This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

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

The Code of Federal Regulations is sold by

the Superintendent of Documents.

Rules and Regulations Federal Register

39335 

Vol. 82, No. 159 

Friday, August 18, 2017 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 107 

RIN 3245–AG67 

Small Business Investment 

Companies: Passive Business 

Expansion and Technical Clarifications 

AGENCY: U.S. Small Business 

Administration. 

ACTION: Final rule and withdrawal of 

final rule. 

SUMMARY: The U.S. Small Business 

Administration (SBA) is withdrawing 

the final rule concerning Small Business 

Investment Company (SBIC) 

investments in passive businesses that 

was published on December 28, 2016, 

and is replacing it with this final rule. 

This final rule expands SBIC permitted 

investments in passive businesses and 

includes new reporting and other 

requirements for passive investments. 

This rule also makes a few minor 

technical amendments. 

DATES: As of August 18, 2017, the final 

rule published December 28, 2016 (81 

FR 95424), delayed until March 21, 

2017, on January 26, 2017 (82 FR 8499), 

further delayed until May 20, 2017, on 

March 21, 2017 (82 FR 14428), and 

further delayed until August 18, 2017, 

on May 2, 2017 (82 FR 20433), is 

withdrawn. The amendments in this 

rule are effective September 18, 2017. 

FOR FURTHER INFORMATION CONTACT: 

Theresa Jamerson, Office of Investment 

and Innovation, (202) 205–7563 or sbic@

sba.gov. 

SUPPLEMENTARY INFORMATION: 

I. Background Information 

The SBIC Program is an SBA 

financing program authorized under 

Title III of the Small Business 

Investment Act of 1958, 15 U.S.C. 681 

et seq. Congress created the Small 

Business Investment Company (SBIC) 

program to ‘‘stimulate and supplement 

the flow of private equity capital and 

long-term loan funds, which smallbusiness concerns need for the sound 

financing of their business operations 

and for their growth, expansion, and 

modernization, and which are not 

available in adequate supply. . . .’’ 15 

U.S.C. 661. Congress intended that the 

program ‘‘be carried out in such manner 

as to insure the maximum participation 

of private financing sources.’’ Id. In 

accordance with that policy, SBA does 

not invest directly in small businesses. 

Rather, through the SBIC Program, SBA 

licenses and provides debenture 

leverage (Leverage) to SBICs. SBICs are 

privately-owned and professionally 

managed for-profit investment funds 

that make loans to, and investments in, 

qualified small businesses using a 

combination of privately raised capital 

and Leverage guaranteed by SBA. SBA 

will guarantee the repayment of 

debentures issued by an SBIC up to a 

maximum of $150 million or three times 

the amount of the SBIC’s qualifying 

private capital, whichever is less 

(although pursuant to SBA’s regulations 

and credit policies, SBA rarely approves 

an SBIC to have a maximum amount of 

Leverage outstanding in excess of two 

times the amount of the SBIC’s 

qualifying private capital). 

SBICs are generally prohibited from 

investing in passive businesses under 

the Act. Prior to this final rule, the SBIC 

program regulations provided for the 

following two exceptions that allowed 

an SBIC to structure an investment 

utilizing a passive small business as a 

pass-through: 

A. ‘‘Holding company exception’’— 

§ 107.720(b)(2): This exception provides 

conditions under which an SBIC may 

structure an investment through up to 

two levels of passive entities to make an 

investment in a non-passive business 

that is a subsidiary of the passive 

business directly financed by the SBIC. 

The regulation defines a subsidiary 

company as one in which the financed 

passive business directly or indirectly 

owns at least 50% of the outstanding 

voting securities. As an example, this 

exception allows an SBIC to finance 

ABC Holdings 1, a passive small 

business, with the proceeds flowing 

through ABC Holdings 2, another 

passive small business, and then to ABC 

Manufacturing, a non-passive small 

business in which ABC Holdings 1 

owns directly or indirectly at least 50% 

of the outstanding voting securities. 

B. ‘‘Blocker corporation exception’’— 

§ 107.720(b)(3): This exception enables a 

partnership SBIC, with SBA’s prior 

approval, to provide financing to a small 

business through a passive, whollyowned C corporation, but only if a 

direct financing would cause one or 

more of the SBIC’s investors to incur 

Unrelated Business Taxable Income 

(UBTI). A passive C corporation formed 

under the second exception is 

commonly known as a blocker 

corporation. 

On October 5, 2015, SBA published a 

proposed rule, Small Business 

Investment Companies: Passive 

Business Expansion and Technical 

Clarifications (80 FR 60077), to further 

expand the permitted use of passive 

businesses, provide clarification with 

regard to investments in such 

businesses, and make minor technical 

clarifications. SBA received three 

comments on the proposed rule, not 

including one comment that generally 

questioned the fairness of the Act as a 

whole and did not provide any specific 

comments on the rule. The three 

comments pertinent to the rule are 

addressed in Section II. 

