This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

71053

Vol. 65, No. 230

Wednesday, November 29, 2000

SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

Small Business Investment Companies

AGENCY: Small Business Administration.

ACTION: Final rule.

SUMMARY: This final rule modifies the

management-ownership diversity

requirement in SBA’s Small Business

Investment Company (‘‘SBIC’’) Program

to prohibit the ownership of more than

70% of a leveraged SBIC by any single

investor or group of affiliated investors.

An exception to the prohibition permits

an investor that qualifies as a

‘‘traditional investment company’’, as

determined by SBA, to own in excess of

70% of an SBIC. This final rule will

help to ensure that each new leveraged

SBIC has managers that exercise

independence in managing the

operations of the SBIC.

DATES: This rule is effective on

December 29, 2000.

FOR FURTHER INFORMATION CONTACT:

Leonard W. Fagan, at (202) 205–7583.

SUPPLEMENTARY INFORMATION: On August

14, 2000, SBA published a proposed

rule (65 FR 49511) to revise the

management-ownership diversity

regulation in SBA’s Small Business

Investment Company (‘‘SBIC’’) Program.

Under the proposal, no single investor

or group of affiliated investors would be

permitted to own or control more than

70% of a leveraged SBIC. SBA also

proposed an exception to allow an

entity qualifying as a ‘‘traditional

investment company’’ to own and

control more than 70% of an SBIC. SBA

solicited comments on the proposed

rule and specifically sought comment as

to whether the proposed exception

should be expanded to cover other

categories of investors.

SBA received no comments on the

proposed rule and, accordingly, is

finalizing it without substantive change.

SBA has made certain minor nonsubstantive edits to the proposed

version of section 107.150

(‘‘Management-ownership diversity

requirement’’), including relettering of

the paragraphs, in order to conform to

drafting requirements of the Federal

Register.

The proposed rule summarized the

changes in the management-ownership

diversity regulation since its adoption in

1994. That summary and SBA’s

explanation of the proposed changes to

the regulation, all of which have been

implemented in this final rule, are

repeated here as a convenience to the

reader.

In 1994, SBA adopted a regulation

requiring that all small business

investment companies (‘‘SBICs’’)

intending to issue participating

securities have independence, or

‘‘diversity’’, between the management

and the ownership of the company. 59

Fed. Reg. 16918 (April 8, 1994). This

requirement of independence was

designed to prevent the types of abuses

that SBA had observed in SBICs owned

and operated by a single individual or

group of individuals. The abuses, which

included conflict of interest

transactions, misapplication of funds,

and other types of self-dealing activities,

had resulted in significant losses to

SBA.

To satisfy the 1994 managementownership diversity regulation, at least

30% of the capital of the SBIC had to

be owned by investors who were neither

Associates nor Affiliates of any

Associates of the SBIC (as such terms

were defined in 13 CFR Parts 107 and

121). In other words, at least 30% of the

capital of the SBIC had to be owned by

investors who were not part of the

SBIC’s management team and did not

control the SBIC’s management team. In

general, three such ‘‘diversity investors’’

were required, but a single diversity

investor would suffice if the investor

was an entity that met certain net worth

and regulatory oversight requirements.

The 1994 regulation permitted an

SBIC with a parent company (i.e., an

investor owning greater than 50% of the

SBIC) to treat the parent company’s

investors as if they were direct investors

in the SBIC for purposes of

demonstrating diversity. SBA would, in

effect, ‘‘look-through’’ to the investors in

the parent company for the desired

independence from, and oversight of,

the management of the SBIC.

In 1996, SBA extended the

management-ownership diversity

requirement to all new SBICs intending

to use SBA financial assistance, or

‘‘leverage’’, whether the leverage was in

the form of participating securities or

debentures. 61 FR 3177 (January 31,

1996). SBA also replaced the automatic

look-through provision described above

with a discretionary look-through: SBA,

in the exercise of its discretion, could

look through to the parent’s investors,

but such treatment was no longer

automatic. This change was in response

to the increasing complexity SBA was

encountering in ‘‘drop-down’’ SBICs

(SBIC subsidiaries of larger companies),

where the combination of multi-tiered

organizational structures and other

factors had led SBA to conclude that the

necessary oversight by independent

owners might not be present. SBA could

still look through to the parent

company’s investors to find diversity,

but would do so only if SBA believed

that the result was consistent with the

intent of the diversity regulation.

