80 FR 19886 - Surety Bond Guarantee Program; Miscellaneous Amendments

SMALL BUSINESS ADMINISTRATION

Federal Register Volume 80, Issue 71 (April 14, 2015)

Page Range		19886-19889
FR Document		2015-08297
This rule proposes to change the regulations for SBA's Surety Bond Guarantee Program in four areas. First, as a condition for participating in the Prior Approval and Preferred Programs, the proposal would clarify that a Surety must directly employ underwriting and claims staffs sufficient to perform and manage these functions, and final settlement authority for claims and recovery is vested only in salaried employees of the Surety. Second, the proposal would provide that all costs incurred by the Surety's salaried claims staff are ineligible for reimbursement by SBA, but the Surety may seek reimbursement for amounts paid for specialized services that are provided by outside consultants in connection with the processing of a claim. Third, the rule proposes to modify the criteria for determining when a Principal that caused a Loss to SBA is ineligible for a bond guaranteed by SBA. Fourth, the rule proposes to modify the criteria for admitting Sureties to the Preferred Surety Bond Guarantee Program by increasing the Surety's underwriting limitation, as certified by the U.S. Treasury Department on its list of acceptable sureties, from at least $2 million to at least $6.5 million.
Federal Register, Volume 80 Issue 71 (Tuesday, April 14, 2015)
[Federal Register Volume 80, Number 71 (Tuesday, April 14, 2015)]
[Proposed Rules]
[Pages 19886-19889]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-08297]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 115

RIN 3245-AG70


Surety Bond Guarantee Program; Miscellaneous Amendments

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to change the regulations for SBA's Surety 
Bond Guarantee Program in four areas. First, as a condition for 
participating in the Prior Approval and Preferred Programs, the 
proposal would clarify that a Surety must directly employ underwriting 
and claims staffs sufficient to perform and manage these functions, and 
final settlement authority for claims and recovery is vested only in 
salaried employees of the Surety. Second, the proposal would provide 
that all costs incurred by the Surety's salaried claims staff are 
ineligible for reimbursement by SBA, but the Surety may seek 
reimbursement for amounts paid for specialized services that are 
provided by outside consultants in connection with the processing of a 
claim. Third, the rule proposes to modify the criteria for determining 
when a Principal that caused a Loss to SBA is ineligible for a bond 
guaranteed by SBA. Fourth, the rule proposes to modify the criteria for 
admitting Sureties to the Preferred Surety Bond Guarantee Program by 
increasing the Surety's underwriting limitation, as certified by the 
U.S. Treasury Department on its list of acceptable sureties, from at 
least $2 million to at least $6.5 million.

DATES: SBA must receive comments to this proposed rule on or before 
June 15, 2015.

ADDRESSES: You may submit comments, identified by RIN 3245-AG70, by any 
of the following methods: (1) Federal eRulemaking Portal: http://www.regulations.gov, following the instructions for submitting 
comments; or (2) Mail/Hand Delivery/Courier: Barbara J. Brannan, Office 
of Surety Guarantees, 409 Third Street SW., Suite 8600, Washington, DC 
20416.
    SBA will post all comments on www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, you must submit such information to U.S. 
Small Business Administration, Barbara J. Brannan, Office of Surety 
Guarantees, 409 Third Street SW., Washington, DC 20416 or send an email 
to [email protected]. Highlight the information that you consider 
to be CBI and explain why you believe SBA should hold this information 
as confidential. SBA will review your information and determine whether 
it will make the information public.

FOR FURTHER INFORMATION CONTACT: Barbara J. Brannan, Office of Surety 
Guarantees, (202) 205-6545 or email: [email protected].

SUPPLEMENTARY INFORMATION:

