November 25, 1997
Mr. Raymond Kammer
Director
National Institute of Standards and Technology
U.S. Department of Commerce
Building 820, Room 306
Gaithersburg, MD 20899
Re: Docket No. 970724177-7177-01; Procedures for Implementation
of the Fastener Quality Act; Notice of Proposed Rulemaking
Dear Mr. Kammer:
The Small Business Administration's Office of Advocacy is submitting
comments to the National Institute for Standards and Technology
(NIST) on the proposed rule for a process to register a manufacturer's
Fastener Quality Assurance System (QAS). The agency is amending
its implementing regulations for the Fastener Quality Act (FAQ)
by providing an alternative to final inspection certification.
This letter is for the public record.
I. Chief Counsel's Authority
The Office of Advocacy was established by Congress under Public
Law No. 94-305 to represent the views of small business before
Federal agencies and Congress. The authority is vested in the
Chief Counsel to develop proposals for changing the policies of
Federal agencies; to represent the views and interests of small
businesses before Federal agencies; to receive criticisms of policies
of Federal agencies which affect small businesses;(1) and to make
proposals for minimizing the burden on regulations on small business.(2)
In that capacity, the Office of Advocacy is required to monitor and report to Congress on Federal agencies compliance with the Regulatory Flexibility Act (RFA).(3) The Small Business Regulatory Enforcement Fairness Act of 1996 amends the RFA and explicitly provides the Chief Counsel for Advocacy with authority to file amicus curiae briefs in court challenges to Federal agency actions.(4)
II. Regulatory Flexibility Act Certification
Generally, the RFA requires Federal agencies to complete an regulatory
flexibility analysis of the impact of proposed rule on small entities.
Under section 605(b) of RFA, an exception is provided. The head
of the agency may certify that a rule will not have a significant
impact on a substantial number of small entities. Agencies historically
ignored the requirements of RFA and erroneously certified rulemakings.
To resolve this problem, Congress amended RFA with SBREFA and
now requires agencies to provide a factual basis for the certification.
Affected or aggrieved small entities may seek judicial review
of final rules for failure to comply with this section.(5) In
order to avoid a challenge, agencies are compelled to do enough
analysis to demonstrate a factual basis for a certification.
Importantly, Congress intended to assure that agencies did not
inappropriately exercise their right to certify rules under RFA.
Therefore, Congress requires Federal agencies to provide the Chief
Counsel for Advocacy with the certification.
III. Overview of Advocacy Comments
The Office of Advocacy has reviewed the proposed rulemaking and
accompanying certification provided under the Regulatory Flexibility
Act. In addition, we have reviewed the agency's June 1996 Regulatory
Impact Analysis prepared for the original implementing regulations
for the Fastener Quality Act. The effective date of all the rules
is May 26, 1998.
Advocacy compliments NIST in the development of an alternative
to final inspection certification. However, we are concerned the
rule as proposed does not afford a meaningful regulatory alternative
to small businesses. We conclude:
1) The short deadline of May 26, 1998, effectively eliminates
the value of the proposal to the small entities. The rule could
result in a competitive advantage for large fastener manufacturers
and registrars.
2) The RFA certification is inadequate because NIST has not provided
sufficient information to demonstrate a factual basis that the
rule will not have a significant economic impact on a substantial
number of small entities.
VI. Small Businesses Disadvantaged by Compliance Deadline
The Office of Advocacy applauds NIST's decision to adopt an alternative
approach to minimize the impact on industry for compliance with
the Fastener Quality Act. NIST has recognized that some manufacturing
companies do not use final inspections to assure fasteners are
in compliance with standards. Instead, many have prevention-based
quality assurance systems in place. In order to accommodate an
industry's use of this type of system, the agency has proposed
to register facilities with these systems in lieu of requiring
final inspections.
However, the short deadline of May 26, 1998, effectively eliminates
the value of the proposal to the small entities, and instead,
the rule could result in a competitive advantage for large companies.
As a result of this rulemaking, large companies will gain a competitive
advantage in several ways. First, assuming NIST can quickly implement
the program for accreditors, large companies with resources will
be the first to queue for registrar accreditation. By the time
this rule is finalized, it will be hard for small registrar companies
and independent or in-house laboratories to muster the resources
and get accreditation by May 1998. Second, the sellers' market
will result in large fastener manufacturing companies capturing
the available registrar services. Accredited independent registrars
will seek customers that have the most potential (i.e., the large
fastener manufacturers with larger facilities to register and
more cash flow to pay higher registration fees). Therefore, large
manufacturers will be able to deliver in-compliance fasteners
to the market before their small competitors.
