Source: https://www.federalregister.gov/articles/2011/02/11/2011-2581/small-business-size-regulations-8a-business-developmentsmall-disadvantaged-business-status
Timestamp: 2014-03-09 05:22:21
Document Index: 93354369

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Federal Register | Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business Status Determinations
-8264 (44 pages)
Document Number: 2011-2581
Shorter URL: https://federalregister.gov/a/2011-2581 Related Topics
This rule makes changes to the regulations governing the section 8(a) Business Development (8(a) BD) program, the U.S. Small Business Administration's (SBA or Agency) size regulations, and the regulations affecting Small Disadvantaged Businesses (SDBs). It is the first comprehensive revision to the 8(a) BD program in more than ten years. Some of the changes involve technical issues such as changing the term “SIC code” to “NAICS code” to reflect the national conversion to the North American Industry Classification System (NAICS).
Small Business Size Regulations; (8)a Business Development/Small Disadvantaged Business Status Determination 9 actions from October 28th, 2009 to March 14th, 2011
74 FR 55694
Hearing; Tribal Consultation
75 FR 1296
76 FR 8222
Changes Applicable to Concerns Owned by NHOs
Termination From the 8(a) BD Program
Barriers to Acceptance and Release From the 8(a) BD Program
Example to paragraph (d)(1).
Effective Date: This rule is effective March 14, 2011.
Compliance Dates: Except for 13 CFR 124.604, the revisions to 13 CFR part 124 apply to all applications for the 8(a) BD program pending as of March 14, 2011 and all 8(a) procurement requirements accepted by SBA on or after March 14, 2011. These rules do not apply to any 8(a) BD appeals pending before SBA's Office of Hearings and Appeals. The requirements of § 124.604 apply to all 8(a) BD program participants as of September 9, 2011, unless SBA further delays implementation through a Notice in the Federal Register. The amendments to 13 CFR part 121 apply with respect to all solicitations issued and all certifications as to size made after March 14, 2011.
On October 28, 2009, SBA published in the Federal Register a comprehensive proposal to revise the 8(a) BD program and several proposed revisions to SBA's size regulations. 74 FR 55694. Some of the proposed changes involve technical issues. Others are more substantive and result from SBA's experience in implementing the current regulations. In addition, SBA has made changes in this final rule in response to comments received to its notice of proposed rulemaking. SBA has learned through experience that certain of its rules governing the 8(a) BD program are too restrictive and serve to unduly preclude firms from being admitted to the program. In other cases, SBA determined that a rule is too expansive or indefinite and sought to restrict or clarify those rules. In one case, SBA made wording changes to correct past public or agency misinterpretation. Additionally, this rule makes changes to address situations that were not contemplated when the previous revisions to the 8(a) BD program were made. The proposed rule called for a 60-day comment period, with comments required to be received by SBA by December 28, 2009. The overriding comment SBA received in the first few weeks after the publication was to extend the comment period. Commenters felt that the nature of the issues raised in the rule and the timing of comments during the holiday season required more time for affected businesses to adequately review the proposal and prepare their comments. In response to these comments, SBA published a notice in the Federal Register on December 9, 2009, extending the comment period an additional 30 days to January 28, 2010. 74 FR 65040. In addition to providing a 90-day comment period, SBA also solicited the public's views regarding the proposal through a series of listening sessions held throughout the country. SBA held listening sessions in Washington, DC on December 10 and 11, 2009; in New York, New York on December 16, 2009; in Seattle, Washington on December 17, 2009; in Boston, Massachusetts on December 18, 2009; in Dallas, Texas on January 11, 2010; in Atlanta, Georgia on January 12, 2010; in Albuquerque, New Mexico and Miami, Florida on January 14, 2010; and in Chicago, Illinois and Los Angeles, California on January 19, 2010.
Additionally, SBA conducted Tribal consultations pursuant to Executive Order 13175, Tribal Consultations, on December 16, 2009 in Seattle, Washington; on January 14, 2010 in Albuquerque, New Mexico; and on January 27, 2010 for Anchorage, Alaska in Vienna, Virginia via a video teleconference with representatives located in Anchorage, Alaska.
In addition to the many comments received from those testifying at the various public forums and Tribal consultations conducted around the country, SBA received 231 timely written comments during the 90-day comment period, with a high percentage of commenters favoring the proposed changes. A substantial number of commenters applauded SBA's effort to clarify and address misinterpretations of the rules. For the most part, the comments supported the substantive changes proposed by SBA. Additionally, in response to specific requests for information, SBA received comments with alternative approaches on many aspects of the proposed rule.
The proposed rule contained changes to SBA's size regulations (part 121) and the regulations governing SBA's 8(a) BD program (part 124). SBA received substantive comments on the proposed changes to both of these program areas. With the exception of comments which did not set forth any rationale or make suggestions, SBA discusses and responds fully to all the comments below.
Summary of Comments and SBA's Responses Back to Top
SBA received a substantial number of comments addressing the proposed changes to the size rules.
Production Pools Back to Top
In response to the proposed changes on affiliation, one commenter noted that § 121.103(b) was not entirely consistent with the statutory authority regarding exclusions from affiliation for certain types of small business pools. Specifically, section 9(d) of the Small Business Act (the Act), 15 U.S.C. 638(d), authorizes an exclusion from affiliation for research and development pools. Similarly, section 11 of the Act, 15 U.S.C. 640, authorizes an exclusion from affiliation for defense production pools. SBA's current regulation set forth in § 121.103(b)(3) inadvertently omitted the reference to defense production pools. It was never SBA's intent to exclude defense production pools from the exception to affiliation. The words “or for defense production” were inadvertently omitted from § 121.102(b)(3) after the words “joint program of research and development.” Accordingly, this final rule corrects this omission.
Exception to Affiliation for Mentor/Protégé Programs Back to Top
The proposed rule intended to clarify when SBA would consider a protégé firm not to be affiliated with its mentor based on assistance received from the mentor through a mentor/protégé agreement. In practice, the former regulation was at times misconstrued by other Federal agencies that believed they could establish mentor/protégé programs and exempt protégés from SBA's size affiliation rules on their own. That was never SBA's intent. The exception to affiliation contained in § 121.103(b)(6) is meant to apply to SBA's 8(a) BD mentor/protégé program and other Federal mentor/protégé programs that specifically authorize an exception to affiliation in their authorizing statute. Because of the business development purposes of the 8(a) BD program, SBA administratively established an exception to affiliation for protégé firms. Specifically, protégé firms are not affiliated with their mentors based on assistance received from their mentors through an SBA-approved 8(a) BD mentor/protégé agreement. That exception exists in the current rule and remained in the rule as proposed. The proposed rule also clarified that an exception to affiliation for protégés in other Federal mentor/protégé programs will be recognized by SBA only where specifically authorized by statute (e.g., the Department of Defense mentor/protégé program) or where SBA has authorized an exception to affiliation for a mentor/protégé program of another Federal agency under the procedures set forth in § 121.903. The Supplementary Information to the proposed rule noted that SBA did not anticipate approving exceptions to affiliation to agencies seeking to have such an exception for their mentor/protégé programs except in limited circumstances. SBA reasoned that the 8(a) BD program is a unique business development program that is unlike other Federal programs.
SBA received a number of comments in response to this proposal. Several comments supported the current requirement, that was not amended in the proposed rule, that SBA would not find affiliation between a protégé firm and its mentor based solely on the assistance received under a mentor/protégé agreement. SBA does not change that provision in this final rule.
SBA received comments both in support and of and in opposition to the clarification contained in the proposed rule that other agencies could create mentor/protégé programs containing an exclusion to affiliation only where authorized by statute or by SBA after requesting such an exception under § 121.903 of SBA's size regulations. Those supporting the proposal recognized that were agencies able to waive SBA's affiliation rules whenever they thought it to be appropriate (i.e., without requesting or receiving approval from SBA), legitimate small businesses could be adversely affected. Several commenters stated that other agencies should be able to construct mentor/protégé programs for their purposes as they see fit. Specifically, these commenters believed that if another agency wanted to allow an exclusion from affiliation for a joint venture between a protégé firm and its mentor for a program of that other agency, the agency should be able to do so. By statute, SBA is the agency authorized to determine size, specifically including whether a firm qualifies as a small business for any Federal program. See 15 U.S.C. 632(a). In particular, the Act specifies that “[u]nless authorized by statute, no Federal department or agency may prescribe a size standard for categorizing a business concern as a small business concern, unless such proposed size standard * * * is [among other things] approved by the [SBA] Administrator.” 15 U.S.C. 632(a)(2)(C). SBA firmly believes that another agency should not be able to exempt firms from SBA's affiliation rules (and in effect make program-specific size rules) without SBA's approval. SBA's regulations set forth a formal process that a Federal department or agency must follow in order to request, and possibly receive SBA's approval, to deviate from SBA's size rules, including those relating to affiliation. See 13 CFR 121.903.
The 8(a) BD program is a unique Federal program. It is not a contracting program, but rather a business development program. The program is designed to assist in the business development of disadvantaged small businesses through management and technical assistance, contractual assistance, and other means. Requiring mentors to provide business development assistance to protégé firms in order for a mentor/protégé relationship to receive an exclusion from affiliation is merely one tool to assist in the business development of 8(a) firms. SBA's size regulations generally aggregate the receipts/employees of joint venture partners for size purposes, and SBA believes that is the correct approach since the combined resources of the partners are available to the joint venture. The exclusion to affiliation for mentor/protégé relationships approved for the 8(a) BD program is designed to encourage the business development purposes of the 8(a) BD program. Where a mentor/protégé program of another agency is also intended to promote the business development of specified small business concerns, SBA would be inclined to approve the agency's request for an exclusion from affiliation because it would serve the same purpose as the exclusion from affiliation for 8(a) mentor/protégé relationships. As such, the final rule continues to allow exclusions from affiliation for mentor/protégé relationships of other agencies only where specifically authorized by statute or where the agency asks for and SBA grants such an exclusion.
Joint Ventures Back to Top
The proposed rule also amended the size rules pertaining to joint ventures. Under current § 121.103(h), a joint venture is an entity with limited duration. Specifically, the current regulation limits a specific joint venture to submitting no more than three offers over a two-year period. The proposed rule changed this requirement to allow a specific joint venture to be awarded three contracts over a two-year period. It also clarified that the partners to a joint venture could form a second joint venture and be awarded three additional contracts, and a third joint venture to be awarded three more. At some point, however, such a longstanding relationship or contractual dependence could lead to a finding of general affiliation, even in the 8(a) mentor/protégé joint venture context. The proposed rule also asked for comments on other alternatives, including limiting the number of contract awards that the same partners to one or more joint ventures could receive without the partners being deemed affiliates for all purposes.
Many commenters supported the proposed change from three offers over two years to three contract awards over two years, noting that this change would provide more certainty to offerors. One commenter asked for more clarity regarding what constitutes a contract. That commenter was concerned that a contract could be awarded and then ultimately not performed due to a protest or otherwise and that such an award would still count against the three contract award limit for that joint venture. SBA does not see this as a significant problem. As previously noted, two partners could form an additional joint venture entity and that new entity could be awarded three additional contracts. The fact that one of the three contracts awarded to the first joint venture entity was not performed in no way inhibits the ability of the two firms from forming a new joint venture and receiving additional contracts. As such, SBA does not adopt the comment that recommended the word contract to mean only a contract that was kept and performed by the joint venture.
The majority of comments received also preferred limiting one joint venture to three contract awards (and allowing the firms to form additional joint venture entities for additional contract awards) rather than limiting the overall number of contracts that two (or more) firms acting as a joint venture could receive. Several commenters contended that they often go after and are awarded many small dollar projects through joint venture relationships. Even though the combined value of the contracts awarded could be very small, the alternative option, which would prohibit no more than five total awards to two firms acting through a joint venture, would prohibit them from seeking and being awarded additional contracts. They felt that such a prohibition would adversely affect their overall business development. Other commenters observed that limiting the total number of contract awards to a specific number (e.g., five) would make mentor/protégé relationships short term, which would encourage less business development assistance to protégé firms in the long term. SBA concurs with these comments and does not adopt this alternative in this final rule.
