5666 Federal Register / Vol. 81, No. 22 / Wednesday, February 3, 2016 / Proposed Rules 

12For the most recent discussion in this format, 

see box titled ‘‘Developments Related to Financial 

Stability’’ in Board of Governors of the Federal 

Reserve System, Monetary Policy Report to 

Congress, July 2015, pp. 24–25. 

13BIS, Countercyclical capital buffer (CCyB), 

www.bis.org/bcbs/ccyb/index.htm. 

economic developments suggest the absence 

of notable risks to financial stability. Indeed, 

for it to be most effective, the CCyB should 

be deactivated or reduced in a timely 

manner. This would reduce the likelihood 

that advanced approaches institutions would 

significantly pare their risk-weighted assets 

in order to maintain their capital ratios 

during a downturn. 

The pace and magnitude of changes in the 

CCyB will depend importantly on the 

underlying conditions in the financial sector 

and the economy as well as the desired 

effects of the proposed change in the CCyB. 

If vulnerabilities are rising gradually, then 

incremental increases in the level of the 

CCyB may be appropriate. Incremental 

increases would allow banks to augment 

their capital primarily through retained 

earnings and allow policymakers additional 

time to assess the effects of the policy change 

before making subsequent adjustments. 

However, if vulnerabilities in the financial 

system are building rapidly, then larger or 

more frequent adjustments may be necessary 

to increase loss-absorbing capacity sooner 

and potentially to mitigate the rise in 

vulnerabilities. 

The Board will also consider whether the 

CCyB is the most appropriate of its available 

policy instruments to address the financialsystem vulnerabilities highlighted by the 

framework’s judgmental assessments and 

empirical models. The CCyB primarily is 

intended to address cyclical vulnerabilities, 

rather than structural vulnerabilities that do 

not vary significantly over time. Structural 

vulnerabilities are better addressed though 

targeted reforms or permanent increases in 

financial system resilience. Two key factors 

for the Board to consider are whether 

advanced approaches institutions are 

exposed—either directly or indirectly—to the 

vulnerabilities identified in the 

comprehensive judgmental assessment or by 

the quantitative indicators that suggest 

activation of the CCyB and whether advanced 

approaches institutions are contributing— 

either directly or indirectly—to these 

highlighted vulnerabilities. 

The Board, in setting the CCyB for 

advanced approaches institutions that it 

supervises, plans to consult with the OCC 

and FDIC on their analyses of financialsystem vulnerabilities and on the extent to 

which banking organizations are either 

exposed to or contributing to these 

vulnerabilities. 

5. Communication of the U.S. CCyB With the 

Public 

The Board expects to consider at least once 

per year the applicable level of the U.S. 

CCyB. The Board will review financial 

conditions regularly throughout the year and 

may adjust the CCyB more frequently as a 

result of those monitoring activities. 

Further, the Board will continue to 

communicate with the public in other 

formats regarding its assessment of U.S. 

financial stability, including financial-system 

vulnerabilities. For example, the Board’s 

biannual Monetary Policy Report to 

Congress, usually published in February and 

July, will continue to contain a section that 

reports on developments pertaining to the 

stability of the U.S. financial system.12 That 

portion of the report will be an important 

vehicle for updating the public on how the 

Board’s current assessment of financialsystem vulnerabilities bears on the setting of 

the CCyB. 

6. Monitoring of the Effects of the U.S. CCyB 

The effects of the U.S. CCyB ultimately 

will depend on the level at which it is set, 

the size and nature of any adjustments in the 

level, and the timeliness with which it is 

increased or decreased. The extent to which 

the CCyB may affect vulnerabilities in the 

broader financial system depends upon a 

complex set of interactions between required 

capital levels at the largest banking 

organizations and the economy and financial 

markets. In addition to the direct effects, the 

secondary economic effects could be 

amplified if financial markets extract a signal 

from the announcement of a change in the 

CCyB about subsequent actions that might be 

taken by the Board. Moreover, financial 

market participants might react by updating 

their expectations about future asset prices in 

specific markets or broader economic activity 

based on the concerns expressed by the 

regulators in communications announcing a 

policy change. 

The Board will monitor and analyze 

adjustments by banking organizations and 

other financial institutions to the CCyB. 

Factors that will be considered include (but 

are not limited to) the types of adjustments 

that affected banking organizations might 

undertake. For example, it will be useful to 

monitor whether a change in the CCyB leads 

to observed changes in risk-based capital 

ratios at advanced approaches institutions, as 

well as whether those adjustments are 

achieved passively through retained 

earnings, or actively through changes in 

capital distributions or in risk-weighted 

assets. Other factors to be monitored include 

the extent to which loan growth and spreads 

on loans issued by affected banking 

organizations change relative to loan growth 

and loan spreads at banking organizations 

that are not subject to the buffer. Another key 

consideration in setting the CCyB and other 

macroprudential tools is the extent to which 

the adjustments by advanced approaches 

institutions to higher capital buffers lead to 

migration of credit market activity outside of 

those banking organizations, especially to the 

nonbank financial sector. Depending on the 

amount of migration and which institutions 

are affected, those adjustments could cause 

the Board to favor either a higher or a lower 

value of the CCyB. 

The Board will also monitor information 

regarding the levels of and changes in the 

CCyB in other countries. The Basel 

Committee on Banking Supervision is 

expected to maintain this information for 

member countries in a publically available 

form on its Web site.13 Using that data in 

conjunction with supervisory and publicly 

available datasets, Board staff will be able to 

draw not only upon the experience of the 

United States but also that of other countries 

to refine estimates of the effects of changes 

in the CCyB. 

By order of the Board of Governors of the 

Federal Reserve System, December 21, 2015. 

Robert deV. Frierson, 

Secretary of the Board. 

[FR Doc. 2016–01934 Filed 2–2–16; 8:45 am] 

BILLING CODE P 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 107 

RIN 3245–AG66 

Small Business Investment Company 

Program—Impact SBICs 

AGENCY: U.S. Small Business 

Administration. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: In this proposed rule, the U.S. 

Small Business Administration (SBA) is 

defining a new class of small business 

investment companies (SBICs) that will 

seek to generate positive and 

measurable social impact in addition to 

financial return. With the creation of 

this class of ‘‘Impact SBICs,’’ SBA is 

seeking to expand the pool of 

investment capital available primarily to 

underserved communities and 

innovative sectors as well as support the 

development of America’s growing 

impact investing industry. This 

proposed rule sets forth regulations 

applicable to Impact SBICs with respect 

to licensing, leverage eligibility, fees, 

reporting and compliance requirements. 

DATES: Comments on the proposed rule 

must be received on or before March 4, 

2016. 

ADDRESSES: You may submit comments, 

identified by RIN 3245–AG66, by any of 

the following methods: 

Federal eRulemaking Portal: http://

www.regulations.gov. Follow the 

instructions for submitting comments. 

Mail, Hand Delivery/Courier: Mark 

Walsh, Associate Administrator for the 

Office of Investment and Innovation, 

U.S. Small Business Administration, 

409 Third Street SW., Washington, DC 

20416. 

SBA will post comments on http://

www.regulations.gov. If you wish to 

submit confidential business 

information (CBI) as defined in the User 

Notice at http://www.regulations.gov, 

please submit the information to Nate T. 

Yohannes, Office of Investment and 

Innovation, 409 Third Street SW., 

Washington, DC 20416. Highlight the 

information that you consider to be CBI 

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Federal Register / Vol. 81, No. 22 / Wednesday, February 3, 2016 / Proposed Rules 5667 

and explain why you believe this 

information should be held confidential. 

SBA will review the information and 

make the final determination of whether 

or not it will publish the information. 

FOR FURTHER INFORMATION CONTACT: Nate 

T. Yohannes, Office of Investment and 

Innovation, (202) 205–6714. 

SUPPLEMENTARY INFORMATION: 

I. Background Information 

‘‘Impact investing’’ is a term used to 

describe an investment approach that 

combines the pursuit of financial return 

with the goal of generating measurable 

social, environmental or economic 

impact. The term ‘‘social impact 

investing’’ is often used synonymously 

with the term impact investing, and 

refers, collectively, to all types of impact 

investing, including social, 

environmental and economic. Impact 

investors are active throughout the 

capital markets, and though their 

strategies may vary, according to the 

Global Impact Investing Network, a nonprofit organization dedicated to 

increasing the scale and effectiveness of 

impact investing, impact investors share 

three defining traits. First, impact 

investors invest with the explicit 

intention of generating a positive social 

impact. This is in contrast to other types 

of investors who attempt to avoid 

generating negative social impacts or 

who are entirely indifferent to the social 

outcomes resulting from their 

investments. Second, though their 

return requirements vary, impact 

investors are not grant providers and 

always expect a return on their invested 

capital. Finally, impact investors share 

a commitment to measure the effect of 

their investments on the employees, 

customers and communities of the 

companies in which they invest. See, 

The Global Impact Investing Network, 

About Impact Investing, http://www.

thegiin.org/cgi-bin/iowa/resources/

about/index.html. 

