SPEAKERS       CONTENTS       INSERTS    
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2006
REGULATORY FLEXIBILITY IMPROVEMENTS ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW

OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

ON
H.R. 682

JULY 20, 2006

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Serial No. 109–134

Printed for the use of the Committee on the Judiciary

Available via the World Wide Web: http://judiciary.house.gov

COMMITTEE ON THE JUDICIARY

F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
DANIEL E. LUNGREN, California
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL ISSA, California
JEFF FLAKE, Arizona
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MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
CHRIS VAN HOLLEN, Maryland
DEBBIE WASSERMAN SCHULTZ, Florida

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PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel

Subcommittee on Commercial and Administrative Law

CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina
TRENT FRANKS, Arizona
STEVE CHABOT, Ohio
MARK GREEN, Wisconsin
J. RANDY FORBES, Virginia
LOUIE GOHMERT, Texas

MELVIN L. WATT, North Carolina
WILLIAM D. DELAHUNT, Massachusetts
CHRIS VAN HOLLEN, Maryland
JERROLD NADLER, New York
DEBBIE WASSERMAN SCHULTZ, Florida

RAYMOND V. SMIETANKA, Chief Counsel
SUSAN A. JENSEN, Counsel
BRENDA HANKINS, Counsel
MIKE LENN, Full Committee Counsel
STEPHANIE MOORE, Minority Counsel
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C O N T E N T S

JULY 20, 2006

OPENING STATEMENT
    The Honorable Chris Cannon, a Representative in Congress from the State of Utah, and Chairman, Subcommittee on Commercial and Administrative Law

WITNESSES

The Honorable Thomas M. Sullivan, Chief Counsel for Advocacy, United States Small Business Administration, Washington, DC
Oral Testimony
Prepared Statement

Mr. J. Christopher Mihm, Managing Director for Strategic Issues, United States Government Accountability Office, Washington, DC
Oral Testimony
Prepared Statement

Mr. J. Robert Shull, Director of Regulatory Policy, OMB Watch, Washington, DC
Oral Testimony
Prepared Statement

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David Frulla, Esquire, Kelley Drye Collier Shannon, Washington, DC
Oral Testimony
Prepared Statement

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable Chris Cannon, a Representative in Congress from the State of Utah, and Chairman, Subcommittee on Commercial and Administrative Law

APPENDIX

Material Submitted for the Hearing Record

    Revised Prepared Statement of J. Robert Shull, Director of Regulatory Policy, OMB Watch, Washington, DC

    Prepared Statement of the Honorable Donald A. Manzullo, a Representative in Congress from the State of Illinois, and Chairman, Committee on Small Business

    Letter from Robert D. Evans, Director, Governmental Affairs Office, American Bar Association (ABA)

    Response to Post-Hearing Questions from the Honorable Thomas M. Sullivan, Chief Counsel for Advocacy, United States Small Business Administration, Washington, DC

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    Response to Post-Hearing Questions from J. Christopher Mihm, Managing Director for Strategic Issues, United States Government Accountability Office, Washington, DC

    Response to Post-Hearing Questions from J. Robert Shull, Director of Regulatory Policy, OMB Watch, Washington, DC

    Response to Post-Hearing Questions from David Frulla, Esquire, Kelley Drye Collier Shannon, Washington, DC

REGULATORY FLEXIBILITY IMPROVEMENTS ACT

THURSDAY, JULY 20, 2006

House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.

    The Subcommittee met, pursuant to notice, at 12:19 p.m., in Room 2141, Rayburn House Office Building, the Honorable Chris Cannon (Chairman of the Subcommittee) presiding.

    Mr. CANNON. Now, the Subcommittee will please come to order.

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    Thank you, all. We apologize for being long on that vote. And my understanding is Mr. Watt is on his way and will join us momentarily, but we do have Mr. Coble, though, so we will get started.

    Mostly, we will avoid boring Mr. Watt by not having to listen to my opening statement, which, actually, I think is sort of interesting.

    I want to begin with some fairly astounding facts. First, according to OMB, no one has ever tabulated the sheer number of Federal regulations that have been adopted since the passage of the Administrative Procedure Act of 1946.

    Second, and perhaps even more astounding, is the fact that OMB states that most of these existing Federal rules have never been evaluated to determine whether they have worked as intended and what their actual benefits and costs have been. We do know their costs have been high.

    Last year, the Office of Advocacy for the Small Business Administration issued a report estimating that the annual cost to comply with Federal regulations in the United States in 2004 exceeded $1.1 trillion. It reported if every household received a bill for an equal share, each household would have owed $10,172, an amount that exceeds what the average American household spent on health care in 2004, which was slightly under $9,000.

    I think these facts underscore several critical needs. Most importantly, we need to get the Administrative Conference of the United States up and running. As many of you know, I drafted bipartisan legislation that was signed into law in the last Congress that reauthorized ACUS. For 25 years, the Conference played an invaluable role as the Federal Government's in-house adviser on and coordinator of administrative procedural reforms.
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    I am in fact paraphrasing from a letter that the American Bar Association sent earlier this week to the Senate Appropriations Committee seeking funding for ACUS. With unanimous consent, I would like to submit this letter for inclusion to the record, and hearing no objections, so ordered.

    Second, these facts underscore the urgent need for continuing and aggressive congressional oversight over the regulatory process. To that end, the Subcommittee on Commercial and Administrative Law, at the request of the House Judiciary Committee Chairman Jim Sensenbrenner, with support of Ranking Member John Conyers, is conducting a comprehensive review of administrative law, process and procedure.

