[Federal Register Volume 67, Number 226 (Friday, November 22, 2002)]
[Proposed Rules]
[Pages 70339-70352]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29272]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121 and 134

RIN: 3245-AE92


Small Business Size Regulations; Rules of Procedure Governing 
Cases Before the Office of Hearings and Appeals

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The Small Business Administration (SBA) proposes to amend its 
small business size regulations and the regulations applying to appeals 
of size determinations. The proposed rule would amend the definitions 
of affiliation, annual receipts, and employees. It would also make 
procedural and technical changes to cover new programs such as SBA's 
HUBZone program and the government-wide Small Disadvantaged Business 
program. The proposed rule would codify several long-standing 
precedents of SBA's Office of Hearings and Appeals and would clarify 
the jurisdiction of that office.

DATES: Comments must be received on or before January 21, 2003.

ADDRESSES: Written comments should be addressed to John W. Klein, 
Associate General Counsel for Procurement Law, Small Business 
Administration, 409 3rd Street, SW., Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Laura M. Eyester, Office of General 
Counsel, (202) 619-1801.

SUPPLEMENTARY INFORMATION: SBA's small business size regulations (13 
CFR part 121) are used to determine eligibility for all SBA and Federal 
programs that require an entity to be a small business concern. In the 
past, to be considered small, concerns were required to qualify under a 
particular size standard that corresponded to a four-digit Standard 
Industrial Classification (SIC) code. Effective October 1, 2000, to be 
considered small, concerns are required to qualify under a particular 
size standard that corresponds to the six-digit North American 
Industrial Classification System (NAICS) code. SBA published its final 
rule setting forth the various NAICS codes and corresponding size 
standards at 65 FR 30836 (May 15, 2000). SBA published a technical 
correction to the final at 65 FR 53533 (September 5, 2000). That final 
rule changed all references to SIC codes in part 121 to NAICS codes. 
This proposed rule would not change any size standards currently 
corresponding to specific NAICS codes.
    With a few exceptions, SBA size standards are based on either 
average annual receipts or number of employees, depending on the 
industry. When measuring a concern's size, the receipts or employees of 
affiliated concerns are included. The proposed rule would modify the 
definitions of affiliation, annual receipts, and number of employees. 
The proposed changes to part 134 would clarify the jurisdiction of 
SBA's Office of Hearings and Appeals (OHA) and make certain technical 
amendments.

Section-by-Section Analysis

    SBA proposes to amend Sec.  121.102 by adding a new paragraph (d) 
that would recognize that there currently exists an internal Size 
Policy Board at SBA that is responsible for making recommendations to 
the Administrator

[[Page 70340]]

on size standards, other size eligibility requirements, and size 
protest procedures. In addition, SBA proposes to amend Sec.  121.103 to 
specifically incorporate into the definition of ``affiliation'' certain 
provisions that were previously contained in the regulations. Because 
there may have been some confusion regarding the more generalized 
affiliation language when SBA amended its regulations in 1996, SBA 
believes it is necessary to again specifically state other bases of 
possible affiliation in the regulations. The section would be revised 
to state that control may be affirmative or negative, provide an 
example of negative control, state that control may be exercised 
indirectly through a third party, and state that affiliation may be 
found under the totality of the circumstances even though no single 
factor is sufficient to constitute affiliation. These three changes 
codify long-standing OHA rulings. See, e.g., Size Appeal of Jensco 
Marine, Inc., SBA No. SIZ-4330 (1998); Size Appeal of National Welders, 
SBA No. SIZ-4315 (1998); Size Appeal of First American Tax Valuation, 
Inc., SBA No. SIZ-4206 (1996); and Size Appeal of Field Support 
Services, Inc., SBA No. SIZ-4176 (1996). (OHA decisions cited in this 
preamble can be located at www.sba.gov/oha/searchpage.html or by 
contacting OHA by e-mail at [email protected] or by phone at 202-401-8200.)
    This proposed rule would change the title of Sec.  121.103(b) from 
``Exclusion from affiliation coverage'' to ``Exceptions to affiliation 
coverage'' for clarity. In addition, the proposed rule would amend 
Sec.  121.103(b)(2) to clarify the exception to affiliation for Indian 
tribes (including Alaska Native Corporations), Community Development 
Corporations (CDCs) or Native Hawaiian Organizations (NHOs). 
Specifically, the proposed rule would specify that the exception 
applies whether the tribe, CDC or NHO owns the concern whose size is at 
issue directly, or through another entity, which is wholly-owned by the 
tribe, CDC or NHO. The proposed rule would also provide that 
affiliation could not be found among several tribally, ANC, CDC or NOH-
owned concerns based on common management. This is an extension of the 
current regulation, which precludes affiliation based solely on common 
ownership. SBA believes that this change is particularly needed in the 
context of tribally-owned concerns where tribal board members often are 
also board members of tribally-owned concerns. SBA specifically asks 
for comments as to whether this exception from affiliation goes far 
enough, or whether SBA should provide the same exception to affiliation 
as that contained for the 8(a) program in Sec.  124.109(c)(2)(iii). SBA 
notes, however, that the exception to affiliation for the 8(a) program 
is statutorily based, while the general exception contained in Sec.  
121.103(b)(2) is not.
    The proposed rule would also add language to both Sec.  
121.103(b)(2) and (b)(6) to clarify that SBA may find affiliation other 
than through common ownership or common management, and with respect to 
approved mentor/protege relationships, other than on the basis of the 
mentor/protege agreement. This is not a change in policy, but a 
clarification of existing policy.
    SBA proposes two changes to Sec.  121.103(c). Section 121.103(c)(1) 
would be amended by adding the word ``voting'' to clarify that only 
voting stock is considered in determining affiliation. In addition, SBA 
proposes adding a sentence to Sec.  121.103(c)(2) stating that the 
presumption of control may be rebutted by showing that control does not 
in fact exist. For example, in Size Appeal of Tri-Fuels, Inc., SBA No. 
SIZ-3563 (1992), OHA held that the presumption that minority 
shareholders owning substantially equal blocks of stock each control a 
firm was rebutted where a shareholder's agreement specified that each 
of the shareholders could appoint one of five directors. The proposed 
rule would also add a new Sec.  121.103(c)(3), which would provide that 
where a concern's voting stock is widely held and no single block of 
stock is large as compared with all other stock holdings, SBA will deem 
the concern's Board of Directors and its Chief Executive Officer (CEO) 
or President to have the power to control the concern in the absence of 
evidence to the contrary. In the absence of evidence to the contrary, 
SBA will find control in such circumstances to rest with the Board of 
Directors and with the highest ranking officer of the concern (either 
its CEO or President) because control of the concern must rest 
somewhere.
    Section 121.103(d) discusses affiliation, which arises under stock 
options, convertible debentures, and agreements to merge. SBA gives 
present effect to all such arrangements in determining affiliation. SBA 
proposes to amend the section by setting forth exceptions to this 
``present effect'' rule that have been developed by OHA rulings. See, 
e.g., Size Appeal of Consolidated Industries, Inc., SBA No. SIZ-4235 
(1997). One proposed exception would not give present effect to 
agreements to open or continue negotiations towards the possibility of 
a merger or a sale of stock at some later date. Another proposed 
exception would not give present effect to options, debentures, and 
agreements that are subject to conditions that are incapable of 
fulfillment, speculative, conjectural, remote, or unenforceable under 
state or Federal law.
    Section 121.103(e) covers control through common management and 
would be amended to clarify that affiliation arises when an officer, 
director, managing member, or partner controls two concerns. Section 
121.103(f) would expand the current regulation at Sec.  121.103(a)(3) 
covering the concept of ``identity of interest.'' The concept is that 
two or more persons with an identity of interest, such as members of 
the same family or with common investments in more than one concern, 
may be treated as a single party for size determination purposes. See, 
Size Appeal of Golden Bear Arborists, SBA No. SIZ-1899 (1984). Although 
this provision was deleted as a separate basis for affiliation from 
part 121 in 1996, when SBA streamlined its regulations, see, 13 CFR 
121.401(d) (1995), the concept remained under the ``General Principles 
of Affiliation,'' and OHA continues to use the identity of interest 
concept in ruling on affiliation issues. See, e.g., Size Appeal of 
Lyons Security Service, Inc., SBA No. SIZ-4264 (1997). SBA believes 
that for purposes of clarity this rule should be explicitly set forth 
as a separate basis for finding affiliation in the size regulations.
    SBA also proposes to add Sec.  121.103(g), ``Affiliation based on 
the newly organized concern rule.'' This proposed section provides that 
affiliation may arise where former officers, directors, stockholders, 
managing members (in a limited liability corporation) or key employees 
of one concern organize a new concern in the same or related industry 
and serve as its officers, directors, stockholders, managing members or 
key employees, and the first concern will provide contractual, 
financial, or other assistance to the new concern. This provision also 
previously appeared in SBA's size regulations, and SBA believes that it 
is appropriate to add it back to the regulations as a separate basis 
for finding affiliation. SBA notes that even after the regulatory 
change removing the newly organized concern concept as a separate basis 
for finding affiliation, OHA has continued to use it from the general 
principles of affiliation contained in the regulations to find 
affiliation. See, e.g., Size Appeal of Lyons Security Service, Inc., 
supra; Size

[[Page 70341]]

