[Federal Register Volume 81, Number 78 (Friday, April 22, 2016)]
[Rules and Regulations]
[Pages 23563-23566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09302]



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  Federal Register / Vol. 81, No. 78 / Friday, April 22, 2016 / Rules 
and Regulations  

[[Page 23563]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 115

RIN 3245-AG70


Surety Bond Guarantee Program; Miscellaneous Amendments

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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

SUMMARY: The Small Business Administration (SBA) is issuing this final 
rule to change the regulations for SBA's Surety Bond Guarantee Program 
in four areas. First, as a condition for participating in the Prior 
Approval and Preferred Surety Bond Programs, this rule clarifies that a 
Surety must directly employ underwriting and claims staffs sufficient 
to perform and manage these functions, and that final settlement 
authority for claims and recovery is vested only in salaried employees 
of the Surety. Second, this rule provides that all costs incurred by 
the Surety's salaried claims staff are ineligible for reimbursement by 
SBA, except the amounts actually paid for reasonable and necessary 
travel expenses. In addition, the Surety may seek reimbursement for 
amounts paid for specialized services that are provided by outside 
consultants in connection with the processing of a claim. Third, the 
rule modifies the criteria for determining when a Principal that caused 
a Loss to SBA is ineligible for a bond guaranteed by SBA. Fourth, the 
rule modifies the criteria for admitting Sureties to the Preferred 
Surety Bond Program by increasing the Surety's underwriting limitation, 
as certified by the U.S. Treasury Department on its list of acceptable 
sureties, from at least $2 million to at least $6.5 million.

DATES: This rule is effective May 23, 2016.

FOR FURTHER INFORMATION CONTACT: Barbara J. Brannan, Office of Surety 
Guarantees, (202) 205-6545 or email: [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background Information

    The U.S. Small Business Administration (SBA) guarantees bid, 
payment and performance bonds for small and emerging contractors who 
cannot obtain surety bonds through regular commercial channels. SBA's 
guarantee gives Sureties an incentive to provide bonding for small 
businesses and, thereby, assists small businesses in obtaining greater 
access to contracting opportunities. SBA's guarantee is an agreement 
between a Surety and SBA that SBA will assume a certain percentage of 
the Surety's loss should a contractor default on the underlying 
contract.
    On April 14, 2015, SBA published a notice of proposed rulemaking 
with a request for comments in the Federal Register (80 FR 19886). The 
rule proposed to change the regulations governing SBA's Surety Bond 
Guarantee Program (SBG Program) in the following four areas that had 
prompted questions from participating Sureties:
    (1) The rule proposed to clarify that to participate in the Prior 
Approval and Preferred Surety Bond (PSB) Programs, a Surety must 
directly employ underwriting and claims staffs sufficient to perform 
and manage these functions, and that final settlement authority for 
claims and recoveries must be vested only in the Surety's salaried 
claims staff.
    (2) The rule proposed to specify that the costs that the Surety 
incurs for its salaried claims staff are ineligible for reimbursement 
by SBA and that the Surety may seek reimbursement for amounts actually 
paid by the Surety for specialized services that are provided by an 
outside consultant, which is not an Affiliate of the Surety, in 
connection with the processing of a claim, provided that such services 
are beyond the capability of the Surety's salaried claims staff.
    (3) The rule proposed to modify the conditions under which a 
Principal, and its Affiliates, would be deemed ineligible for a bond 
guaranteed by SBA in the circumstance where the Principal has 
previously defaulted on an SBA guaranteed surety bond. The rule 
provided that a Principal, or any of its Affiliates, would lose 
eligibility for further SBA bond guarantees if the Principal, or any of 
its Affiliates, had defaulted on an SBA guaranteed bond resulting in a 
Loss (as defined in 13 CFR 115.16) that had not been fully reimbursed 
to SBA, or if SBA had not been fully reimbursed for any Imminent Breach 
payments. It also provided that the Principal, or any of its 
Affiliates, may be reinstated only if SBA had been fully repaid for the 
Loss or for the Imminent Breach payment, unless SBA's Office of Surety 
Guarantees (OSG) found good cause for reinstating the Principal. In 
addition, the discharge of the indebtedness in bankruptcy would no 
longer be specifically included as a condition for reinstatement, but 
the circumstances of such discharge could be considered as part of 
OSG's good cause analysis for reinstatement. The Proposed Rule also 
clarified that the same standards regarding the loss of eligibility and 
the conditions for reinstatement would apply to both the Prior Approval 
Program and the PSB Program.
    (4) The rule proposed to modify the criteria for admitting a Surety 
to participate in the PSB Program by increasing the Surety's 
underwriting limitation, as certified by the U.S. Treasury Department 
on its list of acceptable sureties on Federal bonds, from at least $2 
million to at least $6.5 million.
    The comment period was open until June 15, 2015, and SBA received 
comments from one trade association and one surety company. One other 
comment was received from an individual, but this comment did not 
relate to the Proposed Rule or the SBG Program.
    One of the commenters indicated its support for the proposed 
changes that modify the conditions under which a Principal, and its 
Affiliates, would be deemed ineligible for a bond guaranteed by SBA and 
that modify the requirements for reinstatement. The commenter also 
expressed support for SBA's effort to address the failure of some 
participating Sureties to maintain adequate in-house claims personnel, 
and to ensure that participating Sureties handle their SBA-guaranteed 
bond claims in the same manner as their other bond claims.
    However, both commenters expressed concern that the proposed 
changes to 13