On December 28, 2016, SBA 

published a final rule regarding SBIC 

investments in passive businesses, 81 

FR 95419, which had an effective date 

of January 27, 2017. On January 26, 

2017, SBA published a notice in the 

Federal Register at 82 FR 8499, to delay 

the effective date of the final rule until 

March 21, 2017, and to re-open the rule 

for additional public comment in 

accordance with the memorandum 

dated January 20, 2017, from the 

Assistant to the President and Chief of 

Staff, entitled ‘‘Regulatory Freeze 

Pending Review.’’ SBA received one 

comment that supported the December 

2016 final rule. On March 21, 2017, SBA 

published another notice to delay the 

effective date of the final rule until May 

20, 2017, to give the new administration 

time to further consider the rule. 82 FR 

14428. After completing its review, SBA 

issued another delay notice at 82 FR 

20433 (May 2, 2017), which stated that 

SBA was considering removing a 

provision in the final rule published on 

December 28, 2016 that would allow 

SBICs to use a blocker corporation if an 

investor in an SBIC had elected to be 

taxed as a regulated investment 

company (RIC), and if a direct 

investment into the operating company 

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39336 Federal Register / Vol. 82, No. 159 / Friday, August 18, 2017 / Rules and Regulations 

would jeopardize the investor’s RIC 

status. As part of this document, SBA 

asked for additional comments 

regarding the removal of this provision, 

and delayed the effective date of the 

December 28, 2016 final rule until 

August 18, 2017. SBA received one 

comment in response to its proposed 

change. This comment is addressed in 

Section II. 

SBA is withdrawing the final rule 

published on December 28, 2016, and is 

replacing it with this final rule. This 

final rule expands permitted 

investments in passive businesses, 

provides further clarification with 

regard to investments in such 

businesses, and adds certain 

requirements to improve SBA’s ability 

to monitor such investments. The rule 

also includes a conforming change to 

the regulations regarding the amount of 

Leverage available to SBICs under 

common control to be consistent with 

the Consolidated Appropriations Act, 

2016, Public Law 114–113, 129 Stat. 

2242 (December 22, 2015), which 

increased the maximum amount of such 

Leverage from $225 million to $350 

million. 

II. Section-by-Section Analysis 

This section discusses the comments 

SBA received on the proposed rule 

dated October 5, 2017 (80 FR 60077), as 

well as the comment received in 

response to the notice published on May 

2, 2017 (82 FR 20433). 

A. Passive Business Rules 

Section 107.720—Small Businesses That 

May Be Ineligible for Financing 

1. Changes to Holding Company 

Exception § 107.720(b)(2): SBA 

proposed revisions to § 107.720(b)(2) to 

explicitly permit an SBIC to form and 

finance a passive business that will 

either pass the proceeds through to or 

use the proceeds to acquire all or part 

of a non-passive business. These 

changes were intended to codify SBA’s 

existing interpretation of the 

regulations. 

SBA received two comments on 

§ 107.720(b)(2) indicating that the 

proposed changes would be more 

effective if the passive business directly 

financed was not required to own at 

least 50 percent of the underlying active 

business. Commenters also suggested 

that SBICs be allowed to structure 

investments using passive investment 

vehicles ‘‘irrespective of the number of 

parent entities involved so long as the 

parent entities in question directly or 

indirectly own or control at least 50 

percent of the voting or economic 

interests of the active business.’’ SBA 

received similar comments as part of the 

rulemaking process when it last 

proposed expanding the permitted use 

of passive businesses on December 23, 

2013 (78 FR 77377). SBA considered 

these comments a second time in 

developing this final rule; however, 

neither set of comments was adopted. 

SBA believes that complex investment 

structures involving passive entities 

require more protections, not fewer. 

Although the new § 107.720(b)(4) 

should help address some of SBA’s 

credit concerns with respect to these 

structures, SBA believes that the 

subsidiary relationship between the 

financed passive business and the active 

company must be maintained to 

facilitate SBA’s access to the 

information and records needed to 

effectively monitor these transactions 

and to aid in the recovery of assets in 

the event of a default. SBA also 

maintains its position that effective 

monitoring of transactions with 

unlimited levels of passive companies 

would require resources well beyond 

those available to the Agency. Proposed 

§ 107.720(b)(2) is adopted without 

change. 

2. Changes to Blocker Corporation 

Exception—§ 107.720(b)(3): The 

proposed rule included the following 

changes to § 107.720(b)(3): 

a. Removing the requirement to obtain 

SBA’s prior approval to form a blocker 

corporation; 

b. Permitting an SBIC to form a 

blocker corporation to enable any 

foreign investors to avoid effectively 

connected income (ECI) under the 

Internal Revenue Code; 

c. Permitting a blocker corporation to 

provide financing to a second passive 

small business that passes the proceeds 

through to a non-passive small business 

in which it owns at least 50 percent of 

the outstanding voting securities 

(effectively permitting an investment 

structured with two levels of passive 

companies, one of which is the blocker 

corporation); and 

d. Removing outdated language 

indicating that an SBIC’s ownership of 

a blocker corporation formed under 

§ 107.720(b)(3) will not constitute a 

violation of § 107.865(a). This provision 

was rendered unnecessary by a rule 

change in 2002 (67 FR 64789) that 

revised § 107.865(a) to permit an SBIC 

to exercise control over a small business 

for up to seven years without SBA 

approval. 

SBA received comments on proposed 

§ 107.720(b)(3) as discussed below: 

a. Regulated Investment Company 

(RIC) Exception. All three commenters 

asked that the regulations provide an 

additional exception for SBICs that are 

wholly owned subsidiaries of Business 

Development Companies (BDCs). A BDC 

typically elects to be taxed as a RIC 

pursuant to Subchapter M of the 

Internal Revenue Code of 1986. In 

general, a RIC is not subject to U.S. 

