[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Rules and Regulations]
[Pages 8222-8264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2581]
[[Page 8221]]
Vol. 76
Friday,
No. 29
February 11, 2011
Part VII
Small Business Administration
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13 CFR Parts 121 and 124
Small Business Size Regulations; 8(a) Business Development/Small
Disadvantaged Business Status Determinations; Final Rule
Federal Register / Vol. 76 , No. 29 / Friday, February 11, 2011 /
Rules and Regulations
[[Page 8222]]
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SMALL BUSINESS ADMINISTRATION
13 CFR Parts 121 and 124
RIN 3245-AF53
Small Business Size Regulations; 8(a) Business Development/Small
Disadvantaged Business Status Determinations
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: 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).
DATES: 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 Sec. 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.
FOR FURTHER INFORMATION CONTACT: LeAnn Delaney, Deputy Associate
Administrator, Office of Business Development, at (202) 205-5852, or
[email protected].
SUPPLEMENTARY INFORMATION: 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
Part 121
SBA received a substantial number of comments addressing the
proposed changes to the size rules.
Production Pools
In response to the proposed changes on affiliation, one commenter
noted that Sec. 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 Sec.
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 Sec. 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/Prot[eacute]g[eacute] Programs
The proposed rule intended to clarify when SBA would consider a
prot[eacute]g[eacute] firm not to be affiliated with its mentor based
on assistance received from the mentor through a mentor/
prot[eacute]g[eacute] agreement. In practice, the former regulation was
at times misconstrued by other Federal agencies that believed they
could establish mentor/prot[eacute]g[eacute] programs and exempt
prot[eacute]g[eacute]s from SBA's size affiliation rules on their own.
That was never SBA's intent. The
[[Page 8223]]
exception to affiliation contained in Sec. 121.103(b)(6) is meant to
apply to SBA's 8(a) BD mentor/prot[eacute]g[eacute] program and other
Federal mentor/prot[eacute]g[eacute] 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
prot[eacute]g[eacute] firms. Specifically, prot[eacute]g[eacute] firms
are not affiliated with their mentors based on assistance received from
their mentors through an SBA-approved 8(a) BD mentor/
prot[eacute]g[eacute] 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 prot[eacute]g[eacute]s
in other Federal mentor/prot[eacute]g[eacute] programs will be
recognized by SBA only where specifically authorized by statute (e.g.,
the Department of Defense mentor/prot[eacute]g[eacute] program) or
where SBA has authorized an exception to affiliation for a mentor/
prot[eacute]g[eacute] program of another Federal agency under the
procedures set forth in Sec. 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/prot[eacute]g[eacute] 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 prot[eacute]g[eacute] firm and its mentor based solely on the
assistance received under a mentor/prot[eacute]g[eacute] 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/prot[eacute]g[eacute] programs containing an
exclusion to affiliation only where authorized by statute or by SBA
after requesting such an exception under Sec. 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/prot[eacute]g[eacute] 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 prot[eacute]g[eacute] 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 prot[eacute]g[eacute]
firms in order for a mentor/prot[eacute]g[eacute] 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/prot[eacute]g[eacute]
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/prot[eacute]g[eacute] 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/prot[eacute]g[eacute]
relationships. As such, the final rule continues to allow exclusions
from affiliation for mentor/prot[eacute]g[eacute] relationships of
other agencies only where specifically authorized by statute or where
the agency asks for and SBA grants such an exclusion.
Joint Ventures
The proposed rule also amended the size rules pertaining to joint
ventures. Under current Sec. 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/prot[eacute]g[eacute] 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
[[Page 8224]]
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/prot[eacute]g[eacute] relationships
short term, which would encourage less business development assistance
to prot[eacute]g[eacute] 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 Sec. 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, Sec. 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, Sec. 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 Sec.
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 Sec.
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 Sec. 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 Sec. 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 Sec. 121.404(g)(4).
Exclusion From Affiliation for Mentor/Prot[eacute]g[eacute] Joint
Ventures
The proposed rule also attempted to clarify that any joint venture
seeking to use the 8(a) mentor/prot[eacute]g[eacute] 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
Sec. 124.513(c) and the performance of work requirements set forth in
Sec. 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
[[Page 8225]]
exception to affiliation is protested, the requirements of Sec.
124.513(c) and (d) must be met in order for the exception to
affiliation to apply. For purposes of clarification Sec. 124.513(d)
references the percentage of work requirements of Sec. 124.510 which
include the percentage of work requirements set forth in Sec. 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/
prot[eacute]g[eacute] 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/prot[eacute]g[eacute] relationships can
receive. The intent behind the exclusion generally is to promote
business development assistance to prot[eacute]g[eacute] firms from
their mentors. Without a requirement that a prot[eacute]g[eacute] 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) prot[eacute]g[eacute] 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 prot[eacute]g[eacute]
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/prot[eacute]g[eacute] 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)
prot[eacute]g[eacute] firm.
SBA also requested comments on whether to continue to allow the
exclusion to affiliation for mentor/prot[eacute]g[eacute] 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/
prot[eacute]g[eacute] 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/
prot[eacute]g[eacute] joint ventures for all government prime contracts
and subcontracts.
Classification of a Procurement for Supplies
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
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 Sec. 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
[[Page 8226]]
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 Sec. 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 Sec. 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 Sec.
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, Sec. 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 Sec. 121.406 as well for clarity purposes.
Request for Formal Size Determination
The proposed rule also amended Sec. 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
[[Page 8227]]
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.
Part 124
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
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
Sec. Sec. 124.2, 124.301 and 124.302 to effect this change. In
addition, the proposed rule added a new Sec. 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
The proposed rule amended Sec. 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 Sec. Sec. 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
[[Page 8228]]
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 Sec. 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
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 Sec. 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 Sec. 103.4 and is
included here for purposes of ease and clarity.
Residence in the United States
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 Sec. 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
The proposed rule sought to amend Sec. 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 Sec. 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
[[Page 8229]]
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 Sec. 121.104.
This provision is not meant to conflict with the change made to the
definition of primary industry classification in Sec. 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
A few commenters asked for clarification of the term ``American
Indian'' in Sec. 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
SBA proposed several revisions to Sec. 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 Sec. 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
[[Page 8230]]
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 Sec. 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
[[Page 8231]]
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 Sec. 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
SBA proposed two amendments to the ownership requirements for 8(a)
BD participation. First, SBA proposed to amend Sec. 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 Sec. 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 Sec. 124.105(h)(2) without any change,
and addresses the specific comments regarding Sec. 124.105(g).
Prior to any change, the language of Sec. 124.105(g) provided that
``the
[[Page 8232]]
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
The proposed rule amended three provisions pertaining to the
control requirements set forth in Sec. 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
Sec. 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 Sec. 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
Sec. 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 Sec.
124.106(e), clarifying that restrictions imposed on
[[Page 8233]]
non-disadvantaged managers apply to all non-disadvantaged individuals.
As such, the final rule adopts the language contained in the proposed
rule.
Proposed Sec. 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 Sec. 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 Sec. Sec.
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
The proposed rule removed Sec. 124.108(f), as well as other
references to the achievement of benchmarks contained in Sec. Sec.
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
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 Sec. 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 Sec. 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
[[Page 8234]]
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
[[Page 8235]]
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 Sec. 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 Sec.
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 Sec. 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
[[Page 8236]]
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 Sec. 124.112(b)(8) to a new Sec. 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 Sec. 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
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 Sec. 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
The final rule amends Sec. 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
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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
Sec. 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
The proposed rule made minor changes to Sec. Sec. 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.
[[Page 8238]]
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 Sec. 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
The proposed rule amended Sec. Sec. 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 Sec. 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 Sec. 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
[[Page 8239]]
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
The proposed rule made three amendments to Sec. 124.303 regarding
termination from the 8(a) BD program. First the proposed rule amended
Sec. 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 Sec. 124.303(a)(13) to be consistent with the
proposed changes to Sec. 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 Sec. 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, Sec. 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 goals
contained in such Program Participant's business plan.'' SBA has
adopted that language in this final rule. Third, the proposed rule
amended Sec. 124.303(a)(16) to remove the reference to part 145, a
regulatory provision that addresses nonprocurement debarment and
suspension that was moved to 2 CFR parts 180 and 2700. The two comments
SBA received regarding this provision did not pertain to the
ministerial change to the reference citation, but, rather, questioned
whether a voluntary exclusion should be a basis for possible
termination. This basis for possible termination existed prior to the
proposed rulemaking process. It was not a change to which public
comment was appropriate. SBA also notes that the first sentence in
Sec. 124.303(a) clearly makes termination discretionary, depending
upon the good cause shown. As such, SBA continues to believe that a
voluntary exclusion may be good cause for termination depending upon
the underlying facts which caused the voluntary exclusion.
Effect of Early Graduation or Termination
The proposed rule also amended Sec. 124.304(f) regarding the
effect an early graduation or termination would have. It provided that
a firm which early graduates or is terminated from the 8(a) BD program
could generally not self certify its status as an SDB for future
procurement actions. If the firm believes that it does qualify as an
SDB and seeks to certify itself as an SDB, the firm must notify the
contracting officer that SBA early graduated or terminated the firm
from the 8(a) BD program. The firm must also demonstrate either that
the grounds upon which the early graduation or termination was based do
not affect its status as an SDB, or that the circumstances upon which
the early graduation or termination was based have changed and the firm
would now qualify as an SDB. The proposed rule also provided that
whenever a firm notifies a contracting officer that it has been
terminated or early graduated by SBA along with its SDB certification,
the contracting officer must protest the SDB status of the firm so that
SBA can make a formal eligibility determination. SBA received several
comments supporting the clarification that a firm could not self-
certify its SDB status without addressing a previous termination or
early graduation from the 8(a) BD program. Several commenters, however,
also believed that a contracting officer should not be required to
protest a firm's SDB status in every instance in which the firm
identifies that it had been terminated or early graduated from the 8(a)
BD program. They felt that contracting officers should have the
discretion to determine if the information provided by a firm with its
SDB certification was sufficient for the contracting officer to believe
that the firm qualified as an SDB at the time of its certification.
They believed that a contracting officer should protest a firm's SDB
status only where he or she did not believe that the firm currently
meets the SDB requirements. SBA agrees and has changed this provision
to allow a contracting officer to accept an SDB certification where he
or she believes that the firm currently qualifies as an SDB, and to
protest the firm's SDB status to SBA where he or she continues to have
questions about the firm's current SDB status.
Suspensions for Call-Ups to Active Duty
As noted above, the proposed rule amended Sec. 124.305 to permit
SBA to suspend an 8(a) Participant where the individual upon whom
eligibility is based can no longer control the day-to-day operations of
the firm because the individual is a reserve component member in the
United States military who has been called to active duty. Suspension
in these circumstances is intended to preserve the firm's full term in
the program by adding the time of the suspension to the end of the
Participant's program term when the individual returns to control its
daily business operations. SBA received mostly favorable comments in
response to this provision. A few commenters sought clarification of a
few points. One commenter stated that not all activities as reservists
require deployment, and that activation is not the same as deployment.
SBA does not use the word deployment in the regulation. Any reservist
called to active duty who can no longer run the day-to-day operations
of his or her 8(a) Participant firm could elect to be suspended during
the call-up period. SBA believes that is clear from the regulatory text
and that no further clarification is needed. Another commenter
requested clarification as to whether a firm can continue to perform
8(a) contracts already awarded if the firm chooses to be suspended
during the call-up period. As with any suspension, a firm is always
required to complete performance of contracts it was awarded prior to
the suspension. SBA believes this is clear from the current regulatory
text in Sec. 124.305(b)(4), but has added a new paragraph (i) to
clarify SBA's intent nevertheless.
Task and Delivery Order Contracts
The proposed rule amended Sec. 124.503(h) to address task and
delivery order contracts. In order to help 8(a) concerns compete in the
current multiple-award contracting environment, SBA proposed to allow
agencies to receive 8(a) credit for orders placed with 8(a) concerns
under contracts that were not set aside for 8(a) concerns as long as
the order is offered to and accepted for the 8(a) BD program and
competed exclusively among eligible 8(a) concerns, and as long as the
limitations on subcontracting provisions apply to the individual order.
SBA received more than 20 comments in support of this proposal.
Commenters specifically agreed that procuring
[[Page 8240]]
agencies should not be able to take 8(a) credit for the award of an
order to an 8(a) Participant that was not competed solely among
eligible 8(a) Participants. The final rule adopts the proposed language
and merely allows contracting officers the discretion to reserve orders
for 8(a) concerns if they so choose. The rule does not require any
contracting officer to make such a reservation. If a contracting
officer chose not to reserve a specific order for 8(a) concerns (e.g.,
if a contracting officer went to an 8(a) firm, a small business, and a
large business off a schedule or otherwise competed an order among 8(a)
and one or more non-8(a) concerns), the contracting officer could
continue to take SDB credit for the award of an order to an 8(a) firm,
but could not count the order as an 8(a) award.
Barriers to Acceptance and Release From the 8(a) BD Program
The proposed rule amended Sec. 124.504(a) to add a provision
limiting SBA's ability to accept a requirement for the 8(a) BD program
where a procuring agency expresses a clear intent to make a HUBZone or
service disabled veteran-owned (SDVO) small business award prior to
offering the requirement to SBA for award as an 8(a) contract. The
previous regulation identified the small business set aside program,
but not the HUBZone or SDVO small business programs. Commenters
supported this change, specifically recognizing SBA's position relating
to parity among the various small business contracting programs. One
commenter recommended that the women-owned small business (WOSB)
program be added to the list of small business programs that would
limit SBA's ability to accept a requirement for the 8(a) BD program.
SBA agrees. As such the final rule would limit SBA's ability to accept
a requirement for the 8(a) BD program where a procuring agency
expresses a clear intent to make a small business set-aside, or
HUBZone, SDVO small business, or WOSB award prior to offering the
requirement to SBA for award as an 8(a) contract.
The proposed rule also amended Sec. 124.504(e) to require that
follow-on or repetitive 8(a) procurements would generally remain in the
8(a) BD program unless SBA agrees to release them for non-8(a)
competition. This had been SBA's policy, but had not been previously
incorporated into the regulations. If a procuring agency would like to
fulfill a follow-on or repetitive acquisition outside of the 8(a) BD
program, it must make a written request to and receive the concurrence
of the AA/BD to do so. Release may be based on an agency's achievement
of its SDB goal, but failure to achieve its HUBZone, SDVO, or WOSB
goal, where the requirement is not critical to the business development
of the 8(a) Participant that is currently performing the requirement or
another 8(a) BD Participant. SBA received nine comments in support of
this provision. The commenters believed that incorporating this policy
into the regulations was an important safeguard to ensuring that the
business development purposes of the 8(a) BD remain strong. The final
rule adopts the proposed language.
Competitive Threshold Amounts
The proposed rule amended Sec. 124.506 to adjust the competitive
threshold amounts to $5,500,000 for manufacturing contracts and
$3,500,000 for all other contracts to align with the changes made to
the Federal Acquisition Regulation (FAR) to implement an inflationary
adjustment authorized by 41 U.S.C. 431a. See 71 FR 57363 (September 28,
2006). Several commenters supported the change to incorporate the
competitive threshold amounts contained in the FAR. They believed that
removing the conflict between SBA's regulations and the FAR will also
eliminate possible confusion in the contracting community. Several
commenters recommended increasing the competitive threshold amounts,
believing that such a change would better promote business development
by making larger 8(a) contracts easier for procuring agencies to award
and thus providing easier access to larger contracts for 8(a)
Participants. Since the publication of the proposed rule, the Civilian
Agency Acquisition Council and the Defense Acquisition Regulations
Council (Councils) have determined that a further inflation adjustment
to the 8(a) competitive threshold amounts is warranted and have set the
new amounts at $6,500,000 as the competitive threshold for contracts
assigned a manufacturing NAICS code and $4,000,000 as the competitive
threshold for all other contracts. 75 FR 53129 (Aug. 30, 2010). The
councils are authorized by section 807 of the Ronald W. Reagan National
Defense Authorization Act for Fiscal Year 2005 to adjust acquisition-
related thresholds every five years for inflation using the Consumer
Price Index (CPI) for all urban consumers, except for Davis-Bacon Act,
Service Contract Act, and trade agreements thresholds. As these
thresholds are statutory and SBA cannot change them administratively,
the final rule adopts the language from the final rule amending the
FAR.
Several commenters opposed allowing sole source contracts above the
competitive threshold amounts to firms owned by ANCs, Tribes, and, for
Department of Defense (DoD) contracts, NHOs. The authority to permit
these sole source awards is statutory and cannot be changed
administratively by SBA. As such, the authority for these awards
continues to be incorporated in the final rule.
In addition, in order to address the perceived problem of non-8(a)
firms unduly benefitting from the 8(a) BD program through joint
ventures with 8(a) firms owned by ANCs, Tribes and NHOs, the proposed
rule prohibited non-8(a) joint venture partners to 8(a) sole source
contracts above the competitive thresholds from also being
subcontractors under the joint venture prime contract. If a non-8(a)
joint venture partner seeks to perform more work under the contract,
then the amount of work done by the 8(a) partner to the joint venture
must also increase. SBA recognizes that the mentor/
prot[eacute]g[eacute] aspect of the 8(a) BD program can be an important
component to the overall business development of 8(a) small businesses.
However, SBA does not believe that non-8(a) businesses, particularly
non-8(a) large businesses, should benefit more from an 8(a) contract
than 8(a) prot[eacute]g[eacute] firms themselves. As such, the change
to disallow subcontracts to non-8(a) joint venture partners is not
meant to penalize Tribal, ANC and NHO 8(a) firms, but, rather, to
ensure that the benefits of the program flow to its intended
beneficiaries. SBA received a substantial number of comments in
response to this proposal. There were a large number of comments on
both sides of this issue. Many commenters supported the proposed change
as a legitimate way to ensure that non-8(a) firms do not control or
dominate the performance of 8(a) contracts. Other commenters opposed
the change because they did not want to discourage firms from serving
as mentors and providing needed business development assistance to
prot[eacute]g[eacute] firms. A few of these commenters also recommended
that SBA increase its oversight of mentor/prot[eacute]g[eacute]
relationships instead of prohibiting all subcontracting to non-8(a)
joint venture partners. Several commenters recommended that the
restriction that non-8(a) joint venture partners cannot also be
subcontractors to the joint venture prime contract should be extended
beyond sole source 8(a) contracts above the competitive threshold
amounts. These commenters believed that it is important to ensure
[[Page 8241]]
that non-disadvantaged businesses, particularly large businesses in the
context of any joint venture between a prot[eacute]g[eacute] firm and
its mentor, do not obtain more benefits from an 8(a) contract than the
8(a) Participant itself does. SBA agrees and has made a change to Sec.
124.513(d) that would generally prohibit a non-8(a) joint venture
partner, or any of its affiliates, from acting as a subcontractor to
the joint venture awardee on any 8(a) contract. The restriction is
intended to apply to all subcontracting tiers, so that a non-8(a) joint
venture partner could not receive a subcontract from a firm that was
acting as a subcontractor to the joint venture or another subcontractor
of the joint venture. In response to a commenter that was concerned
that there might not be an appropriate subcontractor available if SBA
prohibited non-8(a) joint venture partners from acting as
subcontractors across the board, the final rule allows a non-8(a) joint
venture partner, or an affiliate of the non-8(a) joint venture partner,
to act as a subcontractor where the AA/BD determines that other
potential subcontractors are not available. This could be because no
one else has the capability to do the work, or because those firms that
have the capability are busy with other work and not available to be a
subcontractor on the 8(a) contract in question. If a non-8(a) joint
venture partner seeks to do more work, the additional work must
generally be done through the joint venture, which would require the
8(a) partner(s) to the joint venture to also do additional work to meet
the 40% requirement set forth in Sec. 124.513(d)(1).
Several commenters noted that prohibiting a non-8(a) partner to a
joint venture from subcontracting with the joint venture did not make
sense in the context of an unpopulated joint venture where both the
8(a) and non-8(a) partners must technically be subcontractors to the
joint venture. SBA agrees. In order to ensure that the 8(a) partner(s)
to a joint venture perform at least 40% of the work performed by an
unpopulated joint venture, Sec. 124.513(d)(2)(ii) of the final rule
provides that the total amount of work done by the partners on the
contract (at any level) will be aggregated and the work done by the
8(a) partner(s) must be at least 40% of the total done by all partners.
