[Federal Register Volume 70, Number 167 (Tuesday, August 30, 2005)]
[Rules and Regulations]
[Pages 51243-51250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-17206]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121, 124, 125 and 126

RIN 3245-AF31


HUBZone, Government Contracting, 8(a) Business Development and 
Small Business Size Standard Programs

AGENCY: U.S. Small Business Administration (SBA).

ACTION: Interim rule with request for comments.

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SUMMARY: This interim rule amends SBA's HUBZone, 8(a) Business 
Development, Government Contracting and Size Standard regulations to 
implement provisions of the Small Business Act including the 
Consolidated Appropriations Act, 2005, specifically, Subtitle E of 
Division K entitled the Small Business Reauthorization and 
Manufacturing Assistance Act of 2004. Consistent with the new statutory 
requirements under Subtitle E, this interim rule: Amends the 
definitions of the terms ``business concern,'' ``affiliation,'' 
``HUBZone small business concern'' and ``qualified HUBZone small 
business concern;'' amends the HUBZone eligibility requirements for 
tribally-owned HUBZone concerns; extends qualified HUBZone areas to 
include military base closure areas for a period of five years; revises 
the definition of a ``qualified non-metropolitan county;'' extends the 
redesignation period for HUBZone areas through the release of the 2010 
census data; and provides a five percent HUBZone evaluation price 
preference for agricultural commodities in international food aid 
procurements. Pursuant to the Administrative Procedure Act, SBA has 
determined that there is good cause to issue this rule as an interim 
rule with an immediate effective date. However, SBA encourages and will 
consider all timely public comments in developing the final rule.

DATES: This interim rule is effective August 30, 2005. Comments must be 
received on or before October 31, 2005.

ADDRESSES: You may submit comments, identified by RIN <greek-i>3245-
AF31, by any of the following methods:
    Internet: http://www.regulations.gov. Follow the instructions for 
submitting comments. E-mail: <a href="/cdn-cgi/l/email-protection#90f8e5f2eafffef5d0e3f2f1bef7ffe6"><span class="__cf_email__" data-cfemail="325a4750485d5c57724150531c555d44">[email protected]</span></a>. Fax: (202) 481-5593.
    Mail or Hand Deliver: Michael McHale, Associate Administrator for 
the HUBZone Program, 409 Third Street, SW., Washington, DC, 20416.

FOR FURTHER INFORMATION CONTACT: Sheryl J. Swed, Office of Government 
Contracting, at (202) 205-6413 or by e-mail at: <a href="/cdn-cgi/l/email-protection#295a414c5b5045075a5e4c4d695a4b48074e465f"><span class="__cf_email__" data-cfemail="addec5c8dfd4c183dedac8c9eddecfcc83cac2db">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

A. Statutory Authority

    On December 8, 2004, the President signed into law the Consolidated 
Appropriations Act, 2005, Public Law 108-447 which contained the Small 
Business Reauthorization and Manufacturing Assistance Act of 2004 (the 
Reauthorization Act). Subtitle E of the Reauthorization Act amended 
certain provisions of the Small Business Act, 15 U.S.C. 631 et. seq., 
that govern the HUBZone program and the definition of small 
agricultural cooperative.

1. Section 151 of the Reauthorization Act

    In particular, Section 151 of the Reauthorization Act relaxed the 
statutory requirement that a HUBZone small business concern (SBC) must 
be entirely owned by U.S. citizens. Congress concluded that this 
statutory mandate precluded small business owners from taking advantage 
of available forms of business organizations that limit the personal 
liability of business owners. It also precluded ownership by small 
agricultural cooperatives that operate in rural HUBZones, and thereby 
deprived those communities of the economic benefits of increased 
HUBZone contracting opportunities.
    As a result, Section 151 of the Reauthorization Act amended the 
definition of ``HUBZone SBC'' in section 3(p)(3)(A) of the Small 
Business Act, 15 U.S.C 632(p)(3)(A), to require that SBCs eligible for 
HUBZone certification be 51 percent (instead of 100 percent) owned and 
controlled by U.S. citizens. It also added a new section 3(p)(3)(E) to 
the Small Business Act, 15 U.S.C 632(p)(3)(E), to include as HUBZone 
SBCs small agricultural cooperatives or SBCs wholly or partially-owned 
by small agricultural cooperatives organized and incorporated in the 
United States. Also in connection with agricultural cooperatives, 
Section 151 further amended Section 3(j) of the Small Business Act, 15 
U.S.C. 632(j), to require that small agricultural cooperatives be 
treated as business concerns for purposes of the Small

[[Page 51244]]

Business Act. This section also states that when determining size, SBA 
should not include the income or employees of the underlying members of 
the cooperative. Because SBA's programs and services were created for 
the benefit of the small business community, SBA interprets this 
section to mean that the members of any small agricultural cooperative 
applying for SBA assistance must also qualify as a small business 
concern or small agricultural cooperative in order to qualify for SBA 
assistance. To interpret the statute otherwise would circumvent the 
Agency's mission.
    In addition, Section 151 of the Reauthorization Act expanded the 
employee residency requirement for tribally-owned HUBZone SBCs. 
Previously, the Small Business Act did not mandate that tribally-owned 
concerns maintain a principal office in a qualified HUBZone and hire at 
least 35 percent of their employees from any HUBZone area, as is the 
requirement for other HUBZone SBCs. Instead, section 
3(p)(5)(A)(i)(I)(bb) of the Small Business Act, 15 U.S.C. 
632(p)(5)(A)(i)(I)(bb), required that at least 35 percent of the 
tribally-owned HUBZone SBC's employees performing a HUBZone contract 
must reside within an Indian Reservation governed by one or more of the 
tribal government owners or an adjoining HUBZone. Although that 
requirement was originally intended to encourage economic development 
of tribes, Congress determined that, over time, it had the unintended 
consequence of limiting the kinds of contracts that tribally-owned 
concerns could perform and of inhibiting their potential synergies with 
other business organizations.
    To remedy the disparity this separate employee residency 
requirement created for tribally-owned HUBZone SBCs (as compared to 
other HUBZone SBCs), Section 151 of the Reauthorization Act added as an 
option for tribally-owned concerns the same residency and principal 
office requirement that applies to other HUBZone SBCs. As amended, 
Section 3(p)(5)(A)(i)(I)(aa) of the Small Business Act, 15 U.S.C. 
632(p)(5)(A)(i)(I)(aa), now allows tribally-owned concerns the option 
of either maintaining their principal office in a HUBZone and hiring at 
least 35 percent of their employees from any HUBZone area, or complying 
with the existing separate requirement that 35 percent of their 
employees performing a HUBZone contract reside within an Indian 
Reservation governed by one or more of the tribal government owners or 
adjoining HUBZone.