Federal income taxes on income and 

gains that it distributes to stockholders, 

provided that it satisfies certain 

minimum distribution requirements. To 

qualify as a RIC, a BDC must satisfy 

certain source of income and assetdiversification tests; among other things, 

a RIC must generally derive at least 90% 

of its gross income for each taxable year 

from certain types of investment. In 

particular, the commenters explained 

that equity interests in pass-through 

entities (such as an LLC or S 

corporation) generate operating income 

that, if received or deemed received 

directly by a BDC, could disqualify the 

BDC from maintaining RIC status, and 

therefore, such interests must often be 

held through a blocker corporation. The 

commenters requested that 

§ 107.720(b)(3) be revised to permit an 

SBIC to form a blocker corporation to 

avoid adverse tax consequences to an 

investor (typically a parent BDC) that 

has elected to be taxed as a RIC. 

The final rule published on December 

28, 2016 (81 FR 95419) adopted this 

comment. However, in the delay notice 

published on May 2, 2017 (82 FR 

20433), SBA stated that it was 

considering removing this provision and 

solicited comment from the public on 

that proposed action. The notice cited 

SBA’s concern that, in light of the 

increased complexities involved in 

monitoring and examining investments 

structured through blocker entities, the 

expanded use of such entities could 

increase risk to the SBIC program unless 

SBA were to increase examination 

resources to monitor these complex 

transactions. The notice further 

explained that while SBA expects 

limited use of blocker entities for the 

purposes of avoiding UBTI and ECI 

(because these situations apply to only 

a few SBICs), SBA would expect 

significantly greater usage of blocker 

entities by SBICs that are subsidiaries of 

BDCs that have elected to be taxed as 

RICs. Currently, there are 31 SBICs with 

BDC investors (BDC–SBICs) that 

collectively account for over 23% of 

SBA’s outstanding Leverage, and SBA 

expects that most of them would make 

use of blocker entities if the RIC 

exception were to be finalized. 

SBA received one comment stating 

that not including the RIC exception 

would prevent BDC–SBICs from taking 

equity positions and benefiting from the 

upside afforded by equity investments. 

While the commenter strongly 

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supported SBA’s goal of protecting 

taxpayers, the commenter believed that 

this goal may be better served by 

including the RIC exception and thereby 

increasing a BDC–SBIC’s potential for 

maximizing profits. The commenter 

further noted that the profits from a 

single successful equity investment can 

offset losses on other investments and 

that SBA’s guarantee is protected by a 

BDC–SBIC’s portfolio as a whole. The 

commenter suggested that SBA consider 

creating the RIC exception, but making 

the exception subject to SBA prior 

approval. SBA recognizes that not 

including the RIC exception for blocker 

corporations limits a BDC–SBIC’s ability 

to execute some transactions; however, 

due to the large amount of outstanding 

Leverage held by BDC–SBICs, SBA 

remains concerned that these 

investments would unacceptably 

increase risk to SBA absent an increase 

in SBA’s resources to monitor and 

examine such investments. Adding a 

requirement for SBA’s prior approval of 

a blocker entity does not address this 

concern; SBA would still need to review 

and approve the transactions and 

examine each of the passive businesses 

used in the transaction. For this reason, 

this final rule does not include the RIC 

exception. SBA notes that BDC–SBICs 

may still take equity positions in small 

businesses not structured as pass 

through entities and also may invest 

using any passive structure permitted 

under § 107.720(b)(2). 

b. Blocker Entity Form of 

Organization. At the proposed stage of 

this rule, SBA received two comments 

suggesting that non-corporate forms of 

organization should be permitted for 

blocker entities. The commenters 

explained that these structures are often 

‘‘more streamlined in terms of corporate 

formalities than a C corporation’’ and 

suggested the regulations allow ‘‘any 

entity that elects to be taxed as a 

corporation for Federal income tax 

purposes.’’ SBA considered this 

suggestion to be overly broad, but 

partially adopted this suggestion in this 

final rule by allowing a blocker entity to 

be structured as an LLC that elects to be 

taxed as a corporation. 

c. Two Level Holding Company 

Financing. Two commenters indicated 

that § 107.720(b)(3) should allow SBICs 

to structure a financing with a blocker 

entity coupled with two additional 

levels of passive holding companies as 

defined in § 107.720(b)(2). The 

commenters stated that the proposed 

rule puts an SBIC that requires a blocker 

entity to accommodate its investors at a 

disadvantage compared to other SBICs 

that do not require a blocker entity, 

since the blocker entity can only finance 

a single passive business entity that in 

turn makes an investment into an active 

business. For example, an SBIC with a 

foreign investor would not be able to 

participate in a financing that is 

structured as a two-level passive 

business financing under 

§ 107.720(b)(2), if it also needed a 

separate passive business to serve as a 

blocker entity in order to avoid 

effectively connected income. If 

adopted, this suggestion would 

effectively permit up to three levels of 

passive businesses between the SBIC 

and the operating business. These 

additional levels of passive businesses 

impose a burden on SBA as regulator 

and increase the Agency’s credit risk. 

SBA believes that two levels of passive 

businesses under either exception 

should provide SBICs with sufficient 

flexibility to operate successfully, and 

this final rule does not adopt the 

suggested change. 

d. SBA did not receive any comments 

on the proposed change to 

§ 107.720(b)(3) regarding the removal of 

outdated language. This rule adopts the 

change as proposed. 

3. Additional Passive Business 

Guidance—§ 107.720(b)(4): The 

proposed rule identified SBA’s concerns 

with regard to passive investments, 

including ensuring the financing dollars 

go to the eligible non-passive small 

business, fees being charged at each 

passive business level, and SBA’s ability 

to access passive business financial 

records, especially in the case of a 

defaulting SBIC. To address these 

concerns, SBA proposed making the 

following changes in new 

§ 107.720(b)(4), which would apply to 

any eligible passive investment made 

under § 107.720(b)(2) or (b)(3): 

a. ‘‘Substantially All’’ Definition. 

