Testimony of Major L. Clark, III
Acting Chief Counsel
Office of Advocacy
U.S. Small Business Administration
U.S. Senate Committee on Small Business and Entrepreneurship
and
Committee on Homeland Security and Government Affairs, Subcommittee on Regulatory Affairs and Federal Management
Date: May 22, 2019
Time: 2:30 P.M.
Location: 106 Dirksen Senate Office Building, Washington, DC
Topic: Reauthorization of the SBA Office of Advocacy
Chairman Rubio, Ranking Member Cardin, Members of the Committee on Small Business and Entrepreneurship, as well as Chairman Lankford, Ranking Member Sinema, and Members of the Homeland Security and Government Affairs Subcommittee on Regulatory Affairs and Federal Management, I am honored to be here today on behalf of the Office of Advocacy (Advocacy) to present testimony to you about our office and the federal rulemaking process. Advocacy is an independent office that speaks on behalf of the small business community before federal agencies, Congress, and the White House. The views in my testimony do not necessarily reflect the views of the Administration or the Small Business Administration (SBA), and this statement has not been circulated to the Office of Management and Budget for clearance.
I. The Independent Office of Advocacy
First, as the Acting Chief Counsel for Advocacy, and on behalf of the entire Advocacy team, we would like to thank both committees for the tremendous support you have shown the office over the years.
There was early recognition by Congress of the importance of small businesses to our nation’s economy. The Office of Advocacy was created by Congress in 1976 to be an independent voice for small business within the federal government. Title II of Public Law 94-305 and the Regulatory Flexibility Act confer responsibilities and authorities on Advocacy. Both laws are standing, non-expiring legislation and have been amended over the years.
An important theme leading to Public Law 94-305 was the need for an independent voice within the federal government to represent the interests of small business. The law provides that the Chief Counsel is to be appointed from civilian life by the President with the advice and consent of the Senate, and Advocacy employees serve at the pleasure of the Chief Counsel. Further, the law authorized the Chief Counsel to prepare and publish reports as deemed appropriate and the reports “shall not by submitted to the Office of Management and Budget (OMB) or to any other Federal agency or executive department for any purpose prior to transmittal to the Congress and the President.”[1] For this reason, Advocacy does not circulate its work product for clearance with the SBA Administrator, OMB, or any other federal agency prior to publication. Since 2010, Advocacy has also had independent budget authority.[2]
However, Advocacy still encounters challenges with maintaining its independence from SBA. The fact that the words “Small Business Administration” remain a part of Advocacy’s name continues to confuse the public and even some federal agencies. To avoid this confusion, the committees might consider changing Advocacy’s name to clarify that Advocacy is not a program within the Small Business Administration, but rather a separate, independent office representing small businesses.
That said, Advocacy is a relatively small operation and continues to rely on SBA for a variety of administrative support services, ranging from office space, equipment, IT, communications support, human resources support, and acquisitions, which are outlined in a Memorandum of Understanding between SBA and Advocacy. Advocacy’s administrative support staff “plug in” to SBA’s systems to keep Advocacy functioning at a high level of productivity.
It is also important to note the other ways in which Advocacy and SBA interact. Of special importance is the work of Advocacy’s economic research team that is widely used by SBA offices. For example, the number of small businesses in the United States is a common statistic used by SBA and other agencies, but is calculated by Advocacy’s research team.[3] Advocacy also works closely with the SBA Ombudsman and prides itself on the level of cooperation and assistance that its professionals provide to all SBA program and policy staff.
