[Federal Register Volume 89, Number 13 (Friday, January 19, 2024)]
[Rules and Regulations]
[Pages 3542-3549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00559]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 107 and 121

RIN 3245-AH90


Small Business Investment Company Investment Diversification and 
Growth; Technical Amendments and Clarifications

AGENCY: U. S. Small Business Administration.

ACTION: Direct final rule.

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SUMMARY: This direct final rule clarifies and provides technical 
updates to the Small Business Investment Company Investment 
Diversification and Growth final rule implemented on August 17, 2023 
(SBIC IDG Final Rule), which reduced barriers to program participation 
for new SBIC fund managers and funds investing in underserved 
communities and

[[Page 3543]]

geographies, capital intensive investments, and technologies critical 
to national security and economic development. In the SBIC IDG Final 
Rule, SBA introduced a new class of SBICs (``Accrual'' SBICs) to unlock 
more patient capital financing for small businesses through the SBIC 
program and implement changes to lower financial barriers to program 
participation for new fund managers. This direct final rule will help 
SBA implement Executive Order 13985, Advancing Racial Equity and 
Support for Underserved Communities Through the Federal Government, by 
reducing financial and administrative barriers to participate in the 
SBIC program and modernizing the program's license offerings to align 
with a more diversified set of private funds investing in underserved 
small businesses.

DATES: This rule is effective March 4, 2024, without further action, 
unless significant comment is received by February 20, 2024. If 
significant adverse comment is received, SBA will publish a timely 
withdrawal of the rule in the Federal Register.

FOR FURTHER INFORMATION CONTACT: 
    Policy: Bailey G. DeVries, Associate Administrator of the Office of 
Investment and Innovation, Small Business Administration, 
<a href="/cdn-cgi/l/email-protection#a4cbcdcd8ac2d6cbcad0cbc2c2cdc7c1e4d7c6c58ac3cbd2"><span class="__cf_email__" data-cfemail="a7c8cece89c1d5c8c9d3c8c1c1cec4c2e7d4c5c689c0c8d1">[email protected]</span></a>, 202-941-6064. This phone number can also be 
reached by individuals who are deaf or hard of hearing, or who have 
speech disabilities, through the Federal Communications Commission's 
TTY-Based Telecommunications Relay Service teletype service at 711.
    Regulatory Comments/Federal Register Docket: Nathan Putnam, Office 
of Investment and Innovation, Small Business Administration, 
<a href="/cdn-cgi/l/email-protection#bed1d7d790d8ccd1d0cad1d8d8d7dddbfecddcdf90d9d1c8"><span class="__cf_email__" data-cfemail="e8878181c68e9a87869c878e8e818b8da89b8a89c68f879e">[email protected]</span></a>, 202-699-1746. This phone number can also be 
reached by individuals who are deaf or hard of hearing, or who have 
speech disabilities, through the Federal Communications Commission's 
TTY-Based Telecommunications Relay Service teletype service at 711.

SUPPLEMENTARY INFORMATION:

I. Background Information

A. Small Business Investment Company Program

    The mission of the SBIC program is to enhance small business access 
to capital by stimulating and supplementing ``the flow of private 
equity capital and long-term loan funds which small-business concerns 
need for the sound financing of their business operations and for their 
growth, expansion, and modernization, and which are not available in 
adequate supply.'' SBA carries out this mission by licensing and 
monitoring privately owned and managed investment funds that raise 
capital from private investors and issue SBA-guaranteed Debentures to 
make private long-term equity and debt investments into qualifying 
Small Businesses.

