81_FR_41546 81 FR 41423 - Affiliation for Business Loan Programs and Surety Bond Guarantee Program

81 FR 41423 - Affiliation for Business Loan Programs and Surety Bond Guarantee Program

SMALL BUSINESS ADMINISTRATION

Federal Register Volume 81, Issue 123 (June 27, 2016)

Page Range41423-41429
FR Document2016-14984

This final rule amends the regulations pertaining to the determination of size eligibility based on affiliation by creating distinctive requirements for small business applicants for assistance from the Business Loan, Disaster Loan and Surety Bond Guarantee Program (``SBG''). For purposes of this rule, the Business Loan Programs consist of the 7(a) Loan Program, the Microloan Program, the Intermediary Lending Pilot Program (``ILP''), and the Development Company Loan Program (``504 Loan Program''). Note: the Intermediary Lending Pilot Program was inadvertently left out of the proposed rule. There are currently intermediaries with revolving funds for eligible small businesses, so the program has been included in this final rule. The Disaster Loan Programs consist of Physical Disaster Business Loans, Economic Injury Disaster Loans, Military Reservist Economic Injury Disaster Loans, and Immediate Disaster Assistance Program loans. This rule redefines and establishes separate affiliation guidance applicable only to small business applicants in these Programs.

Federal Register, Volume 81 Issue 123 (Monday, June 27, 2016)
[Federal Register Volume 81, Number 123 (Monday, June 27, 2016)]
[Rules and Regulations]
[Pages 41423-41429]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-14984]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 109, 115, 120, and 121

RIN 3245-AG73


Affiliation for Business Loan Programs and Surety Bond Guarantee 
Program

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: This final rule amends the regulations pertaining to the 
determination of size eligibility based on affiliation by creating 
distinctive requirements for small business applicants for assistance 
from the Business Loan, Disaster Loan and Surety Bond Guarantee Program 
(``SBG''). For purposes of this rule, the Business Loan Programs 
consist of the 7(a) Loan Program, the Microloan Program, the 
Intermediary Lending Pilot Program (``ILP''), and the Development 
Company Loan Program (``504 Loan Program''). Note: the Intermediary 
Lending Pilot Program was inadvertently left out of the proposed rule. 
There are currently intermediaries with revolving funds for eligible 
small businesses, so the program has been included in this final rule. 
The Disaster Loan Programs consist of Physical Disaster Business Loans, 
Economic Injury Disaster Loans, Military Reservist Economic Injury

[[Page 41424]]

Disaster Loans, and Immediate Disaster Assistance Program loans. This 
rule redefines and establishes separate affiliation guidance applicable 
only to small business applicants in these Programs.

DATES: This rule is effective July 27, 2016.

FOR FURTHER INFORMATION CONTACT: Dianna Seaborn, Office of Financial 
Assistance, Office of Capital Access, Small Business Administration, 
409 Third Street SW., Washington, DC 20416; telephone 202-205-3645.

SUPPLEMENTARY INFORMATION: 

I. Background

    SBA is revising its regulations on affiliation for the Business 
Loan, Disaster Loan, and SBG Programs by separating and distinguishing 
the rules from the Agency's government contracting, business 
development and other programs. This change streamlines the rules to 
comply with Executive Order 13563. This Executive Order ``Improving 
Regulation and Regulatory Review,'' provides that agencies ``must 
identify and use the best, most innovative, and least burdensome tools 
for achieving regulatory ends.'' (Emphasis added). Executive Order 
13563 further provides that ``[t]o facilitate the periodic review of 
existing significant regulations, agencies shall consider how best to 
promote retrospective analysis of rules that may be outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' (Emphasis added).
    The loan programs authorized by the Small Business Act (Act), 15 
U.S.C. 631 et seq., that are affected by this final rule are: (1) The 
7(a) Loan Program authorized by Section 7(a) of the Act; (2) the 
Business Disaster Loan (``BDL'') Program authorized by Sections 7(b) 
and 42 of the Act; (3) the Microloan Program authorized by Section 7(m) 
of the Act; and (4) the ILP Program authorized by Section 7(l) of the 
Act. The 504 Loan Program, which is authorized by Title V of the Small 
Business Investment Act of 1958 (the ``SBIA''), as amended, 15 U.S.C. 
695 et seq., is also affected. Finally, this rule affects the Surety 
Bond Guarantee (``SBG'') Program, authorized by section 411 of the 
SBIA. A detailed description of each program was included in the 
proposed rule.
    On October 2, 2015, SBA published a proposed rule with request for 
comments in the Federal Register to identify changes to the rules on to 
simplify and streamline the application review process for the Business 
Loan, Disaster Loan, and SBG Programs. (80 FR 59667, October 2, 2015). 
These proposed affiliation changes apply only to applicants and not to 
SBA participants or CDCs in the programs. The comment period ended 
December 1, 2015.

II. Summary of Comments

    The Agency received and reviewed the public comments on its 
affiliation rules for 13 CFR parts 115, 120 and 121 in a proposed rule 
(80 FR 59667, October 2, 2015). The following narrative summarizes the 
comments reviewed and specifies the final rule changes regarding size 
standards based on principles of affiliation involving applicants to 
the Business Loan, Disaster Loan, and SBG Programs.
    Size based on affiliation for applicants to the Business Loan, 
Disaster Loan, and SBG Programs will be addressed separately in a new 
Sec.  121.301(f) to distinguish them from affiliation requirements for 
government contracting, business development, and SBA's other programs. 
These changes impact only the small business applicants and not 
lenders, CDCs, and surety bond companies.
    SBA received 160 comments related to the proposed affiliation 
standards for the Business Loan, Disaster Loan, and SBG Programs. Of 
the comments received, 128 comments were from financial institutions 
(lenders and Certified Development Companies), 15 comments were from 
lender service providers, 4 comments were from businesses (accounting 
and consulting firms), 7 comments were from trade associations, 3 
comments were from law firms, 2 comments were from franchises, and 1 
comment was from an individual that did not disclose an organizational 
type. All but 5 commenters indicated support for the majority of the 
proposed affiliation rule. There were 4 opposing comments related only 
to proposed changes to 121.301(f)(5), affiliation based on franchise 
and license agreements, and a 5th comment expressing concern about 
compliance regarding the affiliation rules for Surety Bonds in 
conjunction with federal contracts.
    Thirty-four commenters requested modification of the defined 
management officials in Sec.  121.301(f)(1) and (f)(3).
    Ninety-six commenters requested additional clarification in the 
language proposed defining who SBA includes for the identity of 
interest test in Sec.  121.301(f)(4), while 36 requested that it be 
eliminated in its entirety.
    One hundred thirty-eight commenters supported changes to 
121.301(f)(5), ``Affiliation based on franchise and license 
agreements,'' specifically requesting further modifications and clarity 
as to how SBA aggregates franchisees/licensees with franchisors/
licensors as affiliates to determine whether the small business 
applicant (franchisee/licensee) is a small, independent business. The 
comments opposing franchise affiliation changes were received from a 
consulting group, an individual, a law firm, and one lender. These 
comments revolved around franchise disclosures and relationship issues 
under the jurisdiction of the FTC, and the lack of clarity
    Thirty-seven commenters requested removal of the ``totality of 
circumstances'' analysis in Sec.  121.301(f)(6), while 92 commenters 
recommended examples and/or greater clarity for when and how SBA will 
apply this analysis. SBA's responses to these comments are detailed in 
the following sections.

III. Section-by-Section Analysis of Comments and Changes

    Section 109.20. In Sec.  109.20 Definitions, SBA proposes to 
include an amendment for the definition of Affiliate for the ILP 
Program from 13 CFR 121.103 to Sec.  121.301. SBA did not receive 
comments regarding this program as it is not currently funded.
    Section 115.10. In Sec.  115.10 Definitions, SBA proposed to amend 
the definition of Affiliate for the SBG Program from the general 13 CFR 
121 to the more specific Sec.  121.301. One comment expressed concern 
about the potential necessity for small business contractors to comply 
with the affiliation rules for contracting, as well as the separate 
rules for Surety Bond Guarantees.
    SBA data indicates that the significant majority of surety bond 
guarantees are for non-federal contracts which will benefit from this 
simplified rule. For the federal contract recipients, the existing 
contract rules will still apply, and if eligible thereunder, would also 
be eligible under this rule for the Surety Bond Guarantee. The 
provision is adopted as proposed.
    Section 120.1700. Definitions used in subpart J. SBA proposed to 
amend the definition of Affiliate in Sec.  121.1700 for purposes of the 
First Lien Position 504 Loan Pooling Program. However, after further 
review, SBA determined that this affiliation rule for the Business 
Loan, Disaster Loan and Surety Bond Programs does not apply to 13 CFR 
120.1700. SBA is not adopting the proposed change.
    Section 121.103(a)(8). SBA proposed establishing the new Sec.  
121.103(a)(8) to

[[Page 41425]]