The Office of Advocacy urges NIST to extend the deadline to
assure all market players, including small companies, have an
opportunity to comply. The best method for identifying an
appropriate timeline is completing a thorough regulatory impact
analysis and soliciting small business input.
V. Inadequate Certification
NIST prepared an inadequate RFA certification for this rulemaking.
NIST has not demonstrated with a factual basis that the rule will
not have a significant economic impact on a substantial number
of small entities. Advocacy concluded: cost information is limited;
the certification provides no information on the impact on sectors
other than manufacturing; and the specific impact of those costs
to small firms was not fully addressed.
First, the agency has provided limited cost information in the
certification. For manufacturing, the two cost items specified
are accreditation (estimated to be $5,000 to $15,000 per facility)
and information collection requests (IRC) (estimated to be four
hours annually). We believe the cost of IRC is underestimated.
The regulation requires creation, maintenance, and retention of
records for inspections, tests, and measurements. The QAS must
be documented according to ISO-9001 and ISO-9002. It is difficult
to determine how NIST provided such a low estimate. To put this
estimate in perspective, OSHA estimates that the paperwork requirement
for merely certifying a scaffolding system for a construction
company takes two hours per year.(6) Advocacy recommends that
NIST reevaluate the IRC costs by consulting with small businesses.
Through this process, NIST should obtain an accurate estimate
of the time for IRC.
There are other cost factors to manufacturers that are not addressed
in the certification. For instance, what is the cost to small
manufacturers that will be forced to sacrifice fastener inventories
produced before May 1998?(7) What operating costs are associated
with quality assurance systems? These issues should be addressed
in an analysis.
Second, the agency provides no information on the impact of the
rule on businesses in affected industry sectors other than manufacturing.
This omission results in an erroneous RFA certification because
there are a substantial number of small businesses in these sectors.
Advocacy has identified several industries in addition to manufacturing
that will be affected by the FQA regulation. Examples include
steel manufacturers, steel service centers, accreditors, registrars
and laboratories, fastener manufacturers and distributors. Each
of these sectors should be discussed in the certification analysis.
Potentially, there will be a significant economic impact on each
of the affected industries. Clearly, the impact on these sectors
is affected by the interrelated nature of the preceding regulations
and the proposal. However, the proposed alternative and its effective
date do not relieve the impact on some sectors and create new
complications for others. Each sector should have been addressed
in an analysis.
The burden is on NIST to demonstrate how this proposal would impact
small businesses in each industry sector. Advocacy will address
a few of these industries.
Registrars/Laboratories
No factual basis has been provided regarding the costs or impact
of this rule on the registrars. NIST has proposed QAS accreditation
for registrars, similar to that used for final inspection certification.
Accreditation is usually a complex, timely and costly process
for laboratories and registrar firms. While the industry generally
agrees that coordinated, streamlined accreditation is valuable
for serving the domestic and international marketplace, the industry
must have early and detailed information about the process and
the costs. NIST has been a leader in advancing the U.S. system
of laboratory accreditation; the Office of Advocacy encourages
the agency to continue this role with oversight. However, in this
rulemaking, NIST must analyze the impact on small businesses in
the registrar industry.
The May 1998 deadline does not provide time for registrars to
meet capacity.(8) The proposal would require manufacturers to
have an accredited registrar certify their QAS by this date. The
expense of accreditation is a serious matter for a registrar which
may invest large amounts of time and money for expertise development,
administrative oversight and scientific or engineering personnel.
However, this investment will be made by all of the potential
registrars if the market is developed in a steady, thoughtful
manner.
Many small registrars will be unable to receive accreditation
by May 1998, and there will be a market demand filled by large
testing organizations (e.g., the non-profit Underwriters Laboratories).
As a result, the large companies will dominate the market.(9)The
agency states, "NIST believes that it will have completed
the approval/accreditation of a sufficient number of accreditation
bodies/laboratories to implement the Act by May 26, 1997."
This conclusory statement should be supported with a factual basis.
