[Federal Register Volume 81, Number 123 (Monday, June 27, 2016)]
[Rules and Regulations]
[Pages 41423-41429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14984]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 109, 115, 120, and 121

RIN 3245-AG73


Affiliation for Business Loan Programs and Surety Bond Guarantee 
Program

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: This final rule amends the regulations pertaining to the 
determination of size eligibility based on affiliation by creating 
distinctive requirements for small business applicants for assistance 
from the Business Loan, Disaster Loan and Surety Bond Guarantee Program 
(``SBG''). For purposes of this rule, the Business Loan Programs 
consist of the 7(a) Loan Program, the Microloan Program, the 
Intermediary Lending Pilot Program (``ILP''), and the Development 
Company Loan Program (``504 Loan Program''). Note: the Intermediary 
Lending Pilot Program was inadvertently left out of the proposed rule. 
There are currently intermediaries with revolving funds for eligible 
small businesses, so the program has been included in this final rule. 
The Disaster Loan Programs consist of Physical Disaster Business Loans, 
Economic Injury Disaster Loans, Military Reservist Economic Injury

[[Page 41424]]

Disaster Loans, and Immediate Disaster Assistance Program loans. This 
rule redefines and establishes separate affiliation guidance applicable 
only to small business applicants in these Programs.

DATES: This rule is effective July 27, 2016.

FOR FURTHER INFORMATION CONTACT: Dianna Seaborn, Office of Financial 
Assistance, Office of Capital Access, Small Business Administration, 
409 Third Street SW., Washington, DC 20416; telephone 202-205-3645.

SUPPLEMENTARY INFORMATION: 

I. Background

    SBA is revising its regulations on affiliation for the Business 
Loan, Disaster Loan, and SBG Programs by separating and distinguishing 
the rules from the Agency's government contracting, business 
development and other programs. This change streamlines the rules to 
comply with Executive Order 13563. This Executive Order ``Improving 
Regulation and Regulatory Review,'' provides that agencies ``must 
identify and use the best, most innovative, and least burdensome tools 
for achieving regulatory ends.'' (Emphasis added). Executive Order 
13563 further provides that ``[t]o facilitate the periodic review of 
existing significant regulations, agencies shall consider how best to 
promote retrospective analysis of rules that may be outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' (Emphasis added).
    The loan programs authorized by the Small Business Act (Act), 15 
U.S.C. 631 et seq., that are affected by this final rule are: (1) The 
7(a) Loan Program authorized by Section 7(a) of the Act; (2) the 
Business Disaster Loan (``BDL'') Program authorized by Sections 7(b) 
and 42 of the Act; (3) the Microloan Program authorized by Section 7(m) 
of the Act; and (4) the ILP Program authorized by Section 7(l) of the 
Act. The 504 Loan Program, which is authorized by Title V of the Small 
Business Investment Act of 1958 (the ``SBIA''), as amended, 15 U.S.C. 
695 et seq., is also affected. Finally, this rule affects the Surety 
Bond Guarantee (``SBG'') Program, authorized by section 411 of the 
SBIA. A detailed description of each program was included in the 
proposed rule.
    On October 2, 2015, SBA published a proposed rule with request for 
comments in the Federal Register to identify changes to the rules on to 
simplify and streamline the application review process for the Business 
Loan, Disaster Loan, and SBG Programs. (80 FR 59667, October 2, 2015). 
These proposed affiliation changes apply only to applicants and not to 
SBA participants or CDCs in the programs. The comment period ended 
December 1, 2015.