B. Notice of Rulemaking

    The following is an overview of changes made to 13 CFR part 107 as 
part of this Direct Final Rule to clarify and provide technical updates 
to the Small Business Investment Company Investment Diversification and 
Growth final rule (SBIC IDG Final Rule) implemented on August 17, 2023.
    (a) Sec.  107.50 Definition of terms clarification. Clarifying the 
definition of Annual Charge, for certain investors clarifying the 
definition of Institutional Investor to eliminate the need for a ``dual 
commitment'' relative to the capital commitment of such investors and 
clarifying that the definition of Leverage is consistent across SBIC 
Debenture types.
    (b) Sec.  107.150 Management ownership diversity requirements 
clarification.
    Clarifying the exemption for non-profit entities to own more than 
70 percent of the Licensee's Regulatory Capital to facilitate capital 
raising efforts, particularly for funds targeting investments in 
underserved geographies and critical technologies.
    (c) Sec.  107.230 Permitted sources of Private Capital for 
Licensees clarification. Clarifying that while SBICs are not restricted 
in the amount of investment capital that can be contributed to SBICs 
directly or indirectly from local, State or Federal Government 
entities, the extent to which such investment capital from local, State 
or Federal Government entities is eligible to qualify as Leverageable 
Capital is limited by the Small Business Investment Act of 1958, as 
amended (``the Act''). The capital contributed by such entities can be 
included in an SBIC applicant's proposed formula to calculate 
management fees.
    (d) Sec.  107.305 Evaluation of license applicants clarification. 
Clarifying that SBA does not require a ``certified'' track record as a 
part of the SBIC application process and would expect to see that a 
meaningful proportion of a prior SBIC fund's institutional investor 
base would return to support an anticipated subsequent SBIC fund.
    (e) Sec.  107.503 Licensee's adoption of an approved valuation 
policy technical correction. Aligning the existing regulation with the 
statutory requirements.
    (f) Sec.  107.585 Distributions and reductions in Regulatory 
Capital technical correction. Correcting the timeframe for payment of 
amounts due SBA by Accrual and Reinvestor Licensees making 
distributions other than those made solely for tax purposes.
    (g) Sec.  107.630 Requirement for Licensees to file financial 
statements with SBA (Form 468) clarification.
    Clarifying that Reinvestor SBIC Licensees must file Annual and 
Interim (Quarterly) Form 468s within 120 calendar days of the close of 
the calendar quarter.
    (h) Sec.  107.650 Requirement to report portfolio valuations to SBA 
clarification.
    Clarifying that Reinvestor SBIC Licensees must report valuations to 
SBA within 120 calendar days of the close of the calendar quarter.
    (i) Sec.  107.650 Requirement to report portfolio valuations to SBA 
technical correction. Aligning the existing regulation with the 
statutory requirements.
    (j) Sec.  107.720 Small Businesses that may be ineligible for 
financing clarification. Clarifying that Reinvestor SBIC Licensees may 
provide Equity Capital Investments to Disadvantaged Businesses that are 
relenders or reinvestors, including Community Development Financial 
Institutions (CDFIs) and Minority Deposit Institutions (MDIs). In 
addition to Equity Capital Investments, Reinvestor SBIC Licensees may 
provide long-term debt or loan financing to CDFIs and MDIs.
    (k) Sec.  107.720 Small Businesses that may be ineligible for 
financing technical correction. SBA is expanding the exception that 
permits holding companies to be established by Licensees to mitigate 
implementation challenges for Accrual SBIC Licensees. Also, SBA is 
updating the regulation by including a provision that appeared in a 
prior rulemaking permitting SBIC Business Development Companies (BDCs) 
to form a blocker entity to avoid adverse tax consequences to an 
investor that has elected to be taxed as a registered investment 
company (RIC) under the Internal Revenue Code (26 U.S.C. 851(b)(2)).
    (l) Sec.  107.740 Portfolio diversification (``overline'' 
limitation) technical correction. Aligning the existing regulation with 
the statutory requirements.
    (m) Sec.  107.855 Interest rate ceiling and limitations on fees 
charged to Small Businesses (``Cost of Money'') technical correction. 
Correcting regulations that misstate in 13 CFR 107.855(h)(2) the ``Cost 
of Money ceiling'' reference within Sec.  107.855.

[[Page 3544]]

    (n) Sec.  107.1120 General eligibility requirements for Leverage 
technical correction. Correcting regulations that erroneously state in 
13 CFR 107.1120(d) that SBIC Licensees are limited to $150 million in 
outstanding Leverage.
    (o) Sec.  107.1130 Leverage fees and Annual Charges clarification. 
Clarifying that Annual Charges on Debentures are based on the principal 
amount of Debentures.
    (p) Sec.  107.1150 Maximum amount of Leverage clarification. 
Clarifying a statement from the preamble of the SBIC IDG Final Rule 
regarding the how SBA determines the Leverage available to Accrual 
SBICs and Reinvestor SBICs and how the Agency safely manages the risk 
of an outsized interest balance accruing.
    (q) Sec.  107.1850 Watchlist technical correction. Correcting 
regulations that misstate the formula used to calculate the Leverage 
Coverage Ratio.
    (r) Sec.  121.103(b) How does SBA determine affiliation? 
clarification. Clarifying that SBA does not consider the underlying 
fund of a Reinvestor SBIC to be the affiliate of a small business in 
which such underlying fund has made an equity investment.

II. Section by Section Analysis

A. Section 107.50 Definition of Terms

    SBA seeks to clarify the definition of Institutional Investor to be 
consistent with rules implemented in the SBIC IDG Final Rule to provide 
regulatory flexibility for fund-of-fund investors that are required to 
be managed by SEC regulated Registered Investment Advisors. SBA 
considers the commitments of such fund-of-fund investors to not be of 
questionable collectability if the conditions set forth in the revised 
paragraph (1)(x) of the Institutional Investor definition are met, 
generally eliminating the requirement that a ``dual commitment'' be 
obtained relative to such investor's capital commitment.
    SBA seeks to correct the definition of Annual Charge and correct 
text added to the definition of Leverage that could inadvertently lead 
to Annual Charges being charged on Accrual Debenture principal and 
accrued interest. Consistent with existing practices for Standard 
Debentures, the Annual Charge on Accrual Debentures is charged on 
Accrual Debenture principal only.

