81 FR 95419 - Small Business Investment Companies: Passive Business Expansion and Technical Clarifications
SMALL BUSINESS ADMINISTRATION Federal Register Volume 81, Issue 249 (December 28, 2016)
Federal Register Volume 81, Issue 249 (December 28, 2016)
| Page Range | 95419-95425 | |
| FR Document | 2016-31291 |
[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)] [Rules and Regulations] [Pages 95419-95425] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-31291] ======================================================================= ----------------------------------------------------------------------- SMALL BUSINESS ADMINISTRATION 13 CFR Part 107 RIN 3245-AG67 Small Business Investment Companies: Passive Business Expansion and Technical Clarifications AGENCY: U.S. Small Business Administration. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: The U.S. Small Business Administration (SBA) is revising the regulations for the Small Business Investment Company (SBIC) program to expand permitted investments in passive businesses and provide further clarification with regard to investments in such businesses. SBICs are generally prohibited from investing in passive businesses under the Small Business Investment Act of 1958, as amended (Act). SBIC program regulations provide for two exceptions that allow an SBIC to structure an investment utilizing a passive small business as a pass-through. The first exception provides conditions under which an SBIC may structure an investment through up to two levels of passive entities to make an investment in a non-passive business that is a subsidiary of the passive business directly financed by the SBIC. The second exception, prior to this final rule, enabled a partnership SBIC, with SBA's prior approval, to provide financing to a small business through a passive, wholly-owned C corporation (commonly known as a blocker corporation), but only if a direct financing would cause the SBIC's investors to incur Unrelated Business Taxable Income (UBTI). This final rule clarifies several aspects of the first exception and in the second exception eliminates the prior approval requirement and expands the purposes for which a blocker corporation may be formed. The final rule also adds new reporting and other requirements for passive investments to help protect SBA's financial interests and ensure adequate oversight and makes minor technical amendments. Finally, this rule makes a conforming change to the regulations regarding the amount of leverage available to SBICs under common control. This change is necessary for consistency with the Consolidated Appropriations Act, 2016, which increased the maximum amount of such leverage to $350 million. DATES: This rule is effective January 27, 2017. FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment and Innovation, (202) 205-7563 or [email protected]. SUPPLEMENTARY INFORMATION: I. Background Information The SBIC Program is an SBA financing program authorized under Title III of the Small Business Investment Act of 1958, 15 U.S.C. 681 et seq. Congress created the Small Business Investment Company (SBIC) program to ``stimulate and supplement the flow of private equity capital and long-term loan funds, which small-business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply . . . .'' 15 U.S.C. 661. Congress intended that the program ``be carried out in such manner as to insure the maximum participation of private financing sources.'' Id. In accordance with that policy, SBA does not invest directly in small businesses. Rather, through the SBIC Program, SBA licenses and provides debenture leverage (Leverage) to SBICs. SBICs are privately-owned and professionally managed for-profit investment funds that make loans to, and investments in, qualified small businesses using a combination of privately raised capital and Leverage guaranteed by SBA. SBA will guarantee the repayment of debentures issued by an SBIC based on the amount of qualifying private capital raised by an SBIC up to a maximum amount of $150 million in Leverage. SBICs are generally prohibited from investing in passive businesses under the Small Business Investment Act of 1958. Prior to this final rule, the SBIC program regulations provided for the following two exceptions that allowed an SBIC to structure an investment utilizing a passive small business as a pass-through: A. ``Holding company exception''--Sec. 107.720(b)(2): This exception provides [[Page 95420]] conditions under which an SBIC may structure an investment through up to two levels of passive entities to make an investment in a non- passive business that is a subsidiary of the passive business directly financed by the SBIC. The regulation defines a subsidiary company as one in which the financed passive business directly or indirectly owns at least 50% of the outstanding voting securities. As an example, this exception allows an SBIC to finance ABC Holdings 1, a passive small business, with the proceeds flowing through ABC Holdings 2, another passive small business, and then to ABC Manufacturing, a non-passive small business in which ABC Holdings 1 owns directly or indirectly at least 50% of the outstanding voting securities. B. ``Blocker corporation exception''--Sec. 107.720(b)(3): This exception enables a partnership SBIC, with SBA's prior approval, to provide financing to a small business through a passive, wholly-owned C corporation, but only if a direct financing would cause one or more of the SBIC's investors to incur Unrelated Business Taxable Income (UBTI). A passive C corporation formed under the second exception is commonly known as a blocker corporation. On October 5, 2015, SBA published a proposed rule (80 FR 60077) to further expand the permitted use of passive businesses, provide clarification with regard to investments in such businesses, and make minor technical clarifications. SBA received three comments on the proposed rule, not including one comment that generally questioned the fairness of the Act as a whole and did not provide any specific comments on the rule. The three comments pertinent to the rule are addressed in Section II. Section II also discusses a conforming regulatory change to implement Section 521 of the Consolidated Appropriations Act, 2016 which increased the maximum leverage available to two or more SBICs under common control from $225 million to $350 million. II. Section-By-Section Analysis A. Passive Business Rules Section 107.720--Small Businesses That May Be Ineligible for Financing 1. Changes to Holding Company Exception Sec. 107.720(b)(2): SBA proposed revisions to Sec. 107.720(b)(2) to explicitly permit an SBIC to form and finance a passive business that will either pass the proceeds through to or use the proceeds to acquire all or part of a non-passive business. These changes were intended to codify SBA's existing interpretation of the regulations. SBA received 2 comments on Sec. 107.720(b)(2) indicating that the proposed changes would be more effective if the passive business directly financed was not required to own at least 50 percent of the underlying active business. Commenters suggested that SBICs be allowed to structure investments using passive investment vehicles ``irrespective of the number of parent entities involved so long as the parent entities in question directly or indirectly own or control at least 50 percent of the voting or economic interests of the active business.'' SBA received similar comments as part of the rulemaking process when it last proposed expanding the permitted use of passive businesses. SBA reconsidered these previous suggestions in developing this current rule; however, in light of the additional protections added in this final rule (see the discussion of Sec. 107.720(b)(4) in paragraph II.A.3 of this preamble), neither set of comments was adopted. Although the new Sec. 107.720(b)(4) should help address some of SBA's credit concerns, SBA believes that controlling ownership provisions are needed to facilitate access to information and records needed to effectively monitor these transactions and to aid in the recovery of assets in the event of a default. SBA also continues to maintain its position that effective monitoring of transactions with unlimited levels of passive companies would require resources well beyond those available to the Agency. Proposed Sec. 107.720(b)(2) is adopted without change. 