2. Section 152 of the Reauthorization Act

    In Section 152 of the Reauthorization Act, Congress provided three 
basic amendments to expand the areas that qualify as HUBZones. First, 
Section 152 added new Sections 3(p)(1)(E) and 3(p)(4)(D) to the Small 
Business Act, 15 U.S.C. 632(p)(1)(E), 632(p)(4)(D), to authorize 
military base closure areas that have undergone final closure to be 
treated as qualified HUBZones for a period of five years. Congress 
recognized that many base closure areas are not located in qualified 
HUBZones, and therefore do not benefit from the job creation and 
economic revitalization potential of the HUBZone program.
    Second, Section 152 revised the statutory definition of ``qualified 
non-metropolitan county'' in Section 3(p)(4)(B)(ii)(II) of the Small 
Business Act, 15 U.S.C. 632(p)(4)(B)(ii)(II). Under the previous 
definition, some of the poorest rural communities in states with high 
unemployment did not qualify as a HUBZone based on unemployment because 
the unemployment qualification was based solely on the statewide 
unemployment average. Accordingly, Section 152 revised the definition 
of ``qualified non-metropolitan county'' to allow for a comparison of a 
county's unemployment rate to the lower of the statewide or the 
national average, in determining eligibility.
    Third, Section 152 of the Reauthorization Act expanded qualified 
HUBZones by extending the redesignation period for HUBZone areas 
through the public release of the 2010 census data. The previous 
statutory definition of ``redesignated area'' in Section 3(p)(4)(C) of 
the Small Business Act, 15 U.S.C. 632(p)(4)(C), allowed those areas 
that no longer qualify as HUBZones to remain in the program for a 
period of three years. Congress determined that this three-year 
grandfather period did not provide sufficient time for firms to recoup 
a return on their investment in locating their businesses in qualified 
HUBZone areas, adjusting their ownership structure, and recruiting 
HUBZone residents as employees. To allow firms additional time to reap 
the benefits of their HUBZone investment, Section 152 extended the 
redesignation period until the later of the date on which the Census 
Bureau publicly releases the first results from the 2010 decennial 
census or 3 years after the date on which the area ceased to qualify as 
a HUBZone.

3. Section 153 of the Reauthorization Act

    Finally, in Section 153 of the Reauthorization Act, Congress 
provided a five percent HUBZone evaluation price preference in 
international food aid procurements by the Secretary of Agriculture. 
Congress explained that the previously authorized price evaluation 
preference regime may have made it more difficult for non-HUBZone SBCs 
to compete in food aid tender auctions and, in turn, may have had the 
unintended effect of diminishing the competitive supplier base. Section 
153 therefore amended Section 31(b)(3) of the Small Business Act, 15 
U.S.C. 657a(b)(3), to apply a five percent price evaluation preference 
on the first 20 percent of U.S. Department of Agriculture's 
procurements of commodities used for international food aid export 
operations.
    This interim rule amends Parts 121, 124, 125 and 126 of SBA's 
regulations to adopt the specific statutory changes provided under 
Subtitle E of the Reauthorization Act. In accordance with the express 
statutory language and declared legislative purposes of those changes, 
this interim rule amends the exceptions to SBA's affiliation rules in 
13 CFR 121.103 and the definition of business concern in Sec.  121.105; 
for consistency purposes, amends Sec. Sec.  124.503 and 126.607 to 
incorporate the preference for HUBZone, 8(a) and service disabled 
veterans (SDV) over small business set-asides set forth in SBA's SDV 
regulations, clarifies the definition of ``employee'' for the HUBZone 
program in Sec.  125.6; adds new definitions and amends existing 
definitions in Sec.  126.103; amends the employee residency requirement 
for tribally-owned HUBZone SBCs and adds the requirements for small 
agricultural cooperatives to be considered qualified HUBZone SBCs in 
Sec.  126.200; amends the corporate stock ownership example to reflect 
the change in ownership requirements in Sec.  126.201; amends Sec.  
126.204 to include agricultural cooperatives; clarifies the application 
of requirements for SBCs applying for HUBZone status based on a 
location in a qualified base closure area in Sec.  126.304; amends the 
price evaluation preference for agricultural commodities in Sec.  
126.613 and reorganizes and clarifies Sec.  126.700 to make it 
consistent with SBA's other regulations regarding contractor 
performance requirements.

