[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Rules and Regulations]
[Pages 8222-8264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2581]



[[Page 8221]]

Vol. 76

Friday,

No. 29

February 11, 2011

Part VII





Small Business Administration





-----------------------------------------------------------------------



13 CFR Parts 121 and 124



Small Business Size Regulations; 8(a) Business Development/Small 
Disadvantaged Business Status Determinations; Final Rule

  Federal Register / Vol. 76 , No. 29 / Friday, February 11, 2011 / 
Rules and Regulations  

[[Page 8222]]


-----------------------------------------------------------------------

SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121 and 124

RIN 3245-AF53


Small Business Size Regulations; 8(a) Business Development/Small 
Disadvantaged Business Status Determinations

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This rule makes changes to the regulations governing the 
section 8(a) Business Development (8(a) BD) program, the U.S. Small 
Business Administration's (SBA or Agency) size regulations, and the 
regulations affecting Small Disadvantaged Businesses (SDBs). It is the 
first comprehensive revision to the 8(a) BD program in more than ten 
years. Some of the changes involve technical issues such as changing 
the term ``SIC code'' to ``NAICS code'' to reflect the national 
conversion to the North American Industry Classification System 
(NAICS).

DATES: Effective Date: This rule is effective March 14, 2011.
    Compliance Dates: Except for 13 CFR 124.604, the revisions to 13 
CFR part 124 apply to all applications for the 8(a) BD program pending 
as of March 14, 2011 and all 8(a) procurement requirements accepted by 
SBA on or after March 14, 2011. These rules do not apply to any 8(a) BD 
appeals pending before SBA's Office of Hearings and Appeals. The 
requirements of Sec.  124.604 apply to all 8(a) BD program participants 
as of September 9, 2011, unless SBA further delays implementation 
through a Notice in the Federal Register. The amendments to 13 CFR part 
121 apply with respect to all solicitations issued and all 
certifications as to size made after March 14, 2011.

FOR FURTHER INFORMATION CONTACT: LeAnn Delaney, Deputy Associate 
Administrator, Office of Business Development, at (202) 205-5852, or 
[email protected].

SUPPLEMENTARY INFORMATION: On October 28, 2009, SBA published in the 
Federal Register a comprehensive proposal to revise the 8(a) BD program 
and several proposed revisions to SBA's size regulations. 74 FR 55694. 
Some of the proposed changes involve technical issues. Others are more 
substantive and result from SBA's experience in implementing the 
current regulations. In addition, SBA has made changes in this final 
rule in response to comments received to its notice of proposed 
rulemaking. SBA has learned through experience that certain of its 
rules governing the 8(a) BD program are too restrictive and serve to 
unduly preclude firms from being admitted to the program. In other 
cases, SBA determined that a rule is too expansive or indefinite and 
sought to restrict or clarify those rules. In one case, SBA made 
wording changes to correct past public or agency misinterpretation. 
Additionally, this rule makes changes to address situations that were 
not contemplated when the previous revisions to the 8(a) BD program 
were made. The proposed rule called for a 60-day comment period, with 
comments required to be received by SBA by December 28, 2009. The 
overriding comment SBA received in the first few weeks after the 
publication was to extend the comment period. Commenters felt that the 
nature of the issues raised in the rule and the timing of comments 
during the holiday season required more time for affected businesses to 
adequately review the proposal and prepare their comments. In response 
to these comments, SBA published a notice in the Federal Register on 
December 9, 2009, extending the comment period an additional 30 days to 
January 28, 2010. 74 FR 65040. In addition to providing a 90-day 
comment period, SBA also solicited the public's views regarding the 
proposal through a series of listening sessions held throughout the 
country. SBA held listening sessions in Washington, DC on December 10 
and 11, 2009; in New York, New York on December 16, 2009; in Seattle, 
Washington on December 17, 2009; in Boston, Massachusetts on December 
18, 2009; in Dallas, Texas on January 11, 2010; in Atlanta, Georgia on 
January 12, 2010; in Albuquerque, New Mexico and Miami, Florida on 
January 14, 2010; and in Chicago, Illinois and Los Angeles, California 
on January 19, 2010.
    Additionally, SBA conducted Tribal consultations pursuant to 
Executive Order 13175, Tribal Consultations, on December 16, 2009 in 
Seattle, Washington; on January 14, 2010 in Albuquerque, New Mexico; 
and on January 27, 2010 for Anchorage, Alaska in Vienna, Virginia via a 
video teleconference with representatives located in Anchorage, Alaska.
    In addition to the many comments received from those testifying at 
the various public forums and Tribal consultations conducted around the 
country, SBA received 231 timely written comments during the 90-day 
comment period, with a high percentage of commenters favoring the 
proposed changes. A substantial number of commenters applauded SBA's 
effort to clarify and address misinterpretations of the rules. For the 
most part, the comments supported the substantive changes proposed by 
SBA. Additionally, in response to specific requests for information, 
SBA received comments with alternative approaches on many aspects of 
the proposed rule.
    The proposed rule contained changes to SBA's size regulations (part 
121) and the regulations governing SBA's 8(a) BD program (part 124). 
SBA received substantive comments on the proposed changes to both of 
these program areas. With the exception of comments which did not set 
forth any rationale or make suggestions, SBA discusses and responds 
fully to all the comments below.

Summary of Comments and SBA's Responses

Part 121

    SBA received a substantial number of comments addressing the 
proposed changes to the size rules.

Production Pools

    In response to the proposed changes on affiliation, one commenter 
noted that Sec.  121.103(b) was not entirely consistent with the 
statutory authority regarding exclusions from affiliation for certain 
types of small business pools. Specifically, section 9(d) of the Small 
Business Act (the Act), 15 U.S.C. 638(d), authorizes an exclusion from 
affiliation for research and development pools. Similarly, section 11 
of the Act, 15 U.S.C. 640, authorizes an exclusion from affiliation for 
defense production pools. SBA's current regulation set forth in Sec.  
121.103(b)(3) inadvertently omitted the reference to defense production 
pools. It was never SBA's intent to exclude defense production pools 
from the exception to affiliation. The words ``or for defense 
production'' were inadvertently omitted from Sec.  121.102(b)(3) after 
the words ``joint program of research and development.'' Accordingly, 
this final rule corrects this omission.

Exception to Affiliation for Mentor/Prot[eacute]g[eacute] Programs

    The proposed rule intended to clarify when SBA would consider a 
prot[eacute]g[eacute] firm not to be affiliated with its mentor based 
on assistance received from the mentor through a mentor/
prot[eacute]g[eacute] agreement. In practice, the former regulation was 
at times misconstrued by other Federal agencies that believed they 
could establish mentor/prot[eacute]g[eacute] programs and exempt 
prot[eacute]g[eacute]s from SBA's size affiliation rules on their own. 
That was never SBA's intent. The

[[Page 8223]]

exception to affiliation contained in Sec.  121.103(b)(6) is meant to 
apply to SBA's 8(a) BD mentor/prot[eacute]g[eacute] program and other 
Federal mentor/prot[eacute]g[eacute] programs that specifically 
authorize an exception to affiliation in their authorizing statute. 
Because of the business development purposes of the 8(a) BD program, 
SBA administratively established an exception to affiliation for 
prot[eacute]g[eacute] firms. Specifically, prot[eacute]g[eacute] firms 
are not affiliated with their mentors based on assistance received from 
their mentors through an SBA-approved 8(a) BD mentor/
prot[eacute]g[eacute] agreement. That exception exists in the current 
rule and remained in the rule as proposed. The proposed rule also 
clarified that an exception to affiliation for prot[eacute]g[eacute]s 
in other Federal mentor/prot[eacute]g[eacute] programs will be 
recognized by SBA only where specifically authorized by statute (e.g., 
the Department of Defense mentor/prot[eacute]g[eacute] program) or 
where SBA has authorized an exception to affiliation for a mentor/
prot[eacute]g[eacute] program of another Federal agency under the 
procedures set forth in Sec.  121.903. The Supplementary Information to 
the proposed rule noted that SBA did not anticipate approving 
exceptions to affiliation to agencies seeking to have such an exception 
for their mentor/prot[eacute]g[eacute] programs except in limited 
circumstances. SBA reasoned that the 8(a) BD program is a unique 
business development program that is unlike other Federal programs.
    SBA received a number of comments in response to this proposal. 
Several comments supported the current requirement, that was not 
amended in the proposed rule, that SBA would not find affiliation 
between a prot[eacute]g[eacute] firm and its mentor based solely on the 
assistance received under a mentor/prot[eacute]g[eacute] agreement. SBA 
does not change that provision in this final rule.
    SBA received comments both in support and of and in opposition to 
the clarification contained in the proposed rule that other agencies 
could create mentor/prot[eacute]g[eacute] programs containing an 
exclusion to affiliation only where authorized by statute or by SBA 
after requesting such an exception under Sec.  121.903 of SBA's size 
regulations. Those supporting the proposal recognized that were 
agencies able to waive SBA's affiliation rules whenever they thought it 
to be appropriate (i.e., without requesting or receiving approval from 
SBA), legitimate small businesses could be adversely affected. Several 
commenters stated that other agencies should be able to construct 
mentor/prot[eacute]g[eacute] programs for their purposes as they see 
fit. Specifically, these commenters believed that if another agency 
wanted to allow an exclusion from affiliation for a joint venture 
between a prot[eacute]g[eacute] firm and its mentor for a program of 
that other agency, the agency should be able to do so. By statute, SBA 
is the agency authorized to determine size, specifically including 
whether a firm qualifies as a small business for any Federal program. 
See 15 U.S.C. 632(a). In particular, the Act specifies that ``[u]nless 
authorized by statute, no Federal department or agency may prescribe a 
size standard for categorizing a business concern as a small business 
concern, unless such proposed size standard * * * is [among other 
things] approved by the [SBA] Administrator.'' 15 U.S.C. 632(a)(2)(C). 
SBA firmly believes that another agency should not be able to exempt 
firms from SBA's affiliation rules (and in effect make program-specific 
size rules) without SBA's approval. SBA's regulations set forth a 
formal process that a Federal department or agency must follow in order 
to request, and possibly receive SBA's approval, to deviate from SBA's 
size rules, including those relating to affiliation. See 13 CFR 
121.903.
    The 8(a) BD program is a unique Federal program. It is not a 
contracting program, but rather a business development program. The 
program is designed to assist in the business development of 
disadvantaged small businesses through management and technical 
assistance, contractual assistance, and other means. Requiring mentors 
to provide business development assistance to prot[eacute]g[eacute] 
firms in order for a mentor/prot[eacute]g[eacute] relationship to 
receive an exclusion from affiliation is merely one tool to assist in 
the business development of 8(a) firms. SBA's size regulations 
generally aggregate the receipts/employees of joint venture partners 
for size purposes, and SBA believes that is the correct approach since 
the combined resources of the partners are available to the joint 
venture. The exclusion to affiliation for mentor/prot[eacute]g[eacute] 
relationships approved for the 8(a) BD program is designed to encourage 
the business development purposes of the 8(a) BD program. Where a 
mentor/prot[eacute]g[eacute] program of another agency is also intended 
to promote the business development of specified small business 
concerns, SBA would be inclined to approve the agency's request for an 
exclusion from affiliation because it would serve the same purpose as 
the exclusion from affiliation for 8(a) mentor/prot[eacute]g[eacute] 
relationships. As such, the final rule continues to allow exclusions 
from affiliation for mentor/prot[eacute]g[eacute] relationships of 
other agencies only where specifically authorized by statute or where 
the agency asks for and SBA grants such an exclusion.

Joint Ventures

    The proposed rule also amended the size rules pertaining to joint 
ventures. Under current Sec.  121.103(h), a joint venture is an entity 
with limited duration. Specifically, the current regulation limits a 
specific joint venture to submitting no more than three offers over a 
two-year period. The proposed rule changed this requirement to allow a 
specific joint venture to be awarded three contracts over a two-year 
period. It also clarified that the partners to a joint venture could 
form a second joint venture and be awarded three additional contracts, 
and a third joint venture to be awarded three more. At some point, 
however, such a longstanding relationship or contractual dependence 
could lead to a finding of general affiliation, even in the 8(a) 
mentor/prot[eacute]g[eacute] joint venture context. The proposed rule 
also asked for comments on other alternatives, including limiting the 
number of contract awards that the same partners to one or more joint 
ventures could receive without the partners being deemed affiliates for 
all purposes.
    Many commenters supported the proposed change from three offers 
over two years to three contract awards over two years, noting that 
this change would provide more certainty to offerors. One commenter 
asked for more clarity regarding what constitutes a contract. That 
commenter was concerned that a contract could be awarded and then 
ultimately not performed due to a protest or otherwise and that such an 
award would still count against the three contract award limit for that 
joint venture. SBA does not see this as a significant problem. As 
previously noted, two partners could form an additional joint venture 
entity and that new entity could be awarded three additional contracts. 
The fact that one of the three contracts awarded to the first joint 
venture entity was not performed in no way inhibits the ability of the 
two firms from forming a new joint venture and receiving additional 
contracts. As such, SBA does not adopt the comment that recommended the 
word contract to mean only a contract that was kept and performed by 
the joint venture.
    The majority of comments received also preferred limiting one joint 
venture to three contract awards (and allowing the firms to form 
additional joint venture entities for additional contract awards) 
rather than limiting the overall

[[Page 8224]]

number of contracts that two (or more) firms acting as a joint venture 
could receive. Several commenters contended that they often go after 
and are awarded many small dollar projects through joint venture 
relationships. Even though the combined value of the contracts awarded 
could be very small, the alternative option, which would prohibit no 
more than five total awards to two firms acting through a joint 
venture, would prohibit them from seeking and being awarded additional 
contracts. They felt that such a prohibition would adversely affect 
their overall business development. Other commenters observed that 
limiting the total number of contract awards to a specific number 
(e.g., five) would make mentor/prot[eacute]g[eacute] relationships 
short term, which would encourage less business development assistance 
to prot[eacute]g[eacute] firms in the long term. SBA concurs with these 
comments and does not adopt this alternative in this final rule.
    The proposed rule also clarified when SBA will determine whether 
the three contract awards in two years requirement has been met. The 
proposal set the time at which compliance with the three awards in two 
years rule should be determined as of the date a concern submits a 
written self-certification that it is small as part of its initial 
offer including price. This point in time coincides with the time at 
which size is determined and SBA believed that consistency dictated 
this approach. Commenters supported this approach, particularly 
favoring allowing joint venture offerors the flexibility to ultimately 
be awarded more than three contracts if they had not yet received three 
awards as of the date they submitted several offers and happened to win 
more than one of the awards pertaining to those offers. A few 
commenters specifically supported the example contained in the 
supplementary information to the proposed rule and suggested that it be 
included in the actual regulatory text. SBA sees no reason not to 
include the example in the regulation if that will help further clarify 
SBA's intent. As such, SBA has added the example to the regulatory text 
for Sec.  121.103(h) in this final rule.
    The proposed rule also clarified that while a joint venture may or 
may not be a separate legal entity (e.g., a limited liability company 
(LLC)), it must exist through a written document. Thus, even an 
``informal'' joint venture must have a written agreement between the 
partners. In addition, the rule clarified SBA's longstanding policy 
that a joint venture may or may not be populated (i.e., have its own 
separate employees). The supplementary information to the proposed rule 
indicated that whether a joint venture needs to be populated or have 
separate employees would depend upon the legal structure of the joint 
venture. If a joint venture is a separate legal entity, SBA thought 
that it must have its own employees. If a joint venture merely exists 
through a written agreement between two or more individual business 
entities, then SBA felt that it need not have its own separate 
employees and employees of each of the individual business entities may 
perform work for the joint venture. SBA received several comments on 
this interpretative language. A few commenters asked SBA to clearly 
delineate what ``populated'' means in the regulatory text. The final 
rule adopts this comment and has identified that a populated joint 
venture is joint venture formed as a separate legal entity that has its 
own separate employees.
    The majority of comments on the provision addressing the population 
of joint ventures believed that any regulation that required a 
populated joint venture would unintentionally deprive joint venture 
partners of the opportunity to structure joint ventures as LLCs because 
of the requirements contained in other regulatory provisions. For 
example, in an 8(a) joint venture, Sec.  124.513(c)(2) requires an 
employee of the 8(a) Participant to be the project manager. If an LLC 
was populated, so that it hired its own employees to perform an 8(a) 
contract, the project manager hired by the LLC to oversee the project 
(even if he/she came from the 8(a) Participant) would not be an 
employee of the 8(a) Participant. Similarly, Sec.  124.513(d) requires 
the 8(a) Participant to a joint venture to perform a specific 
percentage of work (``a significant portion'' in the regulations prior 
to this final rule, and at least 40% of the work done by the joint 
venture in this final rule). If an LLC is populated, the LLC is 
performing the work; the work is not being performed individually by 
the two (or more) partners to the joint venture. SBA understands these 
concerns and has made several changes in this final rule in response to 
them. SBA believes that the individual businesses involved in the joint 
venture should determine whether to form a separate legal entity for 
the joint venture (e.g., LLC) and, if they do, whether or not to 
populate the new entity. SBA will not require any joint venture to be 
populated, and will not find a joint venture ineligible merely because 
it is or is not populated. In addition, SBA believes clarifications 
need to be made in the substantive 8(a) rules between populated and 
unpopulated joint ventures. The requirement contained in Sec.  
124.513(d) that an 8(a) Participant must perform at least 40% of the 
work done by a joint venture, and the requirement contained in Sec.  
124.513(c)(2) that the project manager be an employee of the 8(a) 
Participant, make sense only for unpopulated joint ventures or joint 
ventures populated only with administrative personnel. For joint 
ventures populated with individuals intended to perform any awarded 
contracts, the joint venture must demonstrate that the 8(a) Participant 
to the joint venture controls the joint venture, is responsible for the 
books and records of the joint venture, owns at least 50% of the joint 
venture, and receives profits commensurate with its ownership interest. 
SBA has made these clarifications in Sec.  124.513 of the final rule. A 
detailed description of these changes is included below in the 
discussion of the comments on Part 124.
    A few commenters questioned SBA's application of the ostensible 
subcontractor rule in Sec.  121.103(h)(4). Specifically, they sought 
clarification as to whether SBA applied the ostensible subcontractor 
rule only at the time of size certification (as part of the firm's 
offer for a particular contract) or if it also applied after contract 
performance. SBA believes that it would not make sense to allow a firm 
to submit an offer proposing how it will perform a contract in which it 
will perform the primary and vital portions of a contract, and thus 
qualify individually as a small business, and then subcontract out the 
entire contract after award and have the contract count as an award to 
small business. SBA believes that if options are exercised on such a 
contract, the options should not count as a small business award if the 
aggregate size of the contractor and its ostensible subcontractor 
exceeds the applicable size standard. The final rule adds clarifying 
language to a new Sec.  121.404(g)(4).

Exclusion From Affiliation for Mentor/Prot[eacute]g[eacute] Joint 
Ventures

    The proposed rule also attempted to clarify that any joint venture 
seeking to use the 8(a) mentor/prot[eacute]g[eacute] status as a basis 
for an exception to affiliation requirements must follow the 8(a) 
requirements (i.e., it must meet the content requirements set forth in 
Sec.  124.513(c) and the performance of work requirements set forth in 
Sec.  124.513(d)). Although SBA does not approve joint venture 
agreements for procurements outside the 8(a) program, if the size of a 
joint venture claiming an

[[Page 8225]]

exception to affiliation is protested, the requirements of Sec.  
124.513(c) and (d) must be met in order for the exception to 
affiliation to apply. For purposes of clarification Sec.  124.513(d) 
references the percentage of work requirements of Sec.  124.510 which 
include the percentage of work requirements set forth in Sec.  125.6.
    In connection with a size protest, one commenter opposed requiring 
the 8(a) joint venture rules to be met in order for a mentor/
prot[eacute]g[eacute] joint venture to receive an exclusion from 
affiliation for a non-8(a) contract. This commenter did not believe it 
was appropriate to apply 8(a) rules to non-8(a) contracts, thinking 
that such a requirement would impose an undue burden on 8(a) firms 
seeking non-8(a) contracts. SBA disagrees. Receiving an exclusion from 
affiliation for any non-8(a) contract is a substantial benefit that 
only SBA-approved mentor/prot[eacute]g[eacute] relationships can 
receive. The intent behind the exclusion generally is to promote 
business development assistance to prot[eacute]g[eacute] firms from 
their mentors. Without a requirement that a prot[eacute]g[eacute] firm 
must be the project manager and take an active and substantial role in 
contract performance on a non-8(a) joint venture with its mentor, the 
entire small business contract could otherwise be performed by an 
otherwise large business.
    Overall, however, SBA received many favorable comments to this 
proposed change. Commenters noted that without such a clarification, a 
joint venture between an 8(a) prot[eacute]g[eacute] firm and its large 
business mentor on a non-8(a) small business contract could perform the 
contract with minimal work being performed by the prot[eacute]g[eacute] 
8(a) firm. The commenters believed such a scenario was inappropriate. 
SBA agrees. SBA recognized this potential abuse of small business 
contracting programs and has not changed the requirement in this final 
rule that a mentor/prot[eacute]g[eacute] joint venture seeking an 
exception to affiliation on a non-8(a) contract must follow the 8(a) 
requirements regarding control and performance by the 8(a) 
prot[eacute]g[eacute] firm.
    SBA also requested comments on whether to continue to allow the 
exclusion to affiliation for mentor/prot[eacute]g[eacute] joint 
ventures on non-8(a) contracts, or whether the exclusion to affiliation 
should apply only to 8(a) contracts. Related to this inquiry was the 
proposed change that would allow the exclusion to apply not just to 
Federal prime contracts, but to subcontracts as well. This change was 
particularly important to the Department of Energy, which has a 
significant amount of contracting activity go through government owned 
contractor operated (GOCO) facilities, and the contracts between the 
GOCO and a contractor technically are government subcontracts. The 
overwhelming majority of comments supported permitting the exclusion to 
affiliation for both 8(a) and non-8(a) contracts. They believed that 
performing non-8(a) contracts is just as or more important in a firm's 
business development than performing 8(a) contracts. They noted that 
understanding and being able to perform non-8(a) government contracts 
is critical to a firm's ultimate survival and success after leaving the 
8(a) BD program, and getting that experience through a mentor/
prot[eacute]g[eacute] relationship while still in the 8(a) BD program 
is essential. In addition, the majority of commenters supported the 
proposed change applying the exclusion to affiliation to both 
government subcontracts as well as prime contracts. They viewed this 
extension as further assisting 8(a) Participants realize the business 
development purposes of the 8(a) BD program. As such, this final rule 
continues to allow the exclusion to affiliation for mentor/
prot[eacute]g[eacute] joint ventures for all government prime contracts 
and subcontracts.

Classification of a Procurement for Supplies

    SBA's regulations provide that acquisitions for supplies must be 
classified under the appropriate manufacturing NAICS code, not under a 
wholesale trade NAICS code. The proposed rule amended the size 
regulations to clarify that a procurement for supplies also cannot be 
classified under a retail trade NAICS code. SBA received seven comments 
supporting and three comments opposing this proposed change. SBA 
continues to believe that procurements for supplies should be 
classified under the appropriate manufacturing or other supply NAICS 
code. The retail trade NAICS code is appropriate for financial 
assistance (e.g., loans), but not for the procurement of specified 
supply items. As such, SBA does not change this provision in the final 
rule.

Application of the Nonmanufacturer Rule

    The proposed rule also attempted to provide further guidance to the 
current nonmanufacturer rule (i.e., the rule that requires, in 
pertinent part, a firm that is not itself the manufacturer of the end 
item being procured to provide the product of a small business 
manufacturer). The proposed rule explicitly provided that the 
nonmanufacturer rule applies only where the procuring agency has 
classified a procurement as a manufacturing procurement by assigning 
the procurement a NAICS code under Sectors 31-33.
    In addition, the proposed rule clarified that the nonmanufacturer 
rule applies only to the manufacturing or supply component of a 
manufacturing procurement. Where a procuring agency has classified a 
procurement as a manufacturing procurement and is also acquiring 
services, the nonmanufacturer rule would apply to the supply component 
of that procurement only. In other words, a firm seeking to qualify as 
a small business nonmanufacturer must supply the product of a small 
business manufacturer (unless a nonmanufacturer waiver applies), but 
need not perform any specific portion of the accompanying services. 
Since the procurement is classified under a manufacturing NAICS code, 
it cannot also be considered a services procurement and, thus, the 50% 
performance of work requirement set forth in Sec.  125.6 for services 
does not apply to that procurement. In classifying the procurement as a 
manufacturing/supply procurement, the procuring agency must have 
determined that the ``principal nature'' of the procurement was 
supplies. As a result, any work done by a subcontractor on the services 
portion of the contract cannot rise to the level of being ``primary and 
vital'' requirements of the procurement, and therefore cannot be the 
basis or affiliation as an ostensible subcontractor. Conversely, if a 
procuring agency determines that the ``principal nature'' of the 
procurement is services, only the requirements relating to services 
contracts apply. The nonmanufacturer rule, which applies only to 
manufacturing/supply contracts, would not apply. Thus, although a firm 
seeking to qualify as a small business with respect to such a contract 
must certify that it will perform at least 50% of the cost of the 
contract incurred for personnel with its own employees, it need not 
supply the product of a small business manufacturer on the supply 
component of the contract.
    In order to qualify as a nonmanufacturer, a firm must be primarily 
engaged in the retail or wholesale trade and normally sell the type of 
item being supplied. The proposed rule further defined this statutory 
requirement to mean that the firm takes ownership or possession of the 
item(s) with its personnel, equipment or facilities in a manner 
consistent with industry practice. This change is primarily in response 
to

[[Page 8226]]

situations where SBA has waived the nonmanufacturer rule and the prime 
contractor essentially subcontracts all services, such as warehousing 
or delivery, to a large business. Such an arrangement, where the prime 
contractor can legally provide the product of a large business and then 
subcontract all tangential services to a large business, is contrary to 
the intent and purpose of the Small Business Act, i.e., providing small 
businesses with an opportunity to perform prime contracts. Such an 
arrangement inflates the cost to the Government of contract performance 
and inflates the statistics for prime contracting dollars awarded to 
small business, which is detrimental to other small businesses that are 
willing and able to perform Government contracts.
    In response to the proposed changes to the nonmanufacturer rule, 12 
commenters addressed the proposal to require a nonmanufacturer to take 
possession of the items with its own facilities, equipment or personnel 
in a manner consistent with industry practice. Eight commenters 
supported the change, while four opposed it. Those in opposition 
believed that the change would limit opportunities for small 
businesses. Two commenters also stated that taking possession of supply 
items is not consistent with industry practices. Those supporting the 
change believed that it was a reasonable requirement to ensure that 
small business nonmanufacturers were providing some value to the 
procurement other than their status as small or small 8(a) businesses. 
These commenters particularly thought that the proposal made sense in 
the scenario outlined in the supplementary information for the proposed 
rule, where there are no small business manufacturers available for the 
contract (and either a class or individual waiver to the 
nonmanufacturer rule is granted). In such a case, small business 
participation is minimal, yet the entire value of the contract is 
counted as an award to small business for goaling purposes. In response 
to these comments, SBA first notes that the proposed rule did not 
require a small business nonmanufacturer to take possession of the 
supply items in every case. It required that the nonmanufacturer take 
ownership or possession. If the nonmanufacturer arranged for 
transportation of the supply items (e.g., it uses trucks it owns or 
leases to transport the items to the final destination), then it need 
not take ownership of the supply items. If it does not arrange for the 
transportation, then it must at least take ownership of the supply 
items. SBA recognizes the validity of small business dealers and does 
not seek to harm legitimate small business dealers. SBA continues to 
believe, however, that the ownership or possession requirement provides 
a necessary safeguard to abuse. A multi-million dollar supply contract 
in which a large business manufacturer provides the supply items 
directly to the Government procuring agency and the small business 
nonmanufacturer provides nothing more than its status as a small 
business does not foster small business development. As such, this 
provision is not changed in the final rule.
    One commenter disagreed with the proposal to limit application of 
the nonmanufacturer rule to acquisitions that have been classified with 
a manufacturing NAICS code. The commenter argued that some supply 
contracts cannot be classified as manufacturing. We agree. Thus, we 
have removed this requirement from the final rule. The commenter 
further argued that SBA should allow procuring agencies to assign 
wholesale NAICS codes to procurements because not all supply contracts 
can be classified under a manufacturing or supply NAICS code. We 
disagree. First, the Small Business Act and SBA's regulation do not 
contain performance requirements applicable to wholesale or retail 
contracts. Thus, wholesale and retail NAICS codes cannot be used for 
government procurement purposes. The wholesale and retail trade NAICS 
codes are for purposes of SBA financial assistance only. Second, a 
contracting officer should assign the NAICS code to a procurement which 
best describes the principal purpose of the acquisition. While some 
procurements call for the provision of supplies and services, a 
procurement should be classified as one or the other, and cannot be 
classified as both. The classification dictates what an offeror must 
perform in order to qualify as a small business concern for a small set 
aside procurement. These limitations on subcontracting performance 
requirements vary depending on whether the contract is classified as a 
service, supply, construction or specialty trade construction 
procurement. If a contract is classified as a service contract, then 
only the requirements pertaining to service contracts apply. There is 
no requirement that the ultimate contractor meet any performance of 
work requirements relating to the manufacture of products, which may be 
ancillary to the services contract. The relevant consideration is the 
cost of the contract incurred for personnel. If a contract is 
classified as a supply contract, then only the requirements pertaining 
to supply contracts apply. The concern must either be the manufacturer 
of the items being procured or be a dealer that supplies the products 
of a small business manufacturer (unless a waiver to the 
nonmanufacturer rule applies), and there is no requirement that the 
concern provide any ancillary services. The relevant consideration is 
the cost of manufacturing the supplies or products. In the acquisition 
described by the commenter, for the delivery of fruits and vegetables, 
if a manufacturing or supply NAICS code is not appropriate then the 
procurement should be classified under a warehousing or delivery 
service NAICS code. In response to this comment, the final rule also 
clarifies that a waiver of the nonmanufacturer rule does not waive the 
requirement that a nonmanufacturer not exceed the 500 employee size 
standard or the requirement that the nonmanufacturer must take 
ownership or possession of the items with its personnel, equipment or 
facilities. A waiver of the nonmanufacturer rule only applies to the 
requirement that a nonmanufacturer supply a product of a small business 
concern made in the United States.
    Finally, one commenter recommended that Sec.  121.406 specifically 
reference the service disabled veteran-owned (SDVO) program as a 
program to which the nonmanufacturer rule applies. Section 125.15(c) 
currently states that the nonmanufacturer rule applies to SDVO 
requirements for supplies. Thus, although it is not necessary to also 
add that requirement to Sec.  121.406 of the size regulations, this 
final rule has done so in order to provide more clarity regarding the 
rule's application. Similarly, the final rule also clarifies in Sec.  
121.406 that the nonmanufacturer rule applies to women-owned small 
business (WOSB) and economically disadvantaged women-owned small 
business (EDSOB) requirements for supplies. Again, Sec.  127.505 of 
SBA's regulations currently states that the nonmanufacturer rule 
applies to WOSB and EDWOSB requirements for supplies, but it is added 
to Sec.  121.406 as well for clarity purposes.

Request for Formal Size Determination

    The proposed rule also amended Sec.  121.1001(b) to give the SBA's 
OIG the authority to ask for a formal size determination. Because the 
OIG is not currently listed in the regulations as an individual who can 
request a formal size determination, the OIG must currently seek a 
formal size

[[Page 8227]]

determination through the relevant SBA program office. SBA believes 
that the Inspector General should be able to seek a formal size 
determination when questions about a concern's size arise in the 
context of an investigation or other review of SBA programs by the 
Office of Inspector General. SBA received several comments regarding 
the proposed change to allow the SBA's OIG to ask for formal size 
determinations. All but one commenter supported the change. The 
dissenting commenter believed that the change is unnecessary and would 
give the OIG too much power. SBA believes that it is reasonable for the 
OIG to be able to request a formal size determination where it deems it 
to be appropriate, and, thus, has not changed this provision in this 
final rule.

Part 124

    Because the primary focus of the October 28th proposed rule was to 
comprehensively revise the regulations relating to the SBA's 8(a) BD 
program, the vast majority of the comments SBA received pertained to 
proposed changes to part 124. SBA will address each of the substantive 
comments made regarding proposed changes to part 124 in turn.