2. Changes to Blocker Corporation Exception--Sec. 107.720(b)(3): The proposed rule also included the following changes to Sec. 107.720(b)(3): a. Removing the requirement to obtain SBA's prior approval to form a blocker corporation; b. Permitting an SBIC to form a blocker corporation to enable any foreign investors to avoid effectively connected income (ECI) under the Internal Revenue Code; c. Permitting a blocker corporation to provide financing to a second passive small business that passes the proceeds through to a non-passive small business in which it owns at least 50 percent of the outstanding voting securities (effectively permitting an investment structured with two levels of passive companies, one of which is the blocker corporation); and d. Removing outdated language indicating that an SBIC's ownership of a blocker corporation formed under Sec. 107.720(b)(3) will not constitute a violation of Sec. 107.865(a). This provision was rendered unnecessary by a rule change in 2002 (67 FR 64789) that revised Sec. 107.865(a) to permit an SBIC to exercise control over a small business for up to seven years without SBA approval. SBA received comments on proposed Sec. 107.720(b)(3) as discussed below: a. Regulated Investment Company (RIC) Exception. All 3 commenters asked that the regulations provide an additional exception for SBICs that are wholly owned subsidiaries of Business Development Companies (BDCs). A BDC typically elects to be taxed as a RIC pursuant to Subchapter M of the Internal Revenue Code of 1986. In general, a RIC is not subject to U.S. federal income taxes on income and gains that it distributes to stockholders, provided that it satisfies certain minimum distribution requirements. To qualify as a RIC, a BDC must satisfy certain source of income and asset-diversification tests; among other things, a RIC must generally derive at least 90% of its gross income for each taxable year from certain types of investment. In particular, the commenters explained that equity interests in pass-through tax entities generate operating income that, if received or deemed received directly by a BDC, could disqualify the BDC from maintaining RIC status, and therefore, such interests must often be held through a blocker corporation. The commenters requested that Sec. 107.720(b)(3) be revised to permit an SBIC to form a blocker corporation to avoid adverse tax consequences to an investor that has elected to be taxed as a RIC. This final rule adopts the suggestion. b. Blocker Entity Form of Organization. SBA also received two comments suggesting that non-corporate forms of organization should be permitted for blocker entities. The commenters explained that these structures are often ``more streamlined in terms of corporate formalities than a C corporation'' and suggested the regulations allow ``any entity that elects to be taxed as a corporation for Federal income tax purposes.'' SBA considered this suggestion to be overly broad, but partially adopted this suggestion in the final rule by allowing a blocker entity to be structured as an LLC that elects to be taxed as a corporation. c. Two Level Holding Company Financing. Two commenters indicated that Sec. 107.720(b)(3) should allow SBICs to structure a financing with a blocker entity and then two levels of passive holding companies as defined in Sec. 107.720(b)(2). The commenters stated [[Page 95421]] that the proposed rule puts an SBIC that requires a blocker entity to accommodate its investors at a disadvantage compared to other SBICs that do not require a blocker entity, since the blocker entity can only finance a single passive business entity that in turn makes an investment into an active business. For example, an SBIC with a foreign investor would not be able to participate in a financing that is structured as a two-level passive business financing under 107.720(b)(2), if they also needed a separate passive business to serve as a blocker entity in order to avoid effectively connected income. However, SBA believes that one of the other passive businesses permitted under Sec. 107.720(b)(2) could possibly be used as a blocker. The commenters' suggestion would effectively permit up to three levels of passive businesses between the SBIC and the operating business. SBA did not adopt this suggestion because additional levels of passive businesses impose a burden on SBA as regulator and increase the Agency's credit risk. SBA believes that two levels of passive businesses under either exception should provide SBICs with sufficient flexibility to operate successfully. d. SBA did not receive any comments on the proposed change to Sec. 107.720(b)(3) regarding the removal of outdated language. This rule adopts the change as proposed. 3. Additional Passive Business Guidance--Sec. 107.720(b)(4): The proposed rule identified SBA's concerns with regard to passive investments, including making sure the financing dollars go to the eligible non-passive small business, fees being charged at each passive business level, and SBA's ability to access passive business financial records, especially in the case of a defaulting SBIC. To address these concerns, SBA proposed making the the following changes in new Sec. 107.720(b)(4), which would apply to any eligible passive investment made under Sec. 107.720(b)(2) or (b)(3): a. ``Substantially All'' Definition. Clarifying the meaning of ``substantially all'' in Sec. 107.720(b)(2) and (b)(3) to mean 99 percent of the financing proceeds after deduction of actual application fees, closing fees, and expense reimbursements, which may not exceed those permitted under Sec. 107.860. b. Fee Requirements. Requiring fees charged by an SBIC or its Associate under Sec. Sec. 107.860 and 107.900 to not exceed those permitted if the SBIC had directly financed the eligible Small Business and requiring any such fees received by an SBIC's Associate to be paid to the SBIC in cash within 30 days of receipt. c. ``Portfolio Concern'' Clarification. Clarifying that both passive and non-passive businesses included in a financing are ``Portfolio Concerns'' and therefore subject to record keeping and reporting obligations with respect to any ``Portfolio Concern,'' defined in Sec. 107.50 as ``a Small Business Assisted by a Licensee.'' SBA received 3 comments on proposed Sec. 107.720(b)(4) as discussed below: a. ``Substantially All'' Definition. Commenters suggested that the definition of ``substantially all'' be lowered to 95 percent of the proceeds instead of 99% of the proceeds because they were concerned that the 99 percent threshold ``may be too limiting and pose issues in deal structuring.'' SBA did not adopt this comment. The definition already excludes allowable fees and expense reimbursements permitted under Sec. Sec. 107.860 and 107.900, and SBA believes that a 95 percent threshold could result in excessive expenses being charged in the passive businesses that is diverted from the intended operating business. Although this percentage may seem inconsequential, 4% of a $20 million financing represents $800,000 that could be diverted from the operating business. b. Fee Requirements. Two commenters suggested removing the requirement that fees received by an Associate must be paid over in cash to the SBIC. They noted that SBIC program policy guidance known as TechNote 7a, which provides guidelines concerning allowable management expenses for leveraged SBICs (see www.sba.gov/sbicpolicy), already requires that 100% of fees collected under Sec. 107.860 or Sec. 107.900 must benefit the SBIC, either by being paid directly to the SBIC or (if paid to an Associate) through a corresponding reduction in the management fee paid by the SBIC, typically called a ``management fee offset.'' Commenters also indicated that management fee offsets have tax advantages relative to other approaches. Although SBA recognizes that management fee offsets can provide tax advantages, SBA did not adopt this suggestion because of the difficulty in monitoring investments utilizing passive businesses and identifying fees associated with each passive business in addition to those paid by the operating business. c. ``Portfolio Concern'' Clarification. Two commenters indicated that the clarification of Portfolio Concern should be revised to apply only ``for the purposes of this part 107.720'' to avoid any unintended effects arising from the use of the term ``Portfolio Concern'' in other sections of the regulations. The commenters indicated that this adjustment would still allow SBA to retain the necessary information rights contemplated by the proposed rule. A search for the term ``Portfolio Concern'' within the regulations identified the following instances.Sec. 107.50 defines ``Portfolio Concern'' as ``a Small Business Assisted by a Licensee.'' Sec. Sec. 107.600-107.660 describe record keeping and information requirements, including those for a Portfolio Concern. Sec. 107.730 discusses conflicts of interest with regards to Portfolio Concerns. Sec. 107.760 discusses how a change in size or activity affect the Licensee with regards to a Portfolio Concern. Sec. 107.850 discusses restrictions on redemption of Equity Securities of a Portfolio Concern. SBA believes that all of the requirements in these sections are applicable to passive business financings. Therefore, this suggestion was not adopted. 