B. Section-by-Section Analysis

    Statutory changes to the definition of small agricultural 
cooperative require

[[Page 51245]]

SBA to add another exception to its affiliation rule in Sec.  121.103 
and to modify its definition of business concern in Sec.  121.105.
    To make the HUBZone regulations consistent with SBA's recently 
published SDV regulations, SBA is adding paragraph (j) to Sec.  124.503 
and revising Sec.  126.607 to incorporate contracting preferences for 
HUBZone, 8(a) and SDV over small business set-asides. This change will 
ensure consistent guidance throughout 13 CFR Chapter 1.
    To clarify the definition of ``employee'' as it relates to the 
HUBZone program, SBA is adding more explicit language to Sec.  
125.6(e)(6) to indicate that for purposes of the HUBZone program, the 
definition of ``employee'' in Sec.  126.103 controls.
    SBA is adding several new definitions in Sec.  126.103 to implement 
the statutory changes under the Reauthorization Act. To incorporate the 
new statutory requirement for the treatment of military base closure 
areas as qualified HUBZones, SBA is adding a definition for the terms 
``base closure area'' and ``qualified base closure area'' in Sec.  
126.103. With respect to the term ``base closure area,'' the interim 
rule adopts the identical definition of that term provided in the 
amended Section 3(p)(4)(D) of the Small Business Act, 15 U.S.C. 
632(p)(4)(D). Under that definition, a ``base closure area'' means 
lands within the external boundaries of a military installation that 
were closed through a privatization process under specified authority. 
To accommodate the statutory five-year period in which a base closure 
area qualifies as a HUBZone, the interim rule adds the new term 
``qualified base closure area,'' which limits the qualifying period of 
a base closure area to five years from the date of final closure of the 
base or five years from the date of signing of the legislation, 
December 8, 2004. SBA will rely on the Department of Defense, Office of 
Economic Adjustment, as the authority to determine whether a base is 
closed.
    In addition, since the amended Section 3(p)(3)(E) of the Small 
Business Act, 15 U.S.C. 632(p)(3)(E), now authorizes ownership in a 
HUBZone SBC by small agricultural cooperatives organized or 
incorporated in the U.S., this interim rule adds a definition for the 
term ``small agricultural cooperative.'' Amended Sec.  126.103 adopts 
the existing definition of a ``small agricultural cooperative'' 
provided in Section 3(j) of the Small Business Act, 15 U.S.C. 632(j). 
That definition makes clear that in determining size, an agricultural 
cooperative is considered a ``business concern'' and that the income or 
employees of any member of the cooperative is not included in the 
calculation of size. The definition of ``small agricultural 
cooperative'' in Sec.  126.103 further indicates that any entity other 
than an SBC, small cooperative or U.S. citizen may not be a member of a 
small agricultural cooperative.
    SBA is also revising the definition of several existing terms in 
Sec.  126.103. With respect to base closure areas, SBA is amending the 
definition of ``HUBZone'' in Sec.  126.103, to include a ``qualified 
base closure area'' as a designated HUBZone. In implementing the 
statutory changes regarding ownership of HUBZone SBCs by U.S. citizens 
and by small agricultural cooperatives, SBA is amending the definition 
of a ``HUBZone small business concern.'' As expressly provided in the 
amended Section 3(p)(3)(A) of the Small Business Act, 15 U.S.C. 
632(p)(3)(A), SBA is amending the definition of a ``HUBZone SBC'' in 
Sec.  126.103, to include a SBC that is at least 51 percent owned and 
controlled by one or more U.S. citizens. Likewise, as expressly 
provided in the amended Section 3(p)(3)(E) of the Small Business Act, 
15 U.S.C. 632(p)(3)(E), the interim rule amends the definition of 
``HUBZone SBC'' to include SBCs that are small agricultural 
cooperatives organized or incorporated in the United States, wholly 
owned by one or more small agricultural cooperatives or partially owned 
by one or more small agricultural cooperatives organized or 
incorporated in the United States, provided that all other owners are 
small business concerns or U.S. citizens.
    Also in connection with Sec.  126.103, SBA is amending the 
definition of the term ``qualified non-metropolitan county,'' to 
incorporate the new statutory definition of the term in Section 
3(p)(4)(B)(ii)(II) of the Small Business Act, 15 U.S.C. 
632(p)(4)(B)(ii)(II). Consistent with that definition, the interim rule 
revises the definition of a ``qualified non-metropolitan county'' to 
allow a comparison between the statewide unemployment average and the 
national average in determining whether a non-metropolitan county 
qualifies as a HUBZone based on unemployment.
    SBA is also amending the definition of ``redesignated area'' in 
Sec.  126.103, in accordance with the statutory amendments of the term 
in Section 3(p)(4)(C) of the Small Business Act, 15 U.S.C. 
632(p)(4)(C). Under the revised Sec.  126.103, a ``redesignated area'' 
is defined as the later of the date on which the Census Bureau publicly 
releases the first results from the 2010 decennial census or three 
years after the date on which the area ceased to qualify as a HUBZone.
    With respect to the new eligibility requirements for tribally-owned 
concerns under Section 3(p)(5)(A)(i)(I) of the Small Business Act, 15 
U.S.C. 632(p)(5)(A)(i)(I), SBA is amending Sec.  126.200, which 
provides the eligibility requirements for such concerns. As amended, 
Sec.  126.200 now allows tribally-owned concerns located in qualified 
HUBZones the option of either maintaining their principal office in a 
HUBZone and hiring at least 35 percent of their employees from any 
HUBZone area, or of complying with the existing separate requirement 
that 35 percent of their employees performing a HUBZone contract reside 
within an Indian Reservation governed by one or more of the tribal 
government owners or adjoining HUBZone.
    SBA is also adding the requirements for small agricultural 
cooperatives to Sec.  126.200(c) in accordance with Section 
3(p)(5)(A)(i)(I) of the Small Business Act, 15 U.S.C. 
632(p)(5)(A)(i)(I). To be a qualified HUBZone SBC, a small agricultural 
cooperative must meet the ownership requirements of 15 U.S.C. 
632(p)(3)(E), have a principal office located in a HUBZone and employ 
at least 35% of its employees from a HUBZone.
    The examples in Sec. Sec.  126.200(b)(1) and 126.201(a) have also 
been amended to reflect the new requirement that SBCs be at least 51% 
owned and controlled by U.S. citizens.
    Section 126.204, relating to SBA's consideration of affiliates when 
determining qualified HUBZone SBC's, has also been amended to provide 
an exception for agricultural cooperatives in accordance with Section 
3(j) of the Small Business Act, 15 U.S.C. 632(j). The statutory 
definition of agricultural cooperative in the Small Business Act 
provides that when determining the size of a cooperative, SBA may not 
include the income or employees of the cooperative members. 15 U.S.C. 
632(j). This means the cooperative and its members are not considered 
affiliated by virtue of their membership in the cooperative.
    SBA is amending Sec.  126.304 to describe the process for verifying 
the specific areas that are considered ``qualified base closure 
areas.'' The interim rule adds a new Sec.  126.304(d), which explains 
that concerns applying for HUBZone status based on a location within a 
qualified base closure area must use SBA's List of Qualified Base 
Closure Areas to verify that the location is within a qualified base 
closure area.