II. Small Business Research
Public Law 94-305 made economic research a core mission of the Office of Advocacy. This mission includes the documentation of the role of small businesses and entrepreneurship in the economy and the examination of various issues of relevance to small business owners. These elements of Advocacy’s mission are the primary responsibility of the Office of Economic Research (OER). OER specializes in the following areas: small business economy, small firm dynamics, small business finance, regulatory policy, international small business issues, barriers to entrepreneurship, and ownership of businesses by demographic groups such as veterans, women, and minorities. OER economists work with federal statistical agencies to acquire and analyze data on small businesses, conduct in-house research, and manage contract research projects. OER economists and work closely with the legal team in Advocacy’s Office of Interagency Affairs to assess the economic impacts of proposed federal rules on small businesses and alternative regulatory approaches that would reduce economic burden. The economists and attorneys collaborate to train federal agency staff on analyzing regulatory impacts on small businesses in accordance with the Regulatory Flexibility Act and Executive Order 13272.
Advocacy uses its economic research funds for two primary purposes: 1) to sponsor the development and continuation of small business data series and special data tabulations on specific small business topics from federal statistical agencies; and 2) to fund contract research on specialized small business issues through the federal procurement process. Advocacy publishes issue-specific research as well as periodic reports. OER publications take many forms, including traditional publications such as reports, bulletins, frequently asked questions, and state economic profiles, along with newer products such as issue briefs, fact sheets, topic-linked research series, and infographics. Additionally, OER economists give presentations on small business research and statistics at various conferences, forums, events, roundtables, and meetings.
Advocacy sponsors issue-specific research on a wide variety of topics of interest to Advocacy stakeholders within Advocacy’s research mandate. Advocacy welcomes suggestions for small business research topics from many sources in order to identify and validate important topics, including input from congressional offices, other federal agencies, small business organizations, advocacy groups, and small businesses themselves. Advocacy staff and leadership also seek to identify areas where new research is needed and feasible given the state of existing data. Subject to the availability of resources, Advocacy periodically solicits research proposals on topics of interest according to the federal procurement process administered by SBA’s Acquisition Division. Each awarded contract research project is monitored by an Advocacy staff member serving as the Contracting Officer’s Representative for the project. In 2015, Advocacy improved controls over its research process, including strengthening its peer review process. OER continuously assesses and refines its research process in order to best carry out the special responsibility of being the only federal office tasked with producing small business research and statistics.
OER publishes an annual report detailing its research activity for the year, including a listing of publications, small business economic research forums held, and an overview and update of the most widely used publicly available data series on small businesses. In FY 2018, OER released 20 publications. OER’s annual report for FY 2018 is still in development, and the FY 2017 report can be accessed on our website.[4]
III. The Regulatory Flexibility Act and Advocacy’s Role in the Federal Rulemaking Process
Federal regulations can have a disproportionate impact on small businesses. Because of this, the Regulatory Flexibility Act (RFA),[5] enacted in September 1980, requires federal agencies to consider the impact of their regulatory proposals on small entities, analyze effective alternatives that minimize small entity impacts, and make their analyses available for public comment. The RFA applies to a wide range of small entities, including small businesses, not-for-profit organizations, and small governmental jurisdictions.
Advocacy continues to emphasize that the RFA “does not seek preferential treatment for small entities, nor does it require agencies to adopt regulations that impose the least burden on them, or mandate exemptions for them. Rather, it requires agencies to examine public policy issues using an analytical process that identifies barriers to small business competitiveness and seeks a level playing field for small entities, not an unfair advantage.”[6]
Under the RFA, when an agency proposes a regulation that would have a “significant economic impact on a substantial number of small entities,” the regulation must be accompanied by an impact analysis known as an initial regulatory flexibility analysis (IRFA), when the rule is published for public comment.[7] When the final rule is published, it must be accompanied by a final regulatory flexibility analysis (FRFA).[8] These analyses must describe, among other things, 1) the reasons why the regulatory action is being considered; 2) the small entities to which the proposed rule will apply and, where feasible, an estimate of their number; 3) the projected reporting, recordkeeping, and other compliance requirements; and 4) any significant alternatives to the rule that would accomplish the statutory objectives while minimizing the impact on small entities. The consideration of significant alternatives is the key to the RFA.
Alternatively, if a federal agency determines that a proposed rule would not have a significant impact on a substantial number of small entities, the head of that agency may “certify” the rule and bypass the IRFA and FRFA requirements.[9] This is commonly referred to as a “certification” and requires the agency to provide a factual basis for its determination that the rule will not have a significant economic impact on a substantial number of small entities.