B. Section 107.150 Management Ownership Diversity Requirements

    This regulation identifies the SBIC ownership diversity 
requirements under section 302(c) of the Act. That section requires 
SBIC ownership be ``sufficiently diversified from and unaffiliated with 
the ownership of the licensee in a manner that ensures independence and 
objectivity in the financial management and oversight of the 
investments and operations of the licensee.'' As an exception to the 
diversity ownership requirement under Sec.  107.150(b)(1), SBA allows 
an investor that is a traditional investment company to own and control 
more than 70 percent of the Licensee's Regulatory Capital. Such SBICs 
are essentially drop-down funds for that traditional investment company 
and are structured exclusively to pool capital from more than one 
source for the purpose of investing and generating profits. In the SBIC 
Investment Diversification and Growth rulemaking, SBA proposed also 
including non-profit entities to own more than 70 percent of the 
Licensee's Regulatory Capital to facilitate capital raising efforts, 
particularly for funds targeting investments in underserved geographies 
and critical technologies. In the final rulemaking, SBA clarified such 
non-profit entities could own and control a Licensee; however, did 
include the proposed reforms, which were supported in public comments, 
for such non-profit entities to own more than 70 percent of the 
Licensee's Regulatory Capital. SBA is clarifying in this rulemaking 
that such non-profit entities can own more than 70 percent of the 
Licensee's Regulatory Capital as originally stated in the proposed 
rulemaking.

C. Section 107.230 Permitted Sources of Private Capital for Licensees

    SBA seeks to clarify that while SBICs are not restricted in the 
amount of investment capital that can be contributed to SBICs directly 
or indirectly from local, State or Federal Government entities, the 
extent to which such investment capital from local, State or Federal 
Government entities is eligible to qualify as Leverageable Capital is 
limited by the Small Business Investment Act of 1958, as amended (``the 
Act''). The capital contributed by such entities can be included in an 
SBIC applicant's proposed formula to calculate management fees.

D. Section 107.305 Evaluation of License Applicants

    SBA seeks to clarify that a management team must have demonstrated 
investment acumen to apply for an SBIC license, as defined in Sec.  
107.305(b). SBA looks at a mosaic of factors when determining 
eligibility for an SBIC license and can rely upon third-party data 
sources and reference checks in conjunction with the initial license 
application to verify management team eligibility. For clarity, SBA is 
adding that while a track record is required to apply for an SBIC 
license, a certified track record is not required and is clarifying 
that SBA would expect to see that a meaningful proportion, in terms of 
the number of institutional investors, of a prior SBIC fund's investor 
base would return to support an anticipated subsequent SBIC fund.

E. Section 107.503 Licensee's Adoption of an Approved Valuation Policy

    SBA is correcting current regulations, which erroneously state in 
13 CFR 107.503(d)(4) that SBIC Licensees must report material adverse 
changes within 45 days following the close of the quarter. The 
statutory requirement is within 30 days following the close of the 
quarter.

F. Section 107.585 Distributions and Reductions in Regulatory Capital

    SBA is correcting the timeframe set forth in Sec.  107.585(c), for 
both the mandatory payment of Annual Charges and accrued interest and 
the mandatory payment of the ``SBA share'' by Accrual and Reinvestor 
Licensees making distributions other than those made solely for tax 
purposes. Under the SBIC IDG Final Rule such Licensees are required to 
make mandatory payments on annual charges and accrued interest and the 
calculated SBA share of Leverage in connection with each distribution 
to private investors, other than a distribution approved in writing and 
in advance by SBA as solely for tax purposes. The SBIC IDG Final Rule 
provided inconsistent guidance as to the timing of such payments due to 
SBA. In order to reduce its risk, SBA corrects the regulation to 
require that each such payment to SBA be made on or before the date of 
the corresponding non-tax distribution to private investors.
    Also, in view of the alignment of the ``overline'' formula of Sec.  
107.740 with the formula set forth in section 306 of the Act, SBA seeks 
to eliminate from Sec.  107.585 two references to the former regulatory 
formula. Those references concern an ``add back'' of approved 
reductions of Regulatory Capital to the regulatory formula previously 
contained within Sec.  107.740. Given that Sec.  107.740 has now been 
aligned with the statutory overline formula, as to which such ``add 
backs'' are not applicable, the references within Sec.  107.585 to such 
``add backs'' are no longer relevant.

[[Page 3545]]

G. Section 107.630 Requirement for Licensees To File Financial 
Statements With SBA (Form 468)

    SBA seeks to clarify that Reinvestor SBICs are required to file 
Annual Form 468 within 120 calendar days of the end of your fiscal year 
and Interim Form 468 within 120 calendar days of the respective 
quarter.

H. Section 107.650 Requirement To Report Portfolio Valuations to SBA

    Consistent with the clarification in 13 CFR 107.630, SBA similarly 
clarifies that Reinvestor SBICs must report valuations to SBA within 
120 days of the end of the fiscal year and within 120 days following 
the close of other reporting periods.
    In addition, SBA aligns the regulatory requirement for Licensees to 
report material adverse changes in valuations with the statutory 
requirement.