II. Summary of Comments

    The Agency received and reviewed the public comments on its 
affiliation rules for 13 CFR parts 115, 120 and 121 in a proposed rule 
(80 FR 59667, October 2, 2015). The following narrative summarizes the 
comments reviewed and specifies the final rule changes regarding size 
standards based on principles of affiliation involving applicants to 
the Business Loan, Disaster Loan, and SBG Programs.
    Size based on affiliation for applicants to the Business Loan, 
Disaster Loan, and SBG Programs will be addressed separately in a new 
Sec.  121.301(f) to distinguish them from affiliation requirements for 
government contracting, business development, and SBA's other programs. 
These changes impact only the small business applicants and not 
lenders, CDCs, and surety bond companies.
    SBA received 160 comments related to the proposed affiliation 
standards for the Business Loan, Disaster Loan, and SBG Programs. Of 
the comments received, 128 comments were from financial institutions 
(lenders and Certified Development Companies), 15 comments were from 
lender service providers, 4 comments were from businesses (accounting 
and consulting firms), 7 comments were from trade associations, 3 
comments were from law firms, 2 comments were from franchises, and 1 
comment was from an individual that did not disclose an organizational 
type. All but 5 commenters indicated support for the majority of the 
proposed affiliation rule. There were 4 opposing comments related only 
to proposed changes to 121.301(f)(5), affiliation based on franchise 
and license agreements, and a 5th comment expressing concern about 
compliance regarding the affiliation rules for Surety Bonds in 
conjunction with federal contracts.
    Thirty-four commenters requested modification of the defined 
management officials in Sec.  121.301(f)(1) and (f)(3).
    Ninety-six commenters requested additional clarification in the 
language proposed defining who SBA includes for the identity of 
interest test in Sec.  121.301(f)(4), while 36 requested that it be 
eliminated in its entirety.
    One hundred thirty-eight commenters supported changes to 
121.301(f)(5), ``Affiliation based on franchise and license 
agreements,'' specifically requesting further modifications and clarity 
as to how SBA aggregates franchisees/licensees with franchisors/
licensors as affiliates to determine whether the small business 
applicant (franchisee/licensee) is a small, independent business. The 
comments opposing franchise affiliation changes were received from a 
consulting group, an individual, a law firm, and one lender. These 
comments revolved around franchise disclosures and relationship issues 
under the jurisdiction of the FTC, and the lack of clarity
    Thirty-seven commenters requested removal of the ``totality of 
circumstances'' analysis in Sec.  121.301(f)(6), while 92 commenters 
recommended examples and/or greater clarity for when and how SBA will 
apply this analysis. SBA's responses to these comments are detailed in 
the following sections.

III. Section-by-Section Analysis of Comments and Changes

    Section 109.20. In Sec.  109.20 Definitions, SBA proposes to 
include an amendment for the definition of Affiliate for the ILP 
Program from 13 CFR 121.103 to Sec.  121.301. SBA did not receive 
comments regarding this program as it is not currently funded.
    Section 115.10. In Sec.  115.10 Definitions, SBA proposed to amend 
the definition of Affiliate for the SBG Program from the general 13 CFR 
121 to the more specific Sec.  121.301. One comment expressed concern 
about the potential necessity for small business contractors to comply 
with the affiliation rules for contracting, as well as the separate 
rules for Surety Bond Guarantees.
    SBA data indicates that the significant majority of surety bond 
guarantees are for non-federal contracts which will benefit from this 
simplified rule. For the federal contract recipients, the existing 
contract rules will still apply, and if eligible thereunder, would also 
be eligible under this rule for the Surety Bond Guarantee. The 
provision is adopted as proposed.
    Section 120.1700. Definitions used in subpart J. SBA proposed to 
amend the definition of Affiliate in Sec.  121.1700 for purposes of the 
First Lien Position 504 Loan Pooling Program. However, after further 
review, SBA determined that this affiliation rule for the Business 
Loan, Disaster Loan and Surety Bond Programs does not apply to 13 CFR 
120.1700. SBA is not adopting the proposed change.
    Section 121.103(a)(8). SBA proposed establishing the new Sec.  
121.103(a)(8) to

[[Page 41425]]