In addition, the Environmental Protection Agency (EPA), Occupational Safety and Health Administration (OSHA), and the Consumer Financial Protection Bureau (CFPB) are required to convene a small business advocacy review panel (also referred to as a SBREFA panel) whenever they are developing a rule that is expected to have a significant economic impact on a substantial number of small entities.[10] These agencies must notify Advocacy prior to the publication of an IRFA and provide information on the potential impacts of the proposed rule. The SBREFA panels consist of representatives of the Chief Counsel for Advocacy, the Administrator of OMB’s Office of Information and Regulatory Affairs (OIRA), and the agency proposing the rule.[11] The panel reviews materials related to the proposal, and, importantly, the advice and recommendation of small entity representatives (SERs) on the rule’s potential effects and possible mitigation strategies. The panel then issues a report on the comments of the SERs and on its own findings related to RFA issues. The agency is then required to consider the panel report findings and, where appropriate, modify the proposed rule and/or its IRFA.[12]
Section 610 of the RFA also requires agencies to review their existing rules that have or will have a significant impact on a substantial number of small entities within ten years of their promulgation.[13] The purpose of the review is to determine whether such rules should be continued without change, or should be amended or rescinded, consistent with the stated objectives of applicable statutes, to minimize any significant economic impact of the rules upon a substantial number of small entities.
The elements of the RFA are the primary responsibility of Advocacy’s Office of Interagency Affairs. Interagency is Advocacy’s largest operational division in terms of staff, and the team of attorneys monitor federal regulatory and other activity with potential small entities impacts. They also work with agencies to help them develop less burdensome rules, both by providing small entity input early in the regulatory process, while still achieving the agencies’ regulatory goals. The team utilizes numerous methods of communication to present the concerns of small entities to federal officials promulgating new regulations. For example, Advocacy holds meetings with officials, participates in OIRA-led review of upcoming rules, writes comment letters to agency directors, conducts outreach to small entities through roundtables and other methods, and holds training sessions on RFA compliance to help facilitate meaningful participation by all interested parties.
One of the important functions of this team is confidential interagency communications. Advocacy’s goal is to participate in the regulatory development process as early as possible, both to counsel agencies on potential effects of their actions on small business and to provide RFA compliance expertise as needed. Advocacy believes it is essential that agency policymakers and regulatory development staff have confidence that they can share pre-proposal information with Advocacy staff. Such disclosure could have a variety of adverse consequences, and, depending on what is disclosed to whom, could in some cases violate law. Fortunately, Advocacy’s track record in this regard has been exemplary, and the trust that Interagency has built with regulatory agencies is evident, as these agencies are increasingly asking for Advocacy guidance early in the pre-proposal phase of the rule development process. Because of the confidential nature of most such communications, it is difficult for Advocacy to document the precise regulatory cost savings to small businesses that flow from this important work.
IV. Agency Compliance with the Regulatory Flexibility Act
In addition to the RFA’s requirements that agencies consider how their regulations will impact small businesses and consider less burdensome alternatives, the RFA also requires the Office of Advocacy to monitor and report on how well federal agencies are complying with the law. In addition, Executive Order 13272, “Proper Consideration of Small Entities in Agency Rulemaking,” which was signed by President George W. Bush in 2002, requires Advocacy to educate federal agency officials on compliance with the RFA, to provide resources to facilitate continued compliance, and to report to OMB on agency compliance with it.[14] Every year, Advocacy reports to Congress and OMB on agencies’ compliance with the RFA and E.O. 13272. Advocacy’s report for FY 2018[15] was published in April 2019 and was sent to these Committees, and I would like to highlight some important items.
