[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]
[Proposed Rules]
[Pages 91049-91058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30104]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

RIN 3245-AG65


Small Business Investment Companies--Administrative Fees

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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[[Page 91050]]

SUMMARY: The U.S. Small Business Administration (SBA) proposes to 
increase the Small Business Investment Company (SBIC) licensing and 
examination fees. The Small Business Investment Act of 1958, as 
amended, allows SBA to collect licensing and examination fees to offset 
SBA's costs associated with the administration of these two activities. 
SBA last increased fees for SBICs in 1996. Current fees offset less 
than 40% of SBA's administrative expenses related to these activities. 
The proposed rule would revise existing regulations to increase, over a 
five-year period, SBIC licensing and examination fees in order to 
annually recoup an estimated 70% of SBA administrative expenses related 
to these activities. After the five year period, the rule proposes 
annual increases of these fees based on inflation. To encourage 
investment into underserved areas, the proposed rule would establish 
certain examination fee discounts for SBICs that make significant low 
and moderate income (LMI) investments.

DATES: Comments on the proposed rule must be received on or before 
February 14, 2017.

ADDRESSES: You may submit comments, identified by RIN 3245-AG65, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail, Hand Delivery/Courier: Mark Walsh, Associate 
Administrator for the Office of Investment and Innovation, U.S. Small 
Business Administration, 409 Third Street SW., Washington, DC 20416.
    SBA will post comments on http://www.regulations.gov. If you wish 
to submit confidential business information (CBI) as defined in the 
User Notice at http://www.regulations.gov, please submit the 
information to Theresa Jamerson, Office of Investment and Innovation, 
409 Third Street SW., Washington, DC 20416. Highlight the information 
that you consider to be CBI and explain why you believe this 
information should be held confidential. SBA will review the 
information and make the final determination of whether it will publish 
the information or not.

FOR FURTHER INFORMATION CONTACT: Theresa Jamerson, Office of Investment 
and Innovation, (202) 205-7563 or [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background Information

    The Small Business Investment Act of 1958, as amended, authorizes 
SBA to collect fees to cover the costs associated with the licensing 
and examination of SBICs. 15 U.S.C. 681(e)(2)(B) and 687b(b). Although 
SBA has regulations setting the amount of these fees, SBA has not 
increased licensing and examination fees for SBICs since 1996. As part 
of the final rule published January 31, 1996 (61 FR 3177), SBA set 
licensing fees ``to reflect the Agency's costs of processing 
applications'' and similarly set examination fees to ``produce total 
revenue sufficient to cover the current direct costs to SBA of 
conducting examinations.'' In a subsequent rule published on April 30, 
1997 (62 FR 23337), SBA capped examination fees at $14,000, which 
lowered the fee for SBICs with over $60 million in assets. As part of 
the rationale for this change, the rule stated, ``many of the largest 
SBICs are bank-owned and do not use federal leverage, so that fees 
computed on the basis of total assets do not appropriately reflect the 
level of effort and risk associated with the examination process.'' In 
December 1996, only 6 of the 28 SBICs with over $60 million in assets 
used leverage and only 1 of the 12 SBICs with over $120 million in 
assets used leverage. As of September 14, 2016, 114 of the 121 SBICs 
with over $60 million in assets used leverage and 64 of the 66 SBICs 
with over $120 million in assets used leverage. Since nearly all of the 
SBIC program's largest SBICs now utilize leverage, the rationale stated 
in the 1997 rule as a basis for reducing examination fees no longer 
applies.
    The 1997 rule, which remains in place today, does not include an 
inflation adjustment for these fees. Consequently, these fees have not 
kept pace with rising SBA costs due to changes in inflation and 
increased risk in its portfolio. In 1996 when the fees were most 
recently increased to cover SBA's costs, aggregate outstanding SBA 
leverage was less than $1.4 billion; this figure has grown to $10.4 
billion as of June 30, 2016. Licensing and examination fees received in 
Fiscal Year (FY) 2015 were slightly lower than those received in FY 
1999 (the earliest date fees paid and SBA expenses for these activities 
are readily available) because, at that time, SBA was licensing SBICs 
issuing Participating Securities (in addition to SBICs issuing only 
Debentures), which pay higher licensing and examination fees than SBICs 
issuing only Debentures. While licensing and examination fees have 
decreased, SBA's expenses related to licensing and examination 
activities have doubled due to inflation and the cost of obtaining 
necessary resources to manage SBA's increased risk.
    Although fees set in 1996, as adjusted in 1997, were intended to 
fully reimburse SBA's costs, by FY 1999, licensing and examination fees 
only covered approximately 85% of SBA's related expenses. In FY 2015, 
licensing and examination fees covered less than 40% of SBA's related 
licensing and examination expenses.
    In FY 2015, SBA processed 44 Management Assessment Questionnaires 
as part of its initial licensing review and 32 SBIC license 
applications in its final licensing review. SBA collected approximately 
$0.4 million in SBIC licensing fees, which reimbursed less than a 
quarter of SBA's expenses associated with licensing. In FY 2015 SBA 
issued 222 exam reports for over 300 operating SBICs and collected $1.8 
million in examination fees, reimbursing less than half of SBA's costs 
associated with examination activities. SBA's Office of Inspector 
General (OIG) also noted the disparity between examination costs and 
fees collected in Audit Report 13-22: Improved Examination Quality Can 
Strengthen SBA's Oversight of Small Business Investment Companies 
(available at http://www.sba.gov/oig/audit-report-13-22-improved-examination-quality-can-strengthen-sbas-oversight-small-business), 
stating, ``while the SBA has continued to exercise its statutory 
authority to collect examination fees, we determined the fees were not 
sufficient to keep pace with rising costs.'' OIG Audit Report 13-22 at 
8.
    The primary reason that licensing and examination fees do not cover 
the current cost of these activities is inflation. Another factor is 
the increased number of SBICs utilizing higher amounts of leverage. 
Since 1996 (when the fees were last increased), the number of leveraged 
SBICs with assets over $60 million has risen from 6 SBICs in 1996 to 
114 in September 2016. SBA applies a higher level of credit analysis to 
leveraged SBICs than non-leveraged SBICs in both licensing and exams. 
Another factor is that SBA has intensified its licensing activities in 
the past ten years due to the increased amounts of leverage sought by 
applicants and in order to improve the quality of its SBIC portfolio. 
SBA has adopted many industry best practices in its licensing process, 
including accessing relevant private equity performance resources and 
benchmarking applicants to industry performance. These industry-
standard best practices cost money. For example, SBA spent over 
$100,000 for information subscription services to support licensing 
activities in FY 2016.