The 1996 RFA analysis addressed laboratory capacity but industry
capacity is not discussed for this rulemaking. Moreover, the 1996
analysis is not wholly related because QAS is a fundamentally
different process and different industry sectors may be involved.
NIST must demonstrate that the registrar industry's capacity will
be fully operational by the deadline.
NIST should advance a rule that maximizes the registrar industry
capacity to meet the safety objective of the FQA. Registrar accreditation
is one of the underpinnings for fastener quality. If in-process
certification is to succeed, the registrars must have time to
enter the market. The small businesses and the entire industry
need time to install all the expertise, processes and resources
necessary for the accreditation process. In this instance, NIST
should extend the deadline to assure the registrar industry can
meet the demand imposed by FQA.
Fastener Distributors
The implementing regulations for FQA will have a tremendous impact
on fastener distributors by forcing them to sacrifice their inventories.
The proposed rule has encouraged the manufacturing sector to delay
certification of their products until QAS is in place. However,
by delaying the final regulations, the manufacturers are not producing
in-compliance products that would begin to replace inventory for
fastener distributors.
This delay has aggravated the impact of the FQA on fastener distributors,
and NIST has not addressed the economic impact on this sector.
Advocacy recommends that NIST consider another delay to increase
the volume of in-compliance fasteners in order to minimize the
impact on this industry sector. Moreover, some period of "cross
over" to allow fasteners that are in compliance with either
the previous or new rule should be considered and addressed in
the impact analysis.
Finally, NIST did not provide a sufficient explanation of its
conclusion that the costs associated with this rule would not
be significant to small firms. While the agency identifies one
sector and gives two cost estimates, it does not explain why these
costs are not significant. For example, there is no industry revenue
or profit data provided to demonstrate the relationship between
the costs and small firms' capacity to accommodate these costs.
In the manufacturing sector, this information is important given
indications that small manufacturers in this Standard Industry
Classification face diminishing returns.(10) Because the cost
per unit is higher, small firms have less profit margin than large
companies.
NIST must address the rulemaking's economic impact and its
significance on small businesses in all potentially affected sectors.
VI. Conclusion
The Office of Advocacy urges NIST to comply with the Regulatory
Flexibility Act by doing an analysis to determine the economic
impact on all affected small businesses. We believe this analysis
will show the rule will have a significant economic impact on
small entities, and the certification was erroneous. Moreover,
Advocacy encourages NIST to consider a sufficient deadline extension
to relieve the impact on small businesses.
Failure to comply with RFA could result in a court challenge to
this rule. We respectfully request that the Department of Commerce
notify the Chief Counsel immediately upon receipt of a challenge
to final agency action on this rulemaking or any rulemaking under
the FQA which raises an issue under the Regulatory Flexibility
Act.
If you have any questions about our comments, please contact me
or Anita Drummond of my staff at (202) 205-6533.
Sincerely,
Jere W. Glover
Chief Counsel for Advocacy
cc: Honorable Sally Katzen
ENDNOTES
1. 15 U.S.C. § 634c
2. 15 U.S.C. § 634(b)(3)
3. 5 U.S.C. §§601-612
4. 5 U.S.C. § 612(b)
5. 5 U.S.C. § 611(2)
6. 29 CFR pt. 1926
7. This date is particularly troubling when the proposed rule was published just eight months before the proposed effective date. Many fastener manufacturers' orders and inventories are based on multi-year contracts.
8. Importantly, the accreditors must be ready to meet registrar market demand for accreditation. We recognize that NIST's National Voluntary Laboratory Accreditation Program or a private sector body (e.g., American Association of Laboratory Accreditation) will be the accreditors. However, there is no substantial basis presented to demonstrate that the private sector accrediting bodies have the capacity (expertise in quality assurance systems as well as other resources) to accredit registrars in time to meet the industry demand for certification.
9. Obviously, market domination is not only costly to small registrars, but competitive restraints increase the direct costs to manufacturers and ultimately the economy as a whole.
10. Using U.S. Census data for the manufacturing sectors, Advocacy
calculated the return on payroll. The data are provided in Appendix
A. Advocacy recognizes that this regulation does not apply to
the entire universe of this industry sector. However, the data
serves to demonstrate that some small firms face diminishing returns
until they can enjoy economies of scale.