Change of Ownership and Conversion Improvement Act
Bill: H.R.7031 | Sponsor: Rep. Keller, Fred (R-PA)
Policy area: Education

Summary:
Change of Ownership and Conversion Improvement Act
This bill revises the application and review process for institutions of higher education (IHEs) to change ownership or for a proprietary (i.e., for-profit) IHE to convert to public or other nonprofit status, including by establishing a pretransaction review application and requiring an IHE to pay an administrative fee for such transactions or pretransaction reviews. The Government Accountability Office must report on the implementation of this bill's provisions.

To amend the Higher Education Act of 1965 to modify the application and 
     review process for changes of control, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Change of Ownership and Conversion 
Improvement Act''.

SEC. 2. FINDINGS.

    Congress finds the following:
            (1) Institutions of higher education in the United States 
        frequently merge with, consolidate, and acquire other 
        institutions that result in a change in ownership.
            (2) These transactions are generally good for students, as 
        they promote innovation, drive competition, and prevent 
        stagnation.
            (3) Changing demographics and evolving higher education 
        enrollment patterns may lead to more mergers and acquisitions 
        in the future.
            (4) Proprietary institutions that voluntarily convert to 
        nonprofit status or are acquired by nonprofit and public 
        entities can have a positive impact on students and society.
            (5) The Department of Education has an interest in 
        safeguarding Federal student aid funds and therefore should 
        conduct thorough and comprehensive reviews of all changes in 
        ownership involving institutions of higher education.
            (6) These reviews are necessary to ensure that the 
        acquiring entity has the financial and administrative capacity 
        to manage the target institutions.
            (7) The Department of Education should conduct these 
        reviews in a thorough and comprehensive manner but should do so 
        as quickly as possible to promote the execution of these 
        transactions.
            (8) As of May 2021, the Department of Education had ``very 
        few staff'' assigned to evaluate pretransaction, change of 
        control, and conversion applications on a full-time basis.
            (9) Consequently, these transactions are processed by the 
        Department of Education at an extraordinary slow rate of speed, 
        with some institutions waiting up to 5 years before receiving a 
        final determination.
            (10) One of the primary challenges in processing these 
        applications quickly is the lack of funding to hire enough 
        qualified staff.
            (11) Currently, general taxpayers are bearing the cost of 
        reviewing these transactions.
            (12) It is in the interest of institutions and the United 
        States to charge a fee for applications involving changes in 
        ownership at institutions of higher education that are 
        submitted to the Department of Education.
            (13) In consideration for the fee, the Department of 
        Education will be required to guarantee an expedited review 
        process for all applicants, absent compelling circumstances 
        where good cause exists for delay.
            (14) The Government Accountability Office has identified 
        weaknesses in the Department of Education's post-transaction 
        monitoring process, which will likewise require additional 
        staff to be hired to conduct monitoring.
            (15) Institutions that have converted from proprietary 
        status to nonprofit status and have an ongoing financial 
        relationship with the former owners of the institution are at 
        highest risk of entering into financial arrangements that 
        result in improper private inurement.
            (16) These institutions should be closely monitored for a 
        period after these transactions occur and should be required to 
        pay a fee to support the hiring of staff to conduct this 
        monitoring.
            (17) The Government Accountability Office has likewise 
        found weaknesses in the Internal Revenue Service review process 
        for conversion requests and the post-transaction monitoring 
        process.
            (18) In order to support a more thorough review of these 
        applications and to conduct monitoring, the Department of 
        Education will remit part of the fee paid by institutions to 
        the Internal Revenue Service for these purposes.

SEC. 3. MODIFYING THE APPROVAL PROCESS FOR CHANGES OF CONTROL.