Later in 1996, Congress expressed its

support for management-ownership

diversity by enacting a statutory

provision requiring SBA to ensure that

the management of all new SBICs ‘‘is

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.’’ 15 U.S.C. 682(c); Public Law

104–208, section 208(c)(3) (September

30, 1996). SBA subsequently made

minor changes to strengthen the

management-ownership diversity

regulation. These changes included

requiring (1) that the diversity investors

be unrelated to each other, (2) that each

diversity investor have a significant

ownership interest in dollar and

percentage terms, and (3) that an SBIC’s

diversity be evidenced in its paid-in

capital, not just its unfunded

commitments. 63 FR 5859 (February 5,

1998).

As SBA stated in the proposed rule

published on August 14, 2000, SBA

believes that, overall, the managementownership diversity regulation has been

successful in encouraging the presence

of investors who are truly independent

of management. However, SBA has had

71054 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Rules and Regulations

concerns as to whether independence

was assured when a single investor,

unrelated to the management team,

owned substantially all of an SBIC.

To provide diversity under the

regulation as in effect since 1994, the

non-management interest was required

to be at least 30% of the SBIC, but could

have been as much as 100% and could

have been owned by a single entity.

This single super-majority investor

could provide the required diversity

from management as long as the

investor did not control, was not

controlled by, and was not under

common control with, the managers of

the SBIC. Thus, for diversity to be

provided by a single super-majority

investor who was otherwise unrelated to

the SBIC’s management team, SBA had

to conclude that the investor did not

control the SBIC’s managers by virtue of

the size of the investor’s ownership

interest in the SBIC.

As SBA explained in the proposed

rule, SBA believes that the degree of

influence that can be exerted by a supermajority investor may significantly

reduce the management team’s ability to

act independently and objectively. The

larger the size of an investor’s

ownership interest, the greater the

investor’s potential influence over the

activities of the SBIC. This is true even

if the investor is a passive limited

partner.

At some ownership level, an

investor’s power to influence effectively

becomes the power to control the

managers of the SBIC, and the

management team can no longer be said

to have the ability to act independently.

SBA’s experience in administering the

management-ownership diversity

regulation persuaded it that it is

difficult to objectively establish when

that ownership level is reached.

However, if the super-majority investor

is limited to owning not more than 70%,

and there is a 30% diversity investor

that is independent of both the

management and the super-majority

investor, the super-majority investor’s

degree of potential influence on

management becomes acceptable.

Accordingly, SBA proposed to amend

the management-ownership diversity

regulation, section 107.150, to prohibit

ownership of more than 70% of a

leveraged SBIC by a single investor or

group of affiliated investors.

SBA recognized that there might be

categories of investors who could be

permitted to own in excess of 70% of an

SBIC without destroying the SBIC’s

management-ownership diversity. SBA

proposed an exception for one such

category—the traditional investment

company—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.

A subsidiary SBIC of such a

traditional investment company can

offer meaningful managementownership diversity even if the

investment company owns substantially

all of the SBIC. This is true for a number

of reasons. First, a traditional

investment company has managers who

are largely unrelated to and unaffiliated

with the investors in the firm. These

independent managers typically also

serve as the managers of the subsidiary

SBIC. Second, the managers of a

traditional investment company and its

subsidiary SBIC are properly authorized

and motivated to make investments that,

in their independent judgment, are

likely to produce significant returns to

all investors in the investment company

and in the SBIC. Although the managers

act independently of the investors in the

firm, they are directly accountable to

them. Most importantly, a traditional

investment company benefits from the

use of a subsidiary SBIC only if the SBIC

makes profitable investments.

As SBA discussed in the proposed

rule, SBICs with other types of supermajority investors do not necessarily

present the same degree of management

independence and objectivity, plus

investor oversight. The objectives of

other super-majority investors may

include something other than profit

maximization at the SBIC level. Large

operating companies, for example, may

profit from the use of a subsidiary SBIC

other than through the financial

performance of the SBIC. The SBIC

might make strategic investments to

support or otherwise benefit the noninvesting activities of the operating

company, rather than investments

intended solely to contribute to the

profitability of the SBIC. This would

defeat one of the underlying purposes of

management-ownership diversity—the

protection of SBA’s financial interest in

the SBIC.

Under the final rule, a traditional

investment company is permitted to

own and control more than 70% of an

SBIC.

In addition, the final rule adopts

without change the proposed revisions

to the 30% test (new paragraph (c) of

section 107.150) in the managementownership diversity regulation. Under

those revisions, (1) publicly-traded

licensees can no longer automatically

satisfy the 30% test, (2) two new

categories are added to the list of

entities permitted to serve as the sole

(30%) diversity investor in an SBIC, and

(3) the scope of one of the other

categories of entities on that list is

clarified.