Completion of Program Term

    The proposed rule clarified that every firm that completes its 
nine-year program term will not be deemed to ``graduate'' from the 8(a) 
BD program. Pursuant to the Small Business Act, a Participant is 
considered to graduate only if it successfully completes the program by 
substantially achieving the targets, objectives, and goals contained in 
the concern's business plan, thereby demonstrating its ability to 
compete in the marketplace without 8(a) assistance. 15 U.S.C. 
636(j)(10)(H). After nine years in the program, a firm will be deemed 
to graduate only where SBA determines that is has substantially 
achieved the targets, objectives and goals set forth in its business 
plan. Where those targets, objectives and goals have not been 
substantially achieved, the firm will merely be deemed to have 
completed its nine-year program term. The proposed rule made changes to 
Sec. Sec.  124.2, 124.301 and 124.302 to effect this change. In 
addition, the proposed rule added a new Sec.  124.112(f) to require SBA 
to determine if a firm should be deemed to have graduated from the 8(a) 
BD program at the end of its nine-year program term or to merely have 
completed its program term. As part of the final annual review 
performed by SBA prior to the expiration of a Participant's nine-year 
program term, SBA will determine whether the firm has met the targets, 
objectives and goals set forth in its business plan and whether it has 
``graduated'' from the program.
    Several commenters voiced support for the clarification to 
distinguish between graduation and completion of a firm's program term, 
but did not provide reasoning for their support. Other commenters 
misinterpreted the purpose of the proposed change, believing that SBA 
intended to extend the program term beyond nine years. This conclusion 
was incorrect. A few commenters recommended extending the program term 
beyond nine years. That is something SBA cannot do. The Small Business 
Act specifically restricts the maximum amount of time a firm may 
participate in the BD program to nine years; no more than four years in 
the developmental stage and no more than five years in the transitional 
stage. See 15 U.S.C. 636(j)(15). As such, SBA is precluded by statute 
from extending a firm's participation in the program beyond nine years, 
and the nine-year program term remains in this final rule. The final 
rule also retains the proposed language pertaining to graduation and 
program term completion with minor changes in wording.
    Finally, two commenters recommended that the nine-year program term 
begin on the date that a firm receives its first 8(a) contract award, 
stating that many firms are in the 8(a) BD program for four, five or 
more years before receiving their first 8(a) contract, and believing 
that true business development does not begin until contractual 
assistance is received. Again, the Small Business Act prevents such a 
change. Specifically, the Act states that a firm cannot participate in 
the 8(a) BD program ``for a total period of not longer than nine years, 
measured from the date of its certification'' into the 8(a) BD program. 
15 U.S.C. 636(j)(15). Thus, SBA does not have the discretion to change 
the date upon which the nine-year program term begins to run.

Definitional Changes

    The proposed rule amended Sec.  124.3, to add a definition of NAICS 
code. It also proposed to change the term ``SIC code'' to ``NAICS 
code'' everywhere it appears in part 124 to take into account the 
replacement of the Standard Industry Classification (SIC) code system 
with the North American Industry Classification System. Commenters 
applauded SBA changing the references in the 8(a) BD regulations from 
SIC codes to NAICS codes, believing it was long overdue and would 
eliminate any confusion to those new to the Government contracting 
arena. Specifically, in this final rule, the term ``NAICS code'' 
replaces the term ``SIC code'' in Sec. Sec.  124.110(c), 124.111(d), 
124.502(c)(3), 124.503(b), 124.503(b)(1), 124.503(b)(2), 
124.503(c)(1)(iii), 124.503(g)(3), 124.505(a)(3), 124.507(b)(2)(i), 
124.513(b)(1), 124.513(b)(1)(i), 124.513(b)(1)(ii)(A), 124.513(b)(2), 
124.513(b)(3), 124.514(a)(1), 124.515(d), 124.517(d)(1), 124.517(d)(2), 
124.519(a)(1), 124.519(a)(2), 124.1002(b)(1), 124.1002(b)(1)(i), 
124.1002(b)(1)(ii), and 124.1002(f)(3).
    The proposed rule also amended the definition of primary industry 
classification to specifically recognize that a Participant may change 
its primary industry classification over time. Specifically, the 
proposed rule authorized a firm to change its primary NAICS code by 
demonstrating that the majority of its revenues during a two-year 
period have evolved from its former primary NAICS code to another NAICS 
code. The vast majority of comments supported the proposed change. One 
commenter recommended that the language be changed from ``SBA may 
permit'' a change in a firm's primary industry classification to ``SBA 
shall permit'' to make it clear that no criteria other than a 
demonstration that the source of a firm's revenues has changed from one 
NAICS code to another is required for SBA to recognize such a NAICS 
code change. A few other commenters suggested that SBA should define 
the term ``majority of its revenues'' and describe specifically SBA's 
analysis and the process by which a firm can demonstrate that the 
``majority of its revenues'' have evolved from one NAICS code to 
another. One commenter opposed the proposed language believing that a 
firm should be able to change its primary NAICS code at any time 
without any demonstration to SBA as it is a business decision for the 
concern.
    SBA agrees that the wording of the provision should be clarified to 
make it clear that a primary industry classification change is entirely 
within the control of a Participant. If the Participant can show that 
the majority of the revenues that it has received have changed from one 
NAICS code to another, that is all that is needed. SBA will not look at 
any other factors. SBA does not believe, however, that a firm can 
independently deem that its primary NAICS code has changed without 
providing any support to demonstrate that the work that it performs 
(and thus the firm's primary industry classification) has in fact 
changed over time. Thus, the final rule clarifies that SBA will look 
only at a

[[Page 8228]]

firm's total revenues. SBA intended that the majority of a firm's 
revenues means that NAICS code accounting for the largest amount of all 
of its revenues from whatever source. If the firm performs work only in 
two NAICS codes, then a majority would mean at least 51% of its 
revenues. If a firm performs work in more than two NAICS codes, the new 
primary industry would be that NAICS code accounting for the most 
dollars. For example, if a firm comes into the program with a primary 
industry classification in NAICS code X, but also does work in NAICS 
codes Y and Z, and over time its revenues change so that for the last 
two years it has 40% of its revenues in NAICS code Y, 30% in NAICS code 
X and 30% in NAICS code Z, then its primary industry would change to 
NAICS code Y. That interpretation is consistent with how SBA defines 
``revenues'' for size purposes (i.e., to specifically include all 
receipts from whatever source). As such, SBA does not believe that 
further clarification of that term is required.
    In addition, one commenter was concerned that only the Participant 
should be able to initiate a primary NAICS code change, and did not 
believe that SBA should be able to force such a change on its own 
initiative. It was never SBA's intent that SBA would be able to change 
a firm's primary NAICS code on its own. However, SBA does not believe 
that a change is needed to the regulations since Sec.  124.112(e) 
recognizes only the right of a Participant to request a change in 
primary industry classification.
    The proposed rule also added a definition of the term ``regularly 
maintains an office.'' This definition is important in determining 
whether a Participant has a bona fide place of business in a particular 
geographic location. The proposed rule took this definition from 
current SBA policy contained in SBA's Standard Operating Procedures. 
Several commenters supported this change. In particular, commenters 
supported the clarification contained in the supplementary information 
that although a firm would generally be required to have a license to 
do business in a particular location in order to ``regularly maintain 
an office'' there, the firm would not be required to have a 
construction license or other specific type of license in order to 
regularly maintain an office and thus have a bona fide place of 
business in a specific location. One commenter recommended that this 
clarification be included in the actual regulatory text. SBA agrees and 
has made that change in this final rule.

Fees for Applicant and Participant Representatives

    SBA has permitted firms applying to the 8(a) program and 
Participants in the program seeking contracts to hire agents or 
representatives to assist them in that process. In response to concerns 
that SBA's policy is not set forth in the regulations, this final rule 
adds a new Sec.  124.4 to address fees for agents and representatives. 
The final rule provides that the compensation received by any agent or 
representative of an 8(a) applicant or Participant for assisting the 
applicant in obtaining 8(a) certification or for assisting the 
Participant in obtaining 8(a) contracts must be reasonable in light of 
the service(s) performed by the agent or representative. The rule 
captures SBA's current policy and responds to concerns raised that some 
applicants and Participants have paid unreasonable amounts to 
representatives. In particular, several commenters believed that some 
representatives have obtained compensation that has been a percentage 
of gross contract value, that unsophisticated 8(a) firms may not have 
fully understood what fee they were agreeing to, and that such a fee is 
unreasonable. In response, the final rule provides that the 
compensation received by any agent or representative assisting the 8(a) 
firm, both at time of application or any other assistance to support 
program participation, must be reasonable. Compensation that is a 
percentage of the gross contract value will be prohibited. 
Additionally, compensation that is a percentage of profits may be found 
to be unreasonable. The final rule sets out procedures by which SBA 
will suspend or revoke an agent's or representative's privilege to 
assist applicants. SBA's authority to suspend or revoke an agent's or 
representative's privileges is already contained in Sec.  103.4 and is 
included here for purposes of ease and clarity.

Residence in the United States

    Under the basic requirements a firm must meet in order to be 
eligible for the 8(a) BD program, the proposed rule added a provision 
to Sec.  124.101 requiring individuals claiming social and economic 
disadvantage status to reside in the United States. SBA received four 
comments to this proposed change. All four supported the change 
thinking that such a requirement is reasonable in light of the benefits 
afforded through the program. As such, this provision remains unchanged 
in the final rule.

Size for Primary NAICS Code

    The proposed rule sought to amend Sec.  124.102(a) to require that 
a firm remain small for its primary NAICS code during its term of 
participation in the 8(a) BD program, and correspondingly sought to 
revise Sec.  124.302 to permit SBA to graduate a Participant prior to 
the expiration of its program term where the firm exceeds the size 
standard corresponding to its primary NAICS code for two successive 
program years. SBA received numerous comments to this proposed change 
which were overwhelmingly opposed to the proposed change.
    Several commenters believed that looking at a firm's size over a 
two year period was inconsistent with the Agency's size regulations, 
which determines size for a firm with a revenue-based primary NAICS 
code over a three year period. Other commenters questioned the purpose 
and wisdom of this entire provision, believing that the natural 
progression of many small businesses necessarily leads them into 
various business opportunities and SBA should not inhibit firms' 
growth. They argued that the proposed change would have a chilling 
effect on the growth of small businesses and in essence penalized firms 
for succeeding in the program.
    The 8(a) program is a business development program designed to 
assist Participant firms advance toward competitive viability. Where a 
firm has grown to be other than small in its primary NAICS code, SBA 
believes that the program has been successful and it is reasonable to 
conclude that the firm has achieved the goals and objectives of its 
business plan. Because the Small Business Act authorizes early 
graduation where a firm has met the targets, goals and objectives set 
forth in its business plan, SBA believes that growing to other than 
small in a firm's primary industry classification similarly warrants 
consideration of early graduation. The program would resemble a 
contracting program more than a business development program where a 
firm is permitted to remain in the program after it has grown to be 
other than small in its primary NAICS code and be able to shop for 
contracting opportunities in NAICS codes having accompanying larger 
size standards. A firm that is other than small in its primary NAICS 
code is, and has always been, ineligible to be admitted to the 8(a) BD 
program. That being the case, SBA believes that it follows that a firm 
that grows to exceed its primary NAICS code once in the 8(a) BD program 
and does not intend to change its primary

[[Page 8229]]

NAICS code may no longer need the business development assistance the 
program provides and should be early graduated from the program. SBA 
recognizes, however, that it would be unfair to early graduate a firm 
from the 8(a) BD program where it has one very successful program year 
that may not again be repeated. In response to the comments received, 
the final rule changes the number of years that a Participant must 
exceed its primary NAICS code before SBA will consider early graduation 
from two years (as proposed) to three years. Additionally, in response 
to the many comments received regarding this provision, the rule allows 
a firm to demonstrate that it has made attempts and continues to move 
to one of the secondary NAICS codes identified in its business plan and 
that it will change the primary NAICS code accordingly. This will more 
closely align to the way SBA determines size under Sec.  121.104.
    This provision is not meant to conflict with the change made to the 
definition of primary industry classification in Sec.  124.3 that 
permits a Participant to change its primary NAICS code during its 
participation in the 8(a) BD program. Where a firm demonstrates that it 
has changed its primary NAICS code, SBA would consider early graduation 
only where the Participant exceeds the size standard corresponding to 
its new primary NAICS code for three successive program years.

Definition of American Indian

    A few commenters asked for clarification of the term ``American 
Indian'' in Sec.  124.103. Section 124.103(b) includes Native Americans 
as individuals who are presumptively socially disadvantaged. The 
previous regulatory provision defined Native Americans to be ``American 
Indians, Eskimos, Aleuts, or Native Hawaiians.'' This final rule 
clarifies that an individual must be an enrolled member of a Federally 
or State recognized Indian Tribe in order to be considered an American 
Indian for purposes of presumptive social disadvantage. This definition 
is consistent with the majority of other Federal programs defining the 
term Indian. An individual who is not an enrolled member of a Federally 
or State recognized Indian Tribe will not receive the presumption of 
social disadvantage as an American Indian. Nevertheless, if that 
individual has been identified as an American Indian, he or she may 
establish his or her individual social disadvantage by a preponderance 
of the evidence, and be admitted to the 8(a) BD program on that basis. 
In addition, the rule inserts the words ``Alaska Native'' to take the 
place of Eskimos and Aleuts.

Economic Disadvantage

    SBA proposed several revisions to Sec.  124.104 Who is Economically 
Disadvantaged?, including: A clarification regarding how community 
property laws affect an individual's economic disadvantage; adding a 
provision to exempt certain Individual Retirement Accounts (IRAs) from 
SBA's net worth calculation; clarifications relating to S corporations; 
and adding objective standards by which an individual can qualify as 
economically disadvantaged based on his or her income and total assets. 
SBA received a substantial number of comments regarding these proposed 
changes. Overall, the comments to the proposed changes supported the 
revisions. However, several commenters opposed the requirement that 
individuals remain economically disadvantaged after their admission 
into and throughout their participation in the 8(a) BD program. SBA 
believes that the Small Business Act requires individuals upon whom 
program eligibility is based to remain economically disadvantaged 
throughout the program term of the Participant firm. Specifically, the 
Small Business Act authorizes firms owned and controlled by socially 
and economically disadvantaged individuals to be eligible for the 
program. Where one of these underlying requirements is not met (e.g., 
the individual owners no longer qualify as economically disadvantaged), 
the firm ceases to be eligible for the program. Several other 
commenters recommended that net worth, personal income and total asset 
standards should vary either by industry or geographically. SBA 
believes that any such change would require additional public comment 
and could not be made final in this rule. As such, SBA has not 
addressed these comments in this rule, but will consider them for a 
possible future proposed rulemaking. The specific comments regarding 
economic disadvantage are addressed below.
    A few commenters addressed the proposed change to add a sentence to 
paragraph (b)(2) to clarify that SBA does not take community property 
laws into account when determining economic disadvantage. Those that 
did generally supported the change. Pursuant to the change, property 
that is legally in the name of one spouse would be considered wholly 
that spouse's property, whether or not the couple lived in a community 
property state. This policy also results in equal treatment for 
applicants in community and non-community property states. Community 
property laws will continue to be applied in Sec.  124.105(k) for 
purposes of determining ownership of an applicant or Participant firm, 
but they will not be applied for any other purpose.
    Several commenters expressed concern with the proposed amendment to 
paragraph (b)(2) that would allow SBA to consider a spouse's financial 
situation in determining an individual's access to capital and credit. 
The commenters suggested that a spouse's finances should be reviewed 
only if the spouse is active in the business or lending money to the 
company. This was particularly true of individuals who intentionally 
have kept separate finances from their spouses. They felt that the 
proposed rule did not look at their individual economic disadvantage 
status as required by the Small Business Act, but rather at their joint 
economic condition with their spouses. Several commenters suggested 
that SBA should clarify the limited circumstances when SBA will 
consider the financial situation of a socially disadvantaged owner's 
spouse. After careful review, SBA has determined that a spouse's 
financial condition should not be attributed to the individual claiming 
disadvantaged status in every case. Instead, SBA will consider a 
spouse's financial condition only when the spouse has a role in the 
business (e.g., an officer, employee or director) or has lent money to, 
provided credit support to, or guaranteed a loan of the business.
    Several commenters believed that the provision requiring SBA to 
consider the financial condition of the applicant compared to the 
financial profiles of small businesses in the same industry which are 
not owned by socially and economically disadvantaged individuals 
confused personal economic disadvantage with the applicant firm's 
potential for success. They believed that the applicant firm's 
financial condition was already considered under the potential for 
success requirement and that it has no relationship as to whether an 
individual qualifies as economically disadvantaged. SBA believes that 
the financial condition of the applicant firm could have a bearing on 
whether an individual is considered to have access to credit and 
capital, but understands the confusion noted by the commenters. To 
eliminate any confusion and because SBA already reviews the financial 
condition of the applicant as part of its potential for success 
determination, this rule deletes from an individual's personal economic 
disadvantage review the requirement that SBA compare the financial 
condition of the applicant to

[[Page 8230]]

that of non-disadvantaged small businesses.
    SBA's proposed treatment of income from an S corporation and 
exclusion of IRAs from an individual's net worth determination in 
paragraph (c)(2) received wide support. Several commenters suggested 
that all IRA accounts should be excluded from the net worth calculation 
whether there is a penalty or not. SBA continues to believe, however, 
that the presence of a penalty with a retirement account will lessen 
the potential for abuse of this provision. Individuals will be less 
likely to attempt to hide current assets in funds labeled ``retirement 
accounts'' when there is a substantial penalty for accessing the 
account. A significant penalty would be one equal or similar to the 
penalty assessed by the Internal Revenue Service (IRS) for early 
withdrawal. Although, as one commenter notes, it is true that the 
practical effect of the rule may treat older individuals differently 
than younger individuals because individuals of a certain age will not 
incur a penalty with a withdrawal, SBA believes that any account that 
may be accessed immediately without a penalty must be treated as a 
present asset and included within an individual's net worth 
determination. If an individual invests funds from a retirement account 
into the participant concern, those funds would be excluded from the 
net worth analysis as part of the exclusion of business equity even 
where there was not a significant penalty for access to the 
``retirement'' funds prior to the investment in the business. The 
applicant may be required to submit evidence that the funds were 
invested into the participant concern.
    One commenter suggested Participants should be required to submit 
retirement account statements when applying for 8(a) certification and 
filing their 8(a) status updates, and the Participants should have to 
certify that the funds remain in ``legitimate'' retirement accounts. 
SBA agrees that some verification of retirement account information 
should be required. As such, the final rule provides that in order for 
SBA to determine whether funds invested in a specific account labeled a 
``retirement account'' may be excluded from an individual's net worth 
calculation, the individual must provide to SBA information about the 
terms and conditions of the account and certify in writing that the 
``retirement account'' is legitimate.
    SBA also proposed an amendment to paragraph (c)(2) to exempt income 
earned from an S Corporation from the calculation of both an 
individual's income and net worth to the extent such income is 
reinvested in the firm or used to pay taxes arising from the normal 
course of operations of an S corporation. This change will result in 
equal treatment of corporate income for C and S corporations. Most 
commenters applauded SBA's consideration of the tax treatment for S 
corporations. A few commenters believed that the clarification 
contained in the supplementary information that S corporation losses 
are losses to the company only, and not losses to the individual, 
should be specifically set forth in the regulatory text to clear up 
confusion on this issue. SBA agrees and has included that clarification 
in this final rule. In addition, the final rule has clarified that the 
treatment of S corporation income applies to both determinations of an 
individual's net worth and personal income. Several commenters also 
recommended that Limited Liability Companies (LLCs) and other pass-
through entities be treated the same way as S corporations for purposes 
of an individual's net worth and personal income. SBA agrees. S 
corporations, LLCs and partnerships should all be treated similarly 
since all pass income through to the individual owners/members/
partners.
    The proposed rule added a new Sec.  124.104(c)(3) to provide that 
SBA would presume that an individual is not economically disadvantaged 
if his or her adjusted gross income averaged over the past two years 
exceeds $200,000 for initial 8(a) BD eligibility and $250,000 for 
continued 8(a) BD eligibility. SBA received numerous comments on the 
proposed change to income thresholds. Several commenters opposed any 
objective thresholds; others recognized the precedential case law of 
SBA's Office of Hearings and Appeals (OHA) and supported the inclusion 
of standards in the regulations for clarity purposes. Still others 
suggested alternative methodologies, including comparing income to W-2 
data, as opposed to adjusted gross income (AGI), or comparing industry 
data and similarly situated business owners. SBA considered the 
alternate approaches and has determined that a set threshold amount is 
consistent with the requirements of determining economic disadvantage 
and is not only a fair and reasonable approach, but is one that is 
easily understandable by all potential applicants. As noted, the 
proposed rule established $200,000 as the amount of personal income 
below which an individual would be considered economically 
disadvantaged for initial 8(a) BD eligibility. In formulating what the 
personal income threshold should be, the supplementary information to 
the proposed rule explained that SBA considered statistical data from 
the IRS. The $200,000 figure closely approximated the income level 
corresponding to the top two percent of all wage earners, which has 
been upheld by OHA as a reasonable indicator of a lack of economic 
disadvantage. Since SBA published its proposed rule, the IRS has 
released new statistical data pertaining to high income wage earners in 
the United States. The current IRS statistical data on wage earners in 
the United States shows individuals earning an AGI of approximately 
$260,000 fall in the top two percentile of all wage earners. 
Accordingly, SBA believes that the personal income threshold should be 
adjusted upward to align more closely with the new IRS statistical 
data. As such, this final rule has adjusted the personal income 
threshold amount to $250,000. Although a $250,000 personal income 
threshold may seem high, SBA notes that this amount is being used only 
to presume, without further information, that the individual is or is 
not economically disadvantaged. SBA may consider an income lower than 
$250,000 as indicative of lack of economic disadvantage in appropriate 
circumstances. SBA also notes that the average income for a small 
business owner is generally higher than the average income for the 
population at large and, therefore, what appears to be a high benchmark 
is merely reflective of the small business community. In all cases, 
SBA's determination is based on the totality of the circumstances.
    The final rule establishes a three year average income level of 
$350,000 for continued 8(a) BD program eligibility. Considering the new 
IRS statistical data and the threshold established for initial 8(a) BD 
eligibility, the $250,000 proposed figure for continued 8(a) BD 
eligibility was inappropriate. It seems obvious to SBA that as a firm 
becomes more developed and sophisticated, the income levels for its 
owners and managers will most often increase. Increasing the personal 
income threshold for continued 8(a) BD eligibility to $350,000 will 
allow the Participant to attract and retain higher skilled employees, 
since the disadvantaged owner/manager must be the highest compensated 
individual in the firm, with limited exceptions. This will enable the 
Participant to more fully develop, thereby further serving the purposes 
of the 8(a) BD program.
    Several commenters also recommended that the snapshot that SBA 
looks at for determining whether an individual's personal income

[[Page 8231]]

exceeds the applicable standard should be three years instead of two 
years. These commenters noted that income for a small business owner is 
not constant and could fluctuate dramatically in volatile economic 
times. They argued that a small business could have two very good 
years, provide higher incomes to its owners during those two years, and 
be deemed ineligible for future 8(a) BD participation because of the 
income given. They believed such a result was unfair, particularly when 
the two good years were followed by several bad years. One commenter 
also pointed to the three year average annual receipts review for 
purposes of determining a firm's size for receipts-based size standards 
and felt that personal income should similarly be evaluated over a 
three year period. SBA believes these comments are valid and has 
adjusted the evaluation period to three years in the final rule. 
However, SBA does not seek to make it more difficult for firms that 
have already applied to the 8(a) BD program before the date this final 
rule is published. As such, firms that have applied to the 8(a) BD 
program prior to the date of publication of this final rule may elect 
to have their applications continued to be processed based on two years 
personal income data instead of three years and would not be required 
to submit additional information relating to a third year's personal 
income. If any such firms would like to have their applications 
evaluated based on three years personal income data instead of two 
years, they must notify SBA within 30 days after the date of 
publication of this final rule in the Federal Register.
    The final rule continues to permit applicants to rebut the 
presumption of lack of economic disadvantage upon a showing that the 
income is not indicative of lack of economic disadvantage. For example, 
the presumption could be rebutted by a showing that the income was 
unusual (inheritance) and is unlikely to occur again or that the 
earnings were offset by losses as in the case of winnings and losses 
from gambling resulting in a net gain far less than the actual income 
received. SBA may still consider any unusual earnings or windfalls as 
part of its review of total assets. Thus, although an inheritance of $6 
million, for example, may be unusual income and excluded from SBA's 
determination of economic disadvantage based on income, it would not be 
excluded from SBA's determination of economic disadvantage based on 
total assets. In such a case, a $6 million inheritance would render the 
individual not economically disadvantaged based on total assets.
    The proposed rule also sought to amend Sec.  124.104(c) to 
establish an objective standard by which an individual can qualify as 
economically disadvantaged based on his or her total assets. The 
regulations have historically authorized SBA to use total assets as a 
basis for determining economic disadvantage, but did not identify a 
specific level below which an individual would be considered 
disadvantaged. The regulations also did not spell out a specific level 
of total assets above which an individual would not qualify as 
economically disadvantaged. Although SBA has used total assets as a 
basis for denying an individual participation in the 8(a) BD program 
based on a lack of economic disadvantage, the precise level at which an 
individual no longer qualifies as economically disadvantaged was not 
certain. The proposed rule established $3 million in total assets as 
the standard for initial 8(a) BD eligibility and $4 million in total 
assets as the standard for continued 8(a) BD eligibility. SBA based 
these standards on OHA cases supporting SBA's determination that an 
individual was not economically disadvantaged with total asset levels 
of $4.1 million and $4.6 million. See Matter of Pride Technologies, SBA 
No. 557 (1996), and SRS Technologies v. U.S., 843 F. Supp. 740 (D.D.C. 
1994). Several commenters believed that both of these proposed 
standards were too low. Because the value of the applicant or 
Participant concern is included within the total assets standard, 
several commenters believed that the proposed standards contradicted 
the business development purposes of the 8(a) BD program. One commenter 
wondered whether SBA intended that only less developed firms be 
admitted to the 8(a) BD program because a $3 million total asset 
standard that included the value of the applicant firm would not permit 
applicants which had been successful prior to the date of application. 
Other commenters questioned how firms could truly develop in the 8(a) 
BD program if their value could increase only $1 million during the 
course of nine years because to increase in value by more than $1 
million could cause the individuals upon whom eligibility was based to 
no longer be considered economically disadvantaged. Similarly, several 
commenters felt that the proposed total asset standards would have a 
chilling effect on business growth because they would discourage 
reinvestment into the firm. SBA understands these concerns. It was 
never SBA's intent to limit in any way an 8(a) firm's ability to fully 
develop its business during its participation in the 8(a) BD program. 
First, considering that the personal income standards have been 
increased in this final rule, SBA believes that it makes sense to also 
increase the total assets standards. In addition, to dismiss any 
concern that the proposed standards would have hindered Participants' 
business development during their nine years in the 8(a) BD program, 
this final rule allows the total assets of a disadvantaged individual 
to increase by more than $1 million during the firm's participation in 
the program. Thus, pursuant to this final rule, an individual will not 
be considered economically disadvantaged if the fair market value of 
all his or her assets exceeds $4 million at the time of 8(a) 
application and $6 million for purposes of continued 8(a) BD program 
participation. This means that SBA will presume that an individual does 
not qualify as economically disadvantaged if the fair market value of 
all his or her assets is $4 million and one dollars for initial 
eligibility and $6 million and one dollars for purposes of continuing 
eligibility. Unlike the net worth analysis, SBA does not exclude the 
fair market value of the primary residence or the value of the 
applicant/participant concern in determining economic disadvantage in 
the total asset analysis. The only assets excluded from this 
determination are funds invested in a qualified IRA account.

Changes to Ownership Requirements

    SBA proposed two amendments to the ownership requirements for 8(a) 
BD participation. First, SBA proposed to amend Sec.  124.105(g) to 
provide more flexibility in determining whether to admit to the 8(a) BD 
program companies owned by individuals where such individuals have 
immediate family members who are owners of current or former 8(a) 
concerns. Second, SBA also proposed to amend Sec.  124.105(h)(2) to add 
the words ``or a principal of such firm'' which were inadvertently 
omitted from the previous regulations. SBA received 29 comments to the 
proposed changes in this section. All of the comments received 
pertained to the immediate family member issue, and SBA received no 
comments on correcting the inadvertent omission. As such, SBA adopts 
the language as proposed for Sec.  124.105(h)(2) without any change, 
and addresses the specific comments regarding Sec.  124.105(g).
    Prior to any change, the language of Sec.  124.105(g) provided that 
``the

[[Page 8232]]

individuals determined to be disadvantaged for purposes of one 
Participant, their immediate family members, and the Participant 
itself, may not hold, in the aggregate, more than a 20 percent equity 
ownership interest in any other single Participant.'' Because of the 
wording of that provision, SBA was forced to deny 8(a) program 
admission to companies solely because the owners of those firms had 
family members who were disadvantaged owners of other 8(a) concerns. In 
some cases, the two firms were in different industries and located in 
different parts of the country. SBA thought that that language was too 
restrictive and attempted to allow some flexibility in the proposed 
rule.
    The majority of those commenting on this section supported the 
increased flexibility for firms owned by immediate family members set 
forth in the proposed rule. A few commenters believed that the proposed 
language was still too restrictive, while others thought that immediate 
family members of a disadvantaged individual in one 8(a) firm should 
never be allowed to qualify a second firm for 8(a) participation. SBA 
continues to believe that it serves no purpose to automatically 
disqualify a firm simply because the individual seeking to qualify the 
firm has an immediate family member already participating in the 
program. There are some cases where it is clear that an absolute ban on 
an immediate family member owning a second 8(a) Participant is 
inappropriate. For example, if one sibling lives in California and one 
sibling lives in New York and they each operate a business in different 
industries, it makes no sense not to allow the second firm to 
participate in the 8(a) BD program. In such a case, there is no 
likelihood that the current or graduated 8(a) firm is seeking to 
prolong its participation in the 8(a) BD program through the second 
firm. Although there may be situations in which SBA chooses to deny 
admission to a firm based on a family member's program participation, 
such a decision will be made on a case-by-case basis.
    Several commenters recommended that SBA should allow immediate 
family members to qualify independent businesses for 8(a) participation 
provided the family members do not live in the same household. SBA does 
not believe that the recommended restriction goes far enough. SBA has a 
legitimate interest in preventing disadvantaged individuals from using 
family members to extend their program terms by creating fronts whereby 
a disadvantaged individual controls and operates a second firm owned by 
an immediate family member. This control can occur whether or not the 
two family members are living in the same household. SBA believes that 
the restriction contained in the proposed rule, that an immediate 
family member of a current or former 8(a) firm can qualify a second 
firm for the 8(a) BD program where there are no or negligible 
connections between the two firms and he or she can demonstrate 
sufficient management and technical experience to independently operate 
the firm, is a more appropriate approach. If there are in fact 
connections between the two firms or if the individual claiming 
disadvantaged status for the second firm does not possess sufficient 
management and technical experience to operate the firm, the firm would 
be ineligible for 8(a) participation whether or not the two family 
members live in the same household. SBA also believes that the narrow 
exception to the general prohibition against family members owning 8(a) 
concerns in the same or similar line of business contained in the 
proposed rule will permit the Agency sufficient flexibility to admit 
firms where they are clearly operating separately and independently 
from the relative's firm. As such, this final rule does not alter the 
language contained in the proposed rule regarding participation by 
immediate family members.

Changes to Control Requirements

    The proposed rule amended three provisions pertaining to the 
control requirements set forth in Sec.  124.106 for 8(a) applicants and 
Participants. First, it added an additional requirement that the 
disadvantaged manager of an 8(a) applicant or Participant must reside 
in the United States and spend part of every month physically present 
at the primary offices of the applicant or Participant. Second, it 
clarified that control restrictions applying to non-disadvantaged 
managers, officers and directors applied to all non-disadvantaged 
individuals in an applicant or Participant firm. Third, it added a new 
Sec.  124.106(h) to address control of an 8(a) Participant where a 
disadvantaged individual upon whom eligibility is based is called up to 
active duty in the United States military. SBA received over 40 
comments relating to the proposed changes to Sec.  124.106. We will 
address the comments relating to each proposed provision in turn.
    SBA received 35 comments in response to the proposed amendment to 
Sec.  124.106(a)(2). The comments identified two issues: residence in 
the United States, and physical presence by the disadvantaged manager 
at the firm for some portion of each month. Most commenters agreed that 
it makes sense to require a full-time disadvantaged manager of an 8(a) 
applicant or Participant to be physically located in the United States. 
Commenters noted that the program is intended to assist disadvantaged 
businesses develop in the United States and that it was a reasonable 
requirement to require one or more disadvantaged managers to reside in 
the United States as well. However, many commenters disagreed with the 
requirement that a disadvantaged manager must spend part of every month 
physically present at the primary offices of the applicant or 
Participant. They felt that some sort of minimum or nominal presence 
was arbitrary and meaningless. Commenters also agreed with the 
statements made in supplementary information to the proposed rule that 
new and improved technologies enable managers to maintain control over 
the operations of their businesses without the need for a constant or 
consistent physical presence. They believed that individual managers 
who are not physically present should be required to demonstrate that 
they control the day-to-day operations of the firm, but that such 
demonstration should be on a case-by-case basis and should not be tied 
to any specific hourly presence requirement at the headquarters or 
principal office of the firm. After considering the comments, SBA 
believes that the best approach is to determine day-to-day control on a 
case-by-case basis. As such, this final rule retains the requirement 
that the disadvantaged manager of an 8(a) applicant or Participant must 
reside in the United States, but eliminates the added requirement that 
he or she must also spend part of every month physically present at the 
primary offices of the applicant or Participant. One commenter 
recommended that SBA more clearly define what it means to ``reside'' in 
the United States. Specifically, the commenter questioned whether 
physical presence was required or whether an individual who lives in 
another country but files taxes and votes in the United States could 
satisfy this requirement. In order to eliminate any assertion that an 
individual ``resides'' in the United States because he or she has 
maintained a residence in the United States despite living in another 
country, the final rule clarifies that a disadvantaged manager must be 
physically located in the United States.
    SBA received no comments to the proposed change to Sec.  
124.106(e), clarifying that restrictions imposed on

[[Page 8233]]

non-disadvantaged managers apply to all non-disadvantaged individuals. 
As such, the final rule adopts the language contained in the proposed 
rule.
    Proposed Sec.  124.106(h) added a new provision regarding control 
of an 8(a) BD Participant where a disadvantaged individual upon whom 
eligibility is based is a reserve component member in the United States 
military who has been called to active duty. Specifically, the proposed 
rule permitted a Participant to designate one or more individuals to 
control its daily business operations during the time that a 
disadvantaged individual upon whom eligibility has been called to 
active duty in the United States military. The proposed rule also 
amended Sec.  124.305 to authorize the Participant to suspend its 8(a) 
BD participation during the active duty call-up period. If the 
Participant elects to designate one or more individuals to control the 
concern on behalf of the disadvantaged individual during the active 
duty call-up period, the concern will continue to be treated as an 
eligible 8(a) Participant and no additional time will be added to its 
program term. If the Participant elects to suspend its status as an 
eligible 8(a) Participant, the Participant's program term would be 
extended by the length of the suspension when the individual returns 
from active duty. All comments received regarding this provision 
supported the proposed change. As such, the changes made to Sec. Sec.  
124.106(h) and 124.305 in the proposed rule to protect reservists 
called to active duty are finalized in this final rule without change.