    This project, which is being guided by the Congressional Research Service, will culminate with the issuance of a final report and the publication of the results of various studies focusing on succinct issues presented by the rule-making process. Third, these problems underscore the need for legislative redress. H.R. 682, I believe, is a very good start.

    Essentially, this legislation addresses several significant shortcomings of the Regulatory Flexibility Act. Enacted in 1980, the act requires Federal agencies to assess the impact of proposed regulations on small entities, which the act defines as either a small business, small organization or small governmental jurisdiction.

    One of the principal purposes of the act was to reduce unnecessary and disproportionately burdensome demands that Federal regulatory and reporting requirements placed on small entities. For example, the act requires agencies to prepare a regulatory flexibility analysis at the time certain proposed and final rules are promulgated. Among other things, the analysis must describe the reasons why action by the agency is necessary and identify any significant alternatives to the rule.
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    This analysis is not required, however, if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Since its enactment in 1980, however, certain recurring deficiencies with the act have been identified. The GAO on numerous occasions has cited the act's uneven implementation and lack of clarity. I expect Mr. Mihm, who appears today on behalf of the GAO, will be able to elaborate on these concerns.

    In response to these problems, Representative Don Manzullo, who Chairs the House Committee on Small Business, introduced H.R. 682, the Regulatory Flexibility Improvement Act. On unanimous consent, I ask that the record include a statement from the bill's author, Representative Manzullo.

    Hearing none, so ordered.

    [The prepared statement of Mr. Manzullo is published in the Appendix.]

    Mr. CANNON. H.R. 682 consists of a comprehensive set of reforms intended to encourage Federal agencies to analyze and uncover less costly alternative regulatory approaches and to ensure that all effects, including foreseeable indirect effects, of proposed and final rules are considered by agencies during the rulemaking process.

    The legislation currently has 18 cosponsors, including me, and is supported by the United States Chamber of Commerce and the National Federation of Independent Business. It is against this exceedingly interesting backdrop that we are holding this legislative hearing today.
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    When Mr. Watt arrives, we will turn to him for any comments that he would like to make. Without objection, his entire statement and any other Members who wish to submit a statement will be placed in the record.

    Hearing no objection, so ordered.

    Without objection, all Members may place—we just did that. Without objection, the Chair will be authorized to declare recesses at any point of the hearing.

    Hearing no objection, so ordered.

    I ask unanimous consent that Members have 5 legislative days to submit written statements for inclusion in today's hearing record.

    Hearing no objection, so ordered.

    [The prepared statement of Mr. Cannon follows:]

PREPARED STATEMENT OF THE HONORABLE CHRIS CANNON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF UTAH, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

    The Subcommittee will please come to order.

    I want to begin this hearing by noting some fairly astounding facts. First, according to OMB, no one has ever tabulated the sheer number of federal regulations that have been adopted since passage of the Administrative Procedure Act in 1946. Second, and perhaps even more astounding, is the fact that OMB states that ''most of these existing federal rules have never been evaluated to determine whether they have worked as intended and what their actual benefits and costs have been.''
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    Last year, the Office of Advocacy for the Small Business Administration issued a report estimating that the annual cost to comply with federal regulations in the United States in 2004 exceeded $1.1 trillion. It reported, ''Had every household received a bill for an equal share, each would have owed $10,172, an amount that exceeds what the average American household spent on health care in 2004 (slightly under $9,000).''

    I think these facts underscore several critical needs. Most importantly, we need to get the Administrative Conference of the United States up and running. As many of you know, I drafted bipartisan legislation that was signed into law in the last Congress that reauthorized ACUS. For 25 years, the Conference played an invaluable role as the federal government's in-house advisor on—and coordinator of—administrative procedural reform. I'm in fact paraphrasing from a letter that the American Bar Association sent earlier this week to the Senate Appropriations Committee seeking funding for ACUS. With unanimous consent, I would like to submit this letter for inclusion in the record. Hearing no objection, so ordered.

    Second, these facts underscore the urgent need for continuing and aggressive Congressional oversight of the regulatory process. To that end, the Subcommittee on Commercial and Administrative Law—at the request of House Judiciary Committee Chairman Jim Sensenbrenner and support of Ranking Member John Conyers—is conducting a comprehensive review of administrative law, process and procedure. This project, which is being guided by the Congressional Research Service, will culminate with the issuance of a final report and the publication of the results of various studies focusing on succinct issues presented by the rulemaking process.

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    Third, these problems underscore the need for legislative redress. H.R. 682, I believe, is a very good start. Essentially, this legislation addresses several significant shortcomings of the Regulatory Flexibility Act. Enacted in 1980, the Act requires federal agencies to assess the impact of proposed regulations on ''small entities,'' which the Act defines as either a small business, small organization, or small governmental jurisdiction. One of the principal purposes of the Act was to reduce unnecessary and disproportionately burdensome demands that federal regulatory and reporting requirements place on small entities.

    For example, the Act requires agencies to prepare a regulatory flexibility analysis at the time certain proposed and final rules are promulgated. Among other things, the analysis must describe the reasons why action by the agency is necessary and identify any significant alternatives to the rule. This analysis is not required, however, if the agency certifies that the rule will not have a ''significant economic impact on a substantial number of small entities.''

    Since its enactment in 1980, however, certain recurring deficiencies with the Act have been identified. The GAO on numerous occasions has cited the Act's uneven implementation and lack of clarity. I expect Mr. Mihm, who appears today on behalf of the GAO, will be able to elaborate on these concerns.

    In response to these problems, Representative Don Manzullo, who chairs the House Committee on Small Business, introduced H.R. 682, the Regulatory Flexibility Improvements Act.