    (a) Amendments.--Section 498(i) of the Higher Education Act of 1965 
(20 U.S.C. 1099c(i)) is amended--
            (1) in the subsection heading, by inserting ``and Proposed 
        Changes of Ownership'' after ``Ownership'';
            (2) in paragraph (1)--
                    (A) by striking ``(1) An eligible institution'', 
                and inserting the following: ``(1)(A) An eligible 
                institution'';
                    (B) by striking ``the requirements of section 102 
                (other than the requirements in subsections (b)(5) and 
                (c)(3))'' and inserting ``the applicable requirements 
                of section 102 or 103(13)''
                    (C) by adding at the end the following:
                    ``(B)(i) Prior to a change in ownership resulting 
                in a change of control, an institution may seek a 
                pretransaction determination about whether the 
                institution will meet the applicable requirements of 
                section 102 or 103(13) and this section after such 
                proposed change in ownership by submitting to the 
                Secretary a materially complete pretransaction review 
                application.
                    ``(ii) In reviewing applications submitted under 
                clause (i), the Secretary shall only provide a 
                comprehensive review of each such application, and may 
                not provide an abbreviated or partial review.
                    ``(iii) If an institution submits a materially 
                complete pretransaction review application at least 90 
                days prior to the transaction and the Secretary 
                approves the application, the subsequent change in 
                ownership application shall also be approved and the 
                institution shall be certified as meeting the 
                requirements for such transaction, provided that the 
                institution--
                            ``(I) complies with the applicable terms of 
                        this section; and
                            ``(II) the transaction resulting in a 
                        change of control does not differ materially in 
                        its terms from the transaction proposed in the 
                        pretransaction review application.'';
            (3) in paragraph (2)--
                    (A) in subparagraph (E), by striking ``or'' at the 
                end;
                    (B) in subparagraph (F), by striking the period at 
                the end and inserting ``; or''; and
                    (C) by adding the following at the end:
            ``(G) in the case of a proprietary institution of higher 
        education, a conversion to a public or other nonprofit 
        institution of higher education.'';
            (4) by adding at the end the following:
    ``(5)(A) Subject to subparagraph (B), when any institution submits 
an application for a change in ownership resulting in a change in 
control under this section or submits a pretransaction review 
application under paragraph (1)(B) (other than in the case of a 
conversion transaction), the institution shall be required to pay to 
the Secretary an administrative fee that shall--
            ``(i) be in an amount equal to 0.15 percent of the total 
        institutional revenue derived from this title by such 
        institution for the most fiscal year for which data is 
        available; and
            ``(ii) be used exclusively for expenses related to the 
        processing of such application, and be available to the 
        Secretary without further appropriation, exclusively for 
        expenses related to the processing of such approval or 
        application.
    ``(B) In the case of a proprietary institution submitting an 
application for conversion, or a pretransaction review application for 
conversion, the institution shall be required to pay to the Secretary 
an administrative fee that shall--
            ``(i) be in an amount equal to 0.30 percent of the total 
        institutional revenue derived from this title by such 
        institution for the most fiscal year for which data is 
        available; and
            ``(ii) be used exclusively for expenses related to the 
        processing of such application, and of which--
                    ``(I) 50 percent shall be available to the 
                Secretary without further appropriation, exclusively 
                for expenses related to the processing of such 
                application; and
                    ``(II) 50 percent shall be remitted by the 
                Secretary to the Commissioner of the Internal Revenue, 
                and shall be available, without further appropriation, 
                to the Commissioner of Internal Revenue exclusively for 
                purposes of determining whether the institution seeking 
                such conversion or pretransaction review is an 
                institution exempt from tax and is otherwise in 
                compliance with applicable requirements of the Internal 
                Revenue Code of 1986.
    ``(C) An institution that pays a fee under subparagraph (A) or (B) 
for a pretransaction application with respect to a proposed transaction 
shall not be required to pay another fee under such subparagraph for a 
change in ownership application with respect to such transaction.
    ``(D) In no case may any fee remitted under subparagraph (A) or (B) 
exceed $120,000 for any transaction (or pretransaction) application, 
nor may the Secretary require an institution that has paid a fee under 
subparagraph (B) to pay an additional fee under subparagraph (A).
    ``(6)(A) The Secretary shall approve or deny a materially complete 
application (including pretransaction reviews and conversion 
applications) submitted under this section as soon as practicable and 
not later than the 90-day period beginning on the date of receipt of 
such an application, except that in a case in which the Secretary 
determines, on a nondelegable basis, that good cause exists to not make 
the determination during such 90-day period, the Secretary shall notify 
the institution in writing detailing the reasons for a good cause 
extension.