In determining the amount of work done by a non-8(a) partner, all work
done by the non-8(a) partner and any of its affiliates at any
subcontracting tier will be counted.
The final rule eliminates the reference in Sec. 124.506(b)(4) that
a joint venture between one or more eligible Tribally-owned, ANC-owed
or NHO-owned Participants and one or more non-disadvantaged business
concerns could be awarded a sole source 8(a) contract above the
competitive threshold amounts provided that no non-8(a) joint venture
partner also acts as a subcontractor to the joint venture awardee. In
light of the changes made to Sec. 124.513, it is not necessary to
repeat those same requirements in Sec. 124.506. As such, the final
rule provides in Sec. 124.506 that a joint venture with a non-8(a)
firm can receive an 8(a) contract above the competitive threshold
amounts if it meets the requirements of Sec. 124.513.
The supplemental information to the proposed rule noted that SBA
considered other alternatives to disallowing subcontracting to a non-
8(a) joint venture partner, and asked for comments on those and other
alternatives. Commenters did not believe that eliminating joint
ventures on sole source awards above the competitive threshold amounts
was a reasonable approach. They felt that such an alternative would
discourage firms from being mentors for Tribal, ANC and NHO-owned
Participants and, thus, would significantly hamper the ability of such
firms to fully receive valuable business development assistance.
Commenters also believed that the alternative that permitted sole
source joint venture contracts above the competitive threshold amounts
only where the 8(a) partner(s) to the joint venture performed a
specified percent of the entire contract itself was unworkable. They
observed that one of the principle reasons that a firm enters into a
joint venture relationship in order to perform a contract is because
the firm lacks the resources necessary to perform the contract on its
own. In the case of an 8(a) or small business set aside procurement,
this means that the firm is generally unable to meet the 50%
performance of work requirement by itself and, therefore, looks to
another firm to assist it in meeting that requirement and in performing
the overall procurement. For the larger contracts to which this
restriction would apply (i.e., the sole source contracts above the
competitive threshold amounts), a firm may not only not be able to
perform 50% of the entire contract, it may also not be able to perform
a smaller percentage (e.g., 40%) of the entire contract. As such,
commenters did not believe this alternative would be conducive to joint
venture relationships and should not be pursued. Finally, a few
commenters also thought that the alternative that would require a
majority of subcontract dollars under a sole source 8(a) joint venture
contract between a prot[eacute]g[eacute] firm and its mentor to be
performed by small businesses was not an attractive alternative. While
they believed that attempting to ensure that small businesses performed
a certain percentage of subcontracting work was a good objective, they
felt that this alternative would impose a subcontracting plan
requirement on small businesses that are currently exempt from having
subcontracting plans. In addition, they questioned the logic of
requiring subcontract work be performed by small businesses when the
prime contractor qualified as small and was already performing a
significant portion of the work on the contract. They reasoned that
such an approach would give small business prime contractors fewer
subcontracting options and could adversely affect their ability to
fulfill the procurement at a fair price. Based on the comments
received, SBA believes that the proposed approach is the best
alternative and has finalized it in this rule.
Bona Fide Place of Business
The proposed rule clarified the procedures a Participant must
follow to establish a bona fide place of business in a new location
pursuant to Sec. 124.507(c)(2). The rule clarified that a Participant
must first submit its request to be recognized as having a bona fide
place of business in a different location to the SBA district office
that normally services it. This will ensure that there is proper
coordination between the two SBA district offices. The servicing
district office will forward the request to the SBA district office
serving the geographic area of the particular location for processing.
The SBA district office in the geographic location of the purported
bona fide place of business will then contact the Participant and may
ask for further information in support of the Participant's claim. In
order for a Participant to establish a bona fide place of business in a
particular geographic location, the SBA district office serving the
geographic area of that location must determine if that location in
fact qualifies as a bona fide place of business under SBA's
requirements.
All but one of those submitting comments in response to this
proposal supported the proposed change as a necessary clarification.
One commenter opposed any geographic limitations for 8(a) contracts,
believing that firms should be free to seek contracts anywhere they
deem appropriate, whether or not they have a separate
[[Page 8242]]
office in a particular location. The bona fide place of business
requirement for 8(a) construction contracts is derived from the
statutory requirement that ``[t]o the maximum extent practicable,
[8(a)] construction * * * contracts * * * shall be awarded within the
county or State where the work is to be performed.'' 15 U.S.C.
637(a)(11). Thus, SBA does not believe that it has the unfettered
discretion to eliminate all geographic location requirements for 8(a)
construction procurements. Through regulations, SBA has permitted a
firm to establish a new bona fide place of business in the geographic
location where it expects to seek and be awarded 8(a) contracts. SBA
believes that this is as far as it may go and still remain consistent
with the statutory authority. Several commenters were frustrated by the
lack of coordination in the past that has caused a sometimes lengthy
process for a Participant to establish a bona fide place of business
within the geographical area served by another SBA district office.
They anticipated that the new provision would clear up confusion
between the various SBA district offices and accelerate the process to
establish a new bona fide place of business. A few commenters
recommended that SBA clarify the point at which a bona fide business is
deemed to exist. In response, this final rule clarifies that the
effective date of a bona fide place of business is the date that the
evidence (paperwork) shows that the business in fact regularly
maintained its business at the new geographic location. The district
office needs to look at the written evidence, including leases, payroll
records (showing the hiring of one or more individuals at the new
location), date of filings with the State to do business in the State,
and bills. Although the facts showing exactly when a firm has a bona
fide place of business may not be precise, based on the evidence, a
district office does have some discretion to determine when it believes
the bona fide place of business was established. However, it is not
reasonable for SBA to say that a firm does not have a place of business
until such time as SBA does the analysis or does a site visit to
determine that a bona fide office exists at a particular point in time.
The determination is based on the facts as supported by the evidence
not when SBA makes the determination. Similarly, the date of the site
visit is not the determinative date of when a bona fide place of
business was established.
Competitive Business Mix
The proposed rule amended Sec. 124.509(a)(1) to clarify that work
performed by an 8(a) Participant for any Federal department or agency
other than through an 8(a) contract, including work performed on orders
under the General Services Administration (GSA) Multiple Award Schedule
program, and work performed as a subcontractor, including work
performed as a subcontractor to another 8(a) Participant on an 8(a)
contract, qualifies as work performed outside the 8(a) BD program. This
change was made to respond to specific questions raised concerning
whether orders off the GSA Schedule and subcontracts on 8(a) contracts
counted against their competitive business mix requirement. The
majority of commenters supported the clarification. A few commenters
recommended that SBA count competitive 8(a) awards towards the non-8(a)
business activity targets. They argued that these targets are meant to
wean Participants away from sole source 8(a) contracting so that the
firms are able to compete and survive after leaving the 8(a) BD
program, and that 8(a) competition is more like non-8(a) competition
than it is like 8(a) sole source awards. SBA does not believe that such
a recommendation is consistent with the statutory authority. In
authorizing the non-8(a) business activity targets, the Small Business
Act speaks of ``contracts awarded other than pursuant to section
8(a).'' 15 U.S.C. 636(j)(10)(I). Competitive 8(a) contracts are
obviously awarded pursuant to section 8(a) of the Small Business Act,
and, thus, cannot be included as ``contracts awarded other than
pursuant to section 8(a).''
Several commenters recommended that where an 8(a) contract is
awarded to a joint venture, only the revenue going to the 8(a)
Participant should count as 8(a) revenue for competitive business mix
purposes. While this approach is initially appealing, SBA believes that
it would lead to skewed results. First, procuring agencies count the
entire 8(a) award toward their small disadvantaged business goal, and
the entire contract amount is coded as an 8(a) award. It seems
inconsistent to count the entire contract amount as an 8(a) award for
one purpose (goaling) but not another (competitive business mix).
Second, if SBA counted only the revenues going to the 8(a) partner(s)
in an 8(a) joint venture contract, others would argue that work
performed and revenues received by subcontractors should also not be
counted as 8(a) revenue for the 8(a) Participant prime contractor.
Thus, SBA has not made the recommended change.
Administration of 8(a) Contracts
The proposed rule also added clarifying language to Sec. 124.512
to make clear that tracking compliance with the performance of work
requirements is a contract administration function which is performed
by the procuring activity. SBA received a few comments supporting and a
few comments opposing this clarification. One commenter thought that it
made sense to put this clarification in the regulation because the
regulation would then conform with the Partnership Agreement, which
delegates contract execution and administration functions to procuring
agencies. Another commenter opposed the change, mistakenly thinking
that such a change was inconsistent with the Partnership Agreements.
Also included within the delegation of contract administration is the
authority to exercise priced options and issue appropriate
modifications. The previous regulation required contracting officers
who issued modifications or exercised options on 8(a) contracts to
notify SBA of these actions. Because there was no clear guidance as to
when SBA must be notified, there was often a delay between the issuance
of a modification (or exercise of an option) and notification being
supplied to SBA. The proposed rule required contracting officers to
submit copies of modifications and options to SBA within 10 days of
their issuance or exercise. While several commenters supported the
proposed change as requiring timely communication of options and
modifications, others believed that the 10-day turnaround time was too
short and burdensome. One commenter recommended that 10 business days
be changed to 15 business days to be consistent with the Partnership
Agreements. The final rule amends the provision to require a
contracting officer to submit copies to SBA of all modifications and
options exercised within 15 business days of their occurrence, or by
another date agreed upon by SBA.
In addition, this rule adds clarifying language to Sec. 124.510(b)
to make it clear that the initial determination of whether a firm
submitting an offer for an 8(a) contract will meet the applicable
performance of work requirement is made by the procuring agency
contracting officer. SBA may provide input if requested.
Changes to Joint Venture Requirements
The proposed rule made four amendments to the joint venture
requirements contained in Sec. 124.513(c)(3). Specifically, the
amendments provided that (1) the 8(a) Participant(s) to an 8(a) joint
venture must receive profits from the joint
[[Page 8243]]
venture commensurate with the work performed by the 8(a)
Participant(s); (2) the 8(a) Participant(s) to a joint venture for an
8(a) contract must perform at least 40% of the work done by the joint
venture; (3) where a joint venture has been established and approved by
SBA for one 8(a) contract, a second or third 8(a) contract may be
awarded to that joint venture provided an addendum to the joint venture
agreement, setting forth the performance requirements on that second or
third contract, is provided to and approved by SBA prior to contract
award; and (4) each 8(a) firm that performs an 8(a) contract through a
joint venture must report to SBA how the performance of work
requirements (i.e., that the joint venture performed at least 50% of
the work of the contract and that the 8(a) participant to the joint
venture performed at least 40% of the work done by the joint venture)
were met on the contract. SBA received over 100 comments regarding the
proposed changes to Sec. 124.513, and will address the comments to
each of the four proposals in turn.
First, the majority of commenters supported the proposal that 8(a)
Participant(s) to an 8(a) joint venture must receive profits from the
joint venture commensurate with the work they performed. Those in
support believed that this provision makes sense in light of the change
specifying that the 8(a) partner(s) to a joint venture must perform at
least 40% of the work performed by the joint venture. In a situation
where the joint venture performs 100% of the contract, 40% by an 8(a)
Participant and 60% by a non-8(a) firm, these commenters believed that
it was not reasonable for the 8(a) firm to receive 51% of the profits
when it performed only 40% of the work. SBA continues to agree. SBA
believes that requiring an 8(a) firm to receive 51% of the profits in
all instances could discourage legitimate non-8(a) firms from
participating as joint venture partners in the 8(a) BD program, or
encourage creative accounting practices in which a significant amount
of revenues flowing to a non-8(a) joint venture partner would be
counted as costs to the contract instead of profits in order to meet
the SBA requirement. SBA does not believe that either of those outcomes
is positive. As such, this provision is retained in this final rule.
Second, the comments responding to the proposed rule requiring the
8(a) Participant(s) to a joint venture for an 8(a) contract to perform
at least 40% of the work done by the joint venture were diverse. Many
commenters supported the proposal as a reasonable implementation of the
previous ``significant portion'' rule. Several commenters believed that
40% was not sufficient to ensure that 8(a) Participants received a
significant benefit from the joint venture contract. Theses commenters
believed that a 50% performance requirement for the 8(a) partner(s) to
a joint venture would more likely result in 8(a) partners receiving a
significant benefit from the joint venture contract. Conversely,
several other commenters opposed any objective measure, believing that
the ``significant portion'' language was more appropriate because a
suitable portion for an 8(a) firm to perform will vary based on the
type and size of the project. These commenters believed the
``significant portion'' approach provided needed flexibility and was
preferred to the proposed amendment. SBA believes that the rule
requiring an 8(a) Participant to a joint venture to perform a
significant portion of the work, without identifying a specific
percentage, did not provide sufficient guidance to 8(a) firms and
contracting officers as to what was expected of those firms. In
addition, it allowed non-sophisticated 8(a) firms to be taken advantage
of by certain non-8(a) joint venture partners. SBA believes that the
best way to ensure that the 8(a) partners to a joint venture gain
valuable experience from the joint venture is to require the 8(a)
partners to perform a specific percentage of work. SBA does not agree
with the commenter recommending that the 8(a) partner(s) perform at
least 50% of the work done by the joint venture. The fundamental reason
to have a joint venture is because one firm cannot act as prime and
perform the contract by itself. Where an 8(a) contract is awarded to an
8(a) Participant directly (and there is no joint venture) the 8(a) firm
must meet the performance of work requirement (i.e., generally 50%)
with its own work force. If SBA required the 8(a) partner to a joint
venture to perform at least 50% of the work of the joint venture and
the joint venture intended to perform the entire contract itself, then
the 8(a) firm would be in the same position it would be in if it did
not have a joint venture; it would be required to perform 50% of the
entire contract. There would be no benefit to having a joint venture.
As such, SBA continues to believe that the proposed 40% makes the most
sense. It ensures that the 8(a) partners perform a significant amount
of work, but also recognizes that 8(a) firms in a joint venture cannot
generally accomplish the task by themselves. Thus, it provides some
needed flexibility.
The final rule makes a distinction between populated and
unpopulated joint ventures in terms of the performance of work
requirement. For a populated joint venture, the requirement that the
8(a) partner must perform at least 40% of the work done by the joint
venture may not always make sense. Where the joint venture is populated
with one administrative person, then it continues to make sense that
the 8(a) partner must perform at least 40% of the work done by the
aggregate of the joint venture partners. However, where the joint
venture itself hires the individuals necessary to perform the contract,
the work of the joint venture will be done by the joint venture entity
itself. An 8(a) partner to such a joint venture must demonstrate
clearly how it will benefit or otherwise develop its business from the
joint venture relationship. Where an 8(a) Participant cannot clearly
demonstrate the benefits it will receive, SBA will not approve the
joint venture. It may be easier for an 8(a) Participant to show that it
will perform 40% of the work of an unpopulated joint venture (or 40% of
a joint venture populated with administrative personnel only) than it
will to demonstrate that it will substantially benefit from the work
done by a populated joint venture.
Third, SBA received five comments responding to the proposal to
clarify that once a joint venture is approved by SBA for one contract
the 8(a) Participant need only supply an addendum to the joint venture
agreement, setting forth the performance requirements on that second or
third contract, for SBA approval. The commenters supported this change,
but three commenters asked for further amplification to clarify that
SBA's approval of the addendums for a second and third contract under
the joint venture consisted only of SBA reviewing the work to be done
under those two additional contracts and not a repeat of the structure
of the joint venture for every contract. They stressed that this
approach would reduce costs and increase efficiency. It was always
SBA's intent to review only the addendums to the joint venture for the
additional contracts to be awarded under the joint venture. As such,
the final rule adds clarifying language to accomplish this result.
Fourth, SBA received two comments supporting the proposal to
require each 8(a) firm that performs an 8(a) contract through a joint
venture to report to SBA how the performance of work requirements were
met on the contract. SBA believes that this requirement is needed to
reinforce the performance of work requirements. Several audits
performed by SBA's OIG have revealed that the performance of work
[[Page 8244]]
requirements are not always met. SBA needs to know when and why the
requirements are not met. This could affect the firm's future
responsibility to perform additional contracts and, depending upon the
circumstance, could be cause for termination from the 8(a) BD program.
Sole Source Limits for NHO-Owned Concerns
Section 124.519 generally imposes limits to the amount of 8(a)
contract dollars a Participant may receive on a sole source basis. The
current rule exempts ANC and Tribally owned concerns from the
limitations set forth in the rule. The proposed rule added NHO-owned
concerns to the list of 8(a) concerns exempted from the limitations.
SBA believes that all three of these types of firms should be treated
consistently, and the failure to include NHO-owned concerns in the
exemption in the current regulation was an inadvertent omission. SBA
received 31 comments in response to this proposal. The comments
overwhelmingly supported exempting NHOs from the sole source
limitations. Only one commenter opposed the change (and that commenter
believed that firms owned by Tribes and ANCs should also not have a
sole source exemption) and one responded that it was ``neutral'' to the
proposed change. All others commenting on the proposal supported it.
One commenter supported the inclusion of NHOs and suggested that all
8(a) firms should be exempt from sole source dollar limits. SBA
believes that the exemption that allows firms owned by Tribes, ANCs and
NHOs to receive sole source 8(a) contracts even where the firm has
received 8(a) contracts totaling in excess of the identified
limitations is consistent with the statutory authority that permits
these firms to be awarded sole source 8(a) contracts above the
competitive threshold amounts. That statutory authority does not appear
to limit sole source awards to firms owned by Tribes, ANCs or, with
respect to DOD contracts, NHOs in any way. SBA believes that any
regulatory provision that limits sole source awards to firms owned by
these entities could be inconsistent with that statutory authority. No
other firms have that statutory authority. Thus, it makes sense to SBA
to allow only firms owned by Tribes, ANCs and NHOs to receive sole
source 8(a) awards in excess of the limitations set forth in Sec.
124.519. A few commenters suggested that option years should not be
included in the calculations for the total contract value because
option year funding is not guaranteed. SBA did not propose a change as
to how 8(a) contracts should be counted in determining whether a firm
has reached the threshold above which it may not receive additional
sole source 8(a) awards. As such, this recommendation is beyond this
rulemaking, and SBA does not change the provision in this final rule.
The proposed rule also changed the official authorized to waive the
requirement prohibiting a Participant from receiving sole source 8(a)
contracts in excess of the dollar amount set forth in Sec. 124.519
from the SBA Administrator to the AA/BD. SBA received no comments to
this proposed change. As such, SBA adopts that change in this final
rule.
Changes to Mentor/Prot[eacute]g[eacute] Program
The proposed rule made several changes to Sec. 124.520, governing
SBA's mentor/prot[eacute]g[eacute] program. The proposed changes to
this section generated a great deal of interest and comment. SBA
received 206 separate comments to the various proposed revisions to
Sec. 124.520.
The rule would specifically require that assistance to be provided
through a mentor/prot[eacute]g[eacute] relationship be tied to the
prot[eacute]g[eacute] firm's SBA-approved business plan. Although SBA
believed that this was implicit in the current regulations, SBA thought
that it was important to reinforce that the mentor/
prot[eacute]g[eacute] program is but one tool that can be used to help
the business development of 8(a) Participants in accordance with their
business plans. SBA received two comments supporting this change as a
logical clarification and one comment opposing it as not allowing
sufficient flexibility. The commenter who opposed the clarification
noted that circumstances change quickly in the beginning phases of 8(a)
program participation and new opportunities may not be included within
a firm's business plan. In such a case, a firm may not be eligible for
the mentor/prot[eacute]g[eacute] program because its business plan did
not reflect its new vision. SBA believes that a firm's business plan is
an ever-evolving document. At each annual review a firm may adjust its
business plan to account for changed circumstances. As long as a firm
makes the necessary adjustments at each annual review, its business
plan should be current and the assistance to be provided through a
proposed mentor/prot[eacute]g[eacute] agreement should be consistent
with and tied to the business plan. As such, the final rule adopts the
language contained in the proposed rule.