I. Discussion of Proposed Changes

    The U.S. Small Business Administration (SBA) guarantees bid, 
payment and performance bonds for small and emerging contractors who 
cannot obtain surety bonds through regular commercial channels. SBA's 
guarantee gives Sureties an incentive to provide bonding for small 
businesses and, thereby, assists small businesses in obtaining greater 
access to contracting opportunities. SBA's guarantee is an agreement 
between a Surety and SBA that SBA will assume a certain percentage of 
the Surety's loss should a contractor default on the underlying 
contract.
    This rule proposes to change the regulations governing SBA's Surety 
Bond Guarantee Program (SBG Program) in four areas that have prompted 
questions from participating Sureties over the past year. First, the 
rule proposes to clarify that, to participate in the Prior Approval and 
Preferred Programs, a Surety must directly employ underwriting and 
claims staffs sufficient to perform and manage these functions. Final 
settlement authority for claims and recoveries is vested only in the 
surety's claims staff. The current rules require PSB Sureties to vest 
final settlement authority for claims and recovery in their salaried 
employees, see 13 CFR 115.60(a)(5), and this proposed rule would extend 
this requirement to Prior Approval Sureties. Some Prior Approval 
Sureties retain the final underwriting authority to approve a 
particular bond and some Prior Approval Sureties grant their agents 
this authority. For the latter arrangement, the proposed rule would 
clarify that Prior Approval Sureties must have salaried employees 
responsible for managing and overseeing the underwriting operations. In 
conducting such oversight, SBA would expect Prior Approval Sureties to 
periodically conduct reviews of the underwriting operations of their 
agents to ensure that the agent is underwriting SBA-guaranteed bonds in 
accordance with the standards set forth in 13 CFR 115.15(a). SBA is not 
aware that any Prior Approval Surety currently participating in the SBG 
Program is unable to satisfy this requirement, but is making this 
requirement explicit in the regulations for clarity and to avoid 
misunderstanding. PSB Sureties are currently required to vest 
underwriting authority in their salaried employees, see 13 CFR 
115.60(a)(4), and the proposed rule would not affect this requirement. 
Accordingly, while PSB Sureties may allow their agents to perform the 
initial underwriting on a bond, the current rule requires that only the 
PSB Surety may execute the bond guarantee agreement (SBA Form 990 or 
990A).
    Second, the rule proposes to specify that the costs that the Surety 
incurs for its salaried claims staff are ineligible for reimbursement 
by SBA. SBA considers such costs to be integral to the Surety's 
overhead, which is not eligible for reimbursement by SBA. See 13 CFR 
115.16(f)(1). Under the proposed rule, however, the Surety may seek 
reimbursement for amounts actually paid by the Surety for specialized 
services that are provided by an outside consultant, which is not an 
Affiliate of the Surety, in connection with the processing of a claim, 
provided that such services are beyond the capability of the Surety's 
salaried claims staff. For example, to evaluate a claim, the Surety may 
need the opinion of a structural engineer to determine the Principal's 
compliance with engineering specifications. SBA would not expect the 
Surety to directly employ a structural engineer, and SBA would approve 
reasonable costs to contract for this specialized service as part of 
the Surety's Loss.
    Third, the rule proposes to modify the conditions under which a 
Principal, and its Affiliates, would be deemed ineligible for a bond 
guaranteed by SBA in the circumstance where the Principal has 
previously defaulted on an SBA guaranteed surety bond. Under the 
current rules, a Principal and its Affiliates are ineligible for 
further SBA bond guarantees if the Surety has requested reimbursement 
for Losses

[[Page 19887]]

incurred under an SBA guaranteed bond issued on behalf of the 
Principal. See 13 CFR 115.14(a)(4). However, in the Prior Approval 
Program, the current rules provide that SBA's Office of Surety 
Guarantees (OSG) may agree, upon the Surety's recommendation, to 
reinstate the Principal, and its Affiliates, if the Surety has settled 
its claim with the Principal for an amount and on terms accepted by OSG 
(13 CFR 115.36(b)(2)), or the Principal's indebtedness to the Surety is 
discharged by operation of law (e.g., bankruptcy discharge) (13 CFR 
115.36(b)(4)), or OSG and the Surety determine that further bond 
guarantees are appropriate (13 CFR 115.36(b)(5)). In addition, in the 
PSB Program, the current rules provide that the PSB Surety may 
reinstate a Principal's eligibility upon the Surety's determination 
that reinstatement is appropriate (13 CFR 115.14(b)).
    SBA is proposing to modify these rules in two ways. First, the 
proposed rule would prohibit the reinstatement of a Principal if the 
Principal, or any of its Affiliates, had previously defaulted on an SBA 
guaranteed bond that resulted in a Loss (as defined in 13 CFR 115.16) 
that has not been fully reimbursed to SBA or if SBA has not been fully 
reimbursed for any Imminent Breach payments. The proposed rule would 
provide that the Principal, or any of its Affiliates, may be reinstated 
only if SBA has been fully repaid for the Loss or for the Imminent 
Breach payment. In addition, the discharge of the indebtedness in 
bankruptcy would no longer qualify the Principal for reinstatement. 
These changes would conform the SBG Program more closely to SBA's other 
financial assistance programs under which an applicant is ineligible 
for financial assistance if it has caused a prior loss to the Agency. 
See 13 CFR 120.111(q). SBA believes that a Principal that has 
previously caused a Loss to SBA presents a higher risk to the Agency 
and should not receive the benefit of further SBA financial assistance. 
Under the proposed rule, SBA would have the authority to waive this 
prohibition for good cause. For example, if the Principal is able to 
show that the Loss was attributed to the acts or omissions of a co-
owner who is no longer a part of the business, SBA could find good 
cause to reinstate the eligibility of the Principal. PSB Sureties would 
not be delegated the authority to make this ``good cause'' 
determination, but would continue to have the authority to reinstate 
the eligibility of a Principal when the Surety determines that further 
bond guarantees are appropriate for those Principals deemed ineligible 
under paragraphs (1), (2), (3), (5) or (6) of section 115.14.
    Second, the proposed rule would apply the same standards regarding 
the loss of eligibility and the conditions for reinstatement to both 
the Prior Approval Program and the PSB Program. SBA believes that the 
conditions for reinstatement of a Principal's eligibility for SBA 
guaranteed bonds should not depend upon whether the Surety is a Prior 
Approval Surety or a PSB Surety, but that the reinstatement conditions 
should be uniform and apply equally to both Programs.
    Fourth, the rule proposes to modify the criteria for admitting a 
Surety to participate in the Preferred Surety Bond Guarantee Program by 
increasing the Surety's underwriting limitation, as certified by the 
U.S. Treasury Department on its list of acceptable sureties on Federal 
bonds, from at least $2 million to at least $6.5 million. This change 
would conform the underwriting limitation to the statutory increase 
made by Public Law 112-239 in the maximum amount of any Contract or 
Order for which SBA may guarantee a bond. All PSB Sureties currently 
participating in the PSB Program would satisfy this new requirement.