advise the public that the principles of affiliation for applicants in 
the Business Loan, Disaster Loan and SBG Programs will be moved to a 
new Sec.  121.301(f). The final rule clarifies that Sec.  121.301(f) 
applies only to applicants for these specific programs. Affiliation for 
SBA's other programs remains unchanged.
    Section 121.301(f). SBA proposed establishing the new Sec.  
121.301(f) where the principles for determining affiliation to qualify 
applicant business concerns as small, and therefore eligible to apply 
for the Business Loan, Disaster Loan, and SBG Programs would be 
located. The SBA has established this separate subsection because the 
analysis of affiliation under the Business Loan, Disaster Loan and 
Surety Bond Programs is different from the analysis for contracting 
programs. The affiliation guidance for all other SBA programs, 
including the government contracting and business development programs, 
remains unchanged.
    Section 121.301(f)(1). SBA proposed establishing the new Sec.  
121.301(f)(1) Affiliation Based on Ownership, where SBA would determine 
that control exists based on ownership when: (1) A person owns or has 
the power to control more than 50% of the voting equity of a concern; 
or (2) if no one person owns or has the power to control more than 50% 
of the voting equity of the concern, SBA would deem the small business 
to be controlled by either the President, Chairman of the Board, Chief 
Executive Officer (CEO) of the concern, or other officers, managing 
members, partners, or directors who control the management of the 
concern. A total of 155 commenters supported a change in the rule, with 
34 of the commenters proposing further modification to limit the scope 
to only the President, CEO, Managing Partner, or Principal Manager. The 
comments for limiting scope were not adopted as it would not include 
all potential management and ownership organizational structures. Based 
on the elimination of the totality of circumstances, more fully 
discussed in Sec.  121.301(f)(6), SBA proposes to include in this 
section that SBA finds control when a minority shareholder has the 
ability, under the concern's charter, by-laws, or shareholder's 
agreement, to prevent a quorum or otherwise block action by the board 
of directors or shareholders. SBA is adopting the regulation with the 
inclusion of the Board and other shareholders.
    Section 121.301(f)(2). SBA is establishing the new Sec.  
121.301(f)(2) Affiliation arising under stock options, convertible 
securities, and agreements to merge, where SBA would duplicate language 
from Sec.  121.103(d). Other than duplicating the language in a 
different section of the regulation, SBA did not change the existing 
principles regarding affiliation arising under stock options, 
convertible securities, and agreements to merge currently found in 
Sec.  121.103(d). A total of 155 commenters supported keeping this the 
same, and repeating the language in Sec.  121.301(f)(2) for the 
Business Loan, Disaster Loan, and SBG Programs. There were no opposing 
comments. SBA is adopting the rule as proposed.
    Section 121.301(f)(3). SBA proposed establishing the new Sec.  
121.301(f)(3) Affiliation based on management, where SBA will utilize 
the same principles of affiliation for common management set forth in 
Sec.  121.103. Thirty-four commenters proposed limiting the scope of 
common management consideration to only the President, CEO, Managing 
Partner, or Principal Manager. Commenters did not include reasons for 
the requested elimination of Board members. SBA does not adopt the 
request for limiting scope, as they do not include consideration of all 
potential management organizational structures. In addition, SBA has 
modified the language to clarify that management agreements are 
included in the types of managers and management subject to 
consideration under this regulation. Details on the types of management 
agreements that result in determinations of affiliation will be 
provided in SBA Loan Program Requirements. SBA is adopting the rule 
with refinements that include management by agreement.
    Section 121.301(f)(4). SBA proposed establishing the new Sec.  
121.301(f)(4) Affiliation based on identity of interest, where SBA 
would re-define the presumptions underlying the principles of 
establishing an identity of interest. The proposed rule provided that 
SBA would presume affiliation between two or more persons with an 
identity of interest, and the presumption could be rebutted with 
evidence showing that the interests are separate. The proposed rule 
provided further that SBA would presume an identity of interest between 
close relatives, as defined in 13 CFR 120.10. The proposed rule 
deviated from the existing rule in 13 CFR 121.103(f) by not 
specifically citing common investments and economic dependence as bases 
for finding an identity of interest. There were 155 commenters 
supporting a separate affiliation rule for identity of interest for the 
Business Loan and SBG Programs. Ninety-six commenters recommended 
additional clarity from SBA on the definition on ``identity of 
interest,'' as to the aggregation of unrelated parties and former 
employers. Thirty-six commenters requested elimination of the 
``identity of interest'' regulation. SBA reviewed the language and 
disagrees with the request to eliminate the language related to 
identity of interest between close relatives, but otherwise agrees with 
the commenters' suggestion to remove other bases for affiliation 
through identity of interest. SBA has revised the proposed rule by 
retaining identity of interest between close relatives but otherwise 
eliminating discussion of identity of interest for other reasons.
    Section 121.301(f)(5). SBA proposed establishing the new Sec.  
121.301(f)(5) Affiliation based on franchise and license agreements, 
where SBA proposed language that would limit franchise or license 
agreement reviews to the applicant franchisee or licensee and the 
franchisor, and not consider any franchise or license relationship of 
an affiliate of the applicant. A total of 138 commenters supported this 
change to SBA's treatment of franchisee affiliation with franchisors. 
The majority of commenters, however, expressed concern that the 
proposed rule was confusing, and others commented that the proposed 
rule did not go far enough to resolve the challenges and costs involved 
in the review of franchise relationships. Some commenters stated the 
proposed rule would not eliminate inconsistent determinations of 
franchise affiliation by SBA. Partnering with internal and external 
stakeholders, SBA made an extensive effort to better understand the 
burden imposed by existing processes, to identify relevant risks and to 
develop meaningful improvements. Along with public comments, SBA 
received specific comment from the office of Steve Chabot, Chairman of 
the House Small Business Committee, encouraging SBA to streamline and 
improve how best to address franchised business size relative to 
affiliation.
    The current regulatory language in Sec.  121.103(f) recognizes that 
``the restraints imposed on a franchisee or licensee by its franchise 
or license agreement relating to standardized quality, advertising, 
accounting format, and other similar provisions, generally will not be 
considered in determining whether the franchisor or licensor is 
affiliated with the franchisee or licensee provided the franchisee or 
licensee has the right to profit from its efforts and bears the risk of 
loss commensurate with ownership.'' The current regulation continues, 
stating that ``affiliation may arise, however, through other means, 
such as common ownership, common management, or

[[Page 41426]]

excessive restrictions upon the sale of the franchise interest.'' 
Commenters indicated that SBA's determination of the types of controls 
that do or do not constitute affiliation is not clear and is 
inconsistent with the overarching concept that many restraints are 
generally not considered when determining affiliation. Some commenters 
recommended that the regulation be amended to delete the provision that 
affiliation would be found based on restrictions in the agreement so 
long as the franchisee continues to have the right to profit from its 
efforts and bears the risk of loss commensurate with ownership. 
Additionally, many commenters recommended language be included in the 
regulatory text to clarify SBA's intent to only review agreements of 
the ``applicant'' and not review any agreements of affiliated entities. 
These commenters recommended adding language to the regulatory text 
similar to what was included in the Supplementary Information in the 
proposed rule.
    Based on the volume of comments received in the current and 
previous rulemaking requests, and to provide consistency in its 
application of the principles of affiliation involving franchise or 
license agreements, SBA is removing regulatory text that only addressed 
certain types of restraint. The regulatory changes clarify that SBA 
does not consider that franchise or license relationships create 
affiliation, provided the franchisee/licensee has the right to profit 
from its efforts, and bears the risk of loss commensurate with 
ownership. SBA will provide guidance on the franchisee/licensee's right 
to profit from its efforts and bear the risk of loss commensurate with 
ownership in its Standard Operating Procedure (SOP) 50 10.
    SBA also is adding a sentence to the end of the regulatory text to 
clarify its intent that only franchise or license relationships of the 
applicant will be considered, not those of any of the applicant's 
affiliates.
    Section 121.301(f)(6). SBA proposed establishing the new Sec.  
121.301(f)(6) Affiliation based on SBA's determination of the totality 
of circumstances, where SBA proposed to retain finding of affiliation 
based on the totality of circumstances similar to the regulations 
currently found in Sec.  121.103(a)(5). There were 97 commenters 
requesting elimination of this rule, and 37 commenters indicated that 
including this requirement as a factor for determining affiliation 
would contravene SBA's stated intent of providing a bright line test of 
affiliation. Commenters requested examples of when SBA would apply the 
test so that participants could better understand how this factor would 
impact eligibility decisions. SBA reviewed and considered the concerns 
identified regarding the potential overarching but undefined 
aggregation of circumstances. SBA agrees that the prior rules in 
proposed Sec.  121.301(f)(1)-(5) and (7)-(8) provide specificity. 
Generally examples reviewed are negative control, and control through 
management agreement. Rather than include examples here, SBA is 
removing the totality of the circumstances criterion, but provides 
specific guidance in Sec.  121.301(f)(1) and (f)(3) to address negative 
control, and control through management agreements that would have been 
included in this section. SBA agrees with the commenters' suggestions 
and will remove this paragraph from the final rule. Therefore proposed 
Sec.  121.301(f)(7) and (f)(8) are renumbered Sec.  121.301(f)(6) and 
(f)(7).
    Section 121.301(f)(7). SBA proposed establishing the new Sec.  
121.301(f)(7) Determining the concern's size, where SBA states that SBA 
counts receipts, employees, or alternate size standards of a concern 
and its affiliates. There were no specific objections regarding this 
provision. SBA is adopting the rule as proposed, and renumbered as 
Sec.  121.301(f)(6).
    Section 121.301(f)(8). SBA proposed establishing the new Sec.  
121.301(f)(8) Exceptions to affiliation, where SBA would incorporate 
the exceptions to affiliation set forth in 13 CFR 121.103(b). There 
were no specific objections regarding this provision. The proposed rule 
is adopted as written, and renumbered as Sec.  121.301(f)(7).
    Finally, SBA proposed not to apply several current principles of 
affiliation that apply in the federal contracting and business 
development programs to the Business Loan, Disaster Loan, and SBG 
Programs. Specifically, SBA proposed to eliminate applying affiliation 
based on a newly organized concern (see Sec.  121.103(g)) and joint 
ventures (see Sec.  121.103(h)). One purpose of the newly organized 
concern rule is to prevent former small businesses from creating spin-
off companies in order to continue to perform on small business 
contracts or receive other contracting benefits. While this affiliation 
principle is appropriate for federal contracting, it is generally not 
applicable to the Business Loan, Disaster Loan, or SBG Programs. The 
only responsible party or parties for an SBA loan are the owners or 
guarantors executing debt instruments on behalf of the applicant 
business. Generally, former employers of small business applicants are 
not obligors nor are they guarantors on extensions of credit to SBA 
applicants. There were no specific objections to the elimination of 
newly organized concerns or joint ventures as affiliates for purposes 
of these programs. SBA adopts the proposed exclusion from the rule on 
affiliation for the Business Loan, Disaster Loan, and SBA Programs.
    With respect to joint ventures, these partnerships form when two or 
more businesses combine their efforts in order to perform on a federal 
contract or receive other contract assistance. SBA does not consider 
affiliation based on the joint venture to be of significant concern to 
the Business Loan or Disaster Loan Programs because a loan to any joint 
venture will require all members of the joint venture to accept full 
responsibility for loan guarantee liability. Also, agency records 
indicate that applicants for assistance under SBA Business Loan and 
Disaster Loan Programs are rarely, if ever, joint ventures, and, 
therefore, this provision is unnecessary. For the Surety Bond Guarantee 
Program, the guarantee is on the bond, not a contract. In any joint 
venture where the surety company requests a bond guarantee, each member 
of the joint venture is required to accept full responsibility for the 
bond guarantee liability.
    SBA also proposed to omit ``negative control'' as a stand-alone 
factor in determining affiliation for the purpose of loan eligibility. 
Pursuant to 13 CFR 121.103(a)(3), negative control may exist where a 
minority shareholder can block certain actions by the board of 
directors. SBA received many comments requesting clarity or removal of 
Sec.  121.301(f)(6) Affiliation based on SBA's determination of the 
totality of circumstances. SBA agreed to the removal of Sec.  
121.301(f)(6), and included additional specific guidance as to negative 
control through minority ownership and by management agreement in Sec.  
121.301(f)(1) and (f)(3) respectively.

IV. 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 
final rule is a ``significant'' regulatory action for the purposes of 
Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. However, this is not a major

[[Page 41427]]

rule under the Congressional Review Act, 5 U.S.C. 800.