[[Page 23564]]

CFR 115.11 and 115.16(e)(1) would not create clear standards with 
respect to when SBA would reimburse Sureties for the costs of using 
outside consultants in connection with bond claims. Under the proposed 
13 CFR 115.16(e)(1), a Surety may seek reimbursement for ``[a]mounts 
actually paid by the Surety for specialized services that are provided 
under contract by an outside consultant, which is not an Affiliate of 
the Surety, in connection with the processing of a claim, provided that 
such services are beyond the capability of the Surety's salaried claims 
staff.'' The commenters were concerned that this standard is too 
limiting, and instead suggested that SBA amend 13 CFR 115.16(e)(2) to 
allow Sureties to seek reimbursement for the ``reasonable'' costs of 
any outside consultants. The commenters indicated that this standard 
would cover a broader range of consultants, such as construction, 
accounting or other professionals, that assist Sureties in 
investigating and settling claims. They argued that the services of 
these outside consultants may become necessary to avoid delay and to 
mitigate expenses and that these expenses would be recoverable from the 
Principal under the General Indemnity Agreement obtained under 13 CFR 
115.17(a).
    SBA has considered the suggestion but has concluded that the 
reasonable cost standard proposed by the commenters does not adequately 
reflect the requirement that Sureties employ sufficient in-house staff 
to handle all customary claims and recovery functions. SBA expects 
participating Sureties to employ adequate in-house staff to perform 
these functions and to bear the full cost of performing such functions. 
The Proposed Rule does recognize that there may be circumstances where 
an outside consultant with a particular expertise beyond the 
capabilities of the Surety's salaried claims staff is needed in 
connection with a claim, and would allow Sureties to seek reimbursement 
for the costs of such expertise. As described in the preamble to the 
Proposed Rule, an example of such ``specialized services . . . beyond 
the capability of the Surety's salaried claims staff'' would be the 
services of a structural engineer that are needed to evaluate the 
Principal's compliance with engineering specifications, and a commenter 
agreed with this example. SBA believes that its proposed language is 
sufficiently broad to cover the various situations that may arise.
    In addition, a commenter suggested that the proposed requirement in 
13 CFR 115.11 that the Surety must have a salaried staff ``to perform 
all claims and recovery functions'' be revised by removing the term 
``all'' to account for those instances where outside consultants are 
retained to assist in claim and recovery functions. Instead of removing 
the term ``all'', SBA is revising this section to recognize that the 
Surety may seek reimbursement for specialized services provided by 
outside consultants under 13 CFR 115.16(e)(1). Again, SBA expects that 
these consultants will be needed to provide a specialized service that 
is beyond the expertise of the Surety's salaried claims staff.
    Finally, both commenters stated that travel by in-house claims 
staff is often necessary and expressed concern that the proposed 
language in 13 CFR 115.16(f)(1) excludes travel costs as a 
reimburseable expense. SBA agrees that Sureties may seek reimbursement 
for reasonable and necessary travel expenses by their in-house claims 
staff, and has amended the language in 13 CFR 115.16(e)(1) and 
115.16(f)(1) accordingly.