The proposed rule also clarified when SBA will determine whether the three contract awards in two years requirement has been met. The proposal set the time at which compliance with the three awards in two years rule should be determined as of the date a concern submits a written self-certification that it is small as part of its initial offer including price. This point in time coincides with the time at which size is determined and SBA believed that consistency dictated this approach. Commenters supported this approach, particularly favoring allowing joint venture offerors the flexibility to ultimately be awarded more than three contracts if they had not yet received three awards as of the date they submitted several offers and happened to win more than one of the awards pertaining to those offers. A few commenters specifically supported the example contained in the supplementary information to the proposed rule and suggested that it be included in the actual regulatory text. SBA sees no reason not to include the example in the regulation if that will help further clarify SBA's intent. As such, SBA has added the example to the regulatory text for § 121.103(h) in this final rule.
The proposed rule also clarified that while a joint venture may or may not be a separate legal entity (e.g., a limited liability company (LLC)), it must exist through a written document. Thus, even an “informal” joint venture must have a written agreement between the partners. In addition, the rule clarified SBA's longstanding policy that a joint venture may or may not be populated (i.e., have its own separate employees). The supplementary information to the proposed rule indicated that whether a joint venture needs to be populated or have separate employees would depend upon the legal structure of the joint venture. If a joint venture is a separate legal entity, SBA thought that it must have its own employees. If a joint venture merely exists through a written agreement between two or more individual business entities, then SBA felt that it need not have its own separate employees and employees of each of the individual business entities may perform work for the joint venture. SBA received several comments on this interpretative language. A few commenters asked SBA to clearly delineate what “populated” means in the regulatory text. The final rule adopts this comment and has identified that a populated joint venture is joint venture formed as a separate legal entity that has its own separate employees.
The majority of comments on the provision addressing the population of joint ventures believed that any regulation that required a populated joint venture would unintentionally deprive joint venture partners of the opportunity to structure joint ventures as LLCs because of the requirements contained in other regulatory provisions. For example, in an 8(a) joint venture, § 124.513(c)(2) requires an employee of the 8(a) Participant to be the project manager. If an LLC was populated, so that it hired its own employees to perform an 8(a) contract, the project manager hired by the LLC to oversee the project (even if he/she came from the 8(a) Participant) would not be an employee of the 8(a) Participant. Similarly, § 124.513(d) requires the 8(a) Participant to a joint venture to perform a specific percentage of work (“a significant portion” in the regulations prior to this final rule, and at least 40% of the work done by the joint venture in this final rule). If an LLC is populated, the LLC is performing the work; the work is not being performed individually by the two (or more) partners to the joint venture. SBA understands these concerns and has made several changes in this final rule in response to them. SBA believes that the individual businesses involved in the joint venture should determine whether to form a separate legal entity for the joint venture (e.g., LLC) and, if they do, whether or not to populate the new entity. SBA will not require any joint venture to be populated, and will not find a joint venture ineligible merely because it is or is not populated. In addition, SBA believes clarifications need to be made in the substantive 8(a) rules between populated and unpopulated joint ventures. The requirement contained in § 124.513(d) that an 8(a) Participant must perform at least 40% of the work done by a joint venture, and the requirement contained in § 124.513(c)(2) that the project manager be an employee of the 8(a) Participant, make sense only for unpopulated joint ventures or joint ventures populated only with administrative personnel. For joint ventures populated with individuals intended to perform any awarded contracts, the joint venture must demonstrate that the 8(a) Participant to the joint venture controls the joint venture, is responsible for the books and records of the joint venture, owns at least 50% of the joint venture, and receives profits commensurate with its ownership interest. SBA has made these clarifications in § 124.513 of the final rule. A detailed description of these changes is included below in the discussion of the comments on Part 124.
A few commenters questioned SBA's application of the ostensible subcontractor rule in § 121.103(h)(4). Specifically, they sought clarification as to whether SBA applied the ostensible subcontractor rule only at the time of size certification (as part of the firm's offer for a particular contract) or if it also applied after contract performance. SBA believes that it would not make sense to allow a firm to submit an offer proposing how it will perform a contract in which it will perform the primary and vital portions of a contract, and thus qualify individually as a small business, and then subcontract out the entire contract after award and have the contract count as an award to small business. SBA believes that if options are exercised on such a contract, the options should not count as a small business award if the aggregate size of the contractor and its ostensible subcontractor exceeds the applicable size standard. The final rule adds clarifying language to a new § 121.404(g)(4).
Exclusion From Affiliation for Mentor/Protégé Joint Ventures Back to Top
The proposed rule also attempted to clarify that any joint venture seeking to use the 8(a) mentor/protégé status as a basis for an exception to affiliation requirements must follow the 8(a) requirements (i.e., it must meet the content requirements set forth in § 124.513(c) and the performance of work requirements set forth in § 124.513(d)). Although SBA does not approve joint venture agreements for procurements outside the 8(a) program, if the size of a joint venture claiming an exception to affiliation is protested, the requirements of § 124.513(c) and (d) must be met in order for the exception to affiliation to apply. For purposes of clarification § 124.513(d) references the percentage of work requirements of § 124.510 which include the percentage of work requirements set forth in § 125.6.
In connection with a size protest, one commenter opposed requiring the 8(a) joint venture rules to be met in order for a mentor/protégé joint venture to receive an exclusion from affiliation for a non-8(a) contract. This commenter did not believe it was appropriate to apply 8(a) rules to non-8(a) contracts, thinking that such a requirement would impose an undue burden on 8(a) firms seeking non-8(a) contracts. SBA disagrees. Receiving an exclusion from affiliation for any non-8(a) contract is a substantial benefit that only SBA-approved mentor/protégé relationships can receive. The intent behind the exclusion generally is to promote business development assistance to protégé firms from their mentors. Without a requirement that a protégé firm must be the project manager and take an active and substantial role in contract performance on a non-8(a) joint venture with its mentor, the entire small business contract could otherwise be performed by an otherwise large business.
Overall, however, SBA received many favorable comments to this proposed change. Commenters noted that without such a clarification, a joint venture between an 8(a) protégé firm and its large business mentor on a non-8(a) small business contract could perform the contract with minimal work being performed by the protégé 8(a) firm. The commenters believed such a scenario was inappropriate. SBA agrees. SBA recognized this potential abuse of small business contracting programs and has not changed the requirement in this final rule that a mentor/protégé joint venture seeking an exception to affiliation on a non-8(a) contract must follow the 8(a) requirements regarding control and performance by the 8(a) protégé firm.
SBA also requested comments on whether to continue to allow the exclusion to affiliation for mentor/protégé joint ventures on non-8(a) contracts, or whether the exclusion to affiliation should apply only to 8(a) contracts. Related to this inquiry was the proposed change that would allow the exclusion to apply not just to Federal prime contracts, but to subcontracts as well. This change was particularly important to the Department of Energy, which has a significant amount of contracting activity go through government owned contractor operated (GOCO) facilities, and the contracts between the GOCO and a contractor technically are government subcontracts. The overwhelming majority of comments supported permitting the exclusion to affiliation for both 8(a) and non-8(a) contracts. They believed that performing non-8(a) contracts is just as or more important in a firm's business development than performing 8(a) contracts. They noted that understanding and being able to perform non-8(a) government contracts is critical to a firm's ultimate survival and success after leaving the 8(a) BD program, and getting that experience through a mentor/protégé relationship while still in the 8(a) BD program is essential. In addition, the majority of commenters supported the proposed change applying the exclusion to affiliation to both government subcontracts as well as prime contracts. They viewed this extension as further assisting 8(a) Participants realize the business development purposes of the 8(a) BD program. As such, this final rule continues to allow the exclusion to affiliation for mentor/protégé joint ventures for all government prime contracts and subcontracts.
Classification of a Procurement for Supplies Back to Top
SBA's regulations provide that acquisitions for supplies must be classified under the appropriate manufacturing NAICS code, not under a wholesale trade NAICS code. The proposed rule amended the size regulations to clarify that a procurement for supplies also cannot be classified under a retail trade NAICS code. SBA received seven comments supporting and three comments opposing this proposed change. SBA continues to believe that procurements for supplies should be classified under the appropriate manufacturing or other supply NAICS code. The retail trade NAICS code is appropriate for financial assistance (e.g., loans), but not for the procurement of specified supply items. As such, SBA does not change this provision in the final rule.
Application of the Nonmanufacturer Rule Back to Top
The proposed rule also attempted to provide further guidance to the current nonmanufacturer rule (i.e., the rule that requires, in pertinent part, a firm that is not itself the manufacturer of the end item being procured to provide the product of a small business manufacturer). The proposed rule explicitly provided that the nonmanufacturer rule applies only where the procuring agency has classified a procurement as a manufacturing procurement by assigning the procurement a NAICS code under Sectors 31-33.
In addition, the proposed rule clarified that the nonmanufacturer rule applies only to the manufacturing or supply component of a manufacturing procurement. Where a procuring agency has classified a procurement as a manufacturing procurement and is also acquiring services, the nonmanufacturer rule would apply to the supply component of that procurement only. In other words, a firm seeking to qualify as a small business nonmanufacturer must supply the product of a small business manufacturer (unless a nonmanufacturer waiver applies), but need not perform any specific portion of the accompanying services. Since the procurement is classified under a manufacturing NAICS code, it cannot also be considered a services procurement and, thus, the 50% performance of work requirement set forth in § 125.6 for services does not apply to that procurement. In classifying the procurement as a manufacturing/supply procurement, the procuring agency must have determined that the “principal nature” of the procurement was supplies. As a result, any work done by a subcontractor on the services portion of the contract cannot rise to the level of being “primary and vital” requirements of the procurement, and therefore cannot be the basis or affiliation as an ostensible subcontractor. Conversely, if a procuring agency determines that the “principal nature” of the procurement is services, only the requirements relating to services contracts apply. The nonmanufacturer rule, which applies only to manufacturing/supply contracts, would not apply. Thus, although a firm seeking to qualify as a small business with respect to such a contract must certify that it will perform at least 50% of the cost of the contract incurred for personnel with its own employees, it need not supply the product of a small business manufacturer on the supply component of the contract.
In order to qualify as a nonmanufacturer, a firm must be primarily engaged in the retail or wholesale trade and normally sell the type of item being supplied. The proposed rule further defined this statutory requirement to mean that the firm takes ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice. This change is primarily in response to situations where SBA has waived the nonmanufacturer rule and the prime contractor essentially subcontracts all services, such as warehousing or delivery, to a large business. Such an arrangement, where the prime contractor can legally provide the product of a large business and then subcontract all tangential services to a large business, is contrary to the intent and purpose of the Small Business Act, i.e., providing small businesses with an opportunity to perform prime contracts. Such an arrangement inflates the cost to the Government of contract performance and inflates the statistics for prime contracting dollars awarded to small business, which is detrimental to other small businesses that are willing and able to perform Government contracts.
In response to the proposed changes to the nonmanufacturer rule, 12 commenters addressed the proposal to require a nonmanufacturer to take possession of the items with its own facilities, equipment or personnel in a manner consistent with industry practice. Eight commenters supported the change, while four opposed it. Those in opposition believed that the change would limit opportunities for small businesses. Two commenters also stated that taking possession of supply items is not consistent with industry practices. Those supporting the change believed that it was a reasonable requirement to ensure that small business nonmanufacturers were providing some value to the procurement other than their status as small or small 8(a) businesses. These commenters particularly thought that the proposal made sense in the scenario outlined in the supplementary information for the proposed rule, where there are no small business manufacturers available for the contract (and either a class or individual waiver to the nonmanufacturer rule is granted). In such a case, small business participation is minimal, yet the entire value of the contract is counted as an award to small business for goaling purposes. In response to these comments, SBA first notes that the proposed rule did not require a small business nonmanufacturer to take possession of the supply items in every case. It required that the nonmanufacturer take ownership or possession. If the nonmanufacturer arranged for transportation of the supply items (e.g., it uses trucks it owns or leases to transport the items to the final destination), then it need not take ownership of the supply items. If it does not arrange for the transportation, then it must at least take ownership of the supply items. SBA recognizes the validity of small business dealers and does not seek to harm legitimate small business dealers. SBA continues to believe, however, that the ownership or possession requirement provides a necessary safeguard to abuse. A multi-million dollar supply contract in which a large business manufacturer provides the supply items directly to the Government procuring agency and the small business nonmanufacturer provides nothing more than its status as a small business does not foster small business development. As such, this provision is not changed in the final rule.