[[Page 91051]]

However, SBICs ultimately benefit financially from improvements in the 
quality of the SBIC program portfolio through lower annual charges on 
SBA-guaranteed debenture leverage. SBA formulates the annual charge 
each year to keep the program at zero subsidy cost. The SBIC debenture 
leverage annual charge has decreased from 1% in FY 1999 to an annual 
charge of 0.347% in FY 2017, reflecting improvements to the SBIC 
debenture portfolio.
    Even with these improvements, SBA recognizes that its oversight 
capabilities must continue to improve, particularly in the areas of 
technology and training in connection with its licensing and 
examination activities. As indicated by the OIG's report, ``without 
proper training and technology examiners may not effectively identify 
all regulatory violations as intended by the Act.'' OIG Audit Report 
13-22 at 11. Testimony to the House Small Business Committee on behalf 
of the Small Business Investor Alliance in July 2013 also indicated 
that the SBIC Program has ``a number of major technological and 
information systems challenges.'' Examining the Small Business 
Investment Company Program: Hearing Before the House Subcommittee on 
Investigations, Oversight and Regulations, 113th Congress (Statement by 
Steven Brown, President, Trinity Capital Investment, testifying on 
behalf of the Small Business Investor Alliance), which may be found at 
http://smallbusiness.house.gov/uploadedfiles/7-25-2013_steven_brown_testimony_final_july_25.pdf. In order to overcome 
some of these technological challenges, SBA needs to expand its web-
based reporting application to address licensing and examinations 
needs. These efforts are expected to increase licensing and examination 
costs by $500,000 annually. SBA believes that improvements in its web-
based tools will facilitate the exchange and analysis of information 
and result in more effective licensing and examination activities, as 
well as improve efficiency and ease of use by SBIC program 
stakeholders. To address identified training needs, SBA expects to 
incur additional training costs amounting to between $50,000 and 
$100,000 to support analysts in licensing and examinations.
    Finally, due to recent attrition in staffing and to address peaks 
in licensing, SBA expects to hire contractors to support both 
examinations and licensing processes. Due to the specialized skill set 
associated with these activities, SBA estimates additional contracting 
resources may cost an additional $600,000 for examinations and up to 
$400,000 for licensing annually.
    Based on estimated costs for FY 2017, SBA projects costs exceeding 
$2 million for SBIC licensing activities and $4.5 million for SBIC 
examination activities. SBA is not currently proposing to increase fees 
to 100% of its anticipated costs; SBA estimates the proposed fees would 
recoup only 70% of its anticipated licensing and examination costs. 
Under this proposed rule, SBA seeks to increase SBIC licensing and 
examination fees in order to: (1) Recoup a significant portion of its 
projected expenses associated with licensing and examination 
activities; (2) pay for necessary technology upgrades related to 
licensing and examinations; (3) pay for additional licensing and 
examiner training; (4) pay for necessary information resources commonly 
available to private equity fund of funds to support due diligence, 
analysis and decision-making in the licensing area; and (5) pay for 
contractors with specialized expertise to help support staff associated 
with licensing and examination-related activities. SBA proposes to 
increase these fees over a five year period in order to provide a more 
gradual impact on SBICs and then annually adjust these fees for 
inflation beginning on October 1, 2021. SBA may consider increasing its 
fees to reimburse more of its expenses at a later time, but will be 
mindful of any impact on the level of interest in the program.

II. Section by Section Analysis

A. Indexing Fees

Section 107.50--Definition of Terms
    In order to adjust licensing and examination fees to remain current 
with inflation after the five year period, SBA proposes to add the 
defined term ``Inflation Adjustment'', which would be defined as the 
methodology used to increase SBIC administrative fees using the 
consumer price index for all urban consumers (CPI-U), as calculated by 
the U.S. Bureau of Labor and Statistics (BLS), based on the U.S. city 
average for all items, not seasonally adjusted, with the base period 
1982-84=100. After consulting with BLS, SBA chose this index because it 
reflects the average change in the prices paid for a market basket of 
goods and services and is most frequently used in escalation 
agreements, as discussed on the BLS Web site (http://www.bls.gov/cpi/cpi1998d.htm). Historical CPI-U values may be found at http://data.bls.gov/timeseries/CUUR0000SA0?. Beginning October 1, 2021, SBA 
would recalculate the examination and licensing fees annually to 
reflect increases in the CPI-U at the beginning of each government 
fiscal year (October 1) based on the change in the index from the 
previous year and round the amount to the nearest $100. If the CPI-U 
decreases, no change will be made to the fees. SBA will publish the 
resulting fees in a notice in the Federal Register each year prior to 
the date of the increase. SBA is proposing to calculate the increase 
based on the change from the previous year's June CPI-U to the most 
recent June CPI-U, which will provide sufficient time for SBA to 
publish the revised fee before October. For example, the CPI-U is 
238.638 in June 2015 and 241.038 in June 2016, a 1.0057% increase.