4. Section 107.610 Required certifications for Loans and Investments. The proposed rule also added a certification requirement to Sec. 107.610 to require an SBIC that finances a business under Sec. 107.720(b)(3) to certify as to the qualifying basis for such financing. The certification replaces the requirement for SBA prior approval of the formation and financing of a blocker corporation. Although SBA received no comments on proposed Sec. 107.610, because SBA adopted the suggestion to allow SBICs that are BDC subsidiaries to form blocker entities in order to maintain the BDC's RIC status under Sec. 107.720 (b)(3), the language in the final rule adds compliance with this tax election as a permissible basis for a passive business formed under Sec. 107.720(b)(3). B. Technical Changes SBA also proposed the following technical changes to the regulations. 1. Section 107.50 Definition of terms. Changing ``Associates's'' to ``Associate's''. 2. Section 107.210 Minimum capital requirements for Licensees. Modifying paragraph (a) of Sec. 107.210 to allow both Leverageable Capital and Regulatory Capital to fall below the stated minimums if the reductions are performed in accordance with an SBA-approved wind-up plan per Sec. 107.590(c), to conform with SBA's current oversight practices. 3. Section 107.503 Licensee's adoption of an approved valuation [[Page 95422]] policy. Changing the last sentence of Sec. 107.503(a) to indicate that valuation guidelines for SBICs may be obtained from the SBIC program's public Web site, www.sba.gov/inv. 4. Section 107.630 Requirement for Licensees to file financial statements with SBA (Form 468). Removing current Sec. 107.630(d), which provides a mailing address for submission of SBA Form 468, and re-designating paragraph (e) as paragraph (d). These instructions are no longer necessary because SBICs submit this information electronically using the SBA's web-based application. 5. Section 107.1100 Types of Leverage and application procedures. Correcting the misspelling of ``Yu'' to ``You'' and removing paragraph (c) which identifies where to send Leverage applications. This paragraph is unnecessary because the application forms provide these instructions. None of the comments SBA received in response to the proposed rule were related to these technical changes. The final rule incorporates these changes as proposed. C. Increase to Maximum Leverage to SBICs Under Common Control Section 521 of the Consolidated Appropriations Act, 2016, Public Law 114-113, 129 Stat. 2242, (December 22, 2015) amended section 303(b)(2) of the Small Business Investment Act of 1958 to increase the maximum amount of Leverage available to two or more SBICs under Common Control from $225 million to $350 million. SBA defines Common Control to mean a condition where two or more persons, either through ownership, management, contract, or otherwise, are under the control of one group or person. Under 13 CFR 107.50, SBA presumes that two or more SBICs are under Common Control if, among other things, they have common officers, directors, or general partners. Currently, 13 CFR 107.1150(b) limits two or more SBICs under Common Control to the maximum aggregate amount of outstanding Leverage of $225 million, which amount is subject to further limitations under SBA's credit policies. Solely as a conforming change, this rule increases the maximum amount set forth in the regulation from $225 million to $350 million. This statutory change was not addressed previously because it had not yet been enacted when the rule was proposed. Now that it has, the technical change is necessary to avoid public confusion and ensure consistency between the regulations and the current law. Compliance With Executive Orders 12866, 12988, 13132, and 13563, 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 has determined that this rule is not a ``significant'' regulatory action under Executive Order 12866. This is also not a ``major'' rule under the Congressional Review Act, 5 U.S.C. 801, et seq. Executive Order 12988 This action meets applicable standards set forth in section 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 presumptive effect. Executive Order 13132 The final rule would not have substantial direct effects on the States, or the distribution of power and responsibilities among the various levels of government. Therefore, for the purposes of Executive Order 13132, Federalism, SBA determines that this rule has no federalism implications warranting the preparation of a federalism assessment. Executive Order 13563 This final rule was developed in response to comments received on previously proposed amendments to these regulations on investments in passive businesses. See 78 FR 77377 (December 23, 2013). SBA received one set of comments on that rule that suggested changes to further liberalize permitted financings to passive businesses under Sec. 107.720(b). In response to the comment, SBA indicated in the final rule (79 FR 62819) that it would further consider the suggested changes in a future rulemaking. As part of that reconsideration, SBA discussed the comments with industry representatives and solicited additional comments in the proposed rule published in October 2015 at 80 FR 60077. This final rule reflects the input received from those public outreach efforts. Paperwork Reduction Act, 44 U.S.C. Ch. 35 SBA has determined that this rule would impose additional reporting and recordkeeping requirements under the Paperwork Reduction Act. In particular, this rule implements changes to the Portfolio Financing Report, SBA Form 1031 (OMB Control Number 3245-0078), to clarify information to be reported in Parts A, B, and C of the form. The changes, described in detail below, also include designating current Part D as Part F and adding new Parts D and E. The title, description of respondents, description of the information collection and the changes to it are discussed below with an estimate of the revised annual burden. Included in the estimate is the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing each collection of information. Title: Portfolio Financing Report, SBA Form 1031 (OMB Control Number 3245-0078). Summary: SBA Form 1031 is a currently approved information collection. SBA regulations, specifically Sec. 107.640, require all SBICs to submit a Portfolio Financing Report using SBA Form 1031 for each financing that an SBIC provides to a Small Business Concern within 30 days after closing an investment. SBA uses the information provided on Form 1031 to evaluate SBIC compliance with regulatory requirements. The form is also SBA's primary source of information for compiling statistics on the SBIC program as a provider of capital to small businesses. The proposed rule (80 FR 60077) invited the public to provide comments on the following changes to SBA Form 1031: (1) Clarifying the SBIC should report the non-passive Small Business Concern information in the Form 1031. SBA has noted that SBICs sometimes report data on the passive Small Business Concern rather than the non-passive Small Business Concern when reporting financing information. SBA has clarified that the SBIC should report data on the non-passive Small Business Concern when reporting information on financings using passive businesses in the Form 1031 Part A--the Small Business Concern; Part B--the pre-financing data; and Part C--the financing information, with the exception of the financing dollars in Question 29. The amount of financing dollars provided by the SBIC should be the total amount of such financing, regardless of whether the dollars were provided directly or indirectly to the non-passive business concern. Example: The SBIC provides $5 million in equity to ABC Holding Corporation, which passes $4.98 million to the non-passive business, Acme Manufacturing LLC. In addition, the SBIC provides $5 million in debt directly to Acme Manufacturing LLC. The SBIC would report information on Acme Manufacturing LLC in Parts A, B, and C. However, the [[Page 95423]] total financing dollars would be reported as $5 million in equity and $5 million in debt for a total of $10 million in total financing dollars. (2) Identifying financings using one or more passive businesses. SBA has added a question on whether the financing utilizes one or more passive businesses as part of the financing, to help SBA identify these financings. (3) Adding