I. Section 107.720 Small Businesses That May Be Ineligible for 
Financing

    This regulation identifies small businesses that may be ineligible 
for financing by SBICs. Current 13 CFR 107.720(a)(2)(i) provides an 
exception to the limitation on investments in relenders or reinvestors 
in order to permit Reinvestor SBICs to provide Equity Capital 
Investments to underserved Small Business reinvestors (except banks, 
savings and loans not insured by agencies of the Federal Government, 
and agricultural credit companies). As part of this rulemaking, SBA is 
seeking to clarify its intent relative to Sec.  107.720(a)(2)(i) by 
noting that Reinvestor SBIC Licensees may provide Equity Capital 
Investments to Disadvantaged Businesses that are relenders or 
reinvestors, including Community Development Financial Institutions 
(CDFIs) and Minority Deposit Institutions (MDIs). In addition to Equity 
Capital Investments, Reinvestor SBIC Licensees may provide long-term 
debt or loan financing to CDFIs and MDIs. SBA notes that such CDFIs and 
MDIs are excepted from the requirement to solely make investments or 
loans to eligible businesses pursuant to the requirements set forth in 
Sec.  107.720(a)(2)(i).
    Current regulations provide for two exceptions that allow an SBIC 
to structure an investment utilizing a passive small business as a 
pass-through. The first exception, identified in Sec.  107.720(b)(2), 
permits an investment utilizing up to two passive entities, as long as 
substantially all of the financing proceeds are passed through to one 
or more active ``subsidiary companies,'' each of which is an eligible 
small business. The second exception, identified in Sec.  
107.720(b)(3), allows a partnership SBIC to form and finance a passive, 
blocker entity that in turn provides financing to an active, 
unincorporated small business. Currently, this structure is permitted 
only if a direct financing of the unincorporated small business would 
cause at least one of the SBIC's investors to incur Unrelated Business 
Taxable Income (UBTI) under section 511 of the Internal Revenue Code, 
which may arise from an activity engaged in by a tax-exempt 
organization that is not related to the tax-exempt purpose of that 
organization.
    SBA is clarifying that the exception set forth in 13 CFR 
107.720(b)(2) permits an SBIC to structure an investment utilizing 
additional passive small businesses as a pass through, provided that 
(i) all financing proceeds are passed through to one or more active 
``subsidiary companies,'' each of which is an eligible small business, 
(ii) SBA has adequate information to review information appropriate to 
each passive small business pursuant to 13 CFR 107.720(b)(4), and (iii) 
SBA is able to maintain enforcement rights against each of the small 
businesses financed pursuant to 13 CFR 107.720(b)(2), including the 
active Small Business. Further, SBA is clarifying that 13 CFR 
107.720(b)(3) allows the formation of a blocker entity, in the case of 
an SBIC that either is a BDC licensed under the Investment Company Act 
of 1940 or is owned by a parent BDC, to avoid adverse tax consequences 
to an investor that has elected to be taxed as a registered investment 
company under the Internal Revenue Code (26 U.S.C. 851(b)(2)). SBA 
believes that these changes will provide SBICs with additional 
flexibility investments to eligible Small Businesses and increase the 
flow of private capital within the SBIC program.

J. Section 107.740 Portfolio Diversification (``Overline'' Limit)

    SBA seeks to align the ``overline'' formula contained within Sec.  
107.740 with overline formula that is set forth in section 306 of the 
Act. Section 306 contains an aggregate limitation on the concentration 
of a Licensee's combined capital (Private Capital + guaranteed 
Leverage), precluding a Licensee from investing combined capital in 
excess of a threshold determined under the statutory formula. 
Previously, SBA regulations contained an overline limitation that was 
similar to the statutory requirement though different in important 
respects, thus subjecting Licensees to an additional overline 
requirement and potentially resulting in confusion in various 
circumstances. By aligning the regulation with the statute, SBA now 
effectively simplifies overline management and the burden of tracking 
the overline requirement under two separate formulae.

K. Section 107.855 Interest Rate Ceiling and Limitations on Fees 
Charged to Small Businesses (``Cost of Money'')

    SBA seeks to correct a misstated reference by correcting 
107.855(h)(2) to read as follows: ``Discount the cash flows back to the 
first disbursement date using the Cost of Money ceiling from paragraph 
(c) of this section as the discount rate.''

L. Section 107.1120 General Eligibility Requirements for Leverage

    SBA seeks to correct current regulations, which erroneously state 
in 13 CFR 107.1120(d) that SBIC Licensees are limited to $150 million 
in outstanding Leverage. This provision does not reflect a change in 
the statutory outstanding Leverage maximum which is $175 million for an 
individual Licensee and $350 million in aggregate for SBIC Licensees 
that are under Common Control. Also, SBA has inserted language 
referring to the maximum Leverage allowed under the Act to ensure that 
any statutory changes are reflected in the regulations.

M. Section 107.1130 Leverage Fees and Annual Charge

    SBA seeks to clarify the current regulations which are ambiguous as 
to the basis for which Annual Charges are calculated on outstanding 
Debentures. SBA clarifies the regulation by adding the word 
``principal'' in front of ``amount'' in 13 CFR 107.1130(d)(1).