[[Page 51246]]

The HUBZone map will be modified to reflect these areas. It also 
describes the information concerns may submit to SBA if they believe 
the List fails to identify a particular location as a qualified base 
closure area.
    SBA is making a technical correction to Sec.  126.503 by changing 
the word ``may,'' found in subparagraph (c), to ``will'' in order to be 
consistent with the language of Sec.  126.803(d). Section 126.503(c) 
cross references Sec.  126.803, therefore the language in both sections 
needs to be consistent.
    SBA is amending Sec.  126.613 to incorporate the new statutory 
price evaluation preference for international food aid procurements 
provided under Section 31(b)(3) of the Small Business Act, 15 U.S.C. 
657a(b)(3). The amended Sec.  126.613 provides a 5% price evaluation 
preference on the first 20% of the USDA procurements for commodities 
used for international food aid export operations.
    Finally, SBA is making a technical correction to Sec.  126.700 by 
changing the citation from Sec.  125.6(b) to Sec.  125.6(c) and further 
clarifying the section by reorganizing the paragraphs and adding more 
explicit language in order to be consistent with Sec.  125.6(c) and the 
Small Business Act. As currently drafted, Sec.  126.700 is a source of 
confusion for many SBCs and this confusion may lead to misapplication 
of SBA's regulations resulting in the award of subcontracts to non-
qualified HUBZone concerns. It is also inconsistent with Sec.  125.6 
and Sec.  3(p)(5)(C) of the Small Business Act as it incorrectly 
requires that for construction contracts a qualified HUBZone SBC must 
perform 50% of the cost of the contract and at least 15% (or 25% 
depending on type of contract) of the cost of contract for personnel. 
As currently drafted, the two percentages do not measure the same base, 
that is, one relates to the overall cost of the contract and one to the 
cost of the contract incurred for personnel. This discrepancy was never 
intended and is not consistent with the requirements of the Small 
Business Act. To clarify this inconsistency, this rule changes the 
current performance of work requirement for construction contracts from 
``at least 50% of the contract'' to ``at least 50% of the cost of 
contract incurred for personnel.'' This standard is what is referenced 
throughout the Small Business Act (see Sec. Sec.  3(p)(5)(C), 
8(a)(14)(A) and 15(o)) and in Sec.  125.6 of SBA's regulations, and the 
change to one standard ensures consistency throughout SBA's 
regulations. More explicit language was also added to clarify the 
relationship between the prime and subcontracting performance of work 
requirements by stating that not more than 50% of the cost of contract 
incurred for personnel may be subcontracted to a non-qualified HUBZone 
SBC.
    Although SBA is issuing this rule as an interim rule with an 
immediate effective date, it encourages public comments on these 
regulatory amendments. In developing the final rule, SBA will consider 
all timely comments received.

C. Justification for Publication as an Interim Rule

    In general, SBA publishes a proposed rule for public comment before 
issuing a final rule, in accordance with the Administrative Procedure 
Act and SBA regulations. 5 U.S.C. 553, and 13 CFR 101.108. The 
Administrative Procedure Act provides an exception to this standard 
rulemaking process 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. Under 
such circumstances, an agency may publish an interim rule without 
soliciting prior public comment.
    SBA has determined that there is good cause to issue this rule 
without prior notice and opportunity for public comment because it is 
impracticable, unnecessary, and contrary to the public interest to do 
so under the present circumstances. As discussed above, Congress 
amended several HUBZone provisions in the Small Business Act to expand 
the program's reach over the Nation's economically distressed 
communities and to eliminate unduly restrictive HUBZone requirements 
that impede the achievement of the HUBZone goals. These statutory 
changes became effective on December 8, 2004.
    As a result of these recent legislative amendments, important 
provisions of SBA's existing HUBZone, Government Contracting, 8(a) 
Business Development and Size Standard regulations are now inconsistent 
with governing sections of the Small Business Act. It is both 
unnecessary and impracticable to provide advance notice and public 
participation in implementing the recent statutory changes because SBA 
is simply adopting the identical amendments mandated by the 
Reauthorization Act and ensuring consistency with existing provisions 
of the Small Business Act, and any delay in revising the inconsistent 
provisions in SBA's existing regulations will hamper the proper 
application of important HUBZone requirements. In addition, immediate 
implementation of the statute is in the public interest, since the 
legislative amendments expand the opportunities for HUBZone 
contracting. Specifically, the time it will take to afford prior public 
participation in this rulemaking will deprive newly eligible firms and 
economically depressed communities of the needed economic benefits of 
the HUBZone program, and will frustrate the ability of Federal 
contracting agencies to utilize the expanded program to achieve the 
statutory HUBZone procurement goal.
    Accordingly, SBA has determined that there is good cause to issue 
this rule without prior public participation. SBA does, however, 
encourage the public to comment on the interim rule, especially the 
clarifications to Sec.  126.700 and will consider all timely comments 
in preparing the final rule.