Appeal of Frontier Applied Sciences, Inc., SBA No. SIZ-4316 (1998).
    SBA proposes to redesignate the joint venture regulation currently 
at Sec.  121.103(f) to Sec.  121.103(h), clarify it, and define its key 
terms. SBA receives numerous inquiries concerning the definition of the 
terms ``joint venture'' and ``teaming arrangement.'' Therefore, SBA 
proposes to add definitions of these terms in its regulations. SBA is 
using the definitions of these terms as set forth in parts 9 and 19 of 
the Federal Acquisition Regulation (FAR), title 48 of the Code of 
Federal Regulations, for consistency in the government contracting 
field. In addition, in Sec.  121.103(h)(5), SBA proposes to add 
language clarifying that for size purposes a concern must include in 
its revenues its proportionate share of joint venture receipts, or in 
its total number of employees its proportionate share of joint venture 
employees. A concern that was found to be affiliated through the 
``ostensible subcontractor'' rule cannot, however, claim that because 
SBA found there to be a joint venture in effect for a particular 
contract it can exclude the receipts/employees of its subcontractor 
(i.e., the ostensible subcontractor), which SBA deemed to be a joint 
venturer. SBA will exclude the proportionate share of receipts/
employees only of true joint venture partners.
    SBA is considering another change to the joint venture regulation, 
as well. SBA's regulations allow joint ventures to be considered small 
for larger procurements when certain requirements are met. See Sec.  
121.103(f)(3). In general, SBA regards joint ventures as short term 
relationships, which enable two or more concerns to enter into a 
business relationship to perform a specific contract. SBA is 
considering adopting a rule that would allow two or more small 
businesses to form a joint venture relationship that would go beyond a 
specific contract and still afford them the exclusion from affilation 
(if the other requirements are met). In other words, the joint venture 
could be an ongoing relationship that would allow the concerns to seek 
out several different larger contract opportunities and still get an 
exclusion from affiliation without requiring the entities to form a 
separate joint venture for each contract opportunity. SBA is 
specifically requesting comments on this proposal.
    SBA proposes several changes to Sec.  121.104, which pertain to how 
the annual receipts of a concern are calculated. On January 31, 1996, 
SBA amended its size regulations to simplify the method by which it 
determines average annual receipts (aar). Under the current 
regulations, SBA bases its calculation of a concern's aar solely on 
information contained in the concern's Federal income tax returns over 
its last three completed fiscal years. 61 FR 3280 (January 31, 1996). 
Previously, SBA could rely either on a concern's regular books of 
account or Federal income tax returns to determine a concern's aar. 
That policy change was made by SBA in an effort to simplify its size 
regulations by using the information a business concern reports to the 
Internal Revenue Service (IRS) for tax purposes to determine the annual 
receipts of a concern. The 1996 revisions also deleted SBA's 
requirement that a concern whose small business size status had been 
protested had to restate its receipts based on the accrual method of 
accounting if its books of account or tax returns were prepared using a 
different method of accounting. Since 1996, a number of issues have 
arisen concerning that revision and SBA now believes the public would 
benefit from additional regulatory guidance on these matters. In 
addition, OHA has rendered several significant rulings relating to the 
calculation of annual receipts and SBA believes these rulings should be 
codified in SBA's size regulations so the public is aware of them.
    Thus, SBA is proposing to modify its definition of receipts in 
Sec.  121.104(a)(1). This modification would identify the items on a 
Federal tax return that are to be used to calculate receipts. 
Currently, the regulation states that receipts consist of ``total 
income'' and ``gross income'' plus the ``cost of goods sold.'' Although 
these terms as defined by the IRS include income from all sources, SBA 
has received comments from some businesses stating that certain types 
of income not explicitly specified in the regulations could be excluded 
in determining receipts. To eliminate any such misinterpretation, SBA 
is proposing to remove the words ``total income'' and ``gross income'' 
and add in their place ``gross receipts,'' ``gross sales,'' and ``other 
income.'' This change in terminology merely lists the items on a 
Federal tax return that comprise all or part of total or gross income. 
In addition, SBA is proposing a revision to the definition of receipts 
to include interest, dividends, rents and royalties received by 
partnerships, S corporations, and sole proprietorships. For 
corporations, income from these sources is included in total income as 
reported on IRS Form 1120. However, for partnerships and S 
corporations, these items are reported separately from total income on 
Schedule K of IRS Form 1165 and 1120S, respectively, and on Schedule C 
or S of IRS Form 1040 for sole proprietorships. Business entities such 
as limited liability corporations (LLCs) can elect the tax entity 
(partnership, corporation, or disregarded entity) that best suits their 
need. This is often referred to as ``check the box.'' See 26 CFR 
301.7701-3 (located at http://www.access.gpo.gov/nara/cfr/cfr-retrieve.html#page1) and IRS Form 8832 (located at http://www.irs.gov/forms_pubs/forms.html). To be consistent with the corporate tax 
return, and to continue SBA's long-standing policy of including income 
from all sources in its definition of receipts, SBA proposes to revise 
Sec.  121.104(a)(1) to specifically include these sources of income in 
the definition of receipts.
    SBA also proposes to expand its exclusion of receipts received by 
an agent for another. The existing regulation allows this exclusion 
only for agents specifically identified in the regulation, such as a 
travel agent. While the proposed regulation would continue to list 
those agency-type business entities for which amounts collected for 
another would be excluded, it would also permit SBA to find a similar 
agent-type situation to be equally excluded. SBA's concern is that this 
provision be applied consistently. Thus, SBA would exclude amounts 
collected for another only when a specific type of business (or 
industry) deomonstrates that that is the practice in the industry. SBA 
would not exclude amounts based on specific facts of one business 
entity. This revision will eliminate the need to conduct a separate 
study and rulemaking to expand the list of agents that can exclude 
amounts they receive for another and apply a general principle in the 
case of agents.
    Finally, SBA would also clarify this section to state that the only 
exclusions from the definition are those specifically provided for in 
the section and that all other items, such as subcontractor costs, 
reimbursements for purchases a contractor makes at a customer's 
request, and employee-based costs such as payroll taxes, may not be 
excluded from receipts. See, e.g., Size Appeal of Uniband, Inc., SBA 
No. SIZ-4326 (1998); Size Appeal of Aliron International, Inc., SBA No. 
SIZ-4317 (1998).
    Proposed Sec.  121.104(a)(1) would provide that the Federal income 
tax return and any amendments filed with the IRS on or before the date 
of self-certification must be used to determine the size status of a 
concern, and that SBA will not consider tax returns or

[[Page 70342]]

amendments filed with the IRS after the initiation of a size 
determination. This proposed change would preclude a concern that is 
the subject of a size protest from providing revised Federal tax 
returns to SBA while a size determination or appeal is pending. If SBA 
were to accept amended tax returns prepared after initiation of a size 
determination, SBA would constantly be re-evaluating cases that had 
already been completed or that were substantially prepared. This would 
invariably lead to delays in the size determination process and, in the 
case of pending procurements, delays in contract award. A business 
concern is expected to base its small business self-certification on 
information existing at that time. This rule is in accord with OHA 
rulings that size status must be based on documents in existence and 
available as of the date of self-certification. See, e.g., Size Appeal 
of MTB Investments, Inc., SBA No. SIZ-4239 (1997); Size Appeals of J.L. 
Associates, Inc. and HLJ Management Group, Inc., SBA No. SIZ-3102 
(1988). Where a concern is determined to be other than small, but 
legitimately erred in reporting its income on its Federal tax returns, 
it could subsequently request recertification as a small business from 
SBA based on amendments filed with the IRS. SBA then would be able to 
conduct a review of the amended returns without delaying the size 
determination or the Federal procurement process.
    Proposed Sec.  121.104(a)(2) would cover situations where a concern 
has not filed a Federal income tax return for one or more of its most 
recently completed three fiscal years. This proposed regulation is 
intended to codify OHA's ruling in Size Appeal of Troy Systems, Inc., 
SBA No. SIZ-4296 (1998). In that appeal, a concern had not filed a 
Federal income tax return for its most recently completed fiscal year 
at the time it self-certified as small. The appellant argued that 
because the tax return was not available, it did not have to submit any 
information for that year. OHA rejected that argument. The proposed 
rule provides that in such a situation, SBA may use any other 
information that is available, such as an audited financial statement 
or affidavit from the concern's accountant or chief financial officer.
    Section 121.104(b)(3) is the formula SBA uses to determine annual 
receipts when the concern has a ``short year'' (as defined by the IRS) 
as one of the years within the period of measurement. The proposed rule 
would not change the substance of the formula. It would merely clarify 
the language for ease of use.
    Section 121.104(d) applies to the annual receipts of a concern's 
affiliates and requires the inclusion of an affiliate's receipts during 
the entire period of measurement, not just the period after affiliation 
arose. This rule has existed for many years and SBA proposes to simply 
clarify the language.
    Section 121.106 addresses how SBA counts a concern's number of 
employees. SBA proposes to amend Sec.  121.106(a) to clarify that SBA 
may utilize the same criteria used by the IRS for Federal income tax 
purposes in determining whether individuals are employees. See, e.g., 
IRS Publication 15A, ``Employer's Supplemental Tax Guide'' (located at 
http://www.irs.gov/forms_pubs/forms.html), which provides guidance on 
whether a person is a common-law employee, a statutory employee, a 
statutory nonemployee, or an independent contractor. In addition, SBA's 
proposed amendment states that it considers ``leased'' employees to be 
employees of the concern. The proposed rule continues to direct SBA to 
consider the totality of the circumstances when determining whether 
certain individuals are to be considered employees of the concern in 
question. This ``totality of the circumstances'' language stems from 
SBA Size Policy Statement No. 1, published in the Federal Register on 
February 20, 1986, 51 FR 6099, and that Size Policy Statement continues 
to have effect.
    Further, SBA proposes to amend Sec.  121.106(b)(4) by explicitly 
describing how employees of affiliates and former affiliates are 
treated, rather than simply referring to the manner in which annual 
receipts of affiliates and former affiliates are treated in Sec.  
121.104.
    SBA also proposes to revise Footnote 14 to the Table of Small 
Business Size Standards by NAICS Industry in Sec.  121.201. 
Specifically, the proposed revisions to Footnote 14(b) adds language to 
clarify that a Federal procurement involving a range of environmental 
services to restore a contaminated environment does not need to include 
remedial action as one of three activities to be classified under this 
size standard. SBA has learned that some Federal agencies have 
interpreted this footnote to require remedial action to be part of the 
procurement before it will classify the procurement under 
``Environmental Remediation Services.'' This was not the intention of 
SBA when it established the size standard. SBA intended this size 
standard to apply to large scale, multi-disciplined procurements 
involving environmental remediation. To be classified under 
Environmental Remediation Services, a procurement must satisfy two 
requirements. First, the general purpose of the procurement is to 
restore a contaminated environment. Second, the procurement requires 
tasks to be performed in a range of activities which can be classified 
in three or more NAICS industries, or sub-industries which have 
separate size standards, and that no industry or sub-industry accounts 
for 50 percent or more of the procurement. The statement ``the general 
purpose of the procurement must be to restore a contaminated 
environment'' was intended to mean that the procurement would be 
associated with environment remediation by performing a range of 
activities that would contribute to the eventual cleanup of a site. To 
clarify SBA's intent, the footnote is revised by stating ``the general 
purpose of the procurement must be to restore or directly support the 
restoration of a contaminated environment * * *.'' Also, added is a 
list of activities usually associated with environmental remediation 
and related activities. This language makes clear that a procurement 
involving several activities, all in separate NAICS codes, that 
directly contribute to the eventual cleanup of a contaminated 
environment can be classified under this size standard, even though 
another procurement would be awarded to perform the actual cleanup.
    SBA proposes to eliminate the existing dual size standard that 
currently applies to applicants for SBA financial assistance (Sec.  
121.301(a)), and replace it with a single size standard requirement. 
Under the current regulation, an applicant for financial or disaster 
assistance must be small under two size standards. An applicant, along 
with its affiliates, must be small for the size standard for the 
industry in which the applicant alone is primarily engaged, and for the 
industry in which the applicant along with its affiliates is primarily 
engaged. Since most applicants are small businesses well below SBA's 
size standards, they generally do not have extensive affiliation 
relationships with other business concerns. Thus, SBA believes a dual 
size standard requirement is not needed for these programs. SBA also 
believes that the wording of the dual size standard is not clear, and 
has caused confusion as to its proper application. For these reasons, 
SBA is proposing a single size standard requirement in which a business 
concern eligible for financial and disaster assistance is a concern 
that, combined with its affiliates, does not