Benchmarks

    The proposed rule removed Sec.  124.108(f), as well as other 
references to the achievement of benchmarks contained in Sec. Sec.  
124.302(d), 124.403(d), and 124.504(d). When these regulations were 
first implemented, the Department of Commerce was supposed to update 
industry codes every few years to determine those industries which 
minority contractors were underrepresented in the Federal market. These 
industry categories have never been revised since the initial 
publication, and SBA believed that references to them are outdated and 
should be removed. SBA received six comments in response to this 
proposal. All six comments supported the proposed change. This final 
rule adopts the proposed language without change.

Changes Applying Specifically to Tribally-Owned Firms

    In the proposed rule, SBA offered or considered changes to five 
provisions contained in the 8(a) BD regulations that apply specifically 
to Indian Tribes or Alaska Native Corporations (ANCs). Those proposed 
changes were: (1) How best to determine whether a Tribe is economically 
disadvantaged; (2) prohibiting work in a secondary NAICS code that is 
(or was within the last two years) the primary NAICS code of another 
8(a) firm owned by the same Tribe or ANC; (3) clarifying the potential 
for success requirement as it is applied to Tribes and ANCs; (4) making 
it clear that any Tribal member may participate in the management of a 
Tribally-owned firm and need not individually qualify as economically 
disadvantaged; and (5) requiring 8(a) firms owned by Tribes and ANCs to 
submit information identifying how its 8(a) participation has benefited 
the Tribal or native members and/or the Tribal, native or other 
community as part of its annual review submission. SBA received more 
than 100 comments relating to proposed changes to Sec.  124.109. The 
comments pertaining to each of the five areas of consideration are 
discussed below in turn.
    The Small Business Act permits 8(a) Participants to be owned by 
``an economically disadvantaged Indian Tribe (or a wholly owned 
business entity of such Tribe.'' 15 U.S.C. 637(a)(4)(A)(i)(II). The 
term Indian Tribe includes any Alaska Native village or regional 
corporation. 15 U.S.C. 637(a)(13). Pursuant to the Alaska Native Claims 
Settlement Act, a concern which is majority owned by an ANC is deemed 
to be both owned and controlled by Alaska Natives and an economically 
disadvantaged business. As such, ANCs do not have to establish that 
they are ``economically disadvantaged.'' Conversely, Indian Tribes are 
not afforded the same automatic statutory economic disadvantage 
designation. Current Sec.  124.109(b) requires Tribes to demonstrate 
their economic disadvantage through the submission of data, including 
information relating to Tribal unemployment rate, per capita income of 
Tribal members, and the percentage of the Tribal population below the 
poverty level. The proposed rule requested comments on how best to 
determine whether a Tribe should be considered ``economically 
disadvantaged.'' Specifically, SBA sought comments as to whether the 
current approach to economic disadvantage for Tribes should continue, 
or whether a bright line assets or net worth test for Tribes should be 
used instead. The current regulation also requires a Tribe to 
demonstrate its economic disadvantage only once. SBA also sought 
comments regarding whether this one time demonstration of economic 
disadvantage makes sense.
    SBA received more than 40 comments responding to its request for 
comments on economic disadvantage for Indian Tribes. Several commenters 
believed that Tribes should be afforded the same presumption of 
economic disadvantage as that given to ANCs. It is SBA's view that it 
does not have the authority to make such a change. SBA is constrained 
by the specific language of the Small Business Act, which requires 
firms to be owned by an ``economically disadvantaged'' Indian Tribe. 
While ANSCA provides economic disadvantage status to ANCs so that SBA 
does not have to determine whether any specific ANC is economically 
disadvantaged, Tribes have not been given similar statutory treatment. 
Thus, SBA must determine whether a specific Tribe may be considered 
economically disadvantaged. Regarding the best approach SBA should take 
to determine whether a Tribe qualifies as economically disadvantaged, 
commenters universally rejected any bright line asset or net worth 
test. Several commenters noted that it would be difficult to structure 
a bright line test suited to all Tribes given the vast differences 
among Tribes as to the number of Tribal members, number of members 
living on Tribal land, and other demographics, such as the average age 
of the membership. Other commenters believed that any asset or net 
worth test ignores historical data and the unique circumstances of 
Tribes, and would be subject to claims that it involves culturally 
biased criteria. Most commenters believed that the current approach to 
economic disadvantage for Tribes, although not perfect, makes the most 
sense. It allows an individual Tribe to address economic disadvantage 
in ways most relevant to that Tribe. SBA understands that every Tribe 
does not always possess or it may be very difficult for the Tribe to 
obtain data relating to Tribal unemployment rate, per capita income of 
Tribal members, or the percentage of the Tribal population below the 
poverty level. After considering the concerns raised in the comments, 
SBA agrees that an asset or net worth test could be misleading, and has 
not changed how it will determine economic disadvantage for Tribes. In 
addition, SBA has added to this final rule a provision authorizing a 
Tribe, where the Tribe deems it to be helpful, to request a meeting 
with SBA prior to submitting an application for 8(a) BD participation 
for its first applicant firm

[[Page 8234]]

to better understand what SBA requires. Several commenters also 
recommended that SBA clarify the requirement that a Tribe demonstrate 
its economic disadvantage only in connection with its first Tribally-
owned firm applying for 8(a) BD participation. In response, SBA has 
clarified that SBA does not expect a Tribe to demonstrate economic 
disadvantage as part of every Tribally-owned 8(a) application.
    The final rule also clarifies that ownership of an 8(a) applicant 
or Participant by a Tribe or ANC must be unconditional. The requirement 
that ownership be unconditional is contained in the Small Business Act, 
and the final rule merely incorporates that language to avoid any 
confusion.
    The proposed rule prohibited a newly certified Tribally-owned 
Participant from receiving an 8(a) contract in a secondary NAICS code 
that is the primary NAICS code of another Participant (or former 
participant that has left the program within two years of the date of 
application) owned by the Tribe for a period of two years from the date 
of admission to the program. The supplementary information to the 
proposed rule also identified an alternative proposal that allowed such 
secondary work on a limited basis (e.g., no more than 20% or 30% of its 
8(a) work could be in a NAICS code that was/is the primary NAICS code 
of a former/other Tribally-owned Participant). SBA sought comments on 
both approaches. SBA received a substantial number of comments 
responding to this proposal. Several commenters opposed allowing Tribes 
to own more than one firm in the 8(a) BD program generally, believing 
that such an occurrence creates an unfair competitive advantage. 
Congress has specifically authorized Tribal/ANC ownership of firms in 
the 8(a) BD program. Such ownership serves a broader purpose than mere 
business development. SBA does not believe that it can restrict a Tribe 
to own only one firm in the 8(a) BD program under the current statutory 
authority. As such, this final rule does not change the authority of a 
Tribe or ANC to own more than one firm in the 8(a) BD program. None of 
the commenters who addressed the proposed language supported the strict 
prohibition on receiving any 8(a) contracts in a secondary NAICS code 
that was the primary NAICS code of a sister company. Commenters 
believed that such a rule would hinder the growth and diversification 
of firms owned by Tribes and ANCs. Many commenters also opposed the 
alternative proposal allowing secondary work up to a specified 
percentage of the firm's overall 8(a) revenues for the same reason. 
They believed that any restriction on a firm's ability to diversify as 
that firm deems appropriate would hamper the firm's growth and ultimate 
ability to remain a viable business after leaving the 8(a) BD program. 
While some commenters opposed the alternative proposal allowing 
secondary work on a limited basis, they considered it to be a better 
approach than the strict ban as proposed. A few commenters offered 
additional alternatives. One commenter recommended that if SBA was 
concerned that one Tribally-owned or ANC-owned firm would be the 
successor contractor for an 8(a) contract previously performed by 
another 8(a) Participant owned by the Tribe or ANC then the regulation 
should address that concern specifically and not prohibit work in 
secondary NAICS codes generally. SBA agrees. As noted in the 
supplementary information to the proposed rule, when SBA certifies two 
or more firms owned by a Tribe or ANC for participation in the 8(a) BD 
program, SBA expects that each firm will operate and grow 
independently. The purpose of the 8(a) BD program is business 
development. Having one business take over work previously performed by 
another does not advance the business development of two distinct 
firms. SBA does not believe that a Tribally-owned or ANC-owned firm 
should be able to perform a specific 8(a) contract for many years and 
then, when it leaves the 8(a) BD program, to pass that contract on to 
another 8(a) firm owned by the Tribe or ANC. In such a case, the 
negative perception is that one business is operating in the 8(a) BD 
program in perpetuity by changing its structure or form in order to 
continue to perform the contracts that it has previously performed. SBA 
seeks to address this concern without unduly restricting a 
Participant's ability to grow and diversify. Thus, SBA adopts the 
comment to restrict a Tribe's or ANC's ability to pass an 8(a) contract 
from one firm that it owns and operates to another. Specifically, the 
final rule provides that a firm owned by a Tribe or ANC may not receive 
a sole source 8(a) contract that is a follow-on contract to an 8(a) 
contract that was performed immediately previously by another 
Participant (or former Participant) owned by the same Tribe. One 
commenter recommended that the same rules regarding work in secondary 
NAICS codes should apply equally to firms owned by Native Hawaiian 
Organizations (NHOs). SBA agrees, but also believes that the same is 
true for Community Development Companies (CDCs). This final rule makes 
the provisions pertaining to Tribes, ANCs, NHOs and CDCs consistent.
    Finally, one commenter recommended that SBA more fully define what 
the term primary NAICS code means for purposes of determining whether a 
new applicant owned by the Tribe could be eligible for 8(a) BD 
participation. Specifically, the commenter noted that several NAICS 
codes identified in SBA's size regulations are further divided by 
specific subcategory having differing size standards for two or more 
subcategories. The commenter questioned whether SBA's regulations 
permitted a Tribe to own two firms with the same primary six digit 
NAICS code, but different subcategories of work with different 
corresponding size standards. For example, NAICS code 541330 is divided 
into four subcategories: Engineering Services, with a corresponding 
size standard of $4.5 million in average annual receipts; Military and 
Aerospace Equipment and Military Weapons, with a corresponding size 
standard of $27 million in average annual receipts; Contracts and 
Subcontracts for Engineering Services Awarded Under the National Energy 
Policy Act of 1992, with a corresponding size standard of $27 million 
in average annual receipts; and Marine Engineering and Naval 
Architecture, with a corresponding size standard of $18.5 million in 
average annual receipts. SBA's Office of Size Standards has identified 
that these subcategories are different enough to warrant separate 
recognition and that the industries are different enough to warrant 
distinct size standards. SBA believes that general Engineering 
Services, with a corresponding size standard of $4.5 million in average 
annual receipts, is vastly different from Military and Aerospace 
Equipment and Military Weapons, with a corresponding size standard of 
$27 million in average annual receipts. As such, it is SBA's view that 
a Tribe could own one Participant in the 8(a) BD program with a primary 
NAICS code of 541330 doing marine engineering and naval architecture 
and qualify a new firm with a primary NAICS code of 541330 doing 
general engineering services, provided the current firm did not start 
off in the general engineering services subcategory and switch to a 
different subcategory with a larger size standard within the last two 
years. SBA believes the regulations should clarify SBA's intent on this 
issue. Thus, the final rule makes clear that the same primary NAICS 
code

[[Page 8235]]

means the six digit NAICS code having the same corresponding size 
standard.
    The proposed rule clarified the potential for success requirement 
for Tribally-owned applicants contained in Sec.  124.109(c)(6). 
Specifically, in addition to the current ways in which SBA may 
determine that a firm has the potential for success required to 
participate in the 8(a) BD program, the proposed rule authorized SBA to 
find potential for success where a Tribe has made a firm written 
commitment to support the operations of the applicant concern and the 
Tribe has the financial ability to do so. SBA received overwhelming 
support for this proposed provision. Many of the comments praised SBA 
for recognizing that unlike a firm owned by one or more individuals, 
the viability of a firm owned by a Tribe or ANC is not dependent only 
on the firm's profitability. Several commenters recommended that 
similar treatment should be afforded to NHOs. As with the issue 
relating to work in secondary NAICS codes, SBA believes that this 
provision should apply equally to firms owned by Tribes, ANCs, NHOs and 
CDCs. This final rule makes the changes necessary for such equal 
treatment. As such, the final rule permits an applicant concern owned 
by a Tribe, ANC, NHO or CDC to establish potential for success where 
the Tribe, ANC, NHO or CDC has made a firm written commitment to 
support the operations of the applicant concern and it has the 
financial ability to do so.
    The proposed rule also deleted the word ``disadvantaged'' in Sec.  
124.109(c)(4) to make clear that any Tribal member may participate in 
the management of a Tribally-owned firm and need not individually 
qualify as economically disadvantaged. This change was made to allow 
Tribally-owned firms to attract the most qualified Tribal members to 
assist in running 8(a) Tribal businesses. SBA received 35 comments 
regarding this provision. Although most commenters agreed that this 
proposed change was an improvement over the previous regulatory 
language, they questioned whether the proposed language went far enough 
in clarifying that a Tribe had the discretion to hire any individual, 
whether or not a member of any Tribe, to run the day-to-day operations 
of a Tribally-owned 8(a) Participant. SBA believes that the proposed 
regulatory text gives that discretion to Tribes. Tribes must 
demonstrate that they control Tribally-owned firms. Tribes are then 
given flexibility to structure the control as they deem it best for 
their circumstances. It may be through committees, teams or Boards of 
Directors which are controlled by Tribal members, or it may be through 
non-disadvantaged employees who can be hired and fired and are 
controlled by the Tribe. Where non-disadvantaged employees manage a 
Tribally-owned firm, the regulations have required that the Tribally-
owned firm have a management development plan showing how Tribal 
members will gain management experience to be able to manage the 
concern or similar Tribally-owned concerns in the future. SBA continues 
to believe that is a good policy. However, in response to these 
comments, SBA has made minor language revisions to more clearly state 
SBA's position.
    In response to audits of the 8(a) BD program conducted by the 
Government Accountability Office (GAO) and SBA's OIG, SBA proposed an 
amendment to the annual review provisions contained in Sec.  124.112(b) 
to require each Participant owned by a Tribe, ANC, NHO or CDC to submit 
information demonstrating how its 8(a) participation has benefited the 
Tribal or native members and/or the Tribal, native or other community 
as part of its annual review submission. The proposed rule identified 
that each firm should submit information relating to funding cultural 
programs, employment assistance, jobs, scholarships, internships, 
subsistence activities, and other services to the affected community.
    SBA received more than 60 comments addressing this proposed change. 
Most commenters opposed the requirement, expressing concern about the 
lack of specificity in the proposed rule and the difficulty firms would 
have in trying to report this information at the Participant level. 
Several commenters pointed out that a uniform data source for the 
information being requested does not currently exist and the benefits 
vary widely among the groups and cannot be uniformly quantified. 
Commenters noted that it would be nearly impossible to separate the 
benefits a Tribe or ANC community receives from individual 8(a) 
contracts or even individual 8(a) firms, especially where a Tribe has 
multiple 8(a) firms receiving both 8(a) and non-8(a) contracts. A few 
commenters noted that 8(a) firms owned by ANCs do not necessarily 
contribute benefits directly to the shareholders, but rather direct 
their profits to the parent ANC who in turn distributes the benefits. 
Most expressed concern that the potential end result of the requirement 
will be burdensome, intangible and difficult to quantify. Commenters 
recommended that if this requirement remained, benefits should be 
reported at the Tribe/ANC/NHO/CDC level, instead of requiring each 
Participant individually to try to somehow track benefits flowing from 
it back to the affected community. Although SBA understands the 
concerns raised generally in opposition to reporting benefits, SBA 
feels compelled to address the recommendations made by the GAO and OIG. 
As such, the requirement to report benefits that flow to Tribal or 
native members and/or the Tribal, native or other community is retained 
in this final rule. However, SBA agrees with the majority of commenters 
that it would be virtually impossible for individual 8(a) firms to 
track and report on benefits that ultimately flow to the affected 
community because of their 8(a) participation. In an effort to strike a 
balance between the concerns raised regarding SBA's monitoring and 
oversight of the 8(a) BD program and those raised by entity-owned 8(a) 
Participants regarding their ability to generate meaningful 
information, only the parent corporations, not the individual 
subsidiary 8(a) Participants, will be required to submit the requested 
information. Therefore, the final rule specifies that those 8(a) 
Participants owned by ANCs, Tribes, NHOs, and CDCs will submit overall 
information relating to how 8(a) participation has benefited the Tribal 
or native members and/or the Tribal, native or other community as part 
of each Participant's annual review submissions, including information 
about funding cultural programs, employment assistance, jobs, 
scholarships, internships, subsistence activities, and other services 
to the affected community. SBA expects that two Participants owned by 
the same Tribe, ANC, NHO or CDC will submit identical data describing 
the benefits provided by the Tribe, ANC, NHO or CDC.
    Several commenters opposed the reporting of any information 
relating to benefits flowing to Tribal or native members and/or the 
Tribal, native or other community, and questioned whether the Federal 
Government was attempting to dictate how Tribes should provide benefits 
to their respective communities. A few commenters also noted that this 
was an added burden imposed on Tribal and ANC-owned Participants that 
was not required for individually-owned Participants. One comment found 
it offensive for a non-Tribal government to determine the success or 
failure of a Tribal effort. Others expressed concern that the data 
would be used against the program Participants required to provide the 
data. Several commenters also

[[Page 8236]]

recommended that if any reporting requirement relating to benefits 
flowing to the native or Tribal community remain in the final 
regulation, then it should not be included within a section entitled 
``What criteria must a business meet to remain eligible to participate 
in the 8(a) BD program'' because that implies that SBA will somehow 
evaluate the benefits reported and could determine a firm to be 
ineligible for further program participation if the reported benefits 
were deemed insufficient. It was never SBA's intent to evaluate or 
otherwise determine whether the benefits reported by Tribes, ANCs, NHOs 
and CDCs were or were not acceptable as compared to the value of 8(a) 
contracts received by firms owned by those entities. SBA did not intend 
future eligibility of an 8(a) Participant to be dependent on the amount 
or the type of benefits provided by the parent Tribe, ANC, NHO or CDC. 
As such, SBA agrees that the requirement to provide information related 
to benefits flowing to Tribal or native members and/or the Tribal, 
native or other community should be contained in a section of SBA's 
regulations relating to reporting requirements as opposed to the 
section relating to what a Participant must do to remain eligible to 
participate in the 8(a) BD program. This final rule moves the proposed 
provision from Sec.  124.112(b)(8) to a new Sec.  124.604.
    Finally, several commenters recommended that SBA delay 
implementation of any reporting of benefits requirement to allow 
affected firms to gather and synthesize this data. In addition, these 
commenters encouraged SBA to establish a task force, comprised of 
native leaders and SBA, to further study how this requirement could be 
best implemented without imposing an undue burden on Tribes, ANCs, NHOs 
or CDCs, or on their affected 8(a) Participants. SBA agrees that 
further refinement of this requirement may be needed. As such, SBA has 
delayed implementation of new Sec.  124.604 for six months after the 
effective date for the other provisions of this final rule. If further 
refinement takes longer than six months, SBA may delay implementation 
further. If further delay is necessary, SBA will publish a notice in 
the Federal Register to that effect. During the delayed six months 
implementation period, SBA anticipates meeting with members of the 
affected communities to further study and possibly improve this 
requirement and to develop best practices for utilizing the data 
collected.

Changes Applicable to Concerns Owned by NHOs

    In addition to the changes identified above relating to follow-on 
contracts and potential for success and the change below regarding sole 
source limits for NHO-owned concerns, the final rule clarifies other 
requirements for NHO-owned concerns. Several commenters noted that SBA 
requires NHOs to be economically disadvantaged and to establish that 
their business activities will principally benefit Native Hawaiians, 
but believed that SBA's implementation of these requirements was not 
clearly set forth in the regulations. A few commenters recommended that 
SBA's requirement that a majority of an NHO's members must establish 
that they individually qualify as economically disadvantaged should be 
included within the regulatory text. Other commenters recommended 
clarifications relating to the control requirement. In response to 
these comments, the final rule adds clarifications regarding the 
current policy on how an NHO qualifies as economically disadvantaged, 
demonstrates that its business activities benefit Native Hawaiians, and 
controls an NHO-owned concern. To determine whether an NHO is 
economically disadvantaged, SBA considers the individual economic 
status of the NHO's members. The majority of an NHO's members must 
qualify as economically disadvantaged under Sec.  124.104. For the 
first 8(a) applicant owned by a particular NHO, individual NHO members 
must meet the same initial eligibility economic disadvantage thresholds 
as individually-owned 8(a) applicants (i.e., $250,000 net worth; 
$250,000 income; and $4 million in total assets). Once that firm is 
approved for participation in the 8(a) program, it will continue to 
qualify as economically disadvantaged provided a majority of its 
members meet the economic disadvantage thresholds for continued 
eligibility (i.e., $750,000 net worth; $350,000 income; and $6 million 
in total assets). Because SBA will consider a firm to continue to be 
owned by an economically disadvantaged NHO where a majority of the 
NHO's members meet the thresholds for continued eligibility, SBA does 
not believe that the same NHO should be considered not economically 
disadvantaged for purposes of qualifying a new applicant if it exceeds 
one or more of the thresholds for initial eligibility. As such, for any 
additional 8(a) applicant owned by the NHO, this rule provides that 
individual NHO members must meet the economic disadvantage thresholds 
for continued 8(a) eligibility even though the determination is being 
made with respect to the initial eligibility of that applicant.
    The final rule also incorporates the statutory requirement that an 
NHO must control the applicant or Participant firm. To establish 
control, the NHO must control the board of directors of the applicant 
or Participant. There is no statutory requirement that the day-to-day 
operations of an NHO-owned firm be controlled by Hawaiian Natives of 
the NHO. The requirement is merely that the NHO controls the firm. As 
such, an individual responsible for the day-to-day management of an 
NHO-owned firm need not establish personal social and economic 
disadvantage.

Excessive Withdrawals

    The final rule amends Sec.  124.112(d) requiring what amounts 
should be considered excessive withdrawals, and thus a basis for 
possible termination or early graduation. SBA believes that the new 
definition of withdrawal better addresses the original legislative 
intent behind the prohibition against excessive withdrawals.
    By statute, SBA is directed to limit withdrawals made ``for the 
personal benefit'' of a Participant's owners or any person or entity 
affiliated with such owners. 15 U.S.C. 637(a)(6)(D). Where such 
withdrawals are ``unduly excessive'' so that they are ``detrimental to 
the achievement of the targets, objectives, and goals contained in such 
Program Participant's business plan,'' SBA is authorized to terminate 
the firm from further participation in the 8(a) BD program. Id. SBA's 
previous regulations broadly defined what a withdrawal was and did not 
adequately tie termination to withdrawals that were detrimental to the 
achievement of the Participant's targets, objectives and goals. This 
unnecessarily hampered a Participant's ability to recruit and retain 
key employees or to pay fair wages to its officers. The proposed rule 
amended the definition of what constitutes a ``withdrawal'' in order to 
permit a Participant to more freely use its best business judgment in 
determining compensation. It modified the definition of withdrawal to 
generally eliminate the inclusion of officers' salaries from the 
definition of withdrawal and excluded other items currently included 
within such definition.
    SBA received comments both in favor and opposed to the excessive 
withdrawal provisions contained in the proposed rule. Several 
commenters suggested eliminating the excessive withdrawal analysis 
entirely. Many suggested that SBA should look to the

[[Page 8237]]

totality of the circumstances to determine if withdrawals are 
excessive, and not use the thresholds as a bright line test. All 
commenters that addressed excessive withdrawals suggested that the 
existing threshold amounts be increased. The comments, however, were 
not uniform in their approach, and recommended many alternatives as to 
how SBA should determine excessive withdrawals. Many commenters 
suggested specific dollar amounts, such as $100,000 more than the 
proposed thresholds. A few commenters suggested that excessive 
withdrawals should be based on a reasonable percentage of revenue 
rather than a fixed dollar value. Several commenters recommended that 
excessive withdrawals should vary by industry or depending upon the 
geographic location of the firm. Several commenters suggested that 
there not be any limits or thresholds and firms be allowed to 
compensate the owners, officers and employees of the organization based 
on the viability of the business.
    As noted above, the excessive withdrawal concept comes straight 
from the language of the Small Business Act. As such, SBA does not have 
the discretion to eliminate this requirement entirely as a few 
commenters recommended. SBA considered the alternate approaches 
suggested in the comments, but decided to retain the thresholds based 
on the revenues generated by the Participant as the most fair and 
reasonable approach. SBA believes that thresholds that vary from 
industry to industry or from one geographic location to another would 
be difficult to implement fairly. In addition, either approach would 
require further refinement through an additional proposed rule and 
public comment process. In response to comments, the final rule amends 
Sec.  124.112(d)(3) to increase each of the current ``excessive'' 
withdrawal amounts by $100,000. Thus, for firms with sales of less than 
$1,000,000 the excessive withdrawal amount would be $250,000 instead of 
$150,000, for firms with sales between $1,000,000 and $2,000,000 the 
excessive withdrawal amount would be $300,000 instead of $200,000, and 
for firms with sales exceeding $2,000,000 the excessive withdrawal 
amount would be $400,000 instead of $300,000.
    The final rule also clarifies that withdrawals that exceed the 
threshold amounts indentified in the regulations in the aggregate will 
be considered excessive. SBA believes that this makes sense because 
officers' salaries generally will not be included within what 
constitutes a withdrawal. Under the previous regulations, although it 
was not specifically spelled out, it appeared that withdrawals were 
excessive if they exceeded the thresholds in the aggregate, not by the 
individual owner or manager. This was a problem where officers' 
salaries were included within withdrawals. SBA was concerned that the 
excessive withdrawal provisions conflicted with the individual economic 
disadvantage provisions. For example, two disadvantaged individuals 
could own and operate an applicant or Participant firm and each could 
receive an income of $190,000 and be considered economically 
disadvantaged. Where officers' salaries counted as withdrawals, 
however, a Participant could nevertheless be terminated from the 
program because the $380,000 in combined salaries exceeded the 
excessive withdrawal threshold, even for Participants large total 
revenues. SBA thought that this inconsistency was unfair. One approach 
could have been to continue to count officers' salaries as withdrawals 
and determine excessive withdrawals by the individual owner or manager. 
SBA believes that such an approach would allow too much to be withdrawn 
from a Participant without adverse consequences and would be 
detrimental to the overall development of Participant firms. Excluding 
officers' salaries generally from withdrawals, but looking at 
withdrawals in the aggregate appears to be a fairer approach to SBA.
    SBA recognizes that some firms may try to circumvent the excessive 
withdrawal limitations through the distribution of salary or by other 
means. As such, the final rule authorizes SBA to look at the totality 
of the circumstances in determining whether to include a specific 
amount as a ``withdrawal,'' and specifically clarifies that if SBA 
believes that a firm is attempting to get around the excessive 
withdrawal limitations though the payment of officers' salaries, SBA 
would count those salaries as withdrawals.
    Additionally, in order to more closely comply with statutory 
language, the final rule further clarifies that in order for 
termination or graduation to be considered by SBA, funds or assets must 
be withdrawn from the Participant for the personal benefit of one or 
more owners or managers, or any person or entity affiliated with such 
owners or managers, and any withdrawal must be detrimental to the 
achievement of the targets, objectives, and goals contained in the 
Participant's business plan. These requirements were not clearly 
contained in the previous regulations. Adding this language is 
consistent with the Small Business Act and with the intent of the 
original statutory provision, which sought to reach ``individuals who 
have engaged in unduly excessive withdrawals.'' H.R. Conf. Rep. No. 
100-1070, at 7 (1988). In determining whether a withdrawal meets this 
definition, the person or entity receiving the withdrawal will have the 
burden to show that the withdrawal was not for its personal benefit.
    Finally, several commenters suggested that the excessive withdrawal 
prohibition not apply to firms owned by Tribes, ANCs, NHOs or CDCs. 
They believed that the community development purposes of the 8(a) BD 
program for entity-owned Participants is inconsistent with the 
excessive withdrawal provisions. As long as the Tribe, ANC, NHO or CDC 
has committed to supporting the firm, the commenters felt that any 
withdrawals made for the benefit of the Tribe, ANC, NHO or CDC (or 
community served by such entity) should be permitted. SBA agrees. As 
stated above, the original statutory provision was intended to apply to 
individuals who have withdrawn funds from the Participant that are 
unduly excessive and thus detrimental to the Participant's achievement 
of the targets, objectives, and goals contain it its business plan. 
Funds benefitting a Tribe or Tribal community serve a different 
purpose. SBA does not believe that it should prohibit a Participant 
owned by Tribe, ANC, NHO or CDC from benefitting the entity or the 
native or shareholder community. However, if SBA determines that the 
withdrawals from a firm owned by a Tribe, ANC, NHO or CDC are not for 
the benefit of the native or shareholder community, then SBA may 
determine that the withdrawal is excessive. For example, if funds or 
assets are withdrawn from an entity-owned Participant for the benefit 
of a non-disadvantaged manager or owner that exceed the withdrawal 
thresholds, SBA may find that withdrawal to be excessive.

Applications to the 8(a) BD Program

    The proposed rule made minor changes to Sec. Sec.  124.202, 
124.203, 124.204 and 124.205 to emphasize SBA's preference that 
applications for participation in the 8(a) BD program are to be 
submitted in an electronic format. SBA received only positive comments 
to these proposed changes. As such, the final rule does not change 
these provisions from those proposed. Despite the preference for an 
electronic application, SBA again wants to clarify that nothing in the 
proposed rule or in this final rule would prohibit hard copy 8(a) BD 
applications from being submitted to and processed by SBA.