II. Section-By-Section Analysis

    Section 115.11. SBA is proposing to revise this Section by 
including the requirement that an applicant have a salaried staff that 
is employed directly (not an agent or other individual or entity under 
contract with the applicant) to oversee its underwriting functions and 
to perform all claims and recovery functions. This section would also 
be revised to provide that final settlement authority for claims and 
recovery actions must be vested only in the applicant's salaried staff. 
In addition, this section would be revised to clarify that the 
applicant must continue to comply with SBA's standards and procedures 
for underwriting, administration, claims, recovery, and staffing 
requirements while participating in SBA's Surety Bond Guarantee 
Program.
    Section 115.13(a). SBA is proposing to revise this section by 
adding a new paragraph (7) to provide that, to be eligible for an SBA 
guaranteed bond, neither the Principal nor any of its Affiliates may be 
ineligible for an SBA guaranteed bond under the grounds set forth in 13 
CFR 115.14.
    Section 115.14. SBA is proposing to modify the criteria regarding 
the loss of the Principal's eligibility for future assistance and the 
conditions for reinstatement by providing that a Principal loses 
eligibility for further SBA bond guarantees if the Principal, or any of 
its Affiliates, has defaulted on an SBA guaranteed bond that resulted 
in a Loss (as defined in 13 CFR 115.16) that has not been fully 
reimbursed to SBA, or if SBA has not been fully reimbursed for any 
Imminent Breach payments. OSG would have the authority to waive this 
requirement for good cause. In addition, the discharge in bankruptcy of 
the Principal's indebtedness to the Surety would no longer qualify the 
Principal for reinstatement.
    SBA is also proposing to apply the same criterion on ineligibility 
and conditions for reinstatement to both the Prior Approval Program and 
the PSB Program. As the same conditions for reinstatement would apply 
to both the Prior Approval Program and the PSB Program, the conditions 
for reinstatement set forth in 13 CFR 115.36(b) and (c) would be moved 
in their entirety to 13 CFR 115.14(b) and (c), and the heading of this 
section would be changed to ``Loss of Principal's eligibility for 
future assistance and reinstatement of Principal''.
    Section 115.16(e)(1). SBA is proposing to revise this provision to 
provide that SBA will reimburse amounts actually paid by a Surety for 
specialized services that are provided under contract by outside 
consultants in connection with the processing of a claim, provided that 
such services are beyond the capability of the Surety's salaried claims 
staff. The change, coupled with the other changes in this Proposed 
Rule, clarifies that a Surety cannot outsource routine claims functions 
and responsibilities or include such costs in its reimbursement 
requests submitted to SBA under the bond guarantee agreement. With the 
exception of specialized work that falls outside the scope of the 
routine processing and administration of claims, the expectation is 
that the Surety will be able to perform the claims function at no cost 
to the Agency.
    Section 115.16(f)(1). SBA is proposing to revise this provision to 
clarify that all costs incurred by the Surety's salaried claims staff, 
whether or not specifically allocable to an SBA guaranteed bond, are 
excluded from the definition of Loss. Costs incurred by the Surety's 
salaried claims staff, like all other overhead of the Surety, are the 
responsibility of the Surety.
    Section 115.18(a)(2). SBA is proposing to revise this paragraph to 
provide that the Surety's failure to continue to comply with the 
requirements set forth in section 115.11 are sufficient grounds for 
refusal to issue further guarantees, or in the case

[[Page 19888]]

of a PSB Surety, termination of preferred status.
    Section 115.36. By including the conditions for reinstatement and 
the standard for underwriting after reinstatement in Sec.  115.14(b) 
and (c), this rule proposes to rename the heading of this section to 
``Sec.  115.36 Indemnity settlements'', delete ``(a) Indemnity 
settlements.'', renumber paragraphs ``(1)'', ``(2)'', and ``(3)'', as 
``(a)'', ``(b)'', and ``(c)'', respectively, and remove paragraphs (b) 
and (c).
    Section 115.60(a)(1). SBA is proposing to conform this provision to 
the statutory increase in the maximum contract amount for which a bond 
may be guaranteed by removing ``$2,000,000'' and inserting 
``$6,500,000'' in its place.
    Section 115.60(a)(5). By including in Sec.  115.11 the requirement 
that all Sureties vest final settlement authority for claims and 
recovery only in their salaried claims staff, this rule proposes to 
remove 115.60(a)(5) and renumber the existing paragraph 115.60(a)(6) 
accordingly. Compliance with Executive Orders 12866, 13563, 12988, and 
13132, the Paperwork Reduction Act (44 U.S.C. Ch. 35) and the 
Regulatory Flexibility Act (5 U.S.C. 601-612).

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule does not constitute a significant regulatory action under 
Executive Order 12866. This rule is also not a major rule under the 
Congressional Review Act (5 U.S.C. 800).

Executive Order 13563

    In accordance with Executive Order 13563, SBA discussed with 
several surety companies issues regarding the SGB Program regulations. 
In particular, SBA discussed the underwriting and claims staffing 
requirements that sureties must meet in order to participate in SBA's 
SGB Program. SBA also discussed with these companies the conditions for 
reimbursement of the costs incurred by their claims staffs. Generally, 
the sureties responded favorably to SBA's position that changes were 
necessary to clarify or amend the regulations on these issues.

Executive Order 12988

    This action meets applicable standards set forth in Sections 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

    SBA has determined that this proposed rule 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. Therefore, 
for purposes of Executive Order 13132, SBA has determined that this 
proposed rule has no federalism implications warranting preparation of 
a federalism assessment.