[[Page 70343]]

exceed the size standard of the primary industry of the applicant 
concern alone.
    Section 121.301(d)(1), which contains the size standard for surety 
bond guarantee assistance, would be amended by adding the words 
``together with its affiliates'' to make it clear that the receipts of 
all affiliates must be included. This change is for clarity purposes 
only, as SBA always includes the receipts or employees of a concern's 
affiliates when determining the concern's size. SBA also proposes to 
revise Sec.  121.301(e) to state that an applicant for financial 
assistance must use all of the assistance within a labor surplus area 
(LSA) in order to obtain the benefit of the 25% size standard 
differential. The current regulation does not clearly provide what 
percentage of work must be performed in an LSA. It has always been 
SBA's intent to require 100% of the assistance be used in an LSA in 
order to get the size differential, but a recent case has raised the 
question as to whether the regulation could be read to permit less than 
100% of the assistance to be used in an LSA. This proposed change would 
clarify SBA's position in this regard.
    Section 121.302 addresses when SBA determines the size status of an 
applicant for SBA financial assistance. The section would be amended to 
include a provision for financial assistance from a Small Business 
Investment Company (SBIC) licensee and from a New Markets Venture 
Capital Company.
    Section 121.401, covering what procurement programs are subject to 
size determinations, would be amended for plain language purposes.
    The proposed rule would amend the section heading for Sec.  121.402 
to read ``What size standards are applicable to Federal Government 
Contracting programs?'' In addition, SBA proposes to amend Sec.  
121.402(a) to state that a contracting officer (CO) must use the size 
standard in effect at the time the solicitation is issued. If SBA 
amends a size standard and it becomes effective after the solicitation 
is issued, then the CO would not be required to amend the solicitation 
and use the new size standard. However, the proposed regulation does 
note that if the size standard is amended and becomes effective before 
the date initial offers are due, the CO may modify the solicitation and 
use the new size standard. This has been a long-standing policy of 
SBA's, and SBA believes it should be specifically set forth in the 
regulations for clarity purposes.
    Section 121.404 would be amended to add additional exceptions to 
the general rule that the size status of a concern is determined as of 
the date the concern submits a written self-certification that it is 
small to the procuring agency as part of its initial offer including 
price. Proposed Sec.  121.404(a)(1) would provide that a concern 
applying to be certified as a Participant in SBA's 8(a) Business 
Development (8(a) BD) program, as a small disadvantaged business (SDB), 
or as a HUBZone small business must qualify as small as of the date of 
certification by SBA. This is not a change in SBA policy. SBA currently 
requires a concern to be small at the date of certification for these 
programs, but those regulatory requirements are contained in the 
program specific regulations only. The proposed rule would simply add 
those requirements to the size regulations as well. When requiring an 
8(a) BD, HUBZone, or SDB applicant to be small for ``its primary 
industry classification,'' the concern's primary industry 
classification is determined by looking solely at the applicant concern 
(i.e., by excluding its affiliates), but the size of the concern is 
determined by including the receipts or employees of all affiliates.
    Another new exception would apply to the case where a solicitation 
is modified so that initial offers are no longer responsive to the 
solicitation. In such a case, proposed Sec.  121.404(a)(4) would 
provide that a concern must recertify that it is small at the time it 
submits a responsive offer which includes price to the modified 
solicitation. SBA believes that this makes sense and flows from 
existing SBA policy. If a solicitation changes drastically so that a 
previous offer would no longer be responsive, it is in effect a new 
solicitation. As such, a firm must certify its status as a small 
business with respect to the new solicitation.
    The proposed rule would also add an exception for the 
subcontracting program. Under proposed Sec.  121.404(a)(5), for 
subcontracting purposes, a concern must qualify as small as of the date 
that it certifies that it is small for the subcontract. The date of 
offers for or the award of the prime contract are not relevant to 
whether a concern is small for a subcontract. In addition, the 
applicable size standard would be the size standard in effect at the 
time the concern self-certifies that it is small for the subcontract, 
not the size standard that may have been in effect when the prime 
contract was awarded or otherwise.
    The proposed rule would add a final exception applying to two-step 
sealed bidding under subpart 14.5 of the FAR, 48 CFR. Under two-step 
sealed bidding, the proposed rule would require that a concern must 
qualify as small as of the date that it certifies that it is small as 
part of its step one proposal. SBA believes that it makes sense to 
establish size as of the date of the step one proposal in order to give 
certainty early on in the process who is and who is not eligible for 
such an award.
    Proposed Sec.  121.404(b) would specify that a concern that 
qualified as a small business at the time it receives a contract is 
considered to be a small business throughout the life of that contract. 
This is not a change in policy, but merely puts into the regulations 
SBA's long-standing position on this issue. Proposed Sec.  121.404(c) 
covers the case where an existing contract is ``renewed'' by a 
procuring activity. SBA believes that the renewal of an existing 
contract is a term that is imprecisely used. Renewal should refer to a 
follow-on contract. In that case, the date at which size is determined 
is set by the general rule specified in Sec.  121.404(a) (i.e., the 
date that the concern submits a written self-certification that it is 
small to the procuring agency for the renewal contract). Sometimes the 
term ``renewal'' is incorrectly used where a procuring agency exercises 
an option. In that case, there is no new contracting action. The 
authority for the option relates back to the original contract. As set 
forth in proposed Sec.  121.404(b), mentioned above, as long as a 
concern qualified as a small business at the time it receives a 
contract, it is considered to be a small business throughout the life 
of that contract. Therefore, a concern that was small at the time of 
award would always be considered a small business for purposes of any 
options relating to that contract. Proposed Sec.  121.404(b) would 
specifically provide that where a concern grows to be other than small, 
the procuring agency may exercise options and still count the award as 
an award to a small business. SBA is, however, considering a rule which 
would place a limit on the amount of time a concern would be deemed a 
small business. Specifically, SBA is considering a separate rule making 
that would permit a procuring agency to treat a concern as a small 
business for no more than 5 years from the date of award.
    Section 121.406(b)(1)(ii) would be amended to delete the 
requirement that a nonmanufacturer must normally sell the items being 
supplied to the general public. This rule was based on provisions of 
the Walsh-Healey Public Contracts Act, which permitted Federal 
acquisitions of supplies only from manufacturers or ``regular 
dealers.'' One of the requirements for being a regular dealer was to 
sell items to the general

[[Page 70344]]