II. Section-by-Section Analysis

    Section 115.11. As proposed, this provision required that an 
applicant have a salaried staff that is employed directly (not an agent 
or other individual or entity under contract with the applicant) to 
oversee its underwriting functions and to perform all claims and 
recovery functions. For clarity, SBA is revising this section to 
recognize that, with respect to claims functions, a Surety may contract 
with an outside consultant for a specialized service the costs of which 
may be reimbursable under 13 CFR 115.16(e)(1). SBA expects Sureties to 
employ salaried claims staff capable of handling the routine processing 
and administration of claims and recovery, and to not seek 
reimbursement for the costs of these functions under 115.16(e)(1), 
except, as revised by this final rule, Sureties may seek reimbursement 
for the reasonable and necessary travel expenses of its salaried claims 
staff. This section also provides that final settlement authority for 
claims and recovery actions must be vested only in the applicant's 
``claims staff'' and, for clarity and consistency, SBA is revising this 
phrase to read ``salaried claims staff''. There are no other changes to 
this section as proposed.
    Section 115.13(a). As proposed, this provision added a new 
paragraph (7) to provide that, to be eligible for an SBA guaranteed 
bond, neither the Principal nor any of its Affiliates may be ineligible 
for an SBA guaranteed bond under the grounds set forth in 13 CFR 
115.14. There are no changes to this provision as proposed.
    Section 115.14. SBA is modifying the criteria regarding the loss of 
the Principal's eligibility for future assistance and the conditions 
for reinstatement by providing that a Principal loses eligibility for 
further SBA bond guarantees if the Principal, or any of its Affiliates, 
has defaulted on an SBA guaranteed bond that resulted in a Loss (as 
defined in 13 CFR 115.16) that has not been fully reimbursed to SBA, or 
if SBA has not been fully reimbursed for any Imminent Breach payments. 
OSG will have the authority to waive this requirement for good cause.
    In addition, as proposed, the same criteria on ineligibility and 
conditions for reinstatement would apply to both the Prior Approval 
Program and the PSB Program. As the same conditions for reinstatement 
will apply to both the Prior Approval Program and the PSB Program, the 
conditions for reinstatement set forth in 13 CFR 115.36(b) and (c) will 
be moved in their entirety to 13 CFR 115.14(b) and (c), and the heading 
of this section will be changed to ``Loss of Principal's eligibility 
for future assistance and reinstatement of Principal.''
    There are no changes to this provision as proposed.
    Section 115.16(e)(1). As proposed, this provision provided that SBA 
would reimburse amounts actually paid by a Surety for specialized 
services provided under contract by outside consultants in connection 
with the processing of a claim, provided that such services are beyond 
the capability of the Surety's salaried claims staff. Based on 
comments, SBA is revising this provision to allow the Surety to seek 
reimbursement for travel expenses incurred by the Surety's claims 
staff, and to provide that the cost of the consultant's services and 
the travel expenses of the Surety's claims staff must be reasonable and 
necessary, and must specifically concern the investigation, adjustment, 
negotiation, compromise, settlement of, or resistance to a claim for 
Loss resulting from the breach of the terms of the bonded Contract. 
These changes, coupled with the changes made to 115.11, clarify that a 
Surety cannot outsource routine claims functions and responsibilities 
or include such costs in its reimbursement requests submitted to SBA 
under the bond guarantee agreement. With the exception of specialized 
work that falls outside the scope of the routine processing and 
administration of claims, the Surety will perform the claims function 
at no cost to the Agency (other

[[Page 23565]]

than the reasonable and necessary travel costs of claims staff).
    Section 115.16(f)(1). As proposed, this provision clarified that 
all costs incurred by the Surety's salaried claims staff, whether or 
not specifically allocable to an SBA guaranteed bond, are excluded from 
the definition of Loss. Costs incurred by the Surety's salaried claims 
staff, like all other overhead of the Surety, are the responsibility of 
the Surety. Based on the comments, and for consistency with section 
115.16(e)(1), an exception for the reasonable and necessary travel 
expenses of the Surety's salaried claims staff is being added to this 
provision.
    Section 115.18(a)(2). As proposed, SBA is revising this paragraph 
to provide that the Surety's failure to continue to comply with the 
requirements set forth in section 13 CFR 115.11 are sufficient grounds 
for refusal to issue further guarantees, or in the case of a PSB 
Surety, termination of preferred status. There are no changes to this 
provision as proposed.
    Section 115.36. By including the conditions for reinstatement and 
the standard for underwriting after reinstatement in 13 CFR 115.14(b) 
and (c), the rule, as proposed, renamed the heading of this section to 
``Sec.  115.36 Indemnity settlements'', deleted the paragraph heading 
``(a) Indemnity settlements.'', removed paragraphs (b) and (c), and 
renumbered paragraphs ``(1)'', ``(2)'', and ``(3)'', as ``(a)'', 
``(b)'', and ``(c)'', respectively. There are no changes to this 
provision as proposed.
    Section 115.60(a)(1). As proposed, SBA conformed this provision to 
the statutory increase in the maximum contract amount for which a bond 
may be guaranteed by removing ``$2,000,000'' and inserting 
``$6,500,000'' in its place. There are no changes to this provision as 
proposed.
    Section 115.60(a)(5). By including in 13 CFR 115.11 the requirement 
that all Sureties vest final settlement authority for claims and 
recovery only in their salaried claims staff, this rule removes 13 CFR 
115.60(a)(5) and renumbers the existing paragraph 13 CFR 115.60(a)(6) 
accordingly. There are no changes to this provision as proposed.
    Compliance with Executive Orders 12866, 13563, 12988, and 13132, 
the Paperwork Reduction Act (44 U.S.C. Ch. 35) and the Regulatory 
Flexibility Act (5 U.S.C. 601-612).