advise the public that the principles of affiliation for applicants in 
the Business Loan, Disaster Loan and SBG Programs will be moved to a 
new Sec.  121.301(f). The final rule clarifies that Sec.  121.301(f) 
applies only to applicants for these specific programs. Affiliation for 
SBA's other programs remains unchanged.
    Section 121.301(f). SBA proposed establishing the new Sec.  
121.301(f) where the principles for determining affiliation to qualify 
applicant business concerns as small, and therefore eligible to apply 
for the Business Loan, Disaster Loan, and SBG Programs would be 
located. The SBA has established this separate subsection because the 
analysis of affiliation under the Business Loan, Disaster Loan and 
Surety Bond Programs is different from the analysis for contracting 
programs. The affiliation guidance for all other SBA programs, 
including the government contracting and business development programs, 
remains unchanged.
    Section 121.301(f)(1). SBA proposed establishing the new Sec.  
121.301(f)(1) Affiliation Based on Ownership, where SBA would determine 
that control exists based on ownership when: (1) A person owns or has 
the power to control more than 50% of the voting equity of a concern; 
or (2) if no one person owns or has the power to control more than 50% 
of the voting equity of the concern, SBA would deem the small business 
to be controlled by either the President, Chairman of the Board, Chief 
Executive Officer (CEO) of the concern, or other officers, managing 
members, partners, or directors who control the management of the 
concern. A total of 155 commenters supported a change in the rule, with 
34 of the commenters proposing further modification to limit the scope 
to only the President, CEO, Managing Partner, or Principal Manager. The 
comments for limiting scope were not adopted as it would not include 
all potential management and ownership organizational structures. Based 
on the elimination of the totality of circumstances, more fully 
discussed in Sec.  121.301(f)(6), SBA proposes to include in this 
section that SBA finds control when a minority shareholder has the 
ability, under the concern's charter, by-laws, or shareholder's 
agreement, to prevent a quorum or otherwise block action by the board 
of directors or shareholders. SBA is adopting the regulation with the 
inclusion of the Board and other shareholders.
    Section 121.301(f)(2). SBA is establishing the new Sec.  
121.301(f)(2) Affiliation arising under stock options, convertible 
securities, and agreements to merge, where SBA would duplicate language 
from Sec.  121.103(d). Other than duplicating the language in a 
different section of the regulation, SBA did not change the existing 
principles regarding affiliation arising under stock options, 
convertible securities, and agreements to merge currently found in 
Sec.  121.103(d). A total of 155 commenters supported keeping this the 
same, and repeating the language in Sec.  121.301(f)(2) for the 
Business Loan, Disaster Loan, and SBG Programs. There were no opposing 
comments. SBA is adopting the rule as proposed.
    Section 121.301(f)(3). SBA proposed establishing the new Sec.  
121.301(f)(3) Affiliation based on management, where SBA will utilize 
the same principles of affiliation for common management set forth in 
Sec.  121.103. Thirty-four commenters proposed limiting the scope of 
common management consideration to only the President, CEO, Managing 
Partner, or Principal Manager. Commenters did not include reasons for 
the requested elimination of Board members. SBA does not adopt the 
request for limiting scope, as they do not include consideration of all 
potential management organizational structures. In addition, SBA has 
modified the language to clarify that management agreements are 
included in the types of managers and management subject to 
