[Federal Register Volume 66, Number 12 (Thursday, January 18, 2001)]
[Rules and Regulations]
[Pages 4643-4645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1543]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 126


HUBZone Program

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: This final rule amends the regulations governing the HUBZone 
Empowerment Contracting Program (HUBZone program). In particular, this 
rule clarifies the application of the HUBZone program to state and 
local governments, revises the definition of the term ``principal 
office,'' eliminates the program eligibility restrictions on allowable 
affiliations of HUBZone small business concerns, and eases the program 
eligibility requirements and procurement restrictions concerning 
qualified HUBZone small business concerns that operate as non-
manufacturers.

DATES: This rule is effective on February 20, 2001.

FOR FURTHER INFORMATION CONTACT: Michael McHale, Associate 
Administrator for the HUBZone Program, (202) 205-6731 or 
[email protected].

SUPPLEMENTARY INFORMATION: On October 3, 2000, the Small Business 
Administration (SBA) published in the Federal Register, 65 FR 58963, a 
proposed rule to amend its regulations governing the HUBZone program. 
The rule proposed to update the list of Federal agencies covered by the 
HUBZone program and clarify that the program does not apply to 
contracts awarded by state and local governments. In addition, the rule 
proposed to amend the definition of the term principal office to 
accommodate service and construction concerns, and to eliminate the 
program eligibility restrictions on allowable affiliations of HUBZone 
small business concerns (SBCs). Finally, the rule proposed to ease the 
program eligibility requirements and procurement restrictions 
concerning qualified HUBZone small business concerns that operate as 
non-manufacturers. The proposed regulatory amendments were intended to 
improve the efficiency and effectiveness of the program in light of 
SBA's experience since the effective date of the final regulations 
implementing the HUBZone Act of 1997, Title VI of the Small Business 
Reauthorization Act of 1997, Public Law 105-135.

Discussion of Comments on the Proposed Rule

    SBA received 22 timely comments concerning the proposed amendments. 
The vast majority of the comments supported the proposed regulatory 
amendments and applauded SBA's efforts to improve and clarify the 
HUBZone regulations. In addition to expressing support for the 
amendments, a few commenters also recommended some modifications to two 
of the