public. These provisions of the Walsh-Healey Act were repealed by the 
Federal Acquisition and Streamlining Act of 1994. SBA believes that 
requiring a firm to sell to the general public is overly restrictive. A 
firm may be a legitimate, viable business selling exclusively to 
government entities. SBA does not believe that a firm that sells only 
to the government should be excluded from being considered a small 
business just because it does not generally sell items to the general 
public. Therefore, so long as a firm normally sells the type of item 
either to public or private entities, it may qualify as a small 
business nonmanufacturer under SBA's size regulations. The proposed 
rule would also change the provision to require the concern to normally 
sell the same ``type of item.'' The current regulation simply states 
that a concern must sell ``the items'' being supplied. SBA believes 
that the current provision could be read to be overly restrictive. 
Under the proposed rule, a firm would not need to have a track record 
of selling the exact item, but only items of the same type.
    The proposed rule would also add clarifying language to Sec.  
121.406(b)(2) to explain what a firm that makes changes to an item and 
then resells it must do in order to qualify as an eligible small 
business manufacturer. The current regulation states that firms that 
perform only minimal operations upon the item being procured do not 
qualify as manufacturers. The proposed rule adds language, which states 
that ``[f]irms that add substances, parts, or components to an existing 
end-item to modify its performance will not be considered the end-item 
manufacturer where those identical modifications can be performed by 
and are available from the manufacturer of the existing end item.'' If 
a firm adds something to an item that the manufacturer of that existing 
item does not provide, the firm will be considered the manufacturer of 
the ultimate end item (i.e., the item plus the addition). For example, 
if firm A manufactures a saw, the Government wants to purchase a saw 
with a safety switch, and firm B adds a safety switch to the saw, firm 
B, and not firm A, will be considered the manufacturer of the end item 
(i.e., saw with safety switch) provided firm A does not itself make or 
provide a saw with safety switch. Similarly, a firm that merely 
installs a video card that the manufacturer of a computer could have 
installed will not be considered the manufacturer of computer.
    Currently, under Sec.  121.410, a business concern is small for 
purposes of a subcontract awarded by a Federal prime contractor if: (a) 
For subcontracts of $10,000 or less, the concern bidding on the 
subcontract has 500 or fewer employees averaged over each pay period of 
the previous year, or, (b) for subcontracts of more than $10,000, the 
concern bidding on the subcontract is no larger than the size standard 
corresponding to the NAICS industry that best represents the scope of 
work of the subcontract.
    This rule proposes to eliminate the 500-employee size standard 
provision for subcontracts of less than $10,000 and require that the 
size standard of the NAICS industry that best matches the purpose of 
the subcontract be used. This change merely adopts the size standard 
policy now in effect for subcontracts of $10,000 or greater.
    SBA is proposing this change for two reasons. First, this proposed 
change makes the size standards requirements consistent for all prime 
Federal contracts and for subcontracts awarded by prime contractors. 
Under this policy, the small business status would not change depending 
on the size of a subcontract or whether the contract was awarded as a 
Federal prime contract or as a subcontract of a Federal prime contract. 
SBA is also concerned about inconsistencies of two-tiered 
subcontracting size standards. A prime contractor awarding a 
subcontract classified in a NAICS industry with a receipt-based size 
standard (primarily in the construction and service industries) will 
have a higher size standard associated with subcontracts of less than 
$10,000 than the size standard for the same type of subcontract but 
valued over $10,000. For example, a subcontract for analytical testing 
services falls under NAICS code 541620, Environmental Consulting 
Services, and SBA has established a size standard for this industry of 
$6 million in average annual receipts. If the value of the subcontract 
is more than $10,000, a small business is defined as one with $6 
million or less in average annual receipts. A firm of this size has 
about 60 to 70 employees. Yet, under the current regulations, a 
subcontract of less than $10,000 allows firms of up to 500 employees to 
qualify as small businesses. SBA believes that one size standard should 
apply to the same type of subcontracts, regardless of their value.
    Second, the two-tiered size standard based on the size of the 
subcontract is not widely known or followed by prime contractors and 
small businesses. SBA believes establishing a policy of having a 
consistent size standard requirement at the prime and subcontracting 
level is more desirable than retaining and educating the prime 
contractors and subcontractors about two-tiered size standards. Most 
prime contractors verify the status of their small business 
subcontractors based on the size standard of the subcontractor's 
primary NAICS industry or based on the size standard of the prime 
contract. These methods for ascertaining the small business status of a 
subcontractor lead to an incorrect small business determination in many 
cases, since the subcontractor must be small based on the industry of 
the subcontract, which is not necessarily the same as the primary 
industry of the subcontractor or the industry of the prime contract. 
SBA believes that the proposed change reflects how most prime 
contractors have been administratively determining the small business 
status of their subcontractors. Enforcing the current two-tiered size 
standard regulation would in essence subject prime contractors to a 
different size standard requirement than generally being followed. 
Thus, change should have little if any impact.
    SBA invites comments to the elimination of the two-tiered 
subcontracting size standards requirement. SBA also welcomes 
suggestions on other approaches to size standards for the 
Subcontracting Program. Alternative size standards should address how 
they would be an improvement over the current and proposed 
subcontracting size standards and how they best protect the interests 
of small business.
    Section 121.411 would be amended by deleting the words 
``Procurement Automated Source System (PASS)'' and substituting the 
words ``Procurement Marketing & Access Network (PRO-Net).'' PASS no 
longer exists and has been replaced by PRO-Net. PRO-Net is an online 
database of information on thousands of small businesses. PRO-Net 
serves as a search engine for contracting officers, a marketing tool 
for small companies, and a ``link'' to procuring opportunities and 
other important information.
    Sections 121.601 through 121.604 would be changed by removing all 
references to ``Minority Enterprise Development'' and ``MED'' and 
substituting ``8(a) Business Development'' and ``8(a) BD.'' SBA no 
longer uses the former terms.
    The proposed rule would amend Sec.  121.702(a) to recognize that 
for purposes of the SBIR program a joint venture is permitted where 
each entity to the venture is at least 51 percent owned and controlled 
by one or more individuals who are citizens of, or permanent resident 
aliens in, the United States. The current requirement does

[[Page 70345]]

not contain such an exception for joint ventures, and requires 51 
percent direct ownership by individuals who are U.S. citizens or 
permanent resident aliens in every case. This change is being made to 
make the size regulations consistent with a recent change made to the 
SBIR Policy Directive.
    SBA proposes to amend Sec.  121.1001 entitled ``Who may initiate a 
size protest or request a formal size determination?'' Section 
121.1001(a)(1)(i) presently allows ``any offeror'' to file a size 
protest in connection with a particular procurement or sale. The 
purpose of the proposed regulation is to give standing to those 
concerns whose successful challenge would enable them to compete for 
award. This section would be changed to provide that ``any offeror whom 
the contracting officer has not eliminated for reasons unrelated to 
size'' may file a protest. An offeror that has been eliminated for 
reasons unrelated to size would not be able to compete for award if the 
protest were successful, and, thus, should not have standing to 
question another firm's size status. This change would codify long-
standing OHA precedent on this issue. See, e.g., Size Appeal of Arcata 
Associates, Inc., SBA No. SIZ-3377 (1990).
    The proposed rule would amend Sec.  121.1001(a)(5)(iii) applying to 
protests under the SDB program to delete the reference to the Associate 
Administrator (AA) for MED, and substitute the SBA Associate 
Administrator for 8(a) Business Development. Section 
121.1001(a)(6)(iv), applying to protests under the HUBZone program, 
would be changed to delete the reference to the AA for Government 
Contracting and substitute SBA's AA for the HUBZone program. Section 
121.1001(a)(7)(3), applying to any unrestricted Government procurement 
in which status as a small business may be beneficial, would be changed 
by deleting the reference to the AA for MED and substituting the SBA AA 
for 8(a) BD.
    The proposed rule would add new paragraphs (b)(7), (b)(8) and 
(b)(9) to Sec.  121.1001 to authorize SBA program personnel to request 
formal size determinations regarding a firm's status as small for SDB 
certification, HUBZone certification, and being listed as a small 
business on PRO-Net, respectively.
    SBA proposes to add a new Sec.  121.1004(a)(4) to cover instances 
where notification of contract award is posted on the Internet, as 
authorized under Simplified Acquisition Procedures (SAP). In such 
cases, SBA proposes that a size protest must be made to the contracting 
officer within five business days after the electronic posting. SBA 
also proposes to add a new Sec.  121.1004(a)(5) that would provide that 
where no written notification is required, either prior to or at the 
time of award, a protest will be considered timely if filed within five 
days after receipt of verbal notification from the contracting officer 
or other agency representative. Under SAP, there is no requirement for 
the contracting officer to provide either pre-award or award 
notification to unsuccessful offerors. Consequently, the date of verbal 
notification or date of posting on the internet will be considered the 
start of the 5-day period allotted for a timely size protest. There may 
be other instances where there is no notice provided (e.g., award of a 
task order under a schedule contract), and this provision would apply 
there as well.
    SBA proposes to amend Sec.  121.1007 containing the requirement 
that a size protest must allege specific facts by restoring the six 
examples that were formerly found at Sec.  121.1604(a) (1995). SBA has 
received comments that these examples were helpful in determining 
whether or not a particular protest satisfies the specificity 
requirement.
    The proposed rule would amend Sec.  121.1008, describing what 
occurs after SBA receives a size protest or request for formal size 
determination. The proposed rule would require the SBA Government 
Contracting Area Director to notify SBA's AA/8(a) BD, if a protest 
involves the size status of a concern that SBA has certified as a small 
disadvantaged business, and notify the appropriate SBA district office, 
if a protest pertains to the apparent successful offeror on a 
requirement that has been reserved for competition among eligible 8(a) 
Participants. Section 121.1008(d) would be amended by adding a sentence 
requiring a concern whose size status is at issue to furnish 
information about its alleged affiliates to SBA, notwithstanding any 
third party claims of privacy or confidentiality, because SBA does not 
disclose information obtained in the course of a size determination 
except as permitted by Federal law. This is intended to codify several 
OHA rulings. See, e.g., Size Appeal of Donovan Travel, Inc., d/b/a 
Carlson Wagonlit Travel, SBA No. SIZ-4270 (1997); Size Appeal of 
Quantrad Sensor, Inc., SBA No. SIZ-4255 (1997).
    The proposed rule would add clarifying language to Sec.  
121.1009(b), ``Basis for determination.'' Section 121.1009(g), 
``Results of an SBA Size Determination,'' would be amended by making it 
clear that contract award may be made based on a formal size 
determination by a SBA Government Contracting Area Director. It would 
also be amended to provide that an OHA decision on appeal will apply to 
the pending acquisition or sale if the decision is received before 
award. OHA decisions received after contract award will not apply to 
that acquisition or sale unless the contracting officer agrees to apply 
the OHA decision to that acquisition or sale.
    The proposed rule would amend Sec.  121.1101 by adding a new second 
paragraph providing that OHA will not review a formal size 
determination where the contract has been awarded and the issues raised 
in a petition for review are contract specific, such as compliance with 
the nonmanufacturer rule or joint venture/ostensible subcontractor 
rule. This change would conform the size appeal regulation to the re-
certification regulation at Sec.  121.1010(b) and codify long-standing 
OHA rulings. See, e.g., Size Appeal of Lightcom International, Inc., 
SBA No. SIZ-4118 (1995).
    Currently, Sec.  121.1103 simply states that the procedures for 
NAICS code appeals are contained in section 19.303 of the Federal 
Acquisition Regulation (FAR), 48 CFR 19.303. SBA proposes to amend this 
section by setting forth in detail the specific procedures for NAICS 
code appeals rather than referring the reader to the FAR. The 
procedures set forth do not differ from those currently in the FAR.
    Section 121.1205 would be amended by stating that a list of classes 
of products for which waivers of the Nonmanufacturer Rule have been 
granted may be obtained on SBA's Web site at www.sba.gov/GC/approved.html.
    13 CFR part 134 contains rules of procedure governing cases before 
OHA, including size appeals and former SIC (now NAICS) code appeals. 
SBA is proposing several amendments to part 134, mainly to conform to 
the changes being proposed for part 121.
    13 CFR 134.102 sets forth OHA's jurisdiction. The proposed rule 
would amend paragraph (k) to authorize an affected party to appeal a 
determination by the SBA Government Contracting Area Office as to 
whether two or more concerns are affiliated for purposes of SBA's 
financial assistance programs, or other programs for which an 
affiliation determination was requested. SBA financial assistance 
personnel may seek assistance from a Government Contracting Area Office 
in determining whether a loan applicant is affiliated with one or more 
other business entities. This may not be a ``formal size 
determination'' in the normal sense because the concerns even if 
affiliated may still qualify as small. However, this

