Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Rules and Regulations 62819 

(6) Endorsements. (i) A corporation or 

labor organization may endorse a 

candidate, and may communicate the 

endorsement to the restricted class and 

the general public. The Internal 

Revenue Code and regulations 

promulgated thereunder should be 

consulted regarding restrictions or 

prohibitions on endorsements by 

nonprofit corporations described in 26 

U.S.C. 501(c)(3). 

(ii) Disbursements for announcements 

of endorsements to the general public 

are not contributions or expenditures, 

provided that: 

(A) The public announcement is not 

coordinated with a candidate, a 

candidate’s authorized committee, or 

their agents; and 

(B) Disbursements for any press 

release or press conference to announce 

the endorsement are de minimis. Such 

disbursements shall be considered de 

minimis if the press release and notice 

of the press conference are distributed 

only to the representatives of the news 

media that the corporation or labor 

organization customarily contacts when 

issuing non-political press releases or 

holding press conferences for other 

purposes. 

(iii) Disbursements for 

announcements of endorsements to the 

restricted class may be coordinated 

pursuant to 114.3(a) and are not 

contributions or expenditures provided 

that no more than a de minimis number 

of copies of the publication that 

includes the endorsement are circulated 

beyond the restricted class. 

* * * * * 

(d) Voter registration and get-out-thevote drives—(1) Voter registration and 

get-out-the-vote drives permitted. A 

corporation or labor organization may 

support or conduct voter registration 

and get-out-the-vote drives that are 

aimed at employees outside its 

restricted class and the general public. 

Voter registration and get-out-the-vote 

drives include providing transportation 

to the polls or to the place of 

registration. 

(2) Disbursements for certain voter 

registration and get-out-the-vote drives 

not expenditures. Voter registration or 

get-out-the-vote drives that are 

conducted in accordance with 

paragraphs (d)(2)(i) through (d)(2)(v) of 

this section are not expenditures. 

(i) The corporation or labor 

organization shall not make any 

communication expressly advocating 

the election or defeat of any clearly 

identified candidate(s) or candidates of 

a clearly identified political party as 

part of the voter registration or get-outthe-vote drive. 

(ii) The voter registration drive shall 

not be directed primarily to individuals 

previously registered with, or intending 

to register with, the political party 

favored by the corporation or labor 

organization. The get-out-the-vote drive 

shall not be directed primarily to 

individuals currently registered with the 

political party favored by the 

corporation or labor organization. 

(iii) These services shall be made 

available without regard to the voter’s 

political preference. Information and 

other assistance regarding registering or 

voting, including transportation and 

other services offered, shall not be 

withheld or refused on the basis of 

support for or opposition to particular 

candidates or a particular political 

party. 

(iv) Individuals conducting the voter 

registration or get-out-the-vote drive 

shall not be paid on the basis of the 

number of individuals registered or 

transported who support one or more 

particular candidates or political party. 

(v) The corporation or labor 

organization shall notify those receiving 

information or assistance of the 

requirements of paragraph (d)(2)(iii) of 

this section. The notification shall be 

made in writing at the time of the 

registration or get-out-the-vote drive. 

* * * * * 

■ 9. Section 114.10 is revised to read as 

follows: 

§ 114.10 Corporations and labor 

organizations making independent 

expenditures and electioneering 

communications. 

(a) General. Corporations and labor 

organizations may make independent 

expenditures, as defined in 11 CFR 

100.16, and electioneering 

communications, as defined in 11 CFR 

100.29. Corporations and labor 

organizations are prohibited from 

making coordinated expenditures as 

defined in 11 CFR 109.20, coordinated 

communications as defined in 11 CFR 

109.21, or contributions as defined in 11 

CFR part 100, subpart B. 

Note to paragraph (a): Pursuant to 

SpeechNow.org v. FEC, 599 F.3d 686 (D.C. 

Cir. 2010) (en banc), and Carey v. FEC, 791 

F. Supp. 2d 121 (D.D.C. 2011), corporations 

and labor organizations may make 

contributions to non-connected political 

committees that make only independent 

expenditures, or to separate accounts 

maintained by non-connected political 

committees for making only independent 

expenditures, notwithstanding 11 CFR 

114.2(b) and 11 CFR 114.10(a). The 

Commission has not conducted a rulemaking 

in response to these cases. 

(b) Reporting independent 

expenditures and electioneering 

communications. (1) Corporations and 

labor organizations that make 

independent expenditures aggregating 

in excess of $250 with respect to a given 

election in a calendar year shall file 

reports as required by 11 CFR part 114, 

104.4(a), and 109.10(b)–(e). 