Clarifying the meaning of ‘‘substantially 

all’’ in § 107.720(b)(2) and (b)(3) to mean 

99 percent of the financing proceeds 

after deduction of actual application 

fees, closing fees, and expense 

reimbursements, which may not exceed 

those permitted under § 107.860. 

b. Fee Requirements. Requiring fees 

charged by an SBIC or its Associate 

under §§ 107.860 and 107.900 to not 

exceed those permitted if the SBIC had 

directly financed the eligible Small 

Business and requiring any such fees 

received by an SBIC’s Associate to be 

paid to the SBIC in cash within 30 days 

of receipt. 

c. ‘‘Portfolio Concern’’ Clarification. 

Clarifying that both passive and nonpassive businesses included in a 

financing are ‘‘Portfolio Concerns’’; 

therefore, they are subject to record 

keeping and reporting obligations with 

respect to any ‘‘Portfolio Concern,’’ 

defined in § 107.50 as ‘‘a Small Business 

Assisted by a Licensee.’’ 

SBA received 3 comments on 

proposed § 107.720(b)(4) as discussed 

below: 

a. ‘‘Substantially All’’ Definition. 

Commenters suggested that the 

definition of ‘‘substantially all’’ be 

lowered to 95 percent of the proceeds 

instead of 99% of the proceeds because 

they were concerned that the 99 percent 

threshold ‘‘may be too limiting and pose 

issues in deal structuring.’’ SBA did not 

adopt this comment. The definition 

already excludes allowable fees and 

expense reimbursements permitted 

under §§ 107.860 and 107.900, and SBA 

believes that a 95 percent threshold 

could result in excessive expenses being 

charged by the passive businesses, 

effectively diverting proceeds from the 

intended operating business. Although 

this percentage may seem 

inconsequential, 4% of a $20 million 

financing represents $800,000 that 

could be diverted from the operating 

business. 

b. Fee Requirements. Two 

commenters suggested removing the 

requirement that fees received by an 

Associate must be paid over in cash to 

the SBIC. They noted that SBIC program 

policy guidance known as TechNote 7a, 

which provides guidelines concerning 

allowable management expenses for 

leveraged SBICs (see www.sba.gov/ 

sbicpolicy), already requires that 100% 

of fees collected under § 107.860 or 

§ 107.900 must benefit the SBIC, either 

by being paid directly to the SBIC or (if 

paid to an Associate) through a 

corresponding reduction in the 

management fee paid by the SBIC, 

typically called a ‘‘management fee 

offset.’’ Commenters also indicated that 

management fee offsets have tax 

advantages relative to other approaches. 

Although SBA recognizes that 

management fee offsets can provide tax 

advantages, SBA did not adopt this 

suggestion because of the difficulty in 

monitoring investments utilizing 

passive businesses and identifying fees 

associated with each passive business in 

addition to those paid by the operating 

business. 

c. ‘‘Portfolio Concern’’ Clarification. 

Two commenters indicated that the 

clarification of Portfolio Concern should 

be revised to apply only ‘‘for the 

purposes of this part 107.720’’ to avoid 

any unintended effects arising from the 

use of the term ‘‘Portfolio Concern’’ in 

other sections of the regulations. The 

commenters indicated that this 

adjustment would still allow SBA to 

retain the necessary information rights 

contemplated by the proposed rule. A 

search for the term ‘‘Portfolio Concern’’ 

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39338 Federal Register / Vol. 82, No. 159 / Friday, August 18, 2017 / Rules and Regulations 

within the regulations identified the 

following: 

• § 107.50 defines ‘‘Portfolio 

Concern’’ as ‘‘a Small Business Assisted 

by a Licensee.’’ 

• §§ 107.600–107.660 describe record 

keeping and information requirements, 

including those for a Portfolio Concern. 

• § 107.730 discusses conflicts of 

interest with regards to Portfolio 

Concerns. 

• § 107.760 discusses how a change 

in size or activity affect the Licensee 

with regard to a Portfolio Concern. 

• § 107.850 discusses restrictions on 

redemption of Equity Securities of a 

Portfolio Concern. 

SBA believes that all of the 

requirements in these sections are 

applicable to passive business 

financings. Therefore, this suggestion 

was not adopted. 

4. Section 107.610 Required 

certifications for Loans and Investments. 

The proposed rule also added a 

certification requirement to § 107.610 to 

require an SBIC that finances a business 

under § 107.720(b)(3) to certify as to the 

qualifying basis for such financing. The 

certification replaces the requirement 

for SBA prior approval of the formation 

and financing of a blocker corporation. 

As previously discussed under the 

changes to § 107.720(b)(3) paragraph, 

the December 2016 final rule, 81 FR 

95419 (December 28, 2016), would have 

permitted the formation of a blocker 

entity by an SBIC with an investor that 

had elected to be taxed as a RIC. Since 

this final rule does not include the RIC 

exception, that portion of the 

certification requirement has been 

removed from § 107.610 in this final 

rule. The final § 107.610 adopts the 

proposed rule (80 FR 60077) language 

with respect to the formation of blocker 

entities to accommodate investors 

subject to UBTI or ECI with minor 

technical changes to clarify these two 

permitted exceptions. 

B. Technical Changes 

SBA also proposed the following 

technical changes to the regulations: 

1. Section 107.50 Definition of terms. 

Changing ‘‘Associates’s’’ to 

‘‘Associate’s’’. 

2. Section 107.210 Minimum capital 

requirements for Licensees. Modifying 

paragraph (a) of § 107.210 to allow both 

Leverageable Capital and Regulatory 

Capital to fall below the stated 

minimums if the reductions are 

performed in accordance with an SBAapproved wind-up plan per 

§ 107.590(c), to conform with SBA’s 

current oversight practices. 