[[Page 70346]]

determination is necessary in order to determine whether the borrower, 
including the borrower's affiliates, has exceeded the $750,000 loan 
limit amount set forth in Sec.  120.151 of this chapter. If the Area 
Office finds affiliation such that the borrower is determined to be 
ineligible to receive additional loan amounts, the firm may not 
currently appeal that determination to OHA as it is not a ``formal size 
determination.'' This change would permit such an appeal.
    Section 134.314 would be amended by adding a provision that the 
appellant has the burden of proof, by a preponderance of the evidence, 
in both size and NAICS code designations. This provision was formerly 
in the size regulations (see Sec.  121.1707 (1995)), and since its 
deletion from the regulations, OHA has adopted this premise in its 
rulings. See, e.g., Size Appeal of Rebmar, Inc., SBA No. SIZ-4173 
(1996); SIC Appeal of The Scientific Consulting Group, Inc., SBA No. 
SIZ-4186 (1996). SBA believes that it is appropriate to restore the 
provision to the regulations.
    Finally, SBA proposes amending Sec.  134.316(a) to state that an 
OHA judge will decline to decide substantive issues not properly raised 
on appeal, or which are abandoned, or have become moot. This would 
codify OHA precedent. See e.g., Size Appeal of Lightcom International 
Inc., SBA No. SIZ-4118 (1995), Size Appeal of Infotec Development, 
Inc., SBA No. SIZ-4197 (1996).

Compliance With Executive Orders 12612, 12988, and 12866, the 
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35)

    OMB has determined that this proposed rule does not constitute a 
``significant regulatory action'' under Executive Order 12866. This 
rule would clarify SBA's procedural and definitional size rules. As 
such, the rule would have no effect on the amount or dollar value of 
any Federal contract requirements or of any financial assistance 
provided through SBA. Therefore, the rule is not likely to have an 
annual economic effect of $100 million or more, result in a major 
increase in costs or prices, or have a significant adverse effect on 
competition or the United States economy. In addition, the proposed 
rule does not create a serious inconsistency or otherwise interfere 
with an action taken or planned by another agency, materially alter the 
budgetary impact of entitlements, grants, user fees, loan programs or 
the rights and obligations of such recipients, nor raise novel legal or 
policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
certifies that this rule, if adopted in final form, would not impose 
new reporting or record keeping requirements.
    For purposes of Executive Order 12988, SBA has drafted this 
proposed 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 
proposed rule has no federalism implications warranting the preparation 
of a Federalism Assessment.
    SBA has determined that this proposed rule, if adopted in final 
form, will not have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act (RFA), 5 U.S.C. 601-612. Although the rule amends 
several definitions concerning the size of a business concern, the 
majority of these amendments are clarification of current policy.

List of Subjects

13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Loan programs--business, 
Small businesses.

13 CFR Part 134

    Administrative practice and procedure, Organization and functions 
(Government agencies).

    For the reasons set forth in the supplementary information, SBA 
proposes to amend parts 121 and 134 of Title 13, Code of Federal 
Regulations, as follows:

PART 121

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

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c) and 
662(5) and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.

    2. Amend Sec.  121.102 by adding a new paragraph (e) to read as 
follows:


Sec.  121.102  How does SBA establish size standards?

* * * * *
    (e) SBA's Size Policy Board considers and makes recommendations to 
the Administrator relating to improvements in SBA regulations, 
procedures, and policy concerning size matters, including size 
standards.
    3. Amend Sec.  121.103 as follows:
    a. Revising the heading;
    b. Revising (a)(1), (3), (4), and adding new paragraphs (a)(5) and 
(a)(6);
    c. Revising the heading of paragraph (b);
    d. Revising paragraph (b)(2);
    e. Adding a new sentence to the end of paragraph (b)(6);
    f. Revising paragraphs (c), (d), and (e);
    g. Redesignating paragraph (f) as paragraph (h), and amending newly 
redesignated paragraph (h) by revising the introductory text, (h)(1), 
(h)(2), (h)(3), heading, (h)(3)(i), introductory text, (h)(3)(i)(B)(1), 
(h)(3)(ii), and (h)(4);
    h. Redesignating paragraph (g) as (i); and
    i. Adding new paragraphs (f) and (g).
    The revisions and additions read as follows:


Sec.  121.103  How does SBA determine affiliation?

    (a) General Principles of Affiliation. (1) Concerns and entities 
are affiliates of each other when one controls or has the power to 
control the other, or a third party or parties controls or has the 
power to control both. It does not matter whether control is exercised, 
so long as the power to control exists.
    (2) * * *
    (3) Control may be affirmative or negative. Negative control 
includes, but is not limited to, instances where a minority shareholder 
has the ability, under the concern's charter, by-laws, or shareholder's 
agreement, to prevent a quorum or otherwise block action by the board 
of directors or shareholders.
    (4) Affiliation may be found where an individual, concern, or 
entity exercises control indirectly through a third party.
    (5) In determining whether affiliation exists, SBA will consider 
the totality of the circumstances, and may find affiliation even though 
no single factor is sufficient to constitute affiliation.
    (6) In determining the concern's size, SBA counts the receipts, 
employees, or other measure of size of the concern whose size is at 
issue and all of its domestic and foreign affiliates, regardless of 
whether the affiliates are organized for profit.
    (b) Exceptions to affiliation coverage. (1) * * *
    (2) Business concerns owned and controlled by Indian Tribes, Alaska 
Regional or Village Corporations organized pursuant to the Alaska 
Native Claims Settlement Act (43 U.S.C. 1601), Native Hawaiian 
Organizations (NHOs), Community Development Corporations (CDCs) 
authorized by 42 U.S.C. 9805, or wholly-owned entities of Indian 
Tribes, ANCs, NHOs, or CDCs are not considered affiliates of such 
entities, or with other concerns owned by these

[[Page 70347]]

entities because of their common ownership or common management. 
Affiliation may be found for other reasons.
* * * * *
    (6) * * * Affiliation may be found for other reasons.
    (c) Affiliation based on stock ownership. (1) A person (including 
any individual, concern or other entity) that owns, or has the power to 
control, 50 percent or more of a concern's voting stock, or a block of 
voting stock which is large compared to other outstanding blocks of 
voting stock, controls or has the power to control the concern.
    (2) If two or more persons (including any individual, concern or 
other entity) each owns, controls, or has the power to control less 
than 50 percent of a concern's voting stock, and such minority holdings 
are equal or approximately equal in size, and the aggregate of these 
minority holdings is large as compared with any other stock holding, 
SBA presumes that each such person controls or has the power to control 
the concern whose size is at issue. This presumption may be rebutted by 
a showing that such control or power to control does not in fact exist.
    (3) If a concern's voting stock is widely held and no single block 
of stock is large as compared with all other stock holdings, the 
concern's Board of Directors and CEO or President will be deemed to 
have the power to control the concern in the absence of evidence to the 
contrary.
    (d) Affiliation arising under stock options, convertible 
debentures, and agreements to merge. (1) In determining size, SBA 
considers stock options, convertible debentures, and agreements to 
merge (including agreements in principle) to have a present effect on 
the power to control a concern. SBA treats such options, debentures, 
and agreements as though the rights granted have been exercised.
    (2) Agreements to open or continue negotiations towards the 
possibility of a merger or a sale of stock at some later date are not 
considered ``agreements in principle'' and are thus not given present 
effect.
    (3) Options, debentures, and agreements that are subject to 
conditions precedent which are incapable of fulfillment, speculative, 
conjectural, remote, or unenforceable under state or Federal law are 
not given present effect.
    (4) An individual or concern that controls one or more other 
concerns cannot use options, debentures, or agreements to appear to 
terminate such control before actually doing so.
    (e) Affiliation based on common management. Affiliation arises 
where one or more officers, directors, managing members, or partners 
who control the board of directors and/or management of one concern 
also control the board of directors or management of one or more other 
concerns.
    (f) Affiliation based on identity of interest. Affiliation may 
arise among two or more persons with an identity of interest. 
Individuals or firms that have identical or substantially identical 
business or economic interests (such as family members, individuals or 
firms with common investments, or firms that are economically dependent 
through contractual or other relationships) may be treated as one party 
with such interests aggregated. Where SBA determines that such 
interests should be aggregated, an individual or firm may rebut that 
determination with evidence showing that the interests deemed to be one 
are in fact separate.
    (g) Affiliation based on the newly organized concern rule. 
Affiliation may arise where former officers, directors, principal 
stockholders, managing members, or key employees of one concern 
organize a new concern in the same or related industry or field of 
operation, and serve as the new concern's officers, directors, 
principal stockholders, managing members, or key employees, and the one 
concern is furnishing or will furnish the new concern with contracts, 
financial or technical assistance, indemnification on bid or 
performance bonds, and/or other facilities, whether for a fee or 
otherwise. A concern may rebut such an affiliation determination by 
demonstrating a clear line of fracture between the two concerns.
    (h) Affiliation based on joint ventures or teaming arrangements. A 
joint venture is an association of individuals and/or concerns with 
interests in any degree or proportion by way of contract, express or 
implied, consorting to engage in and carry out a single specific 
business venture for joint profit, for which purpose they combine their 
efforts, property, money, skill, or knowledge, but not on a continuing 
or permanent basis for conducting business generally. A joint venture 
is viewed as a business entity in determining power to control its 
management. A teaming arrangement for affiliation purposes is one in 
which two or more companies form a partnership or joint venture to act 
as a potential prime contractor. Affiliation may also be found between 
a potential prime contractor and its intended subcontractor pursuant to 
paragraph (h)(4) of this section.
    (1) Parties to a joint venture or teaming arrangement are 
affiliates if any one of them seeks SBA financial assistance for use in 
connection with the joint venture or teaming arrangement.
    (2) Except as provided in paragraph (h)(3) of this section, 
concerns submitting offers on a particular procurement or property sale 
as joint venturers or teaming arrangement partners are affiliated with 
each other with regard to the performance of that contract.
    (3) Exception to affiliation for certain joint ventures and teaming 
arrangements. (i) A joint venture or teaming arrangement of two or more 
business concerns may submit an offer as a small business for a Federal 
procurement without regard to affiliation under paragraph (h) of this 
section so long as each concern is small under the size standard 
corresponding to the NAICS code assigned to the contract, provided:
    (A) * * *
    (B) * * *
    (1) For a procurement having a receipts based size standard, the 
dollar value of the procurement, including options, exceeds half the 
size standard corresponding to the NAICS code assigned to the contract; 
or
* * * * *
    (ii) A joint venture or teaming arrangement of at least one 8(a) 
Participant and one or more other business concerns may submit an offer 
for a competitive 8(a) procurement without regard to affiliation under 
paragraph (h) of this section so long as the requirements of Sec.  
124.513(b)(1) of this chapter are met.
    (iii) * * *
    (4) A contractor and its ostensible subcontractor are treated as 
joint venturers, and therefore affiliates, for size determination 
purposes. An ostensible subcontractor is a subcontractor that performs 
primary and vital requirements of a contract, or of an order under a 
multiple award schedule contract, or a subcontractor upon which the 
prime contractor is unusually reliant. All aspects of the relationship 
between the prime and subcontractor are considered, including, but not 
limited to, the terms of the proposal (such as contract management, 
technical responsibilities, and the percentage of subcontracted work), 
agreements between the prime and subcontractor (such as bonding 
assistance), and whether the subcontractor is the incumbent contractor 
and is ineligible to submit a proposal because it exceeds the 
applicable size standard for that solicitation.