B. Licensing Fees

Section 107.300--License Application Form and Fee
    Regulations currently require SBIC applicants to pay a base fee of 
$10,000 plus an additional $5,000 if the applicant intends to operate 
as a limited partnership (Partnership Licensee). Most SBIC applicants 
are organized as limited partnerships and therefore currently pay a 
licensing fee of $15,000. Applicants seeking to be licensed as Early 
Stage SBICs are required to pay both the additional $5,000 Partnership 
Licensee fee and an additional $10,000 Early Stage fee, for a total of 
$25,000. Current regulations also include an additional $5,000 fee for 
applicants intending to issue Participating Securities leverage (a type 
of leverage, no longer available, that was designed to encourage SBICs 
to invest in equity securities).
    Current regulations require applicants to pay the licensing fee 
when they submit their complete license application, which initiates 
the final phase in the SBIC licensing process. SBA expends significant 
resources prior to this submission. The first phase in the licensing 
process begins when a first time applicant submits its Management 
Assessment Questionnaire (``MAQ''), which consists of SBA Forms 2181 
and exhibits A through F of SBA Form 2182, or when the management of an 
existing SBIC submits a request to SBA to be considered for a 
subsequent SBIC license. (SBIC application forms are available on SBA's 
Web site at www.sba.gov/sbic.) SBA reviews the MAQ or subsequent SBIC 
applicant materials, performs due diligence, analyzes the management 
team's performance, interviews those management teams invited for an 
in-person interview, and ultimately determines whether to issue a 
formal invitation (Green Light letter) to the

[[Page 91052]]

applicant to proceed to the final licensing phase of the process. Once 
an applicant receives a Green Light letter, the applicant typically has 
up to 18 months to raise the requisite private capital. During this 
timeframe, SBA keeps in touch with the applicant, conducts SBIC 
training classes, and provides guidance as needed. The applicant pays 
the licensing fee only at the final licensing phase, which occurs when 
it submits its complete license application (consisting of an updated 
SBA Form 2181 and complete SBA Forms 2182 and 2183) after raising 
sufficient private capital. A number of applicants fail to raise the 
requisite capital or for other reasons do not submit a license 
application. As a result, SBA estimates that less than half of SBIC 
applicants pay the licensing fee, even though SBA expends resources on 
all applicants.
    To clarify its existing practices, the proposed rule defines SBA's 
licensing phases and what forms and fees are required at each phase as 
discussed above. SBA considered adding a fee at the beginning of the 
licensing process to help spread the costs across all applicants on 
which SBA expends resources, but decided not to pursue this approach so 
as to not discourage applicants from applying to the program. SBA 
invites comments on whether SBA should charge a fee at the first phase 
to help spread the costs across all applicants on which SBA expends 
resources.
    The proposed rule would remove the additional fee currently charged 
to applicants seeking to operate as a Partnership Licensee, since 
substantially all applicants intend to operate as a Partnership 
Licensee and this is not a significant variable in determining costs. 
The proposed rule also removes the additional fee for Participating 
Securities Licensees, since SBA stopped issuing commitments for 
Participating Securities Leverage and licensing new Participating 
Securities SBICs as of October 1, 2004. The proposed rule increases the 
licensing fee to $25,000 in FY 2017, after the effective date of a 
final rule, with further increases of $5,000 each October for the next 
4 years, resulting in a licensing fee of $45,000 by October 1, 2020. 
Beginning on October 1, 2021, SBA will increase the licensing fee using 
the Inflation Adjustment and, prior to the date of the increase, will 
publish the amount in a Notice in the Federal Register. As previously 
discussed, this increase will be used to offset SBA's costs associated 
with additional training, upgraded information technology, necessary 
subscription services, and specialized contractor support. Even with 
this increase, SBA expects these fees to offset less than half of SBA's 
licensing expenses by FY 2021. SBA may consider further increases in 
the future in order to fully cover the costs of its licensing 
activities as authorized by the Small Business Investment Act, but does 
not want to increase fees too sharply without better understanding the 
impact fee increases may have on application submission rates.
Section 107.410--Changes in Control of Licensee
    SBA treats a change in control of a Licensee as a licensing action, 
since SBA must perform similar functions and processes to those in 
SBA's final licensing phase. Current regulations require SBICs seeking 
a change in control to pay a $10,000 fee, similar to the current 
licensing fee. Since the procedures and costs are similar to those in 
the final licensing process, the proposed regulations change the 
current fee to be equal to the licensing fee identified in proposed 
Sec.  107.300.

C. Examination Fees

Section 107.692--Examination Fees
    Current Sec.  107.692(b) provides for a base examination fee 
calculated as a percentage of an SBIC's total assets at cost. As more 
specifically set forth in current Sec.  107.692(b), the percentage 
decreases as the assets increase, with the maximum base examination fee 
set at $14,000 for SBICs with total assets greater than $60 million.
    Current Sec.  107.692(c) then provides for various adjustments to 
the base examination fee which are summarized in the table set forth in 
Sec.  107.692(d), as shown on Table 1: Current SBIC Examination Fee 
Adjustments, as follows:

                                Table 1--Current SBIC Examination Fee Adjustments
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                                                 Amount of                                         Amount of
                                              discount--%  of                                   addition--%  of
         Examination fee  discounts           base examination    Examination fee additions     base examination
                                                    fee                                               fee
----------------------------------------------------------------------------------------------------------------
No prior violations........................                 15  Partnership or limited                         5
                                                                 liability company.
Responsiveness.............................                 10  Participating Security                        10
                                                                 Licensee.
                                                                Records/Files at multiple                     10
                                                                 locations.
                                                                Early Stage SBIC.............                 10
----------------------------------------------------------------------------------------------------------------