One commenter disagreed with the proposal to limit application of the nonmanufacturer rule to acquisitions that have been classified with a manufacturing NAICS code. The commenter argued that some supply contracts cannot be classified as manufacturing. We agree. Thus, we have removed this requirement from the final rule. The commenter further argued that SBA should allow procuring agencies to assign wholesale NAICS codes to procurements because not all supply contracts can be classified under a manufacturing or supply NAICS code. We disagree. First, the Small Business Act and SBA's regulation do not contain performance requirements applicable to wholesale or retail contracts. Thus, wholesale and retail NAICS codes cannot be used for government procurement purposes. The wholesale and retail trade NAICS codes are for purposes of SBA financial assistance only. Second, a contracting officer should assign the NAICS code to a procurement which best describes the principal purpose of the acquisition. While some procurements call for the provision of supplies and services, a procurement should be classified as one or the other, and cannot be classified as both. The classification dictates what an offeror must perform in order to qualify as a small business concern for a small set aside procurement. These limitations on subcontracting performance requirements vary depending on whether the contract is classified as a service, supply, construction or specialty trade construction procurement. If a contract is classified as a service contract, then only the requirements pertaining to service contracts apply. There is no requirement that the ultimate contractor meet any performance of work requirements relating to the manufacture of products, which may be ancillary to the services contract. The relevant consideration is the cost of the contract incurred for personnel. If a contract is classified as a supply contract, then only the requirements pertaining to supply contracts apply. The concern must either be the manufacturer of the items being procured or be a dealer that supplies the products of a small business manufacturer (unless a waiver to the nonmanufacturer rule applies), and there is no requirement that the concern provide any ancillary services. The relevant consideration is the cost of manufacturing the supplies or products. In the acquisition described by the commenter, for the delivery of fruits and vegetables, if a manufacturing or supply NAICS code is not appropriate then the procurement should be classified under a warehousing or delivery service NAICS code. In response to this comment, the final rule also clarifies that a waiver of the nonmanufacturer rule does not waive the requirement that a nonmanufacturer not exceed the 500 employee size standard or the requirement that the nonmanufacturer must take ownership or possession of the items with its personnel, equipment or facilities. A waiver of the nonmanufacturer rule only applies to the requirement that a nonmanufacturer supply a product of a small business concern made in the United States.
Finally, one commenter recommended that § 121.406 specifically reference the service disabled veteran-owned (SDVO) program as a program to which the nonmanufacturer rule applies. Section 125.15(c) currently states that the nonmanufacturer rule applies to SDVO requirements for supplies. Thus, although it is not necessary to also add that requirement to § 121.406 of the size regulations, this final rule has done so in order to provide more clarity regarding the rule's application. Similarly, the final rule also clarifies in § 121.406 that the nonmanufacturer rule applies to women-owned small business (WOSB) and economically disadvantaged women-owned small business (EDSOB) requirements for supplies. Again, § 127.505 of SBA's regulations currently states that the nonmanufacturer rule applies to WOSB and EDWOSB requirements for supplies, but it is added to § 121.406 as well for clarity purposes.
Request for Formal Size Determination Back to Top
The proposed rule also amended § 121.1001(b) to give the SBA's OIG the authority to ask for a formal size determination. Because the OIG is not currently listed in the regulations as an individual who can request a formal size determination, the OIG must currently seek a formal size determination through the relevant SBA program office. SBA believes that the Inspector General should be able to seek a formal size determination when questions about a concern's size arise in the context of an investigation or other review of SBA programs by the Office of Inspector General. SBA received several comments regarding the proposed change to allow the SBA's OIG to ask for formal size determinations. All but one commenter supported the change. The dissenting commenter believed that the change is unnecessary and would give the OIG too much power. SBA believes that it is reasonable for the OIG to be able to request a formal size determination where it deems it to be appropriate, and, thus, has not changed this provision in this final rule.
Because the primary focus of the October 28th proposed rule was to comprehensively revise the regulations relating to the SBA's 8(a) BD program, the vast majority of the comments SBA received pertained to proposed changes to part 124. SBA will address each of the substantive comments made regarding proposed changes to part 124 in turn.
Completion of Program Term Back to Top
The proposed rule clarified that every firm that completes its nine-year program term will not be deemed to “graduate” from the 8(a) BD program. Pursuant to the Small Business Act, a Participant is considered to graduate only if it successfully completes the program by substantially achieving the targets, objectives, and goals contained in the concern's business plan, thereby demonstrating its ability to compete in the marketplace without 8(a) assistance. 15 U.S.C. 636(j)(10)(H). After nine years in the program, a firm will be deemed to graduate only where SBA determines that is has substantially achieved the targets, objectives and goals set forth in its business plan. Where those targets, objectives and goals have not been substantially achieved, the firm will merely be deemed to have completed its nine-year program term. The proposed rule made changes to §§ 124.2, 124.301 and 124.302 to effect this change. In addition, the proposed rule added a new § 124.112(f) to require SBA to determine if a firm should be deemed to have graduated from the 8(a) BD program at the end of its nine-year program term or to merely have completed its program term. As part of the final annual review performed by SBA prior to the expiration of a Participant's nine-year program term, SBA will determine whether the firm has met the targets, objectives and goals set forth in its business plan and whether it has “graduated” from the program.
Several commenters voiced support for the clarification to distinguish between graduation and completion of a firm's program term, but did not provide reasoning for their support. Other commenters misinterpreted the purpose of the proposed change, believing that SBA intended to extend the program term beyond nine years. This conclusion was incorrect. A few commenters recommended extending the program term beyond nine years. That is something SBA cannot do. The Small Business Act specifically restricts the maximum amount of time a firm may participate in the BD program to nine years; no more than four years in the developmental stage and no more than five years in the transitional stage. See 15 U.S.C. 636(j)(15). As such, SBA is precluded by statute from extending a firm's participation in the program beyond nine years, and the nine-year program term remains in this final rule. The final rule also retains the proposed language pertaining to graduation and program term completion with minor changes in wording.
Finally, two commenters recommended that the nine-year program term begin on the date that a firm receives its first 8(a) contract award, stating that many firms are in the 8(a) BD program for four, five or more years before receiving their first 8(a) contract, and believing that true business development does not begin until contractual assistance is received. Again, the Small Business Act prevents such a change. Specifically, the Act states that a firm cannot participate in the 8(a) BD program “for a total period of not longer than nine years, measured from the date of its certification” into the 8(a) BD program. 15 U.S.C. 636(j)(15). Thus, SBA does not have the discretion to change the date upon which the nine-year program term begins to run.
Definitional Changes Back to Top
The proposed rule amended § 124.3, to add a definition of NAICS code. It also proposed to change the term “SIC code” to “NAICS code” everywhere it appears in part 124 to take into account the replacement of the Standard Industry Classification (SIC) code system with the North American Industry Classification System. Commenters applauded SBA changing the references in the 8(a) BD regulations from SIC codes to NAICS codes, believing it was long overdue and would eliminate any confusion to those new to the Government contracting arena. Specifically, in this final rule, the term “NAICS code” replaces the term “SIC code” in §§ 124.110(c), 124.111(d), 124.502(c)(3), 124.503(b), 124.503(b)(1), 124.503(b)(2), 124.503(c)(1)(iii), 124.503(g)(3), 124.505(a)(3), 124.507(b)(2)(i), 124.513(b)(1), 124.513(b)(1)(i), 124.513(b)(1)(ii)(A), 124.513(b)(2), 124.513(b)(3), 124.514(a)(1), 124.515(d), 124.517(d)(1), 124.517(d)(2), 124.519(a)(1), 124.519(a)(2), 124.1002(b)(1), 124.1002(b)(1)(i), 124.1002(b)(1)(ii), and 124.1002(f)(3).
The proposed rule also amended the definition of primary industry classification to specifically recognize that a Participant may change its primary industry classification over time. Specifically, the proposed rule authorized a firm to change its primary NAICS code by demonstrating that the majority of its revenues during a two-year period have evolved from its former primary NAICS code to another NAICS code. The vast majority of comments supported the proposed change. One commenter recommended that the language be changed from “SBA may permit” a change in a firm's primary industry classification to “SBA shall permit” to make it clear that no criteria other than a demonstration that the source of a firm's revenues has changed from one NAICS code to another is required for SBA to recognize such a NAICS code change. A few other commenters suggested that SBA should define the term “majority of its revenues” and describe specifically SBA's analysis and the process by which a firm can demonstrate that the “majority of its revenues” have evolved from one NAICS code to another. One commenter opposed the proposed language believing that a firm should be able to change its primary NAICS code at any time without any demonstration to SBA as it is a business decision for the concern.
SBA agrees that the wording of the provision should be clarified to make it clear that a primary industry classification change is entirely within the control of a Participant. If the Participant can show that the majority of the revenues that it has received have changed from one NAICS code to another, that is all that is needed. SBA will not look at any other factors. SBA does not believe, however, that a firm can independently deem that its primary NAICS code has changed without providing any support to demonstrate that the work that it performs (and thus the firm's primary industry classification) has in fact changed over time. Thus, the final rule clarifies that SBA will look only at a firm's total revenues. SBA intended that the majority of a firm's revenues means that NAICS code accounting for the largest amount of all of its revenues from whatever source. If the firm performs work only in two NAICS codes, then a majority would mean at least 51% of its revenues. If a firm performs work in more than two NAICS codes, the new primary industry would be that NAICS code accounting for the most dollars. For example, if a firm comes into the program with a primary industry classification in NAICS code X, but also does work in NAICS codes Y and Z, and over time its revenues change so that for the last two years it has 40% of its revenues in NAICS code Y, 30% in NAICS code X and 30% in NAICS code Z, then its primary industry would change to NAICS code Y. That interpretation is consistent with how SBA defines “revenues” for size purposes (i.e., to specifically include all receipts from whatever source). As such, SBA does not believe that further clarification of that term is required.
In addition, one commenter was concerned that only the Participant should be able to initiate a primary NAICS code change, and did not believe that SBA should be able to force such a change on its own initiative. It was never SBA's intent that SBA would be able to change a firm's primary NAICS code on its own. However, SBA does not believe that a change is needed to the regulations since § 124.112(e) recognizes only the right of a Participant to request a change in primary industry classification.
The proposed rule also added a definition of the term “regularly maintains an office.” This definition is important in determining whether a Participant has a bona fide place of business in a particular geographic location. The proposed rule took this definition from current SBA policy contained in SBA's Standard Operating Procedures. Several commenters supported this change. In particular, commenters supported the clarification contained in the supplementary information that although a firm would generally be required to have a license to do business in a particular location in order to “regularly maintain an office” there, the firm would not be required to have a construction license or other specific type of license in order to regularly maintain an office and thus have a bona fide place of business in a specific location. One commenter recommended that this clarification be included in the actual regulatory text. SBA agrees and has made that change in this final rule.