The proposed rule made several changes to requirements relating to
mentors. First, while stating that a mentor would generally have one
prot[eacute]g[eacute] firm, the proposed rule amended Sec.
124.520(b)(2) to limit the number of prot[eacute]g[eacute]s any mentor
could have to three. SBA proposed this rule to prevent mentor firms
from being able to take advantage of the program by collecting
prot[eacute]g[eacute]s in order to benefit from 8(a) contracts. SBA
received comments both supporting and opposing the provision. The
majority of comments believed the provision limiting mentors to having
three prot[eacute]g[eacute] firms at a time was reasonable. Commenters
agreed that allowing a mentor to have an unlimited number of
prot[eacute]g[eacute] firms could permit a mentor to unduly benefit
from the 8(a) program. In addition, one commenter believed the
limitation to be reasonable because it ensures that 8(a) firms receive
more individualized attention and assistance from their mentor. Several
of these commenters, however, recommended that the rule more clearly
provide that the limitation is not an absolute limit, but only a limit
on the number of prot[eacute]g[eacute]s a mentor can have at a time.
Those opposing the provision feared that limiting the number of
prot[eacute]g[eacute]s a mentor could have would hurt the availability
of mentors. To date, SBA has generally permitted a mentor to have one
prot[eacute]g[eacute] firm, and in some cases two prot[eacute]g[eacute]
firms. SBA has not heard that there has been a scarcity of mentors or
that potential prot[eacute]g[eacute] firms could not find suitable
mentor firms. This rule would expand the number of
prot[eacute]g[eacute]s a mentor could have to three. Thus, the rule
should actually increase the availability of mentors, not curtail it.
SBA did not intend this provision to be an absolute limit (i.e., a
total of three prot[eacute]g[eacute] firms), but rather that it could
not have more than three at any point in time. SBA believes that the
proposed language states that clearly and that no further change is
necessary to capture its intent.
Second, the proposed rule amended Sec. 124.520(b)(3) to allow a
firm seeking to be a mentor to submit Federal income tax returns or
audited financial statements, including any notes, or other evidence
from the mentor in order to demonstrate the firm's favorable financial
health. The previous requirement that a proposed mentor must submit
Federal tax returns in all instances had proven to be impracticable,
particularly in the case of very large firms. The proposed rule allowed
a proposed mentor to submit Federal tax returns, but also allowed it to
demonstrate its favorable financial health by other means, including
submitting audited financial statements or in the case of publicly
traded
[[Page 8245]]
concerns the filings required by the Securities and Exchange Commission
(SEC). SBA received one comment on this proposed change. The commenter
supported the change, believing that it provided needed flexibility.
The final rule adopts the proposed language.
The supplemental information to the proposed rule advised that SBA
was considering making a change to Sec. 124.520(b) to specifically
allow non-profit business entities to be mentors, and sought public
comment on this issue. Sixteen commenters supported allowing non-profit
entities to serve as mentors. These commenters believed that expanding
the mentor/prot[eacute]g[eacute] program to include well-managed non-
profit corporations to serve as mentors would increase the pool of good
mentors and the scope of the program. A few of these commenters also
believed that a non-profit mentor could benefit a prot[eacute]g[eacute]
firm by providing developmental assistance to the prot[eacute]g[eacute]
in the same way as a for-profit could. One commenter opposed non-profit
mentors, believing that non-profits could not provide the same
assistance because they have not actively participated in the Federal
marketplace. Because the commenters overwhelmingly supported allowing
non-profit entities to be mentors, the final rule amends Sec.
124.520(b) to specifically allow non-profit business entities to be
mentors. This authority merely gives firms seeking to be
prot[eacute]g[eacute]s an additional avenue to find mentors that meet
their needs. If a firm, like the one commenter opposing allowing non-
profits to be mentors, does not believe a non-profit entity can supply
it with needed developmental assistance, that firm would not enter a
mentor/prot[eacute]g[eacute] relationship with a non-profit. However,
another firm that sees a benefit to such a relationship will now be
able to have such a relationship.
The proposed rule added clarifying language to Sec. 124.520(c)(2)
to make it clear that the benefits derived from the mentor/
prot[eacute]g[eacute] relationship end once the prot[eacute]g[eacute]
firm graduates from or otherwise leaves the 8(a) BD program. SBA wanted
to specifically make clear that the exclusion from affiliation enjoyed
by joint ventures between prot[eacute]g[eacute]s and their mentors
generally ends when the prot[eacute]g[eacute] leaves the 8(a) BD
program. SBA received 16 comments in response to this proposal. All 16
supported the change. Most of the commenters, however, also recommended
that SBA further clarify the provision to specify that any contract
awarded to a joint venture between a prot[eacute]g[eacute] and its
mentor prior to the termination of the mentor/prot[eacute]g[eacute]
relationship does not automatically end when the mentor/
prot[eacute]g[eacute] relationship ends, and that the parties remain
obligated to perform the contract to completion. SBA believes that to
be fundamental. As with any contract awarded to any firm, contract
performance continues. If a firm graduates or otherwise leaves the 8(a)
BD program, the firm is bound to continue performance on any 8(a)
contracts previously awarded. That is the same for any contract awarded
to a joint venture, including joint ventures between a
prot[eacute]g[eacute] and its mentor. If a prot[eacute]g[eacute] firm
graduates from the 8(a) BD program, it would no longer be eligible for
the exclusion from affiliation that is available to current
prot[eacute]g[eacute] firms and their mentors for future contracts, but
its leaving the 8(a) BD program does not affect the status of
previously awarded contracts. In addition, the status of the joint
venture as a small business for a previously awarded contract does not
change where the prot[eacute]g[eacute] firm graduates or otherwise
leaves the 8(a) BD program. Upon further reflection, SBA believes that
this provision should be moved from Sec. 124.520(c), which identifies
the requirements for prot[eacute]g[eacute] firms, to Sec. 124.520(d),
which addresses the benefits available to mentor/prot[eacute]g[eacute]
relationships. The final rule does that, and also adds clarifying
language to clear up any confusion regarding what happens to previously
awarded contracts.
The proposed rule amended Sec. 124.520(c)(3) to allow a
prot[eacute]g[eacute] to have a second mentor where it demonstrates
that the second relationship pertains to an unrelated, secondary NAICS
code, the first mentor does not possess the specific expertise that is
the subject of the mentor/prot[eacute]g[eacute] agreement with the
second mentor, and the two relationships will not compete or otherwise
conflict with each other. All 20 comments SBA received in response to
this provision supported the proposed change. The commenters believed
that this will allow prot[eacute]g[eacute] firms to develop expertise
in different areas more quickly than if they only had one mentor, and
will more fully promote the business development purposes of the 8(a)
BD program. One commenter recommended that a firm should be able to
have a second mentor in all instances where the mentor is in a
different NAICS code. SBA believes that NAICS codes alone do not
adequately determine whether a firm is in a different or related
industry. As commenters have pointed out in addressing other provisions
of the proposed rule, many times contracting officers classify the same
work in different NAICS codes. Work done in different NAICS codes could
relate to one another and two such mentor/prot[eacute]g[eacute]
relationships could conflict with each other. SBA believes that
requiring a prot[eacute]g[eacute] to demonstrate that the second mentor
possesses specific expertise that the first does not have and that the
two relationships will not compete or otherwise conflict with each
other provide important safeguards to ensuring that
prot[eacute]g[eacute]s benefit from their mentor/prot[eacute]g[eacute]
relationships. As such, the final rule adopts the proposed language.
The proposed rule also added a provision to preclude 8(a) firms
from being mentors and prot[eacute]g[eacute]s at the same time. Under
the amendment, 8(a) concern must give up its status as a
prot[eacute]g[eacute] if it becomes a mentor. SBA received one comment
supporting this provision as reasonable and two comments opposing it.
The comments opposing the rule believed that a firm could act as a
mentor and assist a firm less sophisticated than it is and still
qualify as a prot[eacute]g[eacute] itself to obtain assistance in more
highly developed areas from a larger, more diversified firm. SBA
disagrees. If a firm was permitted to be both a prot[eacute]g[eacute]
and a mentor at the same time, SBA believes that a conflict could
easily develop between the two relationships. It is possible that there
would be procurements that both prot[eacute]g[eacute] firms would want
to compete for, which could cause friction between the parties. In the
end, it is likely that the smaller prot[eacute]g[eacute] firm would not
get the full benefits of a mentor/prot[eacute]g[eacute] relationship.
As such, the final rule retains the prohibition against a firm being a
prot[eacute]g[eacute] and mentor at the same time.
SBA received 27 comments in response to proposed Sec.
124.520(c)(5), which prohibited SBA from approving a mentor/
prot[eacute]g[eacute] agreement if the proposed prot[eacute]g[eacute]
firm has less than one year remaining in its program term. Three
commenters supported the rule as proposed. One commenter thought that
mentor/prot[eacute]g[eacute] agreements should not be permitted in the
last 18 months of a firm's program term. The remainder of the
commenters believed that the one-year limit was too harsh. Many of
these commenters believed that SBA approval should be based upon the
particular agreement, and whether it provided for meaningful
developmental support to the prot[eacute]g[eacute] firm, and not on the
time remaining in the program. Other commenters believed that a shorter
length of time to disallow new mentor/prot[eacute]g[eacute]
relationships was more
[[Page 8246]]
appropriate. One commenter recommended nine months, three commenters
recommended six months, and three commenters recommended three months.
Several commenters were concerned that because the process for SBA to
approve a mentor/prot[eacute]g[eacute] agreement may take a long time,
an agreement might be denied because of SBA's inaction. As stated in
the supplemental information to the proposed rule, SBA was concerned
that mentor/prot[eacute]g[eacute] relationships approved within one
year of the end of a firm's program term would not provide the agreed
upon assistance to the prot[eacute]g[eacute] firm. An agreement may
appear valid on its face, but SBA's oversight of the firm and what
assistance it actually obtains ends when the firm leaves the program.
SBA cannot ensure that the prot[eacute]g[eacute] ever receives the
agreed upon assistance. In many of the cases SBA has seen where a
mentor/prot[eacute]g[eacute] agreement is submitted within the last
year of a firm's program term, the proposed mentor is looking to
benefit from the 8(a) BD program through the award of an immediate
joint venture contract. After the contract award, there are no
assurances that the prot[eacute]g[eacute] ever receives developmental
assistance. SBA also understands, however, that certain firms nearing
the end of their program terms could benefit from mentor/
prot[eacute]g[eacute] relationships if they in fact received the agreed
upon assistance. Because this rule imposes new consequences for a
mentor that has not provided the assistance set forth in its mentor/
prot[eacute]g[eacute] agreement, SBA believes that the one year
restriction may be too limiting. As such, this final rule prohibits SBA
from approving a mentor/prot[eacute]g[eacute] agreement if the proposed
prot[eacute]g[eacute] firm has less than six months remaining in its
program term.
The proposed rule amended Sec. 124.520(d)(1) to allow a joint
venture between a mentor and prot[eacute]g[eacute] to be small for
Federal subcontracts. All nine comments responding to this provision
supported allowing the exclusion from affiliation for subcontracts. One
commenter thought the exclusion from affiliation should be limited only
to the unique contracting situation of 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 for
which the exclusion from affiliation for a mentor/prot[eacute]g[eacute]
joint venture did not previously apply. The other eight commenters
thought that the exclusion from affiliation should be applied equally
to all subcontracts of Federal prime contracts. These commenters
thought that it made no sense to distinguish between types of
subcontracts. They viewed allowing the exclusion from affiliation on
all subcontracts as another business development tool. The final rule
retains the exclusion from affiliation for all Federal subcontracts.
The proposed rule also clarified that a mentor/
prot[eacute]g[eacute] agreement must be approved by SBA before the two
firms can submit an offer as a joint venture to take advantage of the
special exception to the size requirements for that procurement. Under
SBA's size regulations, size is determined at a fixed point in time
(i.e., as of the date of the initial offer, including price). See 13
CFR 121.504. If the entity submitting an offer is small as of that
date, it will qualify as small for the procurement even if it grows to
be other than small at the date of award. If the entity submitting an
offer does not qualify as small as of the date it submits its initial
offer, it cannot later come into compliance and qualify as small for
that procurement. Thus, in order for a joint venture to be eligible as
a small business, it must be small at the time it submits its offer
including price. It seems obvious to SBA that if SBA has not yet
approved a mentor/prot[eacute]g[eacute] agreement, a joint venture
between proposed prot[eacute]g[eacute] and mentor firms is not entitled
to receive the benefits of the 8(a) mentor/prot[eacute]g[eacute]
program, including the exclusion from affiliation. SBA received no
substantive comments on this provision, and it remains unchanged in
this final rule.
In addition, the proposed rule added a provision making it clear
that in order to receive the exclusion from affiliation for both 8(a)
and non-8(a) procurements, the joint venture must comply with the
requirements set forth in Sec. 124.513(a). SBA received no comments on
this proposal. It is SBA's view that in order to obtain a benefit
derived from the 8(a) program (i.e., the exclusion from affiliation for
joint ventures between approved prot[eacute]g[eacute]s and mentors),
the same restrictions that are applicable to 8(a) contracts apply to
non-8(a) contracts. SBA believes that it would not make sense for the
requirement that the prot[eacute]g[eacute] firm perform 40% of the work
performed by the joint venture not apply to small business set-aside
contracts. The whole purpose of the mentor/prot[eacute]g[eacute]
program is to help prot[eacute]g[eacute] firms develop so that they can
better compete for future contracts on their own. If they are not
required to perform a significant portion of or be the project manager
on a contract, the development purposes of the mentor/
prot[eacute]g[eacute] program would not be served. The final rule
adopts the proposed language.
The proposed rule also clarified procedures for requesting
reconsideration of SBA's decision to deny a proposed mentor/
prot[eacute]g[eacute] agreement. No reconsideration process was
authorized under previous regulations. Under the procedures, where SBA
declines to approve a specific mentor/prot[eacute]g[eacute] agreement,
the prot[eacute]g[eacute] may request the AA/BD to reconsider the
Agency's initial decline decision by filing a request for
reconsideration with its servicing SBA district office within 45
calendar days of receiving notice that its mentor/prot[eacute]g[eacute]
agreement was declined. The prot[eacute]g[eacute] is then able to
revise its mentor/prot[eacute]g[eacute] agreement to more fully detail
the business development assistance that the mentor will provide and
provide any additional information and documentation pertinent to
overcoming the reason(s) for the initial decline. The proposed rule
also provided that if the AA/BD declines to approve the mentor/
prot[eacute]g[eacute] agreement on reconsideration, the 8(a) firm
seeking to become a prot[eacute]g[eacute] could not submit a new
mentor/prot[eacute]g[eacute] agreement with that same mentor for one
year; it could, however, submit a proposed mentor/prot[eacute]g[eacute]
agreement with a different proposed mentor at any time after the SBA's
final decline decision. SBA received two comments responding to this
proposal. While the comments supported authorizing a reconsideration
process, they opposed the provision requiring a prospective
prot[eacute]g[eacute] to wait one year after its mentor/
prot[eacute]g[eacute] agreement was denied to submit a new mentor/
prot[eacute]g[eacute] agreement with the same proposed mentor. The
commenters viewed this proposal as a punitive measure that does not
benefit any party involved. SBA agrees that requiring the same two
parties to wait a year before submitting a new mentor/
prot[eacute]g[eacute] agreement does not serve the business development
purposes of the program. However, SBA continues to believe that some
waiting period makes sense to ensure that the parties properly
understand SBA's requirements and take some time to draft an agreement
that meets those requirements. Thus, this final rule reduces the one-
year waiting period for the same parties to submit a new mentor/
prot[eacute]g[eacute] agreement to 60 calendar days.
The proposed rule also added a new Sec. 124.520(h), which set
forth consequences for a mentor that fails to provide the assistance it
agreed to provide in its mentor/prot[eacute]g[eacute]
[[Page 8247]]
agreement. Where SBA determines that a mentor has not provided to the
prot[eacute]g[eacute] firm the business development assistance set
forth in its mentor/prot[eacute]g[eacute] agreement, SBA will afford
the mentor an opportunity to respond. The response must explain why the
assistance set forth in the mentor/prot[eacute]g[eacute] agreement has
not been provided to date and must set forth a definitive plan as to
when it will provide such assistance. Under the proposed rule, if the
mentor fails to respond, does not supply adequate reasons for its
failure to provide the agreed upon assistance, or does not set forth a
definite plan to provide the assistance, SBA will recommend to the
relevant procuring agency to issue a stop work order for each Federal
contract for which the mentor and prot[eacute]g[eacute] are performing
as a small business joint venture and received the exclusion from
affiliation authorized by Sec. 124.520(d)(1). SBA received over 50
comments responding to this proposal. Many commenters opposed the stop
work order authority because they feared that it would harm
prot[eacute]g[eacute] firms and discourage procuring agencies from
awarding contracts to mentor/prot[eacute]g[eacute] joint ventures. Any
stop work order issued under this section is intended to be temporary
to encourage the mentor to come into compliance with its mentor/
prot[eacute]g[eacute] agreement. SBA anticipates that it will be
withdrawn when SBA is satisfied that the assistance has been or will be
provided to the prot[eacute]g[eacute]. If the work is critical to and
any delay in contract performance would harm the procuring activity,
SBA may request that another Participant be substituted for the joint
venture to continue performance. SBA continues to believe that some
seemingly harsh measure must be imposed to ensure that
prot[eacute]g[eacute] firms obtain the business development assistance
promised to them in their various mentor/prot[eacute]g[eacute]
agreements. SBA has no other way to compel mentors to comply with their
mentor/prot[eacute]g[eacute] agreements. Without such authority, SBA
fears that prot[eacute]g[eacute] firms will continue to be taken
advantage of by firms who merely want to get access to 8(a) contracts
that they would not otherwise be able to do without the mentor/
prot[eacute]g[eacute] relationship. SBA understands the concerns raised
by commenters who view a stop work order as something that will hurt
prot[eacute]g[eacute] firms in addition to not obtaining the agreed-
upon development assistance through their mentor/prot[eacute]g[eacute]
agreements. However, SBA believes that this is a valuable tool to
maintain the integrity of small business programs. Large business
mentors that are performing significant portions of 8(a) and small
business contracts that they otherwise would not be eligible for should
not be able to continue to benefit from such contracts when they are
not meeting SBA's requirements. Instead of providing that SBA will
recommend the issuance of a stop work order in every case where the
mentor does not supply adequate reasons for its failure to provide the
agreed upon assistance or does not set forth a definite plan to provide
the assistance, the final rule gives SBA the authority to recommend a
stop work order, but makes it discretionary. SBA will look at the
circumstances in each case before deciding whether to make such a
recommendation. In addition, the final rule adds further language to
attempt to protect prot[eacute]g[eacute] firms. Specifically, the final
rule provides that where a prot[eacute]g[eacute] firm is able to
independently complete performance of any contract awarded to a joint
venture between it and its mentor, SBA may authorize a substitution of
the prot[eacute]g[eacute] firm for the joint venture. This would allow
the prot[eacute]g[eacute] firm to continue to perform the contract
without the mentor.
The proposed rule also authorized SBA to terminate a mentor/
prot[eacute]g[eacute] agreement where the mentor has failed to provide
the agreed upon developmental assistance, and render the mentor firm
ineligible to again act as a mentor for a period of two years from the
date SBA terminates the mentor/prot[eacute]g[eacute] agreement. If SBA
believes that the mentor entered into the mentor/prot[eacute]g[eacute]
relationship solely to obtain one or more Federal contracts as a joint
venture partner with the prot[eacute]g[eacute] and had no intent to
provide developmental assistance to the prot[eacute]g[eacute], SBA
could initiate proceedings to debar the mentor from Federal
contracting. Similarly, if SBA believes that a prot[eacute]g[eacute]
firm entered a mentor/prot[eacute]g[eacute] agreement in order to be
awarded joint venture contracts with its mentor knowing that it would
bring little or no value to the joint venture, SBA could initiate
proceedings to terminate the firm from 8(a) participation or debar the
firm from Federal contracting. Several commenters believed that a firm
should be forever barred from again acting as a mentor if it failed to
provide the agreed upon developmental assistance to the
prot[eacute]g[eacute] firm in one mentor/prot[eacute]g[eacute]
relationship. SBA takes seriously a mentor's failure to live up to its
mentor/prot[eacute]g[eacute] agreement, particularly where the mentor
has benefited from the 8(a) BD program through joint venture contracts.