The first of those revisions is

accomplished by deleting paragraph

(a)(2) of the old diversity regulation. The

second revision, the addition of two

new categories of entities permitted to

serve as the sole diversity investor,

appears in new paragraphs (c)(1)(ii) and

(iii) of section 107.150. The new

categories are Institutional Investors that

(1) are listed on the New York Stock

Exchange or (2) are publicly-traded and

meet the minimum numerical and

corporate governance listing standards

of that Exchange. Companies satisfying

either of these listing standards have

sufficient size and public oversight and

visibility to justify treating them the

same as regulated companies for

purposes of the diversity regulation.

SBA expects this change to resolve any

uncertainty as to the requirements for a

publicly-traded company to be

considered acceptable to SBA as a single

diversity investor under the regulation.

The third revision referred to above

appears in new paragraph (c)(1)(i) of

section 107.150. It makes clear that an

entity seeking to qualify as the sole

diversity investor because it is subject to

government oversight or regulation must

have its overall activities both regulated

and periodically examined by a

governmental authority satisfactory to

SBA. U.S. federal and state bank

regulators or insurance commissions are

examples of satisfactory governmental

authorities for this purpose. Regulation

of an entity’s health and safety activities

by the Office of Safety and Health

Administration (OSHA), on the other

hand, would not be acceptable for this

purpose.

An existing SBIC that is not currently

required to have diversity will become

subject to the new managementownership diversity regulation only if

(1) the SBIC applies for approval of a

change of control and SBA requires

diversity as a condition of its approval,

or (2) the SBIC was not licensed with

the expectation that it would issue

leverage but it now seeks approval to do

so.

As was proposed, SBA also is

amending section 107.440(c) to clarify

that SBA’s approval of a change of

control of an SBIC may be conditioned

upon the licensee’s compliance with the

diversity regulation, as well as

minimum capital requirements, then in

effect. This has been SBA’s practice

since the diversity regulation was first

adopted.

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Rules and Regulations 71055

Compliance With Executive Orders

12866, 12988, and 13132, the

Regulatory Flexibility Act (5 U.S.C.

601–612), and the Paperwork

Reduction Act (44 U.S.C. Ch. 35).

This final rule is not a significant

regulatory action for purposes of

Executive Order 12866 and therefore

was not reviewed by the Office of

Management and Budget.

SBA has determined that this final

rule will not have a significant

economic impact on a substantial

number of small entities within the

meaning of the Regulatory Flexibility

Act, 5 U.S.C. 601–612. The purpose of

the final rule is to redefine and clarify

the concept of management-ownership

diversity in an SBIC. The final rule will

not apply to the approximately 365

companies currently licensed as SBICs,

except in the insignificant number of

cases where a transfer of control of the

licensee occurs or where an SBIC that

was not licensed with the expectation

that it would issue leverage applies for

such approval.

For purposes of Executive Order

12988, SBA has determined that this

final rule is drafted, to the extent

practicable, in accordance with the

standards set forth in Section 3 of that

Order.

For purposes of Executive Order

13132, SBA has determined that this

final rule will have no federalism

implications.

For purposes of the Paperwork

Reduction Act, 44 U.S.C. Ch. 35, SBA

has determined that this final rule

contains no new reporting or

recordkeeping requirements.

List of Subjects in 13 CFR Part 107

Investment companies, Loan

programs—business, Reporting and

recordkeeping requirements, Small

businesses.

For the reasons stated above, the SBA

amends 13 CFR part 107 as follows:

PART 107—SMALL BUSINESS

INVESTMENT COMPANIES

1. The authority citation for part 107

continues to read as follows:

Authority: 15 U.S.C. 681 et seq., 683,

687(c), 6887b, 687d, 687g and 687m.

2. Revise § 107.150 to read as follows:

§ 107.150 Management-ownership

diversity requirement.

(a) Diversity requirement. You must

satisfy the requirements in paragraphs

(b), (c) and (d) of this section:

(1) In order to obtain an SBIC license

(unless you do not plan to obtain

Leverage),

(2) If at the time you were licensed

you did not plan to obtain Leverage, but

you now wish to be eligible for

Leverage, or

(3) If SBA so requires as a condition

of approval of your transfer of Control

under § 107.440.

(b) Percentage ownership

requirement. (1) Except as provided in

paragraph (b)(2) of this section, no

Person or group of Persons who are

Affiliates of one another may own or

control, directly or indirectly, more than

70 percent of your Regulatory Capital or

your Leverageable Capital.