[[Page 8238]]

Firms that prefer to file a hard copy application may continue to do 
so.
    The proposed rule also changed the location of SBA's initial review 
of applications from ANC-owned firms from SBA's Anchorage, Alaska 
District Office to SBA's San Francisco unit of the Division of Program 
Certification and Eligibility (DPCE). Most comments opposed this move, 
believing that the SBA Alaska District Office better understood issues 
relating to ANCs and ANC-owned applicants. Commenters expressed concern 
about making interactions between ANC-owned applicants and the initial 
SBA reviewers more difficult because of the time difference or the 
imposition of a travel burden. Several commenters suggested SBA 
establish one or more offices to review only those applications from 
Tribally-owned concerns. Other commenters suggested that SBA take the 
provision identifying the San Francisco DPCE unit as the office that 
would initially review applications from ANC-owned concerns out of the 
regulations in order to provide flexibility to possible future changes 
in application processing. SBA has two DPCE units, one in San Francisco 
and the other in Philadelphia. All applications for participation in 
the 8(a) BD program, whether from ANC-owned, Tribally-owned or 
individually-owned firms, are processed by one of these two offices. 
The concerns raised by commenters about the possible difficulty of 
interacting with a reviewing office that is located in another State 
are no different than those faced by many individually-owned applicant 
firms. Both DPCE units interact daily with applicants located in other 
States. In addition, applications from ANC-owned firms come from firms 
located throughout the United States, not just from those located in 
Alaska. ANC-owned applicant firms not located in Alaska have 
historically dealt with an SBA processing office in another State 
(before this change, the Alaska District Office) without trouble. Thus, 
SBA does not see this physical presence issue as a problem. SBA has 
staffed the offices and for consistency purposes has designated the San 
Francisco DPCE unit to review and process all applications from ANC-
owned firms. SBA agrees, however, that there is no need for the 
regulations to specifically address which DPCE unit will process 
specific types of applications. That can be done through internal 
guidance which can be changed more easily than regulations, and will 
provide more flexibility to SBA for possible future changes in 
application processing. As such, the final rule does not specifically 
state that applications from ANC-owned firms will be processed by the 
San Francisco DPCE unit even though it is SBA's intent to continue that 
policy. SBA will use its discretion to have the Philadelphia DPCE unit 
process applications from ANC-owned applicants in appropriate 
circumstances, such as where there is an uneven distribution of 
applications and the San Francisco DPCE unit has a backlog of cases 
while the Philadelphia DPCE unit does not.
    SBA believes this is the best use of its currently available 
resources. Applicants to the 8(a) BD program are welcomed and 
encouraged to tap the Alaska District Office for assistance in the 
application process and SBA does not expect or require applicants to 
travel to DPCE units in order to complete the application process. As 
previously discussed, SBA encourages applicants to apply to the program 
through electronic means and these applications are available online. 
Additionally, SBA conducts training in the area of initial 8(a) 
eligibility on an ongoing basis and regularly includes components in 
the training which address areas unique to the Tribally-owned concerns.
    The proposed rule also added a new paragraph to Sec.  124.204, 
which governs application processing, to clarify that the burden of 
proof to demonstrate eligibility for participation in the 8(a) BD 
program is on the applicant and permitted SBA to presume that 
information requested but not submitted would be adverse (adverse 
inference). SBA received comments both in favor and opposed to this 
adverse inference concept. Those in favor recognized that the burden of 
proof for establishing eligibility must rest with the applicant. To do 
otherwise (e.g., to require SBA to prove that an applicant does not 
meet the eligibility requirements) would not make sense. Those 
commenters opposed to the change expressed concern that information may 
be inadvertently omitted and the application process unreasonably 
extended. SBA disagrees. The burden of proof for establishing 
eligibility rests with the applicant and SBA believes that this 
clarification will streamline the application process. Requiring an 
applicant to submit all requested information when SBA makes a specific 
request for information it deems to be relevant is critical to the 
application process and is reasonable. When that information is not 
provided, it is rational for SBA to presume that the information would 
be adverse to the firm and conclude that the firm has not demonstrated 
eligibility in the area to which the information relates. SBA's 
intended effect is to eliminate the delay that results from making 
repeat information requests. A similar provision has existed as part of 
SBA's size and HUBZone regulations for many years and is cited 
regularly in eligibility determinations relating to those programs.
    Finally, in response to GAO Report Number: GAO-10-353, entitled, 
``Steps Have Been Taken to Improve Administration of the 8(a) Program, 
but Key Controls for Continued Eligibility Need Strengthening'' with 
regard to the submission of tax returns and forms, this final rule 
clarifies that an application must include copies of signed tax returns 
and forms. Although this is not a new requirement, one of the 
conclusions reached in the audit by GAO is that not all copies of tax 
returns contained in SBA's application files were signed.

Graduation

    The proposed rule amended Sec. Sec.  124.301 and 124.302 to utilize 
the terms ``early graduation'' and ``graduation'' in a way that matches 
the statutory meaning of those terms. See amendment to Sec.  124.2, 
explained above. Several commenters supported the distinction made in 
the proposed rule between graduating and exiting the 8(a) BD program. A 
few commenters disagreed with allowing SBA to ``kick out'' any firms 
before their nine year program term expires. SBA believes that early 
graduation is not only supported by the statutory language of the Small 
Business Act, it is in fact required where a firm meets the goals and 
objectives set forth in its business plan, regardless of how long a 
firm has been in the 8(a) BD program. As such, the final rule continues 
to authorize early graduation in appropriate circumstances. Many 
commenters opposed proposed Sec.  124.302(c), which authorized early 
graduation where a Participant exceeded the size standard corresponding 
to its primary NAICS code for two successive program years. Commenters 
believed such a rule was contrary to the business development purposes 
of the 8(a) program, and did not take into account the cyclical nature 
of small businesses where revenues can vary greatly from one year to 
the next. One commenter believed that this proposed provision would be 
a disincentive for firms to enter the 8(a) program in industries with 
small size standards. SBA does not intend to discourage any Participant 
from expanding or seeking business opportunities in diverse areas. 
However, as previously stated, where a firm has grown to be other than 
small in its

[[Page 8239]]

primary NAICS code, SBA believes that the program has been successful 
and it is reasonable to conclude that the firm has achieved the goals 
and objectives of its business plan. Where a firm's business plan goals 
and objectives have been achieved, early graduation is appropriate.

Termination From the 8(a) BD Program

    The proposed rule made three amendments to Sec.  124.303 regarding 
termination from the 8(a) BD program. First the proposed rule amended 
Sec.  124.303(a)(2) to clarify that a Participant could be terminated 
from the program where an individual owner or manager exceeds any of 
the thresholds for economic disadvantage (i.e., net worth, personal 
income or total assets), or is otherwise determined not to be 
economically disadvantaged, where such status is needed for the 
Participant to remain eligible. SBA received no comments regarding this 
provision, and the final rule adopts the proposed language. Second, the 
proposed rule amended Sec.  124.303(a)(13) to be consistent with the 
proposed changes to Sec.  124.112(d)(13) regarding excessive 
withdrawals being a basis for termination. Several commenters supported 
the proposed changes. The final rule makes minor changes to more 
closely align this provision with Sec.  124.112(d) and the statutory 
authority regarding termination for excessive withdrawals. The proposed 
rule authorized termination where an excessive withdrawal was deemed to 
``hinder the development of the concern.'' SBA believes that this 
proposed language did not precisely capture the statutory authority. 
Specifically, Sec.  8(a)(6)(D) of the Small Business Act, 15 U.S.C. 
637(6)(D), authorizes SBA to terminate a firm from participating in the 
8(a) BD program where SBA determines that the withdrawal of funds was 
``detrimental to the achievement of the targets, objectives, and goals 
contained in such Program Participant's business plan.'' SBA has 
adopted that language in this final rule. Third, the proposed rule 
amended Sec.  124.303(a)(16) to remove the reference to part 145, a 
regulatory provision that addresses nonprocurement debarment and 
suspension that was moved to 2 CFR parts 180 and 2700. The two comments 
SBA received regarding this provision did not pertain to the 
ministerial change to the reference citation, but, rather, questioned 
whether a voluntary exclusion should be a basis for possible 
termination. This basis for possible termination existed prior to the 
proposed rulemaking process. It was not a change to which public 
comment was appropriate. SBA also notes that the first sentence in 
Sec.  124.303(a) clearly makes termination discretionary, depending 
upon the good cause shown. As such, SBA continues to believe that a 
voluntary exclusion may be good cause for termination depending upon 
the underlying facts which caused the voluntary exclusion.

Effect of Early Graduation or Termination

    The proposed rule also amended Sec.  124.304(f) regarding the 
effect an early graduation or termination would have. It provided that 
a firm which early graduates or is terminated from the 8(a) BD program 
could generally not self certify its status as an SDB for future 
procurement actions. If the firm believes that it does qualify as an 
SDB and seeks to certify itself as an SDB, the firm must notify the 
contracting officer that SBA early graduated or terminated the firm 
from the 8(a) BD program. The firm must also demonstrate either that 
the grounds upon which the early graduation or termination was based do 
not affect its status as an SDB, or that the circumstances upon which 
the early graduation or termination was based have changed and the firm 
would now qualify as an SDB. The proposed rule also provided that 
whenever a firm notifies a contracting officer that it has been 
terminated or early graduated by SBA along with its SDB certification, 
the contracting officer must protest the SDB status of the firm so that 
SBA can make a formal eligibility determination. SBA received several 
comments supporting the clarification that a firm could not self-
certify its SDB status without addressing a previous termination or 
early graduation from the 8(a) BD program. Several commenters, however, 
also believed that a contracting officer should not be required to 
protest a firm's SDB status in every instance in which the firm 
identifies that it had been terminated or early graduated from the 8(a) 
BD program. They felt that contracting officers should have the 
discretion to determine if the information provided by a firm with its 
SDB certification was sufficient for the contracting officer to believe 
that the firm qualified as an SDB at the time of its certification. 
They believed that a contracting officer should protest a firm's SDB 
status only where he or she did not believe that the firm currently 
meets the SDB requirements. SBA agrees and has changed this provision 
to allow a contracting officer to accept an SDB certification where he 
or she believes that the firm currently qualifies as an SDB, and to 
protest the firm's SDB status to SBA where he or she continues to have 
questions about the firm's current SDB status.

Suspensions for Call-Ups to Active Duty

    As noted above, the proposed rule amended Sec.  124.305 to permit 
SBA to suspend an 8(a) Participant where the individual upon whom 
eligibility is based can no longer control the day-to-day operations of 
the firm because the individual is a reserve component member in the 
United States military who has been called to active duty. Suspension 
in these circumstances is intended to preserve the firm's full term in 
the program by adding the time of the suspension to the end of the 
Participant's program term when the individual returns to control its 
daily business operations. SBA received mostly favorable comments in 
response to this provision. A few commenters sought clarification of a 
few points. One commenter stated that not all activities as reservists 
require deployment, and that activation is not the same as deployment. 
SBA does not use the word deployment in the regulation. Any reservist 
called to active duty who can no longer run the day-to-day operations 
of his or her 8(a) Participant firm could elect to be suspended during 
the call-up period. SBA believes that is clear from the regulatory text 
and that no further clarification is needed. Another commenter 
requested clarification as to whether a firm can continue to perform 
8(a) contracts already awarded if the firm chooses to be suspended 
during the call-up period. As with any suspension, a firm is always 
required to complete performance of contracts it was awarded prior to 
the suspension. SBA believes this is clear from the current regulatory 
text in Sec.  124.305(b)(4), but has added a new paragraph (i) to 
clarify SBA's intent nevertheless.

Task and Delivery Order Contracts

    The proposed rule amended Sec.  124.503(h) to address task and 
delivery order contracts. In order to help 8(a) concerns compete in the 
current multiple-award contracting environment, SBA proposed to allow 
agencies to receive 8(a) credit for orders placed with 8(a) concerns 
under contracts that were not set aside for 8(a) concerns as long as 
the order is offered to and accepted for the 8(a) BD program and 
competed exclusively among eligible 8(a) concerns, and as long as the 
limitations on subcontracting provisions apply to the individual order. 
SBA received more than 20 comments in support of this proposal. 
Commenters specifically agreed that procuring

[[Page 8240]]

agencies should not be able to take 8(a) credit for the award of an 
order to an 8(a) Participant that was not competed solely among 
eligible 8(a) Participants. The final rule adopts the proposed language 
and merely allows contracting officers the discretion to reserve orders 
for 8(a) concerns if they so choose. The rule does not require any 
contracting officer to make such a reservation. If a contracting 
officer chose not to reserve a specific order for 8(a) concerns (e.g., 
if a contracting officer went to an 8(a) firm, a small business, and a 
large business off a schedule or otherwise competed an order among 8(a) 
and one or more non-8(a) concerns), the contracting officer could 
continue to take SDB credit for the award of an order to an 8(a) firm, 
but could not count the order as an 8(a) award.

Barriers to Acceptance and Release From the 8(a) BD Program

    The proposed rule amended Sec.  124.504(a) to add a provision 
limiting SBA's ability to accept a requirement for the 8(a) BD program 
where a procuring agency expresses a clear intent to make a HUBZone or 
service disabled veteran-owned (SDVO) small business award prior to 
offering the requirement to SBA for award as an 8(a) contract. The 
previous regulation identified the small business set aside program, 
but not the HUBZone or SDVO small business programs. Commenters 
supported this change, specifically recognizing SBA's position relating 
to parity among the various small business contracting programs. One 
commenter recommended that the women-owned small business (WOSB) 
program be added to the list of small business programs that would 
limit SBA's ability to accept a requirement for the 8(a) BD program. 
SBA agrees. As such the final rule would limit SBA's ability to accept 
a requirement for the 8(a) BD program where a procuring agency 
expresses a clear intent to make a small business set-aside, or 
HUBZone, SDVO small business, or WOSB award prior to offering the 
requirement to SBA for award as an 8(a) contract.
    The proposed rule also amended Sec.  124.504(e) to require that 
follow-on or repetitive 8(a) procurements would generally remain in the 
8(a) BD program unless SBA agrees to release them for non-8(a) 
competition. This had been SBA's policy, but had not been previously 
incorporated into the regulations. If a procuring agency would like to 
fulfill a follow-on or repetitive acquisition outside of the 8(a) BD 
program, it must make a written request to and receive the concurrence 
of the AA/BD to do so. Release may be based on an agency's achievement 
of its SDB goal, but failure to achieve its HUBZone, SDVO, or WOSB 
goal, where the requirement is not critical to the business development 
of the 8(a) Participant that is currently performing the requirement or 
another 8(a) BD Participant. SBA received nine comments in support of 
this provision. The commenters believed that incorporating this policy 
into the regulations was an important safeguard to ensuring that the 
business development purposes of the 8(a) BD remain strong. The final 
rule adopts the proposed language.

Competitive Threshold Amounts

    The proposed rule amended Sec.  124.506 to adjust the competitive 
threshold amounts to $5,500,000 for manufacturing contracts and 
$3,500,000 for all other contracts to align with the changes made to 
the Federal Acquisition Regulation (FAR) to implement an inflationary 
adjustment authorized by 41 U.S.C. 431a. See 71 FR 57363 (September 28, 
2006). Several commenters supported the change to incorporate the 
competitive threshold amounts contained in the FAR. They believed that 
removing the conflict between SBA's regulations and the FAR will also 
eliminate possible confusion in the contracting community. Several 
commenters recommended increasing the competitive threshold amounts, 
believing that such a change would better promote business development 
by making larger 8(a) contracts easier for procuring agencies to award 
and thus providing easier access to larger contracts for 8(a) 
Participants. Since the publication of the proposed rule, the Civilian 
Agency Acquisition Council and the Defense Acquisition Regulations 
Council (Councils) have determined that a further inflation adjustment 
to the 8(a) competitive threshold amounts is warranted and have set the 
new amounts at $6,500,000 as the competitive threshold for contracts 
assigned a manufacturing NAICS code and $4,000,000 as the competitive 
threshold for all other contracts. 75 FR 53129 (Aug. 30, 2010). The 
councils are authorized by section 807 of the Ronald W. Reagan National 
Defense Authorization Act for Fiscal Year 2005 to adjust acquisition-
related thresholds every five years for inflation using the Consumer 
Price Index (CPI) for all urban consumers, except for Davis-Bacon Act, 
Service Contract Act, and trade agreements thresholds. As these 
thresholds are statutory and SBA cannot change them administratively, 
the final rule adopts the language from the final rule amending the 
FAR.
    Several commenters opposed allowing sole source contracts above the 
competitive threshold amounts to firms owned by ANCs, Tribes, and, for 
Department of Defense (DoD) contracts, NHOs. The authority to permit 
these sole source awards is statutory and cannot be changed 
administratively by SBA. As such, the authority for these awards 
continues to be incorporated in the final rule.
    In addition, in order to address the perceived problem of non-8(a) 
firms unduly benefitting from the 8(a) BD program through joint 
ventures with 8(a) firms owned by ANCs, Tribes and NHOs, the proposed 
rule prohibited non-8(a) joint venture partners to 8(a) sole source 
contracts above the competitive thresholds from also being 
subcontractors under the joint venture prime contract. If a non-8(a) 
joint venture partner seeks to perform more work under the contract, 
then the amount of work done by the 8(a) partner to the joint venture 
must also increase. SBA recognizes that the mentor/
prot[eacute]g[eacute] aspect of the 8(a) BD program can be an important 
component to the overall business development of 8(a) small businesses. 
However, SBA does not believe that non-8(a) businesses, particularly 
non-8(a) large businesses, should benefit more from an 8(a) contract 
than 8(a) prot[eacute]g[eacute] firms themselves. As such, the change 
to disallow subcontracts to non-8(a) joint venture partners is not 
meant to penalize Tribal, ANC and NHO 8(a) firms, but, rather, to 
ensure that the benefits of the program flow to its intended 
beneficiaries. SBA received a substantial number of comments in 
response to this proposal. There were a large number of comments on 
both sides of this issue. Many commenters supported the proposed change 
as a legitimate way to ensure that non-8(a) firms do not control or 
dominate the performance of 8(a) contracts. Other commenters opposed 
the change because they did not want to discourage firms from serving 
as mentors and providing needed business development assistance to 
prot[eacute]g[eacute] firms. A few of these commenters also recommended 
that SBA increase its oversight of mentor/prot[eacute]g[eacute] 
relationships instead of prohibiting all subcontracting to non-8(a) 
joint venture partners. Several commenters recommended that the 
restriction that non-8(a) joint venture partners cannot also be 
subcontractors to the joint venture prime contract should be extended 
beyond sole source 8(a) contracts above the competitive threshold 
amounts. These commenters believed that it is important to ensure

[[Page 8241]]

that non-disadvantaged businesses, particularly large businesses in the 
context of any joint venture between a prot[eacute]g[eacute] firm and 
its mentor, do not obtain more benefits from an 8(a) contract than the 
8(a) Participant itself does. SBA agrees and has made a change to Sec.  
124.513(d) that would generally prohibit a non-8(a) joint venture 
partner, or any of its affiliates, from acting as a subcontractor to 
the joint venture awardee on any 8(a) contract. The restriction is 
intended to apply to all subcontracting tiers, so that a non-8(a) joint 
venture partner could not receive a subcontract from a firm that was 
acting as a subcontractor to the joint venture or another subcontractor 
of the joint venture. In response to a commenter that was concerned 
that there might not be an appropriate subcontractor available if SBA 
prohibited non-8(a) joint venture partners from acting as 
subcontractors across the board, the final rule allows a non-8(a) joint 
venture partner, or an affiliate of the non-8(a) joint venture partner, 
to act as a subcontractor where the AA/BD determines that other 
potential subcontractors are not available. This could be because no 
one else has the capability to do the work, or because those firms that 
have the capability are busy with other work and not available to be a 
subcontractor on the 8(a) contract in question. If a non-8(a) joint 
venture partner seeks to do more work, the additional work must 
generally be done through the joint venture, which would require the 
8(a) partner(s) to the joint venture to also do additional work to meet 
the 40% requirement set forth in Sec.  124.513(d)(1).
    Several commenters noted that prohibiting a non-8(a) partner to a 
joint venture from subcontracting with the joint venture did not make 
sense in the context of an unpopulated joint venture where both the 
8(a) and non-8(a) partners must technically be subcontractors to the 
joint venture. SBA agrees. In order to ensure that the 8(a) partner(s) 
to a joint venture perform at least 40% of the work performed by an 
unpopulated joint venture, Sec.  124.513(d)(2)(ii) of the final rule 
provides that the total amount of work done by the partners on the 
contract (at any level) will be aggregated and the work done by the 
8(a) partner(s) must be at least 40% of the total done by all partners. 
In determining the amount of work done by a non-8(a) partner, all work 
done by the non-8(a) partner and any of its affiliates at any 
subcontracting tier will be counted.
    The final rule eliminates the reference in Sec.  124.506(b)(4) that 
a joint venture between one or more eligible Tribally-owned, ANC-owed 
or NHO-owned Participants and one or more non-disadvantaged business 
concerns could be awarded a sole source 8(a) contract above the 
competitive threshold amounts provided that no non-8(a) joint venture 
partner also acts as a subcontractor to the joint venture awardee. In 
light of the changes made to Sec.  124.513, it is not necessary to 
repeat those same requirements in Sec.  124.506. As such, the final 
rule provides in Sec.  124.506 that a joint venture with a non-8(a) 
firm can receive an 8(a) contract above the competitive threshold 
amounts if it meets the requirements of Sec.  124.513.
    The supplemental information to the proposed rule noted that SBA 
considered other alternatives to disallowing subcontracting to a non-
8(a) joint venture partner, and asked for comments on those and other 
alternatives. Commenters did not believe that eliminating joint 
ventures on sole source awards above the competitive threshold amounts 
was a reasonable approach. They felt that such an alternative would 
discourage firms from being mentors for Tribal, ANC and NHO-owned 
Participants and, thus, would significantly hamper the ability of such 
firms to fully receive valuable business development assistance. 
Commenters also believed that the alternative that permitted sole 
source joint venture contracts above the competitive threshold amounts 
only where the 8(a) partner(s) to the joint venture performed a 
specified percent of the entire contract itself was unworkable. They 
observed that one of the principle reasons that a firm enters into a 
joint venture relationship in order to perform a contract is because 
the firm lacks the resources necessary to perform the contract on its 
own. In the case of an 8(a) or small business set aside procurement, 
this means that the firm is generally unable to meet the 50% 
performance of work requirement by itself and, therefore, looks to 
another firm to assist it in meeting that requirement and in performing 
the overall procurement. For the larger contracts to which this 
restriction would apply (i.e., the sole source contracts above the 
competitive threshold amounts), a firm may not only not be able to 
perform 50% of the entire contract, it may also not be able to perform 
a smaller percentage (e.g., 40%) of the entire contract. As such, 
commenters did not believe this alternative would be conducive to joint 
venture relationships and should not be pursued. Finally, a few 
commenters also thought that the alternative that would require a 
majority of subcontract dollars under a sole source 8(a) joint venture 
contract between a prot[eacute]g[eacute] firm and its mentor to be 
performed by small businesses was not an attractive alternative. While 
they believed that attempting to ensure that small businesses performed 
a certain percentage of subcontracting work was a good objective, they 
felt that this alternative would impose a subcontracting plan 
requirement on small businesses that are currently exempt from having 
subcontracting plans. In addition, they questioned the logic of 
requiring subcontract work be performed by small businesses when the 
prime contractor qualified as small and was already performing a 
significant portion of the work on the contract. They reasoned that 
such an approach would give small business prime contractors fewer 
subcontracting options and could adversely affect their ability to 
fulfill the procurement at a fair price. Based on the comments 
received, SBA believes that the proposed approach is the best 
alternative and has finalized it in this rule.

Bona Fide Place of Business

    The proposed rule clarified the procedures a Participant must 
follow to establish a bona fide place of business in a new location 
pursuant to Sec.  124.507(c)(2). The rule clarified that a Participant 
must first submit its request to be recognized as having a bona fide 
place of business in a different location to the SBA district office 
that normally services it. This will ensure that there is proper 
coordination between the two SBA district offices. The servicing 
district office will forward the request to the SBA district office 
serving the geographic area of the particular location for processing. 
The SBA district office in the geographic location of the purported 
bona fide place of business will then contact the Participant and may 
ask for further information in support of the Participant's claim. In 
order for a Participant to establish a bona fide place of business in a 
particular geographic location, the SBA district office serving the 
geographic area of that location must determine if that location in 
fact qualifies as a bona fide place of business under SBA's 
requirements.
    All but one of those submitting comments in response to this 
proposal supported the proposed change as a necessary clarification. 
One commenter opposed any geographic limitations for 8(a) contracts, 
believing that firms should be free to seek contracts anywhere they 
deem appropriate, whether or not they have a separate

[[Page 8242]]

office in a particular location. The bona fide place of business 
requirement for 8(a) construction contracts is derived from the 
statutory requirement that ``[t]o the maximum extent practicable, 
[8(a)] construction * * * contracts * * * shall be awarded within the 
county or State where the work is to be performed.'' 15 U.S.C. 
637(a)(11). Thus, SBA does not believe that it has the unfettered 
discretion to eliminate all geographic location requirements for 8(a) 
construction procurements. Through regulations, SBA has permitted a 
firm to establish a new bona fide place of business in the geographic 
location where it expects to seek and be awarded 8(a) contracts. SBA 
believes that this is as far as it may go and still remain consistent 
with the statutory authority. Several commenters were frustrated by the 
lack of coordination in the past that has caused a sometimes lengthy 
process for a Participant to establish a bona fide place of business 
within the geographical area served by another SBA district office. 
They anticipated that the new provision would clear up confusion 
between the various SBA district offices and accelerate the process to 
establish a new bona fide place of business. A few commenters 
recommended that SBA clarify the point at which a bona fide business is 
deemed to exist. In response, this final rule clarifies that the 
effective date of a bona fide place of business is the date that the 
evidence (paperwork) shows that the business in fact regularly 
maintained its business at the new geographic location. The district 
office needs to look at the written evidence, including leases, payroll 
records (showing the hiring of one or more individuals at the new 
location), date of filings with the State to do business in the State, 
and bills. Although the facts showing exactly when a firm has a bona 
fide place of business may not be precise, based on the evidence, a 
district office does have some discretion to determine when it believes 
the bona fide place of business was established. However, it is not 
reasonable for SBA to say that a firm does not have a place of business 
until such time as SBA does the analysis or does a site visit to 
determine that a bona fide office exists at a particular point in time. 
The determination is based on the facts as supported by the evidence 
not when SBA makes the determination. Similarly, the date of the site 
visit is not the determinative date of when a bona fide place of 
business was established.

Competitive Business Mix

    The proposed rule amended Sec.  124.509(a)(1) to clarify that work 
performed by an 8(a) Participant for any Federal department or agency 
other than through an 8(a) contract, including work performed on orders 
under the General Services Administration (GSA) Multiple Award Schedule 
program, and work performed as a subcontractor, including work 
performed as a subcontractor to another 8(a) Participant on an 8(a) 
contract, qualifies as work performed outside the 8(a) BD program. This 
change was made to respond to specific questions raised concerning 
whether orders off the GSA Schedule and subcontracts on 8(a) contracts 
counted against their competitive business mix requirement. The 
majority of commenters supported the clarification. A few commenters 
recommended that SBA count competitive 8(a) awards towards the non-8(a) 
business activity targets. They argued that these targets are meant to 
wean Participants away from sole source 8(a) contracting so that the 
firms are able to compete and survive after leaving the 8(a) BD 
program, and that 8(a) competition is more like non-8(a) competition 
than it is like 8(a) sole source awards. SBA does not believe that such 
a recommendation is consistent with the statutory authority. In 
authorizing the non-8(a) business activity targets, the Small Business 
Act speaks of ``contracts awarded other than pursuant to section 
8(a).'' 15 U.S.C. 636(j)(10)(I). Competitive 8(a) contracts are 
obviously awarded pursuant to section 8(a) of the Small Business Act, 
and, thus, cannot be included as ``contracts awarded other than 
pursuant to section 8(a).''
    Several commenters recommended that where an 8(a) contract is 
awarded to a joint venture, only the revenue going to the 8(a) 
Participant should count as 8(a) revenue for competitive business mix 
purposes. While this approach is initially appealing, SBA believes that 
it would lead to skewed results. First, procuring agencies count the 
entire 8(a) award toward their small disadvantaged business goal, and 
the entire contract amount is coded as an 8(a) award. It seems 
inconsistent to count the entire contract amount as an 8(a) award for 
one purpose (goaling) but not another (competitive business mix). 
Second, if SBA counted only the revenues going to the 8(a) partner(s) 
in an 8(a) joint venture contract, others would argue that work 
performed and revenues received by subcontractors should also not be 
counted as 8(a) revenue for the 8(a) Participant prime contractor. 
Thus, SBA has not made the recommended change.

Administration of 8(a) Contracts

    The proposed rule also added clarifying language to Sec.  124.512 
to make clear that tracking compliance with the performance of work 
requirements is a contract administration function which is performed 
by the procuring activity. SBA received a few comments supporting and a 
few comments opposing this clarification. One commenter thought that it 
made sense to put this clarification in the regulation because the 
regulation would then conform with the Partnership Agreement, which 
delegates contract execution and administration functions to procuring 
agencies. Another commenter opposed the change, mistakenly thinking 
that such a change was inconsistent with the Partnership Agreements. 
Also included within the delegation of contract administration is the 
authority to exercise priced options and issue appropriate 
modifications. The previous regulation required contracting officers 
who issued modifications or exercised options on 8(a) contracts to 
notify SBA of these actions. Because there was no clear guidance as to 
when SBA must be notified, there was often a delay between the issuance 
of a modification (or exercise of an option) and notification being 
supplied to SBA. The proposed rule required contracting officers to 
submit copies of modifications and options to SBA within 10 days of 
their issuance or exercise. While several commenters supported the 
proposed change as requiring timely communication of options and 
modifications, others believed that the 10-day turnaround time was too 
short and burdensome. One commenter recommended that 10 business days 
be changed to 15 business days to be consistent with the Partnership 
Agreements. The final rule amends the provision to require a 
contracting officer to submit copies to SBA of all modifications and 
options exercised within 15 business days of their occurrence, or by 
another date agreed upon by SBA.
    In addition, this rule adds clarifying language to Sec.  124.510(b) 
to make it clear that the initial determination of whether a firm 
submitting an offer for an 8(a) contract will meet the applicable 
performance of work requirement is made by the procuring agency 
contracting officer. SBA may provide input if requested.

Changes to Joint Venture Requirements

    The proposed rule made four amendments to the joint venture 
requirements contained in Sec.  124.513(c)(3). Specifically, the 
amendments provided that (1) the 8(a) Participant(s) to an 8(a) joint 
venture must receive profits from the joint

[[Page 8243]]

venture commensurate with the work performed by the 8(a) 
Participant(s); (2) the 8(a) Participant(s) to a joint venture for an 
8(a) contract must perform at least 40% of the work done by the joint 
venture; (3) where a joint venture has been established and approved by 
SBA for one 8(a) contract, a second or third 8(a) contract may be 
awarded to that joint venture provided an addendum to the joint venture 
agreement, setting forth the performance requirements on that second or 
third contract, is provided to and approved by SBA prior to contract 
award; and (4) each 8(a) firm that performs an 8(a) contract through a 
joint venture must report to SBA how the performance of work 
requirements (i.e., that the joint venture performed at least 50% of 
the work of the contract and that the 8(a) participant to the joint 
venture performed at least 40% of the work done by the joint venture) 
were met on the contract. SBA received over 100 comments regarding the 
proposed changes to Sec.  124.513, and will address the comments to 
each of the four proposals in turn.
    First, the majority of commenters supported the proposal that 8(a) 
Participant(s) to an 8(a) joint venture must receive profits from the 
joint venture commensurate with the work they performed. Those in 
support believed that this provision makes sense in light of the change 
specifying that the 8(a) partner(s) to a joint venture must perform at 
least 40% of the work performed by the joint venture. In a situation 
where the joint venture performs 100% of the contract, 40% by an 8(a) 
Participant and 60% by a non-8(a) firm, these commenters believed that 
it was not reasonable for the 8(a) firm to receive 51% of the profits 
when it performed only 40% of the work. SBA continues to agree. SBA 
believes that requiring an 8(a) firm to receive 51% of the profits in 
all instances could discourage legitimate non-8(a) firms from 
participating as joint venture partners in the 8(a) BD program, or 
encourage creative accounting practices in which a significant amount 
of revenues flowing to a non-8(a) joint venture partner would be 
counted as costs to the contract instead of profits in order to meet 
the SBA requirement. SBA does not believe that either of those outcomes 
is positive. As such, this provision is retained in this final rule.
    Second, the comments responding to the proposed rule requiring the 
8(a) Participant(s) to a joint venture for an 8(a) contract to perform 
at least 40% of the work done by the joint venture were diverse. Many 
commenters supported the proposal as a reasonable implementation of the 
previous ``significant portion'' rule. Several commenters believed that 
40% was not sufficient to ensure that 8(a) Participants received a 
significant benefit from the joint venture contract. Theses commenters 
believed that a 50% performance requirement for the 8(a) partner(s) to 
a joint venture would more likely result in 8(a) partners receiving a 
significant benefit from the joint venture contract. Conversely, 
several other commenters opposed any objective measure, believing that 
the ``significant portion'' language was more appropriate because a 
suitable portion for an 8(a) firm to perform will vary based on the 
type and size of the project. These commenters believed the 
``significant portion'' approach provided needed flexibility and was 
preferred to the proposed amendment. SBA believes that the rule 
requiring an 8(a) Participant to a joint venture to perform a 
significant portion of the work, without identifying a specific 
percentage, did not provide sufficient guidance to 8(a) firms and 
contracting officers as to what was expected of those firms. In 
addition, it allowed non-sophisticated 8(a) firms to be taken advantage 
of by certain non-8(a) joint venture partners. SBA believes that the 
best way to ensure that the 8(a) partners to a joint venture gain 
valuable experience from the joint venture is to require the 8(a) 
partners to perform a specific percentage of work. SBA does not agree 
with the commenter recommending that the 8(a) partner(s) perform at 
least 50% of the work done by the joint venture. The fundamental reason 
to have a joint venture is because one firm cannot act as prime and 
perform the contract by itself. Where an 8(a) contract is awarded to an 
8(a) Participant directly (and there is no joint venture) the 8(a) firm 
must meet the performance of work requirement (i.e., generally 50%) 
with its own work force. If SBA required the 8(a) partner to a joint 
venture to perform at least 50% of the work of the joint venture and 
the joint venture intended to perform the entire contract itself, then 
the 8(a) firm would be in the same position it would be in if it did 
not have a joint venture; it would be required to perform 50% of the 
entire contract. There would be no benefit to having a joint venture. 
As such, SBA continues to believe that the proposed 40% makes the most 
sense. It ensures that the 8(a) partners perform a significant amount 
of work, but also recognizes that 8(a) firms in a joint venture cannot 
generally accomplish the task by themselves. Thus, it provides some 
needed flexibility.
    The final rule makes a distinction between populated and 
unpopulated joint ventures in terms of the performance of work 
requirement. For a populated joint venture, the requirement that the 
8(a) partner must perform at least 40% of the work done by the joint 
venture may not always make sense. Where the joint venture is populated 
with one administrative person, then it continues to make sense that 
the 8(a) partner must perform at least 40% of the work done by the 
aggregate of the joint venture partners. However, where the joint 
venture itself hires the individuals necessary to perform the contract, 
the work of the joint venture will be done by the joint venture entity 
itself. An 8(a) partner to such a joint venture must demonstrate 
clearly how it will benefit or otherwise develop its business from the 
joint venture relationship. Where an 8(a) Participant cannot clearly 
demonstrate the benefits it will receive, SBA will not approve the 
joint venture. It may be easier for an 8(a) Participant to show that it 
will perform 40% of the work of an unpopulated joint venture (or 40% of 
a joint venture populated with administrative personnel only) than it 
will to demonstrate that it will substantially benefit from the work 
done by a populated joint venture.
    Third, SBA received five comments responding to the proposal to 
clarify that once a joint venture is approved by SBA for one contract 
the 8(a) Participant need only supply an addendum to the joint venture 
agreement, setting forth the performance requirements on that second or 
third contract, for SBA approval. The commenters supported this change, 
but three commenters asked for further amplification to clarify that 
SBA's approval of the addendums for a second and third contract under 
the joint venture consisted only of SBA reviewing the work to be done 
under those two additional contracts and not a repeat of the structure 
of the joint venture for every contract. They stressed that this 
approach would reduce costs and increase efficiency. It was always 
SBA's intent to review only the addendums to the joint venture for the 
additional contracts to be awarded under the joint venture. As such, 
the final rule adds clarifying language to accomplish this result.
    Fourth, SBA received two comments supporting the proposal to 
require each 8(a) firm that performs an 8(a) contract through a joint 
venture to report to SBA how the performance of work requirements were 
met on the contract. SBA believes that this requirement is needed to 
reinforce the performance of work requirements. Several audits 
performed by SBA's OIG have revealed that the performance of work

[[Page 8244]]

requirements are not always met. SBA needs to know when and why the 
requirements are not met. This could affect the firm's future 
responsibility to perform additional contracts and, depending upon the 
circumstance, could be cause for termination from the 8(a) BD program.