(2) Corporations and labor 

organizations that make electioneering 

communications aggregating in excess 

of $10,000 in a calendar year shall file 

the statements required by 11 CFR 

104.20(b). 

(c) Non-authorization notice. 

Corporations or labor organizations 

making independent expenditures or 

electioneering communications shall 

comply with the requirements of 11 CFR 

110.11. 

(d) Segregated bank account. A 

corporation or labor organization may, 

but is not required to, establish a 

segregated bank account into which it 

deposits only funds donated or 

otherwise provided by persons other 

than national banks, corporations 

organized by authority of any law of 

Congress, or foreign nationals (as 

defined in 11 CFR 110.20(a)(3)), as 

described in 11 CFR 104.20(c)(7), from 

which it makes disbursements for 

electioneering communications. 

(e) Activities prohibited by the 

Internal Revenue Code. Nothing in this 

section shall be construed to authorize 

any organization exempt from taxation 

under 26 U.S.C. 501(a) to carry out any 

activity that it is prohibited from 

undertaking by the Internal Revenue 

Code, 26 U.S.C. 501, et seq. 

■ 10. Sections 114.14 and 114.15 are 

removed and reserved. 

On behalf of the Commission, 

Dated: October 9, 2014. 

Lee E. Goodman, 

Chairman, Federal Election Commission. 

[FR Doc. 2014–24666 Filed 10–20–14; 8:45 am] 

BILLING CODE 6715–01–P 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 107 

RIN 3245–AG57 

Small Business Investment 

Companies—Investments in Passive 

Businesses 

AGENCY: U.S. Small Business 

Administration. 

ACTION: Final rule. 

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

Small Business Administration (SBA) is 

revising the regulations for the Small 

Business Investment Company (SBIC) 

program concerning investments in 


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62820 Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Rules and Regulations 

passive businesses. SBICs are generally 

prohibited from investing in passive 

businesses under the Small Business 

Investment Act of 1958, as amended, as 

well as under SBIC program regulations. 

This final rule modifies an exception 

that allows an SBIC to make an 

investment in a passive small business 

that passes through the investment 

proceeds to one or more subsidiaries, 

each of which must be a non-passive 

small business. This modification 

allows an SBIC to structure an 

investment utilizing two levels of 

passive small businesses as passthrough entities under specific 

circumstances. The purpose of the 

modification is to place SBICs on a more 

equal footing with their non-SBIC 

counterparts in the venture capital and 

private equity sectors, in which 

investments structured with two passive 

levels are not uncommon. 

This final rule also includes several 

technical corrections. Specifically, the 

final rule updates the regulations by 

replacing obsolete Standard Industrial 

Classification (SIC) codes with their 

equivalents under the North American 

Industrial Classification System 

(NAICS); corrects erroneous paragraph 

cross-references; and modernizes the 

options for meeting the record 

preservation requirements by removing 

the reference to ‘‘microfilm.’’ 

DATES: This rule is effective November 

20, 2014. 

FOR FURTHER INFORMATION CONTACT: 

Theresa Jamerson, Office of Investment 

and Innovation, (202) 205–7563, or 

Carol Fendler, Office of Investment and 

Innovation, (202) 205–7559, or sbic@

sba.gov. 

SUPPLEMENTARY INFORMATION: 

I. Background Information 

The Small Business Investment Act of 

1958, as amended, prohibits an SBIC 

from making passive investments. 

Accordingly, SBA promulgated 13 CFR 

107.720(b), which states as a general 

rule that an SBIC is not permitted to 

finance a passive business. The 

regulation defines a business as passive 

if: (1) It is not engaged in a regular and 

continuous business operation; (2) its 

employees do not carry on the majority 

of day-to-day operations, and the 

company does not exercise day-to-day 

control and supervision over contract 

workers; or (3) the business passes 

through substantially all financing 

proceeds to another entity. 

Prior to this final rule, § 107.720(b) 

provided two exceptions to the general 

prohibition that allow SBICs to employ 

certain structures in which the direct 

recipient of financing is a passive 

business, but the end recipient is an 

active business. The first exception, 

identified in § 107.720(b)(2), provided 

that an SBIC may make an investment 

in a passive small business that passes 

through the investment proceeds to one 

or more subsidiary companies, each of 

which must be a non-passive small 

business. SBA defined a subsidiary 

company as one in which the financed 

passive business directly owns at least 

50 percent of the outstanding voting 

securities. The 50 percent ownership 

requirement was promulgated in 1998 

(63 FR 5859, February 5, 1998), 

replacing an earlier provision that 

allowed a passive small business to be 

financed only if it passed the financing 

proceeds through to a wholly-owned 

small business subsidiary. In addressing 

comments suggesting that SBA should 

drop the ownership requirement 

altogether, the 1998 final rule stated, 

‘‘SBA believes that when a Licensee 

makes an investment in a holding 

company which is unrelated to the 

Licensee and is, in fact, a portfolio 

company, the requirement that proceeds 

be passed through only to 50 percentowned subsidiaries should remain. This 

provision ensures that there is a 

significant relationship between the 

financed passive business and the active 

businesses which ultimately receive the 

proceeds, and that the passive business 

is not functioning simply as a reinvestor.’’ The Small Business 

Investment Act prohibits an SBIC from 

financing ‘‘relenders or re-investors.’’ 