Regulatory Impact Analysis

1. Is there a need for this regulatory action?
    The Agency believes it needs to reduce regulatory burdens and 
expand its Business Loan, Disaster Loan, and SBG Programs by 
streamlining delivery, lowering costs, and facilitating job creation. 
As noted above, responses received from the Federal Register proposed 
rule notice regarding SBA rules on affiliation were in favor of 
simplified rules that enhance understanding and align with normal 
commercial industry practices. Specifically of the 160 commenters for 
the proposed rule on affiliation, 4 comments were from businesses 
(accounting and consulting firms), 3 comments were from law firms, and 
1 comment was from an individual that did not disclose their 
organizational type. All of the small business comments showed support 
for the affiliation rule. Small business applicants will be assisted by 
this streamlining of requirements because it will be easier and more 
cost effective for a lender to research whether the applicant small 
business controls or is controlled by large companies which would 
jeopardize their eligibility. Higher lender costs potentially result in 
greater costs to the applicant small business. No comments were 
received from small businesses on the regulatory impact analysis during 
the proposed rule comment period.
2. What are the potential benefits and costs of this regulatory action?
    This rule will eliminate unnecessary cost burdens on loan 
applicants' and lenders' participation in SBA-guaranteed loans. This 
final rule exempts the Business Loan, Disaster Loan, and SBG Programs 
from certain government contracting rules that determine whether an 
entity is deemed affiliated with an applicant. These general 
affiliation rules apply to federal contracting to ensure that small 
businesses (and not another entity) receive and perform a federal 
contract when a preference for small businesses is provided. Many of 
these general principles of affiliation (e.g., newly organized concern) 
are not applicable to the Business Loan, Disaster Loan, or SBG 
Programs. SBA reviewed five years of data from the SBA Loan Guaranty 
Processing Center. The data specifically tracked reasons each loan 
would have been screened out. During the five-year period, based on the 
screen out reasons specific to affiliation, 1,379 small businesses 
failed to submit affiliate financials, and 1,363 needed clarifications 
or additional information to complete processing. SBA has determined 
that the proposed simplification of size based on affiliation will 
eliminate confusion, and save time and costs for the small business 
applicants and the lenders. Additionally this regulatory action will 
improve SBA processing efficiency and turnaround times.
3. What alternatives have been considered?
    As indicated above, on October 2, 2015, the Agency issued a 
proposed rule for comment in the Federal Register to identify several 
changes intended to reinvigorate the Business Loan, Disaster Loan, and 
SBG Programs by eliminating unnecessary compliance burdens and loan 
eligibility restrictions. The Agency previously published in the 
Federal Register on February 25, 2013, a prior proposed rule for 
comment on 7(a) and 504 loan program requirements which had also 
included proposed changes to the affiliation rules for loan programs. 
See Proposed Rule: 504 and 7(a) Loan Programs Updates, 78 FR 12633 
(February 25, 2013). Included in these proposals was an alternate 
affiliation definition. After a full comment period ending April 26, 
2013, and careful consideration of all comments, SBA decided to further 
deliberate and consider issues of redefining affiliation for the 
Business Loan Programs and SBG Program. As a result, no changes were 
adopted regarding affiliation in the 7(a) and 504 loan program final 
rule. See Final Rule: 504 and 7(a) Loan Programs Updates, 78 FR 15641 
(March 21, 2014).
    This final rule presents a set of requirements to determine 
affiliation based on the precedent separating the Small Business 
Innovation Research (SBIR) and Small Business Technology Transfer 
(STTR) programs from the government contracting standards. SBA has 
reviewed extensive public comments and suggestions in developing this 
final rule and considered changes needed to mitigate identified 
economic risk to the taxpayers and reduce waste, fraud, and abuse.

Executive Order 13563

    A description of the need for this regulatory action and benefits 
and costs associated with this action, including possible 
distributional impacts that relate to Executive Order 13563, are 
included above in the Regulatory Impact Analysis under Executive Order 
12866. The Business Loan Programs operate through the Agency's lending 
partners, which are 7(a) Lenders for the 7(a) Loan Program, 
Intermediaries for the Microloan Program and ILP Program, and CDCs for 
the 504 Loan Program. The Agency participated in public forums and 
meetings with NAGGL board members and program participants at industry 
conferences from the Fall of 2014 through Spring of 2015 which allowed 
it to reach trade associations and hundreds of its lending partners 
from which it gained valuable insight, guidance, and suggestions. The 
Agency's outreach efforts to engage stakeholders before proposing this 
rule was extensive, and concluded with the comment period.

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

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

    The SBA has determined that this final rule would not impose 
additional reporting and recordkeeping requirements under the Paperwork 
Reduction Act (PRA). In fact, those individuals and entities that SBA 
considers potential affiliates has been refined and reduced for the 
Business Loan, Disaster Loan, and the SBG Programs, which could result 
in reduced reporting and recordkeeping. Participants in SBA's 7(a) Loan 
Program will continue to report any affiliates of their business on SBA 
Form 1919 (OMB Control No. 3245-0348), and participants in SBA's 504 
Loan Program will continue to report affiliates on SBA Form 1244 (OMB 
Control No. 3245-0071). EIDL Program participants will continue to 
report affiliates on SBA Form 5 (OMB Control No. 3245-0017), and SBG 
Program participants will continue to report affiliates on SBA

[[Page 41428]]

Form 994 (OMB Control No. 3245-0007).

Regulatory Flexibility Act, 5 U.S.C. 601- 612

    When an agency issues a rulemaking, the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601-612, requires the agency to ``prepare and make 
available for public comment a final regulatory analysis'' which will 
``describe the impact of the final rule on small entities.'' 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.
    The rulemaking will positively impact all of the approximately 
4,000 7(a) Lenders (some of which are small), 35 Intermediary Lending 
Pilot lenders, approximately 260 CDCs (all of which are small), 145 
Microloan Intermediaries, and 23 Sureties in the SBG Program. The final 
rule will reduce the burden on program participants. SBA has determined 
that the streamlining of certain program process requirements through 
this modification of eligibility based on affiliation will present no 
adverse or significant impact, including costs for the small business 
borrower, lender, or CDC. This proposal presents a best practice rule 
that removes unnecessary regulatory burdens, increases access to 
capital for small businesses and facilitates American job preservation 
and creation. SBA has determined that there is no significant impact on 
a substantial number of small entities.
    Small business applicants will be assisted by this streamlining of 
requirements because it will be easier and more cost effective for 
lenders to identify whether applicant small businesses control or are 
controlled by other companies that would jeopardize eligibility. SBA 
reviewed five years of data from the SBA Loan Guaranty Processing 
Center. The data specifically tracked reasons for loan screen outs that 
delayed processing. During the five-year period based on the screen out 
reasons specific to affiliation, the processing was delayed for over 
2,600 loan applicants. SBA believes that the proposed simplified rules 
on affiliation provide participants with needed clarity that results in 
reduction of the paperwork and review time required to make accurate 
determinations. The time/cost benefit for business applicants and 
participants is substantial. Additionally this regulatory action will 
improve SBA processing efficiency and turnaround times.
    The SBA Administrator certified to the Chief Counsel for Advocacy 
of the SBA that this rule, if adopted, would not have a significant 
economic impact on a substantial number of small entities. As such, the 
Chief Counsel certifies that this rule will not have a significant 
impact on a substantial number of small entities.

List of Subjects

13 CFR Part 109

    Community development, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.

13 CFR Part 115

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

13 CFR Part 120

    Individuals with disabilities, Loan programs--business, Reporting 
and recordkeeping requirements, Small businesses.

13 CFR Part 121

    Grant programs--business, Individuals with disabilities, Loan 
programs--business, Small businesses.

    For the reasons stated in the preamble, the Small Business 
Administration amends 13 CFR parts 109, 115, 120, and 121 as follows:

PART 109--INTERMEDIARY LENDING PILOT PROGRAM

0
1. The authority citation for 13 CFR part 109 continues to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), (b)(7), and 636(1).

0
2. Amend Sec.  109.20 to revise the definition of ``Affiliate'' to read 
as follows:


Sec.  109.20  Definitions.

    Affiliate is defined in Sec.  121.301(f) of this chapter.
* * * * *

PART 115--SURETY BOND GUARANTEE

0
3. The authority citation for 13 CFR 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
4. Amend Sec.  115.10 to revise the definition of ``Affiliate'' to read 
as follows:


Sec.  115.10  Definitions.

    Affiliate is defined in Sec.  121.301(f) of this chapter.
* * * * *

PART 120--BUSINESS LOANS

0
5. The authority citation for 13 CFR part 120 continues to read as 
follows:

    Authority:  15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note, 
636(a), (h), and (m), 650, 687(f), 696(3), and 697(a) and (e); Pub. 
L. 111-5, 123 Stat. 115, Pub. L. 111-240, 124 Stat. 2504.

0
6. Revise the first sentence of Sec.  120.151 to read as follows:


Sec.  120.151  What is the statutory limit for total loans to a 
Borrower?

    The aggregate amount of the SBA portions of all loans to a single 
Borrower, including the Borrower's affiliates as defined in Sec.  
121.301(f) of this chapter, must not exceed a guaranty amount of 
$3,750,000, except as otherwise authorized by statute for a specific 
program. * * *

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
7. The authority citation for 13 CFR part 121 continues to read as 
follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 662, and 694a(9).

0
8. Amend Sec.  121.103 to add paragraph (a)(8) to read as follows:


Sec.  121.103  How does SBA determine affiliation?

    (a) * * *
    (8) For applicants in SBA's Business Loan, Disaster Loan, and 
Surety Bond Guarantee Programs, the size standards and bases for 
affiliation are set forth in Sec.  121.301.
* * * * *
0
9. Amend Sec.  121.301 to revise the section heading and to add 
paragraph (f) to read as follows:


Sec.  121.301  What size standards and affiliation principles are 
applicable to financial assistance programs?

