Vedder Thinking | Articles Non-Citizen Trusts - What Industry Should Take From Recent FAA Public Meeting
Aviation industry and Federal Aviation Administration (FAA) representatives met recently to discuss their perspectives regarding the purposes and implications of the proposed policy clarification (the PPC),1 regarding Non-Citizen Trusts (NCT).2 The meeting, held on June 6, 2012 in Oklahoma City (the Public Meeting) provided the first opportunity for the two sides to meet officially since the publication of the PPC on February 9, 2012. Industry optimists might have been encouraged by some of the exchanges with the FAA, and pessimists might have perceived the FAA's reaction to industry concerns as non-committal (at best) and unconvinced (at worst).
Various industry representatives, including the AWG/ICG, made submissions to the FAA prior to the public meeting expressing concerns regarding the PPC.3 The AWG/ICG Submission noted the industry’s many procedural and substantive concerns regarding the PPC, and the AWG/ICG and other industry attendees reiterated many of these concerns during the Public Meeting.4
As discussed in our previous articles regarding the FAA's ongoing NCT initiatives,5 the PPC is worrisome to the aviation industry, especially to financing providers, in both obvious and subtle respects. By proposing to make OTs responsible for a variety of aircraft-related obligations, the FAA has created various risks on a number of issues, including valid registration and tort liability.
The AWG/ICG's Submission and Public Meeting comments included objections to the PPC’s imposition of absolute responsibility on non-operating owners for the full or timely delivery of requested information from operators, as well as the FAA’s justifications for imposing this responsibility. AWG/ICG representatives explained that imposing this responsibility on passive or otherwise compliant OTs and/or non-operating trustors could drive OTs, financing parties and other investors out of the aircraft finance market. Industry members cautioned that deterring these parties from participating in NCT-structured or other financings could further weaken an already fragile U.S. aircraft industry.6
The AWG/ICG and other industry representatives endeavored to narrow the FAA's focus to the most likely cause of an investigation and any enforcement impediments relating to NCT-registered aircraft. These circumstances were highlighted in the PPC and referred to again by the FAA during the Public Meeting. Specifically, the FAA is particularly concerned about an NCT trustor operating an aircraft, when either its operator status is not disclosed to the FAA, or the trustor operator and/or the OT fails or refuses to cooperate with the FAA's investigation-related inquiries and requests. Industry members have acknowledged that changes to the NCT procedures and trust agreement to the extent focused on these circumstances is appropriate and industry representatives remain committed to participate in collaborative efforts to address these circumstances.7
By the end of the Public Meeting, the FAA and industry representatives appeared to make some progress on other issues relating to the PPC. The AWG/ICG Submission and Public Meeting comments proposed some procedural and trust agreement changes intended to facilitate the FAA’s stated purposes. The FAA, once again, reassured industry representatives that it was not the FAA’s intention to invalidate NCT registration. Both the FAA and industry representatives confirmed their respective intention to collaborate on mutually acceptable solutions to the FAA's investigation and enforcement concerns regarding NCT-registered and foreign operated aircraft. Industry representatives reminded the FAA that making NCT registration impractical might have the same result.
On June 13, 2012, the AWG/ICG submitted a request to Kathryn Thomson, the FAA's Chief Counsel, asking that the public comment period with respect to the PPC be extended until September 15, 2012 so that the FAA and industry representatives will have additional time to consider the Public Meeting transcript and the respective positions shared. The AWG/ICG also requested an opportunity to participate in an informal meeting (subject to appropriate protocols) between Chief Counsel Thomson, other FAA representatives and certain industry representatives prior to any final action by the FAA regarding the PPC.
1 Proposed Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations Involving Non-U.S. Citizen Trustors, Docket No. FAA-2011-0012.
2 The author of this update attended the meeting as part of the steering and drafting committees of the Aviation Working Group (AWG) Industry Consultative Group (the AWG/ICG) organized under the aegis of the AWG to address various aviation industry concerns, including with respect to NCTs.
3 AWG/ICG’s submission to the FAA included a letter with an attached comment summary and proposed Trust Agreement excerpts pertaining to the matters addressed in the PPC (the AWG/ICG Submission), and was authorized by numerous aviation industry participants (e.g., manufacturers, financing providers and lessors, trade associations, law firms, etc.) referenced as “Supporting Entities” in the letter.
4 The procedural issue with the PPC pertains to the FAA's approach to changing the NCT process. These proposed changes include information gathering and other requirements to be undertaken by owner trustees (OTs) in future NCT trust agreements. Whether the FAA’s proposals constitute "policy clarifications" or "policy changes" is an important characterization when considering their procedural validity. By way of explanation, note that the FAA seeks to address its NCT concerns by issuing "policy clarifications," not by rulemaking. The AWG/ICG made clear in the cover letter to the AWG/ICG Submission that it expected the FAA to limit its NCT efforts to "true clarifications, not changes in policy, as measured against the FAA's interpretation and practice over the last 30 years." Any "fundamental changes in policy, or any attempt to impose mandatory obligations via legislative-type rulemaking”, would require a different procedure. The substantive issues raised in the AWG/ICG Submission and in the meeting pertained to the specific requirements PPC imposes on NCT OTs and the proposed changes to the NCT procedures and trust agreement forms. The FAA justifies these proposals by asserting that the use of NCTs is of particular concern because NCT-registered aircraft are frequently based, operated and maintained outside of the U.S. Consequently, per the FAA, this foreign operation impedes the FAA's national and international responsibilities to monitor, enforce and ensure compliance with the airworthiness and operational standards required of FAA-registered aircraft. See, "FAA Publishes Proposed Policy Clarification Regarding Non-Citizen Trusts: Permitted, but Conditioned," Vedder Price Global Transporation Finance Bulletin (Feb. 2012) “Such impediments could result in dereliction of the FAA’s responsibilities under the Convention on International Civil Aviation (Convention on International Civil Aviation, Dec. 7, 1944, 61 Stat. 1180, 15 U.N.T.S. 295, imposing obligations on contracting states to oversee matters pertinent to the airworthiness, licensing and operations of the aircraft registered in those states) regarding the airworthiness of ‘N’ registered aircraft.”
5 See, "FAA NCT Update," Vedder Price Global Transporation Finance Newsletter (Apr. 2012), and "FAA Publishes Proposed Policy Clarification Regarding Non-Citizen Trusts: Permitted, but Conditioned," Vedder Price Global Transporation Finance Bulletin (Feb. 2012).
6 United States International Trade Commission. Business Jet Aircraft Industry: Structure and Factors Affecting Competitiveness, Investigation No. 332-526, USITC Publication 4314. http://www.usitc.gov/publications/332/pub4314.pdf
7 By way of example, industry representatives agreed that a compliant trustor’s replacement of a non-compliant OT could be made easier, and the reputational risk associated with removal would serve as a means by which non-compliant OTs could gradually be eliminated from the NCT market. Similarly, if an operator trustor is the source of the FAA’s concerns, the OT could “encourage” the operator trustor’s compliance by threatening to resign, especially if resignation is made easier by loosening the related requirements. However, the scope of the FAA’s policy clarifications should not subject an OT or non-operator trustor to sanctions or endanger the registered status of the aircraft if the OT or non-operator trustor are taking actions consistent with achieving the FAA’s legitimate purposes as soon as may be practicable under the circumstances.
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