The same final rule also established a 

second exception, promulgated as 

§ 107.720(b)(3), which allows an SBIC 

organized as a partnership to form, with 

SBA’s prior approval, a passive whollyowned corporation, the sole purpose of 

which is to serve as a conduit for 

financing provided to one or more 

eligible unincorporated small 

businesses. An SBIC may form such a 

corporation only if a direct financing of 

the small business would cause any of 

the SBIC’s investors to incur unrelated 

business taxable income (UBTI) under 

section 511 of the Internal Revenue 

Code of 1986, as amended (26 U.S.C. 

511). A corporation formed for this 

purpose is one example of what is 

commonly referred to as a ‘‘blocker 

corporation’’ to denote an entity that is 

subject to Federal corporate income tax 

and is intended to shield an investor 

from certain types of tax liability (most 

typically UBTI for a tax-exempt investor 

or ‘‘effectively connected income’’ for a 

foreign investor). 

In promulgating § 107.720(b)(3), SBA 

recognized that financing proceeds 

flowing from an SBIC to its whollyowned subsidiary (an ‘‘Associate’’ under 

§ 107.50) would technically represent a 

prohibited conflict of interest under 

§ 107.730(a); the 1998 final rule 

addressed this issue by specifically 

providing that funds invested by an 

SBIC in a blocker corporation created 

under § 107.720(b)(3) would not 

constitute a violation of § 107.730(a). 

Similarly, the 1998 final rule provided 

that an SBIC’s 100 percent ownership of 

a blocker corporation would not 

constitute a violation of § 107.865(a), 

which limits SBIC control over a Small 

Business, but the need for this provision 

was essentially eliminated by the 

relaxation of the regulatory restrictions 

on control in 2002. 

On December 23, 2013, SBA 

published a proposed rule (78 FR 

77377) to expand the holding company 

exception set out in § 107.720(b)(2), by 

modifying the definition of a subsidiary 

company to allow financing proceeds to 

pass through a second passive business 

before reaching a non-passive 

subsidiary. The proposed definition did 

not change the requirement that a 

passive direct recipient of SBIC 

financing own at least 50% of the active 

business that ultimately receives the 

proceeds (or that the proceeds are used 

to acquire); rather it allowed for indirect 

ownership through a second passive 

Small Business. The preamble to the 

proposed rule discussed how this 

change would allow SBICs to have 

greater flexibility in structuring 

transactions typically employed by 

other private equity and venture firms. 

The proposed rule also included several 

technical corrections. 

SBA received one set of comments on 

the proposed rule. These are discussed 

in the following section-by-section 

analysis. 

II. Section-by-Section Analysis 

A. Passive Business Rules 

The proposed rule expanded the 

definition of subsidiary company in 

§ 107.720(b)(2) to allow financing 

proceeds to pass through a second 

passive business before reaching a nonpassive subsidiary. 

The commenter supported the 

expansion of the passive investment 

exceptions and described transaction 

structures that the commenter believed 

would be permitted under the proposed 

rule. SBA agrees with the commenter 

that the proposed rule would allow 

SBICs to ‘‘finance a passive business to 

take advantage of the favorable tax 

treatment under Internal Revenue Code 

§ 338(h)(10)’’ and ‘‘invest in an 

operating company through two passive 

business holding companies, subject to 

certain requirements.’’ The preamble in 


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the proposed rule specifically discussed 

these two instances. 

The commenter believed that the 

proposed rule would also allow an SBIC 

to create a blocker corporation as one of 

the two permitted levels of passive 

businesses under proposed 

§ 107.720(b)(2), for the following 

purposes: (1) To shield tax exempt 

investors from receiving unrelated 

business taxable income (UBTI) from an 

investment in a flow-through entity; (2) 

to protect an SBIC’s foreign investors 

from the taxation imposed on income 

that is considered to be ‘‘effectively 

connected’’ to a U.S. trade or business; 

and (3) in the case of an SBIC that either 

is a BDC licensed under the Investment 

Company Act of 1940 or is owned by a 

parent BDC, to avoid jeopardizing the 

BDC’s qualification as a regulated 

investment company under the Internal 

Revenue Code. 