    H.R. 682 consists of a comprehensive set of reforms intended to encourage federal agencies to analyze and uncover less costly alternative regulatory approaches and to ensure that all effects—including foreseeable indirect effects—of proposed and final rules are considered by agencies during the rulemaking process.
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    The legislation currently has 18 cosponsors, including myself, and is supported by the United States Chamber of Commerce and the National Federation of Independent Businesses.

    It is against this exceedingly interesting backdrop that we are holding this legislative hearing today.

    I am now pleased to introduce the witnesses for today's hearing. Our first witness is Tom Sullivan, who is the Chief Counsel for Advocacy at the Small Business Administration. The Office for Advocacy was created in 1976 to serve as the watchdog for small businesses as they interact with the Federal Government.

    Last year, the office helped save America's small businesses more than $6.6 billion they would have otherwise had to spend in order to comply with Federal regulations, a truly commendable accomplishment.

    Prior to assuming his current responsibilities at the Office of Advocacy, Mr. Sullivan was the Executive Director of the National Federation of Independent Business's Legal Foundation, which provides guidance on legal issues to small businesses and promotes a pro-small business agenda in the Nation's courts. We are now a big Nation of small businesses, overwhelmingly.

    Mr. Sullivan received his undergraduate degree in English from Boston College and his law degree from Suffolk University in Boston.
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    Our next witness is Chris Mihm, who is the Managing Director of GAO's strategic issues team, which focuses on Government-wide issues with the goal of promoting a more results-oriented and accountable Federal Government. The strategic issues team has examined such matters as Federal agency transformations, budgetary aspects of the Nation's long-term fiscal outlook, and civil service reform.

    As many of you know, Mr. Mihm testified last year before our Subcommittee regarding the administrative law, process and procedure project that I previously described, and, welcome back, Mr. Mihm.

    Mr. Mihm is a fellow of the National Academy of Public Administration and he received his undergraduate degree from Georgetown University.

    Our next witness is J. Robert Shull, who serves as the director of regulatory policy at OMB Watch. OMB Watch is a nonprofit research and advocacy organization that seeks to promote Government accountability, citizen participation in public policy decisions and the use of fiscal and regulatory policy to serve the public interest.

    Before joining OMB Watch in 2004, Mr. Shull was a training specialist and child advocate. In that capacity, he worked at Children's Rights, a nonprofit advocacy organization based in New York that represents the interests of abused and neglected children. Mr. Shull obtained his undergraduate degree from the University of Virginia and his law degree from Stanford Law School.

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    David Frulla is our final witness. Mr. Frulla is a partner with the law firm of Kelley, Drye, Collier, Shannon, where he is a member of the firm's litigation, environmental law and Government relations and public policy practice groups. Prior to joining Kelley Drye, Mr. Frulla was a founding partner and principal of Brand and Frulla PC, which specialized in civil, criminal and administrative advocacy before Federal and State courts and administrative agencies.

    Mr. Frulla also serves as Chair of the Criminal Process Committee of the American Bar Association's Administrative Law and Regulatory Practice Section. Mr. Frulla received his undergraduate degree summa cum laude from Dartmouth College and his law degree from University of Virginia Law School.

    I extend to each of you my warm regards and appreciation for your willingness to participate in today's hearing. In light of the fact that your written statements will be included in the record, I request that you limit your oral remarks to 5 minutes. Accordingly, feel free to summarize and highlight the salient points of your testimony.

    You will note that we have a lighting system that starts with the green. After 4 minutes, it turns to yellow and then at 5 minutes turns red. It is my habit to tap the gavel at 5 minutes. We would appreciate if you would finish up your thoughts about that time. We don't want to cut anybody off, and I find that it works much better—we are actually not overflowing with Members who have questions to ask today—so it is not as serious as sometimes it is.

    So, if we could do that, we will have a significant amount of time, I think, to discuss your issues during questioning. After you present your remarks, the Subcommittee Members, in the order that they arrived, will be permitted to ask questions of the witnesses, subject to the 5-minute rule, which I will, depending upon how many people come, enforce more or less strictly.
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    Pursuant to the directive of the Chairman of the Judiciary Committee, I ask the witnesses to please stand and raise your right hand to take the oath.

    Do you swear or affirm under penalty of perjury that the testimony you are about to give is true and correct to the best of your knowledge, information and belief?

    The record should reflect that all of the witnesses answered in the affirmative.

    You may be seated.

    Mr. Watt, would you like to make an opening statement?

    Mr. WATT. No, just welcome the witnesses. Thank you for being here.

    Mr. CANNON. Mr. Sullivan, would you proceed with your testimony?

TESTIMONY OF THE HONORABLE THOMAS M. SULLIVAN, CHIEF COUNSEL FOR ADVOCACY, UNITED STATES SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC

    Mr. SULLIVAN. Thank you, Mr. Chairman, Ranking Member Mr. Watt. I will try to be brief and actually try to go under the 5 minutes. Thank you for already including my written statement in the record.
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    The first part of my statement really goes through the history of the Regulatory Flexibility Act, and it is, I think, an important starting point. Why do we have an act that requires agencies to especially consider their impact on small business?

    Well, I think that it is no surprise that we are a Nation, a big Nation, of small businesses, and those businesses are well known for being the job creators, the innovators and the community leaders. And there was a realization in 1980 that not only is small business the economic engine of the United States, but they bear a disproportionate impact when it comes to Federal rules and regulations. So shouldn't there be a law that tries to level that playing field for small businesses?