From FY 2016 through FY 2018, Advocacy has submitted 61 formal comment letters to regulatory agencies. The most frequent concerns were that agencies had an inadequate analysis of small entity impacts (27 letters); significant alternatives were not considered (24 letters); and deficiencies in the RFA analysis (16 letters). The figure below summarizes Advocacy’s issues of concern from comment letters during FYs 2016 to 2018.
Advocacy also engages with small business stakeholders through a variety of other mechanisms, ensuring that the lines of communication remain open and that small business concerns are heard by the appropriate contacts within the federal agencies. Part of this engagement is through issue roundtables, which focus on small business regulatory topics. Advocacy holds issue roundtables across the country and often provides opportunities for small business stakeholders to participate remotely by phone. In addition to our daily engagement with small entities, in FY 2018, Advocacy hosted 12 issue roundtables on a variety of regulatory issues.[16]
V. Advocacy’s Regulatory Reform Efforts
In response to Executive Orders 13771 and 13777, which commit this administration to regulatory reform and burden reduction, on March 30, 2017, Advocacy sent a memorandum to federal agencies recommending that they consider small entity interests in implementing E.O. 13771 and in subsequent deregulatory actions.[17] Advocacy works to ensure that small businesses are included in the regulatory reform effort by conducting small business outreach at roundtables to gather small business regulatory reform priorities to channel back to federal agencies.
Advocacy’s Regional Regulatory Reform Roundtables have been a means of gathering practical input on small business burdens around the country. These roundtables are open to the public, and small businesses from a wide area are invited. Advocacy also invites federal agency officials to attend, so they can hear feedback and suggestions firsthand, and provide agency perspectives, if they so choose. Congressional representatives have also attended these roundtables to hear their constituents’ regulatory issues.
The roundtables have two goals:
- To identify small business regulatory issues to assist agencies with their regulatory reform plans (as directed by Executive Orders 13771 and 13777). This entails gathering firsthand information on small business regulatory burdens across the nation and identifying specific recommendations for regulatory change to submit to agencies.
- To educate small businesses and stakeholders on the ways that Advocacy can help them meet their goals.
Since June 2017, Advocacy has conducted 36 Regional Regulatory Reform Roundtables in 25 states, and over 1,500 small businesses have participated. While traveling to these events, Advocacy staff also made at least 84 site visits in 22 states through September 2018. In addition, the office’s regional and national advocates held small business forums in 244 cities, and small business owners submitted hundreds of comments through an online portal. Locations span rural and urban areas, geographic regions, and a range of industries. The geographical diversity provides an up-close perspective of how a single federal rule can have varying economic impacts on different types of small businesses.
In December 2018, Advocacy published a progress report which covers the first 16 months of the office’s Regional Regulatory Reform Roundtables.[18] The report provides details about small businesses’ regulatory challenges through our firsthand accounts of roundtables and site visits across the country through September 2018. It also outlines the first steps toward progress in alleviating some of these burdens, which includes follow-up efforts with federal agencies. Advocacy looks forward to continuing progress toward regulatory reform for small businesses.
VI. Legislative Proposals to Amend the RFA
Advocacy’s broad experience with the RFA since its original enactment in 1980, together with a growing body of case law, give Advocacy a unique perspective on the RFA’s implementation. Over the years, previous Chief Counsels have identified areas they believed needed legislative attention if the RFA is to provide small entities with the full consideration that Congress originally intended.
Because Advocacy currently does not have a Senate-confirmed Chief Counsel that can lobby before Congress for legislative solutions, the office has not updated its legislative priorities since 2016. Advocacy acknowledges that these proposals will require more carefully crafted legislative language and analysis to ensure they are appropriately implemented, and our staff is happy to provide technical assistance on legislative proposals concerning the RFA. The 2016 legislative priorities can be found in Appendix C of this testimony, and are briefly explained below:
a. Indirect effects
Under the RFA, agencies are not currently required to consider the impact of a proposed rule on small businesses that are not directly regulated by the rule, even when the impacts are foreseeable and often significant. Advocacy believes that indirect effects should be part of the RFA analysis, but that the definition of indirect effects should be specific and limited so that the analytical requirements of the RFA remain reasonable.[19]
b. Scope of the RFA
Currently, the requirements of the RFA are limited to those rulemakings that are subject to notice and comment. Section 553 of the Administrative Procedure Act (APA), which sets out the general requirements for rulemaking, does not require notice and comment for interim final rulemakings, so agencies may impose a significant economic burden on small entities through these rulemakings without even conducting an Initial Regulatory Flexibility Analysis (IRFA) or Final Regulatory Flexibility Analysis (FRFA). Advocacy believes the definition of a rule under the RFA needs to be expanded to include interim final rulemakings that have the potential to impose economic burden on small entities.