Paperwork Reduction Act, 44 U.S.C. Ch. 35

    For the purpose of the Paperwork Reduction Act, 44 U.S.C., Chapter 
35, SBA has determined that this proposed rule will not impose any new 
reporting or recordkeeping requirements.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) 5 U.S.C. 601, requires 
administrative agencies to consider the effect of their actions on 
small entities, small non-profit enterprises, and small local 
governments. Pursuant to the RFA, when an agency issues a rulemaking, 
the agency must prepare a regulatory flexibility analysis which 
describes the impact of the rule on small entities. However, section 
605 of the RFA allows an agency to certify a rule, in lieu of preparing 
an analysis, if the rulemaking is not expected to have a significant 
economic impact on a substantial number of small entities. There are 23 
Sureties that participate in the SBA program, and no part of this 
proposed rule would impose any significant additional cost or burden on 
them. Consequently, this proposed rule does not meet the significant 
economic impact on a substantial number of small businesses criterion 
anticipated by the Regulatory Flexibility Act.

List of Subjects in 13 CFR Part 115

    Claims, Reporting and recordkeeping requirements, Small businesses, 
Surety bonds.

    For the reasons cited above, SBA proposes to amend 13 CFR part 115 
as follows:

PART 115--SURETY BOND GUARANTEE

0
1. The authority citation for Part 115 continues to read as follows:

    Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b 
note; and Pub. L. 110-246, Sec. 12079, 122 Stat. 1651.

0
2. Amend Sec.  115.11 by adding three sentences at the end to read as 
follows:


Sec.  115.11  Applying to participate in the Surety Bond Guarantee 
Program.

    * * * At a minimum, each applicant must have salaried staff that is 
employed directly (not an agent or other individual or entity under 
contract with the applicant) to oversee its underwriting function and 
to perform all claims and recovery functions. Final settlement 
authority for claims and recovery must be vested only in the 
applicant's claims staff. The applicant must continue to comply with 
SBA's standards and procedures for underwriting, administration, 
claims, recovery, and staffing requirements while participating in 
SBA's Surety Bond Guarantee Programs.
0
3. Amend Sec.  115.13 by adding paragraph (a)(7) to read as follows:


Sec.  115.13  Eligibility of Principal.

* * * * *
    (7) No loss of eligibility. Neither the Principal nor any of its 
Affiliates is ineligible for an SBA-guaranteed bond under section 
115.14.
0
4. Amend Sec.  115.14 to read as follows:
0
a. Revise the section heading, and paragraphs (a)(4) and (b).
0
b. Add paragraph (c).


Sec.  115.14  Loss of Principal's eligibility for future assistance and 
reinstatement of Principal.

* * * * *
    (4) The Principal, or any of its Affiliates, has defaulted on an 
SBA-guaranteed bond resulting in a Loss that has not been fully 
reimbursed to SBA, or SBA has not been fully reimbursed for any 
Imminent Breach payments.
* * * * *
    (b) Reinstatement of Principal's eligibility. At any time after a 
Principal becomes ineligible for further bond guarantees under Sec.  
115.14(a):
    (1) A Prior Approval Surety may recommend that such Principal's 
eligibility be reinstated, and OSG may agree to reinstate the Principal 
if:
    (i) The Surety has settled its claim with the Principal, or any of 
its Affiliates, for an amount that results in no Loss to SBA or in no 
amount owed for Imminent Breach payments, or OSG finds good cause for 
reinstating the Principal notwithstanding the Loss to SBA or amount 
owed for Imminent Breach payments; or
    (ii) OSG and the Surety determine that further bond guarantees are 
appropriate after the Principal was deemed ineligible for further SBA 
bond guarantees under paragraph (1), (2), (3), (5) or (6) of section 
115.14(a).
    (2) A PSB Surety may:
    (i) Recommend that such Principal's eligibility be reinstated, and 
OSG may

[[Page 19889]]

agree to reinstate the Principal, if the Surety has settled its claim 
with the Principal, or any of its Affiliates, for an amount that 
results in no Loss to SBA or in no amount owed for Imminent Breach 
payments, or OSG finds good cause for reinstating the Principal 
notwithstanding the Loss to SBA or amount owed for Imminent Breach 
payments; or
    (ii) Reinstate a Principal's eligibility upon the Surety's 
determination that further bond guarantees are appropriate after the 
Principal was deemed ineligible for further SBA bond guarantees under 
Sec.  115.14(a) (1), (2), (3), (5) or (6).
    (c) Underwriting after reinstatement. A guarantee application 
submitted after reinstatement of the Principal's eligibility is subject 
to a very stringent underwriting review.
0
5. Amend Sec.  115.16 by revising paragraphs (e)(1) and (f)(1) to read 
as follows:


Sec.  115.16  Determination of Surety's Loss.

* * * * *
    (e) * * *
    (1) Amounts actually paid by the Surety for specialized services 
that are provided under contract by an outside consultant, which is not 
an Affiliate of the Surety, in connection with the processing of a 
claim, provided that such services are beyond the capability of the 
Surety's salaried claims staff; and
* * * * *
    (f) * * *
    (1) Any unallocated expenses, all direct and indirect costs 
incurred by the Surety's salaried claims staff, or any clear mark-up on 
expenses or any overhead of the Surety, its attorney, or any other 
party hired by the Surety or the attorney;
* * * * *
0
6. Amend Sec.  115.18 by revising paragraph (a)(2) to read as follows:


Sec.  115.18  Refusal to issue further guarantees; suspension and 
termination of PSB status.