(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 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:

(i) Whether the managers of the firm

are unrelated to and unaffiliated with

the investors in the firm;

(ii) Whether the managers of the firm

are authorized and motivated to make

investments that, in their independent

judgment, are likely to produce

significant returns to all investors in the

firm;

(iii) Whether the firm benefits from

the use of the SBIC only through the

financial performance of the SBIC; and

(iv) Other related factors.

(c) Non-affiliation requirement. (1)

General rule. At least 30 percent of your

Regulatory Capital and Leverageable

Capital must be owned and controlled

by three Persons unaffiliated with your

management and unaffiliated with each

other, and whose investments are

significant in dollar and percentage

terms as determined by SBA. Such

Persons must not be your Associates

(except for their status as your

shareholders, limited partners, or

members) and must not Control, be

Controlled by, or be under Common

Control with any of your Associates. A

single ‘‘acceptable’’ Institutional

Investor may be substituted for two or

three of the three Persons who are

otherwise required under this

paragraph. The following Institutional

Investors are ‘‘acceptable’’ for this

purpose:

(i) Entities whose overall activities are

regulated and periodically examined by

state, Federal or other governmental

authorities satisfactory to SBA;

(ii) Entities listed on the New York

Stock Exchange;

(iii) Entities that are publicly-traded

and that meet both the minimum

numerical listing standards and the

corporate governance listing standards

of the New York Stock Exchange;

(iv) Public or private employee

pension funds;

(v) Trusts, foundations, or

endowments, but only if exempt from

Federal income taxation; and

(vi) Other Institutional Investors

satisfactory to SBA.

(2) Look-through for traditional

investment company investors. SBA, in

its sole discretion, may consider the

requirement in paragraph (c)(1) of this

section to be satisfied if at least 30

percent of your Regulatory Capital and

Leverageable Capital is owned and

controlled indirectly, through a

traditional investment company, by

Persons unaffiliated with your

management.

(d) Voting requirement. (1) Except as

provided in paragraph (d)(2) of this

section, the investors required for you to

satisfy diversity may not delegate their

voting rights to any Person who is your

Associate, or who Controls, is

Controlled by, or is under Common

Control with any of your Associates,

without prior SBA approval.

(2) Exception. Paragraph (d)(1) of this

section does not apply to investors in

publicly-traded Licensees, to proxies

given to vote in accordance with

specific instructions for single specified

meetings, or to any delegation of voting

rights to a Person who is neither a

diversity investor in the Licensee nor

affiliated with management of the

Licensee.

(e) Requirement to maintain diversity.

If you were required to have

management-ownership diversity at any

time, you must maintain such diversity

while you have outstanding Leverage or

Earmarked Assets. To maintain

management-ownership diversity, you

may continue to satisfy the diversity

requirement as in effect at the time it

was first applicable to you or you may

satisfy the management-ownership

diversity requirement as currently in

effect. If, at any time, you no longer

have the required managementownership diversity, you must:

(1) Notify SBA within 10 days; and

(2) Re-establish diversity within six

months. For the consequences of failure

to re-establish diversity, see

§§ 107.1810(g) and 107.1820(f).

3. In § 107.440, revise paragraph (c) to

read as follows:

71056 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Rules and Regulations

§ 107.440 Standards governing prior SBA

approval for a proposed transfer of Control.

* * * * *

(c) Require compliance with any other

conditions set by SBA, including

compliance with the requirements for

minimum capital and managementownership diversity as in effect at such

time for new license applicants.

Dated: November 16, 2000.

Aida Alvarez,

Administrator.

[FR Doc. 00–30415 Filed 11–28–00; 8:45 am]

BILLING CODE 8025–01–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 179

[Docket No. 99F–1912]

Irradiation in the Production,

Processing, and Handling of Food

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule.

SUMMARY: The Food and Drug

Administration (FDA) is amending the

food additive regulations to provide for

the safe use of ultraviolet (UV)

irradiation to reduce human pathogens

and other microorganisms in juice

products. This action is in response to

a food additive petition filed by

California Day-Fresh Foods, Inc.

DATES: This rule is effective November

29, 2000. Submit written objections and

requests for a hearing by December 29,

2000.

ADDRESSES: Submit written objections to

the Dockets Management Branch (HFA–

305), Food and Drug Administration,

5630 Fishers Lane, rm. 1061, Rockville,

MD 20852.

FOR FURTHER INFORMATION CONTACT:

William J. Trotter, Center for Food

Safety and Applied Nutrition (HFS–

206), Food and Drug Administration,

200 C St. SW., Washington, DC 20204,

202–418–3088.