Sole Source Limits for NHO-Owned Concerns

    Section 124.519 generally imposes limits to the amount of 8(a) 
contract dollars a Participant may receive on a sole source basis. The 
current rule exempts ANC and Tribally owned concerns from the 
limitations set forth in the rule. The proposed rule added NHO-owned 
concerns to the list of 8(a) concerns exempted from the limitations. 
SBA believes that all three of these types of firms should be treated 
consistently, and the failure to include NHO-owned concerns in the 
exemption in the current regulation was an inadvertent omission. SBA 
received 31 comments in response to this proposal. The comments 
overwhelmingly supported exempting NHOs from the sole source 
limitations. Only one commenter opposed the change (and that commenter 
believed that firms owned by Tribes and ANCs should also not have a 
sole source exemption) and one responded that it was ``neutral'' to the 
proposed change. All others commenting on the proposal supported it. 
One commenter supported the inclusion of NHOs and suggested that all 
8(a) firms should be exempt from sole source dollar limits. SBA 
believes that the exemption that allows firms owned by Tribes, ANCs and 
NHOs to receive sole source 8(a) contracts even where the firm has 
received 8(a) contracts totaling in excess of the identified 
limitations is consistent with the statutory authority that permits 
these firms to be awarded sole source 8(a) contracts above the 
competitive threshold amounts. That statutory authority does not appear 
to limit sole source awards to firms owned by Tribes, ANCs or, with 
respect to DOD contracts, NHOs in any way. SBA believes that any 
regulatory provision that limits sole source awards to firms owned by 
these entities could be inconsistent with that statutory authority. No 
other firms have that statutory authority. Thus, it makes sense to SBA 
to allow only firms owned by Tribes, ANCs and NHOs to receive sole 
source 8(a) awards in excess of the limitations set forth in Sec.  
124.519. A few commenters suggested that option years should not be 
included in the calculations for the total contract value because 
option year funding is not guaranteed. SBA did not propose a change as 
to how 8(a) contracts should be counted in determining whether a firm 
has reached the threshold above which it may not receive additional 
sole source 8(a) awards. As such, this recommendation is beyond this 
rulemaking, and SBA does not change the provision in this final rule.
    The proposed rule also changed the official authorized to waive the 
requirement prohibiting a Participant from receiving sole source 8(a) 
contracts in excess of the dollar amount set forth in Sec.  124.519 
from the SBA Administrator to the AA/BD. SBA received no comments to 
this proposed change. As such, SBA adopts that change in this final 
rule.

Changes to Mentor/Prot[eacute]g[eacute] Program

    The proposed rule made several changes to Sec.  124.520, governing 
SBA's mentor/prot[eacute]g[eacute] program. The proposed changes to 
this section generated a great deal of interest and comment. SBA 
received 206 separate comments to the various proposed revisions to 
Sec.  124.520.
    The rule would specifically require that assistance to be provided 
through a mentor/prot[eacute]g[eacute] relationship be tied to the 
prot[eacute]g[eacute] firm's SBA-approved business plan. Although SBA 
believed that this was implicit in the current regulations, SBA thought 
that it was important to reinforce that the mentor/
prot[eacute]g[eacute] program is but one tool that can be used to help 
the business development of 8(a) Participants in accordance with their 
business plans. SBA received two comments supporting this change as a 
logical clarification and one comment opposing it as not allowing 
sufficient flexibility. The commenter who opposed the clarification 
noted that circumstances change quickly in the beginning phases of 8(a) 
program participation and new opportunities may not be included within 
a firm's business plan. In such a case, a firm may not be eligible for 
the mentor/prot[eacute]g[eacute] program because its business plan did 
not reflect its new vision. SBA believes that a firm's business plan is 
an ever-evolving document. At each annual review a firm may adjust its 
business plan to account for changed circumstances. As long as a firm 
makes the necessary adjustments at each annual review, its business 
plan should be current and the assistance to be provided through a 
proposed mentor/prot[eacute]g[eacute] agreement should be consistent 
with and tied to the business plan. As such, the final rule adopts the 
language contained in the proposed rule.
    The proposed rule made several changes to requirements relating to 
mentors. First, while stating that a mentor would generally have one 
prot[eacute]g[eacute] firm, the proposed rule amended Sec.  
124.520(b)(2) to limit the number of prot[eacute]g[eacute]s any mentor 
could have to three. SBA proposed this rule to prevent mentor firms 
from being able to take advantage of the program by collecting 
prot[eacute]g[eacute]s in order to benefit from 8(a) contracts. SBA 
received comments both supporting and opposing the provision. The 
majority of comments believed the provision limiting mentors to having 
three prot[eacute]g[eacute] firms at a time was reasonable. Commenters 
agreed that allowing a mentor to have an unlimited number of 
prot[eacute]g[eacute] firms could permit a mentor to unduly benefit 
from the 8(a) program. In addition, one commenter believed the 
limitation to be reasonable because it ensures that 8(a) firms receive 
more individualized attention and assistance from their mentor. Several 
of these commenters, however, recommended that the rule more clearly 
provide that the limitation is not an absolute limit, but only a limit 
on the number of prot[eacute]g[eacute]s a mentor can have at a time. 
Those opposing the provision feared that limiting the number of 
prot[eacute]g[eacute]s a mentor could have would hurt the availability 
of mentors. To date, SBA has generally permitted a mentor to have one 
prot[eacute]g[eacute] firm, and in some cases two prot[eacute]g[eacute] 
firms. SBA has not heard that there has been a scarcity of mentors or 
that potential prot[eacute]g[eacute] firms could not find suitable 
mentor firms. This rule would expand the number of 
prot[eacute]g[eacute]s a mentor could have to three. Thus, the rule 
should actually increase the availability of mentors, not curtail it. 
SBA did not intend this provision to be an absolute limit (i.e., a 
total of three prot[eacute]g[eacute] firms), but rather that it could 
not have more than three at any point in time. SBA believes that the 
proposed language states that clearly and that no further change is 
necessary to capture its intent.
    Second, the proposed rule amended Sec.  124.520(b)(3) to allow a 
firm seeking to be a mentor to submit Federal income tax returns or 
audited financial statements, including any notes, or other evidence 
from the mentor in order to demonstrate the firm's favorable financial 
health. The previous requirement that a proposed mentor must submit 
Federal tax returns in all instances had proven to be impracticable, 
particularly in the case of very large firms. The proposed rule allowed 
a proposed mentor to submit Federal tax returns, but also allowed it to 
demonstrate its favorable financial health by other means, including 
submitting audited financial statements or in the case of publicly 
traded

[[Page 8245]]

concerns the filings required by the Securities and Exchange Commission 
(SEC). SBA received one comment on this proposed change. The commenter 
supported the change, believing that it provided needed flexibility. 
The final rule adopts the proposed language.
    The supplemental information to the proposed rule advised that SBA 
was considering making a change to Sec.  124.520(b) to specifically 
allow non-profit business entities to be mentors, and sought public 
comment on this issue. Sixteen commenters supported allowing non-profit 
entities to serve as mentors. These commenters believed that expanding 
the mentor/prot[eacute]g[eacute] program to include well-managed non-
profit corporations to serve as mentors would increase the pool of good 
mentors and the scope of the program. A few of these commenters also 
believed that a non-profit mentor could benefit a prot[eacute]g[eacute] 
firm by providing developmental assistance to the prot[eacute]g[eacute] 
in the same way as a for-profit could. One commenter opposed non-profit 
mentors, believing that non-profits could not provide the same 
assistance because they have not actively participated in the Federal 
marketplace. Because the commenters overwhelmingly supported allowing 
non-profit entities to be mentors, the final rule amends Sec.  
124.520(b) to specifically allow non-profit business entities to be 
mentors. This authority merely gives firms seeking to be 
prot[eacute]g[eacute]s an additional avenue to find mentors that meet 
their needs. If a firm, like the one commenter opposing allowing non-
profits to be mentors, does not believe a non-profit entity can supply 
it with needed developmental assistance, that firm would not enter a 
mentor/prot[eacute]g[eacute] relationship with a non-profit. However, 
another firm that sees a benefit to such a relationship will now be 
able to have such a relationship.
    The proposed rule added clarifying language to Sec.  124.520(c)(2) 
to make it clear that the benefits derived from the mentor/
prot[eacute]g[eacute] relationship end once the prot[eacute]g[eacute] 
firm graduates from or otherwise leaves the 8(a) BD program. SBA wanted 
to specifically make clear that the exclusion from affiliation enjoyed 
by joint ventures between prot[eacute]g[eacute]s and their mentors 
generally ends when the prot[eacute]g[eacute] leaves the 8(a) BD 
program. SBA received 16 comments in response to this proposal. All 16 
supported the change. Most of the commenters, however, also recommended 
that SBA further clarify the provision to specify that any contract 
awarded to a joint venture between a prot[eacute]g[eacute] and its 
mentor prior to the termination of the mentor/prot[eacute]g[eacute] 
relationship does not automatically end when the mentor/
prot[eacute]g[eacute] relationship ends, and that the parties remain 
obligated to perform the contract to completion. SBA believes that to 
be fundamental. As with any contract awarded to any firm, contract 
performance continues. If a firm graduates or otherwise leaves the 8(a) 
BD program, the firm is bound to continue performance on any 8(a) 
contracts previously awarded. That is the same for any contract awarded 
to a joint venture, including joint ventures between a 
prot[eacute]g[eacute] and its mentor. If a prot[eacute]g[eacute] firm 
graduates from the 8(a) BD program, it would no longer be eligible for 
the exclusion from affiliation that is available to current 
prot[eacute]g[eacute] firms and their mentors for future contracts, but 
its leaving the 8(a) BD program does not affect the status of 
previously awarded contracts. In addition, the status of the joint 
venture as a small business for a previously awarded contract does not 
change where the prot[eacute]g[eacute] firm graduates or otherwise 
leaves the 8(a) BD program. Upon further reflection, SBA believes that 
this provision should be moved from Sec.  124.520(c), which identifies 
the requirements for prot[eacute]g[eacute] firms, to Sec.  124.520(d), 
which addresses the benefits available to mentor/prot[eacute]g[eacute] 
relationships. The final rule does that, and also adds clarifying 
language to clear up any confusion regarding what happens to previously 
awarded contracts.
    The proposed rule amended Sec.  124.520(c)(3) to allow a 
prot[eacute]g[eacute] to have a second mentor where it demonstrates 
that the second relationship pertains to an unrelated, secondary NAICS 
code, the first mentor does not possess the specific expertise that is 
the subject of the mentor/prot[eacute]g[eacute] agreement with the 
second mentor, and the two relationships will not compete or otherwise 
conflict with each other. All 20 comments SBA received in response to 
this provision supported the proposed change. The commenters believed 
that this will allow prot[eacute]g[eacute] firms to develop expertise 
in different areas more quickly than if they only had one mentor, and 
will more fully promote the business development purposes of the 8(a) 
BD program. One commenter recommended that a firm should be able to 
have a second mentor in all instances where the mentor is in a 
different NAICS code. SBA believes that NAICS codes alone do not 
adequately determine whether a firm is in a different or related 
industry. As commenters have pointed out in addressing other provisions 
of the proposed rule, many times contracting officers classify the same 
work in different NAICS codes. Work done in different NAICS codes could 
relate to one another and two such mentor/prot[eacute]g[eacute] 
relationships could conflict with each other. SBA believes that 
requiring a prot[eacute]g[eacute] to demonstrate that the second mentor 
possesses specific expertise that the first does not have and that the 
two relationships will not compete or otherwise conflict with each 
other provide important safeguards to ensuring that 
prot[eacute]g[eacute]s benefit from their mentor/prot[eacute]g[eacute] 
relationships. As such, the final rule adopts the proposed language.
    The proposed rule also added a provision to preclude 8(a) firms 
from being mentors and prot[eacute]g[eacute]s at the same time. Under 
the amendment, 8(a) concern must give up its status as a 
prot[eacute]g[eacute] if it becomes a mentor. SBA received one comment 
supporting this provision as reasonable and two comments opposing it. 
The comments opposing the rule believed that a firm could act as a 
mentor and assist a firm less sophisticated than it is and still 
qualify as a prot[eacute]g[eacute] itself to obtain assistance in more 
highly developed areas from a larger, more diversified firm. SBA 
disagrees. If a firm was permitted to be both a prot[eacute]g[eacute] 
and a mentor at the same time, SBA believes that a conflict could 
easily develop between the two relationships. It is possible that there 
would be procurements that both prot[eacute]g[eacute] firms would want 
to compete for, which could cause friction between the parties. In the 
end, it is likely that the smaller prot[eacute]g[eacute] firm would not 
get the full benefits of a mentor/prot[eacute]g[eacute] relationship. 
As such, the final rule retains the prohibition against a firm being a 
prot[eacute]g[eacute] and mentor at the same time.
    SBA received 27 comments in response to proposed Sec.  
124.520(c)(5), which prohibited SBA from approving a mentor/
prot[eacute]g[eacute] agreement if the proposed prot[eacute]g[eacute] 
firm has less than one year remaining in its program term. Three 
commenters supported the rule as proposed. One commenter thought that 
mentor/prot[eacute]g[eacute] agreements should not be permitted in the 
last 18 months of a firm's program term. The remainder of the 
commenters believed that the one-year limit was too harsh. Many of 
these commenters believed that SBA approval should be based upon the 
particular agreement, and whether it provided for meaningful 
developmental support to the prot[eacute]g[eacute] firm, and not on the 
time remaining in the program. Other commenters believed that a shorter 
length of time to disallow new mentor/prot[eacute]g[eacute] 
relationships was more

[[Page 8246]]

appropriate. One commenter recommended nine months, three commenters 
recommended six months, and three commenters recommended three months. 
Several commenters were concerned that because the process for SBA to 
approve a mentor/prot[eacute]g[eacute] agreement may take a long time, 
an agreement might be denied because of SBA's inaction. As stated in 
the supplemental information to the proposed rule, SBA was concerned 
that mentor/prot[eacute]g[eacute] relationships approved within one 
year of the end of a firm's program term would not provide the agreed 
upon assistance to the prot[eacute]g[eacute] firm. An agreement may 
appear valid on its face, but SBA's oversight of the firm and what 
assistance it actually obtains ends when the firm leaves the program. 
SBA cannot ensure that the prot[eacute]g[eacute] ever receives the 
agreed upon assistance. In many of the cases SBA has seen where a 
mentor/prot[eacute]g[eacute] agreement is submitted within the last 
year of a firm's program term, the proposed mentor is looking to 
benefit from the 8(a) BD program through the award of an immediate 
joint venture contract. After the contract award, there are no 
assurances that the prot[eacute]g[eacute] ever receives developmental 
assistance. SBA also understands, however, that certain firms nearing 
the end of their program terms could benefit from mentor/
prot[eacute]g[eacute] relationships if they in fact received the agreed 
upon assistance. Because this rule imposes new consequences for a 
mentor that has not provided the assistance set forth in its mentor/
prot[eacute]g[eacute] agreement, SBA believes that the one year 
restriction may be too limiting. As such, this final rule prohibits SBA 
from approving a mentor/prot[eacute]g[eacute] agreement if the proposed 
prot[eacute]g[eacute] firm has less than six months remaining in its 
program term.
    The proposed rule amended Sec.  124.520(d)(1) to allow a joint 
venture between a mentor and prot[eacute]g[eacute] to be small for 
Federal subcontracts. All nine comments responding to this provision 
supported allowing the exclusion from affiliation for subcontracts. One 
commenter thought the exclusion from affiliation should be limited only 
to the unique contracting situation of the Department of Energy, which 
has a significant amount of contracting activity go through government 
owned contractor operated (GOCO) facilities, and the contracts between 
the GOCO and a contractor technically are government subcontracts for 
which the exclusion from affiliation for a mentor/prot[eacute]g[eacute] 
joint venture did not previously apply. The other eight commenters 
thought that the exclusion from affiliation should be applied equally 
to all subcontracts of Federal prime contracts. These commenters 
thought that it made no sense to distinguish between types of 
subcontracts. They viewed allowing the exclusion from affiliation on 
all subcontracts as another business development tool. The final rule 
retains the exclusion from affiliation for all Federal subcontracts.
    The proposed rule also clarified that a mentor/
prot[eacute]g[eacute] agreement must be approved by SBA before the two 
firms can submit an offer as a joint venture to take advantage of the 
special exception to the size requirements for that procurement. Under 
SBA's size regulations, size is determined at a fixed point in time 
(i.e., as of the date of the initial offer, including price). See 13 
CFR 121.504. If the entity submitting an offer is small as of that 
date, it will qualify as small for the procurement even if it grows to 
be other than small at the date of award. If the entity submitting an 
offer does not qualify as small as of the date it submits its initial 
offer, it cannot later come into compliance and qualify as small for 
that procurement. Thus, in order for a joint venture to be eligible as 
a small business, it must be small at the time it submits its offer 
including price. It seems obvious to SBA that if SBA has not yet 
approved a mentor/prot[eacute]g[eacute] agreement, a joint venture 
between proposed prot[eacute]g[eacute] and mentor firms is not entitled 
to receive the benefits of the 8(a) mentor/prot[eacute]g[eacute] 
program, including the exclusion from affiliation. SBA received no 
substantive comments on this provision, and it remains unchanged in 
this final rule.
    In addition, the proposed rule added a provision making it clear 
that in order to receive the exclusion from affiliation for both 8(a) 
and non-8(a) procurements, the joint venture must comply with the 
requirements set forth in Sec.  124.513(a). SBA received no comments on 
this proposal. It is SBA's view that in order to obtain a benefit 
derived from the 8(a) program (i.e., the exclusion from affiliation for 
joint ventures between approved prot[eacute]g[eacute]s and mentors), 
the same restrictions that are applicable to 8(a) contracts apply to 
non-8(a) contracts. SBA believes that it would not make sense for the 
requirement that the prot[eacute]g[eacute] firm perform 40% of the work 
performed by the joint venture not apply to small business set-aside 
contracts. The whole purpose of the mentor/prot[eacute]g[eacute] 
program is to help prot[eacute]g[eacute] firms develop so that they can 
better compete for future contracts on their own. If they are not 
required to perform a significant portion of or be the project manager 
on a contract, the development purposes of the mentor/
prot[eacute]g[eacute] program would not be served. The final rule 
adopts the proposed language.
    The proposed rule also clarified procedures for requesting 
reconsideration of SBA's decision to deny a proposed mentor/
prot[eacute]g[eacute] agreement. No reconsideration process was 
authorized under previous regulations. Under the procedures, where SBA 
declines to approve a specific mentor/prot[eacute]g[eacute] agreement, 
the prot[eacute]g[eacute] may request the AA/BD to reconsider the 
Agency's initial decline decision by filing a request for 
reconsideration with its servicing SBA district office within 45 
calendar days of receiving notice that its mentor/prot[eacute]g[eacute] 
agreement was declined. The prot[eacute]g[eacute] is then able to 
revise its mentor/prot[eacute]g[eacute] agreement to more fully detail 
the business development assistance that the mentor will provide and 
provide any additional information and documentation pertinent to 
overcoming the reason(s) for the initial decline. The proposed rule 
also provided that if the AA/BD declines to approve the mentor/
prot[eacute]g[eacute] agreement on reconsideration, the 8(a) firm 
seeking to become a prot[eacute]g[eacute] could not submit a new 
mentor/prot[eacute]g[eacute] agreement with that same mentor for one 
year; it could, however, submit a proposed mentor/prot[eacute]g[eacute] 
agreement with a different proposed mentor at any time after the SBA's 
final decline decision. SBA received two comments responding to this 
proposal. While the comments supported authorizing a reconsideration 
process, they opposed the provision requiring a prospective 
prot[eacute]g[eacute] to wait one year after its mentor/
prot[eacute]g[eacute] agreement was denied to submit a new mentor/
prot[eacute]g[eacute] agreement with the same proposed mentor. The 
commenters viewed this proposal as a punitive measure that does not 
benefit any party involved. SBA agrees that requiring the same two 
parties to wait a year before submitting a new mentor/
prot[eacute]g[eacute] agreement does not serve the business development 
purposes of the program. However, SBA continues to believe that some 
waiting period makes sense to ensure that the parties properly 
understand SBA's requirements and take some time to draft an agreement 
that meets those requirements. Thus, this final rule reduces the one-
year waiting period for the same parties to submit a new mentor/
prot[eacute]g[eacute] agreement to 60 calendar days.
    The proposed rule also added a new Sec.  124.520(h), which set 
forth consequences for a mentor that fails to provide the assistance it 
agreed to provide in its mentor/prot[eacute]g[eacute]

[[Page 8247]]

agreement. Where SBA determines that a mentor has not provided to the 
prot[eacute]g[eacute] firm the business development assistance set 
forth in its mentor/prot[eacute]g[eacute] agreement, SBA will afford 
the mentor an opportunity to respond. The response must explain why the 
assistance set forth in the mentor/prot[eacute]g[eacute] agreement has 
not been provided to date and must set forth a definitive plan as to 
when it will provide such assistance. Under the proposed rule, if the 
mentor fails to respond, does not supply adequate reasons for its 
failure to provide the agreed upon assistance, or does not set forth a 
definite plan to provide the assistance, SBA will recommend to the 
relevant procuring agency to issue a stop work order for each Federal 
contract for which the mentor and prot[eacute]g[eacute] are performing 
as a small business joint venture and received the exclusion from 
affiliation authorized by Sec.  124.520(d)(1). SBA received over 50 
comments responding to this proposal. Many commenters opposed the stop 
work order authority because they feared that it would harm 
prot[eacute]g[eacute] firms and discourage procuring agencies from 
awarding contracts to mentor/prot[eacute]g[eacute] joint ventures. Any 
stop work order issued under this section is intended to be temporary 
to encourage the mentor to come into compliance with its mentor/
prot[eacute]g[eacute] agreement. SBA anticipates that it will be 
withdrawn when SBA is satisfied that the assistance has been or will be 
provided to the prot[eacute]g[eacute]. If the work is critical to and 
any delay in contract performance would harm the procuring activity, 
SBA may request that another Participant be substituted for the joint 
venture to continue performance. SBA continues to believe that some 
seemingly harsh measure must be imposed to ensure that 
prot[eacute]g[eacute] firms obtain the business development assistance 
promised to them in their various mentor/prot[eacute]g[eacute] 
agreements. SBA has no other way to compel mentors to comply with their 
mentor/prot[eacute]g[eacute] agreements. Without such authority, SBA 
fears that prot[eacute]g[eacute] firms will continue to be taken 
advantage of by firms who merely want to get access to 8(a) contracts 
that they would not otherwise be able to do without the mentor/
prot[eacute]g[eacute] relationship. SBA understands the concerns raised 
by commenters who view a stop work order as something that will hurt 
prot[eacute]g[eacute] firms in addition to not obtaining the agreed-
upon development assistance through their mentor/prot[eacute]g[eacute] 
agreements. However, SBA believes that this is a valuable tool to 
maintain the integrity of small business programs. Large business 
mentors that are performing significant portions of 8(a) and small 
business contracts that they otherwise would not be eligible for should 
not be able to continue to benefit from such contracts when they are 
not meeting SBA's requirements. Instead of providing that SBA will 
recommend the issuance of a stop work order in every case where the 
mentor does not supply adequate reasons for its failure to provide the 
agreed upon assistance or does not set forth a definite plan to provide 
the assistance, the final rule gives SBA the authority to recommend a 
stop work order, but makes it discretionary. SBA will look at the 
circumstances in each case before deciding whether to make such a 
recommendation. In addition, the final rule adds further language to 
attempt to protect prot[eacute]g[eacute] firms. Specifically, the final 
rule provides that where a prot[eacute]g[eacute] firm is able to 
independently complete performance of any contract awarded to a joint 
venture between it and its mentor, SBA may authorize a substitution of 
the prot[eacute]g[eacute] firm for the joint venture. This would allow 
the prot[eacute]g[eacute] firm to continue to perform the contract 
without the mentor.
    The proposed rule also authorized SBA to terminate a mentor/
prot[eacute]g[eacute] agreement where the mentor has failed to provide 
the agreed upon developmental assistance, and render the mentor firm 
ineligible to again act as a mentor for a period of two years from the 
date SBA terminates the mentor/prot[eacute]g[eacute] agreement. If SBA 
believes that the mentor entered into the mentor/prot[eacute]g[eacute] 
relationship solely to obtain one or more Federal contracts as a joint 
venture partner with the prot[eacute]g[eacute] and had no intent to 
provide developmental assistance to the prot[eacute]g[eacute], SBA 
could initiate proceedings to debar the mentor from Federal 
contracting. Similarly, if SBA believes that a prot[eacute]g[eacute] 
firm entered a mentor/prot[eacute]g[eacute] agreement in order to be 
awarded joint venture contracts with its mentor knowing that it would 
bring little or no value to the joint venture, SBA could initiate 
proceedings to terminate the firm from 8(a) participation or debar the 
firm from Federal contracting. Several commenters believed that a firm 
should be forever barred from again acting as a mentor if it failed to 
provide the agreed upon developmental assistance to the 
prot[eacute]g[eacute] firm in one mentor/prot[eacute]g[eacute] 
relationship. SBA takes seriously a mentor's failure to live up to its 
mentor/prot[eacute]g[eacute] agreement, particularly where the mentor 
has benefited from the 8(a) BD program through joint venture contracts. 
However, SBA believes that a permanent ban is too restrictive, and that 
two years is an appropriate penalty. If after two years the firm seeks 
to be a mentor for another 8(a) Participant, SBA would require the firm 
to demonstrate when and how it will provide developmental assistance to 
the prot[eacute]g[eacute] firm, and it may not approve any joint 
venture between the mentor and prot[eacute]g[eacute] until the firms 
demonstrate that the prot[eacute]g[eacute] has already received some 
developmental assistance.

Reporting Requirement and Submission of Financial Statements

    The proposed rule amended Sec.  124.601, which addresses a 
statutorily required reporting requirement for 8(a) Participants. Small 
business concerns participating in the 8(a) BD program are required by 
statute to semiannually submit a written report to their assigned BDS 
that includes a listing of any agents, representatives, attorneys, 
accountants, consultants and other parties (other than employees) 
receiving fees, commissions, or compensation of any kind to assist such 
participant in obtaining a Federal contract. The previous regulation 
incorrectly required this report to be submitted annually. This change 
is needed in order to bring the regulation into compliance with the 
statutory requirement. SBA received several comments supporting this 
change. Two commenters believed that semi-annual reporting will add an 
unnecessary burden to 8(a) Participants. Again, SBA is merely changing 
the regulation to coincide with statutory authority.
    The proposed rule also amended Sec.  124.602 regarding the 
submission of audited and reviewed financial statements. SBA proposed 
to raise the level above which audited financial statements are 
required from Participants with gross annual receipts of more than 
$5,000,000 to Participants with gross annual receipts of more than 
$10,000,000. The proposed rule required reviewed financial statements 
of all Participants with gross annual receipts between $2,000,000 and 
$10,000,000, instead of between $1,000,000 and $5,000,000. SBA received 
more than 40 comments supporting the changes in the levels of gross 
annual receipts that require a firm to submit audited and reviewed 
financial statements. One commenter recommended that audited financial 
statements be required only of firms with more than $15,000,000 in 
gross annual receipts, and another commenter recommended that reviewed 
financial statements be required only for firms with gross annual 
receipts between $5,000,000 and $10,000,000. Because

[[Page 8248]]

SBA did not receive any other comments questioning the levels for 
audited and reviewed financial statements and the vast majority of 
comments supported the changes, SBA believes that the proposed levels 
are appropriate. Several commenters recommended that SBA allow for a 
transition for firms who for the first time exceed $10,000,000 in gross 
annual receipts and who would, therefore, be required to submit audited 
financial statements for the first time. These commenters believed that 
it would be difficult for a firm to provide audited financial 
statements in the first year it exceeds the $10,000,000 receipts 
figure. This is because audited income and cash flow statements 
generally require an audited balance sheet for both the beginning and 
the end of the period covered by the income and cash flow statements. 
One commenter noted that it is technically difficult for an auditor to 
recreate an audited balance sheet for a prior period and costly for the 
client company. For example, if a company has inventories and accounts 
receivable, the commenter observed that Generally Accepted Auditing 
Standards would generally require that the auditors observe the taking 
of the physical inventory and confirm the receivables with the debtors. 
The commenter believed that it is challenging and expensive for the 
auditor to carry out these tasks a year later if the client company 
discovers that its sales have increased to the point that an audit will 
be required. In response to these comments, SBA has added a provision 
to the regulations allowing 8(a) Participants to provide an audited 
balance sheet for the first year an audit is required, with the income 
and cash flow statements receiving the level of service required for 
the previous year (review or none, depending on sales the year before 
the audit is required).
    Additionally, during the Tribal consultations, two Tribal 
representatives believed that it was unduly expensive and burdensome 
for Tribally-owned firms to submit separate audited financial 
statements for each individual 8(a) Participant. They recommended that 
where an audited financial statement is required for one or more 
Tribally-owned firms, the firm be able to submit audited consolidated 
financial statements that include audited schedules for each 8(a) 
Participant. They understood that SBA needs separate financial 
information for each Participant to monitor 8(a) compliance, but 
believed that this information is already provided within the schedules 
which are attached to the consolidated financial statements. In 
addition, they felt that requiring a separate, stand alone audit for 
each 8(a) Participant would not provide additional, meaningful detail 
for the SBA, but would impose substantial costs on the Tribe, ANC, NHO, 
or CDC. SBA recognizes the unique nature of ANC, NHO, CDC and Tribal 
participation in the 8(a) BD program. Provided that consolidated 
financial statements contain audited schedules for each 8(a) 
Participant, SBA agrees that separate audited financial statements for 
each entity-owned 8(a) Participant are not necessary. As such, this 
final rule amends Sec.  124.602 by adding a new paragraph (g) making it 
clear that SBA will accept audited consolidated financial statements 
that contain audited schedules for each 8(a) Participant. It will be up 
to each Participant how it wishes to meet the audited financial 
statements requirement. If there is only one 8(a) Participant that must 
submit an audited financial statement, it may make sense for that 
Participant to provide separate, individual audited financial 
statements. If there are two or more 8(a) Participants that must submit 
audited financial statements, or if it otherwise makes sense for the 
8(a) Participant, the Participant may provide audited consolidated 
financial statements with audited schedules for each 8(a) Participant. 
Even if there is only one 8(a) Participant required to submit audited 
financial statements, it may make sense to provide consolidated 
financial statements with audited schedules where the audited 
consolidated statements with audited schedules already exists for other 
purposes and it would be an added cost to have audited financial 
statements of the one 8(a) Participant.
    Several commenters also noted that the previous regulations 
authorize the appropriate SBA district director to waive the 
requirement for audited financial statements where good cause is shown, 
but do not authorize the district director to waive the requirement for 
reviewed financial statements in similar circumstances. These 
commenters recommended that the appropriate district director to waive 
the requirement for reviewed financial statements where good cause 
similar to that permitted to waive audited financial statements is 
shown. SBA agrees and has added such a waiver to Sec.  124.602(b)(2). 
If a waiver is granted, the Participant would be permitted to submit a 
compilation statement instead of reviewed financial statements.
    Finally, as noted above in the discussion under the heading Changes 
Applying Specifically to Tribally-Owned Firm, this final rule moves the 
proposed provision requiring each Participant owned by a Tribe, ANC, 
NHO or CDC to submit information demonstrating how its 8(a) 
participation has benefited the Tribal or native members and/or the 
Tribal, native or other community as part of its annual review 
submission from Sec.  124.112(b)(8) to a new Sec.  124.604. That 
section discusses the other changes made to that requirement in this 
rule.