[[Page 70348]]

    (5) For size purposes, a concern must include in its receipts its 
proportionate share of joint venture receipts, and in its total number 
of employees its proportionate share of joint venture employees.
* * * * *
    4. Revise Sec.  121.104 to read as follows:


Sec.  121.104  How does SBA calculate annual receipts?

    (a) Receipts means gross receipts, gross sales, interest, 
dividends, rents, royalties and other income as these terms are defined 
and reported on Internal Revenue Service (IRS) tax return forms (such 
as Form 1120 for corporations; Form 1120S and Schedule K for S 
corporations; Form 1120, Form 1065 or Form 1040 for LLCs; Form 1065 and 
Schedule K for partnerships; Form 1040, Schedule F for farms; Form 
1040, Schedule C for other sole proprietorships). Receipts do not 
include net capital gains or losses; taxes collected for and remitted 
to a taxing authority if included in gross or total income, such as 
sales or other taxes collected from customers and excluding taxes 
levied on the concern or its employees; proceeds from transactions 
between a concern and its domestic or foreign affiliates; and amounts 
received in trust as an agent on behalf of another, in which the agent 
does not have a claim of right to such monies and the amounts do not 
increase the agent's asset base (such as a travel agent, real estate 
agent, advertising agent, conference management service provider, 
freight forwarder or customs broker). For size determination purposes, 
the only exclusions from receipts are those specifically provided for 
in this paragraph. All other items, such as subcontractor costs, 
reimbursements for purchases a contractor makes at a customer's 
request, and employee-based costs such as payroll taxes, may not be 
excluded from receipts.
    (1) The Federal income tax return and any amendments filed with the 
IRS on or before the date of self-certification must be used to 
determine the size status of a concern. SBA will not use tax returns or 
amendments filed with the IRS after the initiation of a size 
determination.
    (2) When a concern has not filed a Federal income tax return with 
the IRS for a fiscal year which must be included in the period of 
measurement, SBA will calculate the concern's annual receipts for that 
year using any other available information, such as the concern's 
regular books of account, audited financial statements, or information 
contained in an affidavit by a person with personal knowledge of the 
facts.
    (b) Completed fiscal year means a taxable year including any short 
year. ``Taxable year'' and ``short year'' have the meanings attributed 
to them by the IRS.
    (c) Period of measurement. (1) Annual receipts of a concern that 
has been in business for three or more completed fiscal years means the 
total receipts of the concern over its most recently completed three 
fiscal years divided by three.
    (2) Annual receipts of a concern which has been in business for 
less than three complete fiscal years means the total receipts for the 
period the concern has been in business divided by the number of weeks 
in business, multiplied by 52.
    (3) Where a concern has been in business three or more complete 
fiscal years but has a short year as one of the years within its period 
of measurement, annual receipts means the total receipts for the short 
year and the two full fiscal years divided by the total number of weeks 
in the short year and the two full fiscal years, multiplied by 52.
    (d) Annual receipts of affiliates. (1) If a concern has acquired an 
affiliate or been acquired as an affiliate during the applicable period 
of measurement or before the date on which it self-certified as small, 
the annual receipts used in determining size status includes the 
receipts of the acquired or acquiring concern. Furthermore, this 
aggregation applies for the entire period of measurement, not just the 
period after the affiliation arose. Receipts are determined for the 
concern and its affiliates in accordance with paragraph (c) of this 
section even though this may result in using a different period of 
measurement to calculate an affiliate's annual receipts.
    (2) The annual receipts of a former affiliate are not included if 
affiliation ceased before the date used for determining size. This 
exclusion of annual receipts of a former affiliate applies during the 
entire period of measurement, rather than only for the period after 
which affiliation ceased.
    5. Revise Sec.  121.106(a) and (b)(4) to read as follows:


Sec.  121.106  How does SBA calculate number of employees?

    (a) In determining a concern's number of employees, SBA counts all 
individuals employed on a full-time, part-time, or other basis. This 
includes employees obtained from a temporary employee agency, 
professional employee organization or leasing concern. SBA will 
consider the totality of the circumstances, including criteria used by 
the IRS for Federal income tax purposes, in determining whether 
individuals are employees of a concern. Volunteers (i.e., individuals 
who receive no compensation, including no in-kind compensation, for 
work performed) are not considered employees.
    (b) * * *
    (4)(i) If a concern has acquired an affiliate or been acquired as 
an affiliate during the applicable period of measurement or before the 
date on which it self-certified as small, the employees counted in 
determining size status include the employees of the acquired or 
acquiring concern. Furthermore, this aggregation applies for the entire 
period of measurement, not just the period after the affiliation arose.
    (ii) The employees of a former affiliate are not counted if 
affiliation ceased before the date used for determining size. This 
exclusion of employees of a former affiliate applies during the entire 
period of measurement, rather than only for the period after which 
affiliation ceased.
    6. In Sec.  121.201, revise paragraph (b) of footnote 14 to the 
Table of Small Business Size Standards by NAICS Industry to read as 
follows:


Sec.  121.201  What size standards has SBA identified by North American 
Industry Classification System codes?

* * * * *

Footnotes
* * * * *
    14. NAICS 562910--Environmental Remediation Services:
    (a) * * *
    (b) For purposes of classifying a Government procurement as 
Environmental Remediation Services, the general purpose of the 
procurement must be to restore or directly support the restoration 
of a contaminated environment (such as, preliminary assessment, site 
inspection, testing, remedial investigation, feasibility studies, 
remedial design, remediation services, containment, removal of 
contaminated materials, storage of contaminated materials or 
security and site closeouts) and also the procurement must be 
composed of activities in three or more separate industries with 
separate NAICS codes or, in some instances (e.g., engineering), 
smaller sub-components of NAICS codes with separate, distinct size 
standards. These activities may include, but are not limited to, 
separate activities in industries such as: Heavy Construction; 
Special Trade Construction; Engineering Services; Architectural 
Services; Management Consulting Services; Hazardous and Other Waste 
Collection; Remediation Services, Testing Laboratories; and Research 
and Development in the Physical, Engineering and Life Sciences. If 
any activity in the procurement can be identified with a

[[Page 70349]]

separate NAICS code, or component of a code with a separate distinct 
size standard, and that industry accounts for 50 percent or more of 
the value of the entire procurement, then the proper size standard 
is the one for that particular industry, and not the Environmental 
Remediation Service size standard.
* * * * *
    7. Amend Sec.  121.301 by revising paragraphs (a), (d)(1) and 
(e) to read as follows:


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

    (a) For Business Loans and Disaster Loans (other than physical 
disaster loans), an applicant, including its affiliates, must not 
exceed the size standard for the industry in which the applicant is 
primarily engaged.
* * * * *
    (d) * * *
    (1) Any construction (general or special trade) concern or concern 
performing a contract for services is small if, together with its 
affiliates, its average annual receipts does not exceed $6.0 million.
* * * * *
    (e) The applicable size standards for purposes of SBA's financial 
assistance programs, excluding the Surety Bond Guarantee assistance 
program, are increased by 25% whenever the applicant agrees to use all 
of the financial assistance within a labor surplus area. Labor surplus 
areas are listed monthly in the Department of Labor publication ``Area 
Trends in Employment and Unemployment.''
    8. Amend Sec.  121.302 by revising paragraph (a), redesignating 
paragraph (d) as paragraph (e), revising newly redesignated paragraph 
(e), and adding the following new paragraph (d) to read as follows:


Sec.  121.302  When does SBA determine the size status of an applicant?

    (a) The size status of an applicant for SBA financial assistance is 
determined as of the date the application for financial assistance is 
accepted for processing by SBA, except for the Preferred Lenders 
program, the Disaster Loan program, the SBIC program, and the New 
Markets Venture Capital program.
* * * * *
    (d) For financial assistance from an SBIC licensee or a New Markets 
Venture Capital Company, size is determined as of the date a concern's 
application is accepted for processing by the SBIC or the New Markets 
Venture Capital Company.
    (e) Changes in size after the applicable date when size is 
determined will not disqualify an applicant for assistance.
    9. Revise the heading of Sec.  121.305 to read as follows:


Sec.  121.305  What size eligibility requirements exist for obtaining 
financial assistance relating to particular procurements?

* * * * *
    10. Revise Sec.  121.401 to read as follows:


Sec.  121.401  What procurement programs are subject to size 
determinations?

    The rules set forth in Sec. Sec.  121.401 through 121.413 apply to 
all Federal procurement programs for which status as a small business 
is required or advantageous, including the small business set-aside 
program, SBA's Certificate of Competency program, the Very Small 
Business program, SBA's 8(a) Business Development program, SBA's 
HUBZone program, the Small Business Subcontracting program, and the 
Federal Small Disadvantaged Business (SDB) program.
    11. Amend Sec.  121.402 by revising the heading and paragraph (a), 
and by adding a new sentence to the end of paragraph (b) to read as 
follows:


Sec.  121.402  What size standards are applicable to Federal Government 
Contracting programs?