D. Justification for Immediate Effective Date of Interim Rule

    The Administrative Procedure Act requires that ``publication or 
service of a substantive rule shall be made not less than 30 days 
before its effective date, except * * * as otherwise provided by the 
agency for good cause found and published with the rule.'' 5 U.S.C. 
553(d)(3). SBA has determined that there is good cause for an immediate 
effective date of this interim rule, instead of observing the 30-day 
period between publication and effective date. As discussed more fully 
above in the Justification of Publication of Interim Rule, any delay in 
the effective date of this interim rule will unduly perpetuate existing 
inconsistencies between certain provisions of SBA's HUBZone regulations 
and sections of the Small Business Act. It will also hinder the 
accomplishment of the HUBZone goals.

E. Compliance With Executive Orders 12866, 12988, and 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-602)

    OMB determined that this rule constitutes a ``significant 
regulatory action'' under Executive Order 12866. SBA's Regulatory 
Impact Analysis is set forth below.

Regulatory Impact Analysis

1. General Considerations
    a. Is there a need for the regulatory action?
    SBA has determined that this regulatory action is necessary. SBA is 
statutorily authorized to administer the HUBZone program and is 
required to implement all statutory changes to the

[[Page 51247]]

program. The Reauthorization Act amended several provisions of the 
Small Business Act governing the HUBZone program. To implement these 
statutory changes, SBA must amend its existing HUBZone regulations. The 
amendments are also necessary and appropriate to better serve the needs 
of small business concerns (SBCs) and the statutory goals of the 
HUBZone program. There are no practical alternatives to this 
implementation of the statutory changes.
    b. What is the baseline?
    SBA considered several baselines in formulating this interim rule. 
These include the existing HUBZone program regulations and definitions 
that the interim rule revises; the estimated universe of potential 
HUBZone SBCs; the existing statutory requirements; the achievement of 
the three percent HUBZone contracting goal; and the current procurement 
practices of Federal agencies.
    It is difficult to obtain precise quantitative estimates of the 
impact these changes might have on these baseline criteria. However, 
SBA estimates that adoption of this interim rule will increase the 
number of HUBZone SBCs, increase the number of HUBZone procurement 
actions by Federal agencies, and result in better and more efficient 
administration of the program. Ultimately, the program would move 
closer to meeting its statutory objectives of creating jobs and 
infusing capital into distressed communities.
    c. Were there any alternatives?
    There are no alternatives to implementing the statutorily mandated 
provisions detailed in the interim rule. The amendments of the 
Reauthorization Act, require SBA to amend the HUBZone regulations so 
that they will conform to the new statutory provisions. The regulatory 
amendments also facilitate the growth of the program to 
Congressionally-established levels, better serve the program's small 
business participants, and assist in accommodating the procurement 
needs of Federal agencies.
2. Benefit Estimates
    The most significant benefits to implementing the changes included 
in this interim rule are:
    a. Increased benefits to both small businesses and Federal 
agencies.
    SBA believes that the changes in this interim rule will increase 
the base number of small businesses in the HUBZone program and increase 
the program's viability and utilization by Federal agencies. These two 
effects are mutually dependent in that the more firms that are in the 
program, the more Federal agencies will use the program. Furthermore, 
when more Federal agencies use the program, more concerns will want to 
take advantage of the contract assistance available under the program. 
According to available data, there are an estimated 220 counties to be 
added as a result of this new legislation. In addition, over 150 
locations may be designated as HUBZone locations as a result of 
military base closures. As these areas are defined by the Department of 
Defense, they will be posted on the HUBZone Web site and map.
    b. Greater administrative efficiency and program integrity.
    Because the amendments in this interim rule relax some of the 
previous program requirements, the interim rule will likely streamline 
and improve the effective administration of the HUBZone program. It 
will also enhance SBA's ability to administer the program with existing 
resources and better focus the program benefits on the businesses that 
operate in areas of low income or high unemployment.
    c. Greater contracting efficiency for Federal agencies.
    SBA believes that by increasing the level of activity and 
participation in the HUBZone program, it will increase economic savings 
to the Federal government on HUBZone awards. In particular, an increase 
in the number of eligible HUBZone concerns will provide procuring 
agencies with a larger base of HUBZone vendors. This will ultimately 
reduce the cost of HUBZone contracts through increased competition 
among HUBZone SBCs.
3. Cost Estimates
    SBA expects that as a result of this interim rule, there will be 
significant increases in the number of concerns participating in the 
HUBZone program and in the number of HUBZone contract dollars. To the 
extent that this materializes, there may be attendant cost increases to 
the government in terms of the costs of goods and services and slightly 
increased administrative costs. However, existing provisions of the 
Federal Acquisition Regulation concerning the determination of ``fair 
and reasonable'' pricing will mitigate any significant monetary costs 
to the government as a result of this interim rule. SBA does not 
believe these changes will result in significantly higher costs to 
HUBZone SBCs because the amendments do not create additional burdens or 
restrictions on SBCs.
4. Other Considerations, Including Distributional Effects, Equity 
Considerations and Uncertainty
    SBA anticipates that the distribution of contracts among different 
procurement vehicles will change. Non-HUBZone concerns currently 
participating in the Federal marketplace will be affected economically 
as a result of their ineligibility to compete for HUBZone contracts. 
These costs will vary based on the goods and services provided by newly 
eligible HUBZone SBCs. In some industries there may be very little 
impact, while in other industries there may be a substantial impact.
    Large Federal prime contractors may experience some decrease in 
contract opportunities as Federal agencies increase their utilization 
of the HUBZone program. However, these changes are insignificant in 
light of the magnitude of Federal procurement versus HUBZone 
procurement. The Federal government spent $277 billion on goods and 
services in fiscal year 2003. Of this amount, $3.4 billion, or 1.23% of 
total procurements, was awarded to HUBZone firms. This level is 
significantly lower than the $8.3 billion that would have been awarded 
to HUBZone firms if the 3% goal set by Congress for the program had 
been achieved.
5. Conclusion
    Most of the benefits of this interim rule will accrue to HUBZone 
communities. Expanded eligibility for SBCs and designated areas and 
increased HUBZone contacting should result in more Federal contract 
dollars going to distressed communities.
    Overall, SBA believes that increasing the efficiency and access to 
the HUBZone program to both Federal agencies and small businesses will 
result in increased use of the program and a higher probability that 
the HUBZone program will meet its objectives to create jobs and 
increase capital investment in HUBZone communities.
    SBA has determined that this interim rule does not impose 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act, 44 U.S.C., chapter 35.
    This interim rule meets applicable standards set forth in 
Sec. Sec.  3(a) and 3(b)(2) of Executive Order 12988, Civil Justice 
Reform, to minimize litigation, eliminate ambiguity, and reduce burden. 
This action does not have retroactive or preemptive effect.
    This interim rule will not have substantial direct effects on the 
States,