SUPPLEMENTARY INFORMATION:

I. Background

In a notice published in the Federal

Register of June 25, 1999 (64 FR 34258),

FDA announced that a food additive

petition (FAP 9M4676) had been filed

by California Day-Fresh Foods, Inc., 533

West Foothill Blvd., Glendora, CA

91741. The petitioner proposed that the

food additive regulations in part 179

Irradiation in the Production, Processing

and Handling of Food (21 CFR part 179)

be amended to provide for the safe use

of UV light to reduce human pathogens

and other microorganisms in juice

products.

II. Safety Evaluation

Under section 201(s) of the Federal

Food, Drug, and Cosmetic Act (the act)

(21 U.S.C. 321(s)), a source of radiation

used to treat food is defined as a food

additive. The additive is not, literally,

added to food. Instead, a source of

radiation is used to process or treat food

such that, analogous to other food

processes, its use can affect the

characteristics of the food. In the subject

petition, the intended technical effect is

a change in the microbial load of the

food, specifically, a reduction of human

pathogens and other microorganisms in

juice products.

A. Toxicology

FDA has evaluated the safety of the

use of UV irradiation to reduce human

pathogens and other microorganisms in

juices. This safety assessment was based

on the current understanding of the

effects of UV irradiation on the major

chemical components of food. Having

evaluated the data in the petition and

other relevant material in the agency’s

files, the agency finds that any

photochemical changes that may occur

as a result of the UV irradiation are of

no toxicological significance (Ref. 1).

B. Microbiology

The petitioner submitted data

demonstrating the reduction of specific

pathogens (Escherichia coli O157:H7,

Listeria monocytogenes, and

Salmonella) inoculated into four types

of juices (orange, apple, carrot, and

garden vegetable). These four juice

varieties are representative of the types

of juice that are consumed by the U.S.

population and that could be treated

with UV irradiation (Ref. 2). After UV

irradiation, there were significant

reductions in pathogens. FDA concludes

that the proposed use is effective in

reducing human pathogens in juices and

that treated juices will be at least as safe

as untreated juices currently on the

market (Ref. 3). However, the submitted

microbiological data do not constitute

the type of validation studies necessary

to demonstrate the achievement of

specific performance standards, e.g. 5-

log reductions, for human pathogen

control programs (Ref. 3). Therefore,

users of this UV treatment who are

subject to certain performance standards

will need to establish that this treatment

meets their required level of human

pathogen reduction.

C. Specifications for Use

The petitioned UV radiation is

produced by low pressure mercury

lamps, which emit more than 90 percent

of their light at 253.7 nanometers (nm)

(2,537 Angstroms); juice being treated

passes through a transparent tube in

which the juice is subjected to UV

irradiation. Because most juices strongly

absorb UV radiation, most of the UV

radiation would be absorbed by the

juice at the wall of the tube near the

source of the UV irradiation. However,

the amount of UV irradiation that would

reach juice in the middle of the tube

would be insufficient to reduce

significantly human pathogens.

Therefore, the petitioner proposed that

the juices flow under turbulent

conditions that produce eddies and

swirls in the juice to ensure that as

much juice as possible will reach the

wall of the UV transparent tube where

the juice would be exposed to UV

irradiation. This would help to reduce

human pathogens and other

microorganisms throughout the juice.

The conditions for turbulent flow are

described mathematically by the

unitless Reynolds number (Re):

ER29NO00.001

where:

D is the tube diameter,

u is fluid velocity,

p is fluid density, and

μ is fluid viscosity.

To ensure that sufficient turbulent flow

is achieved, the petitioner has requested

that a limit of a Reynolds number of no

less than 2,200 be incorporated into the

regulation. FDA concurs with this

specification (Ref. 4).

The amount of UV irradiation

necessary for human pathogen

reduction will depend on various

factors, such as the type of juice, the

initial microbial load, and the design of

the irradiation system (e.g., flow rate,

number of lamps, and time exposed to

irradiation). Therefore, FDA is not

specifying a minimum or maximum

dose by regulation, but concludes that

this should be achieved for individual

usage situations in a manner consistent

with good manufacturing practice (Ref.

5). FDA expects that the maximum dose

applied to the juice will be

economically self-limiting due to the

costs associated with UV irradiation.

Additionally, the levels of UV

irradiation applied to the juice will be

limited by the possible alterations in

organoleptic characteristics of the juice

(i.e., changes in taste or color) after UV

irradiation, changes that may result in

decreased consumer acceptance. Thus,