* * * * *
    (f) Concerns and entities are affiliates of each other when one 
controls or has the power to control the other, or a third party or 
parties controls or has the power to control both. It does not matter 
whether control is exercised, so long as the power to control exists. 
Affiliation under any of the circumstances described below is 
sufficient to establish affiliation for applicants for SBA's Business 
Loan, Disaster Loan, and Surety Bond Programs. For this rule, the 
Business Loan Programs consist of the 7(a) Loan Program, the Microloan 
Program, the Intermediary Lending Pilot Program, and the Development 
Company Loan Program (``504 Loan Program''). The Disaster Loan Programs 
consist of Physical Disaster Business

[[Page 41429]]

Loans, Economic Injury Disaster Loans, Military Reservist Economic 
Injury Disaster Loans, and Immediate Disaster Assistance Program loans. 
The following principles apply for the Business Loan, Disaster Loan, 
and Surety Bond Guarantee Programs:
    (1) Affiliation based on ownership. For determining affiliation 
based on equity ownership, a concern is an affiliate of an individual, 
concern, or entity that owns or has the power to control more than 50 
percent of the concern's voting equity. If no individual, concern, or 
entity is found to control, SBA will deem the Board of Directors or 
President or Chief Executive Officer (CEO) (or other officers, managing 
members, or partners who control the management of the concern) to be 
in control of the concern. SBA will deem a minority shareholder to be 
in control, if that individual or entity has the ability, under the 
concern's charter, by-laws, or shareholder's agreement, to prevent a 
quorum or otherwise block action by the board of directors or 
shareholders.
    (2) Affiliation arising under stock options, convertible 
securities, and agreements to merge. (i) In determining size, SBA 
considers stock options, convertible securities, and agreements to 
merge (including agreements in principle) to have a present effect on 
the power to control a concern. SBA treats such options, convertible 
securities, and agreements as though the rights granted have been 
exercised.
    (ii) Agreements to open or continue negotiations towards the 
possibility of a merger or a sale of stock at some later date are not 
considered ``agreements in principle'' and are thus not given present 
effect.
    (iii) Options, convertible securities, and agreements that are 
subject to conditions precedent which are incapable of fulfillment, 
speculative, conjectural, or unenforceable under state or Federal law, 
or where the probability of the transaction (or exercise of the rights) 
occurring is shown to be extremely remote, are not given present 
effect.
    (iv) An individual, concern or other entity that controls one or 
more other concerns cannot use options, convertible securities, or 
agreements to appear to terminate such control before actually doing 
so. SBA will not give present effect to individuals', concerns', or 
other entities' ability to divest all or part of their ownership 
interest in order to avoid a finding of affiliation.
    (3) Affiliation based on management. Affiliation arises where the 
CEO or President of the applicant concern (or other officers, managing 
members, or partners who control the management of the concern) also 
controls the management of one or more other concerns. Affiliation also 
arises where a single individual, concern, or entity that controls the 
Board of Directors or management of one concern also controls the Board 
of Directors or management of one of more other concerns. Affiliation 
also arises where a single individual, concern or entity controls the 
management of the applicant concern through a management agreement.
    (4) Affiliation based on identity of interest. Affiliation arises 
when there is an identity of interest between close relatives, as 
defined in 13 CFR 120.10, with identical or substantially, identical 
business or economic interests (such as where the close relatives 
operate concerns in the same or similar industry in the same geographic 
area). Where SBA determines that interests should be aggregated, an 
individual or firm may rebut that determination with evidence showing 
that the interests deemed to be one are in fact separate.
    (5) Affiliation based on franchise and license agreements. The 
restraints imposed on a franchisee or licensee by its franchise or 
license agreement generally will not be considered in determining 
whether the franchisor or licensor is affiliated with an applicant 
franchisee or licensee provided the applicant franchisee or licensee 
has the right to profit from its efforts and bears the risk of loss 
commensurate with ownership. SBA will only consider the franchise or 
license agreements of the applicant concern.
    (6) Determining the concern's size. In determining the concern's 
size, SBA counts the receipts, employees (Sec.  121.201), or the 
alternate size standard (if applicable) of the concern whose size is at 
issue and all of its domestic and foreign affiliates, regardless of 
whether the affiliates are organized for profit.
    (7) Exceptions to affiliation. For exceptions to affiliation, see 
13 CFR 121.103(b).

Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-14984 Filed 6-24-16; 8:45 am]
 BILLING CODE 8025-01-P



                                                                 Federal Register / Vol. 81, No. 123 / Monday, June 27, 2016 / Rules and Regulations                                                41423

                                           No comments were received by the                          C. Small Business Regulatory                           require that the servicers apply industry
                                           FDIC in response to the NPR.                              Enforcement Act                                        best practices for asset management and
                                                                                                        The Office of Management and Budget                 servicing. The documents shall require
                                           III. The Final Rule
                                                                                                     has determined that this final rule is not             the servicer to act for the benefit of all
                                              Having received no comments on the                     a ‘‘major rule’’ within the meaning of                 investors, and not for the benefit of any
                                           NPR, the FDIC is adopting the                             the Small Business Regulatory                          particular class of investors, that the
                                           amendment set forth in the NPR as a                       Enforcement Fairness Act of 1996 (5                    servicer maintain records of its actions
                                           final rule (the ‘‘Final Rule’’).                          U.S.C. 801, et seq.) (‘‘SBREFA’’). As                  to permit full review by the trustee or
                                           Specifically, § 360.6(b)(3)(ii)(A) is being               required by the SBREFA, the FDIC will                  other representative of the investors and
                                           revised to include language stating that                  file the appropriate reports with                      that the servicer must commence action
                                           the loss mitigation action requirement                    Congress and the Government                            to mitigate losses no later than ninety
                                           thereunder ‘‘shall not be deemed to                       Accountability Office so that the Final                (90) days after an asset first becomes
                                           require that the documents include any                    Rule may be reviewed.                                  delinquent unless all delinquencies
                                           provision concerning loss mitigation                                                                             have been cured, provided that this
                                           that requires any action that may                         D. Plain Language                                      requirement shall not be deemed to
                                           conflict with the requirements of                           Section 722 of the Gramm-Leach-                      require that the documents include any
                                           Regulation X . . .’’                                      Bliley Act (Pub. L. 106–102, 113 Stat.                 provision concerning loss mitigation
                                                                                                     1338, 1471) requires the Federal                       that requires any action that may
                                           IV. Policy Objective                                                                                             conflict with the requirements of
                                                                                                     banking agencies to use plain language
                                             One of the FDIC’s general policy                        in all proposed and final rules                        Regulation X (12 CFR part 1024), as
                                           objectives is to facilitate regulatory                    published after January 1, 2000. The                   Regulation X may be amended or
                                           compliance and ease regulatory burden                     FDIC has sought to present the Final                   modified from time to time.
                                           by ensuring that regulations are clear                    Rule in a simple and straightforward                   *     *     *     *      *
                                           and consistent with other regulatory                      manner.                                                  Dated at Washington, DC, this 21st day of
                                           initiatives. In particular, the objective of              List of Subjects in 12 CFR Part 360                    June, 2016.
                                           this rulemaking is to harmonize the                                                                                By order of the Board of Directors.
                                           residential loan servicing condition of                     Banks, Banking, Bank deposit
                                                                                                                                                            Federal Deposit Insurance Corporation.
                                           the Securitization Safe Harbor Rule with                  insurance, Holding companies, National
                                                                                                                                                            Robert E. Feldman,
                                           the CFPB’s loan servicing requirements.                   banks, Participations, Reporting and
                                                                                                     recordkeeping requirements, Savings                    Executive Secretary.
                                           Adopting the Final Rule accomplishes
                                                                                                     associations, Securitizations.                         [FR Doc. 2016–15019 Filed 6–24–16; 8:45 am]
                                           that objective.
                                                                                                       For the reasons stated above, the                    BILLING CODE P
                                           V. Administrative Law Matters                             Board of Directors of the Federal
                                           A. Paperwork Reduction Act                                Deposit Insurance Corporation amends
                                                                                                     12 CFR part 360 as follows:                            SMALL BUSINESS ADMINISTRATION
                                              In accordance with the Paperwork
                                           Reduction Act (44 U.S.C. 3501, et seq.)                   PART 360—RESOLUTION AND                                13 CFR Parts 109, 115, 120, and 121
                                           (‘‘PRA’’), the FDIC may not conduct or                    RECEIVERSHIP RULES                                     RIN 3245–AG73
                                           sponsor, and a person is not required to
                                           respond to, a collection of information                   ■  1. The authority citation for part 360              Affiliation for Business Loan Programs
                                           unless it displays a currently valid                      is revised to read as follows:                         and Surety Bond Guarantee Program
                                           Office of Management and Budget                             Authority: 12 U.S.C.
                                                                                                     1821(d)(1),1821(d)(10)(C), 1821(d)(11),
                                                                                                                                                            AGENCY:    Small Business Administration.
                                           (‘‘OMB’’) control number. The
                                           amendment set forth in the Final Rule                     1821(e)(1), 1821(e)(8)(D)(i), 1823(c)(4),              ACTION:   Final rule.
                                           would not revise the Securitization Safe                  1823(e)(2); Sec. 401(h), Pub. L. 101–73, 103
                                                                                                     Stat. 357.                                             SUMMARY:     This final rule amends the
                                           Harbor Rule information collection                                                                               regulations pertaining to the
                                           (OMB No. 3064–0177) or create any new                     ■ 2. Revise § 360.6(b)(3)(ii)(A) to read as            determination of size eligibility based
                                           information collection pursuant to the                    follows:                                               on affiliation by creating distinctive
                                           PRA. Consequently, no submission will                                                                            requirements for small business
                                                                                                     § 360.6 Treatment of financial assets
                                           be made to the Office of Management                       transferred in connection with a                       applicants for assistance from the
                                           and Budget with respect to the PRA.                       securitization or participation.                       Business Loan, Disaster Loan and Surety
                                           B. Regulatory Flexibility Act                             *       *   *     *    *                               Bond Guarantee Program (‘‘SBG’’). For
                                                                                                        (b) * * *                                           purposes of this rule, the Business Loan
                                              The Regulatory Flexibility Act (5                         (3) * * *                                           Programs consist of the 7(a) Loan
                                           U.S.C. 601, et seq.) (‘‘RFA’’) requires                      (ii) * * *                                          Program, the Microloan Program, the
                                           each federal agency to prepare a final                       (A) Servicing and other agreements                  Intermediary Lending Pilot Program
                                           regulatory flexibility analysis in                        must provide servicers with authority,                 (‘‘ILP’’), and the Development Company
                                           connection with the promulgation of a                     subject to contractual oversight by any                Loan Program (‘‘504 Loan Program’’).
                                           final rule, or certify that the final rule                master servicer or oversight advisor, if               Note: the Intermediary Lending Pilot
                                           will not have a significant economic                      any, to mitigate losses on financial                   Program was inadvertently left out of
                                           impact on a substantial number of small                   assets consistent with maximizing the                  the proposed rule. There are currently
                                           entities.4 Pursuant to section 605(b) of                  net present value of the financial asset.              intermediaries with revolving funds for
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                                           the RFA, the FDIC certifies that the                      Servicers shall have the authority to                  eligible small businesses, so the
                                           Final Rule will not have a significant                    modify assets to address reasonably                    program has been included in this final
                                           economic impact on a substantial                          foreseeable default, and to take other                 rule. The Disaster Loan Programs
                                           number of small entities.                                 action to maximize the value and                       consist of Physical Disaster Business
                                                                                                     minimize losses on the securitized                     Loans, Economic Injury Disaster Loans,
                                             4 See   5 U.S.C. 603, 604 and 605.                      financial assets. The documents shall                  Military Reservist Economic Injury


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                                           41424               Federal Register / Vol. 81, No. 123 / Monday, June 27, 2016 / Rules and Regulations