The commenter’s interpretation of the 

proposed revision of § 107.720(b)(2) is 

correct, provided the financing proceeds 

are passed through only to one or more 

non-passive ‘‘subsidiary companies’’ as 

defined in that section. Proposed 

§ 107.720(b)(2) did not specify any 

purpose for which a passive entity may 

or may not be utilized. Thus, SBA’s 

view is that an investment that is 

otherwise eligible under § 107.720(b)(2) 

could include a passive entity that 

serves one of the tax-avoidance 

purposes cited by the commenter. SBA 

reminds SBICs, however, that 

§ 107.720(b)(2) does not permit any 

investment in which the first-level 

passive entity does not own, either 

directly or indirectly, at least 50 percent 

of the outstanding voting interests of the 

active small business that ultimately 

receives the financing proceeds. 

Furthermore, it is important to note 

that the proposed rule did not include 

any expansion of § 107.720(b)(3), which 

governs the formation and use of 

blocker corporations and which does 

not include any percentage of 

ownership requirement comparable to 

the ‘‘subsidiary company’’ requirement 

in § 107.720(b)(2). SBA did not intend to 

permit the formation and use of blocker 

corporations under § 107.720(b)(3) for 

any purpose other than the avoidance of 

UBTI as permitted by the existing 

regulation. 

The commenter also suggested the 

following changes to further liberalize 

permitted financings to passive 

businesses under § 107.720(b): 

(1) Revise § 107.720(b)(2) to explicitly 

state that an SBIC may ‘‘form and 

finance’’ (rather than merely ‘‘finance’’) 

a passive business. 

(2) Eliminate the requirement for SBA 

prior approval to form a blocker 

corporation under § 107.720(b)(3). 

(3) Revise § 107.720(b)(3) to permit an 

SBIC to form a blocker corporation to 

enable its foreign investors to avoid 

‘‘effectively connected’’ income. 

(4) Further broaden § 107.720(b)(2) to 

allow SBICs to structure financings in 

which proceeds may pass through an 

unlimited number of passive entities 

before reaching an eligible, non-passive 

small business. 

The final rule does not adopt these 

changes. For the reasons discussed 

below, SBA may consider the first three 

suggestions for future rulemaking, but is 

opposed to allowing investments to be 

structured with more than two passive 

levels. 

Regarding the suggestion to allow an 

SBIC to ‘‘form’’ a passive holding 

company under § 107.720(b)(2), SBA 

acknowledges that some SBICs may 

already be providing financing to 

holding companies in which they own 

a controlling equity interest, in 

compliance with the provisions of 

existing §§ 107.865 and 107.720. Thus, 

the addition of ‘‘form’’ to § 107.720(b)(2) 

may not represent a significant change. 

However, SBA wishes to further 

evaluate this change before proposing it 

in any future rulemaking. 

SBA may consider the two suggested 

changes to § 107.720(b)(3) in future 

rulemaking provided that additional 

safeguards are included to address SBA 

concerns regarding credit risk, 

specifically SBA’s ability to collect from 

SBICs that default on their debt to SBA. 

Even under § 107.720(b) as it existed 

prior to this final rule, SBA has 

encountered three issues that affect its 

recoveries from defaulting SBICs with 

assets that are held indirectly through a 

passive company: (1) SBA’s lack of 

access to the books and records of the 

passive company; (2) fees and expenses 

charged at each level, diverting money 

from the actual investment and returns; 

and (3) greater opportunity for 

disproportionate distributions to entities 

other than the SBIC, thereby reducing 

the funds available to repay SBA. SBA 

expects that any future rulemaking to 

expand the permitted financing of 

passive businesses (under either 

§ 107.720(b)(2) or (b)(3)) would include 

provisions to address these concerns. 

The commenter’s suggestion to allow 

more than two levels of passive holding 

companies under § 107.720(b)(2) stated 

that ‘‘the crucial concept should be that 

the operating company receives 

substantially all the proceeds that the 

SBIC is investing.’’ While this concept 

is perhaps valid with respect to the 

SBIC program’s public policy objectives, 

SBA believes that it would be 

problematic to implement in practice, 

precisely because of the credit and 

oversight concerns cited in the 

preceding paragraph. Even with 

potential new regulatory protections 

that would address these concerns, SBA 

believes that effective monitoring of 

transactions with multiple levels of 

passive companies would require 

resources well beyond those available to 

the Agency. 

