Source: https://www.federalregister.gov/documents/2010/02/08/2010-2648/va-veteran-owned-small-business-verification-guidelines
Timestamp: 2018-07-17 06:28:38
Document Index: 174628848

Matched Legal Cases: ['art 74', 'art 74', '§\u200974', '§\u200974', '§\u200974', 'art 2', 'art 74', 'art 107', '§\u200974', '§\u200974', '§\u200974']

A Rule by the Veterans Affairs Department on 02/08/2010
6098-6108 (11 pages)
Other Non-Substantive Changes to the Final Rule: The Changes Below Serve To Clarify Particular Items From the Interim Final Rule in This Final Rule
https://www.federalregister.gov/d/2010-2648 https://www.federalregister.gov/d/2010-2648
This document affirms as final, with changes, an interim final rule that implements portions of the Veterans Benefits, Health Care, and Information Technology Act of 2006. This law requires the Department of Veterans Affairs (VA) to verify ownership and control of veteran-owned small businesses, including service-disabled veteran-owned small businesses. This final rule defines the eligibility requirements for businesses to obtain “verified” status, explains examination procedures, and establishes records retention and review processes. The final rule retains the interim final rule with changes based on the comments received. This document additionally implements new interim final requirements, that eligible owners work full-time in the business for which they have applied for acceptance in the Verification Program, changes the time period for issuance of reconsideration decisions from 30 to 60 days, and changes the distribution of profits for limited liability companies and employee stock ownership plans and solicits comments on these regulatory amendments only.
Comment Date: Comments on the interim final amendments only must be received on or before March 10, 2010.
Written comments may be submitted through http://www.Regulations.gov;​ by mail or hand delivery to the Director, Regulations Management (02REG), Department of Veterans Affairs, 810 Vermont Ave., NW., Room 1068, Washington, DC 20420; or by fax to (202) 273-9026. Comments should indicate that they are submitted in response to RIN 2900-AM78—“VA Veteran-Owned Small Business Verification Guidelines.” Copies of comments received will be available for public inspection in the Office of Regulation Policy and Management, Room 1063B, between the hours of 8 a.m. and 4:30 p.m., Monday through Friday (except holidays). Please call (202) 461-4902 (this is not a toll-free number) for an appointment. In addition, during the comment period, comments may be viewed online through the Federal Docket Management System (FDMS) at http://www.Regulations.gov.
Ms. Gail Wegner, Acting Director, Center for Veterans Enterprise (00VE), Department of Veterans Affairs, 810 Vermont Ave., NW., Washington, DC 20420, phone (202) 303-3260 x5239.
In an interim final rule published in the Federal Register on May 19, 2008 (73 FR 29024), we established new 38 CFR part 74 setting forth a mechanism for verifying ownership and control of veteran-owned small businesses (VOSBs), including service-disabled veteran-owned small businesses (SDVOSBs). We provided a 60-day comment period which ended on July 18, 2008. We received comments from five commenters. The issues raised in the comments are discussed below. Based on the rationale set forth in the interim final rule and in this document, we are adopting the provisions of the interim final rule as a final rule with changes explained below. Due to the nature of the changes and for the convenience of the reader, the regulation text portion of this document restates all of revised part 74.
a. Eligibility of surviving spouses. One commenter expressed the opinion that a surviving spouse of a veteran who had any disability rating should be permitted to maintain a VOSB or a SDVOSB for as long as the spouse owns and controls the business.
The rule is consistent with Congress's limitation set forth in 38 U.S.C. 8127(h)(3), which permits the surviving spouse to maintain the status of a VOSB or SDVOSB only if the veteran was rated as 100 percent disabled or the veteran dies as a result of a service-connected disability. VA does not have authority under section 8127 to expand VOSB or SDVOSB status as the commenter suggests. We will not make any changes to the rule based on the comment.
b. Yearly verification. One commenter suggested that an annual signed statement by the veteran business owner stating there are no changes in ownership or control should be sufficient to protect the Department's interests. If ownership or control changes, it should be mandated that the business owner report it immediately to Start Printed Page 6099the Center for Veterans Enterprise (CVE), and the CVE may determine it necessary to redo the verification application process entirely. 38 CFR 74.3(e) and 74.21(c)(10) established that a business has up to 60 days after a change of ownership to file a new VA Form 0877, VetBiz VIP Verification Program application. This timeframe was established with sensitivity to the needs of surviving spouses and others who may have significant demands due to health or medical challenges. 38 CFR 74.15 also establishes that eligibility is limited to 1 year. VA has determined that annual examinations are necessary to ensure the integrity of the Verification Program. This is consistent with the annual Federal size recertification requirement in the Central Contractor Registry.