In the past, the IRS has regularly promulgated rules that were costly and complicated for small businesses. Generally, the IRS contended that it had no discretion in implementing legislation and that the agency had little authority to consider less costly alternatives under the RFA. Therefore, the IRS often did not analyze the cost of its rules to small businesses under the RFA.[20]
Finally, the RFA has its own definition of information collection. However, this definition is identical to the Paperwork Reduction Act (PRA). A cross-reference to the PRA would allow Advocacy to rely on OMB’s existing implementing regulations and guidance.
c. Quality of Analysis
The Office of Advocacy has been concerned that some agencies are not providing the information required in the IRFA and FRFA in a transparent and easy-to-access manner.[21] This hinders the ability of small entities and the public to comment meaningfully on the impacts on small entities and possible regulatory alternatives. Agencies should be required to include an estimate of the cost savings to small entities in the FRFA. In addition, agencies should have a single section in the preamble of the notice of proposed rulemaking and notice of final rulemaking that lays out clearly the substantive contents of the IRFA or FRFA, including a specific narrative for each of the required elements.
d. Quality of Certification
Some agencies’ improper certifications under the RFA have been based on a lack of information in the record about small entities, rather than data showing that there would not be a significant impact on a substantial number of small entities. A clear requirement for threshold analysis would be a stronger guarantee of the quality of the certifications.[22]
e. SBREFA Panels
The Department of Interior’s Fish and Wildlife Service consistently promulgates regulations without proper economic analyses. Advocacy believes the rules promulgated by this agency would benefit from being added as a covered agency subject to Small Business Advocacy Review Panels.
Advocacy also believes that some recent SBREFA panels have been convened prematurely. SBREFA panels work best when small entity representatives have sufficient information to understand the purpose of the potential rule, likely impacts, and preliminary assessments of the costs and benefits of various alternatives. With this information small entities are better able to provide meaningful input on the ways in which an agency can minimize impacts on small entities consistent with the agency mission. Therefore the RFA should be amended to require that prior to convening a panel, agencies should be required to provide, at a minimum, a clear description of the goals of the rulemaking, the type and number of affected small entities, a preferred alternative, a series of viable alternatives, and projected costs and benefits of compliance for each alternative.
f. Retrospective Review
In addition to the existing required periodic review, agencies should accept and prioritize petitions for review of final rules. They should be required to provide a timely and effective response in which they demonstrate that they have considered alternative means of achieving the regulatory objective while reducing the regulatory impact on small entities. This demonstration should take the form of an analysis similar to a FRFA.
Conclusion
Thank you for the opportunity to testify today. Advocacy looks forward to continuing to work with you and other Members of Congress to be the voice for small businesses in the federal government and work with agencies to reduce small businesses’ regulatory burdens during the rulemaking process. I would be happy to answer any questions you may have.
05-22-2019-Senate-SBC-Reauthorization-Testimony
[1] § 206, Public L. No. 94-305, 15 U.S.C. § 634f.
[2] The Small Business Jobs Act of 2010 established a separate appropriations account for Advocacy, in addition to a requirement that SBA provide operating support for Advocacy. Advocacy’s funds are to remain available until expended. Pub. L. No. 111-240, title I, § 1601(b) (Sept. 27, 2010), 124 Stat. 2551, 15 U.S.C. § 634g. These provisions became operational with Advocacy’s budget request for Fiscal Year 2012. Since then, Advocacy’s annual Congressional Budget Justification and its accompanying Annual Performance Report have appeared in a separate budget appendix following the main SBA budget request.