    Current Sec.  107.692(e) provides that SBA may assess an additional 
fee of $500 per day if SBA determines the examination is delayed due to 
the SBIC's lack of cooperation or the condition of its records.
    Proposed Sec.  107.692(b) would replace the base fee calculation 
with the following formula: Base Fee = Minimum Base Fee + 0.024% of 
assets at cost, but not to exceed the Maximum Base Fee. Both the 
Minimum Base Fee and the Maximum Base Fee would change each year as 
shown on Table 3: Minimum and Maximum Base Fees:

                                     Table 3--Minimum and Maximum Base Fees
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                                                                                   Maximum base    Maximum base
                                                                   Minimum  base   fee for non-       fee for
       Time period  (based on the examination start date)               fee          leveraged       leveraged
                                                                                       SBICs           SBICs
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February 14, 2017 to September 30, 2017.........................          $5,000         $20,000         $20,000
October 1, 2017 to September 30, 2018...........................           6,000          22,500          26,000
October 1, 2018 to September 30, 2019...........................           7,000          25,000          32,000

[[Page 91053]]

 
October 1, 2019 to September 30, 2020...........................           8,000          27,500          38,000
October 1, 2020 to September 30, 2021...........................           9,000          30,000          44,000
----------------------------------------------------------------------------------------------------------------

    For the purposes of calculating the examination fee, the proposed 
rule defines Non-leveraged SBICs as SBICs that have no outstanding SBA-
guaranteed leverage or leverage commitments and, in the case of SBICs 
that have issued leverage in the form of Participating Securities, 
those SBICs that have no outstanding Earmarked Assets. An SBIC that 
satisfies these requirements must also certify to SBA that it will not 
seek new SBA leverage in the future. As discussed in the 1997 rule, 
non-leveraged SBICs pose no credit risk to SBA and therefore require 
less time to examine. The lower Maximum Base Fee for non-leveraged 
SBICs reflects this reduced effort. The lower Maximum Base Fee for non-
leveraged SBICs also provides a small incentive for leveraged SBICs to 
repay their leverage. By October 1, 2020, the examination fees are 
estimated to cover most of SBA's costs related to examination 
activities.
    An example may be helpful to demonstrate the gradual phase-in of 
the proposed exam fees. Assume that in March 2019, a leveraged SBIC has 
$125 million in assets at cost. The Base Fee would be equal to $32,000, 
the Maximum Base Fee for that time period, since the Base Fee 
calculation ($7,000 + .024% x $125 million) computes to $37,000. If the 
SBIC still had $125 million in assets at cost and outstanding leverage 
in March 2021, the Base Fee would be $39,000, since the Base Fee 
calculation ($9,000 + .024% x $125 million) would compute to $39,000 
and the Maximum Base Fee for leveraged SBICs would be $40,000. If the 
SBIC had repaid all SBA leverage, had no leverage commitments and 
certified that it did not intend to seek leverage in the future, it 
would qualify as a non-leveraged SBIC and the Base Fee would be reduced 
to $30,000, based on the non-leveraged Maximum Base Fee in March 2021.
    In considering examination fees, SBA reviewed the expenses reported 
in the Form 468 related to private sector financial auditors (which 
perform activities similar to an examination). In FY 2015, private 
sector auditor expenses for SBICs ranged from $35,000 to over $65,000 
(depending on the size of the fund) with an average audit cost of 
approximately $43,000. By FY 2021, the SBIC Base Fee would range from 
$9,000 to $44,000 with an expected average examination fee of $19,300. 
SBA believes the proposed examination fees are reasonable.
    To keep the fees aligned with SBA's costs, beginning on October 1, 
2021, the Base Fee would be adjusted annually by increasing both the 
Minimum and Maximum Base Fees using the Inflation Adjustment. For 
example, if the Inflation Adjustment was 1.5% between June 2020 and 
June 2021, the Minimum Base Fee beginning in FY 2022 would be $9,100 
and the Maximum Base Fee would be $30,600 for non-leveraged SBICs and 
$44,900 for leveraged SBICs.
    Consistent with current regulations, proposed Sec.  107.692(b) only 
computes a Base Fee. That Base Fee is then increased or decreased using 
the adjustments defined in Sec.  107.692(c) to determine the final 
examination fee. Proposed Sec.  107.692(c) would change the examination 
fee adjustments to better reflect SBA costs and provide certain 
incentives to SBICs. These changes are identified below:
     Low and Moderate Income (LMI) Investing Discount: Proposed 
Sec.  107.692(c)(2) would apply a discount of 1% of the Base Fee for 
every $10 million in LMI Investments (in dollars at cost) financed 
since the Licensee's last examination up to a maximum 10% of the Base 
Fee. SBA will not spend any less time or resources examining SBICs with 
LMI Investments as a result of this discount, but is including the 
discount in order to provide an incentive to SBICs to make LMI 
Investments.
     Remove Fully-responsive Discount and Non-responsiveness 
Addition: Current regulations provide a 15% discount if the SBIC is 
``fully responsive to the letter of notification of examination.'' Most 
SBICs currently receive this discount, and the proposed Base Fee 
already reflects the cost efficiencies resulting from responsiveness. 
To compensate SBA for the additional time associated with SBICs that 
are not responsive, proposed Sec.  107.692(c)(3) would add 15% of the 
Base Fee for non-responsiveness or ``not fully responsive to the letter 
of notification of examination.''
     Remove Additions for Partnership and LLC: Current 
regulations identify additions to the Base Fee for SBICs organized as 
partnerships or limited liability companies (LLCs). The proposed rule 
would remove these additional fees from Sec.  107.692(c). Since 
substantially all SBICs are organized as partnerships or LLCs, the cost 
to SBA of examining SBICs with this structure is reflected in the 
proposed Base Fee.
     Remove Additions for Participating Securities Licensees 
and Early Stage SBICs: Current regulations include additions to the 
Base Fee if the SBIC is authorized to issue Participating Securities or 
is licensed as an Early Stage SBIC. SBA promulgated these additional 
fees because these types of SBICs were perceived to engage in 
particularly complex financing transactions. However, given the 
sophistication of the financing transactions of many of today's SBICs, 
whether standard debenture SBICs or otherwise, SBA no longer sees a 
need for this fee adjustment and proposes to remove it from Sec.  
107.692(c).
     Unresolved Finding Addition: SBA expends significant time 
monitoring and resolving examination findings that have remained 
unresolved for many months, and in some cases, years. SBA believes that 
SBICs should resolve all examination findings within 90 days from 
notification. To encourage SBICs to resolve findings in a timely 
manner, proposed Sec.  107.692(c)(5) would assess an additional fee 
equal to 5% of the Base Fee for every 30 calendar days or portion 
thereof for each examination finding that remains unresolved after a 90 
calendar day grace period after the SBIC is notified that corrective 
action must be taken to resolve an examination finding, unless SBA 
ultimately resolves the finding in the SBIC's favor.
    As an example, if an SBIC is notified on May 1, 2018 of an 
examination finding that requires resolution, the SBIC would have 90 
calendar days (through July 30, 2018) to resolve the finding. If the 
SBIC does not resolve the examination finding until September 10, 2018, 
the SBIC would have taken 132 days to resolve the finding, or 42 days