c. Examination visits should concentrate on management and control of operations to establish that a company is truly independent and not a representative of a non-veteran-owned business employing the veteran on a commission or fee basis. Two commenters expressed concern about legitimate parties controlling veteran-owned small businesses. One commenter suggested that examination visits should examine the actual business relationship among the partners, to include: Individuals who control bank account number, terms, lines of credit, sale price of goods and services, contracts for purchase of goods and services, and acceptance of quotations from suppliers. This commenter also recommended reviewing records to establish that the eligible party and not the non-veteran is receiving funds from payments and distributing funds to employees and contractors and to ensure that there is no record of a payment, including a percentage or commission, to the eligible party from a non-veteran. The second commenter recommended that examination visits of pharmaceutical distributors include inspection of Pedigree or E-Pedigree filings, state-issued pharmaceutical licenses, and the product liability insurance policy to ensure that the business name and manager/owner signatures match and that insurance policies are current and have an aggregate value of 5 million dollars. We make no changes to the rule based on this comment. 38 CFR 74.3-4 address examples of ownership and control. 38 CFR 74.20(b) establishes that the scope of examination is not limited to the documents identified in that section. It only establishes that examiners shall review those documents as a minimum and provides the CVE with the flexibility to examine other records. VA has determined for administrative purposes, it is not practical to have specific document review requirements for particular industries. The rule provides VA the discretion to review any pertinent documents necessary to satisfy Verification requirements.
d. Site visits. One commenter recommended that the Department conduct an on-site visit at the applicant's place of business for 100 percent of the applications found to be complete. The site visit must include attendance by the veteran owner(s) and executive management team (if applicable). The purpose of the visit would be to substantiate information on the application and to review business operations. Any conflicts would be subject to a second review. The site visit would be mandatory for the initial application and subsequent visits would occur every three years as part of the recertification process, or more frequently at the applicant's discretion. Such initial site visits would be performed within 60 days of receipt of the complete application package. The site visit would be at no cost to the business, and the government would agree that there would not be unscheduled site visits.
In the interim final rule, 38 CFR 74.20(a) provided that the Department reserves the right to conduct random verification examinations of applicants. Also, the interim final rule provided at 38 CFR 74.20(b) that VA could determine to conduct all or part of the verification examination at the applicant's offices. First, VA is revising 38 CFR 74.20(a) to clarify that its intent was that verification examinations, including site visits, may be random and unannounced. Next, in addressing the commenter, conducting 100 percent site visits upon receipt of complete applications is not in the best interests of the Department as many of the businesses that are seeking verification are brand new and have not yet applied for any Federal or VA contracts. Also VA finds that mandatory site visits could be an unnecessary burden to vendors when VA can adequately verify firms through other means, such as document review. The Department will monitor awards to companies in the Verification Program and make decisions on which companies to inspect using a combination of factors, including staffing and funding. VA does not have the resources to conduct 100 percent site visit for all applicant firms in the VIP database. We will not make any changes to the rule based on the comment.
e. Relationship between VA's Verification Program and the government-wide SDVOSB protest process under the Federal Acquisition Regulations (FAR), 48 CFR 19.302 and 19.307. One commenter sought clarification on the relationship between the Department's Verification Program and the protest procedures contained in the FAR. Specifically, a question was submitted regarding the Department's intended action when the Small Business Administration finds a firm ineligible due to a protest decision.
We agree with the commenter that clarification is needed, and § 74.2(e) has been added to include guidance in these cases. Any firm registered in the VA VetBiz VIP database that is found to be ineligible due to an SBA protest decision or other negative finding will be immediately removed from the VetBiz VIP database.
f. Appeals of verification application denial or program cancellation decisions. One respondent recommended that the Department establish an appeals process for matters limited to the Verification Program. Requests for reconsideration of application denial decisions are addressed in 38 CFR 74.13, “Can an applicant ask CVE to reconsider its initial decision to deny an application?” The language has been revised to add the mailing address for submission of requests for reconsideration. The Director, CVE, shall make the decision on requests for reconsideration of application denials, and 38 CFR 74.13(b) has been revised to reflect that the timeframe for the issuance of a decision has changed from 30 days to 60 days to allow for a thorough consideration of the applicant's request. The decision of the Director, CVE shall be final with no further appeal rights. This document additionally revises the interim final requirement, for the issuance of a decision from 30 days to 60 days, to allow for a more thorough consideration of the applicant's request and solicits comments on this regulatory amendment.