                                           Disaster Loans, and Immediate Disaster                  Disaster Loan, and SBG Programs. (80                   license agreements,’’ specifically
                                           Assistance Program loans. This rule                     FR 59667, October 2, 2015). These                      requesting further modifications and
                                           redefines and establishes separate                      proposed affiliation changes apply only                clarity as to how SBA aggregates
                                           affiliation guidance applicable only to                 to applicants and not to SBA                           franchisees/licensees with franchisors/
                                           small business applicants in these                      participants or CDCs in the programs.                  licensors as affiliates to determine
                                           Programs.                                               The comment period ended December 1,                   whether the small business applicant
                                           DATES: This rule is effective July 27,                  2015.                                                  (franchisee/licensee) is a small,
                                           2016.                                                                                                          independent business. The comments
                                                                                                   II. Summary of Comments
                                                                                                                                                          opposing franchise affiliation changes
                                           FOR FURTHER INFORMATION CONTACT:                           The Agency received and reviewed                    were received from a consulting group,
                                           Dianna Seaborn, Office of Financial                     the public comments on its affiliation                 an individual, a law firm, and one
                                           Assistance, Office of Capital Access,                   rules for 13 CFR parts 115, 120 and 121                lender. These comments revolved
                                           Small Business Administration, 409                      in a proposed rule (80 FR 59667,                       around franchise disclosures and
                                           Third Street SW., Washington, DC                        October 2, 2015). The following                        relationship issues under the
                                           20416; telephone 202–205–3645.                          narrative summarizes the comments                      jurisdiction of the FTC, and the lack of
                                           SUPPLEMENTARY INFORMATION:                              reviewed and specifies the final rule                  clarity
                                                                                                   changes regarding size standards based                    Thirty-seven commenters requested
                                           I. Background
                                                                                                   on principles of affiliation involving                 removal of the ‘‘totality of
                                              SBA is revising its regulations on                   applicants to the Business Loan,                       circumstances’’ analysis in
                                           affiliation for the Business Loan,                      Disaster Loan, and SBG Programs.                       § 121.301(f)(6), while 92 commenters
                                           Disaster Loan, and SBG Programs by                         Size based on affiliation for applicants            recommended examples and/or greater
                                           separating and distinguishing the rules                 to the Business Loan, Disaster Loan, and               clarity for when and how SBA will
                                           from the Agency’s government                            SBG Programs will be addressed                         apply this analysis. SBA’s responses to
                                           contracting, business development and                   separately in a new § 121.301(f) to                    these comments are detailed in the
                                           other programs. This change streamlines                 distinguish them from affiliation                      following sections.
                                           the rules to comply with Executive                      requirements for government
                                           Order 13563. This Executive Order                       contracting, business development, and                 III. Section-by-Section Analysis of
                                           ‘‘Improving Regulation and Regulatory                   SBA’s other programs. These changes                    Comments and Changes
                                           Review,’’ provides that agencies ‘‘must                 impact only the small business                            Section 109.20. In § 109.20
                                           identify and use the best, most                         applicants and not lenders, CDCs, and                  Definitions, SBA proposes to include an
                                           innovative, and least burdensome tools                  surety bond companies.                                 amendment for the definition of
                                           for achieving regulatory ends.’’                           SBA received 160 comments related                   Affiliate for the ILP Program from 13
                                           (Emphasis added). Executive Order                       to the proposed affiliation standards for              CFR 121.103 to § 121.301. SBA did not
                                           13563 further provides that ‘‘[t]o                      the Business Loan, Disaster Loan, and                  receive comments regarding this
                                           facilitate the periodic review of existing              SBG Programs. Of the comments                          program as it is not currently funded.
                                           significant regulations, agencies shall                 received, 128 comments were from                          Section 115.10. In § 115.10
                                           consider how best to promote                            financial institutions (lenders and                    Definitions, SBA proposed to amend the
                                           retrospective analysis of rules that may                Certified Development Companies), 15                   definition of Affiliate for the SBG
                                           be outmoded, ineffective, insufficient,                 comments were from lender service                      Program from the general 13 CFR 121 to
                                           or excessively burdensome, and to                       providers, 4 comments were from                        the more specific § 121.301. One
                                           modify, streamline, expand, or repeal                   businesses (accounting and consulting                  comment expressed concern about the
                                           them in accordance with what has been                   firms), 7 comments were from trade                     potential necessity for small business
                                           learned.’’ (Emphasis added).                            associations, 3 comments were from law                 contractors to comply with the
                                              The loan programs authorized by the                  firms, 2 comments were from franchises,                affiliation rules for contracting, as well
                                           Small Business Act (Act), 15 U.S.C. 631                 and 1 comment was from an individual                   as the separate rules for Surety Bond
                                           et seq., that are affected by this final rule           that did not disclose an organizational                Guarantees.
                                           are: (1) The 7(a) Loan Program                          type. All but 5 commenters indicated                      SBA data indicates that the significant
                                           authorized by Section 7(a) of the Act; (2)              support for the majority of the proposed               majority of surety bond guarantees are
                                           the Business Disaster Loan (‘‘BDL’’)                    affiliation rule. There were 4 opposing                for non-federal contracts which will
                                           Program authorized by Sections 7(b) and                 comments related only to proposed                      benefit from this simplified rule. For the
                                           42 of the Act; (3) the Microloan Program                changes to 121.301(f)(5), affiliation                  federal contract recipients, the existing
                                           authorized by Section 7(m) of the Act;                  based on franchise and license                         contract rules will still apply, and if
                                           and (4) the ILP Program authorized by                   agreements, and a 5th comment                          eligible thereunder, would also be
                                           Section 7(l) of the Act. The 504 Loan                   expressing concern about compliance                    eligible under this rule for the Surety
                                           Program, which is authorized by Title V                 regarding the affiliation rules for Surety             Bond Guarantee. The provision is
                                           of the Small Business Investment Act of                 Bonds in conjunction with federal                      adopted as proposed.
                                           1958 (the ‘‘SBIA’’), as amended, 15                     contracts.                                                Section 120.1700. Definitions used in
                                           U.S.C. 695 et seq., is also affected.                      Thirty-four commenters requested                    subpart J. SBA proposed to amend the
                                           Finally, this rule affects the Surety Bond              modification of the defined management                 definition of Affiliate in § 121.1700 for
                                           Guarantee (‘‘SBG’’) Program, authorized                 officials in § 121.301(f)(1) and (f)(3).               purposes of the First Lien Position 504
                                           by section 411 of the SBIA. A detailed                     Ninety-six commenters requested                     Loan Pooling Program. However, after
                                           description of each program was                         additional clarification in the language               further review, SBA determined that
                                           included in the proposed rule.                          proposed defining who SBA includes                     this affiliation rule for the Business
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                                              On October 2, 2015, SBA published a                  for the identity of interest test in                   Loan, Disaster Loan and Surety Bond
                                           proposed rule with request for                          § 121.301(f)(4), while 36 requested that               Programs does not apply to 13 CFR
                                           comments in the Federal Register to                     it be eliminated in its entirety.                      120.1700. SBA is not adopting the
                                           identify changes to the rules on to                        One hundred thirty-eight commenters                 proposed change.
                                           simplify and streamline the application                 supported changes to 121.301(f)(5),                       Section 121.103(a)(8). SBA proposed
                                           review process for the Business Loan,                   ‘‘Affiliation based on franchise and                   establishing the new § 121.103(a)(8) to


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                                                               Federal Register / Vol. 81, No. 123 / Monday, June 27, 2016 / Rules and Regulations                                          41425

                                           advise the public that the principles of                duplicating the language in a different                former employers. Thirty-six
                                           affiliation for applicants in the Business              section of the regulation, SBA did not                 commenters requested elimination of
                                           Loan, Disaster Loan and SBG Programs                    change the existing principles regarding               the ‘‘identity of interest’’ regulation.
                                           will be moved to a new § 121.301(f). The                affiliation arising under stock options,               SBA reviewed the language and
                                           final rule clarifies that § 121.301(f)                  convertible securities, and agreements                 disagrees with the request to eliminate
                                           applies only to applicants for these                    to merge currently found in                            the language related to identity of
                                           specific programs. Affiliation for SBA’s                § 121.103(d). A total of 155 commenters                interest between close relatives, but
                                           other programs remains unchanged.                       supported keeping this the same, and                   otherwise agrees with the commenters’
                                              Section 121.301(f). SBA proposed                     repeating the language in § 121.301(f)(2)              suggestion to remove other bases for
                                           establishing the new § 121.301(f) where                 for the Business Loan, Disaster Loan,                  affiliation through identity of interest.
                                           the principles for determining affiliation              and SBG Programs. There were no                        SBA has revised the proposed rule by
                                           to qualify applicant business concerns                  opposing comments. SBA is adopting                     retaining identity of interest between
                                           as small, and therefore eligible to apply               the rule as proposed.                                  close relatives but otherwise eliminating
                                           for the Business Loan, Disaster Loan,                      Section 121.301(f)(3). SBA proposed                 discussion of identity of interest for
                                           and SBG Programs would be located.                      establishing the new § 121.301(f)(3)                   other reasons.
                                           The SBA has established this separate                   Affiliation based on management,                          Section 121.301(f)(5). SBA proposed
                                           subsection because the analysis of                      where SBA will utilize the same                        establishing the new § 121.301(f)(5)
                                           affiliation under the Business Loan,                    principles of affiliation for common                   Affiliation based on franchise and
                                           Disaster Loan and Surety Bond                           management set forth in § 121.103.                     license agreements, where SBA
                                           Programs is different from the analysis                 Thirty-four commenters proposed                        proposed language that would limit
                                           for contracting programs. The affiliation               limiting the scope of common                           franchise or license agreement reviews
                                           guidance for all other SBA programs,                    management consideration to only the                   to the applicant franchisee or licensee
                                           including the government contracting                    President, CEO, Managing Partner, or                   and the franchisor, and not consider any
                                           and business development programs,                      Principal Manager. Commenters did not                  franchise or license relationship of an
                                           remains unchanged.                                      include reasons for the requested                      affiliate of the applicant. A total of 138
                                              Section 121.301(f)(1). SBA proposed                  elimination of Board members. SBA                      commenters supported this change to
                                           establishing the new § 121.301(f)(1)                    does not adopt the request for limiting                SBA’s treatment of franchisee affiliation
                                           Affiliation Based on Ownership, where                   scope, as they do not include                          with franchisors. The majority of
                                           SBA would determine that control                        consideration of all potential                         commenters, however, expressed
                                           exists based on ownership when: (1) A                   management organizational structures.                  concern that the proposed rule was
                                           person owns or has the power to control                 In addition, SBA has modified the                      confusing, and others commented that
                                           more than 50% of the voting equity of                   language to clarify that management                    the proposed rule did not go far enough
                                           a concern; or (2) if no one person owns                 agreements are included in the types of                to resolve the challenges and costs
                                           or has the power to control more than                   managers and management subject to                     involved in the review of franchise
                                           50% of the voting equity of the concern,                consideration under this regulation.                   relationships. Some commenters stated
                                           SBA would deem the small business to                    Details on the types of management                     the proposed rule would not eliminate
                                           be controlled by either the President,                  agreements that result in determinations               inconsistent determinations of franchise
                                           Chairman of the Board, Chief Executive                  of affiliation will be provided in SBA                 affiliation by SBA. Partnering with
                                           Officer (CEO) of the concern, or other                  Loan Program Requirements. SBA is                      internal and external stakeholders, SBA
                                           officers, managing members, partners, or                adopting the rule with refinements that                made an extensive effort to better
                                           directors who control the management                    include management by agreement.                       understand the burden imposed by
                                           of the concern. A total of 155                             Section 121.301(f)(4). SBA proposed                 existing processes, to identify relevant
                                           commenters supported a change in the                    establishing the new § 121.301(f)(4)                   risks and to develop meaningful
                                           rule, with 34 of the commenters                         Affiliation based on identity of interest,             improvements. Along with public
                                           proposing further modification to limit                 where SBA would re-define the                          comments, SBA received specific
                                           the scope to only the President, CEO,                   presumptions underlying the principles                 comment from the office of Steve
                                           Managing Partner, or Principal Manager.                 of establishing an identity of interest.               Chabot, Chairman of the House Small
                                           The comments for limiting scope were                    The proposed rule provided that SBA                    Business Committee, encouraging SBA
                                           not adopted as it would not include all                 would presume affiliation between two                  to streamline and improve how best to
                                           potential management and ownership                      or more persons with an identity of                    address franchised business size relative
                                           organizational structures. Based on the                 interest, and the presumption could be                 to affiliation.
                                           elimination of the totality of                          rebutted with evidence showing that the                   The current regulatory language in
                                           circumstances, more fully discussed in                  interests are separate. The proposed rule              § 121.103(f) recognizes that ‘‘the
                                           § 121.301(f)(6), SBA proposes to include                provided further that SBA would                        restraints imposed on a franchisee or
                                           in this section that SBA finds control                  presume an identity of interest between                licensee by its franchise or license
                                           when a minority shareholder has the                     close relatives, as defined in 13 CFR                  agreement relating to standardized
                                           ability, under the concern’s charter, by-               120.10. The proposed rule deviated                     quality, advertising, accounting format,
                                           laws, or shareholder’s agreement, to                    from the existing rule in 13 CFR                       and other similar provisions, generally
                                           prevent a quorum or otherwise block                     121.103(f) by not specifically citing                  will not be considered in determining
                                           action by the board of directors or                     common investments and economic                        whether the franchisor or licensor is
                                           shareholders. SBA is adopting the                       dependence as bases for finding an                     affiliated with the franchisee or licensee
                                           regulation with the inclusion of the                    identity of interest. There were 155                   provided the franchisee or licensee has
                                           Board and other shareholders.                           commenters supporting a separate                       the right to profit from its efforts and
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                                              Section 121.301(f)(2). SBA is                        affiliation rule for identity of interest for          bears the risk of loss commensurate
                                           establishing the new § 121.301(f)(2)                    the Business Loan and SBG Programs.                    with ownership.’’ The current
                                           Affiliation arising under stock options,                Ninety-six commenters recommended                      regulation continues, stating that
                                           convertible securities, and agreements                  additional clarity from SBA on the                     ‘‘affiliation may arise, however, through
                                           to merge, where SBA would duplicate                     definition on ‘‘identity of interest,’’ as to          other means, such as common
                                           language from § 121.103(d). Other than                  the aggregation of unrelated parties and               ownership, common management, or