    ``(B) If the Secretary fails to approve or deny a materially 
complete application during the period described in subparagraph (A) 
and does not find good cause for extension, the materially complete 
application shall be deemed approved.
    ``(C) In no case may the Secretary grant a good cause extension 
under this section to an institution for more than one month at a time, 
or for a total of more than more than 12 months.
    ``(D) To ensure timely submission of all relevant documentation, 
the Secretary may deny an application if an institution does not make a 
good faith effort to submit to the Secretary, in a timely manner--
            ``(i) all relevant documentation; or
            ``(ii) a materially complete application.
    ``(E)(i) Upon approving or denying an application under this 
paragraph, the Secretary shall publish in the Federal Register the 
reasoning for such approval or denial, including--
            ``(I) a copy of the approval or denial letter sent to the 
        institution; and
            ``(II) any analysis regarding how the Secretary determined 
        under paragraph 7(A)(iii) that a director of the institution 
        was an interested or disinterested party to the transaction.
    ``(ii) The Secretary shall not publish under clause (i) any 
information that is otherwise exempt from disclosure under section 552 
of title 5, United States Code (relating to the Freedom of Information 
Act), including trade secrets and commercial or financial information 
that is privileged or confidential.
    ``(7)(A) In the case of a proprietary institution that subsequent 
to the transaction would be owned and operated by an entity (in this 
paragraph referred to as the `buyer') seeking to be recognized as a 
public or other nonprofit institution, the buyer shall meet the 
definition of a nonprofit institution under section 103(13) if--
            ``(i) the buyer pays no more than fair market value for any 
        assets of the proprietary institution;
            ``(ii) the buyer pays no more than fair market value for 
        any service or lease contracts, including such service and 
        lease contracts provided by the entity selling the proprietary 
        institution; and
            ``(iii) to prevent self-dealing in the case where one or 
        more individuals with a substantial ownership or controlling 
        interests in the proprietary institution will also have 
        substantial or controlling interests in the institution seeking 
        to be recognized as a public or other nonprofit institution 
        (meaning that one or more individuals are on both sides of the 
        transaction), the change of control transaction, and any 
        substantial asset acquisition, service, or lease agreements 
        with the proprietary institution shall be approved by a 
        disinterested committee of directors of the entity that seeks 
        to be recognized as a public or other nonprofit institution.
    ``(B) For the purposes of this paragraph, parties to the 
transaction are entitled to a rebuttable presumption that the assets, 
lease contracts, and service contracts that are part of the transaction 
are purchased at fair market value if--
            ``(i) the acquiring entity pays no more than fair market 
        value for such assets, lease contracts, or service contracts; 
        and
            ``(ii) the value of the assets, lease contracts, or service 
        contracts are evaluated by at least one independent third-party 
        entity hired by parties on both sides of the transaction.
    ``(8)(A) An institution that has been approved for conversion by 
the Secretary shall be subject to a monitoring period for a 5-year 
period beginning on the day after the date of such approval. In 
conducting the monitoring of the institution under this paragraph, the 
Secretary--
            ``(i) shall only conduct monitoring to ensure that the 
        institution is in compliance with the requirements of section 
        103(13) and paragraph (7) of this subsection; and
            ``(ii) may require the institution to submit regular 
        reports or conduct audits of such institution relating to such 
        compliance.
    ``(B) Each institution that is subject to the monitoring period 
under this paragraph shall remit an annual fee to the Secretary--
            ``(i) in an amount equal to 0.15 percent of the total 
        revenue derived from this title by such institution for the 
        most recent fiscal year for which data is available; and
            ``(ii) that shall be exclusively for expenses related to 
        monitoring of the institution for the period described in 
        subparagraph (A)--
                    ``(I) of which 50 percent shall be used by the 
                Secretary, without further appropriation, exclusively 
                for expenses related to monitoring of the institution 
                during such period; and
                    ``(II) of which 50 percent shall be remitted by the 
                Secretary to the Commissioner of Internal Revenue, to 
                be available to such Commissioner, without further 
                appropriation, exclusively for monitoring compliance 
                with the Internal Revenue Code of such institution 
                during such period.
    ``(C) An institution may not be subject to an annual fee under 
subparagraph (B) for monitoring related to a conversion that exceeds 
$60,000.
    ``(D) If the Secretary determines that an institution should be 
subject to the monitoring under this paragraph beyond the 5-year period 
described in subparagraph (A), the Secretary shall provide the reasons 
justifying an extension in writing to the institution (and in the 
Federal Register) at least 30 days before the expiration of such 
period.
    ``(E) Any institution that is subject to monitoring under this 
paragraph may seek a waiver to be exempt from such monitoring 
(including the annual fee under subparagraph (B)) on an annual basis 
for any year during the monitoring period and the Secretary shall grant 
such waiver if there is no ongoing contractual or financial 
relationship between the institution and the former entity or 
individuals that previously owned the institution. The Secretary may 