Despite its concerns about the 

potential risks associated with 

investments structured with passive 

entities, SBA is finalizing this rule at the 

request of SBICs so that they may 

participate in a broader range of 

financing transactions from which small 

businesses will benefit. SBA expects 

that SBICs will exercise due diligence 

and appropriate monitoring to ensure 

that passive companies do not charge 

excessive fees or expenses so that 

maximum funding is provided to the 

active small business investment and 

returns to the SBIC are not adversely 

affected. As previously noted in this 

preamble, SBA intends to take into 

account its experience with such 

structures in future rulemaking. 

The commenter also noted a potential 

source of confusion in proposed 

§ 107.720(b)(2)(ii). This section was 

intended to allow an SBIC to route 

financing proceeds to an active small 

business through two levels of passive 

holding companies, as long as the first 

holding company owns at least 50 

percent of the outstanding voting 

securities of the active company. The 

commenter suggested that the stated 

requirements for a minimum of 50 

percent ownership at each level (i.e., the 

first passive holding company must own 

at least 50 percent of the second, which 

must own at least 50 percent of the 

active company) could be 

misinterpreted as requiring only 50% 

ownership at each level. This incorrect 

reading could result in as little as 25 

percent ownership of the active 

company by the first passive holding 

company. The commenter’s suggestion 

was to delete the intermediate 

ownership percentage requirements and 

retain only the requirement for at least 

50 percent ownership of the active 

company by the first passive company. 

SBA agrees with this clarification and 

has adopted it in the final rule. 

The commenter also noted that 

§ 107.720(b)(2)(i) and (ii) define the 50 

percent ownership requirement in terms 

of ‘‘outstanding voting securities’’. The 

commenter suggested that SBA confirm 

that the regulation encompasses both 

the ‘‘securities’’ of a corporation and the 

‘‘interests’’ of a limited liability 


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62822 Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Rules and Regulations 

company or limited partnership. SBA 

confirms that the regulation is intended 

to refer to both ‘‘securities’’ and 

‘‘interests’’ as described by the 

commenter. SBA has retained the 

ownership requirement based on 

‘‘outstanding voting securities’’ in the 

final rule to remain consistent with 

other regulations (e.g., § 107.865(a)) that 

similarly refer to ‘‘voting securities’’ and 

are understood to include interests of 

limited liability companies and limited 

partnerships. 

B. Technical Changes to Regulations 

SBA received one comment on the 

technical changes in the proposed rule. 

The commenter noted that the proposed 

change to § 107.720(c) mistakenly 

reverses the descriptions of NAICS 

codes 531110 and 531120. SBA has 

corrected this in the final rule. 

Otherwise, all of the technical changes 

have been finalized as proposed, and 

additional cross-references have been 

corrected in the final rule. SBA’s 

section-by-section explanation of the 

changes is repeated here as a 

convenience to the reader. 

Section 107.600—General Requirement 

of Licensee To Maintain and Preserve 

Records 

The record-keeping requirements 

applicable to SBICs are found primarily 

in § 107.600. This section enumerates 

various types of records and the periods 

for which they must be preserved. The 

final paragraph of the section, 

§ 107.600(c)(4), allows an SBIC to 

substitute ‘‘a microfilm or computerscanned or generated copy’’ for any 

original paper record. The final rule 

modernizes this provision by deleting 

the reference to ‘‘microfilm’’ as a 

preservation medium. 

Section 107.720—Small Businesses That 

May Be Ineligible for Financing 

Real Estate Businesses. Under the 

prior § 107.720(c), an SBIC was not 

permitted to finance ‘‘any business 

classified under Major Group 65 (Real 

Estate) or Industry No. 1531 (Operative 

Builders) of the SIC Manual’’ with 

exceptions provided for certain 

businesses that provide services within 

the real estate industry (such as title 

abstract companies). The ‘‘SIC Manual’’ 

refers to the Standard Industrial 

Classification system formerly used by 

Federal statistical agencies in classifying 

business establishments for the purpose 

of collecting, analyzing, and publishing 

statistical data related to the U.S. 

business economy. In 1997, the Federal 

government replaced the SIC codes with 

the North American Industrial 

Classification System (NAICS). 

The final rule updates 13 CFR 

107.720(c) by replacing SIC codes with 

their 2012 NAICS equivalents, which 

duplicate the previous general 

prohibitions and permitted exceptions 

as closely as possible. The following 

tables show each of the SIC codes 

referenced in the current regulation and 

the NAICS code that SBA has replaced 

it with. 

CROSSWALK FROM SIC CODES TO NAICS CODES

Prohibited investments 

SIC Code NAICS Code 

6512 Operators of nonresidential buildings .................................................................... 531120 Lessors of nonresidential buildings (except 

miniwarehouses). 

6513 Operators of apartment buildings .......................................................................... 531110 Lessors of residential buildings and dwellings. 