N. Section 107.1150 Maximum Amount of Leverage

    SBA seeks to further clarify a statement from the preamble of the 
SBIC IDG Final Rule regarding how SBA determines the Leverage available 
to Accrual SBICs and Reinvestor SBICs. In the rule, SBA stated that 
``In order to determine the maximum amount of leverage that Accrual 
SBICs and Reinvestor SBICs may have outstanding, SBA will aggregate the 
total principal leverage plus ten years of accrued interest on such 
principal to determine the total Accrual Debentures that the Accrual 
SBIC may issue based on the statutory limitation.'' SBA seeks to 
clarify that this aggregation is based on an estimate of potential 
interest which could accrue based on prevailing interest rates at the 
time of licensing. Furthermore, SBA seeks to clarify how

[[Page 3546]]

the Agency safely manages the risk of an outsized interest balance 
accruing by requiring Accrual Debentures to include a provision which 
requires the prompt payment of any interest that has accrued in excess 
of the limitation of SBA Leverage available at the end of each quarter. 
This clarification refers to the fact that SBA is performing a 
forecasting exercise in conjunction with other considerations during 
the Licensing process to ultimately make a determination on the Total 
Intended Leverage Commitment SBA will conditionally approve as part of 
the Green Light approval. It should be noted that all Total Intended 
Leverage Commitments and Leverage issued are bound by the statutory 
maxima applicable to Individual Licensees and Licensees under Common 
Control. (SBA may issue a subsequent Leverage Commitment which permits 
the Licensee to exceed the sum otherwise available under section 
303(b)(2), up to an amount equal to the lesser of (a) 33 percent of the 
Licensee's Private Capital, and (b) the Licensee's Energy Saving 
Qualified Investment cost basis, subject to the limitations expressed 
in section 303 of the SBIC Act and its implementing regulations.)

O. Section 107.1850 Watchlist

    SBA seeks to correct current regulations, which erroneously present 
in 13 CFR 107.1859 the formula used to calculate a metric that was 
among those included in the formal Licensee ``Watchlist'' process 
implemented by the SBIC IDG Final Rule to formalize monitoring 
practices that have existed in SBIC Program Standard Operating 
Procedures for several years. Among the ``Watchlist triggers'' 
described in paragraph 13 CFR 107.1850(a) was the Leverage Coverage 
Ratio (LCR). SBA now corrects clause 13 CFR 107.1850(a)(6) which 
presents the formula used to calculate LCR, which was misstated in the 
SBIC IDG Final Rule.

P. Section 121.103 How does SBA determine affiliation?

    With the SBIC IDG Final Rule, SBA established within Sec.  
107.720(a)(2) a new type of SBIC, known as a Reinvestor SBIC, licensed 
to issue Accrual Debentures and approved by SBA to provide ``Equity 
Capital Investments to underserved Small Business reinvestors (except 
banks, savings and loans not insured by agencies of the Federal 
Government, and agricultural credit companies) that make direct 
financings'' to certain qualifying Small Businesses. With the advent of 
Reinvestor SBICs, questions have arisen concerning the applicability of 
SBA affiliation rules to the relationship between such underserved 
Small Business reinvestors and the qualifying Small Businesses in which 
they invest. Although 13 CFR 121.103(b)(1), in current form, provides 
clarity as to the lack of regulatory affiliation between licensed SBICs 
and the Small Businesses to which they provide Financing, the SBIC IDG 
Final Rule failed to answer the related question of whether a Small 
Business reinvestor is affiliated with the qualifying Small Business in 
which it reinvests. SBA now modifies clause 13 CFR 121.103(b)(1) to 
respond to this question and resolve that no affiliation results from 
this relationship.

III. Compliance With Executive Orders 12866, 12988, 13132, 13563, and 
13175, the Paperwork Reduction Act (44 U.S.C., Ch. 35), and the 
Regulatory Flexibility Act (5 U.S.C. 601-612))

A. Executive Order 12866

    The Office of Management and Budget has determined that this rule 
is not a ``significant regulatory action'' under Executive Order 12866.

B. Executive Order 12988

    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have preemptive effect or retroactive effect.

C. Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the National Government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government, as specified in the Executive order. As 
such it does not warrant the preparation of a federalism assessment.

D. Executive Order 13175

    This rule does not have tribal implications under Executive Order 
13175, Consultation and Coordination with Indian Tribal Governments, 
because it would not have a substantial direct effect on one or more 
Indian tribes, on the relationship between the Federal Government and 
Indian tribes, or on the distribution of power and responsibilities 
between the Federal Government and Indian tribes.

E. Executive Order 13563

    Executive Order 13563, Improving Regulation and Regulatory Review 
(January 18, 2011), requires agencies to adopt regulations through a 
process that involves public participation, and to the extent feasible, 
base regulations on the open exchange of information and perspectives 
from affected stakeholders and the public as a whole. SBA has developed 
this rule in a manner consistent with these requirements, and the 
public will have the opportunity to provide comments prior to the 
effective date of this direct final rule.

F. Congressional Review Act, 5 U.S.C. 801-808

    The Office of Management and Budget has determined that this is not 
a major rule under 5 U.S.C. 804(2).

G. Paperwork Reduction Act, 44 U.S.C., Ch. 35

    SBA has determined that this rule would not impose new reporting or 
recordkeeping requirements under the Paperwork Reduction Act.