However, SBA believes that a permanent ban is too restrictive, and that
two years is an appropriate penalty. If after two years the firm seeks
to be a mentor for another 8(a) Participant, SBA would require the firm
to demonstrate when and how it will provide developmental assistance to
the prot[eacute]g[eacute] firm, and it may not approve any joint
venture between the mentor and prot[eacute]g[eacute] until the firms
demonstrate that the prot[eacute]g[eacute] has already received some
developmental assistance.
Reporting Requirement and Submission of Financial Statements
The proposed rule amended Sec. 124.601, which addresses a
statutorily required reporting requirement for 8(a) Participants. Small
business concerns participating in the 8(a) BD program are required by
statute to semiannually submit a written report to their assigned BDS
that includes a listing of any agents, representatives, attorneys,
accountants, consultants and other parties (other than employees)
receiving fees, commissions, or compensation of any kind to assist such
participant in obtaining a Federal contract. The previous regulation
incorrectly required this report to be submitted annually. This change
is needed in order to bring the regulation into compliance with the
statutory requirement. SBA received several comments supporting this
change. Two commenters believed that semi-annual reporting will add an
unnecessary burden to 8(a) Participants. Again, SBA is merely changing
the regulation to coincide with statutory authority.
The proposed rule also amended Sec. 124.602 regarding the
submission of audited and reviewed financial statements. SBA proposed
to raise the level above which audited financial statements are
required from Participants with gross annual receipts of more than
$5,000,000 to Participants with gross annual receipts of more than
$10,000,000. The proposed rule required reviewed financial statements
of all Participants with gross annual receipts between $2,000,000 and
$10,000,000, instead of between $1,000,000 and $5,000,000. SBA received
more than 40 comments supporting the changes in the levels of gross
annual receipts that require a firm to submit audited and reviewed
financial statements. One commenter recommended that audited financial
statements be required only of firms with more than $15,000,000 in
gross annual receipts, and another commenter recommended that reviewed
financial statements be required only for firms with gross annual
receipts between $5,000,000 and $10,000,000. Because
[[Page 8248]]
SBA did not receive any other comments questioning the levels for
audited and reviewed financial statements and the vast majority of
comments supported the changes, SBA believes that the proposed levels
are appropriate. Several commenters recommended that SBA allow for a
transition for firms who for the first time exceed $10,000,000 in gross
annual receipts and who would, therefore, be required to submit audited
financial statements for the first time. These commenters believed that
it would be difficult for a firm to provide audited financial
statements in the first year it exceeds the $10,000,000 receipts
figure. This is because audited income and cash flow statements
generally require an audited balance sheet for both the beginning and
the end of the period covered by the income and cash flow statements.
One commenter noted that it is technically difficult for an auditor to
recreate an audited balance sheet for a prior period and costly for the
client company. For example, if a company has inventories and accounts
receivable, the commenter observed that Generally Accepted Auditing
Standards would generally require that the auditors observe the taking
of the physical inventory and confirm the receivables with the debtors.
The commenter believed that it is challenging and expensive for the
auditor to carry out these tasks a year later if the client company
discovers that its sales have increased to the point that an audit will
be required. In response to these comments, SBA has added a provision
to the regulations allowing 8(a) Participants to provide an audited
balance sheet for the first year an audit is required, with the income
and cash flow statements receiving the level of service required for
the previous year (review or none, depending on sales the year before
the audit is required).
Additionally, during the Tribal consultations, two Tribal
representatives believed that it was unduly expensive and burdensome
for Tribally-owned firms to submit separate audited financial
statements for each individual 8(a) Participant. They recommended that
where an audited financial statement is required for one or more
Tribally-owned firms, the firm be able to submit audited consolidated
financial statements that include audited schedules for each 8(a)
Participant. They understood that SBA needs separate financial
information for each Participant to monitor 8(a) compliance, but
believed that this information is already provided within the schedules
which are attached to the consolidated financial statements. In
addition, they felt that requiring a separate, stand alone audit for
each 8(a) Participant would not provide additional, meaningful detail
for the SBA, but would impose substantial costs on the Tribe, ANC, NHO,
or CDC. SBA recognizes the unique nature of ANC, NHO, CDC and Tribal
participation in the 8(a) BD program. Provided that consolidated
financial statements contain audited schedules for each 8(a)
Participant, SBA agrees that separate audited financial statements for
each entity-owned 8(a) Participant are not necessary. As such, this
final rule amends Sec. 124.602 by adding a new paragraph (g) making it
clear that SBA will accept audited consolidated financial statements
that contain audited schedules for each 8(a) Participant. It will be up
to each Participant how it wishes to meet the audited financial
statements requirement. If there is only one 8(a) Participant that must
submit an audited financial statement, it may make sense for that
Participant to provide separate, individual audited financial
statements. If there are two or more 8(a) Participants that must submit
audited financial statements, or if it otherwise makes sense for the
8(a) Participant, the Participant may provide audited consolidated
financial statements with audited schedules for each 8(a) Participant.
Even if there is only one 8(a) Participant required to submit audited
financial statements, it may make sense to provide consolidated
financial statements with audited schedules where the audited
consolidated statements with audited schedules already exists for other
purposes and it would be an added cost to have audited financial
statements of the one 8(a) Participant.
Several commenters also noted that the previous regulations
authorize the appropriate SBA district director to waive the
requirement for audited financial statements where good cause is shown,
but do not authorize the district director to waive the requirement for
reviewed financial statements in similar circumstances. These
commenters recommended that the appropriate district director to waive
the requirement for reviewed financial statements where good cause
similar to that permitted to waive audited financial statements is
shown. SBA agrees and has added such a waiver to Sec. 124.602(b)(2).
If a waiver is granted, the Participant would be permitted to submit a
compilation statement instead of reviewed financial statements.
Finally, as noted above in the discussion under the heading Changes
Applying Specifically to Tribally-Owned Firm, this final rule moves the
proposed provision requiring 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 from Sec. 124.112(b)(8) to a new Sec. 124.604. That
section discusses the other changes made to that requirement in this
rule.
Requirements Relating to SDBs
This rule amends Sec. 124.1002, which defines what is an SDB. SBA
first adds a provision to Sec. 124.1002(d) to make it clear that the
``other eligibility requirements'' set forth in Sec. 124.108 for 8(a)
BD program participation do not apply to SDBs. As part of an SDB
protest, SBA will merely be determining whether a concern is owned and
controlled by one or more individuals who qualify as socially and
economically disadvantaged. SBA will not consider whether the concern
is a responsible business for the particular contract. As such, issues
such as good character and failure to pay Federal financial obligations
should not be part of SBA's determination as to whether a firm
qualifies as an SDB.
This rule also adds a new paragraph to Sec. 124.1002 to define
full time management as it applies to the SDB program. Since the SDB
program is a contracts program and not a business development program,
and since there is no good policy reason to exclude part-time companies
from the SDB program, SBA proposes to permit SDB owners to devote fewer
than 40 hours per week to their SDB firms provided that the
disadvantaged manager works for the firm during all the hours that the
firm operates. For example, if a firm is in operation only 20 hours per
week, the disadvantaged manager of the firm would be considered to
devote full time to the firm if the individual was available and
working for the firm during the 20 hours the firm was operating. This
definition is not being extended to 8(a) firms as those firms are
expected to operate 40 or more hours per week.
SBA received eight comments in response to the proposed changes and
all but one supported the proposed changes to the SDB regulations. One
commenter disagreed that SDB is not a business development program. SBA
does not currently provide business development assistance to those
firms that self certify their SDB status.
Finally, SBA amends Sec. 124.1009, Who decides disadvantaged
status protests?, clarifying that the AA/BD, or designee,
[[Page 8249]]
will determine whether the concern is disadvantaged. This change is
required due to the recent suspension of SBA's receipt of applications
for the SDB program. 73 FR 54881(September 23, 2008). SBA no longer
processes applications for SDB certification and therefore no longer
has the position Division Chief, Small Disadvantaged Business
Certification and Eligibility. Compliance with Executive Orders 12866,
12988, 13175, and 13132, the Regulatory Flexibility Act (5 U.S.C. 601-
612), and the Paperwork Reduction Act (44 U.S.C., Ch. 35).
Executive Order 12866
OMB has determined that this rule is a ``significant'' regulatory
action under Executive Order 12866. In the proposed rule, the SBA set
forth its initial regulatory impact analysis, which addressed the
following: Necessity of the regulation; alternative approaches to the
proposed rule; and the potential benefits and costs of the regulation.
The SBA did not receive any comment specifically addressing its
regulatory impact analysis. However, numerous commenters agreed that
the proposed changes were necessary and positive. Several commenters
commended SBA's efforts to address certain program abuses and described
the changes as a strong effort to improve the program for legitimate
8(a) BD program participants. In addition, the SBA received numerous
comments supporting its proposed approaches to the specific provision
changes. The specific comments on these approaches are discussed above.
Although SBA received comments not in favor of specific provisions in
the rule overall the comments generally supported the proposed changes
and recognized SBA's requirements and effort to remove confusion. Those
provisions that received unanimous opposition were removed or amended
in consideration of the well-founded comments received. SBA also
considered a number of alternatives to the proposed rule and requested
comments from the public concerning those alternatives. The comments on
the alternative approaches and SBA's response are also discussed above.
For these reasons, and those set forth in the preamble, the SBA
adopts as final its initial regulatory impact analysis.
Executive Order 12988
This action meets applicable standards set forth in Sec. Sec. 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or preemptive effect.
Executive Order 13132
This rule does not have federalism implications as defined in
Executive Order 13132, Federalism. It will not have substantial direct
effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government, as specified
in the Executive Order. As such it does not warrant the preparation of
a Federalism Assessment.
Executive Order 13175, Tribal Summary Impact Statement
For the purposes of Executive Order 13175, Consultation and
Coordination with Indian Tribal Governments, the SBA's General Counsel
has determined that the requirements of this order have been met in a
meaningful and timely manner. This rule complies with the standards set
forth in the Executive Order and SBA has provided the Tribal officials
with an opportunity to provide meaningful and timely input on
regulatory policies that have a Tribal implications.
In drafting this final rule, SBA consulted with representatives of
Alaska Native Corporations (ANCs) and Indian Tribes, both informally
and formally, pursuant to Executive Order 13175, primarily to discuss
potential changes to the mentor/prot[eacute]g[eacute] requirements. SBA
met informally with Tribal and ANC representatives in Washington, DC on
July 19, 2007, and more formally in Fairbanks, Alaska on October 24,
2007, 72 FR 57889, and in Denver, Colorado on November 11, 2007, 72 FR
60702. In addition, SBA conducted 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.
A vast majority of the comments received from these discussions
were concerned that SBA would overreact to negative publicity regarding
one or two 8(a) Participants and would change the mentor/
prot[eacute]g[eacute] program in a way that would take away an
important business development tool to Tribal and ANC-owned firms. Many
Tribal representatives discussed the importance of the 8(a) BD program
to the Tribal and ANC communities. They stressed that the 8(a) BD
program works, providing the government with a contracting option that
is efficient and cost effective while permitting the government to
achieve its policy of supporting disadvantaged small businesses and
providing benefits to some of the most underemployed people in America.
They explained that they have been trying to dispel program
misperceptions caused by unsubstantiated allegations of misconduct and
abuse, when they would rather be devoting their efforts to business and
community development. Several Tribal representatives felt that
relatively few Tribes have realized the benefits of the mentor/
prot[eacute]g[eacute] component of the 8(a) program, and were concerned
that SBA would be closing this business development option just as they
are getting to the point where they would use it. Representatives also
were concerned that SBA would propose changes that would restrict the
participation of mentors in the program. That is not SBA's intent. SBA
also believes that the 8(a) BD program is a much-needed and beneficial
program, and that the Tribal and ANC component of the program serves a
valuable economic and community development purpose in addition to its
business development purpose. It is not SBA's intent to shut down any
component of the 8(a) program that truly assists the development of any
small disadvantaged businesses. Specifically, SBA is not proposing to
close this business development option to Tribes and ANCs as some
Tribal representatives were concerned. SBA does not seek to make it
more difficult for Tribally-owned and ANC-owned firms to participate in
the 8(a) BD program, and merely looks for ways to help ensure that the
benefits of the program flow to those who are truly eligible to
participate. SBA has carefully reviewed both the testimony given at the
Tribal consultation meetings and the formal comments submitted in
response thereto. SBA believes the final rule, as drafted, considered
the comments and testimony received from the Native communities
impacted by this rule change. Additionally, SBA has delayed the
effective date for certain provisions for a period of six months so
that additional discussions may take place with the Native communities
regarding the Annual Review reporting requirements and how best to
implement.
Regulatory Flexibility Act
The SBA set forth an Initial Regulatory Flexibility Analysis (IRFA)
addressing the impact of the proposed rule in accordance with section
603, title 5, of the United States Code. The IRFA examined the
objectives and legal basis for this proposed rule; the kind and number
of small entities that may
[[Page 8250]]
be affected; the projected recordkeeping, reporting, and other
requirements; whether there are any Federal rules that may duplicate,
overlap, or conflict with this proposed rule; and whether there are any
significant alternatives to this proposed rule.
SBA identified six specific provisions of the proposed rule which
it anticipated may have a significant impact on a substantial number of
small businesses. Those provisions were: (1) The provisions relating to
joint ventures between prot[eacute]g[eacute] firms and their SBA-
approved mentors; (2) the 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; (3) the provision excluding qualified
individual retirement accounts from an individual's net worth in
determining economic disadvantage; (4) the provisions establishing
objective criteria for determining economic disadvantage in terms of
income and total assets; (5) the provision requiring SBA to early
graduate a firm from the 8(a) program if the firm becomes large for the
size standard corresponding to its primary NAICS code; and (6) the
provisions relating to what size 8(a) Participants must annually submit
either audited or reviewed financial statements to SBA.
SBA received a couple of comments directly addressing the IRFA and
several comments discussing provisions of the proposed rule that
addressed included subjects addressed in the IRFA. The SBA received a
comment that correctly pointed out that the statement that the rule
imposes no additional reporting requirement or recordkeeping
requirements was inaccurate. This same commenter correctly pointed out
that the Annual Review reporting requirement for Tribes is new. Several
comments stated that SBA should consider the costs and burdens of the
reporting and recordkeeping requirements for the Native owned firms and
the consistency of the data.
SBA notes that Annual Review reporting and recordkeeping
requirements are necessary to reduce fraud in the program and to ensure
that the intended beneficiaries receive the benefits of the program and
only eligible businesses participate. SBA's rule adopts methods and
processes aimed at meeting these objectives, while also minimizing, as
much as possible, the burden on small businesses.
In addition to public comments, the Office of Advocacy (Advocacy),
an independent office within SBA, also provided comments on the
proposed rule. In the comments Advocacy commends SBA for its efforts in
making necessary revisions to the 8(a) BD program rules, moving some of
the internal practices to a regulatory framework, and recognizing cost
burdens that 8(a) companies encounter in complying with the program
requirements for audited financial statements. Advocacy supports SBA's
changes to the economic disadvantage analysis and treatment of IRAs and
applauded SBA's efforts to seek broad public input in this rulemaking.
In addition to noting the positive aspects of the proposed rule,
Advocacy also expressed concern with certain of the proposed changes
which SBA addresses here.
Residency Requirement
In response to the comments SBA received regarding the physical
presence requirement and as explained in the preamble above, SBA has
removed the requirement from the final rule.
Program Graduation
Although Public Law 95-507 was the enabling statute for the 8(a) BD
program, Public Law 100-656 specifically required graduation based on
the economic disadvantaged condition only. See section 8(a)(6)(C)(ii)
of the Small Business Act. Because the final rule as written is
consistent with the Small Business Act as amended, SBA adopts the final
rule.
Administration of 8(a) Contracts
SBA believes that Advocacy has misinterpreted the delegation of
contract administration with the delegation of program administration.
SBA does not delegate the administration of the 8(a) BD program to
other agencies. The changes to Sec. 124.512 address the delegation of
contract administration, not program administration as suggested by
Advocacy in its comments. SBA has historically delegated contract
administration and contract execution to procuring agencies, but has
maintained program administration responsibilities and the setting of
policy with regard to the 8(a) BD program. Additionally, the FAR
specifically addresses the delegation of contract execution authority
from SBA to other procuring activities.
Nothing has changed with regard to the assistance provided by SBA
to 8(a) BD program Participants as delivered through the Business
Development Specialist serving as advocates and administering
assistance.
Requirements Relating to SDBs
Advocacy objects to the change to allow ``part time companies'' to
participate in the SDB program and suggests that SBA does not have the
legal authority to change its definition of small business concern and
the legislative history of the socially and economic disadvantaged
programs does not seem to support or encourage the participation of
part-time business owners. Although true for the 8(a) program
(eligibility is based on the full time devotion of the disadvantaged
individual(s) upon whom eligibility is based) for Small Disadvantaged
Businesses the requirement is for an award to a small business concern
owned and controlled by socially and economically disadvantaged
individuals. SBA defines a small business as a business entity
organized for profit, with a place of business located in the United
States, and which operates primarily within the United States or which
makes a significant contribution to the U.S. economy through payment of
taxes or use of American products, materials or labor. See 13 CFR
121.105(a). The definition does not have a full time devotion
requirement, consequently SBA believes a firm run part time by one or
more socially and economically disadvantaged individuals meets this
definition. If an agency determines that the SDB has the capability to
perform a subcontract and that firm is owned and controlled by a
socially and economically disadvantaged individual who manages the firm
on a part time basis, in the SDB context, SBA believes the firm is
eligible assuming the other eligibility criteria for SDB are met.
In response to Advocacy's recommendation that SBA conduct an
economic impact analysis based on the concerns it raised, as addressed
above, SBA does not believe it is necessary because in one instance SBA
has made the recommended change and as for the remaining comments,
Advocacy's interpretation and suggested results are not consistent with
the actual application of the rule.
For these reasons, and the reasons set forth in the preamble, the
SBA adopts the IRFA as final.
Finally, Advocacy recommended that SBA provide the public with an
opportunity to review the comments from the regional hearings. SBA has
summarized the comments received on the listening tour and has audio
tapes of those hearing, but no transcripts. Someone seeking to listen
to the tapes of one or more hearings may request SBA for such access.
[[Page 8251]]
Paperwork Reduction Act
For purposes of the Paperwork Reduction Act, 44 U.S.C. Chapter 35,
SBA has determined that the rule imposes new reporting and
recordkeeping requirements. Specifically, the final rule imposes a new
requirement on each Participant owned by a Tribe, ANC, NHO, and CDC to
submit information to SBA that evidences how participation in the 8(a)
program has benefited the Tribal or native members and/or communities.
This provision, as proposed in Sec. 124.112(b)(8), required each
Participant to report how its participation in the 8(a) BD program
benefited the Tribal or native members and/or communities. In response
to public comments on this requirement, SBA has decided that it would
be less onerous on the 8(a) firms if the reporting requirement was at
the parent corporation level as opposed to the individual firm level.
In addition, because 124.112 relates to eligibility criteria and not
reporting requirements, SBA has relocated this new requirement to a new
Sec. 124.604, to avoid any confusion as to the purpose for the
information requested.
As discussed above, several commenters recommended that SBA delay
implementation of this reporting requirement to allow affected firms
additional time to gather and synthesize the data and for the Agency to
analyze the requirement further. In response SBA has decided to delay
implementation for a minimum of six months from the effective date of
this final rule.
Although this reporting requirement was identified in the proposed
rule, SBA unintentionally stated that there were no additional
reporting or recordkeeping requirement resulting from this rule, and
further did not submit the information collection to OMB for review and
approval as required by the Paperwork Reduction Act, and OMB
information collection regulations. In order to meet these
requirements, SBA will publish a notice in the Federal Register to
request comments on, among other things, the need for the information,
who is expected to respond to the request for the information, and the
estimated hour and cost burden on these respondents as a result of the
requirement. This action will not impact implementation of the other
aspects of the rule, since, in any event, implementation of the
reporting requirement has been delayed for six months.