Impact investing currently constitutes 

a small segment of global investment 

activity. Each year, J.P. Morgan and the 

Global Impact Investing Network 

(‘‘GIIN’’) publish an annual survey of 

leading impact investors. In their May 

2015 findings, available at http://www.

thegiin.org/cgi-bin/iowa/resources/

research/662.html, 146 survey 

respondents reported managing a 

collective total of $60 billion in impact 

investments. Compared with the $64 

trillion in global assets under 

management, a figure drawn from 

PricewaterhouseCoopers’ (‘‘PwC’’) 2014 

report Asset Management 2020: A Brave 

New World, available at http://www.

pwc.com/gx/en/asset-management/

publications/asset-management-2020-abrave-new-world.jhtml, impact 

investments comprise a small fraction of 

invested capital worldwide. 

However, the size of the impact 

industry belies both its growth potential 

and that of the broader sustainable 

finance sector. This is a sector focused 

on ‘‘creating economic and social value 

through financial models, products and 

markets that are sustainable over time.’’ 

See, Center for Responsible Business, 

Haas School of Business, University of 

California Berkeley, Sustainable 

Finance, http://responsiblebusiness.

haas.berkeley.edu/programs/sustainable

finance.html. The Forum for Sustainable 

and Responsible Investment estimates 

that U.S.-domiciled assets managed 

using sustainable, responsible or impact 

investing strategies increased by a 

compound annual rate of 33% between 

2012 and 2014. If that trend continues, 

sustainable finance will continue to 

outpace overall market growth. 

According to the 2014 PwC report, 

global AUM will grow at a compound 

annual growth rate of just nearly 6 

percent in coming years. 

SBA’s formal efforts in the impact 

investing space began on April 7, 2011, 

when it announced the launch of the 

SBIC program’s Impact Investing 

Initiative (the ‘‘Initiative’’), building 

upon SBA’s belief that targeting capital 

investments into segments of the U.S. 

economy where capital formation gaps 

exist, such as small businesses located 

in low-to-moderate income (‘‘LMI’’) and 

other underserved areas, has the 

potential to effect meaningful and 

sustained economic development 

impact in those areas. The Initiative 

made available $1 billion in debenture 

leverage, over the course of 5 years, to 

SBICs that committed to deploy at least 

50 percent of their total invested capital 

in ‘‘impact investments.’’ Under the 

Initiative, investments in small 

businesses located in LMI areas, 

economically-distressed areas and rural 

areas generally qualified as impact 

investments, as did investments in 

small businesses active in the education 

and clean energy sectors. 

Since 2011, SBA has made several 

changes to the Initiative in an effort to 

enhance its effectiveness. Most recently, 

in September 2014, SBA expanded the 

scope of the Initiative and renamed it 

the ‘‘Impact Investment Fund’’ to reflect 

SBA’s commitment to extend its impact 

investing efforts beyond the Initiative’s 

initial 5-year term. 

This rule follows from that 

commitment and seeks to recognize, 

within the SBIC program’s regulations, 

the important role impact investors can 

play in helping the SBIC program 

achieve its goal of providing capital and 

long-term loan funds for the growth, 

expansion and modernization of small 

businesses. 

II. Section by Section Analysis 

§ 107.50—Definitions. SBA proposes 

to add the defined terms ‘‘FundIdentified Impact Investment,’’ ‘‘Impact 

Investment,’’ ‘‘Impact SBIC’’ and ‘‘SBAIdentified Impact Investment.’’ 

‘‘Fund-Identified Impact Investment,’’ 

‘‘Impact Investment,’’ and ‘‘SBAIdentified Impact Investment’’ 

The definition of ‘‘Impact 

Investment’’ included in this proposed 

rule consists of two categories, each of 

which is also a defined term in the 

proposed rule: (1) SBA-Identified 

Impact Investments, which are 

investments in geographic areas and 

sectors of national priority that SBA 

designates in notices published from 

time to time on SBA’s SBIC program 

Web site (www.sba.gov/inv); and (2) 

Fund-Identified Impact Investments, 

which are investments that meet an 

SBIC’s own definition of an ‘‘Impact 

Investment’’ and which an SBIC 

applicant must propose and SBA must 

approve during the licensing process, as 

described in proposed § 107.331— 

Evaluation and selection of Impact 

SBICs. 

‘‘Impact SBIC’’ 

The regulatory definition of an Impact 

SBIC has several key points. First, an 

Impact SBIC must be organized as a 

limited partnership. Although the 

current regulations permit other forms 

of organization, the vast majority of 

existing SBICs are limited partnerships. 

SBA believes that having a degree of 

uniformity in organizational structure 

will facilitate a more timely and 

efficient licensing process for Impact 

SBICs. 

Second, the ‘‘Impact SBIC’’ 

designation would apply only to SBICs 

licensed under this rule as well as those 

licensees designated as Impact SBICs 

after the launch of the Initiative in 2011 

and before the effective date of this rule. 

Third, an Impact SBIC must invest at 

least 50 percent of its financing dollars 

in small business concerns that meet the 

criteria set forth in the definition of 

Impact Investment in this rule (referred 

to hereafter as the ‘‘50 percent 

requirement’’). SBA believes the 50 

percent threshold indicates a significant 

focus, while still giving Impact SBICs 

flexibility in developing their portfolios. 

Per the proposed rule, follow-on 

investments in a portfolio company that 

qualified as an ‘‘Impact Investment’’ at 

the time of the SBIC’s initial financing 

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would count towards the 50 percent 

requirement. 

An Impact SBIC may satisfy the 50 

percent requirement exclusively 

through SBA-Identified Impact 

Investments or Fund-Identified Impact 

Investments, but may also satisfy the 50 

percent requirement through a 

combination of these investments. Per 

proposed § 107.331, SBA must approve 

all Fund-Identified Impact Investment 

definitions and strategies during the 

licensing process, regardless of whether 

such investments will be used to meet 

all or only a portion of the 50 percent 

requirement. 

§ 107.301—Impact SBIC licensing fee 

discount. This section proposes a 60% 

reduction in the licensing fees Impact 

SBIC applicants must pay under 

§ 107.300. The discount is intended to 

incentivize the formation of Impact 

SBICs. Despite the fee reduction, SBA 

will devote neither less time nor fewer 

resources to the assessment of Impact 

SBIC applications than it devotes to the 

assessment of standard SBIC 

applications. 

However, § 107.301 would provide 

that in the event an Impact SBIC 

applicant were to ultimately be 

approved for an SBIC license as 

anything other than an Impact SBIC, 

SBA would be entitled to recover the 

value of any discounts the applicant 

received prior to licensing. This 

provision was added to cover cases in 

which an applicant decides midprocess, with SBA permission, to seek a 

standard SBIC license instead of an 

Impact SBIC license. These types of 

changes sometimes occur during the 

fundraising process as fund managers 

adjust to the expectations of private 

capital providers. Although licensees 

designated as Impact SBICs under the 

Initiative would be eligible for fee 

discounts as of the effective date of this 

rule, SBA will not return any fees these 

licensees paid prior to that date. 

Finally, any Impact SBIC, whether 

licensed under the Initiative or under 

this rule, may submit a written request 

to SBA seeking to convert to a standard 

SBIC license. SBA would generally 

expect to grant such a request, provided 

that SBA recovers the value of any 

discounts the licensee received. 

§ 107.310—When and how to apply 

for licensing as an Early Stage SBIC. 

America’s impact investment industry 

includes fund managers focused on 

making equity investments in early 

stage companies. In order to 

accommodate these fund managers, 

proposed § 107.310 permits applicants 

to apply simultaneously for an Impact 

SBIC and Early Stage SBIC license. 

Further, such dual applicants will be 

permitted to submit their application at 

any time and will not be subject to the 

submission deadlines specified in Early 

Stage Notices SBA may publish in the 

Federal Register. However, those 

applicants licensed as both Early Stage 

and Impact SBICs will be subject to 

every regulation pertaining to either 

type of licensee. 

§ 107.330—Evaluation and selection 

of Impact SBIC license applicants 

making SBA-Identified Impact 

Investments. Impact SBIC license 

applicants proposing to meet their 

impact investment requirements 

exclusively through SBA-Identified 

Impact Investments will be evaluated 

and selected based on the standards 

outlined in § 107.305, which are used to 

assess all SBIC applicants. In addition, 

SBA will evaluate the managers’ skills 

and experience in building and 

managing a portfolio of impact 

investments. However, an applicant’s 

potential to generate social, 

environmental or economic impact will 

be considered relevant only to its 

eligibility to participate in the SBIC 

program as an Impact SBIC and will not 

serve as a substitute for any of the 

factors cited in § 107.305. 

§ 107.331—Evaluation and selection 

of Impact SBIC license applicants 

making Fund-Identified Impact 

Investments. 

Under proposed § 107.331, Impact 

SBIC license applicants seeking 

approval to make Fund-Identified 

Impact Investments will be subject first 

and foremost to the evaluation process 

and qualification standards outlined in 

§ 107.305, which are used to assess all 

SBIC applicants. An applicant’s 

potential to generate social, 

environmental or economic impact will 

be considered relevant only to its 

eligibility to participate in the SBIC 

program as an Impact SBIC and will not 

serve as a substitute for any of the 

factors cited in § 107.305. 