3. Section 107.503 Licensee’s 

adoption of an approved valuation 

policy. Changing the last sentence of 

§ 107.503(a) to indicate that valuation 

guidelines for SBICs may be obtained 

from the SBIC program’s public Web 

site, www.sba.gov/sbic. 

4. Section 107.630 Requirement for 

Licensees to file financial statements 

with SBA (Form 468). Removing current 

§ 107.630(d), which provides a mailing 

address for submission of SBA Form 

468, and re-designating paragraph (e) as 

paragraph (d). These instructions are no 

longer necessary because SBICs submit 

this information electronically using the 

SBA’s web-based application. 

5. Section 107.1100 Types of Leverage 

and application procedures. Correcting 

the misspelling of ‘‘Yu’’ to ‘‘You’’ and 

removing paragraph (c), which 

identifies where to send Leverage 

applications. This paragraph is 

unnecessary because the application 

forms provide these instructions. 

None of the comments SBA received 

in response to the proposed rule were 

related to these technical changes. This 

final rule incorporates these changes as 

proposed. 

C. Increase to Maximum Leverage to 

SBICs Under Common Control 

Section 521 of the Consolidated 

Appropriations Act, 2016, amended 

section 303(b)(2) of the Act to increase 

the maximum amount of Leverage 

available to two or more SBICs under 

Common Control from $225 million to 

$350 million. SBA defines Common 

Control in 13 CFR 107.50 to mean a 

condition where two or more persons, 

either through ownership, management, 

contract, or otherwise, are under the 

control of one group or person. SBA 

presumes that two or more SBICs are 

under Common Control if, among other 

things, they have common officers, 

directors, or general partners. Currently, 

13 CFR 107.1150(b) limits two or more 

SBICs under Common Control to the 

maximum aggregate amount of 

outstanding Leverage of $225 million, 

which amount is subject to further 

limitations under SBA’s credit policies. 

Solely as a conforming change, this rule 

increases the maximum amount set 

forth in the regulation from $225 

million to $350 million. This statutory 

change was not addressed previously 

because it had not yet been enacted 

when the rule was proposed. Now that 

it has, the technical change has been 

included to ensure consistency between 

the regulations and the current law. 

Compliance With Executive Orders 

12866, 12988, 13132, 13563, and 13771, 

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 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 rule 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 rule does not have 

retroactive or presumptive effect. 

Executive Order 13132 

This final 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 

rule has no federalism implications 

warranting the preparation of a 

federalism assessment. 

Executive Order 13563 

This final rule was developed in 

response to comments received on 

previously proposed amendments to 

these regulations on investments in 

passive businesses. See 78 FR 77377 

(December 23, 2013). SBA received one 

set of comments on that proposed rule 

that suggested changes to further 

liberalize permitted financings to 

passive businesses under § 107.720(b). 

In response to the comment, SBA 

indicated in the related final rule 

published on October 21, 2014 (79 FR 

62819), that it would further consider 

the suggested changes in a future 

rulemaking. As part of that 

reconsideration, SBA discussed the 

comments with industry representatives 

and solicited additional comments in 

the proposed rule published in October 

2015 at 80 FR 60077. In December 2016, 

SBA published a final rule that reflected 

the industry feedback, as well as 

comments from the general public. 81 

FR 95419 (December 28, 2016). After 

reconsideration of that published final 

rule in accordance with the 

memorandum, dated January 20, 2017, 

from the Assistant to the President and 

Chief of Staff, entitled ‘‘Regulatory 

Freeze Pending Review,’’ as discussed 

above, on three separate occasions SBA 

delayed implementation of the rule. 

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SBA also solicited additional comments 

from the public. Any comments 

received in response to those requests 

were also considered in finalizing this 

rule. 

Executive Order 13771 

This rule is not an EO 13771 

regulatory action because this rule is not 

significant under EO 12866. 

Paperwork Reduction Act, 44 U.S.C. 

Ch. 35 

SBA has determined that this rule 

would impose additional reporting and 

recordkeeping requirements under the 

Paperwork Reduction Act. In particular, 

this rule implements changes to the 

Portfolio Financing Report, SBA Form 

1031 (OMB Control Number 3245– 

0078), to clarify information to be 

reported in Parts A, B, and C of the 

form. Both the proposed rule (80 FR 

60077) and the December 2016 Final 

Passive Business Rule (81 FR 95419) 

included additional questions in a new 

Part D on the Form 1031 to collect 

information regarding Impact SBIC 

investments. These additions were 

related to the proposed rule, entitled 

‘‘Impact SBICs,’’ published on February 

3, 2016 (81 FR 5666), which would have 

defined a new class of SBICs in the 

regulations. However, because SBA is 

not finalizing that rule, these questions 

are no longer required and have been 

removed from the Form 1031. As a 

result, proposed Parts E and F have been 

designated as Parts D and E, 

respectively, in the revised Form 1031 

and are discussed in detail below. 

The title, description of respondents, 

description of the information collection 

and the changes to it are discussed 

below with an estimate of the revised 

annual 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 

each collection of information. 

Title: Portfolio Financing Report, SBA 

Form 1031 (OMB Control Number 

3245–0078). 