grant a waiver for more than 1 year in the case where the entity that 
formerly owned the proprietary institution has closed or no longer 
exists and the Secretary determines the institution is not at risk of 
violating the requirements of section 103(13) or paragraph (7) of this 
subsection.
    ``(9) Any institution that submits an application for conversion 
shall not promote or market itself, in any manner, as a public or other 
nonprofit institution of higher education unless--
            ``(A) the Secretary has provided final approval of the 
        conversion of the institution to a public or other nonprofit 
        institution of higher education under this section;
            ``(B) an accrediting agency or association recognized by 
        the Secretary pursuant to section 496 has approved such public 
        or nonprofit status of the institution;
            ``(C) the State has given final approval to the institution 
        as a public or nonprofit institution of higher education, as 
        applicable; and
            ``(D) in the case of an institution seeking nonprofit 
        status, the Commissioner of Internal Revenue has approved the 
        institution as tax exempt pursuant to the Internal Revenue Code 
        of 1986.
    ``(10) Not later than 270 days after the date of enactment of the 
Change of Ownership and Conversion Improvement Act, and periodically 
thereafter, the Secretary shall publish (and update as necessary) in 
the Federal Register--
            ``(A) descriptions of the documents and materials the 
        Secretary expects or requires institutions of higher education 
        to submit (including any standardized forms) as part of any 
        pretransaction application or change in ownership application 
        under this section, including a description of what the 
        Secretary considers to be a materially complete application; 
        and
            ``(B) after at least a 30-day notice and comment period, 
        responses to any public comments received with respect to such 
        descriptions or updates to such descriptions.
    ``(11) In a case in which the Secretary requests a document under 
this section as part of a pretransaction or change in ownership 
application that is not described in the Federal Register under 
paragraph (10), the Secretary shall--
            ``(A) substantiate, in writing to the institution, the 
        reasons why the Secretary is requesting such documents; and
            ``(B) publish such reasons in the Federal Register, 
        including whether the Secretary may request other institutions 
        that submit applications under this section to produce similar 
        documentation.
    ``(12)(A) Not later than 18 months after the date of enactment of 
the Change of Ownership and Conversion Improvement Act, and annually 
thereafter, the Secretary shall submit a report to authorizing 
committees, and post such report on a publicly available website 
regarding implementation of the amendments made to this section by such 
Act, including the following information:
            ``(i) The mean and median length of time taken by the 
        Secretary to review applications under this section during the 
        preceding 12-month period.
            ``(ii) The number of applications approved or denied during 
        the preceding 12-month period.
            ``(iii) For any application not processed during the 90-day 
        period beginning on the date of receipt of the application for 
        which the Secretary found good cause under paragraph (6)(A) to 
        extend the deadline in which the application shall be 
        processed, a copy of the letter sent to the institution 
        explaining why the Secretary believed good cause existed for 
        such extension.
            ``(iv) For any application not processed during such 90-day 
        period, which was deemed to be automatically approved by the 
        requirements of this section under paragraph (6)(B), the name 
        of each institution involved and an explanation for why the 
        application was not processed in a timely manner.
            ``(v) Any legislative suggestions the Secretary may have to 
        improve the application or monitoring process under this 
        section.
    ``(B) If the Secretary fails to submit a report under this 
paragraph by not later than 90 days after the deadline for such 
submission under subparagraph (A), the Secretary may not, for the 12-
month period following such failure, spend the fees remitted by 
institutions under this section or remit such fees to the Commissioner 
unless Congress provides for such use by further appropriation.
    ``(13) For the purposes of this subsection, the term `conversion' 
means any transaction under which--
            ``(A) a proprietary institution is reorganized and seeks 
        recognition as a public or other nonprofit institution; or
            ``(B) the control of a proprietary institution is 
        transferred as a result of a sale, donation, or other method to 
        an entity that seeks certification under this section as a 
        public or other nonprofit institution.''.
    (b) Application.--The amendments made by this section shall be 
apply with respect to applications submitted for change of control or 
conversion submitted on or after January 1, 2023.

SEC. 4. GOVERNMENT ACCOUNTABILITY OFFICE.

     Not later than 5 years after the date of enactment of this Act, 
the Comptroller General shall submit to the Committee on Education and 
Labor of the House of Representatives and the Committee on Health, 
Education, Labor, and Pensions of the Senate, a report on the 
implementation of the amendments made by this Act, including 
recommendations to improve--
            (1) the application process under section 498(i) of the 
        Higher Education Act of 1965 (20 U.S.C. 1099c(i)), as amended 
        by section 3, for institutions of higher education seeking a 
        change in ownership resulting in a change in control; or
            (2) the monitoring process under such section for 
        institutions of higher education that have recently converted 
        from being recognized as a proprietary institution to a public 
        or other nonprofit institution.
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