[[Page 91054]]

beyond the 90 calendar day cure period. If the SBIC's base examination 
fee was $20,000, SBA would assess an additional fee of $2,000 
calculated as follows:

                                                First 30 days:                                         $1,000  (5% of Base Fee)
                                +               Next 12 days:                                          $1,000
                               -------------------------------------------------------------------------------
                                                Total Unresolved Finding Addition:                     $2,000
 

    If the SBIC had two findings that each took 132 days to resolve, 
the total unresolved finding addition would be $4,000. There would be 
no additional charge if SBA ultimately resolved the finding in the 
SBIC's favor.
    Proposed Sec.  107.692(c)(1) keeps the 15% discount for SBICs that 
have no outstanding regulatory violations at the time of the 
commencement of the examination and no violations as a result of the 
most recent prior examination. Proposed Sec.  107.692(c)(5) retains the 
10% addition charged to SBICs that maintain records located in multiple 
locations. SBA believes both these adjustments continue to be 
appropriate. A summary of the resulting proposed examination fee 
discounts and additions is summarized in Table 4: Proposed Examination 
Fee Discounts and Additions, below:

                            Table 4--Proposed Examination Fee Discounts and Additions
----------------------------------------------------------------------------------------------------------------
                                        Amount of discount--%       Examination fee       Amount of addition--%
      Examination fee discounts              of base fee               additions               of base fee
----------------------------------------------------------------------------------------------------------------
No outstanding violations; no          15%....................  Non-responsive.........  15%
 violations in prior exam.
LMI Investments......................  1% of Base Fee for       Records/Files at         10%
                                        every $10 million in     multiple locations.
                                        LMI Investments funded
                                        since the last
                                        examination up to a
                                        maximum discount of
                                        10% of Base Fee.
                                                                Unresolved Findings....  5% of Base Fee for
                                                                                          every 30 days or
                                                                                          portion thereof beyond
                                                                                          the 90 day grace
                                                                                          period for each
                                                                                          unresolved finding
----------------------------------------------------------------------------------------------------------------

    Just as with current Sec.  107.692, the final examination fee is 
calculated by taking the Base Fee determined under Sec.  107.692(b) and 
adding or deducting the adjustments identified in proposed Sec.  
107.692(c). The following example demonstrates this calculation. Assume 
that in March 2019, a leveraged SBIC has $125 million in assets at 
cost. The Base Fee calculation ($8,500 + .024% x $200 million) computes 
to $38,500. Since the Base Fee may not exceed the Maximum Base Fee for 
the relevant time period, the Base Fee would be equal to $30,000. If 
the SBIC is non-responsive to the examiner's requests, has records in 
multiple locations, and does not qualify for any of the proposed 
discounts, the examination fee would be calculated as follows:

                                    ..........   $30,000  Base Fee determined per proposed Sec.   107.692(b)
                                    +            $ 4,500  15% addition for non-responsiveness per proposed Sec.   107.692(c)(3)
                                    +            $ 3,000  10% addition for records in multiple locations per proposed Sec.   107.692(c)(4)
                                    ..........   $37,500  Examination Fee
 

    Although the Base Fee has a minimum and maximum, the resulting 
examination fee does not have a minimum or maximum. Unresolved findings 
beyond the 90-day grace period could result in increasingly higher 
examination fees. These additions are intended to incentivize SBICs to 
be responsive and resolve any findings as quickly as possible.
    Proposed Sec.  107.692(e) changes the current $500 per day delay 
fee to $700 per day, which will be adjusted annually using the 
Inflation Adjustment, beginning on October 1, 2021 to coincide with the 
date on which the other fee inflation adjustments are computed.
Compliance With Executive Orders 12866, 12988 and 13132, the Paperwork 
Reduction Act (44 U.S.C. Ch. 35) and the Regulatory Flexibility Act (5 
U.S.C. 601-612) Executive Order 12866
    The Office of Management and Budget has determined that this rule 
is not a ``significant'' regulatory action under Executive Order 12866. 
However, to provide additional transparency for the SBIC community, a 
Regulatory Impact Analysis is set forth below.
1. Necessity of Regulation
    The Small Business Investment Act authorizes SBA to collect 
administrative fees to cover licensing and examination costs. 
Currently, licensing fees cover less than a quarter of SBA's licensing 
costs and examination fees cover less than half of examination costs. 
It is critical that SBA increase fees in order to (1) improve its 
technology for both licensing and examinations; (2) improve examiner 
training; (3) pay for necessary information subscription services; and 
(4) provide contractor resources to support licensing and examination 
activities.
2. Alternative Approaches to the Regulation
A. Licensing Fees
    SBA considered several alternatives to the proposed regulations 
regarding licensing fees. SBA first considered indexing the licensing 
fees for inflation from 1996 (the year in which SBA most recently 
raised licensing fees) to 2017. This alternative did not produce 
sufficient fees to offset SBA licensing costs and produced lower 
licensing fees