Fees for Applicant and Participant Representatives Back to Top
SBA has permitted firms applying to the 8(a) program and Participants in the program seeking contracts to hire agents or representatives to assist them in that process. In response to concerns that SBA's policy is not set forth in the regulations, this final rule adds a new § 124.4 to address fees for agents and representatives. The final rule provides that the compensation received by any agent or representative of an 8(a) applicant or Participant for assisting the applicant in obtaining 8(a) certification or for assisting the Participant in obtaining 8(a) contracts must be reasonable in light of the service(s) performed by the agent or representative. The rule captures SBA's current policy and responds to concerns raised that some applicants and Participants have paid unreasonable amounts to representatives. In particular, several commenters believed that some representatives have obtained compensation that has been a percentage of gross contract value, that unsophisticated 8(a) firms may not have fully understood what fee they were agreeing to, and that such a fee is unreasonable. In response, the final rule provides that the compensation received by any agent or representative assisting the 8(a) firm, both at time of application or any other assistance to support program participation, must be reasonable. Compensation that is a percentage of the gross contract value will be prohibited. Additionally, compensation that is a percentage of profits may be found to be unreasonable. The final rule sets out procedures by which SBA will suspend or revoke an agent's or representative's privilege to assist applicants. SBA's authority to suspend or revoke an agent's or representative's privileges is already contained in § 103.4 and is included here for purposes of ease and clarity.
Residence in the United States Back to Top
Under the basic requirements a firm must meet in order to be eligible for the 8(a) BD program, the proposed rule added a provision to § 124.101 requiring individuals claiming social and economic disadvantage status to reside in the United States. SBA received four comments to this proposed change. All four supported the change thinking that such a requirement is reasonable in light of the benefits afforded through the program. As such, this provision remains unchanged in the final rule.
Size for Primary NAICS Code Back to Top
The proposed rule sought to amend § 124.102(a) to require that a firm remain small for its primary NAICS code during its term of participation in the 8(a) BD program, and correspondingly sought to revise § 124.302 to permit SBA to graduate a Participant prior to the expiration of its program term where the firm exceeds the size standard corresponding to its primary NAICS code for two successive program years. SBA received numerous comments to this proposed change which were overwhelmingly opposed to the proposed change.
Several commenters believed that looking at a firm's size over a two year period was inconsistent with the Agency's size regulations, which determines size for a firm with a revenue-based primary NAICS code over a three year period. Other commenters questioned the purpose and wisdom of this entire provision, believing that the natural progression of many small businesses necessarily leads them into various business opportunities and SBA should not inhibit firms' growth. They argued that the proposed change would have a chilling effect on the growth of small businesses and in essence penalized firms for succeeding in the program.
The 8(a) program is a business development program designed to assist Participant firms advance toward competitive viability. Where a firm has grown to be other than small in its primary NAICS code, SBA believes that the program has been successful and it is reasonable to conclude that the firm has achieved the goals and objectives of its business plan. Because the Small Business Act authorizes early graduation where a firm has met the targets, goals and objectives set forth in its business plan, SBA believes that growing to other than small in a firm's primary industry classification similarly warrants consideration of early graduation. The program would resemble a contracting program more than a business development program where a firm is permitted to remain in the program after it has grown to be other than small in its primary NAICS code and be able to shop for contracting opportunities in NAICS codes having accompanying larger size standards. A firm that is other than small in its primary NAICS code is, and has always been, ineligible to be admitted to the 8(a) BD program. That being the case, SBA believes that it follows that a firm that grows to exceed its primary NAICS code once in the 8(a) BD program and does not intend to change its primary NAICS code may no longer need the business development assistance the program provides and should be early graduated from the program. SBA recognizes, however, that it would be unfair to early graduate a firm from the 8(a) BD program where it has one very successful program year that may not again be repeated. In response to the comments received, the final rule changes the number of years that a Participant must exceed its primary NAICS code before SBA will consider early graduation from two years (as proposed) to three years. Additionally, in response to the many comments received regarding this provision, the rule allows a firm to demonstrate that it has made attempts and continues to move to one of the secondary NAICS codes identified in its business plan and that it will change the primary NAICS code accordingly. This will more closely align to the way SBA determines size under § 121.104.
This provision is not meant to conflict with the change made to the definition of primary industry classification in § 124.3 that permits a Participant to change its primary NAICS code during its participation in the 8(a) BD program. Where a firm demonstrates that it has changed its primary NAICS code, SBA would consider early graduation only where the Participant exceeds the size standard corresponding to its new primary NAICS code for three successive program years.
Definition of American Indian Back to Top
A few commenters asked for clarification of the term “American Indian” in § 124.103. Section 124.103(b) includes Native Americans as individuals who are presumptively socially disadvantaged. The previous regulatory provision defined Native Americans to be “American Indians, Eskimos, Aleuts, or Native Hawaiians.” This final rule clarifies that an individual must be an enrolled member of a Federally or State recognized Indian Tribe in order to be considered an American Indian for purposes of presumptive social disadvantage. This definition is consistent with the majority of other Federal programs defining the term Indian. An individual who is not an enrolled member of a Federally or State recognized Indian Tribe will not receive the presumption of social disadvantage as an American Indian. Nevertheless, if that individual has been identified as an American Indian, he or she may establish his or her individual social disadvantage by a preponderance of the evidence, and be admitted to the 8(a) BD program on that basis. In addition, the rule inserts the words “Alaska Native” to take the place of Eskimos and Aleuts.
Economic Disadvantage Back to Top
SBA proposed several revisions to § 124.104 Who is Economically Disadvantaged?, including: A clarification regarding how community property laws affect an individual's economic disadvantage; adding a provision to exempt certain Individual Retirement Accounts (IRAs) from SBA's net worth calculation; clarifications relating to S corporations; and adding objective standards by which an individual can qualify as economically disadvantaged based on his or her income and total assets. SBA received a substantial number of comments regarding these proposed changes. Overall, the comments to the proposed changes supported the revisions. However, several commenters opposed the requirement that individuals remain economically disadvantaged after their admission into and throughout their participation in the 8(a) BD program. SBA believes that the Small Business Act requires individuals upon whom program eligibility is based to remain economically disadvantaged throughout the program term of the Participant firm. Specifically, the Small Business Act authorizes firms owned and controlled by socially and economically disadvantaged individuals to be eligible for the program. Where one of these underlying requirements is not met (e.g., the individual owners no longer qualify as economically disadvantaged), the firm ceases to be eligible for the program. Several other commenters recommended that net worth, personal income and total asset standards should vary either by industry or geographically. SBA believes that any such change would require additional public comment and could not be made final in this rule. As such, SBA has not addressed these comments in this rule, but will consider them for a possible future proposed rulemaking. The specific comments regarding economic disadvantage are addressed below.
A few commenters addressed the proposed change to add a sentence to paragraph (b)(2) to clarify that SBA does not take community property laws into account when determining economic disadvantage. Those that did generally supported the change. Pursuant to the change, property that is legally in the name of one spouse would be considered wholly that spouse's property, whether or not the couple lived in a community property state. This policy also results in equal treatment for applicants in community and non-community property states. Community property laws will continue to be applied in § 124.105(k) for purposes of determining ownership of an applicant or Participant firm, but they will not be applied for any other purpose.
Several commenters expressed concern with the proposed amendment to paragraph (b)(2) that would allow SBA to consider a spouse's financial situation in determining an individual's access to capital and credit. The commenters suggested that a spouse's finances should be reviewed only if the spouse is active in the business or lending money to the company. This was particularly true of individuals who intentionally have kept separate finances from their spouses. They felt that the proposed rule did not look at their individual economic disadvantage status as required by the Small Business Act, but rather at their joint economic condition with their spouses. Several commenters suggested that SBA should clarify the limited circumstances when SBA will consider the financial situation of a socially disadvantaged owner's spouse. After careful review, SBA has determined that a spouse's financial condition should not be attributed to the individual claiming disadvantaged status in every case. Instead, SBA will consider a spouse's financial condition only when the spouse has a role in the business (e.g., an officer, employee or director) or has lent money to, provided credit support to, or guaranteed a loan of the business.
Several commenters believed that the provision requiring SBA to consider the financial condition of the applicant compared to the financial profiles of small businesses in the same industry which are not owned by socially and economically disadvantaged individuals confused personal economic disadvantage with the applicant firm's potential for success. They believed that the applicant firm's financial condition was already considered under the potential for success requirement and that it has no relationship as to whether an individual qualifies as economically disadvantaged. SBA believes that the financial condition of the applicant firm could have a bearing on whether an individual is considered to have access to credit and capital, but understands the confusion noted by the commenters. To eliminate any confusion and because SBA already reviews the financial condition of the applicant as part of its potential for success determination, this rule deletes from an individual's personal economic disadvantage review the requirement that SBA compare the financial condition of the applicant to that of non-disadvantaged small businesses.
SBA's proposed treatment of income from an S corporation and exclusion of IRAs from an individual's net worth determination in paragraph (c)(2) received wide support. Several commenters suggested that all IRA accounts should be excluded from the net worth calculation whether there is a penalty or not. SBA continues to believe, however, that the presence of a penalty with a retirement account will lessen the potential for abuse of this provision. Individuals will be less likely to attempt to hide current assets in funds labeled “retirement accounts” when there is a substantial penalty for accessing the account. A significant penalty would be one equal or similar to the penalty assessed by the Internal Revenue Service (IRS) for early withdrawal. Although, as one commenter notes, it is true that the practical effect of the rule may treat older individuals differently than younger individuals because individuals of a certain age will not incur a penalty with a withdrawal, SBA believes that any account that may be accessed immediately without a penalty must be treated as a present asset and included within an individual's net worth determination. If an individual invests funds from a retirement account into the participant concern, those funds would be excluded from the net worth analysis as part of the exclusion of business equity even where there was not a significant penalty for access to the “retirement” funds prior to the investment in the business. The applicant may be required to submit evidence that the funds were invested into the participant concern.
One commenter suggested Participants should be required to submit retirement account statements when applying for 8(a) certification and filing their 8(a) status updates, and the Participants should have to certify that the funds remain in “legitimate” retirement accounts. SBA agrees that some verification of retirement account information should be required. As such, the final rule provides that in order for SBA to determine whether funds invested in a specific account labeled a “retirement account” may be excluded from an individual's net worth calculation, the individual must provide to SBA information about the terms and conditions of the account and certify in writing that the “retirement account” is legitimate.
SBA also proposed an amendment to paragraph (c)(2) to exempt income earned from an S Corporation from the calculation of both an individual's income and net worth to the extent such income is reinvested in the firm or used to pay taxes arising from the normal course of operations of an S corporation. This change will result in equal treatment of corporate income for C and S corporations. Most commenters applauded SBA's consideration of the tax treatment for S corporations. A few commenters believed that the clarification contained in the supplementary information that S corporation losses are losses to the company only, and not losses to the individual, should be specifically set forth in the regulatory text to clear up confusion on this issue. SBA agrees and has included that clarification in this final rule. In addition, the final rule has clarified that the treatment of S corporation income applies to both determinations of an individual's net worth and personal income. Several commenters also recommended that Limited Liability Companies (LLCs) and other pass-through entities be treated the same way as S corporations for purposes of an individual's net worth and personal income. SBA agrees. S corporations, LLCs and partnerships should all be treated similarly since all pass income through to the individual owners/members/partners.