consideration under this regulation. Details on the types of management 
agreements that result in determinations of affiliation will be 
provided in SBA Loan Program Requirements. SBA is adopting the rule 
with refinements that include management by agreement.
    Section 121.301(f)(4). SBA proposed establishing the new Sec.  
121.301(f)(4) Affiliation based on identity of interest, where SBA 
would re-define the presumptions underlying the principles of 
establishing an identity of interest. The proposed rule provided that 
SBA would presume affiliation between two or more persons with an 
identity of interest, and the presumption could be rebutted with 
evidence showing that the interests are separate. The proposed rule 
provided further that SBA would presume an identity of interest between 
close relatives, as defined in 13 CFR 120.10. The proposed rule 
deviated from the existing rule in 13 CFR 121.103(f) by not 
specifically citing common investments and economic dependence as bases 
for finding an identity of interest. There were 155 commenters 
supporting a separate affiliation rule for identity of interest for the 
Business Loan and SBG Programs. Ninety-six commenters recommended 
additional clarity from SBA on the definition on ``identity of 
interest,'' as to the aggregation of unrelated parties and former 
employers. Thirty-six commenters requested elimination of the 
``identity of interest'' regulation. SBA reviewed the language and 
disagrees with the request to eliminate the language related to 
identity of interest between close relatives, but otherwise agrees with 
the commenters' suggestion to remove other bases for affiliation 
through identity of interest. SBA has revised the proposed rule by 
retaining identity of interest between close relatives but otherwise 
eliminating discussion of identity of interest for other reasons.
    Section 121.301(f)(5). SBA proposed establishing the new Sec.  
121.301(f)(5) Affiliation based on franchise and license agreements, 
where SBA proposed language that would limit franchise or license 
agreement reviews to the applicant franchisee or licensee and the 
franchisor, and not consider any franchise or license relationship of 
an affiliate of the applicant. A total of 138 commenters supported this 
change to SBA's treatment of franchisee affiliation with franchisors. 
The majority of commenters, however, expressed concern that the 
proposed rule was confusing, and others commented that the proposed 
rule did not go far enough to resolve the challenges and costs involved 
in the review of franchise relationships. Some commenters stated the 
proposed rule would not eliminate inconsistent determinations of 
franchise affiliation by SBA. Partnering with internal and external 
stakeholders, SBA made an extensive effort to better understand the 
burden imposed by existing processes, to identify relevant risks and to 
develop meaningful improvements. Along with public comments, SBA 
received specific comment from the office of Steve Chabot, Chairman of 
the House Small Business Committee, encouraging SBA to streamline and 
improve how best to address franchised business size relative to 
affiliation.
    The current regulatory language in Sec.  121.103(f) recognizes that 
``the restraints imposed on a franchisee or licensee by its franchise 
or license agreement relating to standardized quality, advertising, 
accounting format, and other similar provisions, generally will not be 
considered in determining whether the franchisor or licensor is 
affiliated with the franchisee or licensee provided the franchisee or 
licensee has the right to profit from its efforts and bears the risk of 
loss commensurate with ownership.'' The current regulation continues, 
stating that ``affiliation may arise, however, through other means, 
such as common ownership, common management, or