List of Subjects
13 CFR Part 121
Administrative practice and procedure, Government procurement,
Government property, Grant programs--business, Individuals with
disabilities, Loan programs--business, Reporting and recordkeeping
requirements, Small businesses.
13 CFR Part 124
Administrative practice and procedures, Government procurement,
Hawaiian natives, Indians--business and finance, Minority businesses,
Reporting and recordkeeping requirements, Tribally-owned concerns,
Technical assistance.
For the reasons set forth above, the Small Business Administration
amends parts 121 and 124 of title 13 of the Code of Federal Regulations
as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
Subpart A--Size Eligibility Provisions and Standards
0
1. The authority citation for part 121 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 637(a), 644 and
662(5); and, Pub. L. 105-135, sec. 401 et seq., 111 Stat. 2592.
0
2. Amend Sec. 121.103 as follows:
0
a. Revise paragraphs (b)(3) and (b)(6);
0
b. Revise paragraph (h) introductory text; and
0
c. Revise paragraph (h)(3)(iii).
Sec. 121.103 How does SBA determine affiliation?
* * * * *
(b) * * *
(3) Business concerns which are part of an SBA approved pool of
concerns for a joint program of research and development or for defense
production as authorized by the Small Business Act are not affiliates
of one another because of the pool.
* * * * *
(6) An 8(a) BD Participant that has an SBA-approved mentor/
prot[eacute]g[eacute] agreement is not affiliated with a mentor firm
solely because the prot[eacute]g[eacute] firm receives assistance from
the mentor under the agreement. Similarly, a prot[eacute]g[eacute] firm
is not affiliated with its mentor solely because the
prot[eacute]g[eacute] firm receives assistance from the mentor under a
Federal Mentor-Prot[eacute]g[eacute] program where an exception to
affiliation is specifically authorized by statute or by SBA under the
procedures set forth in Sec. 121.903. Affiliation may be found in
either case for other reasons.
* * * * *
(h) Affiliation based on joint ventures. A joint venture is an
association of individuals and/or concerns with interests in any degree
or proportion consorting to engage in and carry out no more than three
specific or limited-purpose business ventures for joint profit over a
two year period, for which purpose they combine their efforts,
property, money, skill, or knowledge, but not on a continuing or
permanent basis for conducting business generally. This means that a
specific joint venture entity generally may not be awarded more than
three contracts over a two year period, starting from the date of the
award of the first contract, without the partners to the joint venture
being deemed affiliated for all purposes. Once a joint venture receives
one contract, SBA will determine compliance with the three awards in
two years rule for future awards as of the date of initial offer
including price. As such, an individual joint venture may be awarded
more than three contracts without SBA finding general affiliation
between the joint venture partners where the joint venture had received
two or fewer contracts as of the date it submitted one or more
additional offers which thereafter result in one or more additional
contract awards. The same two (or more) entities may create additional
joint ventures, and each new joint venture entity may be awarded up to
three contracts in accordance with this section. At some point,
however, such a longstanding inter-relationship or contractual
dependence between the same joint venture partners will lead to a
finding of general affiliation between and among them. For purposes of
this provision and in order to facilitate tracking of the number of
contract awards made to a joint venture, a joint venture must be in
writing and must do business under its own name, and it may (but need
not) be in the form of a separate legal entity, and if it is a separate
legal entity it may (but need not) be populated (i.e., have its own
separate employees). SBA may also determine that the relationship
between a prime contractor and its subcontractor is a joint venture,
and that affiliation between the two exists, pursuant to paragraph
(h)(4) of this section.
Example 1 to paragraph (h) introductory text. Joint Venture AB
has received two contracts. On April 2, Joint Venture AB submits an
offer for Solicitation 1. On June 6, Joint Venture AB submits an
offer for Solicitation 2. On July 13, Joint Venture AB submits an
offer for Solicitation 3. In September, Joint Venture AB is found to
be the apparent successful offeror for all three solicitations. Even
though the award of the three contracts would give Joint Venture AB
[[Page 8252]]
a total of five contract awards, it could receive those awards
without causing general affiliation between its joint venture
partners because Joint Venture AB had not yet received three
contract awards as of the dates of the offers for each of three
solicitations at issue.
Example 2 to paragraph (h) introductory text. Joint Venture XY
receives a contract on December 19, year 1. It may receive two
additional contracts through December 19, year 3. On August 6, year
2, XY receives a second contract. It receives no other contract
awards through December 19, year 3 and has submitted no additional
offers prior to December 19, year 3. Because two years have passed
since the date of the first contract award, after December 19, year
3, XY cannot receive an additional contract award. The individual
parties to XY must form a new joint venture if they want to seek and
be awarded additional contracts as a joint venture.
Example 3 to paragraph (h) introductory text. Joint Venture XY
receives a contract on December 19, year 1. On May 22, year 2, XY
submits an offer for Solicitation 1. On June 10, year 2, XY submits
an offer for Solicitation 2. On June 19, year 2, XY receives a
second contract responding to Solicitation 1. XY is not awarded a
contract responding to Solicitation 2. On December 15, year 3, XY
submits an offer for Solicitation 3. In January, XY is found to be
the apparent successful offeror for Solicitation 3. XY is eligible
for the contract award because compliance with the three awards in
two years rule is determined as of the date of the initial offer
including price, XY submitted its offer prior to December 19, year
3, and XY had not received three contract awards prior to its offer
on December 15.
* * * * *
(3) * * *
(iii) Two firms approved by SBA to be a mentor and
prot[eacute]g[eacute] under Sec. 124.520 of these regulations may
joint venture as a small business for any Federal government prime
contract or subcontract, provided the prot[eacute]g[eacute] qualifies
as small for the size standard corresponding to the NAICS code assigned
to the procurement and, for purposes of 8(a) sole source requirements,
has not reached the dollar limit set forth in Sec. 124.519 of these
regulations. If the procurement is to be awarded through the 8(a) BD
program, SBA must approve the joint venture pursuant to Sec. 124.513.
If the procurement is to be awarded other than through the 8(a) BD
program (e.g., small business set aside, HUBZone set aside), SBA need
not approve the joint venture prior to award, but if the size status of
the joint venture is protested, the provisions of Sec. Sec. 124.513(c)
and (d) will apply. This means that the joint venture must meet the
requirements of Sec. Sec. 124.513(c) and (d) in order to receive the
exception to affiliation authorized by this paragraph. In either case,
after contract performance is complete, the 8(a) partner to the joint
venture must submit a report to its servicing SBA district office
explaining how the applicable performance of work requirements were met
for the contract.
* * * * *
0
3. Amend Sec. 121.402(b) by revising the last sentence and adding a
new sentence at the end thereof to read as follows:
Sec. 121.402 What size standards are applicable to Federal Government
contracting programs?
* * * * *
(b) * * * Acquisitions for supplies must be classified under the
appropriate manufacturing or supply NAICS code, not under a wholesale
trade or retail trade NAICS code. A concern that submits an offer or
quote for a contract where the NAICS code assigned to the contract is
one for supplies, and furnishes a product it did not itself manufacture
or produce, is categorized as a nonmanufacturer and deemed small if it
meets the requirements set forth in Sec. 121.406(b).
* * * * *
0
4. Amend Sec. 121.404 by adding a new paragraph (g)(4) to read as
follows:
Sec. 121.404 When does SBA determine the size status of a business
concern?
* * * * *
(g) * * *
(4) If during contract performance a subcontractor performs primary
and vital requirements of a contract, the contractor and its ostensible
subcontractor will be treated as joint venturers. See Sec.
121.103(h)(4). If the two firms exceed the applicable size standard in
the aggregate, the contractor cannot continue to certify as small for
that contract or for any task order under that contract.
* * * * *
0
5. Amend Sec. 121.406 as follows:
0
a. Revise the section heading and paragraphs (a) introductory text, and
(a)(1);
0
b. Revise paragraph (b)(1) introductory text;
0
c. Remove the word ``and'' at the end of paragraph (b)(1)(ii);
0
d. Revise paragraph (b)(1)(iii);
0
e. Add a new paragraph (b)(1)(iv);
0
f. Redesignate paragraphs (b)(3), (b)(4) and (b)(5) as paragraphs
(b)(5), (b)(6), and (b)(7), respectively, and add new paragraphs (b)(3)
and (b)(4); and
0
g. Revise newly redesignated paragraph (b)(6) to read as follows:
Sec. 121.406 How does a small business concern qualify to provide
manufactured products or other supply items under a small business set-
aside, service-disabled veteran-owned small business set-aside, WOSB or
EDWOSB set-aside, or 8(a) contract?
(a) General. In order to qualify as a small business concern for a
small business set-aside, service-disabled veteran-owned small business
set-aside, WOSB or EDWOSB set-aside, or 8(a) contract to provide
manufactured products or other supply items, an offeror must either:
(1) Be the manufacturer or producer of the end item being procured
(and the end item must be manufactured or produced in the United
States); or
* * * * *
(b) * * *
(1) A firm may qualify as a small business concern for a
requirement to provide manufactured products or other supply items as a
nonmanufacturer if it:
* * * * *
(iii) Takes ownership or possession of the item(s) with its
personnel, equipment or facilities in a manner consistent with industry
practice; and
(iv) Will supply the end item of a small business manufacturer,
processor or producer made in the United States, or obtains a waiver of
such requirement pursuant to paragraph (b)(5) of this section.
* * * * *
(3) The nonmanufacturer rule applies only to procurements that have
been assigned a manufacturing or supply NAICS code. The nonmanufacturer
rule does not apply to contracts that have been assigned a service,
construction, or specialty trade construction NAICS code.
(4) The nonmanufacturer rule applies only to the supply component
of a requirement classified as a manufacturing or supply contract. If a
requirement is classified as a service contract, but also has a supply
component, the nonmanufacturer rule does not apply to the supply
component of the requirement.
Example 1 to paragraph (b)(4). A procuring agency seeks to
acquire computer integration and maintenance services. Included
within that requirement, the agency also seeks to acquire some
computer hardware. If the procuring agency determines that the
principal nature of the procurement is services and classifies the
procurement as a services procurement, the nonmanufacturer rule does
not apply to the computer hardware portion of the requirement. This
means that while a contractor must meet the applicable performance
of work requirement set forth in Sec. 125.6 for the services
portion of the contract, the contractor does not have to
[[Page 8253]]
supply the computer hardware of a small business manufacturer.
Example 2 to paragraph (b)(4). A procuring agency seeks to
acquire computer hardware, as well as computer integration and
maintenance services. If the procuring agency determines that the
principal nature of the procurement is for supplies and classifies
the procurement as a supply procurement, the nonmanufacturer rule
applies to the computer hardware portion of the requirement. A firm
seeking to qualify as a small business nonmanufacturer must supply
the computer hardware manufactured by a small business. Because the
requirement is classified as a supply contract, the contractor does
not have to meet the performance of work requirement set forth in
Sec. 125.6 for the services portion of the contract.
* * * * *
(6) The two waiver possibilities identified in paragraph (b)(5) of
this section are called ``individual'' and ``class'' waivers
respectively, and the procedures for requesting and granting them are
contained in Sec. 121.1204.
* * * * *
0
6. Amend Sec. 121.1001(b) by adding a new paragraph (b)(10) at the end
thereof to read as follows:
Sec. 121.1001 Who may initiate a size protest or request a formal
size determination?
* * * * *
(b) * * *
(10) The SBA Inspector General may request a formal size
determination with respect to any of the programs identified in
paragraph (b) of this section.
PART 124--8(A) BUSINESS DEVELOPMENT/SMALL DISADVANTAGED BUSINESS
STATUS DETERMINATIONS
0
7. The authority citation for part 124 is revised to read as follows:
Authority: 15 U.S.C. 634(b)(6), 636(j), 637(a), 637(d) and Pub.
L. 99-661, Pub. L. 100-656, sec. 1207, Pub. L. 101-37, Pub. L. 101-
574, section 8021, Pub. L. 108-87, and 42 U.S.C. 9815.
Sec. Sec. 124.110, 124.111, 124.502, 124,503, 124.505, 124.507,
124.513, 124.514, 124.515, 124.517, 124.519, and 124.1002 [Amended]
0
8. Remove the term ``Standard Industrial Classification'' in Sec.
124.1002(b)(1) and add, in its place the term ``North American Industry
Classification System''; and remove the term ``SIC'' and add, in its
place, the term ``NAICS,'' in the following places:
0
a. Sec. 124.110(c);
0
b. Sec. 124.111(d);
0
c. Sec. 124.502(c)(3);
0
d. Sec. 124.503(b) introductory text;
0
e. Sec. 124.503(b)(1);
0
f. Sec. 124.503(b)(2);
0
g. Sec. 124.503(c)(1)(iii);
0
h. Sec. 124.503(g)(3);
0
i. Sec. 124.505(a)(3);
0
j. Sec. 124.507(b)(2)(i);
0
k. Sec. 124.513(b)(1) introductory text, (b)(1)(i), and (b)(1)(ii)(A);
0
l. Sec. 124.513(b)(2);
0
m. Sec. 124.513(b)(3);
0
n. Sec. 124.514(a)(1);
0
o. Sec. 124.515(d);
0
p. Sec. 124.517(d)(1);
0
q. Sec. 124.517(d)(2);
0
r. Sec. 124.519(a)(1);
0
s. Sec. 124.519(a)(2);
0
t. Sec. 124.1002 (b)(1)(i), and (b)(1)(ii); and
0
u. Sec. 124.1002(f)(3).
0
9. Revise Sec. 124.2 to read as follows:
Sec. 124.2 What length of time may a business participate in the 8(a)
BD program?
A Participant receives a program term of nine years from the date
of SBA's approval letter certifying the concern's admission to the
program. The Participant must maintain its program eligibility during
its tenure in the program and must inform SBA of any changes that would
adversely affect its program eligibility. The nine year program term
may be shortened only by termination, early graduation (including
voluntary early graduation) or voluntary withdrawal as provided for in
this subpart.
0
10. Amend Sec. 124.3 as follows:
0
a. By amending the definition of ``Alaska Native'' by adding in the
first sentence, the phrase ``, as defined by the Alaska Native Claims
Settlement Act (43 U.S.C. 1602),'' before the word ``means'';
0
b. By adding a definition of ``NAICS code'';
0
c. By revising the definitions of ``Primary industry classification''
and ``Same or similar line of business,''; and
0
d. By adding a definition of the term ``Regularly maintains an office''
to read as follows:
Sec. 124.3 What definitions are important in the 8(a) BD program?
* * * * *
NAICS code means North American Industry Classification System
code.
* * * * *
Primary industry classification means the six digit North American
Industry Classification System (NAICS) code designation which best
describes the primary business activity of the 8(a) BD applicant or
Participant. The NAICS code designations are described in the North
American Industry Classification System book published by the U.S.
Office of Management and Budget. SBA utilizes Sec. 121.107 of this
chapter in determining a firm's primary industry classification. A
Participant may change its primary industry classification where it can
demonstrate to SBA by clear evidence that the majority of its total
revenues during a two-year period have evolved from one NAICS code to
another.
* * * * *
Regularly maintains an office means conducting business activities
as an on-going business concern from a fixed location on a daily basis.
The best evidence of the regular maintenance of an office is
documentation that shows that third parties routinely transact business
with a Participant at a location within a particular geographical area.
Such evidence includes lease agreements, payroll records,
advertisements, bills, correspondence, and evidence that the
Participant has complied with all local requirements concerning
registering, licensing, or filing with the State or County where the
place of business is located. 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 an additional construction license or other specific
type of license in order to regularly maintain an office.
Same or similar line of business means business activities within
the same four-digit ``Industry Group'' of the NAICS Manual as the
primary industry classification of the applicant or Participant. The
phrase ``same business area'' is synonymous with this definition.
* * * * *
0
11. Add Sec. 124.4 to read as follows:
Sec. 124.4 What restrictions apply to fees for applicant and
Participant representatives?
(a) The compensation received by any packager, 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, or any other assistance to
support program participation, must be reasonable in light of the
service(s) performed by the packager, agent or representative.
(b) In assisting a Participant obtain one or more 8(a) contracts, a
packager, agent or representative cannot receive a fee that is a
percentage of the gross contract value.
(c) For good cause, the AA/BD may initiate proceedings to suspend
or revoke a packager's, agent's or representative's privilege to assist
applicants obtain 8(a) certification, assist Participants obtain 8(a)
contracts, or any other assistance to support program participation.
Good cause is defined in Sec. 103.4 of these regulations.
[[Page 8254]]
(1) The AA/BD may send a show cause letter requesting the agent or
representative to demonstrate why the agent or representative should
not be suspended or proposed for revocation, or may immediately send a
written notice suspending or proposing revocation, depending upon the
evidence in the administrative record. The notice will include a
discussion of the relevant facts and the reason(s) why the AA/BD
believes that good cause exists.
(2) Unless the AA/BD specifies a different time in the notice, the
agent or representative must respond to the notice within 30 days of
the date of the notice with any facts or arguments showing why good
cause does not exist. The agent or representative may request
additional time to respond, which the AA/BD may grant in his or her
discretion.
(3) After considering the agent's or representative's response, the
AA/BD will issue a final determination, setting forth the reasons for
this decision and, if a suspension continues to be effective or a
revocation is implemented, the term of the suspension or revocation.
(d) The AA/BD may refer a packager, agent, or other representative
to SBA's Suspension and Debarment Official for possible Government-wide
suspension or debarment where appropriate, including where it appears
that the packager, agent or representative assisted an applicant to or
Participant in the 8(a) BD program submit information to SBA that the
packager, agent or representative knew was false or materially
misleading.
0
12. Revise Sec. 124.101 to read as follows:
Sec. 124.101 What are the basic requirements a concern must meet for
the 8(a) BD program?
Generally, a concern meets the basic requirements for admission to
the 8(a) BD program if it is a small business which is unconditionally
owned and controlled by one or more socially and economically
disadvantaged individuals who are of good character and citizens of and
residing in the United States, and which demonstrates potential for
success.
0
13. Amend Sec. 124.102 by redesignating paragraph (a) as paragraph
(a)(1), and by adding a new paragraph (a)(2) to read as follows:
Sec. 124.102 What size business is eligible to participate in the
8(a) BD program?
(a)(1) * * *
(2) In order to remain eligible to participate in the 8(a) BD
program after certification, a firm must generally remain small for its
primary industry classification, as adjusted during the program. SBA
may graduate a Participant prior to the expiration of its program term
where the firm exceeds the size standard corresponding to its primary
NAICS code, as adjusted, for three successive program years, unless the
firm demonstrates that through its growth and development its primary
industry is changing, pursuant to the criteria described in 13 CFR
121.107, to a related secondary NAICS code that is contained in its
most recently approved business plan. The firm's business plan must
contain specific targets, objectives, and goals for its continued
growth and development under its new primary industry.
* * * * *
Sec. 124.103 [Amended]
0
14. Amend Sec. 124.103(b)(1) by removing the parenthetical ``(American
Indians, Eskimos, Aleuts, or Native Hawaiians)'' and by adding in its
place, the parenthetical ``(Alaska Natives, Native Hawaiians, or
enrolled members of a Federally or State recognized Indian Tribe)''.
0
15. Amend Sec. 124.104 as follows:
0
a. Revise paragraph (b)(2);
0
b. Revise paragraph (c), introductory text;
0
c. Redesignate paragraph (c)(2)(ii) as paragraph (c)(2)(iv), and add
new paragraphs (c)(2)(ii) and (c)(2)(iii); and
0
d. Add new paragraphs (c)(3) and (c)(4) to read as follows:
Sec. 124.104 Who is economically disadvantaged?
* * * * *
(b) * * *
(2) When married, an individual claiming economic disadvantage must
submit separate financial information for his or her spouse, unless the
individual and the spouse are legally separated. SBA will consider a
spouse's financial situation in determining an individual's access to
credit and capital where 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. SBA does not take
into consideration community property laws when determining economic
disadvantage.