The proposed rule added a new § 124.104(c)(3) to provide that SBA would presume that an individual is not economically disadvantaged if his or her adjusted gross income averaged over the past two years exceeds $200,000 for initial 8(a) BD eligibility and $250,000 for continued 8(a) BD eligibility. SBA received numerous comments on the proposed change to income thresholds. Several commenters opposed any objective thresholds; others recognized the precedential case law of SBA's Office of Hearings and Appeals (OHA) and supported the inclusion of standards in the regulations for clarity purposes. Still others suggested alternative methodologies, including comparing income to W-2 data, as opposed to adjusted gross income (AGI), or comparing industry data and similarly situated business owners. SBA considered the alternate approaches and has determined that a set threshold amount is consistent with the requirements of determining economic disadvantage and is not only a fair and reasonable approach, but is one that is easily understandable by all potential applicants. As noted, the proposed rule established $200,000 as the amount of personal income below which an individual would be considered economically disadvantaged for initial 8(a) BD eligibility. In formulating what the personal income threshold should be, the supplementary information to the proposed rule explained that SBA considered statistical data from the IRS. The $200,000 figure closely approximated the income level corresponding to the top two percent of all wage earners, which has been upheld by OHA as a reasonable indicator of a lack of economic disadvantage. Since SBA published its proposed rule, the IRS has released new statistical data pertaining to high income wage earners in the United States. The current IRS statistical data on wage earners in the United States shows individuals earning an AGI of approximately $260,000 fall in the top two percentile of all wage earners. Accordingly, SBA believes that the personal income threshold should be adjusted upward to align more closely with the new IRS statistical data. As such, this final rule has adjusted the personal income threshold amount to $250,000. Although a $250,000 personal income threshold may seem high, SBA notes that this amount is being used only to presume, without further information, that the individual is or is not economically disadvantaged. SBA may consider an income lower than $250,000 as indicative of lack of economic disadvantage in appropriate circumstances. SBA also notes that the average income for a small business owner is generally higher than the average income for the population at large and, therefore, what appears to be a high benchmark is merely reflective of the small business community. In all cases, SBA's determination is based on the totality of the circumstances.
The final rule establishes a three year average income level of $350,000 for continued 8(a) BD program eligibility. Considering the new IRS statistical data and the threshold established for initial 8(a) BD eligibility, the $250,000 proposed figure for continued 8(a) BD eligibility was inappropriate. It seems obvious to SBA that as a firm becomes more developed and sophisticated, the income levels for its owners and managers will most often increase. Increasing the personal income threshold for continued 8(a) BD eligibility to $350,000 will allow the Participant to attract and retain higher skilled employees, since the disadvantaged owner/manager must be the highest compensated individual in the firm, with limited exceptions. This will enable the Participant to more fully develop, thereby further serving the purposes of the 8(a) BD program.
Several commenters also recommended that the snapshot that SBA looks at for determining whether an individual's personal income exceeds the applicable standard should be three years instead of two years. These commenters noted that income for a small business owner is not constant and could fluctuate dramatically in volatile economic times. They argued that a small business could have two very good years, provide higher incomes to its owners during those two years, and be deemed ineligible for future 8(a) BD participation because of the income given. They believed such a result was unfair, particularly when the two good years were followed by several bad years. One commenter also pointed to the three year average annual receipts review for purposes of determining a firm's size for receipts-based size standards and felt that personal income should similarly be evaluated over a three year period. SBA believes these comments are valid and has adjusted the evaluation period to three years in the final rule. However, SBA does not seek to make it more difficult for firms that have already applied to the 8(a) BD program before the date this final rule is published. As such, firms that have applied to the 8(a) BD program prior to the date of publication of this final rule may elect to have their applications continued to be processed based on two years personal income data instead of three years and would not be required to submit additional information relating to a third year's personal income. If any such firms would like to have their applications evaluated based on three years personal income data instead of two years, they must notify SBA within 30 days after the date of publication of this final rule in the Federal Register.
The final rule continues to permit applicants to rebut the presumption of lack of economic disadvantage upon a showing that the income is not indicative of lack of economic disadvantage. For example, the presumption could be rebutted by a showing that the income was unusual (inheritance) and is unlikely to occur again or that the earnings were offset by losses as in the case of winnings and losses from gambling resulting in a net gain far less than the actual income received. SBA may still consider any unusual earnings or windfalls as part of its review of total assets. Thus, although an inheritance of $6 million, for example, may be unusual income and excluded from SBA's determination of economic disadvantage based on income, it would not be excluded from SBA's determination of economic disadvantage based on total assets. In such a case, a $6 million inheritance would render the individual not economically disadvantaged based on total assets.
The proposed rule also sought to amend § 124.104(c) to establish an objective standard by which an individual can qualify as economically disadvantaged based on his or her total assets. The regulations have historically authorized SBA to use total assets as a basis for determining economic disadvantage, but did not identify a specific level below which an individual would be considered disadvantaged. The regulations also did not spell out a specific level of total assets above which an individual would not qualify as economically disadvantaged. Although SBA has used total assets as a basis for denying an individual participation in the 8(a) BD program based on a lack of economic disadvantage, the precise level at which an individual no longer qualifies as economically disadvantaged was not certain. The proposed rule established $3 million in total assets as the standard for initial 8(a) BD eligibility and $4 million in total assets as the standard for continued 8(a) BD eligibility. SBA based these standards on OHA cases supporting SBA's determination that an individual was not economically disadvantaged with total asset levels of $4.1 million and $4.6 million. See Matter of Pride Technologies, SBA No. 557 (1996), and SRS Technologies v. U.S., 843 F. Supp. 740 (D.D.C. 1994). Several commenters believed that both of these proposed standards were too low. Because the value of the applicant or Participant concern is included within the total assets standard, several commenters believed that the proposed standards contradicted the business development purposes of the 8(a) BD program. One commenter wondered whether SBA intended that only less developed firms be admitted to the 8(a) BD program because a $3 million total asset standard that included the value of the applicant firm would not permit applicants which had been successful prior to the date of application. Other commenters questioned how firms could truly develop in the 8(a) BD program if their value could increase only $1 million during the course of nine years because to increase in value by more than $1 million could cause the individuals upon whom eligibility was based to no longer be considered economically disadvantaged. Similarly, several commenters felt that the proposed total asset standards would have a chilling effect on business growth because they would discourage reinvestment into the firm. SBA understands these concerns. It was never SBA's intent to limit in any way an 8(a) firm's ability to fully develop its business during its participation in the 8(a) BD program. First, considering that the personal income standards have been increased in this final rule, SBA believes that it makes sense to also increase the total assets standards. In addition, to dismiss any concern that the proposed standards would have hindered Participants' business development during their nine years in the 8(a) BD program, this final rule allows the total assets of a disadvantaged individual to increase by more than $1 million during the firm's participation in the program. Thus, pursuant to this final rule, an individual will not be considered economically disadvantaged if the fair market value of all his or her assets exceeds $4 million at the time of 8(a) application and $6 million for purposes of continued 8(a) BD program participation. This means that SBA will presume that an individual does not qualify as economically disadvantaged if the fair market value of all his or her assets is $4 million and one dollars for initial eligibility and $6 million and one dollars for purposes of continuing eligibility. Unlike the net worth analysis, SBA does not exclude the fair market value of the primary residence or the value of the applicant/participant concern in determining economic disadvantage in the total asset analysis. The only assets excluded from this determination are funds invested in a qualified IRA account.
Changes to Ownership Requirements Back to Top
SBA proposed two amendments to the ownership requirements for 8(a) BD participation. First, SBA proposed to amend § 124.105(g) to provide more flexibility in determining whether to admit to the 8(a) BD program companies owned by individuals where such individuals have immediate family members who are owners of current or former 8(a) concerns. Second, SBA also proposed to amend § 124.105(h)(2) to add the words “or a principal of such firm” which were inadvertently omitted from the previous regulations. SBA received 29 comments to the proposed changes in this section. All of the comments received pertained to the immediate family member issue, and SBA received no comments on correcting the inadvertent omission. As such, SBA adopts the language as proposed for § 124.105(h)(2) without any change, and addresses the specific comments regarding § 124.105(g).
Prior to any change, the language of § 124.105(g) provided that “the individuals determined to be disadvantaged for purposes of one Participant, their immediate family members, and the Participant itself, may not hold, in the aggregate, more than a 20 percent equity ownership interest in any other single Participant.” Because of the wording of that provision, SBA was forced to deny 8(a) program admission to companies solely because the owners of those firms had family members who were disadvantaged owners of other 8(a) concerns. In some cases, the two firms were in different industries and located in different parts of the country. SBA thought that that language was too restrictive and attempted to allow some flexibility in the proposed rule.
The majority of those commenting on this section supported the increased flexibility for firms owned by immediate family members set forth in the proposed rule. A few commenters believed that the proposed language was still too restrictive, while others thought that immediate family members of a disadvantaged individual in one 8(a) firm should never be allowed to qualify a second firm for 8(a) participation. SBA continues to believe that it serves no purpose to automatically disqualify a firm simply because the individual seeking to qualify the firm has an immediate family member already participating in the program. There are some cases where it is clear that an absolute ban on an immediate family member owning a second 8(a) Participant is inappropriate. For example, if one sibling lives in California and one sibling lives in New York and they each operate a business in different industries, it makes no sense not to allow the second firm to participate in the 8(a) BD program. In such a case, there is no likelihood that the current or graduated 8(a) firm is seeking to prolong its participation in the 8(a) BD program through the second firm. Although there may be situations in which SBA chooses to deny admission to a firm based on a family member's program participation, such a decision will be made on a case-by-case basis.
Several commenters recommended that SBA should allow immediate family members to qualify independent businesses for 8(a) participation provided the family members do not live in the same household. SBA does not believe that the recommended restriction goes far enough. SBA has a legitimate interest in preventing disadvantaged individuals from using family members to extend their program terms by creating fronts whereby a disadvantaged individual controls and operates a second firm owned by an immediate family member. This control can occur whether or not the two family members are living in the same household. SBA believes that the restriction contained in the proposed rule, that an immediate family member of a current or former 8(a) firm can qualify a second firm for the 8(a) BD program where there are no or negligible connections between the two firms and he or she can demonstrate sufficient management and technical experience to independently operate the firm, is a more appropriate approach. If there are in fact connections between the two firms or if the individual claiming disadvantaged status for the second firm does not possess sufficient management and technical experience to operate the firm, the firm would be ineligible for 8(a) participation whether or not the two family members live in the same household. SBA also believes that the narrow exception to the general prohibition against family members owning 8(a) concerns in the same or similar line of business contained in the proposed rule will permit the Agency sufficient flexibility to admit firms where they are clearly operating separately and independently from the relative's firm. As such, this final rule does not alter the language contained in the proposed rule regarding participation by immediate family members.
Changes to Control Requirements Back to Top
The proposed rule amended three provisions pertaining to the control requirements set forth in § 124.106 for 8(a) applicants and Participants. First, it added an additional requirement that the disadvantaged manager of an 8(a) applicant or Participant must reside in the United States and spend part of every month physically present at the primary offices of the applicant or Participant. Second, it clarified that control restrictions applying to non-disadvantaged managers, officers and directors applied to all non-disadvantaged individuals in an applicant or Participant firm. Third, it added a new § 124.106(h) to address control of an 8(a) Participant where a disadvantaged individual upon whom eligibility is based is called up to active duty in the United States military. SBA received over 40 comments relating to the proposed changes to § 124.106. We will address the comments relating to each proposed provision in turn.
SBA received 35 comments in response to the proposed amendment to § 124.106(a)(2). The comments identified two issues: residence in the United States, and physical presence by the disadvantaged manager at the firm for some portion of each month. Most commenters agreed that it makes sense to require a full-time disadvantaged manager of an 8(a) applicant or Participant to be physically located in the United States. Commenters noted that the program is intended to assist disadvantaged businesses develop in the United States and that it was a reasonable requirement to require one or more disadvantaged managers to reside in the United States as well. However, many commenters disagreed with the requirement that a disadvantaged manager must spend part of every month physically present at the primary offices of the applicant or Participant. They felt that some sort of minimum or nominal presence was arbitrary and meaningless. Commenters also agreed with the statements made in supplementary information to the proposed rule that new and improved technologies enable managers to maintain control over the operations of their businesses without the need for a constant or consistent physical presence. They believed that individual managers who are not physically present should be required to demonstrate that they control the day-to-day operations of the firm, but that such demonstration should be on a case-by-case basis and should not be tied to any specific hourly presence requirement at the headquarters or principal office of the firm. After considering the comments, SBA believes that the best approach is to determine day-to-day control on a case-by-case basis. As such, this final rule retains the requirement that the disadvantaged manager of an 8(a) applicant or Participant must reside in the United States, but eliminates the added requirement that he or she must also spend part of every month physically present at the primary offices of the applicant or Participant. One commenter recommended that SBA more clearly define what it means to “reside” in the United States. Specifically, the commenter questioned whether physical presence was required or whether an individual who lives in another country but files taxes and votes in the United States could satisfy this requirement. In order to eliminate any assertion that an individual “resides” in the United States because he or she has maintained a residence in the United States despite living in another country, the final rule clarifies that a disadvantaged manager must be physically located in the United States.