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
rule does not constitute a significant regulatory action under 
Executive Order 12866. This rule is also not a major rule under the 
Congressional Review Act (5 U.S.C. 800).

Executive Order 13563

    In accordance with Executive Order 13563, SBA discussed with 
several surety companies issues regarding the SBG Program regulations. 
In particular, SBA discussed the underwriting and claims staffing 
requirements that Sureties must meet in order to participate in SBA's 
SBG Program. SBA also discussed with these companies the conditions for 
reimbursement of the costs incurred by their claims staffs. Generally, 
the Sureties responded favorably to SBA's position that changes were 
necessary to clarify or amend the regulations on these issues.

Executive Order 12988

    This action meets applicable standards set forth in Sections 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

    SBA has determined that this rule 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. Therefore, for 
purposes of Executive Order 13132, SBA has determined that this rule 
has no federalism implications warranting preparation of a federalism 
assessment.

Paperwork Reduction Act, 44 U.S.C. Ch. 35

    For the purpose of the Paperwork Reduction Act, 44 U.S.C., Chapter 
35, SBA has determined that this rule will not impose any new reporting 
or recordkeeping requirements.

Final Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) 5 U.S.C. 601, requires 
administrative agencies to consider the effect of their actions on 
small entities, small non-profit enterprises, and small local 
governments. Pursuant to the RFA, when an agency issues a rulemaking, 
the agency must prepare a regulatory flexibility analysis which 
describes the impact of the rule on small entities. However, section 
605 of the RFA allows an agency to certify a rule, in lieu of preparing 
an analysis, if the rulemaking is not expected to have a significant 
economic impact on a substantial number of small entities. There are 23 
Sureties that participate in the SBA program, and no part of this rule 
would impose any significant additional cost or burden on them. 
Consequently, this rule does not meet the significant economic impact 
on a substantial number of small businesses criterion anticipated by 
the Regulatory Flexibility Act.

List of Subjects in 13 CFR Part 115

    Claims, Reporting and recordkeeping requirements, Small businesses, 
Surety bonds.

    For the reasons stated in the preamble, SBA amends 13 CFR part 115 
as follows:

PART 115--SURETY BOND GUARANTEE

0
1. The authority citation for part 115 continues to read as follows:

    Authority:  5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b 
note; and Pub. L. 110-246, Sec. 12079, 122 Stat. 1651.

0
2. Amend Sec.  115.11 by adding three sentences at the end to read as 
follows:


Sec.  115.11  Applying to participate in the Surety Bond Guarantee 
Program.

    * * * At a minimum, each applicant must have salaried staff that is 
employed directly (not an agent or other individual or entity under 
contract with the applicant) to oversee its underwriting function and 
perform all claims and recovery functions other than specialized 
services the costs of which may be reimbursable under 13 CFR 
115.16(e)(1). Final settlement authority for claims and recovery must 
be vested only in the applicant's salaried claims staff. The applicant 
must continue to comply with SBA's standards and procedures for 
underwriting, administration, claims, recovery, and staffing 
requirements while participating in SBA's Surety Bond Guarantee 
Programs.

0
3. Amend Sec.  115.13 by adding paragraph (a)(7) to read as follows:


Sec.  115.13  Eligibility of Principal.

    (a) * * *
    (7) No loss of eligibility. Neither the Principal nor any of its 
Affiliates is ineligible for an SBA-guaranteed bond under Sec.  115.14.
* * * * *

0
4. Amend Sec.  115.14 as follows:
0
a. Revise the section heading, and paragraphs (a)(4) and (b);
0
b. Add paragraph (c).


Sec.  115.14  Loss of Principal's eligibility for future assistance and 
reinstatement of Principal.

