[Federal Register Volume 59, Number 135 (Friday, July 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17187]


[[Page Unknown]]

[Federal Register: July 15, 1994]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 108, 120, and 123

 

Media Policy Rule

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

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SUMMARY: SBA is repealing its media policy or opinion molder rule. 
Under this final regulation, creditworthy small business concerns 
engaged in media activity will be eligible to be considered for SBA 
financial assistance unless they are otherwise ineligible. Under the 
final regulation, SBA reserves the right to withhold financial 
assistance on a case-by-case basis when the extension of assistance 
would be in violation of a statute or the Constitution. This action is 
being taken to enable SBA to promote job growth and economic 
development by making SBA financial assistance available to a larger 
number of small business concerns.

EFFECTIVE DATE: July 15, 1994. The amendment of Part 123 is effective 
for disasters which occur on or after July 15, 1994.

FOR FURTHER INFORMATION CONTACT:John R. Cox, Assistant Administrator 
for Financial Assistance, 202/205-6490.

SUPPLEMENTARY INFORMATION: On April 5, 1994, SBA published in the 
Federal Register a proposed regulation repealing its media policy rule 
(59 FR 15872). SBA received 143 comments which favored the repeal, and 
two comments against it. The majority of the affirmative commenters 
represented the owners of motion picture theaters and bookstores. They 
noted that the proposed repeal by the Agency would allow many small 
business concerns throughout the country, but particularly in rural 
areas, to obtain urgently needed financial assistance for maintenance, 
upgrading, and growth. While one of the commenters favored the proposed 
repeal, he voiced concern about SBA providing financial assistance to 
adult motion picture theaters. As is noted below, SBA will consider the 
constitutional and legal implications of the repeal of the present 
rule, as they arise on a case-by-case basis. However, the Agency does 
not consider the need to deal with these implications as sufficient to 
prevent it from going forward with the general repeal. Accordingly, the 
Agency is promulgating the repeal is proposed.
    Under SBA's existent regulatory policy, no SBA direct or guaranteed 
business loan, economic injury disaster loan, or development company 
assistance has been made to an applicant engaged in the ``creation, 
origination, expression, dissemination, propagation or distribution of 
ideas, values, thoughts, opinions or similar intellectual property, 
regardless of medium, form or content.'' (13 CFR Sec. 120.101-2(b) 
(1993)). There are several express exceptions to this prohibition.
    This policy was originally adopted by SBA in 1953 under the 
authority granted by Section 4(d) of the Small Business Act (15 USC 
633(d)) which authorizes the Agency to ``establish general policies 
(particularly with reference to the public interest* * *), which shall 
govern the granting and denial of applications for financial assistance 
by the Administration.'' The Reconstruction Finance Agency, the 
predecessor to SBA, had a similar media policy rule.
    There were three basic reasons for the policy: First, the 
prohibition was based upon SBA's desire to avoid any possible 
accusation that the Government was attempting to control editorial 
freedom by subsidizing media or communication for political or 
propaganda purposes. Second, the Agency has generally sought to avoid 
Government identification through its business assistance programs with 
concerns which might publish or produce matters of a religious or 
controversial nature. Third, SBA recognized that the constitutionally 
protected rights of freedom of speech and press ought not to be 
compromised either by the fear of Government reprisal or by the 
expectation of Government financial assistance.
    Over the years, Congress has considered the policy and has not 
objected to SBA's approach. In H.R. Rep. No. 840, 94th Cong., 2d Sess. 
28 (1976), the Subcommittee on SBA Oversight and Minority Enterprise 
acknowledged that SBA's statutory duty to assist small business

    Must be in balance with supervening First Amendment 
prohibitions. The Subcommittee does not believe that the SBA should 
engage in activities which would necessitate its assumption of a 
censorship role. By censorship we mean the ability of SBA to direct 
a business as to what it can do or cannot do, relative to First 
Amendment protected activity, coupled with the power to enforce its 
will through the use of sanctions. The subcommittee believes such 
censorship would exist if SBA were to place in its loan agreements a 
prohibition against the promulgation of certain ideas and values, a 
breach of which would allow the Agency to liquidate the loan.