[[Page 41426]]

excessive restrictions upon the sale of the franchise interest.'' 
Commenters indicated that SBA's determination of the types of controls 
that do or do not constitute affiliation is not clear and is 
inconsistent with the overarching concept that many restraints are 
generally not considered when determining affiliation. Some commenters 
recommended that the regulation be amended to delete the provision that 
affiliation would be found based on restrictions in the agreement so 
long as the franchisee continues to have the right to profit from its 
efforts and bears the risk of loss commensurate with ownership. 
Additionally, many commenters recommended language be included in the 
regulatory text to clarify SBA's intent to only review agreements of 
the ``applicant'' and not review any agreements of affiliated entities. 
These commenters recommended adding language to the regulatory text 
similar to what was included in the Supplementary Information in the 
proposed rule.
    Based on the volume of comments received in the current and 
previous rulemaking requests, and to provide consistency in its 
application of the principles of affiliation involving franchise or 
license agreements, SBA is removing regulatory text that only addressed 
certain types of restraint. The regulatory changes clarify that SBA 
does not consider that franchise or license relationships create 
affiliation, provided the franchisee/licensee has the right to profit 
from its efforts, and bears the risk of loss commensurate with 
ownership. SBA will provide guidance on the franchisee/licensee's right 
to profit from its efforts and bear the risk of loss commensurate with 
ownership in its Standard Operating Procedure (SOP) 50 10.
    SBA also is adding a sentence to the end of the regulatory text to 
clarify its intent that only franchise or license relationships of the 
applicant will be considered, not those of any of the applicant's 
affiliates.
    Section 121.301(f)(6). SBA proposed establishing the new Sec.  
121.301(f)(6) Affiliation based on SBA's determination of the totality 
of circumstances, where SBA proposed to retain finding of affiliation 
based on the totality of circumstances similar to the regulations 
currently found in Sec.  121.103(a)(5). There were 97 commenters 
requesting elimination of this rule, and 37 commenters indicated that 
including this requirement as a factor for determining affiliation 
would contravene SBA's stated intent of providing a bright line test of 
affiliation. Commenters requested examples of when SBA would apply the 
test so that participants could better understand how this factor would 
impact eligibility decisions. SBA reviewed and considered the concerns 
identified regarding the potential overarching but undefined 
aggregation of circumstances. SBA agrees that the prior rules in 
proposed Sec.  121.301(f)(1)-(5) and (7)-(8) provide specificity. 
Generally examples reviewed are negative control, and control through 
management agreement. Rather than include examples here, SBA is 
removing the totality of the circumstances criterion, but provides 
specific guidance in Sec.  121.301(f)(1) and (f)(3) to address negative 
control, and control through management agreements that would have been 
included in this section. SBA agrees with the commenters' suggestions 
and will remove this paragraph from the final rule. Therefore proposed 
Sec.  121.301(f)(7) and (f)(8) are renumbered Sec.  121.301(f)(6) and 
(f)(7).
    Section 121.301(f)(7). SBA proposed establishing the new Sec.  
121.301(f)(7) Determining the concern's size, where SBA states that SBA 
counts receipts, employees, or alternate size standards of a concern 
and its affiliates. There were no specific objections regarding this 
provision. SBA is adopting the rule as proposed, and renumbered as 
Sec.  121.301(f)(6).
    Section 121.301(f)(8). SBA proposed establishing the new Sec.  
121.301(f)(8) Exceptions to affiliation, where SBA would incorporate 
the exceptions to affiliation set forth in 13 CFR 121.103(b). There 
were no specific objections regarding this provision. The proposed rule 
is adopted as written, and renumbered as Sec.  121.301(f)(7).
    Finally, SBA proposed not to apply several current principles of 
affiliation that apply in the federal contracting and business 
development programs to the Business Loan, Disaster Loan, and SBG 
Programs. Specifically, SBA proposed to eliminate applying affiliation 
based on a newly organized concern (see Sec.  121.103(g)) and joint 
ventures (see Sec.  121.103(h)). One purpose of the newly organized 
concern rule is to prevent former small businesses from creating spin-
off companies in order to continue to perform on small business 
contracts or receive other contracting benefits. While this affiliation 
principle is appropriate for federal contracting, it is generally not 
applicable to the Business Loan, Disaster Loan, or SBG Programs. The 
only responsible party or parties for an SBA loan are the owners or 
guarantors executing debt instruments on behalf of the applicant 
business. Generally, former employers of small business applicants are 
not obligors nor are they guarantors on extensions of credit to SBA 
applicants. There were no specific objections to the elimination of 
newly organized concerns or joint ventures as affiliates for purposes 
of these programs. SBA adopts the proposed exclusion from the rule on 
affiliation for the Business Loan, Disaster Loan, and SBA Programs.
    With respect to joint ventures, these partnerships form when two or 
more businesses combine their efforts in order to perform on a federal 
contract or receive other contract assistance. SBA does not consider 
affiliation based on the joint venture to be of significant concern to 
the Business Loan or Disaster Loan Programs because a loan to any joint 
venture will require all members of the joint venture to accept full 
responsibility for loan guarantee liability. Also, agency records 
indicate that applicants for assistance under SBA Business Loan and 
Disaster Loan Programs are rarely, if ever, joint ventures, and, 
therefore, this provision is unnecessary. For the Surety Bond Guarantee 
Program, the guarantee is on the bond, not a contract. In any joint 
venture where the surety company requests a bond guarantee, each member 
of the joint venture is required to accept full responsibility for the 
bond guarantee liability.
    SBA also proposed to omit ``negative control'' as a stand-alone 
factor in determining affiliation for the purpose of loan eligibility. 
Pursuant to 13 CFR 121.103(a)(3), negative control may exist where a 
minority shareholder can block certain actions by the board of 
directors. SBA received many comments requesting clarity or removal of 
Sec.  121.301(f)(6) Affiliation based on SBA's determination of the 
totality of circumstances. SBA agreed to the removal of Sec.  
121.301(f)(6), and included additional specific guidance as to negative 
control through minority ownership and by management agreement in Sec.  
121.301(f)(1) and (f)(3) respectively.