* * * * *
    (2) Regulatory violations, fraud. Acts of wrongdoing such as fraud, 
material misrepresentation, breach of the Prior Approval or PSB 
Agreement, the Surety's failure to continue to comply with the 
requirements set forth in Sec.  115.11, or regulatory violations (as 
defined in Sec. Sec.  115.19(d) and 115.19(h)) also constitute 
sufficient grounds for refusal to issue further guarantees, or in the 
case of a PSB Surety, termination of preferred status.
* * * * *
0
7. Amend Sec.  115.36 to read as follows:
0
a. Revise the section heading;
0
b. Remove the paragraph heading ``(a) Indemnity settlements.'';
0
c. Remove paragraphs (b) and (c); and
0
d. Redesignate paragraphs ``(1)'', ``(2)'', and ``(3)'', as ``(a)'', 
``(b)'', and ``(c)''.


Sec.  115.36  Indemnity settlements.

* * * * *


Sec.  115.60  Selection and admission of PSB Sureties. [Amended]

0
8. Amend Sec.  115.60 to read as follows:
0
a. Amend Sec.  115.60(a)(1) by removing ``$2,000,000'' and inserting 
``$6,500,000'' in its place; and
0
b. Remove paragraph (a)(5) and redesignate paragraph (a)(6) as 
paragraph (a)(5).

    Dated: April 6, 2015.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2015-08297 Filed 4-13-15; 8:45 am]
BILLING CODE 8025-01-P
19886 Federal Register / Vol. 80, No. 71 / Tuesday, April 14, 2015 / Proposed Rules

the www.regulations.gov index. or (2) Mail/Hand Delivery/Courier: authority. For the latter arrangement,
However, not all documents listed in Barbara J. Brannan, Office of Surety the proposed rule would clarify that
the index may be publicly available, Guarantees, 409 Third Street SW., Suite Prior Approval Sureties must have
such as information that is exempt from 8600, Washington, DC 20416. salaried employees responsible for
public disclosure. SBA will post all comments on managing and overseeing the
Issued in Washington, DC, on April 7, www.regulations.gov. If you wish to underwriting operations. In conducting
2015. submit confidential business such oversight, SBA would expect Prior
Kathleen B. Hogan, information (CBI) as defined in the User Approval Sureties to periodically
Notice at www.regulations.gov, you conduct reviews of the underwriting
Deputy Assistant Secretary for Energy
Efficiency, Energy Efficiency and Renewable must submit such information to U.S. operations of their agents to ensure that
Energy. Small Business Administration, Barbara the agent is underwriting SBA-
[FR Doc. 2015–08600 Filed 4–13–15; 8:45 am] J. Brannan, Office of Surety Guarantees, guaranteed bonds in accordance with
409 Third Street SW., Washington, DC the standards set forth in 13 CFR
BILLING CODE 6450–01–P
20416 or send an email to 115.15(a). SBA is not aware that any
Barbara.brannan@sba.gov. Highlight the Prior Approval Surety currently
information that you consider to be CBI participating in the SBG Program is
SMALL BUSINESS ADMINISTRATION unable to satisfy this requirement, but is
and explain why you believe SBA
should hold this information as making this requirement explicit in the
13 CFR Part 115
confidential. SBA will review your regulations for clarity and to avoid
RIN 3245–AG70 information and determine whether it misunderstanding. PSB Sureties are
will make the information public. currently required to vest underwriting
Surety Bond Guarantee Program; authority in their salaried employees,
Miscellaneous Amendments FOR FURTHER INFORMATION CONTACT:
Barbara J. Brannan, Office of Surety see 13 CFR 115.60(a)(4), and the
AGENCY: U.S. Small Business Guarantees, (202) 205–6545 or email: proposed rule would not affect this
Administration. Barbara.brannan@sba.gov. requirement. Accordingly, while PSB
Sureties may allow their agents to
ACTION: Proposed rule. SUPPLEMENTARY INFORMATION:
perform the initial underwriting on a
SUMMARY: This rule proposes to change I. Discussion of Proposed Changes bond, the current rule requires that only
the regulations for SBA’s Surety Bond the PSB Surety may execute the bond
The U.S. Small Business
Guarantee Program in four areas. First, guarantee agreement (SBA Form 990 or
Administration (SBA) guarantees bid,
as a condition for participating in the 990A).