Using SBA Form 2181 (Applicant 

Narrative), applicants will be expected 

to provide definition(s) of the FundIdentified Impact Investments they 

intend to make for the purposes of 

complying with the requirement that 50 

percent of the total dollar amount of 

their financings be deployed in Impact 

Investments. Applicants will also be 

required to describe, using qualitative 

and quantitative analysis, the expected 

social, environmental or economic 

impact of their proposed FundIdentified Impact Investments. 

SBA will review any Fund-Identified 

Impact Investment definition(s), along 

with an applicant’s overall investment 

strategy, in order to determine whether 

the proposed definitions and strategy 

are consistent with SBA’s mission, as 

well as the letter and spirit of the SBIC 

program’s regulations. For instance, a 

Fund-Identified Impact Investment 

definition that targets financial 

intermediaries would not be approved if 

SBA determines it risks running afoul of 

the regulatory prohibition on financing 

‘‘relenders’’ or ‘‘reinvestors.’’ 

SBA will next determine whether the 

applicant’s proposed Fund-Identified 

Impact Investments are likely to yield a 

positive impact when all the potential 

social, environmental and economic 

effects of the investments are 

considered. SBA’s evaluation may 

consider factors such as whether the 

strategy will include investments in 

Portfolio Concerns that increase services 

to low income communities, engage in 

environmentally sustainable business 

practices or manufacture 

environmentally sustainable products, 

or that operate in industries of national 

priority other than in the sectors 

identified by SBA as an SBA-Identified 

Impact Investment. The Agency 

acknowledges that reaching a definitive 

and objective conclusion regarding a 

strategy’s overall impact may be 

challenging. Impact is often described in 

qualitative, rather than quantitative 

terms. In anticipation of that challenge, 

the proposed rule has been drafted to 

mitigate the risk that SBA would be put 

in the position of having to accept or 

reject a proposed definition based solely 

on a value judgment. 

Applicants will be expected to make 

reasonable arguments, supported by 

convincing evidence, that their 

proposed definitions can meet the 

impact requirements of this rule. In this 

regard, the process SBA will use to 

evaluate proposed Fund-Identified 

Impact Investment definitions differs 

little from the process used to assess 

fund manager qualifications. SBA will 

use its standard due diligence tools, 

including principal interviews and 

reference calls, to test the strength of an 

applicant’s proposal and the validity of 

the evidence presented therein. Just as 

a standard SBIC applicant might be 

rejected for making unsubstantiated 

track record claims, so too could a 

Fund-Identified Impact Investment 

definition be turned down if diligence 

suggests it lacks credibility. 

SBA takes a nuanced approach to its 

licensing decisions and does not rely 

solely on easy-to-measure financial 

metrics. An applicant’s past financial 

performance is always carefully 

weighed against less tangible factors 

such as the level of cohesion among the 

proposed management team members; 

the alignment of incentives between the 

fund manager and private investors; and 

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the quality of the proposed investment 

strategy, among other variables. 

SBA expects to receive few, if any, 

Fund-Identified Impact Investment 

definition proposals that are intended 

solely to obtain the fee reduction 

benefits of an Impact SBIC license. The 

fee reductions in the proposed rule are 

not material compared to the amount of 

capital raised by an SBIC applicant, and 

Impact SBIC licensees are subject to 

enhanced regulatory reporting 

requirements. Moreover, fund managers 

that have expressed interest in SBA’s 

impact investing efforts have, to-date, 

all proposed strategies with clear 

benefits and no obvious risk of yielding 

negative effects. The following are 

examples of the types of impact 

investments being made in the market 

today and which SBA anticipates 

Impact SBICs applying under this 

section may target: 

• Healthcare companies that offer 

affordable, high-quality services to 

low-income consumers 

• Education companies that provide 

evidence-based, supplemental 

learning services designed to enhance 

student achievement 

• Energy efficiency and sustainability 

consulting firms 

• Agricultural businesses that employ 

humane and environmentally 

sustainable farming practices 

• Businesses that collect and reprocess 

industrial waste for alternative use 

• Alternative credit scoring firms that 

enhance access to financial services 

for low-income consumers 

In addition to approving an 

applicant’s proposed definition of a 

Fund-Identified Impact Investment, 

SBA must be satisfied with the 

applicant’s impact measurement and 

assessment plan, which an applicant 

must submit in accordance with 

proposed § 107.331(b). Under this 

section, the applicant must outline its 

plan to comply with proposed 

§ 107.665, which requires Impact SBICs 

making Fund-Identified Impact 

Investments to obtain an assessment of 

their impact (1) from an independent, 

third-party assessment provider, (2) 

using an SBA-approved impact 

measurement standard, a list of which 

SBA will publish on its Web site from 

time to time, and (3) using an 

assessment process that is both 

transparent and comprehensive. 

Impact measurement is a defining 

characteristic of impact investors. 

Without it, impact fund managers and 

their capital providers face a much 

bigger challenge in determining whether 

their goal of generating positive social 

impact has been met. Unfortunately, 

determining whether a fund has reached 

its impact target is far more complicated 

than evaluating its financial 

performance. The process requires 

establishing a standard by which the 

targeted outcomes will be measured, 

then crafting an evaluation framework 

capable of weighing the resulting 

measurements to yield an overall 

assessment of impact. 

With regard to measurement, the 

proposed rule would require Impact 

SBICs licensed under this section to 

measure their impact using one of 

several pre-approved measurement 

standards. At the outset, SBA intends to 

approve the use of the three sets of 

standards listed below, although SBA 

may approve additional standards as 

they become more widely adopted by 

the impact investing industry: 

—The Impact Reporting and Investment 

Standards (‘‘IRIS’’), an impact 

evaluation framework created by 

GIIN; 

—The G4 Sustainability Reporting 

Standards, produced by the Global 

Reporting Initiative (‘‘GRI’’); and 

—The standards produced and 

maintained by the Sustainability 

Accounting Standards Board 

(‘‘SASB’’). 

The purpose of these standards is to 

establish a common language companies 

and investors can use to report the 

positive and negative impacts that result 

from their activities. These standards 

are part of a broader industry effort to 

bring to impact measurement what the 

Generally Accepted Accounting 

Standards (‘‘GAAP’’) provide for 

financial reporting. When comparing 

the GAAP-compliant financial 

statements of two different companies, 

an investor can be confident the same 

set of rules was used to report items 

such as revenue, inventory and 

operating cash flow in both statements. 

GAAP does not provide guidance on 

how to interpret the data, but it does 

ensure consistency in reporting. 

Impact measurement standards were 

developed to offer the same proposition. 

Consider the simple example of two 

Impact SBICs, both of which are 

pursuing similar strategies to create 

high-wage jobs in a particular region. In 

the absence of a measurement standard, 

the tasks of defining a ‘‘job’’ and 

calculating a ‘‘wage’’ are left to the 

funds themselves, which leaves room 

for methodological discrepancies. One 

fund may include the value of benefits 

in its calculation of wages, while the 

other restricts its definition to direct 

cash payments. An investor trying to 

determine which fund has been more 

effective in reaching its impact goal 

would have difficulty in this scenario. 

Measurement standards help reduce 

these definitional challenges. Were the 

two funds to use IRIS metrics, for 

instance, they could both rely on the 

IRIS definition of a ‘‘full-time’’ or 

‘‘permanent’’ employee and use the 

method IRIS has established for 

calculating the wages of those 

employees. 

The impact investing industry has yet 

to coalesce around a single set of 

measurement standards and may never 

do so. However, the three standards 

SBA intends to approve were selected, 

in part, because of their prominence in 

the industry and the flexibility they 

provide for different types of impact 

strategies. Of the three, IRIS is likely the 

best-known and most widely used set of 

standards. GRI has a focus on 

sustainability, which may provide 

environmentally focused Impact SBICs 

additional flexibility. Finally, SASB’s 

standards are designed primarily for 

public corporations and may facilitate 

reporting for Impact SBICs with 

portfolio companies that are already 

public or intend to go public. 

With clear options available for the 

measurement of impact, Impact SBICs 

can turn to the second component of 

SBA’s proposed evaluation system, 

which deals with the assessment of 

impact. As noted above, impact 

measurement standards only provide 

guidance on how to report impact data. 

They are silent on how to interpret that 

data. Returning to the example above, 

the two fund managers may report IRIScompliant employee and wage data to 

their investors, but an assessment 

framework is needed to determine what 

constitutes a ‘‘strong’’ level of 

employment growth, what threshold 

determines a wage is ‘‘high’’, or how to 

weigh the growth in wages against the 

growth in employment when evaluating 

the funds’ overall impact. 

As with financial performance, each 

individual investor is empowered to 

reach his or her own conclusions about 

what constitutes ‘‘success’’ with regard 

to impact. While numbers, such as an 

internal rate of return, cannot be easily 

manipulated by a fund manager, 

investors could receive biased reports 

on impact returns if a fund manager 

were to selectively choose metrics and 

the weighting associated with those 

metrics. The use of independent and 

transparent assessment systems not only 

helps reduce the risk of selective 

reporting, but it also promotes the use 

of best practices across the industry. 