With regard to businesses that are already participants in the Verification program, the rule provides procedures for cancellation of verified status, as described in 38 CFR 74.22. The interim final rule provided that the Director, CVE would issue cancellation decisions. The final rule has been modified such that the Director, CVE issues a Notice of Verified Status Cancellation; however, a participant may appeal this notice to the Executive Director, Office of Small and Disadvantaged Business Utilization. Section 74.22(e) provides that the Executive Director, Office of Small and Start Printed Page 6100Disadvantaged Business Utilization and Center for Veterans Enterprise shall render a decision on such an appeal within 60 days after receipt.
g. Full-time control: One commenter suggested that the Department revise 38 CFR 74.4(c)(1) to require the eligible party to work full-time in order to establish control of the firm. The commenter suggested that the original language which requires owners “show sustained and significant time invested in the business” is insufficient to protect the interests of the program and of the Department. The commenter offered alternate language that would “require the veteran to devote the majority of his/her time to managing the concern.” This commenter further recommended “permitting the veteran to be engaged in outside employment/management activities only where he/she can show that doing so won't have a significant impact on his/her ability to run the VOSB or SDVOSB.”
Based on this comment, we have revised § 74.4(c)(1) to clarify the issue of control of a VOSB and SDVOSB. In lieu of the commenter's suggested language, VA has revised the interim final rule to require an eligible owner have only one business in the program at one time and must work full-time in the business. VA has determined that this revision will ensure the integrity of the program. In addition, VA has defined “full-time” in 38 CFR 74.1. The public is invited to comment on the requirement for full-time work in the business.
h. Ownership: Profits and distributions. Two comments were received concerning 38 CFR 74.3. One respondent recommended revising 74.3(a) to adopt language from the Internal Revenue Code, 26 U.S.C. 1563(c)(2)(B), which states that stock in a corporation that is held by an employees' trust described in section 401(a) of the Code will be treated as “excluded stock” if 5 or fewer persons who are individuals, estates, or trusts own 50 percent or more of the total combined voting power of the corporation. Under this proposed language, if 4 individuals own 10 percent each and an Employee Stock Ownership Plan (ESOP) owns 60 percent, the stock held by the ESOP would be treated as excluded stock, and the four individuals would be treated as owning 100 percent of the outstanding stock. In this example, eligible parties would be required to own 51 percent or more of the outstanding stock (excluding the ESOP stock). Conversely, if there were 10 shareholders who own 9 percent each and an ESOP that owns 10 percent, the ESOP stock would be treated as outstanding stock. In this case, eligible parties would be required to own 51 percent of all outstanding stock, including the ESOP stock.
The original text required that veterans own 51 percent of the outstanding stock (including employee stock ownership trusts). VA accepts this comment and has revised 38 CFR 74.3(a). The net effect of this change is that a company that is closely held by veterans would qualify regardless of the size of the ESOP. Alternatively, a firm that is not closely held by veterans will find it much more difficult to qualify for the Verification Program. This commenter noted that there are a number of government programs that are designed to encourage employee ownership as a technique to encourage teamwork, reduce employee turnover, and increase productivity. Adopting this change affects a small number of VOSBs and SDVOSBs that have adopted ESOPs and is consistent with the intent and spirit of public policy objectives.
The second commenter recommended expanding 38 CFR 74.3(d) to state that a veteran's ability to share in the profits of a concern should be commensurate with the extent of his/her ownership interest in that concern. Such revision would also cover limited liability companies (LLC) and partnership structures. For instance, if a VOSB owns 51 percent of an LLC, he/she would be entitled to receive 51 percent of the profits of that LLC.
VA accepts this comment and has revised 38 CFR 74.3(d)(3) to include a partnership or an LLC. Additionally, 38 CFR 74.3(d)(4) has been added to state that an eligible individual's ability to share in the profits of the concern should be commensurate with the extent of his/her ownership interest in that concern. This document additionally revises the interim final requirement for the evaluation of profits and distributions to determine ownership interest in ESOPs and LLCs and solicits comments on this regulatory amendment.
The section headings of §§ 74.1, 74.11, 74.12, 74.15, and 74.21 have been revised to include the word “Program” following verification.
The definition of small business concern has been revised for purpose of consistency to refer to the FAR Part 2 definition of small business.