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                                           41426               Federal Register / Vol. 81, No. 123 / Monday, June 27, 2016 / Rules and Regulations

                                           excessive restrictions upon the sale of                 Commenters requested examples of                       business applicants are not obligors nor
                                           the franchise interest.’’ Commenters                    when SBA would apply the test so that                  are they guarantors on extensions of
                                           indicated that SBA’s determination of                   participants could better understand                   credit to SBA applicants. There were no
                                           the types of controls that do or do not                 how this factor would impact eligibility               specific objections to the elimination of
                                           constitute affiliation is not clear and is              decisions. SBA reviewed and                            newly organized concerns or joint
                                           inconsistent with the overarching                       considered the concerns identified                     ventures as affiliates for purposes of
                                           concept that many restraints are                        regarding the potential overarching but                these programs. SBA adopts the
                                           generally not considered when                           undefined aggregation of circumstances.                proposed exclusion from the rule on
                                           determining affiliation. Some                           SBA agrees that the prior rules in                     affiliation for the Business Loan,
                                           commenters recommended that the                         proposed § 121.301(f)(1)–(5) and (7)–(8)               Disaster Loan, and SBA Programs.
                                           regulation be amended to delete the                     provide specificity. Generally examples                   With respect to joint ventures, these
                                           provision that affiliation would be                     reviewed are negative control, and                     partnerships form when two or more
                                           found based on restrictions in the                      control through management agreement.                  businesses combine their efforts in order
                                           agreement so long as the franchisee                     Rather than include examples here, SBA                 to perform on a federal contract or
                                           continues to have the right to profit                   is removing the totality of the                        receive other contract assistance. SBA
                                           from its efforts and bears the risk of loss             circumstances criterion, but provides                  does not consider affiliation based on
                                           commensurate with ownership.                            specific guidance in § 121.301(f)(1) and               the joint venture to be of significant
                                           Additionally, many commenters                           (f)(3) to address negative control, and                concern to the Business Loan or Disaster
                                           recommended language be included in                     control through management                             Loan Programs because a loan to any
                                           the regulatory text to clarify SBA’s                    agreements that would have been
                                                                                                                                                          joint venture will require all members of
                                           intent to only review agreements of the                 included in this section. SBA agrees
                                                                                                                                                          the joint venture to accept full
                                           ‘‘applicant’’ and not review any                        with the commenters’ suggestions and
                                                                                                                                                          responsibility for loan guarantee
                                           agreements of affiliated entities. These                will remove this paragraph from the
                                                                                                                                                          liability. Also, agency records indicate
                                           commenters recommended adding                           final rule. Therefore proposed
                                                                                                                                                          that applicants for assistance under SBA
                                           language to the regulatory text similar to              § 121.301(f)(7) and (f)(8) are renumbered
                                                                                                                                                          Business Loan and Disaster Loan
                                           what was included in the                                § 121.301(f)(6) and (f)(7).
                                                                                                      Section 121.301(f)(7). SBA proposed                 Programs are rarely, if ever, joint
                                           Supplementary Information in the
                                                                                                   establishing the new § 121.301(f)(7)                   ventures, and, therefore, this provision
                                           proposed rule.
                                              Based on the volume of comments                      Determining the concern’s size, where                  is unnecessary. For the Surety Bond
                                           received in the current and previous                    SBA states that SBA counts receipts,                   Guarantee Program, the guarantee is on
                                           rulemaking requests, and to provide                     employees, or alternate size standards of              the bond, not a contract. In any joint
                                           consistency in its application of the                   a concern and its affiliates. There were               venture where the surety company
                                           principles of affiliation involving                     no specific objections regarding this                  requests a bond guarantee, each member
                                           franchise or license agreements, SBA is                 provision. SBA is adopting the rule as                 of the joint venture is required to accept
                                           removing regulatory text that only                      proposed, and renumbered as                            full responsibility for the bond
                                           addressed certain types of restraint. The               § 121.301(f)(6).                                       guarantee liability.
                                           regulatory changes clarify that SBA does                   Section 121.301(f)(8). SBA proposed                    SBA also proposed to omit ‘‘negative
                                           not consider that franchise or license                  establishing the new § 121.301(f)(8)                   control’’ as a stand-alone factor in
                                           relationships create affiliation, provided              Exceptions to affiliation, where SBA                   determining affiliation for the purpose
                                           the franchisee/licensee has the right to                would incorporate the exceptions to                    of loan eligibility. Pursuant to 13 CFR
                                           profit from its efforts, and bears the risk             affiliation set forth in 13 CFR                        121.103(a)(3), negative control may exist
                                           of loss commensurate with ownership.                    121.103(b). There were no specific                     where a minority shareholder can block
                                           SBA will provide guidance on the                        objections regarding this provision. The               certain actions by the board of directors.
                                           franchisee/licensee’s right to profit from              proposed rule is adopted as written, and               SBA received many comments
                                           its efforts and bear the risk of loss                   renumbered as § 121.301(f)(7).                         requesting clarity or removal of
                                           commensurate with ownership in its                         Finally, SBA proposed not to apply                  § 121.301(f)(6) Affiliation based on
                                           Standard Operating Procedure (SOP) 50                   several current principles of affiliation              SBA’s determination of the totality of
                                           10.                                                     that apply in the federal contracting and              circumstances. SBA agreed to the
                                              SBA also is adding a sentence to the                 business development programs to the                   removal of § 121.301(f)(6), and included
                                           end of the regulatory text to clarify its               Business Loan, Disaster Loan, and SBG                  additional specific guidance as to
                                           intent that only franchise or license                   Programs. Specifically, SBA proposed to                negative control through minority
                                           relationships of the applicant will be                  eliminate applying affiliation based on a              ownership and by management
                                           considered, not those of any of the                     newly organized concern (see                           agreement in § 121.301(f)(1) and (f)(3)
                                           applicant’s affiliates.                                 § 121.103(g)) and joint ventures (see                  respectively.
                                              Section 121.301(f)(6). SBA proposed                  § 121.103(h)). One purpose of the newly
                                           establishing the new § 121.301(f)(6)                    organized concern rule is to prevent                   IV. Compliance With Executive Orders
                                           Affiliation based on SBA’s                              former small businesses from creating                  12866, 13563, 12988, and 13132, the
                                           determination of the totality of                        spin-off companies in order to continue                Paperwork Reduction Act (44 U.S.C.
                                           circumstances, where SBA proposed to                    to perform on small business contracts                 Ch. 35), and the Regulatory Flexibility
                                           retain finding of affiliation based on the              or receive other contracting benefits.                 Act (5 U.S.C. 601–612)
                                           totality of circumstances similar to the                While this affiliation principle is                    Executive Order 12866
                                           regulations currently found in                          appropriate for federal contracting, it is
                                           § 121.103(a)(5). There were 97                          generally not applicable to the Business                 The Office of Management and Budget
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                                           commenters requesting elimination of                    Loan, Disaster Loan, or SBG Programs.                  (OMB) has determined that this final
                                           this rule, and 37 commenters indicated                  The only responsible party or parties for              rule is a ‘‘significant’’ regulatory action
                                           that including this requirement as a                    an SBA loan are the owners or                          for the purposes of Executive Order
                                           factor for determining affiliation would                guarantors executing debt instruments                  12866. Accordingly, the next section
                                           contravene SBA’s stated intent of                       on behalf of the applicant business.                   contains SBA’s Regulatory Impact
                                           providing a bright line test of affiliation.            Generally, former employers of small                   Analysis. However, this is not a major


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                                                               Federal Register / Vol. 81, No. 123 / Monday, June 27, 2016 / Rules and Regulations                                          41427