    (a) A concern must not exceed the size standard for the NAICS code 
specified in the solicitation. The contracting officer must specify the 
size standard in effect on the date the solicitation is issued. If SBA 
amends the size standard and it becomes effective before the date 
initial offers (including price) are due, the contracting officer may 
amend the solicitation and use the new size standard.
    (b) * * * Procurements for supplies must be classified under the 
appropriate manufacturing NAICS code, not under the wholesale trade 
NAICS code.
* * * * *
    12. Revise Sec.  121.404 to read as follows:


Sec.  121.404  When does SBA determine the size status of a business 
concern?

    (a) SBA determines the size status of a concern, including its 
affiliates, as of the date the concern submits a written self-
certification that it is small to the procuring activity as part of its 
initial offer (or other formal response to a solicitation) which 
includes price. The following are the only exceptions to this rule:
    (1) A concern applying to be certified as a Participant in SBA's 
8(a) Business Development program (under part 124, subpart A, of this 
chapter), as a small disadvantaged business (under part 124, subpart B, 
of this chapter), or as a HUBZone small business (under part 126 of 
this chapter) must qualify as a small business for its primary industry 
classification as of the date of certification by SBA.
    (2) The size status of an applicant for a Certificate of Competency 
(COC) relating to an unrestricted procurement is determined as of the 
date of the concern's application for the COC.
    (3) Size status for purposes of compliance with the nonmanufacturer 
rule set forth in Sec.  121.406(b)(1) and the ostensible subcontractor 
rule set forth in Sec.  121.103(f)(4) is determined as of the date of 
the best and final offer.
    (4) Where a solicitation is modified so that initial offers are no 
longer responsive to the solicitation, a concern must recertify that it 
is a small business at the time it submits a responsive offer, which 
includes price to the modified solicitation.
    (5) For subcontracting purposes, a concern must qualify as small as 
of the date that it certifies that it is small for the subcontract. The 
applicable size standard is that set forth in Sec.  121.410 that is in 
effect at the time the concern self-certifies that it is small for the 
subcontract.
    (6) For purposes of two-step sealed bidding under subpart 14.5 of 
the FAR, 48 CFR, a concern must qualify as small as of the date that it 
certifies that it is small as part of its step one proposal.
    (b) A concern that qualified as a small business at the time it 
receives a contract is considered to be a small business throughout the 
life of that contract. Where a concern grows to be other than small, 
the procuring agency may exercise options and still count the award as 
an award to a small business.
    (c) A follow-on or renewal contract is a new contracting action. As 
such, size is determined as of the date the concern submits a written 
self-certification that it is small to the procuring agency as part of 
its initial offer including price for the follow-on or renewal 
contract.
    13. Amend Sec.  121.406 by revising paragraph (b)(1)(ii) and by 
adding a new sentence in paragraph (b)(2) after the fifth sentence to 
read as follows:


Sec.  121.406  How does a small business concern qualify to provide 
manufactured products under small business set-aside or 8(a) contracts?

* * * * *
    (b) Nonmanufacturers. (1) * * *
    (ii) Is primarily engaged in the retail or wholesale trade and 
normally sells the type of item being supplied; and
* * * * *
    (2) * * * Firms that add substances, parts, or components to an 
existing end-item to modify its performance will not

[[Page 70350]]

be considered the end-item manufacturer where those identical 
modifications can be performed by and are available from the 
manufacturer of the existing end item. * * *
* * * * *
    14. Revise Sec.  121.410 to read as follows:


Sec.  121.410  What are the size standards for SBA's Section 8(d) 
Subcontracting Program?

    For subcontracting purposes pursuant to sections 8(d) of the Small 
Business Act, a concern is small for subcontracts which relate to 
Government procurements if it does not exceed the size standard for the 
NAICS code that best describes the product or service being acquired by 
the subcontract. However, subcontracts for engineering services awarded 
under the National Energy Policy Act of 1982 have the same size 
standard as Military and Aerospace Equipment and Military Weapons under 
NAICS 541213.
    15. In Sec.  121.411(a), remove the words ``Procurement Automated 
Source System (PASS)'' and add the words ``Procurement Marketing & 
Access Network (PRO-Net).''
    16. The undesignated center heading before Sec.  121.601 is revised 
to read as follows:
SIZE ELIGIBILITY REQUIREMENTS FOR THE 8(A) BUSINESS DEVELOPMENT PROGRAM
    17. Revise Sec.  121.601 to read as follows:


Sec.  121.601  What is a small business for purposes of admission to 
SBA's 8(a) Business Development program?

    An applicant must not exceed the size standard corresponding to its 
primary industry classification in order to qualify for admission to 
SBA's 8(a) Business Development Program.


Sec.  121.602  [Amended]

    18. In Sec.  121.602 replace the acronym ``MED'' in the heading and 
the text with the words ``8(a) BD.''


Sec.  121.603  [Amended]

    19. In Sec.  121.603 replace the acronym ``MED'' in the heading and 
in paragraphs (a), (b) and (d) with the words ``8(a) BD.''


Sec.  121.604  [Amended]

    20. In Sec.  121.604 replace the acronym ``MED'' in the heading and 
the text with the words ``8(a) BD.''
    21. Section 121.702(a) is revised to read as follows:


Sec.  121.702  What size standards are applicable to the SBIR program?

* * * * *
    (a) is at least 51 percent owned and controlled by one or more 
individuals who are citizens of, or permanent resident aliens in, the 
United States, except in the case of a joint venture, where each entity 
to the venture must be 51 percent owned and controlled by one or more 
individuals who are citizens of, or permanent resident aliens in, the 
United States;
* * * * *
    22. Amend Sec.  121.1001 by revising paragraphs (a)(1), (a)(2)(i), 
(a)(5)(i) and (iii), (a)(6)(i) and (iv), and (a)(7), introductory text, 
and (a)(7)(iii), and by adding new paragraphs (b)(1)(iii), (b)(7), 
(b)(8), and (b)(9) as follows:


Sec.  121.1001  Who may initiate a size protest or request a formal 
size determination?

    (a) Size Status Protests. (1) For SBA's Small Business Set-Aside 
Program, including the Property Sales Program, or any instance in which 
a procurement or order has been restricted to small business or a 
particular group of small business, the following entities may file a 
size protest in connection with a particular procurement, sale or 
order:
    (i) Any offeror whom the contracting officer has not eliminated for 
reasons unrelated to size;
* * * * *
    (2) * * *
    (i) Any offeror whom the contracting officer has not eliminated for 
reasons unrelated to size;
* * * * *
    (5) * * *
    (i) Any offeror for the specific SDB requirement whom the 
contracting officer has not eliminated for reasons unrelated to size;
    (ii) * * *
    (iii) The responsible SBA Area Director for Government Contracting, 
the SBA Associate Administrator for Government Contracting, or the SBA 
Associate Administrator for 8(a) Business Development;
    (6) * * *
    (i) Any concern that submits an offer for a specific HUBZone set-
aside procurement that the contracting officer has not eliminated for 
reasons unrelated to size;
* * * * *
    (iv) The SBA Associate Administrator for the HUBZone Program, or 
designee.
    (7) For any unrestricted Government procurement in which status as 
a small business may be beneficial, including, but not limited to, the 
award of a contract to a small business where there are tie bids, the 
opportunity to seek a Certificate of Competency by a small business, 
and SDB or HUBZone price evaluation preferences, the following entities 
may protest in connection with a particular procurement:
* * * * *
    (iii) The responsible SBA Area Director for Government Contracting, 
the SBA Associate Administrator for Government Contracting, or the SBA 
Associate Administrator for 8(a) Business Development.
    (b) * * * (1) * * *
    (iii) The SBA Associate Administrator for Investment or designee 
may request a formal size determination for any purpose relating to the 
Small Business Investment Company (SBIC) program (see part 107 of this 
chapter). A formal size determination includes a request to determine 
whether or not affiliation exists between two or more entities for any 
purpose relating to the SBIC program.
* * * * *
    (7) In connection with initial or continued eligibility for the 
Small Disadvantaged Business (SDB) program, the following may request a 
formal size determination:
    (i) The applicant or SDB concern; or
    (ii) The Assistant Administrator of the Division of Program 
Certification and Eligibility or the Associate Administrator for 
8(a)BD.
    (8) In connection with initial or continued eligibility for the 
HUBZone program, the following may request a formal size determination:
    (i) The applicant or HUBZone concern; or
    (ii) The Associate Administrator for the HUBZone program, or 
designee.
    (9) For purposes of validating that firms listed in SBA's PRO-Net 
database are small, the Government Contracting Area Director may 
initiate a formal size determination when sufficient information exists 
that calls into question a firm's small business status. The current 
date will be used to determine size, and SBA will remove from the 
database any firm found to be other than small.
    23. In Sec.  121.1004 add new paragraphs (a)(4) and (a)(5) to read 
as follows:


Sec.  121.1004  What time limits apply to size protests?

    (a) * * *
    (4) Electronic notification of award. Where notification of award 
is made electronically, such as posting on the Internet under 
Simplified Acquisition Procedures, a protest must be received by the 
contracting officer before close of business on the fifth day, 
exclusive of Saturdays, Sundays, and legal holidays, after the 
electronic posting.
    (5) No notice of award. Where there is no requirement for written 
pre-award notice or notice of award, or where the

[[Page 70351]]

contracting officer has failed to provide written notification of 
award, the 5-day protest period will commence upon oral notification by 
the contracting officer or authorized representative of the identity of 
the apparent successful offeror.
* * * * *
    24. Revise the first sentence of Sec.  121.1005 to read as follows:


Sec.  121.1005  How must a protest be filed with the contracting 
officer?

    A protest must be delivered to the contracting officer by hand, 
telegram, mail, FAX, Federal Express or other overnight delivery 
service, e-mail, or telephone. * * *
    25. Amend Sec.  121.1007 by adding the following examples after 
paragraph (c):


Sec.  121.1007  Must a protest of size status relate to a particular 
procurement and be specific?