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proposed amendments. As discussed below, SBA carefully considered the 
comments and recommendations in developing this final rule. SBA 
received a few comments addressing other sections of the HUBZone 
regulations. Because this final rule does not involve any of those 
sections, SBA does not discuss those comments here but will consider 
them for future amendments to the HUBZone regulations.
    Four comments addressed SBA's proposal to revise Sec. 126.101, to 
add three additional Federal agencies to the list of agencies covered 
by the HUBZone Act and to clarify that the program does not apply to 
state and local governments. Three of those comments supported those 
amendments. One of the four commenters, however, pointed out that 
Section 212 of Public Law 106-113, which extended the HUBZone program 
to the three Federal agencies that SBA proposed to add to the list, was 
effective for the fiscal year ending September 30, 2000. That commenter 
also noted that although the current Sec. 126.101(b) makes clear that 
after September 30, 2000, the HUBZone program applies to all federal 
agencies that hire one or more contracting officers, it may be useful 
to retain the current list of covered agencies under Sec. 126.101(a) 
because it spells out the program's applicability to HUBZone contracts 
awarded prior to September 30, 2000. SBA concurs with that 
recommendation and therefore has retained the original Sec. 126.101(a) 
without change and has adopted in full a new paragraph (c) to 
Sec. 126.101, as proposed on October 3, 2000.
    The comments concerning the definition of ``principle office,'' 
were all supportive of the proposed amendment of that definition in 
Sec. 126.103. Under the proposed definition, ``principle office'' would 
continue to be defined as the location where the greatest number of the 
concern's employees perform their work, except that for concerns whose 
primary industry is service or construction, the determination of 
``principal office'' would exclude the concern's employees who perform 
their work at separate job-site locations to fulfill specific contract 
obligations.
    In the preamble to the proposed rule, SBA specifically requested 
public comments on the proposed employee exclusion provision for the 
construction and service industries. Responding commenters strongly 
supported that exclusion for firms engaged in the construction and 
service industries. They agreed that the current definition of 
``principal office'' is appropriate for manufacturing concerns, because 
such firms tend to operate with fixed plant, equipment and personnel 
tied to one location, but that it did not make sense for service or 
construction industries. Accordingly, this final rule adopts the 
definition of ``principal office'' as proposed.
    With one notable exception, commenters likewise endorsed the 
proposed amendment of Sec. 126.204, to eliminate the current 
restriction on allowable affiliations of HUBZone SBCs to other 
qualified HUBZone SBCs, 8(a) Business Development program participants 
and women-owned small businesses. The one objecting commenter expressed 
concern that the proposed change would make it easier for large 
businesses to set up ``store-front'' affiliates to abuse the program. 
SBA disagrees. The proposed amendment to Sec. 126.204 makes clear that 
the size of the HUBZone SBCs when combined with the size of all its 
affiliates must qualify as small under part 121 of title 13 of the Code 
of Federal Regulations. That requirement safeguards against possible 
abuse by large businesses in that regard.
    Although supporting the proposed elimination of the existing 
restrictions on allowable affiliations, another commenter recommended 
that SBA relax the requirements of Sec. 126.204 further by revising the 
directive for aggregating the size of the HUBZone SBC and its 
affiliates. That commenter suggested that SBA should only aggregate the 
``business activity resulting from'' the affiliation. SBA declines to 
accept that recommendation. Given the broad definition of affiliation 
under Sec. 121.103 of title 13 of the Code of Federal Regulations, it 
is not feasible to aggregate only the ``business activity resulting 
from'' the affiliation. Further, combining the size of a HUBZone 
concern with all its affiliates is consistent with governing size 
regulations under part 121, and does not impose undue burden on 
otherwise qualified HUBZone SBCs. SBA believes that a finding of 
affiliation should have the same consequences in each of SBA's 
programs. In other words, a finding of affiliation causes SBA to 
aggregate all of the receipts or employees of each of the affiliates. 
SBA does not look only at certain types of receipts of a firm's 
affiliates, but rather, combines all receipts of an affiliate from 
whatever source. SBA believes that that general rule is equally 
applicable to the HUBZone program. Consequently, the requirement for 
aggregating the size of a HUBZone SBC and all its affiliates is 
retained in this final rule.
    Finally, SBA received several comments which were supportive of the 
proposed amendment to Sec. 126.206 to eliminate the eligibility 
requirement that a non-manufacturer demonstrate that it can provide 
products manufactured by a qualified HUBZone SBC, and the proposed 
amendment to Sec. 126.601(d) to allow qualified HUBZone SBCs that are 
non-manufacturers to supply the product of any business for HUBZone 
contracts at or below $25,000 in total value. Three of those 
commenters, however, requested that SBA adopt a higher maximum 
threshold of as high as $100,000 and $250,000. SBA does not believe 
that an increase in the proposed $25,000 threshold is justified at this 
time, since it would unfairly impact qualified HUBZone SBCs that are 
manufacturers. The $25,000 threshold also parallels the regulatory 
scheme of the Federal Acquisition Regulation, 48 CFR 19.502-2(c), which 
permits small businesses in small business set-asides where the 
anticipated cost of the procurement will not exceed $25,000, to provide 
the product or products of any domestic firm.
    As suggested by one commenter, the final rule makes one 
clarification to the provisions regarding HUBZone non-manufacturers. In 
both Sec. 126.206 and Sec. 126.601(d), the final rule specifically 
references 13 CFR 121.406(b)(1)(i) and (ii), as the applicable 
definition of non-manufacturer. Other than that clarification, this 
final rule adopts without change the proposed amendments pertaining to 
HUBZone non-manufacturers.

Application of the Final Rule

    As indicated above, this rule is effective thirty days from the 
date of publication. To ensure that applicants to and participants in 
the HUBZone program are subject to the same regulatory requirements, 
this final rule applies to all HUBZone applications submitted on or 
after the effective date of this rule, to all pending HUBZone 
applications, and to all currently certified HUBZone SBCs.

Compliance With Executive Orders 12866, 12988, and 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-602)

    The Office of Management and Budget (OMB) reviewed this final rule 
as a ``significant'' regulatory action under Executive Order 12866.
    For purposes of Executive Order 12988, SBA has drafted this rule, 
to the extent practicable, in accordance with the standards set forth 
in section 3 of that Order.
    For purposes of Executive Order 13132, SBA has determined that this

[[Page 4645]]