[[Page 91055]]

than those in the proposed rule. SBA therefore rejected the option of 
adjusting the current fees only for inflation.
    Given its technology and processing time concerns, SBA considered 
higher licensing fees than those in the proposed rule in order to 
obtain the same technology and resources utilized by industry peers and 
further use of contractor support to reduce times in the licensing 
process. Although increasing fees even higher than SBA is proposing 
would provide more resources, SBA believes the proposed fee increases 
would be sufficient to meet essential needs while remaining well within 
the ability of qualified applicants to pay.
    SBA considered adding a fee at the first licensing phase (Initial 
Review), but was concerned that this might substantially reduce the 
number of applicants to the program. SBA invites comments from industry 
as to whether SBA should add a fee at the first licensing phase to help 
spread costs across all applicants on which SBA expends resources.
    SBA also considered implementing a larger increase in FY 2017 in 
order to offset costs more quickly. SBA opted to pursue the gradual 
increase identified in the proposed rule to allow potential applicants 
time to adjust to these increases.
B. Examination Fees
    SBA considered several alternatives to the proposed regulations 
regarding examination fees. SBA considered indexing the fees utilizing 
the existing table in current Sec.  107.692(b) to reflect inflation 
from 1997 to 2017. This alternative did not produce sufficient fees to 
offset SBA costs in examinations. In assessing the reasons for this, 
SBA analyzed the SBIC portfolios from both periods, and recognized that 
the SBIC portfolio in 1997 was significantly different than today. In 
1997, most of the SBICs with the highest total assets were bank-owned 
SBICs that did not issue SBA leverage and therefore required less time 
and resources for SBA to examine. Today, most of the highest-asset 
SBICs have significant amounts of SBA leverage. Therefore, merely 
indexing the existing fees would not appropriately reflect the costs 
associated with examinations.
    SBA also considered proposing examination fee increases that were 
only sufficient to cover current costs and did not cover additional 
money needed to address technology upgrades, training, or contractor 
support. SBA rejected this alternative for three reasons. First, the 
OIG indicated the need for improved technology and training for 
examiners and suggested that SBA increase its fees to cover these 
costs. SBA agrees that such resources would improve the examination 
function. Second, SBA believes its proposed examination fees are less 
than fees charged for similar activities such as financial audits. SBA 
calculated the median private sector financial audit fee paid by SBICs 
in FY 2015 to be $43,000, where the proposed fees would result in an 
average Base Fee of $19,300 in FY 2021. Third, while SBA's outstanding 
leverage in its operating portfolio has more than tripled from $3.1 
billion at the end of September 30, 2000 to $10.4 billion as of June 
30, 2016, the number of personnel in SBIC Examinations has declined by 
over a third. In order to continue to monitor the SBIC program at the 
same level as in previous years, SBA will likely need to hire 
contractors with specialized skills to support this function.
    SBA also considered a flat examination fee, regardless of the asset 
cost. SBA believes its examination activities are similar to financial 
auditor or bank examiner activities, which typically are based on asset 
cost and therefore rejected this alternative.
    SBA considered increasing the fees to cover most of its cost in FY 
2017, but believes that a gradual increase over a five year period 
would allow SBICs time to budget and adjust to the higher fees.
3. Potential Benefits and Costs
    SBA anticipates this proposed rule may benefit the taxpayer by 
covering a larger portion of SBIC program administrative costs through 
the collection of an additional estimated $3 million to $4 million per 
year by October 2020. As noted above, these increased fees will (1) 
improve SBIC program technology for both licensing and examinations, 
(2) improve examiner training, (3) pay for necessary information 
subscription services, and (4) provide contractor resources to support 
licensing and examination activities. Collections are expected to 
increase annually each year beginning in October 2021 based on the CPI-
U Inflation Adjustment.
    The proposed rule would increase licensing costs for applicants and 
examination costs for SBICs. The proposed rule would, by October 2020, 
increase licensing costs by $30,000 for all applicants that submit a 
complete license application. Based on the proposed rule, SBA estimates 
that by October 2020, the average non-leveraged examination fee would 
increase by $5,100 and the average examination fee for leveraged SBICs 
would increase by $12,100 based on FY 2015 examinations data. These 
fees would further impact SBICs through annual increases to reflect 
inflation.
Executive Order 13563
    A description of the need for this regulatory action and benefits 
and costs associated with this action is included above in the 
Regulatory Impact Analysis under Executive Order 12866.
    In considering this proposed rule, SBA talked with fund of fund 
managers, auditors, and contractors to determine whether the proposed 
fees were reasonable. In reviewing organizational costs for SBIC 
applicants, including legal and other professional costs, SBIC 
applicants often incur organizational costs amounting to around 
$500,000. The proposed increased licensing fee represents a small 
percentage of the total organizational costs typically incurred by SBIC 
applicants. SBA also compared Federal bank examiner fees and SBIC 
auditor fees (based on the SBIC annual Financial Reporting Form 468s 
submitted in 2015) with proposed SBIC examination fees. SBA believes 
the proposed licensing and examination fees are reasonable in 
comparison to the market.
Executive Order 12988
    This action would meet applicable standards set forth in section 
3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to 
minimize litigation, eliminate ambiguity, and reduce burden. The action 
would not have retroactive or presumptive effect.
Executive Order 13132
    For the purpose of Executive Order 13132, SBA has determined that 
the rule would 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 purpose of Executive Order 13132, 
Federalism, SBA has determined that this proposed rule has no 
federalism implications warranting the preparation of a federalism 
assessment.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
has determined that this rule would not impose any new reporting or 
recordkeeping requirements.
Regulatory Flexibility Act, 5 U.S.C. 601-612
    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires 
administrative agencies to consider the effect of their