6514 Operators of dwellings other than apartment buildings. 

6515 Operators of residential mobile home sites ........................................................... 531190 Lessors of other real estate property. 

6517 Lessors of railroad property. 

6519 Lessors of real property, not elsewhere classified. 

6552 Land subdividers and developers, except cemeteries .......................................... 237210 Land subdivision. 

1531 Operative builders .................................................................................................. 236117 New housing for-sale builders. 

236118 Residential remodelers.1

236210 Industrial building construction.1

236220 Commercial and institutional building construction.1

1An SBIC may not finance a Small Business classified under this code if such business is primarily engaged in construction or renovation of 

properties on its own account rather than as a hired contractor. 

RESTRICTED INVESTMENTS

SIC Code NAICS Code 

6531 Real estate agents and managers (establishments primarily engaged in renting, 

buying, selling, managing, and appraising real estate for others).

531210 Offices of real estate agents and brokers. 

531311 Residential property managers. 

531312 Nonresidential property managers. 

531320 Offices of real estate appraisers. 

531390 Other activities related to real estate. 

Permitted only if business derives at least 80% of its revenue from non-Affiliate 

sources.

Permitted only if business derives at least 80% of its 

revenue from non-Affiliate sources. 

PERMITTED INVESTMENTS

SIC Code NAICS Code 

6541 Title abstract offices ............................................................................................... 541191 Title abstract and settlement offices. 

The only SIC code in the previous 

regulation that did not correspond 

directly to one or more NAICS codes is 

1531, ‘‘Operative builders.’’ The SIC 

Manual described this industry as 

consisting of establishments primarily 


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engaged in the construction (including 

renovation) of single-family houses and 

other buildings for sale on their own 

account rather than as contractors. The 

industry included speculative builders 

and condominium developers. The 2012 

NAICS codes primarily use the term 

‘‘for-sale builder’’ to describe businesses 

engaged in construction or renovation of 

buildings on their own account. 

However, except for those engaged in 

new housing construction (NAICS code 

236117), for-sale builders are combined 

with contractors in three different 

NAICS codes, depending on whether 

they are engaged in residential 

remodeling (NAICS code 236118), 

manufacturing/industrial building 

construction (NAICS code 236210), or 

commercial/institutional building 

construction (NAICS code 236220). The 

final rule prohibits an SBIC from 

providing financing to a Small Business 

classified under any of these three 

NAICS codes only if the company is 

primarily engaged in construction or 

renovation of buildings as a for-sale 

builder. Guidance provided by the 

United States Census Bureau indicates 

that the key element of a for-sale builder 

is whether a firm is engaged in 

construction on its own account, as 

opposed to having been hired as a 

contractor. For example, the final rule 

permits an SBIC to provide financing to 

a firm that primarily renovates or builds 

additions to homes if the homeowners 

have contracted for the firm’s services. 

However, a firm that primarily acquires 

homes to renovate and re-sell at its own 

risk is a ‘‘for-sale remodeler’’ that would 

not be eligible for financing by an SBIC. 

Section 107.1120—General Eligibility 

Requirements for Leverage, and Section 

107.1150—Maximum Amount of 

Leverage for a Section 301(c) Licensee 

The final rule corrects erroneous 

paragraph references in §§ 107.1120 and 

107.1150, which set forth leverage 

eligibility provisions for SBICs. Some of 

these erroneous references were not 

identified in the proposed rule, but are 

nevertheless finalized in this rule 

because they are merely corrections that 

do not substantively change the subject 

regulations. 

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. 

601–612) 

Executive Order 12866 

The Office of Management and Budget 

has determined that this final rule is not 

a ‘‘significant’’ regulatory action under 

Executive Order 12866. This is also not 

a ‘‘major’’ rule under the Congressional 

Review Act, 5 U.S.C. 801, et seq. 

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 rule does 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 

final rule has no federalism implications 

warranting the preparation of a 

federalism assessment. 

Paperwork Reduction Act, 44 U.S.C. 

Ch. 35 

For purposes of the Paperwork 

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

has determined that this final rule does 

not impose any new reporting or 

recordkeeping requirements. 

Regulatory Flexibility Act, 5 U.S.C. 

601–612 

The Regulatory Flexibility Act (RFA), 

5 U.S.C. 601, requires administrative 

agencies to consider the effect of their 

actions on small entities, small nonprofit businesses, and small local 

governments. Pursuant to the RFA, 

when an agency issues a rule, the 

agency must prepare an Initial 

Regulatory Flexibility Act (IRFA) 

analysis which describes whether the 

impact of the rule will have a significant 

economic impact on a substantial 

number of small entities. However, 

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 final rule would affect all 

SBICs, of which there are currently 

close to 300. SBA estimates that 

approximately 75% of these SBICs are 

small entities. Therefore, SBA has 

determined that this final rule does have 

an impact on a substantial number of 

small entities. However, SBA has 

determined that the impact on entities 

affected by the rule is not significant. 