IV. 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 
final rule is a ``significant'' regulatory action for the purposes of 
Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. However, this is not a major

[[Page 41427]]

rule under the Congressional Review Act, 5 U.S.C. 800.

Regulatory Impact Analysis

1. Is there a need for this regulatory action?
    The Agency believes it needs to reduce regulatory burdens and 
expand its Business Loan, Disaster Loan, and SBG Programs by 
streamlining delivery, lowering costs, and facilitating job creation. 
As noted above, responses received from the Federal Register proposed 
rule notice regarding SBA rules on affiliation were in favor of 
simplified rules that enhance understanding and align with normal 
commercial industry practices. Specifically of the 160 commenters for 
the proposed rule on affiliation, 4 comments were from businesses 
(accounting and consulting firms), 3 comments were from law firms, and 
1 comment was from an individual that did not disclose their 
organizational type. All of the small business comments showed support 
for the affiliation rule. Small business applicants will be assisted by 
this streamlining of requirements because it will be easier and more 
cost effective for a lender to research whether the applicant small 
business controls or is controlled by large companies which would 
jeopardize their eligibility. Higher lender costs potentially result in 
greater costs to the applicant small business. No comments were 
received from small businesses on the regulatory impact analysis during 
the proposed rule comment period.
2. What are the potential benefits and costs of this regulatory action?
    This rule will eliminate unnecessary cost burdens on loan 
applicants' and lenders' participation in SBA-guaranteed loans. This 
final rule exempts the Business Loan, Disaster Loan, and SBG Programs 
from certain government contracting rules that determine whether an 
entity is deemed affiliated with an applicant. These general 
affiliation rules apply to federal contracting to ensure that small 
businesses (and not another entity) receive and perform a federal 
contract when a preference for small businesses is provided. Many of 
these general principles of affiliation (e.g., newly organized concern) 
are not applicable to the Business Loan, Disaster Loan, or SBG 
Programs. SBA reviewed five years of data from the SBA Loan Guaranty 
Processing Center. The data specifically tracked reasons each loan 
would have been screened out. During the five-year period, based on the 
screen out reasons specific to affiliation, 1,379 small businesses 
failed to submit affiliate financials, and 1,363 needed clarifications 
or additional information to complete processing. SBA has determined 
that the proposed simplification of size based on affiliation will 
eliminate confusion, and save time and costs for the small business 
applicants and the lenders. Additionally this regulatory action will 
improve SBA processing efficiency and turnaround times.
3. What alternatives have been considered?
    As indicated above, on October 2, 2015, the Agency issued a 
proposed rule for comment in the Federal Register to identify several 
changes intended to reinvigorate the Business Loan, Disaster Loan, and 
SBG Programs by eliminating unnecessary compliance burdens and loan 
eligibility restrictions. The Agency previously published in the 
Federal Register on February 25, 2013, a prior proposed rule for 
comment on 7(a) and 504 loan program requirements which had also 
included proposed changes to the affiliation rules for loan programs. 
See Proposed Rule: 504 and 7(a) Loan Programs Updates, 78 FR 12633 
(February 25, 2013). Included in these proposals was an alternate 
affiliation definition. After a full comment period ending April 26, 
2013, and careful consideration of all comments, SBA decided to further 
deliberate and consider issues of redefining affiliation for the 
Business Loan Programs and SBG Program. As a result, no changes were 
adopted regarding affiliation in the 7(a) and 504 loan program final 
rule. See Final Rule: 504 and 7(a) Loan Programs Updates, 78 FR 15641 
(March 21, 2014).
    This final rule presents a set of requirements to determine 
affiliation based on the precedent separating the Small Business 
Innovation Research (SBIR) and Small Business Technology Transfer 
(STTR) programs from the government contracting standards. SBA has 
reviewed extensive public comments and suggestions in developing this 
final rule and considered changes needed to mitigate identified 
economic risk to the taxpayers and reduce waste, fraud, and abuse.

Executive Order 13563

    A description of the need for this regulatory action and benefits 
and costs associated with this action, including possible 
distributional impacts that relate to Executive Order 13563, are 
included above in the Regulatory Impact Analysis under Executive Order 
12866. The Business Loan Programs operate through the Agency's lending 
partners, which are 7(a) Lenders for the 7(a) Loan Program, 
Intermediaries for the Microloan Program and ILP Program, and CDCs for 
the 504 Loan Program. The Agency participated in public forums and 
meetings with NAGGL board members and program participants at industry 
conferences from the Fall of 2014 through Spring of 2015 which allowed 
it to reach trade associations and hundreds of its lending partners 
from which it gained valuable insight, guidance, and suggestions. The 
Agency's outreach efforts to engage stakeholders before proposing this 
rule was extensive, and concluded with the comment period.

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

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

    The SBA has determined that this final rule would not impose 
additional reporting and recordkeeping requirements under the Paperwork 
Reduction Act (PRA). In fact, those individuals and entities that SBA 
considers potential affiliates has been refined and reduced for the 
Business Loan, Disaster Loan, and the SBG Programs, which could result 
in reduced reporting and recordkeeping. Participants in SBA's 7(a) Loan 
Program will continue to report any affiliates of their business on SBA 
Form 1919 (OMB Control No. 3245-0348), and participants in SBA's 504 
Loan Program will continue to report affiliates on SBA Form 1244 (OMB 
Control No. 3245-0071). EIDL Program participants will continue to 
report affiliates on SBA Form 5 (OMB Control No. 3245-0017), and SBG 
Program participants will continue to report affiliates on SBA

[[Page 41428]]

Form 994 (OMB Control No. 3245-0007).