The definition of surviving spouse has been revised to add “or died as a direct result of a service-connected disability” to be consistent with the statutory definition at 38 U.S.C. 8127(h)(3).
The term “in the line of duty” in the definition of veteran has been changed to “in line of duty” to be consistent with the term of art as used in title 38 of the United States Code.
The options for transmitting decisions on applications and requests for reconsideration have been clarified, as stated in 38 CFR 74.11(g) and 74.13(g), to include mail, commercial carrier, facsimile, or other electronic means.
VA has revised language in 38 CFR 74.14 to clarify the time period for reapplication for admission to the VA VetBiz VIP Verification Program. “Or participant” has been added to address those concerns whose verification status is cancelled.
Regarding the new interim final amendments published within this final rule at 38 CFR 74.1 and 74.4(c)(1), pursuant to 5 U.S.C. 553(b)(3)(B) and (d)(3), we find that there is good cause to dispense with advance public notice and opportunity to comment and with the 30-day delayed effective date. Advance solicitation of comments on the additional interim final provisions would be impracticable and contrary to the public interest, as it could delay VA's examination and verification procedures. VA has good cause to publish the interim final provisions in light of the urgent need to ensure that business concerns are being properly characterized as VOSBs or SDVOSBs, which is accomplished through verification of ownership and control. Immediate implementation of these provisions is consistent with the prior interim final rule and permits VA to continue reviewing basic information necessary to the verification process. This information is necessary even if, as a result of any additional comments received after publication of this notice, VA needs to further revise any of the rules set forth herein. Accordingly, VA has found good cause for the additional interim final provisions to become effective upon publication.
This final rule would generally be small business neutral as it applies only to applying for verified status in the VetBiz.gov VIP database. The overall impact of the final rule will be of benefit to small businesses owned by veterans Start Printed Page 6101or service-disabled veterans. VA estimates the cost to an individual business to be less than $100.00 for 70-75 percent of the businesses seeking verification, and the average cost to the entire population of veterans seeking to become verified is less than $325.00 on average. A related rule describes the effect that verified businesses will have in the Department's acquisition regulation. This impact is discussed in the proposed rule modifying the VA Acquisition Regulation which was published in the Federal Register at 73 FR 49141 on August 20, 2008. On this basis, the Secretary certifies that the adoption of this final rule would not have a significant economic impact on a substantial number of small entities as they are defined in the Regulatory Flexibility Act, 5 U.S.C. 601-612. Therefore, under 5 U.S.C. 605(b), this regulation is exempt from the initial and final regulatory flexibility analysis requirements of sections 603 and 604.
Approved: October 5, 2009.
Days are calendar days. In computing any period of time described in part 74, the day from which the period begins to run is not counted, and when the last day of the period is a Saturday, Sunday, or Federal holiday, the period extends to the next day that is not a Saturday, Sunday, or Federal holiday. Similarly, in circumstances where CVE is closed for all or part of the last day, the period extends to the next day on which the agency is open.Start Printed Page 6102
Full-time means working at the business during the normal working hours, which equate to Monday through Friday, approximately 9 a.m. to 5 p.m.
Small business concern is— CVE applies the small business concern definition established by 48 CFR 2.101.
Veteran is a person who served on active duty with the U.S. Army, Air Force, Navy, Marine Corps or Coast Guard, for any length of time and at any place and who was discharged or released under conditions other than dishonorable. Reservists or members of Start Printed Page 6103the National Guard called to Federal active duty or disabled from a disease or injury incurred or aggravated in line of duty or while in training status also qualify as a veteran.
(e) U.S. Small Business Administration (SBA) Protest Decisions. Any firm registered in the VetBiz VIP database that is found to be ineligible due to an SBA protest decision or other negative finding will be immediately removed from the VetBiz VIP database. Until such time as CVE receives official notification that the firm has proven that it has successfully overcome the grounds for the determination or that the SBA decision is overturned on appeal, the firm will not be eligible to participate in the 38 U.S.C. 8127 program.
(c) Stock options' effect on ownership. In determining unconditional ownership, CVE will disregard any unexercised stock options or similar agreements held by veterans or service-disabled veterans. However, any unexercised stock options or similar agreements (including rights to convert non-voting stock or debentures into voting stock) held by non-veterans will be treated as exercised, except for any ownership interests that are held by investment companies licensed under Start Printed Page 6104part 107 of title 13, Code of Federal Regulations.
(1) At least 51 percent of the annual distribution of profits paid to the owners of a corporate, partnership, or LLC applicant concern;
(4) An eligible individual's ability to share in the profits of the concern should be commensurate with the extent of his/her ownership interest in that concern.