SBA received no comments to the proposed change to § 124.106(e), clarifying that restrictions imposed on non-disadvantaged managers apply to all non-disadvantaged individuals. As such, the final rule adopts the language contained in the proposed rule.
Proposed § 124.106(h) added a new provision regarding control of an 8(a) BD Participant where a disadvantaged individual upon whom eligibility is based is a reserve component member in the United States military who has been called to active duty. Specifically, the proposed rule permitted a Participant to designate one or more individuals to control its daily business operations during the time that a disadvantaged individual upon whom eligibility has been called to active duty in the United States military. The proposed rule also amended § 124.305 to authorize the Participant to suspend its 8(a) BD participation during the active duty call-up period. If the Participant elects to designate one or more individuals to control the concern on behalf of the disadvantaged individual during the active duty call-up period, the concern will continue to be treated as an eligible 8(a) Participant and no additional time will be added to its program term. If the Participant elects to suspend its status as an eligible 8(a) Participant, the Participant's program term would be extended by the length of the suspension when the individual returns from active duty. All comments received regarding this provision supported the proposed change. As such, the changes made to §§ 124.106(h) and 124.305 in the proposed rule to protect reservists called to active duty are finalized in this final rule without change.
Benchmarks Back to Top
The proposed rule removed § 124.108(f), as well as other references to the achievement of benchmarks contained in §§ 124.302(d), 124.403(d), and 124.504(d). When these regulations were first implemented, the Department of Commerce was supposed to update industry codes every few years to determine those industries which minority contractors were underrepresented in the Federal market. These industry categories have never been revised since the initial publication, and SBA believed that references to them are outdated and should be removed. SBA received six comments in response to this proposal. All six comments supported the proposed change. This final rule adopts the proposed language without change.
Changes Applying Specifically to Tribally-Owned Firms Back to Top
In the proposed rule, SBA offered or considered changes to five provisions contained in the 8(a) BD regulations that apply specifically to Indian Tribes or Alaska Native Corporations (ANCs). Those proposed changes were: (1) How best to determine whether a Tribe is economically disadvantaged; (2) prohibiting work in a secondary NAICS code that is (or was within the last two years) the primary NAICS code of another 8(a) firm owned by the same Tribe or ANC; (3) clarifying the potential for success requirement as it is applied to Tribes and ANCs; (4) making it clear that any Tribal member may participate in the management of a Tribally-owned firm and need not individually qualify as economically disadvantaged; and (5) requiring 8(a) firms owned by Tribes and ANCs to submit information identifying how its 8(a) participation has benefited the Tribal or native members and/or the Tribal, native or other community as part of its annual review submission. SBA received more than 100 comments relating to proposed changes to § 124.109. The comments pertaining to each of the five areas of consideration are discussed below in turn.
The Small Business Act permits 8(a) Participants to be owned by “an economically disadvantaged Indian Tribe (or a wholly owned business entity of such Tribe.” 15 U.S.C. 637(a)(4)(A)(i)(II). The term Indian Tribe includes any Alaska Native village or regional corporation. 15 U.S.C. 637(a)(13). Pursuant to the Alaska Native Claims Settlement Act, a concern which is majority owned by an ANC is deemed to be both owned and controlled by Alaska Natives and an economically disadvantaged business. As such, ANCs do not have to establish that they are “economically disadvantaged.” Conversely, Indian Tribes are not afforded the same automatic statutory economic disadvantage designation. Current § 124.109(b) requires Tribes to demonstrate their economic disadvantage through the submission of data, including information relating to Tribal unemployment rate, per capita income of Tribal members, and the percentage of the Tribal population below the poverty level. The proposed rule requested comments on how best to determine whether a Tribe should be considered “economically disadvantaged.” Specifically, SBA sought comments as to whether the current approach to economic disadvantage for Tribes should continue, or whether a bright line assets or net worth test for Tribes should be used instead. The current regulation also requires a Tribe to demonstrate its economic disadvantage only once. SBA also sought comments regarding whether this one time demonstration of economic disadvantage makes sense.
SBA received more than 40 comments responding to its request for comments on economic disadvantage for Indian Tribes. Several commenters believed that Tribes should be afforded the same presumption of economic disadvantage as that given to ANCs. It is SBA's view that it does not have the authority to make such a change. SBA is constrained by the specific language of the Small Business Act, which requires firms to be owned by an “economically disadvantaged” Indian Tribe. While ANSCA provides economic disadvantage status to ANCs so that SBA does not have to determine whether any specific ANC is economically disadvantaged, Tribes have not been given similar statutory treatment. Thus, SBA must determine whether a specific Tribe may be considered economically disadvantaged. Regarding the best approach SBA should take to determine whether a Tribe qualifies as economically disadvantaged, commenters universally rejected any bright line asset or net worth test. Several commenters noted that it would be difficult to structure a bright line test suited to all Tribes given the vast differences among Tribes as to the number of Tribal members, number of members living on Tribal land, and other demographics, such as the average age of the membership. Other commenters believed that any asset or net worth test ignores historical data and the unique circumstances of Tribes, and would be subject to claims that it involves culturally biased criteria. Most commenters believed that the current approach to economic disadvantage for Tribes, although not perfect, makes the most sense. It allows an individual Tribe to address economic disadvantage in ways most relevant to that Tribe. SBA understands that every Tribe does not always possess or it may be very difficult for the Tribe to obtain data relating to Tribal unemployment rate, per capita income of Tribal members, or the percentage of the Tribal population below the poverty level. After considering the concerns raised in the comments, SBA agrees that an asset or net worth test could be misleading, and has not changed how it will determine economic disadvantage for Tribes. In addition, SBA has added to this final rule a provision authorizing a Tribe, where the Tribe deems it to be helpful, to request a meeting with SBA prior to submitting an application for 8(a) BD participation for its first applicant firm to better understand what SBA requires. Several commenters also recommended that SBA clarify the requirement that a Tribe demonstrate its economic disadvantage only in connection with its first Tribally-owned firm applying for 8(a) BD participation. In response, SBA has clarified that SBA does not expect a Tribe to demonstrate economic disadvantage as part of every Tribally-owned 8(a) application.
The final rule also clarifies that ownership of an 8(a) applicant or Participant by a Tribe or ANC must be unconditional. The requirement that ownership be unconditional is contained in the Small Business Act, and the final rule merely incorporates that language to avoid any confusion.
The proposed rule prohibited a newly certified Tribally-owned Participant from receiving an 8(a) contract in a secondary NAICS code that is the primary NAICS code of another Participant (or former participant that has left the program within two years of the date of application) owned by the Tribe for a period of two years from the date of admission to the program. The supplementary information to the proposed rule also identified an alternative proposal that allowed such secondary work on a limited basis (e.g., no more than 20% or 30% of its 8(a) work could be in a NAICS code that was/is the primary NAICS code of a former/other Tribally-owned Participant). SBA sought comments on both approaches. SBA received a substantial number of comments responding to this proposal. Several commenters opposed allowing Tribes to own more than one firm in the 8(a) BD program generally, believing that such an occurrence creates an unfair competitive advantage. Congress has specifically authorized Tribal/ANC ownership of firms in the 8(a) BD program. Such ownership serves a broader purpose than mere business development. SBA does not believe that it can restrict a Tribe to own only one firm in the 8(a) BD program under the current statutory authority. As such, this final rule does not change the authority of a Tribe or ANC to own more than one firm in the 8(a) BD program. None of the commenters who addressed the proposed language supported the strict prohibition on receiving any 8(a) contracts in a secondary NAICS code that was the primary NAICS code of a sister company. Commenters believed that such a rule would hinder the growth and diversification of firms owned by Tribes and ANCs. Many commenters also opposed the alternative proposal allowing secondary work up to a specified percentage of the firm's overall 8(a) revenues for the same reason. They believed that any restriction on a firm's ability to diversify as that firm deems appropriate would hamper the firm's growth and ultimate ability to remain a viable business after leaving the 8(a) BD program. While some commenters opposed the alternative proposal allowing secondary work on a limited basis, they considered it to be a better approach than the strict ban as proposed. A few commenters offered additional alternatives. One commenter recommended that if SBA was concerned that one Tribally-owned or ANC-owned firm would be the successor contractor for an 8(a) contract previously performed by another 8(a) Participant owned by the Tribe or ANC then the regulation should address that concern specifically and not prohibit work in secondary NAICS codes generally. SBA agrees. As noted in the supplementary information to the proposed rule, when SBA certifies two or more firms owned by a Tribe or ANC for participation in the 8(a) BD program, SBA expects that each firm will operate and grow independently. The purpose of the 8(a) BD program is business development. Having one business take over work previously performed by another does not advance the business development of two distinct firms. SBA does not believe that a Tribally-owned or ANC-owned firm should be able to perform a specific 8(a) contract for many years and then, when it leaves the 8(a) BD program, to pass that contract on to another 8(a) firm owned by the Tribe or ANC. In such a case, the negative perception is that one business is operating in the 8(a) BD program in perpetuity by changing its structure or form in order to continue to perform the contracts that it has previously performed. SBA seeks to address this concern without unduly restricting a Participant's ability to grow and diversify. Thus, SBA adopts the comment to restrict a Tribe's or ANC's ability to pass an 8(a) contract from one firm that it owns and operates to another. Specifically, the final rule provides that a firm owned by a Tribe or ANC may not receive a sole source 8(a) contract that is a follow-on contract to an 8(a) contract that was performed immediately previously by another Participant (or former Participant) owned by the same Tribe. One commenter recommended that the same rules regarding work in secondary NAICS codes should apply equally to firms owned by Native Hawaiian Organizations (NHOs). SBA agrees, but also believes that the same is true for Community Development Companies (CDCs). This final rule makes the provisions pertaining to Tribes, ANCs, NHOs and CDCs consistent.
Finally, one commenter recommended that SBA more fully define what the term primary NAICS code means for purposes of determining whether a new applicant owned by the Tribe could be eligible for 8(a) BD participation. Specifically, the commenter noted that several NAICS codes identified in SBA's size regulations are further divided by specific subcategory having differing size standards for two or more subcategories. The commenter questioned whether SBA's regulations permitted a Tribe to own two firms with the same primary six digit NAICS code, but different subcategories of work with different corresponding size standards. For example, NAICS code 541330 is divided into four subcategories: Engineering Services, with a corresponding size standard of $4.5 million in average annual receipts; Military and Aerospace Equipment and Military Weapons, with a corresponding size standard of $27 million in average annual receipts; Contracts and Subcontracts for Engineering Services Awarded Under the National Energy Policy Act of 1992, with a corresponding size standard of $27 million in average annual receipts; and Marine Engineering and Naval Architecture, with a corresponding size standard of $18.5 million in average annual receipts. SBA's Office of Size Standards has identified that these subcategories are different enough to warrant separate recognition and that the industries are different enough to warrant distinct size standards. SBA believes that general Engineering Services, with a corresponding size standard of $4.5 million in average annual receipts, is vastly different from Military and Aerospace Equipment and Military Weapons, with a corresponding size standard of $27 million in average annual receipts. As such, it is SBA's view that a Tribe could own one Participant in the 8(a) BD program with a primary NAICS code of 541330 doing marine engineering and naval architecture and qualify a new firm with a primary NAICS code of 541330 doing general engineering services, provided the current firm did not start off in the general engineering services subcategory and switch to a different subcategory with a larger size standard within the last two years. SBA believes the regulations should clarify SBA's intent on this issue. Thus, the final rule makes clear that the same primary NAICS code means the six digit NAICS code having the same corresponding size standard.