    And that law is, in fact, the Regulatory Flexibility Act. It was amended in 1996 by the Small Business Regulatory Enforcement Fairness Act. In 1996, Congress realized that the requirement, or the encouragement, for agencies to do a small business impact analysis maybe just isn't enough incentive for agencies to do that. And so in 1996, Congress actually amended the RFA to include judicial review, so that if agencies do not conduct small business impact analysis and consider less burdensome alternatives, then they can be taken to court and a court will tell them to do so.

    The most recent update to the Regulatory Flexibility Act actually came in 2002, when President Bush signed an executive order—and, again, that was an affirmation of small businesses' importance to this country, and an affirmation or realization that small businesses continue to bear a disproportionate regulatory impact, and even more work needs to be done to level the playing field.
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    This executive order really encourages agencies even more to do the type of small business impact analysis and work with my office than ever before, and it is working. The Regulatory Flexibility Act is working, and I certainly don't want anyone to proceed in this hearing to think that we are fixing an absolutely broken law. That is just not the case.

    My testimony bears out that we are saving billions of dollars by filtering out parts of rules and regulations that don't make sense for small business, and by filtering them out, you are leveling the playing field without compromising regulatory protections, while still protecting the environment, protecting workplace safety, protecting our Nation's borders.

    While the Reg Flex Act is working, it is not working perfectly, and now is the time where you look at the law, much like this Committee looks at the Administrative Procedure Act and has amended it close to 60 times over the past several years. It is time to look at the Regulatory Flexibility Act and ask, ''How can it work better?'' And H.R. 682 plugs many, if not all, of the loopholes that are contained in the Regulatory Flexibility Act.

    My office believes that the biggest loophole that needs to be closed is indirect impact. Agencies right now are required to examine how their rules will impact those who are directly regulated. But that doesn't extend to the logically foreseeable secondary impacts, tertiary impacts, and I believe it is the Government's responsibility to inform the public before finalizing rules and regulations how will this rule work? How will it impact consumers? How will it impact the tourist industry? How will this rule impact homeowners and community leaders?

    Those are the types of secondary and tertiary impacts that are sometimes ignored because the Reg Flex Act doesn't require it. H.R. 682 plugs that loophole.
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    There are other loopholes that exist in the Regulatory Flexibility Act. My statement goes in some detail into how H.R. 682 cures that and I am happy to answer any questions about the particulars of 682 or the Committee's curiosity on how my office works to enforce the Regulatory Flexibility Act.

    [The prepared statement of Mr. Sullivan follows:]

PREPARED STATEMENT OF THE HONORABLE THOMAS M. SULLIVAN

[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]

    Mr. CANNON. Thank you, Mr. Sullivan.

    Mr. Mihm?

TESTIMONY OF J. CHRISTOPHER MIHM, MANAGING DIRECTOR FOR STRATEGIC ISSUES, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

    Mr. MIHM. Thank you, Mr. Chairman, Mr. Watt. It is, again, a great honor to appear before you again today and to contribute to your review of the Regulatory Flexibility Act and your continuing broad examination of administrative law processes and procedures.
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    My written statement provides an overview of the basic purpose and requirements of the RFA, the main impediments to the act's implementation and the elements of RFA that Congress might consider amending to improve the effectiveness of the act. In the interest of brevity, this afternoon I will just hit the highlights of those issues.

    As Mr. Sullivan mentioned in his opening statement, RFA was enacted in response to concerns about the effect Federal regulations can have on small entities. Among other things, RFA prompts regulatory agencies to analyze the potential effects of the rules on those entities, consider alternatives to reduce the burden of those rules and ensure that small entities have an opportunity to participate in the rule-making process.

    As you mentioned in your opening statement, Mr. Chairman, in response to congressional requests, we have reviewed RFA's implementation on many occasions over many years, going back to the early 1990's. My bottom line today is that our prior reports have illustrated both the promise and the problems associated with RFA, with the recurring theme being the varying interpretations of RFA's requirements by Federal agencies. Although some progress has undoubtedly been made to address issues we identified, the full promise of the Regulatory Flexibility Act may never be realized until Congress either clarifies terms and definitions in the act or provides an agency with the clear authority and the responsibility to do so.

    It is also important to keep in mind the domino effect that an agency's initial determination of whether the Regulatory Flexibility Act is applicable to rule-making has on other statutory requirements. These other requirements can include, for example, preparing compliance guides for small entities and periodically reviewing existing regulations.
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    More specifically, unclear terms and definitions can affect the applicability and effectiveness of regulatory reform requirements. We have frequently cited the need to clarify key terms in RFA, particularly—and this is the 800-pound gorilla, as it were—''the significant economic impact on a substantial number of small entities.'' RFA's requirements do not apply, as Mr. Sullivan mentioned, if an agency head certifies that a rule will not have that significant economic impact on a substantial number of small entities.

    However, RFA neither defines this key phrase, nor places responsibility on any party to determine it consistently across the Government. It is therefore not surprising that compliance with RFA has varied from one agency to another and that agencies have had different interpretations of the act's requirements.

    We have examined 12 years of annual reports from the Office of Advocacy, basically Tom's shop, and that these reports showed that compliance with RFA varied across agencies, within agencies and over time, a conclusion obviously shared by the Office of Advocacy in its own reports.

    We noted that some agencies have been repeatedly characterized as satisfying the requirements, but other agencies have been viewed as less compliant over time.