Requirements Relating to SDBs

    This rule amends Sec.  124.1002, which defines what is an SDB. SBA 
first adds a provision to Sec.  124.1002(d) to make it clear that the 
``other eligibility requirements'' set forth in Sec.  124.108 for 8(a) 
BD program participation do not apply to SDBs. As part of an SDB 
protest, SBA will merely be determining whether a concern is owned and 
controlled by one or more individuals who qualify as socially and 
economically disadvantaged. SBA will not consider whether the concern 
is a responsible business for the particular contract. As such, issues 
such as good character and failure to pay Federal financial obligations 
should not be part of SBA's determination as to whether a firm 
qualifies as an SDB.
    This rule also adds a new paragraph to Sec.  124.1002 to define 
full time management as it applies to the SDB program. Since the SDB 
program is a contracts program and not a business development program, 
and since there is no good policy reason to exclude part-time companies 
from the SDB program, SBA proposes to permit SDB owners to devote fewer 
than 40 hours per week to their SDB firms provided that the 
disadvantaged manager works for the firm during all the hours that the 
firm operates. For example, if a firm is in operation only 20 hours per 
week, the disadvantaged manager of the firm would be considered to 
devote full time to the firm if the individual was available and 
working for the firm during the 20 hours the firm was operating. This 
definition is not being extended to 8(a) firms as those firms are 
expected to operate 40 or more hours per week.
    SBA received eight comments in response to the proposed changes and 
all but one supported the proposed changes to the SDB regulations. One 
commenter disagreed that SDB is not a business development program. SBA 
does not currently provide business development assistance to those 
firms that self certify their SDB status.
    Finally, SBA amends Sec.  124.1009, Who decides disadvantaged 
status protests?, clarifying that the AA/BD, or designee,

[[Page 8249]]

will determine whether the concern is disadvantaged. This change is 
required due to the recent suspension of SBA's receipt of applications 
for the SDB program. 73 FR 54881(September 23, 2008). SBA no longer 
processes applications for SDB certification and therefore no longer 
has the position Division Chief, Small Disadvantaged Business 
Certification and Eligibility. Compliance with Executive Orders 12866, 
12988, 13175, and 13132, the Regulatory Flexibility Act (5 U.S.C. 601-
612), and the Paperwork Reduction Act (44 U.S.C., Ch. 35).

Executive Order 12866

    OMB has determined that this rule is a ``significant'' regulatory 
action under Executive Order 12866. In the proposed rule, the SBA set 
forth its initial regulatory impact analysis, which addressed the 
following: Necessity of the regulation; alternative approaches to the 
proposed rule; and the potential benefits and costs of the regulation. 
The SBA did not receive any comment specifically addressing its 
regulatory impact analysis. However, numerous commenters agreed that 
the proposed changes were necessary and positive. Several commenters 
commended SBA's efforts to address certain program abuses and described 
the changes as a strong effort to improve the program for legitimate 
8(a) BD program participants. In addition, the SBA received numerous 
comments supporting its proposed approaches to the specific provision 
changes. The specific comments on these approaches are discussed above. 
Although SBA received comments not in favor of specific provisions in 
the rule overall the comments generally supported the proposed changes 
and recognized SBA's requirements and effort to remove confusion. Those 
provisions that received unanimous opposition were removed or amended 
in consideration of the well-founded comments received. SBA also 
considered a number of alternatives to the proposed rule and requested 
comments from the public concerning those alternatives. The comments on 
the alternative approaches and SBA's response are also discussed above.
    For these reasons, and those set forth in the preamble, the SBA 
adopts as final its initial regulatory impact analysis.

Executive Order 12988

    This action meets applicable standards set forth in Sec. Sec. 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.

Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132, Federalism. It will not have substantial direct 
effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government, as specified 
in the Executive Order. As such it does not warrant the preparation of 
a Federalism Assessment.

Executive Order 13175, Tribal Summary Impact Statement

    For the purposes of Executive Order 13175, Consultation and 
Coordination with Indian Tribal Governments, the SBA's General Counsel 
has determined that the requirements of this order have been met in a 
meaningful and timely manner. This rule complies with the standards set 
forth in the Executive Order and SBA has provided the Tribal officials 
with an opportunity to provide meaningful and timely input on 
regulatory policies that have a Tribal implications.
    In drafting this final rule, SBA consulted with representatives of 
Alaska Native Corporations (ANCs) and Indian Tribes, both informally 
and formally, pursuant to Executive Order 13175, primarily to discuss 
potential changes to the mentor/prot[eacute]g[eacute] requirements. SBA 
met informally with Tribal and ANC representatives in Washington, DC on 
July 19, 2007, and more formally in Fairbanks, Alaska on October 24, 
2007, 72 FR 57889, and in Denver, Colorado on November 11, 2007, 72 FR 
60702. In addition, SBA conducted Tribal consultations on December 16, 
2009 in Seattle, Washington, on January 14, 2010 in Albuquerque, New 
Mexico, and on January 27, 2010 for Anchorage, Alaska in Vienna, 
Virginia via a video teleconference with representatives located in 
Anchorage, Alaska.
    A vast majority of the comments received from these discussions 
were concerned that SBA would overreact to negative publicity regarding 
one or two 8(a) Participants and would change the mentor/
prot[eacute]g[eacute] program in a way that would take away an 
important business development tool to Tribal and ANC-owned firms. Many 
Tribal representatives discussed the importance of the 8(a) BD program 
to the Tribal and ANC communities. They stressed that the 8(a) BD 
program works, providing the government with a contracting option that 
is efficient and cost effective while permitting the government to 
achieve its policy of supporting disadvantaged small businesses and 
providing benefits to some of the most underemployed people in America. 
They explained that they have been trying to dispel program 
misperceptions caused by unsubstantiated allegations of misconduct and 
abuse, when they would rather be devoting their efforts to business and 
community development. Several Tribal representatives felt that 
relatively few Tribes have realized the benefits of the mentor/
prot[eacute]g[eacute] component of the 8(a) program, and were concerned 
that SBA would be closing this business development option just as they 
are getting to the point where they would use it. Representatives also 
were concerned that SBA would propose changes that would restrict the 
participation of mentors in the program. That is not SBA's intent. SBA 
also believes that the 8(a) BD program is a much-needed and beneficial 
program, and that the Tribal and ANC component of the program serves a 
valuable economic and community development purpose in addition to its 
business development purpose. It is not SBA's intent to shut down any 
component of the 8(a) program that truly assists the development of any 
small disadvantaged businesses. Specifically, SBA is not proposing to 
close this business development option to Tribes and ANCs as some 
Tribal representatives were concerned. SBA does not seek to make it 
more difficult for Tribally-owned and ANC-owned firms to participate in 
the 8(a) BD program, and merely looks for ways to help ensure that the 
benefits of the program flow to those who are truly eligible to 
participate. SBA has carefully reviewed both the testimony given at the 
Tribal consultation meetings and the formal comments submitted in 
response thereto. SBA believes the final rule, as drafted, considered 
the comments and testimony received from the Native communities 
impacted by this rule change. Additionally, SBA has delayed the 
effective date for certain provisions for a period of six months so 
that additional discussions may take place with the Native communities 
regarding the Annual Review reporting requirements and how best to 
implement.

Regulatory Flexibility Act

    The SBA set forth an Initial Regulatory Flexibility Analysis (IRFA) 
addressing the impact of the proposed rule in accordance with section 
603, title 5, of the United States Code. The IRFA examined the 
objectives and legal basis for this proposed rule; the kind and number 
of small entities that may

[[Page 8250]]

be affected; the projected recordkeeping, reporting, and other 
requirements; whether there are any Federal rules that may duplicate, 
overlap, or conflict with this proposed rule; and whether there are any 
significant alternatives to this proposed rule.
    SBA identified six specific provisions of the proposed rule which 
it anticipated may have a significant impact on a substantial number of 
small businesses. Those provisions were: (1) The provisions relating to 
joint ventures between prot[eacute]g[eacute] firms and their SBA-
approved mentors; (2) the requirement that the disadvantaged manager of 
an 8(a) applicant or Participant must reside in the United States and 
spend part of every month physically present at the primary offices of 
the applicant or Participant; (3) the provision excluding qualified 
individual retirement accounts from an individual's net worth in 
determining economic disadvantage; (4) the provisions establishing 
objective criteria for determining economic disadvantage in terms of 
income and total assets; (5) the provision requiring SBA to early 
graduate a firm from the 8(a) program if the firm becomes large for the 
size standard corresponding to its primary NAICS code; and (6) the 
provisions relating to what size 8(a) Participants must annually submit 
either audited or reviewed financial statements to SBA.
    SBA received a couple of comments directly addressing the IRFA and 
several comments discussing provisions of the proposed rule that 
addressed included subjects addressed in the IRFA. The SBA received a 
comment that correctly pointed out that the statement that the rule 
imposes no additional reporting requirement or recordkeeping 
requirements was inaccurate. This same commenter correctly pointed out 
that the Annual Review reporting requirement for Tribes is new. Several 
comments stated that SBA should consider the costs and burdens of the 
reporting and recordkeeping requirements for the Native owned firms and 
the consistency of the data.
    SBA notes that Annual Review reporting and recordkeeping 
requirements are necessary to reduce fraud in the program and to ensure 
that the intended beneficiaries receive the benefits of the program and 
only eligible businesses participate. SBA's rule adopts methods and 
processes aimed at meeting these objectives, while also minimizing, as 
much as possible, the burden on small businesses.
    In addition to public comments, the Office of Advocacy (Advocacy), 
an independent office within SBA, also provided comments on the 
proposed rule. In the comments Advocacy commends SBA for its efforts in 
making necessary revisions to the 8(a) BD program rules, moving some of 
the internal practices to a regulatory framework, and recognizing cost 
burdens that 8(a) companies encounter in complying with the program 
requirements for audited financial statements. Advocacy supports SBA's 
changes to the economic disadvantage analysis and treatment of IRAs and 
applauded SBA's efforts to seek broad public input in this rulemaking. 
In addition to noting the positive aspects of the proposed rule, 
Advocacy also expressed concern with certain of the proposed changes 
which SBA addresses here.

Residency Requirement

    In response to the comments SBA received regarding the physical 
presence requirement and as explained in the preamble above, SBA has 
removed the requirement from the final rule.

Program Graduation

    Although Public Law 95-507 was the enabling statute for the 8(a) BD 
program, Public Law 100-656 specifically required graduation based on 
the economic disadvantaged condition only. See section 8(a)(6)(C)(ii) 
of the Small Business Act. Because the final rule as written is 
consistent with the Small Business Act as amended, SBA adopts the final 
rule.

Administration of 8(a) Contracts

    SBA believes that Advocacy has misinterpreted the delegation of 
contract administration with the delegation of program administration. 
SBA does not delegate the administration of the 8(a) BD program to 
other agencies. The changes to Sec.  124.512 address the delegation of 
contract administration, not program administration as suggested by 
Advocacy in its comments. SBA has historically delegated contract 
administration and contract execution to procuring agencies, but has 
maintained program administration responsibilities and the setting of 
policy with regard to the 8(a) BD program. Additionally, the FAR 
specifically addresses the delegation of contract execution authority 
from SBA to other procuring activities.
    Nothing has changed with regard to the assistance provided by SBA 
to 8(a) BD program Participants as delivered through the Business 
Development Specialist serving as advocates and administering 
assistance.

Requirements Relating to SDBs

    Advocacy objects to the change to allow ``part time companies'' to 
participate in the SDB program and suggests that SBA does not have the 
legal authority to change its definition of small business concern and 
the legislative history of the socially and economic disadvantaged 
programs does not seem to support or encourage the participation of 
part-time business owners. Although true for the 8(a) program 
(eligibility is based on the full time devotion of the disadvantaged 
individual(s) upon whom eligibility is based) for Small Disadvantaged 
Businesses the requirement is for an award to a small business concern 
owned and controlled by socially and economically disadvantaged 
individuals. SBA defines a small business as a business entity 
organized for profit, with a place of business located in the United 
States, and which operates primarily within the United States or which 
makes a significant contribution to the U.S. economy through payment of 
taxes or use of American products, materials or labor. See 13 CFR 
121.105(a). The definition does not have a full time devotion 
requirement, consequently SBA believes a firm run part time by one or 
more socially and economically disadvantaged individuals meets this 
definition. If an agency determines that the SDB has the capability to 
perform a subcontract and that firm is owned and controlled by a 
socially and economically disadvantaged individual who manages the firm 
on a part time basis, in the SDB context, SBA believes the firm is 
eligible assuming the other eligibility criteria for SDB are met.
    In response to Advocacy's recommendation that SBA conduct an 
economic impact analysis based on the concerns it raised, as addressed 
above, SBA does not believe it is necessary because in one instance SBA 
has made the recommended change and as for the remaining comments, 
Advocacy's interpretation and suggested results are not consistent with 
the actual application of the rule.
    For these reasons, and the reasons set forth in the preamble, the 
SBA adopts the IRFA as final.
    Finally, Advocacy recommended that SBA provide the public with an 
opportunity to review the comments from the regional hearings. SBA has 
summarized the comments received on the listening tour and has audio 
tapes of those hearing, but no transcripts. Someone seeking to listen 
to the tapes of one or more hearings may request SBA for such access.

[[Page 8251]]

Paperwork Reduction Act

    For purposes of the Paperwork Reduction Act, 44 U.S.C. Chapter 35, 
SBA has determined that the rule imposes new reporting and 
recordkeeping requirements. Specifically, the final rule imposes a new 
requirement on each Participant owned by a Tribe, ANC, NHO, and CDC to 
submit information to SBA that evidences how participation in the 8(a) 
program has benefited the Tribal or native members and/or communities. 
This provision, as proposed in Sec.  124.112(b)(8), required each 
Participant to report how its participation in the 8(a) BD program 
benefited the Tribal or native members and/or communities. In response 
to public comments on this requirement, SBA has decided that it would 
be less onerous on the 8(a) firms if the reporting requirement was at 
the parent corporation level as opposed to the individual firm level. 
In addition, because 124.112 relates to eligibility criteria and not 
reporting requirements, SBA has relocated this new requirement to a new 
Sec.  124.604, to avoid any confusion as to the purpose for the 
information requested.
    As discussed above, several commenters recommended that SBA delay 
implementation of this reporting requirement to allow affected firms 
additional time to gather and synthesize the data and for the Agency to 
analyze the requirement further. In response SBA has decided to delay 
implementation for a minimum of six months from the effective date of 
this final rule.
    Although this reporting requirement was identified in the proposed 
rule, SBA unintentionally stated that there were no additional 
reporting or recordkeeping requirement resulting from this rule, and 
further did not submit the information collection to OMB for review and 
approval as required by the Paperwork Reduction Act, and OMB 
information collection regulations. In order to meet these 
requirements, SBA will publish a notice in the Federal Register to 
request comments on, among other things, the need for the information, 
who is expected to respond to the request for the information, and the 
estimated hour and cost burden on these respondents as a result of the 
requirement. This action will not impact implementation of the other 
aspects of the rule, since, in any event, implementation of the 
reporting requirement has been delayed for six months.

List of Subjects

13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Individuals with 
disabilities, Loan programs--business, Reporting and recordkeeping 
requirements, Small businesses.

13 CFR Part 124

    Administrative practice and procedures, Government procurement, 
Hawaiian natives, Indians--business and finance, Minority businesses, 
Reporting and recordkeeping requirements, Tribally-owned concerns, 
Technical assistance.

    For the reasons set forth above, the Small Business Administration 
amends parts 121 and 124 of title 13 of the Code of Federal Regulations 
as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

Subpart A--Size Eligibility Provisions and Standards

0
1. The authority citation for part 121 continues to read as follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 636(b), 637(a), 644 and 
662(5); and, Pub. L. 105-135, sec. 401 et seq., 111 Stat. 2592.


0
2. Amend Sec.  121.103 as follows:
0
a. Revise paragraphs (b)(3) and (b)(6);
0
b. Revise paragraph (h) introductory text; and
0
c. Revise paragraph (h)(3)(iii).


Sec.  121.103  How does SBA determine affiliation?

* * * * *
    (b) * * *
    (3) Business concerns which are part of an SBA approved pool of 
concerns for a joint program of research and development or for defense 
production as authorized by the Small Business Act are not affiliates 
of one another because of the pool.
* * * * *
    (6) An 8(a) BD Participant that has an SBA-approved mentor/
prot[eacute]g[eacute] agreement is not affiliated with a mentor firm 
solely because the prot[eacute]g[eacute] firm receives assistance from 
the mentor under the agreement. Similarly, a prot[eacute]g[eacute] firm 
is not affiliated with its mentor solely because the 
prot[eacute]g[eacute] firm receives assistance from the mentor under a 
Federal Mentor-Prot[eacute]g[eacute] program where an exception to 
affiliation is specifically authorized by statute or by SBA under the 
procedures set forth in Sec.  121.903. Affiliation may be found in 
either case for other reasons.
* * * * *
    (h) Affiliation based on joint ventures. A joint venture is an 
association of individuals and/or concerns with interests in any degree 
or proportion consorting to engage in and carry out no more than three 
specific or limited-purpose business ventures for joint profit over a 
two year period, for which purpose they combine their efforts, 
property, money, skill, or knowledge, but not on a continuing or 
permanent basis for conducting business generally. This means that a 
specific joint venture entity generally may not be awarded more than 
three contracts over a two year period, starting from the date of the 
award of the first contract, without the partners to the joint venture 
being deemed affiliated for all purposes. Once a joint venture receives 
one contract, SBA will determine compliance with the three awards in 
two years rule for future awards as of the date of initial offer 
including price. As such, an individual joint venture may be awarded 
more than three contracts without SBA finding general affiliation 
between the joint venture partners where the joint venture had received 
two or fewer contracts as of the date it submitted one or more 
additional offers which thereafter result in one or more additional 
contract awards. The same two (or more) entities may create additional 
joint ventures, and each new joint venture entity may be awarded up to 
three contracts in accordance with this section. At some point, 
however, such a longstanding inter-relationship or contractual 
dependence between the same joint venture partners will lead to a 
finding of general affiliation between and among them. For purposes of 
this provision and in order to facilitate tracking of the number of 
contract awards made to a joint venture, a joint venture must be in 
writing and must do business under its own name, and it may (but need 
not) be in the form of a separate legal entity, and if it is a separate 
legal entity it may (but need not) be populated (i.e., have its own 
separate employees). SBA may also determine that the relationship 
between a prime contractor and its subcontractor is a joint venture, 
and that affiliation between the two exists, pursuant to paragraph 
(h)(4) of this section.

    Example 1 to paragraph (h) introductory text. Joint Venture AB 
has received two contracts. On April 2, Joint Venture AB submits an 
offer for Solicitation 1. On June 6, Joint Venture AB submits an 
offer for Solicitation 2. On July 13, Joint Venture AB submits an 
offer for Solicitation 3. In September, Joint Venture AB is found to 
be the apparent successful offeror for all three solicitations. Even 
though the award of the three contracts would give Joint Venture AB

[[Page 8252]]

a total of five contract awards, it could receive those awards 
without causing general affiliation between its joint venture 
partners because Joint Venture AB had not yet received three 
contract awards as of the dates of the offers for each of three 
solicitations at issue.
    Example 2 to paragraph (h) introductory text.  Joint Venture XY 
receives a contract on December 19, year 1. It may receive two 
additional contracts through December 19, year 3. On August 6, year 
2, XY receives a second contract. It receives no other contract 
awards through December 19, year 3 and has submitted no additional 
offers prior to December 19, year 3. Because two years have passed 
since the date of the first contract award, after December 19, year 
3, XY cannot receive an additional contract award. The individual 
parties to XY must form a new joint venture if they want to seek and 
be awarded additional contracts as a joint venture.
    Example 3 to paragraph (h) introductory text.  Joint Venture XY 
receives a contract on December 19, year 1. On May 22, year 2, XY 
submits an offer for Solicitation 1. On June 10, year 2, XY submits 
an offer for Solicitation 2. On June 19, year 2, XY receives a 
second contract responding to Solicitation 1. XY is not awarded a 
contract responding to Solicitation 2. On December 15, year 3, XY 
submits an offer for Solicitation 3. In January, XY is found to be 
the apparent successful offeror for Solicitation 3. XY is eligible 
for the contract award because compliance with the three awards in 
two years rule is determined as of the date of the initial offer 
including price, XY submitted its offer prior to December 19, year 
3, and XY had not received three contract awards prior to its offer 
on December 15.
* * * * *
    (3) * * *
    (iii) Two firms approved by SBA to be a mentor and 
prot[eacute]g[eacute] under Sec.  124.520 of these regulations may 
joint venture as a small business for any Federal government prime 
contract or subcontract, provided the prot[eacute]g[eacute] qualifies 
as small for the size standard corresponding to the NAICS code assigned 
to the procurement and, for purposes of 8(a) sole source requirements, 
has not reached the dollar limit set forth in Sec.  124.519 of these 
regulations. If the procurement is to be awarded through the 8(a) BD 
program, SBA must approve the joint venture pursuant to Sec.  124.513. 
If the procurement is to be awarded other than through the 8(a) BD 
program (e.g., small business set aside, HUBZone set aside), SBA need 
not approve the joint venture prior to award, but if the size status of 
the joint venture is protested, the provisions of Sec. Sec.  124.513(c) 
and (d) will apply. This means that the joint venture must meet the 
requirements of Sec. Sec.  124.513(c) and (d) in order to receive the 
exception to affiliation authorized by this paragraph. In either case, 
after contract performance is complete, the 8(a) partner to the joint 
venture must submit a report to its servicing SBA district office 
explaining how the applicable performance of work requirements were met 
for the contract.
* * * * *

0
3. Amend Sec.  121.402(b) by revising the last sentence and adding a 
new sentence at the end thereof to read as follows:


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

* * * * *
    (b) * * * Acquisitions for supplies must be classified under the 
appropriate manufacturing or supply NAICS code, not under a wholesale 
trade or retail trade NAICS code. A concern that submits an offer or 
quote for a contract where the NAICS code assigned to the contract is 
one for supplies, and furnishes a product it did not itself manufacture 
or produce, is categorized as a nonmanufacturer and deemed small if it 
meets the requirements set forth in Sec.  121.406(b).
* * * * *

0
4. Amend Sec.  121.404 by adding a new paragraph (g)(4) to read as 
follows:


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

* * * * *
    (g) * * *
    (4) If during contract performance a subcontractor performs primary 
and vital requirements of a contract, the contractor and its ostensible 
subcontractor will be treated as joint venturers. See Sec.  
121.103(h)(4). If the two firms exceed the applicable size standard in 
the aggregate, the contractor cannot continue to certify as small for 
that contract or for any task order under that contract.
* * * * *

0
5. Amend Sec.  121.406 as follows:
0
a. Revise the section heading and paragraphs (a) introductory text, and 
(a)(1);
0
b. Revise paragraph (b)(1) introductory text;
0
c. Remove the word ``and'' at the end of paragraph (b)(1)(ii);
0
d. Revise paragraph (b)(1)(iii);
0
e. Add a new paragraph (b)(1)(iv);
0
f. Redesignate paragraphs (b)(3), (b)(4) and (b)(5) as paragraphs 
(b)(5), (b)(6), and (b)(7), respectively, and add new paragraphs (b)(3) 
and (b)(4); and
0
g. Revise newly redesignated paragraph (b)(6) to read as follows:


Sec.  121.406  How does a small business concern qualify to provide 
manufactured products or other supply items under a small business set-
aside, service-disabled veteran-owned small business set-aside, WOSB or 
EDWOSB set-aside, or 8(a) contract?

    (a) General. In order to qualify as a small business concern for a 
small business set-aside, service-disabled veteran-owned small business 
set-aside, WOSB or EDWOSB set-aside, or 8(a) contract to provide 
manufactured products or other supply items, an offeror must either:
    (1) Be the manufacturer or producer of the end item being procured 
(and the end item must be manufactured or produced in the United 
States); or
* * * * *
    (b) * * *
    (1) A firm may qualify as a small business concern for a 
requirement to provide manufactured products or other supply items as a 
nonmanufacturer if it:
* * * * *
    (iii) Takes ownership or possession of the item(s) with its 
personnel, equipment or facilities in a manner consistent with industry 
practice; and
    (iv) Will supply the end item of a small business manufacturer, 
processor or producer made in the United States, or obtains a waiver of 
such requirement pursuant to paragraph (b)(5) of this section.
* * * * *
    (3) The nonmanufacturer rule applies only to procurements that have 
been assigned a manufacturing or supply NAICS code. The nonmanufacturer 
rule does not apply to contracts that have been assigned a service, 
construction, or specialty trade construction NAICS code.
    (4) The nonmanufacturer rule applies only to the supply component 
of a requirement classified as a manufacturing or supply contract. If a 
requirement is classified as a service contract, but also has a supply 
component, the nonmanufacturer rule does not apply to the supply 
component of the requirement.

    Example 1 to paragraph (b)(4). A procuring agency seeks to 
acquire computer integration and maintenance services. Included 
within that requirement, the agency also seeks to acquire some 
computer hardware. If the procuring agency determines that the 
principal nature of the procurement is services and classifies the 
procurement as a services procurement, the nonmanufacturer rule does 
not apply to the computer hardware portion of the requirement. This 
means that while a contractor must meet the applicable performance 
of work requirement set forth in Sec.  125.6 for the services 
portion of the contract, the contractor does not have to

[[Page 8253]]

supply the computer hardware of a small business manufacturer.
    Example 2 to paragraph (b)(4). A procuring agency seeks to 
acquire computer hardware, as well as computer integration and 
maintenance services. If the procuring agency determines that the 
principal nature of the procurement is for supplies and classifies 
the procurement as a supply procurement, the nonmanufacturer rule 
applies to the computer hardware portion of the requirement. A firm 
seeking to qualify as a small business nonmanufacturer must supply 
the computer hardware manufactured by a small business. Because the 
requirement is classified as a supply contract, the contractor does 
not have to meet the performance of work requirement set forth in 
Sec.  125.6 for the services portion of the contract.
* * * * *
    (6) The two waiver possibilities identified in paragraph (b)(5) of 
this section are called ``individual'' and ``class'' waivers 
respectively, and the procedures for requesting and granting them are 
contained in Sec.  121.1204.
* * * * *

0
6. Amend Sec.  121.1001(b) by adding a new paragraph (b)(10) at the end 
thereof to read as follows:


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

* * * * *
    (b) * * *
    (10) The SBA Inspector General may request a formal size 
determination with respect to any of the programs identified in 
paragraph (b) of this section.

PART 124--8(A) BUSINESS DEVELOPMENT/SMALL DISADVANTAGED BUSINESS 
STATUS DETERMINATIONS

0
7. The authority citation for part 124 is revised to read as follows:

    Authority:  15 U.S.C. 634(b)(6), 636(j), 637(a), 637(d) and Pub. 
L. 99-661, Pub. L. 100-656, sec. 1207, Pub. L. 101-37, Pub. L. 101-
574, section 8021, Pub. L. 108-87, and 42 U.S.C. 9815.


Sec. Sec.  124.110, 124.111, 124.502, 124,503, 124.505, 124.507, 
124.513, 124.514, 124.515, 124.517, 124.519, and 124.1002  [Amended]

0
8. Remove the term ``Standard Industrial Classification'' in Sec.  
124.1002(b)(1) and add, in its place the term ``North American Industry 
Classification System''; and remove the term ``SIC'' and add, in its 
place, the term ``NAICS,'' in the following places:
0
a. Sec.  124.110(c);
0
b. Sec.  124.111(d);
0
c. Sec.  124.502(c)(3);
0
d. Sec.  124.503(b) introductory text;
0
e. Sec.  124.503(b)(1);
0
f. Sec.  124.503(b)(2);
0
g. Sec.  124.503(c)(1)(iii);
0
h. Sec.  124.503(g)(3);
0
i. Sec.  124.505(a)(3);
0
j. Sec.  124.507(b)(2)(i);
0
k. Sec.  124.513(b)(1) introductory text, (b)(1)(i), and (b)(1)(ii)(A);
0
l. Sec.  124.513(b)(2);
0
m. Sec.  124.513(b)(3);
0
n. Sec.  124.514(a)(1);
0
o. Sec.  124.515(d);
0
p. Sec.  124.517(d)(1);
0
q. Sec.  124.517(d)(2);
0
r. Sec.  124.519(a)(1);
0
s. Sec.  124.519(a)(2);
0
t. Sec.  124.1002 (b)(1)(i), and (b)(1)(ii); and
0
u. Sec.  124.1002(f)(3).

0
9. Revise Sec.  124.2 to read as follows:


Sec.  124.2  What length of time may a business participate in the 8(a) 
BD program?

    A Participant receives a program term of nine years from the date 
of SBA's approval letter certifying the concern's admission to the 
program. The Participant must maintain its program eligibility during 
its tenure in the program and must inform SBA of any changes that would 
adversely affect its program eligibility. The nine year program term 
may be shortened only by termination, early graduation (including 
voluntary early graduation) or voluntary withdrawal as provided for in 
this subpart.

0
10. Amend Sec.  124.3 as follows:
0
a. By amending the definition of ``Alaska Native'' by adding in the 
first sentence, the phrase ``, as defined by the Alaska Native Claims 
Settlement Act (43 U.S.C. 1602),'' before the word ``means'';
0
b. By adding a definition of ``NAICS code'';
0
c. By revising the definitions of ``Primary industry classification'' 
and ``Same or similar line of business,''; and
0
d. By adding a definition of the term ``Regularly maintains an office'' 
to read as follows:


Sec.  124.3  What definitions are important in the 8(a) BD program?

* * * * *
    NAICS code means North American Industry Classification System 
code.
* * * * *
    Primary industry classification means the six digit North American 
Industry Classification System (NAICS) code designation which best 
describes the primary business activity of the 8(a) BD applicant or 
Participant. The NAICS code designations are described in the North 
American Industry Classification System book published by the U.S. 
Office of Management and Budget. SBA utilizes Sec.  121.107 of this 
chapter in determining a firm's primary industry classification. A 
Participant may change its primary industry classification where it can 
demonstrate to SBA by clear evidence that the majority of its total 
revenues during a two-year period have evolved from one NAICS code to 
another.
* * * * *
    Regularly maintains an office means conducting business activities 
as an on-going business concern from a fixed location on a daily basis. 
The best evidence of the regular maintenance of an office is 
documentation that shows that third parties routinely transact business 
with a Participant at a location within a particular geographical area. 
Such evidence includes lease agreements, payroll records, 
advertisements, bills, correspondence, and evidence that the 
Participant has complied with all local requirements concerning 
registering, licensing, or filing with the State or County where the 
place of business is located. Although a firm would generally be 
required to have a license to do business in a particular location in 
order to ``regularly maintain an office'' there, the firm would not be 
required to have an additional construction license or other specific 
type of license in order to regularly maintain an office.
    Same or similar line of business means business activities within 
the same four-digit ``Industry Group'' of the NAICS Manual as the 
primary industry classification of the applicant or Participant. The 
phrase ``same business area'' is synonymous with this definition.
* * * * *

0
11. Add Sec.  124.4 to read as follows:


Sec.  124.4  What restrictions apply to fees for applicant and 
Participant representatives?

    (a) The compensation received by any packager, agent or 
representative of an 8(a) applicant or Participant for assisting the 
applicant in obtaining 8(a) certification or for assisting the 
Participant in obtaining 8(a) contracts, or any other assistance to 
support program participation, must be reasonable in light of the 
service(s) performed by the packager, agent or representative.
    (b) In assisting a Participant obtain one or more 8(a) contracts, a 
packager, agent or representative cannot receive a fee that is a 
percentage of the gross contract value.
    (c) For good cause, the AA/BD may initiate proceedings to suspend 
or revoke a packager's, agent's or representative's privilege to assist 
applicants obtain 8(a) certification, assist Participants obtain 8(a) 
contracts, or any other assistance to support program participation. 
Good cause is defined in Sec.  103.4 of these regulations.

[[Page 8254]]

    (1) The AA/BD may send a show cause letter requesting the agent or 
representative to demonstrate why the agent or representative should 
not be suspended or proposed for revocation, or may immediately send a 
written notice suspending or proposing revocation, depending upon the 
evidence in the administrative record. The notice will include a 
discussion of the relevant facts and the reason(s) why the AA/BD 
believes that good cause exists.
    (2) Unless the AA/BD specifies a different time in the notice, the 
agent or representative must respond to the notice within 30 days of 
the date of the notice with any facts or arguments showing why good 
cause does not exist. The agent or representative may request 
additional time to respond, which the AA/BD may grant in his or her 
discretion.
    (3) After considering the agent's or representative's response, the 
AA/BD will issue a final determination, setting forth the reasons for 
this decision and, if a suspension continues to be effective or a 
revocation is implemented, the term of the suspension or revocation.
    (d) The AA/BD may refer a packager, agent, or other representative 
to SBA's Suspension and Debarment Official for possible Government-wide 
suspension or debarment where appropriate, including where it appears 
that the packager, agent or representative assisted an applicant to or 
Participant in the 8(a) BD program submit information to SBA that the 
packager, agent or representative knew was false or materially 
misleading.