The proposed rule clarified the potential for success requirement for Tribally-owned applicants contained in § 124.109(c)(6). Specifically, in addition to the current ways in which SBA may determine that a firm has the potential for success required to participate in the 8(a) BD program, the proposed rule authorized SBA to find potential for success where a Tribe has made a firm written commitment to support the operations of the applicant concern and the Tribe has the financial ability to do so. SBA received overwhelming support for this proposed provision. Many of the comments praised SBA for recognizing that unlike a firm owned by one or more individuals, the viability of a firm owned by a Tribe or ANC is not dependent only on the firm's profitability. Several commenters recommended that similar treatment should be afforded to NHOs. As with the issue relating to work in secondary NAICS codes, SBA believes that this provision should apply equally to firms owned by Tribes, ANCs, NHOs and CDCs. This final rule makes the changes necessary for such equal treatment. As such, the final rule permits an applicant concern owned by a Tribe, ANC, NHO or CDC to establish potential for success where the Tribe, ANC, NHO or CDC has made a firm written commitment to support the operations of the applicant concern and it has the financial ability to do so.
The proposed rule also deleted the word “disadvantaged” in § 124.109(c)(4) to make clear that any Tribal member may participate in the management of a Tribally-owned firm and need not individually qualify as economically disadvantaged. This change was made to allow Tribally-owned firms to attract the most qualified Tribal members to assist in running 8(a) Tribal businesses. SBA received 35 comments regarding this provision. Although most commenters agreed that this proposed change was an improvement over the previous regulatory language, they questioned whether the proposed language went far enough in clarifying that a Tribe had the discretion to hire any individual, whether or not a member of any Tribe, to run the day-to-day operations of a Tribally-owned 8(a) Participant. SBA believes that the proposed regulatory text gives that discretion to Tribes. Tribes must demonstrate that they control Tribally-owned firms. Tribes are then given flexibility to structure the control as they deem it best for their circumstances. It may be through committees, teams or Boards of Directors which are controlled by Tribal members, or it may be through non-disadvantaged employees who can be hired and fired and are controlled by the Tribe. Where non-disadvantaged employees manage a Tribally-owned firm, the regulations have required that the Tribally-owned firm have a management development plan showing how Tribal members will gain management experience to be able to manage the concern or similar Tribally-owned concerns in the future. SBA continues to believe that is a good policy. However, in response to these comments, SBA has made minor language revisions to more clearly state SBA's position.
In response to audits of the 8(a) BD program conducted by the Government Accountability Office (GAO) and SBA's OIG, SBA proposed an amendment to the annual review provisions contained in § 124.112(b) to require each Participant owned by a Tribe, ANC, NHO or CDC to submit information demonstrating how its 8(a) participation has benefited the Tribal or native members and/or the Tribal, native or other community as part of its annual review submission. The proposed rule identified that each firm should submit information relating to funding cultural programs, employment assistance, jobs, scholarships, internships, subsistence activities, and other services to the affected community.
SBA received more than 60 comments addressing this proposed change. Most commenters opposed the requirement, expressing concern about the lack of specificity in the proposed rule and the difficulty firms would have in trying to report this information at the Participant level. Several commenters pointed out that a uniform data source for the information being requested does not currently exist and the benefits vary widely among the groups and cannot be uniformly quantified. Commenters noted that it would be nearly impossible to separate the benefits a Tribe or ANC community receives from individual 8(a) contracts or even individual 8(a) firms, especially where a Tribe has multiple 8(a) firms receiving both 8(a) and non-8(a) contracts. A few commenters noted that 8(a) firms owned by ANCs do not necessarily contribute benefits directly to the shareholders, but rather direct their profits to the parent ANC who in turn distributes the benefits. Most expressed concern that the potential end result of the requirement will be burdensome, intangible and difficult to quantify. Commenters recommended that if this requirement remained, benefits should be reported at the Tribe/ANC/NHO/CDC level, instead of requiring each Participant individually to try to somehow track benefits flowing from it back to the affected community. Although SBA understands the concerns raised generally in opposition to reporting benefits, SBA feels compelled to address the recommendations made by the GAO and OIG. As such, the requirement to report benefits that flow to Tribal or native members and/or the Tribal, native or other community is retained in this final rule. However, SBA agrees with the majority of commenters that it would be virtually impossible for individual 8(a) firms to track and report on benefits that ultimately flow to the affected community because of their 8(a) participation. In an effort to strike a balance between the concerns raised regarding SBA's monitoring and oversight of the 8(a) BD program and those raised by entity-owned 8(a) Participants regarding their ability to generate meaningful information, only the parent corporations, not the individual subsidiary 8(a) Participants, will be required to submit the requested information. Therefore, the final rule specifies that those 8(a) Participants owned by ANCs, Tribes, NHOs, and CDCs will submit overall information relating to how 8(a) participation has benefited the Tribal or native members and/or the Tribal, native or other community as part of each Participant's annual review submissions, including information about funding cultural programs, employment assistance, jobs, scholarships, internships, subsistence activities, and other services to the affected community. SBA expects that two Participants owned by the same Tribe, ANC, NHO or CDC will submit identical data describing the benefits provided by the Tribe, ANC, NHO or CDC.
Several commenters opposed the reporting of any information relating to benefits flowing to Tribal or native members and/or the Tribal, native or other community, and questioned whether the Federal Government was attempting to dictate how Tribes should provide benefits to their respective communities. A few commenters also noted that this was an added burden imposed on Tribal and ANC-owned Participants that was not required for individually-owned Participants. One comment found it offensive for a non-Tribal government to determine the success or failure of a Tribal effort. Others expressed concern that the data would be used against the program Participants required to provide the data. Several commenters also recommended that if any reporting requirement relating to benefits flowing to the native or Tribal community remain in the final regulation, then it should not be included within a section entitled “What criteria must a business meet to remain eligible to participate in the 8(a) BD program” because that implies that SBA will somehow evaluate the benefits reported and could determine a firm to be ineligible for further program participation if the reported benefits were deemed insufficient. It was never SBA's intent to evaluate or otherwise determine whether the benefits reported by Tribes, ANCs, NHOs and CDCs were or were not acceptable as compared to the value of 8(a) contracts received by firms owned by those entities. SBA did not intend future eligibility of an 8(a) Participant to be dependent on the amount or the type of benefits provided by the parent Tribe, ANC, NHO or CDC. As such, SBA agrees that the requirement to provide information related to benefits flowing to Tribal or native members and/or the Tribal, native or other community should be contained in a section of SBA's regulations relating to reporting requirements as opposed to the section relating to what a Participant must do to remain eligible to participate in the 8(a) BD program. This final rule moves the proposed provision from § 124.112(b)(8) to a new § 124.604.
Finally, several commenters recommended that SBA delay implementation of any reporting of benefits requirement to allow affected firms to gather and synthesize this data. In addition, these commenters encouraged SBA to establish a task force, comprised of native leaders and SBA, to further study how this requirement could be best implemented without imposing an undue burden on Tribes, ANCs, NHOs or CDCs, or on their affected 8(a) Participants. SBA agrees that further refinement of this requirement may be needed. As such, SBA has delayed implementation of new § 124.604 for six months after the effective date for the other provisions of this final rule. If further refinement takes longer than six months, SBA may delay implementation further. If further delay is necessary, SBA will publish a notice in the Federal Register to that effect. During the delayed six months implementation period, SBA anticipates meeting with members of the affected communities to further study and possibly improve this requirement and to develop best practices for utilizing the data collected.
Changes Applicable to Concerns Owned by NHOs Back to Top
In addition to the changes identified above relating to follow-on contracts and potential for success and the change below regarding sole source limits for NHO-owned concerns, the final rule clarifies other requirements for NHO-owned concerns. Several commenters noted that SBA requires NHOs to be economically disadvantaged and to establish that their business activities will principally benefit Native Hawaiians, but believed that SBA's implementation of these requirements was not clearly set forth in the regulations. A few commenters recommended that SBA's requirement that a majority of an NHO's members must establish that they individually qualify as economically disadvantaged should be included within the regulatory text. Other commenters recommended clarifications relating to the control requirement. In response to these comments, the final rule adds clarifications regarding the current policy on how an NHO qualifies as economically disadvantaged, demonstrates that its business activities benefit Native Hawaiians, and controls an NHO-owned concern. To determine whether an NHO is economically disadvantaged, SBA considers the individual economic status of the NHO's members. The majority of an NHO's members must qualify as economically disadvantaged under § 124.104. For the first 8(a) applicant owned by a particular NHO, individual NHO members must meet the same initial eligibility economic disadvantage thresholds as individually-owned 8(a) applicants (i.e.,$250,000 net worth; $250,000 income; and $4 million in total assets). Once that firm is approved for participation in the 8(a) program, it will continue to qualify as economically disadvantaged provided a majority of its members meet the economic disadvantage thresholds for continued eligibility (i.e.,$750,000 net worth; $350,000 income; and $6 million in total assets). Because SBA will consider a firm to continue to be owned by an economically disadvantaged NHO where a majority of the NHO's members meet the thresholds for continued eligibility, SBA does not believe that the same NHO should be considered not economically disadvantaged for purposes of qualifying a new applicant if it exceeds one or more of the thresholds for initial eligibility. As such, for any additional 8(a) applicant owned by the NHO, this rule provides that individual NHO members must meet the economic disadvantage thresholds for continued 8(a) eligibility even though the determination is being made with respect to the initial eligibility of that applicant.
The final rule also incorporates the statutory requirement that an NHO must control the applicant or Participant firm. To establish control, the NHO must control the board of directors of the applicant or Participant. There is no statutory requirement that the day-to-day operations of an NHO-owned firm be controlled by Hawaiian Natives of the NHO. The requirement is merely that the NHO controls the firm. As such, an individual responsible for the day-to-day management of an NHO-owned firm need not establish personal social and economic disadvantage.
Excessive Withdrawals Back to Top
The final rule amends § 124.112(d) requiring what amounts should be considered excessive withdrawals, and thus a basis for possible termination or early graduation. SBA believes that the new definition of withdrawal better addresses the original legislative intent behind the prohibition against excessive withdrawals.
By statute, SBA is directed to limit withdrawals made “for the personal benefit” of a Participant's owners or any person or entity affiliated with such owners. 15 U.S.C. 637(a)(6)(D). Where such withdrawals are “unduly excessive” so that they are “detrimental to the achievement of the targets, objectives, and goals contained in such Program Participant's business plan,” SBA is authorized to terminate the firm from further participation in the 8(a) BD program. Id. SBA's previous regulations broadly defined what a withdrawal was and did not adequately tie termination to withdrawals that were detrimental to the achievement of the Participant's targets, objectives and goals. This unnecessarily hampered a Participant's ability to recruit and retain key employees or to pay fair wages to its officers. The proposed rule amended the definition of what constitutes a “withdrawal” in order to permit a Participant to more freely use its best business judgment in determining compensation. It modified the definition of withdrawal to generally eliminate the inclusion of officers' salaries from the definition of withdrawal and excluded other items currently included within such definition.
SBA received comments both in favor and opposed to the excessive withdrawal provisions contained in the proposed rule. Several commenters suggested eliminating the excessive withdrawal analysis entirely. Many suggested that SBA should look to the totality of the circumstances to determine if withdrawals are excessive, and not use the thresholds as a bright line test. All commenters that addressed excessive withdrawals suggested that the existing threshold amounts be increased. The comments, however, were not uniform in their approach, and recommended many alternatives as to how SBA should determine excessive withdrawals. Many commenters suggested specific dollar amounts, such as $100,000 more than the proposed thresholds. A few commenters suggested that excessive withdrawals should be based on a reasonable percentage of revenue rather than a fixed dollar value. Several commenters recommended that excessive withdrawals should vary by industry or depending upon the geographic location of the firm. Several commenters suggested that there not be any limits or thresholds and firms be allowed to compensate the owners, officers and employees of the organization based on the viability of the business.