    One of the reasons for the agencies' lack of compliance with the Regulatory Flexibility Act requirements is that the act did not expressly authorize the SBA to interpret key provisions and did not require SBA to develop criteria for agencies to follow in reviewing their rules.
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    It is important to note at this point that the Office of Advocacy's 2003 RFA compliance guide, while reiterating that the RFA does not define certain terms, nevertheless provides some suggestions for agencies on the subject.

    While the guidance and the associated training for agencies appear to have been very helpful, the key will be the degree to which agencies effectively and consistently apply that guidance and that training. In that regard, none of us know whether or not yet the extent or if the guidance and training has really made a substantive improvement in agencies' efforts to clarify some of the longstanding confusion about RFA requirements. We believe additional scrutiny and congressional monitoring of the RFA compliance may help to answer that question.

    Well, let me just conclude there and say once again that I appreciate the opportunity to testify on these important issues and obviously would be pleased to take any questions you or Mr. Watt might have.

    [The prepared statement of Mr. Mihm follows:]

PREPARED STATEMENT OF J. CHRISTOPHER MIHM

[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]

    Mr. CANNON. Thank you, Mr. Mihm. We are actually sort of on a roll here. We had two people finish before the yellow light.
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    Mr. MIHM. We take your guidance, sir.

    Mr. CANNON. I think you did this before, Mr. Mihm. Welcome back.

    Mr. Shull, you are recognized for 5 minutes.

TESTIMONY OF J. ROBERT SHULL, DIRECTOR OF REGULATORY POLICY, OMB WATCH, WASHINGTON, DC

    Mr. SHULL. Thank you very much, and thank you, Mr. Chairman and Mr. Watt, for having me before you to talk about this really important issue.

    I want to start from the simple proposition that no agency is in the business of producing regulations for the sake of producing regulations. We ask our agencies to produce regulations to protect the public, to protect all of us who are breathing the air, drinking the water, all of the men and women of America who have to work for a living and go to a job where they want to be safe and healthy.

    And small businesses, like all businesses, contribute to the hazards that we face, when we are breathing the air, drinking the water, going on the job, driving on the highways. And it really doesn't matter to all of us, to someone who is breathing dirty air or drinking poisoned water, whether the hazards that we are suddenly experiencing have been put there into our environment by small businesses or large businesses.
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    But I also want to start from the proposition that small businesses want to be good corporate citizens, and that the best intention for helping small businesses and recognizing the fact that small businesses do face a different kind of hurdle than their larger counterparts when trying to comply with regulations, might need some assistance. But that the answer isn't to give them a free pass in any way, that the answer isn't to burden the agencies whose job it is to protect the public, but rather to help small businesses comply.

    We did hear that regulations have produced some costs for the economy and for the businesses who have to comply with them, but I think we also have to recognize that the benefits of regulation have been extraordinary. I mean, you can even look and measure in terms of I.Q. points when we took out lead from gasoline and now that kids aren't breathing that lead in from the air. You can see the measurable benefits, and that is one of many, many examples.

    I also want to recognize that, although the Reg Flex Improvements Act that we are looking at today has a lot of concerns about regulation and whether or not they are hindering the competitiveness of American business in the global marketplace, that the economics literature out there just doesn't support the case that in America our regulations are somehow hindering our businesses from competing.

    You can look at evidence of, say, plant location decisions. When we have environmental regulations, do plants that manufacture goods suddenly move to areas where there are less stringent environmental regulations? Or you can look at the trade flows: when environmental regulations become more stringent, do pollution-intensive goods start coming in from developing nations to developed nations? And that link just hasn't been shown.
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    And because of that concern, we really think that there is no basis for the Reg Flex Improvements Act that we are looking at today. And I am concerned that it will really hinder the agencies from doing the good job that they are doing of protecting the people. I am concerned that the analysis itself that agencies have to perform under the Reg Flex Act will become more burdensome.

    I mean, already, there is a signal in the bill that a succinct statement is not enough, that we have to have a very detailed explanation. The burden will increase through the scope of it. It would no longer apply just to rule makings that go through the APA notice and comment process, but now it would also apply to guidance documents, general policy statements, interpretive rules, and land management plans, that the periodic re-reviews of rules under the Reg Flex Act, which were for 10-year reviews of rules found to have a SEISNOSE, a significant economic impact on a substantial number of small entities. Since the Regulatory Flexibility Act went into effect, that those now go back to all the rules on the books, even the rules that we know, like the ban on lead in gasoline, just are incredibly important, proven protections.

    We are also concerned about SBREFA panels now applying not just to EPA and OSHA rules, which we think were bad enough—it is giving business interests a first bite at the apple for those rules, but also applying to a significant number of other rules. We are also concerned about the SBA Office of Advocacy being put in a compromised position: if it is given regulatory authority over implementing the new requirements of the Reg Flex Improvements Act, that will compromise their role as an independent voice of small business.

    And we think that there is a better way. We have outlined some in our prepared statement, and I would like to offer a more complete version of that statement for the record after this hearing.
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    [The prepared statement of Mr. Shull follows:]

PREPARED STATEMENT OF J. ROBERT SHULL

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    Mr. CANNON. Thank you. Let us just ask unanimous consent that you have 5 additional days to submit that. Would that be sufficient?

    Mr. SHULL. Thank you very much.

    Mr. CANNON. Without objection, so ordered. And, frankly, we understand that you were drawn into this late. That was a compelling statement given what apparently was a short time to prepare, and we thank you for being here.

    Mr. Frulla, you are recognized for 5 minutes. Thank you.

TESTIMONY OF DAVID FRULLA, ESQUIRE, KELLEY DRYE COLLIER SHANNON, WASHINGTON, DC

    Mr. FRULLA. Thank you, Mr. Chairman, Mr. Ranking Member.