0
12. Revise Sec.  124.101 to read as follows:


Sec.  124.101  What are the basic requirements a concern must meet for 
the 8(a) BD program?

    Generally, a concern meets the basic requirements for admission to 
the 8(a) BD program if it is a small business which is unconditionally 
owned and controlled by one or more socially and economically 
disadvantaged individuals who are of good character and citizens of and 
residing in the United States, and which demonstrates potential for 
success.

0
13. Amend Sec.  124.102 by redesignating paragraph (a) as paragraph 
(a)(1), and by adding a new paragraph (a)(2) to read as follows:


Sec.  124.102  What size business is eligible to participate in the 
8(a) BD program?

    (a)(1) * * *
    (2) In order to remain eligible to participate in the 8(a) BD 
program after certification, a firm must generally remain small for its 
primary industry classification, as adjusted during the program. SBA 
may graduate a Participant prior to the expiration of its program term 
where the firm exceeds the size standard corresponding to its primary 
NAICS code, as adjusted, for three successive program years, unless the 
firm demonstrates that through its growth and development its primary 
industry is changing, pursuant to the criteria described in 13 CFR 
121.107, to a related secondary NAICS code that is contained in its 
most recently approved business plan. The firm's business plan must 
contain specific targets, objectives, and goals for its continued 
growth and development under its new primary industry.
* * * * *


Sec.  124.103  [Amended]

0
14. Amend Sec.  124.103(b)(1) by removing the parenthetical ``(American 
Indians, Eskimos, Aleuts, or Native Hawaiians)'' and by adding in its 
place, the parenthetical ``(Alaska Natives, Native Hawaiians, or 
enrolled members of a Federally or State recognized Indian Tribe)''.

0
15. Amend Sec.  124.104 as follows:
0
a. Revise paragraph (b)(2);
0
b. Revise paragraph (c), introductory text;
0
c. Redesignate paragraph (c)(2)(ii) as paragraph (c)(2)(iv), and add 
new paragraphs (c)(2)(ii) and (c)(2)(iii); and
0
d. Add new paragraphs (c)(3) and (c)(4) to read as follows:


Sec.  124.104  Who is economically disadvantaged?

* * * * *
    (b) * * *
    (2) When married, an individual claiming economic disadvantage must 
submit separate financial information for his or her spouse, unless the 
individual and the spouse are legally separated. SBA will consider a 
spouse's financial situation in determining an individual's access to 
credit and capital where the spouse has a role in the business (e.g., 
an officer, employee or director) or has lent money to, provided credit 
support to, or guaranteed a loan of the business. SBA does not take 
into consideration community property laws when determining economic 
disadvantage.
* * * * *
    (c) Factors to be considered. In considering diminished capital and 
credit opportunities, SBA will examine factors relating to the personal 
financial condition of any individual claiming disadvantaged status, 
including income for the past three years (including bonuses and the 
value of company stock received in lieu of cash), personal net worth, 
and the fair market value of all assets, whether encumbered or not. An 
individual who exceeds any one of the thresholds set forth in this 
paragraph for personal income, net worth or total assets will generally 
be deemed to have access to credit and capital and not economically 
disadvantaged.
* * * * *
    (2) * * *
    (ii) Funds invested in an Individual Retirement Account (IRA) or 
other official retirement account that are unavailable to an individual 
until retirement age without a significant penalty will not be 
considered in determining an individual's net worth. In order to 
properly assess whether funds invested in a retirement account may be 
excluded from an individual's net worth, the individual must provide 
information about the terms and restrictions of the account to SBA and 
certify that the retirement account is legitimate.
    (iii) Income received from an applicant or Participant that is an S 
corporation, limited liability company (LLC) or partnership will be 
excluded from an individual's net worth where the applicant or 
Participant provides documentary evidence demonstrating that the income 
was reinvested in the firm or used to pay taxes arising in the normal 
course of operations of the firm. Losses from the S corporation, LLC or 
partnership, however, are losses to the company only, not losses to the 
individual, and cannot be used to reduce an individual's net worth.
* * * * *
    (3) Personal income for the past three years. (i) If an 
individual's adjusted gross income averaged over the three years 
preceding submission of the 8(a) application exceeds $250,000, SBA will 
presume that such individual is not economically disadvantaged. For 
continued 8(a) BD eligibility, SBA will presume that an individual is 
not economically disadvantaged if his or her adjusted gross income 
averaged over the three preceding years exceeds $350,000. The 
presumption may be rebutted by a showing that this income level was 
unusual and not likely to occur in the future, that losses commensurate 
with and directly related to the earnings were suffered, or by evidence 
that the income is not indicative of lack of economic disadvantage.
    (ii) Income received from an applicant or Participant that is an S 
corporation, LLC or partnership will be excluded from an individual's 
income where the applicant or Participant provides

[[Page 8255]]

documentary evidence demonstrating that the income was reinvested in 
the firm or used to pay taxes arising in the normal course of 
operations of the firm. Losses from the S corporation, LLC or 
partnership, however, are losses to the company only, not losses to the 
individual, and cannot be used to reduce an individual's personal 
income.
    (4) Fair market value of all assets. An individual will generally 
not be considered economically disadvantaged if the fair market value 
of all his or her assets (including his or her primary residence and 
the value of the applicant/Participant firm) exceeds $4 million for an 
applicant concern and $6 million for continued 8(a) BD eligibility. The 
only assets excluded from this determination are funds excluded under 
paragraph (c)(2)(ii) of this section as being invested in a qualified 
IRA account.

0
16. Amend Sec.  124.105 by revising paragraphs (g) and (h)(2) to read 
as follows:


Sec.  124.105  What does it mean to be unconditionally owned by one or 
more disadvantaged individuals?

* * * * *
    (g) Ownership of another Participant in the same or similar line of 
business. (1) An individual may not use his or her disadvantaged status 
to qualify a concern if that individual has an immediate family member 
who is using or has used his or her disadvantaged status to qualify 
another concern for the 8(a) BD program. The AA/BD may waive this 
prohibition if the two concerns have no connections, either in the form 
of ownership, control or contractual relationships, and provided the 
individual seeking to qualify the second concern has management and 
technical experience in the industry. Where the concern seeking a 
waiver is in the same or similar line of business as the current or 
former 8(a) concern, there is a presumption against granting the 
waiver. The applicant must provide clear and compelling evidence that 
no connection exists between the two firms.
    (2) If the AA/BD grants a waiver under paragraph (g)(1) of this 
section, SBA will, as part of its annual review, assess whether the 
firm continues to operate independently of the other current or former 
8(a) concern of an immediate family member. SBA may initiate 
proceedings to terminate a firm for which a waiver was granted from 
further participation in the 8(a) BD program if it is apparent that 
there are connections between the two firms that were not disclosed to 
the AA/BD when the waiver was granted or that came into existence after 
the waiver was granted. SBA may also initiate termination proceedings 
if the firm begins to operate in the same or similar line of business 
as the current or former 8(a) concern of the immediate family member 
and the firm did not operate in the same or similar line of business at 
the time the waiver was granted.
    (h) * * *
    (2) A non-Participant concern in the same or similar line of 
business or a principal of such concern may not own more than a 10 
percent interest in a Participant that is in the developmental stage or 
more than a 20 percent interest in a Participant in a transitional 
stage of the program, except that a former Participant or a principal 
of a former Participant (except those that have been terminated from 
8(a) BD program participation pursuant to Sec. Sec.  124.303 and 
124.304) may have an equity ownership interest of up to 20 percent in a 
current Participant in the developmental stage of the program or up to 
30 percent in a transitional stage Participant, in the same or similar 
line of business.
* * * * *

0
17. Amend Sec.  124.106 by revising paragraph (a)(2), and paragraph 
(e), introductory text, and by adding a new paragraph (h) to read as 
follows:


Sec.  124.106  When do disadvantaged individuals control an applicant 
or Participant?

* * * * *
    (a) * * *
    (2) A disadvantaged full-time manager must hold the highest officer 
position (usually President or Chief Executive Officer) in the 
applicant or Participant and be physically located in the United 
States.
* * * * *
    (e) Non-disadvantaged individuals may be involved in the management 
of an applicant or Participant, and may be stockholders, partners, 
limited liability members, officers, and/or directors of the applicant 
or Participant. However, no non-disadvantaged individual or immediate 
family member may:
* * * * *
    (h) Notwithstanding the provisions of this section requiring a 
disadvantaged owner to control the daily business operations and long-
term strategic planning of an 8(a) BD Participant, where a 
disadvantaged individual upon whom eligibility is based is a reserve 
component member in the United States military who has been called to 
active duty, the Participant may elect to designate one or more 
individuals to control the Participant on behalf of the disadvantaged 
individual during the active duty call-up period. If such an election 
is made, the Participant will continue to be treated as an eligible 
8(a) Participant and no additional time will be added to its program 
term. Alternatively, the Participant may elect to suspend its 8(a) BD 
participation during the active duty call-up period pursuant to 
Sec. Sec.  124.305(h)(1)(ii) and 124.305(h)(4).

0
18. Amend Sec.  124.108 by revising paragraph (a)(1) and removing 
paragraph (f) to read as follows:


Sec.  124.108  What other eligibility requirements apply for 
individuals or businesses?

    (a) * * *
    (1) If during the processing of an application, adverse information 
is obtained from the applicant or a credible source regarding possible 
criminal conduct by the applicant or any of its principals, SBA will 
suspend further processing of the application and refer it to SBA's 
Office of Inspector General (OIG) for review. If SBA does not hear back 
from OIG within 45 days, SBA will coordinate with OIG a suitable date 
to recommence the processing of the application. The AA/BD will 
consider any findings of the OIG when evaluating the application.
* * * * *

0
19. Amend Sec.  124.109 by revising paragraphs (b) introductory text, 
(c)(3)(i), (c)(3)(ii), (c)(4)(i) introductory text, (c)(4)(i)(B), and 
(c)(6) to read as follows:


Sec.  124.109  Do Indian Tribes and Alaska Native Corporations have any 
special rules for applying to the 8(a) program?

* * * * *
    (b) Tribal eligibility. In order to qualify a concern which it owns 
and controls for participation in the 8(a) BD program, an Indian Tribe 
must establish its own economic disadvantaged status under paragraph 
(b)(2) of this section. Once an Indian Tribe establishes that it is 
economically disadvantaged in connection with the application for one 
Tribally-owned firm, it need not reestablish such status in order to 
have other businesses that it owns certified for 8(a) BD program 
participation, unless specifically requested to do so by the AA/BD. An 
Indian Tribe may request to meet with SBA prior to submitting an 
application for 8(a) BD participation for its first applicant firm to 
better understand what SBA requires for it to establish economic 
disadvantage. Each Tribally-owned concern seeking to be certified for 
8(a) BD participation must comply with the

[[Page 8256]]

provisions of paragraph (c) of this section.
* * * * *
    (c) * * *
    (3) * * *
    (i) For corporate entities, a Tribe must unconditionally own at 
least 51 percent of the voting stock and at least 51 percent of the 
aggregate of all classes of stock. For non-corporate entities, a Tribe 
must unconditionally own at least a 51 percent interest.
    (ii) A Tribe may not own 51% or more of another firm which, either 
at the time of application or within the previous two years, has been 
operating in the 8(a) program under the same primary NAICS code as the 
applicant. A Tribe may, however, own a Participant or other applicant 
that conducts or will conduct secondary business in the 8(a) BD program 
under the NAICS code which is the primary NAICS code of the applicant 
concern. In addition, once an applicant is admitted to the 8(a) BD 
program, it may not receive an 8(a) sole source contract that is a 
follow-on contract to an 8(a) contract that was performed immediately 
previously by another Participant (or former Participant) owned by the 
same Tribe. For purposes of this paragraph, the same primary NAICS code 
means the six digit NAICS code having the same corresponding size 
standard.
* * * * *
    (4) * * *
    (i) The management and daily business operations of a Tribally-
owned concern must be controlled by the Tribe. The Tribally-owned 
concern may be controlled by the Tribe through one or more individuals 
who possess sufficient management experience of an extent and 
complexity needed to run the concern, or through management as follows:
* * * * *
    (B) Management may be provided by non-Tribal members if the concern 
can demonstrate that the Tribe can hire and fire those individuals, 
that it will retain control of all management decisions common to 
boards of directors, including strategic planning, budget approval, and 
the employment and compensation of officers, and that a written 
management development plan exists which shows how Tribal members will 
develop managerial skills sufficient to manage the concern or similar 
Tribally-owned concerns in the future.
* * * * *
    (6) Potential for success. A Tribally-owned applicant concern must 
possess reasonable prospects for success in competing in the private 
sector if admitted to the 8(a) BD program. A Tribally-owned applicant 
may establish potential for success by demonstrating that:
    (i) It has been in business for at least two years, as evidenced by 
income tax returns (individual or consolidated) for each of the two 
previous tax years showing operating revenues in the primary industry 
in which the applicant is seeking 8(a) BD certification; or
    (ii) The individual(s) who will manage and control the daily 
business operations of the firm have substantial technical and 
management experience, the applicant has a record of successful 
performance on contracts from governmental or nongovernmental sources 
in its primary industry category, and the applicant has adequate 
capital to sustain its operations and carry out its business plan as a 
Participant; or
    (iii) The Tribe has made a firm written commitment to support the 
operations of the applicant concern and it has the financial ability to 
do so.
* * * * *

0
20. Amend Sec.  124.110 as follows:
0
a. Redesignate paragraphs (c), (d) and (e) as paragraphs (e), (f) and 
(g), respectively;
0
b. Add new paragraphs (c) and (d);
0
c. Add two new sentences to the end of newly designated paragraph (e); 
and
0
d. Revise newly designated paragraph (g).


Sec.  124.110  Do Native Hawaiian Organizations have any special rules 
for applying to the 8(a) BD program?

* * * * *
    (c) An NHO must establish that it is economically disadvantaged and 
that its business activities will principally benefit Native Hawaiians.
    (1) To determine whether an NHO is economically disadvantaged, SBA 
considers the individual economic status of the NHO's members. The 
majority of an NHO's members must qualify as economically disadvantaged 
under Sec.  124.104. For the first 8(a) applicant owned by a particular 
NHO, individual NHO members must meet the same initial eligibility 
economic disadvantage thresholds as individually-owned 8(a) applicants. 
For any additional 8(a) applicant owned by the NHO, individual NHO 
members must meet the economic disadvantage thresholds for continued 
8(a) eligibility. If the NHO has no members, then a majority of the 
members of the board of directors must qualify as economically 
disadvantaged. If there are members and a board of directors, only a 
majority of the members must be economically disadvantaged.
    (2) An NHO should describe any activities that it has done to 
benefit Native Hawaiians at the time its NHO-owned firm applies to the 
8(a) BD program. In addition, the NHO must include statements in its 
bylaws or operating agreements identifying the benefits Native 
Hawaiians will receive from the NHO. The NHO must have a detailed plan 
that shows how revenue earned by the NHO will principally benefit 
Native Hawaiians. As part of an annual review conducted for an NHO-
owned Participant, SBA will review how the NHO is fulfilling its 
obligation to principally benefit Native Hawaiians.
    (d) An NHO must control the applicant or Participant firm. To 
establish that it is controlled by an NHO, an applicant or Participant 
must demonstrate that the NHO controls its board of directors. An 
individual responsible for the day-to-day management of an NHO-owned 
firm need not establish personal social and economic disadvantage.
    (e) * * * In addition, once an applicant is admitted to the 8(a) BD 
program, it may not receive an 8(a) sole source contract that is a 
follow-on contract to an 8(a) contract performed by another Participant 
(or former Participant that has left the program within two years of 
the date of application) owned by the Native Hawaiian Organization for 
a period of two years from the date of admission to the program. For 
purposes of this paragraph, the same primary NAICS code means the six 
digit NAICS code having the same corresponding size standard.
* * * * *
    (g) An applicant concern owned by a NHO must possess reasonable 
prospects for success in competing in the private sector if admitted to 
the 8(a) BD program. An applicant concern owned by a NHO may establish 
potential for success by demonstrating that:
    (1) It has been in business for at least two years, as evidenced by 
income tax returns (individual or consolidated) for each of the two 
previous tax years showing operating revenues in the primary industry 
in with the applicant is seeking 8(a) BD certification; or
    (2) The individual(s) who will manage and control the daily 
business operations of the firm have substantial technical and 
management experience, the applicant has a record of successful 
performance on contracts from governmental or nongovernmental sources 
in its primary industry category, and the applicant has adequate 
capital to sustain its operations and carry out its business plan as a 
Participant; or

[[Page 8257]]

    (3) The NHO has made a firm written commitment to support the 
operations of the applicant concern and it has the financial ability to 
do so.
0
21. Amend Sec.  124.111 by adding two new sentences to the end of 
paragraph (d) and by revising paragraph (f) to read as follows:


Sec.  124.111  Do Community Development Corporations (CDCs) have any 
special rules for applying to the 8(a) BD program?

* * * * *
    (d) * * * In addition, once an applicant is admitted to the 8(a) BD 
program, it may not receive an 8(a) sole source contract that is a 
follow-on contract to an 8(a) contract performed by another Participant 
(or former Participant that has left the program within two years of 
the date of application) owned by the CDC for a period of two years 
from the date of admission to the program. For purposes of this 
paragraph, the same primary NAICS code means the six digit NAICS code 
having the same corresponding size standard.
* * * * *
    (f) An applicant concern owned by a CDC must possess reasonable 
prospects for success in competing in the private sector if admitted to 
the 8(a) BD program. An applicant concern owned by a CDC may establish 
potential for success by demonstrating that:
    (1) It has been in business for at least two years, as evidenced by 
income tax returns (individual or consolidated) for each of the two 
previous tax years showing operating revenues in the primary industry 
in with the applicant is seeking 8(a) BD certification; or
    (2) The individual(s) who will manage and control the daily 
business operations of the firm have substantial technical and 
management experience, the applicant has a record of successful 
performance on contracts from governmental or nongovernmental sources 
in its primary industry category, and the applicant has adequate 
capital to sustain its operations and carry out its business plan as a 
Participant; or
    (3) The CDC has made a firm written commitment to support the 
operations of the applicant concern and it has the financial ability to 
do so.
* * * * *
0
22. Amend Sec.  124.112 as follows:
0
a. Redesignate paragraphs (b)(7) and (b)(8) as paragraphs (b)(9) and 
(b)(10), respectively, and add new paragraphs (b)(7) and (b)(8);
0
b. Revise paragraphs (d)(1), (d)(2) introductory text, and (d)(3); and
0
c. Add new paragraphs (d)(5), (e) and (f) to read as follows:


Sec.  124.112  What criteria must a business meet to remain eligible to 
participate in the 8(a) BD program?

* * * * *
    (b) * * *
    (7) A listing of any fees paid to agents or representatives to 
assist the Participant in obtaining or seeking to obtain a Federal 
contract;
    (8) A report for each 8(a) contract performed during the year 
explaining how the performance of work requirements are being met for 
the contract, including any 8(a) contracts performed as a joint 
venture;
* * * * *
    (d) * * *
    (1) The term withdrawal includes, but is not limited to, the 
following: Cash dividends; distributions in excess of amounts needed to 
pay S Corporation, LLC or partnership taxes; cash and property 
withdrawals; payments to immediate family members not employed by the 
Participant; bonuses to officers; and investments on behalf of an 
owner. Although officers' salaries are generally not considered 
withdrawals for purposes of this paragraph, SBA will count those 
salaries as withdrawals where SBA believes that a firm is attempting to 
circumvent the excessive withdrawal limitations though the payment of 
officers' salaries. SBA will look at the totality of the circumstances 
in determining whether to include any specific amount as a withdrawal 
under this paragraph.
    (2) If SBA determines that funds or assets have been excessively 
withdrawn from the Participant for the personal benefit of one or more 
owners or managers, or any person or entity affiliated with such owners 
or managers, and such withdrawal was detrimental to the achievement of 
the targets, objectives, and goals contained in the Participant's 
business plan, SBA may: * * *
    (3) Withdrawals are excessive if in the aggregate during any fiscal 
year of the Participant they exceed (i) $250,000 for firms with sales 
up to $1,000,000; (ii) $300,000 for firms with sales between $1,000,000 
and $2,000,000; and (iii) $400,000 for firms with sales exceeding 
$2,000,000.
* * * * *
    (5) The excessive withdrawal analysis does not apply to 
Participants owned by Tribes, ANCs, NHOs, or CDCs where a withdrawal is 
made for the benefit of the Tribe, ANC, NHO, CDC or the native or 
shareholder community. It does, however, apply to withdrawals from a 
firm owned by a Tribe, ANC, NHO, or CDC that do not benefit the 
relevant entity or community. Thus, if funds or assets are withdrawn 
from an entity-owned Participant for the benefit of a non-disadvantaged 
manager or owner that exceed the withdrawal thresholds, SBA may find 
that withdrawal to be excessive. For example, a $1,000,000 payout to a 
non-disadvantaged manager would be deemed an excessive withdrawal.
    (e) Change in primary industry classification. A Participant may 
request that the primary industry classification contained in its 
business plan be changed by filing such a request with its servicing 
SBA district office. SBA will grant such a request where the 
Participant can demonstrate that the majority of its total revenues 
during a three-year period have evolved from one NAICS code to another.
    (f) Graduation determination. As part of the final annual review 
performed by SBA prior to the expiration of a Participant's nine-year 
program term, SBA will determine if the Participant has met the 
targets, objectives and goals set forth in its business plan and, thus, 
whether the Participant will be considered to have graduated from the 
8(a) BD program at the expiration of its program term. A firm that has 
not met the targets, objectives and goals set forth in its business 
plan at the end of its nine-year term in the 8(a) BD program will not 
be considered to have graduated from the 8(a) BD program, but rather to 
have merely completed its program term.

0
23. Revise Sec.  124.202 to read as follows:


Sec.  124.202  How must an application be filed?

    An application for 8(a) BD program admission must generally be 
filed in an electronic format. An electronic application can be found 
by going to the 8(a) BD page of SBA's Web site (http://www.sba.gov). An 
applicant concern that does not have access to the electronic format or 
does not wish to file an electronic application may request in writing 
a hard copy application from the AA/BD. The SBA district office will 
provide an applicant concern with information regarding the 8(a) BD 
program.

0
24. Revise Sec.  124.203 to read as follows:


Sec.  124.203  What must a concern submit to apply to the 8(a) BD 
program?

    Each 8(a) BD applicant concern must submit those forms and 
attachments required by SBA when applying for admission to the 8(a) BD 
program. These forms and attachments may include, but not be limited 
to, financial statements, copies of signed Federal personal and

[[Page 8258]]

business tax returns, individual and business bank statements, and 
personal history statements. An applicant must also submit a signed IRS 
Form 4506T, Request for Copy or Transcript of Tax Form, to SBA. In all 
cases, the applicant must provide a wet signature from each individual 
claiming social and economic disadvantage status.

0
25. Amend Sec.  124.204 as follows:
0
a. Revise paragraph (a);
0
b. Redesignate paragraphs (c), (d) (e) and (f) as paragraphs (d), (e), 
(f) and (g);
0
c. Add a new paragraph (c); and
0
d. Revise newly designated paragraph (d).


Sec.  124.204  How does SBA process applications for 8(a) BD program 
admission?

    (a) The AA/BD is authorized to approve or decline applications for 
admission to the 8(a) BD program. The DPCE will receive, review and 
evaluate all 8(a) BD applications. SBA will advise each program 
applicant within 15 days after the receipt of an application whether 
the application is complete and suitable for evaluation and, if not, 
what additional information or clarification is required to complete 
the application. SBA will process an application for 8(a) BD program 
participation within 90 days of receipt of a complete application 
package by the DPCE. Incomplete packages will not be processed.
* * * * *
    (c) The burden of proof to demonstrate eligibility is on the 
applicant concern. If a concern does not provide requested information 
within the allotted time provided by SBA, or if it submits incomplete 
information, SBA may presume that disclosure of the missing information 
would adversely affect the firm or would demonstrate lack of 
eligibility in the area to which the information relates.
    (d) An applicant must be eligible as of the date the AA/BD issues a 
decision. The decision will be based on the facts set forth in the 
application, any information received in response to SBA's request for 
clarification made pursuant to paragraph (b) of this section, and any 
changed circumstances since the date of application.
* * * * *

0
26. Amend Sec.  124.205 by revising paragraphs (a) and (b) to read as 
follows:


Sec.  124.205  Can an applicant ask SBA to reconsider SBA's initial 
decision to decline its application?

    (a) An applicant may request the AA/BD to reconsider his or her 
initial decline decision by filing a request for reconsideration with 
SBA. The applicant may submit a revised electronic application or 
submit its request for reconsideration to the SBA DPCE unit that 
originally processed its application by personal delivery, first class 
mail, express mail, facsimile transmission followed by first class 
mail, or commercial delivery service. The applicant must submit its 
request for reconsideration within 45 days of its receipt of written 
notice that its application was declined. If the date of actual receipt 
of such written notice cannot be determined, SBA will presume receipt 
to have occurred ten calendar days after the date the notice was sent 
to the applicant. The applicant must provide any additional information 
and documentation pertinent to overcoming the reason(s) for the initial 
decline, whether or not available at the time of initial application, 
including information and documentation regarding changed 
circumstances.
    (b) The AA/BD will issue a written decision within 45 days of SBA's 
receipt of the applicant's request. The AA/BD may either approve the 
application, deny it on the same grounds as the original decision, or 
deny it on other grounds. If denied, the AA/BD will explain why the 
applicant is not eligible for admission to the 8(a) BD program and give 
specific reasons for the decline.
* * * * *

0
27. Revise Sec.  124.301 to read as follows:


Sec.  124.301  What are the ways a business may leave the 8(a) BD 
program?

    A concern participating in the 8(a) BD program may leave the 
program by any of the following means:
    (a) Expiration of the program term established pursuant to Sec.  
124.2;
    (b) Voluntary withdrawal or voluntary early graduation;
    (c) Graduation pursuant to Sec.  124.302;
    (d) Early graduation pursuant to the provisions of Sec. Sec.  
124.302 and 124.304; or
    (e) Termination pursuant to the provisions of Sec. Sec.  124.303 
and 124.304.

0
28. Amend Sec.  124.302 as follows:
0
a. Revise the section heading;
0
b. Revise paragraphs (a) introductory text, and (a)(1);
0
c. Remove paragraph (d);
0
d. Redesignate paragraph (c) as paragraph (d); and
    3. Add a new paragraph (c) to read as follows:


Sec.  124.302  What is graduation and what is early graduation?

    (a) General. SBA may graduate a firm from the 8(a) BD program at 
the expiration of its program term (graduation) or prior to the 
expiration of its program term (early graduation) where SBA determines 
that:
    (1) The concern has successfully completed the 8(a) BD program by 
substantially achieving the targets, objectives, and goals set forth in 
its business plan, and has demonstrated the ability to compete in the 
marketplace without assistance under the 8(a) BD program; or
* * * * *
    (c) Exceeding the size standard corresponding to the primary NAICS 
code. SBA may graduate a Participant prior to the expiration of its 
program term where the firm exceeds the size standard corresponding to 
its primary NAICS code, as adjusted during the program, for three 
successive program years unless the firm is able to demonstrate that it 
has taken steps to change its industry focus to another NAICS code that 
is contained in the goals, targets and objectives of its business plan.
* * * * *

0
29. Amend Sec.  124.303 by revising paragraphs (a)(2), (a)(13) and 
(a)(16) to read as follows:


Sec.  124.303  What is termination?

    (a) * * *
    (2) Failure by the concern to maintain its eligibility for program 
participation, including failure by an individual owner or manager to 
continue to meet the requirements for economic disadvantage set forth 
in Sec.  124.104 where such status is needed for eligibility. * * *
    (13) Excessive withdrawals that are detrimental to the achievement 
of the targets, objectives, and goals contained in the Participant's 
business plan, including transfers of funds or other business assets 
from the concern for the personal benefit of any of its owners or 
managers, or any person or entity affiliated with the owners or 
managers (see Sec.  124.112(d)). * * *
    (16) Debarment, suspension, voluntary exclusion, or ineligibility 
of the concern or its principals pursuant to 2 CFR parts 180 and 2700 
or FAR subpart 9.4 (48 CFR part 9, subpart 9.4). * * *

0
30. Revise Sec.  124.304(f) to read as follows:


Sec.  124.304  What are the procedures for early graduation and 
termination?

* * * * *
    (f) Effect or early graduation or termination. (1) After the 
effective date of early graduation or termination, a Participant is no 
longer eligible to receive any 8(a) BD program assistance. However, 
such concern is obligated to

[[Page 8259]]

complete previously awarded 8(a) contracts, including any priced 
options which may be exercised.
    (2) When SBA early graduates or terminates a firm from the 8(a) BD 
program, the firm will generally not qualify as an SDB for future 
procurement actions. If the firm believes that it does qualify as an 
SDB and seeks to certify itself as an SDB, as part of its SDB 
certification the firm must identify:
    (i) That it has been early graduated or terminated;
    (ii) The statutory or regulatory authority that qualifies the firm 
for SDB status; and
    (iii) Where applicable, the circumstances that have changed since 
the early graduation or termination or that do not prevent it from 
qualifying as an SDB.
    (3) Where a concern certifies that it qualifies as an SDB pursuant 
to paragraph (f)(2) of the section, the procuring activity contracting 
officer may protest the SDB status of the firm to SBA pursuant to Sec.  
124.1010 where questions regarding the firm's SDB status remain.

0
31. Amend Sec.  124.305 by revising the first sentence of paragraph 
(a), by revising paragraph (h), to read as follows:


Sec.  124.305  What is suspension and how is a Participant suspended 
from the 8(a) BD program?

    (a) Except as set forth in paragraph (h) of this section, at any 
time after SBA issues a Letter of Intent to Terminate an 8(a) 
Participant pursuant to Sec.  124.304, the AA/BD may suspend 8(a) 
contract support and all other forms of 8(a) BD program assistance to 
that Participant until the issue of the Participant's termination from 
the program is finally determined. * * *
* * * * *
    (h)(1) SBA will suspend a Participant from receiving further 8(a) 
BD program benefits when termination proceedings have not been 
commenced pursuant to Sec.  124.304 where:
    (i) A Participant requests a change of ownership and/or control and 
SBA discovers that a change of ownership or control has in fact 
occurred prior to SBA's approval; or
    (ii) A disadvantaged individual who is involved in the ownership 
and/or control of the Participant is called to active military duty by 
the United States, his or her participation in the firm's management 
and daily business operations is critical to the firm's continued 
eligibility, and the Participant elects not to designate a non-
disadvantaged individual to control the concern during the call-up 
period pursuant to Sec.  124.106(h).
    (2) A suspension initiated under paragraph (h) of this section will 
be commenced by the issuance of a notice similar to that required for 
termination-related suspensions under paragraph (b) of this section, 
except that a suspension issued under paragraph (h) is not appealable.
    (3) Where a Participant is suspended pursuant to paragraph 
(h)(1)(i) of this section and SBA approves the change of ownership and/
or control, the length of the suspension will be added to the firm's 
program term only where the change in ownership or control results from 
the death or incapacity of a disadvantaged individual or where the firm 
requested prior approval and waited at least 60 days for SBA approval 
before making the change.
    (4) Where a Participant is suspended pursuant to paragraph 
(h)(1)(ii) of this section, the Participant must notify SBA when the 
disadvantaged individual returns to control the firm so that SBA can 
immediately lift the suspension. When the suspension is lifted, the 
length of the suspension will be added to the concern's program term.
    (5) Effect of suspension. Once a suspension is issued pursuant to 
this section, a Participant cannot receive any additional 8(a) BD 
program assistance, including new 8(a) contract awards, for as long as 
the Participant is suspended. This includes any procurement 
requirements that the firm has self-marketed and those that have been 
accepted into the 8(a) BD program on behalf of the suspended concern. 
However, the suspended Participant must complete any previously awarded 
8(a) contracts.
* * * * *


Sec.  124.403  [Amended]

0
32. Amend Sec.  124.403 by removing paragraph (d).

0
33. Amend Sec.  124.501 by revising the first sentence of paragraph (h) 
to read as follows:


Sec.  124.501  What general provisions apply to the award of 8(a) 
contracts?

* * * * *
    (h) A Participant must certify that it qualifies as a small 
business under the size standard corresponding to the NAICS code 
assigned to each 8(a) contract. * * *
* * * * *

0
34. Amend Sec.  124.503 by revising paragraph (h) to read as follows:


Sec.  124.503  How does SBA accept a procurement for award through the 
8(a) BD program?