final rule has no federalism implications warranting the preparation of 
a Federalism Assessment.
    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
has determined that this rule does not impose new reporting or 
recordkeeping requirements.
    SBA has determined that this final rule may have a significant 
beneficial economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 
Sec. 601, et seq. This rule involves revising the definition of 
``principal office'' and eliminating certain requirements governing the 
allowable affiliations of qualified HUBZone SBCs and SBCs that operate 
as non-manufacturers. The rule will affect a large percentage of the 
over 30,000 SBCs that SBA believes are now eligible or will become 
eligible for certification as qualified HUBZone SBCs over the life of 
the program.
    Pursuant to the requirements of the RFA, SBA prepared an Initial 
Regulatory Flexibility Analysis (IRFA), fully discussing the economic 
impact of the amendments on small entities. SBA submitted a copy of the 
IRFA to the Chief Counsel for Advocacy of the Small Business 
Administration. No comments were submitted in response to the IRFA. 
Since this final rule implements the amendments without significant 
substantive change, this final rule does not change the nature of the 
economic impact of the amendments on small entities, nor alter the 
basis of SBA's IRFA. Accordingly, this Final Regulatory Flexibility 
Analysis incorporates by reference the entire IRFA. A copy of the Final 
Regulatory Flexibility Analysis and IRFA may be obtained by contacting 
the Chief Counsel for Advocacy of the Small Business Administration, 
(202) 205-6533.
    The amendments that are the subject of this rule will affect 
primarily those SBCs that participate in Federal procurements, that 
have affiliates, or that are non-manufacturers. The amendments will 
make it easier for qualified SBCs to participate in the program because 
it provides a definition of ``principal office'' that accommodates the 
fluid nature of the construction and service industries and it allows 
qualified HUBZone SBCs to have any affiliates provided that they, 
together with their affiliates, do not exceed their applicable size 
standard under part 121 of title 13 of the Code of Federal Regulations. 
This final rule also will facilitate the certification of qualified 
HUBZone SBCs and open the door to more HUBZone contracts by eliminating 
the eligibility requirement that non-manufacturers must demonstrate 
that they can supply the goods of a qualified SBC as a prerequisite for 
program certification, and by exempting non-manufacturers from making 
that showing when submitting offers to supply goods for HUBZone 
contracts with a total value of $25,000 or less.
    In addition, this final rule does not duplicate, overlap or 
conflict with relevant Federal regulations. SBA reviewed several 
alternatives to the amendments implemented by this rule and believes 
that the amendments are in the best interest of SBCs and the HUBZone 
Program.

(Catalog of Federal Domestic Assistance Programs, No. 59,009)

List of Subjects in 13 CFR Part 126

    Administrative practice and procedure, Government procurement, 
Reporting and recordkeeping requirements, Small businesses.
    Accordingly, for the reasons set forth above, SBA amends 13 CFR 
part 126, as follows:

PART 126--HUBZONE PROGRAM [AMENDED]

    1. Revise the authority citation for 13 CFR part 126 to read as 
follows:

    Authority: 15 U.S.C. 632(a); Pub. L. 105-135 sec. 601 et seq., 
111 Stat. 2592.


    2. Amend Sec. 126.101 by adding a new paragraph (c) to read as 
follows:


Sec. 126.101  Which government departments or agencies are affected 
directly by the HUBZone program?

* * * * *
    (c) The HUBZone program does not apply to contracts awarded by 
state and local governments. However, state and local governments may 
use the List of qualified HUBZone SBCs to identify qualified HUBZone 
SBCs for similar programs authorized under state or local law.
    3. Amend Sec. 126.103 to revise the definition of ``principal 
office'' to read as follows:


Sec. 126.103  What definitions are important in the HUBZone program?

* * * * *
    Principal office means the location where the greatest number of 
the concern's employees at any one location perform their work. 
However, for those concerns whose ``primary industry'' (see 13 CFR 
121.107) is service or construction (see 13 CFR 121.201), the 
determination of principal office excludes the concern's employees who 
perform the majority of their work at job-site locations to fulfill 
specific contract obligations.
* * * * *

    4. Revise Sec. 126.204 to read as follows:


Sec. 126.204  May a qualified HUBZone SBC have affiliates?

    A concern may have affiliates provided that the aggregate size of 
the concern and all its affiliates is small as defined in part 121 of 
this title.


    5. Revise Sec. 126.206 to read as follows:


Sec. 126.206  May non-manufacturers be certified as qualified HUBZone 
SBCs?

    Non-manufacturers (referred to in the HUBZone Act of 1997 as 
``regular dealers'') may be certified as qualified HUBZone SBCs if they 
meet all of the requirements set forth in Sec. 126.200. For purposes of 
this part, a ``non-manufacturer'' is defined in Sec. 121.406(b)(1)(i) 
and (ii) of this title.


    6. Amend Sec. 126.601 by revising paragraph (d) to read as follows:


Sec. 126.601  What additional requirements must a qualified HUBZone SBC 
meet to bid on a contract?

* * * * *
    (d) A qualified HUBZone SBC which is a non-manufacturer may submit 
an offer on a HUBZone contract for supplies if it meets the 
requirements of the non-manufacturer rule set forth at 
Sec. 121.406(b)(1)(i) and (ii) of this title, and if the small 
manufacturer providing the end item for the contract is also a 
qualified HUBZone SBC. However, for HUBZone contracts at or below 
$25,000 in total value, a qualified HUBZone SBC may supply the end item 
of any manufacturer, including a large business.

    Dated: January 10, 2001.
Aida Alvarez,
Administrator.
[FR Doc. 01-1543 Filed 1-17-01; 8:45 am]
BILLING CODE 8025-01-P