payment and performance bonds for Second, the rule proposes to specify
Prior Approval and Preferred Programs, small and emerging contractors who
the proposal would clarify that a Surety that the costs that the Surety incurs for
cannot obtain surety bonds through its salaried claims staff are ineligible for
must directly employ underwriting and regular commercial channels. SBA’s
claims staffs sufficient to perform and reimbursement by SBA. SBA considers
guarantee gives Sureties an incentive to such costs to be integral to the Surety’s
manage these functions, and final provide bonding for small businesses
settlement authority for claims and overhead, which is not eligible for
and, thereby, assists small businesses in reimbursement by SBA. See 13 CFR
recovery is vested only in salaried obtaining greater access to contracting
employees of the Surety. Second, the 115.16(f)(1). Under the proposed rule,
opportunities. SBA’s guarantee is an however, the Surety may seek
proposal would provide that all costs agreement between a Surety and SBA
incurred by the Surety’s salaried claims reimbursement for amounts actually
that SBA will assume a certain paid by the Surety for specialized
staff are ineligible for reimbursement by percentage of the Surety’s loss should a
SBA, but the Surety may seek services that are provided by an outside
contractor default on the underlying consultant, which is not an Affiliate of
reimbursement for amounts paid for contract.
specialized services that are provided by the Surety, in connection with the
This rule proposes to change the processing of a claim, provided that
outside consultants in connection with regulations governing SBA’s Surety
the processing of a claim. Third, the rule such services are beyond the capability
Bond Guarantee Program (SBG Program) of the Surety’s salaried claims staff. For
proposes to modify the criteria for in four areas that have prompted example, to evaluate a claim, the Surety
determining when a Principal that questions from participating Sureties may need the opinion of a structural
caused a Loss to SBA is ineligible for a over the past year. First, the rule engineer to determine the Principal’s
bond guaranteed by SBA. Fourth, the proposes to clarify that, to participate in compliance with engineering
rule proposes to modify the criteria for the Prior Approval and Preferred specifications. SBA would not expect
admitting Sureties to the Preferred Programs, a Surety must directly the Surety to directly employ a
Surety Bond Guarantee Program by employ underwriting and claims staffs structural engineer, and SBA would
increasing the Surety’s underwriting sufficient to perform and manage these approve reasonable costs to contract for
limitation, as certified by the U.S. functions. Final settlement authority for this specialized service as part of the
Treasury Department on its list of claims and recoveries is vested only in Surety’s Loss.
acceptable sureties, from at least $2 the surety’s claims staff. The current Third, the rule proposes to modify the
million to at least $6.5 million. rules require PSB Sureties to vest final conditions under which a Principal, and
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DATES: SBA must receive comments to settlement authority for claims and its Affiliates, would be deemed
this proposed rule on or before June 15, recovery in their salaried employees, see ineligible for a bond guaranteed by SBA
2015. 13 CFR 115.60(a)(5), and this proposed in the circumstance where the Principal
ADDRESSES: You may submit comments, rule would extend this requirement to has previously defaulted on an SBA
identified by RIN 3245–AG70, by any of Prior Approval Sureties. Some Prior guaranteed surety bond. Under the
the following methods: (1) Federal Approval Sureties retain the final current rules, a Principal and its
eRulemaking Portal: http:// underwriting authority to approve a Affiliates are ineligible for further SBA
www.regulations.gov, following the particular bond and some Prior bond guarantees if the Surety has
instructions for submitting comments; Approval Sureties grant their agents this requested reimbursement for Losses