Regulatory Flexibility Act, 5 U.S.C. 601- 612

    When an agency issues a rulemaking, the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601-612, requires the agency to ``prepare and make 
available for public comment a final regulatory analysis'' which will 
``describe the impact of the final rule on small entities.'' 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.
    The rulemaking will positively impact all of the approximately 
4,000 7(a) Lenders (some of which are small), 35 Intermediary Lending 
Pilot lenders, approximately 260 CDCs (all of which are small), 145 
Microloan Intermediaries, and 23 Sureties in the SBG Program. The final 
rule will reduce the burden on program participants. SBA has determined 
that the streamlining of certain program process requirements through 
this modification of eligibility based on affiliation will present no 
adverse or significant impact, including costs for the small business 
borrower, lender, or CDC. This proposal presents a best practice rule 
that removes unnecessary regulatory burdens, increases access to 
capital for small businesses and facilitates American job preservation 
and creation. SBA has determined that there is no significant impact on 
a substantial number of small entities.
    Small business applicants will be assisted by this streamlining of 
requirements because it will be easier and more cost effective for 
lenders to identify whether applicant small businesses control or are 
controlled by other companies that would jeopardize eligibility. SBA 
reviewed five years of data from the SBA Loan Guaranty Processing 
Center. The data specifically tracked reasons for loan screen outs that 
delayed processing. During the five-year period based on the screen out 
reasons specific to affiliation, the processing was delayed for over 
2,600 loan applicants. SBA believes that the proposed simplified rules 
on affiliation provide participants with needed clarity that results in 
reduction of the paperwork and review time required to make accurate 
determinations. The time/cost benefit for business applicants and 
participants is substantial. Additionally this regulatory action will 
improve SBA processing efficiency and turnaround times.
    The SBA Administrator certified to the Chief Counsel for Advocacy 
of the SBA that this rule, if adopted, would not have a significant 
economic impact on a substantial number of small entities. As such, the 
Chief Counsel certifies that this rule will not have a significant 
impact on a substantial number of small entities.

List of Subjects

13 CFR Part 109

    Community development, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.

13 CFR Part 115

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

13 CFR Part 120

    Individuals with disabilities, Loan programs--business, Reporting 
and recordkeeping requirements, Small businesses.

13 CFR Part 121

    Grant programs--business, Individuals with disabilities, Loan 
programs--business, Small businesses.

    For the reasons stated in the preamble, the Small Business 
Administration amends 13 CFR parts 109, 115, 120, and 121 as follows:

PART 109--INTERMEDIARY LENDING PILOT PROGRAM

0
1. The authority citation for 13 CFR part 109 continues to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), (b)(7), and 636(1).

0
2. Amend Sec.  109.20 to revise the definition of ``Affiliate'' to read 
as follows:


Sec.  109.20  Definitions.

    Affiliate is defined in Sec.  121.301(f) of this chapter.
* * * * *

PART 115--SURETY BOND GUARANTEE

0
3. The authority citation for 13 CFR 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
4. Amend Sec.  115.10 to revise the definition of ``Affiliate'' to read 
as follows:


Sec.  115.10  Definitions.

    Affiliate is defined in Sec.  121.301(f) of this chapter.
* * * * *

PART 120--BUSINESS LOANS

0
5. The authority citation for 13 CFR part 120 continues to read as 
follows:

    Authority:  15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note, 
636(a), (h), and (m), 650, 687(f), 696(3), and 697(a) and (e); Pub. 
L. 111-5, 123 Stat. 115, Pub. L. 111-240, 124 Stat. 2504.

0
6. Revise the first sentence of Sec.  120.151 to read as follows:


Sec.  120.151  What is the statutory limit for total loans to a 
Borrower?

    The aggregate amount of the SBA portions of all loans to a single 
Borrower, including the Borrower's affiliates as defined in Sec.  
121.301(f) of this chapter, must not exceed a guaranty amount of 
$3,750,000, except as otherwise authorized by statute for a specific 
program. * * *

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
7. The authority citation for 13 CFR part 121 continues to read as 
follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 662, and 694a(9).

0
8. Amend Sec.  121.103 to add paragraph (a)(8) to read as follows:


Sec.  121.103  How does SBA determine affiliation?