                                           rule under the Congressional Review                     specific to affiliation, 1,379 small                   The Business Loan Programs operate
                                           Act, 5 U.S.C. 800.                                      businesses failed to submit affiliate                  through the Agency’s lending partners,
                                                                                                   financials, and 1,363 needed                           which are 7(a) Lenders for the 7(a) Loan
                                           Regulatory Impact Analysis
                                                                                                   clarifications or additional information               Program, Intermediaries for the
                                           1. Is there a need for this regulatory                  to complete processing. SBA has                        Microloan Program and ILP Program,
                                           action?                                                 determined that the proposed                           and CDCs for the 504 Loan Program.
                                              The Agency believes it needs to                      simplification of size based on                        The Agency participated in public
                                           reduce regulatory burdens and expand                    affiliation will eliminate confusion, and              forums and meetings with NAGGL
                                           its Business Loan, Disaster Loan, and                   save time and costs for the small                      board members and program
                                           SBG Programs by streamlining delivery,                  business applicants and the lenders.                   participants at industry conferences
                                                                                                   Additionally this regulatory action will               from the Fall of 2014 through Spring of
                                           lowering costs, and facilitating job
                                                                                                   improve SBA processing efficiency and                  2015 which allowed it to reach trade
                                           creation. As noted above, responses
                                                                                                   turnaround times.                                      associations and hundreds of its lending
                                           received from the Federal Register
                                           proposed rule notice regarding SBA                      3. What alternatives have been                         partners from which it gained valuable
                                           rules on affiliation were in favor of                   considered?                                            insight, guidance, and suggestions. The
                                           simplified rules that enhance                                                                                  Agency’s outreach efforts to engage
                                                                                                      As indicated above, on October 2,                   stakeholders before proposing this rule
                                           understanding and align with normal                     2015, the Agency issued a proposed rule
                                           commercial industry practices.                                                                                 was extensive, and concluded with the
                                                                                                   for comment in the Federal Register to                 comment period.
                                           Specifically of the 160 commenters for                  identify several changes intended to
                                           the proposed rule on affiliation, 4                     reinvigorate the Business Loan, Disaster               Executive Order 12988
                                           comments were from businesses                           Loan, and SBG Programs by eliminating
                                           (accounting and consulting firms), 3                                                                              This action meets applicable
                                                                                                   unnecessary compliance burdens and
                                           comments were from law firms, and 1                                                                            standards set forth in Sections 3(a) and
                                                                                                   loan eligibility restrictions. The Agency
                                           comment was from an individual that                                                                            3(b)(2) of Executive Order 12988, Civil
                                                                                                   previously published in the Federal
                                           did not disclose their organizational                                                                          Justice Reform, to minimize litigation,
                                                                                                   Register on February 25, 2013, a prior
                                           type. All of the small business                                                                                eliminate ambiguity, and reduce
                                                                                                   proposed rule for comment on 7(a) and
                                           comments showed support for the                                                                                burden. The action does not have
                                                                                                   504 loan program requirements which
                                           affiliation rule. Small business                                                                               retroactive or preemptive effect.
                                                                                                   had also included proposed changes to
                                           applicants will be assisted by this                     the affiliation rules for loan programs.               Executive Order 13132
                                           streamlining of requirements because it                 See Proposed Rule: 504 and 7(a) Loan
                                           will be easier and more cost effective for              Programs Updates, 78 FR 12633                             SBA has determined that this final
                                           a lender to research whether the                        (February 25, 2013). Included in these                 rule will not have substantial direct
                                           applicant small business controls or is                 proposals was an alternate affiliation                 effects on the States, on the relationship
                                           controlled by large companies which                     definition. After a full comment period                between the national government and
                                           would jeopardize their eligibility.                     ending April 26, 2013, and careful                     the States, or on the distribution of
                                           Higher lender costs potentially result in               consideration of all comments, SBA                     power and responsibilities among the
                                           greater costs to the applicant small                    decided to further deliberate and                      various levels of government. Therefore,
                                           business. No comments were received                     consider issues of redefining affiliation              for the purposes of Executive Order
                                           from small businesses on the regulatory                 for the Business Loan Programs and                     13132, SBA has determined that this
                                           impact analysis during the proposed                     SBG Program. As a result, no changes                   final rule has no federalism implications
                                           rule comment period.                                    were adopted regarding affiliation in the              warranting preparation of a federalism
                                                                                                   7(a) and 504 loan program final rule.                  assessment.
                                           2. What are the potential benefits and
                                           costs of this regulatory action?                        See Final Rule: 504 and 7(a) Loan                      Paperwork Reduction Act, 44 U.S.C.
                                                                                                   Programs Updates, 78 FR 15641 (March                   Ch. 35
                                              This rule will eliminate unnecessary                 21, 2014).
                                           cost burdens on loan applicants’ and                       This final rule presents a set of                      The SBA has determined that this
                                           lenders’ participation in SBA-                          requirements to determine affiliation                  final rule would not impose additional
                                           guaranteed loans. This final rule                       based on the precedent separating the                  reporting and recordkeeping
                                           exempts the Business Loan, Disaster                     Small Business Innovation Research                     requirements under the Paperwork
                                           Loan, and SBG Programs from certain                     (SBIR) and Small Business Technology                   Reduction Act (PRA). In fact, those
                                           government contracting rules that                       Transfer (STTR) programs from the                      individuals and entities that SBA
                                           determine whether an entity is deemed                   government contracting standards. SBA                  considers potential affiliates has been
                                           affiliated with an applicant. These                     has reviewed extensive public                          refined and reduced for the Business
                                           general affiliation rules apply to federal              comments and suggestions in                            Loan, Disaster Loan, and the SBG
                                           contracting to ensure that small                        developing this final rule and                         Programs, which could result in
                                           businesses (and not another entity)                     considered changes needed to mitigate                  reduced reporting and recordkeeping.
                                           receive and perform a federal contract                  identified economic risk to the                        Participants in SBA’s 7(a) Loan Program
                                           when a preference for small businesses                  taxpayers and reduce waste, fraud, and                 will continue to report any affiliates of
                                           is provided. Many of these general                      abuse.                                                 their business on SBA Form 1919 (OMB
                                           principles of affiliation (e.g., newly                                                                         Control No. 3245–0348), and
                                           organized concern) are not applicable to                Executive Order 13563                                  participants in SBA’s 504 Loan Program
                                           the Business Loan, Disaster Loan, or                      A description of the need for this                   will continue to report affiliates on SBA
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                                           SBG Programs. SBA reviewed five years                   regulatory action and benefits and costs               Form 1244 (OMB Control No. 3245–
                                           of data from the SBA Loan Guaranty                      associated with this action, including                 0071). EIDL Program participants will
                                           Processing Center. The data specifically                possible distributional impacts that                   continue to report affiliates on SBA
                                           tracked reasons each loan would have                    relate to Executive Order 13563, are                   Form 5 (OMB Control No. 3245–0017),
                                           been screened out. During the five-year                 included above in the Regulatory Impact                and SBG Program participants will
                                           period, based on the screen out reasons                 Analysis under Executive Order 12866.                  continue to report affiliates on SBA


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                                           41428               Federal Register / Vol. 81, No. 123 / Monday, June 27, 2016 / Rules and Regulations

                                           Form 994 (OMB Control No. 3245–                         SBA that this rule, if adopted, would                  PART 120—BUSINESS LOANS
                                           0007).                                                  not have a significant economic impact
                                                                                                   on a substantial number of small                       ■ 5. The authority citation for 13 CFR
                                           Regulatory Flexibility Act, 5 U.S.C. 601–                                                                      part 120 continues to read as follows:
                                                                                                   entities. As such, the Chief Counsel
                                           612
                                                                                                   certifies that this rule will not have a                 Authority: 15 U.S.C. 634(b)(6), (b)(7),
                                              When an agency issues a rulemaking,                  significant impact on a substantial                    (b)(14), (h), and note, 636(a), (h), and (m),
                                           the Regulatory Flexibility Act (RFA), 5                 number of small entities.                              650, 687(f), 696(3), and 697(a) and (e); Pub.
                                           U.S.C. 601–612, requires the agency to                                                                         L. 111–5, 123 Stat. 115, Pub. L. 111–240, 124
                                           ‘‘prepare and make available for public                 List of Subjects                                       Stat. 2504.
                                           comment a final regulatory analysis’’                   13 CFR Part 109                                        ■ 6. Revise the first sentence of
                                           which will ‘‘describe the impact of the                                                                        § 120.151 to read as follows:
                                           final rule on small entities.’’ Section 605               Community development, Loan
                                           of the RFA allows an agency to certify                  programs—business, Reporting and                       § 120.151 What is the statutory limit for
                                           a rule, in lieu of preparing an analysis,               recordkeeping requirements, Small                      total loans to a Borrower?
                                           if the rulemaking is not expected to                    businesses.                                               The aggregate amount of the SBA
                                           have a significant economic impact on                   13 CFR Part 115                                        portions of all loans to a single
                                           a substantial number of small entities.                                                                        Borrower, including the Borrower’s
                                              The rulemaking will positively impact                  Claims, Reporting and recordkeeping                  affiliates as defined in § 121.301(f) of
                                           all of the approximately 4,000 7(a)                     requirements, Small businesses, Surety                 this chapter, must not exceed a guaranty
                                           Lenders (some of which are small), 35                   bonds.                                                 amount of $3,750,000, except as
                                           Intermediary Lending Pilot lenders,                     13 CFR Part 120                                        otherwise authorized by statute for a
                                           approximately 260 CDCs (all of which                                                                           specific program. * * *
                                           are small), 145 Microloan                                 Individuals with disabilities, Loan
                                           Intermediaries, and 23 Sureties in the                  programs—business, Reporting and                       PART 121—SMALL BUSINESS SIZE
                                           SBG Program. The final rule will reduce                 recordkeeping requirements, Small                      REGULATIONS
                                           the burden on program participants.                     businesses.
                                           SBA has determined that the                                                                                    ■ 7. The authority citation for 13 CFR
                                                                                                   13 CFR Part 121                                        part 121 continues to read as follows:
                                           streamlining of certain program process
                                           requirements through this modification                    Grant programs—business,                               Authority: 15 U.S.C. 632, 634(b)(6), 662,
                                           of eligibility based on affiliation will                Individuals with disabilities, Loan                    and 694a(9).
                                           present no adverse or significant impact,               programs—business, Small businesses.
                                                                                                                                                          ■ 8. Amend § 121.103 to add paragraph
                                           including costs for the small business                    For the reasons stated in the                        (a)(8) to read as follows:
                                           borrower, lender, or CDC. This proposal                 preamble, the Small Business
                                           presents a best practice rule that                      Administration amends 13 CFR parts                     § 121.103 How does SBA determine
                                           removes unnecessary regulatory                          109, 115, 120, and 121 as follows:                     affiliation?
                                           burdens, increases access to capital for                                                                         (a) * * *
                                           small businesses and facilitates                        PART 109—INTERMEDIARY LENDING                            (8) For applicants in SBA’s Business
                                           American job preservation and creation.                 PILOT PROGRAM                                          Loan, Disaster Loan, and Surety Bond
                                           SBA has determined that there is no                                                                            Guarantee Programs, the size standards
                                           significant impact on a substantial                     ■ 1. The authority citation for 13 CFR                 and bases for affiliation are set forth in
                                           number of small entities.                               part 109 continues to read as follows:                 § 121.301.
                                              Small business applicants will be                      Authority: 15 U.S.C. 634(b)(6), (b)(7), and          *     *     *     *     *
                                           assisted by this streamlining of                        636(1).                                                ■ 9. Amend § 121.301 to revise the
                                           requirements because it will be easier                                                                         section heading and to add paragraph (f)
                                           and more cost effective for lenders to                  ■ 2. Amend § 109.20 to revise the
                                                                                                   definition of ‘‘Affiliate’’ to read as                 to read as follows:
                                           identify whether applicant small
                                           businesses control or are controlled by                 follows:                                               § 121.301 What size standards and
                                           other companies that would jeopardize                   § 109.20    Definitions.                               affiliation principles are applicable to
                                           eligibility. SBA reviewed five years of                                                                        financial assistance programs?
                                                                                                     Affiliate is defined in § 121.301(f) of
                                           data from the SBA Loan Guaranty                                                                                *      *     *    *     *
                                                                                                   this chapter.
                                           Processing Center. The data specifically                                                                          (f) Concerns and entities are affiliates
                                           tracked reasons for loan screen outs that               *     *     *     *     *                              of each other when one controls or has
                                           delayed processing. During the five-year                                                                       the power to control the other, or a third
                                                                                                   PART 115—SURETY BOND
                                           period based on the screen out reasons                                                                         party or parties controls or has the
                                                                                                   GUARANTEE
                                           specific to affiliation, the processing                                                                        power to control both. It does not matter
                                           was delayed for over 2,600 loan                         ■ 3. The authority citation for 13 CFR                 whether control is exercised, so long as
                                           applicants. SBA believes that the                       part 115 continues to read as follows:                 the power to control exists. Affiliation
                                           proposed simplified rules on affiliation                                                                       under any of the circumstances
                                           provide participants with needed clarity                  Authority: 5 U.S.C. app 3; 15 U.S.C. 687b,           described below is sufficient to establish
                                                                                                   687c, 694a, 694b note; and Pub. L. 110–246,            affiliation for applicants for SBA’s
                                           that results in reduction of the                        Sec. 12079, 122 Stat. 1651.
                                           paperwork and review time required to                                                                          Business Loan, Disaster Loan, and
                                           make accurate determinations. The                       ■ 4. Amend § 115.10 to revise the                      Surety Bond Programs. For this rule, the
                                           time/cost benefit for business applicants               definition of ‘‘Affiliate’’ to read as                 Business Loan Programs consist of the
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                                           and participants is substantial.                        follows:                                               7(a) Loan Program, the Microloan
                                           Additionally this regulatory action will                                                                       Program, the Intermediary Lending Pilot
                                                                                                   § 115.10    Definitions.
                                           improve SBA processing efficiency and                                                                          Program, and the Development
                                           turnaround times.                                         Affiliate is defined in § 121.301(f) of              Company Loan Program (‘‘504 Loan
                                              The SBA Administrator certified to                   this chapter.                                          Program’’). The Disaster Loan Programs
                                           the Chief Counsel for Advocacy of the                   *     *     *     *     *                              consist of Physical Disaster Business