information on passive business financings to aid in regulatory compliance monitoring. SBA has also added a requirement for SBICs to upload a file in Portable Document Format (PDF) that contains the following information, which SBA will use to help assess whether the financing meets regulatory compliance: (a) Qualifying exception: Identification of the passive business exception under which the financing is made (i.e., Sec. 107.720(b)(2) Exception for pass-through of proceeds to subsidiary, or Sec. 107.720(b)(3) Exception for certain Partnership Licensees). If the SBIC indicates that the financing is made under Sec. 107.720(b)(3), it would also indicate the qualifying basis for the financing (i.e., financing would cause an investor in the fund to incur unrelated business taxable income or effectively connected income or to receive non-qualifying income for a regulated investment company). (b) Passive Business Entities: Identification of the name and employer ID number for each passive business entity used within the financing. This is needed so that SBA can identify all Portfolio Concerns involved in the financing. (c) Financing Structure Description: A description of the financing structure, including the flow of the money between the SBIC and the non-passive Small Business Concern that receives the proceeds (including amounts and types of securities between each entity), and the ownership from the SBIC through each entity to the non-passive Small Business Concern. This information will help SBA assess that the Small Business Concern receives ``substantially all'' the financing dollars and the ownership percentages are in compliance with the regulations. This will also help SBA with SBICs transferred to the Office of Liquidation to identify the structure of the financing and aid in recovery of SBA leverage. (4) Impact Fund Policy Initiative: Finally, a new Part D, consisting of two questions concerning whether the investment is a fund-identified impact investment or SBA-identified impact investment has been added to the Form. This change provides a vehicle for SBICs licensed to participate in SBA's Impact Investment Fund (Impact SBICs to more clearly report whether they are reporting on an SBA-identified impact investment or a Fund-identified impact investment. The Impact Investment Fund was launched in April 2011 as part of President Obama's Start-Up America Initiative. See, [https://www.sba.gov/about-sba/sba-initiatives/startup-america/about-startup-america.] The initiative was amended in September 2014 to allow Impact SBICs to invest in self- identified impact investments. [https://www.sba.gov/sites/default/files/articles/SBA%20Impact%20Investment%20Fund%20Policy%20-%20September%202014_1.pdf or https://www.sba.gov/content/new-2014-expanding-sbas-impact-fund] While Impact SBICs, like all SBICS use Form 1031 to report on their financings, SBA has determined that it would be beneficial to Impact SBICs if SBA Form 1031 were to include questions specifically targeted towards impact investments. SBA did not receive any comments on the changes; therefore, they are adopted as proposed. Description of Respondents and Burden: There are approximately 299 licensed SBICs. All of these SBICs are required to submit SBA Form 1031 for each financing. The current estimated number of responses (i.e., number of financings) is 2,021 based on a recent three year period (FY 2012 through 2014). The current estimate indicates that it takes approximately 12 minutes to complete the form, for a total annual burden of 404 hours. Neither the number of respondents nor the number of responses per year is expected to be affected by this rule. However, SBA estimates a slight increase in the burden hour as a result of the additional reporting in new Parts D (Impact Investments) and Part E (Passive Business). Impact Fund Reporting. This reporting is expected to have minimal impact. The estimated eight SBICs making impact investments would complete new Part D an estimated total 56 times annually. At an estimated 2 minutes per response, this additional reporting would add 2 hours to the annual burden for Form 1031. Passive Business Reporting. SBA believes that the SBIC should be able to provide the passive business information since it should be readily available as part of the financing. SBA estimates that providing the information will take on average an additional 30 minutes for those financings utilizing passive businesses, with no incremental burden for those financings that do not use a passive business. SBA estimates that about 12% of the annual responses relate to passive businesses financings (based on financing data in 2014). Based on the number of SBICs reporting such financings the total estimated annual hour burden resulting from new Part E reporting would be 122. Therefore the total estimated annual hour burden for all SBICs submitting SBA Form 1031s in a year would be 528 hours. The current cost estimate for completing SBA Form 1031 uses a rate of $35 per hour for an accounting manager to fill out the form. Using that same rate, the cost per form would change from $7 per form to $9.14 per form. However, SBA has increased its estimate of an hourly rate for an accounting manager to $43 per hour (estimated using www1.salary.com/Accounting-Manager-hourly-wages.html in July 2015), which rate results in a new cost per form of $11.23 for an aggregate cost of $22,704 for the 2,021 estimated responses. This final rule also identifies information that an SBIC must maintain in its files to support the required changes. SBA believes that the SBICs should already be maintaining this information since a passive business by definition is a Portfolio Concern and the SBIC should be maintaining all documents needed to support each financing. The rule makes this expectation explicit. Furthermore, currently, an SBIC must maintain this information for it to effectively monitor and evaluate an investment that uses a passive business to finance a non- passive business. Therefore, SBA does not believe this recordkeeping requirement increases the burden. The rule also requires a certification under Sec. 107.610 when the SBIC makes a financing using the exemption in Sec. 107.720(b)(3). This includes maintaining records supporting the certification. Since this regulation effectively replaces the requirement for SBICs to seek prior SBA approval and maintain these records, SBA does not believe this change will increase the burden. Regulatory Flexibility Act, 5 U.S.C. 601-612 The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires administrative agencies to consider the effect of their actions on small entities, small non-profit businesses, and small local governments. Pursuant to the RFA, when an agency issues a rule, the agency must prepare an Initial Regulatory Flexibility Act (IRFA) analysis which describes whether the impact of the rule will have a significant [[Page 95424]] economic impact on a substantial number of small entities. However, Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an IRFA, if the rulemaking is not expected to have a significant economic impact on a substantial number of small entities. This rule would affect all SBICs, of which there are currently close to 300. SBA estimates that approximately 75 percent of these SBICs are small entities. Therefore, SBA has determined that this rule would have an impact on a substantial number of small entities. However, SBA has determined that the economic impact on entities affected by the rule would not be significant. As discussed under the Paperwork Reduction Act section, SBICs would need to provide descriptions of the transactions in the Form 1031, which based on the estimate would cost each SBIC approximately $28 per year. The changes in the passive business regulation provide SBICs with additional flexibility to employ transaction structures commonly used by private equity or venture capital funds that are not SBICs. SBA asserts that the economic impact of the rule, if any, would be minimal and beneficial to small SBICs. Accordingly, the Administrator of the SBA certifies that this rule would not have a significant economic impact on a substantial number of small entities. List of Subjects in 13 CFR Part 107 Investment companies, Loan programs-business, Reporting and recordkeeping requirements, Small businesses. For the reasons stated in the preamble, the Small Business Administration amends 13 CFR part 107 as follows: PART 107--SMALL BUSINESS INVESTMENT COMPANIES 0 1. The authority citation for part 107 is revised to read as follows: Authority: 15 U.S.C. 681, 683, 687(c), 687b, 687d, 687g, 687m. Sec. 107.50 [Amended] 0 2. Amend Sec. 107.50 by removing from the definition of ``Lending Institution'' the term ``Associates's'' and adding in its place the term ``Associate's''. 