[3] There
are 30.7 million small businesses in the United States. U.S. Small Bus. Admin. Office of Advocacy, 2019
Small Business Profile: United States,
1 (2019), available at https://advocacy.sba.gov/wp-content/uploads/2019/
04/2019-Small-Business-Profiles-US.pdf.
Advocacy calculates small business statistics using the most recent data
available from government sources.
[4] U.S. Small Bus. Admin. Office of Advocacy, Annual Report of the Office of Economic Research: FY 2017, available at https://www.sba.gov/sites/default/files/OER_2017_Annual_Report.pdf.
[5] 5 U.S.C. § 601, et seq. The Regulatory Flexibility Act was originally passed in 1980 (Pub. L. No. 96-354). The Act was amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. No. 104-121), the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203), and the Small Business Jobs Act of 2010 (Pub. L. No. 111-240).
[6] U.S. Small Bus. Admin. Office of Advocacy, A Guide for Government Agencies: How to Comply with the Regulatory Flexibility Act, 1 (Aug. 2017), available at https://www.sba.gov/sites/default/files/advocacy/How-to-Comply-with-the-RFA-WEB.pdf
[7] 5 U.S.C. § 603.
[8] 5 U.S.C. § 604.
[9] 5 U.S.C. § 605(b).
[10] A list of all SBREFA panels that have been convened can be found in our annual report to Congress, and in Appendix A of this testimony.
[11] In limited circumstances, the Chief Counsel may waive the requirement for a SBREFA panel.
[12] 5 U.S.C. § 609.
[13] 5 U.S.C. § 610.
[14] Exec. Order No. 13,272, 67 Fed. Reg. 53,461 (Aug. 13, 2002).
[15] U.S. Small Bus. Admin. Office of Advocacy, Report on the Regulatory Flexibility Act, FY 2018 (Apr. 2019), available at https://advocacy.sba.gov/wp-content/uploads/2019/04/RFA-Annual-Report-FY-2018.pdf [hereinafter RFA FY 2018 Report].
[16] The list and descriptions of the roundtables can be found in Chapter 3 of our RFA FY 2018 Report.
[17] The memorandum can be found in Appendix B of this testimony.
[18] U.S. Small Bus. Admin. Office of Advocacy, What
Small Businesses Are Saying and What Advocacy Is Doing About It: Progress
Report on the Office of Advocacy’s Regional Regulatory Reform Roundtables, June
2017 – September 2018 (Dec. 2018), available
at https://s3.amazonaws.com/uploads.advocacy.sba.gov/wp-content/uploads/2018/12/
20091536/What-Small-Businesses-Are-Saying-What-Advocacy-Is-Doing.pdf.
[19] Advocacy’s RFA Compliance Guide states that agencies “should examine the reasonably foreseeable effects on small entities that purchase products or services from, sell products or services to, or otherwise conduct business with entities directly regulated by the rule.” RFA Compliance Guide, supra note 6, at 23.
[20] On April 11, 2018, the Department of the Treasury and OMB signed a Memorandum of Agreement outlining the general terms for OIRA within OMB to review tax regulatory actions under Executive Order 12866. The MOA went into immediate affect with the exception of the additional information required under section 6(a)(3)(C) of E.O. 12866 pertaining to tax regulatory actions that would have an annual non-revenue effect on the economy of $100 million or more, measured against a no-action baseline, which went into effect in April 2019.
[21] Advocacy believes the information should be at the level of detail necessary to understand the rule’s impact on all affected entities, such as identifying all of the different types of affected small businesses by industry and accessing the rule’s impact on each type of affected small business.
[22] Advocacy’s RFA Compliance Guide walks through the certification in detail and the items that should be included in any certification, including the requirements of a factual basis for the certification. RFA Compliance Guide, supra note 6, at 11-30. a