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                                                               Federal Register / Vol. 81, No. 123 / Monday, June 27, 2016 / Rules and Regulations                                          41429

                                           Loans, Economic Injury Disaster Loans,                  partners who control the management of                 DEPARTMENT OF TRANSPORTATION
                                           Military Reservist Economic Injury                      the concern) also controls the
                                           Disaster Loans, and Immediate Disaster                  management of one or more other                        Federal Aviation Administration
                                           Assistance Program loans. The                           concerns. Affiliation also arises where a
                                           following principles apply for the                      single individual, concern, or entity that             14 CFR Part 39
                                           Business Loan, Disaster Loan, and                       controls the Board of Directors or                     [Docket No. FAA–2015–4210; Directorate
                                           Surety Bond Guarantee Programs:                         management of one concern also                         Identifier 2015–NM–067–AD; Amendment
                                              (1) Affiliation based on ownership.                  controls the Board of Directors or                     39–18567; AD 2016–13–03]
                                           For determining affiliation based on
                                                                                                   management of one of more other                        RIN 2120–AA64
                                           equity ownership, a concern is an
                                                                                                   concerns. Affiliation also arises where a
                                           affiliate of an individual, concern, or
                                           entity that owns or has the power to                    single individual, concern or entity                   Airworthiness Directives; The Boeing
                                           control more than 50 percent of the                     controls the management of the                         Company Airplanes
                                           concern’s voting equity. If no                          applicant concern through a
                                                                                                                                                          AGENCY:  Federal Aviation
                                           individual, concern, or entity is found                 management agreement.                                  Administration (FAA), DOT.
                                           to control, SBA will deem the Board of                     (4) Affiliation based on identity of                ACTION: Final rule.
                                           Directors or President or Chief                         interest. Affiliation arises when there is
                                           Executive Officer (CEO) (or other                       an identity of interest between close                  SUMMARY:   We are adopting a new
                                           officers, managing members, or partners                 relatives, as defined in 13 CFR 120.10,                airworthiness directive (AD) for all The
                                           who control the management of the                       with identical or substantially, identical             Boeing Company Model 767 airplanes.
                                           concern) to be in control of the concern.               business or economic interests (such as                This AD was prompted by a
                                           SBA will deem a minority shareholder                    where the close relatives operate                      determination that certain splice plate
                                           to be in control, if that individual or                 concerns in the same or similar industry               locations of the aft pressure bulkhead
                                           entity has the ability, under the                                                                              web are hidden and cannot be inspected
                                                                                                   in the same geographic area). Where
                                           concern’s charter, by-laws, or                                                                                 using existing manufacturer service
                                                                                                   SBA determines that interests should be
                                           shareholder’s agreement, to prevent a                                                                          information. This AD requires repetitive
                                           quorum or otherwise block action by the                 aggregated, an individual or firm may
                                                                                                   rebut that determination with evidence                 open-hole high frequency eddy current
                                           board of directors or shareholders.                                                                            (HFEC) inspections for cracking of the
                                              (2) Affiliation arising under stock                  showing that the interests deemed to be
                                                                                                                                                          aft pressure bulkhead web. We are
                                           options, convertible securities, and                    one are in fact separate.
                                                                                                                                                          issuing this AD to detect and correct
                                           agreements to merge. (i) In determining                    (5) Affiliation based on franchise and              cracking in the aft pressure bulkhead
                                           size, SBA considers stock options,                      license agreements. The restraints                     web, which could result in rapid
                                           convertible securities, and agreements                  imposed on a franchisee or licensee by                 airplane decompression and loss of
                                           to merge (including agreements in                       its franchise or license agreement                     structural integrity.
                                           principle) to have a present effect on the              generally will not be considered in                    DATES: This AD is effective August 1,
                                           power to control a concern. SBA treats                  determining whether the franchisor or
                                           such options, convertible securities, and                                                                      2016.
                                                                                                   licensor is affiliated with an applicant                  The Director of the Federal Register
                                           agreements as though the rights granted                 franchisee or licensee provided the
                                           have been exercised.                                                                                           approved the incorporation by reference
                                              (ii) Agreements to open or continue                  applicant franchisee or licensee has the               of a certain publication listed in this AD
                                           negotiations towards the possibility of a               right to profit from its efforts and bears             as of August 1, 2016.
                                           merger or a sale of stock at some later                 the risk of loss commensurate with                     ADDRESSES: For service information
                                           date are not considered ‘‘agreements in                 ownership. SBA will only consider the                  identified in this final rule, contact
                                           principle’’ and are thus not given                      franchise or license agreements of the                 Boeing Commercial Airplanes,
                                           present effect.                                         applicant concern.                                     Attention: Data & Services Management,
                                              (iii) Options, convertible securities,                  (6) Determining the concern’s size. In              P.O. Box 3707, MC 2H–65, Seattle, WA
                                           and agreements that are subject to                      determining the concern’s size, SBA                    98124–2207; telephone 206–544–5000,
                                           conditions precedent which are                          counts the receipts, employees                         extension 1; fax 206–766–5680; Internet
                                           incapable of fulfillment, speculative,                  (§ 121.201), or the alternate size                     https://www.myboeingfleet.com. You
                                           conjectural, or unenforceable under                     standard (if applicable) of the concern                may view this referenced service
                                           state or Federal law, or where the                      whose size is at issue and all of its                  information at the FAA, Transport
                                           probability of the transaction (or                                                                             Airplane Directorate, 1601 Lind Avenue
                                                                                                   domestic and foreign affiliates,
                                           exercise of the rights) occurring is                                                                           SW., Renton, WA. For information on
                                                                                                   regardless of whether the affiliates are
                                           shown to be extremely remote, are not                                                                          the availability of this material at the
                                                                                                   organized for profit.                                  FAA, call 425–227–1221. It is also
                                           given present effect.
                                              (iv) An individual, concern or other                    (7) Exceptions to affiliation. For                  available on the Internet at http://
                                           entity that controls one or more other                  exceptions to affiliation, see 13 CFR                  www.regulations.gov by searching for
                                           concerns cannot use options,                            121.103(b).                                            and locating Docket No. FAA–2015–
                                           convertible securities, or agreements to                                                                       4210.
                                                                                                   Maria Contreras-Sweet,
                                           appear to terminate such control before
                                                                                                   Administrator.                                         Examining the AD Docket
                                           actually doing so. SBA will not give
                                           present effect to individuals’, concerns’,              [FR Doc. 2016–14984 Filed 6–24–16; 8:45 am]              You may examine the AD docket on
                                           or other entities’ ability to divest all or             BILLING CODE 8025–01–P                                 the Internet at http://
Lhorne on DSK30JT082PROD with RULES




                                           part of their ownership interest in order                                                                      www.regulations.gov by searching for
                                           to avoid a finding of affiliation.                                                                             and locating Docket No. FAA–2015–
                                              (3) Affiliation based on management.                                                                        4210, or in person at the Docket
                                           Affiliation arises where the CEO or                                                                            Management Facility between 9 a.m.
                                           President of the applicant concern (or                                                                         and 5 p.m., Monday through Friday,
                                           other officers, managing members, or                                                                           except Federal holidays. The AD docket


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Document Created: 2016-06-25 02:07:00
Document Modified: 2016-06-25 02:07:00
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionRules and Regulations
ActionFinal rule.
DatesThis rule is effective July 27, 2016.
ContactDianna Seaborn, Office of Financial Assistance, Office of Capital Access, Small Business Administration, 409 Third Street SW., Washington, DC 20416; telephone 202-205-3645.
FR Citation81 FR 41423 
RIN Number3245-AG73
CFR Citation13 CFR 109
13 CFR 115
13 CFR 120
13 CFR 121
CFR AssociatedCommunity Development; Loan Programs-Business; Reporting and Recordkeeping Requirements; Small Businesses; Claims; Surety Bonds; Individuals with Disabilities and Grant Programs-Business

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