H. Regulatory Flexibility Act, 5 U.S.C. 601-612

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires 
administrative agencies to consider the effect of their actions on 
small businesses, small organizations, and small governmental 
jurisdictions. According to the Regulatory Flexibility Act (RFA), 5 
U.S.C. 601, when an agency issues a rulemaking, it must prepare a 
regulatory flexibility analysis to address the impact of the rule on 
small entities. However, section 605 of the RFA allows an agency to 
certify a rule, in lieu of preparing an analysis, if the rulemaking is 
not expected to have a significant economic impact on a substantial 
number of small entities.
    This rule likely will not impact a substantial number of small 
entities. This rulemaking is intended to update and clarify comments 
received in connection with prior SBA rules, and accordingly will 
affect only a limited population of existing and potential SBIC 
Licensees. Importantly, this rule does not directly impact small 
businesses receiving investments, nor any investors or small banks 
participating in the SBIC Licensee. This rulemaking regulates the 
relevant SBIC Licensees. The courts have held that the RFA does not 
require a regulatory flexibility analysis for entities not directly 
regulated by the agency's proposed rulemaking. Thus, SBA is not 
required to conduct a regulatory flexibility analysis on potential 
downstream benefits or costs to those entities.
    Further, this rulemaking also does not have a significant economic 
impact on

[[Page 3547]]

those small entities directly regulated under this rulemaking. SBA 
expects the changes in this proposed rule to increase program 
participation, access to capital, and diversity of investment 
strategies. The rule does not impose any significant new compliance 
requirements to SBIC program participants.
    Based on the foregoing, the Administrator of the SBA hereby 
certifies that this rulemaking will not have a significant economic 
impact on a substantial number of small entities.

Justification for Direct Final Rule--Administrative Procedure Act

    In general, SBA publishes a rule for public comment before issuing 
a final rule, in accordance with the Administrative Procedure Act. 5 
U.S.C. 553. The Administrative Procedure Act provides an exception to 
this standard rulemaking process, however, when an agency finds good 
cause to adopt a rule without prior public participation. 5 U.S.C. 
553(b)(3)(B). The good cause requirement is satisfied when prior public 
participation is impracticable, unnecessary, or contrary to the public 
interest.
    SBA is publishing this rule as a direct final rule because public 
participation is unnecessary. SBA views this as a non-controversial 
administrative action because all technical corrections and updates are 
consistent with public comments received throughout the SBIC IDG Final 
Rule rulemaking process. This rule will be effective on the date shown 
in the DATES section unless SBA receives significant adverse comment on 
or before the deadline for comments. Significant adverse comments are 
comments that provide strong justifications why the rule should not be 
adopted or for changing the rule. SBA does not expect to receive any 
significant adverse comments because these technical corrections and 
updates are consistent with broad stakeholder comments received during 
the prior SBIC IDG Final Rule rulemaking process.
    If SBA receives significant adverse comment, SBA will publish a 
notice in the Federal Register withdrawing this rule before the 
effective date. If SBA receives no significant adverse comments, the 
rule will be effective 45 days after publication without further 
notice.

List of Subjects

13 CFR Part 107

    Investment companies, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.

13 CFR Part 121

    Investment companies, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.

    Accordingly, for the reasons stated in the preamble, SBA is 
implementing regulations to amend 13 CFR parts 107 and 121 as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

0
1. The authority citation for part 107 continues to read as follows:

    Authority:  15 U.S.C. 662, 681-687, 687b-h, 687k-m.


0
2. Amend Sec.  107.50 by revising the definitions of Annual Charge, 
paragraph (1)(x) of Institutional Investor, and Leverage to read as 
follows:


Sec.  107.50  Definition of terms.

* * * * *
    Annual Charge means:
    Annual Charge means an annual fee on the principal amount of 
outstanding Debentures which is payable to SBA by Licensees, subject to 
the terms and conditions set forth in Sec. Sec.  107.585 and 
107.1130(d).
* * * * *
    Institutional Investor means:
    (1) * * *
    (x) An entity managed by an SEC regulated Registered Investment 
Adviser in good standing, provided the Licensee's limited partnership 
agreement (or other governing agreement) contains sufficient provisions 
to ensure collectability.
* * * * *
    Leverage means:
    Leverage means financial assistance provided to a Licensee by SBA, 
either through the purchase or guaranty of a Licensee's Debentures, and 
any other SBA financial assistance evidenced by a security of the 
Licensee.
* * * * *

0
3. Amend Sec.  107.150 by revising paragraph (b)(2) to read as follows:
* * * * *
    (b) * * *
    (2) Exception. An investor that is a traditional investment 
company, as determined by SBA, may own and control more than 70 percent 
of your Regulatory Capital and your Leverageable Capital. For purposes 
of this section, a traditional investment company must be a non-profit 
entity, or a professionally managed firm organized exclusively to pool 
capital from more than one source for the purpose of investing in 
businesses that are expected to generate substantial returns to the 
firm's investors. In determining whether a firm is a traditional 
investment company for purposes of this section, SBA will also 
consider:
* * * * *

0
4. Amend Sec.  107.230 by:
0
a. Adding a heading to paragraph (e); and
0
b. Adding paragraph (f).
    The revisions read as follows:


Sec.  107.230  Permitted sources of Private Capital for Licensees.