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Federal Register / Vol. 80, No. 71 / Tuesday, April 14, 2015 / Proposed Rules 19887

incurred under an SBA guaranteed bond ineligible under paragraphs (1), (2), (3), SBA bond guarantees if the Principal, or
issued on behalf of the Principal. See 13 (5) or (6) of section 115.14. any of its Affiliates, has defaulted on an
CFR 115.14(a)(4). However, in the Prior Second, the proposed rule would SBA guaranteed bond that resulted in a
Approval Program, the current rules apply the same standards regarding the Loss (as defined in 13 CFR 115.16) that
provide that SBA’s Office of Surety loss of eligibility and the conditions for has not been fully reimbursed to SBA,
Guarantees (OSG) may agree, upon the reinstatement to both the Prior Approval or if SBA has not been fully reimbursed
Surety’s recommendation, to reinstate Program and the PSB Program. SBA for any Imminent Breach payments.
the Principal, and its Affiliates, if the believes that the conditions for OSG would have the authority to waive
Surety has settled its claim with the reinstatement of a Principal’s eligibility this requirement for good cause. In
Principal for an amount and on terms for SBA guaranteed bonds should not addition, the discharge in bankruptcy of
accepted by OSG (13 CFR 115.36(b)(2)), depend upon whether the Surety is a the Principal’s indebtedness to the
or the Principal’s indebtedness to the Prior Approval Surety or a PSB Surety, Surety would no longer qualify the
Surety is discharged by operation of law but that the reinstatement conditions Principal for reinstatement.
(e.g., bankruptcy discharge) (13 CFR should be uniform and apply equally to SBA is also proposing to apply the
115.36(b)(4)), or OSG and the Surety both Programs. same criterion on ineligibility and
determine that further bond guarantees Fourth, the rule proposes to modify conditions for reinstatement to both the
are appropriate (13 CFR 115.36(b)(5)). In the criteria for admitting a Surety to Prior Approval Program and the PSB
addition, in the PSB Program, the participate in the Preferred Surety Bond Program. As the same conditions for
current rules provide that the PSB Guarantee Program by increasing the reinstatement would apply to both the
Surety may reinstate a Principal’s Surety’s underwriting limitation, as Prior Approval Program and the PSB
eligibility upon the Surety’s certified by the U.S. Treasury Program, the conditions for
determination that reinstatement is Department on its list of acceptable reinstatement set forth in 13 CFR
appropriate (13 CFR 115.14(b)). sureties on Federal bonds, from at least 115.36(b) and (c) would be moved in
$2 million to at least $6.5 million. This their entirety to 13 CFR 115.14(b) and
SBA is proposing to modify these change would conform the underwriting (c), and the heading of this section
rules in two ways. First, the proposed limitation to the statutory increase made would be changed to ‘‘Loss of
rule would prohibit the reinstatement of by Public Law 112–239 in the maximum Principal’s eligibility for future
a Principal if the Principal, or any of its amount of any Contract or Order for assistance and reinstatement of
Affiliates, had previously defaulted on which SBA may guarantee a bond. All Principal’’.
an SBA guaranteed bond that resulted in PSB Sureties currently participating in Section 115.16(e)(1). SBA is
a Loss (as defined in 13 CFR 115.16) the PSB Program would satisfy this new proposing to revise this provision to
that has not been fully reimbursed to requirement. provide that SBA will reimburse
SBA or if SBA has not been fully amounts actually paid by a Surety for
reimbursed for any Imminent Breach II. Section-By-Section Analysis
specialized services that are provided
payments. The proposed rule would Section 115.11. SBA is proposing to under contract by outside consultants in
provide that the Principal, or any of its revise this Section by including the connection with the processing of a
Affiliates, may be reinstated only if SBA requirement that an applicant have a claim, provided that such services are
has been fully repaid for the Loss or for salaried staff that is employed directly beyond the capability of the Surety’s
the Imminent Breach payment. In (not an agent or other individual or salaried claims staff. The change,
addition, the discharge of the entity under contract with the coupled with the other changes in this
indebtedness in bankruptcy would no applicant) to oversee its underwriting Proposed Rule, clarifies that a Surety
longer qualify the Principal for functions and to perform all claims and cannot outsource routine claims
reinstatement. These changes would recovery functions. This section would functions and responsibilities or include
conform the SBG Program more closely also be revised to provide that final such costs in its reimbursement requests
to SBA’s other financial assistance settlement authority for claims and submitted to SBA under the bond
programs under which an applicant is recovery actions must be vested only in guarantee agreement. With the
ineligible for financial assistance if it the applicant’s salaried staff. In exception of specialized work that falls
has caused a prior loss to the Agency. addition, this section would be revised outside the scope of the routine
See 13 CFR 120.111(q). SBA believes to clarify that the applicant must processing and administration of claims,
that a Principal that has previously continue to comply with SBA’s the expectation is that the Surety will be
caused a Loss to SBA presents a higher standards and procedures for able to perform the claims function at
risk to the Agency and should not underwriting, administration, claims, no cost to the Agency.
receive the benefit of further SBA recovery, and staffing requirements Section 115.16(f)(1). SBA is proposing
financial assistance. Under the proposed while participating in SBA’s Surety to revise this provision to clarify that all
rule, SBA would have the authority to Bond Guarantee Program. costs incurred by the Surety’s salaried
waive this prohibition for good cause. Section 115.13(a). SBA is proposing claims staff, whether or not specifically
For example, if the Principal is able to to revise this section by adding a new allocable to an SBA guaranteed bond,
show that the Loss was attributed to the paragraph (7) to provide that, to be are excluded from the definition of Loss.
acts or omissions of a co-owner who is eligible for an SBA guaranteed bond, Costs incurred by the Surety’s salaried
no longer a part of the business, SBA neither the Principal nor any of its claims staff, like all other overhead of
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could find good cause to reinstate the Affiliates may be ineligible for an SBA the Surety, are the responsibility of the
eligibility of the Principal. PSB Sureties guaranteed bond under the grounds set Surety.
would not be delegated the authority to forth in 13 CFR 115.14. Section 115.18(a)(2). SBA is
make this ‘‘good cause’’ determination, Section 115.14. SBA is proposing to proposing to revise this paragraph to
but would continue to have the modify the criteria regarding the loss of provide that the Surety’s failure to
authority to reinstate the eligibility of a the Principal’s eligibility for future continue to comply with the
Principal when the Surety determines assistance and the conditions for requirements set forth in section 115.11
that further bond guarantees are reinstatement by providing that a are sufficient grounds for refusal to
appropriate for those Principals deemed Principal loses eligibility for further issue further guarantees, or in the case

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19888 Federal Register / Vol. 80, No. 71 / Tuesday, April 14, 2015 / Proposed Rules