As noted above, the excessive withdrawal concept comes straight from the language of the Small Business Act. As such, SBA does not have the discretion to eliminate this requirement entirely as a few commenters recommended. SBA considered the alternate approaches suggested in the comments, but decided to retain the thresholds based on the revenues generated by the Participant as the most fair and reasonable approach. SBA believes that thresholds that vary from industry to industry or from one geographic location to another would be difficult to implement fairly. In addition, either approach would require further refinement through an additional proposed rule and public comment process. In response to comments, the final rule amends § 124.112(d)(3) to increase each of the current “excessive” withdrawal amounts by $100,000. Thus, for firms with sales of less than $1,000,000 the excessive withdrawal amount would be $250,000 instead of $150,000, for firms with sales between $1,000,000 and $2,000,000 the excessive withdrawal amount would be $300,000 instead of $200,000, and for firms with sales exceeding $2,000,000 the excessive withdrawal amount would be $400,000 instead of $300,000.
The final rule also clarifies that withdrawals that exceed the threshold amounts indentified in the regulations in the aggregate will be considered excessive. SBA believes that this makes sense because officers' salaries generally will not be included within what constitutes a withdrawal. Under the previous regulations, although it was not specifically spelled out, it appeared that withdrawals were excessive if they exceeded the thresholds in the aggregate, not by the individual owner or manager. This was a problem where officers' salaries were included within withdrawals. SBA was concerned that the excessive withdrawal provisions conflicted with the individual economic disadvantage provisions. For example, two disadvantaged individuals could own and operate an applicant or Participant firm and each could receive an income of $190,000 and be considered economically disadvantaged. Where officers' salaries counted as withdrawals, however, a Participant could nevertheless be terminated from the program because the $380,000 in combined salaries exceeded the excessive withdrawal threshold, even for Participants large total revenues. SBA thought that this inconsistency was unfair. One approach could have been to continue to count officers' salaries as withdrawals and determine excessive withdrawals by the individual owner or manager. SBA believes that such an approach would allow too much to be withdrawn from a Participant without adverse consequences and would be detrimental to the overall development of Participant firms. Excluding officers' salaries generally from withdrawals, but looking at withdrawals in the aggregate appears to be a fairer approach to SBA.
SBA recognizes that some firms may try to circumvent the excessive withdrawal limitations through the distribution of salary or by other means. As such, the final rule authorizes SBA to look at the totality of the circumstances in determining whether to include a specific amount as a “withdrawal,” and specifically clarifies that if SBA believes that a firm is attempting to get around the excessive withdrawal limitations though the payment of officers' salaries, SBA would count those salaries as withdrawals.
Additionally, in order to more closely comply with statutory language, the final rule further clarifies that in order for termination or graduation to be considered by SBA, funds or assets must be withdrawn from the Participant for the personal benefit of one or more owners or managers, or any person or entity affiliated with such owners or managers, and any withdrawal must be detrimental to the achievement of the targets, objectives, and goals contained in the Participant's business plan. These requirements were not clearly contained in the previous regulations. Adding this language is consistent with the Small Business Act and with the intent of the original statutory provision, which sought to reach “individuals who have engaged in unduly excessive withdrawals.” H.R. Conf. Rep. No. 100-1070, at 7 (1988). In determining whether a withdrawal meets this definition, the person or entity receiving the withdrawal will have the burden to show that the withdrawal was not for its personal benefit.
Finally, several commenters suggested that the excessive withdrawal prohibition not apply to firms owned by Tribes, ANCs, NHOs or CDCs. They believed that the community development purposes of the 8(a) BD program for entity-owned Participants is inconsistent with the excessive withdrawal provisions. As long as the Tribe, ANC, NHO or CDC has committed to supporting the firm, the commenters felt that any withdrawals made for the benefit of the Tribe, ANC, NHO or CDC (or community served by such entity) should be permitted. SBA agrees. As stated above, the original statutory provision was intended to apply to individuals who have withdrawn funds from the Participant that are unduly excessive and thus detrimental to the Participant's achievement of the targets, objectives, and goals contain it its business plan. Funds benefitting a Tribe or Tribal community serve a different purpose. SBA does not believe that it should prohibit a Participant owned by Tribe, ANC, NHO or CDC from benefitting the entity or the native or shareholder community. However, if SBA determines that the withdrawals from a firm owned by a Tribe, ANC, NHO or CDC are not for the benefit of the native or shareholder community, then SBA may determine that the withdrawal is excessive. For example, if funds or assets are withdrawn from an entity-owned Participant for the benefit of a non-disadvantaged manager or owner that exceed the withdrawal thresholds, SBA may find that withdrawal to be excessive.
Applications to the 8(a) BD Program Back to Top
The proposed rule made minor changes to §§ 124.202, 124.203, 124.204 and 124.205 to emphasize SBA's preference that applications for participation in the 8(a) BD program are to be submitted in an electronic format. SBA received only positive comments to these proposed changes. As such, the final rule does not change these provisions from those proposed. Despite the preference for an electronic application, SBA again wants to clarify that nothing in the proposed rule or in this final rule would prohibit hard copy 8(a) BD applications from being submitted to and processed by SBA. Firms that prefer to file a hard copy application may continue to do so.
The proposed rule also changed the location of SBA's initial review of applications from ANC-owned firms from SBA's Anchorage, Alaska District Office to SBA's San Francisco unit of the Division of Program Certification and Eligibility (DPCE). Most comments opposed this move, believing that the SBA Alaska District Office better understood issues relating to ANCs and ANC-owned applicants. Commenters expressed concern about making interactions between ANC-owned applicants and the initial SBA reviewers more difficult because of the time difference or the imposition of a travel burden. Several commenters suggested SBA establish one or more offices to review only those applications from Tribally-owned concerns. Other commenters suggested that SBA take the provision identifying the San Francisco DPCE unit as the office that would initially review applications from ANC-owned concerns out of the regulations in order to provide flexibility to possible future changes in application processing. SBA has two DPCE units, one in San Francisco and the other in Philadelphia. All applications for participation in the 8(a) BD program, whether from ANC-owned, Tribally-owned or individually-owned firms, are processed by one of these two offices. The concerns raised by commenters about the possible difficulty of interacting with a reviewing office that is located in another State are no different than those faced by many individually-owned applicant firms. Both DPCE units interact daily with applicants located in other States. In addition, applications from ANC-owned firms come from firms located throughout the United States, not just from those located in Alaska. ANC-owned applicant firms not located in Alaska have historically dealt with an SBA processing office in another State (before this change, the Alaska District Office) without trouble. Thus, SBA does not see this physical presence issue as a problem. SBA has staffed the offices and for consistency purposes has designated the San Francisco DPCE unit to review and process all applications from ANC-owned firms. SBA agrees, however, that there is no need for the regulations to specifically address which DPCE unit will process specific types of applications. That can be done through internal guidance which can be changed more easily than regulations, and will provide more flexibility to SBA for possible future changes in application processing. As such, the final rule does not specifically state that applications from ANC-owned firms will be processed by the San Francisco DPCE unit even though it is SBA's intent to continue that policy. SBA will use its discretion to have the Philadelphia DPCE unit process applications from ANC-owned applicants in appropriate circumstances, such as where there is an uneven distribution of applications and the San Francisco DPCE unit has a backlog of cases while the Philadelphia DPCE unit does not.
SBA believes this is the best use of its currently available resources. Applicants to the 8(a) BD program are welcomed and encouraged to tap the Alaska District Office for assistance in the application process and SBA does not expect or require applicants to travel to DPCE units in order to complete the application process. As previously discussed, SBA encourages applicants to apply to the program through electronic means and these applications are available online. Additionally, SBA conducts training in the area of initial 8(a) eligibility on an ongoing basis and regularly includes components in the training which address areas unique to the Tribally-owned concerns.
The proposed rule also added a new paragraph to § 124.204, which governs application processing, to clarify that the burden of proof to demonstrate eligibility for participation in the 8(a) BD program is on the applicant and permitted SBA to presume that information requested but not submitted would be adverse (adverse inference). SBA received comments both in favor and opposed to this adverse inference concept. Those in favor recognized that the burden of proof for establishing eligibility must rest with the applicant. To do otherwise (e.g., to require SBA to prove that an applicant does not meet the eligibility requirements) would not make sense. Those commenters opposed to the change expressed concern that information may be inadvertently omitted and the application process unreasonably extended. SBA disagrees. The burden of proof for establishing eligibility rests with the applicant and SBA believes that this clarification will streamline the application process. Requiring an applicant to submit all requested information when SBA makes a specific request for information it deems to be relevant is critical to the application process and is reasonable. When that information is not provided, it is rational for SBA to presume that the information would be adverse to the firm and conclude that the firm has not demonstrated eligibility in the area to which the information relates. SBA's intended effect is to eliminate the delay that results from making repeat information requests. A similar provision has existed as part of SBA's size and HUBZone regulations for many years and is cited regularly in eligibility determinations relating to those programs.
Finally, in response to GAO Report Number: GAO-10-353, entitled, “Steps Have Been Taken to Improve Administration of the 8(a) Program, but Key Controls for Continued Eligibility Need Strengthening” with regard to the submission of tax returns and forms, this final rule clarifies that an application must include copies of signed tax returns and forms. Although this is not a new requirement, one of the conclusions reached in the audit by GAO is that not all copies of tax returns contained in SBA's application files were signed.
Graduation Back to Top
The proposed rule amended §§ 124.301 and 124.302 to utilize the terms “early graduation” and “graduation” in a way that matches the statutory meaning of those terms. See amendment to § 124.2, explained above. Several commenters supported the distinction made in the proposed rule between graduating and exiting the 8(a) BD program. A few commenters disagreed with allowing SBA to “kick out” any firms before their nine year program term expires. SBA believes that early graduation is not only supported by the statutory language of the Small Business Act, it is in fact required where a firm meets the goals and objectives set forth in its business plan, regardless of how long a firm has been in the 8(a) BD program. As such, the final rule continues to authorize early graduation in appropriate circumstances. Many commenters opposed proposed § 124.302(c), which authorized early graduation where a Participant exceeded the size standard corresponding to its primary NAICS code for two successive program years. Commenters believed such a rule was contrary to the business development purposes of the 8(a) program, and did not take into account the cyclical nature of small businesses where revenues can vary greatly from one year to the next. One commenter believed that this proposed provision would be a disincentive for firms to enter the 8(a) program in industries with small size standards. SBA does not intend to discourage any Participant from expanding or seeking business opportunities in diverse areas. However, as previously stated, where a firm has grown to be other than small in its primary NAICS code, SBA believes that the program has been successful and it is reasonable to conclude that the firm has achieved the goals and objectives of its business plan. Where a firm's business plan goals and objectives have been achieved, early graduation is appropriate.
Termination From the 8(a) BD Program Back to Top
The proposed rule made three amendments to § 124.303 regarding termination from the 8(a) BD program. First the proposed rule amended § 124.303(a)(2) to clarify that a Participant could be terminated from the program where an individual owner or manager exceeds any of the thresholds for economic disadvantage (i.e., net worth, personal income or total assets), or is otherwise determined not to be economically disadvantaged, where such status is needed for the Participant to remain eligible. SBA received no comments regarding this provision, and the final rule adopts the proposed language. Second, the proposed rule amended § 124.303(a)(13) to be consistent with the proposed changes to § 124.112(d)(13) regarding excessive withdrawals being a basis for termination. Several commenters supported the proposed changes. The final rule makes minor changes to more closely align this provision with § 124.112(d) and the statutory authority regarding termination for excessive withdrawals. The proposed rule authorized termination where an excessive withdrawal was deemed to “hinder the development of the concern.” SBA believes that this proposed language did not precisely capture the statutory authority. Specifically, § 8(a)(6)(D) of the Small Business Act, 15 U.S.C. 637(6)(D), authorizes SBA to terminate a firm from participating in the 8(a) BD program where SBA determines that the withdrawal of funds was “detrimental to the achievement of the targets, objectives, and