* * * * *
    (e) Borrowed funds exclusion. * * *
    (f) Public sector contributions. The Act limits the extent to which 
funds invested directly or indirectly by local, State or Federal 
Government entities are eligible to qualify as Leverageable Capital. 
However, SBICs are not restricted from accepting funds invested 
directly or indirectly from local, State or Federal Government 
entities. The funds contributed by such entities may be included in an 
SBIC applicant's proposed formula to calculate management fees.

0
5. Amend Sec.  107.305 by adding a sentence at the end of paragraph (b) 
and revising (e)(1)(iii) to read as follows:


Sec.  107.305  Evaluation of license applicants.

* * * * *
    (b) * * * While a track record is required to apply for an SBIC 
license, a ``certified'' track record is not required.
* * * * *
    (e) * * *
    (1) * * *
    (iii) Consistent limited partnership (LP)-general partnership (GP) 
dynamics. No new limited partner will represent >=33 percent of the 
Private Capital of the licensee upon reaching final close at target 
fund size or hard cap. SBA would expect to see that a meaningful 
proportion of a prior SBIC fund's institutional investor base would 
return to support an anticipated subsequent SBIC fund. The most recent 
limited partnership agreement (LPA) of the active Licensee and all side 
letters will have no substantive changes for the applicant fund.
* * * * *

0
6. Amend 107.503 by revising paragraph (d)(4) to read as follows:


Sec.  107.503  Permitted sources of Private Capital for Licensees.

* * * * *
    (d) * * *
    (4) You must report material adverse changes in valuations at least 
quarterly,

[[Page 3548]]

within 30 days following the close of the quarter.
* * * * *

0
7. Amend Sec.  107.585 by:
0
a. In paragraph (b), removing the fourth sentence;
0
b. Revising the introductory text of paragraph (c), paragraph (c)(1), 
paragraph (c)(2) introductory text, and paragraph (c)(2)(i); and
0
c. In paragraph (c)(4) removing the fifth sentence.
    The revisions read as follows:


Sec.  107.585  Distributions and reductions in Regulatory Capital.

* * * * *
    (c) Accrual SBICs and Reinvestor SBICs. If you are an Accrual SBIC 
or Reinvestor SBIC, unless you receive prior written approval from SBA 
to make a distribution solely to cover tax liabilities, you may only 
distribute as follows:
    (1) Payment of Annual Charges and accrued interest. Prior to any 
non-tax distribution, you must pay any Annual Charges owed to SBA and 
all accrued interest on your outstanding Leverage.
    (2) Calculate SBA's share of distribution. Prior to any non-tax 
distribution, you must make payments to SBA on a pro rata basis with 
any distributions based on your SBA Total Intended Leverage Commitment 
relative to your Total Private Capital Commitments, inclusive of 
Qualified Non-Private Funds, determined within 12 months of Licensure 
calculated as follows: SBA's Share = Total Distributions x [Total 
Intended Leverage Commitment/(Total Intended Leverage Commitment + 
Total Private Capital Commitments)] where:
    (i) Total Distributions means any prior tax distributions plus the 
total amount of distributions, whether profit or return of capital, you 
intend to make after paying all accrued interest and Annual Charges;
* * * * *

0
8. Amend Sec.  107.630 by adding a sentence at the end of paragraphs 
(a) introductory text and (b) to read as follows:


Sec.  107.630  Requirement for Licensees to file financial statements 
with SBA (Form 468).

    (a) * * * Reinvestor SBICs must file Annual Form 468 within 120 
calendar days of the end of your fiscal year.
* * * * *
    (b) * * * Reinvestor SBICs must file such reports within 120 
calendar days of the end of the reporting period.
* * * * *

0
9. Revise Sec.  107.650 to read as follows:


Sec.  107.650  Requirement to report portfolio valuations to SBA.

    You must determine the value of your Loans and Investments in 
accordance with Sec.  107.503. You must report such valuations to SBA 
within 90 calendar days of the end of the fiscal year in the case of 
annual valuations, and if you are a Leveraged Licensee within 45 
calendar days following the close of other reporting periods. 
Reinvestor SBICs must report valuations to SBA within 120 calendar days 
of the end of the fiscal year in the case of annual valuations, and 
within 120 calendar days following the close of other reporting 
periods. You must report material adverse changes in valuations at 
least quarterly, within 30 days following the close of the quarter.

0
10. Amend Sec.  107.720 by:
0
a. Adding two sentences at the end of paragraph (a)(2)(i);
0
b. Revising the first sentence of paragraph (b)(2) introductory text;
0
c. Revising the fourth sentence of paragraph (b)(3) introductory text; 
and
0
d. Revising paragraph (b)(4)(iii).
    The additions and revisions read as follows:


Sec.  107.720  Small Businesses that may be ineligible for financing.