    However, many individual Members of Congress have expressed concern 
with the substance of SBA's regulations in this area. Several bills 
have been introduced to revise the rule legislatively, although none 
has been enacted. For example, S. 2084, 98th Cong., 2nd Sess. (1984), 
would have abolished the rule except in cases where the financial 
assistance would have been used primarily to (1) advance or inhibit 
religion; (2) threaten the overthrow of organized Government by 
unlawful means; or (3) engage in any illegal activity or the 
dissemination of obscene materials which may be unlawful in any 
jurisdiction in which the small concern may operate. S. 2084 also would 
have required SBA to look at the content of the publications or 
communications in making its decision to assist a particular small 
concern.
    H.R. 1157, 98th Cong., 1st Sess. (1983), would have required SBA to 
hold a hearing, if the business was covered by the media policy rule, 
in order to ascertain if the SBA financial assistance would have been 
(1) adverse or detrimental to a legitimate public interest, or (2) used 
primarily to promote or criticize political or religious ideas. This 
approach would have led to lengthy hearings on applications for 
assistance every time the Agency interpreted the law adversely to an 
applicant.
    SBA testified on both of these bills and supported a legislative 
remedy to the problems associated with administration of the rule. 
However, no legislation has been forthcoming.
    In hearings on March 7, 1984, before the House Subcommittee on 
Export Opportunity and Special Small Business Problems, which was 
considering H.R. 1157, an expert in Constitutional Law on the faculty 
of the George Washington University Law School testified that the media 
policy rule was constitutional and was a justifiable approach in light 
of SBA's business and financial orientation and limited First Amendment 
expertise. However, there have been concerns raised over the years 
regarding the breadth of the present rule.
    The regulation presently provides a very broad list of ineligible 
enterprises which includes publishers, producers, importers, exporters 
or distributors of all types of communications (such as newspapers, 
sheet music, posters, film, tape, theatrical productions, greeting 
cards, and books), plus transportation concerns limited to the 
distribution of such products. Regulatory exceptions have been granted 
to commercial printing firms, advertising agencies, technical 
production facilities (such as a recording studio), and vocational 
schools. Eligible for assistance based on administrative 
interpretations are general merchandise stores which sell books, 
magazines and newspapers, and general book, music, record or videotape 
stores. Not eligible for assistance are specialty book or videotape 
stores which sell or rent items in a single or limited subject area. 
The rationale underlying the distinction between general and specialty 
stores has been that a general store covers a broad range of ideas, 
values and thoughts, rather than a particular or narrow set of ideas or 
values. SBA no longer regards this distinction as a proper basis for 
determining eligibility.
    SBA is well aware that small media concerns often have difficulty 
in raising capital or borrowing money. The media policy rule applicable 
to the financing of business loans has not been applied to assistance 
provided by small business investment companies (SBICs) which are 
licensed by SBA. Thus, SBICs are permitted to help businesses engaged 
in the media. The policy surrounding SBIC assistance to media concerns 
is similar to the approach taken by the Congress in funding 
broadcasting through the nonprofit Corporation for Public Broadcasting. 
SBICs operate within SBA regulations, but their transactions with small 
companies are private arrangements which carry no SBA guaranty.
    SBA also has been making physical injury disaster loans to media 
concerns and academic schools since 1953, based on humanitarian 
grounds. The SBA's disaster loan program attempts to restore to an 
injured party that which was lost due to circumstances beyond its 
control. No distinction is made for eligibility purposes between media 
and non-media concerns for physical disaster loans, but economic injury 
disaster loans have been subject to the limitations of the media policy 
rule.
    SBA believes that the assistance it presently makes available under 
the exceptions to the media rule and under the SBIC and disaster 
programs is not sufficient to assist small businesses in the media 
industries which are demonstrably in need of increased aid. 
Accordingly, SBA is changing its policy so as to make assistance 
available, under the 7(a) business, economic injury disaster and 
development company loan programs, to media concerns which are 
otherwise eligible for such assistance.
    SBA believes that its present regulatory apparatus and 
administrative practice for screening applicants for such assistance 
are sufficient to protect the public interest. In this regard, the 
present credit criteria under which applications for such assistance 
are reviewed and the prohibition on funding illegal activities should 
be sufficient to provide the desired level of protection. (See 13 CFR 
Parts 120 et seq. and 122 et seq., specifically 13 CFR Secs. 120.101-
2(d) and 120.103-2). SBA's Office of General Counsel plans to address 
constitutional and other legal issues which may arise as a result of 
this repeal on a case by case basis. The General Counsel's Office will 
provide SBA field personnel with guidance and advice with respect to 
loan applications which are referred to that office because of 
constitutional or other legal concerns.
    Since SBA is repealing the media rule in Part 120 of its 
regulations, it is also eliminating the cross-reference to the rule 
which is in Part 123 of its regulations, relating to economic injury 
disaster loans. Because the repeal of the opinion molder necessitates 
renumbering subparagraphs in Part 120, SBA is also changing a cross-
reference to Part 120 in Part 108 of its regulations, relating to 
development companies.