For these reasons, SBA considers the 

assessment component of its proposed 

impact evaluation system critical to the 

credibility of the program. Impact SBIC 

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applicants seeking a license under this 

section of the proposed rule must 

identify the assessment providers they 

expect to use to fulfill their reporting 

requirements and describe the systems 

those providers employ. Further, the 

applicant must provide evidence that 

each assessment provider is 

independent, that the criteria and 

weightings the providers use are 

publicly available and that each 

provider is capable of conducting a 

comprehensive assessment of the 

Impact SBIC’s impact. A comprehensive 

assessment is one capable of evaluating 

the social, environmental and economic 

impacts of the applicant’s proposed 

strategy. 

One assessment system SBA has 

already approved for use under its 

current Impact Investment Fund policy 

is the Global Impact Investment Ratings 

System (‘‘GIIRS’’), a product of the nonprofit organization B Lab, which uses a 

standard set of IRIS impact metrics. 

GIIRS was created to bring to the impact 

investment industry the kind of 

consistent and comparable rating 

reports traditional finance has had for 

decades in the form of mutual fund 

ratings or credit ratings. With each 

investment fund they rate, B Lab staff 

collects a standard set of IRIS impact 

metrics from each company in the 

portfolio. That data is then run through 

the GIIRS assessment criteria, each of 

which is assigned a specific weight. The 

end result is a ratings report with an 

overall impact score and scores for each 

individual sub-component of the overall 

assessment. Since each rating uses the 

same set of core metrics, assessment 

criteria and weightings, one investment 

fund’s score can be compared to that of 

another. 

With each new Impact SBIC licensed 

under this section, SBA will build a 

portfolio of investment strategies and 

impact reports that it hopes will help 

guide future applicants to the program. 

Both to facilitate that learning process 

and to ensure program transparency, 

Section 107.331(d) allows the Agency to 

publish information about the 

investment strategies and assessment 

systems the Impact SBICs licensed 

under this section have employed. 

However, the provisions of paragraph 

(d) will not release SBA from its 

responsibility to protect the confidential 

business information of its licensees. 

SBA intends only to publish general 

descriptions of the investment strategies 

it has approved and will not reveal any 

details that might compromise an 

applicant or licensee’s confidential 

business information. Similarly, the 

Agency will make public the names of 

assessment providers it has approved 

and descriptions of the assessment 

systems those providers use, but will 

not reveal the results of any individual 

impact assessment. 

§ 107.502—Representations to the 

public. SBA is proposing to add new 

paragraphs (b) and (c) to this section, 

which would require Impact SBIC 

license applicants and Impact SBICs to 

identify themselves as impact 

investment funds when marketing their 

funds to prospective investors. This 

requirement is meant to ensure that 

investors are made aware that the 

Impact SBIC applicant intends to 

participate, or that a licensed Impact 

SBIC is participating, in the SBIC 

program as an Impact SBIC. Requiring 

Impact SBICs to identify themselves as 

such will also help deter applicants 

whose sole interest in obtaining an 

Impact SBIC license is to benefit from 

the associated fee discounts. 

§ 107.610—Required certifications for 

Loans and Investments. Proposed new 

paragraph (g) would provide for new 

certifications by Impact SBICs and the 

small businesses in which they make 

Impact Investments, certifying the basis 

for which each investment qualifies as 

an Impact Investment. As with most of 

the existing certifications in this section, 

the Impact certifications would be 

retained in the SBIC’s files and be 

available for SBA’s review. 

The paragraph would require different 

levels of certification depending on the 

type of Impact Investment. SBAIdentified Impact Investments will be 

based on certifications from both the 

Impact SBIC and its portfolio concerns; 

Fund-Identified Impact Investments will 

only require the certification of the 

Impact SBIC. Since SBA-Identified 

Impact Investments will be based on 

definitions in federal regulation and 

will generally depend on specific 

statistics collected at the company level, 

it is reasonable to expect the leaders of 

those businesses to certify the accuracy 

of their information. By contrast, FundIdentified Impact Investments may be 

based on sector data or other 

information outside the control of the 

small business being financed. 

Therefore, for Impact SBICs making 

Fund-Identified Impact Investments, the 

regulation places the full certification 

burden on the Impact SBIC. 

As noted above, per the proposed 

rule, follow-on financings in Impact 

Investments would count towards the 

50 percent requirement, and therefore, 

SBA will not require Impact SBICs to recertify the investment as part of a 

follow-on financing. SBA believes that 

requiring Impact SBICs to re-certify 

their follow-on financings as Impact 

Investments might deter them from 

making long-term capital commitments 

out of concern that future financings 

might not count towards the ‘‘50 percent 

requirement.’’ Nonetheless, SBA is 

soliciting comments from the public on 

whether such follow-on investments 

should count towards the 50 percent 

requirement only if the Impact SBIC recertifies the investment as an Impact 

Investment at the time a follow-on 

investment is made. 

§ 107.665—Measurement and 

reporting requirements for Impact SBICs 

making Fund-Identified Impact 

Investments. This proposed section 

would require Impact SBICs making 

Fund-Identified Impact Investments to 

obtain independent assessments of the 

social, environmental and economic 

impact of their investment strategy. 

Unless the licensee obtains SBA 

approval to do otherwise, these 

assessments must be prepared in 

manner consistent with the plan 

approved during the licensing process. 

Impact SBICs subject to this section 

will face penalties if they fail to obtain 

impact assessments, but SBA will 

neither penalize nor reward an Impact 

SBIC based solely on the results of those 

impact assessments. One purpose of 

permitting Impact SBICs to make FundIdentified Impact Investments is to 

encourage innovative approaches to 

social, environment and economic 

challenges. Penalizing licensees that fail 

to meet their impact goals, despite their 

best efforts, would be 

counterproductive. Instead, the Agency 

trusts that successful fund managers 

will earn their rewards in the market 

place, using the strength of their 

financial and social returns to attract 

private capital. SBA will also look 

favorably on subsequent Impact SBIC 

applicants with a record of strong social 

and financial performance. By contrast, 

Impact SBICs with poor impact 

assessments are more likely to face 

difficulty raising private capital and 

obtaining a subsequent Impact SBIC 

license. 

§ 107.693—Impact SBIC examination 

fee discount. This new proposed section 

would allow a 10% reduction in the 

examination ‘‘base fee’’ that would 

otherwise be applicable to Impact SBICs 

under existing § 107.692. SBA will 

devote neither less time nor fewer 

resources to the examination of Impact 

SBIC licensees as a result of this 

discount. Under the proposed rule, 

licensees designated as Impact SBICs 

prior to the effective date of this rule 

will be eligible for fee discounts on a 

going-forward basis, but SBA will not 

return fees already paid. 

§ 107.1120—General eligibility 

requirements for Leverage. Proposed 

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new paragraph (l) would provide for a 

new certification by Impact SBICs 

seeking an SBA leverage commitment or 

draw. The Impact SBIC would be 

required to certify that it will invest at 

least 50 percent of the aggregate dollar 

amount of its financings in Impact 

Investments, in compliance with the 

Impact Investment and Impact SBIC 

definitions in § 107.50. This prospective 

certification is consistent with the other 

certifications required by § 107.1120. 

SBA intends to monitor Impact SBICs’ 

performance in making Impact 

Investments to ensure that they are 

making investments that meet this 

requirement. 

§ 107.1810—Events of default and 

SBA’s remedies for Licensee’s 

noncompliance with terms of 

Debentures. SBA is proposing two 

changes in this section that would apply 

only to Impact SBICs. First, under 

proposed § 107.1810(f)(13), it would be 

an event of default if an Impact SBIC 

fails to meet the requirement to invest 

at least 50 percent of its financing 

dollars in Impact Investments, as 

defined in proposed § 107.50. If the 

Impact SBIC fails to cure to SBA’s 

satisfaction, SBA could invoke the 

remedies in existing § 107.1810(g), 

which includes the right to declare 

outstanding debenture leverage 

immediately due and payable. SBA 

would generally not expect to invoke 

such remedies if an Impact SBIC’s 

failure to meet the 50 percent 

requirement appears to be temporary. 

Second, under proposed 

§ 107.1810(f)(14), it would be an event 

of default if an Impact SBIC licensed 

under an SBA-approved plan to make 

Fund-Identified Impact Investments 

fails to obtain an acceptable 

independent, third-party assessment to 

measure the social, environmental or 

economic impact of the fund’s Impact 

Investment strategy within the time 

frames required by proposed § 107.665. 

If the Impact SBIC fails to cure to SBA’s 

satisfaction, SBA could invoke the 

remedies in existing § 107.1810(g), 

which include the right to declare 

outstanding debenture leverage 

immediately due and payable. 

§ 107.1940—Impact SBIC licensee 

noncompliance with regulations. SBA 

proposes creating in this new section a 

series of actions the Agency may take 

with respect to Impact SBICs that fail to 

meet the 50 percent requirement and 

Fund-Identified Impact SBICs that fail 

to meet assessment requirements. 

Regardless of whether an Impact SBIC 

has outstanding leverage, if an event of 

default would have been triggered under 

proposed § 107.1810(f)(13) or (14), SBA 

will have the authority, upon written 

notice, to take any or all of the following 

actions: (1) Convert the licensee’s 

Impact SBIC license to a standard SBIC 

license (including, in SBA’s discretion, 

requiring the licensee to notify its 

private investors of the conversion); and 

(2) require the licensee to return to SBA 

up to the full dollar amount of any 

licensing or examinations fee discounts 

it has received prior to the date of the 

written notice. However, SBA will be 

authorized to take these actions only 

after giving the licensee at least 15 days 

to resolve its non-compliance and only 

after the licensee fails to resolve its noncompliance within the time period 

given. 