[[Page 91056]]

actions on small entities, small non-profit businesses, and small local 
governments. Pursuant to the RFA, when an agency issues a rule, the 
agency must prepare an Initial Regulatory Flexibility Act (IRFA) 
analysis which describes whether the impact of the rule will have a 
significant economic impact on a substantial number of small entities. 
However, Sec.  605 of the RFA allows an agency to certify a rule, in 
lieu of preparing an IRFA, if the rulemaking is not expected to have a 
significant economic impact on a substantial number of small entities. 
This proposed rule would affect all applicants that submit applications 
at final licensing (which averaged 35 per year for FYs 2013 to 2015), 
and all operating SBICs (currently approximately 300). SBA estimates 
that approximately 98% of these SBICs are small entities. Therefore, 
SBA has determined that this proposed rule does have an impact on a 
substantial number of small entities. However, SBA has determined that 
the impact on entities affected by the rule is not significant.
    As noted above, proposed Sec.  107.300 would increase licensing 
costs by $30,000 by October 1, 2020 for all applicants that submit a 
license application, which represents less than 0.1% of the average 
applicant's Regulatory Capital based on newly licensed SBICs between 
October 1, 2014 and June 30, 2016. Many applicants have organizational 
costs totaling around $500,000, and some have far in excess of that 
amount. The proposed FY 2021 licensing fee of $45,000 would represent a 
small fraction of those costs.
    SBA estimates that proposed Sec.  107.692 would eventually increase 
the average examination fee by $5,100, representing approximately 0.02% 
of the average non-leveraged SBIC's Regulatory Capital, and the average 
leveraged SBIC examination fee by $12,100, representing approximately 
0.01% of the average total capital under management (Regulatory Capital 
and outstanding SBA guaranteed leverage). As a point of comparison, 
most SBIC managers charge management fees of approximately 2% of 
capital under management. (Management fees, like the examination fees, 
are paid by the SBIC.) For a leveraged SBIC with $50 million in 
Regulatory Capital and using 2 tiers of leverage charging a 2% 
management fee, the management fee would equal $3 million a year. If 
the leveraged SBIC had assets at cost of $150 million, no regulatory 
violations, and did not incur any exam fee additions, the exam fee in 
FY 2021 would amount to $37,400 ($44,000 minus the 15% discount for no 
violations), representing 0.025% of the SBIC's total capital. The 
examination fee would be a very small percentage of the SBIC's 
expenses.
    SBA believes that most applicants with sufficient private equity 
experience and capital raising ability will not be discouraged from 
applying to the program based on the proposed administrative fee 
increases. SBA asserts that the economic impact of the rule is minimal. 
Accordingly, the Administrator of the SBA certifies that this proposed 
rule would not have a significant impact on a substantial number of 
small entities.

List of Subjects in 13 CFR Part 107

    Examination fees, Investment companies, Loan programs--business, 
Licensing fees, Small businesses.

    For the reasons stated in the preamble, SBA proposes to amend 13 
CFR part 107 as follows:

PART 107--SMALL BUSINESS INVESTMENT COMPANIES

0
1. The authority citation for part 107 continues to read as follows:

    Authority: 15 U.S.C. 681, 683, 687(c), 687b, 687d, 687g, 687m.

0
2. Amend Sec.  107.50 by adding a definition of ``Inflation 
Adjustment'' to read as follows:


Sec.  107.50  Definitions of terms.

* * * * *
    Inflation Adjustment is the methodology used to increase SBIC 
administrative fees using the Consumer Price Index for Urban Consumers 
(CPI-U), calculated by the U.S. Bureau of Labor and Statistics (BLS), 
using the U.S. city average for all items, not seasonally adjusted, 
with the base period of 1982-84=100. To calculate the Inflation 
Adjustment, each year, SBA will divide the CPI-U from the most recent 
June by the CPI-U from June of the preceding year. If the result is 
greater than 1, SBA will increase the relevant fees as follows:
    (1) Multiply the result by the current fee; and
    (2) Round to the nearest $100.
* * * * *
0
3. Revise Sec.  107.300 to read as follows:


Sec.  107.300  License application form and fee.

    SBA evaluates license applicants in two review phases: (1) Initial 
review and (2) final licensing, as follows:
    (a) Initial review. Except as provided in this paragraph, SBIC 
applicants must submit a MAQ. MAQ means the Management Assessment 
Questionnaire in the form approved by SBA and available on SBA's Web 
site at www.sba.gov/sbic. An applicant under Common Control with one or 
more Licensees must submit a written request to SBA to be considered 
for a license and is exempt from the requirement in this paragraph to 
submit a MAQ unless otherwise determined by SBA in SBA's discretion.
    (b) Final licensing. (1) An applicant may proceed to the final 
licensing phase only if notified in writing by SBA that it may do so. 
Following receipt of such notice, in order to proceed to the final 
licensing phase, the applicant must submit (i) a complete license 
application, in the form approved by SBA and available on SBA's Web 
site at www.sba.gov/sbic, within the timeframe identified by SBA and 
(ii) the Licensing Fee. The Licensing Fee means a non-refundable fee 
(determined as of the date SBA accepts the application) fee adjusted 
annually as follows:

------------------------------------------------------------------------
                       Time period                         Licensing fee
------------------------------------------------------------------------
February 14, 2017 to September 30, 2017.................         $25,000
October 1, 2017 to September 30, 2018...................          30,000
October 1, 2018 to September 30, 2019...................          35,000
October 1, 2019 to September 30, 2020...................          40,000
October 1, 2020 to September 30, 2021...................          45,000
------------------------------------------------------------------------

    (2) Beginning on October 1, 2021, SBA will annually adjust the fee 
using the Inflation Adjustment and will publish a Notice prior to such 
adjustment in the Federal Register identifying the amount of the fee.
0
4. In Sec.  107.410, revise paragraph (b) to read as follows:


Sec.  107.410  Changes in Control of Licensee (through change in 
ownership or otherwise).