The passive business provision provides 

SBICs with additional flexibility to 

employ a transaction structure 

commonly used by private equity or 

venture capital funds that are not SBICs. 

SBA asserts that the economic impact 

of the rule, if any, is minimal and 

entirely beneficial to small SBICs. 

Accordingly, the Administrator of the 

SBA certifies that this final rule will not 

have a significant impact on a 

substantial number of small entities. 

List of Subjects in 13 CFR Part 107 

Investment companies, Loan 

programs-business, Reporting and 

recordkeeping requirements, Small 

businesses. 

For the reasons stated in the 

preamble, the Small Business 

Administration amends 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 

continues to read as follows: 

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

687(c), 687b, 687d, 687g, 687m, and Pub. L. 

106–554, 114 Stat. 2763; and Pub. L. 111–5, 

123 Stat. 115. 

§ 107.50 [Amended] 

■ 2. Amend § 107.50 by removing the 

definition of ‘‘SIC Manual’’. 

■ 3. Revise § 107.600(c)(4) to read as 

follows: 

§ 107.600 General requirement for 

Licensee to maintain and preserve records. 

* * * * * 

(c) * * * 

(4) You may substitute a computerscanned or generated copy for the 

original of any record covered by this 

paragraph (c). 

■ 4. Amend § 107.720 by revising 

paragraphs (b)(2) and (c)(1) and the 

introductory text of paragraph (c)(2) to 

read as follows: 

§ 107.720 Small Businesses that may be 

ineligible for financing. 

* * * * * 

(b) * * * 

(2) Exception for pass-through of 

proceeds to subsidiary. You may finance 

a passive business if it is a Small 

Business and it passes substantially all 

the proceeds through to one or more 

subsidiary companies, each of which is 

an eligible Small Business that is not 

passive. For the purpose of this 

paragraph (b)(2), ‘‘subsidiary company’’ 

means a company in which the 

Financed passive business either: 

(i) Directly owns at least 50 percent of 

the outstanding voting securities; or 

(ii) Indirectly owns at least 50 percent 

of the outstanding voting securities (by 

directly owning the outstanding voting 

securities of another passive Small 

Business that is the direct owner of the 


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62824 Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Rules and Regulations 

outstanding voting securities of the 

subsidiary company). 

* * * * * 

(c) Real Estate Businesses. (1) You are 

not permitted to finance any business 

classified under North American 

Industry Classification System (NAICS) 

codes 531110 (lessors of residential 

buildings and dwellings), 531120 

(lessors of nonresidential buildings 

except miniwarehouses), 531190 

(lessors of other real estate property), 

237210 (land subdivision), or 236117 

(new housing for-sale builders). You are 

not permitted to finance any business 

classified under NAICS codes 236118 

(residential remodelers), 236210 

(industrial building construction), or 

236220 (commercial and institutional 

building construction), if such business 

is primarily engaged in construction or 

renovation of properties on its own 

account rather than as a hired 

contractor. You are permitted to finance 

a business classified under NAICS codes 

531210 (offices of real estate agents and 

brokers), 531311 (residential property 

managers), 531312 (nonresidential 

property managers), 531320 (offices of 

real estate appraisers), or 531390 (other 

activities related to real estate), only if 

such business derives at least 80 percent 

of its revenue from non-Affiliate 

sources. 

(2) You are not permitted to finance 

a Small Business, regardless of NAICS 

classification, if the Financing is to be 

used to acquire or refinance real 

property, unless the Small Business: 

* * * * * 

■ 5. Amend § 107.1120 by revising 

paragraphs (e) and (f) to read as follows: 

§ 107.1120 General eligibility requirements 

for Leverage. 

* * * * * 

(e) For any Leverage request pursuant 

to § 107.1150(d)(2)(i), certify that at least 

50 percent (in dollars) of your 

Financings made on or after the date of 

such request will be invested in Small 

Businesses located in low-income 

geographic areas. 

(f) For any Leverage request pursuant 

to § 107.1150(d)(2)(ii), certify that at 

least 50 percent (in dollars) of the 

Financings made by each Licensee 

under Common Control on or after the 

date of such request will be invested in 

Small Businesses located in low-income 

geographic areas. 

* * * * * 

■ 6. Amend § 107.1150 by revising the 

first and second sentences of the 

introductory text and paragraphs (d) 

introductory text, (d)(1)(iii) and (iv), the 

first sentence of (d)(2), (e)(1), and 

(e)(2)(iii) and (iv) to read as follows: 

§ 107.1150 Maximum amount of Leverage 

for a Section 301(c) Licensee. 