* * * * *
(c) Factors to be considered. In considering diminished capital and
credit opportunities, SBA will examine factors relating to the personal
financial condition of any individual claiming disadvantaged status,
including income for the past three years (including bonuses and the
value of company stock received in lieu of cash), personal net worth,
and the fair market value of all assets, whether encumbered or not. An
individual who exceeds any one of the thresholds set forth in this
paragraph for personal income, net worth or total assets will generally
be deemed to have access to credit and capital and not economically
disadvantaged.
* * * * *
(2) * * *
(ii) Funds invested in an Individual Retirement Account (IRA) or
other official retirement account that are unavailable to an individual
until retirement age without a significant penalty will not be
considered in determining an individual's net worth. In order to
properly assess whether funds invested in a retirement account may be
excluded from an individual's net worth, the individual must provide
information about the terms and restrictions of the account to SBA and
certify that the retirement account is legitimate.
(iii) Income received from an applicant or Participant that is an S
corporation, limited liability company (LLC) or partnership will be
excluded from an individual's net worth where the applicant or
Participant provides documentary evidence demonstrating that the income
was reinvested in the firm or used to pay taxes arising in the normal
course of operations of the firm. Losses from the S corporation, LLC or
partnership, however, are losses to the company only, not losses to the
individual, and cannot be used to reduce an individual's net worth.
* * * * *
(3) Personal income for the past three years. (i) If an
individual's adjusted gross income averaged over the three years
preceding submission of the 8(a) application exceeds $250,000, SBA will
presume that such individual is not economically disadvantaged. For
continued 8(a) BD eligibility, SBA will presume that an individual is
not economically disadvantaged if his or her adjusted gross income
averaged over the three preceding years exceeds $350,000. The
presumption may be rebutted by a showing that this income level was
unusual and not likely to occur in the future, that losses commensurate
with and directly related to the earnings were suffered, or by evidence
that the income is not indicative of lack of economic disadvantage.
(ii) Income received from an applicant or Participant that is an S
corporation, LLC or partnership will be excluded from an individual's
income where the applicant or Participant provides
[[Page 8255]]
documentary evidence demonstrating that the income was reinvested in
the firm or used to pay taxes arising in the normal course of
operations of the firm. Losses from the S corporation, LLC or
partnership, however, are losses to the company only, not losses to the
individual, and cannot be used to reduce an individual's personal
income.
(4) Fair market value of all assets. An individual will generally
not be considered economically disadvantaged if the fair market value
of all his or her assets (including his or her primary residence and
the value of the applicant/Participant firm) exceeds $4 million for an
applicant concern and $6 million for continued 8(a) BD eligibility. The
only assets excluded from this determination are funds excluded under
paragraph (c)(2)(ii) of this section as being invested in a qualified
IRA account.
0
16. Amend Sec. 124.105 by revising paragraphs (g) and (h)(2) to read
as follows:
Sec. 124.105 What does it mean to be unconditionally owned by one or
more disadvantaged individuals?
* * * * *
(g) Ownership of another Participant in the same or similar line of
business. (1) An individual may not use his or her disadvantaged status
to qualify a concern if that individual has an immediate family member
who is using or has used his or her disadvantaged status to qualify
another concern for the 8(a) BD program. The AA/BD may waive this
prohibition if the two concerns have no connections, either in the form
of ownership, control or contractual relationships, and provided the
individual seeking to qualify the second concern has management and
technical experience in the industry. Where the concern seeking a
waiver is in the same or similar line of business as the current or
former 8(a) concern, there is a presumption against granting the
waiver. The applicant must provide clear and compelling evidence that
no connection exists between the two firms.
(2) If the AA/BD grants a waiver under paragraph (g)(1) of this
section, SBA will, as part of its annual review, assess whether the
firm continues to operate independently of the other current or former
8(a) concern of an immediate family member. SBA may initiate
proceedings to terminate a firm for which a waiver was granted from
further participation in the 8(a) BD program if it is apparent that
there are connections between the two firms that were not disclosed to
the AA/BD when the waiver was granted or that came into existence after
the waiver was granted. SBA may also initiate termination proceedings
if the firm begins to operate in the same or similar line of business
as the current or former 8(a) concern of the immediate family member
and the firm did not operate in the same or similar line of business at
the time the waiver was granted.
(h) * * *
(2) A non-Participant concern in the same or similar line of
business or a principal of such concern may not own more than a 10
percent interest in a Participant that is in the developmental stage or
more than a 20 percent interest in a Participant in a transitional
stage of the program, except that a former Participant or a principal
of a former Participant (except those that have been terminated from
8(a) BD program participation pursuant to Sec. Sec. 124.303 and
124.304) may have an equity ownership interest of up to 20 percent in a
current Participant in the developmental stage of the program or up to
30 percent in a transitional stage Participant, in the same or similar
line of business.
* * * * *
0
17. Amend Sec. 124.106 by revising paragraph (a)(2), and paragraph
(e), introductory text, and by adding a new paragraph (h) to read as
follows:
Sec. 124.106 When do disadvantaged individuals control an applicant
or Participant?
* * * * *
(a) * * *
(2) A disadvantaged full-time manager must hold the highest officer
position (usually President or Chief Executive Officer) in the
applicant or Participant and be physically located in the United
States.
* * * * *
(e) Non-disadvantaged individuals may be involved in the management
of an applicant or Participant, and may be stockholders, partners,
limited liability members, officers, and/or directors of the applicant
or Participant. However, no non-disadvantaged individual or immediate
family member may:
* * * * *
(h) Notwithstanding the provisions of this section requiring a
disadvantaged owner to control the daily business operations and long-
term strategic planning 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, the Participant may elect to designate one or more
individuals to control the Participant on behalf of the disadvantaged
individual during the active duty call-up period. If such an election
is made, the Participant will continue to be treated as an eligible
8(a) Participant and no additional time will be added to its program
term. Alternatively, the Participant may elect to suspend its 8(a) BD
participation during the active duty call-up period pursuant to
Sec. Sec. 124.305(h)(1)(ii) and 124.305(h)(4).
0
18. Amend Sec. 124.108 by revising paragraph (a)(1) and removing
paragraph (f) to read as follows:
Sec. 124.108 What other eligibility requirements apply for
individuals or businesses?
(a) * * *
(1) If during the processing of an application, adverse information
is obtained from the applicant or a credible source regarding possible
criminal conduct by the applicant or any of its principals, SBA will
suspend further processing of the application and refer it to SBA's
Office of Inspector General (OIG) for review. If SBA does not hear back
from OIG within 45 days, SBA will coordinate with OIG a suitable date
to recommence the processing of the application. The AA/BD will
consider any findings of the OIG when evaluating the application.
* * * * *
0
19. Amend Sec. 124.109 by revising paragraphs (b) introductory text,
(c)(3)(i), (c)(3)(ii), (c)(4)(i) introductory text, (c)(4)(i)(B), and
(c)(6) to read as follows:
Sec. 124.109 Do Indian Tribes and Alaska Native Corporations have any
special rules for applying to the 8(a) program?
* * * * *
(b) Tribal eligibility. In order to qualify a concern which it owns
and controls for participation in the 8(a) BD program, an Indian Tribe
must establish its own economic disadvantaged status under paragraph
(b)(2) of this section. Once an Indian Tribe establishes that it is
economically disadvantaged in connection with the application for one
Tribally-owned firm, it need not reestablish such status in order to
have other businesses that it owns certified for 8(a) BD program
participation, unless specifically requested to do so by the AA/BD. An
Indian Tribe may request to meet with SBA prior to submitting an
application for 8(a) BD participation for its first applicant firm to
better understand what SBA requires for it to establish economic
disadvantage. Each Tribally-owned concern seeking to be certified for
8(a) BD participation must comply with the
[[Page 8256]]
provisions of paragraph (c) of this section.
* * * * *
(c) * * *
(3) * * *
(i) For corporate entities, a Tribe must unconditionally own at
least 51 percent of the voting stock and at least 51 percent of the
aggregate of all classes of stock. For non-corporate entities, a Tribe
must unconditionally own at least a 51 percent interest.
(ii) A Tribe may not own 51% or more of another firm which, either
at the time of application or within the previous two years, has been
operating in the 8(a) program under the same primary NAICS code as the
applicant. A Tribe may, however, own a Participant or other applicant
that conducts or will conduct secondary business in the 8(a) BD program
under the NAICS code which is the primary NAICS code of the applicant
concern. In addition, once an applicant is admitted to the 8(a) BD
program, it may not receive an 8(a) sole source 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. For purposes of this paragraph, the same primary NAICS code
means the six digit NAICS code having the same corresponding size
standard.
* * * * *
(4) * * *
(i) The management and daily business operations of a Tribally-
owned concern must be controlled by the Tribe. The Tribally-owned
concern may be controlled by the Tribe through one or more individuals
who possess sufficient management experience of an extent and
complexity needed to run the concern, or through management as follows:
* * * * *
(B) Management may be provided by non-Tribal members if the concern
can demonstrate that the Tribe can hire and fire those individuals,
that it will retain control of all management decisions common to
boards of directors, including strategic planning, budget approval, and
the employment and compensation of officers, and that a written
management development plan exists which shows how Tribal members will
develop managerial skills sufficient to manage the concern or similar
Tribally-owned concerns in the future.
* * * * *
(6) Potential for success. A Tribally-owned applicant concern must
possess reasonable prospects for success in competing in the private
sector if admitted to the 8(a) BD program. A Tribally-owned applicant
may establish potential for success by demonstrating that:
(i) It has been in business for at least two years, as evidenced by
income tax returns (individual or consolidated) for each of the two
previous tax years showing operating revenues in the primary industry
in which the applicant is seeking 8(a) BD certification; or
(ii) The individual(s) who will manage and control the daily
business operations of the firm have substantial technical and
management experience, the applicant has a record of successful
performance on contracts from governmental or nongovernmental sources
in its primary industry category, and the applicant has adequate
capital to sustain its operations and carry out its business plan as a
Participant; or
(iii) The Tribe has made a firm written commitment to support the
operations of the applicant concern and it has the financial ability to
do so.
* * * * *
0
20. Amend Sec. 124.110 as follows:
0
a. Redesignate paragraphs (c), (d) and (e) as paragraphs (e), (f) and
(g), respectively;
0
b. Add new paragraphs (c) and (d);
0
c. Add two new sentences to the end of newly designated paragraph (e);
and
0
d. Revise newly designated paragraph (g).
Sec. 124.110 Do Native Hawaiian Organizations have any special rules
for applying to the 8(a) BD program?
* * * * *
(c) An NHO must establish that it is economically disadvantaged and
that its business activities will principally benefit Native Hawaiians.
(1) 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 Sec. 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.
For any additional 8(a) applicant owned by the NHO, individual NHO
members must meet the economic disadvantage thresholds for continued
8(a) eligibility. If the NHO has no members, then a majority of the
members of the board of directors must qualify as economically
disadvantaged. If there are members and a board of directors, only a
majority of the members must be economically disadvantaged.
(2) An NHO should describe any activities that it has done to
benefit Native Hawaiians at the time its NHO-owned firm applies to the
8(a) BD program. In addition, the NHO must include statements in its
bylaws or operating agreements identifying the benefits Native
Hawaiians will receive from the NHO. The NHO must have a detailed plan
that shows how revenue earned by the NHO will principally benefit
Native Hawaiians. As part of an annual review conducted for an NHO-
owned Participant, SBA will review how the NHO is fulfilling its
obligation to principally benefit Native Hawaiians.
(d) An NHO must control the applicant or Participant firm. To
establish that it is controlled by an NHO, an applicant or Participant
must demonstrate that the NHO controls its board of directors. An
individual responsible for the day-to-day management of an NHO-owned
firm need not establish personal social and economic disadvantage.
(e) * * * In addition, once an applicant is admitted to the 8(a) BD
program, it may not receive an 8(a) sole source contract that is a
follow-on contract to an 8(a) contract performed by another Participant
(or former Participant that has left the program within two years of
the date of application) owned by the Native Hawaiian Organization for
a period of two years from the date of admission to the program. For
purposes of this paragraph, the same primary NAICS code means the six
digit NAICS code having the same corresponding size standard.
* * * * *
(g) An applicant concern owned by a NHO must possess reasonable
prospects for success in competing in the private sector if admitted to
the 8(a) BD program. An applicant concern owned by a NHO may establish
potential for success by demonstrating that:
(1) It has been in business for at least two years, as evidenced by
income tax returns (individual or consolidated) for each of the two
previous tax years showing operating revenues in the primary industry
in with the applicant is seeking 8(a) BD certification; or
(2) The individual(s) who will manage and control the daily
business operations of the firm have substantial technical and
management experience, the applicant has a record of successful
performance on contracts from governmental or nongovernmental sources
in its primary industry category, and the applicant has adequate
capital to sustain its operations and carry out its business plan as a
Participant; or
[[Page 8257]]
(3) The NHO has made a firm written commitment to support the
operations of the applicant concern and it has the financial ability to
do so.
0
21. Amend Sec. 124.111 by adding two new sentences to the end of
paragraph (d) and by revising paragraph (f) to read as follows:
Sec. 124.111 Do Community Development Corporations (CDCs) have any
special rules for applying to the 8(a) BD program?
* * * * *
(d) * * * In addition, once an applicant is admitted to the 8(a) BD
program, it may not receive an 8(a) sole source contract that is a
follow-on contract to an 8(a) contract performed by another Participant
(or former Participant that has left the program within two years of
the date of application) owned by the CDC for a period of two years
from the date of admission to the program. For purposes of this
paragraph, the same primary NAICS code means the six digit NAICS code
having the same corresponding size standard.
* * * * *
(f) An applicant concern owned by a CDC must possess reasonable
prospects for success in competing in the private sector if admitted to
the 8(a) BD program. An applicant concern owned by a CDC may establish
potential for success by demonstrating that:
(1) It has been in business for at least two years, as evidenced by
income tax returns (individual or consolidated) for each of the two
previous tax years showing operating revenues in the primary industry
in with the applicant is seeking 8(a) BD certification; or
(2) The individual(s) who will manage and control the daily
business operations of the firm have substantial technical and
management experience, the applicant has a record of successful
performance on contracts from governmental or nongovernmental sources
in its primary industry category, and the applicant has adequate
capital to sustain its operations and carry out its business plan as a
Participant; or
(3) The CDC has made a firm written commitment to support the
operations of the applicant concern and it has the financial ability to
do so.
* * * * *
0
22. Amend Sec. 124.112 as follows:
0
a. Redesignate paragraphs (b)(7) and (b)(8) as paragraphs (b)(9) and
(b)(10), respectively, and add new paragraphs (b)(7) and (b)(8);
0
b. Revise paragraphs (d)(1), (d)(2) introductory text, and (d)(3); and
0
c. Add new paragraphs (d)(5), (e) and (f) to read as follows:
Sec. 124.112 What criteria must a business meet to remain eligible to
participate in the 8(a) BD program?
* * * * *
(b) * * *
(7) A listing of any fees paid to agents or representatives to
assist the Participant in obtaining or seeking to obtain a Federal
contract;
(8) A report for each 8(a) contract performed during the year
explaining how the performance of work requirements are being met for
the contract, including any 8(a) contracts performed as a joint
venture;
* * * * *
(d) * * *
(1) The term withdrawal includes, but is not limited to, the
following: Cash dividends; distributions in excess of amounts needed to
pay S Corporation, LLC or partnership taxes; cash and property
withdrawals; payments to immediate family members not employed by the
Participant; bonuses to officers; and investments on behalf of an
owner. Although officers' salaries are generally not considered
withdrawals for purposes of this paragraph, SBA will count those
salaries as withdrawals where SBA believes that a firm is attempting to
circumvent the excessive withdrawal limitations though the payment of
officers' salaries. SBA will look at the totality of the circumstances
in determining whether to include any specific amount as a withdrawal
under this paragraph.
(2) If SBA determines that funds or assets have been excessively
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 such withdrawal was detrimental to the achievement of
the targets, objectives, and goals contained in the Participant's
business plan, SBA may: * * *
(3) Withdrawals are excessive if in the aggregate during any fiscal
year of the Participant they exceed (i) $250,000 for firms with sales
up to $1,000,000; (ii) $300,000 for firms with sales between $1,000,000
and $2,000,000; and (iii) $400,000 for firms with sales exceeding
$2,000,000.
* * * * *
(5) The excessive withdrawal analysis does not apply to
Participants owned by Tribes, ANCs, NHOs, or CDCs where a withdrawal is
made for the benefit of the Tribe, ANC, NHO, CDC or the native or
shareholder community. It does, however, apply to withdrawals from a
firm owned by a Tribe, ANC, NHO, or CDC that do not benefit the
relevant entity or community. Thus, 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. For example, a $1,000,000 payout to a
non-disadvantaged manager would be deemed an excessive withdrawal.
(e) Change in primary industry classification. A Participant may
request that the primary industry classification contained in its
business plan be changed by filing such a request with its servicing
SBA district office. SBA will grant such a request where the
Participant can demonstrate that the majority of its total revenues
during a three-year period have evolved from one NAICS code to another.
(f) Graduation determination. 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 if the Participant has met the
targets, objectives and goals set forth in its business plan and, thus,
whether the Participant will be considered to have graduated from the
8(a) BD program at the expiration of its program term. A firm that has
not met the targets, objectives and goals set forth in its business
plan at the end of its nine-year term in the 8(a) BD program will not
be considered to have graduated from the 8(a) BD program, but rather to
have merely completed its program term.
0
23. Revise Sec. 124.202 to read as follows:
Sec. 124.202 How must an application be filed?
An application for 8(a) BD program admission must generally be
filed in an electronic format. An electronic application can be found
by going to the 8(a) BD page of SBA's Web site (http://www.sba.gov). An
applicant concern that does not have access to the electronic format or
does not wish to file an electronic application may request in writing
a hard copy application from the AA/BD. The SBA district office will
provide an applicant concern with information regarding the 8(a) BD
program.
0
24. Revise Sec. 124.203 to read as follows:
Sec. 124.203 What must a concern submit to apply to the 8(a) BD
program?
Each 8(a) BD applicant concern must submit those forms and
attachments required by SBA when applying for admission to the 8(a) BD
program. These forms and attachments may include, but not be limited
to, financial statements, copies of signed Federal personal and
[[Page 8258]]
business tax returns, individual and business bank statements, and
personal history statements. An applicant must also submit a signed IRS
Form 4506T, Request for Copy or Transcript of Tax Form, to SBA. In all
cases, the applicant must provide a wet signature from each individual
claiming social and economic disadvantage status.
0
25. Amend Sec. 124.204 as follows:
0
a. Revise paragraph (a);
0
b. Redesignate paragraphs (c), (d) (e) and (f) as paragraphs (d), (e),
(f) and (g);
0
c. Add a new paragraph (c); and
0
d. Revise newly designated paragraph (d).
Sec. 124.204 How does SBA process applications for 8(a) BD program
admission?
(a) The AA/BD is authorized to approve or decline applications for
admission to the 8(a) BD program. The DPCE will receive, review and
evaluate all 8(a) BD applications. SBA will advise each program
applicant within 15 days after the receipt of an application whether
the application is complete and suitable for evaluation and, if not,
what additional information or clarification is required to complete
the application. SBA will process an application for 8(a) BD program
participation within 90 days of receipt of a complete application
package by the DPCE. Incomplete packages will not be processed.
* * * * *
(c) The burden of proof to demonstrate eligibility is on the
applicant concern. If a concern does not provide requested information
within the allotted time provided by SBA, or if it submits incomplete
information, SBA may presume that disclosure of the missing information
would adversely affect the firm or would demonstrate lack of
eligibility in the area to which the information relates.
(d) An applicant must be eligible as of the date the AA/BD issues a
decision. The decision will be based on the facts set forth in the
application, any information received in response to SBA's request for
clarification made pursuant to paragraph (b) of this section, and any
changed circumstances since the date of application.
* * * * *
0
26. Amend Sec. 124.205 by revising paragraphs (a) and (b) to read as
follows:
Sec. 124.205 Can an applicant ask SBA to reconsider SBA's initial
decision to decline its application?