Compliance With Executive Orders 12612, 12778 and 12866, the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq. and the Paperwork Reduction Act, 
44 U.S.C. Ch. 35

    For purposes of the Regulatory Flexibility Act, 5 U.S.C. 601 et 
seq., SBA certifies that this final rule will have a significant 
economic impact on a substantial number of small entities. From the 
limited amounts of data that the SBA had at the proposed rulemaking 
stage, SBA certified that repeal of the media policy rule would not 
have a significant economic impact upon a substantial number of small 
entities. Based upon data received from various sources and comments 
received by SBA concerning the proposed rulemaking, SBA, upon further 
consideration, believes that this rule could have a significant 
economic impact upon a substantial number of small entities.
    Repeal of the media policy rule would increase the eligibility for 
small entities in certain industries. Material from unpublished data 
prepared under contract by the United States Bureau of the Census for 
the SBA in May, 1994, show that approximately 75,000 small business 
concerns in the affected industries would become eligible for 
participation in the SBA's loan guaranty program. These small business 
concerns account for approximately 95% of the businesses in those 
industries.
    In compliance with the Regulatory Flexibility Act, the SBA has 
examined alternatives other than the repeal of the media policy rule. 
The alternatives included modification of the rule and maintenance of 
the status quo. The SBA has determined that of those courses of action, 
repeal of the rule would be most beneficial to those entities.
    This final rule was reviewed by OMB under Executive Order 12866. 
This final rule is intended to make eligible more media small business 
concerns. It is reasonable to assume that SBA will not be requested to 
process a disproportionate number of additional media loan 
applications. For example, in fiscal 1991, 1992 and 1993, respectively, 
SBA guaranteed 202, 199 and 241 section 7(a) loans to eligible 
bookstores, advertising agencies, video stores and vocational schools. 
The aggregate amounts of the SBA guaranteed portions for those three 
years for such businesses were, respectively, $27.7, $28.7 and $35.2 
million.
    SBA certifies that the final rule would not impose additional 
reporting or recordkeeping requirements which would be subject to the 
Paperwork Reduction Act, 44 U.S.C. Chapter 35.
    SBA certifies that this final rule would not have federalism 
implications warranting the preparation of a Federalism Assessment in 
accordance with Executive Order 12612.
    Further, for purposes of Executive Order 12778, SBA certifies that 
this final rule is drafted, to the extent practicable, in accordance 
with the standards set forth in section 2 of that Order.

(Catalogue of Federal Domestic Assistance Programs, No. 59.012, 
Small Business Loans)

List of Subjects

13 CFR Part 120

    Loan programs/businesses; Small Businesses

13 CFR Part 123

    Disaster Assistance; Loan programs--business

13 CFR Part 108

    Loan programs--business; Small businesses.

    Accordingly, pursuant to the authority contained in section 5(b)(6) 
of the Small Business Act (15 U.S.C. 634(b)(6)), SBA is amending parts 
108, 120 and 123, chapter I, title 13, Code of Federal Regulations, as 
follows:

PART 120--BUSINESS LOAN POLICY

    1. The authority citation for Part 120 continues to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6) and 636 (a) and (h).

    2. Section 120.101-2 is amended by removing paragraph (b) in its 
entirety, and redesignating paragraphs (c) through (h) as paragraphs 
(b) through (g).

PART 123--DISASTER--PHYSICAL DISASTER AND ECONOMIC INJURY LOANS

    1. The authority citation for part 123 continues to read as 
follows:

    Authority: Sections 5(b)(6), 7 (b), (c), (f) of the Small 
Business Act (15 U.S.C. 634 (b)(6), 636 (b), (c), (f)); and Pub. L. 
102-395, 106 Stat. 1828, 1864, and Pub. L. 103-75, 107 Stat. 739.

    2. Section 123.41(b)(2) is revised to read as follows:


Sec. 123.41  General Provisions.

* * * * *
    (b) Eligible applicants. (1) * * *
    (2) Small business concerns regardless of their business activity 
are eligible to apply for these loans, except for (i) gambling 
concerns--see Sec. 120.101-2(b); (ii) concerns engaged in illegal 
activities--see Sec. 120.101-2(c); (iii) lending or investment 
concerns--see Sec. 120.101-2(d); (iv) concerns with principals 
incarcerated, on parole or probation--see Sec. 120.101-2(e); (v) multi-
level sales distribution (``pyramid'') concerns--see Sec. 120.101-2(f); 
(vi) loan packagers--see Sec. 120.101-2(g); (vii) concerns engaged in 
speculation--see Sec. 120.102-5; (viii) concerns investing in 
property--see Sec. 120.102-8.
* * * * *

PART 108--LOANS TO STATE AND LOCAL DEVELOPMENT COMPANIES

    1. The authority citation for part 108 continues to read as 
follows:

    Authority: 15 U.S.C. 687(c), 695, 696, 697a, 697b, 697c.

    2. Section 108.8(g) is revised to read as follows:


Sec. 108.8  Borrower requirements and prohibitions.

* * * * *
    (g) Other loan eligibility requirements. Sections 120.101-2 (except 
paragraph (d)), 120.102-5 and 120.102-9 of this chapter shall apply to 
loans made or guaranteed under this part.

    Dated: June 29, 1994.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-17187 Filed 7-14-94; 8:45 am]
BILLING CODE 8025-01-M