[[Page 51248]]

on the relationship between the Federal government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Therefore, for the purposes of Executive Order 
13132, SBA determines that this rule has no federalism implications 
warranting preparation of a federalism assessment.
    Because this rule has been issued as an interim final, there is no 
requirement for SBA to prepare a Regulatory Flexibility Act analysis.

List of Subjects in 13 CFR Parts 121, 124, 125 and 126

    Administrative practice and procedure, Government procurement, 
Small businesses.


0
For the reasons set forth above, SBA amends 13 CFR parts 121, 124, 125, 
and 126, as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for part 121 is revised to read as follows:

    Authority: 15 U.S.C. 632(a), 632(j), 632(p), 634(b)(6), 636(b), 
637(a), 644(c) and 662(5); Sec. 304, Pub. L. 103-403, 108 Stat. 
4175, 4188; Pub. L. 105-135 sec. 601 et seq., 111 Stat. 2592; Pub. 
L. 106-24, 113 Stat. 39.

0
2. Amend Sec.  121.103 to add a new paragraph (b)(7) to read as 
follows:


Sec.  121.103  How does SBA determine affiliation?

* * * * *
    (b) * * *
    (7) The member shareholders of a small agricultural cooperative, as 
defined in the Agricultural Marketing Act (12 U.S.C. 1141j), are not 
considered affiliated with the cooperative by virtue of their 
membership in the cooperative.
* * * * *

0
3. Revise Sec.  121.105(a) to read as follows:


Sec.  121.105  How does SBA define ``business concern or concern''

    (a)(1) Except for small agricultural cooperatives, a business 
concern eligible for assistance from SBA as a small business is a 
business entity organized for profit, with a place of business located 
in the United States, and which operates primarily within the United 
States or which makes a significant contribution to the U.S. economy 
through payment of taxes or use of American products, materials or 
labor.
    (a)(2) A small agricultural cooperative is an association 
(corporate or otherwise) acting pursuant to the provisions of the 
Agricultural Marketing Act (12 U.S.C.A. 1141j) whose size does not 
exceed the size standard established by SBA for other similar 
agricultural small business concerns. A small agricultural 
cooperative's member shareholders are not considered to be affiliates 
of the cooperative by virtue of their membership in the cooperative. 
However, a business concern or cooperative that does not qualify as 
small under this part may not be a member of a small agricultural 
cooperative.
* * * * *

PART 124--8(a) BUSINESS DEVELOPMENT/SMALL DISADVANTAGED BUSINESS 
STATUS DETERMINATIONS

0
3a. The authority citation for part 124 continues to read as follows:

    Authority: 15 U.S.C. 634(b)(6), 636(j), 637(a), 637(d) and Pub. 
L. 99-661, Pub. L. 100-656, sec. 1207, Pub. L. 101-37, Pub. L. 101-
574, and 42 U.S.C. 9815.


0
4. Amend Sec.  124.503 to add a new paragraph (j) as follows:


Sec.  124.503  How does SBA accept a procurement for award through the 
8(a) BD program?

* * * * *
    (j) The contracting officer should consider setting aside the 
requirement for HUBZone, 8(a) or SDVO SBC participation before 
considering to set aside the requirement as a small business set-aside.

PART 125--GOVERNMENT CONTRACTING PROGRAMS

0
4a. The authority citation for part 125 continues to read as follows:


    Authority: 15 U.S.C. 634(b)(6), 637, 744, and 657f; 31 U.S.C. 
9701, 9702.

0
5. Revise Sec.  125.6(e)(6) to read as follows:


Sec.  125.6  Prime contractor performance requirements (limitations on 
subcontracting).

* * * * *
    (e) * * *
    (6) Personnel. Individuals who are ``employees'' under Sec.  
121.106 of this chapter except for purposes of the HUBZone program, 
where the definition of ``employee'' is found in Sec.  126.103 of this 
chapter.
* * * * *

PART 126--HUBZONE PROGRAM

0
6. The authority citation of part 126 is revised to read as follows:

    Authority: 15 U.S.C. 632(a), 632(j), 632(p) and 657a.


0
7. Amend Sec.  126.103 as follows:
0
A. Add the terms and definitions for ``Base closure area,'' ``Qualified 
base closure area,'' and ``Small agricultural cooperative;'' and
0
B. Revise the definitions of ``HUBZone,'' paragraph (ii) of the 
definition of ``Qualified non-metropolitan county,'' ``Redesignated 
area'' and paragraphs (1), (5), (6), and (7) of the definition for 
``HUBZone small business concern (HUBZone SBC).''
    The added and revised terms read as follows:


Sec.  126.103  What definitions are important in the HUBZone Program?