A Section 301(c) Licensee, other than 

an Early Stage SBIC, may have 

maximum outstanding Leverage as set 

forth in paragraphs (a), (b), (d), and (e) 

of this section. An Early Stage SBIC may 

have maximum outstanding Leverage as 

set forth in paragraph (c) of this 

section. * * * 

* * * * * 

(d) Additional Leverage based on 

investment in low-income geographic 

areas. Subject to SBA’s credit policies, 

you may have outstanding Leverage in 

excess of the amounts permitted by 

paragraphs (a) and (b) of this section in 

accordance with this paragraph (d). If 

you were licensed before October 1, 

2009, you may seek additional Leverage 

under paragraph (d)(1) only. If you were 

licensed on or after October 1, 2009, you 

may seek additional Leverage under 

paragraph (d)(1) or (2), but not both. In 

this paragraph (d), ‘‘low income 

geographic areas’’ are as defined in 

§ 108.50 of this chapter. Any investment 

that you use as a basis to seek additional 

leverage under this paragraph (d) cannot 

also be used to seek additional leverage 

under paragraph (e) of this section. 

(1) * * * 

(iii) Subtract from your outstanding 

Leverage the lesser of paragraph (d)(1)(i) 

or (ii). 

(iv) If the amount calculated in 

paragraph (d)(1)(iii) is less than the 

maximum leverage determined under 

paragraph (a) of this section, the 

difference between the two amounts 

equals your additional Leverage 

availability. 

(2) Investment in Small Businesses 

located in low-income geographic areas. 

This paragraph (d)(2) applies only to 

Licensees licensed on or after October 1, 

2009. * * * 

* * * * * 

(e) Additional Leverage based on 

Energy Saving Qualified Investments in 

Smaller Enterprises. (1) Subject to SBA’s 

credit policies, if you were licensed on 

or after October 1, 2008, you may have 

outstanding Leverage in excess of the 

amounts permitted by paragraphs (a) 

and (b) of this section in accordance 

with this paragraph (e). Any investment 

that you use as a basis to seek additional 

Leverage under this paragraph (e) 

cannot also be used to seek additional 

Leverage under paragraph (d) of this 

section. 

* * * * * 

(2) * * * 

(iii) Subtract from your outstanding 

Leverage the lesser of paragraph (e)(2)(i) 

or (ii). 

(iv) If the amount calculated in 

paragraph (e)(2)(iii) is less than the 

maximum Leverage determined under 

paragraph (a) of this section, the 

difference between the two amounts 

equals your additional Leverage 

availability. 

Maria Contreras-Sweet, 

Administrator. 

[FR Doc. 2014–24803 Filed 10–20–14; 8:45 am] 

BILLING CODE 8025–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117 

[Docket No. USCG–2014–0908] 

Drawbridge Operation Regulations; 

Long Island, New York Inland 

Waterway From East Rockaway Inlet to 

Shinnecock Canal, Nassau, NY 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of deviation from 

drawbridge regulation. 

SUMMARY: The Coast Guard has issued a 

temporary deviation from the operating 

schedule that governs the operation of 

the Long Beach Bridge, across Reynolds 

Channel, mile 4.7, at Nassau, New York. 

This deviation is necessary to allow the 

bridge to remain in the closed position 

for thirty days to facilitate scheduled 

bridge maintenance, the replacement of 

the concrete bridge deck. 

DATES: This deviation is effective 

without actual notice from October 21, 

2014 through 8 p.m. on November 19, 

2014. For the purposes of enforcement, 

actual notice will be used from 9 a.m. 

on October 20, 2014, until October 21, 

2014. 

ADDRESSES: The docket for this 

deviation [USCG–2014–0908] is 

available at http://www.regulations.gov. 

Type the docket number in the 

‘‘SEARCH’’ box and click ‘‘SEARCH.’’ 

Click on Open Docket Folder on the line 

associated with this deviation. You may 

also visit the Docket Management 

Facility in Room W12–140, on the 

ground floor of the Department of 

Transportation West Building, 1200 

New Jersey Avenue SE., Washington, 

DC 20590, between 9 a.m. and 5 p.m., 

Monday through Friday, except Federal 

holidays. 

FOR FURTHER INFORMATION CONTACT: If 

you have questions on this temporary 

deviation, call or email Ms. Judy LeungYee, Project Officer, First Coast Guard 

District, judy.k.leung-yee@uscg.mil, or 

(212) 668–7165. If you have questions 

on viewing the docket, call Cheryl 


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