SBA included these additional 

remedies to address two areas of 

concern. First, the events of default 

proposed under § 107.1810(f) would 

only apply to Impact SBICs with 

outstanding leverage. As a result, Impact 

SBICs that are licensed as non-leveraged 

funds or those that pre-pay their 

leverage in full would not be subject to 

any remedies if they were to fall out of 

compliance with the 50 percent 

requirement or, as applicable, the 

assessment requirement. Second, the fee 

discounts proposed under this rule 

generally reward Impact SBIC 

applicants and licensees for future, 

rather than past behavior. For instance, 

an Impact SBIC will be eligible for a 60 

percent discount on its licensing fee 

based on its proposal to deploy at least 

50 percent of its capital in Impact 

Investments. Without the provisions 

proposed under this section, SBA would 

have limited authority to recover those 

benefits or otherwise take action against 

the fund if it fails to follow through on 

that commitment. 

Compliance With Executive Orders 

12866, 12988, 13132, 13563, the 

Paperwork Reduction Act (44 U.S.C. 

Ch. 35) and the Regulatory Flexibility 

Act (5 U.S.C. 601–612) 

Executive Order 12866 

The Office of Management and Budget 

has determined that this rule is a 

‘‘significant’’ regulatory action under 

Executive Order 12866. The Regulatory 

Impact Analysis is set forth below. 

1. Need for Regulation 

The Small Business Investment Act of 

1958, as amended, established the SBIC 

program to ‘‘stimulate and supplement 

the flow of private equity capital and 

long-term loan funds’’ to U.S.-based 

small businesses. 15 U.S.C. 661. As part 

of that effort, the Act contains several 

provisions aimed at promoting the flow 

of capital to several special categories of 

small business, including those located 

in low income geographic areas, those 

engaged in energy-saving activities and 

‘‘smaller’’ businesses.15 U.S.C. 

683(b)(2)(C), 683(b)(2)(D), 683(d). 

Over the past several years, SBA’s 

focus on achieving these economic 

development goals has yielded results, 

but progress has come at a slower pace 

than anticipated. Despite the recent 

growth in the number of SBIC-financed 

businesses located in LMI areas, which 

rose from 216 in fiscal year (‘‘FY’’) 2012 

to 229 in FY 2014, the program has yet 

to return to the high level achieved in 

FY 2011, during which SBICs financed 

351 businesses located in LMI areas. 

The LMI Debenture, a leverage 

instrument meant to help facilitate these 

types of investments, is rarely used. 

Similarly, there has yet to be a single 

draw of SBA’s Energy Savings 

Debenture, which has been available 

since 2012 to help finance small 

businesses involved in reducing the use 

of non-renewable energy sources. 

The proposed rule was crafted to 

enhance the SBIC program’s 

effectiveness in channeling muchneeded capital to these and other 

underserved segments of the U.S. 

economy. From an overall economic 

development perspective, SBA believes 

that capital investments made into small 

businesses located in LMI and other 

underserved areas have the potential to 

have the most meaningful and sustained 

impact due to the capital formation gaps 

in those areas. 

2. Alternative Approaches to Regulation 

SBA considered several alternatives to 

the proposed regulation, each of which 

will be discussed below. First, SBA 

considered pursuing its impact 

investment objectives solely through 

existing policy initiatives. Based on 

extensive feedback received from SBIC 

fund managers, lower-middle market 

industry representatives, impact 

investment fund managers, impact 

policy thought leaders and others, SBA 

rejected this alternative. SBA’s existing 

impact investing policies impose 

additional burdens without providing 

sufficient incentives to attract Impact 

SBIC fund managers to the program. 

Further, given that SBIC licensees have 

operational lives of ten years or more, 

the market will be reluctant to embrace 

SBA’s impact investing efforts unless 

the Agency demonstrates a lasting 

commitment to the space by 

promulgating regulations. 

SBA faced a challenge in developing 

a definition of an ‘‘Impact Investment’’ 

that dealt appropriately with the 

subjectivity inherent in any nonfinancial measure of performance. 

Initially, SBA considered restricting the 

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definition of an Impact Investment to 

financings that meet requirements 

already outlined in federal regulations, 

such as Energy-Savings Investments, 

LMI Investments or investments in rural 

areas. These investments are aligned 

with federal policy priorities and are 

easy to define and monitor. The original 

Impact Investment Initiative policy 

launched in 2011 was structured in this 

manner and was slow to attract 

applicants. Given the nascence of the 

impact investing industry, which 

supports a diverse range of investment 

strategies, SBA determined a more 

accommodative approach would be 

more effective. 

The proposed rule has been drafted to 

allow Impact SBIC applicants to make 

SBA-Identified Impact Investments, 

which target federal priority areas, or 

make Fund-Identified Impact 

Investments that align with their own 

definitions of impact. This approach 

expands the reach of SBA’s impact 

investing efforts beyond the limited subset of investments that meet existing 

regulatory criteria. The Agency also 

recognizes the complexities FundIdentified Impact Investments may 

introduce to the SBIC licensing and 

monitoring process. 

SBA had to carefully consider the 

bases on which it would approve an 

Impact SBIC’s proposed Fund-Identified 

Impact Investment definition. One 

option the Agency considered was to 

outline, as part of this regulation, a 

series of sector-specific eligibility 

requirements that Fund-Identified 

Impact Investments would have to 

satisfy. Working with colleagues at the 

U.S. Department of Education, SBA staff 

made an initial attempt at preparing 

guidelines for investments in the 

education sector but quickly discovered 

the impracticality of the approach. Even 

within a single sector, there exists such 

a tremendous diversity of economic 

activity that establishing requirements 

specific-enough to be useful would 

require an inordinate commitment of 

time and resources. 

An alternative approach would be to 

remove SBA from the approval process 

altogether and give Impact SBIC 

applicants complete latitude to pursue 

Fund-Identified Impact Investments of 

their choice. Under this approach, SBA 

would evaluate Impact SBICs using its 

existing licensing process without any 

additional consideration of the impactrelated aspects of the applicant’s 

proposal. A key advantage of this 

approach is that it would allow SBA to 

fully cede the definitional challenge of 

impact to fund managers and their 

private investors. It would also ensure 

the program remains open to innovative 

impact strategies. 

SBA will always encourage applicants 

to propose innovative investment 

strategies, but the Agency must retain 

the ability to review and approve 

proposed Fund-Identified Impact 

Investment definitions. Not only must 

the Agency ensure that SBICs are 

making investments that are consistent 

with the letter and spirit of program 

regulations, but it must also consider 

the reputation of the SBIC program 

within the private investor community. 

The statute underlying the SBIC 

program, known as the Small Business 

Investment Act, makes clear that the 

program should be implemented in a 

manner that ‘‘insure[s] the maximum 

participation of private financing 

sources.’’ 15 U.S.C. 661. Were SBA to 

ignore an applicant’s proposed FundIdentified Impact Investment 

definitions, private impact investors 

might take the Agency’s approach as a 

signal of indifference to market 

development. 

In fact, the approach SBA has taken 

reflects the Agency’s interest in not only 

enhancing the impact of the SBIC 

program, but also promoting industry 

best practices. SBA is as concerned with 

the process used to make FundIdentified Impact Investments as it is 

with the outcomes of those investments. 

Each Impact SBIC applicant will have 

the burden of demonstrating, with 

qualitative or quantitative analysis, that 

its investment strategy will, in 

aggregate, generate a measurable 

positive impact. SBA staff will 

supplement their evaluation of the 

applicant’s analysis and its other 

application materials with the results 

obtained using the standard tools of due 

diligence, such as interviews with the 

management team, reference calls, 

consultations with industry experts, 

public record searches and other 

research. 

As long as a fund manager is qualified 

and its definition does not run afoul of 

the Agency’s mission, statutes, 

regulations or policies, SBA intends to 

give applicants substantial leeway in 

defining their Fund-Identified Impact 

Investments. The measurement and 

assessment requirements of the 

proposed rule ensure that even those 

Impact SBICs that fail to meet their 

targeted social returns will contribute to 

market development. Measuring results, 

good and bad, contributes to the 

industry’s understanding of the 

relationship between financial and 

social returns and helps investors 

identify the most talented managers. 

SBA confronted two key questions as 

it considered how to create a robust 

measurement and assessment process. 

First, what means should SBA use to 

assess the impact of Fund-Identified 

Impact Investments? Second, what 

consequences, if any, should Impact 

SBICs face based on the result of their 

impact assessments? 

With regard to the first question, SBA 

could have assumed the full burden of 

evaluating each Fund-Identified Impact 

Investment to determine its impact. This 

alternative was rejected because SBA 

staff lack sufficient time, resources and 

expertise to properly evaluate the full 

range of potential Fund-Identified 

Impact Investments. A second 

alternative was to leverage the expertise 

of Impact SBIC fund managers 

themselves and allow them to prepare 

their own assessments. While it may be 

appropriate to have Impact SBIC 

applicants argue the merits of their 

Fund-Identified Impact Investment 

definitions during the licensing process, 

SBA considered it imprudent to allow 

Impact SBICs to evaluate their own 

success. 