    (a) * * *
    (8) For applicants in SBA's Business Loan, Disaster Loan, and 
Surety Bond Guarantee Programs, the size standards and bases for 
affiliation are set forth in Sec.  121.301.
* * * * *
0
9. Amend Sec.  121.301 to revise the section heading and to add 
paragraph (f) to read as follows:


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

* * * * *
    (f) Concerns and entities are affiliates of each other when one 
controls or has the power to control the other, or a third party or 
parties controls or has the power to control both. It does not matter 
whether control is exercised, so long as the power to control exists. 
Affiliation under any of the circumstances described below is 
sufficient to establish affiliation for applicants for SBA's Business 
Loan, Disaster Loan, and Surety Bond Programs. For this rule, the 
Business Loan Programs consist of the 7(a) Loan Program, the Microloan 
Program, the Intermediary Lending Pilot Program, and the Development 
Company Loan Program (``504 Loan Program''). The Disaster Loan Programs 
consist of Physical Disaster Business

[[Page 41429]]

Loans, Economic Injury Disaster Loans, Military Reservist Economic 
Injury Disaster Loans, and Immediate Disaster Assistance Program loans. 
The following principles apply for the Business Loan, Disaster Loan, 
and Surety Bond Guarantee Programs:
    (1) Affiliation based on ownership. For determining affiliation 
based on equity ownership, a concern is an affiliate of an individual, 
concern, or entity that owns or has the power to control more than 50 
percent of the concern's voting equity. If no individual, concern, or 
entity is found to control, SBA will deem the Board of Directors or 
President or Chief Executive Officer (CEO) (or other officers, managing 
members, or partners who control the management of the concern) to be 
in control of the concern. SBA will deem a minority shareholder to be 
in control, if that individual or entity has the ability, under the 
concern's charter, by-laws, or shareholder's agreement, to prevent a 
quorum or otherwise block action by the board of directors or 
shareholders.
    (2) Affiliation arising under stock options, convertible 
securities, and agreements to merge. (i) In determining size, SBA 
considers stock options, convertible securities, and agreements to 
merge (including agreements in principle) to have a present effect on 
the power to control a concern. SBA treats such options, convertible 
securities, and agreements as though the rights granted have been 
exercised.
    (ii) Agreements to open or continue negotiations towards the 
possibility of a merger or a sale of stock at some later date are not 
considered ``agreements in principle'' and are thus not given present 
effect.
    (iii) Options, convertible securities, and agreements that are 
subject to conditions precedent which are incapable of fulfillment, 
speculative, conjectural, or unenforceable under state or Federal law, 
or where the probability of the transaction (or exercise of the rights) 
occurring is shown to be extremely remote, are not given present 
effect.
    (iv) An individual, concern or other entity that controls one or 
more other concerns cannot use options, convertible securities, or 
agreements to appear to terminate such control before actually doing 
so. SBA will not give present effect to individuals', concerns', or 
other entities' ability to divest all or part of their ownership 
interest in order to avoid a finding of affiliation.
    (3) Affiliation based on management. Affiliation arises where the 
CEO or President of the applicant concern (or other officers, managing 
members, or partners who control the management of the concern) also 
controls the management of one or more other concerns. Affiliation also 
arises where a single individual, concern, or entity that controls the 
Board of Directors or management of one concern also controls the Board 
of Directors or management of one of more other concerns. Affiliation 
also arises where a single individual, concern or entity controls the 
management of the applicant concern through a management agreement.
    (4) Affiliation based on identity of interest. Affiliation arises 
when there is an identity of interest between close relatives, as 
defined in 13 CFR 120.10, with identical or substantially, identical 
business or economic interests (such as where the close relatives 
operate concerns in the same or similar industry in the same geographic 
area). Where SBA determines that interests should be aggregated, an 
individual or firm may rebut that determination with evidence showing 
that the interests deemed to be one are in fact separate.
    (5) Affiliation based on franchise and license agreements. The 
restraints imposed on a franchisee or licensee by its franchise or 
license agreement generally will not be considered in determining 
whether the franchisor or licensor is affiliated with an applicant 
franchisee or licensee provided the applicant franchisee or licensee 
has the right to profit from its efforts and bears the risk of loss 
commensurate with ownership. SBA will only consider the franchise or 
license agreements of the applicant concern.
    (6) Determining the concern's size. In determining the concern's 
size, SBA counts the receipts, employees (Sec.  121.201), or the 
alternate size standard (if applicable) of the concern whose size is at 
issue and all of its domestic and foreign affiliates, regardless of 
whether the affiliates are organized for profit.
    (7) Exceptions to affiliation. For exceptions to affiliation, see 
13 CFR 121.103(b).

Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-14984 Filed 6-24-16; 8:45 am]
 BILLING CODE 8025-01-P