    (a) * * *
    (4) The Principal, or any of its Affiliates, has defaulted on an 
SBA-

[[Page 23566]]

guaranteed bond resulting in a Loss that has not been fully reimbursed 
to SBA, or SBA has not been fully reimbursed for any Imminent Breach 
payments.
* * * * *
    (b) Reinstatement of Principal's eligibility. At any time after a 
Principal becomes ineligible for further bond guarantees under 
paragraph (a) of this section:
    (1) A Prior Approval Surety may recommend that such Principal's 
eligibility be reinstated, and OSG may agree to reinstate the Principal 
if:
    (i) The Surety has settled its claim with the Principal, or any of 
its Affiliates, for an amount that results in no Loss to SBA or in no 
amount owed for Imminent Breach payments, or OSG finds good cause for 
reinstating the Principal notwithstanding the Loss to SBA or amount 
owed for Imminent Breach payments; or
    (ii) OSG and the Surety determine that further bond guarantees are 
appropriate after the Principal was deemed ineligible for further SBA 
bond guarantees under paragraph (a)(1), (2), (3), (5) or (6) of this 
section.
    (2) A PSB Surety may:
    (i) Recommend that such Principal's eligibility be reinstated, and 
OSG may agree to reinstate the Principal, if the Surety has settled its 
claim with the Principal, or any of its Affiliates, for an amount that 
results in no Loss to SBA or in no amount owed for Imminent Breach 
payments, or OSG finds good cause for reinstating the Principal 
notwithstanding the Loss to SBA or amount owed for Imminent Breach 
payments; or
    (ii) Reinstate a Principal's eligibility upon the Surety's 
determination that further bond guarantees are appropriate after the 
Principal was deemed ineligible for further SBA bond guarantees under 
paragraph (a)(1), (2), (3), (5) or (6) of this section.
    (c) Underwriting after reinstatement. A guarantee application 
submitted after reinstatement of the Principal's eligibility is subject 
to a very stringent underwriting review.

0
5. Amend Sec.  115.16 by revising paragraphs (e)(1) and (f)(1) to read 
as follows:


Sec.  115.16  Determination of Surety's Loss.

* * * * *
    (e) * * *
    (1) Amounts actually paid by the Surety for specialized services 
that are provided under contract by an outside consultant, which is not 
an Affiliate of the Surety, provided that such services are beyond the 
capability of the Surety's salaried claims staff, and amounts actually 
paid by the Surety for travel expenses of the Surety's claims staff. 
The cost of the consultant's services and the travel expenses of the 
Surety's claims staff must be reasonable and necessary and must 
specifically concern the investigation, adjustment, negotiation, 
compromise, settlement of, or resistance to a claim for Loss resulting 
from the breach of the terms of the bonded Contract. The cost 
allocation method must be reasonable and must comply with generally 
accepted accounting principles; and
* * * * *
    (f) * * *
    (1) Any unallocated expenses, all direct and indirect costs 
incurred by the Surety's salaried claims staff (except for reasonable 
and necessary travel expenses of such staff), or any clear mark-up on 
expenses or any overhead of the Surety, its attorney, or any other 
consultant hired by the Surety or the attorney;
* * * * *

0
6. Amend Sec.  115.18 by revising paragraph (a)(2) to read as follows:


Sec.  115.18  Refusal to issue further guarantees; suspension and 
termination of PSB status.

    (a) * * *
    (2) Regulatory violations, fraud. Acts of wrongdoing such as fraud, 
material misrepresentation, breach of the Prior Approval or PSB 
Agreement, the Surety's failure to continue to comply with the 
requirements set forth in Sec.  115.11, or regulatory violations (as 
defined in Sec.  115.19(d) and (h)) also constitute sufficient grounds 
for refusal to issue further guarantees, or in the case of a PSB 
Surety, termination of preferred status.
* * * * *

0
7. Amend Sec.  115.36 as follows:
0
a. Revise the section heading;
0
b. Remove the paragraph designation and heading ``(a) Indemnity 
settlements.'';
0
c. Remove paragraphs (b) and (c); and
0
d. Redesignate paragraphs (1), (2), and (3), as (a), (b), and (c).


Sec.  115.36  Indemnity settlements.

* * * * *


Sec.  115.60  [Amended]

0
8. Amend Sec.  115.60 as follows:
0
a. Amend paragraph (a)(1) by removing ``$2,000,000'' and adding 
``$6,500,000'' in its place; and
0
b. Remove paragraph (a)(5) and redesignate paragraph (a)(6) as new 
paragraph (a)(5).

Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-09302 Filed 4-21-16; 8:45 am]
 BILLING CODE 8025-01-P