0 3. Amend Sec. 107.210 by revising paragraph (a) introductory text to read as follows: Sec. 107.210 Minimum capital requirements for Licensees. (a) Companies licensed on or after October 1, 1996. A company licensed on or after October 1, 1996, must have Leverageable Capital of at least $2,500,000 and must meet the applicable minimum Regulatory Capital requirement in this paragraph (a), unless lower Leverageable Capital and Regulatory Capital amounts are approved by SBA as part of a Wind-Up Plan in accordance with Sec. 107.590(c): * * * * * 0 4. Amend Sec. 107.503 by revising the last sentence of paragraph (a) to read as follows: Sec. 107.503 Licensee's adoption of an approved valuation policy. (a) * * * These guidelines may be obtained from SBA's SBIC Web site at www.sba.gov/inv. * * * * * 0 5. Amend Sec. 107.610 by adding paragraph (g) to read as follows: Sec. 107.610 Required certifications for Loans and Investments. * * * * * (g) For each passive business financed under Sec. 107.720(b)(3), a certification by you, dated as of the closing date of the Financing, as to the basis for the qualification of the Financing under Sec. 107.720(b)(3) and identifying one or more limited partners for which a direct Financing would cause those investors: (1) To incur ``unrelated business taxable income'' under section 511 of the Internal Revenue Code (26 U.S.C. 511); (2) To incur ``effectively connected income'' to foreign investors under sections 871 and 882 of the Internal Revenue Code (26 U.S.C. 871 and 882); or (3) For an investor that has elected to be taxed as a regulated investment company, to receive or be deemed to receive gross income that does not qualify under Section 851(b)(2) of the Internal Revenue Code (26 U.S.C. 851(b)(2)). Sec. 107.630 [Amended] 0 6. Amend Sec. 107.630 by removing paragraph (d) and redesignating paragraph (e) as paragraph (d). 0 7. Amend Sec. 107.720 by revising paragraphs (b)(2) and (3) and adding paragraph (b)(4) to read as follows: Sec. 107.720 Small Businesses that may be ineligible for financing. * * * * * (b) * * * (2) Exception for pass-through of proceeds to subsidiary. You may provide Financing directly to a passive business, including a passive business that you have formed, if it is a Small Business and it passes substantially all the proceeds through to (or uses substantially all the proceeds to acquire) one or more subsidiary companies, each of which is an eligible Small Business that is not passive. For the purpose of this paragraph (b)(2), ``subsidiary company'' means a company in which the financed passive business either: (i) Directly owns, or will own as a result of the Financing, at least 50 percent of the outstanding voting securities; or (ii) Indirectly owns, or will own as a result of the Financing, at least 50 percent of the outstanding voting securities (by directly owning the outstanding voting securities of another passive Small Business that is the direct owner of the outstanding voting securities of the subsidiary company). (3) Exception for certain Partnership Licensees. If you are a Partnership Licensee, you may form one or more blocker entities in accordance with this paragraph (b)(3). For the purposes of this paragraph, a ``blocker entity'' means a corporation or a limited liability company that elects to be taxed as a corporation for Federal income tax purposes. The sole purpose of a blocker entity must be to provide Financing to one or more eligible, unincorporated Small Businesses. You may form such blocker entities only if a direct Financing to such Small Businesses would cause any of your investors to incur ``unrelated business taxable income'' under section 511 of the Internal Revenue Code (26 U.S.C. 511); incur ``effectively connected income'' to foreign investors under sections 871 and 882 of the Internal Revenue Code (26 U.S.C. 871 and 882); or (for an investor that has elected to be taxed as a regulated investment company) receive or be deemed to receive gross income that does not qualify under section 851(b)(2) of the Internal Revenue Code (26 U.S.C. 851(b)(2)). Your ownership and investment of funds in such blocker entities will not constitute a violation of Sec. 107.730(a). For each passive business financed under this section 107.720(b)(3), you must provide a certification to SBA as required under Sec. 107.610(g). A blocker entity formed under this paragraph may provide Financing: (i) Directly to one or more eligible non-passive Small Businesses; or (ii) Directly to a passive Small Business that passes substantially all the proceeds directly to (or uses substantially all the proceeds to acquire) one or more eligible non-passive Small Businesses in which the passive Small Business directly owns, or will own as a result of the Financing, at least 50% of the outstanding voting securities. [[Page 95425]] (4) Additional conditions for permitted passive business financings. Financings permitted under paragraphs (b)(2) or (b)(3) of this section must meet all of the following conditions: (i) For the purposes of this paragraph (b), ``substantially all'' means at least ninety-nine percent of the Financing proceeds after deduction of actual application fees, closing fees, and expense reimbursements, which may not exceed those permitted by Sec. 107.860. (ii) If you and/or your Associate charge fees permitted by Sec. 107.860 and/or Sec. 107.900, the total amount of such fees charged to all passive and non-passive businesses that are part of the same Financing may not exceed the fees that would have been permitted if the Financing had been provided directly to a non-passive Small Business. Any such fees received by your Associate must be paid to you in cash within 30 days of the receipt of such fees. (iii) For the purposes of this part 107, each passive and non- passive business included in the Financing is a Portfolio Concern. The terms of the financing must provide SBA with access to Portfolio Concern information in compliance with this part 107, including without limitation Sec. Sec. 107.600 and 107.620. * * * * * Sec. 107.1100 [Amended] 0 8. Amend Sec. 107.1100 by removing the term ``Yu'' in the second to the last sentence of paragraph (b) and adding in its place ``You'', and by removing paragraph (c). Sec. 107.1150 [Amended] 0 9. Amend Sec. 107.1150 by removing the term ``$225 million'' in the first sentence of paragraph (b) and adding in its place ``$350 million''. Dated: December 20, 2016. Maria Contreras-Sweet, Administrator. [FR Doc. 2016-31291 Filed 12-27-16; 8:45 am] BILLING CODE 8025-01-P
![Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Rules and Regulations 95419
other person participating in the Pursuant to the Flood Disaster formed. The final rule also adds new
conduct of the affairs of such institution Protection Act (FDPA) (42 U.S.C. reporting and other requirements for
is an amount not to exceed $2,394 for 4012a(f)), civil money penalties may be passive investments to help protect
each day a violation of the ILSA or any assessed against any regulated lending SBA’s financial interests and ensure
rule, regulation or order issued pursuant institution that engages in a pattern or adequate oversight and makes minor
to ILSA continues. practice of violations of the FDPA in an technical amendments. Finally, this rule
(15) Civil money penalties assessed amount not to exceed $2,090 per makes a conforming change to the
for violations of 15 U.S.C. 78u–2. violation. regulations regarding the amount of
Pursuant to section 21B of the Securities Dated at Washington, DC, this 21st day of leverage available to SBICs under
Exchange Act of 1934 (Exchange Act) December, 2016. common control. This change is
(15 U.S.C. 78u–2), civil money penalties By order of the Board of Directors. necessary for consistency with the
may be assessed for violations of certain Consolidated Appropriations Act, 2016,
Federal Deposit Insurance Corporation.
provisions of the Exchange Act, where which increased the maximum amount
such penalties are in the public interest. Robert E. Feldman,
of such leverage to $350 million.
Tier One civil money penalties may be Executive Secretary.
DATES: This rule is effective January 27,
assessed pursuant to 15 U.S.C. 78u– [FR Doc. 2016–31240 Filed 12–27–16; 8:45 am]
2017.
2(b)(1) in an amount not to exceed BILLING CODE 6714–01–P
FOR FURTHER INFORMATION CONTACT:
$9,054 for a natural person or $90,535
for any other person for violations set Theresa Jamerson, Office of Investment
forth in 15 U.S.C. 78u–2(a). Tier Two and Innovation, (202) 205–7563 or sbic@
SMALL BUSINESS ADMINISTRATION sba.gov.