* * * * *
    Base closure area means lands within the external boundaries of a 
military installation that were closed through a privatization process 
under the authority of:
    (1) The Defense Base Closure and Realignment Act of 1990 (part A of 
title XXIX of division B of Public Law 101-510; 10 U.S.C. 2687 note);
    (2) Title II of the Defense Authorization Amendments and Base 
Closure and Realignment Act (Pub. L. 100-526; 10 U.S.C. 2687 note);
    (3) 10 U.S.C. 2687; or
    (4) Any other provision of law authorizing or directing the 
Secretary of Defense or the Secretary of a military department to 
dispose of real property at the military installation for purposes 
relating to base closures of redevelopment, while retaining the 
authority to enter into a leaseback of all or a portion of the property 
for military use.
* * * * *
    HUBZone means a historically underutilized business zone, which is 
an area located within one or more:
    (1) Qualified census tracts;
    (2) Qualified non-metropolitan counties;
    (3) Lands within the external boundaries of an Indian reservation;
    (4) Qualified base closure area; or
    (5) Redesignated area.
    HUBZone small business concern (HUBZone SBC) means an SBC that is:
    (1) At least 51% owned and controlled by 1 or more persons, each of 
whom is a United States citizen;
* * * * *
    (5) An SBC that is owned in part by one or more Indian Tribal 
Governments or in part by a corporation that is wholly owned by one or 
more Indian Tribal Governments, if all other owners are either United 
States citizens or SBCs;
    (6) An SBC that is wholly owned by a CDC or owned in part by one or 
more CDCs, if all other owners are either United States citizens or 
SBCs; or
    (7) An SBC that is a small agricultural cooperative organized or 
incorporated

[[Page 51249]]

in the United States, wholly owned by one or more small agricultural 
cooperatives organized or incorporated in the United States or owned in 
part by one or more small agricultural cooperatives organized or 
incorporated in the United States, provided that all other owners are 
small business concerns or United States citizens.
* * * * *
    Qualified base closure area means a base closure area for a period 
of 5 years either from December 8, 2004, or from the date of final base 
closure, whichever is later.
* * * * *
    Qualified non-metropolitan county
* * * * *
    (ii) The unemployment rate is not less than 140 percent of the 
average unemployment rate for the United States or for the State in 
which such county is located, whichever is less, based on the most 
recent data available from the Secretary of Labor.
* * * * *
    Redesignated area means any census tract or any non-metropolitan 
county that ceases to be a qualified HUBZone, except that such census 
tracts or non-metropolitan counties may be ``redesignated areas'' only 
until the later of:
    (1) The date on which the Census Bureau publicly releases the first 
results from the 2010 decennial census; or
    (2) Three years after the date on which the census tract or non-
metropolitan county ceased to be so qualified. The date on which the 
census tract or non-metropolitan county ceases to be qualified is the 
date that the official government data, which affects the eligibility 
of the HUBZone, is released to the public.
* * * * *
    Small agricultural cooperative means an association (corporate or 
otherwise), comprised exclusively of other small agricultural 
cooperatives, small business concerns, or U.S. citizens, pursuant to 
the provisions of the Agricultural Marketing Act, 12 U.S.C. 1141j, 
whose size does not exceed the applicable size standard pursuant to 
part 121 of this chapter. In determining such size, an agricultural 
cooperative is treated as a ``business concern'' and its member 
shareholders are not considered affiliated with the cooperative by 
virtue of their membership in the cooperative.
* * * * *

0
8. Amend Sec.  126.200 to revise paragraphs (a)(3) and (b)(1)(i), and 
to add paragraphs (c) and (d) to read as follows:


Sec.  126.200  What requirements must a concern meet to receive SBA 
certification as a qualified HUBZone SBC?

    (a) * * *
    (3) Other Requirements. The concern must either:
    (i) Maintain a principal office located in a HUBZone and ensure 
that at least 35% of its employees reside in a HUBZone as provided in 
paragraph (b)(4) of this section; or
    (ii) Certify that when performing a HUBZone contract, at least 35% 
of its employees engaged in performing that contract will reside within 
any Indian reservation governed by one or more of the Indian Tribal 
Government owners, or reside within any HUBZone adjoining such Indian 
reservation. A HUBZone and Indian reservation are adjoining when the 
two areas are next to and in contact with each other; and
    (iii) The concern will ``attempt to maintain'' (see Sec.  126.103) 
that applicable employment percentage stated above during the 
performance of any HUBZone contract it receives.
    (b) * * *
    (1) * * *
    (i) The concern must be at least 51% unconditionally and directly 
owned and controlled by persons who are United States citizens;
    Example: A concern that is a partnership owned 50% by an individual 
who is a United States citizen and 50% by someone who is not, is not an 
eligible concern because it is not at least 51% owned by United States 
citizens.
* * * * *
    (c) Concerns owned by small agricultural cooperatives. (1) 
Ownership. (i) A small agricultural cooperative organized or 
incorporated in the United States;
    (ii) A small business concern wholly owned by one or more small 
agricultural cooperatives organized or incorporated in the United 
States; or
    (iii) A small business concern owned in part by one or more small 
agricultural cooperatives organized or incorporated in the United 
States, provided that all other owners are small business concerns or 
United States citizens.
    (2) Size. The small agricultural cooperative must meet the size 
standard corresponding to its primary industry classification as 
defined in part 121 of this chapter. However, in determining such size, 
an agricultural cooperative is treated as a ``business concern'' and 
its member shareholders are not considered affiliated with the 
cooperative by virtue of their membership in the cooperative.
    (3) Principal office. The cooperative's principal office must be 
located in a HUBZone.
    (4) Employees. At least 35% of the cooperative's employees must 
reside in a HUBZone. When determining the percentage of employees that 
reside in a HUBZone, if the percentage results in a fraction, round up 
to the nearest whole number.
    (5) Contract Performance. The concern must represent, as provided 
in the application, that it will ``attempt to maintain'' (see Sec.  
126.103) having 35% of its employees reside in a HUBZone during the 
performance of any HUBZone contract it receives.
    (d) Subcontracting. The concern must represent, as provided in the 
application, that it will ensure that it will comply with certain 
contract performance requirements in connection with contracts awarded 
to it as a qualified HUBZone SBC, as set forth in Sec.  126.700.
* * * * *

0
9. Amend Sec.  126.201 by revising the example following paragraph (a) 
to read as follows:


Sec.  126.201  Who does SBA consider to own a HUBZone SBC?