The proposed rule instead requires 

Impact SBICs to obtain independent, 

third-party impact evaluations based on 

industry-adopted standards. The use of 

independent third parties helps reduce 

the bias inherent in a fund’s own impact 

evaluation and relieves SBA of the 

potentially significant burden of 

assessing a wide range of impact 

investment strategies. 

With regard to the second question, 

SBA has chosen not to penalize 

licensees based on the results of their 

impact assessments. As noted above, 

assessments provide private capital with 

greater transparency regarding an 

applicant’s track record of generating 

impact. Given that most fund managers 

seek to follow their first investment 

vehicle with a second, the assessment 

process itself creates sufficient risk that 

investors will decline to invest in a 

second fund. Accordingly, SBA does not 

believe that an Impact SBIC should 

incur regulatory penalties based on the 

results of an impact assessment. 

3. Potential Benefits and Costs 

The proposed rule offers two primary 

benefits to SBA and its stakeholders. 

First, it offers the potential to enhance 

the overall social, environmental and 

economic impact of the SBIC program. 

Existing SBICs already have tremendous 

impact on America’s small business 

economy. In FY 2014, SBICs together 

invested nearly $5.5 billion in more 

than 1,000 small business concerns, 

helping them to grow and modernize 

their operations. The introduction of 

Impact SBICs will increase the portion 

of those annual financings that are 

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intentionally directed towards 

economically-distressed communities 

and companies taking innovative 

approaches to social problems. 

SBA also hopes the proposed rule will 

support the development of the impact 

investing industry more broadly. The 

rule has been drafted to incorporate 

impact investing best practices, 

especially with regard to the 

measurement and assessment of impact. 

As more and more SBA- and FundIdentified Impact Investments are made, 

the SBIC program will have more data 

to contribute to the industry on the 

balance between financial and social 

performance. 

In terms of costs, Impact SBICs are 

anticipated to have an additional 3% 

higher loss rate than regular SBICs, due 

to the risks that may be associated with 

Impact Investments contemplated under 

the proposed rule. Although SBA is 

targeting $200 million in commitments 

per year in terms of licensing, the 

number of Impact SBICs that SBA may 

license or the amount of debenture 

leverage commitments that may be 

approved for Impact SBICs in any year 

is subject to the limitations set forth in 

annual appropriations acts or in other 

statutes or regulations. In addition, both 

newly licensed Impact SBICs and 

previously licensed Impact SBICs have 

the opportunity to receive new leverage 

commitments in any year. The SBIC 

program subsidy model for FY 2017 has 

been formulated to reflect the provision 

proposed in this rule that Impact SBICs 

are allowed to be licensed as Early Stage 

SBICs. Early Stage SBICs are expected to 

have approximately a 10% higher loss 

rate than regular SBICs. The resulting 

fee of 34.7 basis points for FY 2017 

remains well within historical ranges for 

the SBIC Debenture annual fee. 

Executive Order 12988 

This action meets applicable 

standards set forth in section 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 

retroactive or presumptive effect. 

Executive Order 13132 

The proposed rule will not have 

substantial direct effects on the States, 

or the distribution of power and 

responsibilities among the various 

levels of government. Therefore, for the 

purposes of Executive Order 13132, 

Federalism, SBA determines that this 

proposed rule has no federalism 

implications warranting the preparation 

of a federalism assessment. 

Executive Order 13563 

In drafting this proposed rule, SBA 

considered the input of impact 

investment industry experts on ways to 

facilitate the growth of private-sector led 

impact investing as a strategy to create 

jobs and strengthen communities. With 

the assistance of the White House Office 

of Social Innovation and Civic 

Participation, which included a White 

House hosted event in June 2014 (see, 

https://www.whitehouse.gov/blog/2014/

06/25/executive-actions-accelerateimpact-investing-create-jobs-andstrengthen-communities), SBA held 

roundtable discussions with 

representatives from endowments, 

foundations, institutional asset 

managers, high net worth individuals, 

investment funds, standard SBICs, 

existing Impact SBICs, not-for-profit 

entities, banks, and other federal 

government agencies. The roundtables 

covered topics such as: (1) Increasing 

the flow of private capital toward 

sustainable business models; (2) 

supporting private sector investment in 

high-impact sectors and underserved 

communities; (3) making innovative 

impact enterprises investment-ready; (4) 

removing regulatory barriers that keep 

capital on the sidelines; and (5) growing 

the impact economy through policy 

interventions. 

Paperwork Reduction Act, 44 U.S.C. 

Ch. 35 

SBA has determined that this 

rulemaking proposes additional 

reporting requirements as defined by the 

Paperwork Reduction Act. Specifically, 

as discussed above, all Impact SBICs 

utilizing a Fund-Identified Impact 

strategy would be required to submit to 

SBA independent, third-party 

evaluations of the impacts of such 

investments. This proposed rule would 

also codify two other reporting 

requirements that are already imposed 

on Impact SBICs based on the terms and 

conditions of the Impact Investment 

Fund established by SBA on April 11, 

2011, as amended on September 25, 

2014, available at https://www.sba.gov/

content/impact-investment-fundoverview. First, at the time of 

application, Impact SBIC applicants are 

currently required to outline in their 

proposed investment strategy whether a 

particular strategy is an ‘‘Impact 

Investment.’’ This requirement is not 

being changed by this rule; it is merely 

being codified in the regulations. 

Furthermore, this requirement is already 

approved as part of SBA Form 2181, 

Appendix 2 (OMB Control Number 

3245–0062). Second, as part of reporting 

on their portfolio financings, Impact 

SBICs are also currently required to 

identify whether a completed financing 

is an Impact Investment. Therefore, this 

requirement is also not being imposed 

for the first time by this rule but rather 

merely being codified in the regulations. 

To make it easier for SBICs to meet this 

requirement, SBA recently proposed 

adding two questions to the Portfolio 

Financing Report (an existing 

information collection approved under 

OMB Control Number 3245–0078), to 

enable Impact SBICS to specifically 

identify whether a particular investment 

qualifies as an SBA-Identified or Fund 

Identified investment. This particular 

change will be made in conjunction 

with other revisions to Form 1031 as a 

result of other amendments to the SBIC 

program in the proposed rule, Small 

Business Investment Companies; 

Passive Business Expansion & Technical 

Clarifications. (RIN: 3245–AG67) (80 FR 

60077, October 5, 2015). The 

description, number of respondents, and 

the purpose of the information 

collection that would be imposed by 

this rule is discussed below with an 

estimate of the annual reporting burden. 

Included in the estimate is the time for 

reviewing instructions, searching 

existing data sources, gathering and 

maintaining the data needed, and 

completing and reviewing the 

requirements for the collection of 

information. 

A. Impact Evaluations 

Title: Independent, Third-Party 

Impact Evaluations. 

Summary: The proposed rule requires 

Impact SBICs licensed to make FundIdentified Impact Investments to submit 

two impact evaluations to SBA. Each 

assessment must be completed by an 

independent third-party based on 

industry standards. One assessment is 

due within two years of licensing, while 

the second must be submitted between 

the 5th and 7th year after licensing. 

These independent evaluations are 

required only of Impact SBICs that make 

Fund-Identified Impact Investments. 

Impact SBICs that restrict themselves to 

SBA-Identified Impact Investments bear 

no additional reporting burden beyond 

what is required of all SBICs. 

Description and Number of 

Respondents: Only those Impact SBICs 

licensed to make Fund-Identified 

Impact Investments will be required to 

complete this requirement. 

Annual Estimated Number of 

Responses: SBA estimates that it may 

receive approximately 2 responses each 

year based on an annual average of 6 

Impact SBICs requiring assessments 

during years 1–2 and again in years 5– 

7 of their lifecycle. 

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Estimated Annual Hour and Cost 

Burden: Impact SBICs licensed to make 

Fund-Identified Impact Investments will 

be required to obtain an impact 

evaluation and may incur costs. SBA 

estimates that it may have 

approximately 6 Impact SBICs making 

Fund-Identified Impact Investments in 

any given year. One independent 

provider charges between $3,500 and 

$7,500 for a full portfolio rating, 

depending on the size of the fund and 

the number of portfolio companies. Two 

ratings completed at the maximum price 

of $7,500 would require an Impact SBIC 

to spend a total of $15,000 over the 

course of its 10 year fund life. On an 

annualized basis, the cost would be 

$1,500 per year. The total annual cost 

burden for the estimated 6 Impact SBICs 

making Fund-Identified Impact 

Investments is $9,000. 

The hourly burden for these 

respondents would be negligible, as the 

assessment work would be completed 

by an independent third-party. The total 

time required to contact the provider 

and initiate an assessment is estimated 

at a total of 24 hours per assessment. 

Impact SBICs subject to the third-party 

assessment requirement must submit a 

total of two assessments over the course 

of their 10 year fund life. On an 

annualized basis, these applicants each 

will spend 4.8 hours per year. With an 

estimated 6 Impact SBICs making FundIdentified Impact Investments in the 

portfolio at any given time, the total 

annual hourly burden is estimated at 

28.8 hours. 