* * * * *

[[Page 91057]]

    (b) Fee. A processing fee equal to the Licensing Fee defined in 
Sec.  107.300(b) must accompany any application for approval of one or 
more transactions or events that will result in a transfer of Control.
0
5. In Sec.  107.692, revise paragraphs (b) through (e) to read as 
follows:


Sec.  107.692  Examination Fees.

* * * * *
    (b) Base fee. (1) The Base Fee will be assessed based on your total 
assets (at cost) as of the date of your latest certified financial 
statement, including if requested by SBA in connection with the 
examination, a more recently submitted interim statement. For purposes 
of this Sec.  107.692, Base Fee means the Minimum Base Fee plus 0.024% 
of assets at cost, rounded to the nearest $100, not to exceed the 
Maximum Base Fee. The Minimum and Maximum Base Fees are adjusted 
annually as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                   Maximum base    Maximum base
                                                                   Minimum base    fee for non-       fee for
        Time period (Based on the examination start date)               fee          leveraged       leveraged
                                                                                       SBICs           SBICs
----------------------------------------------------------------------------------------------------------------
February 14, 2017 to September 30, 2017.........................          $5,000         $20,000         $20,000
October 1, 2017 to September 30, 2018...........................           6,000          22,500          26,000
October 1, 2018 to September 30, 2019...........................           7,000          25,000          32,000
October 1, 2019 to September 30, 2020...........................           8,000          27,500          38,000
October 1, 2020 to September 30, 2021...........................           9,000          30,000          44,000
----------------------------------------------------------------------------------------------------------------

    (2) In the table in paragraph (b)(1) of this section, a Non-
leveraged SBIC means any SBIC that, as of the date of the examination, 
has no outstanding Leverage or Leverage commitment, has no Earmarked 
Assets, and certifies to SBA that it will not seek Leverage in the 
future. Beginning on October 1, 2021, SBA will annually adjust the 
Minimum Base Fee and Maximum Base Fees using the Inflation Adjustment 
and will publish a Notice prior to such adjustment in the Federal 
Register identifying the amount of the fees.
    (c) Adjustments to base fee. In order to determine the amount of 
your examination fee, your Base Fee, as determined in paragraph (b) of 
this section, will be adjusted (increased or decreased) based on the 
following criteria:
    (1) If you have no outstanding regulatory violations at the time of 
the commencement of the examination and SBA did not identify any 
violations as a result of the most recent prior examination, you will 
receive a 15% discount on your Base Fee;
    (2) If you have funded at least $10 million in LMI Investments at 
cost since the last examination, you will receive a 1% discount for 
every $10 million in LMI Investments made since the last examination up 
to a maximum of a 10% discount on your Base Fee;
    (3) If you were not fully responsive to the letter of notification 
of examination (that is, you did not provide all requested documents 
and information within the time period stipulated in the notification 
letter in a complete and accurate manner, or you did not prepare or did 
not have available all information requested by the examiner for on-
site review), you will pay an additional charge equal to 15% of your 
Base Fee;
    (4) If you maintain your records/files in multiple locations (as 
permitted under Sec.  107.600(b)), you will pay an additional charge 
equal to 10% of your Base Fee; and
    (5) For any regulatory violation that remains unresolved 90 days 
from the date SBA notified you that you must take corrective action (as 
established by the date of the notification letter), you will pay an 
additional charge equal to 5% of the Base Fee for every 30 days or 
portion thereof that the violation remains unresolved after the 90 day 
cure period, unless SBA resolves the finding in your favor.
    (d) Fee discounts and additions table. The following table 
summarizes the discounts and additions noted in paragraph (c) of this 
section:

----------------------------------------------------------------------------------------------------------------
                                        Amount of discount--%       Examination fee       Amount of addition--%
      Examination fee discounts              of base fee               additions               of base fee
----------------------------------------------------------------------------------------------------------------
No outstanding violations; no          15.....................  Non-responsive.........  15
 violations in prior exam.
LMI Investments......................  1% of Base Fee for       Records/Files at         10
                                        every $10 million in     multiple locations.
                                        LMI Investments made
                                        since the last
                                        examination up to a
                                        maximum discount of
                                        10% of Base Fee.
                                                                Unresolved Findings....  5% of Base Fee for
                                                                                          every 30 days or
                                                                                          portion thereof beyond
                                                                                          the 90 day grace
                                                                                          period for each
                                                                                          unresolved finding.
----------------------------------------------------------------------------------------------------------------


[[Page 91058]]

    (e) Delay fee. If, in the judgment of SBA, the time required to 
complete your examination is delayed due to your lack of cooperation or 
the condition of your records, SBA may assess an additional fee of $700 
per day. Beginning on October 1, 2021, SBA will annually adjust this 
fee using the Inflation Adjustment and will publish a Notice prior to 
such adjustment in the Federal Register identifying the amount of the 
fee.

    Dated: November 17, 2016.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-30104 Filed 12-15-16; 8:45 am]
 BILLING CODE 8025-01-P