(3) Where the transfer results from the death or incapacity due to a serious, long-term illness or injury of an eligible principal, prior approval is not required, but the concern must file a new application with contracting officer and CVE within 60 days of the change. Existing contracts may be performed to the end of the instant term. However, no options may be exercised.
(c)(1) An applicant or participant must be controlled by one or more veterans or service-disabled veterans who possess requisite management capabilities. With the exception of joint-venture agreements, an eligible owner may only have one business participating in the Verification Program at one time and must work full-time in the business as defined in § 74.1.
(3) One or more veterans or service-disabled veteran owners who manage the applicant or participant must devote full-time to the business during the normal working hours of firms in the same or similar line of business. Work in a wholly-owned subsidiary of the applicant or participant may be considered to meet the requirement of full-time devotion. This applies only to a subsidiary owned by the VOSB itself, and not to firms in which the veteran has a mere ownership interest.
(4) Except as provided in paragraph (d)(1) of this section, a veteran owner's unexercised right to cause a change in the management of the applicant concern does not in itself constitute veteran control, regardless of how quickly or easily the right could be exercised.
(2) Where an applicant or participant does not meet the requirements set forth in paragraph (d)(1) of this section, the veteran(s) upon whom eligibility is based must control the board of Start Printed Page 6105directors through actual numbers of voting directors or, where permitted by state law, through weighted voting (e.g., in a concern having a two-person board of directors where one individual on the board is a veteran and one is not, the veteran vote must be weighted—worth more than one vote—in order for the concern to be eligible for VetBiz VIP Verification). Where a concern seeks to comply with this paragraph:
An application for VetBiz VIP Verification status must be electronically filed in the Vendor Information Pages database located in the Center for Veterans Enterprise's Web portal, http://www.VetBiz.gov. Guidelines and forms are located on the Web portal. Upon receipt of the applicant's electronic submission, an acknowledgment message will be dispatched to the concern, containing estimated processing time and other information. Address information for the CVE is also contained on the Web portal. Correspondence may be dispatched to: Director, Center for Veterans Enterprise (00VE), U.S. Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420.
(e) The decision of the Director, CVE, to approve or deny an application will Start Printed Page 6106be in writing. A decision to deny verification status will state the specific reasons for denial, and will inform the applicant of any appeal rights.
(d) If CVE finds that the participant does not qualify as a VOSB, the procedures at § 74.22 will apply.
(b) Scope of examination. CVE may conduct the examination, or parts of the program examination, at one or all of the participant's offices. CVE will determine the location of the examination. Examiners may review any information related to the concern's eligibility requirements including, but not limited to, documentation related to the legal structure, ownership and control of the concern. As a minimum, Start Printed Page 6107examiners shall review all documents supporting the application, as described in § 74.12. These include: Financial statements; Federal personal and business tax returns; personal history statements; and Request for Copy or Transcript of Tax Form (IRS Form 4506) for up to 3 years. Other documents, which may be reviewed include (if applicable): Articles of Incorporation/Organization; corporate by-laws or operating agreements; organizational, annual and board/member meeting records; stock ledgers and certificates; State-issued Certificates of Good Standing; contract, lease and loan agreements; payroll records; bank account signature cards; and licenses.
(e) Appeals. A participant may file an appeal with the Executive Director, Office of Small and Disadvantaged Business Utilization and Center for Veterans Enterprise, concerning the Notice of Verified Status Cancellation within 30 days of receipt of CVE's cancellation decision. “Filing” means a document is received by CVE by 5:30 p.m., eastern time, on that day. Documents may be filed by hand delivery, mail, commercial carrier, or facsimile transmission. Hand delivery and other means of delivery may not be practicable during certain periods due, for example, to security concerns or equipment failures. The filing party bears the risk that the delivery method chosen will not result in timely receipt at CVE. Submit appeals to: Executive Director, Office of Small and Disadvantaged Business Utilization and Center for Veterans Enterprise (00VE), U.S. Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420. A formal decision will be issued within 60 days after receipt. The decision on the appeal shall be final.
The records, including those pertaining to businesses not determined Start Printed Page 6108to be eligible for the program, will be kept intact and in good condition for seven years following a program examination or the date of the last Notice of Verified Status Approval letter. Longer retention will not be required unless a written request is received from the Government Accountability Office not later than 30 days prior to the end of the retention period.
[FR Doc. 2010-2648 Filed 2-5-10; 8:45 am]