RFA to the Chief Counsel for Advocacy of the Small Business Administration (SBA).
Additional procedures are required to ensure participation by small entities in rule makings by either the Environmental Protection Agency (EPA) or the Occupational Safety and Health Administration (OSHA). Those two agencies must convene a regulatory review panel consisting of employees from that agency, the Office of Management and Budget, and the Chief Counsel for Advocacy of the Small Business Administration to review the rule and make recommendations to the agency from the perspective of small entities.
An agency's initial RFA must identify any "significant alternatives" to the proposed regulation that might achieve its goals while minimizing the impact on small entities. Approaches suggested in the act include modifying compliance or reporting timetables, simplifying compliance or reporting requirements, using performance rather than design standards, and exempting small entities from certain requirements. The final RFA must explain why any such significant alternatives to the rule were not adopted.
Agencies must also publish semiannual regulatory agendas identifying upcoming and current rule-making proposals that may affect small entities. In addition, the act directs agencies to apply regulatory flexibility analysis to their existing rules, initially evaluating them over a ten-year period, and reviewing them periodically.
CIRCUMSTANCES LEADING TO THE ADOPTION OF THE ACT
Congress's special concern for the problems of small business dates back to the passage of the Small Business Act in 1953. That act established the SBA and provided small businesses with assistance in receiving government grants and loans. In 1976, Congress established the Chief Counsel for Advocacy as an independent office within the SBA to protect the interests of small business. One of the chief counsel's tasks included measuring the costs of government regulation on small businesses and making proposals for eliminating excessive or unnecessary regulations of small businesses. The establishment of the office of chief council was followed by an influential White House Conference on Small Business that recommended the elimination or reduction of burdensome regulations and reporting requirements. That same year, President Jimmy Carter supported the passage of several new laws intended to aid small business, including the Regulatory Flexibility Act.
EXPERIENCE UNDER THE ACT
As originally enacted, the act expressly prohibited judicial review of agency compliance with any of its requirements. Most courts limited review to a determination under the APA of the reasonableness of a final agency rule based on the record before it, which included the RFAs and any comments from small entities about the proposed rule.
In 1996, after noting that the requirements of the act were too often being ignored, Congress amended it. The amendments permitted judicial review of agency compliance with the act and allowed courts to send the rule back to the agency or defer its enforcement. These amendments, made by the Small Business Regulatory Enforcement Fairness Act, also (1) inserted the special provisions applying to EPA and OSHA (described above); (2) created a national small business ombudsman in the SBA to receive complaints relating to regulatory enforcement; (3) required that agencies produce compliance guides for small businesses; and (4) created a special regime for after-the-fact congressional review of agency rule making.
Since 1996, numerous cases have been brought challenging agency actions under the act. Most courts have held that the standard of review is one of reasonableness, meaning that the agency must have made a reasonable, good faith effort to carry out the requirements of the statute. Challenges to the adequacy of an agency certification or final RFA, claiming that the agency failed to consider the effects of the proposed rule on a particular entity, have been mostly unsuccessful. The Chief Counsel for Advocacy has, however, been very active in monitoring agency compliance with the act. The Office of Advocacy issues extensive annual reports on the implementation of the act as well as on the act's strengths and weaknesses as identified by that office. The General Accounting Office also provides regular reviews of the act's implementation, which it has characterized as a mixed success.
RELATIONSHIP WITH OTHER LAWS
The act is closely related to the Administrative Procedure Act because it supplements the APA's rule-making process, and, except for IRS rules, is applicable only to those rules that have to be issued after notice-and-comment procedures required by the APA or another statute. It also is linked to the legislation creating the SBA Office of Advocacy. Other related laws include such "small business relief" legislation as the Small Business Regulatory Enforcement Fairness Act and the Equal Access to Justice Act.
See also: Administrative Procedure Act; Small Business Act.
Freedman, Doris S., Barney Singer, and Frank Swain. "The Regulatory Flexibility Act: Orienting Federal Regulation Toward Small Business." Dickenson Law Review, vol. 93 (1989): 439-464
Sargentich, Thomas O. "The Small Business Regulatory Enforcement Fairness Act." Administrative Law Review, vol. 49 (1997): 123-137
"Twenty Years of the Regulatory Flexibility Act: Rulemaking in a Dynamic Economy." Washington, DC: U.S. Small Business Administration, Office of Advocacy, 2000. Also available at <http://www.sba.gov/advo/laws/flex/00regflx.html>.
Verkuil, Paul R. "A Critical Guide to the Regulatory Flexibility Act." Duke Law Journal, vol. 213 (1982): 213-271
U.S. Small Business Administration. <http://www.sba.gov/regfair>.