(a) An applicant may request the AA/BD to reconsider his or her
initial decline decision by filing a request for reconsideration with
SBA. The applicant may submit a revised electronic application or
submit its request for reconsideration to the SBA DPCE unit that
originally processed its application by personal delivery, first class
mail, express mail, facsimile transmission followed by first class
mail, or commercial delivery service. The applicant must submit its
request for reconsideration within 45 days of its receipt of written
notice that its application was declined. If the date of actual receipt
of such written notice cannot be determined, SBA will presume receipt
to have occurred ten calendar days after the date the notice was sent
to the applicant. The applicant must provide any additional information
and documentation pertinent to overcoming the reason(s) for the initial
decline, whether or not available at the time of initial application,
including information and documentation regarding changed
circumstances.
(b) The AA/BD will issue a written decision within 45 days of SBA's
receipt of the applicant's request. The AA/BD may either approve the
application, deny it on the same grounds as the original decision, or
deny it on other grounds. If denied, the AA/BD will explain why the
applicant is not eligible for admission to the 8(a) BD program and give
specific reasons for the decline.
* * * * *
0
27. Revise Sec. 124.301 to read as follows:
Sec. 124.301 What are the ways a business may leave the 8(a) BD
program?
A concern participating in the 8(a) BD program may leave the
program by any of the following means:
(a) Expiration of the program term established pursuant to Sec.
124.2;
(b) Voluntary withdrawal or voluntary early graduation;
(c) Graduation pursuant to Sec. 124.302;
(d) Early graduation pursuant to the provisions of Sec. Sec.
124.302 and 124.304; or
(e) Termination pursuant to the provisions of Sec. Sec. 124.303
and 124.304.
0
28. Amend Sec. 124.302 as follows:
0
a. Revise the section heading;
0
b. Revise paragraphs (a) introductory text, and (a)(1);
0
c. Remove paragraph (d);
0
d. Redesignate paragraph (c) as paragraph (d); and
3. Add a new paragraph (c) to read as follows:
Sec. 124.302 What is graduation and what is early graduation?
(a) General. SBA may graduate a firm from the 8(a) BD program at
the expiration of its program term (graduation) or prior to the
expiration of its program term (early graduation) where SBA determines
that:
(1) The concern has successfully completed the 8(a) BD program by
substantially achieving the targets, objectives, and goals set forth in
its business plan, and has demonstrated the ability to compete in the
marketplace without assistance under the 8(a) BD program; or
* * * * *
(c) Exceeding the size standard corresponding to the primary NAICS
code. SBA may graduate a Participant prior to the expiration of its
program term where the firm exceeds the size standard corresponding to
its primary NAICS code, as adjusted during the program, for three
successive program years unless the firm is able to demonstrate that it
has taken steps to change its industry focus to another NAICS code that
is contained in the goals, targets and objectives of its business plan.
* * * * *
0
29. Amend Sec. 124.303 by revising paragraphs (a)(2), (a)(13) and
(a)(16) to read as follows:
Sec. 124.303 What is termination?
(a) * * *
(2) Failure by the concern to maintain its eligibility for program
participation, including failure by an individual owner or manager to
continue to meet the requirements for economic disadvantage set forth
in Sec. 124.104 where such status is needed for eligibility. * * *
(13) Excessive withdrawals that are detrimental to the achievement
of the targets, objectives, and goals contained in the Participant's
business plan, including transfers of funds or other business assets
from the concern for the personal benefit of any of its owners or
managers, or any person or entity affiliated with the owners or
managers (see Sec. 124.112(d)). * * *
(16) Debarment, suspension, voluntary exclusion, or ineligibility
of the concern or its principals pursuant to 2 CFR parts 180 and 2700
or FAR subpart 9.4 (48 CFR part 9, subpart 9.4). * * *
0
30. Revise Sec. 124.304(f) to read as follows:
Sec. 124.304 What are the procedures for early graduation and
termination?
* * * * *
(f) Effect or early graduation or termination. (1) After the
effective date of early graduation or termination, a Participant is no
longer eligible to receive any 8(a) BD program assistance. However,
such concern is obligated to
[[Page 8259]]
complete previously awarded 8(a) contracts, including any priced
options which may be exercised.
(2) When SBA early graduates or terminates a firm from the 8(a) BD
program, the firm will generally not qualify as an SDB for future
procurement actions. If the firm believes that it does qualify as an
SDB and seeks to certify itself as an SDB, as part of its SDB
certification the firm must identify:
(i) That it has been early graduated or terminated;
(ii) The statutory or regulatory authority that qualifies the firm
for SDB status; and
(iii) Where applicable, the circumstances that have changed since
the early graduation or termination or that do not prevent it from
qualifying as an SDB.
(3) Where a concern certifies that it qualifies as an SDB pursuant
to paragraph (f)(2) of the section, the procuring activity contracting
officer may protest the SDB status of the firm to SBA pursuant to Sec.
124.1010 where questions regarding the firm's SDB status remain.
0
31. Amend Sec. 124.305 by revising the first sentence of paragraph
(a), by revising paragraph (h), to read as follows:
Sec. 124.305 What is suspension and how is a Participant suspended
from the 8(a) BD program?
(a) Except as set forth in paragraph (h) of this section, at any
time after SBA issues a Letter of Intent to Terminate an 8(a)
Participant pursuant to Sec. 124.304, the AA/BD may suspend 8(a)
contract support and all other forms of 8(a) BD program assistance to
that Participant until the issue of the Participant's termination from
the program is finally determined. * * *
* * * * *
(h)(1) SBA will suspend a Participant from receiving further 8(a)
BD program benefits when termination proceedings have not been
commenced pursuant to Sec. 124.304 where:
(i) A Participant requests a change of ownership and/or control and
SBA discovers that a change of ownership or control has in fact
occurred prior to SBA's approval; or
(ii) A disadvantaged individual who is involved in the ownership
and/or control of the Participant is called to active military duty by
the United States, his or her participation in the firm's management
and daily business operations is critical to the firm's continued
eligibility, and the Participant elects not to designate a non-
disadvantaged individual to control the concern during the call-up
period pursuant to Sec. 124.106(h).
(2) A suspension initiated under paragraph (h) of this section will
be commenced by the issuance of a notice similar to that required for
termination-related suspensions under paragraph (b) of this section,
except that a suspension issued under paragraph (h) is not appealable.
(3) Where a Participant is suspended pursuant to paragraph
(h)(1)(i) of this section and SBA approves the change of ownership and/
or control, the length of the suspension will be added to the firm's
program term only where the change in ownership or control results from
the death or incapacity of a disadvantaged individual or where the firm
requested prior approval and waited at least 60 days for SBA approval
before making the change.
(4) Where a Participant is suspended pursuant to paragraph
(h)(1)(ii) of this section, the Participant must notify SBA when the
disadvantaged individual returns to control the firm so that SBA can
immediately lift the suspension. When the suspension is lifted, the
length of the suspension will be added to the concern's program term.
(5) Effect of suspension. Once a suspension is issued pursuant to
this section, a Participant cannot receive any additional 8(a) BD
program assistance, including new 8(a) contract awards, for as long as
the Participant is suspended. This includes any procurement
requirements that the firm has self-marketed and those that have been
accepted into the 8(a) BD program on behalf of the suspended concern.
However, the suspended Participant must complete any previously awarded
8(a) contracts.
* * * * *
Sec. 124.403 [Amended]
0
32. Amend Sec. 124.403 by removing paragraph (d).
0
33. Amend Sec. 124.501 by revising the first sentence of paragraph (h)
to read as follows:
Sec. 124.501 What general provisions apply to the award of 8(a)
contracts?
* * * * *
(h) A Participant must certify that it qualifies as a small
business under the size standard corresponding to the NAICS code
assigned to each 8(a) contract. * * *
* * * * *
0
34. Amend Sec. 124.503 by revising paragraph (h) to read as follows:
Sec. 124.503 How does SBA accept a procurement for award through the
8(a) BD program?
* * * * *
(h) Task or Delivery Order Contracts--(1) Contracts set aside for
exclusive competition among 8(a) Participants. (i) A task or delivery
order contract that is reserved exclusively for 8(a) Program
Participants must follow the normal 8(a) competitive procedures,
including an offering to and acceptance into the 8(a) program, SBA
eligibility verification of the apparent successful offerors prior to
contract award, and application of the performance of work requirements
set forth in Sec. 124.510, and the nonmanufacturer rule, if
applicable, (see Sec. 121.406(b).
(ii) Individual orders need not be offered to or accepted into the
8(a) BD program.
(iii) A concern awarded such a contract may generally continue to
receive new orders even if it has grown to be other than small or has
exited the 8(a) BD program, and agencies may continue to take credit
toward their prime contracting goals for orders awarded to 8(a)
Participants. However, a concern may not receive, and agencies may not
take 8(a), SDB or small business credit, for an order where the concern
has been asked by the procuring agency to re-certify its size status
and is unable to do so (see Sec. 121.404(g)), or where ownership or
control of the concern has changed and SBA has granted a waiver to
allow performance to continue (see Sec. 124.515).
(2) 8(a) credit for orders issued under multiple award contracts
that were not set aside for exclusive competition among eligible 8(a)
Participants. In order to receive 8(a) credit for orders placed under
multiple award contracts that were not initially set aside for
exclusive competition among 8(a) Participants:
(i) The order must be offered to and accepted into the 8(a) BD
program;
(ii) The order must be competed exclusively among 8(a) concerns;
(iii) The order must require the concern comply with applicable
limitations on subcontracting provisions (see Sec. 125.6) and the
nonmanufacturer rule, if applicable, (see Sec. 121.406(b)) in the
performance of the individual order; and
(iv) SBA must verify that a concern is an eligible 8(a) concern
prior to award of the order in accordance with Sec. 124.507.
* * * * *
0
35. Amend Sec. 124.504 as follows:
0
a. Revise the heading and the first sentence of paragraph (a);
[[Page 8260]]
0
b. Remove paragraph (d); and
0
c. Redesignate paragraph (e) as paragraph (d), and revise redesignated
paragraph (d) to read as follows:
Sec. 124.504 What circumstances limit SBA's ability to accept a
procurement for award as an 8(a) contract?
* * * * *
(a) Reservation as small business set-aside, or HUBZone, service
disabled veteran-owned small business, or women-owned small business
award. The procuring activity issued a solicitation for or otherwise
expressed publicly a clear intent to reserve the procurement as a small
business set-aside, or a HUBZone, service disabled veteran-owned small
business, or women-owned small business award prior to offering the
requirement to SBA for award as an 8(a) contract. * * *
* * * * *
(d) Release for non-8(a) competition. (1) Except as set forth in
(d)(4) of this section, where a procurement is awarded as an 8(a)
contract, its follow-on or renewable acquisition must remain in the
8(a) BD program unless SBA agrees to release it for non-8(a)
competition. If a procuring agency would like to fulfill a follow-on or
renewable acquisition outside of the 8(a) BD program, it must make a
written request to and receive the concurrence of the AA/BD to do so.
In determining whether to release a requirement from the 8(a) BD
program, SBA will consider:
(i) Whether the agency has achieved its SDB goal;
(ii) Where the agency is in achieving its HUBZone, SDVO, WOSB, or
small business goal, as appropriate; and
(iii) Whether the requirement is critical to the business
development of the 8(a) Participant that is currently performing it.
(2) SBA may decline to accept the offer of a follow-on or renewable
8(a) acquisition in order to give a concern previously awarded the
contract that is leaving or has left the 8(a) BD program the
opportunity to compete for the requirement outside of the 8(a) BD
program.
(i) SBA will consider release under paragraph (2) only where:
(A) The procurement awarded through the 8(a) BD program is being or
was performed by either a Participant whose program term will expire
prior to contract completion, or by a former Participant whose program
term expired within one year of the date of the offering letter;
(B) The concern requests in writing that SBA decline to accept the
offer prior to SBA's acceptance of the requirement for award as an 8(a)
contract; and
(C) The concern qualifies as a small business for the requirement
now offered to the 8(a) BD program.
(ii) In considering release under paragraph (2), SBA will balance
the importance of the requirement to the concern's business development
needs against the business development needs of other Participants that
are qualified to perform the requirement. This determination will
include consideration of whether rejection of the requirement would
seriously reduce the pool of similar types of contracts available for
award as 8(a) contracts. SBA will also seek the views of the procuring
agency.
(3) SBA will release a requirement under this paragraph only where
the procuring activity agrees to procure the requirement as a small
business, HUBZone, SDVO small business, or WOSB set-aside.
(4) The requirement that a follow-on procurement must be released
from the 8(a) BD program in order for it to be fulfilled outside the
8(a) BD program does not apply to orders offered to and accepted for
the 8(a) BD program pursuant to Sec. 124.503(h).
0
36. Amend Sec. 124.506 by revising paragraph (a)(2)(ii), the example
in paragraph (a) (3), and paragraph (b) to read as follows:
Sec. 124.506 At what dollar threshold must an 8(a) procurement be
competed among eligible Participants?
* * * * *
(a) * * *
(2) * * *
(ii) The anticipated award price of the contract, including
options, will exceed $6,500,000 for contracts assigned manufacturing
NAICS codes and $4,000,000 for all other contracts; and * * *
* * * * *
(3) * * *
Example to paragraph (a)(3). If the anticipated award price for
a professional services requirement is determined to be $3.8 million
and it is accepted as a sole source 8(a) requirement on that basis,
a sole source award will be valid even if the contract price arrived
at after negotiation is $4.2 million.
* * * * *
(b) Exemption from competitive thresholds for Participants owned by
Indian Tribes, ANCs and NHOs. (1) A Participant concern owned and
controlled by an Indian Tribe or an ANC may be awarded a sole source
8(a) contract where the anticipated value of the procurement exceeds
the applicable competitive threshold if SBA has not accepted the
requirement into the 8(a) BD program as a competitive procurement.
(2) A Participant concern owned and controlled by an NHO may be
awarded a sole source Department of Defense (DoD) 8(a) contract where
the anticipated value of the procurement exceeds the applicable
competitive threshold if SBA has not accepted the requirement into the
8(a) BD program as a competitive procurement.
(3) There is no requirement that a procurement must be competed
whenever possible before it can be accepted on a sole source basis for
a Tribally-owned or ANC-owned concern, or a concern owned by an NHO for
DoD contracts, but a procurement may not be removed from competition to
award it to a Tribally-owned, ANC-owned or NHO-owned concern on a sole
source basis.
(4) A joint venture between one or more eligible Tribally-owned,
ANC-owned or NHO-owned Participants and one or more non-8(a) business
concerns may be awarded sole source 8(a) contracts above the
competitive threshold amount, provided that it meets the requirements
of Sec. 124.513.
* * * * *
0
37. Amend Sec. 124.507 as follows:
0
a. Redesignate paragraphs (b)(2)(iii) and (b)(2)(iv) as paragraphs
(b)(2)(iv) and (b)(2)(v), respectively;
0
b. Add new paragraphs (b)(2)(iii), (c)(2)(i), (c)(2)(ii) and
(c)(2)(iii); and
0
c. Add an example to paragraph (d)(1) to read as follows:
Sec. 124.507 What procedures apply to competitive procurements?
* * * * *
(b) * * *
(2) * * *
(iii) In compliance with the continued eligibility reporting
requirements set forth in Sec. 124.112(b);
* * * * *
(c) * * *
(2) * * *
(i) A Participant may have bona fide places of business in more
than one location.
(ii) In order for a Participant to establish a bona fide place of
business in a particular geographic location, the SBA district office
serving the geographic area of that location must determine if that
location in fact qualifies as a bona fide place of business under SBA's
requirements.
(A) A Participant must submit a request for a bona fide business
determination to the SBA district office servicing it.
(B) The servicing district office will forward the request to the
SBA district office serving the geographic area of the particular
location for processing.
[[Page 8261]]
(iii) The effective date of a bona fide place of business is the
date that the evidence (paperwork) shows that the business in fact
regularly maintained its business at the new geographic location.
(iv) In order for a Participant to be eligible to submit an offer
for a 8(a) procurement limited to a specific geographic area, it must
receive from SBA a determination that it has a bona fide place of
business within that area prior to submitting its offer for the
procurement.
(d) * * *
(1) * * *
Example to paragraph (d)(1). The program term for 8(a)
Participant X is scheduled to expire on December 19. A solicitation
for a competitive 8(a) procurement specifies that initial offers are
due on December 15. The procuring activity amends the solicitation
to extend the date for the receipt of offers to January 5. X submits
its offer on January 5 and is selected as the apparent successful
offeror. X is eligible for award because it was an eligible 8(a)
Participant on the initial date set forth in the solicitation for
the receipt of offers.
* * * * *
0
38. Amend Sec. 124.509 by adding a new sentence at the end of
paragraph (a)(1), and by adding two new sentences after the first
sentence of paragraph (e)(1) to read as follows:
Sec. 124.509 What are non-8(a) business activity targets.
(a) * * *
(1) * * * Work performed by an 8(a) Participant for any Federal
department or agency other than through an 8(a) contract, including
work performed on orders under the General Services Administration
Multiple Award Schedule program, and work performed as a subcontractor,
including work performed as a subcontractor to another 8(a) Participant
on an 8(a) contract, qualifies as work performed outside the 8(a) BD
program.
* * * * *
(e) * * *
(1) * * * A firm receiving a waiver will be able to self market its
capabilities and receive one or more sole source 8(a) contracts during
the next program year. At its next annual review, SBA will reevaluate
the firm's circumstances and determine whether the waiver should be
extended an additional program year. * * *
* * * * *
0
39. Amend Sec. 124.510 by revising paragraph (b) to read as follows:
Sec. 124.510 What percentage of work must a Participant perform on an
8(a) contract?
* * * * *
(b) A Participant must certify in its offer that it will meet the
applicable performance of work requirement. Compliance with the
requirement will be determined as of the date of contract award, so
that a Participant may revise its initial offer to clarify or otherwise
come into compliance with the performance of work requirements. The
procuring agency contracting officer must be satisfied that the
Participant will meet the applicable performance of work requirement at
time of award.
* * * * *
0
40. Amend Sec. 124.512 by adding a new sentence at the end of
paragraph (a), by revising paragraph (b), and by adding a new paragraph
(c) to read as follows:
Sec. 124.512 Delegation of contract administration to procuring
agencies.
(a) * * * Tracking compliance with the performance of work
requirements set forth in Sec. 124.510 is included within the
functions performed by the procuring activity as part of contract
administration.
(b) This delegation of contract administration authorizes a
contracting officer to execute any priced option or in scope
modification without SBA's concurrence. The contracting officer must,
however, submit copies to the SBA servicing district office of all
modifications and options exercised within 15 business days of their
occurrence, or by another date agreed upon by SBA.
(c) SBA may conduct periodic compliance on-site agency reviews of
the files of all contracts awarded pursuant to Section 8(a) authority.
0
41. Amend Sec. 124.513 as follows:
0
a. Revise paragraph (c)(2);
0
b. Redesignate paragraphs (c)(3) through (c)(11) as (c)(4) through
(c)(12),
0
c. Adding a new paragraph (c)(3);
0
d. Revise newly designated paragraphs (c)(4) and (c)(7);
0
e. Remove the phrase ``the managing venturer'' from newly designated
paragraphs (c)(9) and (c)(10) and add in its place the phrase ``the
8(a) Participant managing venturer'';
0
f. Revise paragraphs (d) and (e); and
0
g. Add a new paragraph (i) to read as follows:
Sec. 124.513 Under what circumstances can a joint venture be awarded
an 8(a) contract?
* * * * *
(c) * * *
(2) Designating an 8(a) Participant as the managing venturer of the
joint venture. In an unpopulated joint venture or a joint venture
populated only with administrative personnel, the joint venture must
designate an employee of the 8(a) managing venturer as the project
manager responsible for performance of the contract. In a joint venture
populated with individuals intended to perform any contracts awarded to
the joint venture, the joint venture must otherwise demonstrate that
performance of the contract is controlled by the 8(a) managing
venturer;
(3) Stating that with respect to a separate legal entity joint
venture the 8(a) Participant(s) must own at least 51% of the joint
venture entity;
(4) Stating that the 8(a) Participant(s) must receive profits from
the joint venture commensurate with the work performed by the 8(a)
Participant(s), or in the case of a separate legal entity joint venture
commensurate with their ownership interests in the joint venture;
* * * * *
(7) Specifying the responsibilities of the parties with regard to
negotiation of the contract, source of labor, and contract performance,
including ways that the parties to the joint venture will ensure that
the joint venture and the 8(a) partner(s) to the joint venture will
meet the performance of work requirements set forth in paragraph (d) of
this section.