Compliance With the Regulatory 

Flexibility Act, 5 U.S.C. 601–612 

When an agency promulgates a rule, 

the Regulatory Flexibility Act requires 

the agency to prepare an initial 

regulatory flexibility analysis (IRFA) 

which describes the potential economic 

impact of the rule on small entities and 

alternatives that may minimize that 

impact. Section 605 of the RFA allows 

an agency to certify a rule, in lieu of 

preparing an IRFA, if the rulemaking is 

not expected to have a significant 

economic impact on a substantial 

number of small entities. 

This proposed rule would affect all 

SBICs issuing debentures, of which 

there are currently 193, most of which 

are small entities. Therefore, SBA has 

determined that this proposed rule 

would have an impact on a substantial 

number of small entities. However, SBA 

has determined that the impact on 

entities affected by the rule will not be 

significant. SBA keeps the SBIC 

program at a zero subsidy cost to 

taxpayers by charging up front and 

annual fees on its leverage. SBA 

calculates the annual fee each year 

using historical data to assess the 

appropriate fee to keep the program at 

zero subsidy cost. Because SBA expects 

Impact SBICs to be riskier than standard 

SBICs, SBA adjusted the SBIC debenture 

program budget formulation model 

which determines the annual fee needed 

to keep the debenture program at a zero 

subsidy cost. 

The projected leverage allocation to 

Impact SBICs would increase the annual 

fee charged to all SBICs seeking new 

debenture commitments by 

approximately 6.1 basis points. The 

annual fee would remain in line with 

historical levels. Since 2000, the annual 

fee has ranged from a high of 100 basis 

points (1 percent) to a low of 29 basis 

points, with a 15-year median of 83 

basis points. The annual fee for FY 2015 

is approximately 74.2 basis points. 

Although the cost will vary in the future 

based on economic factors and 

assumptions used to develop the annual 

fee, SBA expects the fee to remain under 

1 percent, comparable to historical 

annual fees and below the statutory 

maximum of 1.38 percent. Accordingly, 

the Administrator of the SBA hereby 

certifies that this rule will not have a 

significant impact on a substantial 

number of small entities. SBA welcomes 

comment from members of the public 

who believe there will be a significant 

impact either on SBICs, or on 

companies that receive funding from 

SBICs. 

List of Subjects in 13 CFR Part 107 

Investment companies, Loan 

programs—business, Licensing fees, 

Examination fees, Small businesses. 

For the reasons stated in the 

preamble, SBA proposes to amend part 

107 of title 13 of the Code of Federal 

Regulations as follows: 

PART 107—SMALL BUSINESS 

INVESTMENT COMPANIES 

■ 1. The authority citation for part 107 

is revised to read as follows: 

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

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

■ 2. Amend § 107.50 by adding in 

alphabetical order definitions of ‘‘FundIdentified Impact Investment,’’ ‘‘Impact 

Investment,’’ ‘‘Impact SBIC’’ and ‘‘SBAIdentified Impact Investment’’ to read as 

follows: 

§ 107.50 Definition of terms. 

* * * * * 

Fund-Identified Impact Investment 

means a Financing by an Impact SBIC 

that meets the definition of an Impact 

Investment proposed by the SBIC and 

approved by SBA in writing at the time 

of licensing, as described in § 107.331. 

* * * * * 

Impact Investment means an SBAIdentified Impact Investment or FundIdentified Impact Investment. 

Impact SBIC means any Section 

301(c) Partnership Licensee that must 

make at least 50 percent of all of its 

Loans and Investments (in dollars) in 

Impact Investments and is designated by 

SBA as an ‘‘Impact SBIC.’’ 

* * * * * 

SBA-Identified Impact Investment 

means a Financing that meets SBA’s 

definition of an Impact Investment, 

which SBA will publish from time to 

time on its Web site and which will 

include geographies and sectors of 

national priority. 

* * * * * 

■ 3. Add § 107.301 to read as follows: 

§ 107.301 Impact SBIC licensing fee 

discount. 

(a) All applicants seeking to be 

licensed as an Impact SBIC will receive 

a 60 percent discount, rounded to the 

nearest one-hundred dollars, on any fees 

to which they are subject under 

§ 107.300. 

(b) In the event an applicant seeking 

to be licensed as an Impact SBIC is 

licensed as anything other than an 

Impact SBIC, SBA reserves the right to 

recover, prior to licensing, the full 

dollar amount of any licensing fee 

discounts the applicant has received. 

■ 4. In § 107.310, designate the existing 

text as paragraph (a) and add paragraph 

(b) to read as follows: 

§ 107.310 When and how to apply for 

licensing as an Early Stage SBIC. 

* * * * * 

(b) Impact SBIC applicants. An 

applicant may elect to apply 

simultaneously for licensing as both an 

Early Stage SBIC and an Impact SBIC. 

Such applicants may apply as described 

in § 107.300 at any time and are not 

subject to the submission deadlines set 

forth in paragraph (a) of this section. 

Applicants seeking a dual license must 

comply with the regulations in this part 

pertaining to Early Stage SBICs and 

Impact SBICs, and to any requirements, 

other than submission deadlines, 

specified in the most recently published 

Early Stage Notice in the Federal 

Register. 

■ 5. Add §§ 107.330 and 107.331 to read 

as follows: 

§ 107.330 Evaluation of Impact SBIC 

license applicants. 

SBA will evaluate each applicant 

seeking to be licensed as an Impact SBIC 

based on the same factors applicable to 

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other license applicants, as set forth in 

§ 107.305, with particular emphasis on 

the managers’ skill and experience in 

originating, evaluating, executing and 

monitoring Impact Investments 

consistent with the applicant’s 

investment strategy. 

§ 107.331 Evaluation of Fund-Identified 

Impact Investments and measurement 

plans. 

If an applicant intends to qualify for 

an Impact SBIC license based on 

investments in Fund-Identified Impact 

Investments, SBA will evaluate the 

applicant’s proposed definition(s) of a 

Fund-Identified Impact Investment and 

its plan to comply with the 

measurement and reporting 

requirements of § 107.665, and will 

approve the same in writing at the time 

of licensing based the applicant’s 

satisfaction of the following: 

(a) Fund-Identified Impact 

Investments. Using the submitted 

application materials, any interviews 

with the applicant’s management team, 

the results of public record searches and 

any other due diligence conducted by 

SBA, SBA will assess the likelihood that 

the applicant’s proposed investment 

strategy and Fund-Identified Impact 

Investment definition(s) will generate, 

in the aggregate, beneficial social, 

environmental or economic impacts. 

SBA’s evaluation may consider factors 

such as whether the strategy will 

include investments in Portfolio 

Concerns that increase services to low 

income communities, engage in 

environmentally sustainable business 

practices or manufacture 

environmentally sustainable products, 

or that operate in industries of national 

priority other than in the sectors 

identified by SBA as an SBA-Identified 

Impact Investment. 

(b) Measurement and reporting plan. 

During licensing, each applicant seeking 

an Impact SBIC license under § 107.331 

must identify the assessment provider(s) 

and assessment system(s) it intends to 

use in order to comply with the 

requirements of § 107.665. Using the 

submitted application materials, any 

interviews with the applicant’s 

management team, the results of public 

record searches and any other due 

diligence conducted by SBA, SBA will 

assess the applicant’s proposed 

measurement and reporting plan based 

on the following factors: 

(1) The applicant’s proposed 

assessment system(s) must employ at 

least one approved measurement 

standard, from a list of approved 

standards published by SBA on its Web 

site from time to time. 

(2) The applicant’s proposed 

assessment system must comply with 

the following: 

(i) The assessment system’s criteria 

and weightings are publicly available; 

and 

(ii) The assessment system is capable 

of producing an assessment of the 

social, environmental and/or economic 

effects of impact investments. 

(3) The applicant’s proposed 

assessment provider(s) must each be an 

independent, third-party. An 

assessment provider will not be 

considered an independent third-party 

if any of the following conditions exist 

at the time of licensing or assessment: 

(i) The assessment provider is an 

Associate of the Impact SBIC or any of 

its Portfolio Concerns; or 

(ii) The assessment provider is 

materially financed by an association 

that represents the interests of the 

specific industry in which the Impact 

SBIC or its Portfolio Concerns are 

engaged. 

(c) Publication. SBA may periodically 

publish on its Web site: 

(i) General descriptions of impact 

investment strategies pursued by Impact 

SBICs licensed to make Fund-Identified 

Impact Investments; and 

(ii) Detailed descriptions of the 

assessment systems SBA has approved 

for use by Impact SBICs licensed to 

make Fund-Identified Impact 

Investments. 

■ 6. In § 107.502, designate the existing 

text as paragraph (a) and add paragraphs 

(b) and (c) to read as follows: 

§ 107.502 Representations to the public. 

* * * * * 

(b) Impact SBIC applicants must 

declare their intention to apply for an 

Impact SBIC license in any solicitation 

to investors. 

(c) Impact SBIC licensees must 

indicate that they have obtained an 

Impact SBIC license from SBA in any 

solicitation to investors. 