Summary: SBA Form 1031 is a 

currently approved information 

collection. SBA regulations, specifically 

§ 107.640, require all SBICs to submit a 

Portfolio Financing Report using SBA 

Form 1031 for each financing that an 

SBIC provides to a Small Business 

Concern within 30 days after closing an 

investment. SBA uses the information 

provided on Form 1031 to evaluate SBIC 

compliance with regulatory 

requirements. The form is also SBA’s 

primary source of information for 

compiling statistics on the SBIC 

program as a provider of capital to small 

businesses. The proposed rule (80 FR 

60077) invited the public to provide 

comments on the following changes to 

SBA Form 1031: 

(1) Clarifying that SBICs should report 

the non-passive Small Business Concern 

information in the Form 1031. SBA has 

noted that SBICs sometimes report data 

on the passive Small Business Concern 

rather than the non-passive Small 

Business Concern when reporting 

financing information. SBA has clarified 

that the SBIC should report data on the 

non-passive Small Business Concern 

when reporting information on 

financings using passive businesses in 

the Form 1031 Part A—the Small 

Business Concern; Part B—the prefinancing data; and Part C—the 

financing information, with the 

exception of the financing dollars in 

Question 29. The amount of financing 

dollars provided by the SBIC should be 

the total amount of such financing, 

regardless of whether the dollars were 

provided directly or indirectly to the 

non-passive business concern. Example: 

The SBIC provides $5 million in equity 

to ABC Holding Corporation, which 

passes $4.98 million to the non-passive 

business, Acme Manufacturing LLC. In 

addition, the SBIC provides $5 million 

in debt directly to Acme Manufacturing 

LLC. The SBIC would report 

information on Acme Manufacturing 

LLC in Parts A, B, and C. However, the 

total financing dollars would be 

reported as $5 million in equity and $5 

million in debt for a total of $10 million 

in total financing dollars. 

(2) Identifying financings using one or 

more passive businesses. SBA has 

added a question on whether the 

financing utilizes one or more passive 

businesses as part of the financing, to 

help SBA identify these financings. 

(3) Adding information on passive 

business financings to aid in regulatory 

compliance monitoring. SBA has also 

added a requirement under the new Part 

D for SBICs to upload a file in Portable 

Document Format (PDF) that contains 

the following information, which SBA 

will use to help assess whether the 

financing meets regulatory compliance: 

(a) Qualifying exception: 

Identification of the passive business 

exception under which the financing is 

made (i.e., § 107.720(b)(2) Exception for 

pass-through of proceeds to subsidiary, 

or § 107.720(b)(3) Exception for certain 

Partnership Licensees). If the SBIC 

indicates that the financing is made 

under § 107.720(b)(3), it would also 

indicate the qualifying basis for the 

financing (i.e., financing would cause an 

investor in the fund to incur unrelated 

business taxable income or effectively 

connected income). 

(b) Passive Business Entities: 

Identification of the name and employer 

ID number for each passive business 

entity used within the financing. This is 

needed so that SBA can identify all 

Portfolio Concerns involved in the 

financing. 

(c) Financing Structure Description: A 

description of the financing structure, 

including the flow of the money 

between the SBIC and the non-passive 

Small Business Concern that receives 

the proceeds (including amounts and 

types of securities between each entity), 

and the ownership from the SBIC 

through each entity to the non-passive 

Small Business Concern. This 

information will help SBA assess that 

the Small Business Concern receives 

‘‘substantially all’’ the financing dollars 

and the ownership percentages are in 

compliance with the regulations. This 

will also help SBA with SBICs 

transferred to the Office of Liquidation 

to identify the structure of the financing 

and aid in recovery of SBA leverage. 

SBA did not receive any comments on 

the proposed changes. Therefore, except 

as described above, all other changes are 

adopted as final in this rule. SBA 

updated the below burden estimates 

from the December 2016 final rule (81 

FR 31489) to remove the Impact SBIC 

burden estimate and update the 

estimates based on the SBIC portfolio as 

of June 2017, more recent SBIC 

financing data, and updated hourly 

costs. 

Description of Respondents and 

Burden: As of June 2017 there were 

approximately 316 licensed SBICs. All 

of these SBICs are required to submit 

SBA Form 1031 for each financing. The 

current estimated number of responses 

(i.e., number of financings) is 2,695 

based on a recent three year period (FY 

2014 through 2016). The current 

estimate indicates that it takes 

approximately 12 minutes to complete 

the form, for a total annual burden of 

539 hours. 

Neither the number of respondents 

nor the number of responses per year is 

expected to be affected by this rule. 

However, SBA estimates an increase in 

the burden hours as a result of the 

additional reporting in new passive 

business reporting section, as discussed 

below. 

Passive Business Reporting. SBA 

believes that the SBIC should be able to 

provide the passive business 

information since it should be readily 

available as part of the financing. SBA 

estimates that providing the information 

will take on average an additional 30 

minutes for those financings utilizing 

passive businesses, with no incremental 

burden for those financings that do not 

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39340 Federal Register / Vol. 82, No. 159 / Friday, August 18, 2017 / Rules and Regulations 

use a passive business. SBA estimates 

that about 14% of the annual responses 

relate to passive businesses financings 

(based on financing data for the three 

year period of FYs 2014 through 2016). 

Based on the number of SBICs reporting 

such financings the total estimated 

annual hour burden resulting from Part 

D reporting would be 189. 

Therefore, the total estimated annual 

hour burden for all SBICs submitting 

SBA Form 1031s in a year would be 728 

hours. 

The current cost estimate for 

completing SBA Form 1031 uses a rate 

of $35 per hour for an accounting 

manager to fill out the form. Using that 

same rate, the cost per form would 

change from $7 per form to $9.45 per 

form. However, SBA has increased its 

estimate of an hourly rate for an 

accounting manager to $46 per hour 

(estimated using www1.salary.com/ 

Accounting-Manager-hourly-wages.html 

in May 2017), which rate results in a 

new cost per form of $12.43 for an 

aggregate cost of $33,488 for the 2,695 

estimated responses. 