* * * * *
(d) Performance of work. (1) For any 8(a) contract, including those
between mentors and prot[eacute]g[eacute]s authorized by Sec. 124.520,
the joint venture must perform the applicable percentage of work
required by Sec. 124.510. For an unpopulated joint venture or a joint
venture populated only with one or more administrative personnel, the
8(a) partner(s) to the joint venture must perform at least 40% of the
work performed by the joint venture. The work performed by 8(a)
partners to a joint venture must be more than administrative or
ministerial functions so that they gain substantive experience. For a
joint venture populated with individuals intended to perform contracts
awarded to the joint venture, each 8(a) Participant to the joint
venture must demonstrate what it will gain from performance of the
contract and how such performance will assist in its business
development.
(2)(i) In an unpopulated joint venture, where both the 8(a) and
non-8(a) partners are technically subcontractors, the amount of work
done by the partners will be aggregated and the work done by the 8(a)
partner(s) must be at least 40% of the total done by all partners. In
determining the amount of work done by a non-8(a) partner, all work
done by the non-8(a) partner and any of its affiliates at any
subcontracting tier will be counted.
(ii) In a populated joint venture, a non-8(a) joint venture
partner, or any of
[[Page 8262]]
its affiliates, may not act as a subcontractor to the joint venture
awardee, or to any other subcontractor of the joint venture, unless the
AA/BD determines that other potential subcontractors are not available,
or the joint venture is populated only with administrative personnel.
(A) If a non-8(a) joint venture partner seeks to do more work, the
additional work must generally be done through the joint venture, which
would require the 8(a) partner(s) to the joint venture to also do
additional work to meet the 40% requirement set forth in paragraph
(d)(1) of this section.
(B) If a joint venture is populated only with administrative
personnel, the joint venture may subcontract performance to a non-8(a)
joint venture partner provided it also subcontracts work to the 8(a)
partner(s) in an amount sufficient to meet the 40% requirement. The
amount of work done by the partners will be aggregated and the work
done by the 8(a) partner(s) must be at least 40% of the total done by
all partners. In determining the amount of work done by a non-8(a)
partner, all work done by the non-8(a) partner and any of its
affiliates at any subcontracting tier will be counted.
(e) Prior approval by SBA. (1) SBA must approve a joint venture
agreement prior to the award of an 8(a) contract on behalf of the joint
venture.
(2) Where a joint venture has been established and approved by SBA
for one 8(a) contract, a second or third 8(a) contract may be awarded
to that joint venture provided an addendum to the joint venture
agreement, setting forth the performance requirements on that second or
third contract, is provided to and approved by SBA prior to contract
award.
(i) After approving the structure of the joint venture in
connection with the first contract, SBA will review only the addendums
relating to performance of work on successive contracts.
(ii) SBA must approve the addendums prior to the award of any
successive 8(a) contract to the joint venture.
* * * * *
(i) Performance of work reports. An 8(a) Participant to a joint
venture must describe how it is meeting or has met the applicable
performance of work requirements for each 8(a) contract it performs as
a joint venture.
(1) As part of its annual review, the 8(a) Participant(s) to the
joint venture must explain for each 8(a) contract performed during the
year how the performance of work requirements are being met for the
contract.
(2) At the completion of every 8(a) contract awarded to a joint
venture, the 8(a) Participant(s) to the joint venture must submit a
report to the local SBA district office explaining how the performance
of work requirements were met for the contract.
0
42. Amend Sec. 124.519 by revising paragraph (a), by removing
paragraph (c), by redesignating paragraphs (d), (e) and (f) as
paragraphs (c), (d) and (e), respectively, and by revising newly
designated paragraph (e) to read as follows:
Sec. 124.519 Are there any dollar limits on the amount of 8(a)
contracts that a Participant may receive?
(a) A Participant (other than one owned by an Indian Tribe, ANC or
NHO) may not receive sole source 8(a) contract awards where it has
received a combined total of competitive and sole source 8(a) contracts
in excess of the dollar amount set forth in this section during its
participation in the 8(a) BD program.
* * * * *
(e) The AA/BD may waive the requirement prohibiting a Participant
from receiving sole source 8(a) contracts in excess of the dollar
amount set forth in this section where the head of a procuring activity
represents that award of a sole source 8(a) contract to the Participant
is needed to achieve significant interests of the Government.
0
43. Amend Sec. 124.520 as follows:
0
a. Revise the heading;
0
b. Revise paragraph (a);
0
c. Revise paragraph (b) introductory text;
0
d. Revise paragraphs (b)(1)(i) and (iv), (b)(2), and (b)(3);
0
e. Revise paragraphs (c)(1) and (c)(3);
0
f. Add new paragraphs (c)(4) and (c)(5);
0
g. Revise paragraph (d)(1);
0
h. Revise paragraph (e)(1), and the second sentence of (e)(2);
0
i. Redesignate paragraph (f) as paragraph (g) and add new paragraph
(f);
0
j. Redesignate newly designated paragraphs (g)(2) and (g)(3) as
paragraphs (g)(3) and (g)(4);
0
k. Add a new paragraph (g)(2); and
0
l. Add a new paragraph (h) to read as follows:
Sec. 124.520 What are the rules governing SBA's Mentor/
Prot[eacute]g[eacute] program?
(a) General. The mentor/prot[eacute]g[eacute] program is designed
to encourage approved mentors to provide various forms of business
development assistance to prot[eacute]g[eacute] firms. This assistance
may include technical and/or management assistance; financial
assistance in the form of equity investments and/or loans;
subcontracts; and/or assistance in performing prime contracts with the
Government through joint venture arrangements. Mentors are encouraged
to provide assistance relating to the performance of non-8(a) contracts
so that prot[eacute]g[eacute] firms may more fully develop their
capabilities. The purpose of the mentor/prot[eacute]g[eacute]
relationship is to enhance the capabilities of the
prot[eacute]g[eacute], assist the prot[eacute]g[eacute] with meeting
the goals established in its SBA-approved business plan, and to improve
its ability to successfully compete for contracts.
(b) Mentors. Any concern or non-profit entity that demonstrates a
commitment and the ability to assist developing 8(a) Participants may
act as a mentor and receive benefits as set forth in this section. This
includes businesses that have graduated from the 8(a) BD program, firms
that are in the transitional stage of program participation, other
small businesses, and large businesses.
(1) * * *
(i) Possesses favorable financial health; * * *
(iv) Can impart value to a prot[eacute]g[eacute] firm due to
lessons learned and practical experience gained because of the 8(a) BD
program, or through its knowledge of general business operations and
government contracting.
(2) Generally a mentor will have no more than one
prot[eacute]g[eacute] at a time. However, the AA/BD may authorize a
concern or non-profit entity to mentor more than one
prot[eacute]g[eacute] at a time where it can demonstrate that the
additional mentor/prot[eacute]g[eacute] relationship will not adversely
affect the development of either prot[eacute]g[eacute] firm (e.g., the
second firm may not be a competitor of the first firm). Under no
circumstances will a mentor be permitted to have more than three
prot[eacute]g[eacute]s at one time.
(3) In order to demonstrate its favorable financial health, a firm
seeking to be a mentor must submit to SBA for review copies of the
Federal tax returns it submitted to the IRS, or audited financial
statements, including any notes, or in the case of publicly traded
concerns the filings required by the Securities and Exchange Commission
for the past three years.
* * * * *
(c) Prot[eacute]g[eacute]s. (1) In order to initially qualify as a
prot[eacute]g[eacute] firm, a Participant must:
(i) Be in the developmental stage of program participation; or
(ii) Have never received an 8(a) contract; or
(iii) Have a size that is less than half the size standard
corresponding to its primary NAICS code.
[[Page 8263]]
(2) * * *
(3) A prot[eacute]g[eacute] firm may generally have only one mentor
at a time. The AA/BD may approve a second mentor for a particular
prot[eacute]g[eacute] firm where:
(i) The second relationship pertains to an unrelated, secondary
NAICS code;
(ii) The prot[eacute]g[eacute] firm is seeking to acquire a
specific expertise that the first mentor does not possess; and
(iii) The second relationship will not compete or otherwise
conflict with the business development assistance set forth in the
first mentor/prot[eacute]g[eacute] relationship.
(4) A prot[eacute]g[eacute] may not become a mentor and retain its
prot[eacute]g[eacute] status. The prot[eacute]g[eacute] must terminate
its mentor/prot[eacute]g[eacute] agreement with its mentor before it
will be approved as a mentor to another 8(a) Participant.
(5) SBA will not approve a mentor/prot[eacute]g[eacute]
relationship for an 8(a) Participant with less than six months
remaining in its program term.
(d) * * *
(1) A mentor and prot[eacute]g[eacute] may joint venture as a small
business for any government prime contract or subcontract, including
procurements with a dollar value less than half the size standard
corresponding to the assigned NAICS code and 8(a) sole source
contracts, provided the prot[eacute]g[eacute] qualifies as small for
the procurement and, for purposes of 8(a) sole source requirements, the
prot[eacute]g[eacute] has not reached the dollar limit set forth in
Sec. 124.519.
(i) SBA must approve the mentor/prot[eacute]g[eacute] agreement
before the two firms may submit an offer as a joint venture on a
particular government prime contract or subcontract in order for the
joint venture to receive the exclusion from affiliation.
(ii) In order to receive the exclusion from affiliation for both
8(a) and non-8(a) procurements, the joint venture must meet the
requirements set forth in Sec. 124.513(c).
(iii) Once a prot[eacute]g[eacute] firm graduates from or otherwise
leaves the 8(a) BD program, it will not be eligible for any further
benefits from its mentor/prot[eacute]g[eacute] relationship (i.e., the
receipts and/or employees of the prot[eacute]g[eacute] and mentor will
generally be aggregated in determining size for any joint venture
between the mentor and prot[eacute]g[eacute] after the
prot[eacute]g[eacute] leaves the 8(a) BD program). Leaving the 8(a) BD
program, or terminating the mentor/prot[eacute]g[eacute] relationship
while a prot[eacute]g[eacute] firm is still in the program, does not,
however, affect contracts previously awarded to a joint venture between
the prot[eacute]g[eacute] and its mentor. In such a case, the joint
venture continues to qualify as small for previously awarded contracts
and is obligated to continue performance on those contracts.
* * * * *
(e) * * *
(1) The mentor and prot[eacute]g[eacute] firms must enter a written
agreement setting forth an assessment of the prot[eacute]g[eacute]'s
needs and providing a detailed description and timeline for the
delivery of the assistance the mentor commits to provide to address
those needs (e.g., management and/or technical assistance, loans and/or
equity investments, cooperation on joint venture projects, or
subcontracts under prime contracts being performed by the mentor). The
mentor/prot[eacute]g[eacute] agreement must:
(i) Address how the assistance to be provided through the agreement
will help the prot[eacute]g[eacute] firm meet the goals established in
its SBA-approved business plan;
(ii) Establish a single point of contact in the mentor concern who
is responsible for managing and implementing the mentor/
prot[eacute]g[eacute] agreement; and
(iii) Provide that the mentor will provide such assistance to the
prot[eacute]g[eacute] firm for at least one year.
(2) * * * The agreement will not be approved if SBA determines that
the assistance to be provided is not sufficient to promote any real
developmental gains to the prot[eacute]g[eacute], or if SBA determines
that the agreement is merely a vehicle to enable the mentor to receive
8(a) contracts.
* * * * *
(f) Decision to decline mentor/prot[eacute]g[eacute] relationship.
(1) Where SBA declines to approve a specific mentor/
prot[eacute]g[eacute] agreement, the prot[eacute]g[eacute] may request
the AA/BD to reconsider the Agency's initial decline decision by filing
a request for reconsideration with its servicing SBA district office
within 45 calendar days of receiving notice that its mentor/
prot[eacute]g[eacute] agreement was declined. The prot[eacute]g[eacute]
may revise the proposed mentor/prot[eacute]g[eacute] agreement and
provide any additional information and documentation pertinent to
overcoming the reason(s) for the initial decline to its servicing
district office.
(2) The AA/BD will issue a written decision within 45 calendar days
of receipt of the prot[eacute]g[eacute]'s request. The AA/BD may
approve the mentor/prot[eacute]g[eacute] agreement, deny it on the same
grounds as the original decision, or deny it on other grounds. If
denied, the AA/BD will explain why the mentor/prot[eacute]g[eacute]
agreement does not meet the requirements of Sec. 124.520 and give
specific reasons for the decline.
(3) If the AA/BD declines the mentor/prot[eacute]g[eacute]
agreement solely on issues not raised in the initial decline, the
prot[eacute]g[eacute] can ask for reconsideration as if it were an
initial decline.
(4) If SBA's final decision is to decline a specific mentor/
prot[eacute]g[eacute] agreement, the 8(a) firm seeking to be a
prot[eacute]g[eacute] cannot attempt to enter another mentor/
prot[eacute]g[eacute] relationship with the same mentor for a period of
60 calendar days from the date of the final decision. The 8(a) firm
may, however, submit another proposed mentor/prot[eacute]g[eacute]
agreement with a different proposed mentor at any time after the SBA's
final decline decision.
(g) * * *
(2) The prot[eacute]g[eacute] must report the mentoring services it
receives by category and hours.
* * * * *
(h) Consequences of not providing assistance set forth in the
mentor/prot[eacute]g[eacute] agreement. (1) Where SBA determines that a
mentor has not provided to the prot[eacute]g[eacute] firm the business
development assistance set forth in its mentor/prot[eacute]g[eacute]
agreement, SBA will notify the mentor of such determination and afford
the mentor an opportunity to respond. The mentor must respond within 30
days of the notification, explaining why it has not provided the agreed
upon assistance and setting forth a definitive plan as to when it will
provide such assistance. If the mentor fails to respond, does not
supply adequate reasons for its failure to provide the agreed upon
assistance, or does not set forth a definite plan to provide the
assistance:
(i) SBA will terminate its mentor/prot[eacute]g[eacute] agreement;
(ii) The firm will be ineligible to again act as a mentor for a
period of two years from the date SBA terminates the mentor/
prot[eacute]g[eacute] agreement; and
(iii) SBA may recommend to the relevant procuring agency to issue a
stop work order for each Federal contract for which the mentor and
prot[eacute]g[eacute] are performing as a small business joint venture
pursuant to paragraph (d)(1) of this section in order to encourage the
mentor to comply with its mentor/prot[eacute]g[eacute] agreement. Where
a prot[eacute]g[eacute] firm is able to independently complete
performance of any such contract, SBA may also authorize a substitution
of the prot[eacute]g[eacute] firm for the joint venture.
(2) SBA may consider a mentor's failure to comply with the terms
and conditions of an SBA-approved mentor/prot[eacute]g[eacute]
agreement as a basis for debarment on the grounds, including but not
limited to, that the mentor has not complied with the terms of a public
agreement under 2 CFR 180.800(b).
[[Page 8264]]
0
44. Amend Sec. 124.601 by revising paragraph (a) to read as follows:
Sec. 124.601 What reports does SBA require concerning parties who
assist Participants in obtaining Federal contracts?
(a) Each Participant must submit semi-annually a written report to
its assigned BOS that includes a listing of any agents,
representatives, attorneys, accountants, consultants and other parties
(other than employees) receiving fees, commissions, or compensation of
any kind to assist such Participant in obtaining or seeking to obtain a
Federal contract. The listing must indicate the amount of compensation
paid and a description of the activities performed for such
compensation.
* * * * *
0
45. Amend Sec. 124.602 as follows:
0
a. Revise paragraph (a) introductory text;
0
b. Redesignate paragraphs (a)(1) and (a)(2) as paragraphs (a)(3) and
(a)(4), respectively;
0
c. Add new paragraph (a)(1) and (a)(2);
0
d. Revise paragraphs (b) and (c); and
0
e. Add new paragraph (g) to read as follows:
Sec. 124.602 What kind of annual financial statement must a
Participant submit to SBA?
(a) Except as set forth in paragraph (a)(1) of this section,
Participants with gross annual receipts of more than $10,000,000 must
submit to SBA audited annual financial statements prepared by a
licensed independent public accountant within 120 days after the close
of the concern's fiscal year.
(1) Participants with gross annual receipts of more than
$10,000,000 which are owned by a Tribe, ANC, NHO, or CDC may elect to
submit unaudited financial statements within 120 days after the close
of the concern's fiscal year, provided the following additional
documents are submitted simultaneously:
(i) Audited annual financial statements for the parent company
owner of the Participant, prepared by a licensed independent public
accountant, for the equivalent fiscal year;
(ii) Certification from the Participant's Chief Executive Officer
and Chief Financial Officer (or comparable positions) that each
individual has read the unaudited financial statements, affirms that
the statements do not contain any material misstatements, and
certifying that the statements fairly represent the Participant's
financial condition and result of operations.
(2) In the first year that a Participant's gross receipts exceed
$10,000,000, a Participant may provide an audited balance sheet, with
the income and cash flow statements receiving the level of service
required for the previous year (review or none, depending on sales the
year before the audit is required). * * *
(b)(1) Participants with gross annual receipts between $2,000,000
and $10,000,000 must submit to SBA reviewed annual financial statements
prepared by a licensed independent public accountant within 90 days
after the close of the concern's fiscal year.
(2) The servicing SBA District Director may waive the requirement
for reviewed financial statements for good cause shown by the
Participant.
(c) Participants with gross annual receipts of less than $2,000,000
must submit to SBA an annual statement prepared in-house or a
compilation statement prepared by a licensed independent public
accountant, verified as to accuracy by an authorized officer, partner,
limited liability member, or sole proprietor of the Participant,
including signature and date, within 90 days after the close of the
concern's fiscal year.
* * * * *
(g) Participants owned by Tribes, ANCs, NHOs and CDCs may submit
consolidated financial statements prepared by the parent entity that
include schedules for each 8(a) Participant instead of separate audited
financial statements for each individual 8(a) Participant. If one
Participant must submit an audited financial statement, then the
consolidated statement and the schedules for each 8(a) Participant must
be audited.
0
46. Add a new Sec. 124.604 to read as follows:
Sec. 124.604 Report of benefits for firms owned by Tribes, ANCs, NHOs
and CDCs.
As part of its annual review submission, each Participant owned by
a Tribe, ANC, NHO or CDC must submit to SBA information showing how the
Tribe, ANC, NHO or CDC has provided benefits to the Tribal or native
members and/or the Tribal, native or other community due to the
Tribe's/ANC's/NHO's/CDC's participation in the 8(a) BD program through
one or more firms. This data includes information relating to funding
cultural programs, employment assistance, jobs, scholarships,
internships, subsistence activities, and other services provided by the
Tribe, ANC, NHO or CDC to the affected community.
0
47. Amend Sec. 124.1002 by revising paragraph (d) and adding a new
paragraph (h) to read as follows:
Sec. 124.1002 What is a Small Disadvantaged Business (SDB)?
* * * * *
(d) Additional eligibility criteria. (1) Except for Tribes, ANCs,
CDCs, and NHOs, each individual claiming disadvantaged status must be a
citizen of the United States.
(2) The other eligibility requirements set forth in Sec. 124.108
for 8(a) BD program participation do not apply to SDB eligibility.
* * * * *
(h) Full-time requirement for SDB purposes. An SDB is considered to
be managed on a full-time basis by a disadvantaged individual if such
individual works for the concern during all of the hours the concern
operates. For example, if a concern operates 20 hours per week and the
disadvantaged manager works for the firm during those twenty hours,
that individual will be considered as working full time for the firm.
0
48. Revise Sec. 124.1009 to read as follows:
Sec. 124.1009 Who decides disadvantaged status protests?
In response to a protest challenging the disadvantaged status of a
concern, the SBA's AA/BD, or designee, will determine whether the
concern is disadvantaged.
Dated: February 1, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-2581 Filed 2-10-11; 8:45 am]
BILLING CODE 8025-01-P