* * * * *
    Example 1:  An allegation that concern X is large because it 
employs more than 500 employees (where 500 employees is the 
applicable size standard) without setting forth a basis for the 
allegation is unspecific.
    Example 2:  An allegation that concern X is large because it 
exceeds the 500 employee size standard (where 500 employees is the 
applicable size standard) because a higher employment figure was 
published in publication Y is sufficiently specific.
    Example 3:  An allegation that concern X is affiliated with 
concern Y without setting forth any basis for the allegation is 
unspecific.
    Example 4:  An allegation that concern X is affiliated with 
concern Y because Mr. A is the majority shareholder in both concerns 
is sufficiently specific.
    Example 5:  An allegation that concern X has revenues in excess 
of $5 million (where $5 million is the applicable size standard) 
without setting forth a basis for the allegation is unspecific.
    Example 6:  An allegation that concern X exceeds the size 
standard (where the applicable size standard is $5 million) because 
it received Government contracts in excess of $5 million last year 
is sufficiently specific.

    26. In Sec.  121.1008, revise the heading and paragraphs (a) and 
(d) to read as follows:


Sec.  121.1008  What occurs after SBA receives a size protest or 
request for a formal size determination?

    (a) When SBA receives a size protest, the SBA Area Director for 
Government Contracting, or designee, will notify the contracting 
officer, the protested concern, and the protestor that the protest has 
been received. If the protest pertains to a requirement involving SBA's 
HUBZone program, the Area Director will also notify the AA/HUB of the 
protest. If the protest pertains to a requirement involving SBA's SBIR 
Program, the Area Director will also notify the Assistant Administrator 
for Technology. If the protest involves the size status of a concern 
that SBA has certified as a small disadvantaged business (SDB) (see 
part 124, subpart B of this chapter) the Area Director will notify 
SBA's AA/8(a) BD. If the protest pertains to a requirement that has 
been reserved for competition among concerns that participate in SBA's 
8(a) BD Program, the Area Director will notify the SBA district office 
servicing the 8(a) concern whose size status has been protested. SBA 
will provide a copy of the protest to the protested concern together 
with SBA Form 355, Application for Small Business Size Determination, 
by certified mail, return receipt requested, or by any overnight 
delivery service that provides proof of receipt. SBA will ask the 
protested concern to complete the form and respond to the allegations 
in the protest.
* * * * *
    (d) If a concern whose size status is at issue fails to submit a 
completed SBA Form 355, responses to the allegations of the protest, or 
other requested information within the time allowed by SBA, or if it 
submits incomplete information, SBA may presume that disclosure of the 
information required by the form or other missing information would 
demonstrate that the concern is other than a small business. A concern 
whose size status is at issue must furnish information about its 
alleged affiliates to SBA, despite any third party claims of privacy or 
confidentiality, because SBA will not disclose information obtained in 
the course of a size determination except as permitted by Federal law.
    27. In Sec.  121.1009 revise paragraphs (b) and (g) to read as 
follows:


Sec.  121.1009  What are the procedures for making the size 
determination?

* * * * *
    (b) Basis for determination. The size determination will be based 
primarily on the information supplied by the protestor or the entity 
requesting the size determination and that provided by the concern 
whose size status is at issue. The determination, however, may also be 
based on grounds not raised in the protest or request for size 
determination. SBA may use other information and may make requests for 
additional information to the protestor, the concern whose size status 
is at issue and any alleged affiliates, or other parties.
* * * * *
    (g) Results of an SBA size determination. (1) A formal size 
determination becomes effective immediately and remains in full force 
and effect unless and until reversed by OHA.
    (2) A contracting officer may award a contract based on SBA's 
formal size determination.
    (3) If the formal size determination is appealed to OHA, the OHA 
decision on appeal will apply to the pending procurement or sale if the 
decision is received before award. OHA decisions received after 
contract award will not apply to that procurement or sale, but will 
have future effect, unless the contracting officer agrees to apply the 
OHA decision to the procurement or sale.
    (4) Once SBA has determined that a concern is other than small for 
purposes of a particular procurement, the concern cannot later become 
eligible for the procurement by reducing its size.
    (5) A concern determined to be other than small under a particular 
size standard is ineligible for any procurement or any assistance 
authorized by the Small Business Act or the Small Business Investment 
Act of 1958 which requires the same or a lower size standard, unless 
SBA recertifies the concern to be small pursuant to Sec.  121.1010 or 
OHA reverses the adverse size determination. After an adverse size 
determination, a concern cannot self-certify as small under the same or 
lower size standard unless it is first recertified as small by SBA. If 
a concern does so, it may be in violation of criminal laws, including 
section 16(d) of the Small Business Act, 15 U.S.C. 645(d). If the 
concern has already certified itself as small on a pending procurement 
or on an application for SBA assistance, the concern must immediately 
inform the officials responsible for the pending procurement or 
requested assistance of the adverse size determination.
* * * * *
    28. Revise Sec.  121.1101 to read as follows:


Sec.  121.1101  Are formal size determinations subject to appeal?

    (a) Appeals from formal size determinations may be made to OHA. 
Unless an appeal is made to OHA, the size determination made by a SBA 
Government Contracting Area Office or Disaster Area Office is the final 
decision of the agency. The procedures for appealing a formal size 
determination to OHA are set forth in part 134 of this chapter. The OHA 
appeal is an administrative remedy that must be exhausted before 
judicial review of a formal size determination may be sought in a 
court.
    (b) OHA will not review a formal size determination where the 
contract has been awarded and the issue(s) raised in

[[Page 70352]]

a petition for review are contract specific, such as compliance with 
the nonmanufacturer rule (see Sec.  121.406(b)), or joint venture or 
ostensible subcontractor rule (see Sec.  121.103(h)).
    29. Revise Sec.  121.1103 to read as follows:


Sec.  121.1103  What are the procedures for appealing a NAICS code 
designation?

    (a) Any interested party adversely affected by a NAICS code 
designation may appeal the designation to OHA. The only exception is 
that, for a sole source contract reserved under SBA's 8(a) Business 
Development program (see part 124 of this chapter), only SBA's 
Associate Administrator for 8(a) Business Development may appeal the 
NAICS code designation.
    (b) The contracting officer's determination of the applicable NAICS 
code is final unless appealed as follows:
    (1) An appeal from a contracting officer's NAICS code designation 
and applicable size standard must be served and filed within 10 
calendar days after the issuance of the initial solicitation. OHA will 
summarily dismiss an untimely NAICS code appeal.
    (2)(i) The appeal petition must be in writing and must be sent to 
the Office of Hearings & Appeals, U.S. Small Business Administration, 
409 3rd Street, SW., Suite 5900, Washington, DC 20416.
    (ii) There is no required format for a NAICS code appeal, but an 
appeal must include the following information: the solicitation or 
contract number; the name, address, and telephone number of the 
contracting officer; a full and specific statement as to why the NAICS 
code designation is erroneous, and argument in support thereof; and the 
name, address and telephone number of the appellant or its attorney.
    (3) The appellant must serve the appeal petition upon the 
contracting officer who assigned the NAICS code to the acquisition and 
SBA's Office of General Counsel, Associate General Counsel for 
Procurement Law, 409 3rd Street, SW., Washington, DC 20416.
    (4) Upon receipt of a NAICS code appeal, OHA will notify the 
contracting officer by notice and order of the date OHA received the 
appeal, the docket number, and the Judge assigned to the case. The 
contracting officer's response to the appeal must include argument and 
supporting evidence (see part 134, subpart C, of this chapter) and must 
be received by OHA within 10 calendar days from the date of the 
docketing notice and order, unless otherwise specified by the Judge. 
Upon receipt of OHA's docketing notice and order, the contracting 
officer must immediately send to OHA a copy of the solicitation 
relating to the NAICS code appeal.
    (5) After close of the record, OHA will issue a decision and inform 
all interested parties, including the appellant and contracting 
officer. If OHA's decision is received by the contracting officer 
before the date offers are due, the solicitation must be amended if the 
contracting officer's designation of the NAICS code is reversed. If 
OHA's decision is received by the contracting officer after the due 
date of initial offers, the decision will not apply to the pending 
procurement, but will apply to future solicitations for the same 
products or services.
    30. Revise Sec.  121.1205 to read as follows:


Sec.  121.1205  How is a list of previously granted class waivers 
obtained?

    A list of classes of products for which waivers of the 
Nonmanufacturer Rule have been granted is maintained in SBA's website 
at www.sba.gov/GC/approved.html. A list of such waivers may also be 
obtained by contacting the Office of Government Contracting, U.S. Small 
Business Administration, 409 3rd Street, SW., Washington, DC 20416, or 
the nearest SBA Government Contracting Area Office.

PART 134--RULES OF PROCEDURE GOVERNING CASES BEFORE THE OFFICE OF 
HEARINGS AND APPEALS

    31. The authority citation for 13 CFR part 134 continues to read as 
follows:

    Authority: 5 U.S.C. 504; 15 U.S.C. 632, 634(b)(6), and 637(a).

    32. Revise Sec.  134.102(k) to read as follows:


Sec.  134.102  Jurisdiction of OHA.

* * * * *
    (k) Appeals from size determinations and NAICS code designations 
under part 121 of this chapter. ``Size determinations'' include 
decisions by Government Contracting Area Directors that determine 
whether two or more concerns are affiliated for purposes of SBA's 
financial assistance programs, or other programs for which an 
appropriate SBA official requested an affiliation determination;
* * * * *
    33. In Sec.  134.314, revise the heading and add the following 
sentence at the end to read as follows:


Sec.  134.314  Standard of review and burden of proof.

    * * * The appellant has the burden of proof, by a preponderance of 
the evidence, in both size and NAICS code appeals.
    34. Amend Sec.  134.316(a) by adding the following sentence at the 
end to read as follows:


Sec.  134.316  The decision.

    (a) * * * The Judge will not decide substantive issues raised for 
the first time on appeal, or which have been abandoned or become moot.
* * * * *

    Dated: November 8, 2002.
Hector V. Barreto,
Administrator.
[FR Doc. 02-29272 Filed 11-21-02; 8:45 am]
BILLING CODE 8025-01-P