This final rule also identifies 

information that an SBIC must maintain 

in its files to support the required 

changes. SBA believes that the SBICs 

should already be maintaining this 

information since a passive business by 

definition is a Portfolio Concern and the 

SBIC should be maintaining all 

documents needed to support each 

financing. The rule makes this 

expectation explicit. Furthermore, 

currently, an SBIC must maintain this 

information for it to effectively monitor 

and evaluate an investment that uses a 

passive business to finance a nonpassive business. Therefore, SBA does 

not believe this recordkeeping 

requirement increases the burden. 

The rule also requires a certification 

under § 107.610 when the SBIC makes 

a financing using the exemption in 

§ 107.720(b)(3). This includes 

maintaining records supporting the 

certification. Since this regulation 

effectively replaces the requirement for 

SBICs to seek prior SBA approval, SBA 

does not believe this change will 

increase the burden. 

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 a Final Regulatory 

Flexibility Act (FRFA) 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 FRFA, if the 

rulemaking is not expected to have a 

significant economic impact on a 

substantial number of small entities. 

This rule would affect all SBICs, of 

which there are currently 316. SBA 

estimates that approximately 98 percent 

of these SBICs are small entities. 

Therefore, SBA has determined that this 

rule would have an impact on a 

substantial number of small entities. 

However, SBA has determined that the 

economic impact on entities affected by 

the rule would not be significant. As 

discussed under the Paperwork 

Reduction Act section, SBICs would 

need to provide descriptions of the 

transactions in the Form 1031 for which 

the annual burden totals 189 hours for 

the 316 SBICs. Based on the estimated 

$46 per hour, the cost for each SBIC 

would be approximately $28 per year 

(189 hours divided by 316 SBICs 

multiplied by $46 per hour). The 

changes in the passive business 

regulation provide SBICs with 

additional flexibility to employ 

transaction structures commonly used 

by private equity or venture capital 

funds that are not SBICs. 

SBA asserts that the economic impact 

of the rule, if any, would be minimal 

and beneficial to small SBICs. 

Accordingly, the Administrator of the 

SBA certifies that this rule would not 

have a significant economic 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 13 CFR part 107 

as follows: 

PART 107—SMALL BUSINESS 

INVESTMENT COMPANIES 

■ 1. The authority citation for part 107 

continues to read as follows: 

Authority: 15 U.S.C. 681, 683, 687(c), 687b, 

687d, 687g, 687m. 

§ 107.50 [Amended] 

■ 2. Amend § 107.50 by removing from 

the definition of ‘‘Lending Institution’’ 

the term ‘‘Associates’s’’ and adding in 

its place the term ‘‘Associate’s’’. 

■ 3. Amend § 107.210 by revising 

paragraph (a) introductory text to read 

as follows: 

§ 107.210 Minimum capital requirements 

for Licensees. 

(a) Companies licensed on or after 

October 1, 1996. A company licensed on 

or after October 1, 1996, must have 

Leverageable Capital of at least 

$2,500,000 and must meet the 

applicable minimum Regulatory Capital 

requirement in this paragraph (a), unless 

lower Leverageable Capital and 

Regulatory Capital amounts are 

approved by SBA as part of a Wind-Up 

Plan in accordance with § 107.590(c): 

* * * * * 

■ 4. Amend § 107.503 by revising the 

last sentence of paragraph (a) to read as 

follows: 

§ 107.503 Licensee’s adoption of an 

approved valuation policy. 

(a) * * * These guidelines may be 

obtained from SBA’s SBIC Web site at 

www.sba.gov/sbic. 

* * * * * 

■ 5. Amend § 107.610 by adding 

paragraph (g) to read as follows: 

§ 107.610 Required certifications for Loans 

and Investments. 

* * * * * 

(g) For each passive business financed 

under § 107.720(b)(3), a certification by 

you, dated as of the closing date of the 

Financing, as to the basis for the 

qualification of the Financing under 

§ 107.720(b)(3) and identifying one or 

more limited partners for which a direct 

Financing would cause those investors: 

(1) To incur ‘‘unrelated business 

taxable income’’ under section 511 of 

the Internal Revenue Code (26 U.S.C. 

511); or 

(2) To incur ‘‘effectively connected 

income’’ to foreign investors under 

sections 871 and 882 of the Internal 

Revenue Code (26 U.S.C. 871 and 882). 

§ 107.630 [Amended] 

■ 6. Amend § 107.630 by removing 

paragraph (d) and redesignating 

paragraph (e) as paragraph (d). 

■ 7. Amend § 107.720 by revising 

paragraphs (b)(2) and (3) and adding 

paragraph (b)(4) 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 

provide Financing directly to a passive 

business, including a passive business 

that you have formed, if it is a Small 

Business and it passes substantially all 

the proceeds through to (or uses 

substantially all the proceeds to acquire) 

one or more subsidiary companies, each 

of which is an eligible Small Business 

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Federal Register / Vol. 82, No. 159 / Friday, August 18, 2017 / Rules and Regulations 39341 

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, or will own as a 

result of the Financing, at least 50 

percent of the outstanding voting 

securities; or 

(ii) Indirectly owns, or will own as a 

result of the Financing, 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 outstanding voting 

securities of the subsidiary company). 