civil money penalties may be assessed
pursuant to 15 U.S.C. 78u–2(b)(2) in an 13 CFR Part 107 SUPPLEMENTARY INFORMATION:
amount not to exceed—for each RIN 3245–AG67 I. Background Information
violation set forth in 15 U.S.C. 78u–
2(a)—$90,535 for a natural person or The SBIC Program is an SBA
Small Business Investment financing program authorized under
$452,677 for any other person if the act Companies: Passive Business
or omission involved fraud, deceit, Title III of the Small Business
Expansion and Technical Clarifications Investment Act of 1958, 15 U.S.C. 681
manipulation, or deliberate or reckless
disregard of a regulatory requirement. AGENCY: U.S. Small Business et seq. Congress created the Small
Tier Three civil money penalties may be Administration. Business Investment Company (SBIC)
assessed pursuant to 15 U.S.C. 78u– ACTION: Final rule. program to ‘‘stimulate and supplement
2(b)(3) for each violation set forth in 15 the flow of private equity capital and
U.S.C. 78u–2(a), in an amount not to SUMMARY: The U.S. Small Business long-term loan funds, which small-
exceed $181,071 for a natural person or Administration (SBA) is revising the business concerns need for the sound
$905,353 for any other person, if the act regulations for the Small Business financing of their business operations
or omission involved fraud, deceit, Investment Company (SBIC) program to and for their growth, expansion, and
manipulation, or deliberate or reckless expand permitted investments in modernization, and which are not
disregard of a regulatory requirement; passive businesses and provide further available in adequate supply . . . .’’ 15
and such act or omission directly or clarification with regard to investments U.S.C. 661. Congress intended that the
indirectly resulted in substantial losses, in such businesses. SBICs are generally program ‘‘be carried out in such manner
or created a significant risk of prohibited from investing in passive as to insure the maximum participation
substantial losses to other persons or businesses under the Small Business of private financing sources.’’ Id. In
resulted in substantial pecuniary gain to Investment Act of 1958, as amended accordance with that policy, SBA does
the person who committed the act or (Act). SBIC program regulations provide not invest directly in small businesses.
omission. for two exceptions that allow an SBIC to Rather, through the SBIC Program, SBA
(16) Civil money penalties assessed structure an investment utilizing a licenses and provides debenture
pursuant to 15 U.S.C. 1639e(k) for passive small business as a pass- leverage (Leverage) to SBICs. SBICs are
appraisal independence violations. through. The first exception provides privately-owned and professionally
Pursuant to section 1472(a) of the Dodd- conditions under which an SBIC may managed for-profit investment funds
Frank Wall Street Reform and Consumer structure an investment through up to that make loans to, and investments in,
Protection Act (Appraisal Independence two levels of passive entities to make an qualified small businesses using a
Rule) (15 U.S.C. 1639e(k)), civil money investment in a non-passive business combination of privately raised capital
penalties may be assessed for an initial that is a subsidiary of the passive and Leverage guaranteed by SBA. SBA
violation of the Appraisal Independence business directly financed by the SBIC. will guarantee the repayment of
Rule in an amount not to exceed The second exception, prior to this final debentures issued by an SBIC based on
$11,053 for each day during which the rule, enabled a partnership SBIC, with the amount of qualifying private capital
violation continues and, for subsequent SBA’s prior approval, to provide raised by an SBIC up to a maximum
violations, $22,105 for each day during financing to a small business through a amount of $150 million in Leverage.
which the violation continues. passive, wholly-owned C corporation SBICs are generally prohibited from
(17) Civil money penalties assessed (commonly known as a blocker investing in passive businesses under
for false claims and statements corporation), but only if a direct the Small Business Investment Act of
pursuant to 31 U.S.C. 3802. Pursuant to financing would cause the SBIC’s 1958. Prior to this final rule, the SBIC
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the Program Fraud Civil Remedies Act investors to incur Unrelated Business program regulations provided for the
(31 U.S.C. 3802), civil money penalties Taxable Income (UBTI). This final rule following two exceptions that allowed
of not more than $10,957 per claim or clarifies several aspects of the first an SBIC to structure an investment
statement may be assessed for violations exception and in the second exception utilizing a passive small business as a
involving false claims and statements. eliminates the prior approval pass-through:
(18) Civil money penalties assessed requirement and expands the purposes A. ‘‘Holding company exception’’—
for violations of 42 U.S.C. 4012a(f). for which a blocker corporation may be § 107.720(b)(2): This exception provides
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total financing dollars would be Impact Investment Fund (Impact SBICs that about 12% of the annual responses
reported as $5 million in equity and $5 to more clearly report whether they are relate to passive businesses financings
million in debt for a total of $10 million reporting on an SBA-identified impact (based on financing data in 2014). Based
in total financing dollars. investment or a Fund-identified impact on the number of SBICs reporting such
(2) Identifying financings using one or investment. The Impact Investment financings the total estimated annual
more passive businesses. SBA has Fund was launched in April 2011 as hour burden resulting from new Part E
added a question on whether the part of President Obama’s Start-Up reporting would be 122.
financing utilizes one or more passive America Initiative. See, [https://www. Therefore the total estimated annual
businesses as part of the financing, to sba.gov/about-sba/sba-initiatives/ hour burden for all SBICs submitting
help SBA identify these financings. startup-america/about-startup-america.] SBA Form 1031s in a year would be 528
(3) Adding information on passive The initiative was amended in hours.
business financings to aid in regulatory September 2014 to allow Impact SBICs The current cost estimate for
compliance monitoring. SBA has also to invest in self-identified impact completing SBA Form 1031 uses a rate
added a requirement for SBICs to investments. [https://www.sba.gov/sites/ of $35 per hour for an accounting
upload a file in Portable Document default/files/articles/SBA%20Impact manager to fill out the form. Using that
Format (PDF) that contains the %20Investment%20Fund%20Policy same rate, the cost per form would
following information, which SBA will %20-%20September%202014_1.pdf or change from $7 per form to $9.14 per
use to help assess whether the financing https://www.sba.gov/content/new-2014- form. However, SBA has increased its
meets regulatory compliance: expanding-sbas-impact-fund] While estimate of an hourly rate for an
(a) Qualifying exception: Impact SBICs, like all SBICS use Form accounting manager to $43 per hour
Identification of the passive business 1031 to report on their financings, SBA (estimated using www1.salary.com/
exception under which the financing is has determined that it would be Accounting-Manager-hourly-wages.html
made (i.e., § 107.720(b)(2) Exception for beneficial to Impact SBICs if SBA Form in July 2015), which rate results in a
pass-through of proceeds to subsidiary, 1031 were to include questions new cost per form of $11.23 for an
or § 107.720(b)(3) Exception for certain specifically targeted towards impact aggregate cost of $22,704 for the 2,021
Partnership Licensees). If the SBIC investments. estimated responses.
indicates that the financing is made SBA did not receive any comments on This final rule also identifies
under § 107.720(b)(3), it would also the changes; therefore, they are adopted information that an SBIC must maintain
indicate the qualifying basis for the as proposed. in its files to support the required
financing (i.e., financing would cause an Description of Respondents and changes. SBA believes that the SBICs
investor in the fund to incur unrelated Burden: There are approximately 299 should already be maintaining this
business taxable income or effectively licensed SBICs. All of these SBICs are information since a passive business by
connected income or to receive non- required to submit SBA Form 1031 for definition is a Portfolio Concern and the
qualifying income for a regulated each financing. The current estimated SBIC should be maintaining all
investment company). number of responses (i.e., number of documents needed to support each
(b) Passive Business Entities: financings) is 2,021 based on a recent financing. The rule makes this
Identification of the name and employer three year period (FY 2012 through expectation explicit. Furthermore,
ID number for each passive business 2014). The current estimate indicates currently, an SBIC must maintain this
entity used within the financing. This is that it takes approximately 12 minutes information for it to effectively monitor
needed so that SBA can identify all to complete the form, for a total annual and evaluate an investment that uses a
Portfolio Concerns involved in the burden of 404 hours. passive business to finance a non-
financing. Neither the number of respondents passive business. Therefore, SBA does
(c) Financing Structure Description: A nor the number of responses per year is not believe this recordkeeping
description of the financing structure, expected to be affected by this rule. requirement increases the burden.