    (a) * * *
    (2) * * *
    (i) * * *A Reinvestor SBIC may make Equity Capital Investments to 
Disadvantaged Businesses that are relenders or reinvestors, including 
Community Development Financial Institutions (CDFIs) and Minority 
Deposit Institutions (MDIs), and any such investments in CDFIs or MDIs 
pursuant to this section are not subject to the requirement that such 
CDFIs or MDIs make direct financings solely to Small Businesses. In 
addition to Equity Capital Investments, Reinvestor SBIC Licensees may 
provide long-term debt or loan financing to CDFIs and MDIs.
* * * * *
    (b) * * *
    (2) Exception for pass-through of proceeds to subsidiary. You may 
provide Financing directly to passive businesses, including passive 
businesses that you have formed, if it is a Small Business and it 
passes substantially all the proceeds through to (or uses substantially 
all the proceeds to acquire) one or more subsidiary companies, each of 
which is an eligible Small Business that is not passive. * * *
    (3) * * * You may form such blocker entities only if a direct 
Financing to such Small Businesses would cause any of your investors to 
incur ``unrelated business taxable income'' under section 511 of the 
Internal Revenue Code (26 U.S.C. 511) or to incur ``effectively 
connected income'' to foreign investors under sections 871 and 882 of 
the Internal Revenue Code (26 U.S.C. 871 and 882) or (for an investor 
that has elected to be taxed as a regulated investment company) receive 
or be deemed to receive gross income that does not qualify under 
section 851(b)(2) of the Internal Revenue Code (26 U.S.C. 851(b)(2)). * 
* *
    (4) * * *
    (iii) For the purposes of this part 107, each passive and non-
passive business included in the Financing is a Portfolio Concern and 
subject to the provisions set forth in the Act. The terms of the 
financing must also provide SBA with access to Portfolio Concern 
information in compliance with this part 107, including without 
limitation Sec. Sec.  107.600 and 107.620.
* * * * *

0
11. Revise Sec.  107.740 to read as follows:


Sec.  107.740  Portfolio diversification (``Overline'' limitation).

    If you are a Leveraged Licensee, the aggregate amount of financings 
you may provide and commitments you may issue to a Small Business and 
its affiliates may not, without SBA's prior written approval, exceed 10 
percent of the sum of:
    (a) Your Private Capital; and
    (b) The total amount of Leverage principal (excluding any interest 
which may become due or accrue at any point following the issuance of 
Leverage) projected to be issued in the business plan that was approved 
by SBA at the time you were licensed.

0
12. Amend Sec.  107.855 by revising paragraph (h)(2) to read as 
follows:


Sec.  107.855  Interest rate ceiling and limitations on fees charged to 
Small Businesses (``Cost of Money'').

* * * * *
    (h) * * *
    (2) Discount the cash flows back to the first disbursement date 
using the Cost of Money ceiling from paragraph (c) of this section as 
the discount rate.
* * * * *

0
13. Amend Sec.  107.1120 by revising paragraph (d) to read as follows:


Sec.  107.1120  General eligibility requirements for Leverage.

* * * * *
    (d) For any Leverage draw that would cause you and any other 
Licensees under Common Control to have aggregate outstanding Leverage 
in excess of the amount permitted under Section 303(b)(2)(A)(ii) of the 
Act,

[[Page 3549]]

which, as of June 21, 2018, is $175,000,000, certify that none of the 
Licensees has a condition of Capital Impairment. See also Sec.  
107.1150(b).
* * * * *

0
14. Amend Sec.  107.1130 by revising paragraph (d)(1) introductory text 
to read as follows:


Sec.  107.1130  Leverage fees and Annual Charge.

* * * * *
    (d) * * *
    (1) Debentures. You must pay to SBA an Annual Charge, not to exceed 
1.38 percent per annum, on the outstanding principal amount of your 
Debentures, payable under the same terms and conditions as the interest 
on the Debentures. For Leverage issued pursuant to Leverage commitments 
approved on or after October 1, 2023, the Annual Charge, established 
and published, shall not be less than 0.10 percent per annum, subject 
to the following provisions:
* * * * *

0
15. Amend Sec.  107.1850 by revising paragraph (a)(6) to read as 
follows:


Sec.  107.1850  Watchlist.

* * * * *
    (a) * * *
    (6) Your leverage coverage ratio (LCR) falls below 1.25, where LCR 
is calculated as ((Total Assets-Liabilities excluding SBA Leverage-
Other Assets) + Unfunded Private Commitments)/Outstanding Leverage, or 
a Capital Impairment Percentage approaching your threshold set forth in 
Sec.  107.1830.
* * * * *

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
16. The authority citation for part 121 continues to read as follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 636(a)(36), 662, and 
694a(9); Pub. L. 116-136, Section 1114.

0
17. Amend Sec.  121.103 by revising paragraph (b)(1) to read as 
follows:


Sec.  121.103  How does SBA determine affiliation?

* * * * *
    (b) * * *
    (1) Business concerns owned in whole or substantial part either by 
investment companies licensed, or by development companies qualifying, 
under the Small Business Investment Act of 1958, as amended, or by 
investment companies to which a Reinvestor SBIC (within the meaning of 
13 CFR 107.720(a)(2)) has provided a meaningful percentage of Equity 
Capital are not considered affiliates of such investment companies or 
development companies.
* * * * *

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-00559 Filed 1-18-24; 8:45 am]
BILLING CODE 8026-09-P


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