* * * * *
    (a) * * *
    Example: U.S. citizens own all of the stock of a corporation. A 
corporate officer, a non-U.S. citizen, owns no stock in the corporation 
but owns options to purchase stock in the corporation. SBA will 
consider the options exercised and the individual to be an owner. 
Therefore, if that corporate officer has options to purchase 50% or 
more of the corporate stock, pursuant to Sec.  126.200, the corporation 
would not be eligible to be a qualified HUBZone SBC because it is not 
at least 51% owned and controlled by persons who are U.S. citizens.
* * * * *

0
10. Revise Sec.  126.204 to read as follows:


Sec.  126.204  May a qualified HUBZone SBC have affiliates?

    A concern may have affiliates provided that the aggregate size of 
the concern and all of its affiliates is small as defined in part 121 
of this title, except as otherwise provided for small agricultural 
cooperatives in Sec.  126.103.

0
11. Amend Sec.  126.304 to redesignate the current paragraph (c) as 
paragraph (d), and to add a new paragraph (c) to read as follows:


Sec.  126.304  What must a concern submit to SBA?

* * * * *
    (c) Concerns applying for HUBZone status based on a location within 
a qualified base closure area must use

[[Page 51250]]

SBA's List of Qualified Base Closure Areas (located at http://www.sba.gov/hubzone) to verify that the location is within a qualified 
base closure area. If a concern disagrees with the failure of SBA's 
List of Qualified Base Closure Areas to include a particular area as a 
qualified base closure area, then the concern must submit relevant 
documentation from the Department of Defense, Office of Economic 
Adjustment, or the military department responsible for closing that 
installation.
* * * * *

0
12. Revise Sec.  126.306 as follows:


Sec.  126.306  How will SBA process this certification?

    (a) The AA/HUB or designee is authorized to approve or decline 
certifications. * * * The decision of the AA/HUB or designee is the 
final agency decision.

0
13. Revise Sec.  126.503(c) as follows:


Sec.  126.503  What happens if SBA is unable to verify a qualified 
HUBZone SBC's eligibility or determines that the concern is no longer 
eligible for the program?

* * * * *
    (c) Decertifying Pursuant to a Protest. SBA will decertify a 
qualified HUBZone SBC and remove its name from the List without first 
proposing it for decertification if the AA/HUB upholds a protest 
pursuant to Sec.  126.803 and the AA/HUB's decision is not overturned 
pursuant to Sec.  126.805.

0
14. Revise Sec.  126.607(b) and (c) to read as follows:


Sec.  126.607  When must a contracting officer set aside a requirement 
for qualified HUBZone SBCs?

* * * * *
    (b) If the contracting officer determines that Sec.  126.605 does 
not apply, the contracting officer shall set aside the requirement for 
HUBZone, 8(a) or SDVO SBC contracting before setting aside the 
requirement as a small business set-aside.
    (c) If the contracting officer decides to set aside the requirement 
for competition restricted to qualified HUBZone SBCs, the contracting 
officer must:
    (1) Have a reasonable expectation after reviewing SBA's list of 
qualified HUBZone SBCs that at least two responsible qualified HUBZone 
SBCs will submit offers; and
    (2) Determine that award can be made at fair market price.

0
15. Amend Sec.  126.613 to redesignate the current paragraph (c) as 
paragraph (d), and to add a new paragraph (c) to read as follows:


Sec.  126.613  How does a price evaluation preference affect the bid of 
a qualified HUBZone SBC in full and open competition?

* * * * *
    (c) For purchases by the Secretary of Agriculture of agricultural 
commodities for export operations through international food aid 
programs administered by the Farm Service Agency, the price evaluation 
preference shall be 5% on the first portion of a contract to be awarded 
that is not greater than 20% of the total volume being procured for 
each commodity in a single IFB.
* * * * *

0
16. Revise Sec.  126.700 to read as follows:


Sec.  126.700  What are the performance of work requirements for 
HUBZone contracts?

    (a) A prime contractor receiving an award as a qualified HUBZone 
SBC must meet the performance of work requirements set forth in Sec.  
125.6(c) of this chapter.
    (b) In addition to the requirements set forth in Sec.  125.6(c), 
one or more qualified HUBZone SBCs must spend at least 50% of the cost 
of the contract incurred for personnel on its own employees or 
employees of other qualified HUBZone SBCs.
    (1) A qualified HUBZone SBC prime contractor receiving a HUBZone 
contract for general construction may meet this requirement itself by 
expending at least 50% of the cost of the contract incurred for 
personnel on its employees or it may subcontract at least 35% of the 
cost of the contract performance incurred for personnel to one or more 
qualified HUBZone SBCs. A qualified HUBZone SBC prime contractor may 
not, however, subcontract more than 50% of the cost of the contract 
incurred for personnel to non-qualified HUBZone SBCs.
    (2) A qualified HUBZone SBC prime contractor receiving a HUBZone 
contract for specialty construction may meet this requirement itself by 
expending at least 50% of the cost of the contract incurred for 
personnel on its employees or it may subcontract at least 25% of the 
cost of the contract performance incurred for personnel to one or more 
qualified HUBZone SBCs. A qualified HUBZone SBC prime contractor may 
not, however, subcontract more than 50% of the cost of the contract 
incurred for personnel to non-qualified HUBZone SBCs.
    (c) A contracting officer may waive the 50% requirement set forth 
in paragraph (b) of this section for a particular procurement after 
determining that at least two qualified HUBZone SBCs cannot meet the 
requirement. Where a waiver is granted, the qualified HUBZone SBC prime 
contractor must still meet the performance of work requirements set 
forth in Sec.  125.6(c) of this chapter.

    Dated: June 17, 2005.
Hector V. Barreto,
Administrator.
[FR Doc. 05-17206 Filed 8-29-05; 8:45 am]
BILLING CODE 8025-01-P


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