including the flow of the money However, SBA estimates a slight The rule also requires a certification
between the SBIC and the non-passive increase in the burden hour as a result under § 107.610 when the SBIC makes
Small Business Concern that receives of the additional reporting in new Parts a financing using the exemption in
the proceeds (including amounts and D (Impact Investments) and Part E § 107.720(b)(3). This includes
types of securities between each entity), (Passive Business). maintaining records supporting the
and the ownership from the SBIC Impact Fund Reporting. This certification. Since this regulation
through each entity to the non-passive reporting is expected to have minimal effectively replaces the requirement for
Small Business Concern. This impact. The estimated eight SBICs SBICs to seek prior SBA approval and
information will help SBA assess that making impact investments would maintain these records, SBA does not
the Small Business Concern receives complete new Part D an estimated total believe this change will increase the
‘‘substantially all’’ the financing dollars 56 times annually. At an estimated 2 burden.
and the ownership percentages are in minutes per response, this additional
compliance with the regulations. This reporting would add 2 hours to the Regulatory Flexibility Act, 5 U.S.C. 601–
will also help SBA with SBICs annual burden for Form 1031. 612
transferred to the Office of Liquidation Passive Business Reporting. SBA The Regulatory Flexibility Act (RFA),
to identify the structure of the financing believes that the SBIC should be able to 5 U.S.C. 601, requires administrative
and aid in recovery of SBA leverage. provide the passive business agencies to consider the effect of their
(4) Impact Fund Policy Initiative: information since it should be readily actions on small entities, small non-
sradovich on DSK3GMQ082PROD with RULES
Finally, a new Part D, consisting of two available as part of the financing. SBA profit businesses, and small local
questions concerning whether the estimates that providing the information governments. Pursuant to the RFA,
investment is a fund-identified impact will take on average an additional 30 when an agency issues a rule, the
investment or SBA-identified impact minutes for those financings utilizing agency must prepare an Initial
investment has been added to the Form. passive businesses, with no incremental Regulatory Flexibility Act (IRFA)
This change provides a vehicle for burden for those financings that do not analysis which describes whether the
SBICs licensed to participate in SBA’s use a passive business. SBA estimates impact of the rule will have a significant
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![95424 Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Rules and Regulations
economic impact on a substantial or after October 1, 1996, must have the proceeds through to (or uses
number of small entities. However, Leverageable Capital of at least substantially all the proceeds to acquire)
Section 605 of the RFA allows an $2,500,000 and must meet the one or more subsidiary companies, each
agency to certify a rule, in lieu of applicable minimum Regulatory Capital of which is an eligible Small Business
preparing an IRFA, if the rulemaking is requirement in this paragraph (a), unless that is not passive. For the purpose of
not expected to have a significant lower Leverageable Capital and this paragraph (b)(2), ‘‘subsidiary
economic impact on a substantial Regulatory Capital amounts are company’’ means a company in which
number of small entities. This rule approved by SBA as part of a Wind-Up the financed passive business either:
would affect all SBICs, of which there Plan in accordance with § 107.590(c): (i) Directly owns, or will own as a
are currently close to 300. SBA * * * * * result of the Financing, at least 50
estimates that approximately 75 percent percent of the outstanding voting
■ 4. Amend § 107.503 by revising the
of these SBICs are small entities. securities; or
last sentence of paragraph (a) to read as (ii) Indirectly owns, or will own as a
Therefore, SBA has determined that this follows:
rule would have an impact on a result of the Financing, at least 50
substantial number of small entities. § 107.503 Licensee’s adoption of an percent of the outstanding voting
However, SBA has determined that the approved valuation policy. securities (by directly owning the
economic impact on entities affected by (a) * * * These guidelines may be outstanding voting securities of another
the rule would not be significant. As obtained from SBA’s SBIC Web site at passive Small Business that is the direct
discussed under the Paperwork www.sba.gov/inv. owner of the outstanding voting
Reduction Act section, SBICs would securities of the subsidiary company).
* * * * *
need to provide descriptions of the (3) Exception for certain Partnership
■ 5. Amend § 107.610 by adding Licensees. If you are a Partnership
transactions in the Form 1031, which paragraph (g) to read as follows:
based on the estimate would cost each Licensee, you may form one or more
SBIC approximately $28 per year. The § 107.610 Required certifications for Loans blocker entities in accordance with this
changes in the passive business and Investments. paragraph (b)(3). For the purposes of
regulation provide SBICs with * * * * * this paragraph, a ‘‘blocker entity’’ means
additional flexibility to employ (g) For each passive business financed a corporation or a limited liability
transaction structures commonly used under § 107.720(b)(3), a certification by company that elects to be taxed as a
by private equity or venture capital you, dated as of the closing date of the corporation for Federal income tax
funds that are not SBICs. Financing, as to the basis for the purposes. The sole purpose of a blocker
SBA asserts that the economic impact qualification of the Financing under entity must be to provide Financing to
of the rule, if any, would be minimal § 107.720(b)(3) and identifying one or one or more eligible, unincorporated
and beneficial to small SBICs. more limited partners for which a direct Small Businesses. You may form such
Accordingly, the Administrator of the Financing would cause those investors: blocker entities only if a direct
SBA certifies that this rule would not (1) To incur ‘‘unrelated business Financing to such Small Businesses
have a significant economic impact on taxable income’’ under section 511 of would cause any of your investors to
a substantial number of small entities. the Internal Revenue Code (26 U.S.C. incur ‘‘unrelated business taxable
511); income’’ under section 511 of the
List of Subjects in 13 CFR Part 107 (2) To incur ‘‘effectively connected Internal Revenue Code (26 U.S.C. 511);
Investment companies, Loan income’’ to foreign investors under incur ‘‘effectively connected income’’ to
programs-business, Reporting and sections 871 and 882 of the Internal foreign investors under sections 871 and
recordkeeping requirements, Small Revenue Code (26 U.S.C. 871 and 882); 882 of the Internal Revenue Code (26
businesses. or U.S.C. 871 and 882); or (for an investor
(3) For an investor that has elected to that has elected to be taxed as a
For the reasons stated in the regulated investment company) receive
preamble, the Small Business be taxed as a regulated investment
company, to receive or be deemed to or be deemed to receive gross income
Administration amends 13 CFR part 107 that does not qualify under section
as follows: receive gross income that does not
qualify under Section 851(b)(2) of the 851(b)(2) of the Internal Revenue Code
PART 107—SMALL BUSINESS Internal Revenue Code (26 U.S.C. (26 U.S.C. 851(b)(2)). Your ownership
INVESTMENT COMPANIES 851(b)(2)). and investment of funds in such blocker
entities will not constitute a violation of
■ 1. The authority citation for part 107 § 107.630 [Amended] § 107.730(a). For each passive business
is revised to read as follows: ■ 6. Amend § 107.630 by removing financed under this section
Authority: 15 U.S.C. 681, 683, 687(c), 687b, paragraph (d) and redesignating 107.720(b)(3), you must provide a
687d, 687g, 687m. paragraph (e) as paragraph (d). certification to SBA as required under
■ 7. Amend § 107.720 by revising § 107.610(g). A blocker entity formed
§ 107.50 [Amended] under this paragraph may provide
paragraphs (b)(2) and (3) and adding
■ 2. Amend § 107.50 by removing from paragraph (b)(4) to read as follows: Financing:
the definition of ‘‘Lending Institution’’ (i) Directly to one or more eligible
the term ‘‘Associates’s’’ and adding in § 107.720 Small Businesses that may be non-passive Small Businesses; or
its place the term ‘‘Associate’s’’. ineligible for financing. (ii) Directly to a passive Small
■ 3. Amend § 107.210 by revising * * * * * Business that passes substantially all the
sradovich on DSK3GMQ082PROD with RULES
paragraph (a) introductory text to read (b) * * * proceeds directly to (or uses
as follows: (2) Exception for pass-through of substantially all the proceeds to acquire)
proceeds to subsidiary. You may one or more eligible non-passive Small
§ 107.210 Minimum capital requirements provide Financing directly to a passive Businesses in which the passive Small
for Licensees. business, including a passive business Business directly owns, or will own as
(a) Companies licensed on or after that you have formed, if it is a Small a result of the Financing, at least 50%
October 1, 1996. A company licensed on Business and it passes substantially all of the outstanding voting securities.