    My perspective on the Regulatory Flexibility Act is as a 10-year litigant. I have had over a dozen cases regarding six different agencies, rule-making proceedings, and we have prevailed about half the time. And we have gotten some substantive results. These aren't always things that are high profile, above-the-radar issues. In one case, we ended up with a settlement that involved a scientific re-review of a 67 percent reduction in a quota for sharks that were caught in the Gulf and Atlantic.
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    That review showed there was no scientific basis for that quota cut. Again, not every regulation is lead in gasoline. There is a lot that the Government does. Sometimes it goes awry. There needs to be checks and balances there. The Regulatory Flexibility Act is an important tool.

    And I would also note that a Regulatory Flexibility Act victory is only a first step. It is often a long haul to get an agency to change course. And I also have to tell you, and it is probably not a news flash to anybody here, that Federal agencies don't always listen to Federal judges.

    So SBREFA was a step in the right direction and this new legislation, H.R. 682, and equally importantly, the congressional attention that is being paid to the RFA, are right on point. Litigation does impose discipline. We get to see after 10 years weaknesses in the law that litigation shows in the same way as cross examination, but on the legal side.

    I would like to applaud especially H.R. 682's efforts to clarify jurisdictional issues and timing issues. We lay this out extensively in my written testimony. To address the foreseeable indirect effects, let me give you one example. A couple of years ago, I think it was, Congress wanted to impose cost-containment standards on what they call WIC-only vendors in the Women, Infant and Children Food and Nutrition Program.

    And it was clear that there were to be stores that are WIC-only vendors, that essentially service that community, that were to be regulated and were to have their costs contained. However, the States regulated that level and the directive was for the States to make these changes.
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    That is outside the Regulatory Flexibility Act as it currently stands, even though these small businesses were clearly the target, and the intended target. We also think it is going to be important to crystallize the Office of Advocacy's role in establishing how other agencies do reg-flex analyses. We had a case with the EPA at one point, and the EPA's reg flex guidance asks the question in terms of determining economic impact as what the impact of the regulation is on a business's gross revenues.

    They say, we don't need to look at profitability, and they said, well, you know, a 1 percent hit on gross revenues, that is not much. Well, it is a lot if you only have a 4 percent profit margin. But the court said the EPA had the discretion to use its own standards. That is something else that needs to be looked at, and that is something that the SBA has issued guidance on.

    Other issues we note, the standard of review. Normally, there is essentially what they call a good-faith standard. It is kind of backing up from an arbitrary and capricious standard. That is starting to get pretty toothless in many cases.

    I have addressed that in the testimony, some good results and some bad results. We submit that the arbitrary and capricious standard ought to apply to the no significant impact determinations. Clearly in the law, it is in the legislative history, and the same when the final regulatory flexibility analyses are reviewed.

    It also should be stated that application of the Reg Flex Act to a particular rule ought to be handled under the de novo standard, as should the question of whether an agency has flexibility under a given law. Another case we had, one page of law ended up with 47 pages of regulations and the agency said that they had no flexibility, and it was all required. That doesn't seem to make sense.
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    Three other points I would like to mention quickly, expedition. Questions of whether the Regulatory Flexibility Act applies should be expedited. We are waiting 6 years for a final decision, when we know the answer from the D.C. circuit that the Reg Flex Act applies to nationwide permitting under the Clean Water Act. Attorneys' fees, got to put a plug in for that. If a small business prevails, they should be able to be awarded attorneys' fees. A victory on reg flex is only the start, and it shouldn't be a war of attrition. And, finally, make sure the Office of Advocacy has the resources they need.

    Thank you very much.

    [The prepared statement of Mr. Frulla follows:]

PREPARED STATEMENT OF DAVID E. FRULLA

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    Mr. CANNON. Thank you, Mr. Frulla.

    I appreciate all your testimony, and I recognize myself for 5 minutes to ask some questions.

    It sounds like there is consensus that there are some improvements we can make and we need to try and achieve that in addressing this bill.
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    Mr. Shull, recognizing you didn't have time to prepare, and you have heard what the other witnesses have said, I don't want to put you on the spot in this regard, but do you either have things that you would like to propose that we do better in the Regulatory Flexibility Act, or things that you have heard today—do things come to mind that you would oppose as you consider what has been said today?

    Mr. SHULL. Yes, sir. I actually think that if the goal is to serve small businesses, that there are better ways other than the Reg Flex to go about serving that need. And, actually, something that would be in the jurisdiction of this Committee—and that would serve not just small businesses but really all of us—might be to look at the petitions for rule-making under the APA.

    Because it can take a really long time for either public interest groups who have identified a need for new protections or more increased protections, or for business groups that have identified a standard that is out of date and they have a new way, a better way, of going about it.

    With the petition for rule-making process, what we can do is bring to the agencies a specific rule that needs to be improved and call for specific improvements. But the agencies can take a really long time to respond to the petitions or to do anything about it once they have recognized the need for improvement. I mean, it took over 10 years, and I don't know how many court battles, to get OSHA, after it recognized the need for improving the standard on hexavalent chromium, to actually get about the work of doing it, of protecting workers.

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    So I think that that would be a better approach, something that is evenhanded that applies to business groups and public interest groups as well, and anybody else out there who sees a need for improvement, and it is more targeted. It doesn't drain the agencies' resources into going back and reopening the case for rules that we already know need to stay on the books and for just really sort of this meat ax approach, a clumsy approach, as opposed to a focused, targeted approach, where small businesses can bring up the rules they think need to be fixed, other groups can pull up needs that need to be met.