* * * * *
    (h) Task or Delivery Order Contracts--(1) Contracts set aside for 
exclusive competition among 8(a) Participants. (i) A task or delivery 
order contract that is reserved exclusively for 8(a) Program 
Participants must follow the normal 8(a) competitive procedures, 
including an offering to and acceptance into the 8(a) program, SBA 
eligibility verification of the apparent successful offerors prior to 
contract award, and application of the performance of work requirements 
set forth in Sec.  124.510, and the nonmanufacturer rule, if 
applicable, (see Sec.  121.406(b).
    (ii) Individual orders need not be offered to or accepted into the 
8(a) BD program.
    (iii) A concern awarded such a contract may generally continue to 
receive new orders even if it has grown to be other than small or has 
exited the 8(a) BD program, and agencies may continue to take credit 
toward their prime contracting goals for orders awarded to 8(a) 
Participants. However, a concern may not receive, and agencies may not 
take 8(a), SDB or small business credit, for an order where the concern 
has been asked by the procuring agency to re-certify its size status 
and is unable to do so (see Sec.  121.404(g)), or where ownership or 
control of the concern has changed and SBA has granted a waiver to 
allow performance to continue (see Sec.  124.515).
    (2) 8(a) credit for orders issued under multiple award contracts 
that were not set aside for exclusive competition among eligible 8(a) 
Participants. In order to receive 8(a) credit for orders placed under 
multiple award contracts that were not initially set aside for 
exclusive competition among 8(a) Participants:
    (i) The order must be offered to and accepted into the 8(a) BD 
program;
    (ii) The order must be competed exclusively among 8(a) concerns;
    (iii) The order must require the concern comply with applicable 
limitations on subcontracting provisions (see Sec.  125.6) and the 
nonmanufacturer rule, if applicable, (see Sec.  121.406(b)) in the 
performance of the individual order; and
    (iv) SBA must verify that a concern is an eligible 8(a) concern 
prior to award of the order in accordance with Sec.  124.507.
* * * * *

0
35. Amend Sec.  124.504 as follows:
0
a. Revise the heading and the first sentence of paragraph (a);

[[Page 8260]]

0
b. Remove paragraph (d); and
0
c. Redesignate paragraph (e) as paragraph (d), and revise redesignated 
paragraph (d) to read as follows:


Sec.  124.504  What circumstances limit SBA's ability to accept a 
procurement for award as an 8(a) contract?

* * * * *
    (a) Reservation as small business set-aside, or HUBZone, service 
disabled veteran-owned small business, or women-owned small business 
award. The procuring activity issued a solicitation for or otherwise 
expressed publicly a clear intent to reserve the procurement as a small 
business set-aside, or a HUBZone, service disabled veteran-owned small 
business, or women-owned small business award prior to offering the 
requirement to SBA for award as an 8(a) contract. * * *
* * * * *
    (d) Release for non-8(a) competition. (1) Except as set forth in 
(d)(4) of this section, where a procurement is awarded as an 8(a) 
contract, its follow-on or renewable acquisition must remain in the 
8(a) BD program unless SBA agrees to release it for non-8(a) 
competition. If a procuring agency would like to fulfill a follow-on or 
renewable acquisition outside of the 8(a) BD program, it must make a 
written request to and receive the concurrence of the AA/BD to do so. 
In determining whether to release a requirement from the 8(a) BD 
program, SBA will consider:
    (i) Whether the agency has achieved its SDB goal;
    (ii) Where the agency is in achieving its HUBZone, SDVO, WOSB, or 
small business goal, as appropriate; and
    (iii) Whether the requirement is critical to the business 
development of the 8(a) Participant that is currently performing it.
    (2) SBA may decline to accept the offer of a follow-on or renewable 
8(a) acquisition in order to give a concern previously awarded the 
contract that is leaving or has left the 8(a) BD program the 
opportunity to compete for the requirement outside of the 8(a) BD 
program.
    (i) SBA will consider release under paragraph (2) only where:
    (A) The procurement awarded through the 8(a) BD program is being or 
was performed by either a Participant whose program term will expire 
prior to contract completion, or by a former Participant whose program 
term expired within one year of the date of the offering letter;
    (B) The concern requests in writing that SBA decline to accept the 
offer prior to SBA's acceptance of the requirement for award as an 8(a) 
contract; and
    (C) The concern qualifies as a small business for the requirement 
now offered to the 8(a) BD program.
    (ii) In considering release under paragraph (2), SBA will balance 
the importance of the requirement to the concern's business development 
needs against the business development needs of other Participants that 
are qualified to perform the requirement. This determination will 
include consideration of whether rejection of the requirement would 
seriously reduce the pool of similar types of contracts available for 
award as 8(a) contracts. SBA will also seek the views of the procuring 
agency.
    (3) SBA will release a requirement under this paragraph only where 
the procuring activity agrees to procure the requirement as a small 
business, HUBZone, SDVO small business, or WOSB set-aside.
    (4) The requirement that a follow-on procurement must be released 
from the 8(a) BD program in order for it to be fulfilled outside the 
8(a) BD program does not apply to orders offered to and accepted for 
the 8(a) BD program pursuant to Sec.  124.503(h).

0
36. Amend Sec.  124.506 by revising paragraph (a)(2)(ii), the example 
in paragraph (a) (3), and paragraph (b) to read as follows:


Sec.  124.506  At what dollar threshold must an 8(a) procurement be 
competed among eligible Participants?

* * * * *
    (a) * * *
    (2) * * *
    (ii) The anticipated award price of the contract, including 
options, will exceed $6,500,000 for contracts assigned manufacturing 
NAICS codes and $4,000,000 for all other contracts; and * * *
* * * * *
    (3) * * *
    Example to paragraph (a)(3).  If the anticipated award price for 
a professional services requirement is determined to be $3.8 million 
and it is accepted as a sole source 8(a) requirement on that basis, 
a sole source award will be valid even if the contract price arrived 
at after negotiation is $4.2 million.
* * * * *
    (b) Exemption from competitive thresholds for Participants owned by 
Indian Tribes, ANCs and NHOs. (1) A Participant concern owned and 
controlled by an Indian Tribe or an ANC may be awarded a sole source 
8(a) contract where the anticipated value of the procurement exceeds 
the applicable competitive threshold if SBA has not accepted the 
requirement into the 8(a) BD program as a competitive procurement.
    (2) A Participant concern owned and controlled by an NHO may be 
awarded a sole source Department of Defense (DoD) 8(a) contract where 
the anticipated value of the procurement exceeds the applicable 
competitive threshold if SBA has not accepted the requirement into the 
8(a) BD program as a competitive procurement.
    (3) There is no requirement that a procurement must be competed 
whenever possible before it can be accepted on a sole source basis for 
a Tribally-owned or ANC-owned concern, or a concern owned by an NHO for 
DoD contracts, but a procurement may not be removed from competition to 
award it to a Tribally-owned, ANC-owned or NHO-owned concern on a sole 
source basis.
    (4) A joint venture between one or more eligible Tribally-owned, 
ANC-owned or NHO-owned Participants and one or more non-8(a) business 
concerns may be awarded sole source 8(a) contracts above the 
competitive threshold amount, provided that it meets the requirements 
of Sec.  124.513.
* * * * *

0
37. Amend Sec.  124.507 as follows:
0
a. Redesignate paragraphs (b)(2)(iii) and (b)(2)(iv) as paragraphs 
(b)(2)(iv) and (b)(2)(v), respectively;
0
b. Add new paragraphs (b)(2)(iii), (c)(2)(i), (c)(2)(ii) and 
(c)(2)(iii); and
0
c. Add an example to paragraph (d)(1) to read as follows:


Sec.  124.507  What procedures apply to competitive procurements?

* * * * *
    (b) * * *
    (2) * * *
    (iii) In compliance with the continued eligibility reporting 
requirements set forth in Sec.  124.112(b);
* * * * *
    (c) * * *
    (2) * * *
    (i) A Participant may have bona fide places of business in more 
than one location.
    (ii) In order for a Participant to establish a bona fide place of 
business in a particular geographic location, the SBA district office 
serving the geographic area of that location must determine if that 
location in fact qualifies as a bona fide place of business under SBA's 
requirements.
    (A) A Participant must submit a request for a bona fide business 
determination to the SBA district office servicing it.
    (B) The servicing district office will forward the request to the 
SBA district office serving the geographic area of the particular 
location for processing.

[[Page 8261]]

    (iii) The effective date of a bona fide place of business is the 
date that the evidence (paperwork) shows that the business in fact 
regularly maintained its business at the new geographic location.
    (iv) In order for a Participant to be eligible to submit an offer 
for a 8(a) procurement limited to a specific geographic area, it must 
receive from SBA a determination that it has a bona fide place of 
business within that area prior to submitting its offer for the 
procurement.
    (d) * * *
    (1) * * *

    Example to paragraph (d)(1). The program term for 8(a) 
Participant X is scheduled to expire on December 19. A solicitation 
for a competitive 8(a) procurement specifies that initial offers are 
due on December 15. The procuring activity amends the solicitation 
to extend the date for the receipt of offers to January 5. X submits 
its offer on January 5 and is selected as the apparent successful 
offeror. X is eligible for award because it was an eligible 8(a) 
Participant on the initial date set forth in the solicitation for 
the receipt of offers.
* * * * *

0
38. Amend Sec.  124.509 by adding a new sentence at the end of 
paragraph (a)(1), and by adding two new sentences after the first 
sentence of paragraph (e)(1) to read as follows:


Sec.  124.509  What are non-8(a) business activity targets.

    (a) * * *
    (1) * * * Work performed by an 8(a) Participant for any Federal 
department or agency other than through an 8(a) contract, including 
work performed on orders under the General Services Administration 
Multiple Award Schedule program, and work performed as a subcontractor, 
including work performed as a subcontractor to another 8(a) Participant 
on an 8(a) contract, qualifies as work performed outside the 8(a) BD 
program.
* * * * *
    (e) * * *
    (1) * * * A firm receiving a waiver will be able to self market its 
capabilities and receive one or more sole source 8(a) contracts during 
the next program year. At its next annual review, SBA will reevaluate 
the firm's circumstances and determine whether the waiver should be 
extended an additional program year. * * *
* * * * *

0
39. Amend Sec.  124.510 by revising paragraph (b) to read as follows:


Sec.  124.510  What percentage of work must a Participant perform on an 
8(a) contract?

* * * * *
    (b) A Participant must certify in its offer that it will meet the 
applicable performance of work requirement. Compliance with the 
requirement will be determined as of the date of contract award, so 
that a Participant may revise its initial offer to clarify or otherwise 
come into compliance with the performance of work requirements. The 
procuring agency contracting officer must be satisfied that the 
Participant will meet the applicable performance of work requirement at 
time of award.
* * * * *

0
40. Amend Sec.  124.512 by adding a new sentence at the end of 
paragraph (a), by revising paragraph (b), and by adding a new paragraph 
(c) to read as follows:


Sec.  124.512  Delegation of contract administration to procuring 
agencies.

    (a) * * * Tracking compliance with the performance of work 
requirements set forth in Sec.  124.510 is included within the 
functions performed by the procuring activity as part of contract 
administration.
    (b) This delegation of contract administration authorizes a 
contracting officer to execute any priced option or in scope 
modification without SBA's concurrence. The contracting officer must, 
however, submit copies to the SBA servicing district office of all 
modifications and options exercised within 15 business days of their 
occurrence, or by another date agreed upon by SBA.
    (c) SBA may conduct periodic compliance on-site agency reviews of 
the files of all contracts awarded pursuant to Section 8(a) authority.

0
41. Amend Sec.  124.513 as follows:
0
a. Revise paragraph (c)(2);
0
b. Redesignate paragraphs (c)(3) through (c)(11) as (c)(4) through 
(c)(12),
0
c. Adding a new paragraph (c)(3);
0
d. Revise newly designated paragraphs (c)(4) and (c)(7);
0
e. Remove the phrase ``the managing venturer'' from newly designated 
paragraphs (c)(9) and (c)(10) and add in its place the phrase ``the 
8(a) Participant managing venturer'';
0
f. Revise paragraphs (d) and (e); and
0
g. Add a new paragraph (i) to read as follows:


Sec.  124.513  Under what circumstances can a joint venture be awarded 
an 8(a) contract?

* * * * *
    (c) * * *
    (2) Designating an 8(a) Participant as the managing venturer of the 
joint venture. In an unpopulated joint venture or a joint venture 
populated only with administrative personnel, the joint venture must 
designate an employee of the 8(a) managing venturer as the project 
manager responsible for performance of the contract. In a joint venture 
populated with individuals intended to perform any contracts awarded to 
the joint venture, the joint venture must otherwise demonstrate that 
performance of the contract is controlled by the 8(a) managing 
venturer;
    (3) Stating that with respect to a separate legal entity joint 
venture the 8(a) Participant(s) must own at least 51% of the joint 
venture entity;
    (4) Stating that the 8(a) Participant(s) must receive profits from 
the joint venture commensurate with the work performed by the 8(a) 
Participant(s), or in the case of a separate legal entity joint venture 
commensurate with their ownership interests in the joint venture;
* * * * *
    (7) Specifying the responsibilities of the parties with regard to 
negotiation of the contract, source of labor, and contract performance, 
including ways that the parties to the joint venture will ensure that 
the joint venture and the 8(a) partner(s) to the joint venture will 
meet the performance of work requirements set forth in paragraph (d) of 
this section.
* * * * *
    (d) Performance of work. (1) For any 8(a) contract, including those 
between mentors and prot[eacute]g[eacute]s authorized by Sec.  124.520, 
the joint venture must perform the applicable percentage of work 
required by Sec.  124.510. For an unpopulated joint venture or a joint 
venture populated only with one or more administrative personnel, the 
8(a) partner(s) to the joint venture must perform at least 40% of the 
work performed by the joint venture. The work performed by 8(a) 
partners to a joint venture must be more than administrative or 
ministerial functions so that they gain substantive experience. For a 
joint venture populated with individuals intended to perform contracts 
awarded to the joint venture, each 8(a) Participant to the joint 
venture must demonstrate what it will gain from performance of the 
contract and how such performance will assist in its business 
development.
    (2)(i) In an unpopulated joint venture, where both the 8(a) and 
non-8(a) partners are technically subcontractors, the amount of work 
done by the partners will be aggregated and the work done by the 8(a) 
partner(s) must be at least 40% of the total done by all partners. In 
determining the amount of work done by a non-8(a) partner, all work 
done by the non-8(a) partner and any of its affiliates at any 
subcontracting tier will be counted.
    (ii) In a populated joint venture, a non-8(a) joint venture 
partner, or any of

[[Page 8262]]

its affiliates, may not act as a subcontractor to the joint venture 
awardee, or to any other subcontractor of the joint venture, unless the 
AA/BD determines that other potential subcontractors are not available, 
or the joint venture is populated only with administrative personnel.
    (A) If a non-8(a) joint venture partner seeks to do more work, the 
additional work must generally be done through the joint venture, which 
would require the 8(a) partner(s) to the joint venture to also do 
additional work to meet the 40% requirement set forth in paragraph 
(d)(1) of this section.
    (B) If a joint venture is populated only with administrative 
personnel, the joint venture may subcontract performance to a non-8(a) 
joint venture partner provided it also subcontracts work to the 8(a) 
partner(s) in an amount sufficient to meet the 40% requirement. The 
amount of work done by the partners will be aggregated and the work 
done by the 8(a) partner(s) must be at least 40% of the total done by 
all partners. In determining the amount of work done by a non-8(a) 
partner, all work done by the non-8(a) partner and any of its 
affiliates at any subcontracting tier will be counted.
    (e) Prior approval by SBA. (1) SBA must approve a joint venture 
agreement prior to the award of an 8(a) contract on behalf of the joint 
venture.
    (2) Where a joint venture has been established and approved by SBA 
for one 8(a) contract, a second or third 8(a) contract may be awarded 
to that joint venture provided an addendum to the joint venture 
agreement, setting forth the performance requirements on that second or 
third contract, is provided to and approved by SBA prior to contract 
award.
    (i) After approving the structure of the joint venture in 
connection with the first contract, SBA will review only the addendums 
relating to performance of work on successive contracts.
    (ii) SBA must approve the addendums prior to the award of any 
successive 8(a) contract to the joint venture.
* * * * *
    (i) Performance of work reports. An 8(a) Participant to a joint 
venture must describe how it is meeting or has met the applicable 
performance of work requirements for each 8(a) contract it performs as 
a joint venture.
    (1) As part of its annual review, the 8(a) Participant(s) to the 
joint venture must explain for each 8(a) contract performed during the 
year how the performance of work requirements are being met for the 
contract.
    (2) At the completion of every 8(a) contract awarded to a joint 
venture, the 8(a) Participant(s) to the joint venture must submit a 
report to the local SBA district office explaining how the performance 
of work requirements were met for the contract.

0
42. Amend Sec.  124.519 by revising paragraph (a), by removing 
paragraph (c), by redesignating paragraphs (d), (e) and (f) as 
paragraphs (c), (d) and (e), respectively, and by revising newly 
designated paragraph (e) to read as follows:


Sec.  124.519  Are there any dollar limits on the amount of 8(a) 
contracts that a Participant may receive?

    (a) A Participant (other than one owned by an Indian Tribe, ANC or 
NHO) may not receive sole source 8(a) contract awards where it has 
received a combined total of competitive and sole source 8(a) contracts 
in excess of the dollar amount set forth in this section during its 
participation in the 8(a) BD program.
* * * * *
    (e) The AA/BD may waive the requirement prohibiting a Participant 
from receiving sole source 8(a) contracts in excess of the dollar 
amount set forth in this section where the head of a procuring activity 
represents that award of a sole source 8(a) contract to the Participant 
is needed to achieve significant interests of the Government.

0
43. Amend Sec.  124.520 as follows:
0
a. Revise the heading;
0
b. Revise paragraph (a);
0
c. Revise paragraph (b) introductory text;
0
d. Revise paragraphs (b)(1)(i) and (iv), (b)(2), and (b)(3);
0
e. Revise paragraphs (c)(1) and (c)(3);
0
f. Add new paragraphs (c)(4) and (c)(5);
0
g. Revise paragraph (d)(1);
0
h. Revise paragraph (e)(1), and the second sentence of (e)(2);
0
i. Redesignate paragraph (f) as paragraph (g) and add new paragraph 
(f);
0
j. Redesignate newly designated paragraphs (g)(2) and (g)(3) as 
paragraphs (g)(3) and (g)(4);
0
k. Add a new paragraph (g)(2); and
0
l. Add a new paragraph (h) to read as follows:


Sec.  124.520  What are the rules governing SBA's Mentor/
Prot[eacute]g[eacute] program?

    (a) General. The mentor/prot[eacute]g[eacute] program is designed 
to encourage approved mentors to provide various forms of business 
development assistance to prot[eacute]g[eacute] firms. This assistance 
may include technical and/or management assistance; financial 
assistance in the form of equity investments and/or loans; 
subcontracts; and/or assistance in performing prime contracts with the 
Government through joint venture arrangements. Mentors are encouraged 
to provide assistance relating to the performance of non-8(a) contracts 
so that prot[eacute]g[eacute] firms may more fully develop their 
capabilities. The purpose of the mentor/prot[eacute]g[eacute] 
relationship is to enhance the capabilities of the 
prot[eacute]g[eacute], assist the prot[eacute]g[eacute] with meeting 
the goals established in its SBA-approved business plan, and to improve 
its ability to successfully compete for contracts.
    (b) Mentors. Any concern or non-profit entity that demonstrates a 
commitment and the ability to assist developing 8(a) Participants may 
act as a mentor and receive benefits as set forth in this section. This 
includes businesses that have graduated from the 8(a) BD program, firms 
that are in the transitional stage of program participation, other 
small businesses, and large businesses.
    (1) * * *
    (i) Possesses favorable financial health; * * *
    (iv) Can impart value to a prot[eacute]g[eacute] firm due to 
lessons learned and practical experience gained because of the 8(a) BD 
program, or through its knowledge of general business operations and 
government contracting.
    (2) Generally a mentor will have no more than one 
prot[eacute]g[eacute] at a time. However, the AA/BD may authorize a 
concern or non-profit entity to mentor more than one 
prot[eacute]g[eacute] at a time where it can demonstrate that the 
additional mentor/prot[eacute]g[eacute] relationship will not adversely 
affect the development of either prot[eacute]g[eacute] firm (e.g., the 
second firm may not be a competitor of the first firm). Under no 
circumstances will a mentor be permitted to have more than three 
prot[eacute]g[eacute]s at one time.
    (3) In order to demonstrate its favorable financial health, a firm 
seeking to be a mentor must submit to SBA for review copies of the 
Federal tax returns it submitted to the IRS, or audited financial 
statements, including any notes, or in the case of publicly traded 
concerns the filings required by the Securities and Exchange Commission 
for the past three years.
* * * * *
    (c) Prot[eacute]g[eacute]s. (1) In order to initially qualify as a 
prot[eacute]g[eacute] firm, a Participant must:
    (i) Be in the developmental stage of program participation; or
    (ii) Have never received an 8(a) contract; or
    (iii) Have a size that is less than half the size standard 
corresponding to its primary NAICS code.

[[Page 8263]]

    (2) * * *
    (3) A prot[eacute]g[eacute] firm may generally have only one mentor 
at a time. The AA/BD may approve a second mentor for a particular 
prot[eacute]g[eacute] firm where:
    (i) The second relationship pertains to an unrelated, secondary 
NAICS code;
    (ii) The prot[eacute]g[eacute] firm is seeking to acquire a 
specific expertise that the first mentor does not possess; and
    (iii) The second relationship will not compete or otherwise 
conflict with the business development assistance set forth in the 
first mentor/prot[eacute]g[eacute] relationship.
    (4) A prot[eacute]g[eacute] may not become a mentor and retain its 
prot[eacute]g[eacute] status. The prot[eacute]g[eacute] must terminate 
its mentor/prot[eacute]g[eacute] agreement with its mentor before it 
will be approved as a mentor to another 8(a) Participant.
    (5) SBA will not approve a mentor/prot[eacute]g[eacute] 
relationship for an 8(a) Participant with less than six months 
remaining in its program term.
    (d) * * *
    (1) A mentor and prot[eacute]g[eacute] may joint venture as a small 
business for any government prime contract or subcontract, including 
procurements with a dollar value less than half the size standard 
corresponding to the assigned NAICS code and 8(a) sole source 
contracts, provided the prot[eacute]g[eacute] qualifies as small for 
the procurement and, for purposes of 8(a) sole source requirements, the 
prot[eacute]g[eacute] has not reached the dollar limit set forth in 
Sec.  124.519.
    (i) SBA must approve the mentor/prot[eacute]g[eacute] agreement 
before the two firms may submit an offer as a joint venture on a 
particular government prime contract or subcontract in order for the 
joint venture to receive the exclusion from affiliation.
    (ii) In order to receive the exclusion from affiliation for both 
8(a) and non-8(a) procurements, the joint venture must meet the 
requirements set forth in Sec.  124.513(c).
    (iii) Once a prot[eacute]g[eacute] firm graduates from or otherwise 
leaves the 8(a) BD program, it will not be eligible for any further 
benefits from its mentor/prot[eacute]g[eacute] relationship (i.e., the 
receipts and/or employees of the prot[eacute]g[eacute] and mentor will 
generally be aggregated in determining size for any joint venture 
between the mentor and prot[eacute]g[eacute] after the 
prot[eacute]g[eacute] leaves the 8(a) BD program). Leaving the 8(a) BD 
program, or terminating the mentor/prot[eacute]g[eacute] relationship 
while a prot[eacute]g[eacute] firm is still in the program, does not, 
however, affect contracts previously awarded to a joint venture between 
the prot[eacute]g[eacute] and its mentor. In such a case, the joint 
venture continues to qualify as small for previously awarded contracts 
and is obligated to continue performance on those contracts.
* * * * *
    (e) * * *
    (1) The mentor and prot[eacute]g[eacute] firms must enter a written 
agreement setting forth an assessment of the prot[eacute]g[eacute]'s 
needs and providing a detailed description and timeline for the 
delivery of the assistance the mentor commits to provide to address 
those needs (e.g., management and/or technical assistance, loans and/or 
equity investments, cooperation on joint venture projects, or 
subcontracts under prime contracts being performed by the mentor). The 
mentor/prot[eacute]g[eacute] agreement must:
    (i) Address how the assistance to be provided through the agreement 
will help the prot[eacute]g[eacute] firm meet the goals established in 
its SBA-approved business plan;
    (ii) Establish a single point of contact in the mentor concern who 
is responsible for managing and implementing the mentor/
prot[eacute]g[eacute] agreement; and
    (iii) Provide that the mentor will provide such assistance to the 
prot[eacute]g[eacute] firm for at least one year.
    (2) * * * The agreement will not be approved if SBA determines that 
the assistance to be provided is not sufficient to promote any real 
developmental gains to the prot[eacute]g[eacute], or if SBA determines 
that the agreement is merely a vehicle to enable the mentor to receive 
8(a) contracts.
* * * * *
    (f) Decision to decline mentor/prot[eacute]g[eacute] relationship. 
(1) Where SBA declines to approve a specific mentor/
prot[eacute]g[eacute] agreement, the prot[eacute]g[eacute] may request 
the AA/BD to reconsider the Agency's initial decline decision by filing 
a request for reconsideration with its servicing SBA district office 
within 45 calendar days of receiving notice that its mentor/
prot[eacute]g[eacute] agreement was declined. The prot[eacute]g[eacute] 
may revise the proposed mentor/prot[eacute]g[eacute] agreement and 
provide any additional information and documentation pertinent to 
overcoming the reason(s) for the initial decline to its servicing 
district office.
    (2) The AA/BD will issue a written decision within 45 calendar days 
of receipt of the prot[eacute]g[eacute]'s request. The AA/BD may 
approve the mentor/prot[eacute]g[eacute] agreement, deny it on the same 
grounds as the original decision, or deny it on other grounds. If 
denied, the AA/BD will explain why the mentor/prot[eacute]g[eacute] 
agreement does not meet the requirements of Sec.  124.520 and give 
specific reasons for the decline.
    (3) If the AA/BD declines the mentor/prot[eacute]g[eacute] 
agreement solely on issues not raised in the initial decline, the 
prot[eacute]g[eacute] can ask for reconsideration as if it were an 
initial decline.
    (4) If SBA's final decision is to decline a specific mentor/
prot[eacute]g[eacute] agreement, the 8(a) firm seeking to be a 
prot[eacute]g[eacute] cannot attempt to enter another mentor/
prot[eacute]g[eacute] relationship with the same mentor for a period of 
60 calendar days from the date of the final decision. The 8(a) firm 
may, however, submit another proposed mentor/prot[eacute]g[eacute] 
agreement with a different proposed mentor at any time after the SBA's 
final decline decision.
    (g) * * *
    (2) The prot[eacute]g[eacute] must report the mentoring services it 
receives by category and hours.
* * * * *
    (h) Consequences of not providing assistance set forth in the 
mentor/prot[eacute]g[eacute] agreement. (1) Where SBA determines that a 
mentor has not provided to the prot[eacute]g[eacute] firm the business 
development assistance set forth in its mentor/prot[eacute]g[eacute] 
agreement, SBA will notify the mentor of such determination and afford 
the mentor an opportunity to respond. The mentor must respond within 30 
days of the notification, explaining why it has not provided the agreed 
upon assistance and setting forth a definitive plan as to when it will 
provide such assistance. If the mentor fails to respond, does not 
supply adequate reasons for its failure to provide the agreed upon 
assistance, or does not set forth a definite plan to provide the 
assistance:
    (i) SBA will terminate its mentor/prot[eacute]g[eacute] agreement;
    (ii) The firm will be ineligible to again act as a mentor for a 
period of two years from the date SBA terminates the mentor/
prot[eacute]g[eacute] agreement; and
    (iii) SBA may recommend to the relevant procuring agency to issue a 
stop work order for each Federal contract for which the mentor and 
prot[eacute]g[eacute] are performing as a small business joint venture 
pursuant to paragraph (d)(1) of this section in order to encourage the 
mentor to comply with its mentor/prot[eacute]g[eacute] agreement. Where 
a prot[eacute]g[eacute] firm is able to independently complete 
performance of any such contract, SBA may also authorize a substitution 
of the prot[eacute]g[eacute] firm for the joint venture.
    (2) SBA may consider a mentor's failure to comply with the terms 
and conditions of an SBA-approved mentor/prot[eacute]g[eacute] 
agreement as a basis for debarment on the grounds, including but not 
limited to, that the mentor has not complied with the terms of a public 
agreement under 2 CFR 180.800(b).

[[Page 8264]]


0
44. Amend Sec.  124.601 by revising paragraph (a) to read as follows:


Sec.  124.601  What reports does SBA require concerning parties who 
assist Participants in obtaining Federal contracts?

    (a) Each Participant must submit semi-annually a written report to 
its assigned BOS that includes a listing of any agents, 
representatives, attorneys, accountants, consultants and other parties 
(other than employees) receiving fees, commissions, or compensation of 
any kind to assist such Participant in obtaining or seeking to obtain a 
Federal contract. The listing must indicate the amount of compensation 
paid and a description of the activities performed for such 
compensation.
* * * * *

0
45. Amend Sec.  124.602 as follows:
0
a. Revise paragraph (a) introductory text;
0
b. Redesignate paragraphs (a)(1) and (a)(2) as paragraphs (a)(3) and 
(a)(4), respectively;
0
c. Add new paragraph (a)(1) and (a)(2);
0
d. Revise paragraphs (b) and (c); and
0
e. Add new paragraph (g) to read as follows:


Sec.  124.602  What kind of annual financial statement must a 
Participant submit to SBA?

    (a) Except as set forth in paragraph (a)(1) of this section, 
Participants with gross annual receipts of more than $10,000,000 must 
submit to SBA audited annual financial statements prepared by a 
licensed independent public accountant within 120 days after the close 
of the concern's fiscal year.
    (1) Participants with gross annual receipts of more than 
$10,000,000 which are owned by a Tribe, ANC, NHO, or CDC may elect to 
submit unaudited financial statements within 120 days after the close 
of the concern's fiscal year, provided the following additional 
documents are submitted simultaneously:
    (i) Audited annual financial statements for the parent company 
owner of the Participant, prepared by a licensed independent public 
accountant, for the equivalent fiscal year;
    (ii) Certification from the Participant's Chief Executive Officer 
and Chief Financial Officer (or comparable positions) that each 
individual has read the unaudited financial statements, affirms that 
the statements do not contain any material misstatements, and 
certifying that the statements fairly represent the Participant's 
financial condition and result of operations.
    (2) In the first year that a Participant's gross receipts exceed 
$10,000,000, a Participant may provide an audited balance sheet, with 
the income and cash flow statements receiving the level of service 
required for the previous year (review or none, depending on sales the 
year before the audit is required). * * *
    (b)(1) Participants with gross annual receipts between $2,000,000 
and $10,000,000 must submit to SBA reviewed annual financial statements 
prepared by a licensed independent public accountant within 90 days 
after the close of the concern's fiscal year.
    (2) The servicing SBA District Director may waive the requirement 
for reviewed financial statements for good cause shown by the 
Participant.
    (c) Participants with gross annual receipts of less than $2,000,000 
must submit to SBA an annual statement prepared in-house or a 
compilation statement prepared by a licensed independent public 
accountant, verified as to accuracy by an authorized officer, partner, 
limited liability member, or sole proprietor of the Participant, 
including signature and date, within 90 days after the close of the 
concern's fiscal year.
* * * * *
    (g) Participants owned by Tribes, ANCs, NHOs and CDCs may submit 
consolidated financial statements prepared by the parent entity that 
include schedules for each 8(a) Participant instead of separate audited 
financial statements for each individual 8(a) Participant. If one 
Participant must submit an audited financial statement, then the 
consolidated statement and the schedules for each 8(a) Participant must 
be audited.

0
46. Add a new Sec.  124.604 to read as follows:


Sec.  124.604  Report of benefits for firms owned by Tribes, ANCs, NHOs 
and CDCs.

    As part of its annual review submission, each Participant owned by 
a Tribe, ANC, NHO or CDC must submit to SBA information showing how the 
Tribe, ANC, NHO or CDC has provided benefits to the Tribal or native 
members and/or the Tribal, native or other community due to the 
Tribe's/ANC's/NHO's/CDC's participation in the 8(a) BD program through 
one or more firms. This data includes information relating to funding 
cultural programs, employment assistance, jobs, scholarships, 
internships, subsistence activities, and other services provided by the 
Tribe, ANC, NHO or CDC to the affected community.

0
47. Amend Sec.  124.1002 by revising paragraph (d) and adding a new 
paragraph (h) to read as follows:


Sec.  124.1002  What is a Small Disadvantaged Business (SDB)?

* * * * *
    (d) Additional eligibility criteria. (1) Except for Tribes, ANCs, 
CDCs, and NHOs, each individual claiming disadvantaged status must be a 
citizen of the United States.
    (2) The other eligibility requirements set forth in Sec.  124.108 
for 8(a) BD program participation do not apply to SDB eligibility.
* * * * *
    (h) Full-time requirement for SDB purposes. An SDB is considered to 
be managed on a full-time basis by a disadvantaged individual if such 
individual works for the concern during all of the hours the concern 
operates. For example, if a concern operates 20 hours per week and the 
disadvantaged manager works for the firm during those twenty hours, 
that individual will be considered as working full time for the firm.

0
48. Revise Sec.  124.1009 to read as follows:


Sec.  124.1009  Who decides disadvantaged status protests?

    In response to a protest challenging the disadvantaged status of a 
concern, the SBA's AA/BD, or designee, will determine whether the 
concern is disadvantaged.

    Dated: February 1, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-2581 Filed 2-10-11; 8:45 am]
BILLING CODE 8025-01-P