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![Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Rules and Regulations 95425
(4) Additional conditions for DEPARTMENT OF TRANSPORTATION 800–647–5527) is in the ADDRESSES
permitted passive business financings. section. Comments will be available in
Financings permitted under paragraphs Federal Aviation Administration the AD docket shortly after receipt.
(b)(2) or (b)(3) of this section must meet For service information identified in
all of the following conditions: 14 CFR Part 39 this final rule, contact Sikorsky Aircraft
[Docket No. FAA–2016–9537; Directorate Corporation, Customer Service
(i) For the purposes of this paragraph
Identifier 2016–SW–075–AD; Amendment Engineering, 124 Quarry Road,
(b), ‘‘substantially all’’ means at least Trumbull, CT 06611; telephone 1–800-
39–18759; AD 2016–24–51]
ninety-nine percent of the Financing Winged-S or 203–416–4299; email: wcs_
proceeds after deduction of actual RIN 2120–AA64 cust_service_eng.gr-sik@lmco.com. You
application fees, closing fees, and may review the referenced service
expense reimbursements, which may Airworthiness Directives; Sikorsky
Aircraft Corporation information at the FAA, Office of the
not exceed those permitted by Regional Counsel, Southwest Region,
§ 107.860. AGENCY: Federal Aviation 10101 Hillwood Pkwy, Room 6N–321,
(ii) If you and/or your Associate Administration (FAA), DOT. Fort Worth, TX 76177.
charge fees permitted by § 107.860 and/ ACTION: Final rule; request for FOR FURTHER INFORMATION CONTACT:
or § 107.900, the total amount of such comments. Blaine Williams, Aerospace Engineer,
fees charged to all passive and non- Boston Aircraft Certification Office,
passive businesses that are part of the SUMMARY: We are publishing a new Engine & Propeller Directorate, 1200
same Financing may not exceed the fees airworthiness directive (AD) for District Avenue, Burlington,
that would have been permitted if the Sikorsky Aircraft Corporation (Sikorsky) Massachusetts 01803; telephone (781)
Model S–92A helicopters, which was 238–7161; email blaine.williams@
Financing had been provided directly to
sent previously to all known U.S. faa.gov.
a non-passive Small Business. Any such
owners and operators of these
fees received by your Associate must be SUPPLEMENTARY INFORMATION:
helicopters. This AD requires inspecting
paid to you in cash within 30 days of certain bearings. This AD is prompted Comments Invited
the receipt of such fees. by a report of a failed bearing. We are This AD is a final rule that involves
(iii) For the purposes of this part 107, issuing this AD to address the unsafe requirements affecting flight safety, and
each passive and non-passive business condition on these products. we did not provide you with notice and
included in the Financing is a Portfolio DATES: This AD is effective January 12, an opportunity to provide your
Concern. The terms of the financing 2017 to all persons except those persons comments prior to it becoming effective.
must provide SBA with access to to whom it was made immediately However, we invite you to participate in
Portfolio Concern information in effective by Emergency AD 2016–24–51, this rulemaking by submitting written
compliance with this part 107, issued on November 16, 2016, which comments, data, or views. We also
including without limitation §§ 107.600 contains the requirements of this AD. invite comments relating to the
and 107.620. We must receive comments on this economic, environmental, energy, or
* * * * * AD by February 27, 2017. federalism impacts that resulted from
ADDRESSES: You may send comments by adopting this AD. The most helpful
§ 107.1100 [Amended] any of the following methods: comments reference a specific portion of
Federal eRulemaking Docket: Go to the AD, explain the reason for any
■ 8. Amend § 107.1100 by removing the
http://www.regulations.gov. Follow the recommended change, and include
term ‘‘Yu’’ in the second to the last online instructions for sending your supporting data. To ensure the docket
sentence of paragraph (b) and adding in comments electronically. does not contain duplicate comments,
its place ‘‘You’’, and by removing • Fax: 202–493–2251. commenters should send only one copy
paragraph (c). • Mail: Send comments to the U.S. of written comments, or if comments are
§ 107.1150 [Amended] Department of Transportation, Docket filed electronically, commenters should
Operations, M–30, West Building submit them only one time. We will file
■ 9. Amend § 107.1150 by removing the Ground Floor, Room W12–140, 1200 in the docket all comments that we
term ‘‘$225 million’’ in the first New Jersey Avenue SE., Washington, receive, as well as a report summarizing
sentence of paragraph (b) and adding in DC 20590–0001. each substantive public contact with
its place ‘‘$350 million’’. • Hand Delivery: Deliver to the FAA personnel concerning this
‘‘Mail’’ address between 9 a.m. and 5 rulemaking during the comment period.
Dated: December 20, 2016. p.m., Monday through Friday, except We will consider all the comments we
Maria Contreras-Sweet, Federal holidays. receive and may conduct additional
Administrator. rulemaking based on those comments.
Examining the AD Docket
[FR Doc. 2016–31291 Filed 12–27–16; 8:45 am]
You may examine the AD docket on Discussion
BILLING CODE 8025–01–P
the Internet at http:// On November 16, 2016, we issued
www.regulations.gov by searching for Emergency AD 2016–24–51 to correct an
and locating Docket No. FAA–2016– unsafe condition on Sikorsky Model S–
9537; or in person at the Docket 92A helicopters with a TR pitch change
sradovich on DSK3GMQ082PROD with RULES
Operations Office between 9 a.m. and 5 shaft (TRPCS) assembly part number (P/
p.m., Monday through Friday, except N) 92358–06303–041 or P/N 92358–
Federal holidays. The AD docket 06303–042. Emergency AD 2016–24–51
contains this AD, the economic was sent previously to all known U.S.
evaluation, any comments received, and owners and operators of these
other information. The street address for helicopters. Emergency AD 2016–24–51
the Docket Operations Office (telephone requires removing TRPCS assemblies
VerDate Sep<11>2014 16:15 Dec 27, 2016 Jkt 241001 PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 E:\FR\FM\28DER1.SGM 28DER1](https://thefederalregister.org/doc/81_FR_95668/page/7.svg)
Document Created: 2016-12-28 02:16:56
Document Modified: 2016-12-28 02:16:56
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Rules and Regulations | |
| Action | Final rule. | |
| Dates | This rule is effective January 27, 2017. | |
| Contact | Theresa Jamerson, Office of Investment and Innovation, (202) 205-7563 or [email protected] | |
| FR Citation | 81 FR 95419 | |
| RIN Number | 3245-AG67 | |
| CFR Associated | Investment Companies; Loan Programs-Business; Reporting and Recordkeeping Requirements and Small Businesses |
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