    I mean, there are other approaches as well, and there I think things outside of this Committee's jurisdiction that might also be very helpful for small businesses, that would help businesses comply without burdening agencies or without giving them a free pass from regulatory compliance. And one of them would be compliance assistance and making sure that there are compliance assistance offices in every congressional district, that can go about the work of helping small businesses understand what regulations they need to comply with and to help them figure out how to go about doing it.

    Plain language in regulation—if it is easier for businesses or anybody else to read the regulations and understand them. There was a bipartisan bill that Mrs. Miller and Mr. Lynch over on the Government Reform Committee proposed that would not do a thing about weakening regulatory standards, but just change the language in which they are written so that they are easier to comply with.

    I think that is another way for reducing cost without reducing the level of protection. And there are other ideas—for example, the small business gateway I have heard proposed—basically, informational resources, helping small businesses get the information they need in order to go about the work of being a good corporate citizen, which I think that we all agree they want to be.
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    Mr. CANNON. Thank you. Have you been involved at all with our APA review process?

    Mr. SHULL. Actually, I haven't, but I have followed it from afar and I look forward to getting more involved.

    Mr. CANNON. It has been a little bit arcane in the sense of hidden away, boxed up in an ark with some very, very smart people working on it. I am hoping that we can move that at some phase into a Wikipedia format so that it is online and people can contribute. I think that might be an easy way for you to get engaged and see what academics and others are looking at and bring it down to the real world of advocacy that you are thinking of.

    And we would invite you and you may want to talk to staff about how you can be engaged prior to that if you are interested. We appreciate your ideas.

    Mr. SHULL. I appreciate that.

    Mr. CANNON. I don't know if you know, we have a hearing next week on the 60th anniversary of the APA.

    Mr. SHULL. I will be here.

    Mr. CANNON. An arcane area of the law, but really actually, in the end, the most important. Thank you. My time has expired.
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    Mr. Watt, you are recognized for 5 minutes.

    Mr. WATT. Thank you, Mr. Chairman, and I thank the witnesses for being here, apologize for being a little late.

    At the end of the day, I guess this is about a bill that is before us and whether it is supportable as written. I think I heard Mr. Shull's opinion on that. I am not sure I heard anybody else's.

    Mr. Sullivan, do you support H.R. 682 as written, or, if not, is there another, better bill? I understand there is a bill pending on the Senate side, S. 1388. Which one of those is better?

    Mr. SULLIVAN. Both bills improve the Regulatory Flexibility Act. A little bit of a dilemma in H.R. 682, if it were passed into law tomorrow or next week, my office does not have the resources to implement it effectively.

    The Senate bill that you refer to is a more targeted approach and contains many of the needed reforms of 682.

    Mr. WATT. Mr. Mihm, does the Administration support this 682? Can you speak for the Administration?

    Mr. MIHM. GAO, the Government Accountability Office. I was actually hoping Mr. Sullivan would take the whole 5 minutes, but since he didn't, I will have to answer your question.
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    As a congressional support agency, we don't typically support legislation——

    Mr. WATT. I am sorry, and I am not trying to put you on the spot.

    Mr. MIHM. But I will say, sir, that many of the types of concerns that our work has identified in the past about the lack of standardization and clarity in the RFA are, is what the bill is designed to address. In that sense, those types of legislative actions would be a step forward.

    Mr. WATT. Mr. Sullivan, you have mentioned secondary and tertiary indirect impacts on small business. I was kind of shuddering to think if the current law requires an assessment of direct impact, I can't even think of anything that wouldn't have some secondary, tertiary, indirect impact on small business and whether we are setting Government agencies up to spend all their time evaluating secondary, tertiary, indirect impacts. It seems to me burdensome enough to require them, expect them to do an assessment of what is foreseeable, not an academic exercise of what may be some possible impact.

    Talk to me about the cost of secondary, tertiary, indirect impact analysis, if you would.

    Mr. SULLIVAN. Thank you, Congressman Watt. H.R. 682 actually balances that very question that you asked, and it does so by, I believe, expecting or mandating agencies to do impact analysis on those impacts that are reasonably foreseeable.
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    Let me use an actual case example of how this works, because the words secondary and tertiary I think do——

    Mr. WATT. And that compares with what is the current standard?

    Mr. SULLIVAN. Currently, when an agency regulates, they look at who must comply directly with a regulation. After September 11th, when the then-referenced agency, INS, decided to limit visitor visas, they were limiting foreign visitors who come to the United States the time allowed to stay in the United States. Those were the direct impact of an INS-proposed rule.

    Now, how it should work, and what H.R. 682 would require INS to do, is to say, all right, is border security important? Yes. Let us look at how long we know visitors in the United States, foreign visitors, are legally in the United States, do the analysis.

    Now, who is impacted by limiting that length of stay? Tourism, high-end vacation homes, pouring millions of dollars into many destination spots, millions of dollars for Canadians crossing the border and going to destination spots in the United States. That type of analysis, the analysis of looking, well, if we limit their stay to 15 days, this is the economic impact, if we limit their stay to 30 days, here is the economic impact—that type of analysis, which actually is not very difficult, is all secondary impact analysis.

    And my office——

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    Mr. WATT. So you are talking about foreseeable under this——

    Mr. SULLIVAN. Reasonably.

    Mr. WATT. Reasonably foreseeable under this bill. What is the language in the current——

    Mr. SULLIVAN. The language is silent on that, and, in fact, the courts have interpreted it only to require direct impact. So INS did not violate the letter of the law as it has been interpreted in courts, and David Frulla's testimony mentions those court decisions, as well as my testimony.