■ 7. Amend § 107.610 by adding 

paragraphs (g) and (h) to read as follows: 

§ 107.610 Required certifications for Loans 

and Investments. 

* * * * * 

(g) For each SBA-Identified Impact 

Investment: 

(i) A certification by the concern, 

dated as of the date of application for 

SBIC financing, as to the basis for its 

qualification as an Impact Investment; 

and 

(ii) A certification by the Impact SBIC, 

made contemporaneously with the 

certification of the concern, that the 

concern qualifies as an Impact 

Investment as of the date of the 

concern’s certification and the basis for 

such qualification. 

(h) For each Fund-Identified Impact 

Investment, a certification by the Impact 

SBIC, as of the date of the financing, 

that the concern qualifies as a FundIdentified Impact Investment under the 

definition(s) approved in writing by 

SBA and the basis for such 

qualification. 

■ 8. Add § 107.665 to read as follows: 

§ 107.665 Measurement and reporting 

requirements for Impact SBICs making 

Fund-Identified Impact Investments. 

Impact SBICs that SBA approved in 

writing to make Fund-Identified Impact 

Investments must obtain an assessment 

of their impact investment strategy from 

an independent, third-party provider 

within two years after licensing and 

again between five and seven years after 

licensing. Without prior written SBA 

approval, the Impact SBIC may not use 

an assessment system(s) or assessment 

provider(s) different from those the 

Impact SBIC identified and SBA 

approved during the licensing process. 

Each assessment must be submitted to 

SBA within 30 days of its completion. 

■ 9. Add § 107.693 to read as follows: 

§ 107.693 Impact SBIC examination fee 

discount. 

An Impact SBIC will receive a 10% 

discount on its examination base fee, 

rounded to the nearest one-hundred 

dollars, subject to the following: 

(a) The discount will be calculated 

based on the examination base as 

determined prior to any adjustments 

provided for under § 107.692. 

(b) Impact SBICs also licensed as 

Early Stage SBICs are entitled to any 

additional discounts, but exempt from 

any premium, that Early Stage SBICs 

would otherwise be required to pay 

under § 107.692. 

■ 10. Amend § 107.1120 by adding 

paragraph (l) to read as follows: 

§ 107.1120 General eligibility requirements 

for Leverage. 

* * * * * 

(l) If you are an Impact SBIC, certify 

in writing that, in accordance with 

§ 107.1810(f)(13), at least 50 percent of 

the aggregate dollar amount of your 

Financings will qualify as Impact 

Investments defined in § 107.50. 

■ 11. Amend § 107.1810 by adding 

paragraphs (f)(13) and (14) to read as 

follows: 

§ 107.1810 Events of default and SBA’s 

remedies for Licensee’s noncompliance 

with terms of Debentures. 

* * * * * 

(f) * * * 

(13) Failure by an Impact SBIC to 

meet investment requirements. You are 

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5676 Federal Register / Vol. 81, No. 22 / Wednesday, February 3, 2016 / Proposed Rules 

an Impact SBIC and, beginning on the 

first fiscal quarter end when your 

cumulative total Financings (in dollars) 

are at least equal to your Regulatory 

Capital, you have not made at least 50 

percent of such Financings to Small 

Businesses that at the time of your 

initial Financing were Impact 

Investments. 

(14) Failure by an Impact SBIC to 

meet assessment requirements. You are 

an Impact SBIC making Fund-Identified 

Impact Investments and you fail to 

obtain an independent, third-party 

assessment within two years of your 

licensing date and, again, between five 

and seven years from your licensing 

date, pursuant to the requirements 

under § 107.665. 

* * * * * 

■ 12. Add § 107.1940 to read as follows: 

§ 107.1940 Impact SBIC licensee 

noncompliance with regulations. 

(a) For any occurrence (as determined 

by SBA) of one or more of the events in 

this paragraph (a), SBA may avail itself 

of one or more of the remedies in 

paragraph (b) of this section. 

(1) Failure by an Impact SBIC to meet 

investment requirements. You are an 

Impact SBIC and, beginning on the first 

fiscal quarter end when your cumulative 

total Financings (in dollars) are at least 

equal to your Regulatory Capital, you 

have not made at least 50 percent of 

such Financings to Small Businesses 

that at the time of your initial Financing 

were Impact Investments. 

(2) Failure by an Impact SBIC to meet 

assessment requirements. You are an 

Impact SBIC making Fund-Identified 

Impact Investments and you fail to 

obtain an independent, third-party 

assessment within two years of your 

licensing date and, again, between five 

and seven years from your licensing 

date, pursuant to the requirements 

under § 107.665. 

(b) SBA may exercise any or all of the 

following rights: 

(1) Convert your Impact SBIC license 

to a standard SBIC license (including, in 

SBA’s discretion, requiring you to 

promptly notify your investors of the 

conversion); and 

(2) Require you to refund to SBA up 

to the full dollar amount of any 

licensing or examination fee discounts 

you have received prior to the date of 

your written notice. 

(c) SBA may invoke the remedies in 

paragraph (b) of this section only if: 

(1) It has given you at least 15 days 

to cure the noncompliance; 

(2) You fail to cure the 

noncompliance to SBA’s satisfaction 

within the allotted time. 

Dated: October 7, 2015. 

Maria Contreras-Sweet, 

Administrator. 

Editorial Note: This document was 

received for publication by the Office of the 

Federal Register on January 29, 2016. 

[FR Doc. 2016–01986 Filed 2–2–16; 8:45 am] 

BILLING CODE 8025–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 71 

[Docket No. FAA–2015–8060; Airspace 

Docket No. 15–ASW–4] 

Proposed Establishment of Class E 

Airspace; Moriarty, NM 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: This action proposes to 

establish Class E airspace at Moriarty, 

NM. Controlled airspace is necessary to 

accommodate new Standard Instrument 

Approach Procedures developed at 

Moriarty Airport, for the safety and 

management of Instrument Flight Rules 

(IFR) operations at the airport. 

DATES: Comments must be received on 

or before March 21, 2016. 

ADDRESSES: Send comments on this 

proposal to the U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE., 

Washington, DC 20590; telephone (202) 

366–9826. You must identify FAA 

Docket No. FAA–2015–8060; Docket 

No.15–ASW–4, at the beginning of your 

comments. You may also submit 

comments through the Internet at 

http://www.regulations.gov. You may 

review the public docket containing the 

proposal, any comments received, and 

any final disposition in person in the 

Dockets Office between 9:00 a.m. and 

5:00 p.m., Monday through Friday, 

except Federal holidays. The Docket 

Office (telephone 1–800–647–5527), is 

on the ground floor of the building at 

the above address. 

FAA Order 7400.9Z, Airspace 

Designations and Reporting Points, and 

subsequent amendments can be viewed 

online at http://www.faa.gov/air_traffic/ 

publications/. For further information, 

you can contact the Airspace Policy 

Group, Federal Aviation 

Administration, 800 Independence 

Avenue SW., Washington, DC 29591; 

telephone: 202–267–8783. The Order is 

also available for inspection at the 

National Archives and Records 

Administration (NARA). For 

information on the availability of FAA 

order 7400.9Z at NARA, call 202–741– 

6030, or go to http://www.archives.gov/ 

federal_register/code_of_federalregulations/ibr_locations.html. 

FAA Order 7400.9, Airspace 

Designations and Reporting Points, is 

published yearly and effective on 

September 15. 

FOR FURTHER INFORMATION CONTACT: Raul 

Garza Jr., Central Service Center, 

Operations Support Group, Federal 

Aviation Administration, Southwest 

Region, 10101 Hillwood Parkway, Fort 

Worth, TX 76177; telephone: 817–222– 

5874. 

SUPPLEMENTARY INFORMATION: 

Authority for This Rulemaking 

The FAA’s authority to issue rules 

regarding aviation safety is found in 

Title 49 of the United States Code. 

Subtitle I, Section 106 describes the 

authority of the FAA Administrator. 

Subtitle VII, Aviation Programs, 

describes in more detail the scope of the 

agency’s authority. This rulemaking is 

promulgated under the authority 

described in Subtitle VII, Part A, 

Subpart I, Section 40103. Under that 

section, the FAA is charged with 

prescribing regulations to assign the use 

of airspace necessary to ensure the 

safety of aircraft and the efficient use of 

airspace. This regulation is within the 

scope of that authority as it would 

establish Class E airspace at Moriarty 

Airport, Moriarty, NM. 

Comments Invited 

Interested parties are invited to 

participate in this proposed rulemaking 

by submitting such written data, views, 

or arguments, as they may desire. 

Comments that provide the factual basis 

supporting the views and suggestions 

presented are particularly helpful in 

developing reasoned regulatory 

decisions on the proposal. Comments 

are specifically invited on the overall 

regulatory, aeronautical, economic, 

environmental, and energy-related 

aspects of the proposal. 

Communications should identify both 

docket numbers and be submitted in 

triplicate to the address listed above. 

Commenters wishing the FAA to 

acknowledge receipt of their comments 

on this notice must submit with those 

comments a self-addressed, stamped 

postcard on which the following 

statement is made: ‘‘Comments to 

Docket No. FAA–2015–8060/Airspace 

Docket No. 15–ASW–4.’’ The postcard 

will be date/time stamped and returned 

to the commenter. 

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