(3) Exception for certain Partnership 

Licensees. If you are a Partnership 

Licensee, you may form one or more 

blocker entities in accordance with this 

paragraph (b)(3). For the purposes of 

this paragraph, a ‘‘blocker entity’’ means 

a corporation or a limited liability 

company that elects to be taxed as a 

corporation for Federal income tax 

purposes. The sole purpose of a blocker 

entity must be to provide Financing to 

one or more eligible, unincorporated 

Small Businesses. You may form such 

blocker entities only if a direct 

Financing to such Small Businesses 

would cause any of your investors to 

incur ‘‘unrelated business taxable 

income’’ under section 511 of the 

Internal Revenue Code (26 U.S.C. 511) 

or to incur ‘‘effectively connected 

income’’ to foreign investors under 

sections 871 and 882 of the Internal 

Revenue Code (26 U.S.C. 871 and 882). 

Your ownership and investment of 

funds in such blocker entities will not 

constitute a violation of § 107.730(a). 

For each passive business financed 

under this section 107.720(b)(3), you 

must provide a certification to SBA as 

required under § 107.610(g). A blocker 

entity formed under this paragraph may 

provide Financing: 

(i) Directly to one or more eligible 

non-passive Small Businesses; or 

(ii) Directly to a passive Small 

Business that passes substantially all the 

proceeds directly to (or uses 

substantially all the proceeds to acquire) 

one or more eligible non-passive Small 

Businesses in which the passive Small 

Business directly owns, or will own as 

a result of the Financing, at least 50% 

of the outstanding voting securities. 

(4) Additional conditions for 

permitted passive business financings. 

Financings permitted under paragraphs 

(b)(2) or (3) of this section must meet all 

of the following conditions: 

(i) For the purposes of this paragraph 

(b), ‘‘substantially all’’ means at least 99 

percent of the Financing proceeds after 

deduction of actual application fees, 

closing fees, and expense 

reimbursements, which may not exceed 

those permitted by § 107.860. 

(ii) If you and/or your Associate 

charge fees permitted by § 107.860 and/ 

or § 107.900, the total amount of such 

fees charged to all passive and nonpassive businesses that are part of the 

same Financing may not exceed the fees 

that would have been permitted if the 

Financing had been provided directly to 

a non-passive Small Business. Any such 

fees received by your Associate must be 

paid to you in cash within 30 days of 

the receipt of such fees. 

(iii) For the purposes of this part 107, 

each passive and non-passive business 

included in the Financing is a Portfolio 

Concern. The terms of the financing 

must provide SBA with access to 

Portfolio Concern information in 

compliance with this part 107, 

including without limitation §§ 107.600 

and 107.620. 

* * * * * 

§ 107.1100 [Amended] 

■ 8. Amend § 107.1100 by removing the 

term ‘‘Yu’’ in the second to the last 

sentence of paragraph (b) and adding in 

its place ‘‘You’’, and by removing 

paragraph (c). 

§ 107.1150 [Amended] 

■ 9. Amend § 107.1150 by removing the 

term ‘‘$225 million’’ in the first 

sentence of paragraph (b) and adding in 

its place ‘‘$350 million’’. 

Dated: August 10, 2017. 

Linda E. McMahon, 

Administrator. 

[FR Doc. 2017–17456 Filed 8–17–17; 8:45 am] 

BILLING CODE 8025–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2017–0699; Directorate 

Identifier 2017–NM–004–AD; Amendment 

39–18968; AD 2017–15–08] 

RIN 2120–AA64 

Airworthiness Directives; Bombardier, 

Inc., Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule; request for 

comments. 

SUMMARY: We are adopting a new 

airworthiness directive (AD) for certain 

Bombardier, Inc., Model CL–600–2E25 

(Regional Jet Series 1000) airplanes. 

This AD requires modifying the bleedair duct and detection system; and 

revising the maintenance or inspection 

program, as applicable. This AD was 

prompted by a report of a possibility 

that the shrouds of the high pressure 

bleed air ducts could deteriorate and 

their maximum permitted leakage rate 

could be exceeded. We are issuing this 

AD to address the unsafe condition on 

these products. 

DATES: This AD becomes effective 

September 5, 2017. 

The Director of the Federal Register 

approved the incorporation by reference 

of certain publications listed in this AD 

as of September 5, 2017. 

We must receive comments on this 

AD by October 2, 2017. 

ADDRESSES: You may send comments, 

using the procedures found in 14 CFR 

11.43 and 11.45, by any of the following 

methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE., 

Washington, DC 20590. 

• Hand Delivery: U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE., 

Washington, DC, between 9 a.m. and 5 

p.m., Monday through Friday, except 

Federal holidays. 

For service information identified in 

this final rule, contact Bombardier, Inc., 

400 Coˆte-Vertu Road West, Dorval, 

Que ́bec H4S 1Y9, Canada; Widebody 

Customer Response Center North 

America toll-free telephone 1–866–538– 

1247 or direct-dial telephone 1–514– 

855–2999; fax 514–855–7401; email 

ac.yul@aero.bombardier.com; Internet 

http://www.bombardier.com. You may 

view this referenced service information 

at the FAA, Transport Airplane 

Directorate, 1601 Lind Avenue SW., 

Renton, WA. For information on the 

availability of this material at the FAA, 

call 425–227–1221. It is also available 

on the Internet at http://

www.regulations.gov by searching for 

and locating Docket No. FAA–2017– 

0699. 

Examining the AD Docket 

You may examine the AD docket on 

the Internet at http://

www.regulations.gov by searching for 

and locating Docket No. FAA–2017– 

0699; or in person at the Docket 

Operations office between 9 a.m. and 5 

p.m., Monday through Friday, except 

Federal holidays. The AD docket 

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