    But, when you step back, you have got to think, shouldn't INS have informed the public through the notice and comment process that you are more familiar with your understanding of the Administrative Procedure Act to say, we are thinking of limiting visitor stay. And we are thinking of limiting those foreign visitors for about 15 days, as opposed to the current 30-day period. This is how we believe it will impact travel agencies, tourist destinations, white water rafting and outfitting companies, and we want you, the public, to comment on that type of analysis.

    That does not happen now under the Reg Flex Act, but it should happen, because it informs the regulatory process, and it informs agencies like INS on how to have a better, more well-informed regulation that is finalized. That is the need for the secondary impact analysis.
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    Mr. WATT. There is nothing in the bill that really requires a tertiary impact? You are just talking about reasonably foreseeable?

    Mr. SULLIVAN. Reasonably foreseeable. And, again, it gets at what should agencies be doing that is responsible to inform the rule-making process? All over the country, we have States who are left in the position through delegated laws, whether that be environmental laws, safety and health laws, that passed these enormous mandates by the Federal Government that says protect the environment and you figure it out. Comply with the Clean Air Act standards, but you figure out how you regulate your own State.

    And these folks don't have chief counsels for advocacy. They don't have reams of chief economists. They need help in the Federal Government to actually lay out, here is how it may impact when you choose these different decisions. So there is a responsibility, I think, to help the State regulators figure out what should they be doing that is both cost effective and protective through the regulatory regimen that they are faced with.

    Mr. WATT. I am way out of time, but if the Chairman will indulge me, and I would like to get——

    Mr. CANNON. I can't see the red light.

    Mr. WATT. Mr. Mihm said he doesn't want to comment on which one of these bills is better. I did want to get Mr. Frulla on the record about whether he prefers the Senate bill or this bill, and even in light of Mr. Shull's disposition not to be doing any of this, I guess, even in that context, whether just kind of a straightforward one or two sentences on which one of these bills you would prefer. Just for the record.
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    Mr. FRULLA. I will be intensely practical. I think that the Senate bill is a little more targeted. This is obviously a little more thoroughgoing a bill. The most important thing is for folks to start to get to the business of reconciling these bills so that we can get the law fixed in a constructive way that everybody can agree on and work together on.

    I think the bills ought to come together, same place as Mr. Sullivan, essentially, and I think it is an important thing to do. And I don't want a little bit of disagreement on the margins to be something that holds this up because this is important to a lot of small businesses.

    Mr. WATT. Mr. Shull?

    Mr. SHULL. I think maybe the way I can say it is by saying that although we object to the core elements that are there in both bills, it is worth noting that the Senate version of this bill does not have the sections that would give new regulatory authorities to the SBA Office of Advocacy, which we find a particularly additional problematic element of the bill. Because the voice of small business, we think, shouldn't be in the business of telling agencies how to comply with the law.

    Mr. WATT. Rather than telling them what is too burdensome.

    Mr. SHULL. Right.

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    Mr. WATT. Okay, thank you, Mr. Chairman.

    I thank the witnesses. That was very informative.

    Mr. CANNON. The gentleman yields back.

    Let me also thank the witnesses.

    I ask unanimous consent that the record be left open for 10 days for follow-up questions by Members of the panel. Without objection, so ordered.

    Thank you for coming. This has been actually quite insightful, very interesting.

    And I know, Mr. Shull in particular, the idea of speedy decisions, we are plagued today with a number of cases where agencies are just not deciding, and that is in some cases bad for business. Often, it is bad for consumers, and so we look forward to your suggestions if we ever get to a public forum with our APA review, which I think would be helpful.

    Because I that, I think, is really the key to business. Industry moves so quickly, things happen so quickly in America today, a danger that didn't exist yesterday is here today and devastating.

    Perhaps tomorrow, the opportunity for business to significantly improve the quality of their products by having standards like the FDA's good manufacturing practices for nutritional supplements, we are just waiting for them. It doesn't really matter much what they are. They just need to be there and then consumers will have an idea of what they are getting, what the quality is of what they are getting.
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    So the opportunity to improve how we regulate ourselves I think is significant. So we thank you for being here today.

    And, with that, we will adjourn.

    [Whereupon, at 1:06 p.m., the Subcommittee was adjourned.]

A P P E N D I X

Material Submitted for the Hearing Record

REVISED PREPARED STATEMENT OF J. ROBERT SHULL, DIRECTOR OF REGULATORY POLICY, OMB WATCH, WASHINGTON, DC

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PREPARED STATEMENT OF THE HONORABLE DONALD A. MANZULLO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON SMALL BUSINESS

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LETTER FROM ROBERT D. EVANS, DIRECTOR, GOVERNMENTAL AFFAIRS OFFICE, AMERICAN BAR ASSOCIATION (ABA)
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RESPONSE TO POST-HEARING QUESTIONS FROM THE HONORABLE THOMAS M. SULLIVAN, CHIEF COUNSEL FOR ADVOCACY, UNITED STATES SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC

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RESPONSE TO POST-HEARING QUESTIONS FROM J. CHRISTOPHER MIHM, MANAGING DIRECTOR FOR STRATEGIC ISSUES, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

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RESPONSE TO POST-HEARING QUESTIONS FROM J. ROBERT SHULL, DIRECTOR OF REGULATORY POLICY, OMB WATCH, WASHINGTON, DC

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RESPONSE TO POST-HEARING QUESTIONS FROM DAVID FRULLA, ESQUIRE, KELLEY DRYE COLLIER SHANNON, WASHINGTON, DC

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