of a PSB Surety, termination of Executive Order 13132 § 115.11 Applying to participate in the
preferred status. Surety Bond Guarantee Program.
SBA has determined that this
Section 115.36. By including the proposed rule will not have substantial, * * * At a minimum, each applicant
conditions for reinstatement and the direct effects on the States, on the must have salaried staff that is
standard for underwriting after relationship between the national employed directly (not an agent or other
reinstatement in § 115.14(b) and (c), this government and the States, or on the individual or entity under contract with
rule proposes to rename the heading of distribution of power and the applicant) to oversee its
this section to ‘‘§ 115.36 Indemnity responsibilities among the various underwriting function and to perform
settlements’’, delete ‘‘(a) Indemnity levels of government. Therefore, for all claims and recovery functions. Final
settlements.’’, renumber paragraphs purposes of Executive Order 13132, settlement authority for claims and
‘‘(1)’’, ‘‘(2)’’, and ‘‘(3)’’, as ‘‘(a)’’, ‘‘(b)’’, SBA has determined that this proposed recovery must be vested only in the
and ‘‘(c)’’, respectively, and remove rule has no federalism implications applicant’s claims staff. The applicant
paragraphs (b) and (c). warranting preparation of a federalism must continue to comply with SBA’s
Section 115.60(a)(1). SBA is assessment. standards and procedures for
proposing to conform this provision to underwriting, administration, claims,
the statutory increase in the maximum Paperwork Reduction Act, 44 U.S.C. recovery, and staffing requirements
contract amount for which a bond may Ch. 35 while participating in SBA’s Surety
be guaranteed by removing For the purpose of the Paperwork Bond Guarantee Programs.
‘‘$2,000,000’’ and inserting Reduction Act, 44 U.S.C., Chapter 35, ■ 3. Amend § 115.13 by adding
‘‘$6,500,000’’ in its place. SBA has determined that this proposed paragraph (a)(7) to read as follows:
Section 115.60(a)(5). By including in rule will not impose any new reporting § 115.13 Eligibility of Principal.
§ 115.11 the requirement that all or recordkeeping requirements.
* * * * *
Sureties vest final settlement authority (7) No loss of eligibility. Neither the
Initial Regulatory Flexibility Analysis
for claims and recovery only in their Principal nor any of its Affiliates is
salaried claims staff, this rule proposes The Regulatory Flexibility Act (RFA)
5 U.S.C. 601, requires administrative ineligible for an SBA-guaranteed bond
to remove 115.60(a)(5) and renumber under section 115.14.
the existing paragraph 115.60(a)(6) agencies to consider the effect of their
■ 4. Amend § 115.14 to read as follows:
accordingly. Compliance with Executive actions on small entities, small non-
■ a. Revise the section heading, and
Orders 12866, 13563, 12988, and 13132, profit enterprises, and small local
paragraphs (a)(4) and (b).
the Paperwork Reduction Act (44 U.S.C. governments. Pursuant to the RFA,
■ b. Add paragraph (c).
Ch. 35) and the Regulatory Flexibility when an agency issues a rulemaking,
Act (5 U.S.C. 601–612). the agency must prepare a regulatory § 115.14 Loss of Principal’s eligibility for
flexibility analysis which describes the future assistance and reinstatement of
Executive Order 12866 impact of the rule on small entities. Principal.
The Office of Management and Budget However, section 605 of the RFA allows * * * * *
(OMB) has determined that this an agency to certify a rule, in lieu of (4) The Principal, or any of its
proposed rule does not constitute a preparing an analysis, if the rulemaking Affiliates, has defaulted on an SBA-
significant regulatory action under is not expected to have a significant guaranteed bond resulting in a Loss that
Executive Order 12866. This rule is also economic impact on a substantial has not been fully reimbursed to SBA,
not a major rule under the number of small entities. There are 23 or SBA has not been fully reimbursed
Congressional Review Act (5 U.S.C. Sureties that participate in the SBA for any Imminent Breach payments.
800). program, and no part of this proposed * * * * *
rule would impose any significant (b) Reinstatement of Principal’s
Executive Order 13563 additional cost or burden on them. eligibility. At any time after a Principal
In accordance with Executive Order Consequently, this proposed rule does becomes ineligible for further bond
13563, SBA discussed with several not meet the significant economic guarantees under § 115.14(a):
surety companies issues regarding the impact on a substantial number of small (1) A Prior Approval Surety may
SGB Program regulations. In particular, businesses criterion anticipated by the recommend that such Principal’s
SBA discussed the underwriting and Regulatory Flexibility Act. eligibility be reinstated, and OSG may
claims staffing requirements that List of Subjects in 13 CFR Part 115 agree to reinstate the Principal if:
sureties must meet in order to (i) The Surety has settled its claim
participate in SBA’s SGB Program. SBA Claims, Reporting and recordkeeping with the Principal, or any of its
also discussed with these companies the requirements, Small businesses, Surety Affiliates, for an amount that results in
conditions for reimbursement of the bonds. no Loss to SBA or in no amount owed
costs incurred by their claims staffs. For the reasons cited above, SBA for Imminent Breach payments, or OSG
Generally, the sureties responded proposes to amend 13 CFR part 115 as finds good cause for reinstating the
favorably to SBA’s position that changes follows: Principal notwithstanding the Loss to
were necessary to clarify or amend the SBA or amount owed for Imminent
regulations on these issues. PART 115—SURETY BOND Breach payments; or
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GUARANTEE (ii) OSG and the Surety determine
Executive Order 12988
that further bond guarantees are
■ 1. The authority citation for Part 115
This action meets applicable appropriate after the Principal was
continues to read as follows:
standards set forth in Sections 3(a) and deemed ineligible for further SBA bond
3(b)(2) of Executive Order 12988, Civil Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, guarantees under paragraph (1), (2), (3),
Justice Reform, to minimize litigation, 687c, 694a, 694b note; and Pub. L. 110–246, (5) or (6) of section 115.14(a).
eliminate ambiguity, and reduce Sec. 12079, 122 Stat. 1651.
(2) A PSB Surety may:
burden. The action does not have ■ 2. Amend § 115.11 by adding three (i) Recommend that such Principal’s
retroactive or preemptive effect. sentences at the end to read as follows: eligibility be reinstated, and OSG may

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Document Created: 2015-12-18 11:09:58
Document Modified: 2015-12-18 11:09:58
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Proposed Rules
Action		Proposed rule.
Dates		SBA must receive comments to this proposed rule on or before June 15, 2015.
Contact		Barbara J. Brannan, Office of Surety Guarantees, (202) 205-6545 or email: [email protected]
FR Citation		80 FR 19886
RIN Number		3245-AG70
CFR Associated		Claims; Reporting and Recordkeeping Requirements; Small Businesses and Surety Bonds